De La Rue issues warning on material uncertainty

Listed bank note printer De La Rue has issued a warning in its half year report about going concern issues due to escalating operating losses and a threat to banking covenants

De La Rue has revised forecasts for year end 2019/20 and has warned that there is a material uncertainty that casts significant doubt on the group's ability to continue as a going concern. Now the company has decided to suspend future dividend payments in order to manage net debt levels as part of a series of measures undertaken to respond to the identified material uncertainty.

Throughout its global operations De La Rue stated that ‘it faces various risks, both internal and external, which could have a material impact on the group's performance. The group manages the risks inherent in its operations in order to mitigate exposure to all forms of risks, where practical, and to transfer risk to insurers, where cost effective’.

It also identified increased risk areas for the business which have arisen since the 2019 annual report was published. These include a Serious Fraud Office (SFO) investigation into the activities of the  De La Rue Group and its associated persons in relation to suspected corruption in South Sudan, and secondly, a rapid change in market conditions which was impacting debt covenant ratios.

As at the 28 September 2019, the group's net debt was £170.7m and the net debt/EBITDA ratio adjusted for the basis of the banking covenant was 2.72 times, both of which are significantly higher than previously forecast.

The company reported IFRS operating loss of £9.2m (H1 2018/19: profit £10.1m), which is stated after significant restructuring charges related to the reorganisation announced in May 2019.

This follows a period of significant management change and instability at the company which led to the reorganisation of the business into two divisions, authentication and currency, announced earlier this month. Earlier this year senior board members resigned, including CEO James Hussey, which has led to overhaul of the top team.

EY, which has been in place as auditor since year end 2018 when it took over from fellow Big Four auditor KPMG, conducted a review of the condensed set of financial statements, with the findings reported in the half-yearly financial report for the six months ended 28 September 2019. Following the review, it issued a warning on material uncertainty surrounding going concern.

‘The 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,’ EY said in the independent review report to the company.

However, it included the caveat that ‘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’.

Following the review, EY flagged concerns about material uncertainty related to going concern, stating that the directors’ report in the interim financial statements, ‘indicates that, if one or more of the most significant modelled downside scenarios (which are binary in nature) were to occur concurrently in the going concern period, without mitigation, a breach of covenants relating to the company's revolving credit facility would occur’.

EY added that ‘these events or conditions along with other matters set forth in the same section, indicate that a material uncertainty exists which may cast significant doubt on the company's ability to continue as a going concern. Our conclusion is not modified in respect of this matter’.

Clive Vacher, chief executive officer of De La Rue, said: ‘The business has experienced an unprecedented period of change with the chairman, CEO, senior independent director and most of the executive team leaving or resigning in the period.

‘This has led to inconsistency in both quality and speed of execution. The new board is working to stabilise the management team, which we believe will take some time.

‘At the same time, we have seen significant changes since the start of the year in the market for currency, including pricing pressure as a result of reduced overspill demand. This has had a material impact on volumes and profitability in H1 2019/20 and it will also take time for the currency market to normalise.

‘In response, we are reviewing our cost base and will make the structural changes that will further strengthen our competitiveness in a challenging market.

The company is now conducting a strategic review of the business, which will focus on cost control and cash management. This includes a reduction in discretionary spend, overhead cost reduction and risk-mitigating actions to deliver the company’s full year forecasts. These actions are designed to cut costs by £20m.

‘Between now and the end of calendar Q1 2020, we will complete a full review of the business and design a comprehensive turnaround plan for the company,’ Vacher said.

‘In the meantime, we have already identified and started to implement the urgent actions needed to stabilise the business and allow us to complete the review.’

De La Rue prints bank notes for the UK and works closely with the Bank of England. UK revenue accounted for 11% of the group's business at £103.3m (worldwide revenue 2018/19: £493.9m) according to the company's 2018/19 annual report, with signifant revenue coming from business in the Middle East and Africa (34%) and Asia (25%). 


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