
8 minute read
Financial Review
progress with our strategic product developments, which increased engineering costs by 33% to £7.7m, although no development expenditure was recognised as an intangible asset this year.
Other operating income was lower at £2.9m (2021: £5.6m), largely because the annual review of Lucy Zodion’s goodwill identified that a £2.3m impairment charge was required following a reassessment of future cash flows.
Operating profit
Gary Ashton
Director
The Group continued to benefit from its position in growth markets, reporting a record order intake of £398.6m and sales of £313.2m in 2022 despite the wider challenging economic conditions.
As signalled in last year’s report, there was a decrease in profit before tax (PBT) to £35.3m, a 16% reduction, and a free cash inflow of £10.5m.
A solid balance sheet supports organic and acquisitive investment in alignment with the Group’s strategy. In 2022 the acquisition of a majority shareholding in Flashnet S.A., an intelligent street lighting and smart city controls company, was completed to strengthen Lucy Controls’ capabilities in the growing energy management market. There have also been notable organic investments in expanding Lucy Real Estate’s land bank and redeveloping St Paul’s House, the former Jericho Health Centre in Oxford. Investments to automate manufacturing processes have improved efficiency and increased capacity in both Lucy Electric and Lucy Controls.
Revenue
Group sales for the year were £313.2m (2021: £263.8m), an increase of 19% on last year or 10% on an organic constant currency (OCC) basis after excluding foreign currency movements and acquisitions. This year, both the strength of the US dollar and the acquisition of a majority shareholding in Flashnet S.A. helped drive sales, although Covid continues to subdue demand in certain markets.
Real estate rental income increased during the year by 3.2% to £8.4m and occupancy levels increased to 99% (2021: 98%). The annual passing rent of our portfolio now stands at £8.8m, split 90:10 between residential and commercial tenancies.
Gross margin
Gross margin reduced by 2.5 percentage points from 29.8% in 2021 to 27.3% in 2022, due to rising inflation, as well as higher commodity and semiconductor prices throughout the year. While price increases have been introduced to mitigate these costs, they only started to become effective in the second half of the year. There are also fixed price contracts that continued throughout the year where pricing benefits cannot be achieved until new contracts are realised. An improved product mix and increased utilisation of the Group’s manufacturing facilities provided some respite.
Material costs as the largest element of cost of sales continues to be closely monitored. Our purchasing teams have strengthened supply chains to help mitigate product constraints and significant engineering resource was diverted to re-engineer existing products in response to global semiconductor supply chain shortages. Our value engineering teams are focused on sustainability and cost reduction, with a clear objective to optimise raw material usage and to reduce waste.
Overheads
Overhead costs increased by 18% compared to 2021 and, on an OCC basis, they increased by 13% after excluding currency movements and acquisitions.
While higher business activity and inflationary pressure have resulted in increased overhead costs, these continue to be carefully managed. We have continued to make good
Group operating profit before valuation gains was £35.5m, 10% lower than last year. There was a £0.9m loss from the annual valuation of the Group’s investment property assets compared with a gain of £4.2m last year. This devaluation was driven by increased interest rates dampening activity in the Oxford property market, leading to softer prices and resulting in an operating profit after valuation gains and losses of £34.7m (2021: £43.7m).
Profit before tax
PBT for the year was £35.3m (2021: £42.2m) after crediting net finance income of £0.6m compared with net finance costs of £1.5m last year. Finance income increased by £2.2m including a foreign exchange gain of £1.5m on foreign currency assets and liabilities.
Taxation
The Group’s headline effective tax rate decreased from 26% to 3%. These rates include a reduction to the current tax charge respective to adjustments from earlier years and the recognition of a deferred tax asset for earlier losses in Saudi Arabia, whereas last year an increase in the enacted UK corporation tax rate significantly increased the tax charge and the deferred tax liability on the revaluation of investment properties. Removing the impact of the non-recurring adjustments provides a more reliable measure: on this basis, the adjusted effective rate of tax is 12% (2021: 13%). The Group expects its adjusted effective tax rate to remain lower than the standard UK tax rate due to lower tax rates in many of the countries in which it operates. The Group’s tax strategy seeks to ensure that key tax risks are appropriately mitigated and that the Group’s reputation as a responsible taxpayer is safeguarded.
Dividends
The Board recommends an increased final dividend of 160 pence per share which, taken together with the interim dividend of 104 pence per share, gives a full year dividend of 264 pence per share (2021 normalised full year dividend: 233 pence per share). This represents a 13% increase. A special dividend of 175 pence per share was paid in December, reflecting the Group’s strong performance compared with a normalised special dividend of 150 pence per share last year.
Our dividend policy is to grow core dividends at least in line with the Retail Price Index (RPI) and to supplement core dividends with special dividends when the Board considers it appropriate after reviewing both profits and cash requirements.
Acquisitions
On 10 June 2022 the Group acquired an 80% shareholding in Flashnet S.A., a leader in intelligent energy management systems, for a total consideration of £4.5m from Engie Energy Services International S.A. The Group also purchased £1.5m of loans to the acquired company from Engie CC SCRL. Based in Bra şov, Romania, Flashnet S.A. will strengthen the Group’s technology portfolio and increase our global reach, two important criteria of our growth strategy. The business is complementary to Lucy Zodion’s street lighting activities and will be part of the Lucy Controls business unit. The Group has a strategy of growing through a combination of organic expansion and acquisition. We continue to seek acquisitions that support the development of our business units.
Cash flow
The Group had a free cash inflow of £10.5m (2021: £30.1m) and £0.8m of foreign currency borrowings were repaid during the year.
Operating cash flow before changes in working capital, interest and taxes was an inflow of £46.6m (2021: £43.5m), largely driven by strong operating profits.
Control of working capital is key to achieving our cash generation during this period of growth. In 2022 working capital increased by £18.4m (2021: £5.4m) in support of both this year’s sales and future sales. Inventory increased by £10.5m (2021: £11.3m) to support higher volumes and to mitigate the disruption in the supply chain, while an investment of £9.0m in Lucy Real Estate’s land bank was required to facilitate its strategic growth plan.
Receivables increased by £11.5m as higher volumes continued throughout the year compared with lower sales in quarter four last year, although overdue balances have decreased.
Payables increased by £4.8m, while provisions decreased by £1.1m, and there was a minimal outflow from changes in the value of derivative financial instruments.
Net interest paid was an outflow of £0.6m (2021: £0.5m) and tax payments were £3.2m compared with £3.8m in 2021.
Investing activities at £14.0m (2021: £3.7m) comprised £4.0m net of cash for the acquisition of the majority shareholding in Flashnet S.A. and £1.5m for loans. There were no changes in the quoted equity portfolio during the year compared with net purchases of £0.2m last year. Capital expenditure was £8.6m (2021: £4.8m) and proceeds from disposals of property, plant and equipment were £0.1m (2021: £1.3m).
Capital commitments at the end of the year were £11.2m (2021: £5.1m), reflecting the St Paul’s House development and covering several investments to increase manufacturing automation and capacity.
Financial position
A five year £20.0m Revolving Credit Facility (RCF) with HSBC Bank PLC was refinanced during the year, leaving Group borrowing facilities unchanged at £43.0m.
Actual bank borrowings increased by £0.5m to £15.4m at 31 December 2022. The acquisition of Flashnet S.A. introduced two minority shareholder loans totalling £0.3m repayable on 1 July 2023.
The Group had net cash of £40.7m (2021: £31.4m) and net assets increased during the year by £50.7m to £289.1m.
The Group’s financial metrics remain strong, with gearing of 5% (2021: 6%) and interest costs covered 55 times (2021: 75 times).
Return on net assets
The Group recorded a return on net assets of 12% (2021: 18%) during the year.
Post-employment benefits
The Group accounts for postemployment benefits in accordance with IAS 19 Employee Benefits. The balance sheet reflects the net surplus of the W Lucy defined benefit pension scheme in the UK as at 31 December 2022 based on the market value of assets at that date, and the valuation of liabilities using AA corporate bond yields adjusted to reflect the duration of the scheme’s liabilities. This scheme was closed in 2002 to new entrants to reduce the risk of volatility of the Group’s liabilities.
The most recent triennial valuation of the scheme was performed as at 6 April 2020. However, given the extreme market conditions created by Covid-19, a post valuation was undertaken as at 31 August 2020. This valuation revealed a scheme deficit of £4.4m and a funding level of 93% compared with a surplus of £3.9m in the previous valuation. Consequently, the Company agreed a recovery plan requiring deficit-reducing contributions of £0.7m per annum from 1 January 2021 to 1 December 2023, increasing to £0.8m per annum from 1 January 2024 to 31 December 2027 with a final payment of £0.3m by 31 May 2028. Additionally, the Company increased its contributions in respect of active members of the scheme from 24.5% to 28.8% of pensionable salary from 6 April 2021.
A significant increase in bond yields during the year moved the Scheme from a deficit to a surplus and, following actuarial advice, the Trustees and the Company agreed to suspend deficit-reducing contributions from October 2022 until the next triennial valuation in April 2023.
The separate IAS 19 valuation performed as at 31 December 2022 showed a Scheme surplus of £14.7m compared with a deficit of £2.9m last year. This represents an increase in the funding level from 96% to 130% during the year. This improvement arose from a significant increase in bond yields over the period, resulting in a higher discount rate than last year, which has significantly decreased the value placed on the Scheme’s liabilities. Expectations of future inflation have also fallen slightly, leading to an actual gain from changes to the financial assumptions of £25.2m. Experience gains have reduced this gain as the Scheme’s assets underperformed their expected rate of interest, reducing this surplus by £5.6m, while inflation above its assumed rate decreased the surplus by £1.7m. Further accrual of pension benefits of £0.7m and a discretionary increase of £0.2m have decreased the surplus. Company contributions and a small increase in the mortality assumptions were responsible for the balance.
The related deferred tax liability of £3.7m resulted in a net pension liability of £11.0m at the end of the year. The amount of the surplus is sensitive to changes in the main financial assumptions, particularly the rate used to discount the liabilities (the discount rate). A change in the discount rate of 0.1% would increase/decrease the surplus by £0.6m.
The value of non-UK post-employment benefits was £6.2m (2021: £5.2m) at the end of the year.
International Financial Reporting Standards
The consolidated financial statements of the Group have been prepared under UK-adopted International Financial Reporting Standards (IFRS) to represent the international nature of the Group’s business activities. The parent company has elected to prepare its financial statements in accordance with FRS 101.
The rise in grid-edge technologies

Gary Ashton Group Finance Director
23 March 2023
The British Electrotechnical and Allied Manufacturers Association (BEAMA) and the Energy Systems Catapult’s March 2022 report – “Growing the Supply Chain for a Net Zero Energy System“ – forecast that electricity demand may grow by 70% by the year 2050. The report also highlights the consequent need for more coordination and planning between utilities, which will require intelligent command and control.
Smart automation brings multiple benefits:
• Enables real-time monitoring and control over generation, transmission, distribution and outage management.
• Delivers resource optimisation and alleviates pressure across the whole power enterprise.
• Makes data available for engineers both at desks and on-the-go, providing actionable information that enables timely reaction and improved planning.
• Facilitates accurate matching of supply and demand and allows macro and micro-grids to better utilise latent capacity, opening up networks to a larger ratio of variable renewable sources including solar, wind, hydrogen power and advanced battery storage technologies.
• Responds to the increase in ‘prosumer’ households selling electricity generated from solar panels or other devices back to the network, rather than just consuming it.