REG - Sage Group PLC - Half Yearly Report <Origin Href="QuoteRef">SGE.L</Origin> - Part 3
15/07/2015 16:12
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£m
Underlying operating profit 193.1 176.0
Impact of movement in foreign currency exchange rates - 4.0
Underlying operating profit (as previously reported) 193.1 180.0
Amortisation of acquired intangible assets (9.5) (7.4)
Other acquisition-related items (0.7) 0.9
Goodwill impairment and fair value adjustments - 2.0
Exceptional items - (1.4)
Statutory operating profit 182.9 174.1
2 Adjustments between underlying profit and statutory profit
Six months ended Six months ended Six months ended Six months ended Six months ended Six months ended
31 March 2015 31 March 2015 31 March 2015 31 March 2014 31 March 2014 31 March 2014
Recurring Non- Total Recurring Non- Total
£m recurring £m £m recurring £m
£m £m
Acquisition related items
Amortisation of acquired intangibles (9.5) - (9.5) (7.4) - (7.4)
Fair value adjustments - - - 2.0 - 2.0
Litigation costs - - - - (1.4) (1.4)
Other acquisition related items (0.7) - (0.7) 0.9 - 0.9
Total adjustments made to operating profit (10.2) - (10.2) (4.5) (1.4) (5.9)
Acquisition related items: Imputed interest on put and call arrangements - - - (0.5) - (0.5)
Fair value adjustments to debt related financial instruments - 1.0 1.0 - - -
Total adjustments made to profit before income tax (10.2) 1.0 (9.2) (5.0) (1.4) (6.4)
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 adjustment relating to acquisition related items is made up of the cost of carrying out business combinations in the
period, partly offset by the net release of earn-out liabilities on previous acquisitions.
Non-recurring items
The current period adjustment relates to an embedded derivative asset which is recognised in the March 2015 interim
financial statements. This derivative relates to contractual terms agreed as part of the US private placement debt which
was partly refinanced during the period. This has been recognised on the face of the balance sheet as a non-current other
financial asset.
The prior period fair value adjustment relates to movement on the fair value of the put and call option in the prior year.
See note 7 for further details.
The prior period adjustment relating to litigation costs relates to the defence of the Archer Capital case, which is
strongly rejected by management. Based upon legal advice, no provision or contingent liability has been recognised in these
financial statements. 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 six months ended 31 March 2015 (Unaudited) is 25% (six months ended 31
March 2014 (Unaudited): 28%; year ended 30 September 2014 excluding exceptional charges (Audited): 27%), representing the
best estimate of the average annual effective income tax rate expected for the full year, applied to the profit before
income tax for the six months ended 31 March 2015.
4 Dividends
Six months ended Six months ended 31 March 2014 Year ended 30 September
31 March 2015 (Unaudited)£m 2014 (Audited)£m
(Unaudited)£m
Finaldividend paid for the year ended 30 September 2013 of 7.44p per share - 81.2 81.2
Interim dividend paid for the year ended 30 September 2014 of 4.12p per share - - 45.0
Final dividend paid for the year ended 30 September 2014 of 8.00p per share 85.7 - -
85.7 81.2 126.2
The interim dividend of 4.45p per share will be paid on 6 June 2015 to shareholders on the register at the close of
business on 15 May 2015.
5 Earnings per share
Basic earnings per share is calculated by dividing the profit for the period attributable to owners of the parent by the
weighted average number of ordinary shares in issue during the period, 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. The Group has dilutive potential ordinary shares consisting of share options
granted to employees, where the exercise price is less than the average market price of the Company's ordinary shares
during the period.
UnderlyingSix months ended Underlying Statutory Statutory
31 March 2015 Six months ended Six months ended Six months ended
(Unaudited) 31 March2014 31 March2015(Unaudited) 31 March
(Unaudited) 2014
(Unaudited)
Earnings attributable to owners of the parent (£m)
Profit for the period 136.3 119.4 127.7 116.2
Number of shares (millions)
Weighted average number of shares 1,077.0 1,097.9 1,077.0 1,097.9
Dilutive effects of shares 2.1 1.9 2.1 1.9
1,079.1 1,099.8 1,079.1 1,099.8
Earnings per share attributable to owners of the parent (pence)
Basic earnings per share 12.66 10.88 11.86 10.58
Diluted earnings per share 12.63 10.85 11.83 10.56
Reconciliation of earnings Six months ended Six months ended
31 March 31 March
2015 2014
(Unaudited) (Unaudited)
£m £m
Underlying earnings attributable to owners of the parent 136.3 119.4
Impact of movement in foreign currency exchange rates - 2.7
Underlying earnings attributable to owners of the parent (as previously reported) 136.3 122.1
Amortisation of acquired intangible assets (9.5) (7.4)
Other acquisition-related items (0.7) 0.9
Goodwill impairment and fair value adjustments 1.0 2.0
Litigation costs - (1.4)
Imputed interest on put and call arrangement to acquire non-controlling interest and deferred consideration - (0.5)
Taxation on adjustments 0.6 0.5
Net adjustments (8.6) (5.9)
127.7 116.2
6 Non-current assets
Goodwill Otherintangibleassets Property, plant and equipment Total
(Unaudited)£m (Unaudited)£m (Unaudited) £m (Unaudited)£m
Opening net book amount at 1 October 2014 1,433.0 98.1 126.7 1,657.8
Additions - 3.1 8.9 12.0
Acquisition of subsidiaries 77.0 33.5 1.0 111.5
Disposals - (0.1) (0.8) (0.9)
Depreciation, amortisation and other movements - (14.9) (9.0) (23.9)
Impairment - - (0.6) (0.6)
Exchange movement 30.7 0.9 (0.2) 31.4
Closing net book amount at 31 March 2015 1,540.7 120.6 126.0 1,787.3
Goodwill Otherintangibleassets Property, plant and equipment Total
(Unaudited)£m (Unaudited)£m (Unaudited) £m (Unaudited)£m
Opening net book amount at 1 October 2013 1,515.2 113.5 128.8 1,757.5
Acquisitions of subsidiaries - - - -
Additions - 3.8 8.1 11.9
Disposals - (0.1) (0.2) (0.3)
Disposal of subsidiaries - - - -
Depreciation, amortisation and other movements - (12.0) (9.3) (21.3)
Impairment - - - -
Exchange movement (31.3) (2.5) (1.2) (35.0)
Closing net book amount at 31 March 2014 1,483.9 102.7 126.2 1,712.8
Goodwill is not subject to amortisation, but is tested for impairment annually at the year-end or whenever there is any
indication of impairment. At 31 March 2015, there were no indicators of impairment to goodwill. Full details of the outcome
of the 2014 goodwill impairment review are provided in the 2014 financial statements.
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 31 March 2015, USPP borrowings with a carrying value of £533.0m had a fair value of
£543.8m 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 Groups 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.
Six months ended
31 March 2014
Unaudited
£m
OpeniF Fair value at 1 October 54.2
Consideration paid -
Imputed interest recognised in the Consolidated income statement within finance costs 0.5
Loss/(gain) on fair value adjustments (2.0)
Exchange movement (2.2)
Closing carrying value 31 March 50.5
8 Ordinary shares and share premium
Number of shares (Unaudited) Ordinary Shares Share premium Total(Unaudited)£m
(Unaudited) £m (Unaudited) £m
At 1 October 2014 1,115,892,047 11.7 535.9 547.6
Shares issued/proceeds 962,612 - 2.1 2.1
At 31 March 2015 1,116,854,659 11.7 538.0 549.7
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 1,073,706 - 2.3 2.3
At 31 March 2014 1,115,209,126 11.7 534.5 546.2
During the period, the Group purchased 3,457,020 (2014: 5,717,000) shares at a cost of £12.4m (2014: £19.1m) and a cash
outflow of £15.5m (2014: £23.7m).
Shares purchased under the Group's buyback programme are initially retained in issue as treasury shares and represent a
deduction from equity. Treasury shares are subsequently cancelled on a periodic basis.
A close period buyback scheme with Citigroup Global Markets Limited was entered into to cover the period from the 30
September to 6 December 2014. The Group did not exercise their rights under this scheme and the liability was released
during the period.
9 Cash flow and net debt
Six months ended Six months ended
31 March 31 March
2015 2014
(Unaudited)£m (Unaudited)
£m
Statutory operating profit 182.9 174.1
Depreciation/amortisation/impairment profit on disposal of intangible assets and property, plant and equipment 24.2 21.3
Share-based payments 4.8 3.3
Fair value adjustments and goodwill impairment - (2.7)
Changes in working capital (42.9) (40.8)
Increase in deferred income 57.2 49.8
Exchange movement 20.1 (8.3)
Cash flows from operating activities 246.3 196.7
Net interest paid (10.2) (9.3)
Income tax paid (60.1) (55.4)
Net capital expenditure (11.2) (11.6)
Free cash flow 164.8 120.4
Net debt at 1 October (437.2) (384.3)
Acquisitions and disposals of subsidiaries, net of cash (97.5) (4.3)
Dividends paid to owners of the parent (85.7) (81.2)
Purchase of treasury shares (15.5) (23.7)
Exchange movement (38.9) 10.3
Other 0.1 1.8
Net debt at 31 March (509.9) (361.0)
Analysis of change in net debt (inclusive of finance leases) At Cash flow Acquisitions Non-cash movements Exchange movement At 31 March 2015
1 October 2014 £m £m £m £m (Unaudited)
(Audited) £m
£m
Cash and cash equivalents 144.6 212.7 (97.5) - 8.2 268.0
Bank overdrafts (0.9) 0.9 - - - -
Cash, cash equivalents and bank overdrafts 143.7 213.6 (97.5) - 8.2 268.0
Finance leases due within one year (1.1) 0.3 - - - (0.8)
Loans due within one year (123.4) 134.7 - (33.7) (11.3) (33.7)
Loans due after more than one year (415.4) (237.3) - 33.7 (32.5) (651.5)
Finance leases due after more than one year (0.4) - - - - (0.4)
Cash collected from customers (40.6) (47.6) - - (3.3) (91.5)
Total (437.2) 63.7 (97.5) - (38.9) (509.9)
Included in cash above is £91.5m (31 March 2014: £34.0m, 30 September 2014: £40.6m) relating to cash collected from
customers, which the Group is contracted to pay onto another party. A liability for the same amount is included in trade
and other payables on the balance sheet and is classified within net debt above.
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 £529m (US$551m and E218m tranches). At 31 March 2015, £156m (H1 2014: £17m) of the multi-currency
revolving debt facility was drawn, with the increase primarily due to the completion of the PayChoice acquisition in the US
in October 2014
Total US private placement ("USPP") loan notes at 31 March 2015 were £533m (US$700m and EURE85m) (H1 2014: £420m, US$700m).
Approximately £135m (US$200m) of USPP borrowings were repaid in March 2015. This debt was refinanced in the USPP market in
January 2015, placing US$200m (£135m) at 3.73% fixed until 2025, E55m (£40m) at 1.89% fixed until 2022 and E30m (£22m) at
2.07% fixed until 2023.
10 Acquisitions and disposals
Acquisitions made during the period
On 16 October 2014 the Group acquired 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. At the date of acquisition, the external debt
of PayChoice was settled for £22.2m
The net identifiable assets were recognised at their provisional fair values as at 16 October 2014. The allocation of the
consideration has been subject to a preliminary purchase price allocation exercise during the period. The excess of
consideration over the net assets acquired, which within the audited September 2014 financial statements, was entirely
recognised as goodwill, and has now been allocated accordingly across asset and liability categories. Further fair value
adjustments to the opening balance sheet of PayChoice may occur in the second half of the year.
PayChoice's product portfolio provides easy to use online payroll solutions to SMB's, 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 33.5
Property, plant and equipment 1.0
Other non-current assets 0.7
Trade and other receivables 1.6
Cash and cash equivalents 0.9
Trade and other payables (3.9)
Current borrowings (2.6)
Non-current borrowings (19.6)
Deferred tax liabilities (12.8)
Provisions (0.6)
Total net identifiable liabilities acquired (1.8)
Goodwill 77.0
Total purchase consideration 75.2
The outflow of cash and cash equivalents on acquisitions is calculated as follows: £m
Cash consideration 75.2
Cash and cash equivalents acquired (0.9)
Borrowings acquired 22.2
Net cash outflow in respect of PayChoice 96.5
Deferred consideration, paid on prior period acquisitions 1.0
Net cash outflow in respect of acquisition 97.5
Disposals made during the period
There were no disposals made in the period.
11 Contingent liabilities
The Group had no contingent liabilities at 31 March 2015 (31 March 2014: none).
12 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 Six months ended Six months ended
31 March 31 March
2015 2014
(Unaudited)£m (Unaudited)£m
Salaries and short-term employee benefits 3.4 2.9
Post-employment benefits 0.3 0.3
Share-based payments 1.8 0.6
5.5 3.8
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 2014.
Supplier transactions occurred during the period between Sage South Africa (Pty) Ltd, one of the Group's subsidiary
companies and Ivan Epstein, Chief Executive Officer, AAMEA. These transactions relate to the lease of four properties in
which Ivan Epstein has a minority and indirect shareholding. During the period £2.2m (2014: £3.2m) relating to these
transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the
period ended 31 March 2015 (31 March 2014: £nil).
Supplier transactions occurred during the period between Sage SP, S.L., one of the Group's subsidiary companies and Álvaro
Ramírez, Chief Executive Officer, Europe. These transactions relate to the lease of a property in which Álvaro Ramírez has
a minority shareholding. During the period £0.5m (31 March 2014: £0.7m) relating to these transactions was charged through
selling and administrative expenses. There were no outstanding amounts payable for the period ended 31 March 2014 (31 March
2013: £nil). These arrangements are subject to independent review using external advisers to ensure all transactions are at
arm's length.
13 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 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. We have identified 10 principal risks which could impact our ability to
achieve our strategic objectives and these are set out below. Lower level risks are analysed and mitigated via the normal
embedded risk management process.
Risk Consequences Principal mitigations
Business Model TransitionSage does not successfully manage the transition of its business to a global operating model, in line with identified timeframes - Lack of unified direction - Missed revenue targets - Employee dissatisfaction - Employee churn and knowledge / skill loss - Strategic opportunities are regularly reviewed by the Group Board- Change and strategic projects are identified and their delivery monitored by the Executive Committee and Global Project Management Office ('PMO')- Technology Advisory Group review of key technology initiatives on a regular basis
Licensing Model TransitionSage does not successfully move to a target subscription licencing model, in line with identified timelines, and adapt its customer approach to reflect the change to this model - Declining revenue / growth potential- Customer retention / attraction- Reduced competitiveness- Unpredictable cash flow and forecasting - - Documented plans and targets in place, with formal tracking against progress - Detailed business planning and budget processes, to review and approve proposals and to ensure on-going review of financial results on a regular basis
Missed revenue targets
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) - Incomplete / unreliable planning data- Missed opportunities- Revenue / growth potential- Customer retention / attraction- Reduced - Structures and processes in place for the capture of market intelligence - Marketing Operations Group supervising development of processes
competitiveness
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 - Erosion of market position- Revenue / growth potential- Incorrect pace of change- Misaligned products for clients- Missed opportunities- - Product development needs identified via customer input and external research - Detailed subscription and pricing initiatives planned and being delivered - Resource allocation processes in place
Failure to meet investor expectations
Sage BrandSage does not deliver clear and consistent branding to the market - Ineffective global leverage- Loss of cross-sell opportunities- Revenue / growth potential- Customer retention / attraction- Reputational - Global brand campaign targeting customer and prospects- Consistency of brand messaging
damage - Failure to recruit top talent
Strategic PartnershipsSage fails to identify, build and maintain strategic relationships - Tardy responsiveness in the market- Reduced competitiveness- Missed opportunities- Reputational damage- Revenue / growth potential - Business driven requirement definition- Partnership management models
Supporting Control EnvironmentSage's underlying control environment (business processes and technology infrastructure) do not support the efficient operation of the business and do not support the control framework - Tardy responsiveness in the market- Reduced competitiveness- Missed opportunities- Reputational damage- Revenue / growth potential - Change and strategic projects are identified and their delivery monitored by the Executive Committee and Global Project Management Office- Technology Advisory Group review of key technology initiatives on a regular basis- Internal audit process reviews, with areas for improvement identified and
remediation plans put in place
3rd Party RelianceSage fails to adequately understand and effectively manage the 3rd party environment that supports its business - Service availability issues - Service reliability issues - Legal breach - Regulatory breach - Reputational damage - Unrationalised - Purchasing process and control reviews - Delegation of Authority controls and limits - Use of standard terms and conditions
third party estate - Financial consequences - Customer retention / attraction
Information Management and Protection (including cyber)Sage fails to adequately understand, manage and protect data - Varying application of controls across the wider estate - Lack of central visibility of risk profile - Loss of Data - Breach of Confidentiality - Framework in place, and continues to be developed and enhanced in order to control the risks associated with the protection of data - On-going monitoring of security incidents - On-going assurance activities
- Loss of data integrity - Loss of availability - Legal breach - Regulatory breach - Reputational damage - Financial consequences
Regulatory and Legal FrameworkSage fails to understand and effectively operate within the legal and regulatory framework applying to its services - Legal breach - Regulatory breach - Reputational damage - Financial consequences - Customer retention / attraction - Group-wide compliance programme which seeks to ensure that all local, national and international regulatory and compliance requirements are identified and complied with - Key examples of compliance requirements include Data Protection, PCI compliance and the Bribery Act
Statement of Directors' Responsibilities
Responsibility statement of the directors on the Annual Report & Accounts
The condensed consolidated half-yearly financial report for the six months ended 31 March 2015 includes the following
responsibility statement.
Each of the directors confirms that, to the best of their knowledge:
- the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true
and fair view of the assets, liabilities, financial position and profit of the Group; and
- the Directors' report includes a fair review of the development and performance of the business and the position of
the Group, together with a description of the principal risks and uncertainties that it faces.
The Directors also confirm that the Interim Management Report herein includes a fair review of information required by
4.2.8R of the DTR (Disclosure and Transparency Rules).
On behalf of the Board
S Hare
Chief Financial Officer
5 May 2015
Independent review report to The Sage Group plc
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report
for the six months ended 31 March 2015 which comprises consolidated income statement, consolidated statement of
comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes
in equity, group accounting policies and the related explanatory notes 1 to 13. We have read the other information
contained in the half yearly financial report and considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with guidance contained in International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are
responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
As disclosed in the group accounting policies, the annual financial statements of the group are prepared in accordance with
IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted
by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the
half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial
statements in the half-yearly financial report for the six months ended 31 March 2015 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
5 May 2015
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