Pace plc: Interim Results for the 6 months ended 30 June 2014
Saltaire, UK, 28 July 2014: Pace plc, a leading global developer of technologies and products for PayTV and broadband
service providers, today announces its results for the 6 months ended 30 June 2014.
Momentum building through the year: gross margin up 3.9ppt to 21.6%, adjusted EBITA up
9.9% to $106.3m, free cash flow of $108.9m up 18.4% and interim dividend increased 23.0%.
Strong H2 anticipated, full year profits and cash flow guidance increased.
Financial highlights
• Revenue down 13.6% to $1,138.9m (H1 2013: $1,318.4m), in-line with management expectations.
• Gross profit up 5.4% to $245.8m (H1 2013: $233.1m), gross margin 21.6% (H1 2013: 17.7%).
• Adjusted EBITA 1 up 9.9% to $106.3m (H1 2013: $96.7m), operating margin 2 9.3% (H1 2013: 7.3%).
• Profit after tax up 9.3% to $55.4m (H1 2013: $50.7m).
• Basic Earnings per Share (“EPS”) up 8.5% to 17.8c (H1 2013: 16.4c) with adjusted basic EPS 3 up 15.4% to 25.5c
(H1 2013: 22.1c).
• Interim dividend 2.25c per share, a 23.0% increase on H1 2013 (H1 2013: 1.83c).
• Free cash flow 4 up 18.4% to $108.9m (H1 2013: $92.0m).
• Closing net debt 5 $167.6m (Pro forma net debt 6 of $279.2m immediately following Aurora acquisition).
Operating highlights
• Increased operating profit on reduced revenues, due to Aurora contribution, improved revenue mix, improved
supply chain efficiency and increased operational efficiency.
• Significant further progress made against the Strategic Plan laid out in November 2011:
• Continue to transform core economics:
o Underlying operating costs 7 reduced by 6.1% whilst continuing to further invest in growth opportunities.
o Integration with Aurora complete and committed synergies, both cost and working capital, achieved ahead
of plan with further opportunities for savings identified.
o Fifth consecutive half of strong cash flow generation (102.4% conversion of adjusted EBITA to free cash
flow). Aggregate free cash flow of $500.6m over last five halves.
• Maintain PayTV hardware leadership:
o Reconfirmed market leader; global number 1 in Media Servers 8, Set-top boxes (“STBs”) 9 and Advanced
Telco Gateways 10.
o Strong uplift in Customer Premise Equipment (“CPE”) revenue in H2 2014 anticipated due to new product
launches with key customers.
o A number of new wins and deployments have been achieved across all regions with customers including
Sky Italia, Oi, GVT and BeIn Sports.
• Widening out:
o 213.8% increase in non-CPE revenue (H1 2013: 4.3% increase) to $167.9m (H1 2013: $53.5m) driven by
the acquisition of Aurora Networks.
o Pace achieved a number of key wins across all areas of our Software, Networks and Services offerings
and has made good progress on major product and customer project launches for this period and H2 2014.
o Demand for network products is stronger than anticipated; revenue and profit growth expected in H2 2014.
1
Adjusted EBITA is operating profit before exceptional costs and amortisation of other intangibles.
Operating margin is adjusted EBITA margin.
Adjusted basic EPS is based on earnings before the post-tax value of exceptional costs and amortisation of other intangibles.
4
Free cash flow is calculated as cash flow before proceeds from issue of shares, dividends, acquisition cash flows and debt repayment / draw down.
5
Net debt is borrowings net of cash and cash equivalents.
6
Pro forma net debt is opening net debt after adjusting for acquisition cash flows.
7
Underlying operating costs are administrative expenses excluding Aurora and the impact of IAS 38 accounting adjustments.
8
By volume (2013) – IHS Set-Top Box Market Monitor Q1/Q2 2014.
9
By volume (2013) – IHS Set-Top Box Market Monitor Q1/Q2 2014.
10
By value (2013) – Infonetics-4Q13-BB-CPE-Subs-Mkt-Fcst.
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Outlook
Revenue momentum has increased as the year has progressed. We have good visibility and anticipate strong revenue
growth in H2 2014 driven by new product launches across a number of markets, regaining leadership with several key
customers plus increased demand for network products.
As such the outlook for the remainder of the year has improved and as a result we anticipate that full year profits and cash
flow for the Group will be higher than previous guidance:
• Revenues for 2014 expected to be c. $2.7bn (2013: $2.47bn)
• Operating margin for 2014 is expected to be no less than 8.5% (2013: 7.8%).
• Strong cash flow will continue, and Pace expects to generate in excess of $200m of free cash flow (2013: $209m).
Commenting on the results, Mike Pulli, Chief Executive Officer said:
“I am pleased to report we have had a successful first half of the year and have made considerable progress. Pace is
continuing to evolve into a more profitable, cash generative business with a broader spread of customers. As expected,
revenue was lower than the comparable period, however, we have delivered strong profit and cash flow growth through
the contribution of Aurora, a better mix of revenue, improving supply chain effectiveness and improving operating
efficiency.
H1 2014 has seen a period of intense development activity with a number of major new products being launched at the
end of the half and early in the second half, supporting our expectation of strong revenue growth in H2 2014.
Aurora Networks has been a great addition to the Pace Group. The integration has been successfully completed and
the underlying demand for Aurora products is well ahead of our expectations with record levels of orders.
The 23.0% increase in the interim dividend is in line with Pace’s progressive dividend policy and reflects both the solid
cash flow performance as well as the Board’s continued confidence in the outlook and future prospects for Pace.
We continue to make good progress on executing our strategy; the integration of Aurora, key wins in all areas of our
product and service portfolio across all of the regions that Pace operates in, and ongoing operational improvements
give management confidence that we will maintain our momentum and make further progress in the second half of
2014 and beyond.”
For further information please contact:
Charles Chichester / James Fearnley
RLM Finsbury
+44 (0) 207 251 3801
Chris Mather
Pace plc
+44 (0) 1274 538 330
A live audio webcast and conference call to present Pace’s Half Year Results to analysts and investors will be held at
09:00am. To register for this audio webcast, please go to: http://www.pace.com/ir
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Business Review
Key highlights in the period
Pace is continuing to become a more profitable, cash generative business with a broader spread of customers and a better
mix of revenue. Revenue in H1 2014 decreased by 13.6% ($1,138.9m vs $1,318.4m in H1 2013). Operating margin in the
period increased from 7.3% to 9.3% reflecting strong contribution from Aurora, better revenue mix, improving supply chain
effectiveness and lower underlying operating costs. The cash flow performance of Pace remains strong with $108.9m of
free cash flow generated in the period, 102.4% of adjusted EBITA.
Market Dynamics
The markets which Pace serves continue to remain strong; global digital PayTV revenue and subscribers are at record
levels and a Compound Annual Growth Rate (“CAGR”) of 7%11 for revenue and 8% 11 for subscribers is expected between
2013 and 2018. Underlying the strength of the PayTV market are a number of key dynamics, both from an operator and
consumer perspective:
• Operator consolidation: The rate of PayTV and telecoms operator consolidation over the past 6-12 months, both
rumoured and realised, is unprecedented. These significant investments into the PayTV space reflect the strength
of and confidence in the PayTV model, and are likely to continue to reshape the industry landscape for many years
to come. Each of the transactions have specific strategic rationale but a number of general strategic aims have
been publicly stated. These include greater scale benefitting programming costs and service and technology
innovation, provision of a broader offer of services and enabling the larger combined entities to compete more
effectively in an increasingly crowded and competitive marketplace. These enlarged service providers will aim to
offer better, more innovative and engaging services to their customers supported by the very best technology, with
higher expectations and demands on their technology vendors that only the largest, most innovative and diversified
companies such as Pace can provide.
• Subscriber growth beyond mature markets: In emerging markets, digital PayTV subscriber growth is still strong
with over 10% subscriber CAGR predicted from 2013 to 201811. This growth is driven by a number of factors such
as demographic transition, introduction of PayTV into greenfield markets, analogue to digital transition, changing
market regulation and increasing consumer demand for high quality video entertainment. With our deep in-market
coverage and capability, a global scale and broad portfolio of products and services including integrated solutions
(Pace hardware, software and conditional access) designed for emerging market service providers, Pace is well
placed to support service providers in these markets during this growth period.
• Whole home and Media Servers becoming the norm: The technology refresh cycle to Media Servers continues
at pace across the industry with over 5m devices shipped globally in 2013 and the total size of the market predicted
to grow 23.4% from 2013 to 2018 (CAGR) to over $4.6bn11. A Media Server combines the functionality of the STB
and the Gateway, augmenting traditional broadcast with IP-enabled services and enabling video content to be
distributed around the home; a key component of the move to “TV Everywhere”. The Media Server product segment
is evolving to become the main hub of the home, enabling any data connectivity (video, voice, broadband, home
automation etc.) around the home with both operator-provided and consumer-purchased devices. Pace has been
widely acknowledged as a clear market leader in the Media Server segment; having shipped over 5 million Media
Servers and nearly 6 million thin client devices over the last three years, with wins and deployments at more than
10 service providers around the world.
• Rapidly evolving advanced user experiences: As communications and entertainment services converge and we
move to an always-connected world, increasingly technology aware consumers are demanding ever more
advanced and rapidly evolving user experiences from their Service Providers. TV Everywhere, Ultra High Definition
(“UHD”) and great in-home wireless connectivity are three examples of advanced user experiences that are
resulting in technology change and faster refresh cycles. With TV Everywhere, service providers are marrying the
best of the Over the Top (“OTT”) experiences with the great content and support model of the traditional broadcast
offering, enabling consumers to watch what they want to watch, whenever and wherever they want to watch it. The
expected emergence of UHD video, over 60 million UHD televisions predicted to be shipped in 2018 (24% of total
shipments)9, brings not only a far greater picture resolution, but a wider range of colours and faster refresh of picture
resulting in a far more immersive experience than High Definition. Consumers now expect to be able to access all
their services at any time on their in-home wireless network. To enable this, service providers are rolling out
advanced residential gateways with next generation wireless network technologies (such as Wi-Fi 802.11ac) that
give greater coverage and increased bandwidth to the consumer. With a strong track record as a technology
11
IHS Television Intelligence Service 2014.
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innovator for the PayTV industry, Pace is at the forefront of supporting service providers to develop and deliver
these rapidly evolving user experiences to their consumers.
Bandwidth, bandwidth and more bandwidth: With increasing numbers of connectable devices, growing usage
of “video everywhere” and other data intensive applications such as wi-fi offload, consumer demand for high speed
data is increasing at a significant rate; global Internet traffic is predicted to reach 14 gigabytes (“GB”) per capita by
2018, up from 5 GB per capita in 2013 12. To respond to this demand and compete in highly competitive markets,
service providers need to upgrade their network capacity in a quick, effective and cost efficient manner. Aurora,
one of the largest suppliers of Optical Transport and Access Network solutions, enables service providers to cost
efficiently increase network capacity whilst minimising disruption to customers, saving on power, space and
operating expenses and leveraging existing network investments.
Supporting the increasingly complex connected home: As service providers deliver more services to
consumers and the number of connected devices in the home proliferates, the connected home continues to
become increasingly more complex; with the emergence of the “Internet of Things” it is estimated that in 2020, the
average broadband connected home will have over 50 connected devices 13. As this complexity increases, the need
for the service provider to be able to effectively and cost-efficiently support the consumer becomes greater. Through
our ECO Service Management Platform and next generation customer care centres, Pace manages over 33 million
devices and handles 6 million calls per annum on behalf of over 20 service providers across the world.
These dynamics are driving increased investment by service providers to deliver the best networks, the best user
experiences and the best service experience they can to their end users. As one of the leading providers of technology
solutions to the PayTV industry with a blue-chip customer base, strong global footprint, broad portfolio of products and
services, the Board believe that Pace is strongly positioned to capitalise on these major industry dynamics over the next 35 years.
Strategic plan
Pace continues to evolve and deliver against the Strategic Plan and goals laid out in 2011. We are pleased to report that
good progress has been made against these goals in H1 2014 and we are confident of further progress in H2 2014. The
Board are confident that we are on track to achieve our medium-term target of 9% operating margin in 2015.
Continue to transform core economics
In the period, significant progress has been made in improving the efficiency and effectiveness of the business. As the
major initiatives which commenced in 2012 continue to deliver tangible benefits, a cost-focussed discipline and high level
of accountability is now ingrained across Pace and is being implemented in the newly acquired Aurora Networks business.
• Continued focus on operating efficiency has enabled Pace to reduce underlying operating costs (excluding Aurora,
and IAS 38 14 adjustments) by 6.1% ($7.9m) whilst increasing investment in software and services research and
development and other growth opportunities.
• The integration of Aurora was completed ahead of plan and the committed Aurora synergies, both cost and working
capital, have been achieved with further opportunities for savings identified.
• There are a number of programmes underway to drive further efficiency into the Pace supply chain to reduce both
time-to-market and cost which will deliver benefits in H2 2014 and beyond.
• Cash generation was strong in the period; free cash flow was $108.9m (102.4% of adjusted EBITA) reflecting robust
cash conversion from operating income and benefits from working capital realignment at Aurora. H1 2014 is the
fifth successive half year that Pace has achieved an adjusted EBITA to cash conversion ratio in excess of 90% and
over the last 30 months Pace has delivered $500.6m aggregate free cash flow. The strong cash generation has
enabled Pace to reduce the debt taken on to fund the Aurora acquisition by 40.0% ($111.6m), from a pro forma net
debt of $279.2m at the close of Aurora acquisition on 6 January 2014. Net debt is now $167.6m, giving a net debt
to last twelve months (“LTM”) adjusted EBITDA 15 ratio of 0.73.
Maintain PayTV hardware leadership
Pace was reconfirmed as the market leader in PayTV hardware; global number 1 in Media Servers, STBs and Advanced
Telco Gateways.
12
Cisco® Visual Networking Index (VNI), 2014
OECD 2013
IAS 38 adjustments are the net of capitalised and amortised development costs under IAS 38 – Intangible Assets.
15
Adjusted EBITDA is operating profit before depreciation, exceptional costs and amortisation of other intangibles.
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23.2% decrease in PayTV Consumer Premise Equipment ("CPE") (H1 2013: 51.8% increase) to $971.0m (H1
2013: $1,264.9m) reflects the run-rate effect of expected dual sourcing at major North American customers that
took place in H2 2013. PayTV CPE Revenue is expected to increase in H2 2014 due to a number of new product
launches and growing demand across a number of customers and regions.
Pace has secured a new contract win with long-term customer Sky Italia, the leading PayTV provider in Italy.
Pace has been selected by Oi, the largest telco and satellite operator in Brazil, to provide their next generation high
definition PVR Set-top box.
Our partnership with TiVo has achieved further success in the period with Midcontinent Communications, a midtier US cable operator, selecting the joint Pace-TiVo Whole Home Media Server solution. We now have four
operators taking this solution with a strong pipeline in North America and Europe.
BeIn Sports, the leading PayTV provider in the Middle East and North African region has deployed Pace Home
Media Servers and High Definition STBs in multiple countries in the region to support their World Cup and English
Premier League marketing activities.
Pace has been selected to launch Residential Gateway, IP Set-top box and DVR solutions with a number of top
tier North American IOCs (“Independent Operating Companies”), including Sonic and Consolidated
Communications.
In Gateways, Pace has launched two high-performance next-generation Telco Gateways in the Americas: the
5268AC Intelligent Gateway, based on cutting-edge 4x4 Multi-User-Multiple Input, Multiple Output (“MU-MIMO)
technology, providing service providers state-of-the-art in-home Wi-Fi and bonded Digital Subscriber Line (“DSL”)
functionality, and the G5500 Advanced Gigabit Passive Optical Network (“GPON”) Gateway. From a customer
perspective, GVT, a major telco operator in Brazil has selected Pace to provide their next-generation GPON
Gateway to support their fiber to the premise rollouts.
Widening out
In the period, Pace achieved a 213.8% increase in non-CPE revenue to (H1 2013: 4.3% increase) to $167.9m (H1 2013:
$53.5m) driven by the acquisition of Aurora Networks. Notable developments in the period include:
• The Elements Software Platform (including Titanium Conditional Access) is now deployed on over 6.3 million
devices, a 17% increase in the last twelve months.
• In addition to shipping over 3 million RDK (Reference Design Kit) compliant devices, Pace’s role at the forefront of
the RDK initiative was reaffirmed with the announcement that the Elements Software Platform now has full RDK
compatibility.
• The ECO Service Management Platform is now managing over 33.7 million devices, a 35% increase in the last
twelve months. New wins include Frontier Communications and Logic Communications.
• Demand for network products at Aurora has been stronger than anticipated reflecting cable operators’ need for
increased bandwidth and Aurora’s product set being an efficient way to upgrade network infrastructure. Aurora
have record levels of orders and expect strong revenue and profit growth in H2 2014.
Business performance
Product type revenue split
H1 2014
$m
H1 2013
$m
FY 2013
$m
STB and Media Servers
893.9
1,074.6
1,979.6
Gateways
77.1
190.3
375.8
Software and Services
54.4
53.5
113.8
Networks
113.5
-
-
Total
1,138.9
1,318.4
2,469.2
The split in revenue across the various product categories is as follows: 78.4% STB and Media Servers (H1 2013: 81.5%),
6.8% Gateways (H1 2013: 14.4%), 4.8% Software and Services (H1 2013: 4.1%) and Networks 10.0% (H1 2013: 0.0%).
The 16.8% decrease in STB and Media Server revenue was expected as the comparable period was boosted by sole
source supply arrangements with major North American customers which became multiple source in H2 2013. STB and
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Media Server revenue is expected to increase in H2 2014 due to customer specific new product launches and growing
demand across a number of customers and regions.
Revenue from Gateway products reduced by 59.5% vs H1 2013, due to both the run rate effect of dual sourced supply at
a major customer and the reduced demand of legacy products ahead of next generation product launches at the end of H1
2014 and early in H2 2014. Gateway revenues are expected to increase to a more normal level in H2 2014 due to both the
take-up of these newly launched products, and new wins beyond the North American market.
Revenue from Software and Services was up 1.7% vs H1 2013, with growth in software and flat revenue in Customer Care.
Growth in H2 2014 is expected as key software projects are launched and Customer Care revenues pick up.
Networks revenue in the period was $113.5m reflecting a strong first half for the newly acquired Aurora Networks business,
with customer demand ahead of expectation and building through the year. The outlook for the Networks business is
encouraging and increased investment is underway to scale up the production capability.
Regional revenue split
H1 2014
$m
H1 2013
$m
FY 2013
$m
North America
699.0
839.0
1,540.5
Latin America
185.8
199.2
358.4
Europe
117.1
158.8
323.9
Rest of World
137.0
121.4
246.4
Total
1,138.9
1,318.4
2,469.2
Pace continues to have a globally diverse customer base and strong customer relationships from which to develop the
business: in H1 2014 revenues split: 61.4% North America (H1 2013: 63.6%), 16.3% Latin America (H1 2013: 15.1%),
10.3% Europe (H1 2013: 12.1%), and Rest of World 12.0% (H1 2013: 9.2%).
North America
North America is the largest, most advanced and most profitable market for digital PayTV and broadband technology in the
world, with over 110m PayTV subscribers and close to 110m broadband connections. We believe the digital PayTV market
in North America will continue to see low single digit annual growth in subscribers for the foreseeable future, however, the
high levels of competition between service providers will drive accelerated technology refresh cycles for the foreseeable
future.
Pace is the only vendor to the largest operators in each of the Cable, Satellite and Telco markets; serving Comcast,
DIRECTV and AT&T respectively. In each case Pace supplies their most advanced in-home technology. In addition, Pace
also serves a large number of tier two Cable and Telco operators in both the USA and Canada.
Total revenues in North America decreased by 16.7% to $699.0m in H1 2014 (H1 2013: $839.0m), reflecting the run-rate
effect of expected dual sourcing at major North American customers that took place in H2 2013. We are confident that Pace
will achieve strong revenue growth in North America in H2 2014 compared to H2 2013 due to increasing demand for new
products from major customers.
Due to our continued position of technological leadership and strong customer relationships, we remain confident about the
long-term opportunities for Pace in North America.
Latin America
The Latin American market is a large, diverse and fast growing market, within which Pace serves Satellite, Cable, IPTV and
hybrid operators across the region, with Brazil, Mexico and Argentina the key markets. The overall market has expanded
significantly over the last few years and continues to display strong PayTV subscriber growth with a predicted 9.5% CAGR
from 2013 to 2018. This growth is led by a number of factors including greenfield markets, deregulation in Brazil, and a
number of growing PayTV operators in the region. Demand for PayTV is strong at all levels of technology; from Standard
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Definition (“SD”) to support analogue to digital transition, through to High Definition (“HD”), high-end Personal Video
Recorders (“PVRs”) and Media Servers to meet growing consumer expectations.
Pace has a well-diversified customer base in Latin America; providing products to eight of the ten largest PayTV providers
in the region. Revenue reduced 6.7% to $185.8m (H1 2013: $199.2m) due to lower demand from a major customer ahead
of new product launches, however profitability in the region increased due to an improved product mix.
The Group remains confident that Latin America offers opportunities for continuing strong revenues and profitability and
that Pace is strategically well positioned in key markets and with key customers in the region.
Europe
Europe remains a fragmented and highly customer specific territory for Pace. Revenues in Europe were down by 26.3% to
$117.1m (H1 2013: $158.8m). The decrease was mainly due to a reduced win rate of new products in 2011, which has
adversely affected revenue in 2012, 2013 and H1 2014. Sales performance started to improve in 2012 and wins achieved
since then with both new and existing customers are now being deployed and give confidence that revenues in Europe will
grow in H2 2014 and beyond.
Mid-single-digit subscriber growth is predicted in the underlying European PayTV market; however, we expect significant
growth in the Media Server segment of the market as operators in Europe follow the innovation of North American operators
and move to whole home solutions.
Rest of World
Rest of World covers a diverse range of markets which are developing at different rates: the highly developed markets in
Australia, New Zealand and South East Asia, the “fast following” markets in Middle East and Africa, and the fast growing
Indian market. Revenues in Rest of World increased 12.9% to $137.0m (H1 2013: $121.4m). This increase reflects new
product launches with major customers in H2 2013 and in the period, and we expect further revenue growth in this region
in H2 2014 and beyond.
The Group remains confident that Pace is well positioned to take advantage of the significant growth opportunities both at
the high end of the market with HD, PVR and Media Server products, and also as the uptake of PayTV and digitisation
continues in emerging greenfield markets allowing Pace to increase its footprint with new customers through Software and
Integrated Solutions.
Outlook
Revenue momentum has increased as the year has progressed. We have good visibility and anticipate strong revenue
growth in H2 2014 driven by new product launches across a number of markets, regaining leadership with several key
customers plus increased demand for network products.
As such the outlook for the remainder of the year has improved and as a result we anticipate that full year profits and cash
flow for the Group will be higher than previous guidance:
• Revenues for 2014 expected to be c. $2.7bn (2013: $2.47bn)
• Operating margin for 2014 is expected to be no less than 8.5% (2013: 7.8%).
• Strong cash flow will continue, and Pace expects to generate in excess of $200m of free cash flow (2013: $209m).
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Financial Review
Group trading results
H1 2014
$m
H1 2013
$m
FY2013
$m
Revenue
1,138.9
1,318.4
2,469.2
Gross profit
245.8
233.1
448.2
Gross margin %
21.6%
17.7%
18.2%
Adjusted administrative expenses*
(139.5)
(136.4)
(254.6)
Adjusted EBITA*
106.3
96.7
193.6
Operating margin**
9.3%
7.3%
7.8%
Exceptional costs
(3.5)
(1.3)
(12.2)
Amortisation of other intangibles
(27.7)
(22.4)
(42.6)
Net finance expense
(3.1)
(4.4)
(8.0)
Profit before tax
72.0
68.6
130.8
Tax charge
(16.6)
(17.9)
(34.1)
Profit after tax
55.4
50.7
96.7
* Pre-exceptional costs and amortisation of other intangibles
** Operating margin is adjusted EBITA margin
Group Revenue of $1,138.9m (H1 2013: $1,318.4m) decreased by 13.6%; mostly due to the run-rate effect of expected
dual sourcing at major North American customers that took place in H2 2013.
In the period, Pace’s three largest customers; AT&T, Comcast and DIRECTV accounted for 43% of the Group revenue
(H1 2013: 59%). This reduction in customer concentration was due to both increased revenue at other customers and the
impact of dual sourced supply of product at two of the three largest customers.
Gross profit increased 5.4% to $245.8m (H1 2013: $233.1m). Gross margin percentage during the period was 21.6%, an
increase of 3.9ppt on H1 2013, reflecting supply chain efficiencies, improved revenue mix and contribution from Aurora.
Gross margins will be diluted in H2 2014 as revenue mix shifts more towards our larger customers.
Administrative expenses pre-exceptional costs and amortisation of other intangibles increased by $3.1m (2.3%) to
$139.5m (H1 2013: $136.4m) reflecting the addition of Aurora. Underlying expenses, excluding Aurora and the impact of
IAS 38 accounting adjustments, decreased by $7.9m (6.1%) to $120.7m (H1 2013: $128.6m).
The IAS 38 net credit in H1 2014 was $14.4m ($34.1m of development spend was capitalised and $19.7m amortised)
reflecting an intense period of development activity ahead of product launches at the end of the half and in H2 2014 plus
the inclusion of the Aurora acquisition. We anticipate that the IAS 38 credit will unwind over the next 18 months.
Adjusted EBITA was $106.3m (H1 2013: $96.7m); an operating margin of 9.3% against 7.3% in H1 2013 due to both
improved profitability in the core business and the contribution from Aurora. Operating margins are expected to reduce in
H2 2014 as product mix shifts more towards STB and Media Servers with our larger customers.
Exceptional costs of $3.5m (H1 2013: $1.3m) related to post-acquisition integration and restructuring costs in the Networks
SBU and restructuring costs in the International SBU.
Amortisation of other intangibles, primarily reflecting the charge for intangible assets related to acquisitions made in both
2010 and 2014, was $27.7m (H1 2013: $22.4m).
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Segmental analysis
The Group operates through Strategic Business Units (“SBUs”). Pace Americas, Pace International and Pace Networks
are deemed by the Board to represent operating segments under IFRS 8, with revenues and EBITA as follows:
Revenue
Pace Americas
Pace International
Pace Networks
Other
Total revenue
Adjusted EBITA
Pace Americas
Pace International
Pace Networks
Other
Total adjusted EBITA
H1 2014
$m
H1 2013
$m
(restated 16)
FY 2013
$m
(restated)
675.7
348.2
115.0
1,138.9
908.7
409.7
1,318.4
1,680.2
789.0
2,469.2
62.6
49.0
16.2
(21.5)
106.3
84.4
39.2
(26.9)
96.7
152.7
82.8
(41.9)
193.6
Movements in revenue are described below. Although not wholly consistent, revenues from STB and Media Servers,
Gateways and Software and Services in North America belong primarily to the Americas, in Europe and Rest of World
belong largely to the International SBU, and in Latin America belong to both the Americas and International SBUs. All
revenue from Network products belong to the Networks SBU, which is the new operating segment for the Aurora acquisition.
H1 2014 revenue was split across the business units as follows; Americas 59.3% (H1 2013: 68.9%), International 30.6%
(H1 2013: 31.1%), Networks 10.1% (H1 2013: 0.0%) and Other 0.0% (H1 2013: 0.0%).
Pace Americas’ revenue decreased by $233.0m (25.6%), adjusted EBITA decreased by $21.8m (25.8%) and operating
margin stayed flat at 9.3% compared to H1 2013, which was boosted by sole source supply arrangements with major North
American customers. Pace International revenues decreased by $61.5m (15.0%) compared to H1 2013, however adjusted
EBITA increased by $9.8m (25.0%) and operating margin increased from 9.6% to 14.1% reflecting improved revenue mix
and ongoing improvements to operating efficiency. Pace Networks achieved revenue of $115.0m, adjusted EBITA of
$16.2m and operating margin of 14.1% reflecting a strong start for this new SBU.
Other amounts include unallocated central costs that are not classified as reportable segments under IFRS 8. The loss in
Other, primarily Corporate costs, decreased by 20.1% to $21.5m (H1 2013: restated loss of $26.9m).
Finance costs
Net financing costs of $3.1m (H1 2013: $4.4m) reflect the improved terms of the new borrowing facilities despite an increase
in average net debt during the period. Finance costs for the half include $0.9m (H1 2013: $1.1m) for amortisation of facility
arrangement and associated fees.
Profit before tax
Profit before tax was $72.0m (H1 2013: $68.6m); an increase of $3.4m (5.0%) on H1 2013.
Taxation
16
The restatement reflects the restructuring of certain activities in the period. As such some items previously classified as “Other” are now split between the Americas and
International SBU.
9
The tax charge of $16.6m (H1 2013: $17.9m) results from the half year effective tax rate of 23.0% (H1 2013: 26.1%). The
rate reduction reflects lower corporate tax rates in the UK and the effect of the Aurora acquisition. The cash cost of corporate
tax was $6.2m (H1 2013: $13.0m), 5.8% of adjusted EBITA (H1 2013: 13.4%), excluding a tax rebate related to Aurora of
$3.4m.
Profit after tax
Profit after tax was $55.4m (H1 2013: $50.7m); an increase of $4.7m (9.3%) on H1 2013.
Earnings per share
Basic EPS was 17.8c (H1 2013: 16.4c), an increase of 8.5%. Adjusted basic EPS, which removes the tax effected impact
of the exceptional costs and amortisation of other intangibles to reflect underlying performance, was 25.5c (H1 2013: 22.1c),
an increase of 15.4%.
Balance sheet
Intangible development expenditure assets increased by $14.9m (H1 2013: $2.8m increase) in the period to $79.3m (31
December 2013: $64.4m).
Tangible fixed assets increased by $5.0m in the period primarily due to the inclusion of Aurora ($6.9m). Capital expenditure
of $12.5m (H1 2013: $14.4m) was offset by the depreciation charge of $14.4m (H1 2013: $12.2m) and $nil exchange
adjustments (H1 2013: $2.1m).
Working capital
In the period following the acquisition of Aurora, the pro forma working capital reduced by $19.5m (14.8%) to $111.9m, as
the reduction in Aurora offset the increase in core Pace. Underlying working capital, excluding the addition of Aurora
increased by $21.5m (36.8%) reflecting phasing of revenue in the period.
Inventory increased by $9.5m (6.1%) to $166.3m during the period reflecting the inclusion of Aurora inventory. Average
stock turn in the period was 3.7 times against 4.0 times in H1 2013.
Debtor days were 59 days at the end of the half compared with 60 days at 31 December 2013 and 54 days at 30 June
2013, reflecting customer mix. The increase in accounts receivable since December reflects the phasing of trading in the
lead up to the period end.
Creditor days remained flat at 90 days at the end of the half compared to 31 December 2013: 90 days and 86 days at 30
June 2013.
Debt
In the period following the acquisition of Aurora, the pro forma net debt reduced by $111.6m (40.0%) from $279.2m to
$167.6m.
A key target for the Group is to reduce the balance sheet leverage (calculated as net debt divided by adjusted EBITDA over
the preceding 12 months). At 30 June 2014 the net debt / LTM adjusted EBITDA ratio was 0.73x, well within the 2x net debt
to EBITDA ratio target set as an appropriate and efficient capital structure for Pace.
Liquidity and cash flows
A key performance measure for the Group is free cash flow, which was $108.9m (H1 2013: $92.0m) and represented
102.4% of adjusted EBITA (H1 2013: 95.1%). Cash outflows from interest payable net of interest received were $3.1m (H1
2013: $4.4m). Cash spent on exceptional costs was $4.1m (H1 2013: $6.5m) and the net cash cost of tax was $2.8m (H1
2013: $13.0m).
Foreign currency
In the period approximately 76.9% of the Group’s revenues were denominated in USD (H1 2013: 81.3%), 13.1% in Brazilian
Real (H1 2013: 12.9%), 6.4% in Euros (5.6%), 2.7% in South African Rand (H1 2013: 0.0%), 0.5% in Sterling (H1 2013:
0.1%) and 0.4% in Australian Dollars (H1 2013: 0.1%).
10
The impact of non-USD revenues, costs and overheads continues to be addressed through Pace’s foreign exchange
hedging strategy. The group is fully hedged for the remainder of 2014 and partially hedged in H1 2015 through a series of
forward contracts.
Risks and Uncertainties
Save as referred to above, the principal risks and uncertainties facing the Group have not changed from those set out in
the Annual Report and Accounts for the year ended 31 December 2013. The risks and uncertainties related to: customers
and markets, suppliers, royalties, currency, innovation, product liability claims, natural disasters, and IT systems and
security. The full Annual Report and Accounts are available at www.pace.com.
Dividend
The Board has declared an interim dividend of 2.25c per share (H1 2013: 1.83c per share), an increase of 23.0% in line
with the progressive dividend policy introduced in 2009 (one-third, two-thirds split between interim and final dividends). The
increase reflects the Board’s confidence in the outlook for the Group and its improving financial position. Pace will look to
continue to pay a progressive dividend from this new rebased level.
Dividends will be paid in sterling, equivalent to 1.326 pence per share. This is based on an exchange rate of £ = $1.6971,
being the closing rate applicable on 25 July 2014, the date on which the Board resolved to recommend the interim dividend.
The proposed dividend will be payable on 5 December 2014 to shareholders on the register on 7 November 2014.
11
Responsibility statement of the directors in respect of the half-yearly financial report
The directors confirm that, to the best of our knowledge:
•
•
the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting
as adopted by the EU;
the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have
occurred during the first six months of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place
in the first six months of the current financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related party transactions described in the last
annual report that could do so.
By order of the Board
Anthony J Dixon
Company Secretary
28 July 2014
The directors are:
• Allan Leighton – Non-executive Chairman
• Mike Pulli – Chief Executive Officer
• Patricia Chapman-Pincher – Non-executive director
• John Grant – Non-executive director
• Mike Inglis – Non-executive director
• Amanda Mesler – Non-executive director
12
Condensed Consolidated Interim Income Statement
for the six months ended 30 June 2014
Notes
Unaudited
6 months
ended
30 June
2014
$m
Unaudited
6 months
ended
30 June
2013
$m
Audited
Year
ended
31 December
2013
$m
2
1,138.9
1,318.4
2,469.2
Cost of sales
(893.1)
(1,085.3)
(2,021.0)
Gross profit
245.8
233.1
448.2
(65.8)
(71.0)
(132.6)
(73.7)
(65.4)
(122.0)
(3.5)
(1.3)
(12.2)
Revenue
Administrative expenses:
Research and development expenditure
Other administrative expenses
Before exceptional costs
Exceptional costs
4
(27.7)
(22.4)
(42.6)
(170.7)
(160.1)
(309.4)
75.1
73.0
138.8
Finance income – interest receivable
1.1
0.3
1.8
Finance expenses – interest payable
(4.2)
(4.7)
(9.8)
Profit before tax
72.0
68.6
130.8
Amortisation of other intangibles
Total administrative expenses
Operating profit
Tax charge
3
(16.6)
(17.9)
(34.1)
Profit after tax
2
55.4
50.7
96.7
55.4
50.7
96.7
Attributable to:
Equity holders of the Company
Basic earnings per ordinary share (cents)
5
17.8
16.4
31.2
Diluted earnings per ordinary share (cents)
5
17.0
15.6
29.8
13
Condensed Consolidated Interim Statement of Comprehensive Income
for the six months ended 30 June 2014
Unaudited
6 months ended
30 June
2014
$m
Unaudited
6 months ended
30 June
2013
$m
Audited
Year
ended
31 December
2013
$m
55.4
50.7
96.7
Exchange differences on translating foreign operations
Net change in fair value of cash flow hedges transferred to profit or
loss gross of tax
6.4
(8.9)
(4.8)
1.5
(3.1)
(2.7)
Deferred tax adjustment on above
Effective portion of changes in fair value of cash flow hedges gross
of tax
(0.3)
0.8
0.7
Profit for the period
Other comprehensive income:
Items that are or may be subsequently reclassified to profit or
loss:
Deferred tax adjustment on above
Other comprehensive income for the period, net of tax
Total comprehensive income for the period
(0.1)
2.6
4.7
-
(0.6)
(1.2)
7.5
(9.2)
(3.3)
62.9
41.5
93.4
62.9
41.5
93.4
Attributable to:
Equity holders of the Company
14
Condensed Consolidated Interim Balance Sheet
at 30 June 2014
Notes
Unaudited
30 June
2014
$m
Unaudited
30 June
2013
$m
Audited
31 December
2013
$m
65.0
489.4
233.4
79.3
42.9
62.9
335.4
143.4
53.5
26.0
60.0
342.6
123.1
64.4
21.2
910.0
621.2
611.3
166.3
549.4
122.4
4.2
188.3
485.7
83.3
11.6
156.8
468.7
33.0
1.3
ASSETS
Non-Current Assets
Property, plant and equipment
Intangible assets – goodwill
Intangible assets – other intangibles
Intangible assets – development expenditure
Deferred tax assets
6
6
6
Total Non-Current Assets
Current Assets
Inventories
Trade and other receivables
Cash and cash equivalents
Current tax assets
7
8
Total Current Assets
842.3
768.9
659.8
1,752.3
1,390.1
1,271.1
Issued capital
Share premium
Merger reserve
Hedging reserve
Translation reserve
Retained earnings
29.1
84.6
109.9
0.9
(53.2)
442.3
28.9
82.9
109.9
(2.0)
(63.7)
353.5
29.0
83.7
109.9
(0.2)
(59.6)
384.2
Total Equity
613.6
509.5
547.0
96.4
83.7
256.7
64.2
53.0
-
56.3
60.3
-
436.8
117.2
116.6
603.8
30.9
33.9
33.3
582.7
10.0
19.2
151.5
567.1
8.5
31.9
-
701.9
763.4
607.5
Total Assets
EQUITY
LIABILITIES
Non-Current Liabilities
Deferred tax liabilities
Provisions
Borrowings
11
12
Total Non-Current Liabilities
Current Liabilities
Trade and other payables
Current tax liabilities
Provisions
Borrowings
9
11
12
Total Current Liabilities
Total Liabilities
1,138.7
880.6
724.1
Total Equity and Liabilities
1,752.3
1,390.1
1,271.1
15
Condensed Consolidated Interim Statement of Changes in Shareholders’ Equity
for the six months ended 30 June 2014
Share
Share
Merger
Hedging Translation
Retained
Total
capital
premium
reserve
Reserve
reserve
earnings
equity
$m
$m
$m
$m
$m
$m
$m
28.7
79.0
109.9
(1.7)
(54.8)
299.0
460.1
Profit for the period
-
-
-
-
-
50.7
50.7
Other comprehensive income
-
-
-
(0.3)
(8.9)
-
(9.2)
Total comprehensive income for the
period ended June 2013
-
-
-
(0.3)
(8.9)
50.7
41.5
-
-
-
-
-
3.8
3.8
Balance at January 2013
Transactions with owners:
Employee share incentive charges
Issue of shares
0.2
3.9
-
-
-
-
4.1
Balance at June 2013
28.9
82.9
109.9
(2.0)
(63.7)
353.5
509.5
Profit for the period
-
-
-
-
-
46.0
46.0
Other comprehensive income
-
-
-
1.8
4.1
-
5.9
Total comprehensive income for the
period ended December 2013
-
-
-
1.8
4.1
46.0
51.9
Dividends to equity shareholders
-
-
-
-
-
(15.6)
(15.6)
Employee share incentive charges
-
-
-
-
-
0.3
0.3
0.1
0.8
-
-
-
-
0.9
Transactions with owners:
Issue of shares
Balance at December 2013
29.0
83.7
109.9
(0.2)
(59.6)
384.2
547.0
Profit for the period
-
-
-
-
-
55.4
55.4
Other comprehensive income
-
-
-
1.1
6.4
-
7.5
Total comprehensive income for the
period ended June 2014
-
-
-
1.1
6.4
55.4
62.9
-
-
-
-
-
2.7
2.7
Transactions with owners:
Employee share incentive charges
Issue of shares
0.1
0.9
-
-
-
-
1.0
Balance at June 2014
29.1
84.6
109.9
0.9
(53.2)
442.3
613.6
16
Condensed Consolidated Interim Cash Flow Statement
for the six months ended 30 June 2014
Unaudited
6 months
ended
30 June
2014
$m
Unaudited
6 months
ended
30 June
2013
$m
Audited
Year
ended
31 December
2013
$m
72.0
68.6
130.8
Cash flows from operating activities
Profit before tax
Adjustments for:
2.7
3.8
4.1
Depreciation of property, plant and equipment
14.4
12.2
25.0
Amortisation of development expenditure
19.4
24.7
45.6
Amortisation of other intangibles
27.7
22.4
42.6
-
-
0.2
Share based payments charge
Loss on sale of property, plant and equipment
Net finance expense
Movement in trade and other receivables
Movement in trade and other payables
Movement in inventories
Movement in provisions
Cash generated from operations
Interest paid
Tax paid
Net cash generated from operating activities
3.1
4.4
8.0
(18.6)
72.4
85.5
1.9
(49.0)
(67.2)
33.4
(6.4)
24.2
(15.2)
(5.0)
14.4
140.8
148.1
313.2
(3.1)
(4.4)
(7.7)
(2.8)
(13.0)
(23.8)
134.9
130.7
281.7
Cash flows from investing activities
(295.3)
-
-
Purchase of property, plant and equipment
(12.5)
(14.4)
(21.6)
Development expenditure
(34.3)
(24.6)
(52.9)
1.1
0.3
1.8
(341.0)
(38.7)
(72.7)
Proceeds from external borrowings
310.0
-
-
Repayment of long-term debt
(15.5)
(87.5)
(240.1)
1.0
4.1
5.0
-
-
(15.6)
295.5
Acquisition of subsidiaries, net of cash acquired
Interest received
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Dividend paid
Net cash used in financing activities
(83.4)
(250.7)
Net change in cash and cash equivalents
89.4
8.6
(41.7)
Cash and cash equivalents at the start of the period
33.0
74.7
74.7
122.4
83.3
33.0
Cash and cash equivalents at the end of the period
17
Notes to the Condensed Consolidated Interim Financial Statements
for the six months ended 30 June 2014
1.
BASIS OF PREPARATION AND GENERAL INFORMATION
General information
Pace plc (the 'Company') is a limited liability company incorporated and domiciled in the UK. The address of its registered
office is Victoria Road, Saltaire, BD18 3LF.
The Company is listed on the London Stock Exchange.
The condensed consolidated interim financial statements for the six months ended 30 June 2014 comprise the Company
and its subsidiaries (together referred to as the 'Group').
Basis of preparation
This consolidated interim financial information for the six months ended 30 June 2014 has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, ‘Interim financial
reporting’, as adopted by the European Union. The condensed consolidated interim financial information should be read
in conjunction with the annual financial statements for the year ended 31 December 2013, which have been prepared in
accordance with IFRSs as adopted by the European Union.
The consolidated interim financial information does not comprise statutory accounts within the meaning of section 434 of
the Companies Act 2006. The comparative figures for the financial year ended 31 December 2013 are not the company's
statutory accounts for that financial year. Those accounts have been reported on by the company's auditor and delivered
to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to
which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006.
The Board’s assessment of the Group’s ability to continue as a going concern has taken into account the effect of the
current economic climate, current market position and the level of borrowings in the year. The principal risks that the
Group is challenged with, and which have not changed at 30 June 2014, were set out in the Risk Management and
Principal Risks section of the 2013 Annual Report along with how the directors intend to mitigate those risks.
The Board has prepared a financial and working capital forecast upon trading assumptions and other medium term plans
and has concluded that the Group will continue to meet its financial performance covenants and will have adequate
working capital available to continue in operational existence for the foreseeable future.
This consolidated interim financial information has been reviewed, not audited. The auditors review report for the six
month period ended 30 June 2014 is set out on page 29.
Significant judgements, key assumptions and estimation uncertainty
The preparation of interim statements requires management to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and
associated assumptions are based on historical experience and various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis of making the judgements about carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Key sources of estimation uncertainty and critical accounting judgements are as follows:
Warranties
Pace provides product warranties for its products. Although it is difficult to make accurate predictions of potential failure
rates or the possibility of an epidemic failure, as a warranty estimate must be calculated at the outset of a product before
field deployment data is available, these estimates improve during the lifetime of the product in the field.
18
A provision for warranties is recognised when the underlying products or services are sold. The provision is based on
historical warranty data and a weighting of all possible outcomes against their associated probabilities. The level of
warranty provision required is reviewed on a product by product basis and provisions adjusted accordingly in light of
actual performance.
Royalties
Pace’s products incorporate third party technology, usually under licence. Inadvertent actions may expose Pace to the
risk of infringing third party intellectual property rights. Potential claims can still be submitted many years after a product
has been deployed. Any such claims are always vigorously defended.
A provision for royalties is recognised where the owners of patents covering technology allegedly used by the Group have
indicated claims for royalties relating to the Group’s use (including past usage) of that technology. Having taken legal
advice, the Board considers that there are defences available that should mitigate the amounts being sought. The Group
will vigorously negotiate or defend all claims but, in the absence of agreement, the amounts provided may prove to be
different from the amounts at which the potential liabilities are finally settled. The provision is based on the latest
information available.
Revenue recognition
Some of the Group’s sales involve the delivery of more than one product or service (multiple components) as part of a
single transaction. The amount recognised as revenue for each component is calculated by reference to the fair value of
the element in relation to the fair value of the arrangement as a whole. This requires a degree of management judgement
and the fair value allocations are, by their nature, best estimates.
Impairment reviews
As is required by International Accounting Standards, the Group carries out impairment reviews of its non-financial assets
on an annual basis, or when indicators of impairment exist. Such reviews involve assessing the value in use of an asset
or CGU by reference to its estimated future cash flows, discounted to their present value. The judgements in relation to
impairment reviews relate to the assumptions applied in calculating the value in use, and the future performance
expectations.
Intangible assets – Capitalised Development costs
The Group business includes a significant element of research and development activity. Under accounting standards,
principally IAS 38 “Intangible Assets”, there is a requirement to capitalise and amortise development expenditure to match
costs to expected benefits from projects deemed to be commercially viable. The application of this policy involves the
ongoing consideration by management of the forecasted economic benefit from such projects compared to the level of
capitalised costs, together with the selection of amortisation periods appropriate to the life of the associated revenues
from the product.
Such considerations made by management are a key judgement in preparation of the financial statements.
Accounting policies
Except as described below, the accounting policies applied are consistent with those of the annual financial statements
for the year ended 31 December 2013, as described in the Annual Report and Accounts.
Taxes on income in the interim periods are accrued using the weighted average tax rate based on the tax rates expected
to be applicable to expected annual earnings.
Changes in accounting policies
The Group has adopted the following new standards with a date of initial application of 1 January 2014:
-
‘Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32’. The amendments clarify the
offsetting criteria, but have no material impact on the Group.
19
2.
-
‘Recoverable amount disclosures for non-financial assets – Amendments to IAS 36’. The amendments reverse
the unintended requirement in IFRS 13 Fair Value Measurement to disclose the recoverable amount of every
cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated. The
amendment has no material impact on the Group.
-
‘Continuing hedge accounting after derivative novation – Amendments to IAS 39’. The amendments add a limited
exception to IAS 39 to provide relief from discontinuing an existing hedging relationship when a novation that was
not contemplated in the original hedging documentation meets specific criteria. The amendment has no material
impact on the Group.
SEGMENTAL REPORTING
In accordance with IFRS 8 “Operating Segments”, the chief operating decision-maker (“CODM”) has been identified as
the Board of Directors which reviews internal monthly management reports, budget and forecast information to evaluate
the performance of the business and make decisions.
The Group determines operating segments on the basis of Strategic Business Unit (“SBU”) areas, being the basis on
which the Group manages its worldwide interests.
During the period the Group created a new SBU named Pace Networks, which contains the Aurora Networks Inc
business acquired in 2014. In addition, certain other activities were restructured and split out across the Pace
International and Pace Americas SBUs.
The Group has the following reportable segments as at 30 June 2014:
•
•
•
Pace Americas;
Pace International; and
Pace Networks.
Other amounts include unallocated central costs that are not classified as reportable segments under IFRS 8.
Performance is measured based on segmental adjusted EBITA, as included in the internal management information
which is reviewed by the CODM. Adjusted EBITA is used to measure performance as management believes that such
information is the most relevant in evaluating the results of certain segments, relative to other entities that operate within
these industries.
Revenues disclosed below materially represent revenues to external customers and where appropriate, pricing is
determined on an arm’s length basis. There are no material inter-segment transactions.
The tables below present the segmental information on the revised basis, with prior periods amended to conform to the
current period presentation.
6 months ended 30 June 2014
Segmental income statement
Revenues
Adjusted EBITA
Pace
Americas
$m
Pace
International
$m
Pace
Networks
$m
Other
$m
Total
$m
675.7
62.6
348.2
49.0
115.0
16.2
(21.5)
1,138.9
106.3
(3.5)
(27.7)
(3.1)
(16.6)
Exceptional items
Amortisation of other intangibles
Interest
Tax
55.4
Profit for the period
20
6 months ended 30 June 2013 (restated)
Segmental income statement
Revenues
Adjusted EBITA
Pace
Americas
$m
Pace
International
$m
Pace
Networks
$m
Other
$m
Total
$m
908.7
84.4
409.7
39.2
-
(26.9)
1,318.4
96.7
Exceptional items
Amortisation of other intangibles
Interest
Tax
(1.3)
(22.4)
(4.4)
(17.9)
Profit for the period
Year ended 31 December 2013 (restated)
Segmental income statement
Revenues
Adjusted EBITA
50.7
Pace
Americas
$m
Pace
International
$m
Pace
Networks
$m
Other
$m
Total
$m
1,680.2
152.7
789.0
82.8
-
(41.9)
2,469.2
193.6
Exceptional items
Amortisation of other intangibles
Interest
Tax
(12.2)
(42.6)
(8.0)
(34.1)
Profit for the period
96.7
Geographical analysis
In presenting information on the basis of geographical segments, segment revenue is based on the geographical location
of customers.
6 months 6 months ended
Year ended 31
ended
30 June
December
30 June 2014
2013
2013
Revenue by destination
$m
$m
$m
117.1
Europe
158.8
323.9
699.0
North America
839.0
1,540.5
185.8
Latin America
199.2
358.4
137.0
Rest of World
121.4
246.4
1,138.9
1,318.4
2,469.2
The Group has four main revenue streams, being Set-top boxes (“STB”) and Media Servers, Gateways, Software &
Services, and Networks. These revenue streams arise in each operating segment and are not defined by geographical
locations.
21
The following table provides an analysis of the Group’s revenue streams according to those classifications.
6 months 6 months ended
ended
30 June
30 June 2014
2013
$m
$m
893.9
77.1
54.4
113.5
1,138.9
STB & Media Servers
Gateways
Software & Services
Networks
3.
Year ended 31
December
2013
$m
1,074.6
190.3
53.5
1,318.4
1,979.6
375.8
113.8
2,469.2
TAX CHARGE
Total current tax charge
Total deferred tax credit/(charge)
Tax charge
6 months
ended
30 June
2014
$m
6 months
ended
30 June
2013
$m
Year
ended 31
December
2013
$m
(19.2)
2.6
(16.6)
(12.5)
(5.4)
(17.9)
(32.4)
(1.7)
(34.1)
The tax charge is recognised using the best estimate of the weighted average annual effective tax rate expected for the
full financial year. The estimated average annual tax rate used for the year ending 31 December 2014 is 23.0% (2013:
26.1%).
4. EXCEPTIONAL ITEMS
Restructuring and reorganisation costs
Acquisition and integration costs
Aborted acquisition costs
6 months
ended
30 June
2014
$m
6 months
ended
30 June
2013
$m
Year
ended 31
December
2013
$m
(0.7)
(2.8)
(3.5)
(1.3)
(1.3)
(4.2)
(6.9)
(1.1)
(12.2)
Restructuring and reorganisation costs in the current period relate to restructuring programmes within the Group, and
represent the costs of redundancy and associated professional fees. Acquisition costs include professional service fees in
respect of the acquisition of Aurora Networks, Inc, and subsequent integration costs thereafter. Aborted acquisition costs
relate to professional service fees in respect of aborted acquisitions.
22
5. EARNINGS PER ORDINARY SHARE
Basic earnings per ordinary share have been calculated by using profit after taxation, and the average number of
qualifying ordinary shares in issue of 311,916,677 (30 June 2013: 308,360,691).
Diluted earnings per ordinary share vary from basic earnings per ordinary share due to the effect of the notional exercise
of outstanding share options. The diluted earnings are the same as basic earnings. The diluted number of qualifying
ordinary shares was 325,634,403 (30 June 2013: 324,772,017).
To better reflect underlying performance, adjusted earnings per share is also calculated (adjusting profit after tax to
remove amortisation of other intangibles and exceptional items, post tax) as below:
Adjusted basic earnings per ordinary share (cents)
Adjusted diluted earnings per ordinary share (cents)
6 months
ended
30 June
2014
6 months
ended
30 June
2013
Year
ended 31
December
2013
25.5
24.4
22.1
21.0
44.3
42.2
Within the adjusted earnings per ordinary share calculations, the earnings amount is calculated as follows:
6 months
ended
30 June
2014
$m
55.4
27.7
(6.4)
3.5
(0.8)
79.4
Profit after tax
Amortisation charge
Tax effect of above
Exceptional items
Tax effect of above
Adjusted profit after tax
6 months
ended
30 June
2013
$m
50.7
22.4
(5.8)
1.3
(0.4)
68.2
Year
ended 31
December
2013
$m
96.7
42.6
(11.1)
12.2
(3.2)
137.2
The Group’s effective tax rate of 23.0% (30 June 2013: 26.1%) has been used to calculate the tax effect of adjusted
items.
23
6. INTANGIBLE ASSETS
Cost
At 31 December 2013
Additions
Exchange adjustments
At 30 June 2014
Amortisation
At 31 December 2013
Provided in the period
At 30 June 2014
Net book value at 31
December 2013
Net book value at 30
June 2014
Goodwill
$m
Development
Expenditure
$m
Customer
contracts and
relationships
$m
Technology
and patents
$m
Other
$m
Other
intangibles
$m
342.6
146.1
0.7
489.4
320.3
34.3
354.6
164.3
30.0
194.3
131.8
108.0
239.8
10.9
10.9
307.0
138.0
445.0
-
255.9
19.4
275.3
80.9
7.4
88.3
95.3
19.9
115.2
7.7
0.4
8.1
183.9
27.7
211.6
342.6
64.4
83.4
36.5
3.2
123.1
489.4
79.3
106.0
124.6
2.8
233.4
7. INVENTORIES
Raw materials and consumable stores
Work-in-progress
Finished goods
24
As at
30 June
2014
$m
As at
30 June
2013
$m
As at
31 December
2013
$m
24.7
4.0
137.6
166.3
21.2
167.1
188.3
17.9
138.9
156.8
8. TRADE AND OTHER RECEIVABLES
Trade receivables
Other receivables
Prepayments
As at
30 June
2014
$m
As at
30 June
2013
$m
As at
31 December
2013
$m
513.0
26.3
10.1
549.4
453.1
23.1
9.5
485.7
422.7
36.9
9.1
468.7
As at
30 June
2014
$m
As at
30 June
2013
$m
As at
31 December
2013
$m
508.9
3.0
12.3
79.6
603.8
515.1
2.3
11.0
54.3
582.7
473.4
2.9
15.0
75.8
567.1
9. TRADE AND OTHER PAYABLES
Trade payables
Social security and other taxes
Other payables
Accruals
10. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Group’s financial instruments qualify for hedge accounting and have an asset fair value at the balance sheet date of
$1.2m (31 December 2013: asset of $0.5m). They are disclosed within trade and other receivables. The carrying value is
equivalent to the fair value.
The Group’s financial instruments, namely forward exchange contracts, have been determined to represent Level 2
instruments (appropriate where Level 1 quoted prices are not available but fair value is based on observable market
data). Level 2 fair values for simple over-the-counter derivative financial instruments are based on broker quotes. Those
quotes are tested for reasonableness by discounting expected future cash flows using market interest rate for a similar
instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take
account of the credit risk of the Group entity and counterparty when appropriate. There were no transfers between levels
during the period.
25
11. PROVISIONS
Royalties under
negotiation
$m
Warranties
$m
Other
$m
Total
$m
At 31 December 2013
Acquisitions
Net charge for the period
Utilised
Transfer
At 30 June 2014
36.9
4.8
(0.9)
4.7
45.5
40.1
4.7
12.8
(8.1)
49.5
15.2
35.9
1.5
(30.0)
22.6
92.2
40.6
19.1
(39.0)
4.7
117.6
Due within one year
Due after more than one year
45.5
20.4
29.1
13.5
9.1
33.9
83.7
Other provisions mainly relate to employee related obligations and exceptional restructuring provisions within the Group,
along with professional fees in relation to the Aurora acquisition and certain other provisions.
12. BORROWINGS
The carrying value of the year end borrowings position is as follows:
Non-current liabilities
Bank term loans
Total
Current liabilities
Bank term loans
Bank revolving credit facility
Total
As at
30 June
2014
$m
As at
30 June
2013
$m
As at
31 December
2013
$m
256.7
256.7
-
-
33.3
33.3
111.5
40.0
151.5
-
The face value of the borrowings is $259.6m (31 December 2013: $Nil) in respect of bank term loans within non-current
liabilities, $34.9m (31 December 2013: $Nil) in respect of bank terms loans within current liabilities and $Nil (31 December
2013: $Nil) in respect of the bank revolving credit facility.
The difference between the face value amounts and the amounts in the above table is $2.9m (31 December 2013: $Nil) in
non-current liabilities and $1.6m (31 December 2013: $Nil) in current liabilities which represents facility arrangement fees
and interest costs.
26
13. FREE CASH FLOW
As at
30 June
2014
$m
As at
30 June
2013
$m
As at
31 December
2013
$m
140.8
(2.8)
(12.5)
(34.3)
(2.0)
19.7
108.9
148.1
(13.0)
(14.4)
(24.6)
(4.1)
92.0
313.2
(23.8)
(21.6)
(52.9)
(5.9)
209.0
Cash generated from operations
Tax paid
Purchase of property, plant and equipment
Development expenditure
Net interest paid
Other acquisition related cash flows
Free cash flow
The acquisition related cash flows relate to non-recurring and non-operating cash flows associated with the Aurora
acquisition.
14. BUSINESS COMBINATIONS
On 6 January 2014 the Group acquired 100% of the share capital of Aurora Networks Inc, a group of companies leading
the development and manufacture of advanced, next-generation Optical Transport and Access Network solutions for
broadband networks that support the convergence of video, data and voice applications, for a cash consideration of
$327.9m. Prior to the acquisition the Group had no interest in the acquiree, and an explanation of the rationale for the
acquisition is set out in the 2013 Annual Report and Accounts.
In the period from the acquisition date to 30 June 2014, Aurora Networks Inc contributed revenue of $115.0m and
adjusted EBITA of $16.2m. If the acquisition had occurred on 1 January 2014, the consolidated results would not be
materially different.
Details of the net assets acquired and goodwill are as follows:
$m
Purchase consideration:
Headline consideration
310.0
Cash paid for tax benefits
13.0
Working capital adjustment and other consideration
4.9
Total Cash Consideration
327.9
Fair value of assets acquired (see below)
(181.8)
Goodwill
146.1
Other intangible assets:
Current and Next Generation Technology
108.0
Customer Relationships
30.0
138.0
There was no contingent consideration as part of the acquisition.
Goodwill relates to the assembled workforce and expected synergies with the wider Pace Group.
27
The assets and liabilities arising from the acquisition, provisionally determined, are as follows:
Book Value
$m
Provisional
Fair Value
Adjustment
$m
Fair Value
$m
6.9
-
6.9
-
138.0
138.0
Deferred tax assets
14.3
7.5
21.8
Inventories
62.9
(20.0)
42.9
Trade and other receivables
61.1
-
61.1
Cash and cash equivalents
32.6
-
32.6
Deferred tax liabilities
(1.6)
(48.3)
(49.9)
Trade and other payables
(31.0)
-
(31.0)
Provisions
(40.6)
-
(40.6)
Net assets acquired
104.6
77.2
181.8
Property, plant and equipment
Other intangible assets
Inventories of $62.9m at 6 January 2014 have been reduced by $20.0m as a fair value adjustment was made within the
measurement period, to write down inventories to their recoverable amount.
28