Elektron Technology : Final Results

30 April 2015

Elektron Technology plc

Preliminary Statement for the Year Ending 31 January 2015

Elektron Technology plc ('Elektron' or 'The Group' or 'We') announces its preliminary audited results for the year ended 31 January 2015.

Group highlights

Financial performance

· Revenue from continuing operations: £44.4m (2014: £46.3m), including sales from New Products (defined as products launched within the last three years) of £3.3m (2014: £2.5m)

· Operating profit before non-recurring or special items: £1.7m (2014: £0.6m)

· Profit before tax from continuing operations: £0.2m (2014: loss £4.9m)

· Adjusted earnings per share from continuing operations (before non-recurring or special items): 1.0p (2014: loss 0.3p)

· Net borrowings: £2.7m (2014: £8.0m)

Investment

· New Product Development capitalised expenditure ('NPD'): £1.1m (2014: £1.9m), with focus on Checkit development

Financing

· Gross proceeds of £3.3m from share placing and open offer

John Wilson, Chief Executive of Elektron, said:

'These results clearly demonstrate the progress we have made during the full-year period as we have continued to rebalance our business and invest in establishing a high growth portfolio of brands for the longer term.

'We are now fully focused on key new product development programmes, in particular relating to the Checkit brand. The Board is confident that this strategy will generate longer term growth across the business.'

Enquiries:

Operational Review

We conceive, design and market innovative engineered products and services for businesses that connect, monitor and control

We have a multi skilled team of engineers, software and product line specialists based in Cambridge focused on the opportunities created by global trends in the following areas:

· New waves of 'aware' business applications: Checkit

· Demand for ubiquitous power and data: Bulgin

· Growth in high precision manufacture: Queensgate

In addition, Elektron owns a portfolio of well-established products and brands that provide cash flow as well as customer access and feedback.

The results for the year demonstrate the good progress the Group has made during the past 12 months. As expected, revenues are lower than the previous year, down 4% to £44.4m as a result of declines in legacy product ranges and the strategic decision to rationalise low margin products. However, selective price increases and reductions in overheads have generated Operating Profit (before non-recurring or special items) of £1.7m, almost treble 2014's £0.6m. As previously announced, all operational exceptional cash costs have been eliminated with non-recurring or special items relating principally to the fundraise, renegotiation of bank facilities and successful completion of the Strategic Alternatives Process.

Whilst the Group saw a net £2.5m cash inflow during the period as a result of the fundraise, significantly increased working capital control and improved operating performance led to a further reduction in net debt in the second half of the year to £2.7m (2014: £8.0m).

Brand Strategies

Elektron has a diverse portfolio of brands and products. The Group's strategy is to invest in fledgling brands and products within the portfolio that are capable of substantial growth whilst ensuring that cash flow from the lower growth established brands is maximised by strictly controlling costs and defending existing market positions where possible. Detailed segmental operating performance is covered in the Financial Review below.

The Connectivity segment saw a strengthening of financial performance. Revenue was down 4% to £25.8m (2014: £27.0m), but Operating Profit (before non-recurring or special items) was up by 71% to £2.9m (2014: £1.7m) as a result of the benefits from a sales focus on higher margin design-in products and from cost cutting initiatives started in previous years.

Within the Instrumentation, Monitoring and Control ('IMC') segment, losses were reduced by 55% to £0.5m (2014: £1.0m). The (albeit reduced) losses incurred were principally due to the continuing costs of re-establishing the Queensgate business, that had struggled to retain market position for many years prior to the recent NPD investment. Although it has a very long sales cycle, there are promising signs that the investment in Queensgate will bear fruit over the next two years.

The Board believes that Checkit will, in future years, be an important growth driver for the Group and has decided to show this segment separately for the first time given the level of investment involved and the opportunity it presents. Checkit is effectively a start-up and, as budgeted, incurred losses for the year of £0.7m (2014: £0.1m).

Summaries of the strategies for individual brands are set out below. The Board believes it is helpful to categorise global markets for the Group's products as follows:

We categorise the Group's different classes of revenue according to the growth characteristics of the markets in which they participate as summarised below:

Connectivity Brands

(58.1% of Group turnover; 21% of gross capitalised development costs to date)

Bulgin connectors (Very large lower growth markets) and other electromechanical components (Large lower growth markets): Invest in connectivity NPD and 'value-add' capability, marketing and sales resource.

Arcolectric switches and indicators (Medium sized declining markets): Work to defend existing business from very low cost competitors operating on single digit margins, and ensure costs are as low as possible.

IMC Brands

(41.4% of Group turnover; 50% of gross capitalised development costs to date mainly in Queensgate and Ophthalmic)

Sheen instrumentation, Wallace instrumentation, Carnation vehicle control systems and Titman router cutters (All small static markets): Seek to ensure costs are as low as possible and identify NPD and value engineering opportunities.

Agar (including Agar Medical, formerly Qados) and Digitron instrumentation distribution (Small and medium sized static and modestly growing markets): Invest in ecommerce and seek to add complementary products from third parties.

Ophthalmic instrumentation (Small high growth markets): Invest in additional sales resource and look for further NPD opportunities.

Queensgate nanopositioning systems (Potential for increased market share within medium sized potentially high growth markets): Continue to develop business with large users; look for further NPD opportunities once the existing investment has been validated by further customer orders, and offer complementary design service capability to OEM end users.

Checkit

(0.5% of Group turnover; 29% of gross capitalised development costs to date)

Checkit food safety system (Excellent growth potential within currently small but potentially very large high growth markets): Devote a significant proportion of Group technical, sales and marketing resources to this brand in the current financial year, with two important launches currently expected.

The first offering for Checkit is targeted at organisations that process, serve or sell food. Checkit allows such organisations to transform the way they manage food safety processes, providing a smart alternative to the manual checking and paper based recording processes that are predominant in the industry. As a result Checkit customers are able to:

· Reduce cost: associated with performing checks, preparing and reporting on audit information and training staff. Additionally, energy consumption can be optimised and equipment failure anticipated leading to significantly reduced downtime and food wastage.

· Reduce risk: safety management is enforced rigorously, with exceptions reported and escalated and monitoring taking place 24 hours a day. The results range from protection against food wastage to the reduction in customer health incidents and resulting investigation and prosecution.

· Improve operational control and insight: ensuring that policies are set and enforced uniformly and performance monitored. As a result, companies can better control customer experience, protect their reputations and improve their offering to the market.

In practice, Checkit achieves these results by providing electronic checklists to its customers' staff that guide and record routine activities, and by automatically monitoring key environmental variables such as temperature and humidity. All results are logged, alerts are raised and escalated automatically. Key performance indicators (KPIs) can be viewed from anywhere using Checkit's cloud dashboards. Checkit hardware, software and support are provided as a service, with a single monthly charge. The Board believes that this approach is a disruptive innovation for this industry, providing Checkit's customers with a fully comprehensive, affordable and predictable model, while delivering a growing recurring revenue stream to the business.

Food safety represents an attractive market due to the disruptive potential of technology and innovation to move a large number of customers to a new breed of product. The opportunity is global, with a sense of the scale provided by the fact that over 450,000 business sites are regularly inspected by environmental health officers in the UK alone (source: Food Standards Agency). Almost all such sites are using paper based food safety management systems.

Transformation is made possible by cost effective, powerful technologies including those frequently referred to as the 'Internet of Things'. We believe that Checkit is well placed to respond to this opportunity through our enhanced product development capabilities and our knowledge and experience of the market gained through our legacy Digitron business. The opportunity is made even more attractive by the presence of other application and market areas that could benefit from a similar approach.

In FY2014/15 we launched an expanded feature set for the current Checkit product, providing cloud-based dashboards and the essential ability to manage the schedules of routine tasks undertaken by employees. This product has now won a number of new clients. It was also recognised at The Catererannual awards, winning first prize for Product Excellence.

Based on these results and our assessment of the broader market potential, the Group has been investing in the creation of the new generation of Checkit product needed to fully exploit the opportunity. In the current financial year investment in NPD and sales and marketing is expected to absorb much of the cash flow from the established brands, with two major product launches planned.

Acquisitions and disposals

During the year Elektron concluded its Strategic Alternatives Process during which it invited bids for the entire Group. As previously reported, it received a number of expressions of interest including a bid involving a share price of 10 pence. After consultation with certain major shareholders the Board rejected this bid and concluded the Process by initiating a fundraising supported by existing shareholders.

During the year we also received approaches from parties expressing interest in individual businesses within the Group's portfolio. To date none of these discussions has resulted in a transaction since the prices offered have not met the Board's expectations. In evaluating proposals the Board takes into careful consideration the potential acquirer's plans for staff working in the businesses concerned.

The Group does not have any acquisitions under consideration at the present time in view of the significant opportunities available within its existing portfolio.

Dividends

Having considered the financial performance to 31 January 2015 and the resources needed to invest in NPD, the Board believes that it is in the Group's best interests not to pay a dividend for the year.

People

Average monthly employee numbers reduced by 239 (19%) in the year to 31 January 2015: 1,050 (2014: 1,289), mainly as a result of the drive to improve operational efficiency, with the greatest reduction in our Tunis manufacturing facility.

Last year we again increased the number of people working on software projects to 18 at year end compared with 2 three years ago. Further software roles will be created in the current year as our products become more interactive and user friendly.

We have an extraordinary team of managers and staff who are addressing the opportunities and challenges facing us with determination and enthusiasm. The Group is now benefiting from the stability and experience of the team that has been assembled over the past few years. We should like to thank them all.

Outlook

The underlying operating performance of the Group has shown a marked improvement, due to the actions taken during the last two years.

We see significant opportunities as a result of our new product offerings, geographic sales expansion and technical capabilities. In the short term we expect some erosion of demand for several of our legacy product ranges. In the medium term, the Group's strategy is that growth from new products will increasingly outweigh sales from the legacy products, leading to growth and enhanced profitability.

The Board is particularly excited both by the brands that have received investment during the last three years and by the potential of Checkit, which is currently in its start-up phase. Given the need to invest in NPD as well as Marketing and Sales as products are launched we intend to devote substantially all of Elektron's free cash flow in the current year to these activities within Checkit as well as the other brands.

The trading performance in the first two months of the financial year has been in line with the Board's expectations.

Financial review

Group revenue for the year decreased by 4% to £44.4m (2014: £46.3m), with parts of both Connectivity and IMC segments suffering a decline. Checkit, as a start-up operation, contributed a modest amount to revenues of £0.2m (2014:

As expected, following the completion of the Group's major streamlining plans last year the level of non-recurring or special items during the year has reduced significantly. These amounted to £1.2m (2014: £5.0m), of which £0.4m (2014: £1.9m) were non-cash.

The overall profit before tax from continuing operations was £0.2m (2014: loss £4.9m).

Segmental Performance

Connectivity

Benefitting from the completion of the consolidation of moulding and assembly operations within the Tunis facility, Connectivity's operating profits grew strongly by £1.2m (71%). This improvement was in spite of a 4% fall in revenue.

Bulgin revenues grew 5% over the prior year, driven by double digit percentage growth in the Americas arising from the changes made to the sales strategy during the last two years. With an optimised distribution channel the direct sales force is now better structured to focus its attention on managing key OEM accounts and channel partners. In contrast Arcolectric revenues contracted by 15%, with falls concentrated in Asia Pacific and EMEA, principally due to increased low cost competition.

The Group will continue to focus its efforts in seeking out higher margin opportunities with its new products and enhanced capabilities. With strengthened local management in Tunisia and the introduction of advanced processes and metrics, the Group expects to deliver further efficiency improvements and cost reductions in the current year.

IMC

Following the introduction of the new business unit structure at the beginning of this year, the Materials division is now reported as part of the IMC segment and given its future expected significance, Checkit is now reported separately. Accordingly prior year comparatives have been restated.

IMC revenues fell by 5% mainly due to the previously reported strategic decision to rationalise the Group's low margin factored products sold to the NHS, which, together with cost reductions and efficiencies, helped deliver a £0.5m reduction in operating losses to £0.5m.

The strategy to invest in developing areas of the business is largely responsible for IMC's losses, with the revenue levels not yet being able to fully absorb the fixed operational cost.

Ophthalmic sales grew 22% over prior year, as a result of new products launched in the two previous financial years. Sheen and Wallace sales performance showed some stability after the declines experienced in 2014 following a factory move, whilst Carnation sales were up over 20% benefiting from new contracts, arising from a pick-up in demand to upgrade NHS ambulance fleets.

Queensgate's work with key strategic customers on its nano-positioning products is progressing well. This should allow the Group to capitalise on opportunities within this sector within the medium term.

The Group is continuing to identify selective areas of investment in new product innovation for these brands coupled with a clear focus on reducing its cost of manufacture and overhead base.

Checkit

As noted in the Operational Review, Checkit is effectively a start-up business and the losses for the year represent costs incurred to support the development of the brand.

Whilst the Board believes Checkit has great potential, Checkit is expected to remain loss making whilst the revenue stream and associated margin increase over the medium term.

Sales from new products and NPD

Sales from new products (defined as products launched within the previous three years) were £3.3m during the year (2014: £2.5m).

Elektron spent £2.1m on NPD and sustaining engineering in the financial year (2014: £2.4m). Of this, £1.1m was capitalised (2014: £1.9m), mainly focused on Checkit and Queensgate. In the current year the Group's expenditure will be focused mainly on Checkit.

The net book value of capitalised NPD is as follows:

Net finance costs

Interest costs on borrowing decreased by £0.2m to £0.3m (2014: £0.5m), reflecting the decrease in average level of net debt from £7.9m in 2014 to £4.8m in 2015, representing an effective interest rate of 6.1% (2014: 5.5%).

Taxation

The Group continues not to recognise any deferred tax in respect of UK trading losses or other timing differences.

At 31 January 2015 the Group had estimated unused trading losses in excess of £5.0m to offset against future UK profits.

Earnings/(loss) per share

The average number of ordinary shares in issue during the year was 140.2m (excluding shares held by the Employee Benefit Trust). Basic earnings per share in respect of continuing operations before non-recurring or special items were 1.0 pence (2014: loss 0.3 pence).

After taking into account non-recurring or special items the Group recorded earnings per share on continuing operations of 0.1 pence (2014: loss 5.1 pence).

Cash flow and net debt

The Group generated cash of £4.9m (2014 £2.3m) from operations before non-recurring or special items, of which £1.3m (2014: £0.3m) was from a reduction of working capital following an implementation of improved cash management procedures. The Group spent £1.2m (2014: £4.5m) on strategic review, refinancing and other non-recurring costs.

Total capital investment in the year was £1.6m (2014: £3.1m) representing 84% of depreciation and amortisation.

The improvement in cash generated from operations and the fund raise in June and July 2014 resulted in total net borrowings of £2.7m, a reduction of £5.3m from the previous year.

Bank facilities, covenants and going concern

At 31 January 2015 the Group had available facilities of £7.2m which include a revolving credit facility of £3.2m, available invoice finance facilities of £3.4m (which could increase up to £6.0m depending on sales levels) and leasing facilities of £0.5m, together with a bank overdraft of £0.1m. At 31 January 2015 available headroom on these facilities amounted to £4.5m.

The Group successfully agreed revised covenants in respect of its revolving credit facility with its existing lender during the year and these covenants reflect the latest financial forecasts of the Group, with a suitable degree of headroom incorporated. The facility runs until April 2016 amortising by £1.1m each year. Due to the relatively short period to the expiry of this facility the Group has held discussions with its Bankers and they have confirmed that in the absence of unforeseen circumstances and the Group continuing to meet or exceed its forecasts, they are not aware of any reason why they would not renew this facility. It is anticipated that new facilities will be formally agreed during this current financial year.

The Directors have prepared and reviewed forecasts and projections for a period of not less than 12 months from the date of this announcement. These are based upon detailed assumptions in particular with regard to the key risks and uncertainties, together with the level of borrowings and other facilities made available to the Group. The Board also takes account of reasonably possible changes in trading performance to determine whether the Group should be able to operate within its current level of facilities.

In the event, should actual performance fall below the current forecast levels in this period the Group has a number of mitigating factors available to it and the Board has the necessary monitoring and controls in place in order to be able to put the required actions in place if it sees a need to do so.

The Directors have, at the time of approving the financial statements after taking into account the factors noted above concluded that the Group has adequate financial resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis.

Potential litigation - update

As reported in the 2014 Annual Report, a shareholder, Mr B Bridge, has issued proceedings under The Companies Act 2006 in the Liverpool District Registry of the High Court seeking permission to pursue a derivative claim against certain directors of the Company, (namely Keith Daley, Tony Harris, Ric Piper and John Wilson) and certain former directors (namely Noah Franklin and Simon Acland).

Since the 2014 Annual Report was approved on 2 July 2014 the proceedings have been delayed, largely as a result of procedural failings on the part of Mr Bridge.

At a procedural hearing held on 1 October 2014 the Court refused permission as against Tony Harris and Ric Piper, against whom it was satisfied that no sufficient claim had been made out. Accordingly Mr Harris and Mr Piper are no longer defendants.

The Court has not yet been able to consider whether it is appropriate to grant permission to continue the intended claim against the remaining directors and former directors detailed above. A further hearing is listed on 16 and 17 June 2015 at which the permission application is expected to be finally determined.

Despite obtaining permission on 1 October 2014 to amend his claim, Mr Bridge has not yet done so. As a result, Mr Bridge's claim remains as outlined in the Annual Report in 2014 on pages 16 and 17.

The Company has continued to receive professional advice on Mr Bridge's claim, which, on the evidence, the Court is highly likely to refuse permission to continue the claim against the remaining current and former directors.

At the hearing in June 2015 the Court will, if it does give permission to continue the claim, also consider Mr Bridge's application for an indemnity out of the assets of the Company in respect of his costs. The potential cost consequences for the Company remain as outlined in the Annual Report last year. In view of the professional advice received, the Company, having carefully considered the matter, does not consider that it is appropriate to make a provision for the costs at this time.

In the event that the claim is continued it would be expected to come to Court in 2016 or later.

Consolidated statement of comprehensive income

Year ended 31 January 2015

Consolidated balance sheet

as at 31 January 2015

Consolidated statement of changes in equity

Year ended 31 January 2015

1The treasury shares are held by the Elektron Technology 2012 Employee Benefit Trust.

Consolidated statement of cash flows

Year ended 31 January 2015

Notes to the audited consolidated accounts for the year ended 31 January 2015

1. Basis of Preparation

While the financial information included in this audited preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Group will publish full financial statements that comply with IFRS.

The financial information set out in this audited announcement does not constitute the Group's statutory accounts for the year ended 31 January 2015 or 31 January 2015, within the meaning of Section 435 of the Companies Act 2006. The audit of the statutory accounts for the year ended 31 January 2014 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this audited announcement and will be delivered to the Registrar of Companies following the Group's annual general meeting.

The financial information for the year ended 31 January 2014 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The Group's auditor issued a report on those financial statements that was unqualified and did not draw attention to any matters by way of emphasis and did not contain a statement under section 489 (2) or (3) of the Companies Act 2006.

2. Segmental reporting

The Group has continued to adopt the provisions of IFRS8 'Operating Segments' and historically shown summary information in respect of these segments. This segmentation is consistent with internal reports to the Chief Operating Decision Maker for use in assessing business performance and allocating Group resources. The Chief Operating Decision Maker is the Chief Executive of the Group.

Revenue reported above represents revenue generated from external customers.

Segment profit represents the profit earned by each segment including a share of central administration costs, which are allocated on the basis of actual use or pro-rata to sales. This is the measure reported to the Chief Operating Decision Maker for the purposes of resource allocation and assessment of segment performance.

Geographical information

The Group considers its operations to be in the following geographical regions:

3. Non-recurring or special items

The restructuring costs in the year ended 31 January 2014 include amounts payable during the year due to the consolidation of operations in the UK and the Asia Pacific region and related factory closure costs.

4. Earnings/(loss) per share

The calculation of the basic earnings/(loss) per share (Basic EPS), diluted earnings/(loss) per share (Diluted EPS) and earnings/(loss) per share before non-recurring or special items (Adjusted EPS) is based on the following data. Shares held in treasury are excluded from the number of shares in issue for the purposes of earnings per share calculations. The calculation of the diluted earnings/(loss) per share is based on the basic earnings/(loss) per share adjusted to allow for the issue of shares on the assumed conversion of all dilutive options. However, in accordance with IAS33 'Earnings Per Share', potential ordinary shares are only considered dilutive when their conversion would decrease the profit per share or increase the loss per share from continuing operations attributable to the equity shareholders. As at 31 January 2015 there were 18,496,718 potential ordinary shares which have been disregarded in the calculation of diluted earnings per share as they were considered non-dilutive at this date.

Earnings/(loss)

5. Net cash flows from operating activities

Cautionary Statement

This announcement has been prepared for the shareholders of the Company, as a whole and its sole purpose and use is to assist shareholders to exercise their governance rights. The Company and its directors and employees are not responsible for any other purpose or use or to any other person in relation to this announcement and their responsibility to shareholders shall be limited to that which is imposed by statute.

This announcement contains indications of likely future developments and other forward-looking statements that are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries, sectors and business segments in which the Group operates. These and other factors could adversely affect the Group's results, strategy and prospects. Forward-looking statements involve risks, uncertainties and assumptions. They relate to events and/or depend on circumstances in the future which could cause actual results and outcomes to differ from those currently expected. No obligation is assumed to update any forward-looking statements, whether as a result of new information, future events or otherwise.