Chief Executive's Operating Report for the year ended 30 April 2022

 

Our financial year from May 2021 to April 2022 coincided with the second year of the COVID-19 pandemic, under which most restrictions to normal life and work were lifted in the UK (with limited and temporary restrictions put back in place for the milder Omicron wave), and from February 2022 the start of the Ukraine conflict (which has had limited impact on the Group).

 

In the previous year (2020-21), while all of our businesses had remained in production throughout, with some exceptions where their customers reduced their purchases, and all businesses had to cope with uncertainty, logistics challenges, employee safety and well-being concerns, and travel restrictions.  The exceptional cases, notably at our MPB and Atik Camera businesses, and at Monmouth Scientific (acquired in December 2020), had additionally the welcome challenge of significantly increased demand for products related to the diagnosis and treatment of COVID-19.

 

This financial year (2021-22) was thus characterised by a substantial progression towards normality, although certainly tempered by persistent travel restrictions (especially outside of Europe), trade fair cancellations, face-to-face customer access difficulties and ongoing supply chain challenges, with difficulties in accessing some components at any cost and large price increases demanded for others in short supply. Customers resumed buying, and while the exceptional demand at MPB and Monmouth Scientific was no longer there, demand for cameras supplied into the PCR testing market remained high.

 

Against this background, I am pleased to report that our very flexible structure and the dedication of our staff across the Group have allowed us to maintain our growth rate, already strong in 2020-21 and previously, and we are reporting again record financial results.

 

Revenues and profit

 

Overall revenues grew by 41.6%, of which 21.6% was organic growth and 20.0% was from the full year impact of the 2020-21 acquisitions of Monmouth Scientific and Uniform Engineering and from the contributions of Scientific Vacuum Systems and Safelab acquired in the year.  Adjusted Operating Profit grew by 57.1%, mainly resulting from the organic sales growth.

 

SDI's digital imaging segment delivered 36.1% organic sales growth, with revenues at £21.5m and Adjusted Operating Profit at £8.5m, up 64.4%. At Atik Cameras, sales of cameras for PCR machines, previously expected to be essentially one-off due to COVID-19 demand, increased further, and in fact they are now expected to continue at least for the first half of 2022-23. At the same time, demand from our other camera customers has been recovering over the course of the year. Graticules Optics also achieved record sales, while sales at Synoptics were flat overall but 3% higher than in 2019-20.

 

The sensors and control segment grew sales by 46.0%, to £28.2m.  Organic growth was 9.7%, and the remaining 36.3% growth was from the acquisitions of last year and this year.  Adjusted Operating Profit grew 19.4% to £5.2m.  Astles Control Systems grew substantially over the previous year, with a partial recovery of its global service revenue and very strong sales of equipment into new aluminium can production lines (linked to a slow transition away from plastic bottles).  Sales of scientific and industrial chillers at ATC and of chemical sensors at Sentek saw good growth (last year they were flat on the previous year).  MPB sales were slightly lower, without the benefit of sales of flowmeters for medical ventilators but were 13% higher than in 2019-20. Sales at Chell Instruments were also lower than in 2020-21 when they benefited from a large equipment order received pre-pandemic.  The level of sales at Monmouth Scientific, acquired in December 2020, continued at a high level, although the mix in demand has shifted away from standard biological safety cabinets (used to ensure operator safety and reduce contamination in COVID-19 test equipment) towards a more normal mix of custom/modular fume cupboards, laminar flow cabinets and cleanrooms.  Both Scientific Vacuum Systems (acquired in January 2022) and Safelab Systems (acquired in March 2022) delivered revenues and profits which were consistent with our modelling at the time of their acquisitions.

 

Basic earnings per share increased by 56.7% from 4.81p to 7.53p; fully diluted earnings per share also improved by 57.6% to 7.23p (2021: 4.58p).

Acquisitions

 

The UK is a centre of excellence for product innovation and manufacturing with many world-leading businesses operating in life science and technology niches. As a buy and build group, finding those businesses with niche capabilities is key to our success. The SDI Group has a reputation as a supportive owner that invests to improve staff expertise and facilities, as well as trusting subsidiary management teams with their day-to-day operations. This approach has allowed companies in our group to upgrade capacity, efficiency and safety in their manufacturing facilities and their businesses to thrive.

 

This year we have focused much attention on embedding last year's acquired businesses into the Group, and we have acquired two additional high-quality and profitable UK-based businesses, extending our technology and customer base and providing further scope for future organic growth.

 

On 5 January 2022, the Group acquired 100% of the share capital of Scientific Vacuum Systems Limited ("SVS"), for total consideration estimated at £5.5m, of which £4.5m has been paid in cash and the remaining £1.0m is contingent on SVS achieving expected profit for the year to 30 September 2022. On the date of the acquisition, SVS had £1.25m of cash in hand. SVS specialises in custom Physical Vapour Deposition (PVD) systems for the deposition of thin film coatings typically on semiconductor wafers, for use in scientific research, industrial and semiconductor manufacturing applications, and is the market leader in the manufacture of production sputter coaters for premium brand razor blade coating.  SVS brings considerable technology and engineering expertise to the Group in high vacuum and PVD applications, as well as blue chip customers, and may be a springboard for future acquisitions.  SVS is based in Finchampstead, Berkshire.

 

On 24 March 2022, the Group acquired 100% of the share capital of Safelab Systems Limited ("Safelab") for £8.5m (including £0.2m in SDI Group shares, £5.9m in cash paid before the year end and £2.4m in cash paid after the year end). On the date of the acquisition, Safelab had £0.8m of cash in hand. The company owns its main manufacturing building valued at £1.4m. Safelab produces high specification fume cupboards and similar cabinets, for both commercial and research laboratories and with a special focus on the education sector which requires versatile and fully featured ducted cabinets often specified in newly built or refurbished laboratory facilities. Safelab is based in Weston-Super-Mare. The acquisition follows the Group's December 2020 acquisition of Monmouth Scientific which manufactures clean rooms, fume cabinets and safety cabinets and is based in Bridgwater. The Group will maintain the identity and autonomy of both companies in their current locations, but the businesses are actively seeking and finding areas of co-operation to reduce costs and enhance their total customer offer. Our Uniform Engineering business is a supplier of sheet metal fabrications to both Monmouth Scientific and to Safelab.

 

We have funded the cash elements paid for both acquisitions from our existing cash resources and from our revolving credit facility with HSBC UK Bank. The acquired companies contributed £1.7m of revenues to the Group this year and as expected, both acquisitions have been earnings enhancing to the Group in 2021-22 immediately following initial acquisition-related costs.

 

Operations

 

We have now learnt to live with the pandemic, and although enhanced safety measures are still in place and some staff work some of their days from home, our focus across the Group is very much on working closely together and with our customers to build for the future.

 

In common with manufacturing industry across the world, and perhaps especially in the UK following Brexit, the pandemic is causing supply chain issues to all of our businesses, and a tight labour market is further forcing cost increases which have recently been compounded by the impact of Russia's invasion of Ukraine.  We have been delighted with the response from our businesses' management and staff who have worked tirelessly to find solutions to component shortages, and the results can be seen in our record levels of sales and profit.  We now look forward to an expansion of new product launch activity, by our customers and by our own businesses, and we believe this brings the Group new opportunities to gain market share following a period in which the focus has been on supplying existing products.

Our rolling programme of upgrading manufacturing facilities across the Group continued with the completion in March of the consolidation of Monmouth Scientific's production and administration activities from several buildings to a single purpose-built site in Bridgwater, the start of a substantial refurbishment of the Graticules Optics factory in Tonbridge, and the doubling of engineering and manufacturing space at Astles Control Systems in Princes Risborough.  Such investments typically have a very good payback, as they are justified by the capacity increase but bring many other benefits including efficiency, staff comfort, product quality and image.

 

While face-to-face sales activity, including trade fairs and exhibitions, remained difficult (although it has picked up substantially in the last couple of months), we have continued to make good progress with website enhancement, on-line sales, virtual selling techniques and social media activity, and we have been able to leverage our capability across the Group.

 

During the 2020-21 year at Atik Cameras, we strengthened the management team at both company sites, near Norwich for overall business management, sales and marketing and research and development, and near Lisbon, Portugal, for manufacturing, logistics, account management and finance. During the 2021-22 year, we have further developed the organisation so that all invoicing to customers is now direct from our Portuguese operation and the UK organisation provides management, sales and marketing and R&D services to Portugal. This has been very well received by customers.

 

When acquiring businesses, it is imperative for us that they have a strong management team usually led by the founder of the business. This year two of our managing directors decided to step down but I am pleased to say, still continue in consultancy roles. Steve Chambers, one of the founders of Atik Cameras, stepped down at the beginning of April 2022. He was replaced by Panos Kapetanopoulos, who was the R&D director. David Pomeroy decided to step down in December 2021 at Monmouth Scientific and was replaced by Alan Holcombe, who also remains Managing Director at Uniform Engineering. I wish Panos and Alan well in their new roles and am certain they can be successful with the support of the SDI directors and their fellow subsidiary directors.

 

Cash and Liquidity

 

SDI has a strong balance sheet with current year-end gross cash at more than £5.1m, and £16.0m of undrawn bank facility, which remains available (unless extended) until November 2024. The Group therefore has sufficient funds that can be used, with its steady cash flow, to acquire new companies and invest in our current portfolio of profitable businesses.

 

Trading Outlook

 

Our businesses remain busy, and several are operating at full capacity with their current staffing.  Finding good staff and circumventing supply chain issues are now part of daily business, and our managers have demonstrated their ability to solve these challenges and more.

We have budgeted for organic growth, and, although mindful of a possible consumer-led recession and levels of inflation that have been absent for many years, we have had a good start to the 2022-23 financial year and are confident that we can continue to trade profitably over the coming months.

The market for acquisitions appears buoyant, and SDI expects to acquire additional businesses in the 2022-23 financial year.

 

 

 

Mike Creedon

Chief Executive Officer

21 July 2022

 

Chief Financial Officer's Report

 

 

Revenue and Profits

 

SDI Group revenues for the year were £49.7m, compared with £35.1m in 2020-21, an increase of 41.6%. Sales growth from acquired businesses, including sales of Monmouth Scientific and of Uniform Engineering in the periods to their acquisition anniversaries and post-acquisition sales of Scientific Vacuum Systems and Safelab Systems, contributed £7.0m, while organic sales growth was £7.6m or 21.6%. This builds on top of organic sales growth in 2020-21 of 19%.

 

From the outset of the COVID-19 pandemic, in 2020-21, our Atik Cameras business received substantial orders from an existing OEM customer for cameras designed into the customer's PCR instrument.  At the time, we considered these to be one-off orders, and we viewed follow-on orders from the same customer in the same light.  Further and larger orders have followed in the 2021-22 year, and sales are continuing at a high rate in 2022-23.  The expansion of Atik Cameras sales represents a large proportion of the Group's organic sales growth in both years.  We can no longer consider these sales to be one-off, but it is also prudent to assume that at some point the demand for PCR instruments will normalise at a lower level.  However, having demonstrated the efficacy and competitiveness of its camera, we also expect Atik to successively pursue a wider market for its products.  Organic growth from other portfolio companies averaged 9%.

 

Gross profit increased to £31.7m (2021: £22.9m), with margin reduced to 63.8% (2021: 65.2%) due to significant product mix changes including lower than average gross margins at recently acquired companies.

 

Operating profit for the year was £10.2m (2021: £5.9m) and Adjusted Operating Profit (AOP) was £12.1m (2021: £7.7m) before reorganisation costs, share based payments, acquisition costs and amortisation of acquired intangible assets, an increase of 57.1%.  Significant drivers of the increase were the organic sales increase, plus the added contributions of the acquired businesses.

 

Investment in R&D

 

Under IFRS we are required to capitalise certain development expenditure, and in the year ended 30 April 2022, £0.4m (2021: £0.4m) of cost was capitalised. Much of the work of our growing R&D teams does not qualify for capitalisation and is charged directly to expense. Amortisation for 2022 were £0.4m (2021: £0.4m). The carrying value of the capitalised development at 30 April 2022 was £0.9m (2021: £1.0m) to be amortised over 3 years.

 

Reorganisation

 

The Board carried out a thorough review of the operations and cost structure of the Group and this gave rise to £0.1m (2021: £0.1m) of reorganisation costs in the year, which should bring benefits in the current year.

 

Acquisition Costs

 

The Group incurred costs of £0.3m (2021: £0.2m) in relation to stamp duty, legal fees, and other advisor remuneration for the acquisitions completed in the year.

 

Financing

 

Financing costs totalled £0.3m (2021: £0.3m), including interest costs estimated within leases.

 

 

Taxation

 

Taxation charge for the year was £2.3m (2021: £0.9m).  Included in the charge is £0.7m representing the increase in net deferred tax liabilities due to the enacted change in UK taxation rates (from 19% to 25%) in force from March 2023.  The remainder of the increase results mostly from increased profitability.  Excluding the rate change on the deferred tax position the net tax rate was 16.3% (2021: 16.6%).  The Group continues to benefit from R&D tax credits.

 

Earnings per Share

Diluted earnings per share for the Group was 7.23p (2021: 4.58p). Adjusted diluted EPS, an alternative performance measure which excludes certain non-cash and non-recurring expenses was 8.71p (2021: 5.97p), an increase of 45.9%.

 

Cash Flow and Working Capital

 

During the year the Group generated cash from operations of £14.7m (2021: £11.7m). In the prior year, we benefited from an increase of £3.2m in customer advanced payments received, largely related to COVID-19 related contracts in Atik.  The balance of these is £1.5m lower at 30 April 2022 compared with a year ago.  

 

Taxes paid have increased to £1.3m (2021: £1.2m). The lower payments, relative to £2.5m taxes charged to the income statement, result partly from the tax deductions available to the Group on exercise by directors and employees of share options. As noted above, taxes on the income statement also include a £0.7m non-cash charge to update deferred tax balances to the enacted future UK tax rate of 25%.

 

Our investment in fixed assets increased to £7.0m (2021: £0.6m) with significant investments in company-owned fixtures to our new leased building at Monmouth Scientific and at Graticules Optics.

 

As in prior years, our biggest investment was in the acquisition of new businesses, with £12.0m deployed on a cash-free basis (including contingent consideration) of which £0.2m in shares (2021: £6.6m of which £0.2m in shares).  At the end of the year contingent consideration of £3.4m was outstanding (2021: £2.35m), of which £2.4m has been paid since the end of the year to the sellers of Safelab Systems and £1.0m remains outstanding relating to the acquisition of SVS, to be settled after 30 September 2022.

 

Funding

 

Our investments were financed out of our own cash flow, except for the issue of 117,716 shares valued at £200,000 as part payment for our Safelab Systems acquisition. Having started the year with net cash of £0.7m (£3.8m of cash less £3.1m of bank loans) we closed the year with net cash of £1.1m (£5.1m of cash less £4.0m of bank loans).

 

On 1 November 2021 we renewed and expanded our committed loan facility with HSBC from £7.4m to a £20m revolving loan facility, with a further accordion option of an additional £10m (at the discretion of HSBC), and with repayment date of November 2024 extendable for two further years. The new facility has been tailored to our business model with fewer restrictions on acquisitions and allows for higher leverage if necessary.

 

 

 

Jon Abell

CFO

21 July 2022

 

 

Strategic Overview

SDI Group is an AIM-quoted group specialising in the acquisition and development of a portfolio of companies that design and manufacture products for use in digital imaging and sensing and control applications in science, technology and medical markets. Corporate expansion is being pursued, both through organic growth within its subsidiary companies and through the acquisition of high-quality businesses with established reputations in global markets.

 

The Board believes there are many businesses operating within the market, a number of which have not achieved critical mass, and that presents an ideal opportunity for consolidation. This strategy will be primarily focused within the UK but, where opportunities exist, acquisitions in Europe and the United States and elsewhere will also be considered, particularly if these also enable geographic expansion of our existing businesses.

 

We intend to continue to buy stand-alone businesses as well as smaller entities and technology acquisitions which bolt onto our existing ones. Our track record over the last eight years has been good, with fifteen businesses acquired across our digital imaging and sensors and controls segments.

 

An important element of our strategy is that we are known to be a good acquirer, able to help sellers to achieve a sale quickly and easily, and without surprises.

 

We keep a lean headquarters, and our businesses are run by seasoned local management with broad discretion within defined limits. Our aim is to grow them, profitably, and we seek to provide them with the resources necessary to grow. Acquired businesses often find that they can grow faster within the SDI Group than they were prepared to do under private ownership, and they are able to learn from and share experience with other companies in the Group.

 

Our current businesses fall broadly into two segments, which we call Digital Imaging and Sensors & Control, and within these groupings there are significant commonalities of applications, industries served and technologies employed. This provides additional opportunity for knowledge sharing, which we encourage.

 

Growth in revenues and profit within our businesses depends on both technology advancement and seeking new customers, often by expanding geographical reach, and the Board sees geographical expansion as a driver of organic growth for the future.

By lowering the cost of capital of businesses we acquire and by facilitating their profitable growth, our business model has demonstrated that it can provide good returns to shareholders and can be scaled into the future.

 

Key Performance Indicators

 

A range of financial key performance indicators are monitored for each business and for the Group as a whole on a monthly basis against budget and over time by the Board and by management, including order pipeline, revenue, gross profit, costs, adjusted operating profit, and cash. 

In support of our acquisition strategy as outlined above, we monitor our acquisition pipeline, including any prospects that fail to progress. Post-acquisition, the Board discusses integration progress, and monitors financial performance against our initial plans. Over a longer period, we monitor the return on total invested capital of all of our businesses.

The Board regularly discusses progress in all major research and development and other projects with project and business leaders, including with respect to cost, timelines and adherence to the projects' initial objectives.

Additionally, the Board reserves a specific agenda item for discussion of health and safety and other employee welfare-related issues.

Consolidated income statement and statement of comprehensive income

 

 

 

 

	Note		2022 £'000		2021 £'000
Revenue	3		49,656		35,076
Cost of sales			(17,998)		(12,206)
Gross profit			31,658		22,870
Other income			55		21
Operating expenses			(21,534)		(16,960)
Operating profit			10,179		5,931
Net financing expenses			(295)		(287)
Profit before tax			9,884		5,644
Income tax	4		(2,341)		(936)
Profit for the year			7,543		4,708

Statement of Comprehensive Income
Profit for the year	7,543		4,708
Other comprehensive income
Items that will subsequently be reclassified to profit and loss:
Exchange differences on translating foreign operations	(46)		(96)
Total comprehensive income for the year	7,497		4,612

 

 

Earnings per share
Basic earnings per share	6		7.53p		4.81p
Diluted earnings per share	6		7.23p		4.58p

 

All activities of the Group are classed as continuing.

 

 

Consolidated balance sheet

 

Company registration number: 6385396	Note			2022	2021
				£'000	£'000
Assets
Intangible assets	7			36,035	26,237
Property, plant and equipment				4,074	1,733
Right-of-use leased assets				7,305	2,398
Deferred tax asset				1,586	1,697
				49,000	32,065
Current assets
Inventories				7,273	6,059
Trade and other receivables				7,544	6,743
Cash and cash equivalents				5,106	3,836
				19,923	16,638
Total assets				68,923	48,703
Liabilities
Non-current liabilities
Borrowings	5			(10,656)	(3,764)
Deferred tax liability				(4,417)	(2,479)
				(15,073)	(6,243)
Current liabilities
Trade and other payables				(16,089)	(12,826)
Provisions for warranties				(163)	(230)
Borrowings	5			(779)	(1,880)
Current tax payable				(1,027)	(750)
				(18,058)	(15,686)
Total liabilities				(33,131)	(21,929)
Net assets				35,792	26,774
Equity
Share capital				1,022	984
Merger reserve				2,606	2,606
Merger relief reserve				424	424
Share premium account				9,905	9,092
Share based payment reserve				320	714
Foreign exchange reserve				39	85
Retained earnings				21,476	12,869
Total equity				35,792	26,774

Consolidated statement of cashflows

 

	Note	2022	2021
		£'000	£'000
Operating activities
Net profit for the year		7,543	4,708
Depreciation		1,197	973
Amortisation	7	1,576	1,589
Finance costs and income		295	287
Impairment of intangible assets		30	130
Decrease in provisions		(97)	(15)
Taxation in the income statement		2,341	936
Employee share-based payments		313	305
Operating cash flows before movement in working capital		13,198	8,913
Decrease in inventories		(365)	(977)
Decrease/(increase) in trade and other receivables		652	(2,363)
Increase in trade and other payables		1,204	6,137
Cash generated from operations		14,689	11,710
Interest paid		(295)	(287)
Income taxes paid		(1,290)	(1,166)
Cash generated from operating activities		13,104	10,257
Investing activities
Capital expenditure on fixed assets		(1,426)	(667)
Sale of property, plant and equipment		66	67
Expenditure on development and other intangibles		(415)	(367)
Acquisition of subsidiaries, net of cash	8	(10,995)	(4,057)
Net cash used in investing activities		(12,770)	(5,024)
Financing activities
Finance leases net repayments	5	(583)	(489)
Proceeds from bank borrowing	5	9,000	5,404
Repayment of borrowings	5	(8,086)	(11,652)
Issues of shares and proceeds from option exercise		651	155
Net cash from/(used in) financing		982	(6,582)
Net changes in cash and cash equivalents		1,316	(1,349)
Cash and cash equivalents, beginning of year		3,836	5,290
Foreign currency movements on cash balances		(46)	(105)
Cash and cash equivalents, end of year		5,106	3,836