Flowtech Fluidpower 2015 Annual Report
The first full calendar year as a public company has seen satisfactory financial progress on several fronts including an 11.7% increase in underlying operating performance.
Chief Financial Officer
The underlying operating result can be summarised as follows:
* Underlying operating result is continuing operations' operating profit before acquisition costs, amortisation of intangible assets, share-based payment costs, restructuring costs, and IPO costs. Underlying operating result is reconciled to statutory profit before tax in note 3 to the consolidated financial statements.
As well as creating a strong platform for the long term growth of the Group, the first full calendar year as a public company has seen satisfactory financial progress on several fronts including an 11.7% (2014:15.4%) increase in underlying operating performance. However, as has been widely reported, broad industrial markets have experienced challenging environments during the middle to latter part of 2015, and this has dampened the short term growth aspirations of the core Flowtechnology operations, particularly in the UK. It is therefore pleasing to report that this division has again demonstrated its resilient nature with reported profits showing overall year-on-year growth. The reduced contribution from the much smaller Benelux operation is largely down to local investment in an expanded technical sales resource which will support the business over the medium to long term, and in the short term has helped to produce year-on-year sales growth on constant currency of 4%. The cost base in this region can now support further significant growth in revenue, and in addition to organic growth, the Group will focus on suitable 'bolt on' acquisitions which should allow attractive synergy gains in due course.
As detailed in the above table, the main driver for growth over the year has been derived from the Group's investment in the newly established Power Motion Control division. After initial setbacks from the slowdown in offshore and oil and gas market expenditure, the combined Primary, Nelson Hydraulics, and Albroco operations have made considerable progress during the latter part of 2015. Nelson is currently operating under an 'earn-out' arrangement and has produced a contribution to the Group of £365,000 in the second half of the year, which is in line with our original expectations. The contribution from Primary and the merged Albroco business at operating level is £863,000, of which £580,000 has come in the second half-year and therefore represents a satisfactory refocusing of the business away from its previous weighting in the oil and gas sector.
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The Group uses a wide array of high quality professional advisers to work on our acquisition strategy and its implementation, complemented by in-house resources focusing on core commercial due diligence. In addition, during the year we have implemented a significant investment in the necessary corporate procedures to ensure that any business we acquire is able to integrate quickly and efficiently into the Group's governance and accounting environment, thereby building an immediate reporting structure. The total cost for the year represents 3.8% of the total consideration paid for acquisitions (as detailed in note 25) and we believe this represents a fair cost for transactions of this type.
Restructuring costs incurred during the year relate to sensible redundancy arrangements incurred as part of the ongoing operational integration between the two North West England-based businesses, in addition to the costs related to the plc Board restructuring in late 2015.
The tax charge for the year was £1.1 million (2014: £1.2m), with an effective tax rate of 20.5% and a blended tax rate based on the geographical regimes of 20.2%. As detailed in note 7, the Group incurred an adjustment to the current year tax charge of £76,000 which related to an over estimation of tax due in the prior year.
The net debt position at the year end was £9.0 million (as detailed in notes 18 and 19) (2014: £6.7m). Cash generated from operating activities before tax payments was £7.4 million (note 27) (2014: £3.5m) providing ample dividend cover and ability to service contingent consideration, which clearly demonstrates the strong cash generative nature of the core business.
During the year the principal use of cash has been in the investment in the Albroco and Nelson operations. Both have been funded by a mixture of day one cash, followed by deferred consideration contingent on the performance of both businesses over the two years immediately following their purchase. These two deals are both examples of where the Group will seek to ensure that our cash resources are used in a focused manner with regard to acquisition activities, and will always look to ensure that wherever possible, the transference of risk from vendors has a suitable profile built over an extended period of time.
In addition, during the latter part of 2015, the Group has used its financial strength to take advantage of the current soft conditions in the Chinese manufacturing environment to procure advantageous pricing on some fast moving lines. Where sensible these will be used to both promote offensive market initiatives during 2016, as well as to provide some defence should the current challenging environments in the UK distribution sector persist. In general, the stock profile created across the Group leaves all our trading divisions well placed for further organic expansion through to 2017 and beyond.
Core working capital requirements again remain at a satisfactory level with key trade debt risks well embraced by the use of our Central Services function. The total charge for bad and doubtful debt related issues of £62,000, representing 0.14% of turnover (2014: £84,000).
Cash resources for further organic and acquisitive growth have also been bolstered by the extension of core facilities with Barclays Bank plc. As detailed in note 19, as well as our long term loan facility, the Group now enjoys an enhanced revolving credit facility of £8 million, with agreement for a further 'accordion' facility of £7 million should such resources be required. All are subject to achievable covenant requirements. This again leaves the business very well placed for the immediate future, and indicates the level of commitment provided to the Group by Barclays.
The majority of the Group's activities take place in sterling, but with an increasing exposure to the euro for purchasing from Eurozone countries, as well as some US dollar supplies from China and Taiwan. For these trading activities the Group is able to take a flexible approach to currency risk management, as it is not involved in fixed price sales contracts. Sales pricing can therefore be flexed as cost prices change and the Group has operated in this manner successfully for a number of years.
In addition, the Group derives income streams from its Benelux and Irish Republic operations. In order to fix the value of these profits, the Group will hedge on an annual basis each January for the estimated euro value of the contribution of these operations. In 2015 this hedging process resulted in a gain of £18,000 (2014: £31,000) and is accounted for within net financing costs.
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Subject to Shareholder approval at the Annual General Meeting which is to be held on 1 June 2016, the Directors are proposing a final dividend of 3.50p per share. This, together with the interim dividend of 1.75p (paid on 23 October 2015), brings the total for the year to 5.25p which again matches the commitment made at the date of the IPO. The outlook for further enhancement to dividend flow remains good and the Board would like to reiterate its view that the retention of a strong dividend policy is a foundation for the investment case in the Group.
Chief Executive Officer's statement