2017 management overview

Revenue from continuing operations increased by 10.8% to £353.3 million (2016: £318.9 million) and adjusted operating profit* from continuing operations was 9.2% higher at £45.2 million (2016: £41.4 million).  At constant exchange rates, revenue from continuing operations was 6.4% higher and adjusted operating profit* from continuing operations was in line with the prior year.  Lower broadcast activity in the more mature US studio markets, higher corporate costs and non-repeat of the 2016 Olympics were offset by acquisitions and growth in sales of higher technology and photographic products.

Imaging Solutions' revenue grew by 16.2% to £175.9 million and adjusted operating profit* increased by 18.7% to £29.9 million.  Revenue growth included a £12.6 million benefit from the acquisition of JOBY and Lowepro and £6.6 million from foreign exchange.  At constant exchange rates and excluding the impact of the acquisition, revenue increased by 3.3% and adjusted operating profit* grew by 10.4% driven by higher sales of video and photo supports, as well as favourable channel mix and production efficiencies.

Production Solutions' revenue from continuing operations declined by 6.1% to £114.2 million and adjusted operating profit* from continuing operations declined by 6.7% to £15.2 million.  This was partly due to non-repeat of the Olympics, and the spectrum "repack" in the US which led to our key broadcast customers focusing their expenditure on transmission rather than studios.  At constant exchange rates revenue from continuing operations fell by 9.6% and adjusted operating profit* from continuing operations was 21.1% lower than the prior year.

Revenue in the Creative Solutions Division increased by 37.7% to £63.2 million, driven by continued strong growth in the Independent Content Creator market, a particularly strong performance for SmallHD and the acquisition of Wooden Camera in 2016.  Adjusted operating profit* increased by 36.8% to £13.0 million.  At constant exchange rates revenue increased by 31.9% and adjusted operating profit* grew by 31.3%.

Adjusted Group gross margin* from continuing operations at 44.3% was higher than the prior year (2016: 42.6%) reflecting growth in higher technology sales and favourable sales mix.

Adjusted operating expenses* from continuing operations were £16.8 million higher than 2016 at £111.3 million. This mainly reflects investments in our Creative Solutions and Imaging Solutions businesses to drive sales and future growth, including higher investment in new product development at 4.6% of Group product sales from continuing operations (2016: 4.4% on continuing operations), and higher corporate costs. This also reflects an adverse currency impact of £3.5 million. This year corporate costs of £12.9 million have been reported separately rather than being allocated to the Divisions.

Adjusted profit before tax* from continuing operations of £42.4 million was £5.0 million higher than the prior year (2016: £37.4 million). There was a net foreign exchange benefit versus 2016 of £3.4 million on our adjusted profit before tax* from continuing operations mainly due to a stronger Euro and US Dollar.

Adjusted earnings per share* from total operations increased by 11.1% to 68.1 pence per share (2016: 61.3 pence per share).

Statutory profit before tax of £27.4 million (2016: £26.4 million) was after £15.0 million charges associated with acquisition of businesses (2016: £7.6 million) and £nil restructuring costs (2016: £3.4 million). 

Free cash flow* of £23.5 million (2016: £44.6 million) includes a working capital outflow of £9.4 million (2016: £12.0 million inflow). This reflects the anticipated investment in working capital following the acquisition of JOBY and Lowepro, as we have started to transition these businesses from a third party distributor model to using Vitec's own distribution business.  Excluding the impact from this acquisition, working capital would have reduced.  The significant reduction in working capital in 2016 was driven by the business right-sizing its inventory which, as expected, was not repeated this year.  2016 free cash flow also included £3.9 million from the sale of the Bury St. Edmunds manufacturing site as well as the benefit of the Olympics.

Net debt at 31 December 2017 was £42.9 million (31 December 2016: £75.1 million).  The decrease in net debt resulting from cash flows was £29.0 million (2016: £12.8 million).  This was after: £12.4 million cash outflow on acquisitions being made up of net payments of £10.8 million relating to the acquisitions of JOBY and Lowepro and RTMotion and a £1.6 million earnout payment on Wooden Camera in respect of their strong 2016 performance, a net cash inflow on disposals of £32.4 million arising from the disposals of Bexel and Haigh-Farr (£32.6 million) partly offset by £0.2 million of rent payments relating to the prior disposal of IMT, £12.4 million of dividend payments (2016: £11.1 million), and a net favourable foreign exchange impact of £3.2 million principally driven by US Dollar denominated debt.  Vitec repaid its $50 million private placement facility in full in the year, funded by the Revolving Credit Facility.  The Group's balance sheet remains strong with a year-end net debt to adjusted EBITDA* ratio of 0.7 times (31 December 2016: 1.2 times).

The Board has recommended a final dividend of 20.1 pence per share (2016: 17.3 pence per share).  The final dividend, if approved by our shareholders at the 2018 AGM to be held on Tuesday, 15 May 2018, will be paid on Friday, 18 May 2018.  This will bring the total dividend for 2017 to 30.5 pence per share (2016: 27.2 pence per share) and provide full year adjusted dividend cover of 2.2 times (2016: 2.3 times). The Group has sufficient distributable reserves to cover the dividends for a number of years.

Repositioning the Group

Vitec's transformed portfolio of businesses and new operating structure has repositioned the Group to deliver future progress.

Vitec operates in the fast-growing, global "image capture and sharing" market. Technology and social media continue to drive fundamental changes to this market.  Vitec's unique heritage, the credibility of our premium products, and our manufacturing and distribution strengths, provide us with exciting opportunities to capitalise on those changes. These, coupled with the experience and knowledge of our people, enable us to develop ground-breaking new products.

2017 was a transformational year for Vitec as we significantly reshaped our portfolio through disposals and acquisitions. The Group sold two non-core businesses and invested in new markets, geographies and technologies. We announced that from 1 January 2018 we would move from two to three Divisions to reflect a changing customer base, to enable us to adapt quickly to market and technological changes, and to give greater focus to the fast-growing Independent Content Creator market. Our new three Divisions - Imaging Solutions, Production Solutions and Creative Solutions - are highly customer-focused and operate in a decentralised, entrepreneurial structure, yet share capabilities across the Group. Although we continued to experience challenging market conditions in the more mature US broadcast market, this was offset by growth in sales of higher technology products and acquisitions.

Vitec has a clear growth strategy which is focused on organic sales growth, operational efficiencies and corporate development. 2017 saw significant progress executing our strategy which is based around five priorities.

1.   Corporate development

We supplement our organic growth opportunities with carefully targeted acquisitions. Our acquisition strategy focuses on finding innovative businesses operating within our core, or closely adjacent, markets which possess the right product development, growth characteristics and financial prospects.

During the year, we streamlined our portfolio by disposing of the non-core Haigh-Farr and Bexel, our US Services business, for net consideration of £33.2 million. In September 2017, we acquired the JOBY and Lowepro brands for our Imaging Solutions Division, for cash consideration of £8.4 million excluding integration costs and investment in working capital. JOBY is best known for its patented GorillaPod tripod and Lowepro is the leading camera bag brand. This acquisition is an excellent strategic fit with Vitec's existing core activities and integration is going well.

In September 2017, we also announced the acquisition of RTMotion for our Creative Solutions Division, for up to £3.1 million in net cash. RTMotion is a high technology business which gives the Group additional high quality camera accessories for the expanding Independent Content Creator market.  This business has been successfully integrated into Creative Solutions and its products are being sold under the Teradek brand name as Teradek RT.

2.   Improve the core

We continue to maximise and improve our business to better deliver underlying growth, and in 2017 Vitec delivered operational efficiencies through improvements to purchasing, inventory management and manufacturing. We achieved further lean manufacturing savings in our Italian and Costa Rican facilities, and are currently moving our manufacturing operations from Shelton, US to Costa Rica. In H1 2018, the Production Solutions Division will relocate its Bury St. Edmunds, UK facility to a purpose-built manufacturing site nearby that will deliver further operational improvements. We also expect to identify additional operational synergies across the Group in the medium-term.

We continue to demonstrate innovation throughout our businesses. In 2017 we launched a range of new products, including the revolutionary Flowtech carbon-fibre tripod, Internet Protocol prompters from Autoscript, Litepanels Gemini LED lights and compact tripods from Manfrotto. We also celebrated the 100-year anniversary of our Gitzo brand.

In 2018 we will maintain our market leadership by focusing on maximising sales of these and other new products, and continuing to innovate with new products and new technologies. In addition, our Production Solutions Division is currently supporting the 2018 Winter Olympics in South Korea.

3.   New markets and technologies

We have maintained investment in new technology and markets to underpin future growth. For example, in 2017 we further expanded our product offering in Apple stores with our newly acquired JOBY brand, and the RTMotion acquisition has performed in line with expectations.

We innovate quickly and we released a range of high quality products, including SmallHD Ultra Bright Monitors, a Wooden Camera Universal Follow Focus, a new Teradek Cube HEVC encoder, and Teradek Serv Pro, a dedicated iOS monitoring solution. We also launched a number of cross-Group products, developing synergies between Vitec brands. Examples include a SmallHD monitor with a built-in Teradek Bolt wireless receiver, a SmallHD Focus monitor with an Anton/Bauer battery, and a Manfrotto/Wooden Camera Directors Cage for DSLR and mirrorless cameras. We remain focused on further cross-selling of brands across the Group, especially to our Independent Content Creator customers.  We also continue to identify acquisition opportunities to address new areas of the content production value chain.

4.   Get closer to our customers

We continue to drive initiatives to get closer to our customers by owning more of our distribution and optimising our e-commerce activities. Our end markets are changing with more independent content creators looking to purchase equipment online and we are investing in and optimising our e-commerce capabilities through working with our major customers like Amazon and other specialised e-tailers, and by further developing our own online platforms. Our Creative Solutions Division has invested in a number of "Customer Experience Centres", tying our many Creative Solutions brands together to offer bundled products as well as educational workshops.

5.   Expand in APAC

Finally, we continue to expand geographically, especially in APAC, leveraging our current capabilities and footprint. Our Imaging Solutions Division has an efficient and widespread distribution network throughout the region and deals directly with the leading retailers and e-tailers. The acquisition of the JOBY and Lowepro brands has brought specialist teams in Hong Kong and China. APAC is the fastest growing region for Vitec, and we see further growth opportunities in this area. We will utilise our current networks to distribute other Vitec brands with a specific focus on growing our Creative Solutions Division, initially in China.

Change of method in reporting corporate costs

As announced on 30 January 2018, we have changed our reporting of corporate costs and will not allocate them across the Divisions but disclose them separately.  Whilst our corporate costs do not meet the definition of an operating segment under IFRS 8 "Operating Segments", the revised format is consistent with that used by the chief operating decision maker.

Implications of US Tax Reform Legislation

On 22 December 2017, the Tax Cuts and Jobs Act was enacted in the United States. The Act is complex and wide ranging and in these financial statements the impact has been estimated and may be further refined as more clarity and guidance becomes available. The legislation includes a reduction in the federal tax rate from 35% to 21% and also contains increased restrictions on the deductibility of interest expense. As a consequence of these changes, the re-measurement of the US deferred tax asset for both the change in tax rate and forecast utilisation of the asset has resulted in a one-off exceptional deferred tax charge of £7.9 million.

The Group expects that the effective tax rate on adjusted profit before tax* will be reduced by two percentage points, from 27% in 2017, to 25% from 2018 as a result of the reduction in federal tax rate.

Audit tender process

We have conducted an external audit tender and are pleased to announce Deloitte LLP as our Auditors starting from our 2018 financial year (subject to approval at the 2018 AGM).  The Board is grateful to KPMG LLP for their lengthy service to Vitec.

Imaging Solutions

The Imaging Solutions Division designs, manufactures and distributes premium branded equipment for photographic and video cameras and provides dedicated solutions to professional and non-professional image makers.  This consists primarily of camera supports and heads, camera bags, lighting supports, LED lights, lighting controls and filters.  It also supplies an expanding range of premium accessories for smartphones, action cameras and drones.

* For Imaging Solutions, before charges associated with acquisition of businesses of £3.8m (2016: £0.8m) and £nil restructuring costs (2016: £1.8m).

Imaging Solutions had a strong year, growing revenue by 16.2% to £175.9 million.  This included £12.6 million of revenue from the transformational acquisition of JOBY and Lowepro which completed in September 2017 and gives Vitec a leading global position in the new and fast growing iPhoneography and vlogging accessories market, as well as the photographic bags market.  The integration of these brands is going well.  Excluding the favourable impact of foreign exchange, as well as the impact from JOBY and Lowepro, revenue was 3.3% higher.

Camera and Imaging Productions Association (CIPA) data has shown a slightly positive trend for full year shipments of interchangeable lens cameras (ILC).  Our sales outperformed CIPA trends, particularly in APAC where we focused on delivering growth.  Revenue growth has been achieved through investing in and launching new products and continued development of our key distribution channels.

We grew our sales of video and photo supports and filters and successfully launched a number of innovative products including the Manfrotto BeFree Advanced tripod and the Manfrotto Nitrotech head.  Gitzo, our premium brand, celebrated its 100 year anniversary and continues to be the favoured choice for professional photographers.  Our decision to move production of the Manfrotto BeFree range of tripods, which were previously part manufactured in China, back to an automated production facility in Italy has been well received by our customers, with the "Made in Italy" stamp helping to differentiate us from our competitors.

We significantly increased our presence in Apple stores globally through the acquisition of JOBY.  We also developed our relationship with Amazon, with double digit sales growth for the year, driven by strong performance in the US.  Our owned distribution business continued to perform well and is a key asset in ensuring that we remain close to our end customers.

Statutory operating profit increased by 15.5% to £26.1 million.  Adjusted operating profit* margin increased by 0.4% pts to 17.0%.  This reflects the higher volumes as well as the favourable product mix from higher sales of video supports, favourable channel mix from higher e-commerce sales and production efficiencies.

Production Solutions

The Production Solutions Division designs, manufactures, distributes and provides premium branded products and solutions for broadcasters, film and video production companies, independent content creators and enterprises. Products include video heads, tripods, lights, batteries and speciality camera systems.

* For Production Solutions' continuing operations, before charges associated with acquisition of businesses of £1.1m (2016: £1.1m) and £nil restructuring costs (2016: £1.5m).

Non-repeat of the 2016 Olympics and continued challenging market conditions in the US studio market led to a fall in Production Solutions' revenue from continuing operations of £7.4 million to £114.2 million.  This included £4.5 million from favourable foreign exchange.

The business remains market leader in the core broadcast studio market.  Whilst we saw an improvement in our US studio business in the second half compared with the first half, overall sales of large supports declined in the year.  This included the impact of the spectrum "repack" in the US.  This was partly offset by stronger market conditions in Europe and the Middle East and higher sales of robotics and LED lighting products.

We launched a number of new products during the year, mainly focusing on the non-studio applications for broadcasters and on independent content creators.  These included Flowtech (Sachtler and Vinten versions), a revolutionary tripod which utilises state-of-the-art carbon fibre technology developed in-house enabling very rapid deployment, and Litepanels Gemini to exploit growth in the LED lighting market.  We also launched Autoscript's Intelligent Prompting, a fully Internet Protocol-enabled teleprompting solution.  These products were well received by the market.

We continue to improve the core business by driving operational efficiencies.  We are in the process of moving our manufacturing operations from Shelton, US to our facility in Costa Rica and in H1 2018 the manufacturing operations in Bury St. Edmunds, UK will relocate to a new purpose built site in the same area which will lead to further operational improvements.

Statutory operating profit increased by £0.4 million to £14.1 million and adjusted operating profit margin* reduced by 0.1% pt to 13.3% driven by an improvement in gross margin from favourable product mix and operational efficiencies offset by lower volumes.

Creative Solutions

The Creative Solutions Division designs, manufactures and distributes premium branded products and solutions for independent content creators, enterprises, broadcasters, and film and video production companies.  It is made up of a number of brands that Vitec has built through acquisitions and includes Teradek, SmallHD, Wooden Camera, Paralinx and RTMotion.

* For Creative Solutions, before charges associated with acquisition of businesses of £10.1m (2016: £5.7m) and £nil restructuring costs (2016: £0.1m).

Creative Solutions further expanded its offering of higher technology products to the independent content creator segment in 2017.  This market has shown continued strong growth with drivers including the proliferation of online platforms such as Netflix which have generated a need for original content.  Revenue for 2017 was £63.2 million, an increase of 37.7% on the prior year.  At constant exchange rates, and after excluding the impact from acquisitions including the 2016 acquisition of Wooden Camera, revenue grew by 20.0%.

We have continued to invest in new product development in line with the changing nature of the image capture and sharing market. New products launched in the year include HEVC encoders, daylight viewable on-camera monitors and Serv Pro, a dedicated iOS monitoring solution.  Our businesses have also worked together during the year to develop new products, including a SmallHD monitor with built-in Teradek Bolt wireless receiver, a SmallHD Focus monitor with an Anton/Bauer battery for DSLR cameras, and a Manfrotto/Wooden Camera Directors Cage for DSLR and mirrorless cameras.

Our higher technology offering was further enhanced by the acquisition of RTMotion in September 2017.  This complements our existing activities and provides the Division with additional high quality camera accessories for the expanding Independent Content Creator market.  The business has been integrated into Teradek and is performing in line with expectations.

Creative Solutions now has "Customer Experience Centres" in Los Angeles and Irvine, California and Brooklyn, New York where our knowledgeable sales people demonstrate and sell our latest products across the brands.  These centres help us to refine our products to improve user experience, particularly when brands are used together.

Statutory operating profit decreased by 21.6% to £2.9 million and adjusted operating profit margin* decreased by 0.1% pts to 20.6%.  This reflects higher volumes offset by increased investment in sales and marketing to drive sales of our legacy products and increased investment to develop new products which has positioned us well for the future.

Discontinued operations

* For discontinued operations, before amortisation of acquired intangible assets of £1.2m (2016: £2.1m), £nil restructuring costs (2016: £1.8m) and £nil impairment of goodwill (2016: £12.1m)

Revenue from discontinued operations was £24.8 million (2016: £57.3 million ) and adjusted operating loss* from discontinued operations was £0.4 million (2016: £0.1 million profit).  The movement was due to these businesses being sold part way through 2017, as well as lower sales at Haigh-Farr and lower activity in Bexel's US asset rentals in a non-Olympic year.  Bexel in particular had a significant negative impact on the Group's financial performance in recent years being capital intensive, low margin and loss making.  The disposals of Haigh-Farr and Bexel make strategic and financial sense for Vitec, allowing us to focus on core image capturing and sharing products and solutions.

Corporate costs

Corporate costs include payroll and bonus costs for the Directors and head office team, Long Term Incentive Plan costs for key individuals across the Group, professional fees, property costs, travel costs and IT costs.

The increase in corporate costs includes higher Long Term Incentive Plan accruals linked to strong financial performance.

Financial detail

Adjusted operating profit* for total operations in 2017 was £3.3 million higher than the prior year.  This reflects an increase in adjusted gross profit* of £5.5 million, favourable foreign exchange impact of £3.8 million and a £3.3 million contribution from acquisitions.  This was partly offset by investment in operating expenses of £8.8 million to drive sales and future growth in our higher technology and photographic businesses as well as higher corporate costs linked to our strong financial performance, and £0.5 million lower adjusted operating profit* from discontinued operations. The statutory operating profit for continuing operations of £30.2 million was £0.2 million lower than prior year.

Management's estimate of these drivers is summarised in the following table:

* Before charges associated with acquisition of businesses, impairment of goodwill, restructuring costs, and material non-operating events as defined in section 11 of the notes

Net financial expense

Net financial expense of £2.8 million was lower than the prior year (2016: £4.0 million) mainly due to lower overall debt levels, the benefit from repaying the $50 million private placement in May 2017 and lower rates of interest on the debt facility that was put in place in July 2016.  Interest payable was £2.6 million (2016: £4.2 million) and was covered 23 times (2016: 14 times) by adjusted EBITDA.

Profit before tax

Adjusted profit before tax* for total operations increased by £4.5 million to £42.0 million (2016: £37.5 million).  Statutory profit before tax for continuing operations increased from £26.4 million to £27.4 million.

Taxation

The effective taxation rate on adjusted profit before tax* was 27% in 2017 (2016: 27%).  Vitec's tax charge is higher than the UK statutory rate because the majority of our profits arise in overseas jurisdictions with higher tax rates than the UK.

Earnings per share

Adjusted earnings per share* for total operations was 68.1 pence per share (2016: 61.3 pence per share).  Basic earnings per share for total operations was 61.4 pence per share (2016: 20.2 pence per share).

Acquisitions

On 22 September 2017, the Group acquired the trade and certain assets (primarily comprising the JOBY and Lowepro brands) of the DayMen Group S.a.r.l. including 100% of the share capital of the subsidiary companies in Hong Kong and China ("JOBY and Lowepro"), through a business combination for a cash consideration of £8.4 million, expected integration and deal costs of £4.4 million and expected investment in working capital of £10.9 million.  The fair value of the net assets acquired was £4.4 million resulting in goodwill of £4.0 million.

JOBY and Lowepro products are designed and developed in Hong Kong and California respectively.  JOBY's patented GorillaPod has transformed the camera accessories market while Lowepro has been a market leader in bags designed to protect electronic and photographic devices since its inception in 1967. The acquisition is an excellent strategic fit with the Group's existing core activities and gives the Group greater access to the fast growing iPhoneography and vlogging consumer accessories market.

On 20 September 2017, the Group acquired 100% of the issued share capital of RT Motion Systems Ltd ("RTMotion"), a private company based in the UK, for a cash consideration of £2.5 million (£1.9 million net of cash acquired). The fair value of the net assets acquired was £1.6 million resulting in goodwill of £0.9 million. Under the terms of the acquisition, there is a potential deferred payment of up to £1.2 million payable in cash. This is dependent on the achievement of non-financial targets, including integration milestones, being met over the period to 31 December 2019, and is not contingent consideration. In 2017 an amount of £0.2 million was provided for and charged to the Income Statement in relating to milestones met in 2017.

RTMotion is a high technology business which provides wireless motor lens control systems for broadcast, cine and video cameras. The acquisition complements the Group's existing activities in the expanding Independent Content Creator market and its products will be marketed through the Group's global distribution network.

Disposals

On 9 May 2017, the Group sold Haigh-Farr Inc ("Haigh-Farr"), a defence antennas business based in the US for a cash consideration of $15.8 million (£12.2 million), of which $0.8 million (£0.6 million) is deferred for twelve months from disposal date.  A profit of £3.2 million arose on disposal after taking into account £0.5 million costs of disposal, £17.3 million net assets disposed and the previously recorded foreign exchange gain of £8.8 million that has been recycled to the Income Statement.

On 1 August 2017, the Group sold Bexel for a net cash consideration of $32.1 million (£24.3 million). A profit of £11.3 million arose on disposal after taking into account £2.8 million costs of disposal, £18.7 million net assets disposed and the previously recorded foreign exchange gain of £8.5 million that has been recycled to the Income Statement.

Restructuring costs

In 2017 the restructuring charge was £nil (2016: £5.2 million).  The prior year charge relates to actions to streamline operations with lower growth prospects and was mostly made up of redundancy costs.

Charges associated with acquisition of businesses

The 2017 charges relate to the Group's acquisition activities and amortisation of previously acquired intangible assets.

The amortisation of acquired intangible assets for continuing operations of £7.4 million (2016: £5.8 million) relates to the JOBY and Lowepro and RTMotion acquisitions in 2017, and other businesses acquired by the Group since 2011.

Transaction costs of £1.3 million (2016: £0.6 million) and integration costs of £2.2 million (2016: £nil) were incurred in relation to acquisitions.

Earnout payments of £4.1 million were accrued during the year (2016: £1.2 million).  £3.9 million related to Wooden Camera on its strong performance in 2017 following its acquisition in the prior year and £0.2 million related to RTMotion following its acquisition in the current year.

Impairment of goodwill

There was £nil impairment of goodwill in the year (2016: £12.1 million).

Cash flow and net debt

Cash generated from operating activities for total operations was £48.7 million (2016: £64.8 million).

The Group uses a number of key performance indicators to manage cash including cash conversion+, the percentage of working capital to sales, inventory days, trade receivable days and trade payable days.  Inventory, trade receivable and trade payable days are stated at year end balances; inventory and trade payable days are based on Q4 cost of sales (excluding exchange gains/losses) while trade receivable days are based on Q4 revenue.

Cash conversion⁺ was 90% for 2017 (2016: 155%).  This includes the impact of working capital investment following the acquisition of JOBY and Lowepro to move from a third party distributor model to using Vitec's own distribution business.  After excluding the impact of the JOBY and Lowepro acquisition, cash conversion was 119%.

The working capital to sales metric was in line with prior year at 15.7% and overall working capital increased by £9.4 million (2016: £12.0 million decrease).

Trade receivable days increased slightly to 45 days (2016: 43 days) and remain well controlled with a good ageing profile.  On a cash flow basis, trade and other receivables increased by £5.6 million (2016: £4.5 million).  The reported carrying value of trade receivables at year end of £52.5 million includes £1.5 million favourable foreign exchange compared to the prior year.

On a cash flow basis, inventory increased by £9.9 million (2016: £11.2 million decrease).  The reported carrying value of inventory at year end includes £2.5 million favourable foreign exchange compared to the prior year.  Inventory days increased to 106 days (2016: 83 days) partly driven by the buy-back of inventory in November 2017 relating to the acquisition of JOBY and Lowepro.

Trade payable days increased to 54 days (2016: 38 days).  On a cash flow basis, there was a £6.1 million increase in trade and other payables (2016: £5.3 million) including bonus and commission accruals and timing of payments.  The reported carrying value of trade payables at year end of £35.1 million includes £0.1 million adverse foreign exchange compared to the prior year.

Capital expenditure for total operations, including £4.3 million of software and capitalised development costs (2016: £3.4 million) totals £15.1 million (2016: £16.8 million). Overall capital expenditure was equivalent to 1.1 times depreciation (2016: 0.9 times).

We monitor Return on Capital Employed (ROCE), calculated as adjusted operating profit* divided by average total assets less current liabilities excluding the current portion of interest-bearing borrowings. This has increased from 17.5% in 2016 to 19.6% in 2017 for total operations.

The net tax paid in 2017 of £11.0 million was £3.8 million higher than the amount paid in 2016 due to the timing of tax payments.

As a result free cash inflow* was £23.5 million (2016: £44.6 million).

* Before charges associated with acquisition of businesses, impairment of goodwill, restructuring costs, and material non-operating events as defined in section 11 of the notes.

 ⁽¹⁾  Includes depreciation, amortisation of software and capitalised development costs and impairment losses on property, plant and equipment

⁽²⁾ Includes change in provisions, share based payments charge, gain on disposal of property, plant and equipment, fair value derivatives, integration costs and transaction costs relating to acquisitions

There was a £12.4 million net cash outflow relating to acquisitions during the year (2016: £20.3 million).

There was a £32.4 million net cash inflow from disposals, which mainly related to the disposals of Haigh-Farr and Bexel during the year (2016: £1.5 million outflow).

Dividends paid to shareholders totalled £12.4 million (2016: £11.1 million) and there was a net cash outflow in respect of shares purchased and issued of £2.1 million (2016: £1.1 million net inflow).  The net cash inflow for the Group was £29.0 million (2016: £12.8 million) which, after £3.2 million favourable foreign exchange (2016: £11.6 million adverse), decreased net debt to £42.9 million (2016: £75.1 million).

Treasury

Vitec manages its financing, hedging and tax planning activities centrally to ensure that the Group has an appropriate structure to support its geographically diverse business. It has clearly defined policies and procedures with any substantial changes to the financial structure of the Group, or to its treasury practice, referred to the Board for approval. The Group operates strict controls over all treasury transactions including clearly defined currency hedging processes to reduce risks from volatility in exchange rates.

The Group is hedging a portion of its forecast future foreign currency transactions to reduce the volatility from changes in exchange rates.  Our main exposure relates to the US Dollar and the table below summarises the contracts held as at 31 December 2017:

The Group does not hedge the translation of its foreign currency profits. A portion of the Group's foreign currency net assets are hedged using the Group's borrowing facilities.

Financing activities

In July 2016, a five year £125.0 million committed multi-currency Revolving Credit Facility with five relationship banks was renegotiated.  This is due to expire on 5 July 2021.  At the end of December 2017, £53.4 million (2016: £48.9 million) of the facility was utilised.  In May 2017 the Group repaid its US$50 million private placement facility in full.

The average cost of borrowing for the year which includes interest payable, commitment fees and amortisation of set-up charges was 3.2% (2016: 3.9%) reflecting an interest cost of £2.6 million (2016: £4.2 million).

The Board has maintained an appropriate capital structure without exposing the Group to unnecessary levels of risk and Vitec has operated comfortably within its loan covenants during 2017.

Foreign exchange

2017 adjusted operating profit* included a £3.8 million net favourable foreign exchange effect after hedging, mainly due to favourable £/€ and £/$ rates when compared to 2016.  Should exchange rates remain at current levels ($1.40, €1.13), we would expect a headwind from foreign exchange in 2018 in the order of £0.8 million.

Dividend

The Directors have recommended a final dividend of 20.1 pence per share amounting to £9.0 million (2016: 17.3 pence per share, amounting to £7.7 million). The final dividend, subject to shareholder approval at the 2018 Annual General Meeting, will be paid on Friday, 18 May 2018 to shareholders on the register at the close of business on Friday, 20 April 2018. This will bring the total dividend for the year to 30.5 pence per share (up 12.1%). A dividend reinvestment alternative is available with details available from our registrars, Link Asset Services.

Principal risks and uncertainties

Vitec is exposed to a number of risk factors which may affect its performance. The Group has a well-established framework for reviewing and assessing these risks on a regular basis, and has put in place appropriate processes and procedures to mitigate against them. However, no system of control or mitigation can completely eliminate all risks. The Board has determined that the following are the principal risks facing the Group.

Demand for Vitec's products

Demand for our products may be adversely affected by many factors, including changes in customer and consumer preferences and our ability to deliver appropriate products or to support changes in technology. The Group increasingly produces and sells products that are more technologically advanced, including encoders, transmitters and on-camera monitors. These products have a shorter life cycle than our historical products, and continuous investment in new product development is needed to keep up with the changing demand. Demand may also be impacted by competitor activity, particularly from low-cost countries.

We value our relationships with our customers and to mitigate this risk we monitor closely our target markets and user requirements. We maintain good relationships with our key customers and make significant investments in product development and marketing activities to ensure that we remain competitive in these markets. In support of our new product launches, we have completed appropriate market analyses before developing new products to ensure that they are appropriately designed for our target markets. We monitor closely the demand for new products and phase out old product lines. We are actively pursuing growth in selected emerging markets.

New markets and channels of distribution

As we enter new markets and channels of distribution we may achieve lower than anticipated trading volumes and pricing levels or higher costs and resource requirements. This may impact the levels of profitability and cash flows delivered.

We continue to increase our online presence and our investment in new innovative products which address the needs of independent content creators. We are also increasing our presence and investment in APAC.

To mitigate these risks, we have a thorough process for assessing and planning the entry into new markets and related opportunities. This includes marketing and advertising strategies for our products and services. We continuously assess our performance and the related opportunities and risks in these markets. We adapt our approach taking into account our actual and anticipated performance. We review our channels of distribution to make sure that they remain appropriate.  Our increased online presence creates IT security and compliance challenges which the Group is continually addressing.

Acquisitions

In pursuing our business strategy we continuously explore opportunities to enhance our business through development activities such as strategic acquisitions. This involves a number of calculated risks including: acquiring desired businesses on economically acceptable terms; integrating new businesses, employees, business systems and technology; and realising satisfactory post-acquisition performance. In 2017, we acquired the JOBY and Lowepro brands and RTMotion. These acquisitions are performing at least to plan.

We mitigate these risks by having a clear acquisition strategy with a robust valuation model. Thorough due diligence processes are completed including the use of external advisers where appropriate. The post-acquisition performance of each business is closely monitored and a plan is developed to integrate the acquired businesses in an effective way.

Pricing pressure

Vitec provides premium branded products and faces a number of competitors. The strength of this competition varies by product and geographical market.

We continue to face price pressure from new market entrants, which we are responding to through the launch of new competitive product ranges. We continually review our production activities for cost saving opportunities. We have also faced issues relating to parallel trades / price arbitrage particularly in our Imaging Solutions business which led us to enforce "Minimum Advertised Price" where this is permitted.

Price competition from Chinese low-cost producers is becoming stronger in some of the more technologically advanced segments, particularly in respect of wireless transmitters.

To mitigate this risk, we ensure that our product and service offering remains competitive by investing in new product development and in appropriate marketing and product support, and by improving the management of supply chain costs. This, and working closely with our suppliers and managing our expenses and cost base appropriately, allows us to support price increases when required. We are rationalising our product range to reduce complexity which will also allow us to achieve some cost savings on production. Most of our products and services have a premium or niche differentiation which commands a price point that is higher than that of the competition. With the recent currency fluctuations, we continue to monitor our pricing across the main currencies.

Dependence on key suppliers

We source materials and components from many suppliers in various locations and in some instances are more dependent on a limited number of suppliers for particular items. If any of these suppliers or subcontractors fail to meet the Group's requirements, we may not have readily available alternatives, thereby impacting our ability to provide an appropriate level of customer service. Our overall dependence on key suppliers has increased as a result of the Group's decision to reduce its costs by outsourcing some manufacturing and assembly activities.  For several of our products we are heavily dependent on a specific supplier for the provision of core elements of the products; such vendors may decide to compete with Vitec. The recent acquisition of JOBY and Lowepro has further increased the dependence on external sourcing.

To address this risk we aim to secure multiple sources of supply for all materials and components and develop strong relationships with our major suppliers. We review the performance of strategically important suppliers and outsourced providers globally on an ongoing basis. Where economical we look to source materials closer to the manufacturing facilities to reduce lead times and improve control over the supply chain.

Dependence on key customers

While the Group has a wide customer base, the loss of a key customer, or a significant worsening in their success or financial performance, could result in a material impact on the Group's results.  Vitec's largest customer accounted for 11.9% of revenue from continuing operations which is marginally higher than in previous years. The business also works with a variety of customers on large sporting events and the extent of these activities varies year-on-year.

We mitigate this risk by monitoring closely our performance with all customers through developing strong relationships, and we monitor the financial performance of our key customers. We continue to expand our customer base including entering into new channels of distribution to expand our portfolio of customers.

People

We employ around 1,700 people and are exposed to a risk of being unable to retain or recruit suitable diverse talent to support the business. We manufacture and supply products from a number of locations and it is important that our people operate in a professional and safe environment.

We recognise that it is important to motivate and retain capable people across our businesses to ensure we are not exposed to risk of unplanned employee turnover. We fairly reward our people and have appropriate recruitment, appraisal, talent management and succession planning strategies to ensure we recruit and retain good quality people and leadership across the business. We take our employees' health and safety very seriously and have appropriate processes in place to allow us to monitor and address any issues appropriately.

Laws and regulations

We are subject to a comprehensive range of legal obligations in all countries in which we operate. As a result, we are exposed to many forms of legal risk. These include, without limitation, regulations relating to government contracting rules, taxation, data protection regimes, anti-bribery provisions, competition, and health and safety laws in numerous jurisdictions around the world. Failure to comply with such laws could significantly impact the Group's reputation and could expose the Group to fines and penalties. We may also incur additional cost from any legal action that is required to protect our intellectual property. 

Recent political developments in the US and Europe may have implications for several areas of regulations including but not limited to: the customs and import tariffs our businesses will be subject to; corporation tax rates; employment laws and regulations; and other business regulation.

More specifically, the UK's exit from the European Union may have a significant impact on rates of duties and other taxes applied to our UK entities' exports and imports, which would have a material effect on the Group's results. There may be other legal, regulatory and commercial ramifications, the likely impact of which are difficult to measure given the uncertainties surrounding the outcome of the current negotiations between the UK Government and the EU.

We address this risk by having resources dedicated to legal and regulatory compliance supported by external advice where necessary. We monitor and respond to developments in the regulatory environment in which our companies operate, including the effect of tax changes.

We enhance our controls, processes and employee knowledge to maintain good governance and to comply with laws and regulations. The Group has processes in place, including senior management training, to ensure that its worldwide business units understand and apply the Group's culture and processes to their own operations. We actively protect our intellectual property, and will legally pursue any party that infringes our intellectual property rights. 

With regards to Brexit, we have established an executive-led steering group to develop contingency plans whilst closely monitoring developments in the negotiations between the UK Government and the EU.

Reputation of the Vitec Group

Damage to our reputation and our brand names can arise from a range of events such as poor product performance, unsatisfactory customer service, and other events either within or outside our control.

We manage this risk by recognising the importance of our reputation and attempting to identify any potential issues quickly and address them appropriately. We recognise the importance of providing high quality products, good customer service and managing our business in a safe and professional manner. This requires all employees to commit to, and comply with, the Code of Conduct.

Exchange rates

The global nature of the Group's business means it is exposed to volatility in currency exchange rates in respect of foreign currency denominated transactions, and the translation of net assets and income statements of foreign subsidiaries and equity accounted investments. The Group is exposed to a number of foreign currencies, the most significant being the US Dollar, Euro and Japanese Yen. The uncertain outcome of Brexit negotiations may increase Sterling's volatility in the next few years, which in turn may a material impact on the Group's translated results.

We regularly review and assess our exposure to changes in exchange rates. We reduce the impact of sudden movements in exchange rates with the use of appropriate hedging activities on forecast foreign exchange net exposures. We do not hedge the translation effect of exchange rate movements on the Income Statement or Balance Sheet of overseas subsidiaries. However, the Group does finance overseas investments partly through the use of foreign currency borrowings in order to provide a net investment hedge over the foreign currency risk that arises on translation of its foreign currency subsidiaries.

Business continuity

There are risks relating to business continuity resulting from specific events such as natural disasters including earthquakes, floods or fires. These may impact our manufacturing plants or supply chain, particularly where these account for a significant amount of our trading activity. We are also dependent on our IT platforms continuing to work effectively in supporting our business and therefore there is a cyber- security risk for the Group.

We address this risk with Business Continuity Plans and Disaster Recovery Plans at our key sites, and by carrying out periodic IT and cyber security vulnerability assessments. We have global insurance schemes in place which provide cover for business interruption. We review coverage annually to determine whether adjustments are needed.

Effectiveness and impact of restructuring projects

In 2015/16 we conducted a number of restructuring projects to streamline the business, and to deliver cost savings. There is a risk that the restructuring activity could have been poorly executed and that the objectives might not be achieved. The main restructuring projects are now substantially complete, and have already started to generate year-on-year savings. We have also sold our Bury St Edmunds site and will move these activities to a lean, modern manufacturing facility in H1 2018. In addition, we continually aim to identify and implement operational synergies between the different business units.

Forward-looking statements

This announcement contains forward-looking statements with respect to the financial condition, performance, position, strategy, results and plans of the Group based on Management's current expectations or beliefs as well as assumptions about future events.  These forward-looking statements are not guarantees of future performance.  Undue reliance should not be placed on forward-looking statements because, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and the Group's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.  The Company undertakes no obligation to publically revise or update any forward-looking statements or adjust them for future events or developments.  Nothing in this announcement should be construed as a profit forecast.

The information in this announcement does not constitute an offer to sell or an invitation to buy shares in the Company in any jurisdiction or an invitation or inducement to engage in any other investment activities.  The release or publication of this announcement in certain jurisdictions may be restricted by law.  Persons who are not resident in the United Kingdom or who are subject to other jurisdictions should inform themselves of, and observe, any applicable requirements.

This announcement contains brands and products that are protected in accordance with applicable trademark and patent laws by virtue of their registration.

Board changes

Mark Rollins will be leaving the Board as an independent non-executive director and senior independent director on 2 April 2018 to focus on his Chairman's role at Carclo plc. Mark has been a valuable member of the Board since joining in October 2013 and the Board wishes him well for the future. To ensure that we have a strong independent non-executive presence on the Board we have searched for a replacement to Mark and we are pleased to report that Richard Tyson will join the Board on 2 April 2018 as an independent non-executive director.  Richard is Chief Executive Officer of TT Electronics plc, holding that position since 2014.  He was formerly President of the Aerospace and Security Division of Cobham plc from 2008 to 2014 and a member of their Executive Committee. Christopher Humphrey will become Senior Independent Director in addition to his role as Chairman of the Audit Committee with effect from Mark ceasing to be a director.

In connection with Richard's appointment there are no further matters to be disclosed in accordance with paragraph 9.6.13 of the Listing Rules of the UK Listing Authority. In accordance with section 430(2B) of the Companies Act 2006, the Company confirms that Mark Rollins will receive his annual fee as a non-executive director of the Company of £45,255 per annum and as Senior Independent Director of £6,000 per annum up to the date of ceasing to be a director of the Company.  No other amounts will be payable to Mark Rollins.

Outlook

We have outlined a number of initiatives for medium-term organic growth, particularly in the Independent Content Creator market and in APAC, and will continue to identify operational improvements and businesses to acquire in core and adjacent markets. Strong cash generation and a robust balance sheet will support these growth plans.

Vitec has a strong position in exciting and fast changing markets. With our transformed portfolio of businesses, new structure and growth initiatives, the Board is confident that, at current exchange rates, the Group remains well positioned to deliver further progress in 2018.

Going concern and viability

The Directors have made appropriate enquiries and consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

The Directors have also assessed the long-term viability of the Group over a three year period, taking account of the Group's current position and prospects, its strategic plan, risk appetite and the principal risks and how these are managed. Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over this period.

For and on behalf of the Board