Financial Review

Group Finance Director Paul Hayes reviews performance

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. 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 St. Edmunds 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).

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)


 
Contributions from acquisitions
1.1 
   
Foreign exchange effects:    
- Translation 4.3  
- Transaction after hedging 1.9  
    6.2
2016 Adjusted operating profit*   41.5

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 m1.2 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
£m
2015
£m
Operating profit* 41.5 35.4
Depreciation[1] 18.4 16.2
Changes in working capital 12.0 (5.2)
Restructuring costs paid (7.4) (3.5)
Other adjustments[2] 0.3
(1.2)
Cash generated from operating activities 64.8 41.7
Purchase of property, plant and equipment (13.4) (16.4)
Capitalisation of software and development costs (3.4) (4.2)
Proceeds from sale of property, plant and equipment, and software 9.0 4.7
Interest paid (5.2) (4.0)
Tax paid (7.2) (5.6)
Free cash flow+ 44.6 16.2

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

+ 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.

Net debt

Net Debt

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 £/m 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.

Viability Statement 

In accordance with provision C.2.2 of the UK Corporate Governance Code, as published in September 2014 (“the Code”), the Directors have assessed the 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. Further details on these items are set out in the Strategic Report on pages 1 to 47 of the Annual Report.

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.

In making this assessment, the Directors have considered the resilience of the Group in severe but plausible scenarios, taking into account the principal risks facing the Group as detailed here, and the effectiveness of any mitigating actions. The Board reviews these risks in detail throughout the year, and the Audit Committee has a structured programme for the review of risks and mitigating actions. This is explained in more detail here

The Directors’ assessment considered the potential impacts of these scenarios, both individually and in combination, on the Group’s business model, future performance, solvency and liquidity over the period. Sensitivity analysis was also used to stress test the Group’s strategic plan and to confirm that sufficient headroom would remain available under the Group’s credit facilities. The Directors consider that under each of these scenarios, the mitigating actions would be effective and sufficient to ensure the continued viability of the Group.     

The Directors believe that three years is an appropriate period for this assessment, reflecting the nature of the Group’s key markets, the nature of its businesses and products, and its limited order visibility. This timeframe is consistent with reviews undertaken annually by the Board during which the Group and Divisional three year strategic plans are presented for approval. 

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%).

Paul Hayes
Group Finance Director

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

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

Group revenue

£376.2m

Up 18.4%

Group operating profit *

£41.5m

Up 17.2%

Adjusted basic earnings per share *

61.3p

Up 24.1%

Vitec is investing in higher technology products and targeted growth opportunities while streamlining activities with lower growth prospects and continuing to closely manage its costs.