TIDMTUNE
RNS Number : 5586M
Focusrite PLC
12 May 2020
Strictly embargoed until 07:00: 12 May 2020.
Focusrite plc ("Focusrite" or "the Group")
Half year results for the period ended 29 February 2020
Focusrite plc, the global audio products group of companies,
today announces its half year results for the six months ended 29
February 2020.
Key financial metrics
HY20 HY19
Revenue (GBP million) 49.9 40.4
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Adjusted EBITDA(2) (GBP million) 9.1 8.9
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Adjusted(3) operating profit (GBP million) 6.4 7.3
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Adjusted(3) diluted earnings per share (p) 9.3 11.0
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Interim dividend per share (p) - 1.2
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Net (debt) cash (GBP million) (19.9) 26.2
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Statutory results
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Operating profit (GBP million) 3.0 7.3
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Basic earnings per share (p) 3.6 11.1
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Highlights
-- Group revenue up by 23.5% to GBP49.9 million (25.3% at
constant currency(1) ) (HY19: GBP40.4 million)
-- Acquisition of Martin Audio in December 2019 for GBP39.6
million
-- Integration of ADAM Audio progressing well and contributing
to both revenue growth and profits
-- Consumer demand remained strong across the Focusrite and
Novation ranges although revenue down slightly like for like in the
period due to the initial impact of COVID-19 in China
-- Gross margin improved to 46.1% (FY19: 44.3%)
-- EBITDA(2) up by 2.9% to GBP9.1 million (HY19: GBP8.9
million)
-- Net debt of GBP19.9 million having bought Martin Audio for
GBP39.6 million (FY19: net cash GBP14.9 million, HY19: net cash
GBP26.2 million)
-- Interim dividend decision deferred in view of the uncertainty
caused by COVID-19
Tim Carroll, Chief Executive Officer, commented:
"We are delighted to have acquired Martin Audio in December
2019, adding another complementary high quality business, following
on the heels of our acquisition of ADAM Audio in July 2019. That
was closely followed by the COVID-19 pandemic. We have managed the
challenges well and I salute the whole team. As a result of their
agile management of the situation, the impact of supply chain
issues as a result of COVID-19 was limited to approximately GBP2
million of revenue in February 2020.
Since the half year, consumer demand for Focusrite and ADAM
Audio products has been high especially via ecommerce and we have
seen record levels of product registrations at Focusrite indicating
positive sell-through to end-users . Manufacturing in China is back
up to speed and we are working hard to ensure that consumers can
still get the product they wish to buy without delay. Demand for
Martin Audio products is being affected by the lack of live music
events due to COVID-19 but we believe this will recover in time.
Our people are adapting well to the unusual working conditions,
supported by state-of-the-art IT and communications facilities that
enable working at home. We are confident that the Group will come
through this upheaval stronger than ever. However, for the time
being we must remain appropriately cautious given the unprecedented
circumstances in which we all find ourselves."
(1) The constant currency revenue growth rate is calculated by
dividing the sum of all transactions in HY20, translated at the
average exchange rate for the relevant currency in HY19, by the sum
of all transactions in HY19, translated at the same average
exchange rate.
(2) Comprising earnings adjusted for interest, taxation,
depreciation, amortisation and non-underlying items. This is shown
on the face of the income statement.
(3) Adjusted for non-underlying items which comprise costs
relating to acquisition (GBP1.8m), amortisation of acquired
intangibles (GBP1.2m), and other costs (GBP0.4m).
Enquiries:
Focusrite Plc : +44 1494 836301
Tim Carroll (CEO)
Jeremy Wilson (CFO)
Panmure Gordon +44 20 7886 2500
(Nominated Adviser and
Broker)
Freddy Crossley
Erik Anderson
Belvedere Communications +44 74 070 23147
John West
Llew Angus
The information communicated in this announcement contains
inside information for the purposes of Article 7 of the Market
Abuse Regulation (EU) No. 596/2014 .
Notes to Editors
Focusrite plc is a global audio 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 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-making and
audio 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 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 sound
reinforcement applications.
The Focusrite Group has a global customer base with a
distribution network covering approximately 160 territories. Both
Focusrite and Martin Audio are headquartered in High Wycombe, UK,
with marketing offices in Los Angeles and Hong Kong. ADAM Audio has
offices in Berlin, Nashville and Dongguan, China.
Focusrite plc is traded on the AIM market, London Stock
Exchange.
Business and operating review
Overview
We are pleased to share with you our financial results and
summary of operations for the first half of our financial year
ending 31 August 2020. This year has been an incredibly busy time
for the Group as we launched a number of new products; began the
integration of ADAM Audio which was acquired in July 2019; and
completed our second acquisition, Martin Audio, in December 2019.
The Group has continued to grow on many of its key metrics:
including revenue, EBITDA, product portfolio and customer base.
Through all of this, we remain focused delivering on our mission of
'Removing Barriers to Creativity'. Indeed, it was paramount for
both acquired companies to have this in their DNA as well. Our
customers, spread widely across beginners, enthusiasts, aspiring
pros, and enterprise facilities and professionals, depend on the
Focusrite Group to deliver solutions that allow them to realise
top-quality results from all the amazing capabilities that our
technology offers. We strive to deliver this with our focus on ease
of use and a deep understanding of our customers' needs.
COVID-19
All three principle business units and subsidiary operations are
operating successfully with the majority of employees working at
home. That said, the Group's ADAM Audio and Martin Audio facilities
that assemble the larger, higher priced products of each brand
remain operational under safe-working mandates. All other
manufacturing, of all brands, is outsourced to third parties in
China or Malaysia. Of these, the Chinese manufacturers have now
restored their output to near pre-COVID levels, while Malaysia is
currently moving out of lockdown. Logistics including warehousing
in multiple locations, is also outsourced. This is our
well-established business model which, to date, has enabled the
companies in the Group to continue their operations successfully
during the crisis.
While traditional retail stores are closed in many countries the
online retail industry is fulfilling the demand so successfully
that we are seeing record levels of product registrations at
Focusrite, indicating positive sell-through to end-users. On the
other hand, d emand for Martin Audio products is being affected by
the lack of live music events due to COVID-19 although we believe
this will recover in time. Our people are adapting well to the
unusual working conditions, supported by state-of-the-art IT and
communications facilities that enable working at home.
Operating review
Our Group now comprises six powerful brands across three
business units: Focusrite, Focusrite Pro, Novation, Ampify, which
make up the Focusrite Audio Engineering ('FAEL') business unit,
ADAM Audio and Martin Audio.
Year to
Six months to Six months to 31 August
29 February 2020 28 February 2019 2019
GBP'000 GBP'000 GBP'000
--------------------------------- ------------------ ------------------ -----------------------------
Revenue from external customers
Focusrite 25,574 26,308 57,644
Focusrite Pro 1,884 2,594 4,704
Novation 9,935 9,827 17,719
ADAM Audio 7,041 - 1,750
Martin Audio 4,526
Distribution 966 1,696 2,848
Total 49,926 40,425 84,665
--------------------------------- ------------------ ------------------ -----------------------------
Focusrite Audio Engineering Ltd ('FAEL')
Within FAEL, Focusrite, comprising our market-leading Scarlett
audio interfaces and mid-range Clarett interfaces, was flat year on
year. The first three months were spent clearing our inventory and
channel inventory of the older generation Scarlett product, which
had some impact on re-orders for the new generation Scarlett.
However, total end-user registrations were significantly up year on
year with both versions selling in the channel for a period of time
and this has continued as the older generation stock has been
phased out. Additionally, net promoter scores ('NPS') are also up
as we have greatly improved the customer onboarding journey to get
users up and running with the product quickly.
Focusrite Pro, comprising our Red and RedNet solutions, had a
difficult first half, coming in 27% down versus prior year. Part of
this is due to a number of product releases, which were originally
scheduled for the first half, being pushed out to the second half.
Additionally, we have restructured the team to ensure we are more
tightly aligned with the different verticals we want to pursue
namely broadcast, education, installed sound and post
production.
Novation revenue was up 1% year on year, mainly driven by the
introduction of new Launchpads and the first of a new generation of
Launchkeys. Just like the new Focusrite Scarlett interfaces, all
the new Launch products have a new and enhanced 'out of the box'
and onboarding journey to get both new users and professionals
alike up and running quickly. This improved 'out of the box'
experience has resulted in higher NPS scores for the Novation brand
as well.
Ampify has continued to update and enhance our world-class iOS
music creation apps and, in addition, has just debuted our first
cross platform Mac/Windows music creation software and content
label, Ampify Studio and Ampify Sounds. Both releases will be well
integrated into the onboarding journey for both Focusrite and
Novation customers and are an important component of our growth
strategy focused on customer lifetime value.
Additionally, following the acquisition of ADAM Audio, the Group
will cease distributing third-party brands by the end of August
2020. Performance on these units has been poor and resulted in a
drag on our overall business.
ADAM Audio GmbH
Our ADAM Audio brand prides itself by offering a comprehensive
portfolio of high precision studio monitors. Our AX and S Series
monitors are chosen by some of the most discerning ears in the
industry as their go-to monitors for recording and mixing the
biggest titles in music and film. The T Series, bringing ADAM sonic
performance to a price point for home studio and aspiring
professionals, continues to gain share in the music instrument
('MI') retail space.
The integration of ADAM has progressed well and performance for
the first half is in line with our expectations and approximately
13% up over its prior year. Numerous initiatives across sales and
marketing, engineering and operations are in play to bring the
scale of the entire Group to bear and maximise our opportunities
with consolidation and cross-selling. The Group has already had
some early wins in terms of consolidating distribution in various
markets which are partially responsible for the year-on-year
growth.
Martin Audio Ltd
Martin Audio, our latest acquisition, was completed on 30
December 2019. The business rallies around the central theme of
'Unite Your Audience', offering a wealth of solutions for the
live/tour sound and installed sound market. Martin has a robust
product roadmap that even in the first few months of trade has
resulted in extensions to their award-winning Adorn and X Series
portfolio, as well as a number of new products specifically for the
Chinese market. In the two months Martin has been with the Group,
revenue has been up 22% year on year within the period and 11%
ahead of budget. The majority of the increase is in the
point-source solutions and subwoofers. Point-source solutions are
primarily used for monitoring live bands, DJs, corporate events and
installations in dance clubs, ballrooms and performing arts
centres.
Group summary
As a whole, the Group achieved revenue of GBP49.9 million for
the first half, up from GBP40.4 million for the first half last
year, including a full six months of ADAM Audio and two months of
Martin Audio. Gross margin increased to 46.1% from 44.3% last half.
Resulting EBITDA was GBP9.1 million compared to GBP8.9 million last
year; the prior year was flattered by a one-off GBP700,000 increase
from tariff-induced price increases in the US.
Research and development remains a cornerstone of our Group's
strategy. In this period, we had a number of new products come to
market, including the third generation of Novation Launchpads, the
first of a new series of Launchkeys, extensions to the Martin Audio
Adorn and X Series, and a host of software and hardware upgrades
across many of the product groups. The second half has a number of
new products and product transitions as well; some have been
slightly impacted by COVID-19 but are still on track for release
before the year end.
Regional review
Six months Six months Year to
to 29 February to 28 February 31 August
2020 2019 2019
GBP'000 GBP'000 GBP'000
----------------------------------------- ---------------- ---------------- -----------
Europe, Middle East and Africa ('EMEA') 23,115 19,315 34,033
North America 18,094 14,963 36,345
Rest of World ('ROW') 8,717 6,147 14,287
----------------------------------------- ---------------- ---------------- -----------
Total 49,926 40,425 84,665
----------------------------------------- ---------------- ---------------- -----------
EMEA
EMEA represented 46% of the Group's revenue for the first half.
For FAEL (comprising the Focusrite, Focusrite Pro, Novation and
Ampify brands), the region was down 4.2% year on year. Two primary
factors made up the majority of the impact. First, distribution
changes: our Scandinavian distributor ceased trading, resulting in
a loss of business for approximately two months as we searched for
and successfully brought online a new distributor. Additionally,
our Italian distributor was purchased by a large company that
resulted in approximately a two-month lapse in orders while they
completed their transaction. Second, we had a tough comparative
period as in February 2019, many European distributors opted to
take on more stock in anticipation of potential Brexit issues.
Business has settled down from these occurrences and we are
watching closely to see what the short and mid-term impacts could
be from COVID-19. For ADAM and Martin, the first half was roughly
on plan, with both showing double digit revenue growth
year-on-year. For now, demand for the Group's products has remained
strong, with increased levels of sales of FAEL and ADAM solutions
through more e-commerce focused resellers and the same for Martin's
installed sound solutions.
North America
North America is an important region for the Group and during
the first half, contributed 36% to the Group's total revenue. Our
North American operations have expanded with the acquisition of
ADAM and Martin. Both these brands utilise the same third party
logistics provider ('3PL') and have in-field demand generation
groups comprising sales, marketing, operations and support. FAEL
sells product to a North American distributor which then supplies
the dealers. FAEL also employs a local team of specialists whose
aim is to stimulate consumer demand.
Both FAEL and ADAM products are sold through a very similar
sales channel, with almost entire overlap. Martin Audio's North
America business is transacted through a mix of live/tour sound
rental companies, system integrators and direct to end-users. FAEL
revenue in North America was down 3.5% for the first half. When
factoring in the one-off gain realised last year from the tariff
price actions, FAEL was roughly flat year on year. ADAM's
performance was up 14% year on year, with a continued adoption of
the lower price T Series as well as continued growth in the upper
end AX series monitors. Martin Audio's North America business for
the two months since acquisition was up 17%, driven by increases in
fixed installations.
ROW
ROW comprises Asia and South America. ROW contributed 18% to the
Group's total revenue for the first half. For FAEL, Asia was down
by 7% compared with HY19. This was driven partially by bringing in
a new management team for the region in mid-January 2020 and
partially due to COVID-19 issues across China during February 2020,
which resulted in very weak sales in China for the month. Latin
America, with the team located in Mexico and Brazil, had a very
positive result for the first half, up 48% year on year. The
management team has done an excellent job of renewing distribution
contracts in key markets and focusing on localised support and
marketing tools for the various countries. ADAM Audio's result in
ROW for the half year was up 26% year on year, comprising an
increase of 6% in Latin America and 31% across Asia. Part of the
increase in Asia was achieved by consolidating distribution across
FAEL and ADAM in a few key markets. Martin Audio's ROW revenue was
up 30% year on year, driven primarily in
Asia and from bringing on board a sales and marketing team
focused on the Asian market with localised marketing and demand
generation.
Financial review
Overview
Since February 2019, the Group has acquired both ADAM Audio and
Martin Audio. These have made a major contribution to the strong
revenue growth of 23.5% over HY20. Within other areas of the income
statement, the picture is more complex and it is set out below.
Income statement
HY20 HY20 HY20 HY19 HY19 HY19
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------
Adjusted Non-underlying Reported Adjusted Non-underlying Reported
---------------------------------- --------- --------------- --------- --------- --------------- ---------
Revenue 49.9 - 49.9 40.4 - 40.4
Cost of sales (26.9) - (26.9) (22.5) - (22.5)
---------------------------------- --------- --------------- --------- --------- --------------- ---------
Gross profit 23.0 - 23.0 17.9 - 17.9
Administrative expenses (16.6) (3.4) (20.0) (10.6) - (10.6)
---------------------------------- --------- --------------- --------- --------- --------------- ---------
Operating profit 6.4 (3.4) 3.0 7.3 - 7.3
Net finance income (0.3) - (0.3) (0.1) - (0.1)
---------------------------------- --------- --------------- --------- --------- --------------- ---------
Profit before tax 6.1 (3.4) 2.7 7.2 - 7.2
Income tax expense (0.7) - (0.7) (0.8) - (0.8)
---------------------------------- --------- --------------- --------- --------- --------------- ---------
Profit for the period 5.4 (3.4) 2.0 6.4 - 6.4
---------------------------------- --------- --------------- --------- --------- --------------- ---------
HY20 HY20 HY20 HY19 HY19 HY19
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------
Adjusted Non-underlying Reported Adjusted Non-underlying Reported
---------------------------------- --------- --------------- --------- --------- --------------- ---------
(3.4)
Operating profit 6.4 (4) 3.0 7.3 - 7.3
Add - amortisation of intangible
assets 2.0 1.2 3.2 1.2 - 1.2
Add - depreciation of tangible
assets 0.7 - 0.7 0.4 - 0.4
---------------------------------- --------- --------------- --------- --------- --------------- ---------
EBITDA 9.1 (2.2) 6.9 8.9 - 8.9
---------------------------------- --------- --------------- --------- --------- --------------- ---------
(4) Non-underlying items set out in Note 5 of the Interim
Statements
Revenue
Revenue for the Group grew 23.5% to GBP49.9 million (HY19:
GBP40.4 million). Within this total, ADAM Audio contributed GBP7.0
million over the whole six-month period (HY19: GBPnil) and Martin
Audio contributed GBP4.5 million in the period from acquisition on
30 December 2019 to 29 February 2020 (HY19: GBPnil). Therefore, the
underlying business that was Focusrite plc last year had revenue of
GBP38.4 million (HY19: GBP40.4 million). Despite this decline of
5.1%, the Board was very pleased with this result. The first half
of last year benefited from the one-off advantage of a selling
price increase in the US, generating a revenue (and profit) of
approximately GBP0.7 million. The comparative period also had a
revenue boost due to customers in continental Europe buying more to
protect themselves against possible Brexit upheaval. Both of these
were discussed last year. This year, the initial supply chain
issues in China caused by COVID-19 delayed the delivery of
approximately GBP2 million of orders.
In general, GBP was stronger in HY20 than in HY19. The Euro
weakened and the average exchange rate moved from EUR1.13 in HY19
to EUR1.16 in HY20. The USD was broadly similar to last year at
$1.28 (HY19: $1.29). The effect of the Euro movement is to reduce
the revenue for HY20 relative to HY19. However, at the profit level
the Euro is largely mitigated by the Group's hedging policy
(approximately 75% of Euro exposure is hedged in the current
financial year and approximately 50% is hedged in the following
financial year) and the USD is mitigated by the purchases of stock
in USD from the manufacturers in China and Malaysia.
Segment profit
Segment profit is disclosed in more detail in the note to the
accounts named, 'Business Segments'. In FY19, the segments
consisted of Focusrite, Focusrite Pro, Novation, Distribution and
ADAM Audio. With the addition of Martin Audio, the Group will now
have three major operating companies, six brands and have six
business segments. With the two acquisitions, the management of the
Group is evolving towards an operating company basis. Therefore,
the Board will reconsider the reporting segments at the year end.
The revenue is compared with the directly attributable costs to
create a segment profit.
Gross profit
In HY19, the gross margin was 44.3%, helped by the boost from
the pricing increase in the US. Excluding that, the underlying
gross margin was approximately 43.3%. By contrast, in HY20, the
gross margin grew to 46.1%. This is a useful increase as a result
of several important factors. These include certain cases where the
specification of a new product was substantially greater than its
predecessor allowing the selling price to be increased.
Additionally, US import duties were mitigated partially and
royalties were reduced. Finally, the mix of business moved towards
higher margin products with the arrival of the higher margin ADAM
and Martin businesses together with the decline of the lower margin
Distribution segment.
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 GBP20.0 million, up from GBP10.7 million last year.
Within the total for HY20, there were non-underlying expenses of
GBP2.3 million, relating largely to the acquisition costs for the
purchase of Martin Audio. In addition, there was amortisation
relating to acquired intangible assets totalling GBP1.2 million.
Excluding these non-underlying costs, the operating costs were
GBP16.6 million, of which GBP4.2 million were incurred by ADAM
Audio and Martin Audio. Within the Focusrite business, marketing
costs were increased by the greatest proportion with particular
focus on online marketing via Google and Facebook as well as
face-to-face marketing via the pop-up store in London prior to
Christmas and the continued importance of the largest trade shows.
The Board supports the continued investment in marketing whilst
guiding the business to manage the costs tightly and in trying to
get the biggest benefit when deciding how to invest the money.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure but it is widely
recognised in the financial markets as a proxy for the ongoing
trading performance of the business. It is also used within the
Group as the basis for some of the incentivisation of senior
management at both the operating company level and the Group level.
EBITDA increased from GBP8.9 million in HY19 to GBP9.1 million in
HY20, an increase of 2.9%. This increase includes GBP0.4m of rental
costs that, due to adoption of IFRS 16, have been accounted for as
depreciation rather than administrative expense. The other major
metric used for the incentivisation of management is cash
generation (measured as free cash flow as a percentage of revenue).
This is discussed later.
Depreciation and amortisation
Depreciation is charged on tangible fixed assets on a
straight-line basis over the assets' estimated useful lives,
normally ranging between two and five years. Additionally, with the
adoption of IFRS 16, this now includes the depreciation of leases
brought onto the balance sheet.
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
prudently and amortised sensibly, with all development costs
relating 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.
Following the purchase of Martin Audio, the Group commissioned
PwC to carry out the purchase price allocation to evaluate the
relative value and useful lives of intangible assets such as brand,
developed products, products in development, patents and goodwill.
The results of this initial assessment were that the brand was
valued at GBP6.8 million and is assumed to be amortised over 20
years; developed products and related patents are being amortised
over eight years and products in development and associated patents
are being amortised over eleven years, reflecting the longer
marketable life of these products. Goodwill is not amortised unless
there is a permanent diminution in value. The amortisation of the
acquired intangible assets for both ADAM Audio and Martin Audio
totalled GBP1.2 million during the period (HY19: GBPnil) and has
been disclosed within non-underlying costs.
Within the Focusrite business, GBP2.1 million of development
costs were capitalised (HY19: GBP1.8 million) and the amortisation
of capitalised development costs was GBP1.5 million (HY19: GBP1.0
million).
Non-underlying items
In HY20, the Group acquired Martin Audio and the costs
associated with the acquisition were GBP1.8 million. In addition,
the Group made a number of changes to the senior employees which
contributed to additional non-underlying costs of approximately
GBP0.4 million. These were generally employment costs relating to
gardening leave periods. Finally, the non-underlying costs included
amortisation on acquired intangible assets totalling GBP1.2
million.
Foreign exchange and hedging
The exchange rates have been more consistent in the last
financial year.
Exchange rates HY20 HY19 FY19
---------------- ----- ----- -----
Average
USD:GBP 1.28 1.29 1.29
---------------- ----- ----- -----
EUR:GBP 1.16 1.13 1.13
---------------- ----- ----- -----
Period end
---------------- ----- ----- -----
USD:GBP 1.28 1.33 1.22
---------------- ----- ----- -----
EUR:GBP 1.16 1.17 1.11
---------------- ----- ----- -----
The average USD rate has been broadly unchanged at $1.28:GBP1.00
for HY20 (HY19: $1.29). The USD accounts for over half of Group
revenue but nearly all of the cost of sales so there is a useful
natural hedge.
As the Euro comprises approximately a quarter of revenue but
little cost, the weaker Euro (stronger GBP) is unhelpful. That
said, the Group enters 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 2020) and approximately 50% of the Euro flows for the
following financial year (FY21).
In HY19, 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 HY20,
the equivalent hedging contracts were at EUR1.12, versus the
transactional rate of EUR1.16 and so creating a blended exchange
rate of EUR1.13.
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.
Corporation tax
Historically, the effective corporation tax rate as a proportion
of profit before tax has been in the range 10-12%. In HY19, it was
11.0%. By contrast, in HY20 the effective tax rate is 23.8%. The
reason for this is that the non-underlying costs are assumed not to
be allowable for corporation tax. Excluding these costs, the
effective tax rate would be 10.5%. Most of the Group's profits are
taxed in the UK, where the headline rate is 19%. The effective tax
rate is lower than this headline rate, due largely to enhanced tax
relief on development costs. As the Group grows, it will move from
the Small or Medium-sized Enterprise regime ('SME') for the
treatment of R&D costs to the Research and Development
Expenditure Credit regime ('RDEC') which is markedly less
beneficial. Therefore, it is expected that the effective tax rate
will increase in the coming years.
Earnings per share ('EPS')
The basic EPS for the year was 3.6 pence, down 68% from 11.1
pence in HY19. This decline has largely followed the decline in
reported profit after tax and the large non-underlying costs
incurred in HY20. The weighted average number of shares used for
the calculation has increased compared to the prior year at
57,537,000 shares (HY19: 57,222,000 shares). The more comparable
measure, excluding non-underlying items and including the dilutive
effect of share options, is the adjusted diluted EPS. This declined
to 9.3 pence, from 11.0 pence in HY19.
HY20 HY19 FY19
Pence Pence Pence
------------------ ------ ------ ------
Basic 3.6 11.1 20.4
Diluted 3.5 11.0 20.1
Adjusted basic 9.4 11.1 21.7
Adjusted diluted 9.3 11.0 21.4
------------------ ------ ------ ------
Balance sheet
HY20 HY19 FY19
GBPm GBPm GBPm
------------------------------- ------- ------ -------
Non-current assets 63.3 7.9 25.7
Current assets
Inventories 18.6 12.3 15.2
Trade and other receivables 19.3 13.1 18.2
Cash 12.8 26.2 15.5
Current liabilities
Bank loan or overdraft - - (0.6)
Other current liabilities (18.2) (9.4) (16.3)
Non-current liabilities
Bank loan or overdraft (32.7) - -
Other non-current liabilities (8.1) (0.8) (4.3)
------------------------------- ------- ------ -------
Net assets 55.0 49.3 53.4
------------------------------- ------- ------ -------
Non-current assets
The non-current assets comprise: goodwill; brands, patents and
capitalised development costs; property, plant and equipment; and
software. The goodwill totals GBP17.6 million (HY19: GBP0.4
million). This comprises Martin Audio GBP12.3 million, ADAM Audio
GBP4.9 million and Novation GBP0.4 million. In both Martin Audio
and ADAM Audio, the goodwill represented approximately 30% of the
acquisition cost.
The brands were valued at GBP14.3 million (HY19: nil). This
comprises Martin Audio GBP6.8 million, which is to be amortised
over 20 years, and ADAM Audio GBP7.5 million, which is to be
amortised over ten years.
The capitalised development costs comprise acquired developments
in relation to both completed products and products currently in
development. The amortisation periods range from three years to
eleven years depending on the expected life of the products. The
shorter amortisation periods are more usual for Focusrite and
Novation products and the longer periods for the ADAM Audio
monitors and the Martin Audio live speakers. The capitalised
development costs have a carrying value of GBP20.8 million (HY19:
GBP5.4m).
Based on current trading and management base forecasts no
impairments to the carrying value of the intangible assets have
been deemed necessary as a consequence of COVID-19. This will be
reassessed at the year-end for evidence of any permanent diminution
in value.
Overall, the amortisation of the intangible assets totals GBP3.2
million (HY19: GBP1.2 million). This is split between amortisation
of intangible assets acquired as part of the acquisition of either
ADAM Audio in July 2019 or Martin Audio in December 2019 of GBP1.2
million (HY19: GBPnil), and other amortisation of GBP2.0 million
(HY19: GBP1.2 million). The amortisation of acquired intangible
assets has been treated as a non-underlying expense. The ongoing
amortisation relates to the capitalised development costs credited
to the income statement. The difference between ongoing
amortisation and capitalised development costs is GBP0.6 million
(HY19: GBP0.8 million).
Working capital
Working capital was 20.9% of revenue (HY19: 19.8%). This remains
at an acceptable level but it has increased over the comparative
period. This is largely due to the acquisition of Martin Audio.
Within ADAM Audio, the working capital is low and the Board is
considering how to use a modest investment in working capital to
drive further revenue growth.
The management of stock and debtors remain a key focus across
the Group. With stock the Board aims for a sensible balance that
minimises stock value whilst maximising the ability to satisfy
customer demand and with some degree of protection for unforeseen
events. This has proved useful in the COVID-19 lock-downs. With
debtors, the ambition is to get the customers to pay on time, i.e.
according to the contractual terms that they have accepted when
placing the order. Finally, we aim to pay suppliers on time.
Cash flow
HY20 HY19 FY19
GBPm GBPm GBPm
Free cash flow(5) (33.2) 4.9 (5.9)
Add - non-underlying cash outflows 37.6 16.1
------------------------------------ ------- ----- ------
Underlying free cash flow 4.4 4.9 10.2
------------------------------------ ------- ----- ------
(5) Defined as net cash from operating activities less net cash
used in investing activities.
The net debt balance at the period end was GBP19.9 million
(HY19: Net cash of GBP26.2 million and FY19: GBP14.9 million).
During the 12 months from February 2019 to February 2020, the Group
acquired ADAM Audio for GBP16.1 million, Martin Audio for GBP35.3
million (net of acquired cash), and also incurred non-underlying
costs totalling GBP2.3 million. As part of the acquisition of
Martin Audio, the Group took a GBP40 million loan facility split
evenly between HSBC and NatWest. The facility lasts for five years
to December 2024.
Excluding these acquisitions and financing activities, such as
issues of equity shares or equity dividends paid, the underlying
free cash flow in HY20 was GBP4.4 million, which was 8.8% of
revenue. In the comparative period, the free cash flow was GBP4.9
million which was 12.0% of revenue. Free cash flow as a percentage
of revenue is a key performance measure within the Group: if the
Group sells product, it is reasonable to assume that some of the
revenue converts to profit which then converts to cash. This forms
an important element of the incentivisation metrics of senior
management across the Group.
Going concern
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
interim statements have been prepared on a going concern basis.
The COVID-19 virus has caused upheaval worldwide with many
businesses experiencing a significant decline in revenue. The
Directors have prepared projected cash flow information (base case
forecasts) for the period ending twelve months from the date of
their approval of this interim statement. These projections did not
take full account of the improvements the Group is experiencing as
a result of the impact of COVID-19 (see below). On the basis of
this cash flow information, the Directors consider that at the end
of the 12-month period, the Group will have reduced its current net
debt position from GBP19.9m (the Group's RCF facility of GBP40.0
million is due for renewal in December 2024). Throughout the period
the forecast cash flow information indicates that the Group will
comfortably comply with the leverage and interest cover covenants
contained within the facility.
Management's 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 6-month period commencing May 2020.
This model assumes that purchases of stock will, in time, reduce to
reflect reduced sales and the Group will respond to the 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 1.0
compared to the maximum of 2.5. The Group's net debt position under
this severe plausible downside scenario is still expected to
improve at the end of the 12-month period.
In their sensitivity analyses, the Directors estimate that if
the Group were to experience a shortfall in revenue of greater than
60% for six months, this could result in leverage beyond that
permitted by the current facility by November 2020, despite
consequential reductions in the purchases of stock and overheads.
As an additional measure the Directors could also stop the
dividend. However, the Directors view is that this scenario of a
revenue shortfall of greater than 60% is not plausible.
In reality, the Group is currently experiencing record levels of
consumer registrations and customer demand, partially as a result
of the COVID-19 restrictions on people's movement, and therefore
revenue growth has accelerated since the half year end. This is
evidenced by improvements in the Group's net debt position which
had reduced by GBP4 million to GBP16 million at 30 April 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
interim statements and therefore have prepared the interim
statements on a going concern basis.
Chief Financial Officer
Following the announcement on 18 March that Jeremy Wilson has
decided to leave the Company at the end of December, an executive
search firm has been appointed to carry out a search for his
successor. A further update on this process will be made as and
when appropriate.
Dividend
Following this successful half year, the Board would normally
expect to propose an interim dividend in line with its consistent
dividend policy. However, in light of the highly unusual
circumstances caused by the COVID-19 virus, and the uncertainty
about future trading conditions this inevitably brings, the Board
has decided that the prudent approach is to defer the declaration
of a dividend until later in 2020.
Summary and outlook
"We are delighted to have acquired Martin Audio in December
2019, adding another high quality business, following the
acquisition of ADAM Audio in July 2019. That was closely followed
by the COVID-19 pandemic. We have managed the challenges well and I
salute the whole team. As a result of their agile management of the
situation, the impact of supply chain issues as a result of
COVID-19 was limited to approximately GBP2 million of revenue in
February 2020.
Since the half year, consumer demand for Focusrite and ADAM
Audio products has been high especially via ecommerce and we have
seen record levels of product registrations at Focusrite indicating
positive sell-through to end-users . Manufacturing in China is back
up to speed and we are working hard to ensure that consumers can
still get the product they wish to buy without delay. Demand for
Martin Audio products is being affected by the lack of live music
events due to COVID-19 but we believe this will recover in time.
Our people are adapting well to the unusual working conditions,
supported by state-of-the-art IT and communications facilities that
enable working at home. We are confident that the Group will come
through this upheaval stronger than ever. However, for the time
being we must remain appropriately cautious given the unprecedented
circumstances in which we all find ourselves."
Tim Carroll Jeremy Wilson
Chief Executive Officer Chief Financial Officer
Principal Risks and Uncertainties
In common with all businesses, the key area in which the Group
currently faces risks is the impact of COVID-19. The Group focuses
on the effective management of its risks in order to achieve its
strategic objectives and secure the resilience of the business for
the long term. Management of risk is critical to the effective
running of the business and is considered as part of the Group's
decision-making processes.
Risk area Description Mitigation
----------------------- ------------------------------------ --------------------------------------
COVID-19 At the time of writing, While the virus is likely
the risks that COVID-19 to impact our operations,
pose to the business are the Group has supply agreements
the most prevalent. When with manufacturers located
the pandemic first occurred in both China and Malaysia
in China, the initial threat thus lessening the impact
was to our manufacturing of the virus occurring in
and Asian supply chain one region. Additionally,
but more recently the threat the Group has stock in two
has become the risk to third party logistics firms,
the global supply chain. one in China and one in the
The Group cannot predict UK. The Group also works
the extent that the effect with its resellers and distributors
of the virus will have to ensure they are holding
on consumer demand, nor sufficient stocks should
is it known how widespread there be disruption to the
the virus will be in any supply chain. The Group's
one country or how long distribution network comprises
the pandemic will last. both bricks and mortar and
Our priority is to keep online resellers and covers
our workplaces and people all major regions of the
as safe as possible. At world. Therefore, while many
the same time we must consider physical stores are currently
other ways of getting the shut the increased demand
products to the consumers from online resellers has
that wish to buy them. more than compensated. Currently
consumer demand for Focusrite
and ADAM products has risen
and while many live sound
tours and installed sound
projects have been postponed,
Martin Audio has not seen
any material cancellations
in future business. The Group
has also transformed its
own e-commerce offering whose
improvement continues month
on month.
The Group has invested significantly
in its information technology
and communications structure
so that nearly all of the
workforce can work from home,
therefore the Group has been
able to continue its efforts
to develop new products.
At an unknown point in time
the pandemic will pass and
while the Group does not
rely on this as a mitigation,
COVID-19 is expected to be
a short-term rather than
a long-term risk. That said,
it is expected that there
will be lasting structural
changes to the retail market
therefore, the Group's serving
of its customers will also
evolve.
----------------------- ------------------------------------ --------------------------------------
Economic environment The Group operates in the The Group sells products
global economy and ultimately at all levels of the market
within the retail environment in c.160 territories worldwide
with products being sold via three distinct product
to consumer end-user musicians. categories and is working
Such operations are influenced to reduce reliance on any
by global and national single product or territory,
economic factors and particularly helped by the acquisition
current is the unknown of ADAM Audio and the more
impact the global pandemic recent acquisition of Martin
caused by the coronavirus Audio.
will have.
----------------------- ------------------------------------ --------------------------------------
Brexit The prospect of a free A large proportion of product
trade agreement not being is shipped directly from
in place at the end of the manufacture to the distributors,
the transition period continues particularly in the US and
to cause uncertainty as Asia. Product destined for
changes in trade relationships continental Europe travels
between Europe and the via the UK. The Group is
UK as a result of Brexit positioning itself to be
could give rise to both able to continue to supply
a supply and cost issue. products from the UK to continental
There has already been Europe after the end of the
foreign exchange volatility transition period. The Group
and the imposition of some has previously increased
additional duties and minor selling prices in the UK
disruption to the logistics to correct the imbalance
network. caused by the significant
foreign exchange rate changes.
The Group's continues to
monitor the possible impacts
of no-deal and plans are
being put in place to mitigate
these risks, for example
the rights of EU employees
to live and work in the UK,
the ability to trade on our
existing contractual terms,
how we will manage the personal
data of customers if the
UK is deemed to be a third
country and other matters
as they become known.
----------------------- ------------------------------------ --------------------------------------
US import tariffs The Group has product manufactured In 2018, the Group increased
in China and Malaysia. the minimum advertised price
The volatile China/US relationship to cover the additional tariffs.
has seen tariffs of between This mitigated much of the
10%-25% being imposed on effect of the higher tariffs.
most products manufactured Additionally, the Group started
in China and then rolled to manufacture some products
back partially following in Malaysia.
agreement between the two
countries. The changing
nature of the relationship
and the subsequent retaliatory
tariff impositions mean
that import tariffs could
be reimposed or rise further.
----------------------- ------------------------------------ --------------------------------------
Product innovation The market for the Group's Research and development
products is characterised remains one of the Group's
by continued evolution largest investments. The
in technology, evolving Group has a bespoke project
industry standards, changes system that facilitates the
in customer needs and frequent operation of a rigorous,
new competitive product disciplined product introduction
introductions. If the Group process to ensure that as
is unable to anticipate far as possible the fast-changing
or respond to these challenges needs of its target markets
or fails to develop and are met. In addition, the
introduce successful products Group continuously seeks
on a timely basis, it could efficiencies and minimises
have an adverse impact costs where possible.
on the Group's business
and prospects.
----------------------- ------------------------------------ --------------------------------------
Supplier concentration The Group is dependent The Group has supply agreements
on a small number of suppliers, with four major manufacturers.
in particular its largest The Group works with its
supplier, which provides resellers and distributors
Focusrite interfaces. Failure to ensure they are holding
or material delay by its sufficient stock levels should
suppliers to perform, or there be disruption to the
failure by the Group to supply chain and this has
renew such arrangements, been successfully tested
could have a material adverse following the recent reduction
effect on the Group's business, in industrial output levels
operating results and financial in China. In addition, the
position. Group's largest selling product
line, Scarlett, is dual-sourced
in both China and Malaysia
with lines running in parallel
to mitigate any regional
risk. Relationships are long-lasting
and strong. Members of the
operations department within
Focusrite meet each supplier
three to four times per year
to review performance and
costs.
----------------------- ------------------------------------ --------------------------------------
Customer concentration In certain countries, including In cases where there is a
the US, the Group operates large distributor in a significant
via a single distributor market, the Group also communicates
or has large individual with the major retailers.
reseller customers. In In addition, the Group carefully
certain cases, a failure monitors customer credit
of or breakdown in the limits and has credit insurance
relationship with a key which typically covers the
reseller or distributor, majority of the customer
or even the failure of debts outstanding at any
a major customer of that point in time.
distributor, could significantly
and adversely affect the
Group's business.
----------------------- ------------------------------------ --------------------------------------
Channels to market Significant change in the The Group or its distributors
methods by which end-users sell to both 'bricks and
wish to buy Focusrite products mortar' and e-commerce retailers
could significantly affect so that the Group can satisfy
the Group's business. customer demand via both
methods.
----------------------- ------------------------------------ --------------------------------------
Currency The Group is exposed to There is a largely effective
currency and exchange rate natural hedge for USD transactions
fluctuations which may as the Group uses its generation
affect the Group's revenue of USD to buy product in
and costs when reported USD.
in GBP.
Conversely, the Group has
substantial Euro revenue
and little cost. The Group
mitigates this Euro exposure
by entering into forward
foreign exchange hedging
contracts for the conversion
of Euro to GBP.
----------------------- ------------------------------------ --------------------------------------
People The nature of the Group's The Group is a leading company
business requires its employees in the UK music industry
in the technical and development and so attracts high-quality
teams to be highly skilled technical personnel. The
and experienced in their Group also attracts graduates
respective fields. The from music technology, electronics
Group is dependent for and engineering courses at
its continued success on renowned universities. The
being able to attract, Group invests in developing
retain and motivate such its employees and incentivises
individuals. them through wide-ranging
share ownership incentives
and other employment benefits
to aid retention.
----------------------- ------------------------------------ --------------------------------------
Intellectual property The intellectual property The Group has established
and data developed by the a programme for protecting
Group is valuable and the its intellectual property
Group could be harmed by and pursues infringements.
infringement or loss. The Group has data and information
technology controls which
are reviewed by the Group
Board. Additionally, the
Group includes data protection
provisions in the contracts
of all Group employees and
requires all employees to
undertake annual data protection
training.
----------------------- ------------------------------------ --------------------------------------
Information security Information security and Following the Group's detailed
cyber threats are currently review of its IT systems
a priority across all industries there has already been a
and remain a key government widespread upgrade of core
agenda item. IT functionality including
cybersecurity (firewalls,
anti-virus, mobile device
management) and the implementation
of cloud backup processes.
The Group has moved all its
core enterprise resource
planning systems to the cloud
with robust service level
agreements in place to ensure
data availability and security.
The Group has also reviewed
its processes and procedures
to ensure GDPR compliance,
has engaged an external adviser
to assist with the Group's
privacy programme and updated
its cookie and privacy policies.
There is an improving business
continuity framework and
a dedicated internal IT support
team aided by external support
providers.
----------------------- ------------------------------------ --------------------------------------
FORWARD-LOOKING STATEMENTS
Certain statements in this half year report are forward looking.
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.
Condensed Consolidated Income Statement
For the six months ended 29 February 2020
Six months to Six months to Year to
Note 29 February 2020 28 February 2019 31 August 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
------------------------------------------- ------- ------------------ ------------------ ----------------
Revenue 3 49,926 40,425 84,665
Cost of sales (26,920) (22,504) (48,899)
------------------------------------------- ------- ------------------ ------------------ ----------------
Gross profit 23,006 17,921 35,766
Administrative expenses (19,991) (10,670) (22,954)
EBITDA (non-GAAP measure) 9,139 8,881 17,197
Depreciation and amortisation (2,757) (1,630) (3,648)
Non-underlying items 5 (3,367) (737)
Operating profit 3,015 7,251 12,812
Finance income 28 75 246
Finance costs (353) (176) (45)
------------------------------------------- ------- ------------------ ------------------ ----------------
Profit before tax 2,690 7,150 13,013
Income tax expense 6 (639) (790) (1,349)
------------------------------------------- ------- ------------------ ------------------ ----------------
Profit for the period from continuing operations 2,051 6,360 11,664
---------------------------------------------------- ------------------ ------------------ ----------------
Earnings per share
From continuing operations
Basic (pence per share) 8 3.6 11.1 20.4
------------------------------------------- ------- ------------------ ------------------ ----------------
Diluted (pence per share) 8 3.5 11.0 20.1
------------------------------------------- ------- ------------------ ------------------ ----------------
Condensed Consolidated Statement of Other Comprehensive
Income
For the six months ended 29 February 2020
Six months to Six months to Year to
29 February 2020 28 February 2019 31 August 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
----------------------------------------------------- ------------------ ------------------ ----------------
Profit for the period 2,051 6,360 11,664
Items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign
operations 88 (24) 42
Gain on forward foreign exchange contracts designated
and effective as a hedging instrument 1,069 ---785 (245)
Tax on hedging instrument (203) (149) 47
------------------------------------------------------ ------------------ ------------------ ----------------
Total comprehensive income for the period 3,005 6,972 11,508
------------------------------------------------------ ------------------ ------------------ ----------------
Profit attributable to:
Equity holders of the Company 3,005 6,972 11,508
------------------------------------------------------ ------------------ ------------------ ----------------
3,005 6,972 11,508
----------------------------------------------------- ------------------ ------------------ ----------------
Condensed Consolidated Statement of Financial Position
Note 28 February 2020 28 February 2019 31 August 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
---------------------------------------------- ----- ------------------ ------------------ ----------------
Assets
Non-current assets
Goodwill 17,587 419 5,271
Other intangible assets 9 41,539 6,308 18,832
Property, plant and equipment 4,170 1,211 1,602
---------------------------------------------- ----- ------------------ ------------------ ----------------
Total non-current assets 4 63,296 7,938 25,705
---------------------------------------------- ----- ------------------ ------------------ ----------------
Current assets
Inventories 18,589 12,295 15,182
Trade and other receivables 18,437 12,254 18,188
Derivative financial instruments 10 881 842 -
Cash and cash equivalents 10 12,767 26,172 15,505
---------------------------------------------- ----- ------------------ ------------------ ----------------
Total current assets 50,674 51,563 48,875
---------------------------------------------- ----- ------------------ ------------------ ----------------
Total assets 113,970 59,501 74,580
---------------------------------------------- ----- ------------------ ------------------ ----------------
Equity and liabilities
Capital and reserves
Share capital 58 58 58
Share premium 115 115 115
Merger reserve 14,595 14,595 14,595
Merger difference reserve (13,147) (13,147) (13,147)
Translation reserve 180 26 92
Hedging reserve 714 682 (152)
EBT reserve (1) (1) (1)
Retained earnings 52,474 46,949 51,827
Equity attributable to owners of the Company 54,988 49,277 53,387
---------------------------------------------- ----- ------------------ ------------------ ----------------
Total equity 54,988 49,277 53,387
---------------------------------------------- ----- ------------------ ------------------ ----------------
Current liabilities
Trade and other payables 17,644 8,437 15,664
Current tax liabilities 551 728 430
Provisions - 200 -
Derivative financial instruments - - 188
Bank loan and overdraft 10 - - 627
Total current liabilities 18,195 9,365 16,909
---------------------------------------------- ----- ------------------ ------------------ ----------------
Non-current liabilities
Deferred tax 8,147 859 4,284
Bank loan and overdraft 10 32,640 - -
Total liabilities 58,982 10,224 21,193
---------------------------------------------- ----- ------------------ ------------------ ----------------
Total equity and liabilities 113,970 59,501 74,580
---------------------------------------------- ----- ------------------ ------------------ ----------------
Condensed Consolidated Statements of Changes in Equity
For the six
months ended Merger
29 February Share Share Merger difference Translation Hedging EBT Retained
2020 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
2019 58 115 14,595 (13,147) 92 (152) (1) 51,827 53,387
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Profit for the
period - - - - - - - 2,051 2,051
Other
comprehensive
income for
the period - - - - 88 866 - - 954
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Total
comprehensive
income for
the period - - - - 88 866 - 2,051 3,005
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Transactions
with owners of
the Company:
Share-based
payment
deferred tax
deduction in
excess of
remuneration
expense - - - - - - - (147) (147)
Shares from
EBT exercised - - - - - - - 233 233
Share-based
payments - - - - - - - 225 225
Shares
withheld to
settle
employees'
tax
obligations
associated
with
share-based
payments - - - - - - - (214) (214)
Dividends paid - - - - - - - (1,501) (1,501)
Balance at 29
February 2020 58 115 14,595 (13,147) 180 714 (1) 52,474 54,988
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Condensed Consolidated Statements of Changes in Equity
(Continued)
For the six
months ended Merger
28 February Share Share Merger difference Translation Hedging EBT Retained
2019 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 - - - - - - - 6,360 6,360
Other
comprehensive
income for
the period - - - - (24) 636 - - 612
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Total
comprehensive
income for
the period - - - - (24) 636 - 6,360 6,972
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Transactions
with owners of
the Company:
Share-based
payment
deferred tax
deduction in
excess of
remuneration
expense - - - - - - - (303) (303)
Share-based
payment
current tax
deduction in
excess of
remuneration
expense - - - - - - - 303 303
Shares from
EBT exercised - - - - - - - 44 44
Share-based
payments - - - - - - - 162 162
Shares
withheld to
settle
employees'
tax
obligations
associated
with
share-based
payments - - - - - - - (205) (205)
Premium on
shares
awarded in
lieu of
bonuses - - - - - - - 175 175
Dividends paid - - - - - - - (1,318) (1,318)
Balance at 28
February 2019 58 115 14,595 (13,147) 26 682 (1) 46,949 49,277
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Condensed Consolidated Statements of Changes in Equity
(Continued)
For the year Merger
ended 31 Share Share Merger difference Translation Hedging EBT Retained
August 2019 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
associated
with
share-based - - - - - - - (204) (204)
Premium on
shares
awarded in
lieu of
bonuses - - - - - - - 175 175
Dividends paid - - - - - - - (2,005) (2,005)
Balance at 31
August 2019 58 115 14,595 (13,147) 92 (152) (1) 51,827 53,387
--------------- --------- --------- --------- ----------- ------------ --------- --------- --------- --------
Consolidated Statement of Cash Flow
For the six months ended 29 February 2020
Six months to Six months to Year to
29 February 2020 28 February 2019 31 August 2019
GBP'000 GBP'000 GBP'000
Cash flows from operating activities
Profit for the period 2,051 6,360 11,664
Adjustments for:
Income tax expense 639 790 1,349
Net finance charge/(income) 325 101 (201)
Loss/(profit) on disposal of property, plant and
equipment (1) - 3
Amortisation of intangibles 3,244 1,271 2,936
Depreciation of property, plant and equipment 644 359 712
Movement in provisions - 200 -
Share-based payment charge 225 162 348
Operating cash flow before movements in working capital 7,127 9,243 16,811
Decrease/(increase) in trade and other receivables 3,535 1,056 (4,203)
(Increase) in inventories 2,579 (904) (696)
(Decrease)/increase in trade and other payables (4,222) (2,272) 2,681
Operating cash flow before interest and tax paid 9,019 7,123 14,593
Net interest received/(paid) (155) 75 58
Income tax paid (816) (79) (825)
Net cash inflow from operating activities 8,048 7,119 13,826
---------------------------------------------------------- ------------------ ------------------ ----------------
Cash flows from investing activities
Purchases of property, plant and equipment (2,698) (295) (808)
Development of intangible assets (3,251) (1,959) (4,135)
Acquisition of subsidiary, net of cash acquired (35,265) - (14,996)
---------------------------------------------------------- ------------------ ------------------ ----------------
Net cash used in investing activities (41,214) (2,254) (19,939)
---------------------------------------------------------- ------------------ ------------------ ----------------
Cash flows from financing activities
Issue of equity shares 1 14 -
New bank and other loans raised 32,640 - -
Equity dividends paid (1,501) (1,318) (2,005)
Net cash generated/(used) in financing activities 31,140 (1,304) (2,005)
---------------------------------------------------------- ------------------ ------------------ ----------------
Net increase in cash and cash equivalents (2,026) 3,561 (8,118)
Net foreign exchange movement (85) (200) 185
Cash and cash equivalents at beginning of the period 14,878 22,811 22,811
---------------------------------------------------------- ------------------ ------------------ ----------------
Cash and cash equivalents at end of the period 12,767 26,172 14,878
---------------------------------------------------------- ------------------ ------------------ ----------------
Notes to the Condensed Consolidated Interim Financial
Statements
1. Basis of preparation and significant accounting policies
Focusrite plc (the 'Company') is a company incorporated in the
UK. The condensed consolidated interim financial statements
('interim financial statements') as at and for the six months ended
29 February 2020 comprised the Company and its subsidiaries
(together referred to as the 'Group').
The Group is a business engaged in the development, manufacture
and marketing of professional audio and electronic music
products.
Statement of compliance
The interim financial statements are for the six months ended 29
February 2020 and are presented in pounds Sterling ('GBP'). This is
the functional currency of the Group. The statement is presented to
the nearest GBP1,000 ('GBP'000'). The interim financial report has
been prepared in accordance with the International Financial
Reporting Standards ('IFRS'), International Accounting Standards
('IAS') and interpretations currently endorsed by the International
Accounting Standards Board ('IASB') and its committees as adopted
by the EU and as required to be adopted by AIM listed companies.
AIM listed companies are not required to comply with IAS 34
'Interim Financial Reporting' and accordingly the Company has taken
advantage of this exemption. They do not include all the
information required for a complete set of IFRS financial
statements. However, selected explanatory notes are included to
explain events and transactions that are significant to an
understanding of the changes in the Group's financial position and
performance since the last annual consolidated financial statements
as at and for the year ended 31 August 2019.
These interim financial statements were authorised for issue by
the Company's Board of Directors on 12 May 2020.
The comparative figures for the financial year ended 31 August
2019 are not the Company's statutory accounts for that financial
year. Those accounts have been reported on by the Company's auditor
and delivered to the registrar of companies. The report of the
auditor was (i) unqualified, (ii) did not include a reference to
any matters to which the auditor drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act
2006.
Significant accounting policies
The interim financial statements have been prepared in
accordance with the accounting policies adopted in the Group's
financial statements for the year ended 31 August 2019, with the
exception of the following:
Adoption of IFRS 16 'Leases'
IFRS 16 is effective for annual periods beginning on or after 1
January 2019. The new standard replaces existing leases guidance,
principally IAS 17 'Leases'.
IFRS 16 introduces a single, on-balance sheet lease accounting
model for lessees. A lessee recognises a right -- of -- use asset
representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. There
are recognition exemptions for short-term leases of 12 months or
less and leases of low-value items. Lessor accounting remains
similar to the current standard - i.e. lessors continue to classify
leases as finance or operating leases.
The Group applied IFRS 16 initially on 1 September 2019, using
the modified retrospective approach. IFRS 16 has a number of
practical expedients for first time adoption. The Group has
utilised the following practical expedients at the transition
date:
-- apply a single discount rate to a portfolio of leases with
reasonably similar characteristics;
-- exclude initial direct costs from the measurement of the
right-of-use asset on transition;
-- use hindsight to determine the term;
-- use onerous contract assessment under IAS 37 'Provisions,
Contingent Liabilities and Contingent Assets' immediately before
transition instead of performing an impairment review under IAS 36
'Impairment'; and
-- for leases with a remaining term of less than 12 months at 1
September 2019, the short-term lease exemption in IFRS 16 has been
taken.
Right-of-use assets and lease liabilities of approximately
GBP2.4 million have been recognised by the Group at 1 September
2019. The impact on net profit after tax is not material. However,
adjusted EBITDA has increased by GBP0.4 million in HY20 as the
operating lease payments were previously included in HY19 in EBITDA
as an administrative expense, but the amortisation of the
right-of-use assets and interest on the lease liability will be
excluded from this measure. The impact on operating profit is not
material.
Repayment of the principal portion of the lease liabilities will
be classified as cash flows from financing activities, while
currently these payments are classified as operating cash flows. In
HY20, the value of these payments was approximately GBP0.4
million.
1.1 Basis of consolidation
The consolidated financial statements comprise the financial
statements of the Company and subsidiaries controlled by the
Company drawn up to 29 February 2020.
1.2 Subsidiaries
Subsidiaries are entities controlled by the Group. Control
exists when the Group has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its
activities. In assessing control, the Group takes into
consideration potential voting rights that are currently
exercisable. The acquisition date is the date on which control is
transferred to the acquirer. The financial statements of
subsidiaries are included in the consolidated financial statements
from the date that control commences until the date control
ceases.
1.3 Going concern
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
interim statements have been prepared on a going concern basis.
The COVID-19 virus has caused upheaval worldwide with many
businesses experiencing a significant decline in revenue. The
Directors have prepared projected cash flow information (base case
forecasts) for the period ending twelve months from the date of
their approval of this interim statement. These projections did not
take full account of the improvements the Group is experiencing as
a result of the impact of COVID-19 (see below). On the basis of
this cash flow information, the Directors consider that at the end
of the 12-month period, the Group will have reduced its current net
debt position from GBP19.9m (the Group's RCF facility of GBP40.0
million is due for renewal in December 2024). Throughout the period
the forecast cash flow information indicates that the Group will
comfortably comply with the leverage and interest cover covenants
contained within the facility.
Management's 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 6-month period commencing May 2020.
This model assumes that purchases of stock will, in time, reduce to
reflect reduced sales and the Group will respond to the 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 1.0
compared to the maximum of 2.5. The Group's net debt position under
this severe plausible downside scenario is still expected to
improve at the end of the 12-month period.
In their sensitivity analyses, the Directors estimate that if
the Group were to experience a shortfall in revenue of greater than
60% for six months, this could result in leverage beyond that
permitted by the current facility by November 2020, despite
consequential reductions in the purchases of stock and overheads.
As an additional measure, the Directors could also stop the
dividend. However, the Directors view is that this scenario of a
revenue shortfall of greater than 60% is not plausible.
In reality, the Group is currently experiencing record levels of
consumer registrations and customer demand, partially as a result
of the COVID-19 restrictions on people's movement, and therefore
revenue growth has accelerated since the half year end. This is
evidenced by improvements in the Group's net debt position which
had reduced by GBP4 million to GBP16 million at 30 April 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
interim statements and therefore have prepared the interim
statements on a going concern basis.
1.4 Earnings per share
The Group presents basic and diluted earnings per share ('EPS')
data for its ordinary shares. Basic EPS is calculated by dividing
the profit attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the period.
For diluted EPS, the weighted average number of ordinary shares is
adjusted for the dilutive effect of potential ordinary shares
arising from the exercise of granted share options.
1.5 Accounting estimates and judgements
In application of the Group's accounting policies, the Directors
are required to make judgements, estimates and assumptions about
the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors
that are considered to be relevant. Actual results may differ from
these estimates.
In preparing these condensed consolidated interim financial
statements, the significant judgements made by the Directors in
applying the Group's accounting policies and key sources of
estimation uncertainty were the same as those applied to the
Group's financial statements for the year ended 31 August 2019 with
the addition of judgements relating to the acquisition of Martin
Audio in December 2019.
1.6 Foreign currencies
The individual financial statements of each subsidiary are
presented in the currency of the primary economic environment in
which it operates (its functional currency). Sterling is the
predominant functional currency of the Group and presentation
currency for the consolidated financial information.
In preparing the financial statements of the individual
companies, transactions in currencies other than the entity's
functional currency (foreign currencies) are recognised at the
rates of exchange prevailing on the dates of the transactions. At
each balance sheet date, monetary assets and liabilities that are
denominated in foreign currencies are retranslated at the rates
prevailing at that date. Non-monetary items carried at fair value
that are denominated in foreign currencies are translated at the
rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in
a foreign currency are not retranslated.
Exchange differences are recognised in profit or loss in the
period in which they arise except for:
-- exchange differences on transactions entered into to hedge
certain foreign currency risks; and
-- exchange differences on monetary items receivable from or
payable to a foreign operation for which settlement is neither
planned nor likely to occur (therefore forming part of the net
investment in the foreign operation), which are recognised
initially in other comprehensive income and reclassified from
equity to profit or loss on disposal or partial disposal of the net
investment.
For the purpose of presenting consolidated financial
information, the assets and liabilities of the Group's foreign
operations are translated at exchange rates prevailing on the
balance sheet date. Income and expense items are translated at the
average exchange rates for the period, unless exchange rates
fluctuate significantly during that period, in which case the
exchange rates at the date of the transactions are used. Exchange
differences arising, if any, are recognised in the income
statement.
1.7 Hedge accounting
The Group has adopted hedge accounting for qualifying
transactions. Derivatives are initially recognised at fair value at
the date a derivative contract is entered into and are subsequently
remeasured to their fair value at each balance sheet date. The
resulting gain or loss is recognised in profit or loss immediately
unless the derivative is designated and effective as a hedging
instrument, in which event the timing of the recognition in profit
or loss depends on the nature of the hedge relationship. The Group
designates certain derivatives as either hedges of the fair value
of recognised assets or liabilities of firm commitments (fair value
hedges), hedges of highly probable forecast transactions or hedges
of foreign currency risk of firm commitments (cash flow hedges), or
hedges of net investments in foreign operations.
Cash flow hedges
Where a derivative financial instrument is designated as a hedge
of the variability in cash flows of a recognised asset or
liability, or a highly probable forecast transaction, the effective
part of any gain or loss on the derivative financial instrument is
recognised directly in the hedging reserve. Any ineffective portion
of the hedge is recognised immediately in the income statement.
For cash flow hedges, the associated cumulative gain or loss is
removed from equity and recognised in the income statement in the
same period or periods during which the hedged forecast transaction
affects profit or loss.
When a hedging instrument expires or is sold, terminated or
exercised, or the entity revokes designation of the hedge
relationship but the hedged forecast transaction is still expected
to occur, the cumulative gain or loss at that point remains in
equity and is recognised in accordance with the above policy when
the transaction occurs. If the hedged transaction is no longer
expected to take place, the cumulative unrealised gain or loss
recognised in equity is recognised in the income statement
immediately.
A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value is
recognised as a financial liability.
2. 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 two-month period between the acquisition and 29 February
2020 Martin Audio contributed revenue of GBP4,526,000 and a profit
before tax of GBP333,000 to the Group's interim results. If the
acquisition had occurred on 1 September 2019, management estimates
that Martin Audio's revenue would have been GBP13,405,000 and
profit before tax for the half year would have been GBP1,563,000.
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 GBP1,721,000 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 values on acquisition GBP'000
----------------------------------------- --------
Brand 6,800
Patent designs 11,300
Patent designs in development 4,600
------------------------------------------ --------
Other intangible assets 22,700
Property, plant and equipment 514
Cash 4,345
Inventories 5,986
Trade and other receivables 3,783
Deferred tax (3,859)
Trade and other payables (6,175)
------------------------------------------ --------
Net identifiable assets and liabilities
at fair value 27,294
Goodwill recognised on acquisition 12,316
------------------------------------------ --------
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 only two 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
GBP11,200,000 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.
3. Revenue
An analysis of the Group's revenue is as follows:
Six months to February Six months to February
2020 2019
----------------------------------------- ------------------------------- --------
EMEA North Rest Total EMEA North Rest Total
America of World America of World
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- --------- ---------- -------- -------- --------- ---------- --------
Focusrite 11,748 10,077 3,749 25,574 11,975 10,580 3,753 26,308
Focusrite Pro 607 853 424 1,884 642 1,562 390 2,594
-------- --------- ---------- -------- -------- --------- ---------- --------
Focusrite segment 12,355 10,930 4,173 27,458 12,617 12,142 4,143 28,902
Novation segment 4,521 3,506 1,908 9,935 5,002 2,821 2,004 9,827
ADAM Audio 3,700 2,205 1,136 7,041 - - - -
Martin Audio 1,573 1,453 1,500 4,526 - - - -
Distribution segment 966 - - 966 1,696 - - 1,696
---------------------- -------- --------- ---------- -------- -------- --------- ---------- --------
Total 23,115 18,094 8,717 49,926 19,315 14,963 6,147 40,425
---------------------- -------- --------- ---------- -------- -------- --------- ---------- --------
Year to August 2019
-----------------------------------------
EMEA North Rest Total
America of World
GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- --------- ---------- --------
Focusrite 22,059 26,366 9,219 57,644
Focusrite Pro 1,316 2,537 851 4,704
-------- --------- ---------- --------
Focusrite segment 23,375 28,903 10,070 62,348
Novation segment 7,096 6,684 3,939 17,719
ADAM Audio 714 758 278 1,750
Distribution segment 2,848 - - 2,848
---------------------- -------- --------- ---------- --------
Total 34,033 36,345 14,287 84,665
---------------------- -------- --------- ---------- --------
4. Operating segments
Products and services from which reportable segments derive
their revenues
Information reported to the Group's Chief Executive Officer (who
has been determined to be the Group's Chief Operating Decision
Maker) for the purposes of resource allocation and assessment of
segment performance is focused on the main product groups which the
Group sells. While the results of Novation and Ampify are reported
separately to the Board, they meet the aggregation criteria set out
in IFRS 8 'Operating Segments'. The Group's reportable segments
under IFRS 8 are therefore as follows:
Focusrite - Sales of Focusrite and Focusrite Pro branded
products
Novation - Sales of Novation and Ampify branded products
Distribution - Distribution of third-party brands, including
KRK speakers, Stanton, Cerwin Vega, Cakewalk and sE Electronics
ADAM Audio - Sale of ADAM Audio products. Only applies after
acquisition on 16 July 2019
Martin Audio - Sale of Martin Audio products. Only applies after
acquisition on 30 December 2019
The revenue and profit generated by each of the Group's
operating segments are summarised as follows:
Six months to Year to
Six months to 28 February 31 August
29 February 2020 2019 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
-------------------------------------------------- ------------------ -------------- ------------------------------
Revenue from external customers
Focusrite 25,574 26,308 57,644
Focusrite Pro 1,884 2,594 4,704
Novation 9,935 9,827 17,719
ADAM Audio 7,041 - 1,750
Martin Audio 4,526 - -
Distribution 966 1,696 2,848
Total 49,926 40,425 84,665
-------------------------------------------------- ------------------ -------------- ------------------------------
Segment profit
Focusrite 13,203 13,219 28,785
Focusrite Pro 1,137 1,631 2,908
Novation 5,073 5,013 8,680
ADAM Audio 3,856 - 159
Martin Audio 1,943 - -
Distribution 241 424 807
-------------------------------------------------- ------------------ -------------- ------------------------------
25,453 20,287 41,339
Central distribution costs and administrative
expenses (19,071) (13,036) (27,790)
Non-underlying items (3,367) - (737)
Operating profit 3,015 7,251 12,812
Finance income 28 75 246
Finance costs (353) (176) (45)
-------------------------------------------------- ------------------ -------------- ------------------------------
Profit before tax 2,690 7,150 13,013
Tax (639) (790) (1,349)
Profit after tax 2,051 6,360 11,664
-------------------------------------------------- ------------------ -------------- ------------------------------
Segment profit represents the profit earned by each segment
without allocation of the share of central administration costs,
including Directors' salaries, finance income and finance costs,
and income tax expense. This is the measure reported to the Group's
Chief Executive Officer 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 GBP225,000 for the six-month
period to 29 February 2020 (six months to 28 February 2019:
GBP162,000; year to 31 August 2019: GBP348,000).
Segment net assets and other segment information
Management does not make use of segmental data relating to net
assets and other balance sheet information for the purposes of
monitoring segment performance and allocating resources between
segments. Accordingly, other than the analysis of the Group's
non-current assets by region shown below, this information is not
available for disclosure in the consolidated financial
information.
The Group's non-current assets, analysed by region, were as
follows:
29 February 28 February 31 August
2020 2019 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
-------------------------------- ------------ ------------ -------------------------------
Non-current assets
US 124 68 124
Europe, Middle East and Africa 61,464 7,335 24,900
Rest of World 1,708 535 681
Total non-current assets 63,296 7,938 25,705
-------------------------------- ------------ ------------ -------------------------------
5. Non-Underlying Costs
The following non-underlying costs have been declared in the
period
29 February 28 February 31 August
2020 2019 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
-------------------------------------------- ------------ ------------ ----------
Non-underlying costs
Acquisition Costs 1,813 - 737
Amortisation of Acquired Intangible Assets 1,144 - -
Other 410 - -
Total non-underlying costs 3,367 - 737
-------------------------------------------- ------------ ------------ ----------
Acquisition costs in the six months to 29 February 2020 included
costs of GBP1,721,000 relating to Martin Audio and additional costs
of GBP92,000 relating to the acquisition of ADAM Audio in July 2019
not previously accrued for. Other costs relate largely to the costs
of people changes.
6. Taxation
The tax charge for the six months to 29 February 2020 is based
on the estimated tax rate for the full year in each
jurisdiction.
7. Dividends
The following equity dividends have been declared:
Year to
Six months to Six months to 31 August 2019
29 February 2020 (unaudited) 28 February 2019 (unaudited) (audited)
-------------------------------- -------------------------------- ------------------------------- -----------------
Dividend per qualifying
ordinary share nil 1.20p 3.80p
-------------------------------- -------------------------------- ------------------------------- -----------------
In light of the highly unusual circumstances caused by the
COVID-19 virus the Board has decided to defer the declaration of a
dividend until later in 2020.
Du ring the period, the Company paid a final dividend in respect
of the year ended 31 August 2019 of 2.60 pence per share, amounting
to GBP1,501,000.
8. Earnings per share
Reported EPS
The calculation of the basic and diluted EPS is based on the
following data:
Six months to Year to
29 February Six months to 31 August
2020 28 February 2019 2019
(unaudited) (unaudited) (audited)
Earnings GBP'000 GBP'000 GBP'000
------------------------------------------------------ ---------------- ------------------- -----------------------
Earnings for the purposes of basic and diluted EPS
being net profit for the period 2,051 6,360 11,664
Non-underlying items 3,367 - 737
Tax on non-underlying items - - -
------------------------------------------------------ ---------------- ------------------- -----------------------
Total underlying profit for adjusted EPS calculation 5,418 6,360 12,401
------------------------------------------------------ ---------------- ------------------- -----------------------
Six months to Six months to Year to
29 February 28 February 31 August
2020 2019 2019
number number number
Number of shares '000 '000 '000
------------------------------------------------------ ---------------- ------------------- -----------------------
Weighted average number of ordinary shares for the
purposes of basic EPS calculation 57,537 57,222 57,221
Effect of dilutive potential ordinary shares:
EMI share option scheme and unapproved share option
plan 733 856 824
Weighted average number of ordinary shares for the
purposes of diluted EPS calculation 58,270 58,078 58,045
------------------------------------------------------ ---------------- ------------------- -----------------------
EPS Pence Pence Pence
------------------------------------------------------ ---------------- ------------------- -----------------------
Basic EPS 3.6 11.1 20.4
Diluted EPS 3.5 11.0 20.1
Adjusted basic EPS 9.4 11.1 21.7
Adjusted diluted EPS 9.3 11.0 21.4
------------------------------------------------------ ---------------- ------------------- -----------------------
At 29 February 2020, the total number of ordinary shares issued
and fully paid was 58,111,639. This included 383,114 shares held by
the Employee Benefit Trust ('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 (574,649). 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. Other Intangible Assets
Intellectual Internally Acquired Licences Trademark Computer Brands Total
property Generated Development software
Development costs
costs
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- ------------- ------------- ------------- --------- ---------- -------------- -------- --------
Cost
At 1
September
2018 495 18,336 - 89 286 857 - 20,063
Additions -
products
previously
under
development 91 - - 14 136 151 - 392
Additions -
products
developed
during the
year - 2,934 - - - - - 2,934
Additions -
from
development
in progress - 887 - - - - 887
Additions
through
business
combination - - 4,485 - - - 7,500 11,985
Disposals (50) (2,495) - - - - - (2,545)
-------------- ------------- ------------- ------------- --------- ---------- -------------- -------- --------
At 1
September
2019 536 19,662 4,485 103 422 1,008 7,500 33,716
-------------- ------------- ------------- ------------- --------- ---------- -------------- -------- --------
Intellectual Internally Acquired Licences Trademark Computer Brands Total
property Generated Development software
Development costs
costs
At 1
September
2019 536 19,662 4,485 103 422 1,008 7,500 33,716
Additions -
products
previously
under
development 38 - - 57 192 399 - 686
Additions -
products
developed
during the
period - 1,267 - - - - - 1,267
Additions -
from
development
in progress - 1,298 - - - - - 1,298
Additions
through
business
combination - - 15,900 - - - 6,800 22,700
Disposals - - - - (1) - - (1)
At 29
February
2020 574 22,227 20,385 160 613 1,407 14,300 59,666
-------------- -------------- ------------- ------------- --------- ----------- -------------- ------- -------
Intellectual Internally Acquired Licences Trademark Computer Brands Total
property Generated Development software
Development costs
costs
Amortisation
At 1
September
2018 208 13,695 - 88 114 338 - 14,443
Charge for
the year 145 2,186 110 7 155 238 95 2,936
Eliminated on
disposal - (2,495) - - - - - (2,495)
At 1
September
2019 353 13,386 110 95 269 576 95 14,884
Charge for
the period 84 1,837 519 10 78 91 625 3,244
Eliminated on
disposal - - - - (1) - - (1)
At 29
February
2020 437 15,223 629 105 346 667 720 18,127
-------------- -------------- ------------- ------------- --------- ---------- -------------- ------- --------
Intellectual Internally Acquired Licences Trademark Computer Brands Total
property Generated Development software
Development costs
costs
Carrying
amount
At 29 February
2020 137 7,004 19,756 55 267 740 13,580 41,539
--------------- -------------- ------------- ------------- --------- ---------- -------------- ------- -------
At 31 August
2019 183 6,276 4,375 8 153 432 7,405 18,832
--------------- -------------- ------------- ------------- --------- ---------- -------------- ------- -------
10. Financial instruments
The fair value of the Group's derivative financial instruments
is calculated using the quoted prices. Where such prices are not
available, a discounted cash flow analysis is performed using
applicable yield curve for the duration of the instruments for
non-optional derivatives, and option pricing model for optional
derivatives. Foreign currency forward contracts are measured using
quoted forward exchange rates and yield curves derived from quoted
interest rates matching maturities of the contract.
IFRS 13 'Fair Value Measurements' requires the Group's
derivative financial instruments to be disclosed at fair value and
categorised in three levels according to the inputs used in the
calculation of their fair value.
Financial instruments carried at fair value should be measured
with reference to the following levels:
-- Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities;
-- Level 2: inputs other than quoted prices included within
Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices); and
-- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The financial instruments held by the Group that are measured at
fair value all related to financial assets/(liabilities) measured
using a Level 2 valuation method.
The fair value of financial assets and liabilities held by the
Group are:
29 February 2020 28 February 2019 31 August 2019
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
-------------------------------------------- -------------------------- -------------------------- ----------------
Financial assets
Amortised cost
Cash and cash equivalents 12,767 26,172 15,505
Trade and other receivables 16,306 11,533 16,181
Designated cash flow hedge relationships
Derivative financial assets designated and
effective as cash flow hedging instruments 881 842 -
29,954 38,547 31,686
-------------------------------------------- -------------------------- -------------------------- ----------------
Financial liabilities
Designated cash flow hedge relationships
Derivative financial liabilities designated
and effective as cash flow - - 188
Amortised cost
Trade and other payables 9,133 5,326 8,953
Bank loan and overdraft 32,640 - 627
41,773 5,326 9,768
-------------------------------------------- -------------------------- -------------------------- ----------------
Independent Review Report to Focusrite plc
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly report for the six
months ended 29 February 2020 which comprises Condensed
Consolidated Income Statement, Condensed Consolidated Statement of
Other Comprehensive Income, Condensed Consolidated Statement of
Financial Position, Condensed Consolidated Statements of Changes in
Equity, Consolidated Statement of Cash Flow and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly report for the six months ended 29 February 2020
is not prepared, in all material respects, in accordance with IAS
34 Interim Financial Reporting as adopted by the EU and the AIM
Rules.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly report and consider whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly report is the responsibility of, and has been
approved by, the directors. The directors are responsible for
preparing the half-yearly report in accordance with the AIM
Rules.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly report
based on our review
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement. Our review has been undertaken so that we
might state to the company those matters we are required to state
to it in this report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the company for our review work, for this
report, or for the conclusions we have reached.
Michael Froom
for and on behalf of KPMG LLP
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
12 May 2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR ABMPTMTIBBPM
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May 12, 2020 02:00 ET (06:00 GMT)
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