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The Vitec Group PLC  -  VTC   

Final Results

Released 07:00 21-Feb-2017

RNS Number : 3755X
The Vitec Group PLC
21 February 2017
 

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISDICTION WHERE TO DO THE SAME WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION. THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

21 February 2017

The Vitec Group plc

2016 Full Year Results

Record performance with strong growth in revenue, profit* and cash

The Vitec Group plc ("Vitec" or "the Group"), the international provider of products and services for the broadcast and photographic markets, announces its audited results for the year ended 31 December 2016.

 

Results

2016

2015

Change

Revenue

£376.2m

£317.8m

+18.4%

 

 

 

 

Adjusted operating profit*

£41.5m

£35.4m

+17.2%

Adjusted profit before tax*

£37.5m

£31.5m

+19.0%

Adjusted earnings per share*

61.3p

49.4p

+24.1%

 

 

 

 

Total dividend per share

27.2p

24.6p

+10.6%

 

 

 

 

Statutory

 

 

 

Operating profit

£14.5m

£22.4m

-35.3%

Profit before tax

£10.5m

£18.5m

-43.2%

Basic earnings per share

20.2p

29.3p

-31.1%

 

 

 

 

Free cash flow+

£44.6m

£16.2m

+£28.4m

Net debt

£75.1m

£76.3m

-£1.2m

 

Highlights

 

Strategic progress in higher technology products, new growth markets and APAC

Strong Group performance in revenue, adjusted profit* and EPS*, driven by:

 

Favourable benefit from foreign exchange

 

Higher revenue growth in the second half

Underlying sales and adjusted profit* growth,  excluding anticipated lower performance of non-core Haigh-Farr business, and despite lower activity in US broadcast rentals

Significant reduction in working capital through management focus to produce strong free cash flow+ of £44.6 million

Total dividend for 2016 increased by 10.6% to 27.2p increasing dividend cover to 2.3x

 

 

* In addition to statutory reporting, Vitec reports performance on an adjusted basis before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill, as described on page 2.

+ Free cash flow: cash generated from operations in the financial year after net capital expenditure, net interest and tax paid.

 

 

 

Commenting on the results, Stephen Bird, Group Chief Executive, said:

"We are pleased to report that Vitec achieved a record performance with strong growth in revenue, adjusted profit* and cash. As expected, foreign exchange rates had a significant favourable impact on our results.

We are continuing to transform the Group. We are outperforming our markets by driving sales, investing in new technologies, and expanding our capabilities in the exciting and growing "image capture and sharing" market. A strong cash flow performance and our robust balance sheet support our clear growth strategy.

Vitec has a strong position in changing markets and the Board remains confident about future growth prospects, assuming no significant adverse change in exchange rates."

 

For further information please contact:    

 

The Vitec Group plc

Telephone: 020 8332 4600

Stephen Bird, Group Chief Executive

 

Paul Hayes, Group Finance Director

 

 

 

MHP Communications

Telephone: 020 3128 8100

Tim Rowntree/ Jamie Ricketts/ Ollie Hoare

 

 

Vitec will present its results to analysts at 9.30am on Tuesday, 21 February 2017. An audio recording of the presentation, along with the presentation slides, will be available on our website after the meeting.

Users can pre-register to access the recording and slides using the following link:

http://www.vitecgroup.com/full year results 2016

 

Notes to Editors:

Vitec is a leading global provider of premium branded products and services to the fast changing and growing "image capture and sharing" market.

Vitec's customers include broadcasters, independent content creators, photographers and enterprises, and our activities comprise: design, manufacture and distribution of high performance products and software including camera supports, wireless systems, robotic camera systems, prompters, LED lights, mobile power, monitors and bags; and premium services including technical solutions, systems integration and equipment rental for TV production teams, film crews and enterprises.

We employ around 1,700 people across the world in ten different countries and are organised in two Divisions: Broadcast and Photographic.

The Vitec Group plc is listed on the London Stock Exchange with 2016 revenue of £376.2 million.

More information can be found at: www.vitecgroup.com.

LEI number: 2138007H5DQ4X8YOCF14

 

Notes

*

- Adjusted performance is before: £5.2m of restructuring costs (2015: £4.9m); £9.7m charges associated with acquisition of businesses (2015: £8.1m); and £12.1m impairment of goodwill (2015: £nil). Charges associated with acquisition of businesses consisted of £1.2m of earnout payments and purchase price adjustment (2015: £2.6m); £0.6m of transaction costs relating to acquisition of businesses (2015: £0.1m); and £7.9m amortisation of acquired intangible assets (2015: £5.4m).

- Adjusted operating expenses is before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill. It excludes £0.5m (2015: £0.9m) of restructuring costs included in cost of sales. 

- Adjusted earnings per share is earnings before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill divided by the weighted average number of ordinary shares in issue.

- Where adjusted performance measures are provided, they are compared to the equivalent measures in the prior year.

 


1

This statement is based on information sourced from management estimates and includes comparing performance at constant exchange rates to assist in understanding the underlying performance of the Group.

2

2016 average exchange rates: £1 = $1.35, £1 = €1.22, €1 = $1.10, £1 = Yen147.

3

2015 average exchange rates: £1 = $1.53, £1 = €1.38, €1 = $1.11, £1 = Yen185.

4

The Company's Annual General Meeting ("AGM") will be held on Wednesday, 17 May 2017. The 2016 Annual Report and Accounts and Notice of AGM will be posted to shareholders and available on the Company's website from Tuesday, 14 March 2017.

 

2016 management & financial review

Revenue increased by 18.4% to £376.2 million (2015: £317.8 million) and adjusted operating profit* was 17.2% higher at £41.5 million (2015: £35.4 million). This included a benefit from foreign exchange; at constant exchange rates revenue grew by 4.8% while adjusted operating profit* decreased by 0.3%. Growth in sales of higher technology products and services in new markets where Vitec continues to invest in new product development was offset by anticipated lower activity in some of our more mature markets. The statutory operating profit was £14.5 million (2015: £22.4 million) as a result of these trends and the £12.1 million (2015: £nil) one-off, non-cash impairment of goodwill. At constant exchange rates the Group delivered higher revenue growth on the prior year of 6.3% in the second half of the year in comparison to first half growth of 3.1%.

The Broadcast Division grew revenue by 18.9% to £224.8 million and adjusted operating profit* increased by 3.4% to £21.0 million. There was continued growth in higher technology products including wireless transmitters and receivers, camera monitors and mobile power. Revenue growth includes a £24.1 million benefit from foreign exchange and £3.2 million from the acquisitions of Offhollywood and Wooden Camera. During the year Vitec successfully supported the Rio 2016 Olympics. This was partially offset by the anticipated lower revenue performance of our Haigh-Farr antenna business and a decrease in activity in our US asset rentals business.

The Photographic Division grew revenue by 17.5% to £151.4 million and adjusted operating profit* increased by 35.8% to £20.5 million. At constant exchange rates adjusted operating profit* was 2.8% higher than the prior year. Sales benefited from: a number of innovative product launches in the year; the acquisition of our Netherlands distributor, Provak; and favourable foreign exchange. Adjusted operating profit* growth also included the benefit from previous restructuring actions.

Statutory gross margin % at 39.4% was lower than the prior year (2015: 40.6%). Excluding the impact of Haigh-Farr of 40 bps and the US broadcast services business of 120 bps, gross margin % was 40 bps higher than the prior year. This reflects the growth in new technology sales, operational initiatives and acquisitions.   

Adjusted operating expenses* were £12.7 million higher than in 2015 at £107.1 million. This mainly reflects an adverse currency impact of £10.0 million, incremental costs from acquisitions and investments in our higher technology businesses to drive future growth. This has been partly offset by restructuring savings. Investment in new product development at £13.4 million (2015: £12.9 million) was broadly in line with the prior year at 4% of Group product sales.

There was a restructuring charge of £5.2 million in 2016 (2015: £4.9 million) relating to the actions announced with our 2015 results. These actions were taken in accordance with our plans, with incremental savings of £5.7 million in the year. The restructuring charge also reflected a £0.7 million gain on the sale of the manufacturing site in Bury St. Edmunds ("Bury"). Consideration of £3.9 million was agreed in January 2016. We plan to vacate the site in late 2017 and move to a lean, modern manufacturing facility in a nearby leased site.

As expected, there was a net foreign exchange benefit of £6.2 million on our adjusted operating profit* of £41.5 million versus 2015 mainly due to a stronger US Dollar and Euro, particularly in the second half of the year. If exchange rates were to remain at current levels, Vitec would realise a net currency benefit in the first half of 2017 mainly from the translation of its results into Sterling.

Adjusted profit before tax* of £37.5 million was £6.0 million higher than the prior year (2015: £31.5 million). Statutory profit before tax of £10.5 million (2015: £18.5 million) was after £5.2 million of restructuring costs (2015: £4.9 million); £9.7 million charges associated with acquisition of businesses (2015: £8.1 million) and a £12.1 million goodwill impairment charge (2015: £nil) relating to Haigh-Farr and the US broadcast services business. We decided to impair this goodwill to better reflect the fair value of each business in light of recent performance.

Adjusted earnings per share* increased by 24.1% to 61.3 pence per share (2015: 49.4 pence per share). Basic earnings per share were 20.2 pence per share (2015: 29.3 pence per share).

Free cash flow+ of £44.6 million (2015: £16.2 million) is reported after £7.4 million of cash outflows on restructuring actions (2015: £3.5 million). The strong free cash flow+ includes the benefits from working capital management initiatives, including a reduction in inventory of £11.2 million, and the consideration of £3.9 million from the sale of the Bury site. There was a total cash inflow of £12.8 million (2015: £3.3 million outflow) after investing £20.3 million in acquisitions (2015: £9.0 million), including a £3.0 million final earnout payment on Teradek, and £11.1 million of dividend payments (2015: £10.7 million).

Net debt at 31 December 2016 was £75.1 million (31 December 2015: £76.3 million). At constant currency net debt would have reduced to £63.5 million given a net adverse foreign exchange impact of £11.6 million. The Group's balance sheet remains strong with a year-end net debt to EBITDA ratio of 1.2 times (31 December 2015: 1.5 times).

The Board has recommended a final dividend of 17.3 pence per share (2015: 15.1 pence per share). The final dividend, if approved by our shareholders at the 2017 AGM to be held on Wednesday, 17 May 2017, will be paid on Friday, 19 May 2017. This will bring the total dividend for 2016 to 27.2 pence per share (2015: 24.6 pence per share) and provide full year adjusted dividend cover of 2.3 times (2015: 2.0 times).

 

Delivering our strategy to realise growth in a changing market

Vitec operates in the fast growing "image capture and sharing" market. Technology is driving fundamental changes to this market and Vitec's unique heritage and the credibility of our premium brands enables us to capitalise on those changes.

We have grown our addressable markets and end users from traditional broadcast and photographic customers to now encompass faster growing market segments, like new media which includes social media. These include independent content creators and enterprises that are increasingly using high quality video for their communication.

Vitec continues to lead the market with its range of products and services. We have developed a significantly higher technology business by expanding our capabilities in software development to support our hardware solutions, by increasing our systems integration expertise, and by designing products for new imaging devices.

We have been successfully transforming Vitec by implementing a growth strategy focused on five main strategic priorities:

1.

To improve the core by improving and strengthening our business model while continuing to innovate. In 2016 Vitec delivered a strong cash flow through disciplined cost control and working capital management initiatives that reduced inventory levels significantly. The business has also been improved through lean manufacturing programmes and has realised savings on previously announced restructuring activities. We have demonstrated our innovation by launching new products, for example new tripods, market-leading robotics and innovative LED lights.

2.

To maintain investment into new and faster growing markets and technologies to underpin future growth. For example, this year we expanded our product offering in Apple stores globally and we launched Sphere, our award winning Virtual Reality product that allows the audience to become the producer of content. We are also building our business to address the growing demand for high quality video produced by corporates, religious, health and education establishments and other enterprises.

3.

To continue to get closer to our end customers by owning more distributors and optimising our e-commerce activities. In January 2016 we acquired our former distribution partner in the Netherlands, Provak, for a net consideration of £0.9 million, which has expanded our strong photographic distribution model. We are also investing in and optimising our e-commerce capabilities through working with our major e-commerce customers, such as Amazon, and by further developing our own online platforms.

4.

To focus on geographical expansion, especially in APAC, which we believe has good medium-term growth opportunities. In 2016 we grew revenue in this market by £12.8 million to £68.7 million, which included strong growth in Japan where we have achieved record sales performances this year. We expanded our Chinese direct distribution model and invested in initiatives to improve synergies across the Group in back office functions in APAC. Vitec has a broad geographic spread and a direct presence in ten countries: the UK, the US, Costa Rica, France, Germany, Italy, the Netherlands, Japan, China and Singapore. In 2016, 48% of our revenues by destination came from North America, with the remainder split between Europe 31%, Asia-Pacific 18%, and Rest of World 3%.

5.

To supplement our many organic growth opportunities with carefully targeted acquisitions and corporate development. In April 2016 we acquired the business and assets of Offhollywood that provides camera-back modules for RED cameras and other services to a similar customer base to that serviced by the Group's existing higher technology businesses, for an initial consideration of £1.5 million. In September 2016 we acquired Wooden Camera, a leading one-stop provider of high quality, essential camera accessories used by filmmakers and independent content creators, for an initial consideration of £15.4 million. Wooden Camera is performing ahead of our expectations. It complements Vitec's strategy of providing premium branded broadcast products and services to our customers to capture and share exceptional images.

We believe that over the medium-term there are exciting opportunities for Vitec that should deliver sustainable sales growth while continuing to drive strong cash performance. This will enable us to finance a growing business, make value-adding acquisitions and pay well-supported, progressive dividends.

Broadcast Division

The Broadcast Division designs, manufactures and distributes premium branded products for broadcasting, film and video production for broadcasters and independent content creators. It also provides premium services including equipment rental and technical solutions to TV production teams, film crews, and corporate enterprises.

Broadcast Division

2016

2015

% Change

% Change at constant exchange rates

Revenue

£224.8m

£189.0m

+18.9%

+5.6%

Adjusted operating profit*

£21.0m

£20.3m

+3.4%

-2.7%

Adjusted operating margin*

9.3%

10.7%

-140 bps

-80 bps

* For Broadcast, before restructuring costs of £3.4m (2015: £4.1m), charges associated with acquisition of businesses of £8.9m (2015: £7.5m) and impairment of goodwill of £12.1m (2015: £nil). There was a statutory operating loss of £3.4m (2015: £8.7m profit).

Revenue for 2016 was £224.8 million, an increase of 18.9% on the prior year. At constant exchange rates revenue grew by 5.6% on 2015 with a strong performance from the higher technology businesses. Adjusted operating profit* increased by £0.7 million to £21.0 million although it was 2.7% lower than the prior year at constant exchange rates.

Adjusted operating profit* and margins reflected a strong performance by the higher margin technology businesses but also the negative impact of the anticipated lower volumes in the Haigh-Farr antenna business and the lower activity at the US asset rentals business. The Haigh-Farr business is a non-core activity. On a constant currency basis excluding Haigh-Farr's results, the Division's revenue grew by 7.0% and its adjusted operating profit* was 11.2% higher.

The Division has continued to increase its sales of higher technology products particularly for independent content creators, including wireless transmitters and receivers, camera monitors and mobile power. Our mobile power business has grown, with the US broadcast battery market performing well and we have gained a number of large medical mobile power orders. This was offset by lower sales in more mature markets.

We have continued to invest in new product development in line with the changing nature of the broadcast market. New products launched in the year include large High Dynamic Range (HDR) monitors; virtual reality capabilities; the Vinten Vantage, a compact robotic head providing smooth on-air motion that supports many cameras and lenses; and the Teradek Live:Air, an iOS app enabling live video production with a full range of real time features, using only an iPad.

Our higher technology offering was further enhanced with the acquisitions of Offhollywood in April 2016 and Wooden Camera in September 2016. Both of these acquisitions provide the Group with innovative ranges of high quality branded camera accessories that we are selling through our global distribution channel. This builds on our recent strong acquisition track record including the purchases of Teradek and SmallHD, with SmallHD delivering growth in 2016 as it benefited from investment in its monitor technology.

Revenue from the equipment rental and broadcast services business was higher than the prior year, benefiting from supporting the Rio 2016 Olympics and the award of a significant contract with the NFL for project management and technical support. However, the NFL contract included high material costs with a low pass-through margin.

The performance of the broadcast services business was negatively impacted by a significant downturn in the more competitive traditional US asset rentals market, particularly in the second half of the year. We are carefully reviewing the business' performance and taking appropriate actions to drive improvement. This resulted in a strong positive cash flow from this business despite it making an operating loss in 2016. This has been achieved by restructuring and further simplifying the business model while significantly reducing the asset base through lower levels of investment and by proactively selling underperforming rental assets.

As previously identified, the Division's results were also negatively impacted by the anticipated lower volumes and planned cost investments within the higher margin Haigh-Farr defence antenna business. The business remains profitable but its outlook is much weaker having performed particularly strongly for the last few years.

Photographic Division

The Photographic Division designs, manufactures and distributes premium branded equipment for photographic and video cameras and provides dedicated solutions to professional and non-professional image makers. This consists primarily of camera supports, tripods, camera bags, lighting supports, LED lights, lighting controls and filters. It also supplies an expanding range of premium accessories for smartphones, action cameras and drones.

Photographic Division

2016

2015

% Change

% Change at constant exchange rates

Revenue

£151.4m

£128.8m

+17.5%

+3.6%

Adjusted operating profit*

£20.5m

£15.1m

+35.8%

+2.8%

Adjusted operating margin*

13.5%

11.7%

+180bps

-10 bps

* For Photographic, before restructuring costs of £1.8m (2015: £0.8m) and charges associated with acquisition of businesses of £0.8m (2015: £0.6m). There was a statutory operating profit of £17.9m (2015: £13.7m).

The Photographic Division performed well in 2016 growing revenue by 17.5% to £151.4 million and adjusted operating profit* by 35.8% to £20.5 million. After eliminating the favourable effect of foreign exchange, revenue was 3.6% higher and adjusted operating profit* increased by 2.8%.

We continue to monitor the shipments of interchangeable lens cameras as published by the Camera and Imaging Products Association (CIPA). We believe that we are continuing to outperform the market as our sales are outperforming recent CIPA trends. Revenue growth has been achieved through investing in and launching innovative new products and developing our distribution channels. As a result we have continued to grow our share in most of our markets. Adjusted operating profit* growth reflects this increase in sales and was helped by lean initiatives and the restructuring actions completed during the year.

New products launched this year include specialised supports and bags that are designed for action cameras and drones. This remains a higher growth area within the photographic market. We have successfully grown our video sales including the new Manfrotto monopod and BeFree Live, a compact and lightweight head that enables smooth camera movement.

We have also launched products aimed at smartphone users who accessorise their phones because they want to take better photographs. In 2016 we collaborated with Apple to launch the TwistGrip that connects all smartphones to any camera support. This is one of five of our products that are sold in Apple's stores worldwide.

During the year the Division acquired the intellectual property of Xume technology. This is a patented quick release magnetic adapter that enables photographers to connect filters to their lenses quickly and with great precision. This range complements Manfrotto's existing premium filters designed for professional and non-professional image makers.

We continue to get closer to our customers with our international distribution infrastructure and e-commerce capabilities. We are pleased with the performance of Provak, our former distribution partner in the Netherlands that we acquired in January 2016. This business has been successfully integrated into the Division and further expands our strong photographic distribution model. We believe that our distribution infrastructure is a major asset in remaining close to our end customers.

This year we continued to develop our online platforms, and launched and upgraded websites in several countries. Our performance reflects the benefit from these investments and the continued growth of our e-commerce sales, both directly and through sales to our major online partners including Amazon.

The Photographic Division has a good market share in the APAC region and we are focused on delivering further growth in this area. We have continued to grow sales in APAC during 2016 supported by our direct distribution in China, Hong Kong and Japan.

Financial detail

Adjusted operating profit* in 2016 was £6.1 million higher than the prior year.  This reflects a favourable foreign exchange impact of £6.2 million, £1.1 million contribution from acquisitions, and incremental savings of £5.7 million from restructuring actions. This was partly offset by investment in our higher technology activities and the impact of lower volumes in Haigh-Farr and our US broadcast asset rentals business. The statutory operating profit of £14.5 million was £7.9 million lower mainly due to the one-off, non-cash impairment of £12.1 million of goodwill (2015: £nil).    

Management's estimate of these drivers is summarised in the following table:

Adjusted operating profit* bridge

£ million

2015 Adjusted operating profit*

 

35.4

Decrease in adjusted gross profit* in the year

(1.1)

 

Incremental restructuring savings

5.7

 

Increase in adjusted operating expenses*

(5.8)

 

 

 

(1.2)

 

 

 

Contribution from acquisitions

 

1.1

 

 

 

Foreign exchange effects:

 

 

- Translation

4.3

 

- Transaction after hedging

1.9

 

 

 

6.2

2016 Adjusted operating profit*

 

41.5

* Before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill as defined on page 2 of this announcement.

Net financial expense

Net financial expense totalled £4.0 million and was broadly in line with the prior year (2015: £3.9 million). Interest payable was £4.2 million (2015: £4.0 million) and was covered 14 times (2015: 13 times) by earnings before interest, tax, depreciation and amortisation.

Profit before tax

Adjusted profit before tax* increased by £6.0 million to £37.5 million (2015: £31.5 million). Statutory profit before tax decreased by 43.2% to £10.5 million (2015: £18.5 million).

Taxation

The effective taxation rate on adjusted profit before tax* was 27% in 2016 (2015: 30%). The Group's tax rate has improved year-on-year and we anticipate that the tax rate will remain around 27% in 2017 supported by reductions in the Italian corporation tax rate. Vitec's tax charge is higher than the UK statutory rate because the majority of our profits arise in overseas jurisdictions with higher tax rates than the UK.

Earnings per share

Adjusted earnings per share* was 61.3 pence per share (2015: 49.4 pence per share). Basic earnings per share was 20.2 pence per share (2015: 29.3 pence per share).

Acquisitions

In January 2016 the Group acquired 100% of the share capital of Manfrotto Distribution Benelux B.V. (formerly Provak Foto Film Video B.V.), based in the Netherlands, through a business combination for a net cash consideration of €1.2 million (£0.9 million). The acquisition complements the Group's owned distribution channels.

In April 2016, the Group acquired the business and some of the assets of Offhollywood Digital, LLC ("Offhollywood"), based in the US, through a business combination for an initial net cash consideration of US$2.2 million (£1.5 million). Under the terms of the acquisition, there is a potential earnout payment of up to US$8.0 million that is dependent on performance against demanding gross profit targets over the period to December 2018. Offhollywood provides camera-back modules for RED cameras and other services to a similar customer base to that serviced by the Group's existing higher technology businesses, and its products will be marketed through the Group's global distribution network.

In September 2016 the Group acquired the whole of the share capital of Wooden Camera, Inc. and Wooden Camera Retail, Inc. ("Wooden Camera"), both based in the US, through a business combination for an initial net cash consideration of US$19.5 million (£14.9 million) after taking account of US$0.6 million (£0.5 million) of cash in the business at acquisition date. Under the terms of the acquisition, there is a potential earnout payment of up to US$15.0 million that is dependent on performance against demanding EBITDA targets over the period to December 2018. In 2016 an amount of US$2.0 million (£1.5 million) was provided for in relation to its performance in 2016. Wooden Camera designs, manufactures and retails directly and online, essential professional camera accessories used by broadcasters and independent content creators. The acquisition complements the Group's existing range of broadcast products.  Wooden Camera operates within the Broadcast Division.

We continue to review various bolt-on acquisition opportunities. These will be assessed as to the strategic, commercial and financial benefits that they could provide against acceptable risk parameters.

Restructuring costs

In 2016 there was a restructuring charge of £5.2 million (2015: £4.9 million) relating to actions to streamline operations with lower growth prospects, which we commenced in the second half of 2015. These actions relate predominantly to redundancy costs and have been completed in line with our plans.

The total year-on-year benefit from these restructuring actions to our profitability was £5.7 million (2015: £0.5 million). Cash outflows relating to restructuring were £7.4 million in the year (2015: £3.5 million) in line with expectations.

Charges associated with acquisition of businesses

The 2016 charges relate to the Group's acquisition activities and amortisation of previously acquired intangibles.

The amortisation of acquired intangibles of £7.9 million (2015: £5.4 million) relates to Provak acquired in January 2016; Offhollywood acquired in April 2016; Wooden Camera acquired in September 2016; and other businesses acquired by the Group from 2011 to 2015.

Transaction costs of £0.6 million were incurred in relation to acquisitions (2015: £0.1 million).

Earnout payments of £1.5 million (US$2.0 million) were accrued during the year to be paid to the previous owners of Wooden Camera in 2017 in relation to the business' performance in 2016. The business has delivered strong growth and has performed ahead of our pre-acquisition expectations.

Impairment of goodwill

We have reviewed the carrying value of the Haigh-Farr goodwill that arose on acquisition of the business in 2011. The long-term opportunities and prospects for this specialist antenna business have been reduced to reflect recent trading activity and the outlook in their niche markets. This has led to a one-off non-cash goodwill impairment charge of £7.9 million to partially impair the carrying value of this investment to £17.0 million.

We have also reviewed the carrying value of the US broadcast services business that has been impacted by a significant downturn in its US asset rentals activity particularly in the second half of 2016. The business made an operating loss in 2016 but delivered a strong cash flow during the year through more cautious investments and by selling non-core assets, and therefore converted a proportion of its balance sheet into cash. The carrying value of goodwill in the balance sheet of £4.2 million that relates to the acquisition of parts of this business acquired prior to 1998 has been fully impaired.  

Cash flow and net debt

Cash generated from operating activities was £64.8 million (2015: £41.7 million).  

The Group uses a number of key performance indicators to manage cash including the percentage of operating cash flow generated from adjusted operating profit*, the percentage of working capital to sales, inventory days, trade receivable days and trade payable days. Inventory, trade receivable and trade payable days are stated at year end balances; inventory and trade payable days are based on Q4 cost of sales (excluding exchange gains/losses) while trade receivable days are based on Q4 revenue.

The adjusted operating profit* into operating cash flow conversion at 155% for 2016 is high as a result of a number of initiatives enacted in the year particularly around inventory management. Vitec has an established track record in converting adjusted operating profit* into cash with a 97% conversion over the last five years.  

The working capital to sales metric has decreased to 15.7% (31 December 2015: 18.9%) and overall working capital decreased by £12.0 million (2015: £5.2 million increase). This reflects a number of initiatives taken across the Group to reduce working capital levels.

Trade receivable days increased to 43 days (2015: 40 days) and remain well controlled with a good ageing profile. On a cash flow basis, trade and other receivables increased by £4.5 million (2015: £0.8 million decrease) on stronger sales in the last two months of the year. The reported carrying value of trade receivables at year end of £50.9 million includes £5.6 million adverse foreign exchange compared to the prior year.

On a cash flow basis, inventory decreased by £11.2 million (2015: £3.0 million increase) to £57.9 million at the year end, reflecting focused initiatives on inventory reduction across the Group. The reported carrying value of inventory at year end includes £9.5 million adverse foreign exchange compared to the prior year. Inventory days decreased to 83 days (2015: 105 days).

Trade payable days decreased to 38 days (2015: 44 days). On a cash flow basis, there was a £5.3 million overall increase in trade and other payables (2015: £3.0 million decrease) including bonus and commission accruals and timing of payments. The reported carrying value of trade payables at year end of £26.8 million includes £3.7 million favourable foreign exchange compared to the prior year.

Capital expenditure, including £3.4 million of software and capitalised development costs (2015: £4.2 million), totalled £16.8 million (2015: £20.6 million), of which £7.1 million (2015: £10.9 million) related to rental assets. This was partly financed by the proceeds from rental asset disposals of £4.1 million (2015: £4.4 million). Overall capital expenditure was equivalent to 0.9 times depreciation (2015: 1.3 times) and included investments in manufacturing processes and production tooling.

We monitor Return on Capital Employed (ROCE), calculated as adjusted operating profit* divided by average total assets less current liabilities excluding the current portion of interest-bearing borrowings. This has increased from 16.3% in 2015 to 17.5% in 2016.

The net tax paid in 2016 of £7.2 million was £1.6 million higher than the £5.6 million paid in 2015 due to the timing of tax payments.

As a result, free cash inflow+ increased by £28.4 million to £44.6 million (2015: £16.2 million).

Free cash flow+

2016

2015

Adjusted operating profit *

£41.5m

£35.4m

Depreciation (1)

£18.4m

£16.2m

Changes in working capital

£12.0m

(£5.2m)

Restructuring costs paid

(£7.4m)

(£3.5m)

Other adjustments (2)

£0.3m

(£1.2m)

Cash generated from operating activities

£64.8m

£41.7m

Purchase of property, plant and equipment

(£13.4m)

(£16.4m)

Capitalisation of software and development costs

(£3.4m)

(£4.2m)

Proceeds from sale of property, plant and equipment and software

£9.0m

£4.7m

Interest paid

(£5.2m)

(£4.0m)

Tax paid

(£7.2m)

(£5.6m)

Free cash flow+

£ 44.6m

£16.2m

* Before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill as defined on page 2 of this announcement.

+ Cash generated from operating activities after net capital expenditure, net interest and tax paid.

‡ Cash generated from operating activities after net capital expenditure, before restructuring costs paid.

(1)   Includes depreciation and amortisation of software and capitalised development costs.

(2)   Includes change in provisions, share based payments charge, gain on disposal of property, plant and equipment, fair value derivatives and transaction costs relating to acquisitions.

There was a £20.3 million net cash outflow relating to acquisitions during the year (2015: £9.0 million). There was a net cash outflow in the period of £1.5 million relating to costs provided for on the disposal of IMT in 2014 (2015: £0.7 million).  

Dividends paid to shareholders totalled £11.1 million (2015: £10.7 million) and there was a net cash inflow in respect of shares purchased and issued of £1.1 million (2015: £0.9 million). The net cash inflow for the Group was £12.8 million (2015: £3.3 million outflow) which, after £11.6 million adverse exchange (2015: £2.1 million adverse), decreased the net debt to £75.1 million (2015: £76.3 million).

Treasury

Vitec manages its financing, hedging and tax planning activities centrally to ensure that the Group has an appropriate structure to support its geographically diverse business. It has clearly defined policies and procedures with any substantial changes to the financial structure of the Group, or to its treasury practice, referred to the Board for approval. The Group operates strict controls over all treasury transactions including clearly defined currency hedging processes to reduce risks from volatility in exchange rates.

The Group is hedging a portion of its forecast future foreign currency transactions to reduce the volatility from changes in exchange rates. Our main exposure relates to the US Dollar and the table below summarises the contracts held as at 31 December 2016:

Currency hedging

December 2016

Average rate of contracts

December 2015

Average rate of contracts

US Dollars sold for Euros

 

 

 

 

Forward contracts

$42.3m

1.13

$47.2m

1.15

US Dollars sold for Sterling

 

 

 

 

Forward contracts

$17.1m

1.37

$21.0m

1.52

The Group does not hedge the translation of its foreign currency profits. A portion of the Group's foreign currency net assets are hedged using the Group's borrowing facilities.

Financing activities

In July 2016 a new five year £125 million multi-currency Revolving Credit Facility with five relationship banks was agreed to replace the previous £100 million facility. It has a better margin and will expire on 5 July 2021. At the end of December 2016, £48.9 million (2015: £53.9 million) of the facility was utilised.

The Group has a US$50 million (£40.5 million) private placement facility which has been drawn down in two tranches of US$25 million each. This financing has a combined fixed interest rate of 4.77% and is due for repayment on 11 May 2017.

The Group therefore has a total of £165.5 million of committed facilities at the year end with drawings of £89.4 million (31 December 2015: £87.6 million).

The average cost of borrowing for the year which includes interest payable, commitment fees and amortisation of set-up charges was 3.9% (2015: 4.1%) reflecting an interest cost of £4.2 million (2015: £4.0 million).

The Board has maintained an appropriate capital structure without exposing the Group to unnecessary levels of risk and Vitec has operated comfortably within its loan covenants during 2016.

Foreign exchange

2016 adjusted operating profit* included a £6.2 million net favourable foreign exchange effect after hedging, mainly due to more favourable £/$ and £/€ rates when compared to 2015. Should exchange rates remain at current levels, Vitec should continue to benefit to the order of £2.0 million from foreign exchange in 2017.

Dividend

The Directors have recommended a final dividend of 17.3 pence per share amounting to £7.7 million (2015: 15.1 pence per share, amounting to £6.7 million). The final dividend, subject to shareholder approval at the AGM, will be paid on Friday, 19 May 2017 to shareholders on the register at the close of business on Friday, 21 April 2017. This will bring the total dividend for the year to 27.2 pence per share (up 10.6%).  A dividend reinvestment alternative is available with details available from our registrars, Capita Asset Services.

 

Principal risks and uncertainties

Vitec is exposed to a number of risk factors which may affect its performance. The Group has a well-established framework for reviewing and assessing these risks on a regular basis, and has put in place appropriate processes and procedures to mitigate against them. However, no system of control or mitigation can completely eliminate all risks. The Board has determined that the following are the principal risks facing the Group.

 

Demand for Vitec's products

Demand for our products may be adversely affected by many factors, including changes in customer and consumer preferences and our ability to deliver appropriate products or to support changes in technology. The Group increasingly produces and sells products that are more technologically advanced, including encoders, transmitters and on-camera monitors. These products have a shorter life cycle than our historical products, and continuous investment in new product development is needed to keep up with the changing demand. Demand may also be impacted by competitor activity, particularly from low-cost countries.

We value our relationships with our customers and to mitigate this risk we monitor closely our target markets and user requirements. We maintain good relationships with our key customers and make significant investments in product development and marketing activities to ensure that we remain competitive in these markets. In support of our new product launches, we have completed consumer research before developing new products to ensure that they are appropriately designed for our target markets. We monitor closely the demand for new products and phase out old product lines. We are actively pursuing growth in selected emerging markets.

 

New markets and channels of distribution

As we enter new markets and channels of distribution we may achieve lower than anticipated trading volumes and pricing levels or higher costs and resource requirements. This may impact the levels of profitability and cash flows delivered. During the year we continued to increase our online presence by developing our e-commerce activity, and using our platform to promote and distribute partner brands.  We have entered new, adjacent markets with the creation of Enterprise Video ("VitecEV"), and the acquisitions of Offhollywood and Wooden Camera. We continue to increase our investment in new innovative products which address the needs of independent content creators.

To mitigate these risks, we have a thorough process for assessing and planning the entry into new markets and related opportunities. This includes marketing and advertising strategies for our products and services. We continuously assess our performance and the related opportunities and risks in these markets. We adapt our approach taking into account our actual and anticipated performance. We review our channels of distribution to make sure that they remain appropriate.  Our increased online presence creates IT security and compliance challenges which the Group is addressing.

 

Acquisitions

In pursuing our business strategy we continuously explore opportunities to enhance our business through development activities such as strategic acquisitions. This involves a number of calculated risks including: acquiring desired businesses on economically acceptable terms; integrating new businesses, employees, business systems and technology; and realising satisfactory post-acquisition performance. In 2016, we acquired Provak (Manfrotto Distribution Benelux), Offhollywood and Wooden Camera. These acquisitions are performing to plan.

We mitigate these risks by having a clear acquisition strategy with a robust valuation model. Thorough due diligence processes are completed including the use of external advisers where appropriate. The post-acquisition performance of each business is closely monitored and a plan is developed to integrate the acquired businesses in an effective way.

 

Pricing pressure

Vitec provides premium branded products and faces a number of competitors. The strength of this competition varies by product and geographical market. In 2016 we continued to see price pressure by low-cost entrants to the market. In addition, there was continued price pressure in broadcast services as major broadcasters continue to manage their budgets tightly.

To mitigate this risk, we ensure that our product and service offering remains competitive by investing in new product development and in appropriate marketing and product support, and by improving the management of supply chain costs. This, and working closely with our suppliers and managing our expenses and cost base appropriately, allows us to support price increases when required. We are rationalising our product range to reduce complexity which will also allow us to achieve some cost savings on production. Most of our products and services have a premium or niche differentiation which commands a price point that is higher than that of the competition. 

 

Dependence on key suppliers

We source materials and components from many suppliers in various locations and in some instances are more dependent on a limited number of suppliers for particular items. If any of these suppliers or subcontractors fail to meet the Group's requirements, we may not have readily available alternatives, thereby impacting our ability to provide an appropriate level of customer service. Our overall dependence on key suppliers has increased as a result of the Group's decision to reduce its costs by outsourcing some manufacturing and assembly activities.

To address this risk we aim to secure multiple sources of supply for all materials and components and develop strong relationships with our major suppliers. We review the performance of strategically important suppliers and outsourced providers globally on an ongoing basis. Where economical we look to source materials closer to the manufacturing facilities to reduce lead times and improve control over the supply chain.

 

Dependence on key customers

While the Group has a wide customer base, the loss of a key customer, or a significant worsening in their success or financial performance, could result in a material impact on the Group's results.  As in previous years, Vitec has no customer that accounts for more than 10% of revenue. The business works with a variety of customers on large sporting events and the extent of these activities varies year-on-year.

We mitigate this risk by monitoring closely our performance with all customers through developing strong relationships, and we monitor the financial performance of our key customers. We continue to expand our customer base including entering into new channels of distribution to expand our portfolio of customers.

 

People

We employ around 1,700 people and are exposed to a risk of being unable to retain or recruit suitable diverse talent to support the business. We manufacture and supply products from a number of locations and it is important that our people operate in a professional and safe environment.

We recognise that it is important to motivate and retain capable people across our businesses to ensure we are not exposed to risk of unplanned employee turnover. We fairly reward our people and have appropriate recruitment, appraisal, talent management and succession planning strategies to ensure we recruit and retain good quality people and leadership across the business. We take our employees' health and safety very seriously and have appropriate processes in place to allow us to monitor and address any issues appropriately.

 

Laws and regulations

We are subject to a comprehensive range of legal obligations in all countries in which we operate. As a result, we are exposed to many forms of legal risk. These include, without limitation, regulations relating to government contracting rules, taxation, data protection regimes, anti-bribery provisions, competition, and health and safety laws in numerous jurisdictions around the world. Failure to comply with such laws could significantly impact the Group's reputation and could expose the Group to fines and penalties. We may also incur additional cost from any legal action that is required to protect our intellectual property.  Although there are no specific issues arising in the near term, recent political developments in the US and Europe may have implications for several areas of regulations including but not limited to: the customs and import tariffs our businesses will be subject to; corporation tax rates; employment laws and regulations; and other business regulation.

We address this risk by having resources dedicated to legal and regulatory compliance supported by external advice where necessary. We monitor and respond to developments in the regulatory environment in which our companies operate. We enhance our controls, processes and employee knowledge to maintain good governance and to comply with laws and regulations such as the provisions of the UK Bribery Act 2010. The Group has processes in place, including senior management training, to ensure that its worldwide business units understand and apply the Group's culture and processes to their own operations. We actively protect our intellectual property, and will legally pursue any party that infringes our intellectual property rights. 

 

Reputation of the Vitec Group

Damage to our reputation and our brand names can arise from a range of events such as poor product performance, unsatisfactory customer service, and other events either within or outside our control.

We manage this risk by recognising the importance of our reputation and attempting to identify any potential issues quickly and address them appropriately. We recognise the importance of providing high quality products, good customer service and managing our business in a safe and professional manner. This requires all employees to commit to, and comply with, the Code of Conduct.

 

Exchange rates

The global nature of the Group's business means it is exposed to volatility in currency exchange rates in respect of foreign currency denominated transactions, and the translation of net assets and income statements of foreign subsidiaries and equity accounted investments. The Group is exposed to a number of foreign currencies, the most significant being the US Dollar, Euro and Japanese Yen. There were significant currency fluctuations affecting Sterling in 2016, partly reflecting the uncertainty caused by the result of the UK referendum on membership of the European Union.

We regularly review and assess our exposure to changes in exchange rates. We reduce the impact of sudden movements in exchange rates with the use of appropriate hedging activities on forecast foreign exchange net exposures. We do not hedge the translation effect of exchange rate movements on the Income Statement or Balance Sheet of overseas subsidiaries. However, the Group does finance overseas investments partly through the use of foreign currency borrowings in order to provide a net investment hedge over the foreign currency risk that arises on translation of its foreign currency subsidiaries.

 

Business continuity

There are risks relating to business continuity resulting from specific events that may impact our manufacturing plants or supply chain, particularly where these account for a significant amount of our trading activity. We are also dependent on our IT platforms continuing to work effectively in supporting our business and therefore there is a cyber security risk for the Group.

We address this risk with Business Continuity Plans and Disaster Recovery Plans at our key sites, and by carrying out periodic IT and cyber security vulnerability assessments. We have global insurance schemes in place which provide cover for business interruption.

 

Effectiveness and impact of restructuring projects

In 2015/16 we conducted a number of restructuring projects to streamline the business, and to deliver cost savings. There is a risk that the restructuring activity could have been poorly executed and that the objectives might not be achieved. The main restructuring projects are now substantially complete, and have already started to generate year-on-year savings. We have also sold our Bury site and plan to move these activities to a lean, modern manufacturing facility in late 2017.

To address this risk, projects are monitored closely by senior operational management with regular updates provided to the Board. We anticipate that there will be significant year-on-year savings. The status of the restructuring activities and risks relating to these projects are being carefully monitored.

 

Forward-looking statements

This announcement contains forward-looking statements with respect to the financial condition, performance, position, strategy, results and plans of The Vitec Group plc (the "Group" or the "Company") based on management's current expectations or beliefs as well as assumptions about future events. These forward-looking statements are not guarantees of future performance. Undue reliance should not be placed on forward-looking statements because, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. The Company undertakes no obligation to publically revise or update any forward-looking statements or adjust them for future events or developments. Nothing in this announcement should be construed as a profit forecast.

The information in this announcement does not constitute an offer to sell or an invitation to buy shares in the Company in any jurisdiction or an invitation or inducement to engage in any other investment activities. The release or publication of this announcement in certain jurisdictions may be restricted by law. Persons who are not resident in the United Kingdom or who are subject to other jurisdictions should inform themselves of, and observe, any applicable requirements.

This announcement contains brands and products that are protected in accordance with applicable trademark and patent laws by virtue of their registration.

Board changes

As previously announced, Paul Hayes will be standing down from his position as Group Finance Director to take up his new appointment as Chief Financial Officer of Consort Medical plc.

As previously announced, Martin Green has been appointed an Executive Director of the Company with effect from 4 January 2017.  In this role Martin's title will be Group Business Development Director and he will have responsibility for business development particularly focusing on APAC and opportunities in the Creative Solutions businesses as well as his existing responsibility for corporate development and HR.

Outlook

We are continuing to transform the Group. We are outperforming our markets by driving sales, investing in new technologies, and expanding our capabilities in the exciting and growing "image capture and sharing" market. A strong cash flow performance and our robust balance sheet support our clear growth strategy.

Vitec has a strong position in changing markets and the Board remains confident about future growth prospects, assuming no significant adverse change in exchange rates.

Going concern and viability

The Directors have made appropriate enquiries and consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

The Directors have also assessed the long-term viability of the Group over a three year period, taking account of the Group's current position and prospects, its strategic plan, risk appetite and the principal risks and how these are managed. Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over this period.

 

For and on behalf of the Board

Stephen Bird

Paul Hayes

Group Chief Executive

Group Finance Director

 

 

Consolidated Income Statement




For the year ended 31 December 2016






2016

2015


Notes

£m

£m

Revenue


376.2

317.8

Cost of sales


(228.1)

(188.9)

Gross profit


148.1

128.9

Operating expenses


(133.6)

(106.5)

Operating profit


14.5

22.4

Comprising 





41.5

35.4

2

(5.2)

(4.9)

2

(9.7)

(8.1)

- Impairment of goodwill

2

(12.1)

-



14.5

22.4

Net finance expense

3

(4.0)

(3.9)

Profit before tax


10.5

18.5

Comprising 




- Profit before tax, excluding restructuring costs, charges associated with acquisition of businesses and impairment of goodwill


37.5

31.5

2

(5.2)

(4.9)

2

(9.7)

(8.1)

- Impairment of goodwill

2

(12.1)

-



10.5

18.5

Taxation

4

(1.5)

(5.5)

Profit for the year attributable to owners of the parent


9.0

13.0

Adjusted earnings per share (see note 5)




Basic earnings per share


61.3p

49.4p

Diluted earnings per share


61.2p

49.3p





Earnings per share (see note 5)




Basic earnings per share


 20.2p

 29.3p

Diluted earnings per share


 20.1p

 29.2p





Dividends per ordinary share (see note 6)




Prior year final paid 15.1p


£6.7m


Current year interim paid 9.9p


£4.4m


Current year final proposed 17.3p


£7.7m










Average exchange rates




      Euro


1.22

1.38

      US$


1.35

1.53

 

 

Consolidated Statement of Comprehensive Income


 

For the year ended 31 December 2016




2016

2015


£m

£m

Profit for the year

9.0

13.0

Other comprehensive income:



Items that will not be reclassified to profit or loss:



Remeasurements of defined benefit obligation

(6.4)

1.5

Related tax

1.0

(0.5)

Items that are or may be reclassified to profit or loss:



Currency translation differences on foreign currency subsidiaries

37.7

4.2

Net investment hedges - net loss

(16.6)

(1.5)

Cash flow hedges - reclassified to the Income Statement, net of tax

0.8

0.6

Cash flow hedges - effective portion of changes in fair value

(4.6)

(1.5)

Related tax

0.9

0.5

Other comprehensive income, net of tax

12.8

3.3

Total comprehensive income for the year attributable to owners of the parent

21.8

16.3




 

 

 

Consolidated Balance Sheet




As at 31 December 2016






2016

2015



£m

£m

Assets




Non-current assets




Intangible assets


99.0

90.7

Property, plant and equipment


54.0

53.8

Trade and other receivables


0.9

0.6

Derivative financial instruments


0.2

0.1

Deferred tax assets


26.6

15.2



180.7

160.4

Current assets




Assets held for sale


-

1.0

Inventories


57.9

58.9

Trade and other receivables


66.2

50.7

Derivative financial instruments


0.2

0.5

Current tax assets


0.7

0.9

Cash and cash equivalents


17.1

13.6



142.1

125.6

Total assets


322.8

286.0

Liabilities




Current liabilities




Bank overdrafts


0.3

1.1

Interest-bearing loans and borrowings


40.9

0.2

Trade and other payables


55.3

43.5

Derivative financial instruments


4.8

1.7

Current tax liabilities


8.1

6.6

Provisions


4.9

8.1



114.3

61.2

Non-current liabilities




Interest-bearing loans and borrowings


51.0

88.6

Derivative financial instruments


1.2

0.5

Post-employment obligations 


13.0

6.1

Provisions


1.1

1.2

Deferred tax liabilities


2.4

2.1



68.7

98.5

Total liabilities


183.0

159.7

Net assets


139.8

126.3





Equity




Share capital


9.0

8.9

Share premium


15.4

14.3

Translation reserve


16.8

(4.3)

Capital redemption reserve


1.6

1.6

Cash flow hedging reserve


(3.9)

(1.0)

Retained earnings


100.9

106.8

Total equity


139.8

126.3





Balance Sheet exchange rates




      Euro


1.17

1.36

      US$


1.24

1.48

 

 

Consolidated Statement of Changes in Equity


 Share capital

 Share premium 

 Translation reserve

 Capital redemption reserve

 Cash flow hedging reserve

 Retained earnings

 Total equity


 £m

 £m

 £m

 £m

 £m

 £m

 £m

Balance at 1 January 2016

8.9

14.3

(4.3)

1.6

(1.0)

106.8

126.3

Total comprehensive income for the year








Profit for the year

-

-

-

-

-

9.0

9.0

Other comprehensive income/(expense) for the year

-

-

21.1

-

(2.9)

(5.4)

12.8

Contributions by and distributions to owners








Dividends paid

-

-

-

-

-

(11.1)

(11.1)

Own shares purchased

-

-

-

-

-

(0.1)

(0.1)

Share-based payment charge

-

-

-

-

-

1.6

1.6

Related tax

-

-

-

-

-

0.1

0.1

New shares issued

0.1

1.1

-

-

-

-

1.2

Balance at 31 December 2016

9.0

15.4

16.8

1.6

(3.9)

100.9

139.8



 Share capital

 Share premium 

 Translation reserve

 Capital redemption reserve

 Cash flow hedging reserve

 Retained earnings

 Total equity


 £m

 £m

 £m

 £m

 £m

 £m

 £m

Balance at 1 January 2015

8.9

13.4

(7.0)

1.6

(0.6)

102.3

118.6

Total comprehensive income for the year








Profit for the year

-

-

-

-

-

13.0

13.0

Other comprehensive income/(expense) for the year

-

-

2.7

-

(0.4)

1.0

3.3

Contributions by and distributions to owners








Dividends paid

-

-

-

-

-

(10.7)

(10.7)

Share-based payment charge

-

-

-

-

-

1.1

1.1

Related tax

-

-

-

-

-

0.1

0.1

New shares issued

-

0.9

-

-

-

-

0.9

Balance at 31 December 2015

8.9

14.3

(4.3)

1.6

(1.0)

106.8

126.3

 

 

Consolidated Statement of Cash Flows




For the year ended 31 December 2016






2016

2015


 Notes

£m

£m

Cash flows from operating activities 




Profit for the year


9.0

13.0

Adjustments for:




 Taxation


1.5

5.5

 Depreciation


15.3

13.8

 Amortisation of intangible assets


11.0

7.8

 Impairment of intangible assets


12.1

0.2

 Net gain on disposal of property, plant and equipment and

 software


(1.5)

(1.2)

 Fair value losses on derivative financial instruments


0.4

0.1

 Share-based payment charge


1.6

1.1

 Earnout payments and purchase price adjustment


1.2

2.6

 Net finance expense


4.0

3.9

Operating profit before changes in working capital and provisions 


54.6

46.8

Decrease/(increase) in inventories


11.2

(3.0)

(Increase)/decrease in receivables


(4.5)

0.8

Increase/(decrease) in payables


5.3

(3.0)

(Decrease)/increase in provisions


(1.8)

0.1

Cash generated from operating activities


64.8

41.7

Interest paid


(5.2)

(4.0)

Tax paid


(7.2)

(5.6)

Net cash from operating activities


52.4

32.1





Cash flows from investing activities 




Proceeds from sale of property, plant and equipment and software


9.0

4.7

Purchase of property, plant and equipment


(13.4)

(16.4)

Capitalisation of software and development costs


(3.4)

(4.2)

Acquisition of businesses, net of cash acquired

7

(20.3)

(9.0)

Cash outflow on previous disposal


(1.5)

(0.7)

Net cash used in investing activities


(29.6)

(25.6)





Cash flows from financing activities 




Proceeds from the issue of shares


1.2

0.9

Own shares purchased


(0.1)

-

(Repayment of)/proceeds from interest-bearing loans and   borrowings


(13.6)

8.5

Dividends paid


(11.1)

(10.7)

Net cash used in financing activities


(23.6)

(1.3)





(Decrease)/increase in cash and cash equivalents  


(0.8)

5.2

Cash and cash equivalents at 1 January


12.5

7.9

Effect of exchange rate fluctuations on cash held 


5.1

(0.6)

Cash and cash equivalents at 31 December

8

16.8

12.5

 

 

Segment reporting

The Group has two reportable segments which are reported in a manner that is consistent with the internal reporting provided to the Chief Operating Decision Maker (considered to be the Board).


Broadcast

Photographic

 Corporate and unallocated

 Consolidated

 


2016

2015

2016

2015

2016

2015

2016

2015

 


£m

£m

£m

£m

£m

£m

£m

£m

 

Revenue from external customers:









 

Sales

190.9

160.3

151.4

128.8

-

-

342.3

289.1

 

Services

33.9

28.7

-

-

-

-

33.9

28.7

 

Total revenue from external customers

224.8

189.0

151.4

128.8

-

-

376.2

317.8

 

Inter-segment revenue (1)

0.4

0.9

0.6

0.2

(1.0)

(1.1)

-

-

 

Total revenue

225.2

189.9

152.0

129.0

(1.0)

(1.1)

376.2

317.8

 










 

Segment result

21.0

20.3

20.5

15.1

-

-

41.5

35.4

 

Restructuring costs

(3.4)

(4.1)

(1.8)

(0.8)

-

-

(5.2)

(4.9)

 

Earnout payments and purchase price adjustment

(1.3)

(2.6)

0.1

-

-

-

(1.2)

(2.6)

 

Transaction costs relating to acquisition of businesses

(0.5)

(0.1)

(0.1)

-

-

-

(0.6)

(0.1)

 

Amortisation of acquired intangible assets

(7.1)

(4.8)

(0.8)

(0.6)

-

-

(7.9)

(5.4)

 

Impairment of goodwill

(12.1)

-

-

-

-

-

(12.1)

-

 

Operating profit

(3.4)

8.7

17.9

13.7

-

-

14.5

22.4

 

Net finance expense







(4.0)

(3.9)

 

Taxation







(1.5)

(5.5)

 

Profit for the year







9.0

13.0

 










 

Segment assets

182.1

172.2

94.8

82.7

1.5

1.4

278.4

256.3

 

Unallocated assets









 

Cash and cash equivalents





17.1

13.6

17.1

13.6

 

Current tax assets





0.7

0.9

0.7

0.9

 

Deferred tax assets





26.6

15.2

26.6

15.2

 

Total assets







322.8

286.0

 

Segment liabilities

38.2

28.1

31.3

26.0

10.8

7.0

80.3

61.1

 

Other liabilities









 

Bank overdrafts

-

-

0.3

-

-

1.1

0.3

1.1

 

Interest-bearing loans and borrowings

-

-

1.1

0.4

90.8

88.4

91.9

88.8

 

Current tax liabilities

-

-

-

-

8.1

6.6

8.1

6.6

 

Deferred tax liabilities

-

-

-

-

2.4

2.1

2.4

2.1

 

Total liabilities







183.0

159.7

 










 

Cash flows from operating activities

34.5

19.4

18.6

15.2

(0.7)

(2.5)

52.4

32.1

 

Cash flows from investing activities

(25.2)

(21.7)

(4.3)

(3.9)

(0.1)

-

(29.6)

(25.6)

 

Cash flows from financing activities

-

-

1.1

0.4

(24.7)

(1.7)

(23.6)

(1.3)

 

Capital expenditure









 

Property, plant and equipment

10.8

14.1

2.6

2.3

-

-

13.4

16.4

 

Software and development costs

1.8

2.6

1.5

1.6

0.1

-

3.4

4.2

 

(1) Inter-segment pricing is determined on an arm's length basis.

No individual customer accounted for more than 10% of external revenue in either 2016 or 2015.

 

 

Geographical segments



 


2016

2015

 


£m

£m

 

Analysis of revenue from external customers, by location of customer



 

United Kingdom

35.5

31.5

 

The rest of Europe

80.5

64.0

 

North America

180.9

150.2

 

Asia Pacific

68.7

55.9

 

The rest of the World

10.6

16.2

 

Total revenue from external customers

376.2

317.8

 

The Group's operations are located in several geographical locations, and sell products and services on to external customers in all parts of the world.

 

1 Accounting policies

 

Basis of consolidation

 

Subsidiaries are entities that are directly or indirectly controlled by the Group.  Control exists when the Group has the rights to variable returns from its involvement with an entity and has the ability to affect those returns through its power over the entity.  The results of subsidiaries sold or acquired during the year are included in the accounts up to, or from, the date that control exists.

 

New standards and interpretations not yet adopted

 

  

The following standards, amendments to standards and interpretations will become effective for the Group in future years.

 

IFRS 16 "Leases" was revised on 13 January 2016 and is effective for the 31 December 2019 year end. The adoption of this standard removes the distinction between operating and finance leases and will result in all operating leases, above a de minimis level, being capitalised with the associated assets and liabilities being brought on to the Balance Sheet. Given the effective date of the standard, the Directors have not yet evaluated the full impact.

 

The adoption of the following standards is not expected to have a significant impact on these consolidated financial statements. They are effective for the 31 December 2018 year end:

IFRS 15 "Revenue from Contracts with Customers"

IFRS 9 "Financial Instruments"

 

 

 

 

2 Restructuring costs, charges associated with acquisition of businesses and impairment of goodwill

 

Restructuring costs, charges associated with acquisition of businesses and impairment of goodwill are excluded from key performance measures in order to more accurately show the underlying current business performance of the Group in a consistent manner. This also reflects how the business is managed and measured on a day-to-day basis. Restructuring costs include employment termination and other site rationalisation costs. Charges associated with acquisition of businesses include non-cash charges such as amortisation of acquired intangible assets, and cash charges such as transaction costs and earnout payments.

 

 


2016

2015

 


£m

£m

 

Restructuring costs (1)

(5.2)

(4.9)

 




 

Earnout payments and purchase price adjustment (2)

(1.2)

(2.6)

 

Transaction costs relating to acquisition of businesses (3)

(0.6)

(0.1)

 

Amortisation of acquired intangible assets

(7.9)

(5.4)

 

Charges associated with acquisition of businesses

(9.7)

(8.1)

 




 

Impairment of goodwill (4)

(12.1)

-

 

(1)  Restructuring costs of £5.2 million primarily relate to the Group streamlining certain operations by downsizing selected activities mainly in the UK, US and Europe. This specific restructuring programme commenced in 2015 and finished in 2016. This includes employment termination costs of £3.5 million and other rationalisation costs of £1.7 million. Of the total £5.2 million restructuring costs, £4.7 million is in operating expenses and the remaining £0.5 million is included in cost of sales. A provision of £1.5 million has been recognised at the end of the period in relation to restructuring primarily related to committed redundancy costs. These actions have better positioned the Group for the future.

 

(2)  A net charge of £1.2 million primarily relates to earnout payable of £1.4 million (US$2.0 million) and a credit on the receipt of £0.2 million for the purchase price adjustment of Autocue (acquired in 2014) which was agreed with the vendors during the year. The earnout to Wooden Camera was as a result of its performance for the year ending 31 December 2016.

 

(3) Transaction costs of £0.6 million were incurred in relation to acquisitions in the year.

 

(4) The annual impairment review of goodwill led to an impairment charge of £12.1 million (US Broadcast Services business: £4.2 million, Haigh-Farr: £7.9 million) both in the Broadcast division.

 

 

 

3 Net finance expense



 


2016

2015

 


£m

£m

 

Finance income



 

Net currency translation gains

0.4

0.3

 

Finance expense



 

Interest payable on interest-bearing loans and borrowings

(4.2)

(4.0)

 

Net interest expense on net defined benefit pension scheme liabilities

(0.2)

(0.2)

 


(4.4)

(4.2)

 

Net finance expense

(4.0)

(3.9)

 




 

 

 

4 Taxation



 




 


2016

2015

 


£m

£m

 

The total taxation charge in the Income Statement is analysed as follows:



 

 

Before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill.



 

Current tax

13.3

7.5

 

Deferred tax

(3.1)

2.1

 


10.2

9.6

 

Restructuring costs, charges associated with acquisition of businesses and impairment of goodwill.



 

Current tax (1)

(4.9)

(1.2)

 

Deferred tax (2)

(3.8)

(2.9)

 


(8.7)

(4.1)

 

Summarised in the Income Statement as follows



 

Current tax

8.4

6.3

 

Deferred tax

(6.9)

(0.8)

 


1.5

5.5

 

(1) Current tax credits of £4.9 million (2015: £1.2 million) were recognised in the year of which £0.7 million (2015: £0.2 million) related to restructuring costs and £4.2 million (2015: £1.0 million) related to amortisation of intangible assets.

 

(2) Deferred tax credits of £3.8 million (2015: £2.9 million) were recognised in the year of which £1.1 million (2015: £1.1 million) related to restructuring costs, £0.7 million (2015: £1.0 million) to acquisitions and £2.0 million (2015: £0.8 million) to amortisation of intangible assets.

 

 

 

5 Earnings per share

 

Earnings per share ("EPS") is the amount of post-tax profit attributable to each share.      

 

Basic EPS is calculated on the profit for the year divided by the weighted average number of ordinary shares in issue during the year.

 

Diluted EPS is calculated on the profit for the year divided by the weighted average number of ordinary shares in issue during the year, but adjusted for the effects of dilutive share options.

 

The Adjusted EPS measure is used by management to assess the underlying performance of the ongoing businesses, and therefore excludes restructuring costs, charges associated with acquisition of businesses and impairment of goodwill, all net of tax.

 


 

The calculation of basic, diluted and adjusted EPS is set out below:

 


2016

2015

 


£m

£m

 

Profit for the financial year

9.0

13.0

 

Add back restructuring costs, charges associated with acquisition of businesses and impairment of goodwill, net of tax

18.3

8.9

 

Earnings before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill.

27.3

21.9

 


 


2016

2015

2016

2015

2016

2015

 


 No.

 No.

 pence

 pence

 pence

 pence

 


Weighted average number of shares '000

Adjusted earnings per share

Earnings per share

 

Basic

44,568

44,364

61.3

49.4

20.2

29.3

 

Dilutive potential ordinary shares

96

133

(0.1)

(0.1)

(0.1)

(0.1)

 

Diluted

44,664

44,497

61.2

49.3

20.1

29.2

 

 

 

6 Dividends

After the Balance Sheet date the following final dividend for the year ended 31 December 2016 was recommended by the Directors and subject to approval by shareholders at the AGM on 17 May 2017 will be paid on 19 May 2017. The dividend has not been included as a liability in these financial statements.


2016

2015


£m

£m

Amounts arising in respect of the year



Interim dividend for the year ended 31 December 2016 of 9.9p (2015: 9.5p) per ordinary share

4.4

4.2

Proposed final dividend for the year ended 31 December 2016 of 17.3p (2015: 15.1p) per ordinary share

7.7

6.7


12.1

10.9




The aggregate amount of dividends paid in the year



Final dividend for the year ended 31 December 2015 of 15.1p (2014: 14.7p) per ordinary share

6.7

6.5

Interim dividend for the year ended 31 December 2016 of 9.9p (2015: 9.5p) per ordinary share

4.4

4.2


11.1

10.7

 

 

7 Acquisitions

Acquisitions are accounted for under the acquisition method of accounting.  As part of the acquisition accounting the Group has adopted a process to identify the fair values of the assets and liabilities acquired, including contingent considerations assumed. This includes the separate identification of intangible assets and the allocation of the consideration paid.  This process continues as information is finalised, and accordingly the fair value adjustments presented in the tables below are provisional. In accordance with IFRS 3 until the assessment is complete the allocation period will remain open up to a maximum of 12 months from the acquisition date so long as information remains outstanding. Acquisition-related costs are recognised in the Income Statement as incurred in accordance with IFRS 3.

Acquisition of Manfrotto Distribution Benelux (formerly Provak Foto Film Video B.V.)

On 13 January 2016, the Group acquired 100% of the issued share capital of Manfrotto Distribution Benelux B.V. (formerly Provak Foto Film Video B.V.), based in the Netherlands, through a business combination for a net cash consideration of €1.2 million (£0.9 million). The acquisition complements the Group's owned distribution channels. The fair value of the net assets acquired in the business at acquisition date was £0.4 million resulting in goodwill of £0.5 million.

A summary of the effect of the acquisition of Manfrotto Distribution Benelux is detailed below:




 Book and fair value of net assets acquired




 £m






0.2



0.4



(0.2)




0.4



0.5

Consideration satisfied from existing cash resources



0.9

The trade receivables acquired had a fair value and a gross contractual value of £0.3 million. No net deferred tax asset or liability has arisen on the net assets acquired.

Acquisition of Offhollywood

On 12 April 2016, the Group acquired the business and some of the assets of Offhollywood Digital, LLC ("Offhollywood"), based in the US, through a business combination for an initial net cash consideration of US$2.2 million (£1.5 million). The fair value of the net assets acquired in the business at acquisition date was £1.5 million resulting in goodwill of £nil. Under the terms of the acquisition, there is a potential earnout payment of up to $8.0 million that is dependent on the performance against demanding gross profit targets over the period to December 2018. There was no earnout payable in relation to its performance in 2016. Offhollywood provides camera-back modules for RED cameras and other services to a similar customer base to that serviced by the Group's existing higher technology businesses, and its products will be marketed through the Group's global distribution network.

 

 

A summary of the effect of the acquisition of Offhollywood is detailed below:

Book value at acquisition

Fair value adjustments

Fair value of net assets acquired


£m

 £m

 £m

Net Assets acquired




Intangible assets

-

1.6

1.6

Trade and other payables

(0.1)

-

(0.1)


(0.1)

1.6

1.5

Goodwill



-

Consideration satisfied from existing cash resources



1.5

The process to identify the fair values of the assets and liabilities acquired was completed in the year. As a result, an increase in intangible assets of £0.8 million was recognised since the half year. No net deferred tax asset or liability has arisen on the net assets acquired.

 

Acquisition of Wooden Camera

On 19 September 2016, the Group acquired the whole of the share capital of Wooden Camera, Inc. and Wooden Camera Retail, Inc., ("Wooden Camera"), both based in the US, through a business combination for an initial net cash consideration of US$19.5 million (£14.9 million) after taking account of US$0.6 million (£0.5 million) of cash in the business at acquisition date. The fair value of the net assets acquired, excluding cash in the business at acquisition date was £14.2 million resulting in goodwill of £0.7 million. Wooden Camera designs, manufactures and retails directly and online, essential professional camera accessories used by broadcasters and independent content creators. The acquisition complements the Group's existing range of products. Wooden Camera operates within the Broadcast Division.

 

Under the terms of the acquisition, there is a potential earnout payment of up to US$15.0 million payable in cash. This is dependent on the performance against demanding EBITDA targets over the period to December 2018. In 2016 an amount of £1.5 million (US$2.0 million) was provided for in relation to its performance in 2016.

 

A summary of the effect of the acquisition of Wooden Camera is detailed below:


Book value at acquisition

Fair value adjustments

Fair value of net assets acquired


£m

£m

£m

Net Assets acquired




Intangible assets

-

13.2

13.2

Property, plant and equipment

0.1

-

0.1

Inventories

0.8

(0.2)

0.6

Trade and other receivables

0.8

(0.2)

0.6

Trade and other payables

(0.1)

-

(0.1)

Provisions

-

(0.2)

(0.2)

Cash

0.5

-

0.5


2.1

12.6

14.7

Goodwill



0.7

Consideration satisfied from existing cash resources



     15.4

The trade receivables acquired had a gross contractual value of £0.7 million and a fair value of £0.5 million. No net deferred tax asset or liability has arisen on the acquisition due to a joint election made by the sellers and the Group to treat the acquisition as an asset acquisition for tax purposes.

 

The results of the acquisitions made during the year comprise the following:

 


Manfrotto Distribution Benelux

£m

Offhollywood

£m

Wooden Camera

£m

Revenue

1.2

1.2

2.0

Operating profit/(loss)

0.2

  (0.6)

0.4

 

Had the acquisitions been made at the beginning of the year (i.e. 1 January 2016), they would have contributed £9.9 million to revenue and £0.7 million to the operating profit of the Group. The level of profitability is stated after amortisation of intangible assets.

An analysis of the cash flows relating to acquisitions is provided below:


2016


£m

Net outflow of cash in respect of acquisitions


Cash consideration(1)

18.0

Cash acquired

(0.5)

Transaction costs

0.6

Net cash outflow in respect of 2016 acquisitions

18.1

Cash paid in respect of contingent consideration for Teradek (acquired in 2013).

3.0

Cash received in relation to the purchase price adjustment for Autocue (acquired in 2014), agreed with the vendors during the period.

(0.2)

Cash paid in 2016 in respect of prior year acquisitions

2.8

Net cash outflow in respect of acquisitions (2)

20.9

(1)  Cash consideration of £18.0 million includes £0.2 million relating to the purchase of the intellectual property of Xume technology in September 2016. This has been fully amortised in the year.

(2)  Of the £20.9 million net cash outflow in respect of acquisitions, transaction costs of £0.6 million are included in cash flows from operating activities and the net cash consideration paid of £20.3 million is included in cash flows from investing activities.

 

 

8 Analysis of net debt

 



The table below analyses the Group's components of net debt and their movements in the year:


2016

2015


£m

£m

(Decrease)/increase in cash and cash equivalents

(0.8)

5.2

Proceeds of/(proceeds from) interest-bearing loans and borrowings

13.6

(8.5)

Decrease/(increase) in net debt resulting from cash flows

12.8

(3.3)

Effect of exchange rate fluctuations on cash held

5.1

(0.6)

Effect of exchange rate fluctuations on debt held

(16.7)

(1.5)

Effect of exchange rate fluctuations on net debt

(11.6)

(2.1)

Movements in net debt in the year

1.2

(5.4)

Net debt at 1 January

(76.3)

(70.9)

Net debt at 31 December 

(75.1)

(76.3)




Cash and cash equivalents in the Balance Sheet

17.1

13.6

Bank overdrafts

(0.3)

(1.1)

Cash and cash equivalents in the Statement of Cash Flows

16.8

12.5

Interest-bearing loans and borrowings

(91.9)

(88.8)

Net debt at 31 December

(75.1)

(76.3)

9 Financial instruments

This provides details on:

   - Financial risk management

   - Derivative financial instruments

   - Fair value hierarchy

   - Interest rate profile

   - Maturity profile of financial liabilities


Financial risk management

The Group's multinational operations and debt financing expose it to a variety of financial risks. In the course of its business, the Group is exposed to foreign currency risk, interest rate risk, liquidity risk and credit risk.

Financial risk management is an integral part of the way the Group is managed. Financial risk management policies are set by the Board of Directors. These policies are implemented by a central treasury department that has formal procedures to manage foreign currency risk, interest rate risk and liquidity risk, including, where appropriate, the use of derivative financial instruments. The Group has clearly defined authority and approval limits built into these procedures.


 

 

Foreign currency risk

Foreign currency risk arises both where sale or purchase transactions are undertaken in currencies other than the respective functional currencies of Group companies (transactional exposures) and where the results of overseas companies are consolidated into the Group's reporting currency of Sterling (translational exposures).

The Group has businesses that operate around the world and accordingly record their results in a number of different functional currencies. Some of these operations also have some customers or suppliers that transact in a foreign currency.  The Group's results which are reported in Sterling are therefore exposed to changes in foreign currency exchange rates across a number of different currencies with the most significant exposures relating to the US Dollar (USD), Euro (EUR) and Japanese Yen (JPY). There has been volatility in currency exchange rates during the year as a result of the EU referendum and other factors. The Group proactively manages a proportion of its short-term transactional foreign currency exposures using derivative financial instruments, but remains exposed to the underlying translational movements which remain outside the control of the Group.

 

The Group manages its transactional exposures to foreign currency risks through the use of forward exchange contracts including the US Dollar, Euro and Japanese Yen. Forward exchange contracts are typically used to hedge approximately 75% of the Group's forecasted foreign currency exposure in respect of forecast cash transactions for the following 12 months. Forward exchange contracts may also be used to hedge a proportion of the forecast cash transactions for the following 13 to 24 months. The forward exchange contracts currently have maturities of less than two years at the Balance Sheet date.

 

The Group's translational exposures to foreign currency risks relate to both the Income Statement and net assets of overseas subsidiaries which are converted into Sterling on consolidation. The Group does not seek to hedge the translational exposure that arises primarily from changes in the exchange rates of the US Dollar, Euro and Japanese Yen against Sterling. However the Group does finance overseas investments partly through the use of foreign currency borrowings in order to provide a net investment hedge over the foreign currency risk that arises on translation of its foreign currency subsidiaries.

 

The Group ensures that its net exposure to foreign denominated cash balances is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.  In addition the Group manages the denomination of surplus cash balances across the overseas subsidiaries to allow natural hedging where effective in any particular country.

It is estimated that the Group's operating profit before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill for the year ended 31 December 2016 would have increased/decreased by approximately £1.4 million from a ten cent stronger/weaker US Dollar against Sterling, by approximately £1.3 million from a ten cent stronger/weaker Euro against Sterling and by approximately £0.3 million from a ten Yen stronger/weaker Japanese Yen against Sterling. This reflects the impact of the sensitivities to the translational exposures and to the proportion of the transactional exposures that is not hedged. The Group, in accordance with its policy, does not use derivatives to manage the translational risks.  During 2016 the Group's operating profit included a net loss of £5.0 million (2015: £2.2 million) upon the crystallisation of forward exchange contracts as described later in this note.

 

It is estimated that statutory operating profit for the year ended 31 December 2016, that includes the one-off impairment of goodwill, restructuring costs and charges associated with the acquisition of businesses, would have increased/decreased by approximately £3.1 million from a ten cent stronger/weaker US Dollar against Sterling, by approximately £1.5 million from a ten cent stronger/weaker Euro against Sterling and by approximately £0.3 million from a ten Yen stronger/weaker Japanese Yen against Sterling.

 

 

Interest rate risk 

Interest rate risk comprises both the interest rate price risk that results from borrowing at fixed rates of interest and also the interest cash flow risk that results from borrowing at variable rates.

For the year ended 31 December 2016, it is estimated that a general increase/decrease of one percentage point in interest rates, would decrease/increase the Group's profit before tax by approximately £1.0 million. 

 

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.

   

The Group has a five year £125 million Multicurrency Revolving Credit Facility Agreement with a syndicate comprising five banks: two UK banks, two American banks, and one European bank, that expires in July 2021. The Group was utilising 39% of the £125 million Multicurrency Revolving Credit Facility at 31 December 2016. In 2011 the Group drew down US$50 million from a Private Placement shelf facility with repayment due in May 2017.

 

Credit risk

Credit risk arises because a counterparty may fail to meet its obligations. The Group is exposed to credit risk on financial assets such as trade receivables, cash balances and derivative financial instruments. The Group's maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the Group Balance Sheet.

a) Trade receivables

The Group's credit risk is primarily attributable to its trade receivables. Trade receivables are subject to credit limits, and control and approval procedures in the operating companies. Due to its large geographic base and number of customers, the Group is not exposed to material concentrations of credit risk on its trade receivables.

b) Cash balances and derivative financial instruments

Credit risk associated with cash balances is managed by transacting with a number of major financial institutions worldwide and periodically reviewing their credit worthiness. Transactions involving derivative financial instruments are managed centrally. These are only with banks that are part of the Group's £125 million Multicurrency Revolving Credit Facility Agreement. Accordingly, the Group's associated credit risk is limited. The Group has no significant concentration of credit risk.

Derivative financial instruments

This is a summary of the derivative financial instruments that the Group holds and uses to manage risk. The value of these derivatives changes over time in response to underlying variables such as exchange rates. They are carried in the Balance Sheet at fair value.

The fair value of forward exchange contracts is determined by estimating the market value of that contract at the reporting date. Derivatives with a positive fair value are recorded as assets and negative fair values as liabilities, and presented as current or non-current based on their contracted maturity dates.

Accounting policies

Derivative financial instruments

In accordance with Board approved policies, the Group uses derivative financial instruments such as forward foreign exchange contracts to hedge its exposure to fluctuations in foreign exchange rates arising from operational activities. These are designated as cash flow hedges. It does not hold or use derivative financial instruments for trading or speculative purposes. 

Cash flow hedge accounting

Cash flow hedges are used to hedge the variability in cash flows of highly probable forecast transactions or a recognised asset or liability, caused by changes in exchange rates.            

Where a derivative financial instrument is designated in a cash flow hedge relationship with a highly probable forecast transaction, the effective part of any change in fair value arising is deferred in the cash flow hedging reserve within Equity, via the Statement of Comprehensive Income. The gain or loss relating to the ineffective part is recognised in the Income Statement within net finance expense. Amounts deferred in the cash flow hedging reserve are reflected in the Income Statement in the periods when the hedged item is recognised in the Income Statement.   

If a hedging instrument expires or is sold 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 immediately in the Income Statement.

Where a derivative is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the Income Statement.

If a derivative financial instrument is not formally designated in a cash flow hedge relationship, any change in fair value is recognised in the Income Statement. 

 

Forward exchange contracts

The following table shows the forward exchange contracts in place at the Balance Sheet date. These contracts mature in the next 24 months, therefore the cash flows and resulting effect on profit and loss are expected to occur within the next 24 months.


As at 31 December

Average exchange rate of contracts

As at 31 December

Average exchange rate of contracts


2016


2015



currency

millions


millions


Cash flow hedging contracts






USD / GBP forward exchange contracts

USD

17.1

1.37

21.0

1.52

USD / EUR forward exchange contracts

USD

42.3

1.13

47.2

1.15

EUR / GBP forward exchange contracts

EUR

25.9

1.25

28.4

1.33

JPY / GBP forward exchange contracts

JPY

769.1

159.2

1,009.0

179.1

JPY / EUR forward exchange contracts

JPY

1,233.4

124.1

1,059.0

134.6

A net loss of £5.0m relating to forward exchange contracts was reclassified to the Income Statement, to match the crystallisation of the hedged forecast cash flows which affect the Income Statement.

Fair value hierarchy

The following summarises financial instruments carried at fair values and the major methods and assumptions used in estimating these fair values. 

The different levels of fair value hierarchy have been defined as follows:

Level 1

Fair value measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2

Fair values measured using 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).

Level 3

Fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The table below shows the carrying values and fair values of financial assets and liabilities:

 


Carrying value

Fair value

Carrying value

Fair value

 


2016

2016

2015

2015

 


£m

£m

£m

£m

 

Forward exchange contracts - Assets

0.4

0.4

0.6

0.6

 

Forward exchange contracts - Liabilities

(6.0)

(6.0)

(2.2)

(2.2)

 

Cash at bank and in hand

17.1

17.1

13.6

13.6

 

Net trade receivables

50.9

50.9

38.3

38.3

 

Trade payables

(26.8)

(26.8)

(24.9)

(24.9)

 

Fixed rate borrowings

(43.0)

(43.7)

(34.9)

(35.6)

 

Floating rate borrowings

(49.2)

(49.2)

(55.0)

(55.0)

 


(56.6)

(57.3)

(64.5)

(65.2)

 

The fair value of floating rate borrowings approximates to the carrying value because interest rates are at floating rates where payments are reset to market rates at intervals of less than one year.

The fair value of fixed rate borrowings is estimated by discounting the future contracted cash flow, using appropriate yield curves, to the net present values.

All financial instruments are deemed Level 2.

Interest rate profile

The table below analyses the Group's interest rate exposure arising from bank loans by currency.

Accounting policies

Net investment hedge accounting

The Group uses US Dollar, Euro and Japanese Yen denominated borrowings as a hedge against the translation exposure on the Group's net investment in overseas companies.

Where the hedge is fully effective at hedging the variability in the net assets of such companies caused by changes in exchange rates, the changes in value of the borrowings are recognised in the translation reserve within Equity, via the Statement of Comprehensive Income. The ineffective part of any change in value caused by changes in exchange rates is recognised in the Income Statement.

The effective portion will be recycled into the Income Statement on the sale of the foreign operation.

Interest-bearing loans and borrowings

The table below analyses the Group's interest-bearing loans and borrowings including bank overdrafts, by currency:


Total

Fixed rate borrowings

Floating rate borrowings

Currency

£m

£m

£m

US Dollar

73.7

40.5

33.2

Euro

16.4

2.5

13.9

Japanese Yen

2.1

-

2.1

At 31 December 2016

92.2

43.0

49.2

US Dollar

63.5

33.7

29.8

Euro

17.7

1.2

16.5

Sterling

7.0

-

7.0

Japanese Yen

1.7

-

1.7

At 31 December 2015

89.9

34.9

55.0


The floating rate borrowings comprise borrowings bearing interest at rates based on LIBOR. The fixed rate borrowings in US Dollar are due for repayment on 11 May 2017.


 

Maturity profile of financial liabilities

 

The table below analyses the Group's financial liabilities and derivative financial liabilities into relevant maturity groupings based on the period remaining until the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (including interest), so will not always reconcile with the carrying amounts disclosed on the Balance Sheet.

 

The following are the contractual maturities of financial liabilities, including undiscounted future interest payments:


Carrying amount

Total contractual cash flows

Within one year

From two to five years

From six to ten years


£m

£m

£m

£m

£m

2016






Unsecured interest-bearing loans and borrowings including bank overdrafts

(92.2)

(95.1)

(43.3)

(51.8)

-

Trade payables

(26.8)

(26.8)

(26.8)

-

-

Forward exchange contracts

(6.0)

(6.0)

(4.9)

(1.1)

-


(125.0)

(127.9)

(75.0)

(52.9)

-

2015






Unsecured interest-bearing loans and borrowings

(89.9)

(94.2)

(3.9)

(90.0)

(0.3)

Trade payables

(24.9)

(24.9)

(24.9)

-

-

Forward exchange contracts

(2.2)

(2.2)

(1.7)

(0.5)

-


(117.0)

(121.3)

(30.5)

(90.5)

(0.3)


The Group had the following undrawn borrowing facilities at the end of the year:


2016

2015

Expiring in :

£m

£m

Less than one year



  - Uncommitted facilities

10.6

9.3

More than one year but not more than five years



  - Committed facilities

76.1

46.2

Total

86.7

55.5

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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