TIDMTUNE
RNS Number : 5041F
Focusrite PLC
17 November 2020
Strictly Embargoed until 07.00, 17th November 2020
Focusrite plc
("the Company" or "the Group")
Final Results for the Year Ended 31 August 2020
Focusrite plc (AIM: TUNE), the global music and audio products
company, announces Final Results for the year ended 31 August
2020.
Phil Dudderidge, Founder and Executive Chairman commented:
"2020 will be remembered as the year of the COVID-19 pandemic.
The Group has benefited in many respects by the growth in demand
for our music and recording products, no doubt because so many
people, professional musicians and amateurs alike, are having to
work at home or having more time to enjoy their passion for music
creation.
Focusrite and ADAM Audio, in particular, have generated
exceptional growth in the reported year and the new financial year
has started well. The use of Focusrite audio interfaces has
expanded with the growth of podcasting and the use of Zoom and
other platforms for creative applications in music, as well as film
and TV dubbing and radio entertainment where actors voice
productions from home."
Financial and Operational Highlights
FY20 FY19
Revenue (GBP million) 130.1 84.7
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EBITDA(2) (GBP million) 28.6 17.2
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Adjusted(3) operating profit (GBP million) 23.0 13.5
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Adjusted(3) diluted earnings per share (p) 32.8 21.4
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Total dividend per share (p) 4.2 3.8
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Net cash (GBP million) 3.3 14.9
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Statutory results
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Operating profit (GBP million) 7.9 12.8
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Basic earnings per share (p) 7.1 20.4
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Highlights
-- Group revenue, including acquisitions, grew by 53.7%
(constant currency(1) : 57.1%) to GBP130.1 million (FY19: GBP84.7
million).
-- Revenue within the core Focusrite business grew by 21.5% to
GBP100.7 million (FY19: GBP82.9 million).
-- Strong growth across geographic regions: North America was up
by 39.9%; Europe, Middle East and Africa by 65.9%; and the Rest of
World by 59.7%.
-- EBITDA(2) grew by 66.1% to GBP28.6 million (FY19: GBP17.2 million).
-- Adjusted(3) operating profit grew 70.0% to GBP23.0 million (FY19: GBP13.5 million).
-- Acquisition of Martin Audio completed in December 2019 for
GBP35.3 million net of acquired cash.
-- The effects of the acquired depreciation and amortisation,
the non-underlying costs and a GBP10.2 million goodwill write down
taken on Martin Audio following the effects of the COVID-19
pandemic, contributed to reported operating profit declining 38.1%
to GBP7.9 million (FY19: GBP12.8 million).
-- Adjusted(3) diluted earnings per share grew 53.3% to 32.8p (FY19: 21.4p).
-- Year-end net cash balance of GBP3.3 million after the
purchase of Martin Audio for GBP35.3 million (FY19: GBP14.9
million).
-- The Group has repaid the net debt taken to buy Martin Audio in less than eight months.
-- Final dividend of 2.9p recommended, resulting in 4.2p for the year, up 10.5% on prior year.
1 Constant currency revenue growth is calculated by taking the
sterling value of FY20 revenue, converting to FY19 annual average
exchange rates and comparing with the reported revenue for FY19. In
addition, all foreign exchange movements disclosed in revenue are
excluded from both years.
2 Comprising earnings adjusted for interest, taxation,
depreciation, amortisation, goodwill impairment and non-underlying
items.
3 Adjusted for amortisation of acquired intangible assets,
goodwill impairment and non-underlying items. See Financial Review
for more information.
Commenting on the results Tim Carroll CEO, said:
"The Group has achieved another record-breaking year of
financial metrics, driven by organic growth and expansion in our
traditional product lines along with a full year of ADAM Audio
revenue and a partial year of Martin Audio.
FY20 was a year that required us to remain focused on our key
growth objectives while carefully watching all the numerous
macroeconomic issues, including COVID-19, and ensuring we were
taking the correct steps to mitigate risk and, where applicable,
maximise opportunity. This past year saw increased investment in
people, technology and tools to ensure our roadmap plans were
achievable and to help us make key decisions across the Group,
driving further growth."
Commenting on the outlook he added:
"Since the year end, demand for most of our Group products has
remained high and revenue is substantially ahead of the level
achieved in the similar, pre-COVID-19, period of the prior year,
helped by the acquisition of Martin Audio. We remain conscious of
global factors that could adversely impact our operations such as
COVID-19, Brexit, and US tariffs and will continue to monitor these
and other obstacles, reacting accordingly.
We are also aware that changes in technology and new customer
requirements can emerge quickly, and many of the macroeconomic
issues can impact our distribution channel and end users. We have
shown over the past years that we are capable of navigating
successfully through these risk factors, reacting in a measured and
methodical way to protect our revenue, gross margin and cash
generation.
I am extremely proud of our accomplishments this past year and
remain impressed by the attitude and performance of our employees
through some very uncertain times. We look forward to another year
of product innovation with many new products and solutions coming
to market across all three of our business groups."
Availability of Annual Report and Notice of AGM
The Annual Report and Accounts for the financial year ended 31
August 2020 and notice of the Annual General Meeting ("AGM") of
Focusrite will be posted to shareholders by 24 November 2020 and
will be available on Focusrite's website at
www.focusriteplc.com.
Dividend timetable
The final dividend is subject to shareholder approval, which is
being sought at Focusrite's AGM to be held on 17 December 2020.
The timetable for the final dividend is as follows:
17 December 2020 AGM to approve the recommended final dividend
7 January 2021 Ex-dividend Date
8 January 2021 Record Date
29 January 2021 Dividend payment date
- ends -
Enquiries:
Focusrite plc:
Tim Carroll (CEO) +44 1494 462246
Jeremy Wilson (CFO) +44 1494 462246
Panmure Gordon (Nominated Adviser
and Broker)
Freddy Crossley (Corporate
Finance) +44 20 7886 2500
Erik Anderson (Corporate Broking) +44 20 7886 2500
Belvedere Communications
John West +44 20 3687 2753
Llew Angus +44 20 3687 2754
This announcement contains inside information for the purposes
of Article 7 of Regulation (EU) No 596/2014 (MAR)
Notes to Editors
Focusrite plc is a global audio and music products group that
develops and markets proprietary hardware and software products.
Used by audio professionals and musicians, its solutions facilitate
the high-quality production of recorded and live performance sound.
The Focusrite Group trades under six established brands: Focusrite,
Focusrite Pro, Novation, Ampify, ADAM Audio and Martin Audio.
With a high-quality reputation and a rich heritage spanning
decades, its brands are category leaders in the music-electronic
music making and audio music recording industries. Focusrite and
Focusrite Pro offer audio interfaces and other products for
recording musicians, producers and professional audio facilities.
Novation and Ampify products are used in the creation of electronic
music, from synthesisers and grooveboxes to industry-shaping music
software controllers and inspirational music-making apps. ADAM
Audio studio monitors have earned a worldwide reputation based on
technological innovation in the field of studio loudspeaker
technology. Martin Audio designs and manufactures performance-ready
systems across the spectrum of live and installed sound
applications.
The Focusrite Group has a global customer base with a
distribution network covering approximately 160 territories.
Focusrite is headquartered in High Wycombe, UK, with marketing
offices in Los Angeles and Hong Kong. ADAM Audio has offices in
Berlin, Nashville and Dongguan, China. Martin Audio is also based
in High Wycombe with a subsidiary in the USA.
Focusrite plc is traded on the AIM market, London Stock
Exchange.
Chairman's Statement
I am very proud to introduce the final results for Focusrite plc
for the year ended 31 August 2020, the sixth Report and Accounts
since the Company joined AIM in December 2014. I am extremely
pleased that once again the Company has made substantial financial
and operational progress.
2020 will be remembered as the year of the COVID-19 pandemic.
The Group has benefited in many respects by the growth in demand
for our music and recording products, no doubt because so many
people, professional musicians and amateurs alike, are having to
work at home or having more time to enjoy their passion for music
creation.
Our Group consists of three main businesses: Focusrite Audio
Engineering, which incorporates the Focusrite, Focusrite Pro,
Novation and Ampify brands; ADAM Audio, the Berlin-based studio
monitor loudspeaker company acquired in July 2019, whose first full
year's results as part of the Group are included in this report;
and Martin Audio, acquired in December 2019, contributing eight
months of revenue and EBITDA to the Group results.
Focusrite and ADAM Audio, in particular, have generated
exceptional growth in the reported year and the new financial year
has started well. The use of Focusrite audio interfaces has
expanded with the growth of podcasting and the use of Zoom and
other platforms for creative applications in music, as well as film
and TV dubbing and radio entertainment where actors voice
productions from home.
Martin Audio performed ahead of our internal expectations in the
first three months of the calendar year before being adversely
affected by the closure of the live music performance industry
globally due to COVID-19, and the resulting postponement of
investment by the service companies and venues that support live
music. Martin Audio has nevertheless turned in a profit in FY20. It
is maintaining a level of business in the installation market
globally and remains ready to meet the demands of the live music
industry as and when it returns to life when COVID-19 restrictions
end.
COVID-19 precautions caused the companies in the Group,
including their UK and overseas offices and personnel, to work from
home with almost no notice. The Group proved remarkably ready to
meet this challenge having invested in VoiP telephony and Zoom, as
well as Netsuite ERP and other cloud-based solutions that allowed
for total connectivity between the business and our people, our
supply chain partners and our customers, globally. We hardly missed
a beat or a moment of business activity. A large part of our
workforce is involved in product development and this has continued
'at home' very successfully and effectively managed, with 11 new
products being released by the Focusrite business since the March
2020 lockdown.
I would like to commend CEO Tim Carroll and CFO Jeremy Wilson
for their outstanding efforts as well as that of the management
teams and staff of all three Group companies, who delivered such
outstanding results in the face of many challenges caused by
COVID-19. I would also like to commend and thank our contract
manufacturers, our logistics partners, and our distribution and
retail partners for their part in meeting these challenges and
opportunities this past year.
This will be the last Annual Report to have been overseen by CFO
Jeremy Wilson who leaves us soon, to be replaced by Sally McKone,
as announced previously. Sally trained at Grant Thornton before
carrying out several senior finance roles at Electrocomponents plc
and IMI plc. Sally brings valuable international experience from
her career at these two highly regarded FTSE250 electronics and
precision engineering groups. Sally is due to start in Q1 2021 and
we are thrilled that she is joining us. Jeremy will stay until
Sally arrives.
I would like to take this opportunity to thank Jeremy, who
joined us in 2014 and was a key member of the team that brought the
Group to the AIM market. His leadership and stewardship of the
finance team, as well as his contribution to the achievement of our
continued growth, profitability and cash generation has been
exemplary and we shall miss him.
Finally, thank you to all our shareholders, those who have been
with us since flotation and those who have joined the register more
recently, for your continued confidence in our business model and
investment proposition. We look forward to having the opportunity
to meet you again in person, once the restrictions imposed as a
result of COVID-19 are lifted .
Phil Dudderidge
Founder and Executive Chairman
Chief Executive's Statement
Introduction
I am extremely pleased to share with you our results for the
financial year ended 31 August 2020. The Group has achieved another
record-breaking year of financial metrics, driven by organic growth
and expansion in our traditional product lines along with a full
year of ADAM Audio revenue and a partial year of Martin Audio.
FY20 was a year that required us to remain focused on our key
growth objectives while carefully watching all the numerous
macroeconomic issues, including COVID-19, and ensuring we were
taking the correct steps to mitigate risk and, where applicable,
maximise opportunity. This past year saw increased investment in
people, technology and tools to ensure our roadmap plans were
achievable and to help us make key decisions across the Group,
driving further growth.
Our employee base has now grown to over 400 strong across the
enlarged Group and we continue to invest in our people, promoting
from within as well as seeking out new top talent in all divisions
across the Group. Our offices now span much of the world with key
locations in the UK (High Wycombe and London), Germany (Berlin),
the US (Los Angeles and Nashville), as well as Hong Kong, Mexico
and Australia. Our employee base is comprised of a highly
passionate group of individuals, many of whom are also accomplished
DJs, musicians, audio engineers, live sound specialists and
podcasters in their own right. We are very fortunate to have so
many people who are passionate about music making and audio
production and who bring to work real life experiences and
feedback. This experience is invaluable.
COVID-19 brought many unique challenges to the Group and our
individual employees. Employee wellbeing has always been a top
priority and the Group rose to the challenges that COVID-19
presented: providing the tools, support and flexibility to allow
all employees to work at home effectively in a short amount of
time. Additionally, all office sites were re-worked to ensure
proper social distancing and hygiene for the employees that have
spent some time in the various offices. We are confident that we
can carry on with most employees working at home and are prepared
to begin bringing more employees back into the office environment
when the local government guidance permits.
Our operations
The Group's products are sold in approximately 160 territories
all over the world. Our routes to market continue to be refined as
macroeconomic conditions change as well as end user buying
behaviours. We utilise a mix of retailers (online as well as
traditional brick and mortar shops); distributors in selected
countries where localisation, local support and supply to the local
channel are factors; and direct to end user via our own e-commerce
platform and in-app software purchases.
Last year we sold over 1.2 million physical products and had
over 1.2 million downloads of our various software titles. Our
manufacturing approach varies by business units. FAEL (Focusrite,
Focusrite Pro, Novation and Ampify) hardware and software products
are all designed in the UK and assembled in China and Malaysia.
ADAM Audio products are all designed in Berlin. ADAM Audio
manufactures some of their high-end products in Berlin and utilises
Chinese contract manufacturing for the rest of its portfolio.
Martin Audio's products are all designed in the UK, where they
build a portion of their range, as well as using Chinese contract
manufacturing for the remainder.
Our market
The Group's portfolio of products and solutions service a vast
spectrum of customers who have a need for high-quality audio. Our
core business, up until December 2019, was focused on solutions for
music and audio content creation, servicing the needs of beginners,
hobbyists, and both aspiring and seasoned professionals. With the
acquisition of Martin Audio, the Group added professional audio
reproduction solutions that scale from portable solutions for a
small band to the largest professional tours, and for permanent
installations for bars, clubs, corporate, houses of worship,
theatres and performance halls. Having a stake in both the
production of music and audio content as well as the reproduction
gives the Group a well differentiated story in that our solutions
help artists through their entire journey of creating, recording
and performing.
The Group is consistently seeking out ways to expand our core
business and enter adjacent categories where our products and
solutions are viable options for customers. To accomplish this, we
continue to drive innovation organically with our in-house R&D
teams, finding new routes to market and carefully considering
acquisitions that are aligned with our existing activities and
market segments and can help us accelerate our growth
We actively seek out updated market research in our sectors,
collating the vast amount of data from our internal efforts as well
as outside resources to categorise our customers into five personae
that encompass the majority of our potential customers. These
personae are:
-- The 'New Creator' is a customer who might have little or no
music or audio recording knowledge.
-- The 'Passionate Maker' is someone who may or may not play a
traditional instrument but has a desire to make high-quality music
or audio content, such as podcasting.
-- The 'Serious Aspiring Producer' is someone for whom music and
audio production is more than just a hobby and is considered a
potential career path; and finally
-- The 'Master' and 'Facility' personae: highly skilled
musicians, audio engineers, or business entities focused on the
production or reproduction of music and audio.
The art of music/audio creation and live sound production are
constantly evolving crafts, with new technologies enabling
workflows and enhancements that are quickly adopted and become part
of the normal process. Due to this, it is imperative that the Group
ensures we have our finger on the pulse of all new applicable
technologies and that we understand how and where they can benefit
our customers.
Operating review of another record year
The Group has delivered another successful year of increased
revenues, as well as managing our cost base closely and remaining
focused on cash generation.
Revenue for the Group grew by 54%, which comprised 22% growth
for the FAEL brands, plus a full year of ADAM Audio, and eight
months of Martin Audio. Adjusted EBITDA increased 66% over the FY19
result.
There are many factors that contributed to this successful
outcome: new product introductions; refined targeted marketing
initiatives; the evolution in our routes to market approach; and
continued success for both legacy products and products released in
the previous fiscal year.
For FAEL, this included new products in the Novation category,
refreshing the Launchpad and Launchkey ranges, continuing to expand
our direct e-commerce efforts globally and material growth of our
3rd generation Scarlett interfaces that were released in late
2019.
ADAM Audio had several product introductions to round out their
monitor loudspeaker offerings, moved several strategic regions to
the same distribution partner as FAEL for scale, and initiated
their own e-store for direct sales in targeted regions. Martin
Audio launched the ADORN series, designed for installed sound
markets and launched a number of new marketing initiatives, both
in-house and virtual as COVID-19 became a factor, to educate and
train live and installed sound engineers worldwide.
Throughout this year we have encountered a number of events,
such as ongoing Brexit negotiations, US-China tariffs, and the
COVID-19 pandemic, that have required careful consideration and
actions to mitigate risk and where possible, maximise opportunity.
While all of these events are ongoing, the Group is confident in
our level of preparedness and ability to adapt where necessary.
Purchase of Martin Audio
In late December 2019, the Group announced completion of the
acquisition of Martin Audio, our second acquisition in the 2019
calendar year, for a total consideration of GBP39.6 million
(GBP35.3 million net of cash acquired). This was funded partially
by existing cash and partially by debt. Martin Audio was a
well-known entity to the Group, with a highly regarded management
team. Additionally, Martin Audio's headquarters is located
approximately one mile from FAEL in High Wycombe.
Martin Audio is a developer of both live sound and installed
sound systems which are used for some of the largest live events,
tours, festivals, and installed sound applications such as houses
of worship, clubs and corporate audio visual. The company was
founded in 1971 and since that time has earned a reputation for
world class audio solutions, rallied around the mission that every
member of an audience should have an exceptional sonic experience,
whether that is at a concert, nightclub, house of worship or club.
The Group identified Martin Audio as a strong candidate for
acquisition based on its brand equity, growth, culture, roadmap and
executive management team. In the first three months following the
acquisition, performance for Martin Audio was very strong, beating
forecasts set during the due diligence phase. However, COVID-19 has
impacted the Martin Audio business negatively but, as we described
in our most recent trading update, we are now seeing modest signs
of recovery, specifically in the installed sound business which is
the largest component of Martin Audio's revenue contribution. We
remain confident of the longer term prospects for Martin Audio once
COVID-19 abates.
Impact of COVID-19
As for most companies, 2020 has proved to be a very unusual year
that has witnessed dramatic impacts on many peoples' lives, as well
as on many of our core solutions. Pre-COVID-19, the market was
experiencing healthy growth in the various sectors in which we
participate. Live and installed sound was having a very good year
and there was a robust pipeline of tours, festivals, and installed
sound business for the second half. Home recording was strong with
many new customers purchasing Novation, Focusrite and ADAM Audio
products for their music making, podcasting and streaming
workflows. Professional audio and content creation were still
tracking at record levels to keep up with all of the new content
providers and demand from the many different music streaming
services.
COVID-19 first became an issue for the Group in late January in
China, when workers did not return to the contract manufacturers
and warehouses as planned post-Chinese New Year. This impacted
production schedules and our ability to get finished products out
of the Chinese warehouses. This impact was mitigated by our second
manufacturing unit in Malaysia, as the two countries were not
simultaneously in lockdown. Therefore, when one unit was closed,
the other was operational. Fortunately, the Chinese warehouses came
back online after a short amount of time and production began to
return to normal shortly after.
It was around this time when we began to see two different
scenarios playing out for our businesses. Within FAEL and ADAM
Audio, we witnessed a marked increase in demand for our home
recording solutions. As countries went into lockdown, many people
looked to music creation, podcasting, and streaming solutions for
remote working and much of the FAEL and ADAM Audio portfolio caters
to these workflows. The lockdown environment shifted the purchasing
balance for consumers from bricks and mortar stores towards
e-commerce offerings. To an extent, the damage that this caused to
the brick and mortar network in many countries continues to this
day. For Martin Audio, many live events such as tours and festivals
began to be postponed. This was followed by many installed sound
projects being delayed as well. The individual businesses responded
to these unique challenges in an admirable way. For FAEL and ADAM
Audio, this involved ramping up production, leveraging routes to
market that had strong e-commerce capabilities, pivoting on
marketing plans as trade shows closed, and focusing primarily on at
home production workflows. Martin Audio's executive team acted
swiftly to cut costs and focus sales and marketing energy on their
installed sound portfolio, where business remained active at
various levels.
Throughout all of that, the various businesses had to react to
new work-at-home rules enforced by local governments; transitioning
many of the employee base to remote working across most
departments. Because of the leadership team's swift reaction to the
changing environment combined with numerous investments we have
made over the past few years in IT, enhanced systems, and new
processes, the Group were able to react rapidly and effectively.
Additionally, with only a few small exceptions, the committed new
products for the second half were launched inside their expected
time frames.
Segmental review
Focusrite
The Focusrite branded product family, which includes Scarlett
and Clarett audio interfaces, had a tremendously strong year,
achieving a 32% year-on-year increase in revenue. Demand for the
ability to create high-quality music and audio content, such as
podcasting in home/remote locations, was strong, especially during
the COVID-19 lockdowns. Additionally, the desire by many to have
high fidelity audio for streaming services and video conferencing
continued to grow and peaked during the lockdown period. Despite
lockdowns having abated in most areas, we have continued to see
higher than normal growth and demand for Focusrite interfaces. We
will wait and see what impact the new lockdowns will have on demand
in the next financial year, but at this stage it is too early to
draw any conclusions.
Focusrite Pro
Focusrite Pro represents a suite of professional products that
provide professional, exceptional quality audio and scalability for
any audio workflow. The Red series, our premium line of audio
interfaces, offers a multitude of connectivity options to meet the
needs of any audio professional. Likewise, RedNet is the Group's
AoIP set of solutions that allows large scale audio connectivity
and routing over standard ethernet networks to meet any production
needs. The portfolio, primarily designed for enterprise level
customers and facilities across the live sound, broadcast,
installed sound and post-production market, had a challenging year.
As many live events were postponed or cancelled, as well as many
production facilities, theatres, universities closed, a large
portion of Pro's pipeline projects were delayed or in some cases,
cancelled. As with Martin Audio, the Group is starting to see signs
of recovery in some sectors. Additionally, the Focusrite Pro team
has a number of new products shipping in the first half of this
financial year which are expected to add incremental value.
Novation
The Novation brand and portfolio is all about the creation and
production of electronic music. Electronic music (and its many
genres) continues to grow and is democratising the art of music
creation. Novation offers a wide range of solutions to address
these genres for everyone from the absolute beginner through to
professionals. The Novation brand enjoyed several major product
launches over the year, resulting in revenue growth of 9% for the
year.
The Novation family of products can be segmented into
controllers, grooveboxes and synthesisers. Novation controllers,
which are comprised of Launchpad, our grid-based controller for
both creating and performing music, and Launchkey, our family of
keyboard controllers, had a strong year with 21% growth. This was
fuelled primarily by new product introductions as well as some
COVID-19 boost as some customers added these components to their
home studios. The Novation family of synthesisers has been core to
the brand since inception and have developed a reputation with
electronic musicians as cutting edge, creative and versatile
instruments. Our flagship synth, Summit, introduced at the end of
last year, has won many accolades in the industry. The other
products in the portfolio, which include Peak and Bass Station,
continue to enjoy strong customer attraction and industry
appreciation.
Ampify
Our Ampify software division, based in London, develops powerful
but brilliantly simple music creation apps for iOS, Mac and Windows
platforms. To date, while the revenue is modest, the Ampify apps
have been downloaded more than 12.5 million times, which has proven
to be a highly effective marketing net to attract new customers.
Inside this year, Ampify apps were downloaded 1.2 million times,
resulting in approximately 900,000 purchases of content from our
in-app commerce engine. Additionally, this year marked the
introduction of Ampify's first cross-platform music creation
application for Mac and Windows, Ampify Studio. With a simple yet
powerful user interface and a large library of content in many
styles of music, Ampify Studio is the perfect music creation
application for beginners and those that want to create music
without a steep tech learning curve. The application is free, but
also offers a subscription to the content library, which has over
10,000 samples of drums, bass, guitar, vocals, beats and effects.
The library offers fresh new content every month, developed by up
and coming artists in a multitude of styles and genres. Ampify
Studio will continue to see feature development to address the
needs of our core music making customers across the Novation and
Focusrite brands.
ADAM Audio
The Group acquired ADAM Audio in July 2019 and started to
leverage Focusrite's more advanced distribution network to improve
the sales of ADAM Audio products. In the first half, revenue
increased 13% over the prior year, signalling the early success of
this strategy. Upon the arrival of COVID-19, ADAM Audio's products
experienced a substantial boost in demand, similar to that
experienced for Focusrite products with the result that, for the
full year, revenue has increased by 42% compared to the twelve
months to August 2019, most of which was pre-acquisition. This is
comfortably ahead of the plans made at the time of the acquisition.
ADAM Audio and Focusrite continue to use their individual areas of
expertise to benefit the other. Now ADAM Audio is the distributor
of Focusrite and Novation products in Germany and Focusrite is the
distributor of ADAM Audio in the UK. This uses the local network of
sales, marketing and operations to serve each market. It also
provides a natural means of combating potential Brexit upheaval
should it arise.
In parallel with these developments, ADAM Audio continues to
develop its product range with some exciting new products planned
for the coming year and we are as excited as ever for them to be a
part of the Focusrite plc family.
Martin Audio
The Group acquired Martin Audio in December 2019. Martin Audio
was founded in 1971 by the innovative loudspeaker designer David
Martin and the company enjoys an international reputation for
supplying award-winning, patent-protected, professional audio
systems across live sound and installation applications.
At the half year, revenue was up 22% year-on-year, however as
explained above, it was then affected by COVID-19 with the
widespread government enforced lockdowns, resulting in the
cancellation of concert tours and festivals, thereby curtailing the
demand for these new systems. Overall, revenue for the full year is
down 26% on the prior year. However, the management team of Martin
Audio has controlled costs tightly and Martin Audio has made a
contribution of GBP1.0 million at EBITDA level.
At the same time, Martin Audio has announced 12 new products
including ceiling speakers in its commercial series, ADORN, and a
dedicated series for the Chinese market, DDX. In addition, it
launched the company's first ever Apple iOS app for the control of
its powered portable series, BlacklineX Powered. It also installed
new systems around the globe including the high-profile new hotel
and restaurant Nobu complex in Chicago, the multiplex Armagh
Planetarium in Northern Ireland and CÉ LA VI - a new luxury dining,
bar and club lounge complex in Shibuya, Tokyo.
Despite challenging circumstances during COVID-19, the company,
which includes a manufacturing facility in the UK, operated safely
throughout. Ultimately the Group believes that COVID-19 has caused
a hiatus rather than a permanent change; the public appreciate live
music and we believe that events will make a steady return, so
Martin Audio has continued to invest in research and development to
ensure a strong programme of new product introduction for the years
ahead, tailored to changing circumstances.
Routes to market
I am once again pleased to report that our success this year was
global, with all major sales and regions experiencing growth
year-on-year. A big part of our success was certainly our
investment in people in the local regions and a big emphasis on
localised marketing content and demand generation. Additionally,
our own e-commerce store experienced record growth of 152% year
over year, albeit from a relatively small base. Our direct
e-commerce strategy continues to evolve as a larger part of our
overall business, especially as we add more software and content
offerings to our customer base.
Regional review
North America
The US market, which accounts for approximately 39% of total
Group revenue, grew by approximately 40% year-on-year. This
includes 16% growth for FAEL brands, a full year of ADAM Audio
revenue and eight months of Martin Audio. With the inclusion of the
Martin Audio team, we now have an expanded team of sales and
marketing professionals representing various parts of the Group's
portfolio. These efforts are supplemented with a world class
support team which is over 20 strong. Our offices in the USA are
based in Los Angeles and Nashville with remote workers living in
various states across the country.
EMEA
Europe, Middle East and Africa (EMEA), which represents
approximately 43% of the Group's revenue, also had a successful
year growing 66%. This comprised 30% growth in FAEL brands, and a
full year of ADAM Audio and eight months of Martin Audio.
Two-tiered distribution has traditionally been the majority of the
Group's route to market for FAEL and ADAM Audio. However, this year
saw a dramatic shift to direct online resellers that have
continent-wide reach. This was mainly caused by many brick and
mortar stores (and consequently regional distributors) closing
during the various regional COVID-19 lockdowns. As more regions
have come out of lockdown, the Group has seen the local brick and
mortar and regional distribution business come back to normal
levels.
ROW
The rest of the world (ROW) region comprises Asia Pacific (APAC)
and Latin America (LATAM). Overall, ROW represents approximately
18% of the Group's revenue and grew 60% year over year. This
included 15% organic growth for FAEL, a full year of ADAM Audio and
eight months of Martin Audio.
Within APAC, the success was primarily driven by more FAEL sales
and marketing professionals employed and residing in the region,
more localisation efforts and some new product introductions from
Martin Audio that are designed for the Chinese market.
LATAM continues to be an area of investment for the Group. This
year, we added to our management team with hires in Brazil and
Mexico. This team focused on local events, marketing collateral and
leveraging the scale of the FAEL and ADAM Audio portfolio. The
result was strong growth year-on-year for the Group's products. We
recognise the region as an area of strong growth potential, through
improved distribution routes to market as well as through our own
e-store.
Growth drivers
The Group remains passionately focused on being a great place
for our employees to work and collectively execute on our growth
strategy: growing our core base; increasing the lifetime value for
our customers; and expanding into new market segments. By focusing
on our employees and our customers, we will continue to innovate
and grow our audience of customers across the globe. Last year saw
the introduction of over 13 new products across the Focusrite
business and numerous software/firmware upgrades to existing
products to enable new workflows and enhance our customer's
experience. For FAEL and ADAM Audio specifically, lots of emphasis
is placed on the out-of-box experience and customer support systems
that are in place to help customers across the globe with any
challenges or questions. Inside FAEL, our new onboarding journey
for Focusrite Scarlett, Novation Launchpad and Launchkey was well
received by new customers, raising our Net Promoter Score (NPS)
score from an already prestigious 69% to 74% this year.
As discussed previously, the development of our routes to market
is an ever-evolving process and we continually look to invest in
channels with higher gross margin, and initiatives that allow us to
transact in local markets around the world in a way that resonates
with the local end user. Our investment in Latin America is a
perfect example of this: over the last year we have invested in
local sales and marketing professionals across Mexico and Brazil
which has netted the Group an increase of 32% in our FAEL business
year-on-year. An important aspect of our growth is risk mitigation,
helped greatly by the diversification of the manufacturing of the
Focusrite products, and the diversification of markets in which we
trade helped by the acquisition of Martin Audio.
Summary and outlook
Our roadmap remains strong, with a number of new, innovative
releases coming across this year from the various business units.
Additionally, we will continue to refine and support existing
products to grow our share in those spaces and enhance customer
loyalty. With two acquisitions under our belt and the debt funding
the Martin Audio acquisition repaid, we will also be looking for
other complementary brands that we believe would be an ideal fit
with the Group's strategy. Overall, even as we expand the Group and
face unprecedented challenges like COVID-19, Brexit and other
macroeconomic issues, our growth strategy continues to prove to be
the right course for the Group.
Since the year end, demand for most of our Group products has
remained high and revenue is substantially ahead of the level
achieved in the similar, pre-COVID-19, period of the prior year,
helped by the acquisition of Martin Audio. We remain conscious of
global factors that could adversely impact our operations such as
COVID-19, Brexit, and US tariffs and will continue to monitor these
and other obstacles, reacting accordingly.
We are also aware that changes in technology and new customer
requirements can emerge quickly, and many of the macroeconomic
issues can impact our distribution channel and end users. We have
shown over the past years that we are capable of navigating
successfully through these risk factors, reacting in a measured and
methodical way to protect our revenue, gross margin and cash
generation.
I am extremely proud of our accomplishments this past year and
remain impressed by the attitude and performance of our employees
through some very uncertain times. We look forward to another year
of product innovation with many new products and solutions coming
to market across all three of our business groups.
Tim Carroll
Chief Executive Officer
Financial Review
Overview
Overall the Group has had a highly successful year, delivering
organic and acquisition related growth totalling 53.7% in revenue,
66.1% in adjusted EBITDA and 53.3% in adjusted diluted earnings per
share (EPS).
Income statement
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------
Adjusted Non-underlying Reported Adjusted Non-underlying Reported
-------------------- --------- --------------- --------- --------- --------------- ---------
Revenue 130.1 - 130.1 84.7 - 84.7
Cost of sales (70.2) - (70.2) (48.9) - (48.9)
-------------------- --------- --------------- --------- --------- --------------- ---------
Gross profit 59.9 - 59.9 35.8 - 35.8
Administrative (15.1)
expenses (36.9) (1) (52.0) (22.3) (0.7) (23.0)
-------------------- --------- --------------- --------- --------- --------------- ---------
(15.1)
Operating profit 23.0 (1) 7.9 13.5 (0.7) 12.8
Net finance income (0.9) - (0.9) 0.2 - 0.2
-------------------- --------- --------------- --------- --------- --------------- ---------
Profit before (15.1)
tax 22.1 (1) 7.0 13.7 (0.7) 13.0
Income tax expense (2.9) - (2.9) (1.3) - (1.3)
-------------------- --------- --------------- --------- --------- --------------- ---------
Profit for the (15.1)
period 19.2 (1) 4.1 12.4 (0.7) 11.7
-------------------- --------- --------------- --------- --------- --------------- ---------
(1) See Note 5 for more detail
on Non-underlying costs
Revenue
Revenue for the Group grew 53.7% from GBP84.7 million to
GBP130.1 million. This included several complexities: ADAM Audio
was acquired in July 2019 so FY20 includes a full year of trade
compared with only six weeks in FY19. Martin Audio was acquired in
December 2019, and so was included for eight months. Aside from
these businesses, the core business of FAEL grew by 21.5% to
GBP100.7 million (FY19: GBP82.9 million). At constant exchange
rates, FAEL grew by 23.5%. The following table summarises the
revenue for each year:
2020 2019
GBPm GBPm
--------------- ------ -----
Focusrite 76.2 57.7
Focusrite Pro 3.5 4.7
Novation 19.3 17.7
Distribution 1.7 2.8
--------------- ------ -----
FAEL 100.7 82.9
ADAM Audio 17.4 1.8
Martin Audio 12.0 -
Total 130.1 84.7
--------------- ------ -----
An additional factor in the revenue changes was the effect of
the COVID-19 pandemic and the measures to manage this that were
adopted by different countries. Lockdowns prevailed, thereby
requiring people to remain at home, in some degree of isolation.
The consequence was that people's creation of music increased
substantially, leading to much higher demand for the products made
by FAEL and ADAM Audio. On the other hand, live events went into
hibernation and installed sound demand lessened, both of which
reduced revenue in Martin Audio. While demand for Martin Audio
products lessened as a result of the impact of the pandemic, we
believe the product diversification that Martin Audio brings will
increase the resilience of the Group in the future.
The Focusrite segment comprises the products used in the
recording and broadcasting of music or voice. The primary ranges
are Scarlett and Clarett. In this segment, revenue increased by
32.2% to GBP76.2 million, driven primarily by demand for the new,
third generation of the Scarlett range.
Focusrite Pro supports 'master music makers' who produce music
for a living and commercial operations such as post-production
houses, live and broadcast stages and education establishments.
These were also adversely affected by the COVID-19 problems and
revenue decreased by 25.8% to GBP3.5 million.
Novation products, including Ampify, support all musicians
wishing to create music with technology. The primary ranges are
Launchpad, Launchkey, Circuit and the Peak and Summit synthesisers.
Overall, revenue increased by 9.4% helped by the new generations of
Launchpad grid controllers and Launchkey keyboard controllers.
ADAM Audio, which was acquired in July 2019, makes studio
monitors of the type used by many of the Group's customers. The
demand for ADAM Audio products has similar drivers to that of
Focusrite and it enjoyed a marked COVID-19 boost. Revenue in FY20
was GBP17.4 million (FY19 (six weeks): GBP1.8 million). Following
the acquisition of ADAM Audio, the Board decided to end the
contract for the distribution of KRK monitors in the UK, as
announced in the half year results, with the consequence that this
distribution revenue declined from GBP2.8 million in FY19 to GBP1.7
million in FY20.
Martin Audio was acquired in December 2019 and had revenue in
the period of GBP12.0 million.
All the major geographic regions grew for each of the major
product categories. North America represents 39% of the Group's
revenue and grew at 39.9% (constant currency: 40.4%) to GBP50.9
million. Organic (FAEL) growth was 16.4%, primarily for the
Scarlett range of interfaces.
EMEA represents 43% of Group revenue. EMEA grew by 65.9%
(constant currency: 69.8%) to GBP56.4 million. The organic (FAEL)
growth was 29.6% despite the decline in the distribution revenue.
Again, Scarlett was important.
The ROW comprises mainly Asia and South America and represents
the remaining 18% of Group revenue. Revenue in ROW grew by 59.7%
(constant currency: 64.1%). Organic (FAEL) growth was 15.2%
signalling the relative strength of ADAM Audio and Martin Audio in
ROW. Within Martin Audio, ROW has been the first region to show
signs of recovery.
Exchange rates have been largely stable this year. The Euro
average exchange rate was EUR1.14 (FY19: EUR1.13). The USD has
strengthened slightly from $1.29 in FY19 to $1.27 in FY20. This
improves revenue but has little effect on gross profit because the
majority of the cost of sales are also charged in USD.
Segment profit
Segment profit is disclosed in more detail in note 3 'Business
Segments'. The only major change has been the inclusion of Martin
Audio upon acquisition. The revenue is compared with the directly
attributable costs to create a segment profit.
Gross profit
In FY20, the gross margin was 46.0%, up from 42.2% in FY19. This
marks a continuation of the trend of improvement from the level of
approximately 39% at the time of the IPO in 2014. There are several
reasons for this strong improvement in gross margin: business mix
(with the higher margin ADAM Audio growing and the lower margin
Distribution segment declining); routes to market (with more
products being sold either directly to the consumer or directly to
dealers rather than via distributors); reducing discounts given to
some dealers and distributors; reducing duty costs; and reducing
royalties. The management of margin to get the best value out of
discounts to the reseller channel remains a consistent
priority.
Administrative expenses
Administrative expenses consist of sales, marketing, operations,
the uncapitalised element of research and development and central
functions such as legal, finance and the Group Board. These
expenses were GBP52.0 million, up from GBP23.0 million last year.
This included costs relating to the acquisitions including
depreciation and amortisation of acquired intangible assets, GBP3.0
million (FY19: nil); goodwill impairment, GBP10.2 million (FY19:
nil) and non-underlying items, GBP1.9 million (FY19: GBP0.7
million). The goodwill impairment is explained further below.
Excluding these items, administrative costs were GBP36.9 million
(FY19: GBP22.3 million), a rise of 65.9% driven largely by the
acquisitions of ADAM Audio and Martin Audio.
The Group's first application of IFRS 16 had a significant
impact on administrative expenses. However, it had only a marginal
impact on profit before tax. Rent within administrative expenses
reduced and the depreciation on right-of-use assets made up for
this reduction. This resulted in a GBP1.0m increase to EBITDA.
EBITDA
EBITDA is a non-GAAP measure but it is widely recognised in the
financial markets and it is used within the Group as the basis for
some of the incentivisation of senior management within the Group.
The other major metric used for the incentivisation of management
is cash generation. EBITDA increased from GBP17.2 million in FY19
to GBP28.6 million in FY20, an increase of 66.1% (see table
below).
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
-----------------------
Adjusted Non-underlying Reported Adjusted Non-underlying Reported
----------------------- --------- --------------- --------- --------- --------------- ---------
Operating profit 23.0 (15.1) 7.9 13.5 (0.7) 12.8
Add - amortisation
of intangible assets 3.7 3.0 6.7 2.9 - 2.9
Add - depreciation
of tangible assets 1.9 - 1.9 0.8 - 0.8
Add - goodwill
impairment - 10.2 10.2 - - -
----------------------- --------- --------------- --------- --------- --------------- ---------
EBITDA[1] 28.6 (1.9) 26.7 17.2 (0.7) 16.5
----------------------- --------- --------------- --------- --------- --------------- ---------
Depreciation and amortisation
Depreciation is charged on tangible fixed assets on a
straight-line basis over the assets' estimated useful lives.
Amortisation is mainly charged on capitalised development costs,
writing-off the development cost over the life of the resultant
product. It has always been intended that the costs are capitalised
in line with IAS 38 and amortised in line with the life of the
product, with all development costs related to an individual
product written-off over a period up to three years for Focusrite
and Novation, up to eight years for ADAM Audio and up to eleven
years for Martin Audio, reflecting the different lifespans of the
products. Normally, the capitalised development costs are slightly
greater than the amortisation, reflecting the continued investment
in product development in a growing group of companies. During
FY20, the capitalised development costs were GBP4.6 million (FY19:
GBP3.8 million), compared with the amortisation of GBP3.0 million
(FY19: GBP2.2 million).
Non-underlying items
In FY19, the Group acquired ADAM Audio and the costs associated
with the acquisition were GBP0.7 million. In FY20, the Group
acquired Martin Audio with associated acquisition costs totalling
GBP1.8 million. These costs exclude the loan arrangement fee which
is required to be shown within net debt and written back to the
income statement over the life of the loan facility. In addition to
these acquisition costs, the Group incurred costs of
acquisition-related employee changes totalling GBP0.1 million.
Non-underlying items also include amortisation of the intangible
assets acquired from ADAM Audio and Martin Audio (GBP3.0 million).
See note 5.
At the time of the acquisition of Martin Audio, the goodwill was
assessed at GBP12.6 million. Since then the COVID-19 pandemic has
materially affected the revenue of Martin Audio. The Board has
considered the impact of the consequential lockdowns on the
industry and, despite a clear belief that the live sound market
will recover in the foreseeable future, this will take time and
there is uncertainty over the impact on future margins and hence an
increased forecasting risk following COVID-19. Consequently, the
Board, based on management's estimate of recoverability, have
recognised an impairment of GBP10.2 million. Notwithstanding this
impairment, Martin Audio has been profitable in the eight months
since acquisition and the wider Group has already repaid the net
debt incurred to buy the Martin Audio business, nearly two years
ahead of schedule.
Foreign exchange and hedging
The exchange rates have been more consistent in the last
financial year.
Exchange rates 2020 2019
---------------- ----- -----
Average
USD:GBP 1.27 1.29
---------------- ----- -----
EUR:GBP 1.14 1.13
---------------- ----- -----
Year end
---------------- ----- -----
USD:GBP 1.34 1.22
---------------- ----- -----
EUR:GBP 1.12 1.11
---------------- ----- -----
___________________________
(1) EBITDA is defined as earnings before tax, interest,
depreciation, amortisation and goodwill impairment. The items
treated as non-underlying are explained in note 5.
The average USD rate has strengthened slightly from $1.29 to
$1.27. The USD accounts for over 50% of Group revenue but over 80%
of cost of sales so this increases the revenue but makes little
difference to the absolute gross profit.
The Euro comprises approximately a quarter of revenue but little
cost. Since the acquisition of ADAM Audio and Martin Audio, these
currency movements have been reassessed. There is no material
change, so the Group has continued entering into forward contracts
to convert Euro to GBP. The policy adopted by the Group is to hedge
approximately 75% of the Euro flows for the current financial year
(year ending August 2021) and approximately 50% of the Euro flows
for the following financial year (FY22). In FY19, approximately
three-quarters of Euro flows were hedged at EUR1.10, and the
average transaction rate was EUR1.13, thereby creating a blended
exchange rate of approximately EUR1.11. In FY20, the equivalent
hedging contracts were at EUR1.11, again close to the transactional
rate of EUR1.14 and so creating a blended exchange rate of
EUR1.12.
Hedge accounting is used, meaning that the hedging contracts
have been matched to income flows and, providing the hedging
contracts remain effective, movements in fair value are shown in a
hedging reserve in the balance sheet, until the hedge transaction
occurs.
Elsewhere, within Finance Income and Finance Costs, there is the
interest paid on the revolving credit facility taken out to fund
the acquisition of Martin Audio.
Corporation tax
Historically the effective corporation tax rate as a proportion
of profit before tax has been 10-12% due largely to enhanced tax
relief on development costs. In FY19, the corporation tax charge
was GBP1.3 million on reported profit before tax of GBP13.0
million.
In FY20, the corporation tax charge totals GBP2.9 million on
reported profit before tax of GBP7.0 million. This substantial
increase in effective tax rate is due to the assumed disallowance
of goodwill impairment, amortisation of acquired intangible assets
and the non-underlying acquisition costs. Excluding these, the
adjusted profit before tax was GBP22.1 million, therefore the tax
charge as a proportion of the underlying profit before tax is
13.3%.
The Group has long been considered a small or medium-sized
enterprise ('SME') for the purposes of research and development
relief in UK. From FY21, this is expected to change to the Research
and Development Expenditure Credit ('RDEC') basis of relief in
which the Group receives smaller credit to operating costs and the
profit is then taxed at the headline rate (19% in UK). Therefore,
the effective tax rate is expected to rise to approximately 19% in
the next financial year.
Earnings per share
The basic EPS for the year was 7.1 pence, down 65.2% from 20.4
pence in FY19. This decrease has been caused by the goodwill
impairment, the amortisation of acquired intangible assets and
non-underlying costs. The more comparable measure of the growth of
the trading profits including the dilutive effect of share options,
is the adjusted diluted EPS. This grew to 32.8 pence, up 53.3% from
21.4 pence in FY19.
2020 2019 Growth
pence pence %
------------------ ------ ------ --------
Basic 7.1 20.4 (65.2)%
Diluted 7.0 20.1 (65.2)%
Adjusted basic 33.2 21.7 53.0%
Adjusted diluted 32.8 21.4 53.3%
------------------ ------ ------ --------
Balance sheet
2020 2019
GBPm GBPm
----------------------------- ------- -------
Non-current assets 52.3 25.7
Current assets
Inventories 19.4 15.2
Trade and other receivables 18.0 18.2
Cash 15.0 15.5
Current liabilities (26.0) (16.9)
Non-current liabilities (21.8) (4.3)
----------------------------- ------- -------
Net assets 56.9 53.4
----------------------------- ------- -------
Non-current assets
The non-current assets comprise: goodwill (GBP7.9 million);
other intangible assets (GBP40.4 million) and property, plant and
equipment (GBP4.0 million). The goodwill of GBP7.9 million (FY19:
GBP5.3 million) relates to acquisitions as follows: GBP0.4 million
for Novation purchased in 2004, GBP5.1 million for ADAM Audio
purchased in July 2019 and GBP2.4 million for Martin Audio
purchased in December 2019.
The other intangible assets (GBP40.4 million) consist mainly of
capitalised research and development costs and acquired intangible
assets relating to product development and brand. The capitalised
development costs have a carrying value of GBP26.0 million (FY19:
GBP10.7 million). This increase of GBP15.3 million comprises the
excess during the year of capitalised development costs over the
amortisation (GBP1. 6 million) and acquired capitalised development
costs (consisting of acquired designs and designs in development
with a year end net book value of GBP13.8 million). Approximately
66% of development costs are capitalised and it is intended that
they are amortised over the life of the relevant products.
In addition, the remaining intangible assets, totalling GBP14.4
million, include brands acquired as part of the acquisitions of
ADAM Audio and Martin Audio with a carrying value at 31 August 2020
at GBP13.2 million (to be amortised over ten years for ADAM Audio
and 20 years for Martin Audio) .
Working capital
At the end of the year, working capital was 8.8% of revenue
(FY19: 20.2%). This is much lower than the historic norm of
approximately 20%. The reason for this w as primarily that stock at
the year-end was very low as a result of the substantial increase
in demand, over and above what could be manufactured quickly.
Manufacturing capacity has been increased substantially and it is
expected that this stock will be replenished during FY21. In
addition, the Group, in this period of particular uncertainty,
placed great emphasis on the timely collection of debts.
Consequently, overdue debtors, especially within FAEL, have been
very low. Creditors continue to be paid on time.
The working capital at ADAM Audio has consisted largely of stock
with relatively low debtors. Over time it is expected that the
Group will allow higher working capital in ADAM Audio to help
facilitate further revenue growth.
Within Martin Audio the stock and debtors have been higher and
management are considering how this could be reduced in future.
Cash flow
2020 2019
GBPm GBPm
Cash and cash equivalents at beginning of year 14.9 22.8
Cash and cash equivalents at end of year 15.0 14.9
-------------------------------------------------------------------------------- ------- ------
Net increase/(decrease) in cash and cash equivalents (per Cash Flow Statement) 0.1 (7.9)
-------------------------------------------------------------------------------- ------- ------
Add - equity dividends paid 2.3 2.0
Free cash flow (1) 2.4 (5.9)
-------------------------------------------------------------------------------- ------- ------
Add - non-underlying cash outflows:
Acquisition of subsidiary (net of cash acquired) 35.3 15.3
Bank loan (net of arrangement fee) (11.6) -
Non-underlying items (cash outflow) 2.1 0.8
-------------------------------------------------------------------------------- ------- ------
Underlying free cash flow 28.2 10.2
-------------------------------------------------------------------------------- ------- ------
(1) Defined as net cash from operating activities less net cash
used in investing activities less the amount of the revolving
credit facility utilised.
In FY19, the net cash balance at the year-end was GBP14.9
million. In December 2019, the Group bought Martin Audio for
GBP35.3 million plus GBP4.3 million of acquired cash and GBP1.8
million of acquisition costs. This was funded by a GBP40 million
revolving credit facility lasting up to five years. The facility
was provided by HSBC and NatWest. Consequently, at 29 February
2020, there was a net debt balance of GBP19.9 million.
During the second half, the strong increase in revenue
contributed to both higher profits and lower stock. Therefore the
underlying free cash flow for the full year was GBP28.2 million
(FY19: GBP10.2 million) leading to a year end net cash position of
GBP3.3 million. Within this, the movement in working capital was an
inflow of GBP13.7 million (FY19: outflow of GBP2.2 million). With
the intended rebuilding of stock within the Group in the next
financial year, and further business growth, there will be a marked
outflow of working capital.
Dividend
The Board is proposing a final dividend of 2.9 pence per share
(FY19 final dividend: 2.6 pence), which would result in a total of
4.2 pence per share for the year (FY19: 3.8 pence). This represents
an adjusted earnings dividend cover of 7.8 times (FY19: 5.6
times).
Summary
In my final Annual Report, I wish to thank the Board, advisers,
shareholders and, above all, colleagues for a thrilling and
rewarding six years at Focusrite during which we have undertaken an
IPO and then grown the Group substantially from an initial market
capitalisation of GBP73 million.
The Group has had a year with several significant achievements
in a uniquely challenging environment: the acquisition of Martin
Audio in December 2019 and repayment of the acquisition cost in
only eight months; the increased alignment of ADAM Audio (bought in
July 2019) leading to growth at a greater rate than was planned
upon acquisition; and substantial growth in FAEL as lockdowns
increased the audience for Focusrite and Novation products. I am
confident that the Group will continue to grow from strength to
strength in FY21 and beyond under the continued leadership of Tim
Carroll and chairmanship of Phil Dudderidge. I wish them and my
successor, Sally McKone, continued success in the future.
Jeremy Wilson
Chief Financial Officer
Principal Risks and Uncertainties
Effective risk management is a priority for Group in order to
sustain the future success of the business. Therefore the Board has
overall responsibility for the Group's risk management process but
has delegated responsibility for its implementation, the system of
internal controls which reduce risk and for reviewing their
effectiveness to the business leaders best qualified in each area
of the business.
The risks and uncertainties that the Group faces evolve over
time, therefore the business leaders review the risk register in
order to monitor key risks, identify emerging risks and update
mitigation efforts. The results are reported to the Board.
Risk identification and assessment
Risk management is a continuous process that is coordinated by
the legal team which reports its findings to the Audit Committee
and Board regularly. Each business leader is responsible for
updating the risk register and for identifying, analysing,
evaluating, managing and monitoring the risks and emerging risks in
their respective areas.
The risk register reflects the significant Group-level key risks
identified and is prepared using consistent risk factors and an
impact and likelihood evaluation.
The risk register includes key controls, mitigating activities
and/or controls and action plans in respect of the principal risks
which form the basis of the principal risks and uncertainties
disclosed in this report.
Review, challenge and control
The Group operates a half yearly cycle of risk and control
assessments. During this review, the business leaders consider and
report on any emerging risks in the near future and in the longer
term.
The risk register is considered by the Board at least annually.
At that time they also review the principal risks of the business
and evaluate the effectiveness of the risk management and internal
controls systems.
Risk appetite
Where a risk cannot be eliminated the Group's risk management
framework is designed to identify and manage the risk of failure to
achieve business objectives.
In determining its appetite for risk, the Group ensures that
risks are consistent with its financial objectives and values. For
example, the Group's financial disciplines ensure that each brand
makes net margins which are sufficient to provide for the vagaries
of a consumer facing business.
Board review
During the year, the Board carried out a detailed evaluation of
the effectiveness of the risk management and internal controls
systems for all parts of the business. This covered all material
controls including financial, operational and compliance controls,
and the Board is satisfied that they have been operating
effectively for the financial year to 31 August 2020 and up to and
including the date of this report. The business will continue to
review opportunities to mature, strengthen and improve the
effectiveness of these systems. No significant failings of internal
control were identified during these reviews.
During this financial year there have been two major challenges
that have dominated the Group's consideration of risk: Brexit and
COVID-19.
Brexit
Following the UK's departure from the EU on 31 January 2020, the
UK entered a transition period which is scheduled to end on 31
December 2020. Until that date, the UK will effectively remain in
the EU's customs union and single market, therefore there will be
no impact on the Group during this period.
The Group had established a Brexit working group in 2019 to
analyse Brexit-related risks and operational challenges to our
business and their potential impact. A large proportion of product
is shipped directly from the manufacturer to the distributors,
particularly in the USA and Asia. Product destined for continental
Europe travels via the UK. The Group is positioning itself to be
able to continue to supply products from the UK to continental
Europe in the period following the exit. The Group is well placed
for all the necessary arrangements to be in place by 31 December
2020 if no new trade deal is agreed. Provided that the Group's
logistics partners can continue to operate, the Group does not
believe that the risks of a no-deal Brexit pose a material threat
to the ongoing operations and profitability of the business.
COVID-19
Unsurprisingly, a summary of the risks that COVID-19 poses to
the business and the actions being taken feature highly in this
risk report. When the pandemic first occurred in China, the initial
threat was to the Group's manufacturing operations and Asian supply
chain. Whilst this remains a key risk, it is now clear that
currently by far the greatest challenge the Group faces is the risk
to demand. As the pandemic is unprecedented there is no way of
predicting the extent of the effect COVID-19 will have on our
customers' retail and online sales, and what the short, medium and
long-term effect of the pandemic will be on consumer behaviour.
The evidence we have seen from sales to date is that:
-- Demand will be the biggest issue. Whereas the Martin Audio
group has seen a significant drop in sales due to the cancellation
of live sound events, the ADAM Audio and Focusrite businesses are
enjoying record demand and therefore the availability of components
is key to those groups' ability to satisfy demand.
-- Some products are likely to fare better than others: to date,
home audio equipment has grown substantially while the pro audio
equipment ranges have declined.
The Group's working practices have been challenged as the
pandemic has developed. Measures to protect our employees, comply
with differing levels of governmental restrictions and cope with
illness throughout the business have been designed to ensure vital
operations and projects remained on track. Trade shows where the
Group would previously have exhibited its new products have been
cancelled and so the Group has had to increase its marketing
activities, use of video conferencing and online inspiration in
order to reach its audiences.
As in all sectors, the music industry continues to experience
profound and lasting structural changes. The Group expects the
pandemic to accelerate the transition away from brick and mortar
retail to online shopping therefore our efforts to learn new ways
to serve customers, collaborate with partners and create value for
our shareholders continue.
Assessment of principal risks and uncertainties
In addition to the more detailed consideration of Brexit and
COVID-19, the business leaders have carried out a robust assessment
of the principal risks and uncertainties facing the Group,
including any emerging risks, and those that would threaten its
business model, future performance, solvency or liquidity. Certain
changes have been made to the principal risks and uncertainties
reported in the previous year as a result of this assessment.
-- 'Economic environment' has been augmented to 'business
strategy development and implementation' to reflect the Group's
continued growth in an uncertain world.
-- 'Customer concentration' and 'channels to market' have been
merged into 'Customer facing systems' so as to cover the risk that
the Group fails to adopt and make effective use of new technologies
which will enable the Group to reach and serve its customers
well.
-- Following the Group's statement that it has taken steps to
mitigate the risk of a no-deal exit from the EU and its subsequent
assessment that the risk is not significant in last year's Annual
Report, 'Brexit' has been removed from the principal risks.
-- 'US import tariffs' have been removed from the principal
risks as the Group has established an alternative manufacturing
plant from which products manufactured do not attract import
tariffs.
-- Within the risks associated with product supply, there
remains a risk of component shortages which could disrupt, or
increase the cost of, the manufacture of the Group's products
-- The principal risk of 'Information security' has been
expanded to incorporate data privacy, business continuity and cyber
risk.
-- The Group has made considerable progress in strengthening its
talent pipeline and succession plans so the 'People' risk relating
to the dependency on attracting, retaining and motivating highly
skilled and experienced personnel is a decreasing risk in the list
of principal risks.
-- Whilst the Group remains exposed to currency and exchange
rate fluctuations which may affect revenue and costs when reported
in GBP, it has taken steps to mitigate this as a risk, as reported
in the previous year's
Annual Report, therefore currency fluctuations has been removed as a principal risk.
-- Climate change has not been assessed as a principal risk as
business interruption insurance is in place, and our suppliers are
deemed to have adequate experience in dealing with typhoons and
other natural disasters.
-- Reputational risk is not in itself a principal risk but is a
key factor in evaluating all principal risks.
Principal risk/uncertainty Mitigation
Business strategy development and implementation
* The Group reviews its business strategy on a regular
In these uncertain times, adopting the wrong business basis (through virtual off-site meetings) to
strategy or ineffectively implementing determine how sales and profit can be maximised, and
a strategy may result in the business suffering. business operations made more efficient.
Therefore the Group needs to understand and
properly manage strategic risk, taking into account
sector specific risk factors (which differ * The Executive Directors provide regular updates at
between the different brands in the business), in order Board meetings, which are challenged by the
to deliver long-term growth for the Non-executive directors, relating to initiatives and
benefit of the Group's stakeholders. their progress.
* The varying brands within the business provide
geographic and product diversity
* A disciplined approach to sales, budgeting and cost
control is taken in order to ensure the Company can
generate strong profits and cash flow
* Business leaders consider strategic risk factors,
wider economic and industry specific trends that
affect the competitive position of its products
* The Group has a detailed plan for the business going
forward
-----------------------------------------------------------------
Product innovation
* Research and development continues to be one of the
The market for the Group's products remains characterised Group's largest investments
by continued evolution in technology,
evolving industry standards, changes in customer needs
and frequent new competitive product * The Group continually reviews:
introduction therefore the Group's success depends on
designing and selecting products that
customers want to buy, at appropriate price points and (i) the design and performance of its product ranges; and
stocked in the right quantities. Failure (ii) trends within the industry and from influencers
to meet the design, quality and value expectations of * Innovation has been bolstered by the appointment of a
customers, in the short term, will result Head of Product and teams dedicated to product
in surplus stocks that cannot be sold/sell slowly/are refreshes
sold for less profit and in the longer
term will adversely affect the Group's brand reputation.
* Product owners approve quality standards, with
in-house quality control and testing teams in place
across all brands
-----------------------------------------------------------------
Product Supply
* Stock availability is reviewed on an ongoing basis
The Group relies on a small supplier base, concentrated and appropriate action taken where service or
in China and Malaysia, to deliver delivery to customers may be negatively impacted
products on time and to the Group's required quality and
ethical standards. Failure to supply
could result in an inability to service customer demand * Management continually seeks ways to solidify the
or adversely affect the Group's reputation. relationships with our suppliers to ensure their
focused attention and maintain the quality of
These suppliers depend on a reliable supply of components products
and there remains a risk of component
shortages which could disrupt, or increase the cost of,
the manufacture of the Group's products. * Management review component supply and maintain close
relationships with the component manufacturers. The
Group also reviews single source components and,
where possible, designs in multiple compatibility
* Employees are trained and communications sent to
suppliers regarding our expectations in relation to
anti-bribery and modern slavery
* The Audit Committee receives an annual report into
modern slavery and anti-bribery training and a
whistleblowing report at each meeting. Significant
matters are reported to the Board
-----------------------------------------------------------------
Customer facing systems
* The Group has documented arrangements with its
By customers, the Group refers to the resellers and resellers and distributors to ensure they are holding
distributors with whom it works to take sufficient stock levels and are motivated to promote
our products to the markets. The Group's performance the brands. Relationships are long-lasting and strong
depends on the engagement, recruitment
and retention of those customers, and on their ability to
drive and service * Resellers are expected to be able to offer in-store
customer demand, particularly in markets where the Group as well as online experiences for users
operates via a single distributor
or has large individual reseller customers.
* The Group has increased its direct to market offering
There is a risk that the business fails to adopt and plans for further expansion in the coming year
and/or make effective and efficient use of new software,
hardware and mechanisation to provide
its customers with service levels that allow them to meet * Continued investment in technology which supports the
or exceed end users' expectations. Group's e-commerce store has led to growth in the
These systems, software and platforms are ever changing, Group's direct to consumer offering
as technology evolves. A failure
of or breakdown in the relationship with a key reseller
or distributor, or even the failure * There is also continual development and monitoring of
of a major customer of a distributor, could significantly performance of the Group's Net Promoter Score, with a
and adversely affect the Group's particular focus by the customer support team on
business. improving the user experience
* The Group also works with influencers to promote its
brands throughout the industry
-----------------------------------------------------------------
Information security, data privacy, business continuity
and cyber risk * The Group has a Privacy Council to operationalise
The unencumbered availability and integrity of the privacy protection in key risk areas. Its main
Group's IT systems is ever critical to activities include raising awareness of data
successful trading. The Group continues to invest heavily protection as well as monitoring key risks,
in order to ensure a system that activities and incidents
can record and process substantial volumes of data,
prevent obsolescence and maintain responsiveness.
* The Group has made significant investment into its
The threat of a cyber security breach or an unauthorised systems' development and security programmes
or malicious attack is an ongoing throughout the year and strengthened its in-house
and increasingly sophisticated risk that the Group information and security resources
believes would negatively impact its reputation.
Similarly, the inadvertent processing of customer or
employee data in a manner deemed unethical * Systems vulnerability and penetration testing is
or unlawful could result in significant financial carried out regularly by both internal and external
penalties, remediation costs, reputational resources to ensure that data is protected from
damage and/or restrictions on our ability to operate. The corruption or unauthorised access or use
Group is noticing:
* a changing attitude by global users towards their
data and how it is used * Critical systems backup facilities and business
continuity plans are reviewed and updated regularly
* increasingly complex and fast-evolving data
protection laws and regulation * Major incident simulations and business continuity
tests are carried out periodically
* rapid technological advances delivering an enhanced
ability to gather, draw insight from and monetise * IT risks are managed through the application of
personal data internal policies and change management procedures as
well as enshrining security requirements and service
level agreements on third-party suppliers in
contractual documentation
* The Group's data protection and information security
policies are mandatory reading and are kept under
regular review
* The Group has prepared a roadmap to address gaps
between current and target risk exposures
-----------------------------------------------------------------
Intellectual property
* The Group has an ongoing programme to support
The Group relies on intellectual property and other appropriate protections of all intellectual property
proprietary rights which may not be always and other proprietary rights
be adequately protected under current laws or which may
be subject to unauthorised use.
* The Group takes action against all known
infringements and documents the terms on which it
will allow the use of its registered rights
* The Group has also hired an experienced intellectual
property lawyer who is designing an active programme
to protect our intellectual property rights
-----------------------------------------------------------------
People
* Making Focusrite a great place to work is central to
People are critical to the Group's ability to meet the the Group's strategy
needs of its customers and end users
and achieve its goals as a business. This requires the
continued service of senior managers * The Group champions diversity and inclusion and is
and technical personnel as well as our ability to building ways in which to develop talent through a
attract, motivate and retain highly qualified number of activities, including apprenticeships and a
people. leadership programme
There is an increased risk of short and long-term staff
absence due to illness during the
COVID pandemic. * The Group has well established recruitment channels
and procedures to recruit and retain people
* The Board considers the development of senior
management to ensure there are opportunities for
career development and promotion
* The Remuneration Committee reviews Executive Director
and senior management remuneration at least annually
and formulates packages to retain and motivate these
employees, including long-term incentive schemes
* The Nomination Committee considers and reviews the
skills, diversity, experience and succession planning
of the Board. There is also detailed work on broader
succession planning which includes wherever possible
named short-term cover for key roles
* Extensive efforts have been made to cater for
individual staff needs during the pandemic, including
enabling people to work from home, and to work safely
on Group premises if they need to
-----------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Certain statements in this full year report are forward looking,
in particular the detailed going concern analysis included in the
Notes to the Final Results. Although the Directors believe that
their expectations are based on reasonable assumptions, any
statements about future outlook may be influenced by factors that
could cause actual outcomes and results to be materially
different.
Consolidated Income Statement
For the year ended 31 August 2020
Note 2020 2019
GBP'000 GBP'000
------------------------------------------------------- ----- --------- ------------------
Revenue 2 130,141 84,665
Cost of sales (70,248) (48,899)
------------------------------------------------------- ----- ------------------
Gross profit 59,893 35,766
Administrative expenses (51,485) (22,994)
Impairment (loss)/gain on trade and other receivables (474) 40
------------------------------------------------------- ----- --------- ------------------
Adjusted EBITDA (non-GAAP measure) 28,565 17,197
Depreciation and amortisation (5,530) (3,648)
Non-underlying items for Adjusted EBITDA:
Amortisation of acquired intangible assets (3,013) -
Impairment of goodwill on acquisition 9 (10,200) -
Non-underlying items 5 (1,888) (737)
------------------------------------------------------- ----- --------- ------------------
Operating profit 7,934 12,812
------------------------------------------------------- ----- --------- ------------------
Finance income 36 246
Finance costs (945) (45)
------------------------------------------------------- ----- --------- ------------------
Profit before tax 7,025 13,013
Income tax expense 6 (2,934) (1,349)
------------------------------------------------------- ----- --------- ------------------
Profit for the period from continuing operations 4,091 11,664
------------------------------------------------------- ----- --------- ------------------
Earnings per share
From continuing operations
Basic (pence per share) 8 7.1 20.4
------------------------------------------------------- ----- --------- ------------------
Diluted (pence per share) 8 7.0 20.1
------------------------------------------------------- ----- --------- ------------------
Consolidated Statement of Comprehensive Income
For the year ended 31 August 2020
2020 2019
GBP'000 GBP'000
------------------------------------------------------------------------------------------- -------- --------
Profit for the period (attributable to equity holders of the Company) 4,091 11,664
Items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations 105 42
Profit/(loss) on forward foreign exchange contracts designated and effective as a hedging
instrument 459 (245)
Tax on hedging instrument (87) 47
-------------------------------------------------------------------------------------------- -------- --------
Total comprehensive income for the period 4,568 11,508
-------------------------------------------------------------------------------------------- -------- --------
Total comprehensive income attributable to:
Equity holders of the Company 4,568 11,508
-------------------------------------------------------------------------------------------- -------- --------
4,568 11,508
------------------------------------------------------------------------------------------- -------- --------
Consolidated Statement of Financial Position
As at 31 August 2020
2020 2019
Note GBP'000 GBP'000
---------------------------------------------- ----- --------- ---------
Assets
Non-current assets
Goodwill 9 7,882 5,271
Other intangible assets 40,374 18,832
Property, plant and equipment 4,082 1,602
Total non-current assets 52,338 25,705
---------------------------------------------- ----- --------- ---------
Current assets
Inventories 19,372 15,182
Trade and other receivables 17,744 18,188
Cash and cash equivalents 14,975 15,505
Derivative financial instruments 271 -
---------------------------------------------- -----
Total current assets 52,362 48,875
--------- ---------
Total assets 104,700 74,580
---------------------------------------------- ----- --------- ---------
Equity and liabilities
Capital and reserves
Share capital 58 58
Share premium 115 115
Merger reserve 14,595 14,595
Merger difference reserve (13,147) (13,147)
Translation reserve 197 92
Hedging reserve 220 (152)
EBT reserve (1) (1)
Retained earnings 54,861 51,827
Equity attributable to owners of the Company 56,898 53,387
---------------------------------------------- ----- --------- ---------
Total equity 56,898 53,387
---------------------------------------------- ----- --------- ---------
Current liabilities
Trade and other payables 23,417 15,664
Other liabilities 1,018 -
Current tax liabilities 452 430
Derivative financial instruments - 188
Provisions 1,094 -
Bank overdraft - 627
Total current liabilities 25,981 16,909
---------------------------------------------- ----- --------- ---------
Non-current liabilities
Deferred tax 7,772 4,284
Other liabilities 889 -
Provisions 1,519 -
Bank loan 11,641 -
Total liabilities 47,802 21,193
---------------------------------------------- ----- --------- ---------
Total equity and liabilities 104,700 74,580
---------------------------------------------- ----- --------- ---------
The financial statements were approved by the Board of Directors
and authorised for issue on 17 November 2020. They were signed on
its behalf by:
Tim Carroll Jeremy Wilson
Chief Executive Officer Chief Financial Officer
The notes form part of the financial statements.
Consolidated Statement of Changes in Equity
For the year ended 31 August 2020
Merger
Share Share Merger difference Translation Hedging EBT Retained
capital premium reserve reserve reserve reserve reserve earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1
September
2018 58 115 14,595 (13,147) 50 46 (1) 41,731 43,447
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Profit for the
period - - - - - - - 11,664 11,664
Other
comprehensive
income for
the period - - - - 42 (198) - - (156)
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Total
comprehensive
income for
the period - - - - 42 (198) - 11,664 11,508
Transactions
with owners of
the Company:
Share-based
payment
deferred
tax deduction
in excess of
remuneration
expense - - - - - - - (238) (238)
Share-based
payment
current
tax deduction
in excess of
remuneration
expense - - - - - - - 310 310
Shares from
EBT exercised - - - - - - - 46 46
Share-based
payments - - - - - - - 348 348
Shares
withheld to
settle
employees'
tax
obligations - - - - - - - (204) (204)
Premium on
shares issued
in
lieu of
bonuses - - - - - - - 175 175
Dividends paid - - - - - - - (2,005) (2,005)
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Balance at 1
September
2019 58 115 14,595 (13,147) 92 (152) (1) 51,827 53,387
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Profit for the
period - - - - - - - 4,091 4,091
Other
comprehensive
income for
the period - - - - 105 372 - - 477
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Total
comprehensive
income for
the period - - - - 105 372 - 4,091 4,568
Transactions
with owners of
the Company:
Share-based
payment
deferred
tax deduction
in excess of
remuneration
expense - - - - - - - 162 162
Share-based
payment
current
tax deduction
in excess of
remuneration
expense - - - - - - - 457 457
Shares from
EBT exercised - - - - - - - 252 252
Share-based
payments - - - - - - - 537 537
Shares
withheld to
settle
employees'
tax
obligations - - - - - - - (192) (192)
Premium on
shares issued
in
lieu of
bonuses - - - - - - - (22) (22)
Dividends paid - - - - - - - (2,251) (2,251)
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Balance at 31
August 2020 58 115 14,595 (13,147) 197 220 (1) 54,861 56,898
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Consolidated Cash Flow Statement
For the year ended 31 August 2020
2020 2019
Note GBP'000 GBP'000
------------------------------------------------------------ ----- --------- ---------
Operating activities
Profit for the financial year 4,091 11,664
Adjustments for:
Income tax expense 6 2,934 1,349
Net interest 909 (201)
Loss/(profit) on disposal of property, plant and equipment - 3
Amortisation of intangibles 6,780 2,936
Impairment of goodwill 10,200 -
Depreciation of property, plant and equipment 1,777 712
Share-based payments charge 537 348
------------------------------------------------------------ ----- --------- ---------
Operating cash flows before movements in working capital 27,228 16,811
(Increase)/decrease in trade and other receivables 3,839 (4,203)
(Increase)/decrease in inventories 1,914 (696)
Increase/(decrease) in trade and other payables 7,932 2,681
------------------------------------------------------------ ----- --------- ---------
Operating cash flows before interest and tax paid 40,913 14,593
Net interest received/(paid) (441) 58
Income taxes paid (3,539) (825)
------------------------------------------------------------ ----- --------- ---------
Cash generated by operations 36,933 13,826
Net foreign exchange movements (322) 185
------------------------------------------------------------ ----- --------- ---------
Net cash from operating activities 36,611 14,011
Investing activities
Purchases of property, plant and equipment (3,966) (808)
Purchases of intangible assets (5,649) (4,210)
Proceeds from disposal of property, plant and equipment - 25
Proceeds from disposal of other intangible assets - 50
Acquisition of subsidiary, net of cash acquired (35,309) (14,996)
Net cash used in investing activities (44,924) (19,939)
------------------------------------------------------------ ----- --------- ---------
Financing activities
Proceeds from loans and borrowings 36,000 -
Repayments of loans and borrowings (24,000) -
Loan arrangement fee (359) -
Payment of right-of-use liabilities (939) -
Payment of interest on right-of-use liabilities (41) -
Equity dividends paid (2,251) (2,005)
Net cash used in financing activities 8,410 (2,005)
------------------------------------------------------------ ----- --------- ---------
Net increase/(decrease) in cash and cash equivalents 97 (7,933)
Cash and cash equivalents at beginning of year 14,878 22,811
Cash and cash equivalents at end of year 14,975 14,878
------------------------------------------------------------ ----- --------- ---------
Notes to the Final Results
For the year ended 31 August 2020
These condensed preliminary financial statements of the Company
and its subsidiaries ("the Group") for the year ended 31 August
2020 have been prepared using accounting policies consistent with
International Financial Reporting Standards (IFRSs).
The information contained within this announcement has been
extracted from the audited financial statements which have been
prepared in accordance with IFRS as adopted by the European Union
('adopted IFRS'), and with those parts of the Companies Act 2006
applicable to companies reporting under adopted IFRS. They have
been prepared using the historical cost convention except where the
measurement of balances at fair value is required.
The Board of Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in
operational existence for the foreseeable future. Accordingly, the
financial statements have been prepared on a going concern
basis.
The group meets its day to day working capital requirements from
cash balances and a revolving credit facility of GBP40.0 million is
due for renewal in December 2024. As further described below, the
availability of the revolving credit facility is subject to
continued compliance with certain covenants
The COVID-19 virus has caused upheaval worldwide with many
businesses experiencing a significant decline in revenue. The
Directors have prepared projected cash flow forecasts for the
period ending 12 months from the date of their approval of this
financial statement. These forecasts include a severe but plausible
downside scenario, which include potential impacts from the
continued uncertainty of COVID-19 (see below).
The base case covers the period to December 2021 and includes
demanding but achievable forecast growth. The forecast has been
extracted from the Group's three-year plan. Key assumptions
include;
-- Future growth assumptions consistent with those recently
achieved by the business excluding an estimate of the impact of
COVID-19, but including the Group's expectation of Martin Audio
recovery from the pandemic, and annualisation of Martin Audio
results.
-- Free cash flow as a percentage of revenue held steady compared to previous years.
-- Continued investment in research and development in all areas of the Group.
-- Dividends consistent with the Group's dividend policy
-- No additional investment in acquisitions in the forecast period.
Throughout the period the forecast cash flow information
indicates that the Group will have sufficient cash reserves and
comply with the leverage and interest cover covenants contained
within the facility.
The Directors' view is that a severe yet plausible downside
assumption against their base case forecasts is estimated to be a
revenue shortfall of 30% for a six-month period commencing November
2020. This model assumes that purchases of stock would, in time,
reduce to reflect reduced sales, if they occurred, and the Group
would respond to a revenue shortfall by taking reasonable steps to
reduce overheads within its control. Even at that level, the Group
would be expected to remain well within the terms of its loan
facility with the leverage covenant (net debt to adjusted EBITDA)
in the period not exceeding 0.2x compared to the maximum of 2.5x.
The Group's net debt position under this severe plausible downside
scenario would still be expected to improve at the end of the
12-month period.
Separately, the Directors estimate that if the Group were to
experience a shortfall in revenue of greater than 90% for six
months, debt and leverage could rise to the upper limits allowed by
the banking covenants by April 21. This scenario includes
consequential reductions in the purchases of stock and overheads.
As an additional measure, the Directors could also cancel the
dividend. However, the Directors view is that any scenario of a
revenue shortfall of greater than 30% is not plausible.
In reality, the Group is still experiencing record levels of
consumer registrations and customer demand, partially as a result
of the COVID-19 restrictions on people's movement, and therefore
the high levels of revenue have been maintained since year end.
This is evidenced by improvements in the Group's net cash position
which has increased from the GBP3.3 million reported at year end to
approximately GBP8 million at 31 October 2020. Consequently, the
Directors are confident that the Company will have sufficient funds
to continue to meet its liabilities as they fall due for at least
12 months from the date of approval of the financial statements and
therefore have prepared the financial statements on a going concern
basis.
The statutory accounts for the year ended 31 August 2019 have
been reported on by the Company's auditors and delivered to the
Registrar of Companies. The statutory accounts for the year ended
31 August 2020 will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The auditors have
reported on those accounts. Their report was unqualified, did not
include references to any matter to which the auditors drew
attention by way of an 'emphasis of matter' without qualifying
their report, and did not contain statements under section 498(2)
or (3) of the Companies Act 2006.
Availability of audited accounts:
Copies of the 31 August 2020 audited accounts will be available
on 17 November 2020 on the Company's website
(www.focusriteplc.com/investors) for the purposes of AIM Rule 26
and will be posted to shareholders in due course.
1 acquisition of a subsidiary
On 30 December 2019, the Group acquired 100% of the shares and
voting interests in Optimal Audio Group Limited (hereafter referred
to as Martin Audio), comprising subsidiaries Martin Audio Limited
and Martin Audio US LLC and 18 shares (10%) of associated company
Martin Audio Japan Inc. The total consideration paid was
GBP39,610,000 of which GBP33,000,000 was funded through use of the
Group's revolving credit facility and the remainder was satisfied
in cash. The Group paid GBP372,000 to arrange the credit facility.
There was no deferred consideration.
Martin Audio, designs, manufactures and distributes premium
professional sound systems across the globe. It employs some 74
people worldwide, with the vast majority based at its head o ce and
co-located manufacturing facilities. Martin Audio is recognised as
a market leader and places great emphasis on product design and
innovation to sustain and drive growth with a strong product
roadmap in place.
By extending the Group's business into new products and markets,
which complement its existing o erings, the acquisition is
strategically aligned with the Company's previously communicated
aims to grow the core customer base, expand into new markets and
increase lifetime value for customers.
For the eight-month period between the acquisition and 31 August
2020 Martin Audio contributed revenue of GBP12,014,000 and a loss
before tax of GBP254,000 to the Group. If the acquisition had
occurred on 1 September 2019, management estimates that Martin
Audio's revenue would have been GBP20,893,000 and profit before tax
for the year would have been GBP946,000. In determining these
amounts management has assumed that the fair value adjustments,
determined provisionally, that arose on the date of acquisition
would have been the same if the acquisition had occurred on 1
September 2019.
Acquisition-related costs
The Group incurred acquisition-related costs of GBP1,737,000 on
legal fees and due diligence costs. These have been included in
non-underlying costs.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets
acquired, and liabilities assumed at the date of acquisition:
Recognised fair values on acquisition GBP'000
------------------------------------------------------- --------
Brand 6,800
Patent designs 11,300
Patent designs in development 4,600
-------------------------------------------------------- --------
Intangible assets 22,700
Property, plant and equipment 290
Computer software 224
Cash 4,345
Inventories 5,986
Trade and other receivables 3,783
Deferred tax (4,107)
Trade and other payables (6,175)
-------------------------------------------------------- --------
Net identifiable assets and liabilities at fair value 27,046
Goodwill recognised on acquisition 12,564
-------------------------------------------------------- --------
Consideration paid 39,610
-------------------------------------------------------- --------
Measurement of fair values
The valuation techniques used for measuring the fair value of
material assets acquired were as follows:
Assets acquired Valuation technique
Property, plant and equipment Cost approach
------------------------------------------------------
Intangible assets- Product design and development Market approach (cost to replace)
------------------------------------------------------
Intangible assets- Brand Income approach (multi-period excess earnings method)
------------------------------------------------------
Inventories Cost approach
------------------------------------------------------
The trade receivables amounts included within 'Trade and other
receivables' comprise gross contractual amounts due of
GBP3,390,000, of which GBP455,000 was expected to be uncollectable
at the date of acquisition.
Fair values measure on a provisional basis
Martin Audio was acquired eight months prior to the end of this
reporting period. If new information is obtained within one year of
the date of acquisition about the facts and circumstances that
existed at the date of acquisition that identifies adjustments to
the above amounts or any additional provisions that existed at the
date of acquisition, then the accounting for the acquisition will
be revised.
Goodwill
The goodwill is attributable to:
-- the skills and technical talent of the Martin Audio workforce;
-- worldwide reputation based on patent design and technological innovation;
-- alignment to the Group's existing customer base; and
-- strong strategic fit to grow the core customer base; and
expand into new markets and increase lifetime value for
customers.
Intangible assets sensitivity analysis
In assessing the estimated useful life of the intangible assets,
management considered the sensitivity in the estimated life of the
brand and patent development. The following table details the
sensitivity to a one-year increase and decrease in the amortisation
period, and ultimately reflecting the impact on the net profit (or
loss).
Amortisation is calculated based on the constant that brand is
recognised at cost of GBP6,800,000, patented design at
GBP11,300,000 and patented design in development at
GBP4,600,000.
Brand Patent designs Patent designs in development
19 years 20 years 21 years 7 years 8 years 9 years 10 years 11 years 12 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------- -------- --------
Annual
amortisation 358 341 324 1,614 1,413 1,256 460 418 383
----------------- --------- --------- -------- -------- -------- ---------- ----------
Impact on profit (17) - 17 (201) - 157 (42) - 35
----------------- --------- --------- --------- -------- -------- -------- ---------- ---------- ----------
The following table assesses the impact of differing estimated
useful lives of products on the valuation of the intangible
assets.
Brand Patent designs Patent designs in development
19 years 20 years 21 years 7 years 8 years 9 years 10 years 11 years 12 years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------- -------- --------
Fair value - 6,800 - - 11,300 - - 4,600 -
----------------- --------- --------- -------- -------- -------- ---------- ----------
Impact on
valuation (116) - 143 (274) - 143 (130) - 74
----------------- --------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Based on the above, we concluded that the impact would not be
material, and therefore a more detailed sensitivity analysis has
not been done.
2 Revenue
An analysis of the Group's revenue is as follows:
Year ended 31 August 2020 Year ended 31 August 2019
------------------------------------------------ -------------------------------------- --------
EMEA North Rest of Total EMEA North Rest of Total
America World America World
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- -------- ------------- ------------- -------- -------- ------------- ------------- --------
Focusrite 32,128 32,782 11,268 76,178 22,059 26,366 9,219 57,644
Focusrite Pro 1,071 1,625 796 3,492 1,316 2,537 851 4,704
-------------- -------- ------------- ------------- -------- -------- ------------- ------------- --------
Focusrite
combined 33,199 34,407 12,064 79,670 23,375 28,903 10,070 62,348
Novation 8,290 7,013 4,080 19,383 7,096 6,684 3,939 17,719
ADAM Audio 8,784 6,352 2,245 17,381 714 758 278 1,750
Martin Audio 4,493 3,089 4,432 12,014 - - - -
Distribution 1,693 - - 1,693 2,848 - - 2,848
Total 56,459 50,861 22,821 130,141 34,033 36,345 14,287 84,665
-------------- -------- ------------- ------------- -------- -------- ------------- ------------- --------
3 Business segments
Information reported to the Board of Directors for the purposes
of resource allocation and assessment of segment performance is
focused on the main product groups which the Group sells.
Similarly, the results of Novation and Ampify also meet the
aggregation criteria set out in IFRS 8 Segmental Reporting. The
Group's reportable segments under IFRS 8 are therefore as
follows:
Focusrite - Sales of Focusrite branded products
Focusrite Pro - Sales of Focusrite Pro branded products
Novation - Sales of Novation or Ampify branded products
ADAM Audio - Sales of ADAM Audio branded products
Martin Audio - Sales of Martin Audio branded products
Distribution - Distribution of third-party brands including KRK,
Stanton, Cerwin-Vega,
and sE Electronics
Segment revenues and results
The following is an analysis of the Group's revenue and results
by reportable segment:
The accounting policies of the reportable segments are the same
as the Group's accounting policies described in note 3 of the full
Annual Report. Segment profit represents the profit earned by each
segment without allocation of the share of central administration
costs including Directors' salaries, investment revenue and finance
costs, and income tax expense. This is the measure reported to the
Board of Directors for the purpose of resource allocation and
assessment of segment performance.
Central administration costs comprise principally the
employment-related costs and other overheads incurred by the Group.
Also included within central administration costs is the charge
relating to the share option scheme of GBP537,000 for the year
ended 31 August 2020 (2019: GBP348,000).
Year ended 31 August
2020 2019
GBP'000 GBP'000
-------------------------------------------------------- ------------------------ ------------------------
Revenue from external customers
Focusrite 76,178 57,644
Focusrite Pro 3,492 4,704
Novation 19,383 17,719
ADAM Audio 17,381 1,750
Martin Audio 12,014 -
Distribution 1,693 2,848
Total 130,141 84,665
-------------------------------------------------------- ------------------------ ------------------------
Segment profit
Focusrite 35,602 28,785
Focusrite Pro 1,916 2,908
Novation 8,458 8,680
ADAM Audio 8,828 159
Martin Audio 5,032 -
Distribution 57 807
-------------------------------------------------------- ------------------------ ------------------------
59,893 41,339
Central distribution costs and administrative expenses (39,871) (27,790)
Goodwill impairment (10,200) -
Non-underlying items (note 5) (1,888) (737)
-------------------------------------------------------- ------------------------ ------------------------
Operating profit 7,934 12,812
Finance income 36 246
Finance costs (945) (45)
-------------------------------------------------------- ------------------------ ------------------------
Profit before tax 7,025 13,013
Tax (2,934) (1,349)
Profit after tax 4,091 11,664
-------------------------------------------------------- ------------------------ ------------------------
The Group's non-current assets, analysed by geographical
location were as follows:
2020 2019
GBP'000 GBP'000
-------------------------------- -------- --------
Non-current assets
North America 760 124
Europe, Middle East and Africa 49,611 24,900
Rest of the World 1,967 681
Total non-current assets 52,338 25,705
-------------------------------- -------- --------
Information about major customers
Included in revenues shown for 2020 is GBP35.4 million (2019:
GBP33.4 million) attributed to the Group's largest customer, which
is located in the USA. Amounts owed at the year end were GBP6.4
million (2019: GBP8.5 million).
4 Profit for the year
Profit for the year has been arrived at after
charging/(crediting):
Year ended 31 August
2020 2019
GBP'000 GBP'000
-------------------------------------------------------------- ----------- ----------
Net foreign exchange (gains)/losses 427 (103)
Research and development costs (excluding costs capitalised) 2,441 1,939
Depreciation and impairment of property, plant and equipment 1,777 714
Profit on disposal of property, plant and equipment - 3
Amortisation of intangibles 6,690 2,936
Impairment of goodwill on acquisition 10,200 -
Operating lease rental expense - 466
Cost of inventories recognised as an expense 61,419 41,805
Staff costs (excluding share-based payments) 17,737 10,339
Movement in expected credit loss 474 (40)
Share-based payments charged to profit and loss 537 348
--------------------------------------------------------------- ----------- ----------
Due to the adoption of IFRS 16 Leases, there is no longer a
charge to profit for operating lease rental. Instead a charge to
profit is made for the depreciation of the right of use asset.
5 NON-UNDERLYING ITEMS
The following non-underlying costs have been declared in the
period
Year ended 31 August
2020 2019
GBP'000 GBP'000
------------------------------------------------ ----------- ----------
Acquisition Costs 1,737 737
Restructuring 151 -
------------------------------------------------ ----------- ----------
Non-underlying costs 1,888 737
------------------------------------------------ ----------- ----------
Amortisation of acquired intangible assets 3,013 -
Impairment of goodwill on acquisition 10,200 -
Total non-underlying costs for adjusted EBITDA 15,101 737
------------------------------------------------ ----------- ----------
Acquisition costs in the 12 months to 31 August 2020 included
costs of GBP1,644,000 relating to Martin Audio. Restructuring costs
relate to the costs of people changes following the ADAM Audio
acquisition. The impairment of goodwill on acquisition is detailed
in note 9.
6 Tax
Year ended 31 August
2020 2019
GBP'000 GBP'000
Corporation tax charges:
Under/(over) provision in prior year 75 (127)
Current year 3,362 1,242
-------------------------------------- ----------- ----------
3,437 1,115
Deferred taxation
Current year (503) 234
-------------------------------------- ----------- ----------
2,934 1,349
-------------------------------------- ----------- ----------
Corporation tax is calculated at 19% (2019: 19%) of the
estimated taxable profit for the year. Taxation for the US and
Germany subsidiaries are calculated at the rates prevailing in the
respective jurisdiction.
The tax charge for each year can be reconciled to the profit per
the income statement as follows:
Year ended 31 August
2020 2019
GBP'000 GBP'000
------------------------------------------------------- ----------- ----------
Current taxation
Profit before tax on continuing operations 7,025 13,013
------------------------------------------------------- ----------- ----------
Tax at the UK corporation tax rate of 19% (2019: 19%) 1,335 2,472
Effects of:
Expenses not deductible for tax purposes 2,582 133
R&D tax credit (1,219) (1,093)
Prior period adjustment - current tax 75 (127)
Effect of change in standard rate of deferred tax - -
Overseas tax 161 (36)
Tax charge for year 2,934 1,349
------------------------------------------------------- ----------- ----------
Expenses not deductible relate to impairment costs, the costs of
acquiring Martin Audio and residual costs of acquiring ADAM
Audio.
The prior period adjustment arose as a result of an over-accrual
of the tax provision. This was due to the changes in capital
allowances not being fully incorporated into the prior year
estimate.
Tax credited directly to equity
In addition to the amount charged to the income statement and
other comprehensive income, the following amounts of tax have been
recognised in equity:
2020 2019
GBP'000 GBP'000
------------------------------------------------------------------------------ -------- --------
Share-based payment deferred tax deduction in excess of remuneration expense 162 (238)
Share-based payment current tax deduction in excess of remuneration expense 457 310
------------------------------------------------------------------------------ -------- --------
619 72
------------------------------------------------------------------------------ -------- --------
Currently for research and development tax credits, Martin Audio
is under the RDEC scheme whereas all other members of the Group are
under the SME scheme. Under the SME scheme the credit is treated as
a taxable deduction within the corporation tax calculation. The
whole Group will be moving to RDEC from the SME scheme for the next
financial year.
The Finance Act 2020 enacted legislation to maintain the current
rate of corporation tax at 19%, up until at least the end of tax
year ended 31 March 2022.
7 Dividends
The following equity dividends have been declared:
Year to Year to
31 August 2020 31 August 2019
---------------------------------------- ---------------- ----------------
Dividend per qualifying ordinary share 4.2p 3.8p
---------------------------------------- ---------------- ----------------
During the year, the Company paid an interim dividend in respect
of the year ended 31 August 2020 of 1.3 pence per share.
On 17 November 2020, the Directors recommended a final dividend
of 2.9 pence per share (2019: 2.6 pence per share), making a total
of 4.2 pence per share for the year (2019: 3.8 pence per
share).
8 Earnings per share ('EPS')
The calculation of the basic and diluted EPS is based on the
following data:
Year ended 31 August
Earnings 2020 2019
----------- -----------
GBP'000 GBP'000
---------------------------------------------------------------------------------------- ----------- -----------
Earnings for the purposes of basic and diluted EPS, being net profit for the period 4,091 11,664
Non-underlying items (Note 5) 15,101 737
Tax on non-underlying items (26) -
---------------------------------------------------------------------------------------- ----------- -----------
Total underlying profit for adjusted EPS calculation 19,166 12,401
---------------------------------------------------------------------------------------- ----------- -----------
Year ended 31 August
2020 2019
----------- -----------
Number Number
'000 '000
---------------------------------------------------------------------------------------- ----------- -----------
Number of shares
Weighted average number of ordinary shares for the purposes of basic EPS calculation 57,680 57,221
Effect of dilutive potential ordinary shares:
Share option plans 812 824
Weighted average number of ordinary shares for the purposes of diluted EPS calculation 58,492 58,045
---------------------------------------------------------------------------------------- ----------- -----------
EPS Pence Pence
Basic EPS 7.1 20.4
Diluted EPS 7.0 20.1
Adjusted basic EPS 33.2 21.7
Adjusted diluted EPS 32.8 21.4
---------------------------------------------------------------------------------------- ----------- -----------
At 31 August 2020, the total number of ordinary shares issued
and fully paid was 58,111,639. This included 359,483 (2019:
782,652) shares held by the EBT to satisfy options vesting in
future years. The operation of this EBT is funded by the Group so
the EBT is required to be consolidated, with the result that the
weighted average number of ordinary shares for the purpose of the
basic EPS calculation is the net of the weighted average number of
shares in issue (58,111,639) less the weighted average number of
shares held by the EBT (431,920). It should be noted that the only
right relinquished by the Trustees of the EBT is the right to
receive dividends. In all other respects, the shares held by the
EBT have full voting rights.
The effect of dilutive potential ordinary share issues is
calculated in accordance with IAS 33 and arises from the employee
share options currently outstanding, adjusted by the profit element
as a proportion of the average share price during the period.
9 Goodwill AND INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIFE
Martin Audio ADAM Audio Novation Total
GBP'000 GBP'000 Digital GBP'000
Music Systems
GBP'000
-------------------------------- ------------- ----------- --------------- ---------
Cost
At 1 September 2018 - - 419 419
Additional goodwill recognised
on business combinations - 4,852 - 4,852
-------------------------------- ------------- ----------- --------------- ---------
At 31 August 2019 - 4,852 419 5,271
Additional goodwill recognised
on business combinations 12,564 247 - 12,811
-------------------------------- ------------- ----------- --------------- ---------
At 31 August 2020 12,564 5,099 419 18,082
-------------------------------- ------------- ----------- --------------- ---------
The additional goodwill recognised in ADAM Audio was a fair
value adjustment recognised within the twelve-month provisional
period allowed.
An impairment of GBP10,200,000 has been recognised against the
goodwill acquired on Martin Audio.
Martin Audio ADAM Audio Novation Total
GBP'000 GBP'000 Digital GBP'000
Music Systems
GBP'000
-------------------------------- ------------- ----------- --------------- ---------
Carrying amount
At 1 September 2018 - - 419 419
Additional goodwill recognised
on business combinations - 4,852 - 4,852
-------------------------------- ------------- ----------- --------------- ---------
At 31 August 2019 - 4,852 419 5,271
Additional goodwill recognised
on business combinations 12,564 247 - 12,811
Loss on impairment (10,200) - - (10,200)
-------------------------------- ------------- ----------- --------------- ---------
At 31 August 2020 2,364 5,099 419 7,882
-------------------------------- ------------- ----------- --------------- ---------
In note 19 'other intangible assets', there are GBP1,825,000 of
development costs which have not started amortisation. These are
projects in development and are considered to be intangible assets
that have not yet started amortisation.
The goodwill shown in the table above and intangible assets with
indefinite useful life are allocated to the CGUs per the schedule
below:
Intangible assets
Goodwill with indefinite useful
life
CGUs GBP'000 GBP'000
Focusrite 419 299
Focusrite Pro - 688
Novation - 838
ADAM Audio 5,099 -
Martin Audio 2,364 -
--------------- ---------- ------------------------------------
Total 7,882 1,825
--------------- ---------- ------------------------------------
Key assumptions for assessment of impairment
The discount rate applied against future cash flows has been
calculated with reference to a WACC calculated by reference to an
industry peer group relevant to each of the operating entities.
Inputs include 20-year nominal risk-free rate and market risk
premium.
The assumed growth rate for Martin Audio in the initial
five-year period is 15.8% compound annual growth ('CAGR').
All CGU's have applied a perpetual 2% growth rate based on
international monetary fund ('IMF') estimates of long-term
inflation.
Focusrite, Focusrite Pro and Novation
An impairment assessment in relation to each of these CGUs was
performed by management. The recoverable amounts of these CGUs have
been determined based on the value in use method. The calculations
use cash flow projections based on financial budgets approved by
management covering a five-year period, and a pre-tax discount rate
of 13.1% (2019: 13.1%). Cash flows beyond that five-year period
have been extrapolated using a perpetual 2% growth rate (FY19: 2%)
based on IMF estimates of long-term inflation. These assumptions
have been applied against Focusrite, Focusrite Pro and Novation
CGUs.
Management believes that any reasonably possible change in the
key assumptions on which these three CGUs' recoverable amounts are
based would not cause the carrying amount to exceed their
respective recoverable amounts. Also, it is noted that there is
sufficient headroom for the Focusrite, Focusrite Pro and Novation
CGUs.
ADAM Audio
The recoverable amount of ADAM Audio has been determined based
on a value in use calculation. That calculation uses cash flow
projections based on financial budgets approved by management
covering a five-year period, and a pre-tax discount rate of 13.8%.
The discount rate applied in FY19 was 16.8%, the reduction in
discount rate is due to updated assumptions based on technical and
current market conditions, in particular, due to ADAM's strong
performance since acquisition risk has reduced therefore the
discount rate has reduced.
Cash flows beyond that five-year period have been extrapolated
using a perpetual 2% growth rate (FY19: 2%) based on IMF estimates
of long-term inflation. Management believes that any reasonably
possible change in the key assumptions on which ADAM Audio's
recoverable amount is based would not cause ADAM Audio's carrying
amount to exceed its recoverable amount.
Martin Audio
The recoverable amount of Martin Audio has been determined based
on a value in use calculation. That calculation uses cash flow
projections based on financial budgets approved by management
covering a five-year period, and a pre-tax discount rate of 13.8%.
The discount rate has been calculated with reference to a WACC
calculated by reference to an industry peer group (including ADAM
Audio). Inputs include 20-year nominal risk free rate and market
risk premium. Any uncertainty risks are reflected within the base
cash flows and not the discount rate.
Cash flows beyond that five-year period have been extrapolated
using a perpetual 2% growth rate based on IMF estimates of
long-term inflation. Based on these assumptions an impairment of
GBP10.2 million has been identified an applied against goodwill
held on the balance sheet against Martin Audio.
To the extent possible, cash flows incorporate the effects of
COVID-19, though as these effects are considered to be constrained
to the short and medium-term no adjustment has been made to
discount rates or long-term growth rates. While the impact of
COVID-19 is deemed to be restricted to the short/medium term, the
initial valuation of Martin Audio was based on strong immediate
growth within the first two to three years post acquisition.
However, these forecasts have now been downgraded to represent a
slower growth than first anticipated in the first three years,
applied against a lower base year (as first-year revenues have been
impacted by COVID-19). The growth forecast in years four to five is
expected to be the same, however again applied against a lower
base. This results in a reduction to forecast cash of GBP8.0
million from initial valuation. This subsequently affects the
forecasted cashflows taken into perpetuity, although the perpetual
growth rate applied remains the same at 2%.
The impact of changes in the primary assumptions in isolation is
set out below for the CGU where detailed testing was carried out
due to indicators of impairment.
Change in estimate (Increase)/decrease in impairment
risk GBPm
Discount rate - increase of 2.2% (5.0)
----------------------------------
Discount rate - decrease of 1.8% 5.8
----------------------------------
Five-year CAGR growth rate - increase
of 1% 2.4
----------------------------------
Five-year CAGR growth rate - decrease
of 1% (2.8)
----------------------------------
Terminal growth rate - increase
of 1% 2.1
----------------------------------
Terminal growth rate - decrease
of 1% (1.8)
----------------------------------
(1) EBITDA is defined as earnings before tax, interest,
depreciation, amortisation and goodwill impairment. The items
treated as non-underlying are explained in note 5.
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(END) Dow Jones Newswires
November 17, 2020 02:00 ET (07:00 GMT)
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