Annual accounts reveal Danwood narrowed its losses last year and set aside a pot of £5.6m to cover the costs of "contract remediation", as it continues on the road back to recovery following a rocky couple of years.
Recently published holding company accounts for the 12 months to 30 September 2013 reveal that the Lincoln-based firm saw group turnover decline 7.5 per cent to £211.8m. Exceptional charges of £11.9m and goodwill and other intangible amortisation of £8.9m contributed to the firm posting an operating loss at £3.25m. This represents a reduction of almost £5m on the prior-year figure. But a spike in interest repayments – which totalled £19m – contributed to the firm enduring an annual net loss of £23.7m.
The year was one of transition for the UK's biggest print reseller, following an "extensive review of its operational controls and management structure" which began in 2012. The investigation led to widespread senior management changes, including the appointment of Steve Francis as chief executive. He replaced company founder Colin Daniels, who left the firm he founded after 40 years in January 2013.
Change was afoot throughout the organisation in FY13, with the reduction in headcount totalling 220, as staff numbers dropped to 1,603. Prior to the downsizing Danwood had long been one of the UK channel's biggest consolidators, closing more than 50 acquisitions of companies across the country since the turn of the century. But it has not been in M&A action for a couple of years.
"Further opportunities to improve operational performance have been identified across the business," adds the directors' report. "These improvements will affect both customer-facing and back-office processes and are expected to deliver improved controls and more efficient performance."
The operational review was kicked off after revelations that "accounting weaknesses" had forced Danwood to restate six years of annual numbers. The problems are understood to largely relate to contracts with leasing funders, and "a programme of remediation work... to meet contractual obligations" began in 2012. Last year £3.6m was set aside to cover the costs of getting its house in order, in addition to the £2m earmarked in the previous year. As of the end of FY13, remedial actions for contracts had cost the VAR a running total of £741,000.
Other drains on its bottom line last year included about £2.8m in "legal fees associated with non-operational matters" (compared with £96,000 in FY12). Costs related to employee severance were £3.6m (up from £435,000 in FY12), and settling "supplier disputes" cost £800,000.
During FY13 Danwood rejigged its financing set-up, reaching an agreement with its bank that will see a reduction in payable interest and smaller loan repayments agreed for FY14 and FY15. The loan's maturity date has also been extended to December 2016 in new terms agreed with the bank two months ago.
The VAR ended the 2012 fiscal year "in technical breach" of its bank loan as "a number of non-financial covenants were not met" as a result of the accounts restatements. In December 2012 the bank waived the breaches, and the terms of the loan have been amended a number of times in the intervening 18 months. At FY13 year-end the revolving credit facility stood at just under £36m, compared with £37.4m a year previously.
Total loan amounts grew from £141.8m to £161.15m over the course of the year. Included in that total is £66.35m in loan notes owed to Bregal Capital. This represents an increase of £5m – invested in the business by its private equity backer in July – on the prior-year figure. Bregal ploughed another £3m into Danwood in April 2014.
The reseller's sales operation is where the bulk of the job losses have been felt, with average monthly employee numbers falling from 526 to 407 during the 2013 fiscal year. There was also a hefty reduction in admin staff, with headcount decreasing by 90 to 736. Service employees were comparatively unaffected, with only a slight reduction in numbers from 471 to 460.
At the top end of the company, aggregate directors' pay increased slightly from £1.47m to £1.57m, with the highest-paid director trousering £800,000 in aggregate emoluments, up from £555,000 in the previous year.
A significant factor in Danwood's top-line drop last year was a big decline in its sales into mainland Europe, which plummeted from £21.3m in FY12 to £11.8m last time out. Revenue in its homeland was comparatively stable, falling from £197.7m to £191.9m, while turnover beyond Europe dropped from £9.9m to £8.1m. Towards the end of the year Danwood disposed of its US business, which was based in Florida and turned over £2.7m in the first 10 months of the fiscal year.
There have also been some changes to its UK-registered entities, with its group holding company Danwood Group Holdings Limited renamed as Hykeham Group Limited. Upon its renaming, the company converted a loan of £38.5m to subsidiary Hykeham Capital Limited (formerly Danwood Capital I Limited) into equity.
The Hykeham Group Limited company balance sheet as of year-end FY13 shows total shareholders' funds of £39.3m, an increase of £1.4m on the prior-year figure. But the consolidated balance sheet – factoring in all subsidiary undertakings, which comprise two financing and four trading entities in the UK – shows a shareholders' deficit of £88.9m, up from £65.2m at the close of the preceding year. The consolidated cashflow statement shows year-end net debt of just over £150m, up from £128.6m 12 months earlier.
The group's "ultimate controlling party" is Swiss-registered Avenia AG. The accounts reveal that Hykeham Group Limited's parent company posted a £1.37m profit in FY13.
Danwood is currently preparing a new website, and a preview homepage promises "exciting developments to come in the next few weeks".
CRN contacted Danwood to ask if it wished to comment for this article, but is yet to hear back.
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