REG - Essentra plc - RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2015 <Origin Href="QuoteRef">ESNT.L</Origin> - Part 3
19/02/2016 07:10
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Goodwill 158.1
Property, plant and equipment 35.6
Inventories 20.8
Receivables 36.4
Cash and cash equivalents 7.2
Retirement benefit obligations (4.9)
Deferred tax (43.6)
Current Tax (0.5)
Payables (57.0)
Provisions (4.6)
Fair value of net assets acquired 308.2
Satisfied by:
Cash consideration paid 308.2
Cash consideration 308.2
Cash and cash equivalents acquired (7.2)
Net cash flow in respect of the acquisition 301.0
Property, plant and equipment, intangible assets, inventories, receivables and payables were all reassessed to their fair
value. The gross contractual amount receivable of the receivables was £38.5m.
Goodwill represents the expected operating synergies and financial synergies, and the value of an assembled workforce.
Goodwill is not deductible for tax purposes. The adjustment to deferred tax is the tax effect of recognising customer
relationships and other intangible assets and the tax effect of the fair value adjustments.
Clondalkin SPD contributed £228.5m to revenue and £27.1m to operating profit before intangible amortisation in the period
from acquisition to 31 December 2015. Had the acquisition been completed on 1 January 2015, the Group's revenue and
operating profit before amortisation and exceptional items would have been £1,118.8m and £171.7m respectively.
2015 acquisition: Specialty Plastics
The Group also acquired Specialty Plastics based in Australia in February 2015. This acquisition was not material.
Relevant previous acquisitions
During 2015, Essentra reassessed the fair value adjustments made in respect of the major operating subsidiaries of Abric
Berhad ("Abric") which was acquired on 16 December 2014, and made changes to certain accruals, property, plant and
equipment, customer relationship intangible assets and deferred tax assets. The impact on goodwill is an increase of
£0.9m.
12. Dividends
Per share Total
2015 2014 2015 2014
p p £m £m
2014 interim: paid 30 October 2014 5.7 13.3
2014 final: paid 1 May 2015 12.6 32.6
2015 interim: paid 30 October 2015 6.3 16.4
2015 proposed final: payable 3 May 2016 14.4 37.5
20.7 18.3 53.9 45.9
13. Transactions with related parties
During 2014, the Filters business in Jordan was disposed of to the minority shareholder who was also a director of the
business, for a consideration of US$50,000. A loss on disposal of £0.4m arose from the transaction. Other than this
transaction and the compensation of key management, Essentra has not entered into any material transactions with related
parties during 2014 and 2015.
14. Adjusted measures
Management reviews the adjusted operating profit and operating cash flow as measures of the performance of the business.
Adjusted operating profit is stated before intangible amortisation and exceptional operating items which are considered not
relevant to measuring the performance of the business. Operating cash flow is adjusted operating profit before
depreciation, share option expense and other non-cash items, less working capital movements and net capital expenditure as
shown below:
2015 2014
£m £m
Operating profit 100.7 108.8
Intangible amortisation 31.7 17.5
Exceptional operating items 39.1 16.2
Adjusted operating profit 171.5 142.5
Depreciation 31.9 27.2
Share option expense 5.7 6.8
Other non-cash items (2.9) (11.0)
Working capital movements (52.8) (25.4)
Net capital expenditure (54.8) (33.1)
Operating cash inflow 98.6 107.0
15. Post balance sheet events
On 29 January 2016, the Group acquired Kamsri Printing and Packaging Private Limted ("Kamsri"), a manufacturer of premium
packaging solutions based in India for the pharmaceutical and healthcare end-markets. This acquisition was not material.
16. Additional segmental analysis
With effect from 1 January 2016, Essentra has implemented a new organisation structure, comprising three strategic business
units. Going forward, the Components, Pipe Protection Technologies, Extrusion and Security businesses will form a
strategic business unit named Component Solutions. The Speciality Tapes business will be included within the current
Health & Personal Care Packaging strategic business unit. The Filter Products and Porous Technologies businesses will form
a new strategic business unit named Filtration Products. The scope of Central Services remains the same.
2015 results under the new organisational structure are shown below:
Component Solutions Health & Personal Care Packaging Filtration Products Elimin-ations Central Services Total
£m £m £m £m £m £m
External revenue 285.2 419.3 393.6 - - 1,098.1
Intersegment revenue 1.0 3.3 0.8 (5.1) - -
Total revenue 286.2 422.6 394.4 (5.1) - 1,098.1
Operating profit/(loss) before intangible amortisation and exceptional operating items 58.1 57.5 72.1 - (16.2) 171.5
Intangible amortisation (8.1) (21.2) (2.4) - - (31.7)
Exceptional operating items 1.8 (31.3) (11.5) - 1.9 (39.1)
Operating profit/(loss) 51.8 5.0 58.2 - (14.3) 100.7
17. Financial instruments
The table below sets out Essentra's accounting categories and fair value for each class of financial asset and liability.
2015 2014
Fair value Loans and receivables Amortised cost Total carrying value Fair value Loans and receivables Amortised cost Total carrying value
£m £m £m £m £m £m £m £m
Trade and other receivables - 243.8 - 243.8 - 161.4 - 161.4
Cash and cash equivalents - 30.2 - 30.2 - 46.0 - 46.0
Interest bearing loans and borrowings - - (404.1) (404.1) - - (110.0) (110.0)
Trade and other payables - - (174.8) (174.8) - - (94.4) (94.4)
Level 2 of fair value hierarchyDerivative assets 0.4 - - 0.4 3.9 - - 3.9
Derivative liabilities (0.4) - - (0.4) (0.1) - - (0.1)
Level 3 of fair value hierarchyOther non-current financial liabilities - - - - (3.5) - - (3.5)
Other current payables (1.5) - - (1.5) (2.3) - - (2.3)
(1.5) 274.0 (578.9) (306.4) (2.0) 207.4 (204.4) 1.0
Total trade and other receivables carried at £254.0m (2014: £168.5m) include prepayments and accrued income of £8.5m (2014:
£7.1m) and consideration paid in advance in respect of business acquisition of £1.7m (2014: £nil) which are not financial
assets and are therefore excluded from the above analysis. Fair values of forward foreign exchange contracts and cross
currency swaps have been calculated at year end forward exchange rates compared to contracted rates. These are determined
to be level 2 in the fair value hierarchy.
The only financial instrument with fair value determined by reference to significant unobservable inputs, which is
classified as level 3 in the fair value hierarchy, is the deferred contingent consideration of £1.5m relating to the
acquisition of Mesan Kilit A.S. and Specialty Plastics (2014: £5.8m relating to the acquisition of Mesan Kilit A.S.). The
fair value of the deferred contingent consideration is estimated based on an assessment of the likely outcome of the
acquired business' financial performance. There have been no transfers between levels of the fair value hierarchy. There
are no non-recurring fair value measurements. During the year, a fair value gain of £4.8m (2014: fair value gain of £0.6m)
in respect of financial instruments at level 3 fair value hierarchy was recognised within exceptional items (see note 3),
and £nil (2014: £nil) was settled in cash. No other fair value gains or losses were recorded in profit or loss and other
comprehensive income.
Included within interest bearing loans and borrowings are $160m US Private Placement Loan Notes. The Loan Notes are held at
amortised cost with a carrying value of £108.3m (2014: £101.9m). The Group estimates that the total fair value of the Loan
Notes at 31 December 2015 is £117.4m (2014: £111.3m).
All other financial assets, classified as 'loans and receivables', and trade and other payables, classified as 'amortised
cost', are held at amortised cost and have short terms to maturity. For this reason, their carrying amounts at the
reporting date approximate the fair values. Unsecured bank loans, included within interest bearing loans and borrowings,
incur interest at floating rates and as a result their carrying amounts also approximate their fair values at the reporting
date.
18. Cautionary forward-looking statements
This Report contains forward-looking statements based on current expectations and assumptions. Various known and unknown
risks, uncertainties and other factors may cause actual results to differ from any future results or developments expressed
or implied from the forward-looking statements. Each forward-looking statement speaks only as of the date of this document.
The Company accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future
events or developments, whether as a result of new information, future events or otherwise, except to the extent legally
required.
19. Directors' responsibility statement
We confirm that to the best of our knowledge
· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and
fair view of the assets, liabilities and financial position and profit or loss of the Company and the undertakings included
in the consolidation taken as a whole; and
· this announcement includes a fair review of the development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal
risks and uncertainties that they face.
On behalf of the Board
Colin Day Stefan Schellinger
Chief Executive Group Finance Director
19 February 2016
MANAGEMENT OF PRINCIPAL RISKS
Risk Management Approach
The sound management of risk within the parameters of a clearly defined risk attitude statement underpins the delivery of
the Company's Drive for 2020 strategy. By focusing on the challenges which arise in the international environment in which
Essentra conducts business, and reflecting the Company's attitude to risk in the delivery of its business objectives,
Essentra's risk management practices are designed to ensure risks are continuously monitored, associated action plans are
reviewed and challenged, appropriate contingencies are provisioned and information is reported through established
management control procedures.
Essentra seeks continuously to improve its risk management processes, and continues to develop new systems which serve to
enhance the Company's response to the risks inherent in its international business activities.
Throughout 2015, Essentra further embedded its enterprise risk management framework that includes both Operational and
Executive Risk Management Committees meeting on a quarterly basis to discuss and monitor the changing risk environment to
which Essentra is exposed and ensure any necessary mitigating actions are undertaken. Such meetings are preceded by
individual discussions on risk with committee members in order that a suitable view of the risk landscape can be
determined. The Board and Audit Committee review the output from these committees in fulfilling their risk management
responsibilities.
Essentra recognises that the ability to monitor, assess and respond to business risks quickly and effectively may provide a
competitive advantage. Reporting within the Group is structured so that key issues are escalated, as appropriate, at the
earliest opportunity. Each area of the business is required to review its areas of risk and uncertainty formally and
regularly. There is an ongoing process to ensure that there are clear and consistent procedures for monitoring, updating
and implementing appropriate controls to manage identified risks. Essentra's short- and long-term performance may be
impacted by many risks and uncertainties, not all of which are within the Company's control. Outside the formal processes,
the Company also seeks to ensure risk management is embedded in its everyday activities and the subject of ongoing review
and discussion.
The Company is subject to the general risks and uncertainties which impact other international organisations, including
political instability in the countries in which the Company operates and sources raw materials, the impact of natural
disasters and changes in general economic conditions, including currency and interest rate fluctuations, tax regimes and
raw material costs.
The Directors have undertaken a robust systematic assessment of the Group's principal risks and uncertainties detailed on
the next page. The Board believes these risks and uncertainties are specific to Essentra, having regard to its strategic
objectives, together with the Company's risk management response thereto. The details provided are not exhaustive and do
not purport to be a complete explanation of all potentially relevant issues. There may be other risks and uncertainties
which are unknown to the Board, or which may not be deemed by the Board to be material at present but which could prove to
be so in the future. There have been no significant failings in the controls within the year.
1. Disruption to infrastructure
A catastrophic loss of the use of all or a portion of any of Essentra's manufacturing or distribution facilities due to
accident, labour issues, fire, terrorist attack, natural disaster, information technology failure, cyber security attack or
otherwise which, whether short- or long-term, could adversely affect the Company's ability to meet the demands of its
customers. Some of the assets maintained by the Company, such as tooling and IT systems, are critical to the manufacture
and delivery of particular products.
Impact Mitigation
A material disruption to operational facilities or the loss of critical assets may negatively affect the Company's: Production capability and asset base Supply chain management Customer relationships Reputation Revenue Profit Financial condition Essentra seeks to manage the risk of potential disruption of the supply of its customers by: Operating within a flexible global infrastructure Installing fire and other risk prevention systems Implementing disaster
recovery and business continuity plans Assessing operational risks Maintaining a comprehensive insurance programme Aligning Group information technology resources
2. Emerging technologies and new competition pressures
Essentra faces pressure from direct competitors, as well as new competition from alternative technologies. Some of the
Company's competitors may derive advantage from greater financial resources, economies of scale, additional purchasing
power or a lower cost base, and Essentra may face aggressive pricing practices.
Impact Mitigation
Demand for competitors' products and the development of competing technologies may result in: Loss of market positions Erosion of margins Intellectual property challenges Decline in revenue Decline in profitability Deterioration in financial condition Essentra seeks to mitigate the risk of competitive pressure by: Sustained investment in research and development to develop the quality and breadth of its product and service offering Exploiting innovation and manufacturing
capabilities in new technologies, products and services Developing long-term relationships with customers at a senior level Protecting its intellectual property rights Expanding its international distribution, sales and
marketing expertise Investing in both organic and acquisition growth opportunities
3. Innovation
Essentra's development and growth has benefited from the success of start-up operations and the continued growth of already
established businesses. The rate of success of any development may in part be dependent on the Group's innovation pipeline
and the ability of the Company to be innovative with its operations in order to create efficiencies. There can be no
assurance that the Company will anticipate market demand, develop, complete and commercialise current and suitable new
products, or be successfully innovative in its operations.
Impact Mitigation
If Essentra fails to meet the challenges of Innovation, the Company may experience: Lower growth rates Delay in the achievement of strategic objectives Reduced profitability Essentra addresses the challenges of international
business development with: Experienced and skilled management Detailed due diligence and planning Continuous improvement programmes Investment programmes Strategic Business Unit innovation programmes
4. Mergers and acquisitions
Essentra's development and growth has benefited from value-adding acquisitions. The rate of any future acquisition
integration may in part be dependent on the success of identifying the correct acquisitions and having sufficient resources
available for integration. There can be no assurance that the Company will be successful in completing and integrating
suitable acquisitions.
Impact Mitigation
If Essentra fails to meet the challenges of business development arising from acquisitions the Company may experience: Lower growth rates Delay in the achievement of strategic objectives Increased costs Reduced profitability Essentra addresses the challenges of mergers and acquisitions with: Experienced and skilled management Detailed due diligence and planning Project risk reviews External expert advice
5. Customer profile
In some of Essentra's businesses the customer base is relatively concentrated. Should Essentra's customers decide to
satisfy their requirements internally or from other suppliers and if Essentra were unable to secure new business this could
result in a significant loss of business. Essentra must serve an increasingly complex profile of customers who will be
heavily reliant on our business in some cases. There is now an increased expectation on Essentra from these customers, and
the Company risks losing business should it fail to adequately measure customer satisfaction and manage relationships.
Impact Mitigation
The loss of certain of Essentra's key customers may expose the Company to: Reduced revenue Restructuring costs Profit decline Deterioration in financial condition Reputational damage To counteract the Company's exposure to its customer profile, Essentra: Invests in innovative, high quality, value-added products and services Develops long-term relationships and loyalty with customers at all levels through key
account management techniques Seeks new markets and growth opportunities to expand the customer base
6. Key raw material supply
Some of Essentra's businesses are dependent on the availability of specialist raw materials or components which are
incorporated into the Company's products. Key raw materials may be subject to price fluctuations from supply shortages. If
rapid increases occur in the price of such raw materials prices, including energy costs, the Company's revenue and
profitability may be materially and adversely affected.
Impact Mitigation
If Essentra is exposed to raw material price increases To counteract the Company's exposure to increases in raw material costs or supply shortages, Essentra seeks to: Adopt appropriate procurement practices Secure longer-term supply agreements Implement cost recovery programmes Investigate the availability of alternative supply options Use
or supply shortages, the Company may suffer: Disruption to supply Increased costs Profit decline Reduced revenue consignment stock
7. Cyber security
Essentra holds sensitive information relating to its customers, suppliers, and employees as well as intellectual property
and financial data that needs to be held securely. Should security be breached, Essentra risks loss of major customers,
information breach fines, disruption of normal operations and reputational damage.
Impact Mitigation
Failure to have adequate cyber security measures in place may lead to: Reduced revenue and profit Disruption of normal operations Litigation Reputational damage To counteract the Company's exposure to cyber security breaches , Essentra: Invests in industry best practice security software Maintains a Security Operations Centre Acts upon external expert advice Undertakes internal cyber security development initiatives
8. Tobacco industry market dynamics
A substantial part of Essentra's business relates to the supply of filter products and packaging solutions to manufacturers
in the tobacco industry. Future performance may be affected by market dynamics within the industry including commercial
pressures from customers, global consumption shift from west to east, overall declining market in the tobacco industry,
customer self-manufacture, new generation development such as e-cigarettes and new legislation. Essentra cannot be
competitive unless it manages and adapts its operational capacity in line with these dynamics.
Tobacco-related litigation could also adversely affect Essentra, although there is no history of the Company being involved
in such claims.
Impact Mitigation
Tobacco industry market dynamics may lead to: Reduced revenue Restructuring costs Profit decline Reputational damage Deterioration in financial condition In seeking to minimise the potential impact of the exposure to the tobacco industry, Essentra: Invests in the research and development of innovative and new value-added products and services Targets growth opportunities outside the
manufacture of filter products Focuses on low cost filter production Takes internal and external legal advice to manage litigation risk Seeks to add value with a range of low cost and innovative packaging solutions
9. People and experience
Essentra's international operations are dependent on existing key executives and certain other employees in order to
sustain, develop and grow its businesses, and there can be no assurance that these employees will remain with the Company.
The success of the Company will reflect its ability to retain, attract and motivate highly qualified executives and other
personnel equipped to deliver Essentra's strategic objectives.
Impact Mitigation
If Essentra fails to retain, attract or motivate the required calibre of employees, its operational performance and financial condition may be materially impacted by a lack of: Experience Expertise Commercial relationships Market insight Product innovation In order to manage the risk of personnel change, Essentra: Regularly reviews personal development and succession planning Sets appropriate key performance indicators Implements management development schemes and other
training programmes Sets effective remuneration programmes Provides long-term share-based incentive plans Uses a talent management system Continues to recruit graduates on its development programme
10. Compliance risk
Risk related to regulatory and legislative changes involves the possible failure of the Company to comply with current,
changing or new legislation or regulation. Many of Essentra's current business activities are subject to increasing
regulation and enforcement activity by relevant authorities. As the Company moves into new markets and territories in
pursuit of its strategic priorities, Essentra is exposed to new and additional compliance risk.
Impact Mitigation
Failure by the Company or its employees or others acting on its behalf to abide by the laws and regulations could result in: Administrative, civil or criminal liability Significant fines and penalties Suspense or debarment of the Company from trading Reputational damage Loss of commercial relationships In order to manage compliance risk Essentra: Establishes a clear compliance culture from the top down Conducts risk assessments and ongoing compliance reviews Implements relevant policies and procedures
Provides behavioural guidance and training to all employees Monitors compliance through verification procedures Engages local advisers as appropriate
This information is provided by RNS
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