REG - Halma PLC - Half Yearly Report <Origin Href="QuoteRef">HLMA.L</Origin> - Part 3
18/11/2014 08:00
- Part 3: For the preceding part double click ID:nRSR2493Xb
Trade and other receivables 135,225 123,968 135,177
Trade and other payables (85,004) (77,355) (88,291)
Provisions (11,003) (10,613) (4,482)
Net tax liabilities (11,679) (12,852) (11,168)
Non-current trade and other payables (3,335) (2,914) (3,564)
Non-current provisions (1,631) (13,944) (6,777)
Add back accrued contingent purchase consideration 8,700 19,855 7,562
Capital employed 205,768 188,941 189,707
Return on Capital Employed (annualised) 69.5% 71.3% 76.4%
* Adjustments include the amortisation of acquired intangible assets, acquisition items, the effects of closure to future benefit accrual of the Defined Benefit pension plans net of associated costs, and profit or loss on disposal of operations.
Return on Total Invested Capital (ROTIC)
Unaudited Unaudited Audited
26 weeks to 26 weeks to 52 weeks to
27 September 28 September 29 March
2014 2013 2014
£000 £000 £000
Post-tax profit before adjustments* 53,144 49,055 107,564
Total shareholders' funds 497,656 452,513 486,000
Add back retirement benefit obligations 44,209 40,754 36,849
Less associated deferred tax assets (8,718) (8,234) (7,372)
Cumulative amortisation of acquired intangible assets 70,080 53,793 61,324
Historical adjustments to goodwill** 89,549 89,549 89,549
Total invested capital 692,776 628,375 666,350
Return on Total Invested Capital (annualised) 15.3% 15.6% 16.1%
* Adjustments include the amortisation of acquired intangible assets, acquisition items, the effects of closure to future benefit accrual of the Defined Benefit pension plans net of associated costs, and profit or loss on disposal of operations, and the associated taxation thereon.** Includes goodwill amortised prior to 3 April 2004 and goodwill taken to reserves.
Organic growthOrganic growth measures the change in revenue and profit from continuing Group operations. The effect of acquisitions and disposals made during the prior financial period, and acquisitions made in the current financial period is equalised by adjusting the current period results for pro-rated contributions based on their revenue and profit before taxation at the dates of acquisition and disposal. The results of disposals made in the prior financial period are removed from the prior period
reported revenue and profit before taxation.
Organic growth
Organic growth measures the change in revenue and profit from continuing Group
operations. The effect of acquisitions and disposals made during the prior
financial period, and acquisitions made in the current financial period is
equalised by adjusting the current period results for pro-rated contributions
based on their revenue and profit before taxation at the dates of acquisition
and disposal. The results of disposals made in the prior financial period are
removed from the prior period reported revenue and profit before taxation.
Adjusted operating profit
Unaudited26 weeks to Unaudited26 weeks to Audited
27 September 28 September 52 weeks to
2014 2013 29 March
£000 £000 2014
£000
Operating profit 62,150 58,645 143,571
Add back:
Acquisition items (366) (26) (12,478)
Effects of closure to future benefit accrual of Defined Benefit pension plans 46 - (3,948)
Amortisation of acquired intangible assets 9,595 8,967 17,515
Adjusted operating profit 71,425 67,586 144,660
Adjusted operating cash flow
Unaudited26 weeks to Unaudited26 weeks to Audited
27 September 28 September 52 weeks to
2014 2013 29 March
£000 £000 2014
£000
Net cash from operating activities (note 8) 61,924 55,934 121,538
Add back:
Taxes paid 12,809 12,447 28,351
Proceeds from sale of property, plant and equipment 543 271 1,708
Less:
Purchase of property, plant and equipment (9,419) (7,266) (15,838)
Purchase of computer software and other intangibles (741) (589) (1,529)
Development costs capitalised (3,239) (2,447) (5,196)
Adjusted operating cash flow 61,877 58,350 129,034
Cash conversion % (adjusted operating cash flow/adjusted operating profit) 87% 86% 89%
10 Acquisitions
In the provisional accounting, adjustments are made to the book values of the
net assets of the companies acquired to reflect their provisional fair values
to the Group. Acquired inventories are valued at fair value adopting Group
bases and any liabilities for warranties relating to past trading are
recognised. Other previously unrecognised assets and liabilities at
acquisition are included and accounting policies are aligned with those of the
Group where appropriate.
The Group made three acquisitions during the period: Rohrback Cosasco Systems
Inc. (RCS); Advanced Electronics Limited (Advanced); and Plasticspritzerei AG
(Plasticspritzerei). Below are summaries of the assets and liabilities
acquired and the purchase consideration of:
a) The total of RCS, Advanced and Plasticspritzerei;
b) RCS, on a standalone basis;
c) Advanced, on a standalone basis; and
d) Plasticspritzerei, on a standalone basis.
(A) Total of RCS, Advanced and Plasticspritzerei
Book value Fair value adjustments Total
£000 £000 £000
Non-current assets
Intangible assets 3,508 31,057 34,565
Property, plant and equipment 2,286 187 2,473
Current assets
Inventories 5,340 (1,075) 4,265
Trade and other receivables 9,777 (1,613) 8,164
Corporation tax 251 89 340
Cash and cash equivalents 9,515 104 9,619
Deferred tax - 453 453
Total assets 30,677 29,202 59,879
Current liabilities
Trade and other payables (3,916) 682 (3,234)
Provisions (763) (659) (1,422)
Corporation tax (686) 327 (359)
Non-current liabilities
Provisions - (17) (17)
Bank loans (468) - (468)
Retirement benefit obligations - (234) (234)
Deferred tax (28) (9,626) (9,654)
Total liabilities (5,861) (9,527) (15,388)
Net assets of businesses acquired 24,816 19,675 44,491
Initial consideration paid (RCS, Advanced and Plasticspritzerei)* 91,286
Contingent purchase consideration paid (Advanced)* 2,105
Contingent purchase consideration estimated to be paid (Advanced) 3,949
Total consideration 97,340
Goodwill arising on current year acquisitions 52,849
* The initial and contingent purchase considerations paid in cash were
£90,828,000 and £1,955,000 respectively. The remainder was satisfied by the
issue of £608,000 of loan notes.
Due to their contractual dates, the fair value of receivables acquired (shown
above) approximate to the gross contractual amounts receivable. The amount of
gross contractual receivables not expected to be recovered is immaterial.
There are no material contingent liabilities recognised in accordance with
paragraph 23 of IFRS 3 (revised).
None of the goodwill arising on acquisitions in the year is expected to be
deductible for tax purposes.
The three acquisitions in the year contributed £14,594,000 of revenue and
£2,426,000 of profit after tax for the period ended 27 September 2014. If
these acquisitions had been held since the start of the financial period, it
is estimated the Group's reported revenue and profit after tax would have been
£5,640,000 and £987,000 higher respectively.
The combined fair value adjustments made for each acquisition resulted in net
adjustments to goodwill, which exclude acquired intangibles recognised and
deferred taxation thereon, of £3,636,000.
As at the date of approval of this Report, the initial acquisition accounting
for RCS, Advanced and Plasticspritzerei is provisional. It is common for
certain provisions, inventory valuations, intangible asset valuations and
deferred tax balances to be revised during the goodwill measurement period,
which expires in May 2015 for all three acquisitions. Revisions are made only
if new information about conditions existing at the acquisition date becomes
available during the measurement period, as defined by IFRS 3 (revised)
'Business Combinations'. The accounting for all prior period acquisitions is
completed.
Analysis of cash outflow in the Consolidated Cash Flow Statement
Unaudited Unaudited Audited
26 weeks to 26 weeks to 52 weeks to
27 September 28 September 29 March
2014 2013 2014
£000 £000 £000
Initial cash consideration paid 90,828 3,315 3,315
Initial cash consideration adjustment (prior year acquisition) - (337) (337)
Cash acquired on acquisitions (9,619) (754) (754)
Contingent consideration paid in relation to current year acquisitions 1,955 - -
Contingent consideration paid and loan notes repaid in cash in relation to prior year acquisitions* 3,981 14,445 14,461
Net cash outflow relating to acquisitions (per Consolidated Cash Flow Statement) 87,145 16,669 16,685
* The £3,981,000 comprises £2,731,000 loan notes and £1,250,000 contingent
purchase consideration paid in respect of prior period acquisitions, all of
which had been provided in the prior year's financial statements.
(B) Rohrback Cosasco Systems Inc.
Book value Fair value adjustments Total
£000 £000 £000
Non-current assets
Intangible assets 420 25,146 25,566
Property, plant and equipment 441 204 645
Current assets
Inventories 4,098 (891) 3,207
Trade and other receivables 4,191 (142) 4,049
Cash and cash equivalents 5,441 - 5,441
Deferred tax - 453 453
Corporation tax 251 - 251
Total assets 14,842 24,770 39,612
Current liabilities
Trade and other payables (868) (3) (871)
Provisions (653) (291) (944)
Non-current liabilities
Deferred tax (28) (7,670) (7,698)
Total liabilities (1,549) (7,964) (9,513)
Net assets of businesses acquired 13,293 16,806 30,099
Initial consideration (all cash) 69,681
Total consideration 69,681
Goodwill arising on acquisition 39,582
The Group acquired the entire share capital of Rohrback Cosasco Systems Inc.
and associated companies (RCS) on 30 May 2014 for an initial cash
consideration of US$116,000,000 (£69,341,000). This was subsequently adjusted
by an additional US$569,000 (£340,000) which was paid in July 2014 based on
the final agreed value of the net tangible assets at the acquisition date.
RCS forms part of the Process Safety sector and specialises in the design,
manufacture and sale of pipeline corrosion monitoring products and systems
into diverse industries including oil, gas, petrochemical, pharmaceutical and
utilities. The acquisition of RCS expands Halma's portfolio of critical safety
products which are sold into the Energy and Utility markets to protect life
and operational assets. The existing RCS management team remains in place and
will continue to operate the business. The excess of the fair value of the
consideration paid over the fair value of the assets acquired is represented
by customer related intangibles of £14,697,000; marketing and technology
related intangibles of £10,869,000; with residual goodwill arising of
£39,582,000. The goodwill represents:
a) the technical expertise of the acquired workforce;
b) the opportunity to leverage this expertise across some of Halma's
businesses; and
c) the ability to exploit the Group's existing customer base.
The RCS acquisition contributed £8,555,000 of revenue and £1,395,000 of profit
after tax for the period ended 27 September 2014.
If this acquisition had been held since the start of the financial period, it
is estimated that the Group's reported revenue and profit after tax would have
been £4,426,000 and £772,000 higher respectively.
(C) Advanced Electronics Limited
Book value Fair value adjustments Total
£000 £000 £000
Non-current assets
Intangible assets 3,088 5,911 8,999
Property, plant and equipment 1,834 (573) 1,261
Current assets
Inventories 1,161 (148) 1,013
Trade and other receivables 4,990 (1,507) 3,483
Corporation tax - 89 89
Cash and cash equivalents 2,259 104 2,363
Total assets 13,332 3,876 17,208
Current liabilities
Trade and other payables (2,759) 703 (2,056)
Provisions - (364) (364)
Corporation tax (582) 582 -
Non-current liabilities
Bank loans (468) - (468)
Deferred tax - (1,956) (1,956)
Total liabilities (3,809) (1,035) (4,844)
Net assets of businesses acquired 9,523 2,841 12,364
Initial consideration 15,927
Contingent purchase consideration paid 2,105
Contingent purchase consideration estimated to be paid 3,949
Total consideration 21,981
Goodwill arising on acquisition 9,617
The Group acquired the entire share capital of Advanced Electronics Limited
(Advanced) on 14 May 2014 for an initial consideration of £15,927,000
(£458,000 of which was satisfied by loan notes). Contingent consideration is
payable over a two-year period based on the profits of the company for the
twelve months to April 2014 and eleven months to March 2015. The total
estimated payable is £6,054,000, of which £1,955,000 has been paid in cash and
£150,000 in loan notes in the period. A further £696,000 has been agreed and
is due to be paid in November 2014 and the remainder, subject to actual
performance, in July 2015. The maximum contingent consideration payable is
£10,100,000 and the current provision represents management's best estimate of
the likely payable based on performance observed to date.
Advanced forms part of the Infrastructure Safety sector and specialises in the
manufacture of networked fire detection and control systems. Advanced's
controllers can be integrated into system solutions using field devices and
products from a broad spectrum of suppliers, meeting the increasingly diverse
regulatory requirements across the world. Its main manufacturing facility is
located near Newcastle in the UK with a dedicated electronics and software
development facility in Barnsley. It has additional commercial offices in the
UK, the USA and Dubai. Advanced brings to Halma complementary products that
help capture the international growth opportunity in the increasingly
regulated Fire market. The excess of the fair value of the consideration paid
over the fair value of the assets acquired is represented by customer related
intangibles of £5,306,000; marketing and technology related intangibles of
£1,463,000; with residual goodwill arising of £9,617,000. Included in the
£5,911,000 fair value adjustment to intangible assets shown above is a
reduction of £858,000 to the carrying value of capitalised development costs
resulting from the application of Halma accounting policies to the acquisition
date balance. The residual goodwill represents:
a) the technical expertise of the acquired workforce;
b) the opportunity to leverage this expertise across some of Halma's
businesses; and
c) the ability to exploit the Group's existing customer base.
The Advanced acquisition contributed £6,039,000 of revenue and £660,000 of
profit after tax for the period ended 27 September 2014. If this acquisition
had been held since the start of the financial period, it is estimated that
the Group's reported revenue and profit after tax would have been £1,214,000
and £163,000 higher respectively.
(D) Plasticspritzerei AG
Book value Fair value adjustments Total
£000 £000 £000
Non-current assets
Property, plant and equipment 11 556 567
Current assets
Inventories 81 (36) 45
Trade and other receivables 596 36 632
Cash and cash equivalents 1,815 - 1,815
Total assets 2,503 556 3,059
Current liabilities
Trade and other payables (289) (18) (307)
Provisions (110) (4) (114)
Corporation tax (104) (255) (359)
Non-current liabilities
Provisions - (17) (17)
Retirement benefit obligations - (234) (234)
Total liabilities (503) (528) (1,031)
Net assets of businesses acquired 2,000 28 2,028
Initial cash consideration 5,678
Total consideration 5,678
Goodwill arising on acquisition 3,650
On 2 May 2014 the Group acquired Plasticspritzerei AG (Plasticspritzerei),
located in Wolfhalden, Switzerland at the same facility as another Group
company, Medicel AG (Medicel). Initial consideration paid for the trade and
assets of the business was CHF8,403,000 (£5,678,000) including the
consideration of CHF917,000 (£620,000) received for the Group's disposal of
its 50% ownership interest in its associate PSRM Immobilien AG (PSRM). The
Group then immediately sold the industrial segment of Plasticspritzerei for
CHF2,673,000 (£1,806,000) to a third party, resulting in a net cash cost to
the Group of CHF4,813,000 (£3,252,000) (CHF5,730,000 (£3,872,000) excluding
the proceeds from the PSRM disposal). These transactions have resulted in the
Group owning only those assets which support Medicel's business.
Plasticspritzerei will be operated by Medicel's management within Halma's
Medical sector, further expanding the Group's manufacturing excellence in
ophthalmic diagnostic and surgical instrumentation.
No customer relationship intangibles were recognised as part of this
transaction because Medicel is the sole customer for the Plasticspritzerei
business acquired and the fair value of any customer relationship is therefore
eliminated from a Group perspective. Goodwill of £3,650,000 was recognised as
part of this transaction, representing the excess of the fair value of
consideration transferred over the fair value of the assets acquired and is
attributable to:
a) the technical expertise of the acquired workforce;
b) the opportunity to secure and advance the supply chain of Medicel AG;
and
c) the ability to exploit the Group's existing customer base.
The Plasticspritzerei acquisition resulted in intercompany sales to Medicel of
£971,000 for the period ended 27 September 2014 and contributed £371,000 to
profit after tax for the Group for the same period. If this acquisition had
been held since the start of the financial period, it is estimated that the
Group's reported revenue and profit after tax would have been £nil and £52,000
higher respectively.
11 Disposal of subsidiary and interests in associates
On 30 May 2014, the Group disposed of Monitor Elevator Products, Inc.
(Monitor) from its Infrastructure Safety sector. The total consideration was
US$6,243,000 (£3,716,000), of which US$5,514,000 (£3,282,000) was received in
cash at completion, and subsequently reduced by US$171,000 (£102,000) for the
final agreed closing net asset value. The remaining US$900,000 was retained in
escrow to be released to Halma on the second anniversary of the transaction
subject to any valid warranty/indemnity claims being made by the purchaser.
The Directors estimate that the entire US$900,000 held in escrow will be
received.
The profit on disposal was US$1,821,000 (£1,084,000), which is net of £189,000
of cumulative foreign exchange losses reclassified to the Income Statement and
£294,000 of disposal costs. Net assets disposed were US$3,610,000
(£2,149,000). No goodwill was disposed of or impaired as a result of this
transaction.
On 14 July 2014 the Group disposed of 28,570 shares in Optomed Oy (Optomed),
representing 11% of its shareholding in the associate. Consideration received
was E876,000 (£695,000). This transaction, after disposal costs of £8,000
resulted in a profit on disposal of £215,000. The Group's residual interest in
Optomed is 34%. As one of the largest shareholders, the Group continues to
exercise significant influence, but not control, over the company and so
continues to apply the equity method of accounting for its interest in
Optomed.
The Group's disposal of its 50% ownership interest in PSRM Immobilien AG
(PSRM) for CHF917,000 (£620,000) resulted in a fair value gain being
recognised in the Income Statement of £131,000. This represented the excess of
the fair value of the Group's interest in the associate over its carrying
value.
The £4,221,000 cash inflow on disposal of businesses shown in the Consolidated
Cash Flow Statement represents the £695,000, £620,000 and £3,180,000 proceeds
from the sale of the shares in Optomed, PSRM and Monitor respectively plus the
£28,000 overdraft in Monitor less the combined disposal costs of £302,000.
The total profit on disposal of operations shown in note 2 of £1,430,000
comprises £1,084,000 for the disposal of Monitor, £215,000 for the partial
disposal of shares in Optomed and £131,000 for the fair value gain recognised
in relation to the disposal of PSRM.
In the prior period the loss on disposal relates to the disposal by the Group,
in 2012, of its Asset Monitoring businesses, comprising Tritech Holdings
Limited and its subsidiary Tritech International Limited, and Volumatic
Limited. Further details are provided on page 143 of the 2014 Annual Report
and Accounts.
12 Fair values of financial assets and liabilities
As at 27 September 2014 there were no significant differences between the book
value and fair value (as determined by market value) of the Group's financial
assets and liabilities.
The fair value of floating and fixed rate borrowings approximate to the
carrying value because interest rates are reset to market rates at intervals
of less than one year.
The fair value of derivative financial instruments is estimated by discounting
the future contracted cash flow using readily available market data and
represents a level 2 measurement in the fair value hierarchy under IFRS 7.
As at 27 September 2014, the total forward foreign currency contracts
outstanding were £17,728,000. The contracts mostly mature within one year and
therefore the cash flows and resulting effect on profit and loss are expected
to occur within the next 12 months.
The fair values of the forward contracts are disclosed as a £622,000 (28
September 2013: £499,000; 29 March 2014: £496,000) asset and £338,000 (28
September 2013: £28,000; 29 March 2014: £167,000) liability in the
Consolidated Balance Sheet.
Any movements in the fair values of the contracts are recognised in equity
until the hedge transaction occurs, when gains/losses are recycled to finance
income or finance expense.
13 Other matters
Seasonality
The Group's financial results have not historically been subject to
significant seasonal trends.
Equity and borrowings
Issues and repurchases of Halma plc's ordinary shares and drawdowns and
repayments of borrowings are shown in the Consolidated Cash Flow Statement.
Related party transactions
There were no significant changes in the nature and size of related party
transactions for the period to those reported in the 2014 Annual Report and
Accounts.
14 Principal risks and uncertainties
A number of potential risks and uncertainties exist that could have a material
impact on the Group's performance over the second half of the financial year
and could cause actual results to differ materially from expected and
historical results.
The Group has in place processes for identifying, evaluating and managing key
risks. These risks, together with a description of the approach to mitigating
them, are set out on pages 30 to 33 of the 2014 Annual Report and Accounts,
which is available on the Group's website at www.halma.com.
The principal risks and uncertainties relate to:
· Remoteness of operations and globalisation
· Competition
· Economic conditions
· Funding, treasury and pension deficit
· Cyber security/Information Technology/Business interruption
· Acquisitions
· Laws and regulations
· Succession planning and staff quality
· Research & Development and Intellectual Property strategy
The Directors consider that the principal risks and uncertainties noted above
continue to be relevant to the Group. As part of their ongoing assessment of
risk throughout the period the Directors have considered the above risks in
the context of the new Executive Board structure and the Group's delivery of
its financial objectives. Movements in foreign exchange rates also remain a
risk to financial performance. We mitigate the risk to demand by operating in
markets underpinned by regulatory drivers (where customer spending is often
non-discretionary), maintaining a diverse product portfolio and targeting
continued growth in developing markets. In addition, Halma's model of autonomy
allows local management to change strategy quickly when reacting to variable
market conditions.
Although the Group uses forward foreign exchange contracts to mitigate its
transactional currency exposure risk, it does not hedge the translation of its
currency profits. In the first half of the year, the US Dollar, Euro and Swiss
Franc were 9%, 6% and 4% weaker respectively relative to Sterling than in the
first half of the previous year. The net result was a 5% negative impact on
reported profit.
15 Responsibility statement
We confirm that to the best of our knowledge:
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