REG - Hunting PLC - 2015 Full Year Results <Origin Href="QuoteRef">HTG.L</Origin> - Part 5
03/03/2016 07:10
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MOVEMENT IN THE YEARDuring 2015 the Board remained focused on organic expansion and a number of major programmes were completed through the year. No acquisitions were made. The Board continues to assess opportunities for growth and consequently this risk MOVEMENT IN THE YEARThe risk of poor product quality or reliability has remained unchanged during the year with no significant issues raised by the Group's customers or during the Board's internal monitoring process.
has not changed during the year.
Nature of the riskInvestment through acquisitions and organic capital spend forms the basis of the Group's strategy of expansion and development. If investments are not properly considered then lower returns than anticipated may be made. In addition, such Nature of the riskThe Group has an established reputation for producing high quality products capable of withstanding high pressure, high temperature environments. A failure of any one of these products could adversely impact the Group's reputation and demand for the Group's entire range of products and services.
activity incurs the potential for business disruption, management distraction and interruption to IT systems if these issues are not controlled properly.
Controls & actionsThe Board reviews and challenges each potential investment, either organic or through an acquisition, prior to approval and frequently engages consultants to provide expert analysis of the key issues. The Board and senior management Controls & actionsQuality assurance standards are monitored, measured and regulated within the Group under the authority of a Quality Assurance Director, who reports directly to the Chief Executive.
follow a rigorous process of approving, managing and monitoring capital investments along with planning for contingencies. The success of each investment decision is assessed through a formal post-investment review process that provides a learning platform
for future expansion projects.
Viability Assessment and Going Concern Basis
Viability Assessment
Introduction
Hunting has a wide global customer base underpinned by strong, long-term relationships. The Group provides a large range of
products and services through its manufacturing and distribution facilities which are located in a number of countries
across the globe.
In considering the Group's long-term viability, the Board regularly assesses the risks to its business model, strategy,
future performance, solvency and liquidity. These assessments are supported by the Group's risk management processes and
include a review of the Group's exposure to the oil and gas industry, competitor action, customer plans and the robustness
of the supply chain.
Assessment Period
The Group's customers are principally involved in the exploration for and production of oil and gas. Given the nature of
the industry and the planning cycles involved, these activities can cover periods of no more than several weeks up to
several years from start to end. Hunting's management works closely with its customers over this period, discussing their
operational plans and reviewing their longer term capital expenditure programmes.
The outlook for the Group beyond this period is generated from management's assessment of industrial data and projections
published by industry commentators and analysts, including statistics on footage drilled and rig activity. The Board
believes that a three-year forward looking period is the appropriate length of time to reasonably assess the Group's
viability. The Group's annual budget process and mid-term projections cover this period and help to support the Board's
assessment.
Consideration of Principal Risks
The nature of the Group's operations exposes the business to a variety of risks which are noted on pages 44 to 47. The
Board regularly reviews the principal risks and assesses the appropriate controls and further actions. The Board has
further considered their potential impact within the context of the Group's viability.
Assumptions
In assessing the long-term viability of the Group, the Board made the following assumptions:
· The raw material pricing environment within the energy industry remains weak in the short-term and becomes positive
in the medium to long-term, given the global outlook for oil and gas demand, which is driven by growth within emerging
markets and sustained demand from developed markets. These are the fundamental drivers of Hunting's core business of
manufacturing, supplying and distributing products and services which enable the extraction of oil and gas.
· Actions taken in 2015 to reduce the Group's cost base enable the business to endure the period of weak commodity
prices and reduced shale drilling activity.
· The development of the global shale drilling industry remains focused in the US where government support remains
positive.
· The Group will continue to have a medium to low exposure to higher risk countries given the proportion of its
current revenues and profits derived from politically stable regions such as North America, Europe and South East Asia. In
addition, the three-year financial projections were stress tested to simulate a further deterioration in market
conditions.
Conclusion
Despite the current downturn within the oil and gas industry, the Board believes that the Group's strategy for growth, its
diverse customer and product base and the positive outlook for the oil and gas industry in the medium term provides Hunting
with a strong platform on which to continue its business. The Directors therefore have a reasonable expectation that
Hunting will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their
assessment.
Going Concern Basis
Introduction
The Group's principal cash outflows include capital expenditure, labour costs, inventory purchases and dividends. The
timing and extent of these cash flows are controlled by local management and the Board. The Group's principal cash inflows
are generated from the sale of its products and services, the level of which is dependent on the variety of its products
and ability to retain strong customer relationships. Cash inflows are further supported by the Group's credit insurance
cover against customer default that at 31 December 2015 covered the majority of its trade receivables, subject to certain
limits.
Current and forecast cash/debt balances are reported on a weekly basis by each of the business units to a centralised
treasury function that uses the information to manage the Group's day-to-day liquidity and longer-term funding needs
through effective cash management programmes.
The Group has access to sufficient financial resources including a $350m committed bank facility of which $233.9m was
undrawn at 31 December 2015. The two main financial covenants attached to this facility are: EBITDA (as defined in the bank
facility agreement) should not be less than four times net finance charges, and net debt should be no more than three times
adjusted EBITDA. At 31 December 2015, the Group had sufficient headroom over both covenants.
Review
In conducting its review of the Group's ability to remain as a going concern, the Board assessed the Group's recent trading
performance and its latest forecasts and took account of reasonably predictable changes in future trading performance. The
Board also considered the potential financial impact of the estimates, judgements and assumptions that were used to prepare
these financial statements. The Board is satisfied that all material uncertainties have been identified and they are not
considered to be sufficiently material to adversely impact the Group.
Conclusion
The Board is satisfied that it has conducted a robust review of the Group's going concern and has a high level of
confidence that the Group has the necessary liquid resources to meet its liabilities as they fall due. Consequently the
Board considered it appropriate to adopt the going concern basis of accounting in preparing these consolidated financial
statements.
Key Performance Indicators
A number of metrics are used to compare the development, business performance and position of the Group. KPI's are
regularly reviewed to ensure they remain appropriate measure of the Groups performance.
Financial
Unit 2015 2014 2013
Revenue $m 810.5 1,386.5 1,293.6
Underlying EBITDA* $m 61.9 269.8 244.0
Underlying profit from operations* $m 16.4 217.8 200.0
Underlying operating margin* % 2 16 15
Underlying diluted earnings per share* cents 3.1 100.0 94.5
Dividend per share declared cents 8.0 31.0 29.5
Capital investment $m 81.1 123.5 94.8
Free cash flow* $m 118.0 182.3 145.6
Inventory days* 196 148 157
Net debt* $m 110.5 131.0 205.8
Gearing ratio* % 9 9 15
Return on average capital employed* % 1 13 12
Operational
Unit 2015 2014
Countries with active operations 15 12
Operating footprint m sq ft 3.2 2.8
Year end employees 2,784 4,003
ISO 9001 (quality) accredited operating sites % 50 51
No. of recordable incidents 36 81
Incident rate (OSHA method) 1.13 1.92
Carbon dioxide emissions Kg/sq ft 10.4 15.0
Internal manufacturing reject rate % 0.81 0.81
* Non - GAAP measure.
Selected non-GAAP Measures
A. EBITDA
Purpose: This profit measure is used as a simple proxy for pre-tax cash flows from operating activities.
Calculation Definition: Underlying earnings before share of associates' post-tax results, interest, tax, depreciation,
impairment and amortisation for continuing operations.
2015 2014
$m $m
Reported (loss) profit from continuing operations (consolidated income statement) (282.2) 113.9
Add:
Depreciation charge for the year on property, plant and equipment (note 9) 43.6 52.0
Impairment of property, plant and equipment (note 9) 33.2 11.3
Impairment of goodwill (note 10) 208.2 49.6
Amortisation of intangible assets (note 11) 40.8 42.8
Impairment of intangible assets (note 11) 11.2 -
Reported EBITDA 54.8 269.6
Add: Exceptional items impacting EBITDA
Restructuring costs (note 5) 7.1 -
Release of foreign exchange on liquidation of subsidiaries (note 5) - 4.8
Excess property provision release (note 5) - (4.6)
Underlying EBITDA 61.9 269.8
B. Net Debt
Purpose: Hunting operates a centralised Treasury function that manages all cash and loan positions throughout the Group and
ensures funds are used efficiently through the use of interest offsetting arrangements and other such measures. As the
Group manages funding on a net debt basis, internal reporting focuses on changes in net debt and this is presented in the
Strategic Report. The net debt reconciliation provides an analysis of the movement in the year for each component of net
debt split between cash and non-cash items.
Calculation Definition: Net debt comprises bank overdrafts, current and non-current borrowings less cash and cash
equivalents and bank deposits maturing after more than three months.
2015
At 1 January 2015 Cash flow Exchange movements Amortisation of loan facility fees Reclassified from held for sale* At 31 December 2015
$m $m $m $m $m $m
Cash and cash equivalents (consolidated balance sheet) 88.5 (35.0) (2.9) - 3.8 54.4
Bank overdrafts (50.5) 17.0 1.0 - - (32.5)
38.0 (18.0) (1.9) - 3.8 21.9
Current investments 3.8 1.1 (0.3) - - 4.6
Non-current borrowings (157.9) 36.3 4.7 (0.3) - (117.2)
Current unsecured bank loans (14.9) (7.6) 2.7 - - (19.8)
(131.0) 11.8 5.2 (0.3) 3.8 (110.5)
*The net assets of Gibson Shipbrokers disposed of on 31 March 2015 included $3.9m of cash and cash equivalents that were
classified as held for sale at 31 December 2015.
2014
At 1 January 2014 Cash flow Exchange movements Amortisation of loan facility fees Classified as held for sale At 31 December 2014
$m $m $m $m $m $m
Cash and cash equivalents (consolidated balance sheet) 167.4 (71.9) (3.2) - (3.8) 88.5
Bank overdrafts (115.0) 62.8 1.7 - - (50.5)
52.4 (9.1) (1.5) - (3.8) 38.0
Current investments 2.0 2.0 (0.2) - - 3.8
Non-current borrowings (239.3) 80.5 2.7 (1.8) - (157.9)
Current unsecured bank loans (20.9) 5.2 0.8 - - (14.9)
(205.8) 78.6 1.8 (1.8) (3.8) (131.0)
C. CAPITAL EMPLOYED
Purpose: Used in the calculation of the return on average capital employed.
Calculation Definition: Capital employed is the amount of capital that the Group has invested in its business and comprises
the
historic value of total equity plus net debt at amortised cost.
The Group's capital comprised:
2015 2014
$m $m
Total equity (consolidated balance sheet) 1,168.1 1,438.3
Net debt (NGM B) 110.5 131.0
1,278.6 1,569.3
D. GEARING
Purpose: This ratio indicates the relative level of debt funding, or financial leverage, that the Group is subject to with
higher levels indicating increasing levels of financial risk.
Calculation Definition: Gearing is calculated as net debt as a percentage of total equity (see NGM C).
2015 2014
Gearing 9% 9%
E. FREE CASH FLOW
Purpose: Free cash flow is a measure of financial performance and represents the cash that the Group is able to generate
after replacement capital investment, which is required to maintain existing levels of operating activity. Free cash flow
represents the amount of cash the Group has available to either retain for investment, whether organic or by way of
acquisition, or to return to shareholders.
Calculation Definition: Underlying profit from continuing operations adjusted for working capital, tax, replacement capital
investment
and interest.
2015 2014
Underlying EBITDA (NGM A) 61.9 269.8
Working capital movements 96.0 3.8
Interest paid and bank fees (consolidated statement of cash flows) (7.4) (5.6)
Tax paid (consolidated statement of cash flows) (10.5) (26.6)
Restructuring costs (consolidated statement of cash flows) (5.9) -
Replacement capital investment (22.0) (69.0)
Other operating cash and non-cash movements 5.9 9.9
118.0 182.3
This information is provided by RNS
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