Final Results

For immediate release  1 February 2021

Results for the year ended 30 November 2020

Resilient performance in challenging circumstances, optimism for the future.

Porvair plc ("Porvair" or "the Group"), the specialist filtration, laboratory and environmental technology group, announces its results for the year ended 30 November 2020.

Highlights

· Revenue 7% lower at £135.0 million (2019: £144.9 million).

· Operating profit 15% lower at £12.6 million (2019: £14.8 million).

· Adjusted operating profit* 13% lower at £13.6 million (2019: £15.6 million).

· Profit before tax 17% lower at £11.6 million (2019: £14.0 million). Adjusted profit before tax* 15% lower at £12.6 million (2019: £14.8 million).

· Basic earnings per share was 18.4 pence (2019: 23.6 pence).  Adjusted basic earnings per share* were 21.6 pence (2019: 25.3 pence).

· Net cash was £4.9 million (2019: £4.0 million) after investing £4.2 million (2019: £14.1 million) in capital expenditure and acquisitions.

· Recommended final dividend of 3.3 pence (2019: 3.2 pence) bringing the full year dividend to 5.0 pence (2019: 4.9 pence).

Commenting on the outlook, Ben Stocks, Chief Executive, said:

"Until the pandemic recedes, near-term trading remains unpredictable and the Group continues to withhold earnings guidance. But the results for the year turned out to be better than initially feared in our contingency planning. This was partly because the Group went into the pandemic financially sound and stable; and partly because the underlying growth drivers for most of the markets we serve remain in place, even though they are currently more volatile than usual. We expect demand for emissions control, clean water, process efficiency and laboratory consumables to revert to normal levels as economies allow. Certain end markets, aerospace in particular, may take longer to recover; while others, mainly in the Laboratory Division, are already rebounding strongly.

"We entered 2021 with a strong balance sheet and a lower cost base than a year ago, which will be helpful while we wait for vaccinations to bring the pandemic under control. The next few months may continue to be difficult, but beyond that we are increasingly optimistic. Investments made over the last few years will help margins and our new product development pipeline is strong for the near term.  Prospects for the medium term are good and Porvair should return to its historical levels of growth once the pandemic retreats."

* See notes 1 and 3 for definitions and reconciliations.

For further information please contact:

An analyst briefing will take place at 9:30 a.m. on Monday 1 February 2021 by video conference through invitation from Buchanan.

A copy of an audio webcast and the presentation will be available at www.porvair.com .

Operating review

Overview of 2020 and impact of Covid-19

Over the course of this extraordinary year, management has acted to protect staff wellbeing; adjust operations to changing levels of demand; and to continue investment for the post-Covid-19 economic recovery. There are early indications that the year ahead will show the benefits of these actions.

While 2020 started strongly, trading was overtaken by events: first in Wuhan where our plant was shut for eight weeks to the end of March; and later across the rest of the Group where supply was constrained by lockdowns in the second quarter and again towards the end of the year.  Order levels dropped in the early summer, with de-stocking sharpening declines in aerospace, molten metal and industrial markets. Actions were taken to ensure working practices were Covid-19 compliant and members of staff were fully supported when away from work. In July orders stabilised at a lower level and they have increased steadily since. Operating costs were reduced, ensuring that the Group remained profitable and cash generative throughout.  Recessionary effects meant the Group finished the year with 13% fewer staff.

The ill-wind of the pandemic was mainly a challenge, but it also brought opportunities. Manufacturing equipment upgrades for productivity improvements were more easily carried out. Periods of lower demand are good times to change process control software, clean facilities and improve workflow. There was more time for skills training.  It was also a good year for new product development, with some projects accelerating as technical staff were less drawn into daily production issues. New products have always been a focus at Porvair and the current pipeline is encouraging: new industrial process filters are in trials; wider applications have been found in superalloy filtration; and high volume life science filters for diagnostics are now in production and will need capacity expansion in early 2021. All of this will benefit the Group when demand recovers.

Porvair remains positioned to address global growth trends, some of which have been affected by the pandemic. While the near-term prospects for aerospace are more challenging than they have been in recent years, the outlook for laboratory sample preparation and diagnostics is much more positive. The fundamental drivers of Group demand remain in place: tightening environmental regulations; growth in analytical science; more carbon-efficient transportation; the replacement of plastic and steel by aluminium; and the drive for manufacturing process efficiency. 

Porvair's strategic purpose remains the development of specialist filtration, laboratory and environmental technologies for the benefit of all stakeholders, and the Board has been mindful of the need to balance these obligations this year. This statement, and the full Environmental, Social and Governance ('ESG') report that accompanies it, set out how the Group has sought to benefit customers, staff, shareholders, pensioners, and communities in 2020.

 

Financial Results

* see note 1 and note 3

Reported and constant currency revenue reduced by 7%.  Profit before tax reduced by 17%.  For the first time in many years the Group recorded significant adjusted items.  The principal adjustments concern the release of provisions; impairment of tangible assets, principally in China; and charges related to redundancies. These are set out in full in note 1.

Adjusted profit before tax reduced by 15% and adjusted earnings per share reduced by 15% to 21.6 pence.  The Group invested £4.2 million (2019: £14.1 million) in acquisitions and capital expenditure in 2020.

The Group's record for growth, cash generation and investment is as follows:

* Compound annual growth rate

Porvair's strategy and purpose is little changed since 2004, a period that now encompasses two recessions and many years of growth. This longer term record gives the Board confidence that the Group can show resilience in difficult times, and will return to growth when economies allow.

Strategic statement and business model

Porvair's strategic purpose is the development of specialist filtration, laboratory and environmental technology businesses for the benefits of all stakeholders. Principal measures of success include consistent earnings growth over the medium term, and selected ESG measures as set out in the full ESG report.

Porvair businesses have certain key characteristics in common:

· Specialist design or engineering skills are required;

· Product use and replacement is mandated by regulation, quality accreditation or a maintenance cycle; and

· Products are typically designed into a system that will have a long life-cycle and must perform to a given specification.

Orders are won by offering the best technical solutions at an acceptable commercial cost. Technical expertise is necessary in all markets served. New products are often adaptations of existing designs with attributes validated in our own test and measurement laboratories. Experience in specific markets and applications is valuable in building customer confidence. Domain knowledge is important, as is deciding where to direct resources.

This leads the Group to:

1.  Focus on markets with long term growth potential.

2.  Look for applications where product use is mandated and replacement demand is regular.

3.  Make new product development a core business activity.

4.  Establish geographic presence where end-markets require.

5.  Invest in both organic and acquired growth.

Therefore:

· We focus on three operating segments: Aerospace & Industrial; Laboratory; and Metal Melt Quality. All have clear long term growth drivers.

· Our products typically reduce emissions or protect downstream systems and, as a result, are replaced regularly.  A high proportion of our annual revenue is from repeat orders.

· Through a focus on new product development, we aim to generate growth rates in excess of the underlying market.  Where possible, we build intellectual property around our product developments.

· Our geographic presence follows the markets we serve.  In the last twelve months: 45% of revenue was in the Americas; 26% in Asia; 18% in Continental Europe; 10% in the UK; and 1% in Africa.  The Group has plants in the US, UK, Germany, the Netherlands and China.  In the last twelve months, 47% of revenue was manufactured in the US, 31% in the UK, 17% in Continental Europe and 5% in China.

· We aim to meet dividend and investment needs from free cash flow and modest borrowing facilities.  In recent years we have expanded manufacturing capacity in the UK, Germany, US and China and made several acquisitions.  All investments are subject to a hurdle rate analysis based on strategic and financial priorities.

Environmental, social and governance ('ESG')

The Board understands that responsible business development is essential for creating long term value for stakeholders.  Most of the products made by Porvair are used to the benefit of the environment.  Our water analysis equipment measures contamination levels in water.  Industrial filters are typically needed to reduce emissions or improve efficiency. Aerospace filters improve process reliability. Nuclear filters confine fissile materials.  Metal Melt Quality filters reduce waste and help improve the strength to weight ratio of metal components. 

A full ESG report is published for the first time with this statement, setting out:

· Porvair's ESG management framework and goals;

· How the Group might address a net zero carbon future;

· ESG metrics and results; and

· How the Group has acted for the benefit of its stakeholders in 2020.

 

Aerospace & Industrial

* see note 2

The Aerospace & Industrial division designs and manufactures a wide range of specialist filtration products, demand for which grows as aerospace and industrial customers seek cleaner, safer or more efficient operations.  Differentiation is achieved through design engineering; the development of intellectual property; and quality accreditations.

Revenue was lower by 4%, with a 19% reduction in aerospace revenue offset by a strong first full year from Royal Dahlman, which traded ahead of expectations in both its petrochemical and distribution businesses. UK industrial filtration capacity was upgraded during the year to support Royal Dahlman, where orders for flue gas emission filters in the first half of 2021 are strong.  Long order lead times in the aerospace supply chain meant that aerospace revenue fell later in the year. Second half aerospace revenues were 29% lower than the same period in 2019, in line with wider industry metrics.  Gasification revenues were £7.0 million (2019: £11.0 million), recognised in the first half of 2020.  These will repeat, but irregularly and not necessarily in 2021.  US general industrial had a mixed year but finished strongly, particularly in microelectronics and sintered products, for which the plant in Caribou, Maine, was extended and upgraded.

In such challenging circumstances, management acted to adjust costs and staff numbers reduced by 21% over the course of the year, mainly in the UK based aerospace business. The UK government Jobs Retention Scheme enabled the division to assess its response to falls in order patterns before making organisational changes or redundancies.  During that time, all staff furloughed received their full salary and benefits.  The Group has concluded that it should fund the impact of necessary restructuring in full and Job Retention Scheme payments received for employees made redundant have been returned. The Board sees this action as being consistent with its purpose of developing Porvair for the benefit of all stakeholders.

Laboratory

* see note 2

The Laboratory division has two operating businesses: Porvair Sciences (including J G Finneran) and Seal Analytical.

· Porvair Sciences manufactures laboratory filters and associated consumables.  Differentiation is achieved through proprietary manufacturing capabilities and filtration media.

· Seal Analytical is a leading supplier of instruments and consumables for environmental laboratories for which demand is driven by water quality regulations.  Differentiation is achieved through consistent new product development.

Revenue in 2020 fell 4% with demand affected in the middle of the year by Covid-19 related shutdowns of environmental, academic and industrial laboratories. 

Towards the end of the year demand rebounded strongly with sales from new products contributing well.  Adjusted operating profit grew 2% as a result.

Clean room manufacturing capacity was increased in the US and laboratory space and equipment upgraded in the UK.  Sales resources were added in Europe. Further expansion for the manufacturing of diagnostic components is underway with record orders received for the early part of 2021. 

Metal Melt Quality

* see note 2

The Metal Melt Quality division manufactures filters for molten aluminium, ductile iron and nickel-cobalt alloys.  It has a well differentiated product range based on patented products and a promising new product pipeline.

Revenue was 16% lower than 2019, but adjusted operating profit was flat. This was well ahead of management's expectation and was achieved through tight cost control and a significantly better performance in China which saw 37% revenue growth. US operations used periods of lower demand to clean manufacturing facilities, improve workflow and upgrade process control software to a Group standard package.  After a difficult year, which included restructuring costs and an impairment of the Chinese assets (see note 1), the division reported sequential growth between the third and fourth quarter and better order books into 2021.

Dividends and Pension

Consistent with its strategic purpose of developing Porvair for the benefit of all stakeholders, the Board has been mindful of the interests of shareholders and pensioners. The Company increased its deficit recovery payments to the Porvair Pension Plan to £1.6 million (2019: £1.0 million) per annum. 

The Board re-affirms its progressive dividend policy and recommends a final dividend of 3.3 pence per share, a cost of £1.5 million (2019: 3.2 pence per share, a cost of £1.5 million).  The full year dividend increases by 2% to 5.0 pence per share, a cost of £2.3 million (2019: 4.9 pence per share, a cost of £2.2 million).  The Company had £17.9 million (2019: £19.2 million) of distributable reserves at 30 November 2020.

Staff

This has been a challenging year and the response of our staff to the many difficulties they have faced has been outstanding. Porvair believes in devolving management autonomy as far as possible and the actions taken by our management teams in looking after staff wellbeing have been exemplary. The Board takes employee engagement seriously and, as set out in the ESG report, has a system in place to make sure it hears and responds to all staff comments. We are fortunate to have colleagues around the Group who show such pragmatism and optimism at times like these and the Board is very grateful for the hard work, enthusiasm and dedication of all our staff.

Current trading and outlook

Until the pandemic recedes near-term trading remains unpredictable and the Group continues to withhold earnings guidance. But the results for the year turned out to be better than initially feared in our contingency planning. This was partly because the Group went into the pandemic financially sound and stable; and partly because the underlying growth drivers for most of the markets we serve remain in place, even though they are currently more volatile than usual. We expect demand for emissions control, clean water, process efficiency and laboratory consumables to revert to normal levels as economies allow. Certain end markets, aerospace in particular, may take longer to recover; while others, mainly in the Laboratory Division, are already rebounding strongly.

We entered 2021 with a strong balance sheet and a lower cost base than a year ago, which will be helpful while we wait for vaccinations to bring the pandemic under control. The next few months may continue to be difficult, but beyond that we are increasingly optimistic. Investments made over the last few years will help margins and the new product development pipeline is strong for the near term. Prospects for the medium term are good and Porvair should return to its historical levels of growth once the pandemic retreats.

Ben Stocks

Group Chief Executive

29 January 2021

 

Financial review

Group results

Reported and constant currency (see note 1) revenue fell 7%. Royal Dahlman contributed a full year for the first time.  Excluding Royal Dahlman, revenue fell by 19%.  Operating profit was £12.6 million (2019: £14.8 million) and profit before tax was £11.6 million (2019: £14.0 million).  Profit after tax was £8.4 million (2019: £10.8 million).

Alternative performance measures - profit

The Group presents alternative performance measures to enable a better understanding of its trading performance (see note 1).

Adjusted operating profit and adjusted profit before tax exclude items that are considered significant and where treatment as an adjusted item provides a more consistent assessment of the Group's trading.  Adjusted operating profit excludes £1.0 million (2019: £0.8 million) of net charges from operating profit.  These are:

· the impact of acquiring businesses:

o  The amortisation of intangible assets arising on acquisition of businesses was £0.6 million (2019: £0.6 million);

o  Other acquisition related adjustments to profit and loss related to acquiring businesses of £0.4 million credit (2019: £0.2 million charge).  In 2020, the £0.4 million credit relates to the release of earnout contingent consideration (see note 12).

· other items that are considered significant and where treatment as an adjusted item provides a more consistent assessment of the Group's trading:

o  Restructuring costs of £2.2 million (2019: £nil) comprised redundancy costs and plant reconfigurations related to the impact of the Covid-19 pandemic, principally arising in the Aerospace & Industrial and Metal Melt Quality divisions;

o  A net credit of £4.0 million (2019: £nil) related to the large gasification projects.  Settlement of outstanding warranty issues and the cancellation of performance bonds has allowed the Group to release £5.1 million (2019: £nil) from its provisions.  Related to the release, the Group has written off a £1.1 million (2019: £nil) receivable due over the next five years; and

o  An impairment write down of tangible assets of £2.6 million (2019: £nil).  £2.3 million results from the Board's review of Chinese operations taking a more prudent view of asset values based on changing geopolitical and international trade assumptions. £0.3 million of redundant fixed assets in Aerospace & Industrial have been written off.

 

Group operating performance

Revenue fell 7% and adjusted operating profit fell 13%. Adjusted operating margin was 10.1% (2019: 10.8%).  Adjusted operating margins in the Aerospace & Industrial division were 10.1% (2019: 13.2%).  Lower revenue from the second quarter, particularly in aerospace, drove down margins.  Adjusted operating margins in the Laboratory division were 16.0% (2019: 15.1%).  A switch to higher margin diagnostic equipment products and away from industrial products improved the margin in the second half. Metal Melt Quality operating margins increased to 8.5% (2019: 7.3%). Lower sales in the US led to lower US margins despite a strong operational performance but this was offset by a better performance in China.  Adjusted Central costs reduced to £2.2 million (2019: £2.4 million). 

Impact of exchange rate movements on performance

The international nature of the Group's business means that relative movements in exchange rates can affect reported performance.  The rate used for translating the results of overseas operations were:

The very similar average rates for the year used for translating the US dollar and Euro into Sterling meant that there was no significance difference between reported revenue and revenue at constant currency.

In the year, the Group sold $28.1 million (2019: $27.0 million) at an average rate of $1.30:£1 (2019: $1.28:£1) and €3.5 million (2019: €3.5 million) at an average rate of €1.15:£1 (2019: €1.14:£1). 

At 30 November 2020, the Group had $1.3 million (2019: $9.9 million) of outstanding forward foreign exchange contracts; hedge accounting has been applied to $nil (2019: $8.6 million) of these contracts. The Group had $4.1 million (2019: $7.8 million) of net current assets on the UK operations' balance sheet. 

Finance costs

Net interest payable comprises bank borrowing costs, interest on lease liabilities, interest on the Group's pension deficit and the cost of unwinding discounts on provisions.  Interest increased in the year to £1.0 million (2019: £0.8 million).  The implementation of IFRS 16 for the first time this year resulted in an interest charge of £0.4 million (2019: £nil). The defined benefit pension scheme interest cost reduced to £0.3 million (2019: 0.4 million), bank interest and borrowing facilities non-utilisation fees were £0.3 million (2019: £0.3 million). The charge related to unwinding discounted provisions reduced to £nil (2019: £0.1 million).

Interest cover was 14 times (2019: 19 times).  Interest cover on bank finance costs was 49 times (2019: 45 times).

Tax

The Group tax charge was £3.1 million (2019: £3.2 million).  The tax charge on the adjusting items was £0.5 million and the tax on the adjusted profit before tax was £2.6 million. This is an effective rate of 19% (2019: 23%), in line with the UK standard corporate tax rate of 19.0% (2019: 19.0%).  The tax rate in the UK was lower than the standard rate because of tax relief on the exercise of share options.  US tax was at an effective rate of 22% (2019: 23%) and in the Netherlands it was 20% (2019: 22%).  The Group tax rate was pushed up by profits made in Germany, which attract a 31% tax rate (2019: 30%). The tax rate is lower than the prior year because no further losses in China were incurred.  In the prior year, the tax rate was increased by 2% because the Group did not take a tax credit relating to the losses arising in China. 

The tax charge comprises current tax of £2.3 million (2019: £2.6 million) and a deferred tax charge of £0.8 million (2019: £0.6 million). 

The Group has current tax provisions of £0.2 million (2019: £0.6 million). The current tax provision includes £1.0 million (2019: £1.2 million) for uncertainties relating to the interpretation of tax legislation in the Group's operating territories offset by payments on account and amounts recoverable for overpayments of tax.

The Group carries a deferred tax asset of £2.6 million (2019: £2.4 million) and a deferred tax liability of £2.8 million (2019: £2.6 million).  The deferred tax asset relates principally to the deficit on the pension fund and share-based payments.  The deferred tax liability relates to accelerated capital allowances, capitalised development costs and other timing differences, predominantly arising in the US and on acquired intangibles in the Netherlands. 

Total equity and distributable reserves

Total equity at 30 November 2020 was £98.2 million (2019: £95.3 million), an increase of 3% over the prior year. 

Increases in total equity arose from: profit after tax of £8.4 million (2019: £10.8 million); employee share option schemes net of tax of £0.1 million (2019: £0.7 million); and £0.4 million (2019: £0.6 million) arising on the proceeds of the issue of shares on share option exercises.

Reductions in total equity arose from: dividends paid of £2.3 million (2019: £2.1 million); purchases by the Employee Benefit Trust of the Company's own shares charged directly to equity of £0.7 million (2019: £0.6 million); a pension scheme actuarial loss (net of tax) of £1.3 million (2019: £2.3 million); and exchange losses (net of tax) on translation of £1.7 million (2019: £1.1 million). 

The Company had £17.9 million (2019: £19.2 million) of distributable reserves at 30 November 2020.  The Company's distributable reserves increased in the year from dividends received from other Group companies, offset by an actuarial loss, head office costs, investment write downs and dividends paid to shareholders. 

Return on capital employed

The Group's after tax return on capital employed of 12% (2019: 14%) gives a measure of the operating return the Group makes on all its invested capital.  It fell in the year because of lower profitability and an increase in average capital employed of £5.2 million.  The after tax return on operating capital employed of 28% (2019: 36%) gives a measure of the returns that the Group makes on its fixed assets and working capital.  It fell in 2020 because of lower profitability and an increase in the average capital employed of £5.2 million mainly comprising the effect of a full year of ownership of Royal Dahlman.  The Group's divisions have post-tax weighted average costs of capital of between 6% and 8%.

 

Cash flow

The table below summarises the key elements of the cash flow for the year:

Generating free cash flow is key to the Group's business model and operating cash flow of £13.2 million (2019: £16.8 million) represented an 80% (2019: 89%) conversion rate of operating profit before depreciation and amortisation.  Net working capital increased by £6.3 million (2019: £1.3 million).  Receivables reduced by £4.1 million (2019: increase of £0.7 million) following good receivables collections and a weaker fourth quarter than the prior year.  Inventories increased by £0.3 million (2019: £2.4 million). Inventories in the laboratory division increased by £0.8 million reflecting the strong order book and aerospace finished goods increased by £0.9 million, which will reduce as aerospace orders recover.  Throughout the rest of the Group inventories reduced by £1.6 million.  Payables and provisions reduced by £10.1 million (2019: increase of £1.7 million), £5.1 million from releasing provisions in the Aerospace & Industrial division, the reduction in other payables reflects reduced purchases in the final quarter, lower accruals and faster payments to suppliers.

 

Provisions, contingent liabilities and performance bonds

The Group has £4.6 million (2019: £9.8 million) of provisions for dilapidations and warranty risks.  In December 2019, a $0.9 million (£0.7 million) performance bond was called by the customer, the amount was paid and charged to provisions.  Subsequently progress has been made on resolving warranty risks and $5.0 million of performance bonds have lapsed.  Consequently £5.1 million of provisions have been released.  0.7 million of warranty provisions have been created in relation to sales made in the year.

At 30 November 2020, the Group had the following advanced payment bonds (relating to monies received in advance on contracts) and performance bonds issued to customers in US dollars and Euros:

The uncalled performance bonds are expected to be called or released no later than March 2023.

Capital expenditure

Capital expenditure was £3.6 million (2019: £4.3 million) in the year.  Expenditure was spread across each division: £0.9 million (2019: 0.5 million plus £0.4 million brought into use in the year) was spent on buildings and infrastructure mainly to complete the 20,000 square feet of space in the Laboratory division in the US.  £2.1 million (2019: £3.4 million) was spent on plant and machinery plus a further £1.0 million (2019: £0.5 million) in the course of construction last year brought into use this year.  £0.5 million (2019: £0.1 million) was spent on equipment that is in the course of construction.  £0.2 million (2019: £0.4 million) was spent on intangible assets including software upgrades and intellectual property costs.  

Acquisitions

£0.6 million (2019: £9.8 million) was spent on acquisitions in the year, all in relation to earnout payments for Rohasys B.V.  There are no earnout payments remaining.

Pension schemes

The Group supports its defined benefit pension scheme in the UK ("The Plan"), which is closed to new members, and provides access to defined contribution schemes for its other employees.  A summary of the costs of pension provision is given below:

The Group's cash contributions paid to The Plan were £2.2 million (2019: £1.6 million). 

The Group's net retirement benefit obligation was £15.4 million (2019: £14.5 million).  The Plan's liabilities increased to £48.6 million (2019: £45.2 million).  The Plan's assets increased to £33.4 million (2019: £30.8 million). There were a further £0.3 million (2019: £0.1 million) of non-Plan liabilities.

The actuarial loss in the year of £2.0 million (2019: £2.7 million) net of £0.7 million (2019: £0.5 million) of tax was recognised in the statement of comprehensive income.  The Plan's assets achieved an actuarial gain of £1.6 million (2019: £3.2 million).  The experience loss of £nil (2019: £0.9 million) related to adjustments arising from the triennial valuation completed in 2019.  The actuarial loss on the liabilities of £3.6 million (2019: £5.0 million) arose principally from changes to the discount rate used to value The Plan's liabilities and a change in the mortality assumption:

· The discount rate reduced from 2.0% to 1.5%, as a result of lower AA bond yields, which accounted for £3.4 million in increased liabilities.

· The mortality assumptions have been updated to incorporate the CMI 2019 Core Projection Model.  This increased the life expectancy of 65 year old women by 0.2 years and men by 0.1 years.  The liabilities increased by £0.2 million as a result.

The triennial actuarial valuation of The Plan determines the cash contributions that the Group makes to The Plan.  A full actuarial valuation was completed in the year based on The Plan's position at 31 March 2018.  Based on the valuation, the Group agreed to set the employer's contributions at 20.9% (previously 18.9%) of salary.  The Group committed to making a £0.2 million annual contribution towards the running costs of The Plan from April 2019, which will increase by 3.5% per annum thereafter.  The Group also committed to make additional annual contributions, to cover the past service deficit, of £1.6 million (previously £1.0 million) per annum from 1 December 2019 until 1 December 2028. 

Borrowings and bank finance

At 30 November 2020, the Group had cash balances of £15.6 million (2019: £12.9 million) and borrowings of £10.7 million (2019: £8.9 million). 

In 2017, the Group secured a five year revolving credit facility of €23 million (£20.4 million) with Barclays Bank plc and Handelsbanken plc.  The facility has a margin over LIBOR of 1.5% and a non-utilisation fee of 0.4375%.  The Group also has a £2.5 million overdraft facility provided by Barclays Bank plc.  The financial covenants require the Group to maintain interest cover of 3.5 times and net debt to be less than 2.5 times EBITDA.

In May 2020, the Group received loan proceeds of $1.8 million (£1.4 million) from the Truist Bank under the Paycheck Protection Program ("PPP").  The PPP provides for loans to qualifying businesses which are forgivable after eight weeks provided the loan proceeds are used for eligible purposes and payroll levels are maintained.  The Group had not taken forgiveness at the year end  and the loan is treated as current borrowings in these accounts.

At 30 November 2020, the Group had net cash of £4.9 million (2019: £4.0 million), €11.1 million (£9.9 million) of unused facilities (2019: €13.3 million of unused facilities (£11.4 million)), and an unutilised overdraft facility of £2.5 million (2019: £2.5 million). 

Adoption of IFRS 16

At 30 November 2020, the Group had right of use assets of £12.8 million (2019: £nil) and lease liabilities of £13.6 million (2019: £nil) arising as a result of adopting IFRS 16 for the first time in the year ended 30 November 2020.

Under IFRS 16, the Group's leases for property, plant and equipment previously treated as operating leases were brought on to the balance sheet from 1 December 2019.  £14.6 million of right of use assets and £15.2 million of discounted lease liabilities were recognised.  A net £0.6 million of previously accrued and prepaid rent was eliminated.  There was no change to opening reserves. 

The profile of expenses related to leasing arrangements has changed.  Straight line operating lease expenses have been replaced by a straight line depreciation of the right of use assets and interest charges on lease liabilities, which follow a reducing balance profile.  Consequently, there will be earlier recognition of cost under IFRS 16 compared to the previous treatment under IAS 17.  Over the lifetime of each lease there will be no change in the overall income statement impact or the cash paid out.

The adoption of IFRS 16 reduced adjusted profit before tax by £0.2 million and basic earnings per share by 0.4 pence per share.  The adjustments are shown below:

Finance and treasury policy

The treasury function at Porvair is managed centrally, under Board supervision.  It seeks to limit the Group's trading exposure to currency movements. The Group does not hedge against the impact of exchange rate movements on the translation of profits and losses of overseas operations.

The Group finances its operations through share capital, retained profits and, when required, bank debt. It has adequate facilities to finance its current operations and capital plans for the foreseeable future.

International trade 

The UK left the EU on 31 January 2020 and signed a trade agreement with the EU, which became effective on 31 December 2020.  The Board does not expect the impact of this change in trading arrangements to be significant for the Group.  The Board notes that revenues between the UK and Continental Europe were less than 10% of total revenues in 2020.  45% of Group revenue is manufactured in the US and higher US tariffs on China trade have had an effect on trading.  A few customers in the US and China have switched back to domestic suppliers, and the Group has both won and lost accounts as a result.  The net effect has been small.

Chris Tyler

Group Finance Director

29 January 2021

 

Consolidated income statement

For the year ended 30 November

Consolidated statement of comprehensive income

For the year ended 30 November

 

Consolidated balance sheet

As at 30 November

 

Consolidated cash flow statement

For the year ended 30 November

Reconciliation of net cash flow to movement in net cash

 

 Consolidated statement of changes in equity

 

Notes

1.  Alternative performance measures

The Group uses adjusted figures as alternative performance measures in addition to those reported under IFRS, as management believe that these measures provide a useful analysis of trends in underlying performance between divisions and compared with prior periods. 

Alternative revenue measures

Revenue at constant currency is derived from translating overseas subsidiaries results at budgeted fixed exchange rates.  In 2020 and 2019 the rates used were $1.4:£ and €1.2:£, compared with reported rates of $1.28:£1 (2019: $1.27:£1) and €1.13:£1 (2019: €1.14:£1).

Underlying revenue is revenue at constant currency adjusted for the impact of acquisitions made in the current and prior years.

 

1.  Alternative performance measures continued

Alternative profit measures

A reconciliation of the Group's adjusted performance measures to the reported IFRS measures is presented below:

Adjusted operating profit and adjusted profit before tax exclude items that are considered significant and where treatment as an adjusted item provides a more consistent assessment of the Group's trading:

· the impact of acquiring businesses:

o  The amortisation of intangible assets arising on acquisition of businesses was £0.6 million (2019: £0.6 million).

o  Other acquisitions related to adjustments to profit and loss related to acquiring businesses of £0.4 million credit (2019: £0.2 million charge).  In 2020, the £0.4 million credit relates to the release of earnout contingent consideration (see note 12).

· other items that are considered significant and where treatment as an adjusted item provides a more consistent assessment of the Group's trading:

o  Restructuring costs of £2.2 million (2019: £nil) included redundancy costs and plant reconfigurations related to the impact of the Covid-19 pandemic;

o  A net release of £4.0 million (2019: £nil) related to the large gasification projects.  Settlement of outstanding warranty issues and the cancellation of performance bonds has allowed the Group to release £5.1 million (2019: £nil) from its provisions.  Related to the release, the Group has written off a £1.1 million (2019: £nil) receivable due over the next five years; and

o  An impairment write down of assets of £2.6 million (2019: £nil).  £2.3 million results from the Board's review of Chinese operations taking a more prudent view of asset values based on changing geopolitical and international trade assumptions.  £0.3 million of redundant fixed assets in Aerospace & Industrial have been written off.

Return on capital employed

The Group uses two return measures to assess the return it makes on its investments: 

· return on capital employed of 12% (2019: 14%) is the tax adjusted operating profit as a percentage of the average capital employed.  Capital employed is the average of the opening and closing Group net assets less the average of the opening and closing net cash position; and

· return on operating capital employed of 28% (2019: 36%) is calculated on the same basis except that the capital employed is adjusted to remove the average of the opening and closing goodwill and the opening and closing pension deficit to give a measure of the operating capital.

 

2.  Segment information

The segmental analyses of revenue, operating profit/(loss), segment assets and liabilities, and geographical analyses of revenue are set out below:

 

2.  Segment information continued

Other Group operations are included in "Central".  These mainly comprise Group corporate expenditure such as head office and Board costs, new business development and general financial costs. 

Segment assets and liabilities

Geographical analysis

 

3.  Earnings per share

4.   Dividends per share

The Directors recommend the payment of a final dividend of 3.3 pence per share (2019: 3.2 pence per share) on 4 June 2021 to shareholders on the register on 30 April 2021; the ex-dividend date is 29 April 2021.  This makes a total dividend for the year of 5.0 pence per share (2019: 4.9 pence per share).

 

5.  Property, plant and equipment

6.  Right of use assets and lease liabilities

 

6.  Right of use assets and lease liabilities - continued

7.  Goodwill and other intangible assets

 

8.  Trade and other payables

9.  Borrowings

On 24 May 2017, the Group agreed a five year revolving credit facility of €23 million (£20 million) with Barclays Bank plc and Handelsbanken plc.  The Group also has a £2.5 million overdraft facility provided by Barclays Bank plc.

In May 2020, the Group received loan proceeds of $1,841,000 from the Truist Bank, North Carolina under the Paycheck Protection Program ("PPP").  The loan bears interest at 1% per annum, with a deferral of payments until the US Small Business Administration, implementing the PPP, has made a final decision on the forgiveness of the loan, as set out in the "Flexibility Act", an amendment to the CARES Act.

At 30 November 2020, the Group had €11.1 million of unused facilities (2019: €13.3 million of unused facilities) and an unutilised overdraft facility of £2.5 million (2019: £2.5 million). 

10.  Provisions

Provisions arise from potential claims on major contracts, discounted dilapidations provision for leased property, which is expected to be required in 2023, and sale warranties which expire by 2021.  The amount charged in the year of £652,000 (2019: £801,000) arose on additional sales made in the year.

10.  Provisions - continued

In December 2019, a US$0.9 million (£0.7 million) performance bond was called by the customer, the amount was paid and charged to provisions. Subsequently, progress has been made on resolving warranty risks and US$5.0 million of performance bonds have lapsed. Consequently £5.1 million of provisions are no longer considered necessary and have been released.

11.   Share capital and premium

In February, October and November 2020, 114,501 ordinary shares of 2 pence each were issued on the exercise of Save As You Earn share options for cash consideration of £425,000.

The Group uses an Employee Benefit Trust (EBT) to purchase shares in the Company to satisfy entitlements, granted since the Company's AGM in 2015, under the Group's Long Term Incentive Plan.  The EBT has waived its rights to dividends.  During the year, the Group purchased 120,000 ordinary shares of 2 pence each (2019: 114,000) for a total consideration of £728,000 (2019: £623,000).  During the year the EBT issued 129,700 ordinary shares of 2 pence each (2019: 164,600) to satisfy the exercise of Long Term Share Plan share options. The cost of the shares held by the EBT is deducted from retained earnings.  The EBT is financed by a repayable-on-demand loan from the Group of £2,317,000 (2019: £1,592,000).  As at 30 November 2020, the EBT held a total of 135,700 ordinary shares of 2 pence each (2019: 145,400) at a cost of £772,000 (2019: £773,000) and a market value of £733,000 (2019: £878,000).

12.  Deferred and contingent consideration on acquisitions

 

13.  Contingent liabilities

At 30 November 2020, the Group had the following advanced payment bonds (relating to monies received in advance on contracts) and performance bonds:

$2,520,000 (2019: $8,478,000) of the performance bonds relate to the contracts for filtration systems provided for gasification projects.  These projects are being commissioned, a process which is taking several years.  The Group has provided its best estimate of the amount of any potential loss arising from rectification and claims arising on these contracts within the £4.4 million warranty provisions disclosed in note 10.  The maximum potential unprovided exposure under these contracts is limited to £9.7 million.  In December 2019, a $930,000 performance bond was called by a customer, paid and cancelled.  The uncalled performance bonds are expected to be called or released no later than March 2023.

14.  Cash generated from operations

15.  Basis of preparation 

The results for the year ended 30 November 2020 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union as at 30 November 2020.  The financial information contained in this announcement does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.  The financial information has been extracted from the financial statements for the year ended 30 November 2020, which have been approved by the Board of Directors and on which the auditors have reported without qualification.  The financial statements will be delivered to the Registrar of Companies after the Annual General Meeting.  The financial statements for the year ended 30 November 2019, upon which the auditors reported without qualification, have been delivered to the Registrar of Companies.

 

16.  Annual general meeting

The Company's Annual General Meeting will be held at 11.00 a.m. on Tuesday 20 April 2021 at the offices of Porvair plc, 7 Regis Place, King's Lynn, PE30 2JN.

17.  Related parties

There were no related party transactions in the year ended 30 November 2020 other than Directors' compensation.

18.  Responsibility Statement

Each of the Directors confirms, to the best of their knowledge, that:

· the financial statements, on which this announcement is based, have been prepared in accordance with the applicable law and International Financial Reporting Standards as adopted by the EU and give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

· the review of the business includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

The Directors of Porvair are listed in the Porvair Annual Report for the year ended 30 November 2019, apart from Paul Dean, who retired from the Board on 3 February 2020.  A list of current Directors is maintained on the Porvair website, www.porvair.com.

Copies of full accounts will be sent to shareholders in March 2021.  Additional copies will be available from www.porvair.com.