RNS Number : 5118W
Elektron PLC
12 June 2008
 



Embargoed for release: 7:00 a.m. 12 June 2008


ELEKTRON PLC


Preliminary unaudited results for the year ended 31st January 2008


Elektron PLC ("Elektron"), the AIM quoted engineered components company announces its preliminary results for the year ended 31st January 2008.



Key Points:


Keith Daley, Chairman of Elektron commented, "These are excellent results, especially given the fact that they were achieved during a period of intense commodity price inflation. The current year will be more challenging but we believe that economic turbulence will provide further opportunities for growth through acquisition." 




For further information please contact:


Keith Daley

Charles Cunningham

Non Executive Chairman

FinnCap

Elektron PLC

Tel: 020 3207 3213

Tel: 020 8348 0810



  



Chief Executive Officer's Statement


Overview

I am pleased to report continued improvement in the Group's financial results, details of which are given below.


The Group has continued its development and following the purchase of Sifam Instruments Limited in August last year it now consists of three divisions; Elektron Components, Hard Metal Components and Instrumentation. 


The acquisition of Sifam has resulted in negative goodwill (i.e. addition to Group net assets) of £1.16 million and in the six months post acquisition Sifam has produced operating profits of £0.07 million. A new managing director has been appointed and annual operating costs reduced by almost £0.4 million, some of which will be reinvested to bolster the engineering team and increase new product development to reverse a sales decline over recent years. Plans are in the process of being formulated for off-shoring manufacture of its traditional products serving mature markets.


2006/7 saw the move of connector production from the UK to our facility in Tunisia and the first half of 2007/8 saw the bedding down of production and the restoration of customer service to better levels than those experienced pre-move. We also started the necessary planning to relocate the remaining UK based switch production to our facilities in China. This process will continue throughout 2008/9 at an estimated remaining expense of £0.8 million.


Hard Metal Components had a reasonable year but cobalt prices and a market slowdown have accelerated the need to look for off-shore cost savings, again with projects currently under way.


The introduction of a new Group IT system is approaching contract stage. We anticipate the project completing towards the end of the next financial year at a total cost of £0.9 million. 


Group Financials

Turnover on continuing operations increased to £34.9 million (2007: £26.0 million). Gross margin was 35% compared with 36% the previous year.


The operating profit margin of £2.14 million, before exceptional items, was 6.1% compared with 7.2% the previous year and largely reflects the drop in gross margin.


Currency movements resulted in exchange losses of £0.15 million compared with a loss the previous year of £0.22 million.


Profit before taxation from continuing operations was £1.95 million (2007: £0.51 million) after exceptional costs of £1.05 million, loss on disposal of discontinued operations £0.12m and negative goodwill of £1.16 million.


Exceptional costs included £0.77 million redundancy and restructuring costs for transferring switch manufacture to China, £0.14 million restructuring costs in Sifam, £0.07 million restructuring costs in the hard metals division and £0.07 million of abortive acquisition costs.


Net assets of the Group have reached £10.2 million (2007: £8.0 million) with net debt as at 31 January 2008 of £1.55 million compared to £5.60m the previous year. Net gearing has reduced from 70% to 15%.

 

The Group generated £3.4 million of cash from trading of which £1.4 million was absorbed in working capital increases, £1.1 million was expended in eliminating pension deficits, £0.7 million in payment of restructuring costs and £0.4 million in tax and interest payments leaving a cash outflow from operating activities of £0.2 million.


£7.2 million was raised through the sale and leaseback of freehold properties of which £3 million was used to repay borrowings, £1.9 million used to acquire Sifam Instruments Limited, £0.7 million used to purchase plant and machinery, £0.3 million paid in dividends resulting in an overall increase in cash in the year of £1.1 million.


The tax credit of £0.52 million arises from a combination of factors, the majority of which are one-off and include the utilisation of capital losses not previously recognised as a deferred tax asset and non-taxable negative goodwill arising on consolidation. Stripping out these would give an underlying tax charge for the current year of £0.08 million, which reflects this year's earnings arising principally from off-shore operations.


Earnings per share metrics, after taking account of the effects of IFRS 2 'share-based payments' were:

 

 


The Board is proposing a final dividend of 0.45p per share (2007: 0.40p) payable on 5th August 2008 to

shareholders on the register at 11th July 2008. This represents an increase of 12.5% and reflects the

Board's confidence in the business.


The Board will also look for opportunities to purchase the Company's shares on market subject to funds not being required elsewhere.



Elektron Components Division (Sales £22.9 million, operating profits £2.01 million)

Elektron Components Limited ("ECL") comprises two brands, Bulgin, which operates in the industrial sector selling connectivity and sealed products for harsh environments, and Arcolectric, which offers switching and indicator solutions primarily for the consumer products market.


ECL manufactures nearly 100 million products per annum, for customers in industries ranging from industrial communications, marine and water treatment, to white goods, small consumer appliances, and products used within the food preparation sector.


Its global reach extends to all continents, with operations in Europe, America, Asia and North Africa, and an extensive sales channel network in 125 countries.


The off-shoring of Arcolectric’s production to China is well under way and we will be exiting two of the three properties in West Molesey at the lease break date in December this year. We have taken a 15-year lease, with 5-year breaks, on a new property in Shenzhen with 6,500 sq metres of factory space and 2,700 sq metres of dormitory space at a current annual rental of £0.08 million. The lease of the existing China factory comes to an end in March 2010. To accommodate the transfer of production, and to protect the Company’s assets, a new wholly owned subsidiary Elektron Components (Shenzhen) has been formed.

 

We reconfigured our US selling organisation and network, to better reflect our business strategy, and we began to realise the positive effects of this activity towards the end of the year.


As fiscal 2007/8 drew to a close, we combined the previously autonomous business units, of Arcolectric and Bulgin Components, into one legal entity. This structure better reflects the interdependence of the brands' manufacturing functions, and there are benefits from leveraging the selling channels across both brands, improving our penetration in certain markets.  


This initiative included the formation of a new management team, and we drew experienced members from the existing businesses enhanced with externally sourced talent.  


The ECL performance reflected both the benefits of a complete year of off-shore manufacture and the disadvantage of increasing commodity prices. Sales revenues of £22.9 million were down from £24.1 million the previous year, the weakness being in switches as the white-goods market slowed. Gross margins were up at 36.9% compared with 36.3% in the prior year with connector margins improving by 7% but switch margins declining by 5%.  


2008/9 is proving to be a challenging year. Approximately 30% of our business is directly related to the consumer market and we are experiencing customer caution in the placing of previously enjoyed forward schedules. The volatile raw materials market, and in particular mounting copper prices, will continue to squeeze our margins. We are having some success in offsetting these pressures through pricing adjustments, productivity gains, and a continuing migration to low cost economies. However, the instability in commodity prices and the time lag in achieving offsets, may adversely affect operating margins for our traditional products.


Achievements worthy of note are:

 




Hard Metals Division (Sales £8.3 million, operating profits £0.45 million)

In a competitive market the division achieved 9.5% sales growth winning new customers as well as new business from existing customers. Productivity improvements enabled us to achieve this growth without additional personnel.


In spite of the relative strength of the pound sterling we increased selling prices where possible partially offsetting major material price increases. Consequently gross margins for the year remained stable at 31%.


Through investment in new machinery we are achieving steady efficiency improvements, bringing sub-contract work back in-house and winning new business from high added value components that we would previously have not been able to manufacture cost effectively. For instance, with new CNC grinding capability we are taking orders for high precision thread grinding. We have also automated the surface grinding of circular knives allowing us to penetrate this market.


Orders in the first quarter of the new year are significantly below last year as a result of the downturn in the markets we serve. In addition we have seen an unprecedented rise in the cost of cobalt, now twice the price it was one year ago. We are forced to increase the selling prices of components with high cobalt content at the risk of losing this low margin business.  


We are however confident that we have not lost customers to date and helped by the current strength of the Euro we are working hard to win more European business. We have taken quick action to reduce costs whilst striving to maintain the key skills underpinning our future growth plans.


For the medium and longer term we continue our strategy to invest in the machinery to enable us to win more "value added" business. Customers continue to demand greater dimensional accuracy in sintered products and more complexity in ground products. We focus on circular ground products for the oil, gas and other industries where precision quality and speed of delivery are paramount. This strategy will reduce our sensitivity to material price fluctuations and extend our move into niche markets where aggressive pricing is not the major element of supply.  


In parallel we are evaluating the feasibility of moving the manufacture of less complex components off-shore.


Instrumentation Division (Sales £3.7m, operating profits £0.07 million)

Sifam Instruments Limited consists of four product areas being nano-positioning instruments ("Queensgate"), electronic measuring instruments ("Digitron"), meters and precision multi-shot mouldings.


From acquisition in August 2007 to year-end in January 2008 the division returned satisfactory operating profits (before exceptional costs) of £0.07 million on sales of £3.7 million with a gross margin of 32%. 


The progress of the business is dependent upon the design and development of new instrumentation products and cost savings in the traditional areas of meters and mouldings. 


First quarter trading in the year beginning February 2008 was satisfactory. The outlook for the rest of the year is solid in some product areas such as Digitron, but weaker in others. The Queensgate business is very dependent on the semiconductor industry and in particular hard disk drive manufacturers all of which are currently experiencing a down turn.

 


In the short term we will be developing new temperature monitoring and control technology and new pressure measurement devices which will produce sales and margin improvements next year. Beyond that we will be looking to launch products complementary to our current range, notably in the areas of gas detection and moisture measurement. This should lead to more substantial growth in 2009/10 and beyond.


In order to improve profitability it was felt prudent to undertake a cost reduction exercise which has led to a headcount reduction of 14 effective 31st May 2008. This will give savings of £0.17 million in the current year and £0.28 million in a full year. 


Looking ahead we plan to improve competitiveness by following the dual strategy of moving manufacture of certain products off-shore and developing in house new higher value added technology. Off-shore manufacture of our range of control knobs will allow us to substantially improve margins on current business and enable us to compete for new contracts in market segments previously not accessible to us. To a lesser extent this principle applies across much of the rest of our product range.


Group strategy and Outlook 

Our approach is three pronged:

 

 

It is worthwhile restating what was said in our last annual report:

 

"The last few years have been exceptionally profitable for manufacturers of all types and your Board believes that this state of affairs cannot last forever. A harsher business environment will however offer more opportunities for acquisitive companies as businesses get into difficulties. Elektron is a low cost manufacturer and is conservatively financed and the Board believes that it is well placed to take advantage of such opportunities as they arise."

 

We managed a healthy increase in earnings per share in the year just ended but those words remain pertinent today in an even harsher business climate. In the past three months we have seen a downturn in orders across the group. Much of this is as a result of destocking by our customers who are becoming more cautious. If this downturn is sustained however, we would expect to see a significant reduction in our near term profitability whilst continuing to produce operating profits. We shall keep the market informed as appropriate.

 

The Board remains confident that it is following the correct strategy and relishes the challenges ahead.



Adrian Girling

Chief Executive Officer

  

Group Income Statement



Preliminary Unaudited Results to 31 January 2008


Year to

Year to


31 January

2008

Unaudited

31 January

2007

Audited





£'000

£'000




Revenue from continuing operations 

34,908

26,010

Cost of sales

(22,749)

(16,662)

Gross profit

12,159

9,348

Net operating expenses (including exceptional items)

  (9,909)

(8,753)




Operating profit - continuing operations

2,135

1,874

  • negative goodwill 

  • exceptional items

1,163

(1,048)

-

(1,279)




Operating profit from continuing operations

2,250

595




Loss on disposal of discontinued operations

(123)

-


Profit before finance costs from continuing operations 


2,127


595

Finance income

74

49

Finance costs

(252)

(131)




Profit before taxation from continuing operations

1,949

513




Taxation on continuing operations

520

(21)




Profit after taxation from continuing operations

2,469

492




Loss after taxation from discontinued operations

(73)

(85)




Profit attributable to shareholders

2,396

407




Earnings per share        - basic

      - diluted

2.76p

2.75p

0.50p

0.50p

Earnings per share continuing operations - basic

  - diluted

2.85p

2.83p

0.61p

0.61p




  

Group Balance Sheet





Preliminary Unaudited Results at 31 January 2008









31 January 2008

Unaudited

31 January

2007

Audited


£'000

£'000

Assets



Non-current assets



Property, plant and equipment

3,875

3,683

Deferred tax

354

-


4,229

3,683

Current assets



Inventories

6,617

4,974

Trade and other receivables

7,679

10,506

Cash and cash equivalents

1,987

858


16,283

16,338

Non-current assets held for sale

-

1,253

Total current assets

16,283

17,591




TOTAL ASSETS

20,512

21,274




Equity and liabilities



Equity attributable to equity holders of the parent



Called - up share capital

4,336

4,336

Share premium

244

244

Merger reserve

1,047

1,047

Capital redemption reserve

106

106

Other reserves

136

54

Retained earnings

4,304

2,214

Total equity

10,173

8,001




Non-current liabilities



Long-term borrowings

471

286

Deferred tax

116

63

Long-term provisions

242

251

Total non-current liabilities

829

600




Current liabilities



Trade and other payables

5,089

4,609

Short-term borrowings

2,783

5,385

Current portion of long-term borrowings 

283

225

Current tax payable

526

895

Short-term provisions

829

500


9,510

11,614

Liabilities associated with non-current assets held for sale


-


1,059

Total current liabilities

9,510

12,673




Total liabilities

10,339

13,273




TOTAL EQUITY AND LIABILITIES

20,512

21,274


  

Group Cash Flow Statement




Preliminary Unaudited Results to 31 January 2008







31 January

2008

Unaudited

31 January

2007

Audited


£'000

£'000




Cash flows from operating activities



Profit before taxation (continuing activities)

1,949

513

Loss before taxation (discontinued activities)

(65)

(104)

Profit before taxation

1,884

409

Adjustments for:



Depreciation

1,293

1,019

Loss on disposal of fixed assets

-

57

Negative goodwill

(1,163)

(5)

Loss on disposal of businesses

123

-

Restructuring and other exceptional charges

1,048

1,279

Interest receivable

(73)

(49)

Interest payable

300

184

Operating profit before working capital changes

3,412

2,894

 (Increase) decrease/ in trade and other receivables

(48)

113

Increase in inventories

(318)

(14)

(Decrease)/increase in trade payables

(1,001)

17

Payments on closure of retirement benefit schemes

(1,085)

-

Payments for restructuring costs 

(699)

(942)

Other non-cash movements

(38)

27

Cash generated from operations

223

2,095

Interest paid

(300)

(184)

Taxation paid

(141)

(457)

Net cash (outflow)/inflow from continuing operations

(27)

1,553

Net cash outflow from discontinued operations

(191)

(99)

Net cash (outflow)/inflow from operating activities 

(218)

1,454




Cash flows from investing activities



Business disposals

68

100

Acquisition of subsidiaries

(1,880)

(1,655)

Purchase of property, plant and equipment

(1,023)

(610)

Proceeds of sale of property, plant and equipment

7,158

4

Interest received

73

49

Net cash generated from/(used in) investing activities 

4,396

(2,112)




Cash flows from financing activities



Purchase of own shares

-

(132)

Movement in long term borrowings

(146)

(2,224)

Movement in short term borrowings 

(2,814)

2,906

New capital leases

302

164

Payment of hire purchase and finance liabilities

(44)

(638)

Dividends paid

(347)

(274)

Net cash used in financing activities

(3,049)

(198)







Net increase /(decrease) in cash and cash equivalents

1,129

(856)

Cash and cash equivalents at the beginning of period

858

1,714

Cash and cash equivalents at the end of period

1,987

858





  

Group statement of changes in equity








Preliminary Unaudited Results to 31 January 2008









Share

 Capital


£'000

Share 

Premium


£'000

Merger

Reserve


£'000

Capital 

Redemption Reserve

£'000

Other

 reserves


£'000

Retained 

earnings


£'000

Total



£'000

At 31 January 2007

4,336

244

1,047

106

54

2,214

8,001

Transfer from income statement

 Exchange differences

-

-

-

-

-

2,396

2,396

Dividends paid

-

-

-

-

-

(347)

(347)

Employee share schemes

-

-

-

-

11

-

11

Actuarial gains

-

-

-

-

-

41

41

Exchange differences

dividends

-

-

-

-

71

-

71

At 31 January 2008

4,336

244

1,047

106

136

4,304

10,173





Notes to the Preliminary Unaudited Results to 31 January 2008

 

1. Accounting Policies


The financial information has been prepared on the basis of International Financial Reporting Standards (IFRS) as adopted by the European Union. Full details of accounting policies will be included in the Annual Report for the year ended 31 January 2008. These are not expected to be materially different from those set out in the Group's statutory accounts for the year ended 31 January 2007.

 

2. Other information


The financial information in respect of the year ended 31 January 2008 set out in this statement has been extracted from the statutory financial statements which have not yet been audited but are not expected to differ materially from the information given in this statement.


The financial information in this statement does not constitute statutory accounts. The financial information in respect of the year ended 31 January 2007 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain any statement under Section 237 of the Companies Act 1985 or under Section 498 of the Companies Act 2006.


Audited financial statements will be sent to shareholders at the end of June 2008. Copies of this announcement are available free of charge from the Company's registered office at Melville Court, Spilsby Road, Romford, Essex RM3 8SB for a period of one month from the date hereof and copies of the audited financial statements will be so available for at least 14 days from date of publication.


The Annual General Meeting will be held at 3 pm on 30 July 2008 at Melville Court, Splisby Road, Romford, Essex, RM3 8SB.

 

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The company news service from the London Stock Exchange
 
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