Porvair PLC – Half Yearly Results

Operating review

Overview

	2018		2017		Growth
	£m		£m		%
Revenue	59.7		55.5		7
Profit before tax	5.2		4.9		8
Earnings per share before exceptional income tax credit	9.0p		8.3p		8
Net cash	2.2		4.0

 

Profit before tax rose 8% to £5.2 million. Earnings per share increased 8% to 9.0 pence.  Revenue was £59.7 million, an increase of 7%.  At constant currency revenue increased by 12%.

Strategic statement

Porvair's strategy is to generate shareholder value through the development of specialist filtration and associated environmental technology businesses, both organically and by acquisition. Such businesses have certain key characteristics in common:

·      Specialist design or engineering skills are required;

·      Product use and replacement is mandated by regulation, quality accreditation or a maintenance cycle; and

·      Products are typically designed into a system that will have a long life-cycle.

This strategy continues to work well for the Group, which is in a position of financial strength, able to invest in both organic and acquired growth as appropriate.

Over the last five years the Group has achieved revenue growth of 43% (7% CAGR), earnings per share growth of 83% (13% CAGR) and cash from operations of £64 million. 

Business model outline

Our customers require filtration or emission control products that perform to a given specification. Orders are won by offering the best technical solutions for these requirements at an acceptable commercial cost. Filtration expertise is applicable across all markets with new products generally being adaptations of existing designs. Experience in specific markets or applications is valuable in building customer confidence. Domain knowledge is important, as is deciding where to direct resources.

This leads the Group to:

1.   Focus on markets where we see long term growth potential.

2.   Look for applications where product use is mandated and replacement demand is therefore regular.

3.   Make new product development a core business activity.

4.   Establish geographic presence where end-markets require.

5.   Invest in both organic and acquired growth.

Therefore:

·      We focus on three operating segments: Aviation & Industrial; Laboratory; and Metal Melt Quality. All have clear structural growth drivers.

·      Our products typically protect complex downstream systems and as a result are replaced regularly.  A high proportion of our annual revenue is from repeat orders.

·      Through a focus on new product development we aim to generate growth rates in excess of the underlying market.  Where possible we build intellectual property around our product developments.

·      Our geographic presence follows the markets we serve: 53% of revenue is in the Americas; 18% in Asia; 15% in the EU; 13% in the UK; and 1% in Africa.  The Group has plants in the US, UK, Germany, the Netherlands and China.  In the last twelve months, 59% of revenue was manufactured in the US, 30% in the UK, 8% in Europe and 3% in China.

·      We aim to meet dividend and investment needs from free cash flow and modest borrowing facilities.  In recent years we have expanded manufacturing capacity in the UK, Germany, US and China and made several acquisitions.  All investments are subject to a hurdle rate analysis based on strategic and financial priorities.

New operating segments

From 1 December 2017, after acquiring J G Finneran earlier in 2017, the Group changed its management and reporting structure to improve market focus and offer greater investor clarity.  The Group now reports under three operating segments:  Aerospace & Industrial; Laboratory; and Metal Melt Quality. 

 

Investment and future development

In the last five years, £40 million has been invested in acquisitions and capacity expansion.  The Group invested £7.0 million (2017: £9.9 million) in acquisitions and capital expenditure in first half of 2018.  During this period:

·      Rohasys BV was acquired and is now part of the Laboratory division, this business broadens Seal Analytical's product range, adding robotic handling and sample preparation expertise that complements Seal's existing technology. Its sample preparation capabilities will be of wider benefit to the Laboratory division's life science development plans.

·      Keystone Filter (“Keystone”) was acquired by the Aerospace & Industrial division. Keystone manufactures filter cartridges for the industrial process, food, beverage and nuclear markets in the USA. It will be relocated to our facility in Ashland VA in the second half.

·      Expansion of the J G Finneran facility in Vineland NJ continues and should complete in the second half, after which further investment in clean manufacturing capabilities will follow.

·      A refurbishment and upgrade of our microelectronics plant in Boise ID has begun and will complete in the second half.

New product development remains core to Porvair's strategy with incremental range extensions and increasing product differentiation being priorities. In the first half:

·      Our new nuclear HEPA filter received regulatory approval and production will accelerate in the second half.

·      New customer orders were received for 3D printed ceramic filters.

·      Seal Analytical introduced a significant platform upgrade. This re-engineered product will replace Seal's best-selling and longest established analyser, offering a better product to its substantial installed customer base.

 

Divisional review

Aerospace & Industrial

	2018		2017		Growth
	£m		£m		%
Revenue	21.7		20.5		6
Operating profit	2.4		2.5		(3)

 

Revenue increased by 6% to £21.7 million. Underlying operating profit growth is obscured by a £0.8 million gasification profit taken in 2017 which did not recur and as a result reported operating profits fell by 3%.

Growth has been strong in US industrial, helped by the first contribution from the recent Keystone acquisition. A major US nuclear order received in the last quarter of 2017 has progressed well with all the agreed milestones met on time.  Further revenue will be recognised in the second half.  Orders for microelectronics and disposable filters were also robust. Having grown 38% (7% p.a.) over the last five years, aerospace revenues have been lower in the period as aircraft programme changes work through the order book. We expect a return to growth in the second half.

Commissioning is underway at all three large gasification projects. These are complex power plants using new gasification technology for which our filter systems are a relatively small but critical component. The facilities in Korea, India and China are all experiencing commissioning challenges due to variations in feedstocks and operating conditions in each plant.  We are working with the customers and other equipment suppliers to resolve those matters relating to the filtration systems. At this early stage our filters are performing as expected. We expect this work to continue into 2019.

 

Laboratory

	2018		2017		Growth
	£m		£m		%
Revenue	20.3		16.8		21
Inter segment revenue	(1.3)		(0.9)
External revenue	19.0		15.9		19
Operating profit	2.9		2.7		6

 

Revenue was up 19% to £19.0 million.  Laboratory orders were robust throughout the period.  The pipeline of bioscience and sample preparation projects is encouraging and the consolidation of the technical teams in their upgraded laboratory in Wrexham is going well.   J G Finneran has performed ahead of expectations in its first year with the Group. Cross sales and manufacturing benefits from the acquisition were realised and further synergies will be achieved when the plant expansion is completed. 

Seal Analytical has started strongly in the US and SE Asia, offsetting a fall in revenue to China. Instrument upgrades introduced at the start of 2018 have been well received.  Rohasys is being integrated into Seal's sales channels and the benefits are starting to be seen in revenue. These are promising opportunities for the second half and beyond.

The operating profit is up 6% to £2.9 million, lower than the revenue growth rate reflecting the initial profitability of Rohasys and changes in the transfer pricing arrangements between the Aerospace & Industrial and Laboratory.

 

Metal Melt Quality

	2018		2017		Growth
	£m		£m		%
Revenue	19.0		19.1		(1)
Operating profit	1.2		0.8		59

 

Reported revenue was down 1%, but revenue at constant currency was up 8% and US$ sales are at record levels.  Profitability improved but is still held back by losses recognised in China.

Activity in the US business has been high, with demand particularly strong in iron foundry and super-alloy filtration. The range and volume of ceramic 3D manufactured products again increased and revenue grew 5%.  Plant efficiencies have also been much better than the prior period. Profitability margin in the US plants improved to 10% (2017: 7%)

As expected, China continues to be loss making, although, when the US margin earned from Chinese sales is taken into account, the situation is improving.  Chinese customers are beginning to switch to the same products made in our Xiaogan plant and, as this trend increases, reported losses will diminish.  

Acquisition related costs

Amortisation of acquired intangibles was £0.2 million (2017: £0.1 million) in the period.  Acquisition expenses were £0.1 million (2017: £0.4 million).

Interest

The Group incurred an interest charge of £0.3 million (2017: £0.3 million).  £0.2 million (2017: £0.2 million) relates to the finance cost of the defined benefit pension scheme.  The remainder comprises undrawn commitment fees and interest on the Group's banking facilities.

Tax

The Group tax charge was £0.4 million (2017: £1.1 million).  Included in the income tax expense is a one off credit of £0.8 million reflecting the impact of the change of US tax rates on the Group's deferred tax liability.  The underlying rate of income tax for the period has reduced to 22% (2017: 23%), which was 2% lower than the rate for the full year ended 30 November 2017 reflecting the lower rates of tax on profits earned in the US.

Earnings per share and dividends

The basic earnings per share for the period increased to 10.7 pence (2017: 8.3 pence).   As described above the change in tax rates in the US resulted in a one off exceptional income tax credit which contributed 1.7 pence of earnings.  Excluding the exceptional item earnings per share grew by 8% to 9.0 pence (2017:  8.3 pence)

The Board has declared an interim dividend of 1.6 pence (2017: 1.5 pence) per share, an increase of 7%.

Cash flow and net debt

Cash generated from operations in the six months to 31 May 2018 was £0.9 million (2017: £1.6 million). Working capital increased in the period by £5.9 million (2017: £3.6 million).  Working capital usually increases in the first half, a particularly strong May trading performance led to unusually high receivables at the period end.

Interest paid was £0.1 million (2017: £0.1 million).  Tax payments were £1.0 million (2017: £1.3 million), lower US tax was paid in the first half to compensate for overpayments in prior periods.

Capital expenditure was £1.7 million (2017: £4.0 million), spent on capacity upgrades and plant expansion.

£5.3 million (2017: £5.9 million) was spent on acquisitions.  £1.5 million (£0.8 million on acquisition, £0.5 million to settle a loan on acquisition and £0.2 million of settled contingent consideration) was paid to acquire Rohasys BV and £3.8 million was paid to acquire the business of Keystone.  As described in notes 9 and 11, deferred and contingent consideration of up to £7.3 million (2017: £4.6 million) is payable from the second half of 2018 to 2022.

Net cash at 31 May 2018 was £2.2 million (31 May 2017: £4.0 million; 30 November 2017: £9.8 million).

Return on capital employed

The Group's return on capital employed was 14% (2017: 14%).  Excluding the impact of goodwill, acquired intangible assets and the pension liability the return on operating capital employed was 42% (2017: 43%).

Current trading and outlook

Porvair traded well in the first half of 2018, with a healthy order book for the second half and robust levels of activity. The business is achieving further organic growth through incremental new product introductions and we continue to expand manufacturing capacity to meet demand. We expect to integrate our two first half acquisitions in the balance of the financial year, with both bringing a wider product range to existing customers and adding intellectual property to our portfolio. We see considerable opportunity for growth ahead.

 

Ben Stocks

Group Chief Executive

22 June 2018

Related parties

There were no related party transactions in the six months ended 31 May 2018 (2017: none).

 

Principal risks

Each division considers strategic, operational and financial risks and identifies actions to mitigate those risks.  These risk profiles are reviewed by the Board and updated at least annually.  The principal risks and uncertainties for the remaining six months of the financial year are discussed below.  Further details of the Group's risk profile analysis can be found in the Strategic Report section of the Annual Report for the year ended 30 November 2017.

 

Although healthy at 31 May 2018, certain elements of the Group's order position can change quickly in the face of changing economic circumstances.  The Metal Melt Quality division, Laboratory division and general industrial filtration within the Aerospace & Industrial division all have relatively short lead times and order cycles and, therefore, revenues are subject to fluctuations, which could have a material effect on the Group's results for the balance of 2018.

 

Forward looking statements

Certain statements in this half yearly financial information are forward-looking.  Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct.  Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

 

We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

 

 

 

 

 

 

Condensed consolidated income statement

For the six months ended 31 May

			Six months ended 31 May
			2018		2017
	Note		Unaudited		Unaudited
			£'000		£'000
Revenue	1		59,685		55,538
Cost of sales			(39,921)		(37,285)
Gross profit			19,764		18,253
Other operating expenses			(14,174)		(13,051)
Operating profit	1		5,590		5,202
Interest payable and similar charges			(346)		(347)
Profit before income tax			5,244		4,855
Income tax expense – before exceptional item			(1,146)		(1,121)
Income tax credit – exceptional item			778		–
Income tax expense			(368)		(1,121)
Profit for the period			4,876		3,734
Profit attributable to:
Owners of the parent			4,877		3,738
Non-controlling interests			(1)		(4)
Profit for the period			4,876		3,734
Earnings per share (basic)	2		10.7p		8.3p
Earnings per share before exceptional item (basic)	2		9.0p		8.3p
Earnings per share (diluted)	2		10.7p		8.2p

 

 

 

 

Condensed consolidated statement of comprehensive income

For the six months ended 31 May

	Six months ended 31 May
	2018 Unaudited		2017 Unaudited
	£'000		£'000
Profit for the period	4,876		3,734
Other comprehensive income:
Items that will not be reclassified to profit and loss
Actuarial gains/(losses) in defined benefit pension plans net of tax	490		(937)
Items that may be subsequently reclassified to profit or loss
Exchange differences on translation of foreign subsidiaries	994		(1,510)
Changes in the fair value of foreign exchange contracts held as a cash flow hedge, net of tax	–		157
	994		(1,353)
Net other comprehensive income	1,484		(2,290)
Total comprehensive income for the period	6,360		1,444
Comprehensive income attributable to:
Owners of the parent	6,361		1,448
Non-controlling interests	(1)		(4)
Total comprehensive income for the period	6,360		1,444

 

The accompanying notes are an integral part of this interim financial information. 

Condensed consolidated statement of changes in equity

For the six months ended 31 May (Unaudited)

	Share capital £'000	Share premium account £'000	Cumulative translation reserve £'000	Retained earnings £'000	Total £'000	Non-controlling interest £'000		Total £'000
Balance at 1 December 2016	906	35,513	10,949	24,078	71,446		–	71,446
Profit for the period	–	–	–	3,738	3,738		–	3,738
Other comprehensive income/(expense):
Exchange differences on translation of foreign subsidiaries	–	–	(1,510)	–	(1,510)		–	(1,510)
Changes in fair value of foreign exchange contracts held as a cash flow hedge	–	–	–	157	157		–	157
Actuarial losses in defined benefit pension plans net of tax	–	–	–	(937)	(937)		–	(937)
Total comprehensive income for the period	–	–	(1,510)	2,958	1,448		–	1,448
Transactions with owners:
Consideration paid for purchase of own shares (held in trust)	–	–	–	(145)	(145)		–	(145)
Proceeds from shares issued	1	33	–	–	34		–	34
Employee share option schemes:
value of employee services net of tax	–	–	–	655	655		–	655
Dividends approved as final or paid	–	–	–	(1,088)	(1,088)		–	(1,088)
Total transactions with owners recognised directly in equity	1	33	–	(578)	(544)		–	(544)
Adjustment arising from change in non-controlling interest	–	–	–	–	–		35	35
Balance at 31 May 2017	907	35,546	9,439	26,458	72,350		35	72,385
Balance at 1 December 2017	913	35,831	6,964	31,161	74,869		20	74,889
Profit for the period	–	–	–	4,877	4,877		–	4,877
Other comprehensive income/(expense):
Exchange differences on translation of foreign subsidiaries	–	–	994	–	994		–	994
Actuarial gains in defined benefit pension plans net of tax	–	–	–	490	490		–	490
Total comprehensive income for the period	–	–	994	5,367	6,361		–	6,361
Transactions with owners:
Consideration paid for purchase of own shares (held in trust)	–	–	–	(207)	(207)		–	(207)
Proceeds from shares issued	1	101	–	–	102		–	102
Employee share option schemes:
– value of employee services net of tax	–	–	–	152	152		–	152
Dividends approved or paid	–	–	–	(1,229)	(1,229)		–	(1,229)
Total transactions with owners recognised directly in equity	1	101	–	(1,284)	(1,182)		–	(1,182)
Adjustment arising from change in non-controlling interest	–	–	–	–	–		(1)	(1)
Balance at 31 May 2018	914	35,932	7,958	35,244	80,048		19	80,067

 

The accompanying notes are an integral part of this interim financial information.

 

Notes to the condensed half-yearly consolidated financial information

 

1.             Segmental analyses

The chief operating decision maker has been identified as the Board of Directors.  The Board of Directors review the Group's internal reporting in order to assess performance and allocate resources.  Management has determined the operating segments based on this reporting.

 

As at 31 May 2018, the Group is organised on a worldwide basis into three operating segments:

1)    Aerospace & Industrial

2)    Laboratory

3)    Metal Melt Quality

 

From 1 December 2017, after acquiring J G Finneran earlier in 2017, the Group changed its management and reporting structure to improve market focus and offer greater investor clarity.  It reports under these three operating segments for the first time in these results.  A reconciliation between the reporting under these segments and the previous two segments for the six month period to 31 May 2017 is given in note 15.

 

The segment results for the period ended 31 May 2018 are as follows:

 

Six months ended 31 May 2018 – Unaudited	Aerospace & Industrial		Laboratory		Metal Melt Quality		Central		Group
	£'000		£'000		£'000		£'000		£'000
Total segment revenue	21,710		20,306		19,011		–		61,027
Inter-segment revenue	(10)		(1,332)		–		–		(1,342)
Revenue	21,700		18,974		19,011		–		59,685
Operating profit/(loss)	2,436		2,871		1,211		(928)		5,590
Interest payable and similar charges	–		–		–		(346)		(346)
Profit/(loss) before income tax	2,436		2,871		1,211		(1,274)		5,244
Income tax expense	–		–		–		(1,146)		(1,146)
Income tax expense -exceptional	–		–		–		778		778
Profit/(loss) for the period	2,436		2,871		1,211		(1,642)		4,876

 

The segment results for the period ended 31 May 2017 are as follows:

 

Six months ended 31 May 2017 – Unaudited	Aerospace & Industrial		Laboratory		Metal Melt Quality		Central		Group
	£'000		£'000		£'000		£'000		£'000
Total segment revenue	20,537		16,787		19,138		–		56,462
Inter-segment revenue	(65)		(859)		–		–		(924)
Revenue	20,472		15,928		19,138		–		55,538
Operating profit/(loss)	2,513		2,700		761		(772)		5,202
Interest payable and similar charges	–		–		–		(347)		(347)
Profit/(loss) before income tax	2,513		2,700		761		(1,119)		4,855
Income tax expense	–		–		–		(1,121)		(1,121)
Profit/(loss) for the period	2,513		2,700		761		(2,240)		3,734

 

Other Group operations are included in “Central”.  These mainly comprise Group corporate expenditure such as head office and Board costs, new business development and general financial costs.  

Segment assets and liabilities

At 31 May 2018 – Unaudited	Aerospace & Industrial		Laboratory		Metal Melt Quality		Central		Group
	£'000		£'000		£'000		£'000		£'000
Segmental assets	55,042		35,675		35,996		2,828		129,541
Cash and cash equivalents	–		–		–		8,461		8,461
Total assets	55,042		35,675		35,996		11,289		138,002
Segmental liabilities	(16,255)		(9,780)		(4,751)		(6,548)		(37,334)
Retirement benefit obligations	–		–		–		(14,298)		(14,298)
Bank overdraft and loans	–		–		–		(6,303)		(6,303)
Total liabilities	(16,255)		(9,780)		(4,751)		(27,149)		(57,935)

 

At 31 May 2017 – Unaudited	Aerospace & Industrial		Laboratory		Metal Melt Quality		Central		Group
	£'000		£'000		£'000		£'000		£'000
Segmental assets	48,182		31,785		37,147		3,842		120,956
Cash and cash equivalents	–		–		–		11,457		11,457
Total assets	48,182		31,785		37,147		15,299		132,413
Segmental liabilities	(15,359)		(10,512)		(4,189)		(5,862)		(35,922)
Retirement benefit obligations	–		–		–		(16,605)		(16,605)
Bank overdraft and loans	–		–		–		(7,501)		(7,501)
Total liabilities	(15,359)		(10,512)		(4,189)		(29,968)		(60,028)

 

At 30 Nov 2017 –	Aerospace & Industrial		Laboratory		Metal Melt Quality		Central		Group
	£'000		£'000		£'000		£'000		£'000
Segmental assets	46,985		30,250		35,222		2,993		115,450
Cash and cash equivalents	–		–		–		12,497		12,497
Total assets	46,985		30,250		35,222		15,490		127,947
Segmental liabilities	(15,979)		(7,690)		(3,917)		(7,091)		(34,677)
Retirement benefit obligations	–		–		–		(15,670)		(15,670)
Bank overdraft and loans	–		–		–		(2,711)		(2,711)
Total liabilities	(15,979)		(7,690)		(3,917)		(25,472)		(53,058)

 

Geographical analysis

Revenue

	Six months ended 31 May
	2018 Unaudited			2017 Unaudited
	By destination £'000	By origin £'000		By destination £'000	By origin £'000
United Kingdom	7,550	17,539		7,514	18,362
Continental Europe	9,872	5,536		7,232	5,245
United States of America	25,724	34,661		24,071	30,400
Other NAFTA	4,146	–		4,747	–
South America	929	–		596	–
Asia	10,628	1,949		10,772	1,531
Africa	836	–		606	–
	59,685	59,685		55,538	55,538

 

2.             Earnings per share

	Six months ended 31 May
	2018 Unaudited				2017 Unaudited
	Earnings     £'000	Weighted average number of shares	Per share amount   Pence		Earnings     £'000	Weighted average number of shares	Per share amount   Pence
Basic EPS – earnings attributable to ordinary shareholders	4,877				3,738
Shares in issue		45,661,303				45,325,567
Shares owned by the Employee Benefit Trust		(135,576)				(17,280)
Basic earnings	4,877	45,525,727	10.7		3,738	45,308,287	8.3
Effect of dilutive securities – share options	–	249,215	–		–	322,906	(0.1)
Diluted EPS	4,877	45,774,942	10.7		3,738	45,631,193	8.2

 

Basic earnings	4,877	45,525,727	10.7		3,738	45,308,287	8.3
Effect of exceptional income tax credit	(778)	–	(1.7)		–	–	–
Basic earnings before exceptional income tax credit	4,099	45,525,727	9.0		3,738	45,308,287	8.3

 

3.             Dividends per share

	Six months ended 31 May
	2018			2017
	Unaudited			Unaudited
	Per share	£'000		Per share	£'000
Final dividend approved	2.7p	1,229		2.4p	1,088

 

The final dividend approved for the year ended 30 November 2017 was paid to shareholders on 1 June 2018.

 

The Directors have declared an interim dividend of 1.6 pence (2017: 1.5 pence) per share to be paid on 31 August 2018 to shareholders on the register at the close of business on 27 July 2018.  The ex-dividend date for the shares is 26 July 2018.

 

4.             Property, plant and equipment and goodwill and other intangible assets

Six months ended 31 May 2018 – Unaudited		Property, plant and equipment		Goodwill and other intangible assets		Total
		£'000		£'000		£'000
Opening net book amount at 1 December 2017		19,997		57,227		77,224
Additions		1,401		255		1,656
Acquisitions		192		6,894		7,086
Depreciation and amortisation		(1,416)		(298)		(1,714)
Exchange movements		279		778		1,057
Closing net book amount at 31 May 2018		20,453		64,856		85,309

 

Six months ended 31 May 2017 – Unaudited		Property, plant and equipment		Goodwill and other intangible assets		Total
		£'000		£'000		£'000
Opening net book amount at 1 December 2016		18,102		52,578		70,680
Additions		3,947		65		4,012
Acquisitions		324		7,843		8,167
Depreciation and amortisation		(1,306)		(214)		(1,520)
Exchange movements		(391)		(1,224)		(1,615)
Closing net book amount at 31 May 2017		20,676		59,048		79,724

 

5.             Share capital and premium

		Number of shares (thousands)		Ordinary shares Unaudited		Share premium account Unaudited		Total Unaudited
				£'000		£'000		£'000
At 1 December 2016		45,308		906		35,513		36,419
Employee share options schemes:
Exercise of options under share option schemes		36		1		33		34
At 31 May 2017		45,344		907		35,546		36,453
At 1 December 2017		45,641		913		35,831		36,744
Employee share options schemes:
Exercise of options under share option schemes		43		1		101		102
At 31 May 2018		45,684		914		35,932		36,846

The authorised number of ordinary shares is 75 million (2017: 75 million) shares with a par value of 2.0 pence (2017: 2.0 pence) per share.  All issued shares are fully paid.  42,600 (2017: 36,000) ordinary shares of 2p each were issued in the period on the exercise of employee share options for a cash consideration of £102,000 (2017: £34,000).  The weighted average share price at the date of exercise of the options was 483 pence (2017: 491 pence).

 

The Group uses an Employee Benefit Trust to purchase shares in the Company to satisfy entitlements under the Group's long term incentive plan.  During the period, the Group purchased 42,000 (2017: 30,000) ordinary shares of 2.0 pence for a consideration of £207,000 (2017: £145,000).  As at 31 May 2018 the Employee Benefit Trust held a total of 154,000 ordinary shares of 2 pence (2017: 30,000) at a cost of £759,000 (2017: £222,000) and a market value of £801,000 (2017:£180,000).

 

6.             Other reserves

			Cumulative translation reserve Unaudited		Retained earnings Unaudited
			£'000		£'000
At 1 December 2016			10,949		24,078
Profit for the period attributable to shareholders			–		3,738
Direct to equity:
Final dividends approved			–		(1,088)
Actuarial loss			–		(1,129)
Tax on actuarial loss			–		192
Share based payments			–		251
Tax on share based payments			–		404
Foreign exchange contract cash flow hedge			–		157
Employee Benefit Trust shares			–		(145)
Exchange differences			(1,510)		–
At 31 May 2017			9,439		26,458
At 1 December 2017			6,964		31,161
Profit for the period attributable to shareholders			–		4,877
Direct to equity:
Final dividends approved			–		(1,229)
Actuarial gain			–		590
Tax on actuarial gain			–		(100)
Share based payments			–		322
Tax on share based payments			–		(170)
Employee Benefit Trust shares			–		(207)
Exchange differences			994		–
At 31 May 2018			7,958		35,244

 

7.             Cash generated from operations

		Six months ended 31 May
		2018 Unaudited £'000		2017 Unaudited £'000
Operating profit		5,590		5,202
Post-employment benefits		(972)		(859)
Fair value of derivatives through profit and loss		84		(898)
Share based payments		322		251
Depreciation and amortisation		1,714		1,520
Operating cash flows before movement in working capital		6,738		5,216
Increase in inventories		(1,538)		(840)
Increase in trade and other receivables		(2,478)		(1,421)
Decrease in payables		(1,499)		(760)
Decrease in provisions		(363)		(624)
Increase in working capital		(5,878)		(3,645)
Cash generated from operations		860		1,571

 

8.             Reconciliation of net cash flow to movement in net cash

	Six months ended 31 May
	2018 Unaudited £'000		2017 Unaudited £'000
Net decrease in cash and cash equivalents	(4,127)		(2,105)
Effects of exchange rate changes	(283)		220
Increase in borrowings	(3,218)		(7,792)
Net cash at the beginning of the period	9,786		13,633
Net cash at the end of the period	2,158		3,956

 

9.             Acquisitions

On 7 December 2017 the Group, through its subsidiary Seal Analytical Limited, purchased 100% of the share capital of Rohasys B.V. (“Rohasys”) to increase the Group's offering in the laboratory market. The trade is the manufacture of robotic sample handling systems and is based in the Netherlands.  The total maximum consideration is €3,046,000 (£2,677,000); €896,000 (£787,000) was paid in cash on the acquisition date, together with €502,000 (£442,000) to settle the outstanding loan.  The balance is contingent on financial performance and due for payment in cash over 4 years. 

 

The contingent consideration is dependent on Rohasys meeting sales and profit targets and will be settled in cash.  Management has forecast that payment of 91% of the maximum contingent consideration, €1,960,000 (£1,722,000), is the most probable outcome, of which €250,000 (£225,000) was earned and paid in the period.  The balance has been discounted to €1,529,000 (£1,341,000) using the discount rate of 14.5%, calculated for Rohasys.  A reduction in the annual sales by €100,000 (£88,000), which is considered a reasonable possible alternative, would reduce this contingent liability to €nil.  In the period since acquisition, the business has contributed €1,071,000 (£942,000) sales and €1,000 (£1,000) operating profit to the Group results.  The direct costs of acquisition charged to the income statement were £35,000.

 

						Total
						£'000
Purchase consideration:
Cash paid						787
Contingent consideration						1,517
Total purchase consideration						2,304
Fair value of net assets acquired						(858)
Goodwill						1,446

 

Provisional recognised amounts of identifiable assets acquired and liabilities assumed							Fair value
							£'000
Property plant and equipment							22
Trade name							72
Knowhow							318
Customer list							530
Inventory							394
Trade receivables							369
Trade payables							(425)
Other working capital (net)							20
Loan							(442)
Net assets acquired							858
Purchase consideration settled in cash							787
Cash outflow on acquisition							787

 

An independent valuation of the identifiable intangible assets has been carried out in the period.  The goodwill is attributable to the non-contractual relationships, the synergies between the business acquired and the existing operations of the Group and the potential to develop the technologies acquired. The goodwill recognised is attributable to the Laboratory division and is not expected to be deductible for income tax purposes.  The purchase has been accounted for as an acquisition. The intangible assets arising on the acquisition are to be written off between three and ten years.

 

On 28 February 2018 the Group, through its subsidiary Porvair Filtration Group Inc., purchased the net assets of Keystone Filter (“Keystone”), a division of CECO Environmental Corp. The trade is the design and manufacture of a range of filter cartridges and housings for the food and beverage, drinking water, and chemical process markets and is based in the USA.  The total consideration is $7,190,000 (£5,219,000); $5,290,000 (£3,840,000) of this was paid in cash on 28 February 2018, with the balance being deferred and due for payment by July 2018.  In the period since acquisition, the business has contributed $878,000 (£638,000) revenue and $68,000 (£49,000) operating profit to the Group results.  The direct costs of acquisition, which have been charged to the income statement, were $77,000 (£56,000).

 

						Total
						£'000
Purchase consideration:
Cash paid						3,840
Deferred consideration						1,379
Total purchase consideration						5,219
Fair value of net assets acquired						(3,030)
Goodwill						2,189

 

Provisional recognised amounts of identifiable assets acquired and liabilities assumed							Fair value
							£'000
Property plant and equipment							170
Trade name							194
Order backlog							87
Customer list							2,058
Inventory							372
Trade receivables							325
Trade payables							(171)
Other working capital (net)							(5)
Net assets acquired							3,030
Purchase consideration settled in cash							3,840
Cash outflow on acquisition							3,840

 

An independent valuation of the identifiable intangible assets has been carried out in the period.  The goodwill is attributable to the non-contractual relationships, the synergies between the business acquired and the existing operations of the Group and the potential to develop the technologies acquired. The goodwill recognised is attributable to the Aerospace & Industrial division and is expected to be deductible for income tax purposes.  The purchase has been accounted for as an acquisition. The intangible assets arising on the acquisition are to be written off between three and ten years.

 

A full fair value exercise of contingent consideration, and identifiable assets and liabilities acquired will be completed for Rohasys and Keystone for inclusion in the results for the year ending 30 November 2018.

 

10.          Contingent liabilities

At 31 May 2018, the Group has performance bonds totalling US$6,189,000 (30 November 2017: US$7,179,000). The bonds are released after a warranty period and in any event no later than November 2019. 

 

11.          Fair value estimation

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The condensed half-yearly consolidated financial information does not include all financial risk management information and disclosures required in the annual financial statements; it should be read in conjunction with the Group's annual financial statements as at 30 November 2017.  There have been no changes in the risk management processes or in any risk management policies since the year end.

 

The Group's finance department performs the valuations of financial assets and liabilities required for financial reporting purposes, including Level 3 fair values.  The department reports directly to the Group Finance Director and the Audit Committee.  Discussions of valuation processes and results are held between the Group Finance Director, the Audit Committee and the valuation team at least twice a year, in line with the Group's external reporting dates.

 

The table below analyses financial instruments carried at fair value, by valuation method.  The different levels have been defined below:

·     Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

·     Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

·     Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

		Level 1		Level 2		Level 3		Total
		£'000		£'000		£'000		£'000
Financial liabilities at fair value through profit or loss: –       Trading derivatives		–		(44)		–		(44)
Contingent consideration		–		–		(5,937)		(5,937)
Deferred consideration		–		–		(1,341)		(1,341)
At 31 May 2018		–		(44)		(7,278)		(7,322)
Financial liabilities at fair value through profit or loss: –       Trading derivatives		–		40		–		40
Contingent consideration		–		–		(4,432)		(4,432)
At 30 November 2017		–		40		(4,432)		(4,392)

There were no transfers between levels during the period, and there were no changes in valuation techniques in the period.

 

Level 2 trading and hedging derivatives comprise forward foreign exchange contracts. These forward foreign exchange contracts have been fair valued using forward exchange rates that are quoted in an active market.  The effects of discounting are generally insignificant for Level 2 derivatives.

 

A summary of the movements in deferred and contingent consideration on acquisitions contained in Level 3 is given below:

		J. G. Finneran Associates, Inc.		Rohasys BV		Keystone Filter		Total
		£'000		£'000		£'000		£'000
At 1 December 2017		(4,432)		–		–		(4,432)
Purchase consideration additions in the period		–		(2,746)		(5,219)		(7,965)
Cash paid in the period		–		1,454		3,840		5,294
Recognised in the income statement		–		(46)		–		(46)
Foreign exchange movement		(77)		(3)		(49)		(129)
At 31 May 2018		(4,509)		(1,341)		(1,428)		(7,278)

 

				J. G. Finneran Associates, Inc.		TEM Filter Company		Total
				£'000		£'000		£'000
At 1 December 2016				–		(696)		(696)
Purchase consideration additions in the period				(10,069)		–		(10,069)
Cash paid in the period				5,248		684		5,932
Recognised in the income statement				–		(20)		(20)
Foreign exchange movement				173		32		205
At 31 May 2017				(4,648)		–		(4,648)

 

Details regarding the valuation and sensitivity of the contingent consideration are disclosed in Note 9.  The fair value of the following financial assets and liabilities approximate their carrying amount: borrowings, trade and other receivables, other current financial assets, cash and cash equivalents, and trade and other payables.

 

 

12.          Provisions for other liabilities and charges

				Dilapidations		Warranty		Total
				£'000		£'000		£'000
At 1 December 2017				178		1,217		1,395
Charged to/(released from) the consolidated income statement:
–       Warranty				–		(363)		(363)
At 31 May 2018				178		854		1,032

 

The provisions, all of which are non-current, arise from a discounted dilapidations provision for leased property, which is expected to be utilised in 2023, and sale warranties, which are utilisable before 2020.

 

13.          Exchange rates

Exchange rates for the US dollar and Euro during the period were:

	Average rate to 31 May 18	Average rate to 31 May 17	Closing rate at 31 May 18	Closing rate at 30 Nov 17
	Unaudited	Unaudited	Unaudited	Unaudited
US dollar	1.38	1.26	1.33	1.35
Euro	1.14	1.17	1.14	1.14

 

14.          Alternative performance measures

 

a.     Underlying revenue at constant currency estimation

		2018		2017		Growth
Aerospace & Industrial		£'000		£'000		%
Underlying revenue*		20,639		19,499		6
Acquisitions		638		–
Underlying revenue including acquisitions*		21,277		19,499		9
Large projects		233		215
Revenue at constant currency*		21,510		19,714		9
Exchange		190		758
Revenue as reported		21,700		20,472		6
Laboratory
Underlying revenue*		12,987		13,745		(6)
Acquisitions		5,550		1,540
Revenue at constant currency*		18,537		15,285		21
Exchange		437		643
Revenue as reported		18,974		15,928		19
Metal Melt Quality
Revenue at constant currency*		18,528		17,181		8
Exchange		483		1,957
Revenue as reported		19,011		19,138		(1)
Group
Underlying revenue*		52,154		50,425		3
Acquisitions		6,188		1,540
Underlying revenue including acquisitions*		58,342		51,965		12
Large projects		233		215
Revenue at constant currency*		58,575		52,180		12
Exchange		1,110		3,358
Revenue as reported		59,685		55,538		7

 

*Revenue at constant currency is based upon retranslating the overseas subsidiaries at fixed exchange rates in both years of $1.4:£ and €1.2:£.  Large projects are the four large gasification and nuclear remediation projects that the Group is currently completing.  Inter-segment revenue has been eliminated in the selling segment.

 

b.     Performance before exceptional item

Included in the income tax expense is a one off non-cash exceptional credit of £778,000 (2017: £nil) reflecting the impact of the change of US tax rates on the Group's deferred tax liability.  As disclosed in note 2, the earnings per share impact of this item is 1.7 pence per share.  Excluding this item from basic earnings per share reduces earnings per share from 10.7 pence per share to 9.0 pence per share.  

 

15.          Reconciliation of new operating segments to amounts reported in 2017

From 1 December 2017 the Group has reported under a three operating segment structure.  The new divisions are Aerospace & Industrial, Laboratory, and Metal Melt Quality.  Metal Melt Quality is the new name for Metals Filtration, no changes were made to the components of the division.  The table below reconciles the Aerospace & Industrial and Laboratory operating segments with the Microfiltration operating segment as previously reported.

 

	Restated						As reported
Six months ended 31 May 2017 – Unaudited	Aerospace & Industrial		Laboratory		Eliminations		Microfiltration
	£'000		£'000		£'000		£'000
Total segment revenue	20,537		16,787		(924)		36,400
Inter-segment revenue	(65)		(859)		924		–
Revenue	20,472		15,928		–		36,400
Operating profit	2,513		2,700		–		5,213
Profit before income tax	2,513		2,700		–		5,213
Income tax expense	–		–		–		–
Profit for the period	2,513		2,700		–		5,213

 

	Restated				As reported
At 31 May 2017 – Unaudited	Aerospace & Industrial		Laboratory		Microfiltration
	£'000		£'000		£'000
Segmental assets	48,182		31,785		79,967
Segmental liabilities	(15,359)		(10,512)		(25,871)

 

	Restated				As reported
At 30 Nov 2017 – Unaudited	Aerospace & Industrial		Laboratory		Microfiltration
	£'000		£'000		£'000
Segmental assets	46,985		30,250		77,235
Segmental liabilities	(15,979)		(7,690)		(23,669)

 

16.          Seasonality

The results for the six months ended 31 May 2018 are impacted by a lower number of working days in the first six months of the year than in the second half of the year.

 

17.          Basis of preparation

Porvair plc is a public limited company registered in the UK and listed on the London Stock Exchange.

 

This unaudited condensed half-yearly consolidated financial information for the six months ended 31 May 2018 has been prepared in accordance with the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union.  The condensed half-yearly consolidated financial information should be read in conjunction with the annual financial statements for the year ended 30 November 2017, which have been prepared in accordance with IFRSs as adopted by the European Union.

 

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 November 2017, as described in those financial statements.  A number of amendments to IFRSs became effective for the financial year beginning 1 December 2017.  However, the Group did not have to change its accounting policies or make material retrospective adjustments as a result of adopting these new standards.

 

Taxes on income in the interim period are accrued using the tax rate that would be applicable to expected total annual earnings.

 

This condensed half-yearly consolidated financial information has been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of certain current assets, financial assets and financial liabilities held for trading and derivative contracts, which are held at fair value.

 

The preparation of condensed half-yearly consolidated financial information in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed half-yearly consolidated financial information and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates.  In preparing the condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended 30 November 2017, with the exception of changes in estimates that are required in determining the provision for income taxes.

 

After having made appropriate enquiries, including a review of progress against the Group's budget for 2018, its medium term plans and taking into account the banking facilities available until May 2022, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approval of the condensed half yearly consolidated financial information.  Accordingly, they continue to adopt the going concern basis in preparing this condensed half-yearly consolidated financial information.

 

This condensed half-yearly consolidated financial information and the comparative figures does not constitute full accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 November 2017, which were approved by the Board of Directors on 26 January 2018, and which include an unqualified audit report, no emphasis of matter paragraph and no statements under sections 498(2) or (3) of the Companies Act 2006, have been delivered to the Registrar of Companies.  This condensed half-yearly consolidated financial information has been reviewed, not audited.

 

The condensed half-yearly consolidated financial information does not include all financial risk management information and disclosures required in the annual financial statements; it should be read in conjunction with the Group's annual financial statements for the year ended 30 November 2017.  There have been no changes in any risk management policies since the year end.

 

This report will be available at Porvair plc's registered office at 7 Regis Place, Bergen Way, King's Lynn, PE30 2JN and on the Company's website www.porvair.com.

 

Statement of directors' responsibilities

 

The Directors confirm that this condensed half-yearly consolidated financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

·          an indication of important events that have occurred during the first six months of the year, their impact on the condensed half-yearly consolidated financial information and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·          material related party transactions in the first six months of the year and any material changes in the related party transactions described in the last annual report.

 

The Directors of Porvair plc are listed in the Porvair plc Annual Report for the year ended 30 November 2017.  A list of current Directors is maintained on the Porvair plc website www.porvair.com.