Half yearly results

Operating Review

Overview

	2016		2015		Growth
	£m		£m		%
Revenue	52.1		46.3		13
Profit before tax	4.5		4.2		7
Basic earnings per share	7.5		6.9		9
Net cash	7.2		6.2

 

Demand in most of our markets was good and revenue for the six months ended 31 May 2016 was up 13%.  In constant currency revenue growth was 10%. 

 

The Group has invested £5.6 million in capital expenditure and acquisitions in the period and has made good progress towards its key operating objectives including:

 

·      Growth in aviation, nuclear and Seal Analytical driven by strong demand and new product introductions;

·      Large projects progressing well, with developments in ancillary services;

·      New facilities opened in the USA and China on budget and schedule; and

·      A good start by TEM, acquired in December 2015.

 

The second half of 2016 has started well and order books are healthy.

 

Strategic statement

Porvair's strategy has remained consistent for a number of years. It is to generate shareholder value through the development of specialist filtration and 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 often designed into a specification and will typically have long life cycles.

Over the last five years this strategy has worked well for the Group.  It has invested £27 million in capacity expansion and acquisitions and generated sufficient cash to turn £9 million of net debt into £7 million of net cash.  The Group is now in a position of financial strength, and will continue to invest in both organic and acquired growth as appropriate.  In the last twelve months the Group's after tax return on operating capital was 48% (2015: 47%).

Business model outline

Our customers require filtration or emission control products that perform to a given specification; for a minimum amount of time; often with prescribed physical attributes such as size or weight. We win business 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 particular markets or applications is valuable in building customer confidence. Domain knowledge is important, as is deciding where to direct resources.

This leads us to:

1.   Focus on end-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 four end-markets: aviation; energy and industrial; environmental laboratories; and molten metals. All have clear structural growth drivers.

·      Our products are specialist in nature and typically protect costly or complex downstream systems. As a result they are replaced regularly.  A high proportion of our annual revenue is from repeat orders.

·      We encourage new product development in order to generate growth rates in excess of the underlying market.  Where possible we build robust intellectual property around our product developments. About 30% of our revenue is derived from patent protected products.

·      Our geographic presence follows the markets we serve. Some 44% of revenue is in the Americas, where aviation and metals filtration are strong.  Some 24% of revenue is in Asia, where sales into water analysis markets are growing and the demand for gasification plants is strongest.

·      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 small acquisitions.  All investments are subject to a careful investment hurdle rate analysis based on strategic and financial priorities.

Operating structure

·      The Group has two divisions.  The Microfiltration division serves the aviation, environmental laboratory and energy/industrial markets.  The Metals Filtration division focuses on filtration of molten metals, principally aluminium.

·      The Group has plants in the US, UK, Germany and China. 

Investment and future development

Since the start of 2014 over £11.5 million has been invested in capacity expansion. New plants have been opened in the UK, US and China. Highlights in 2016 and future developments include:

·      A new US industrial filtration plant was opened in March 2016, expanding manufacturing and design capabilities. Further investment in production equipment is planned for the second half of 2016.

·      New equipment to increase capacity has been installed in Caribou, Maine.

·      The new plant in China has started production successfully and is making good quality products for aluminium filtration customers in the region. 

·      Manufacturing capacity has been expanded in two of the UK plants.

·      Gasification projects remain on track. Commissioning work in Korea has gone well with no major issues reported. Shipping on the project for Reliance is now substantially complete. Commissioning is likely to start in 2017. 

·      Several new aviation product programmes were won including work for Airbus NEO and Boeing 777x.

·      Integration of TEM, acquired in December 2015, is underway. Trading since acquisition has been good.

·      A joint venture agreement with Mascot Dynamics was signed to provide filter cleaning and services in India.

Metals Filtration

	2016		2015		Growth
	£m		£m		%
Revenue	16.8		15.7		7
Operating profit	1.2		1.2		(2)

 

Revenue was up 7% to £16.8 million (2015: £15.7million).  However, in constant currency, revenues are 4% lower, with fewer capital projects at aluminium smelters, following a period of low metal prices, holding back the sales of capital equipment.

Nevertheless, this division has made positive progress in 2016.  Sales of filters in the US and Europe have been steady, with consistent market share gains from patented products.  We have been awarded a further multi-year contract for the exclusive supply of aluminium filters to Alcoa.

The new plant in China has started production with modest start-up losses as expected. The aluminium filtration line is fully commissioned and is making good quality products. These products will be sold into the Asian market, using a new patented formula specifically developed for these applications. We plan to grow our volumes steadily, competing on value not price. We are confident that we have a differentiated offering in Asia and that over time, as in the rest of the world, this approach will be successful.

Microfiltration

	2016		2015		Growth
	£m		£m		%
Revenue	35.3		30.6		15
Operating profit	4.9		4.3		15

 

Revenue was up 15% at £35.3 million (2015: £30.6 million) as a result of good growth in most markets and further revenue from the large projects.

Aviation revenues are up 14% and the order book is healthy.  It has been a good period for project wins, including packages for the Airbus NEO programme, which will be made in the new US facility; and the next generation inerting systems for the Boeing 777x.  Bioscience filtration projects are going well with sales of the product licenced to Thermo Fisher Scientific growing well.  Nuclear projects are having an encouraging year with stronger order books for the second half including some interesting new HEPA filter designs in the USA.

Large projects continue to be a focus. The installation in Korea is now largely commissioned.  Shipments to the installations in India and China have finished and both are expected to begin operations in early 2017.  Shipments for the UK Government nuclear remediation contract will continue through 2016.

We have signed a joint venture agreement with our long term Indian partner, Mascot Dynamics.  The joint venture has reached an agreement with Reliance to design, build and operate filter cleaning equipment for its Indian installations.  We do not expect this to generate significant revenues but it will give better access to the Indian industrial filtration market, and we expect sales to grow in time.

We completed the acquisition of TEM, a filter business serving the microelectronics industry, in December 2015 and it has traded well since then. Integration is underway and we have started the process of expanding the product range using filtration capabilities from other parts of the Group.  Prospects for the second half are encouraging.

Seal Analytical sales grew 13%, again posting a record for the period. Strong demand from Chinese and US markets has driven this growth.  Seal is a market leading supplier of equipment and consumables for the detection of inorganic contamination of water. It distinguishes itself from its competitors with an active new product development programme that has seen the introduction of four new platforms in the last four years, with more to come.

 

Interest

The Group incurred an interest charge of £0.3 million (2015: £0.3 million).  £0.2 million (2015: £0.2 million) relates to the finance cost of the defined benefit pension scheme.  The remainder principally comprises non-utilisation fees on the Group's banking facilities.

Tax

The Group tax charge was £1.1 million (2015: £1.1 million).  This is an effective rate of 24% (2015: 26%), in line with the rate recorded for the full year ended 30 November 2015 and higher than the UK standard corporate tax rate because tax rates are higher on profits made in Germany and the US.

Earnings per share and dividends

The basic earnings per share for the period increased 9% to 7.5 pence (2015: 6.9 pence). 

The Board is declaring an increased interim dividend of 1.4 pence (2015: 1.3 pence) per share, an increase of 8%.

Cash flow and net debt

Cash generated from operations in the six months to 31 May 2016 was £2.5 million (2015: £3.1 million). Working capital increased in the period by £3.9 million (2015: £2.8 million).  Following several years of receiving cash in excess of revenue recognised on the large projects, in this period, as expected, more revenue has been recognised than cash received.   In addition, there was a planned increase in inventory as part of the startup of the new plant in Xiaogan.

Interest paid was £0.1 million (2015: £0.1 million). Tax payments were £0.6 million (2015: £0.6 million) in line with the prior year.

Capital expenditure was £2.7 million (2015: £1.4 million), mainly spent on the planned fit out of facilities in US and China and additional machining capacity in the UK.

£2.9 million (2015: £0.5 million of deferred consideration on previous acquisitions) was spent on TEM acquired on 4 December 2015.  As described in note 9, further consideration is due in 2017 contingent upon the performance of the business in its first year of trading under our ownership.

Net cash at 31 May 2016 was £7.2 million (31 May 2015: £6.2 million; 30 November 2015: £10.7 million).

Return on capital employed

The Group's return on capital employed was 15% (2015: 15%).  Excluding the impact of goodwill and the pension liability the return on operating capital employed was 48% (2015: 47%).

Current trading and outlook

Provided recent economic and political uncertainty does not affect general industrial activity, the outlook for Porvair is positive.  2016 has started well.  Demand in most of our markets is good and order books for the second half are healthy. We are benefiting from the introduction of new products and the integration of acquisitions made in 2015. The Group has a strong balance sheet, a promising project pipeline and many opportunities ahead.

 

 

Ben Stocks

Group Chief Executive

 

 

Related parties

There were no related party transactions in the six months ended 31 May 2016 (2015: 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 2015.

 

Although healthy at 31 May 2016, certain elements of the Group's order position can change quickly in the face of changing economic circumstances.  The Metals Filtration division and environmental laboratory supplies and general industrial filtration within the Microfiltration 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 2016.

 

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
			2016		2015
	Note		Unaudited		Unaudited
			£'000		£'000
Revenue	1		52,060		46,261
Cost of sales			(35,817)		(30,560)
Gross profit			16,243		15,701
Other operating expenses			(11,489)		(11,218)
Operating profit	1		4,754		4,483
Interest payable and similar charges			(303)		(319)
Profit before income tax			4,451		4,164
Income tax expense			(1,084)		(1,062)
Profit for the period attributable to shareholders			3,367		3,102
Earnings per share (basic)	2		7.5p		6.9p
Earnings per share (diluted)	2		7.4p		6.9p

 

 

 

 

Condensed consolidated statement of comprehensive income

For the six months ended 31 May

	Six months ended 31 May
	2016 Unaudited		2015 Unaudited
	£'000		£'000
Profit for the period	3,367		3,102
Other comprehensive income:
Items that will not be reclassified to profit and loss
Actuarial losses in defined benefit pension plans net of tax	(442)		-
Items that may be subsequently reclassified to profit or loss
Exchange differences on translation of foreign subsidiaries	1,727		409
Changes in the fair value of foreign exchange contracts held as a cash flow hedge, net of tax	17		(160)
	1,744		249
Net other comprehensive income	1,302		249
Total comprehensive income for the period attributable to shareholders of Porvair plc	4,669		3,351

 

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

 

Condensed consolidated balance sheet

As at 31 May

		As at 31 May				As at 30 November
	Note	2016 Unaudited		2015 Unaudited		2015 Audited
		£'000		£'000		£'000
Non-current assets
Property, plant and equipment	4	16,061		12,539		14,216
Goodwill and other intangible assets	4	47,729		43,331		43,547
Deferred tax asset		2,484		2,900		2,529
		66,274		58,770		60,292
Current assets
Inventories		14,008		13,060		12,350
Trade and other receivables		20,123		18,373		14,621
Cash and cash equivalents		8,318		8,218		10,738
		42,449		39,651		37,709
Current liabilities
Trade and other payables		(25,870)		(25,919)		(23,192)
Current tax liabilities		(1,893)		(1,432)		(1,405)
Bank overdraft and loans		-		(244)		-
Derivative financial instruments		(427)		(151)		(154)
		(28,190)		(27,746)		(24,751)
Net current assets		14,259		11,905		12,958
Non-current liabilities
Bank loans		(1,153)		(1,794)		-
Deferred tax liability		(1,515)		(1,173)		(1,465)
Retirement benefit obligations		(12,420)		(12,732)		(11,993)
Provisions for other liabilities and charges	12	(2,556)		(144)		(728)
		(17,644)		(15,843)		(14,186)
Net assets		62,889		54,832		59,064
Capital and reserves
Share capital	5	902		896		896
Share premium account	5	35,359		35,344		35,359
Cumulative translation reserve	6	3,433		1,225		1,706
Retained earnings	6	23,195		17,367		21,103
Total equity		62,889		54,832		59,064

 

The interim financial information on pages 7 to 21 was approved by the Board of Directors on 24 June 2016 and was signed on its behalf by:

 

Ben Stocks                                                                                                                                          Chris Tyler

Group Chief Executive                                                                                                                        Group Finance Director

 

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

Condensed consolidated cash flow statement

For the six months ended 31 May

		Six months ended 31 May
	Note	2016 Unaudited		2015 Unaudited
		£'000		£'000
Cash flows from operating activities
Cash generated from operations	7	2,503		3,055
Interest paid		(80)		(91)
Tax paid		(571)		(591)
Net cash generated from operating activities		1,852		2,373
Cash flows from investing activities
Acquisition of subsidiaries (net of cash acquired)	9	(2,930)		(490)
Purchase of property, plant and equipment	4	(2,623)		(1,385)
Purchase of intangible assets	4	(60)		(6)
Proceeds from sale of property, plant and equipment		-		475
Net cash used in investing activities		(5,613)		(1,406)
Cash flows from financing activities
Net proceeds from the issue of ordinary shares	5	6		19
Increase in/(repayment of) borrowings	8	1,113		(637)
Net cash generated from/(used in) financing activities		1,119		(618)
Net (decrease)/increase in cash and cash equivalents	8	(2,642)		349
Effects of exchange rate changes		222		(22)
		(2,420)		327
Cash and cash equivalents at the beginning of the period		10,738		7,891
Cash and cash equivalents at the end of the period		8,318		8,218

 

 

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
Balance at 1 December 2014	887	35,334	816	15,096	52,133
Profit for the period	-	-	-	3,102	3,102
Other comprehensive income for the period:
Exchange differences on translation of foreign subsidiaries	-	-	409	-	409
Changes in the fair value of foreign exchange contracts held as a cash flow hedge	-	-	-	(160)	(160)
Total comprehensive income for the period	-	-	409	2,942	3,351
Transactions with owners:
Proceeds from shares issued, net of costs	9	10	-	-	19
Employee share option schemes:
Value of employee services net of tax	-	-	-	225	225
Dividends approved as final or paid	-	-	-	(896)	(896)
Balance at 31 May 2015	896	35,344	1,225	17,367	54,832
Balance at 1 December 2015	896	35,359	1,706	21,103	59,064
Profit for the period	-	-	-	3,367	3,367
Other comprehensive income for the period:
Exchange differences on translation of foreign subsidiaries	-	-	1,727	-	1,727
Changes in the fair value of foreign exchange contracts held as a cash flow hedge	-	-	-	17	17
Actuarial losses in defined benefit pension plans net of tax	-	-	-	(442)	(442)
Total comprehensive income for the period	-	-	1,727	2,942	4,669
Transactions with owners:
Proceeds from shares issued, net of costs	6	-	-	-	6
Employee share option schemes:
Value of employee services net of tax	-	-	-	143	143
Dividends approved as final or paid	-	-	-	(993)	(993)
Balance at 31 May 2016	902	35,359	3,433	23,195	62,889

 

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 2016, the Group is organised on a worldwide basis into two operating segments:

1)    Metals Filtration

2)    Microfiltration

 

The segment results for the period ended 31 May 2016 are as follows:

 

Six months ended 31 May 2016 - Unaudited		Metals Filtration		Microfiltration		Other unallocated		Group
		£'000		£'000		£'000		£'000
Revenue		16,752		35,308		-		52,060
Operating profit/(loss)		1,181		4,923		(1,350)		4,754
Interest payable and similar charges		-		-		(303)		(303)
Profit/(loss) before income tax		1,181		4,923		(1,653)		4,451
Income tax expense		-		-		(1,084)		(1,084)
Profit/(loss) for the period		1,181		4,923		(2,737)		3,367

 

The segment results for the period ended 31 May 2015 are as follows:

 

Six months ended 31 May 2015 -Unaudited		Metals Filtration		Microfiltration		Other unallocated		Group
		£'000		£'000		£'000		£'000
Revenue		15,690		30,571		-		46,261
Operating profit/(loss)		1,206		4,294		(1,017)		4,483
Interest payable and similar charges		-		-		(319)		(319)
Profit/(loss) before income tax		1,206		4,294		(1,336)		4,164
Income tax expense		-		-		(1,062)		(1,062)
Profit/(loss) for the period		1,206		4,294		(2,398)		3,102

 

Other Group operations are included in "Other unallocated".  These mainly comprise Group corporate costs, including new business development costs, some research and development costs, general financial costs, and income tax expense.

Segment assets and liabilities

 

At 31 May 2016 - Unaudited		Metals Filtration		Microfiltration		Other unallocated		Group
		£'000		£'000		£'000		£'000
Segmental assets		30,595		65,656		4,154		100,405
Cash and cash equivalents		-		-		8,318		8,318
Total assets		30,595		65,656		12,472		108,723
Segmental liabilities		(4,099)		(22,521)		(5,641)		(32,261)
Retirement benefit obligations		-		-		(12,420)		(12,420)
Bank overdraft and loans		-		-		(1,153)		(1,153)
Total liabilities		(4,099)		(22,521)		(19,214)		(45,834)

 

At 31 May 2015 - Unaudited		Metals Filtration		Microfiltration		Other unallocated		Group
		£'000		£'000		£'000		£'000
Segmental assets		28,269		57,791		4,143		90,203
Cash and cash equivalents		-		-		8,218		8,218
Total assets		28,269		57,791		12,361		98,421
Segmental liabilities		(3,929)		(20,748)		(4,142)		(28,819)
Retirement benefit obligations		-		-		(12,732)		(12,732)
Bank overdraft and loans		-		-		(2,038)		(2,038)
Total liabilities		(3,929)		(20,748)		(18,912)		(43,589)

 

At 30 November 2015 - Audited		Metals Filtration		Microfiltration		Other unallocated		Group
		£'000		£'000		£'000		£'000
Segmental assets		28,520		55,445		3,298		87,263
Cash and cash equivalents		-		-		10,738		10,738
Total assets		28,520		55,445		14,036		98,001
Segmental liabilities		(3,851)		(19,087)		(4,006)		(26,944)
Retirement benefit obligations		-		-		(11,993)		(11,993)
Total liabilities		(3,851)		(19,087)		(15,999)		(38,937)

 

 

Geographical analysis

Revenue

	Six months ended 31 May
	2016 Unaudited			2015 Unaudited
	By destination £'000	By origin £'000		By destination £'000	By origin £'000
United Kingdom	8,114	23,049		6,407	17,985
Continental Europe	7,153	4,309		6,367	3,819
United States of America	18,405	23,624		18,602	23,782
Other NAFTA	3,913	-		3,514	-
South America	644	-		817	-
Asia	13,145	1,078		10,006	675
Africa	686	-		548	-
	52,060	52,060		46,261	46,261

 

 

2.             Earnings per share

	Six months ended 31 May
	2016 Unaudited				2015 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	3,367	45,032,387	7.5		3,102	44,659,379	6.9
Effect of dilutive securities - share options	-	165,612	(0.1)		-	146,675	-
Diluted EPS	3,367	45,197,999	7.4		3,102	44,806,054	6.9

 

 

3.             Dividends per share

	Six months ended 31 May
	2016			2015
	Unaudited			Unaudited
	Per share	£'000		Per share	£'000
Final dividend approved	2.20p	993		2.00p	896

 

The final dividend approved for the year ended 30 November 2015 was paid to shareholders on 3 June 2016.

 

The Directors have declared an interim dividend of 1.4 pence (2015: 1.3 pence) per share to be paid on 2 September 2016 to shareholders on the register at the close of business on 29 July 2016.  The ex-dividend date for the shares is 28 July 2016.

 

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

 

Six months ended 31 May 2016 - Unaudited		Property, plant and equipment		Goodwill and other intangible assets		Total
		£'000		£'000		£'000
Opening net book amount at 1 December 2015		14,216		43,547		57,763
Additions		2,623		60		2,683
Acquisitions		44		3,114		3,158
Depreciation and amortisation		(1,044)		(189)		(1,233)
Exchange movements		222		1,197		1,419
Closing net book amount at 31 May 2016		16,061		47,729		63,790

 

 

Six months ended 31 May 2015 - Unaudited		Property, plant and equipment		Goodwill and other intangible assets		Total
		£'000		£'000		£'000
Opening net book amount at 1 December 2014		12,336		43,209		55,545
Additions		1,385		6		1,391
Disposals		(397)		-		(397)
Depreciation and amortisation		(912)		(182)		(1,094)
Exchange movements		127		298		425
Closing net book amount at 31 May 2015		12,539		43,331		55,870

 

5.             Share capital and premium

		Number of shares (thousands)		Ordinary shares Unaudited		Share premium account Unaudited		Total Unaudited
				£'000		£'000		£'000
At 1 December 2014		44,363		887		35,334		36,221
Employee share options schemes:
Exercise of options under share option schemes		450		9		10		19
At 31 May 2015		44,813		896		35,344		36,240
At 1 December 2015		44,824		896		35,359		36,255
Employee share options schemes:
Exercise of options under share option schemes		308		6		-		6
At 31 May 2016		45,132		902		35,359		36,261

 

The authorised number of ordinary shares is 75 million (2015: 75 million) shares with a par value of 2.0 pence (2015: 2.0 pence) per share.  All issued shares are fully paid. 308,200 (2015: 450,221) ordinary shares of 2p each were issued in the period on the exercise of employee share options for a cash consideration of £6,000 (2015: £19,000).  The weighted average share price at the date of exercise of the options was 288 pence (2015: 298 pence).

 

6.             Other reserves

			Cumulative translation reserve Unaudited		Retained earnings Unaudited
			£'000		£'000
At 1 December 2014			816		15,096
Profit for the period attributable to shareholders			-		3,102
Direct to equity:
Final dividends approved			-		(896)
Share based payments			-		238
Tax on share based payments			-		(13)
Foreign exchange contract cash flow hedge			-		(160)
Exchange differences			409		-
At 31 May 2015			1,225		17,367
At 1 December 2015			1,706		21,103
Profit for the period attributable to shareholders			-		3,367
Direct to equity:
Final dividends approved			-		(993)
Actuarial loss			-		(539)
Tax on actuarial loss			-		97
Share based payments			-		227
Tax on share based payments			-		(84)
Foreign exchange contract cash flow hedge			-		17
Exchange differences			1,727		-
At 31 May 2016			3,433		23,195

 

7.             Cash generated from operations

		Six months ended 31 May
		2016 Unaudited £000		2015 Unaudited £000
Operating profit		4,754		4,483
Non-cash pension charge		178		166
Share based payments		227		238
Depreciation and amortisation		1,233		1,094
Profit on disposal of property, plant and equipment		-		(78)
Operating cash flows before movement in working capital		6,392		5,903
Increase in inventories		(1,283)		(1,694)
Increase in trade and other receivables		(4,754)		(1,338)
Increase in payables		779		184
Increase in provisions		1,369		-
Increase in working capital		(3,889)		(2,848)
Cash generated from operations		2,503		3,055

 

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

	Six months ended 31 May
	2016 Unaudited £'000		2015 Unaudited £'000
Net (decrease)/increase in cash and cash equivalents	(2,642)		349
Effects of exchange rate changes	182		(70)
(Increase in)/repayment of borrowings	(1,113)		637
Net cash at the beginning of the period	10,738		5,264
Net cash at the end of the period	7,165		6,180

 

9.             Acquisition

On 4 December 2015 the Group, through its subsidiary Porvair Filtration Group Inc., purchased the trade and assets of TEM Filter Company.  The total estimated consideration payable is $5,100,000 (£3,377,000); $4,350,000 (£2,880,000) was paid on 4 December 2015, with the balance being contingent and due for payment before 31 May 2017.  The contingent consideration is estimated based on the forecast for the operating profit performance of the acquired business in its first year of ownership by the Group.  A change in its operating profit forecast by $100,000 (£69,000), which is considered a reasonable possibility, would change the liability by the same amount.  The maximum contingent consideration is $1,200,000 (£825,000).  Direct acquisition-related costs of $58,000 (£38,000) have been charged to administrative expenses in the consolidated income statement. In the period since acquisition, the business has contributed $1,279,000 (£883,000) in revenue and $296,000 (£205,000) in operating profit to the Group results. 

 

						Total
						£'000
Purchase consideration:
Cash paid						2,880
Contingent consideration						497
Total purchase consideration						3,377
Fair value of net assets acquired						(321)
Goodwill						3,056

 

Recognised amounts of identifiable assets acquired and liabilities assumed							Fair value
							£'000
Property plant and equipment							44
Non-compete agreement							66
Inventory							93
Trade receivables							154
Other working capital (net)							(36)
Net assets acquired							321
Purchase consideration settled in cash							2,880
Cash outflow on acquisition							2,880

 

The goodwill attributable to the acquisition relates to the acquired customer base and non-contractual relationships, the synergies between the business acquired and the existing operations of the Group and the potential to develop the acquired technologies, which do not meet the criteria for capitalisation as intangible assets.  The goodwill recognised is attributable to the Microfiltration division and is expected to be deductible for income tax purposes.  The purchase is accounted for as an acquisition. 

 

10.          Contingent liabilities

At 31 May 2016, the Group has advanced payment bonds totalling US$5,024,000 (30 November 2015: US$5,273,000) relating to monies received in advance on contracts.  The bonds require the amount to be repaid in the event delivery is not made within certain parameters.  The Group has performance bonds totalling US$7,179,000 (30 November 2015: $9,728,000). The bonds are released after a warranty period and in any event no later than January 2019.  The Group has no bid guarantees in place at the period end.

 

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 2015.  There have been no changes in the risk management department or in any risk management policies since the year end.

 

Compared to year end, there was no material change in the contractual undiscounted cash out flows for financial liabilities with the exception of bank overdraft and loans of £1.2 million, which are due in 2018.

 

The Group's finance department includes a team that performs the valuations of financial assets and liabilities required for financial reporting purposes, including Level 3 fair values.  This team 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		-		(354)		-		(354)
Contingent consideration		-		-		(515)		(515)
Foreign exchange contracts used for hedging		-		(73)		-		(73)
At 31 May 2016		-		(427)		(515)		(942)
Financial liabilities at fair value through profit or loss: -       Trading derivatives		-		(64)		-		(64)
Deferred consideration		-		-		(56)		(56)
Foreign exchange contracts used for hedging		-		(90)		-		(90)
At 30 November 2015		-		(154)		(56)		(210)

 

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:

 

				Eisenmann Metallurgical		Thomas Cain		Total
				£'000		£'000		£'000
At 1 December 2014				(639)		(285)		(924)
Cash paid in the period				327		163		490
Recognised in the income statement				-		129		129
Foreign exchange movement				(16)		(7)		(23)
At 31 May 2015				(328)		-		(328)

 

				Fiber Ceramics		TEM Filter Company		Total
				£'000		£'000		£'000
At 1 December 2015				(56)		-		(56)
Purchase consideration additions in the period				-		(3,377)		(3,377)
Cash paid in the period				50		2,880		2,930
Recognised in the income statement				7		-		7
Foreign exchange movement				(1)		(18)		(19)
At 31 May 2016				-		(515)		(515)

 

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 2015				150		578		728
Charged to the consolidated income statement:
-       Unwinding of discount				7		-		7
-       Warranty				-		1,821		1,821
At 31 May 2016				157		2,399		2,556

 

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 16	Average rate to 31 May 15	Closing rate at 31 May 16	Closing rate at 30 Nov 15
	Unaudited	Unaudited	Unaudited	Unaudited
US dollar	1.45	1.53	1.46	1.51
Euro	1.32	1.34	1.31	1.43

 

14.          Revenue at constant currency estimation

		2016		2015		Growth
Metals Filtration		£m		£m		%
Revenue at constant currency*		14.4		15.0		(4)
Exchange		2.4		0.7
Revenue as reported		16.8		15.7		7
Microfiltration
Revenue at constant currency*		35.1		30.0		17
Exchange		0.2		0.6
Revenue as reported		35.3		30.6		15
Group
Revenue at constant currency*		49.5		45.0		10
Exchange		2.6		1.3
Revenue as reported		52.1		46.3		13

 

Revenue at constant currency is based upon fixed exchange rates in both years of $1.6:£ and €1.4:£.

 

15.          Seasonality

The results for the six months ended 31 May 2016 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.

 

16.          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 2016 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 2015, 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 2015, as described in those financial statements.  A number of amendments to IFRSs became effective for the financial year beginning 1 December 2015.  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 2015, 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 2016, its medium term plans and taking into account the banking facilities available until January 2018, 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 2015, which were approved by the Board of Directors on 22 January 2016, 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 2015.  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.

 

17.          Adoption of FRS 101 'Reduced disclosure framework - Disclosure exemptions from EU-adopted IFRS for qualifying entities'

Following the publication of FRS 100, 'Application of financial reporting requirements', by the Financial Reporting Council, Porvair plc is required to change its accounting framework for its entity financial statements, which is currently UK GAAP, for its financial year commencing 1 December 2015.  The Board considers that it is in the best interests of the Group for Porvair plc to adopt FRS 101 'Reduced disclosure framework - Disclosure exemptions from EU-adopted IFRS for qualifying entities'.

 

A list of IFRS requirements where there are exemptions available under FRS 101 which are to be taken in preparation of the financial statements of the entity, has been set out below:

 

•    paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based payment (details of the number and weighted-average exercise prices of share options and how the fair value of goods or services received was determined);

 

•    paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n) (ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and B67 of IFRS 3 Business Combinations;

 

•    paragraph 33(c) of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;

 

•    IFRS 7 Financial Instruments: Disclosures;

 

•    paragraphs 91 to 99 of IFRS 13 Fair Value Measurement (disclosure of valuation techniques and inputs used for fair value measurement of assets and liabilities);

 

•    paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of:

̵ paragraph 79(a)(iv) of IAS 1;

̵ paragraph 73(e) of IAS 16 Property, Plant and Equipment;

̵ paragraph 118(e) of IAS 38 Intangible Assets (reconciliations between the carrying amount at the beginning and end of the period);

 

•    paragraphs 10(d) (statement of cash flows), 10(f) (statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements), 16 (statement of compliance with all IFRSs), 38A (requirement for minimum of two primary statements, including cash flow statements), 38B-D (additional comparative information), 40A-D (requirements for a third statement of financial position), 111 (cash flow statement information) and 134 to 136 (capital management disclosures) of IAS 1 Presentation of Financial Statements;

 

•    IAS 7 Statement of Cash Flows;

 

•    paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (requirement for the disclosure of information when an entity has not applied a new IFRS that has been issued but is not yet effective);

 

•    paragraph 17 of IAS 24 Related Party Disclosures (key management compensation);

 

•    IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and

 

•    paragraphs 130(f)(ii), 130(f)(iii), 134(d) to 134(f) and 135(c) to 135 (e) of IAS 36 Impairment of Assets (disclosures when the recoverable amount is fair value less costs of disposal, assumptions involved in estimating recoverable amounts of cash generating units containing goodwill or intangible assets with indefinite useful lives and management's approach to determining these amounts).

 

A shareholder or shareholders holding in aggregate 5% or more of the total allotted shares in Porvair plc can serve objections to the use of the disclosure exemptions on Porvair plc, in writing, to its registered office (7 Regis Place, Bergen Way, King's Lynn, Norfolk PE30 2JN) no later than 26 August 2016.

 

 

 

 

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 2015.  A list of current Directors is maintained on the Porvair plc website www.porvair.com.

 

By order of the board

 

 

 

 

Ben Stocks 

Group Chief Executive

 

 

 

 

Chris Tyler

Group Finance Director

 

24 June 2016

 

 

Independent review report to Porvair plc

Report on the condensed half-yearly consolidated financial information 

We have reviewed Porvair plc's condensed half-yearly consolidated financial information (the "interim financial statements") in the half-yearly results of Porvair plc for the 6 month period ended 31 May 2016. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

The interim financial statements comprise:

·      the condensed consolidated balance sheet as at 31 May 2016;

·      the condensed consolidated income statement and condensed consolidated statement of comprehensive income for the period then ended;

·      the condensed consolidated cash flow statement for the period then ended;

·      the condensed consolidated statement of changes in equity for the period then ended; and

·      the explanatory notes to the interim financial statements.

The interim financial statements included in the half-yearly results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 16 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The half-yearly results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly results in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the half-yearly results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

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 United Kingdom. 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.

We have read the other information contained in the half-yearly results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

Cambridge

24 June 2016

 

a)    The maintenance and integrity of the Porvair plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

b)    Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.