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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 EBITA1up 9.9% to $106.3m (H1 2013: $96.7m), operating margin2 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 EPS3 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 flow4up 18.4% to $108.9m (H1 2013: $92.0m).

·      Closing net debt5$167.6m (Pro forma net debt6of $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 :

Underlying operating costs7reduced by 6.1% whilst continuing to further invest in growth opportunities.

Integration with Aurora complete and committed synergies, both cost and working capital, achieved ahead of plan with further opportunities for savings identified.

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 :

Reconfirmed market leader; global number 1 in Media Servers8, Set-top boxes ("STBs")9and Advanced Telco Gateways10.

Strong uplift in Customer Premise Equipment ("CPE") revenue in H2 2014 anticipated due to new product launches with key customers.

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 :

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.

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.

Demand for network products is stronger than anticipated; revenue and profit growth expected in H2 2014.

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                               Chris Mather

RLM Finsbury                                                                Pace plc

+44 (0) 207 251 3801                                                     +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



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%11for 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 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 201312. 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 devices13. 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 3-5 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 3814adjustments) 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 EBITDA15ratio 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.

·      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 mid-tier 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
H1 2013
FY 2013
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 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
H1 2013
FY 2013
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 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).



Financial Review

Group trading results

H1 2014
H1 2013
FY2013
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).

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:

H1 2014
H1 2013
(restated16)
FY 2013
(restated)
Revenue
Pace Americas
675.7
908.7
1,680.2
Pace International
348.2
409.7
789.0
Pace Networks
115.0
-
-
Other
-
-
-
Total revenue
1,138.9
1,318.4
2,469.2
Adjusted EBITA
Pace Americas
62.6
84.4
152.7
Pace International
49.0
39.2
82.8
Pace Networks
16.2
-
-
Other
(21.5)
(26.9)
(41.9)
Total adjusted EBITA
106.3
96.7
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

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%).    

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 6 December 2014 to shareholders on the register on 7 November 2014.


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



Condensed Consolidated Interim Income Statement

for the six months ended 30 June 2014



Unaudited

Unaudited

Audited



6 months ended

6 months ended

Year

ended



30 June

30 June

31 December



2014

2013

2013


Notes

$m

$m

$m

Revenue

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






Administrative expenses:





Research and development expenditure


(65.8)

(71.0)

(132.6)

Other administrative expenses





Before exceptional costs


(73.7)

(65.4)

(122.0)

Exceptional costs

4

(3.5)

(1.3)

(12.2)

Amortisation of other intangibles


(27.7)

(22.4)

(42.6)

Total administrative expenses


(170.7)

(160.1)

(309.4)






Operating profit


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

Tax charge

3

(16.6)

(17.9)

(34.1)

Profit after tax

2

55.4

50.7

96.7






Attributable to:





Equity holders of the Company


55.4

50.7

96.7






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



Condensed Consolidated Interim Statement of Comprehensive Income

for the six months ended 30 June 2014


Unaudited

Unaudited

Audited

Year


6 months ended

6 months ended

ended


30 June

30 June

31 December


2014

2013

2013


$m

$m

$m

Profit for the period

55.4

50.7

96.7

Other comprehensive income:




Items that are or may be subsequently reclassified to profit or loss:




Exchange differences on translating foreign operations

6.4

(8.9)

(4.8)

Net change in fair value of cash flow hedges transferred to profit or loss gross of tax

1.5

(3.1)

(2.7)

Deferred tax adjustment on above

(0.3)

0.8

0.7

Effective portion of changes in fair value of cash flow hedges gross of tax

(0.1)

2.6

4.7

Deferred tax adjustment on above

-

(0.6)

(1.2)

Other comprehensive income for the period, net of tax

7.5

(9.2)

(3.3)

Total comprehensive income for the period

62.9

41.5

93.4





Attributable to:




Equity holders of the Company

62.9

41.5

93.4



Condensed Consolidated Interim Balance Sheet

at 30 June 2014




Unaudited

Unaudited

Audited




30 June

30 June

31 December




2014

2013

2013



Notes

$m

$m

$m

ASSETS






Non-Current Assets






Property, plant and equipment



65.0

62.9

60.0

Intangible assets - goodwill


6

489.4

335.4

342.6

Intangible assets - other intangibles


6

233.4

143.4

123.1

Intangible assets - development expenditure


6

79.3

53.5

64.4

Deferred tax assets



42.9

26.0

21.2

Total Non-Current Assets



910.0

621.2

611.3

Current Assets






Inventories


7

166.3

188.3

156.8

Trade and other receivables


8

549.4

485.7

468.7

Cash and cash equivalents



122.4

83.3

33.0

Current tax assets



4.2

11.6

1.3

Total Current Assets



842.3

768.9

659.8

Total Assets



1,752.3

1,390.1

1,271.1

EQUITY






Issued capital



29.1

28.9

29.0

Share premium



84.6

82.9

83.7

Merger reserve



109.9

109.9

109.9

Hedging reserve



0.9

(2.0)

(0.2)

Translation reserve



(53.2)

(63.7)

(59.6)

Retained earnings



442.3

353.5

384.2

Total Equity



613.6

509.5

547.0

LIABILITIES






Non-Current Liabilities






Deferred tax liabilities



96.4

64.2

56.3

Provisions


11

83.7

53.0

60.3

Borrowings


12

256.7

-

-

Total Non-Current Liabilities



436.8

117.2

116.6

Current Liabilities






Trade and other payables


9

603.8

582.7

567.1

Current tax liabilities



30.9

10.0

8.5

Provisions


11

33.9

19.2

31.9

Borrowings


12

33.3

151.5

-

Total Current Liabilities



701.9

763.4

607.5

Total Liabilities



1,138.7

880.6

724.1

Total Equity and Liabilities



1,752.3

1,390.1

1,271.1



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

Balance at January 2013

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

Transactions with owners:








Employee share incentive charges

-

-

-

-

-

3.8

3.8

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

Transactions with owners:








Dividends to equity shareholders

-

-

-

-

-

(15.6)

(15.6)

Employee share incentive charges

-

-

-

-

-

0.3

0.3

Issue of shares

0.1

0.8

-

-

-

-

0.9

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

Transactions with owners:








Employee share incentive charges

-

-

-

-

-

2.7

2.7

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



Condensed Consolidated Interim Cash Flow Statement

for the six months ended 30 June 2014



Unaudited

Unaudited

Audited


6 months
 ended

6 months
 ended

Year

ended


30 June

30 June

31 December


2014

2013

2013


$m

$m

$m

Cash flows from operating activities




Profit before tax

72.0

68.6

130.8

Adjustments for:




Share based payments charge

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

Loss on sale of property, plant and equipment

-

-

0.2

Net finance expense

3.1

4.4

8.0

Movement in trade and other receivables

(18.6)

72.4

85.5

Movement in trade and other payables

1.9

(49.0)

(67.2)

Movement in inventories

33.4

(6.4)

24.2

Movement in provisions

(15.2)

(5.0)

14.4

Cash generated from operations

140.8

148.1

313.2

Interest paid

(3.1)

(4.4)

(7.7)



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.

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.

-     '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.

2.    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

Pace

Americas

Pace

International

Pace

Networks

Other

Total


$m

$m

$m

$m

$m

Segmental income statement






Revenues

675.7

348.2

115.0

-

1,138.9

Adjusted EBITA

62.6

49.0

16.2

(21.5)

106.3

Exceptional items





(3.5)

Amortisation of other intangibles





(27.7)

Interest





(3.1)

Tax





(16.6)

Profit for the period





55.4

6 months ended 30 June 2013 (restated)

Pace

Americas

Pace

International

Pace

Networks

Other

Total


$m

$m

$m

$m

$m

Segmental income statement






Revenues

908.7

409.7

-

-

1,318.4

Adjusted EBITA

84.4

39.2

-

(26.9)

96.7

Exceptional items





(1.3)

Amortisation of other intangibles





(22.4)

Interest





(4.4)

Tax





(17.9)

Profit for the period





50.7

Year ended 31 December 2013 (restated)

Pace

Americas

Pace

International

Pace

Networks

Other

Total


$m

$m

$m

$m

$m

Segmental income statement






Revenues

1,680.2

789.0

-

-

2,469.2

Adjusted EBITA

152.7

82.8

-

(41.9)

193.6

Exceptional items





(12.2)

Amortisation of other intangibles





(42.6)

Interest





(8.0)

Tax





(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.

Revenue by destination

6 months ended

30 June 2014

$m

6 months ended

30 June 2013

$m

Year ended 31 December

2013

$m

Europe

117.1

158.8

323.9

North America

699.0

839.0

1,540.5

Latin America

185.8

199.2

358.4

Rest of World

137.0

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.

The following table provides an analysis of the Group's revenue streams according to those classifications.


6 months ended

30 June 2014

$m

6 months ended

30 June

2013

$m

Year ended 31 December

2013

$m

STB & Media Servers

893.9

1,074.6

1,979.6

Gateways

77.1

190.3

375.8

Software & Services

54.4

53.5

113.8

Networks

113.5

-

-


1,138.9

1,318.4

2,469.2

3.    TAX CHARGE




6 months ended

30 June

2014

6 months ended

30 June

2013

Year ended 31 December

2013




$m

$m

$m

Total current tax charge



(19.2)

(12.5)

(32.4)

Total deferred tax credit/(charge)



2.6

(5.4)

(1.7)

Tax charge



(16.6)

(17.9)

(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




6 months ended

30 June

2014

6 months ended

30 June

2013

Year

ended 31 December

2013




$m

$m

$m

Restructuring and reorganisation costs

(0.7)

(1.3)

(4.2)

Acquisition and integration costs



(2.8)

-

(6.9)

Aborted acquisition costs          



-

-

(1.1)




(3.5)

(1.3)

(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.


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:




6 months ended

30 June

2014

6 months ended

30 June

2013

Year

ended 31 December

2013

Adjusted basic earnings per ordinary share (cents)



25.5

22.1

44.3

Adjusted diluted earnings per ordinary share (cents)



24.4

21.0

42.2

Within the adjusted earnings per ordinary share calculations, the earnings amount is calculated as follows:




6 months ended

30 June

2014

$m

6 months ended

30 June

2013

$m

Year

ended 31 December

2013

$m

Profit after tax



55.4

50.7

96.7

Amortisation charge



27.7

22.4

42.6

Tax effect of above



(6.4)

(5.8)

(11.1)

Exceptional items



3.5

1.3

12.2

Tax effect of above



(0.8)

(0.4)

(3.2)

Adjusted profit after tax



79.4

68.2

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.

6.   INTANGIBLE ASSETS


Goodwill

Development Expenditure

Customer contracts and relationships

Technology and patents

Other

Other intangibles


$m

$m

$m

$m

$m

$m

Cost







At 31 December 2013

342.6

320.3

164.3

131.8

10.9

307.0

Additions

146.1

34.3

30.0

108.0

-

138.0

Exchange adjustments

0.7

-

-

-

-

-

At 30 June 2014

489.4

354.6

194.3

239.8

10.9

445.0

Amortisation







At 31 December 2013

-

255.9

80.9

95.3

7.7

183.9

Provided in the period

-

19.4

7.4

19.9

0.4

27.7

At 30 June 2014

-

275.3

88.3

115.2

8.1

211.6

Net book value at 31 December 2013

342.6

64.4

83.4

36.5

3.2

123.1

Net book value at 30 June 2014

489.4

79.3

106.0

124.6

2.8

233.4

7.   INVENTORIES


As at

30 June

2014

As at

30 June

2013

As at

31 December

2013

$m

$m

$m

Raw materials and consumable stores

24.7

21.2

17.9

Work-in-progress

4.0

-

-

Finished goods

137.6

167.1

138.9


166.3

188.3

156.8


8.   TRADE AND OTHER RECEIVABLES


As at

30 June

As at

30 June

As at

31 December

2014

2013

2013

$m

$m

$m

Trade receivables

513.0

453.1

422.7

Other receivables

26.3

23.1

36.9

Prepayments

10.1

9.5

9.1


549.4

485.7

468.7

9.   TRADE AND OTHER PAYABLES


As at

30 June

As at

30 June

As at

31 December


2014

2013

2013


$m

$m

$m

Trade payables

508.9

515.1

473.4

Social security and other taxes

3.0

2.3

2.9

Other payables

12.3

11.0

15.0

Accruals

79.6

54.3

75.8


603.8

582.7

567.1

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.


11.  PROVISIONS


Royalties under negotiation

Warranties

Other

Total


$m

$m

$m

$m

At 31 December 2013

36.9

40.1

15.2

92.2

Acquisitions

-

4.7

35.9

40.6

Net charge for the period

4.8

12.8

1.5

19.1

Utilised

(0.9)

(8.1)

(30.0)

(39.0)

Transfer

4.7

-

-

4.7

At 30 June 2014

45.5

49.5

22.6

117.6






Due within one year

-

20.4

13.5

33.9

Due after more than one year

45.5

29.1

9.1

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:


As at

30 June

2014

As at

30 June

2013

As at

31 December 2013


$m

$m

$m

Non-current liabilities




Bank term loans

256.7

-

-

Total

256.7

-

-





Current liabilities




Bank term loans

33.3

111.5

-

Bank revolving credit facility

-

40.0

-

Total

33.3

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.


13.  FREE CASH FLOW


As at

30 June

As at

30 June

As at

31 December


2014

2013

2013


$m

$m

$m

Cash generated from operations

140.8

148.1

313.2

Tax paid

(2.8)

(13.0)

(23.8)

Purchase of property, plant and equipment

(12.5)

(14.4)

(21.6)

Development expenditure

(34.3)

(24.6)

(52.9)

Net interest paid

(2.0)

(4.1)

(5.9)

Other acquisition related cash flows

19.7

-

-

Free cash flow

108.9

92.0

209.0

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.

The assets and liabilities arising from the acquisition, provisionally determined, are as follows:

Book Value

Provisional

Fair Value Adjustment

Fair Value


$m

$m

$m

Property, plant and equipment

6.9

-

6.9

Other intangible assets

-

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

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.


INDEPENDENT REVIEW REPORT TO PACE 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 30 June 2014 which comprises the Condensed Consolidated Interim Income Statement, the Condensed Consolidated Interim Statement of Comprehensive Income, the Condensed Consolidated Interim Balance Sheet, the Condensed Consolidated Interim Statement of Changes in Shareholder's Equity, the Condensed Consolidated Interim Cashflow Statement and the related explanatory notes.  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 the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

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 DTR of the UK FCA. 

The annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

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 UK.  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 30 June 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA. 

Mike Barradell

for and on behalf of KPMG LLP 

Chartered Accountants

1 The Embankment

Neville Street, Leeds, LS1 4DW


1  Adjusted EBITA is operating profit before exceptional costs and amortisation of other intangibles.

2  Operating margin is adjusted EBITA margin.

3  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.

11 IHS Television Intelligence Service 2014.

12 Cisco® Visual Networking Index (VNI),  2014

14  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.

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.


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