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Finance reportDownloads
 Ivan Dittrich, Chief Financial Officer
“The continued management of risk will be critical in all markets. Our business units continue to deliver sound results despite a widespread macro economic slow down. The Group’s biggest areas of focus remain cash generation and conservative balance sheet management. The Group remains vigilant to its cost base and has continued to reduce costs in the first half of the current financial year in order to improve operating efficiencies.” “The Group paid US$20,5 million to shareholders as a capital distribution in July 2008. Following the increased cash generation for the current year, the Group plans to maintain its cash distribution in lieu of a dividend of 12 US cents per share (2008: 12 US cents per share) out of share premium.” Introduction This review provides further insight into the performance and financial position of the Group for the year to 28 February 2009 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 growth. Group revenue increased by 5% to US$4,2 billion from US$4,0 billion in 2008 (organically revenue contracted by 3%), while gross margin decreased slightly from 13,7% to 13,5%. Of the Group’s US$4,2 billion revenue in the period, 35% was generated from North America (2008: 42%), 41% from Europe (2008: 43%), 7% from Asia-Pacific (2008: 6%), 9% from South America (2008: 3%) and 8% from the Middle East and Africa (2008: 6%). Gross profit increased by 3% from US$547,1 million to US$563,8 million, while operating costs were US$438,2 million (2008: US$396,4 million). Operating costs increased over the prior year mainly as a result of higher operating costs in Westcon where the business had been sized for higher revenues than achieved, and restructuring costs and additional bad debt provisions being included in operating costs. Group revenues and profits were adversely impacted by the rapid appreciation of the US Dollar particularly against Sterling, the Australian Dollar, the Brazilian Real, the Turkish Lira and South African Rand. On a constant currency basis, revenues for the year would have been US$4,3 billion, and EBITDA US$141 million. EBITDA was US$125,6 million (2008: US$150,7 million), which includes unrealised foreign exchange gains of US$0,4 million (2008: US$5,3 million). Amortisation of intangible fixed assets arising from acquisitions rose to US$17,7 million (2008: US$10,3 million) as a result of intangible assets recognised on the acquisitions made during the past and prior years. The impairment of acquired intangible assets of $6,4 million relates to the impairment of certain European intangibles previously acquired by Westcon. Operating profit was US$84,8 million (2008: US$123,5 million). The net interest charge in the period was US$16,6 million (2008: US$15,3 million). Financing costs reduced as a result of working capital leverage, cash flow generation and decreased debt levels. Interest income reduced mainly as a result of cash outflows associated with acquisitions. Profit before tax was US$85,5 million (2008: US$108,3 million). The Group’s effective tax rate increased to 30% from 26% in 2008, primarily due to profits being realised for a number of business units in jurisdictions with higher effective tax rates, most notably North and South America. If the profits arising from the fair value movements on put option liabilities are excluded from profit before tax, the effective tax rate would have been 37%. The effective tax rate for the financial year ended 28 February 2010 is expected to be approximately 34%. Underlying* earnings per share were 33,1 US cents (2008: 47,3 US cents). Headline earnings per share (“HEPS”) were 36,3 US cents (2008: 45,6 US cents). This includes the effects of the fair value adjustments of the put option liabilities detailed below. HEPS, excluding the effect of these put option fair value adjustments, is 26,6 US cents. The Group issued 7,5 million new shares during the year. In May 2008, 6,7 million shares were issued as part of the Promon acquisition, and 0,8 million shares were issued for exercised share options. During the year the Group repurchased 1,2 million shares at a cost of US$4 million. The Group spent approximately US$42,4 million on acquisitions (net of cash acquired). As a result, goodwill and intangible assets increased by US$59,5 million and US$37,8 million, respectively. Investments increased to US$6,6 million from US$3,7 million in 2008, as a result of the joint venture transaction in respect of The Via Group in the US. The revenue included from these acquisitions in 2009 was US$211 million. Had the acquisition date been 1 March 2008, the pro forma revenue would have been approximately US$260 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 2009, 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 paid US$20,5 million to shareholders as a capital distribution in July 2008. Following the increased cash generation for the current year, the Group plans to maintain its cash distribution in lieu of a dividend of 12 US cents per share (2008: 12 US cents per share) out of share premium. The Board has adopted a policy to pay an annual dividend/capital distribution, which will provide cover of at least three times relative to underlying earnings. Balance sheet Ordinary shareholders’ funds at the reporting date were US$575,9 million, representing a US$78,8 million decrease from US$654,7 million in 2008. The change is due primarily to the strengthening of the US Dollar against many of the Group’s functional currencies and the effects of put option liabilities raised initially against equity. Net asset value per share was US$3,28 (2008: US$3,87). Working capital remained tightly controlled. Receivables decreased 11% over the year, inventory decreased by 27% and payables and provisions decreased by 11%. The Group enjoys comfortable headroom in terms of its working capital lines of credit. The decrease in receivables, inventory and payable balances is as a result of our strategy to manage working capital closely. Goodwill and other intangible assets have remained fairly constant, with a slight increase from US$339,3 million to US$345,4 million as a result of acquisitions made in the year which was largely offset by currency devaluation against the US Dollar. Outstanding liabilities to vendors of businesses acquired have increased since last year-end from US$2,0 million to a total of US$51 million, of which US$27,3 million is included under long-term liabilities. The largest portion of the increase relate to two elements of the Promon acquisition – potential further cash payments of US$21,6 million to the sellers, based on future profitability and the performance of the Datatec share price, as well as a liability of US$22,2 million initially recognised against equity in accordance with IAS 32 Financial Instruments: Presentation, for a put option held by minority shareholders. The total amount of put option liabilities initially raised against equity across the Group was US$43,1 million. Under IAS 39 Financial Instruments: Recognition and Measurement, companies are required to remeasure such liabilities at each reporting date, with changes in the fair values booked in the income statement. A reduction in put option liabilities has resulted in a non-operating profit of US$16,8 million being recognised in the period. 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 post-retirement 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 16 and Note 20 of the annual financial statements. The interest cover ratio (EBITDA over finance costs) at 5,6 times (2008: 5,6 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 Operating cash flows have continued to improve as the Group deleveraged on the back of lower than expected revenues and improvements in working capital. Cash generated from operating activities (after working capital changes) amounted to US$151,7 million which represents an increase of 370% over 2008 which generated cash of US$32,3 million. The Group ended the year with cash and cash equivalents of US$95,1 million (2008: US$34,2 million) and net cash, after taking into account long-term and short-term debt, of US$36,2 million (2008: net debt of US$31,9 million). Business risk areas The Group’s success and our performance over the last five years, indicate that our overall strategy of supporting decentralised, stand-alone 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 only be achieved 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 57 to 65. 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. Macro economic environment The Group is exposed to the world’s developed and developing markets. If conditions do not stabilise or continue to worsen, the Group’s operations and reported results will be impacted. Encouragingly, the Group has not seen further deterioration, but rather business conditions remaining soft. The Board is adopting a cautious approach, making the assumption that all major developed markets will shrink this year. The Board believes that the Group’s divisional structure, multiple lines of business and geographic diversification will enable it to deliver a relatively resilient performance. 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. While 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 dependent on certain vendors, particularly Cisco, whose product sales accounted for approximately 40% of the Group’s revenue in 2009. 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 business, financial condition and results of operations. Working capital As a specialty 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. While 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 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:
The future The continued management of risk will be critical in all markets. Our business units continue to deliver sound results despite a widespread macroeconomic slowdown. The Group’s biggest areas of focus remain cash generation and conservative balance sheet management. The Group remains vigilant to its cost base and has continued to reduce costs in the first half of the current financial year in order to improve operating efficiencies. Ivan Dittrich |
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