Finance report

Downloads

Ivan Dittrich - Group Fincance Director

INTRODUCTION
This review provides further insight into the performance and financial position of the Group for the year to 29 February 2008 and, except where otherwise indicated, focuses primarily on continuing operations. This review is not comprehensive and should be read in conjunction with the annual financial statements presented on pages 90 to 150. The annual financial statements have been prepared in accordance with the Group's published accounting policies, which comply with International Financial Reporting Standards ("IFRS").

PERFORMANCE
Our trading results were solid, and represent another year of continued organic growth. Group revenue increased by 27% (12% organic) to over US$4 billion (2007: US$3,2 billion), while gross margin increased from 13,1% to 13,7%.

Of the Group's US$4 billion revenue in the year, 42% was generated from North America, 43% from Europe, 6% from Asia-Pacific, 3% from South America and 6% from the Middle East and Africa.

Gross profit increased by 32% from US$415,2 million to US$547,1 million, while operating costs increased 34% from US$295,8 million to US$396,4 million, mainly as a result of the European businesses acquired, which operate at higher margins with higher operating costs.

In line with revenue growth EBITDA increased 26% to US$150,8 million (2007: US$119,4 million), which includes unrealised foreign exchange gains of US$5,3 million (2007: US$6,3 million). Amortisation of intangible assets arising from acquisitions rose to US$10,3 million (2007: US$5,4 million) as a result of intangible assets recognised on the acquisitions made during the past year.

Operating profit increased by 25% to US$123,6 million (2007: US$99,1 million). The net interest charge in the year was US$15,3 million (2007: US$9,7 million) as a result of cash expenditure on acquisitions and higher utilisation of Westcon facilities resulting in profit before tax of US$108,3 million which increased by 21% from US$89,4 million.

The Group's effective tax rate decreased to 26,1% from 30,5% in 2007, primarily due to the utilisation and recognition of previously unrecognised tax losses, as well as the recognition of deferred tax assets for assessed losses for a number of business units. The effective tax rate for the financial year ended 28 February 2009 is expected to be approximately 30%.

Underlying* earnings per share rose 21% to 47,3 US cents (2007: 39,2 US cents). HEPS increased by 12% to 45,6 US cents (2007: 40,8 US cents).
* excluding goodwill impairment, amortisation of acquired intangible fixed assets, profits or loss on sale of assets and businesses and unrealised foreign exchange movements on inter-company loans.

The Group issued 14,5 million new shares during the year. 7,2 million shares were issued in May 2007 in connection with an institutional placing, 5,1 million shares were issued for acquisitions and 2,2 million shares were issued for exercised share options. In February 2008 the Group executed a share buy-backand repurchased and subsequently cancelled 0,6 million shares. A further 1,1 million shares were repurchased by the company share trust and are held as treasury shares.

The Group spent approximately US$180 million on acquisitions which has improved its geographical reach, vendor relationships, market position and product mix as well as enhanced its overall scale.

The revenue included from these acquisitions in 2008 was US$384,9 million. Had the acquisition date been 1 March 2007, the pro forma revenue would have been approximately US$500 million. Since these acquisitions are fully integrated into existing operations it is not practical to establish the profit after tax contributed by the acquisitions in 2008, or the profit after tax which the acquisitions would have contributed to the Group if they had been included for the entire year.

DIVIDEND POLICY
The Group has continued with its policy of making an annual distribution to shareholders and has decided to make a cash distribution of 12 US cents per share (2007: 10 US cents per share) out of share premium, which represents a cover of 3,8 times relative to headline earnings.

This policy is subject to annual review and may be adjusted for business growth, acquisition activity, changes in reported earnings resulting from applying fair value accounting principles, or as circumstances dictate.

BALANCE SHEET
Ordinary shareholders' funds at the reporting date were US$654,7 million, representing a US$117 million increase from US$537,7 million in 2007. The change is due primarily to the share placement which took place in May of 2007 for US$35,4 million, as well as shares issued as part of the acquisitions. Net asset value per share was US$3,87 (2007: US$3,47).

Working capital remained tightly controlled. Receivables increased 34% over the year, inventory increased by 27% and payables and provisions increased by 33%. The increase in receivables, inventory and payable balances is in line with revenue growth and is, to a large extent, as a result of the acquisitions made during the year. Goodwill and other intangible assets have increased from US$183,3 million to US$339,3 million due to acquisitions made in the year.

POST-RETIREMENT BENEFITS
The Group's retirement benefit funds comprise a number of defined contribution funds throughout the world. The Group has no liability to these funds other than the monthly payment of staff contributions. The Group has no liability in terms of postretirement medical aid contributions for staff.

DEBT LEVELS
Our overall attitude to debt remains conservative. The Group is dependent on its bank overdrafts, working capital lines of credit and trade finance facilities to operate. These facilities generally consist of either a fixed term or fixed period but repayable on demand, are secured against the assets of the subsidiary company to which the facility is made available and contain certain covenants which include financial covenants such as minimum liquidity, maximum leverage and pre-tax earnings coverage.

If these covenants are breached and a waiver is not obtained for such violation, this may, amongst other things, result in that breached facility becoming repayable on demand. There were no breaches of covenants during the year. For full details refer to Note 17 and Note 21 of the annual financial statements.

The interest cover ratio at 5,6 times (2007: 6,5 times) reflects the Group's extended borrowing capacity. Furthermore, Datatec has no restrictions on its borrowing powers in terms of its memorandum and articles of association.

CASH FLOW
Cash generated from operating activities (after working capital changes) amounted toUS$32,3 million (2007: cash outflow: US$3,6 million). The Group paid US$16,8 million to shareholders as a capital distribution in July 2007 and US$35,4 million was received from an institutional placing in May 2007. The Group ended the year with net debt of US$31,9 million, including long-term and short-term debt (28 February 2007 net cash: US$98 million).

BUSINESS RISK AREAS
The Group's success and our performance over the last five years, indicate that our overall strategy of supporting decentralised, standalone business units mitigates the business risks that we face. Our managers are held accountable for the performance of their business units, which includes understanding and responding to the financial and operational risks they face.

The Board, however, recognises that some elements of risk management can be achieved only on an integrated basis and as such, are controlled centrally. The Group's risk management policies and procedures are summarised in the corporate governance report on pages 59 to 67. The risk management process has identified certain key risks faced by the Group some of which are summarised below.

The risks identified below do not necessarily comprise all those affecting the Group and the risks listed are not set out in any particular order of priority. Additional risks and uncertainties not presently known to the Group or the directors or that the Group or the directors currently deem immaterial may also adversely affect the Group's business or operations.

Financial risk related to financial instruments
These risks include market risk (foreign exchange risk and interest rate risk), credit risk, liquidity risk and cash flow interest rate risk. The Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. Whilst the Group utilises derivative financial instruments where appropriate, the Board cannot predict the effect of exchange rate fluctuations upon future operating results and there can be no assurance that exchange rate fluctuations will not have a material adverse effect on its business, operating results or financial condition.

Dependence on key vendors
The Group is particularly dependent on certain vendors, particularly Cisco, whose product sales accounted for approximately 40% of the Group's revenue in 2008. If any one of the Group's principal vendors, especially Cisco, terminates, fails to renew or materially adversely changes its agreement or arrangements with the Group, it could materially reduce the Group's revenue and operating profit and thereby seriously harm the Group's business, financial condition and results of operations.

Working capital
As a speciality distributor of networking and communications equipment for leading technology vendors, the Group's business is working capital intensive; this is particularly relevant for Westcon. Westcon's working capital needs are utilised to finance accounts receivable and inventories. Westcon largely relies on revolving credit and vendor inventory purchase financing for its working capital needs. Typically, Westcon carries inventory quantities which are sufficient to enable it to promptly meet anticipated customer demand. Westcon maintains inventory levels based on its projections of future demand and market conditions. Any sudden decline in demand or technological change could cause it to have excess or obsolete inventories. If actual market conditions are more favourable than forecasts, additional inventory reserves may be required. Whilst Westcon takes steps to mitigate this risk by including protective provisions in its purchase agreements with vendors, there can be no assurance that such risks will be obviated.

Management of future growth and acquisition risk
The Group's planned growth strategy will continue to place additional demand on the Group's management, customer support, administrative and technological resources. If the Group is unable to manage its growth effectively, its business operations or financial conditions may deteriorate. To date, the business of the Group has grown through acquisitions and through organic growth. The Group will continue to consider further acquisition opportunities. If the Group is unable to successfully integrate an acquired company or business, such acquisition could lead to disruptions to the business. If the operations or assimilation of an acquired business do not accord with the Group's expectations, the Group may have to decrease the value attributed to the acquired business or realign the Group's structure.

Payment discounts, product rebates and allowances
The Group receives significant benefits from purchase and prompt payment discounts, product rebates, allowances and other programmes from vendors based on various factors. A decrease in purchases and/or sales of a particular vendor's products could negatively affect the amount of volume rebates the Group receives from such vendor. Because some purchase discounts, product rebates and allowances from vendors are based on percentage increases in purchases and/or sales of products, it may become more difficult for the Group to achieve the percentage growth in volume required for larger discounts due to the current size of its revenue base. In addition, vendors may exclude the Group from time to time from participation in some of their programmes.

Dependence on key personnel
The Group's future success depends largely upon the continued employment of its executive directors, senior management and key sales, technical and marketing personnel. Certain of its key employees have personal relationships with principal vendors and customers which are particularly important to the business of the Group. The executive directors, senior management team and key technical personnel would be very difficult to replace and the loss of any of these key employees could harm the business and prospects of the Group.

Other risks faced by the Group include

Restrictive covenants.
Intellectual property protection.
Intense competition.
Dependence on relationships with third parties.
Future profitability.
Overseas activities.
Access to capital in future.
Reduction in demand.
Pressure on gross margins.
Adequate supply arrangements.
Dependence on key information systems.
Significant credit exposure.

THE FUTURE
The continued management of risk will be critical in all markets. Our business units have delivered good results over the last number of years and despite widespread macro-economic concerns, we remain cautiously optimistic about the year ahead.

Ivan Dittrich
Group Finance Director