REG - Sage Group PLC - Final Results <Origin Href="QuoteRef">SGE.L</Origin> - Part 3
02/12/2015 07:11
- Part 3: For the preceding part double click ID:nRSB6615Hb
ended
30 September 2015£m 30 September 2014£m
Underlying operating profit 379.9 350.4
Impact of movement in foreign currency exchange rates - 10.6
Underlying operating profit (as previously reported) 379.9 361.0
Amortisation of acquired intangible assets (18.2) (14.5)
Other acquisition-related items - (0.8)
Goodwill impairment and fair value adjustments (64.5) (44.7)
Exceptional items - (1.4)
Statutory operating profit 297.2 299.6
2 Adjustments between underlying profit and statutory profit
Year ended 30 September 2015 Year ended 30 September 2015 Year ended 30 September 2015 Year ended 30 September 2014 Year ended 30 September 2014 Year ended 30 September 2014
Recurring Non- Total Recurring Non- Total
£m recurring £m £m recurring £m
£m £m
Acquisition related items
Amortisation of acquired intangibles 18.2 - 18.2 14.5 - 14.5
Fair value adjustments 2.2 - 2.2 0.4 - 0.4
Litigation costs - - - - 1.4 1.4
Other acquisition related items - - - 0.8 - 0.8
Other items
Goodwill impairment - 62.3 62.3 - 44.3 44.3
Total adjustments made to operating profit 20.4 62.3 82.7 15.7 45.7 61.4
Acquisition related items: Imputed interest on put and call arrangements - - - 0.8 - 0.8
Total adjustments made to profit before income tax 20.4 62.3 82.7 16.5 45.7 62.2
Recurring items
Acquired intangibles are assets which have previously been recognised as part of business combinations. These assets are
predominantly brands, customer relationships and technology rights.
The current year fair value adjustment (£2.2m) relates to an accounting loss on the fair valuation of the call option in
relation to the possible acquisition of Mastermaq. The prior year fair value adjustment (£0.4m) related to the accounting
loss on the settlement of the put and call arrangement to acquire 25% of the share capital of Folhamatic, within the
Brazilian sub-group, from the non-controlling interest holder. This transaction occurred in August 2014.
The 2014 adjustments relating to other acquisition-related items were made up of the cost of carrying out business
combinations in the year (£2.4m). This was partly offset by the net release of earn-out liabilities on previous
acquisitions (£1.6m).
The prior year imputed interest adjustment on the put and call arrangement relates to the accounting adjustment made during
the year to discount this liability to its present value. This entry was made up until the liability was settled in August
2014.
Non-recurring items
As a result of the annual goodwill impairment review, an impairment of the goodwill held in the Brazilian business was
recognised in 2015 and 2014. This impairment is driven by economic conditions in Brazil and a re-assessment of the future
performance of the Brazilian business performed by management.
The adjustment relating to litigation costs relates to the defence of the Archer Capital case, which was strongly rejected
by management. In 2015 the claim brought by Archer Capital was dismissed on all grounds. No further costs were incurred in
2015. All other litigation costs which may be incurred through the normal course of business are charged through
operational expenses.
3 Income tax expense
The underlying effective income tax rate for the year ended 30 September 2015 is 30% (2014: 32%), whilst the effective tax
rate on underlying profit before tax was 25% (2014: 27%). The difference between the statutory effective tax rate and the
underlying effective tax rate relates to an impairment which is not deductible for tax purposes.
The underlying effective tax rate is higher than the UK's statutory rate of tax due to the geographic profile of the Group.
In addition, there is an obligation to account for local business taxes in the corporate tax charge. These additional tax
charges are offset by research and development tax credits which are a government incentive in a number of operating
territories.
4 Dividends
Year ended 30 September 2015£m Year ended30 September
2014£m
Final dividend paid for the year ended 30 September 2014 of 8.00p per share 85.7 -
Final dividend paid for the year ended 30 September 2013 of 7.44p per share - 81.2
Interim dividend paid for the year ended 30 September 2015 of 4.45p per share 47.8 -
Interim dividend paid for the year ended 30 September 2014 of 4.12p per share - 45.0
133.5 126.2
In addition, the Directors are proposing a final dividend in respect of the year ended 30 September 2015 of 8.65p per share
which will absorb an estimated £96.7m of shareholders' funds. It will be paid on 4 March 2016 to shareholders who are on
the register of members on 12 February 2016. These financial statements do not reflect this dividend payable.
5 Earnings per share
Basic earnings per share is calculated by dividing the profit for the year attributable to owners of the parent by the
weighted average number of ordinary shares in issue during the year, excluding those held as treasury shares, which are
treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of
all dilutive potential ordinary shares, exercisable at the end of the year. The Group has one class of dilutive potential
ordinary shares. They are share options granted to employees, where the exercise price is less than the average market
price of the Company's ordinary shares during the year.
Underlying Underlying as Reported (restated) Statutory Statutory (restated)
2015 2014 2015 2014
Earnings attributable to owners of the parent (£m)
Profit for the period 268.2 249.5 194.3 188.0
Number of shares (millions)
Weighted average number of shares 1,073.0 1,089.0 1,073.0 1,089.0
Dilutive effects of shares 6.5 1.7 6.5 1.7
1,079.5 1,090.7 1,079.5 1,090.7
Earnings per share attributable to owners of the parent (pence)
Basic earnings per share 25.00 22.91 18.11 17.26
Diluted earnings per share 24.85 22.87 18.00 17.24
The prior year weighted average share base has been restated to include shares held by the Employee Benefit Trust as
treasury shares.
Reconciliation of earnings Year ended 30 September 2015£m Year ended 30 September
2014
£m
Underlying earnings attributable to owners of the parent 268.2 249.5
Impact of movement in foreign currency exchange rates - (7.8)
Underlying earnings attributable to owners of the parent (as previously reported) 268.2 241.7
Amortisation of acquired intangible assets 18.2 14.5
Other acquisition-related items - 0.8
Goodwill impairment and fair value adjustments 64.5 44.7
Litigation costs - 1.4
Imputed interest on put and call arrangement to acquire non-controlling interest and deferred consideration - 0.8
Taxation on adjustments (8.8) (0.7)
Net adjustments 73.9 61.5
194.3 188.0
6 Non-current assets
Goodwill£m Otherintangibleassets Property, plant and equipment£m Total
£m £m
Opening net book amount at 1 October 2014 1,433.0 98.1 126.7 1,657.8
Additions - 6.0 16.4 22.4
Acquisition of subsidiaries 61.9 34.2 1.0 97.1
Disposals - (0.2) (2.1) (2.3)
Depreciation, amortisation and other movements - (29.1) (18.2) (47.3)
Impairment (62.3) - - (62.3)
Exchange movement 13.4 (3.5) (1.1) 8.8
Closing net book amount at 30 September 2015 1,446.0 105.5 122.7 1,674.2
Goodwill£m Otherintangibleassets£m Property, plant and equipment£m Total£m
Opening net book amount at 1 October 2013 1,515.2 113.5 128.8 1,757.5
Acquisitions of subsidiaries 7.6 6.6 0.2 14.4
Additions - 8.3 19.7 28.0
Disposals - (0.2) (1.9) (2.1)
Disposal of subsidiaries - - - -
Depreciation, amortisation and other movements - (24.5) (18.0) (42.5)
Impairment (44.3) - - (44.3)
Exchange movement (45.5) (5.6) (2.1) (53.2)
Closing net book amount at 30 September 2014 1,433.0 98.1 126.7 1,657.8
Goodwill is not subject to amortisation, but is tested for impairment annually at the year-end or whenever there is any
indication of impairment. The Group performed its annual test for impairment in the third quarter of 2015. The recoverable
amount exceeded the carrying value for all CGUs with the exception of Brazil. An impairment of £62.3m was recognised,
driven by economic uncertainty in Brazil which is expected to continue in the future.
Detail of the current period acquisition has been provided in note 10.
7 Financial instruments
For financial assets and liabilities other than borrowings, the carrying amount of the financial instrument approximates
the fair value of the instruments. At 30 September 2015, USPP borrowings with a carrying value of £571.4m had a fair value
of £572.8m due to bearing interest at fixed rates which are currently higher than equivalent current market fixed rates.
Prior year financial liabilities held at fair value related to a put and call arrangement to acquire the remaining
non-controlling interest's 25% share in Folhamatic in Brazil. This arrangement was settled during 2014 for consideration of
£50.4m, increasing the Group's ownership of the Brazilian sub-Group to 100%.
The following table shows the movements in the valuation of the put and call liability during the comparative period.
Year ended 30 September 2014
£m
OpeniF Fair value at 1 October 54.2
Consideration paid (50.4)
Imputed interest recognised in the Consolidated income statement within finance costs 0.8
Loss on fair value adjustments 0.4
Exchange movement (5.0)
Closing carrying value 30 September -
8 Ordinary shares and share premium
Number of shares Ordinary Shares Share premium £m Total£m
£m
At 1 October 2014 1,115,892,047 11.7 535.9 547.6
Shares issued/proceeds 2,406,701 0.1 5.3 5.4
At 30 September 2015 1,118,298,748 11.8 541.2 553.0
Ordinaryshares£m Sharepremium£m Total£m
Number ofshares
At 1 October 2013 1,114,135,420 11.7 532.2 543.9
Shares issued/proceeds 1,756,627 - 3.7 3.7
At 30 September 2014 1,115,892,047 11.7 535.9 547.6
During the year, under the Executive Share Option Scheme, 1,501,758 14/77p ordinary shares were issued for aggregate
proceeds of £3.5m. Under the Savings-related Share Option Scheme, 928,923 14/77p ordinary shares were issued for aggregate
proceeds of £1.9m.
Shares purchased under the Group's buyback programme are not cancelled but are retained in issue and represent a deduction
from equity attributable to owners of the parent. Treasury shares are subsequently cancelled on a periodic basis. During
the year, the Group purchased 3,457,020 (2014: 24,206,805) shares at a cost of £12.4m (2014: £89.5m) and a cash outflow of
£17.7m (2014: £91.0m).
In 2014 the Group operated a close period buyback programme for £60.1m, relating to the purchase of the Company's own
shares. No such programme is in place for 2015.
9 Cash flow and net debt
Reconciliation of profit for the year to cash generated from continuing operations Year ended 30 September 2015£m Year ended 30 September 2014£m
Profit for the year 194.3 188.9
Adjustments for:
Income tax 81.5 89.8
Finance income (2.2) (2.1)
Finance expenses 23.6 23.0
Amortisation of intangible assets 29.1 24.5
Depreciation of property, plant and equipment 18.2 18.0
Loss on disposal of property, plant and equipment - 0.8
R&D tax credits (2.3) -
Equity-settled share-based transactions 9.1 8.0
Fair value adjustments and goodwill impairment 64.5 44.7
Exchange movement (4.7) (11.0)
Changes in working capital (excluding effects of acquisitions and disposals of subsidiaries):
- (Increase)/Decrease in inventories (0.2) 0.1
- Decrease in trade and other receivables (8.4) (20.5)
- (Decrease)/Increase in trade and other payables (6.8) 8.8
- Increase in deferred income 22.9 9.4
Cash generated from continuing operations 418.6 382.4
Reconciliation of net cash flow to movement in net debt (inclusive of finance leases) 2015£m 2014£m
Increase in cash in the year (pre-exchange movements) 90.5 63.6
Cash outflow from movement in loans, finance leases and cash held on behalf of customers (17.8) (112.8)
Change in net debt resulting from cash flows 72.7 (49.2)
Acquisitions (21.3) -
Non-cash movements - (0.9)
Exchange movement (39.6) (2.8)
Movement in net debt in the year 11.8 (52.9)
Net debt at 1 October (437.2) (384.3)
Net debt at 30 September (425.4) (437.2)
Analysis of change in net debt (inclusive of finance leases) At Cash flow Acquisitions£m Non-cash movements Exchange movement At 30 September 2015£m
1 October 2014£m £m £m £m
Cash and cash equivalents 144.6 89.6 29.6 - (0.4) 263.4
Bank overdrafts (0.9) 0.9 - - - -
Cash, cash equivalents and bank overdrafts 143.7 90.5 29.6 - (0.4) 263.4
Finance leases due within one year (1.1) 0.5 - - - (0.6)
Loans due within one year (123.4) 157.1 (22.2) (33.6) (10.9) (33.0)
Loans due after more than one year (415.4) (162.9) - 33.6 (26.3) (571.0)
Finance leases due after more than one year (0.4) - - - - (0.4)
Cash held on behalf of customers (40.6) (12.5) (28.7) - (2.0) (83.8)
Total (437.2) 72.7 (21.3) - (39.6) (425.4)
Included in cash above is £83.8m (2014: £40.6m) relating to cash collected from customers. This arises as a consequence of
providing payment processing and electronic fund transfer services. The balance represents cash in transit from third
parties to Sage Customers. Accordingly, a liability for the same amount is included in trade and other payables on the
balance sheet and is classified within net debt.
The Group continues to be able to borrow at competitive rates and currently deems this to be the most effective means of
raising finance. The current Group's syndicated bank multi-currency revolving credit facility expires in June 2019 with
facility levels of £525.2m (£509.8m) which consists both of US$551.0m (£364.1m, 2014: £339.9m) and E218.0m (£161.1m, 2014:
£169.9m) tranches.
At 30 September 2015, £81.6m (2014: £110.5m) of the multi-currency revolving debt facility was drawn. These drawings were
primarily used to fund the Paychoice acquisition. Repayments were funded from increased USPP borrowings and free cash
flows.
Total US private placement ("USPP") loan notes at 30 September 2015 were £525.2m (2014: £431.8m) consisting of US$700m and
EURE85m (2014: US$700m). Approximately £125m (US$200m) of USPP borrowings were repaid in March 2015. This debt was
refinanced in the USPP market in January 2015, placing US$200m (£132.2m) at 3.73% fixed until 2025, E55m (£40.6m) at 1.89%
fixed until 2022 and E30m (£22.2m) at 2.07% fixed until 2023.
10 Acquisitions and disposals
Acquisitions made during the period
On 16 October 2014 the Group acquired 100% of the share capital of PAI Group, Inc. ("PayChoice"), a provider of payroll and
HR services for small and medium sized businesses in North America, for a cash consideration of £75.2m. On the date of
acquisition, the external debt of PayChoice was settled for £22.2m. The acquisition strengthens Sage's position in the
large and growing US payroll market.
The allocation of the consideration has been subject to a purchase price allocation exercise during the period. The excess
of consideration over the net assets acquired has been allocated accordingly across asset and liability categories.
PayChoice's product portfolio provides easy to use online payroll solutions to small and medium sized businesses (SMBs),
and strengthens the Sage value proposition to customers with a more robust and comprehensive offering. The combined
portfolio provides attractive growth opportunities, particularly through new customer acquisition and cross-sell to the
combined customer base.
The net assets acquired and goodwill are as follows (presented at the exchange rate as at the acquisition date):
Fair values of acquisition £m
Intangible assets 34.2
Property, plant and equipment 1.0
Trade and other receivables 1.6
Cash and cash equivalents 29.6
Trade and other payables (32.6)
Current borrowings (2.6)
Non-current borrowings (19.6)
Deferred tax assets 4.6
Provisions (0.6)
Total net identifiable assets acquired 15.6
Goodwill 59.6
Total purchase consideration 75.2
The goodwill on acquisition relates to the growth opportunities through both customer acquisition and cross-sell to the
combined customer base. Included within cash and cash equivalents is £28.7m of cash held on behalf of customers with a
corresponding liability within trade and other payables.
The outflow of cash and cash equivalents on acquisitions is calculated as follows: £m
Cash consideration 75.2
Cash and cash equivalents acquired (29.6)
Borrowings acquired 22.2
Net cash outflow in respect of PayChoice 67.8
Deferred consideration, paid on prior period acquisitions 1.7
Net cash outflow in respect of acquisitions 69.5
11 Related party transactions
The Group's related parties are its subsidiary undertakings and Executive Committee members. The Group has taken advantage
of the exemption available under IAS 24, "Related Party Disclosures", not to disclose details of transactions with its
subsidiary undertakings.
Key management compensation 2015 2014
£m £m
Salaries and short-term employee benefits 10.0 5.9
Post-employment benefits 0.4 0.5
Share-based payments 2.4 1.4
12.8 7.8
The key management figures given above include Directors. Key management personnel are deemed to be members of the
Executive Committee and are defined in the Group's Annual Report & Accounts 2015.
Supplier transactions occurred during the year between Sage South Africa (Pty) Ltd, one of the Group's subsidiary companies
and Ivan Epstein, President, International and Executive Committee member. These transactions relate to the lease of four
properties in which Ivan Epstein has a minority and indirect shareholding. During the year £4.3m (2014: £3.2m) relating to
these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for
the year ended 30 September 2015 (30 September 2014: £nil).
Supplier transactions occurred during the year between Sage SP, S.L., one of the Group's subsidiary companies, and Álvaro
Ramírez, who held the role of President, Europe and Executive Committee member during the year. These transactions relate
to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the year £1.0m (2014: £1.1m)
relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts
payable for the year ended 30 September 2015 (30 September 2014: £nil).
These arrangements are subject to independent review using external advisers to ensure all transactions are at arm's
length.
12 Group risk factors
Risks can materialise and impact on both the achievement of business strategy and the successful running of our business. A
key element in achieving our 2020 strategy and maintaining services to our customers is the management of risks. Our risk
management strategy is therefore to support the successful running of the business by identifying and managing risks to an
acceptable level and delivering assurances on this. Currently there are ten principal risks which we monitor and report
against at a global level and which are arranged according to their alignment; seven are formally aligned to successful
delivery of the strategy (risks 1-7 below), and three are primarily operational in nature and support the successful
operation of the business (risks 8-10 below). A number of measures are in place to manage and mitigate these risks, while
other activities are in the process of being developed or deployed, and are marked below as in progress.
Risk Risk background Management and mitigation
#1. Business Model TransitionSage does not successfully manage the transition of its business to a global operating model. Primary strategic alignment: Sage has historically operated as a federated set of Operating Companies across multiple geographies, each with significant local autonomy. In order to avoid duplication of effort, drive greater consistency and efficiency in processes, and provide clearer governance, Sage is moving to a new global operating model. This risk is an evolution from 2014. During 2015, organisational and structural changes have been successfully made, alongside planning for the wider transition, including governance. Transition implementation will run through 2016. - Functional reporting for all support functions established to a global level to allow consistency of direction, and removal of any global / local conflicts-
Capacity for Growth An approved global Business Model Transition Strategy, supported by an overarching plan which details the goal, overall time plan, and scheduled adoption by countries-
Clear governance around strategy and overarching plan through Executive Committee and programme steering committee- Identification of a programme authority lead
to manage the transitionIn progress:- Alignment of transition frameworks for each country / region / function which are integrated to the overarching plan, and
approved by the programme steering committee- Monitoring of implementation through programme management office
#2. Licensing Model TransitionSage does not successfully move to a target subscription licencing model, and adapt its customer approach to reflect the change to this model. Primary strategic alignment: Sage wishes to continue to shift its licensing model towards subscription, where customers pay a monthly charge to use a licence, and in doing so are entitled to upgrade to the most recent release.Subscription licensing is perceived as beneficial within the software industry for a variety of reasons, including increased customer contact and predictability of cash flow. Any transition process must, however, be controlled in order to manage potential impacts, including short term revenue figures.This risk is an evolution from 2014. Through 2015, a dual approach has been followed to ensure achievement of revenue figures, while moving towards subscription. In parallel to these activities, the first of a number of Customer Business Centres (CBCs) have been opened for global products, which co-locate teams (digital marketing, sales, service operations) enabling them to operate collaboratively and serve customers quickly and efficiently. - New products are being offered on a subscription only basis- An approved licensing model transition strategy is in place, with defined targets and
Customers for Life timescales- A series of approved targets have been defined, which span multiple years and support successful delivery of our strategy- Ongoing monitoring and
review of the approved targets is taking place at country, regional and global levels in order to proactively manage the licence transition, and revenue figures In
progress: - Creation of further Customer Business Centres, with staged adoption of global products, to better manage ongoing customer relationships and the sales
cycle
#3. Market IntelligenceSage does not understand or anticipate changes in the external environment (including areas such as customer needs, emerging market trends, competitor strategies and regulatory / legal requirements) Primary strategic alignment: Sage has focused resources and management attention on successfully delivering revenue and margin growth while at the same time maintaining a broad product range. This has been underpinned by local market intelligence.In order to develop a consolidated understanding of its market and customer needs, Sage is developing a global market intelligence capability. The risk was identified in 2015. The initial focus has been to develop appropriate structures which will enable competitive positioning and product development, and 2016 will see development of further operational practices to support this. With a growing emphasis on global products within Sage, this activity will become increasingly relevant in the successful development of Sage's customer solutions. - A Marketing Operations group has been established across the organisation, which has overall responsibility for Market Intelligence- Annual completion of a
Customers for Life global market intelligence survey, to identify market opportunities- Annual completion of a brand health survey to understand customer perception of the Sage brand
Winning in the Market and its products In progress: - Prioritisation of resources and effort on products with a lifecycle status of 'Growth'- Ongoing development of standard
templates for use by market intelligence managers to allow information capture to be enhanced across countries, and reported on a periodic basis- Definition of a
feedback loop to allow continual refinement of standard templates, ensuring they remain effective, and capture relevant information
#4. Competitive Positioning and Product DevelopmentSage is unable to clearly identify its approach to the market, and support it with strategies that drive competitive advantage, including product development Primary strategic alignment: The competitive environment in which Sage operates has seen significant developments in recent years with the emergence of new players and a shift to delivering functionality via the cloud. These new players include venture capital funded organisations whose primary goal is to attain market share irrespective of profit, and a number of US listed companies with similar goals. Cloud products and digital sales and marketing strategies (Zero touch sales) are reducing barriers to entry.Sage must be able to translate market intelligence into appropriate strategies that target attractive market segments with relevant products.Whilst Sage transitions towards global products, a number of which have been launched, in the short- to mid-term there remains the need to manage and evolve the local growth products in tandem with its longer-term aspirations. This risk was identified in 2015. - A Global Marketing team has been established to oversee competitive positioning and product development- Product lifecycle classifications have been
Winning in the Market created, and all products have been assigned a classification of 'Heritage' or 'Growth', to define whether research and development resources may be expended on them-
Capacity for Growth Governance has been established around the creation of global products, to
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