MPAC have now released their interim results for the year ending 2018.
Revenues increased when compared to the first half of last year as a £100K decline in pharmaceutical revenue was more than offset by a £1.6M increase in healthcare revenue, a £200K growth in food and beverage revenue and a £1.1M rise in other revenue. Cost of sales increased by £4M, however, to give a gross profit £1.2M lower. Distribution costs were down £400K and underlying admin expenses fell by £400K, offset by a £300K growth in non-underlying admin expenses which meant that the operating loss deteriorated by £700K. Pension scheme costs reduced slightly but there was an £800K negative swing to a tax charge and no profits from discontinued operations, which were £600K last time. All of this meant that the loss for the period was £900K, a deterioration of £1.8M year on year.
When compared to the end point of last year, total assets increased by £13.6M driven by a £17.5M increase in the pension surplus, a £6.2M growth in contract assets and a £2.5M increase in inventories, partially offset by an £8.1M decline in receivables and a £4.5M decrease in cash. Total liabilities also increased during the period as a £6.7M decline in payables was more than offset by a £6M increase in deferred tax liabilities and a £5.5M growth in contract liabilities. The end result was a net tangible asset level of £51.2M, a growth of £9.3M when compared to the end point of last year.
Before movements in working capital, cash profits declined by £267K to £7.9M. There was a cash outflow from working capital and after tax payments reduced by £225K there was a net cash from operations of £679K, a decline of £4M year on year. The group spent £1.1M on capex but recouped £1.7M on the sale of assets to give a free cash flow of £1.3M. They then spent £2.4M on dividends which meant that there was a cash outflow of £1.1M and a cash level of £12.9M at the period-end.
Within Original Equipment, the group entered the year with a strong order book and sales increased by 19%. Sales in the EMEA region increased by 60% to £11.7M; sales in the Asia Pacific region grew by 20% to £2.4M but sales to the Americas dropped by 11% to £9.1M. The profit impact of the two difficult projects mentioned below was in the region of £1M.
Services order intake was 21% lower. The shortfall was primarily in the Americas which resulted in revenue in the first half year of £2.4M, a decline of £800K. Service sales in both EMEA and Asia Pacific were broadly in line with last year. A change in sales mix contributed to reduced gross margins.
Despite a positive start to the year it has become apparent that the business climate softened considerably as the year progressed, attributable in part to general economic uncertainty, leading to customers deferring machinery investment decisions. The board believe that these prospects will be delivered in future years.
Order intake was 20% below the first half of last year but current order books are broadly in line with the same time last year. Although the group has a robust level of prospects, the conversion to orders is more difficult to predict in the current environment as customers defer discretionary investments.
Engineering difficulties with two significant legacy projects, in the UK and Canada, contributed to the reduced gross profit. The UK-based project is a FOAK machine comprising a healthcare device production line of 22 modules. The complexity around the software and control aspects was the main cause of the time and cost over-run. Once delivered, this line will provide the customer with a clear differentiator with new product time to market. The project is now in the commissioning phase and the board are confident that the main challenges are understood and factored into costings and the delivery schedule, expected to be H2 2019.
The Canadian project encountered issues during the commissioning phase. The consumer products, which were previously hand-picked to retain the homely feel, are now fully automated. Product variability compared with test samples caused low productivity and unforeseen issues with the packaging line. They are working with the customer to reduce this variability and upgrade the robustness of the packaging line. The project is now performing to an agreed productivity level on site and the second phase of work is currently being agreed to further increase productivity and reduce non-conformity.
The group owns an investment property and land in Buckinghamshire held at a net book value of £800K. They are considering development opportunities and are seeking to have the site designated for residential housing. They are negotiating with the planning authorities and if re-designation is granted they will seek outline planning permission to develop the site. It is not their current intention to redevelop the site themselves.
The company will continue to pay a sum of £1.9M per annum to fund the pension deficit recovery.
It has been a mixed start to the year with good progress in some areas counteracted by delays in two legacy contracts. Since the end of June, a significant value order was secured for delivery in 2019 which gives the board confidence that the strategic objectives will deliver long term revenue growth.
At the period-end the group had a net cash position of £24.9M compared to £29.4M at the period-end. Having considered the trading results during the period with the opportunities for investment in the growth of the company, the board have decided not to pay an interim dividend.
On the 7th January the group released a trading update covering the year. Sales growth continued in H2 and the group secured a number of contracts for delivery in 2019. Sales and profit are expected to be in line with expectations, supported by a strong closing order book which will provide a platform for growth in 2019.
The UK legacy contract has been resolved and they have agreed the commercial approach to resolve the Canadian project which is expected to be finalised during 2019. It is currently unknown as to what extent the court ruling around equalising pensions between men and women will have on the group but given the size of the pension here, I would have thought it will be significant.
Overall then this has been a rather difficult period for the group. Losses worsened and the operating cash flow declined, although there was a small amount of free cash generated. The net assets did improve, though, due to an increase in pension assets. There were two main issues, a reduction in order intake due to a general malaise in the industry, particularly in the Americas; and two difficult projects that are causing a drag on results. The latter seems to be mainly resolved but I am not sure about underlying demand. H2 has started in line but these seem a little risky at the moment.