Hardide PLC Preliminary Results (8809J)

TIDMHDD

RNS Number : 8809J

Hardide PLC

10 December 2018

 
                                                                               10 December 2018 
 

Hardide plc

("Hardide" or the "Group" or the "Company")

Preliminary results for the year ended 30 September 2018

Hardide plc (AIM: HDD), the developer and provider of advanced surface coating technology, announces its preliminary results for the year ended 30 September 2018.

Highlights

Financial

   --     Record revenues, up 42% to GBP4.61m (2017: GBP3.24m) 
   --     Gross profit increased by 52% to GBP2.41m (2017: GBP1.59m) 
   --     Stronger gross margin of 52% (2017: 49%) 

-- EBITDA improved by GBP0.44m to loss of GBP0.30m before exceptional items (2017: loss of GBP0.74m)

   --     Successful fundraising of GBP2.54m (before expenses) 
   --     Cash at bank at 30 September 2018 of GBP3.30m (2017: GBP1.21m) 

Business & operational

-- Significant rise in sales to oil and gas sector; supported by strong demand from the two new supply agreements previously announced

-- Increased sales benefitted from new customers and the continuing recovery of the oil and gas sector

-- 84% year-on-year increase in sales to customers in North America - accounting for 61% of total Group sales

-- Technical work successfully completed with Airbus on production parts and final commercial discussions underway

-- Investment in additional capacity: third reactor installed and being commissioned in the US, further upgrades to production equipment in US and UK

   --     Both US and UK sites are now accredited to aerospace quality management system AS9100 Rev D 

-- Awarded funding for three projects: one from Innovate UK and two from The National Aerospace Technology Exploitation Programme ("NATEP")

-- Appointment of two new non-executive directors bringing extensive aerospace and strategic business experience

   --     Appointment of senior independent director 

Commenting on the results, Robert Goddard, Chairman of Hardide, said:

"Hardide has reached an inflexion point, with record sales across all geographies with a 42% year-on-year increase to GBP4.61m. Oil and gas revenue grew significantly, benefiting from the continued recovery in the sector, with strong sales to new and existing customers.

"We are encouraged by the potential for significant growth in sales to the civil aerospace sector. Having successfully completed technical testing, detailed discussions are underway with Airbus and its tier 1 partners regarding the supply of production parts. Parts for other US and UK aerospace manufacturers are in various stages of development, including the final stages of life testing on transmission parts for Leonardo Helicopters.

"The Board is pleased with the Group's performance and the positive trading outlook. Our key oil and gas customers are experiencing a broad-based recovery in activity and are predicting that the current positive cycle will continue and that the supply-demand balance will remain favourable. This is positive news for Hardide and supports the Group's strategy to invest ahead of revenue as it drives towards profitability in the coming year."

 
 Enquiries: 
  Hardide plc                                       Tel: [phone] 
   Robert Goddard, Non-Executive Chairman            353830 
   Philip Kirkham, CEO 
   Jackie Robinson, Communications Manager 
  IFC Advisory                                      Tel: [phone] 
   Graham Herring / Heather Armstrong / Florence     6630 
   Chandler 
  finnCap                                           Tel: [phone] 
   Henrik Persson / James Thompson / Matthew         0500 
   Radley 
 

www.hardide.com

Notes to editors:

Hardide develops, manufactures and applies advanced technology tungsten-carbide coatings to a wide range of engineering components. Its patented technology is unique in combining, in one material, a mix of toughness and resistance to abrasion, erosion and corrosion; together with the ability to coat accurately interior surfaces and complex geometries. The material is proven to offer dramatic improvements in component life, particularly when applied to components that operate in very aggressive environments. This results in cost savings through reduced downtime and increased operational efficiency. Customers include leading companies operating in oil and gas exploration and production, valve and pump manufacturing, precision engineering and aerospace industries.

chairman's and ceo's report

INTRODUCTION

Hardide reported record full year sales of GBP4.61m, a 42% increase over FY17 (2017: GBP3.24m). The global upturn in the oil and gas sector, boosted by the two new supply contracts, benefitted the Group with a strong improvement in oil and gas sales when compared with FY17. Sales increased across all geographies but was particularly marked in North America, where an 84% uplift from last year was achieved.

In February 2018, an oversubscribed fundraising of GBP2.54m (before expenses) was completed. At the same time, a US$0.24m low-interest loan facility was made available by Martinsville-Henry County Economic Development Corporation (MHCEDC) in Virginia, USA. This has helped fund the third coating reactor, equipment upgrades and other developments at the Martinsville site, thereby bringing it up to aerospace standard.

In July 2018, strategic plans to develop the aerospace sector were advanced in the US as the facility there gained aerospace certification to AS9100 Rev D. This followed the UK site's transition to AS9100 Rev D in December 2017. Progress towards securing aerospace contracts in Europe has gathered pace, with technical testing concluded and commercial discussions underway on production parts for Airbus, and parts in development for several other European and US manufacturers. This slow pace of progress is normal in the aerospace industry.

We continued our strategy to achieve further growth of the business by investing ahead of revenue in business development, production equipment and capacity.

FINANCIAL RESULTS

The Group generated record sales of GBP4.61m in the year ended 30 September 2018 (2017: GBP3.24m). Direct expenses including production salaries increased by 33% which allowed Group gross profit to grow by 52% to GBP2.41m. Overhead costs rose by 17% as we continued to invest in marketing, business development resource, research and development and IT, as well as reflecting a slight reduction in grants received compared to the previous year. We recruited an additional Business Development Engineer for the North American market; and we incurred significant expense developing the process to coat extremely complex components which resulted in the award of the second of our two new supply contracts.

The Group's EBITDA loss reduced by 59% to GBP0.30m (2017: GBP0.74m loss). Depreciation expense also fell year on year as some equipment in Martinsville became fully written-down.

In 2015 and 2016, Hardide Coatings, Inc. received two grants worth a combined US$0.32m towards the cost of the new Martinsville facility. These grants had performance criteria attached relating to increasing both the number of employees and the amount of taxable property at the facility within a certain time frame. We have reviewed these criteria and decided prudently to make a provision in the accounts for the potential repayment of these grants in full. The deep and long recession in the oil industry during the period 2014 to 2017 meant that the development of our US business has taken longer than originally projected. Notwithstanding, we have asked the grantors to extend the performance review deadlines.

There has been a slight change to the business model in this financial year. A substantial new, high-volume supply contract has Hardide responsible for the complete supply and stocking of the product. This means that in a few cases, in addition to coating components, the Group is responsible for purchasing the metal for those components and the sub-contract machining of them. Since the added-value of Hardide is in the coating and not in the value of metal or the machining of it, the percentage mark-up that the Group can achieve on the bought-in elements is lower than the margin on the coating itself. However, the high sales value under this contract, albeit at a lower percentage margin, provides a significant uplift to the Group's overall gross profit. As such, this supply contract is a very positive development for the Group. This is the second such contract where customers have asked Hardide to be responsible for the full supply of the parts; this significantly improves and secures our position as a long-term supplier to them.

On the balance sheet, net assets at 30 September 2018 were GBP5.08m (2017: GBP3.29m). This included a cash balance of GBP3.30m (2017: GBP1.21m).

OPERATIONAL OVERVIEW

Customers and Markets

Activity returned strongly to the oil and gas sector and with it the volume of sales in the second half of FY18 to the two customers with whom we announced new, major supply agreements last year. We worked with the first customer - a North American provider of high-value 'completion' technology - to develop an arrangement whereby Hardide builds an agreed level of stock from which coated product can be provided on a 'just-in-time' basis. This cuts lead time for the customer by more than 50%. With the Hardide coating, their tool lasts longer and enables more efficient production, thereby lowering extraction cost and delivering competitive advantage.

The first high-volume production orders were received under the second agreement, which is with a global oil and gas operator. The complex design of the component presented considerable technical and production challenges and it is a notable achievement by the Hardide technical and production teams that these were overcome. The technology is now being deployed in a deepwater production field. Coating of these parts is now being transferred from the UK to our US facility.

Strong demand is forecast for a third oil and gas application. This is from a current blue chip oil services customer for key components in a new downhole tool.

Progress towards securing supply contracts for Airbus components is gathering pace. Over the last year, substantial development work has been undertaken with both Airbus and one of their tier 1 suppliers on a range of components. Frequent joint meetings have been taking place so as to reach a conclusion as fast as is possible. The availability of trial components and information flow from the tier 1 partner was challenging, but now all technical details and required changes have been finalised and agreed. The focus is now on agreeing commercial terms and once this is done, pre-production and/or full production orders should follow shortly thereafter. This pace of progress, while slow and frustrating, is typical for the introduction of a new process to the aerospace industry. However, once complete it is expected that demand for the components will continue for many years.

Additional components for another tier 1 supplier to Airbus are also in the final stages of a life testing programme, with very promising results. We expect progress with these components will be much quicker than with the earlier approval process with Airbus.

Testing of transmission components at Leonardo Helicopters is almost complete and the Hardide coating is showing excellent results.

Other development work is also ongoing with a number of UK, European and North American aerospace companies including Triumph Aerospace Systems Group and has been aided by the recent approval of both Bicester and Martinsville sites to aerospace standard AS9100 Rev D and also the Nadcap accreditation at Bicester.

Good progress was made in our goal to diversify our customer base. This is due largely to the three new major contracts and helped as well by several other smaller accounts arising from development projects. The resurgence of oil and gas activity and the protracted process of securing volume aerospace sales means that our market diversification plans are taking longer than we would like. However, the Board is satisfied that the risk from over-reliance on a small number of customers is now much reduced and that sector diversity will improve as sales into the aerospace sector result alongside sales to other sectors where trials are showing promise, including power generation and coating industrial diamonds for use in the hard-facing of components.

In North America, we strengthened our business development team by appointing a business development engineer. Based in Houston, Texas he is dedicated to the oil and gas sector. This will allow our existing VP of Business Development in North America to concentrate on developing new markets, including aerospace.

Our first participation in a US aerospace exhibition will take place in Arizona in December 2018 and in July 2018, we exhibited at the Farnborough Airshow as part of the North West Aerospace Alliance group. This resulted in increased awareness of Hardide and many productive new leads.

New opportunities arose throughout the year as a direct result of Hardide's technical director making presentations at several top tier conferences in North America and Europe. We continued to publish papers and secure editorial in trade journals in these regions throughout the year.

Being novel technology, achieving awareness has been challenging but now, with substantial sales into new applications that can be publicised, together with sustained marketing, awareness of our technology is improving steadily and expected to lead to new business and the expansion of our customer base.

Production, Technology, Research & Development and Accreditations

In July 2018, the quality management system at the production facility in Martinsville was certified for the first time to the stringent AS9100 Revision D and ISO9001 and the site is now approved to coat aerospace and space industry components. While the UK facility has been approved to this standard for many years, it transitioned to Revision D in December 2017. A complement to ISO 9001:2015, Revision D includes an increased focus on senior management commitment, risk management and product safety requirements.

An emphasis on R&D activity during the oil industry downturn resulted in the Group making sufficient progress to apply successfully for three grants for the further development of the Hardide coating for oil and gas, and aircraft components.

Since January 2018, and with grant support from Innovate UK, the technical team has been making good progress on a low temperature variant of the coating. Following in-depth experimental and analytical work, a production-ready, low temperature coating process was developed and is now under extensive testing by several leading UK laboratories. This new coating will enable the Group to widen the range of materials that can be coated, including some grades of steel and alloys widely used in the subsea oil and gas, and aerospace industries. This project will continue until spring 2019.

During the period, the Group was awarded funding for two projects from NATEP. The funding will help further the application of Hardide coatings for aircraft components. NATEP is a GBP14.4m aerospace initiative programme designed to further the application of 40 technologies in the UK aerospace supply chain. Hardide Coatings is the lead partner on both of the projects.

The first project is the development of a grinding and super-finishing methodology for Hardide-A, which is a proven direct and REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) compliant replacement for hard chrome plating. This project is supported by Airbus and Perfect Bore Manufacturing Ltd.

The second project is for testing and characterisation of the low temperature coating and optimisation of the process that will increase the range of aerospace substrate materials suitable for Hardide coating. Airbus and Leonardo Helicopters as end-users and Perfect Bore Manufacturing as component manufacturer and Westmoreland Laboratories are all support partners. Both projects began on 1 September 2018 and will each take up to 18 months to complete.

The recent fundraising enabled the acquisition of a third reactor for our US site, as well as upgrades to production and process equipment in the US and UK. These upgrades have brought the US facility up to aerospace standard and enabled the UK site to operate more efficiently, as well as to coat a wider range of products. The new reactor for Martinsville is now in place and will be commissioned before the end of December 2018. Further investment in reactors at the Martinsville facility is under constant review. A new, larger pre-treatment line is also on order for Martinsville and will be ready early in 2019. The investment in new reactors in the US will release capacity for technical development projects in the UK as production for US customers continues to be transferred to Martinsville.

At any one time, the Group has several strategic development, feasibility and test programmes underway. These are essential to our ability to diversify and win new business. Capacity and resource to undertake this work is fundamental to the long-term growth of the business.

The predicted significant growth in activity at both the UK and US sites means that new or additional premises may soon be required. An evaluation of options is now underway and investment decisions will be made in line with expected customer demand.

As the business has grown in size and complexity, with multiple sites and evolving customer needs, new business software is now required. A new SAGE 200 Enterprise Resource Planning (ERP) system is being installed and phased-in to business processes. This will achieve efficiencies in management and administration by integrating day-to-day processes, including inventory and order management, accounting, human resources, and customer relationship management.

Intellectual Property

The IP committee met quarterly to review the IP portfolio. During the year, new UK and international patent applications were submitted for a further-enhanced Hardide coating and its new applications, particularly in power generation. This is currently under examination by the UK's Intellectual Property Office. Japanese and Russian Federation patents were granted for the coating of industrial diamonds. Research continues into the development of new coating variants and applications with the objective of strengthening and widening the Group's IP portfolio. Good progress was made during the year on development of a new coating variant; also with patent potential.

STRATEGY

Hardide's coatings are technologically advanced and often convey considerable commercial advantage by helping to solve complex and difficult engineering problems. Our coatings provide a unique combination of advantageous properties and would enhance the product ranges of many other surface technology companies. With high operational gearing, the Group is working towards significantly increasing its revenue, which means maximising gross profit. The Board believes that a strong upward trajectory in gross profit will be seen externally as a clear indicator of the Group's value.

As demonstrated by the successful fundraising during the year, the Board maintains its positive view of Hardide's potential for growth. Accordingly, the Group will invest further in expanding production capacity, marketing, business development and R&D. The Board is confident in the medium- and longer-term outlook and encouraged by the progress being made in diversifying and developing the customer base, particularly in North America. The efforts to further diversify will continue and the new and soon-to-be-expanded production base in the US will be deployed to develop North American business across multiple sectors. At the same time, we aim to expand further our presence in selected UK & European market sectors.

We see substantial new opportunities in our key sectors and are working to convert these into sales. The precision engineering sector continues to develop with multiple new applications expected.

Employees and shareholders

In addition to expressing its thanks and appreciation to our loyal and dedicated staff, the Board thanks Jan Ward, who resigned from the Board during the year, for her contribution. We welcome our new non-executive directors: Charles Irving-Swift and Tim Rice.

The majority of our shareholders have continued to support the Group over many years. They have shared the Board's vision and we hope that they now feel justified in doing so as sales revenue accelerates and significant sales to the aerospace sector are in prospect.

OUTLOOK

The Board is confident of further improvements in performance in FY19 as we progress towards becoming EBITDA-positive. The increase in oil and gas activity, the strong sales pipeline in the UK and North America and the progress being made in test programmes for new applications support this position.

We continue to nurture our long-term relationships with Airbus and Leonardo Helicopters and are confident that soon we will see the benefit to the Group.

 
 Robert Goddard    Philip Kirkham 
 Chairman          CEO 
 7 December 2018   7 December 2018 
 

CONSOLIDATED INCOME STATEMENT

for the year ended 30 September 2018

 
                                           2018      2017 
                                           GBP000    GBP000 
 
 Revenue                                   4,613     3,241 
 Cost of sales                            (2,201)   (1,651) 
 
 Gross profit                              2,412     1,590 
---------------------------------------  --------  -------- 
 
 Administrative expenses                  (2,711)   (2,325) 
 Depreciation and amortisation             (373)     (503) 
 Exceptional item: 
  Provision for grant repayment             (246)       - 
 
 Operating (loss)                          (918)    (1,238) 
---------------------------------------  --------  -------- 
 
 Finance income                              8         4 
 Finance costs                              (3)       (1) 
 
 (Loss) on ordinary activities before 
  taxation                                 (913)    (1,235) 
---------------------------------------  --------  -------- 
 
 Taxation                                   48        139 
 
 (Loss) on ordinary activities after 
  taxation                                 (865)    (1,096) 
---------------------------------------  --------  -------- 
 
 (Loss) per share: Basic                  (0.1)p    (0.1)p 
 (Loss) per share: Diluted                (0.1)p    (0.1)p 
 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 September 2018

 
                                             2018       2017 
                                            GBP000     GBP000 
 
 Assets 
 
 Non-current assets 
                                Goodwill      69         69 
                       Intangible assets      25         1 
             Property, plant & equipment    2,033      1,490 
----------------------------------------  ---------  --------- 
 Total non-current assets                   2,127      1,560 
----------------------------------------  ---------  --------- 
 
 Current assets 
                             Inventories     286        160 
             Trade and other receivables     749        622 
          Other current financial assets     265        242 
               Cash and cash equivalents    3,302      1,212 
----------------------------------------  ---------  --------- 
 Total current assets                       4,602      2,236 
----------------------------------------  ---------  --------- 
 
 Total assets                               6,729      3,796 
----------------------------------------  ---------  --------- 
 
 Liabilities 
 
 Current liabilities 
                Trade and other payables    1,336       488 
                   Financial liabilities      10         5 
 Provisions 
          Provision for grant repayment      246         - 
 Total current liabilities                  1,592       493 
----------------------------------------  ---------  --------- 
 
 Net current assets                         3,010      1,743 
----------------------------------------  ---------  --------- 
 
 Non-current liabilities 
                   Financial liabilities      58         12 
 Total non-current liabilities                58         12 
----------------------------------------  ---------  --------- 
 
 Total liabilities                          1,650       505 
----------------------------------------  ---------  --------- 
 
 Net assets                                 5,079      3,291 
----------------------------------------  ---------  --------- 
 
 Equity attributable to equity holders 
  of the parent 
                           Share capital    3,405      3,242 
                           Share premium    12,676     10,306 
                       Retained earnings   (10,925)   (10,060) 
            Share-based payments reserve     308        235 
                     Translation reserve    (385)      (432) 
----------------------------------------  ---------  --------- 
 Total equity                               5,079      3,291 
----------------------------------------  ---------  --------- 
 

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30 September 2018

 
                                                   2018      2017 
                                                   GBP000    GBP000 
 Cash flows from operating activities 
                               Operating (loss)    (918)    (1,238) 
                      Impairment of intangibles      2         1 
                                   Depreciation     371       503 
                            Share option charge     73        51 
                      (Increase) in inventories    (124)     (100) 
                      (Increase) in receivables    (149)     (91) 
                           Increase in payables     793       78 
                         Increase in provisions     246        - 
 Cash generated from / (used in) operations         294      (796) 
-----------------------------------------------  --------  -------- 
 
                                 Finance income      8         4 
                                  Finance costs     (3)       (1) 
                                   Tax received     93        207 
 Net cash generated from / (used in) operating 
  activities                                        392      (586) 
-----------------------------------------------  --------  -------- 
 
 Cash flows from investing activities 
      Purchase of property, plant and equipment    (887)     (152) 
 Net cash used in investing activities             (887)     (152) 
-----------------------------------------------  --------  -------- 
 
 Cash flows from financing activities 
      Net proceeds from issue of ordinary share    2,533       - 
                                        capital 
                        Finance lease repayment     (3)      (17) 
                               New loans raised     55         - 
 Net cash generated from / (used in) financing 
  activities                                       2,585     (17) 
-----------------------------------------------  --------  -------- 
 
 Net increase / (decrease) in cash and 
  cash equivalents                                 2,090     (755) 
-----------------------------------------------  --------  -------- 
 
 Cash and cash equivalents at the beginning 
  of the year                                      1,212     1,967 
-----------------------------------------------  --------  -------- 
 
 Cash and cash equivalents at the end 
  of the year                                      3,302     1,212 
-----------------------------------------------  --------  -------- 
 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2018

 
                          Share      Share     Share-based     Foreign      Retained     Total 
                          Capital    Premium     Payments     Translation    Earnings    Equity 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 
 At 1 October 2016        3,242      10,305        184          (390)        (8,964)     4,377 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 Issue of new shares        -          1            -             -             -          1 
 Share options              -          -           51             -             -         51 
 Exchange translation       -          -            -            (42)           -        (42) 
 Loss for the year          -          -            -             -          (1,096)    (1,096) 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 At 30 September 
  2017                    3,242      10,306        235          (432)       (10,060)     3,291 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 
 At 1 October 2017        3,242      10,306        235          (432)       (10,060)     3,291 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 Issue of new shares       163       2,370          -             -             -        2,533 
 Share options              -          -           73             -             -         73 
 Exchange translation       -          -            -             47            -         47 
 Loss for the year          -          -            -             -           (865)      (865) 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 At 30 September 
  2018                    3,405      12,676        308          (385)       (10,925)     5,079 
----------------------  ---------  ---------  ------------  -------------  ----------  -------- 
 

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