DIALIGHT PLC Preliminary Results for the year ended 31 December 2015
A refocused business following a challenging year
Dialight plc ('Dialight' or 'the Group'),the leading LED lighting technology company,today announces its Preliminary Results for the year ended 31 December 2015.
Group financial highlights | 2015 £m | 2014 £m | |
Revenue | 161.4 | 159.8 | |
Underlying gross profit | 56.2 | 60.6 | |
Underlying operating profit | 6.1 | 18.1 | |
Underlying operating margin | 4% | 11% | |
Non-underlying items | (9.5) | (2.3) | |
Statutory (loss)/profit before tax | (3.9) | 15.5 | |
Underlying basic EPS | 13.3p | 36.8p | |
Statutory EPS | (6.4p) | 29.4p | |
Net (debt)/cash | (3.8) | 0.6 |
Underlying operating profit is defined as profit before interest, tax and non-underlying items ('EBIT').
Financial headlines
· Lighting revenue up 3% to £120.6m; Signals and Components revenue 5% lower at £40.8m.
· Underlying operating profit fell by 66% to £6.1m (2014: £18.1m).
· Non-underlying costs of £9.5m (2014: £2.3m) mainly due to actions resulting from the Strategic Review.
· Revised operating segments with a focus on growth opportunities within the Lighting segment.
· Cash conversionof 145% (2014: 55%) through better working capital management.
· The Board is not proposing a final dividend for 2015 (2014: 9.8p).
Strategic and operating headlines
· Our new strategy sets out to deliver sustainable, profitable growth with a three year plan to:
· Build scalable and efficient operations
· Develop common production platforms
· Lead the markets in products and technology
· Advance our sales approach through strategic global accounts and automation partnerships
· Grow into new sectors and geographies
· First manufacturing partnership established with Sanmina Corporation (a Fortune 500 company with 44,000 employees worldwide) on 7 March 2016.
· First automation partnership secured with Rockwell Automation to integrate with their building management systems.
· The closure of the Group's UK manufacturing plant is announced today.
Michael Sutsko, Group Chief Executive of Dialight, said:
'2015 was a difficult year for Dialight. A downturn across a number of our markets exacerbated operating challenges. We took immediate action in the second half of the year to address these issues, including improving operational processes in our manufacturing plants and reducing headcount. I would like to thank all of our stakeholders for remaining supportive of the company during this transitional period.
In October 2015 we set out a new strategy to return the business to sustainable profitable growth. We are making progress in 2016, having refocused our sales strategy, established our first manufacturing partnership as well as securing our first automation partnership. Although the economic outlook remains uncertain, there are a number of initiatives underway and we are targeting underlying EBIT growth in 2016. We are confident in the Group's outlook over the medium to long-term.'
Results presentation:
A presentation to analysts and investors will be held today at 09.00 GMT at Investec's offices:Investec Bank plc, 2 Gresham Street, London EC2V 7QP, United Kingdom. The presentation and an audiocast will be made available on the company's website,www.dialight.com.
Contacts:
Dialight PLC
Michael Sutsko - Group Chief Executive
Tel: +44 (0)1638 778641
Fariyal Khanbabi - Group Finance Director
Tel: +44 (0)1638 778642
MHP Communications
Tim Rowntree / Jamie Ricketts / Tom Horsman
Tel: +44 (0)20 3128 8100
Notes:
1. As previously announced, the Group has revised its operating segments. Lighting now consists of Lighting and Obstruction products. Signals & Components comprises the Group's Traffic, Vehicle, Rail and Components businesses.
2. Cash conversion is defined as underlying EBITDA plus working capital movements divided by underlying EBITDA.
3. The closure of the Group's UK plant is announced today. We expect non-underlying costs in 2016 relating to the closure and the other strategic initiatives to be around £12m, with cumulative cost savings of approximately £12m over the next three years.
4. The financial information for the year ended 31 December 2015 has been derived from the audited financial statements of Dialight plc for that year.
5. Cautionary Statement: This announcement contains certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Dialight plc and its subsidiaries is not warranted or guaranteed. These statements typically contain words such as 'intends', 'expects', 'anticipated', 'estimates' and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Although Dialight plc believes that the expectations will prove to be correct. There are a number of factors, many of which are beyond the control of Dialight plc, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements.
About Dialight:
Dialight (LSE: DIA.L) is leading the energy efficient LED lighting revolution around the world for industrial and hazardous applications.Dialight is committed to the continuing development of LED lighting solutions that enable our customers to lower their energy usage and carbon dioxide emissions, reduce maintenance requirements and improve safety.
The company is headquartered in the UK with operations in the USA, UK, Denmark, Germany, Malaysia, Singapore, Australia, Mexico and Brazil.www.dialight.com.
CEO OVERVIEW
This has been a difficult year for the Group from a financial, strategic and operational perspective. In a challenging time for the lighting industry, Dialight has been able to maintain its market share.I joined Dialight in June 2015, believing the Group to have differentiated technology and a strong commercial capability to deliver value in a market with sizeable potential. These beliefs were confirmed as I engaged with the talented people of Dialight around the globe.
Revenue grew by 1% to £161.4m (2014: £159.8m) with 3% growth in Lighting offset by a 5% decline in the Signals and Components division. On a constant currency basis Lighting revenue was flat year on year. The pace of Lighting revenue growth in the year slowed compared to the prior year. This was partly as a result of weakness in the upstream oil and gas sector.The automotive sector also declined from 20% of lighting revenue in 2014 to 6% in 2015, as a result of delays in placing orders from some of our strategic accounts. This hashighlighted the need for Dialight to further diversify its sector exposure. The sales force was refocused in the second half of the year to other market sectors and achieved strong growth in downstream oil and gas, power generation and pulp and paper sectors.
Underlying EBIT decreased 66% to £6.1m (2014: £18.1m). This was primarily the result of the business decision to employ additional headcount in advance of expected growth that did not materialise. There were also manufacturing inefficiencies relating to material sourcing, shop floor planning and tooling which were compounded by too many product variations. These issues were addressed in the second half of 2015 with a 12% headcount reduction undertaken (excluding direct labour) in August and a number of initiatives on the factory floor to address the inefficiencies.
There were significant non-underlying items of £9.5m, mainly in relation to projects triggered by the Strategic Review, which are detailed in the Financial Review.
In October we outlined a new strategy to secure sustainable profitable growth and maintain our leadership in LED technology. With this strategy in mind we have identified a number of steps to address the key issues within the business:
· Build scalable and efficient operations
· Develop common production platforms
· Lead the markets in products and technology
· Advance our sales approach through strategic global accounts and automation partnerships
· Grow into new sectors and geographies
As part of the Group's Strategic Review in the year, the operating segments have been revised (see note on 'operating segments' in the financial statements). The Group's focus is on the growth opportunities within its Lighting and Obstruction businesses; these are now reported as one segment, named Lighting. The Group's Traffic, Vehicle and Components divisions will be reported under one segment named Signals and Components and are managed for value.
FINANCIAL REVIEW
Group revenues grew 1% compared to the previous year; however, underlying operating profit was significantly below last year with the Group achieving an underlying operating profit of £6.1m for 2015.
The performance of each business segment is reviewed individually below. Allocation of overheads in each segment is based on directly attributed costs plus an allocation based on segemental revenue.
Lighting segment
Lighting | 2015 £m | 2014 £m | Variance % |
Revenue | 120.6 | 116.9 | 3% |
Gross profit | 48.3 | 50.8 | (5%) |
Gross profit % | 40% | 43% | (3%) |
Overheads | 41.5 | 35.4 | (17%) |
Underlying EBIT | 6.8 | 15.4 | (56%) |
The Lighting segment represents 75% of the Group's revenue and 71% of the Group's segemental operating profit.
Lighting growth slowed in the second and third quarters of 2015 as a result of retrenchment in the upstream oil and gas market. This vertical segment represented 22% (2014: 21%) of the Lighting revenue. The sales teams were deployed in the second half to target the downstream oil and gas market plus other vertical sectors and the Group achieved strong growth in power generation and pulp and paper. The other factor affecting growth was the automotive sector, which declined from 20% of lighting revenue in 2014 to 6% in 2015 as a result of delays in receiving orders from some of our strategic accounts.
Due to the industrial slowdown and the effects of the low oil price, US revenue only grew by 3%. The European business saw a reduction of 13%. There was strong growth in Asia of 23% and Australia had growth of 34% compared to the previous year.
Gross margin decreased to 40% as a result of inefficient commodity management. Key raw materials were expedited due to lead times, incurring additional unit costs and air freight charges. A Global Commodity Director was hired in the fourth quarter of 2015 to address these issues and streamline the sales, operations and planning processes.
The Obstruction business is characterised by large contracts and is therefore subject to greater fluctuation. The revenue in the Obstruction business declined in the year by 10% compared to 2014. There will be renewed focus on this business in 2016 as the existing Lighting sales force will also sell Obstruction products.
Overheads have increased by £6.1m compared to 2015 partly due to headcount additions in the first half of 2015. This was addressed as part of the headcount reduction announced in August 2015 and the full benefit of these savings will be seen in 2016. The other major contributor relates to a more stringent approach to the capitalisation of development costs. In 2014 there was a net benefit of £1.1m to the income statement, compared to a charge of £0.6m in 2015.
Overall profit in the Lighting segment was significantly behind 2014 due to decreased gross margins and additional overheads on lower revenue growth.
Signals and components
Signals and Components | 2015 £m | 2014 £m | Variance % |
Revenue | 40.8 | 42.9 | (5%) |
Gross profit | 7.9 | 9.8 | (19%) |
Gross profit % | 19% | 23% | (4%) |
Overheads | 5.2 | 4.3 | (21%) |
Underlying EBIT | 2.7 | 5.5 | (51%) |
These are high volume businesses that operate within highly competitive markets. There is significant competition from low cost producers and margins continue to be squeezed. Revenue reduced by 5% compared to 2014 with a gross margin reduction to 19%. This was partly due to production inefficiencies but also coupled with price erosion from increased competition.
Central overheads are not allocated to these segments. In 2015 they amounted to £3.4m, an increase of £0.6m from 2014.
Non-underlying costs
From time to time, the Group incurs costs and earns income that is non-underlying in nature or that is otherwise considered to not be reflective of the underlying performance of the business. In the assessment of performance of the components of the Group, management examines underlying performance, which removes the impact of non-underlying costs and income.
The table below presents the components of non-underlying profit or loss recorded within cost of sales and administrative expenses:
Non-underlying costs | 2015 £m | 2014 £m |
Inventory provision | (6.0) | (2.8) |
Goodwill and asset write-down | (1.0) | (1.3) |
Employee severance and restructuring costs | (1.8) | (0.7) |
Executive director replacement costs | (0.8) | (0.4) |
Settlement of legal case | 0.5 | - |
Other | (0.4) | (0.2) |
Contingent consideration | - | 3.1 |
Non-underlying costs recorded in cost of sales and administrative expenses | (9.5) | (2.3) |
In the prior year, a detailed review of the risk of inventory obsolescence was initiated. The review identified that the pace of product change had increased in the Lighting and Obstruction business with the introduction of control based Lighting and the new Vigilant range. The Board concluded that a strict ageing over-ride should be added in addition to the existing usage formula. As a result the Group incurred a one-off charge of £2.8m in 2014.
Following on from the change of provisioning policy in the prior year, there has been a strong focus on tightening the internal controls and improving the procedures around inventory. A full inventory count was carried out at the key manufacturing facilities in Mexico and Roxboro, a detailed inventory usability analysis was prepared and obsolete stock was disposed of. Inventory procurement was enhanced with the appointment of a Global Commodity Director and inventory control was improved with the appointment of a new Finance Director for North America. The impact of this was that certain non-underlying costs including stock losses and procurement errors were identified. In the Strategic Review on 27 October 2015, it was announced that the Group is embarking on a programme of product platform re-engineering and a trial of outsourced manufacturing. This will transform the production process and will reduce the requirement to hold multiple variations of components and accelerate obsolescence on some existing materials. The existing review was broadened to encompass the impact on inventory of these new factors. The outcome of the review was that total costs of £6.0m were identified.
The Strategic Review also triggered a review of the useful lives of existing capitalised development and patent
costs. This resulted in an acceleration in the amortisation of capitalised cost and the write-off of certain projects totalling £1.0m. In the prior year, intangible assets of £0.8m relating to the Airinet business were written down in full as they were considered to have no future economic benefits. Other intangible assets of £0.5m were also written off in the prior year as their carrying value was judged to be impaired.
In order to manage the cost base, the Group announced a formal headcount reduction programme on 7 August 2015. This was in addition to £0.8m of severance costs incurred in the first half. The total impact was a charge of £1.8m for the year. In the prior year, the Group incurred redundancy and termination costs mainly relating to US and European operations and the closure of its Japanese operation.
The Group also incurred costs in the recruitment of a new CEO and the incremental costs of an interim CEO. The excess costs over and above those relating to one CEO have been classified as non-underlying.
The Group received a net settlement of £0.5m in relation to a claim against a former employee. The settlement is not in the normal course of business and has been classified as non-underlying.
The contingent consideration credit related to an agreement in the prior year to reduce the amount payable in relation to the acquisition of Airinet Inc in June 2012.
The closure of the Group's UK plant was announced today. We expect non-underlying costs in 2016 relating to the closure and the other strategic initiatives to be around £12m, with cumulative cost savings of approximately £12m over the next three years.
The Group is not proposing a dividend for 2015.
Outlook
In October 2015 we set out a new strategy to return the business to sustainable profitable growth. We are making progress in 2016, having refocused our sales strategy, established our first manufacturing partnership as well as securing our first automation partnership. Although the economic outlook remains uncertain, there are a number of initiatives underway and we are targeting underlying EBIT growth in 2016. We are confident in the Group's outlook over the medium to long-term.
Michael Sutsko,Group Chief Executive
8 March 2016
Consolidated income statement
For the year ended 31 December 2015
12 months ended |
12 months ended | ||||||||
Underlying £'m | Non- Underlying £'m | Total £'m | Underlying £'m | Non- Underlying £'m | Total £'m | ||||
Revenue | 161.4 | - | 161.4 | 159.8 | - | 159.8 | |||
Cost of sales | (105.2) | (6.0) | (111.2) | (99.2) | (2.8) | (102.0) | |||
Gross profit | 56.2 | (6.0) | 50.2 | 60.6 | (2.8) | 57.8 | |||
Distribution costs | (30.7) | - | (30.7) | (28.6) | - | (28.6) | |||
Administrative expenses | (19.4) | (3.5) | (22.9) | (13.9) | 0.5 | (13.4) | |||
Profit/(loss) from operating activities | 6.1 | (9.5) | (3.4) | 18.1 | (2.3) | 15.8 | |||
Financial income | - | - | - | - | - | - | |||
Financial expense | (0.4) | (0.1) | (0.5) | (0.2) | (0.1) | (0.3) | |||
Net financing expense | (0.4) | (0.1) | (0.5) | (0.2) | (0.1) | (0.3) | |||
Profit/(loss) before income tax | 5.7 | (9.6) | (3.9) | 17.9 | (2.4) | 15.5 | |||
Income tax (expense)/credit | (1.3) | 3.2 | 1.9 | (6.0) | - | (6.0) | |||
Profit/(loss) for the year | 4.4 | (6.4) | (2.0) | 11.9 | (2.4) | 9.5 | |||
Profit/(loss) for the period attributable to: | |||||||||
Equity owners of the Company | (2.0) | 9.5 | |||||||
Non-controlling Interests | - | - | |||||||
(Loss)/profit for the year | (2.0) | 9.5 | |||||||
Earnings per share | |||||||||
Basic | (6.4)p | 29.4p | |||||||
Diluted | (6.3)p | 29.2p | |||||||
The definitions of cost of sales, gross profit, distribution costs and administrative expenses have been changed. Prior year numbers have been amended to be consistent with the current year.
Consolidated statement of comprehensive income
For the year ended 31 December 2015
2015 £'m | 2014 £'m | |
Other comprehensive income | ||
Items that may be reclassified subsequently to profit and loss Exchange difference on translation of foreign operations | 2.2 | 2.7 |
Income tax on exchange difference on translation of foreign operations | (0.4) | (0.3) |
1.8 | 2.4 | |
Items that will not be reclassified subsequently to profit and loss | ||
Remeasurement of defined benefit pension liability | 0.7 | (1.0) |
Income tax on remeasurement of defined benefit pension liability | (0.1) | 0.2 |
0.6 | (0.8) | |
Other comprehensive income for the year, net of tax | 2.4 | 1.6 |
(Loss)/profit for the year | (2.0) | 9.5 |
Total comprehensive income for the year | 0.4 | 11.1 |
Attributable to: | ||
Owners of the parent | 0.4 | 11.1 |
Non-controlling interest | - | - |
Total comprehensive income for the year | 0.4 | 11.1 |
Consolidated statement of changes in equity
For the year ended 31 December 2015
Share capital £'m | Merger reserve £'m | Translation reserve £'m | Capital redemption reserve £'m | Retained earnings £'m | Total £'m | Non- controlling interests £'m | Total equity £'m | ||
Balance at 1 January 2015 | 0.6 | 1.4 | 3.2 | 2.2 | 65.5 | 72.9 | (0.1) | 72.8 | |
Loss | - | - | - | - | (2.0) | (2.0) | - | (2.0) | |
Other comprehensive income: | |||||||||
Foreign exchange translation differences, net of taxes | - | - | 1.8 | - | - | 1.8 | - | 1.8 | |
Remeasurement of defined benefit pension liability, net of taxes | - | - | - | - | 0.6 | 0.6 | - | 0.6 | |
Total other comprehensive income | - | - | 1.8 | - | 0.6 | 2.4 | - | 2.4 | |
Total comprehensive income for the year | - | - | 1.8 | - | (1.4) | 0.4 | - | 0.4 | |
Transactions with owners, recorded directly in equity: | |||||||||
Share-based payments, net of tax | - | - | - | - | 0.1 | 0.1 | - | 0.1 | |
Dividends | - | - | - | - | (3.2) | (3.2) | - | (3.2) | |
Total contributions by and distributions to owners | - | - | - | - | (3.1) | (3.1) | - | (3.1) | |
Balance at 31 December 2015 | 0.6 | 1.4 | 5.0 | 2.2 | 61.0 | 70.2 | (0.1) | 70.1 | |
Balance at 1 January 2014 | 0.6 | 1.4 | 0.8 | 2.2 | 61.8 | 66.8 | (0.1) | 66.7 | |
Profit | - | - | - | - | 9.5 | 9.5 | - | 9.5 | |
Other comprehensive income: | |||||||||
Foreign exchange translation differences, net of taxes | - | - | 2.4 | - | - | 2.4 | - | 2.4 | |
Remeasurement of defined benefit pension liability, net of taxes | - | - | - | - | (0.8) | (0.8) | - | (0.8) | |
Total other comprehensive income | - | - | 2.4 | - | (0.8) | 1.6 | - | 1.6 | |
Total comprehensive income for the year | - | - | 2.4 | - | 8.7 | 11.1 | - | 11.1 | |
Transactions with owners, recorded directly in equity: | |||||||||
Share-based payments, net of tax | - | - | - | - | (0.1) | (0.1) | - | (0.1) | |
Dividends | - | - | - | - | (4.9) | (4.9) | - | (4.9) | |
Total contributions by and distributions to owners | - | - | - | - | (5.0) | (5.0) | - | (5.0) | |
Balance at 31 December 2014 | 0.6 | 1.4 | 3.2 | 2.2 | 65.5 | 72.9 | (0.1) | 72.8 | |
At 31 December 2015 the number of shares held by the Group through the Dialight Employee's Share Ownership Plan Trust ('ESOT') was 9,606 (2014: 9,606). The market value of these shares at 31 December 2015 was £43,227 (2014: £77,809).
Consolidated statement of total financial position
As at 31 December 2015
2015 £'m | 2014 £'m | ||
Assets | |||
Property, plant and equipment | 16.1 | 15.2 | |
Intangible assets | 20.0 | 21.0 | |
Deferred tax assets | 0.1 | 0.2 | |
Total non-current assets | 36.2 | 36.4 | |
Inventories | 26.9 | 32.4 | |
Trade and other receivables | 35.5 | 36.9 | |
Cash and cash equivalents | 5.5 | 7.9 | |
Total current assets | 67.9 | 77.2 | |
Total assets | 104.1 | 113.6 | |
Liabilities | |||
Trade and other payables | (22.9) | (26.2) | |
Provisions | (0.8) | (0.7) | |
Contingent consideration | - | (0.3) | |
Tax liabilities | (0.3) | (4.6) | |
Borrowings | (9.3) | (7.3) | |
Total current liabilities | (33.3) | (39.1) | |
Employee benefits | (0.1) | (1.2) | |
Provisions | (0.6) | (0.5) | |
Total non-current liabilities | (0.7) | (1.7) | |
Total liabilities | (34.0) | (40.8) | |
Net assets | 70.1 | 72.8 | |
Equity | |||
Issued share capital | 0.6 | 0.6 | |
Merger reserve | 1.4 | 1.4 | |
Other reserves | 7.2 | 5.4 | |
Retained earnings | 61.0 | 65.5 | |
70.2 | 72.9 | ||
Non-controlling interests | (0.1) | (0.1) | |
Total equity | 70.1 | 72.8 |
The accompanying notes form part of the financial statements.
Consolidated statement of cash flows
For the year ended 31 December 2015
2015 £'m | 2014 £'m | ||
Operating activities | |||
(Loss)/profit for the year | (2.0) | 9.5 | |
Adjustments for: | |||
Financial expense | 0.5 | 0.3 | |
Income tax expense | (1.9) | 6.0 | |
Share-based payments | 0.1 | 0.2 | |
Depreciation of property, plant and equipment | 2.8 | 2.5 | |
Amortisation of intangible assets | 3.1 | 2.3 | |
Impairment losses on intangible assets and goodwill | 1.0 | 1.3 | |
Contingent consideration | - | (3.1) | |
Operating cash flow before movements in working capital | 3.6 | 19.0 | |
Decrease/(increase) in inventories | 6.4 | (6.9) | |
Decrease/(increase) in trade and other receivables | 3.1 | (7.4) | |
(Decrease)/increase in trade and other payables | (4.1) | 4.0 | |
Increase in provisions | 0.2 | 0.2 | |
Pension contributions in excess of the income statement | (0.5) | (0.3) | |
Cash generated from operations | 8.7 | 8.6 | |
Income taxes paid | (3.9) | (3.1) | |
Interest paid | (0.4) | (0.2) | |
Net cash generated from operating activities | 4.4 | 5.3 | |
Investing activities | |||
Contingent consideration | (0.3) | - | |
Capital expenditure | (3.3) | (3.7) | |
Capitalised expenditure on development | (2.5) | (3.5) | |
Net cash used in investing activities | (6.1) | (7.2) | |
Financing activities | |||
Dividends paid | (3.2) | (4.8) | |
Drawdown of bank facility | 2.4 | 7.6 | |
Payment of upfront loan facility costs | - | (0.3) | |
Net cash (used in)/generated from financing activities | (0.8) | 2.5 | |
Net (decrease)/increase in cash and cash equivalents | (2.5) | 0.6 | |
Cash and cash equivalents at beginning of the year | 7.9 | 7.1 | |
Effect of exchange rates on cash held | 0.1 | 0.2 | |
Cash and cash equivalents at end of year | 5.5 | 7.9 |
Notes to the consolidated financial statements
For the year ended 31 December 2015
1. Basis of preparation
The financial statements have been prepared on the historical cost basis except for certain financial instruments which are carried at fair value.
The Directors have a reasonable expectation that the Company has sufficient resources to continue in existence for a period no shorter than 12 months from the date of this report. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2015 or 2014 but is derived from those accounts. Statutory accounts for 2014 have been delivered to the registrar of companies, and those for 2015 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
Full financial statements for the year ended 31 December 2015, will be posted to shareholders on 23 March, and delivered to the registrar after the Annual General Meeting on 26 April 2015.
Changes in accounting policies
Except for the changes below, the Group has consistently applied the accounting policies set out in this note to all periods presented in these consolidated financial statements.
The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2015. There was no material impact on the financial performance or position of the Group.
· Defined Benefit Plans: Employee Contributions - Amendments to IAS 19.
The nature and effect of these changes are explained below.
Adoption of new and revised standards
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016 and have not been applied in preparing these consolidated financial statements. None of these are expected to have a significant effect on the consolidated financial statements of the Group.
2. Operating segments
As part of the strategic review of the business announced on 27 October 2015, the reportable operating segments have been reduced to two. These segments have been identified based on the internal information that is supplied regularly to the Group's chief operating decision maker for the purposes of assessing performance and allocating resources. The chief operating decision maker is considered to be the Group Chief Executive.
The two reportable operating segments are:
· Lighting, which develops, manufactures and supplies highly efficient LED lighting solutions for hazardous and industrial applications in which Lighting performance is critical and includes anti-collision Obstruction Lighting; and
· Signals and Components, which develops, manufactures and supplies status indication components for electronics OEMs, together with niche industrial and automotive electronic components and highly efficient LED signalling solutions for the Traffic and Signals markets.
There is no inter-segment revenue.
All revenue relates to the sale of goods. Segment gross profit is revenue less the costs of materials, labour, production and freight that are directly attributable to a segment. Overheads comprise operations management, selling costs plus corporate costs which include share-based payments.
There are no individual customers representing more than 10% of revenue.
Reportable segments
2015 | Lighting £'m | Signals and Components £'m | Total £'m |
Revenue | 120.6 | 40.8 | 161.4 |
Gross profit | 48.3 | 7.9 | 56.2 |
Overheads | (41.5) | (5.2) | (46.7) |
Segment results | 6.8 | 2.7 | 9.5 |
Unallocated expenses | (3.4) | ||
Underlying operating profit | 6.1 | ||
Non-underlying expenses | (9.5) | ||
Operating loss | (3.4) | ||
Net financing expense | (0.5) | ||
Loss before tax | (3.9) | ||
Income tax expense | 1.9 | ||
Loss after tax | (2.0) |
2014 | Lighting £'m | Signals and Components £'m | Total £'m |
Revenue | 116.9 | 42.9 | 159.8 |
Gross profit | 50.8 | 9.8 | 60.6 |
Overheads | (35.4) | (4.3) | (39.7) |
Segment results | 15.4 | 5.5 | 20.9 |
Unallocated expenses | (2.8) | ||
Underlying operating profit | 18.1 | ||
Non-underlying expenses | (2.3) | ||
Operating profit | 15.8 | ||
Net financing expense | (0.3) | ||
Profit before tax | 15.5 | ||
Income tax expense | (6.0) | ||
Profit after tax | 9.5 |
Other segmental data
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Geographical segments
The Lighting and Signals and Components segments are managed on a worldwide basis but operate in four principal geographic areas: North America, UK, Europe and Rest of World. The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods.
All revenue relates to the sale of goods.
Sales revenue by geographical market | 2015 £'m | 2014 £'m |
North America | 107.6 | 96.3 |
UK | 11.8 | 16.5 |
Rest of Europe | 15.6 | 23.9 |
Rest of World | 26.4 | 23.1 |
161.4 | 159.8 |
Reconciliations of reportable segment profit or loss
2015 £'m | 2014 £'m | |
Total profit for reportable segments | 9.5 | 20.9 |
Unallocated amounts: | ||
Overheads | (3.4) | (2.8) |
Non-underlying expenses | (9.5) | (2.3) |
Net financing expenses | (0.5) | (0.3) |
Consolidated (loss)/profit before tax | (3.9) | 15.5 |
3. Non-underlying expense
From time to time, the Group incurs costs and earns income that is non-underlying in nature or that is otherwise considered to not be reflective of the underlying performance of the business. In the assessment of performance of the business units of the Group, management examines underlying performance, which removes the impact of non-underlying costs and income.
The table below presents the elements of non-underlying profit or loss recorded within cost of sales and administrative expenses:
Non-underlying costs | 2015 £m | 2014 £m |
Inventory provision | (6.0) | (2.8) |
Intangible asset write-down | (1.0) | (1.3) |
Employee severance and restructuring costs | (1.8) | (0.7) |
Executive director replacement costs | (0.8) | (0.4) |
Settlement of legal case | 0.5 | - |
Other | (0.4) | (0.2) |
Contingent consideration | - | 3.1 |
Non-underlying costs recorded in cost of sales and administrative expenses | (9.5) | (2.3) |
In the prior year, a detailed review of the risk of inventory obsolescence was initiated. The review identified that the pace of product change has increased in the Lighting and Obstruction business with the introduction of control based Lighting and the new Vigilant range. The Board concluded that a strict ageing over-ride should be added in addition to the existing usage formula. As a result the Group incurred a one-off charge of £2.8m. As the nature of this charge is non-underlying it was treated as a non-underlying expense.
Following on from the change of provisioning policy in the prior year, there has been a strong focus on tightening the internal controls and improving the procedures around inventory. A full inventory count was carried out at the key manufacturing facilities in Mexico and Roxboro, detailed inventory usability analysis was prepared and obsolete stock was disposed of. Inventory procurement was enhanced with the appointment of a Global Commodity Director and inventory control was improved with the appointment of a new Finance Director for North America. The impact of this was that certain non-underlying costs including stock losses and procurement errors were identified. In the Strategic Review on 27 October 2015, it was announced that the Group is embarking on a programme of product platform re-engineering and a trial of outsourced manufacturing. This will transform the production process and will reduce the requirement to hold multiple variations of components and accelerate obsolescence on some existing materials. The existing review was broadened to encompass the impact on inventory of these new factors. The out-come of the review is that total costs of £6.0m were identified and the Directors are of the opinion that in order to reflect the true performance of the business that these costs be treated as non-underlying costs.
The Strategic Review also triggered a review of the useful lives of existing capitalised development and patent costs. This resulted in an acceleration in the amortisation of capitalised cost of £1.0m and is considered a non-underlying cost. In the prior year, intangible assets of £0.8m relating to the Airinet business were written down in full as they were considered to have no future economic benefits. Other intangible assets of £0.5m were also written off in the prior year as their carrying value was judged to be impaired.
In order to manage the cost base, the Group announced a formal headcount reduction programme on 7 August 2015. This was in addition to £0.8m of severance costs incurred in the first half. The total impact was a charge of £1.8m for the year. In the prior year, the Group incurred redundancy and termination costs mainly relating to US and European operations and the closure of its Japanese operation.
The Group incurred significant costs in the recruitment of a new CEO and the incremental costs of an interim CEO. In order to present a more accurate reflection of the underlying business costs, the excess costs over and above those relating to one CEO have been classified as non-underlying.
The Group received a net settlement of £0.5m in relation to a claim against a former employee. The settlement is not in the normal course of business and has been classified as non-underlying.
The contingent consideration credit relates to an agreement in the prior year to reduce the amount payable in relation to the acquisition of Airinet Inc in June 2012.
The table below presents the components of non-underlying profit or loss recorded within finance expense:
2015 £'m | 2014 £'m | |
Net interest on defined benefit liability | (0.1) | - |
Change in fair value of contingent consideration | - | (0.1) |
Non-underlying costs recorded in finance expense | (0.1) | (0.1) |
4. Net financing expense
Recognised in profit and loss
Year ending 31 December 2015 | Year ending 31 December 2014 | ||||||
Underlying £'m | Non- underlying £'m | Total £'m | Underlying £'m | Non- underlying £'m | Total £'m | ||
Interest income on bank deposits | - | - | - | - | - | - | |
Net interest on defined benefit liability | - | (0.1) | (0.1) | - | - | - | |
- | (0.1) | (0.1) | - | - | - | ||
Interest expense on financial liabilities | (0.4) | - | (0.4) | (0.2) | - | (0.2) | |
Change in fair value of contingent consideration | - | - | - | - | (0.1) | (0.1) | |
(0.4) | - | (0.4) | (0.2) | (0.1) | (0.3) | ||
Net financing expense recognised in the consolidated income statement | (0.4) | (0.1) | (0.5) | (0.2) | (0.1) | (0.3) | |
5. Income tax (income)/expense
2015 £'m | 2014 £'m | |
Current tax (income)/expense | ||
Current year | (0.7) | 6.1 |
Adjustment for prior years | (0.9) | (0.3) |
(1.6) | 5.8 | |
Deferred tax (income)/expense | ||
Origination and reversal of temporary differences | (0.4) | 0.3 |
Adjustment for prior years | - | (0.1) |
Reduction in tax rate | 0.1 | - |
Recognition of previously unrecognised losses | - | - |
Change in recognised deductible timing differences | - | - |
Income tax (income)/expense | (1.9) | 6.0 |
Reconciliation of effective tax rate
2015 % | 2015 £'m | 2014 % | 2014 £'m | |
(Loss)/profit for the year | (2.0) | 9.5 | ||
Total income tax (income)/expense | (1.9) | 6.0 | ||
(Loss)/profit excluding income tax | (3.9) | 15.5 | ||
Income tax using the UK corporation tax rate | (19.6) | (0.8) | 21.5 | 3.3 |
Effect of tax rates in foreign jurisdictions | 12.8 | 0.5 | 10.3 | 1.6 |
Reduction in tax rate | (7.9) | (0.3) | 1.3 | 0.2 |
Non-deductible expenses | 17.1 | 0.7 | 4.5 | 0.7 |
Current year losses for which no deferred tax is recognised | (1.8) | (0.1) | 1.3 | 0.2 |
Recognition of tax effect of previously unrecognised losses | (7.7) | (0.3) | - | - |
Adjustment for prior years | (24.3) | (0.9) | (2.6) | (0.4) |
Changes in recognised deductible timing differences | - | - | - | - |
Research and development credits | (3.4) | (0.1) | (0.6) | (0.1)- |
Other | (12.7) | (0.5) | 3.0 | 0.5 |
(47.5) | (1.9) | 38.7 | 6.0 |
The effective tax rate credit for the Group is 47.5% which is an improvement on the prior year tax charge of 38.7%. The tax rate has been positively impacted by losses allowed in the year that were previously considered uncertain and the recognition of previously unrecocognised deferred tax assets. The prior year adjustment arises mainly in relation to the ability to claim accelerated capital allowances in the US.
Tax recognised directly in equity
2015 £'m | 2014 £'m | |
Employee benefits | (0.1) | - |
Other | (0.4) | 0.2 |
The UK corporation tax rate was reduced to 20% (effective from 1 April 2015). Further changes to the UK corporation tax rate were announced in the Chancellor's Budget on 8 July 2015. These include reductions to the main rate to 19% from 1 April 2017 and to 18% from 1 April 2020. These rate changes which were enacted before the Company's year end, will reduce the Company's future current tax charge accordingly. The Group effective rate will continue to be impacted by the tax rates enacted in the various jurisdictions in which it trades. The deferred tax assets/(liabilities) at 31 December 2015 have been calculated based on a rate of 18%. Deferred tax assets/(liabilities) have not been recognised in respect of tax losses amounting to £0.3m because it is not probable that future taxable profits will be available in order to utilise them.
6. Earnings per share
Basic earnings per share
The calculation of basic earnings per share at 31 December 2015 was based on a loss for the year of £2.0m (2014: profit of £9.5m) and the weighted average number of ordinary shares outstanding during the year ended 31 December 2015 of 32,503,258 (2014: 32,479,364).
Diluted earnings per share
The calculation of diluted earnings per share at 31 December 2015 was based on a loss for the year of £2.0m (2014: profit of £9.5m) and the weighted average number of ordinary shares outstanding during the year ended 31 December 2015 of 32,731,992 (2014: 32,675,772) calculated as follows:
Weighted average number of ordinary shares (diluted)
2015 '000 | 2014 '000 | |
Weighted average number of ordinary shares | 32,503 | 32,479 |
Effect of share options in issue | 229 | 197 |
Weighted average number of ordinary shares (diluted) | 32,732 | 32,676 |
Underlying earnings per share is highlighted below as the Directors consider that this measurement of earnings gives valuable information on the performance of the Group.
2015 Per share | 2014 Per share | |
Basic earnings | (6.4p) | 29.4p |
Underlying basic earnings | 13.3p | 36.8p |
Diluted earnings | (6.3p) | 29.2p |
Underlying diluted earnings | 13.2p | 36.6p |
* Underlying earnings excludes non-underlying items as explained in note 3 and allocates tax at the appropriate rate (per note 5).
7. Dividends
The Group's dividend policy was reviewed during the year. As disclosed at the Strategic Review on 27 October 2015, no dividend will be considered until the full year results of 2016 are available.
After the balance sheet date no dividends were proposed by the Directors and there are no income tax consequences for the Company.
Final proposed dividend | 2015 £'m | 2014 £'m |
Nil pence per ordinary share (2014: 9.8 pence) | - | 3.2 |
During the year the following dividends were paid:
2015 £'m | 2014 £'m | |
Final - 9.8 pence (2014: 9.5 pence) per ordinary share | 3.2 | 3.1 |
Interim - nil pence (2014: 5.2 pence) per ordinary share | - | 1.7 |
3.2 | 4.8 | |
Dividends accrued on shares awarded under the PSP and deferred share scheme but not yet vested | - | 0.1 |
Total (amount shown in the statement of changes in equity) | 3.2 | 4.9 |
8. Principal exchange rates
The following significant exchange rates applied during the year:
2015 Average rate | 2015 At balance sheet date | 2014 Average rate | 2014 At balance sheet date | |
US Dollar | 1.53 | 1.48 | 1.63 | 1.56 |
Euro | 1.38 | 1.36 | 1.24 | 1.29 |
Mexican Peso | 24.28 | 25.66 | 21.89 | 22.92 |
9. Cash and cash equivalents
2015 £'m | 2014 £'m | |
Cash and cash equivalents in the statement of total financial position | 5.5 | 7.9 |
10. Principal Risks and Uncertainties
The Board is responsible for identifying the nature and extent of the risks the Group has to manage in order to successfully pursue its growth strategy and generate shareholder value over the long term.
The Board uses a risk framework which is designed to support the process for identifying, evaluating and managing both financial and non-financial risk. The Group has an Executive Risk Committee chaired by the Chief Financial Officer. The Committee meets four times per year and provides updates to the Audit Committee twice a year.
The Group has identified the following key risks. This is not an exhaustive list but rather a list of the most material risks facing the Group. The impact of these risks, individually or collectively, could potentially affect the ability of the Group to operate profitably and generate positive cash flows in the medium to long term. As a result these risks are actively monitored and managed, as detailed below.
Risks | Description | Mitigating actions |
Strategic Risks | ||
Growth strategy | Dialight's long-term growth is dependent on making strategic moves into new territories, channels and products. The wrong strategy or poor implementation could put future growth at risk. | The Board has approved well-structured growth plans and ensured they are adequately resourced. The Board regularly challenges the strategic plans to ensure downside risks are mitigated. The Board closely monitors the progress against the strategic plan, redirecting strategy or implementation efforts where necessary. |
Changes in customer preferences and trends | Future success depends on Dialight's ability to shape, predict and respond to market trends on both products and channels. Failure to do so risks surplus inventories, missed sales opportunities and reducing brand credibility with customers. | The Engineering, Marketing and Sales teams have a structured approach to monitoring trends internally and externally and use the feedback to develop each new product introduction and develop a cohesive product roadmap. Sales teams monitor customer and channel preferences. Marketing team ensures the brand is aligned to the relevant market place. |
Operational Risks | ||
Key personnel | Dialight needs to attract and retain the best people in each area. | HR policies and management culture are reviewed to ensure they are effective in keeping Dialight an attractive place to work. Bonuses and incentive plans are reviewed regularly to ensure they remain competitive with the industry. |
Production capacity | As customer demand changes we must be able to adjust production capacity to meet demand. | Dialight has a dedicated supply chain and quality assurance team that helps build strong relationships with suppliers and manages those suppliers tightly to meet production deadlines. Ongoing review of key suppliers of critical components to ensure they are not sole sourced. |
IT systems | Critical data losses or delays in operations could occur if Dialight's IT systems are not robust against power outages; computer viruses; security breaches and user errors. | Senior management reviews the IT strategy and operations plan regularly to ensure IT systems continue to be appropriate for the size and complexity of the business. In addition, Dialight maintains a disaster recovery plan. |
Programme risk | Interruption or reduced performance during implementation of the operational transformation programme would impact current operations. If the scope of transformation reduced, future development plans of the business would be put at risk. | Senior management have put in place a strong programme management team linking project delivery teams to key staff in the Dialight business. A clear programme structure, planning processes, reporting framework and a communication plan have been put in place and are regularly monitored. Senior management is prepared to enact decisions and actions quickly as required to ensure the programme is implemented successfully |
Compliance Risks | ||
Compliance with laws and regulations | Changes in law and regulations could result in Dialight being non-compliant or incurring costs to be compliant. | Senior Executives in each area monitor regulatory requirements in their area. |
Financial Risks | ||
Exchange rate fluctuations | The majority of raw materials are purchased in US Dollars and sold in local currencies. Adverse movements in foreign exchange rates would impact revenue growth reported in Sterling, as well as gross margins. | The Board has approved a hedging strategy to minimise impact of exchange rate fluctuations. |
Funding | Dialight is dependent on its ability to service its debts and to provide sufficient capital to finance its growth strategy. | Dialight manages its capital to safeguard its ability to continue as a going concern, optimise its capital structure and provide sufficient liquidity to support its operations and its strategic plans. |
Economic downturn and international market risk | Economic downturns in countries where Dialight sells products may reduce sales and increase inventory. Changes in international trade laws, transportation costs or local government instability could all impact financial results. | Economic environment and international market risks are regularly reviewed by senior management, with appropriate action taken as required. |
Reputation Risks | ||
Reputation of brand | If Dialight's products and corporate profile fail to retain the differentiating character, quality and values, brand equity could be reduced and sales impacted. | Brand quality is placed at the core of everything the business does. This ensures close management by all areas of the business to retain the reputation of the quality of the products. |
Dialight plc issued this content on 08 March 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 08 March 2016 09:13:32 UTC
Original Document: http://www.dialight.com/News/InvestorDetails/Preliminary_Results
