Solid State has now released its final results for the year ended 2016.
Revenues increased when compared to last year with a £2.8M growth in distribution revenue relating to the acquisition at the start of the year and a £4.7M increase in manufacturing revenue relating to the initial sales from the MOD contract. Depreciation was up £109K, there was a detrimental movement of £122K in forex differences, R&D increased by £3.9M and other cost of sales grew by £595K to give a gross profit £2.9M above that of 2015. Distribution expenses were up £321K, there was £618K of impairments, stock write-downs increased by £104K and other admin expenses were up £620K which meant that the operating profit grew by £1.2M. After bank loan costs increased by £76K but the tax charge came down £94K due to a deferred tax credit, the profit for the year was £4.2M, a growth of £1.3M year on year.
When compared to the end point of last year, total assets increased by £3.9M to £26.6M driven by a £5.4M growth in trade receivables and a £254K increase in goodwill, partially offset by an £883K growth in prepayments, a £503K fall in development costs and a £744K decline in cash. Total liabilities also increased as a £1.2M increase in accruals, a £197K growth in the bank overdraft and a £160K increase in corporation tax liabilities was partially offset by a £1.1M decline in trade payables. The end result was a net tangible asset level of £10.5M, a growth of £3.5M year on year.
Before movements in working capital, cash profits increased by £2.2M to £5.8M. There was a cash outflow from working capital, with a large growth in receivables but this was offset by a £503K swing to a cash receipt and the net cash from operations came in at £1.7M, a decline of £446K year on year. The group spent £900K on property, plant and equipment; £36K on intangible assets and £783K on acquisitions to give a free cash flow of just £45Kl. We then see £991K being spent on dividends which meant there was a cash outflow for the year of £941K and a cash level at the year-end of -£3.4M.
The profit in the distribution division was £955K, a growth of £434K year on year. The year as a whole saw a strengthening of the key metrics of the business with a positive book to bill ratio and increased backlog going into the coming year. The division ended the year with a greatly improved stock turn. The operating margin improvements made in the previous year continued throughout this year, achieving 6.6% with the resulting divisional EBIT ahead of budget.
In April 2015 the group acquired Ginsbury Electronics. A value added distributor of displays and power products. This acquisition enhanced the range of products available to the existing customer base and equally the range of embedded products available to customers. Cross selling initiatives are now being realised with many customers benefiting from the combined expertise of the two businesses. Particular successes have been achieved in the high growth area of electric vehicle charging and in the relatively new area of on-food printing. During the year the stores at Ginsbury were relocated to the Redditch HQ with some small savings as a consequence.
The business continues to increase its own brand offering, to include innovations in LED lighting control and computing. Value added services continue to provide a useful enhancement to gross margin and to the importance of the business to its customer base. This is demonstrated by the £1M contract won with Renishaw where the business was commissioned to pre-programme components to be supplied directly to the production line, this saving them engineering time and additional logistics.
The division was successful in securing additional franchise lines during the year such as the Luminus Devices LED franchise and the Silicon Labs franchise for internet of things applications. The outlook for the business remains strong.
The profit in the manufacturing division was £4M, an increase of £857K when compared to last year. Steatite achieved a 1.4% increase in sales when the MOJ settlement is excluded with the focus being on value added and niche activities, introducing new products in new markets such as green energy and security along with fully integrated computer cabinet systems. Export sales have potential, principally led by the antenna business and the new range of radio communications systems. The group see opportunity for continued growth at home and overseas for this technology and the potential to expend into adjacent markets such as broadcasting.
The combination of new product development and new market penetration has delivered organic growth despite more challenging markets in oil and gas which has impacted the battery business. This growth has been achieved through cross selling initiatives and an increase in sales through the application of processes that save clients time and money. An example of this is the new train ticketing machines which the business was asked to redesign and which are now being deployed in the field.
The £34M MOJ contract for the supply and maintenance of offender tagging technology was terminated in February as the government changed course to pursue a commercial off the shelf solution rather than the bespoke device for which they had contracted Steatite. They were able to agree an exit strategy and compensation package for the work delivered, although this is bound by a non-disclosure agreement so it is not clear how much this would be. Assuming the receipt of the settlement and the payment of all subcontractor liabilities had taken place before the year-end, however, the group would be in a net cash position of £350K (so about £3.8M cash receipt then).
The business has been granted a license to use the IP derived from the development of the technology as part of the contract. The development of tagging devices will continue on a range of devices for applications in the enhanced justice platforms and high end medical sectors which the board expect to lead to opportunities in new markets both in the UK and abroad.
The battery business, prior to the acquisition of Creasefield, had been largely focused on the Oil and Gas industries which have obviously been under investment pressure recently. The acquisition broadens the industrial focus on the business and allows a greater share of engineering and production capability. Additionally, Creasefield brings battery chemistries and vertical markets that will enable the group to build a strong business with significant presence in the UK.
Steatite continues to develop novel power solutions to increase run times and payloads to support marine autonomous systems, unmanned military systems for mine clearance, countermeasures and asset protection. The board are confident that the ubiquity of batteries as a source of power in most technology applications will allow them the opportunity to considerably expand the supply of bespoke battery products to both the existing group and prospective customer base.
Q-Par designs and manufactures antennas and its performance was held back due to the delay of a major programme with a European aerospace customer that will return in the coming year. The business continues to focus on R&D within key market sectors and providing a service to its network of agents throughout the world. Further investment will be made in the year ahead with new purpose built facilities well underway, along with significant investment in test and measurement facilities that will bring benefits to the whole group in the later stages of next year.
During the year more than 10% of the group’s turnover was derived from one customer in the manufacturing division which always makes me a bit nervous.
After the period-end the group appointed Matthew Richards to the board as MD of Steatite. He has been MD at Nasdaq listed APT Technologies and MD for Secure Systems and Technologies. He was also Business Unit Director at Vislink for the defence and security sectors but I suppose I shouldn’t hold that against him! On the 29th June it was announced that Mark Nutter has stepped down from his role as finance director with immediate effect by mutual agreement – this sounds serious and rather concerning.
On the 1st April 2015, the group acquired Ginsbury Electronics for a cash consideration of £2.1M with an initial cash transfer followed by a further £525K payable in three equal six month tranches. The business specialises in the supply of high quality display components, monitors, panels, signage and power components to the commercial, retail, industrial and military markets in the UK and Europe. The acquisition generated goodwill of £254K and generated profit this year of £239K – nearly paying back the investment in goodwill in one year. This seems like a good quality acquisition to me.
In May, after the year-end, the group acquired Creasefield for a cash consideration of £1.5M. The business specialises in the supply of battery packs to the commercial, retail, industrial and military markets throughout the UK and Europe. Consideration paid on completion was £1.4M with a further payment of £140K subject to a net asset adjustment once the completion accounts have been finalised. The group have a pipeline of target acquisitions with the aim to acquire at least one business per year – hopefully this will be done in a sensible manner but there is always risk involved with this strategy.
Going forward, the group entered the 2017 financial year with a strong order book with the order backlog standing at £17.8M, a like for like increase of £3.4M. Most of the markets lack visibility due to global economic influences and the consequences of the recent EU referendum. The board expect the oil and gas market to continue to be slow in the coming year, but there are the first green shoots of recovery in this market.
The outcome of the Brexit referendum is a situation that is obviously being monitored. The group sells predominantly in Sterling to UK based customers. The products are often intended for international use, however the sales channels for the group are principally in this country. As such, the board expect the impact of Brexit to be limited. It has to be said, though, that a weak pound should be useful for the group as a 10% strengthening of other currencies against sterling giving rise to a £138K increase in pre-tax profit.
We are in a bit of an odd situation where these results have been boosted by the MOJ settlement but because of the non-disclosure agreement, we don’t know by how much which makes comparisons with prior or future years rather difficult. From comments made, it would seem that there is probably a positive effect of just over £1M.
At the current share price the shares are trading on a PE ratio of 6.6 (which includes the positive impact of the MOJ settlement) which increases to 9.5 on next year’s consensus forecast – still rather cheap. After the final dividend was kept the same, the shares are yielding 3.7% which increases to 3.9% on next year’s forecast. At the year-end the net debt position stood at £3.4M compared to £2.5M last year although as of the end of June, the balance sheet shows net cash of £1.1M following the receipt of settlement cash from the MOJ.
Overall then this has been a mixed year for the group. The profit was up but this was mainly due to the MOD settlement profit, net assets also increased but the operating cash flow declined due to an increase in receivables which meant that cash profits actually increased. Despite that, there was negligible free cash generated, and certainly not enough to cover the dividend.
The profits in the distribution division grew, mainly due to the Gisbury acquisition at the start of the year, although margins were also up somewhat. The manufacturing division saw profits increase too, but this was due to the MOJ settlement which is the issue really – like for like profits seem to be pretty much flat. There does seem to be a strong order book, however, and with a forward PE of 9.5 and yield of 3.9%, the shares look cheap. I am tempted here although looking further at the finance director’s resignation – he has been in the job for less than a year which doesn’t sit well with me – there was no explanation of why he left.
On the 19th September the group announced that director John Lavery sold 10,000 shares at a value of £42.7K, apparently in order to offset the cost of share options that he recently exercised.
On the 20th October he group released an update covering the first half of the year. They expect results to be ahead of the first half of last year and in line with market expectations. They have an order backlog of £14.8M comprising £2.1M of Creasefield revenue compared to £14.2M at the same period of last year.
The business has focused on deriving the strategic benefits from its recent acquisitions and promoting cross selling amongst group divisions. Both acquisitions made over the past two years are substantially integrated, performing well in their own markets and demonstrating synergy benefits with the other group divisions with Creasefield benefiting from improved resourcing and cost control measures.
Overall this is a fairly decent but the reduction in the like for like order backlog is a little concerning.