Final Results

Pace plc: Preliminary Results for the year ended 31 December 2014

Saltaire, UK, 3 March 2015: Pace plc ("Pace", the "Group"), a leading global developer of technologies and products for PayTV and broadband service providers, today announces its results for the year ended 31 December 2014.

Strong performance in 2014: Adjusted EBITA up 24.5% to $241.1m, basic adjusted EPS up 43.6% to 63.6c and free cash flow of $204.0m. Dividend up 27.5% to 7.00c per share.

Financial highlights

· Revenue up 6.1% to $2,620.0m (2013: $2,469.2m).

· Adjusted EBITA1 up 24.5% to $241.1m (2013: $193.6m).

· Operating margin2 up 1.4ppt to 9.2% (2013: 7.8%).

· Profit after tax up 53.1% to $148.0m (2013: $96.7m).

· Basic EPS up 51.9% to 47.4c (2013: 31.2c) with Adjusted basic EPS3 up 43.6% to 63.6c (2013: 44.3c).

· Proposed final dividend 4.75c per share, resulting in full year dividend of 7.00c per share, a 27.5% increase on 2013 (2013: 5.49c), reflecting the Board's confidence in the outlook for the Company.

· Free cash flow4 $204.0m (2013: $209.0m), 84.6% of adjusted EBITA (2013: 108.0%).

· Net debt of $93.1m as at 31 December 2014 (31 December 2013: $33.0m net cash). Since the completion of the acquisition of Aurora Networks, Inc. ("Aurora Networks") for a headline consideration of $310m on 6 January 2014, net debt has been reduced by $186.1m (66.7%).

Operating highlights

· Increased operating profit through top-line growth due to the Aurora Networks acquisition, improved revenue mix, supply chain efficiency and increased operational efficiency.

o Increased profitability in underlying business (excluding the Networks business) on lower revenue.

o Strong trading in the Networks business; $264.6m revenue, $47.4m adjusted EBITA contribution.

· Further progress made against the Strategic Plan laid out in November 2011:

o Continue to transform core economics:

§ Underlying operating costs5 reduced by $19.3m (7.4%) whilst continuing to invest in growth opportunities.

§ Application of Pace efficiency and effectiveness principles to the Networks business enabled targeted cost and working capital synergies to be achieved ahead of plan.

§ Third consecutive year of strong free cashflow to EBITA generation; aggregate free cash flow of $595.7m over last three years due to continued focus on working capital and cash management.

o Maintain PayTV hardware leadership:

§ Reconfirmed as the market leader in PayTV hardware; global number one in Media Servers6, Set-top boxes ("STBs")7 and Advanced Telco Gateways8.

§ Record PayTV Consumer Premise Equipment ("CPE") revenue in H2 2014 only partially offset a weaker H1 2014 resulting in a 4.8% revenue decline to $2,243.2m (2013: $2,355.4m).

§ Wins achieved and a record number of project launches delivered across all regions with key customers including AT&T, BeIn Sports, Comcast, Liberty Global and Net Brazil.

o Widening out:

§ 231.1% increase in non-CPE revenue (2013: 5.4% increase) to $376.8m (2013: $113.8m) due to the contribution of the Networks business.

§ Strong year for Networks due to robust customer demand which is expected to continue into 2015.

§ Built on the momentum of 2013 with a number of key wins across all areas of our software and services offerings with key customers including Foxtel, TDS Telecom, Frontier Telecom and Viva Broadcast.

2015 Outlook

Considerable progress has been made in delivering on our strategy in 2014 and there remains further opportunity in 2015 to build on this success to develop and improve the performance of the Company.

The Board is confident that the Group will make further progress in 2015:

· Revenues for 2015 expected to be c. $2.75bn.

· Adjusted EBITA for 2015 is expected to be c. $255m.

· Strong cash flow will continue, and Pace expects to generate in the range of $185m to $195m of free cash flow.

Pace is well positioned to capitalise on major market trends over the next 3 to 5 years.

Commenting on the results, Mike Pulli, Chief Executive Officer said:

"I am pleased to report we have had a very successful year making considerable progress in all areas of the business. Pace is continuing to evolve into a more profitable, cash generative business with a broader spread of offerings and customers and finishes the year in a strong position.

During 2014, we have launched a record number of products across the globe and continued to lead the market in both product innovation and the service we deliver to our customers. Demand from our customers has remained strong and we continue to win new business.

Aurora Networks has been a great strategic addition to the Pace Group, enabling Pace to widen out into network infrastructure and build deeper, more embedded relationships with our customers. The integration was achieved ahead of plan and the Networks business achieved a record year due to strong underlying customer demand.

In delivering a 9.2% operating margin we have achieved our mid-term target a year ahead of plan. However, despite the good progress that has been made there remains significant opportunity for the performance of the Company to continue to improve. The Board are confident that, through Aurora Networks, potential additional acquisitions and the ongoing delivery of our Strategic Plan, Pace will continue to strengthen its position as a market leading technology solutions provider for the PayTV and broadband industries and deliver further value to our shareholders.

The strong performance in 2014 and the momentum of the business going into 2015 give the Board confidence to increase the final dividend by 29.8%. The Board is recommending a final dividend of 4.75c per share, giving a full year dividend of 7.00c per share, a 27.5% increase.

We are confident about our trajectory and are focused on making further progress in 2015 and beyond".

For further information please contact:

Pace's Full Year Results Presentation to Analysts will be held at the offices of Jefferies International Ltd at Vintners Place, 68 Upper Thames Street, London EC4V 3BJ, commencing at 08:30am.

This Presentation will also be available via live audio webcast, commencing at 08:30am. To register for this audio webcast, please go to: http://www.pace.com/ir

Business Review

2014 has been a year of solid execution and expansion for Pace. We have delivered a strong set of financial results, made good progress on our Strategic Plan, and created a platform for further improvement in 2015 and beyond.

Key highlights of the year

Pace is continuing to become a more profitable, cash generative business with a broader spread of products and customers and a better mix of revenue. Revenue in 2014 increased by 6.1% ($2,620.0m vs $2,469.2m in 2013). Operating margin in the period increased from 7.8% to 9.2% reflecting a strong contribution from the Aurora Networks, Inc. acquisition ("Aurora Networks"), better revenue mix, improving supply chain effectiveness and lower underlying operating costs. On an underlying basis (excluding Networks), profitability increased (operating margin 8.2% vs 7.8% in 2013) despite lower revenue ($2,355.4m vs $2,469.2m in 2013). The cash flow performance of Pace remains strong with $204.0m of free cash flow generated in the period, 84.6% of adjusted EBITA.

Strategic plan

The Strategic Review undertaken in 2011 highlighted that Pace operates in sustainable and profitable markets where we have differentiated capabilities; however, the Group must continue to execute on its three primary objectives to take advantage of the opportunities for improving both the level and quality of its earnings. We remain focused on these objectives and have made good progress both in delivering strong results in 2014, and in creating a platform for further improvement in 2015 and beyond.

In addition to the various organic developments Pace has undertaken over the past three years, the acquisition of Aurora Networks is a key step in the evolution of the Group and enhances our strategy to grow a broader platform across Hardware, Software and Services.

Continue to transform core economics

Significant progress has been made in improving the efficiency and effectiveness of the business. As the major initiatives which commenced in 2012 continue to deliver tangible benefits, a cost-focused discipline and high level of accountability is now ingrained across Pace and has been implemented in the newly acquired Networks business.

· Underlying operating costs, excluding the Networks SBU and the impact of IAS 38 accounting (capitalisation and amortisation of development expenditure), reduced by $19.3m (7.4%) in 2014 due to further efficiency programmes across the business. Whilst reducing underlying operating expenses, Pace has continued to internally invest in Software and Services and other growth opportunities.

· Application of Pace efficiency and effectiveness principles to the Networks business enabled targeted cost and working capital synergies to be achieved ahead of plan.

· Cash generation was strong throughout the year; free cash flow was $204.0m (2013: $209.0m), due to further re-alignment of working capital and focused cash management. Since the completion of the acquisition of Aurora Networks for a headline consideration of $310m on 6 January 2014 (pro forma debt of $279.2m), net debt has been reduced by $186.1m (66.7%) to achieve a net debt of $93.1m at 31 December 2014 (Net cash at 31 December 2013: $33.0m).

The various components of the Transform Core Economics stream of the Strategic Plan are now well embedded across the Company and are delivering significant financial and operational benefits. However, the Company believes significant opportunities remain for further improvement and will pursue areas of inefficiency and relentlessly strive to continuously improve operating effectiveness across all areas of the business.

Maintain PayTV hardware leadership

Pace was reconfirmed as the market leader in PayTV hardware; global number one in Set-top boxes9, Media Servers10 and Advanced Telco Gateways11:

· Record PayTV Consumer Premise Equipment ("CPE") revenue in H2 2014 only partially offset a weaker H1 2014 resulting in a 4.8% revenue decline to $2,243.2m (2013: 2.6% growth).

· STB and Media Server revenues were up 1.2% to $2,003.5m in 2014 (2013: $1,979.6m), driven largely by high demand in H2 2014 following a number of major launches across all regions.

· The move to Media Servers and whole home solutions is continuing at speed across the globe with over 27% of Pace's shipments in the STB and Media Server category being Media Servers and related client devices. In the year, Pace announced Media Server wins and deployments with a number of customers including BeIn Sports, Comcast, Foxtel and Liberty Global. We have a strong Media Server pipeline and anticipate increased demand across the globe in 2015 and beyond.

· Demand for traditional STBs remains strong; in the year, Pace achieved next generation hardware wins at a number of longstanding tier one customers including AT&T, Net Brazil, Oi, Sky Italia, Tata Sky and Zon Optimus.

· Gateway revenues were down 36.2% to $239.7m in 2014 (2013: $375.8m) due to reduced demand for legacy products in H1 2014. However, the launch of a number of new products enabled a 110.9% increase in revenue in H2 2014 compared to H1 2014. Wins were achieved with customers including AT&T, GVT and a number of Independent Operating Companies ("IOCs") in North America. In addition, Pace launched a range of DOCSIS 3.0 Cable Gateways in the North American market, our first development in this growing market. The Company believes the overall market demand remains strong for high performance Residential Gateways from Service Providers to effectively deliver high quality double and triple-play services.

Widening out

Pace has built on the momentum of 2013 with wins across all areas of our software and services offerings and good progress on product and customer project launches.

· Pace achieved a 231.1% increase in non-CPE revenue to (2013: 5.4% increase) to $376.8m (2013: $113.8m) due to the acquisition of Aurora Networks.

· Revenues in the Networks Strategic Business Unit ("SBU") have been strong reflecting cable operators' need for increased bandwidth and Pace's networks product set being an efficient way to upgrade network infrastructure. Networks delivered a strong performance in 2014 and further progress is expected in 2015.

· Software and Services revenues were down 1.4% to $112.2m (2013: $113.8m) as an increase in revenue from Pace's Elements and ECO software products and the Customer Care business were offset by declines in legacy software and service contracts.

· The Pace Elements software platform continues to gain traction as part of an advanced integrated solution with a number of wins for deployment in 2015 and the whole home iQ3 solution at Foxtel, Pace's first integrated solution with a tier one Service Provider, approved for trial ahead of launch in early 2015. The Elements software platform (including Titanium Conditional Access) is currently being used by over 9.3m subscribers (2013: 6.9m), a 34.8% increase in the last twelve months. In addition to shipping over 5m RDK ("Reference Design Kit") compliant devices, Pace's role at the forefront of the RDK initiative was reaffirmed with the announcement that the Elements Software Platform now has full RDK compatibility.

· The ECO Service Management Platform is now managing over 34.0m devices (2013: 29.8m), a 14.1% increase in the last twelve months. New wins include Foxtel, Frontier Communications and Logic Communications. These wins build on a strong global customer footprint that includes AT&T, BSkyB, Telmex and Telstra.

Aurora Networks - One year in

The acquisition of Aurora Networks, Inc. was announced on 23 October 2013 and completed on 6 January 2014.

Aurora Networks is a leading developer and manufacturer of advanced, next-generation Optical Transport and Access Network solutions for broadband networks that support the convergence of video, data and voice applications. A leading presence in these solutions, that are increasingly important for cable operators as they continue to fulfil consumers' constant demand for ever increasing bandwidth, ensures the acquisition has further strengthened Pace's relationships with its customers.

Aurora Networks has strengthened our offering and footprint:

· Positions Pace to enable operators to cost effectively support their consumers' constant demand for ever increasing bandwidth.

· Highly profitable and growing business with blue chip customer base and market leading positions, serving over 200 customers in 50 countries, including all of the top 10 cable operators in the US.

· Strong, highly experienced management team.

· Creates deeper and more embedded relationships with key customers.

· Cross-sell opportunity across customer footprints.

· Further widens Pace out beyond PayTV Customer Premise Equipment ("CPE").

Aurora Networks has progressed beyond expectations in the first 12 months:

· Integration - The integration of Aurora into Pace was completed ahead of plan by the end of H1 2014, following which, significant progress has been made in ramping up the supply chain to meet the growing customer demand. Aurora is now a fully integrated SBU within Pace, "Pace Networks", with its own focused sales and engineering teams whilst leveraging the scale and expertise of the wider Group's shared services. The targeted end-state run-rate synergies of $8m per annum were achieved in 2014, a year ahead of plan whilst further investing in supporting customers and new product development.

· Trading - Networks has had a very strong first year as part of Pace. Trading has been above expectations with revenue of $264.6m due to strong underlying customer demand which is expected to continue into 2015. Networks delivered an adjusted EBITA contribution of $47.4m, an operating margin of 17.9%.

· Innovation - Networks has a track record of innovation and this has continued in 2014 with a number of new product and technology launches:

o DOCSIS 3.1 compatibility across the Networks product range - Supporting the next generation of Hybrid Fibre Co-axial ("HFC") access technologies.

o Fifth generation Universal Digital Return solution - the industry's only upgradeable digital return solution and a key component to supporting the transition to DOCSIS 3.1.

o UniPHY Converged Services Platform - high performance aggregation solution for advanced services across high speed fibre and Co-axial networks.

o Distributed Broadband Access Architecture ("DBAA") - Pace's distributed, iterative and modular approach to enabling greater network capacity that leverages operators existing infrastructure investments.

We are confident that Networks will make further progress in 2015 and beyond.

Business performance

Pace has a broad global footprint within which individual markets are at varying stages of development. Overall, these markets have remained strong during the year, with PayTV continuing to show varying levels of subscriber and Average Revenue per User ("ARPU") growth despite perceived disruptive threats from new Over-the-Top ("OTT") market entrants and economic uncertainty in emerging markets. On a global basis, digital PayTV subscribers are expected to grow at 7% Compound Annual Growth Rate ("CAGR") between 2014 and 201812.

Product revenue split

Regional revenue split

North America

North America is the largest, most advanced and most profitable market for digital PayTV and broadband technology in the world, with over 112m PayTV subscribers and close to 104m fixed broadband connections13. Given the already high penetration levels, we believe the digital PayTV market in North America will remain flat in terms of the number of subscribers for the foreseeable future with subscriber acquisition being offset by customer churn between the various PayTV offerings. However, ARPU will continue to grow on an annual basis as service providers deliver an increased range of revenue generating services to their customers.

Pace is the only vendor to all of the largest operators in each of the Cable, Satellite and Telco markets; serving Comcast, DIRECTV and AT&T respectively. In each case Pace supplies the operators' most advanced in-home technology. In addition, Pace also serves a large number of other Cable and Telco operators in both the USA and Canada.

Total revenues in North America increased by 6.2% to $1,635.6m in 2014 (2013: $1,540.5m), driven by strong demand for Aurora products and new launches with major customers in H2 2014. This confirmed Pace's continued position of technological leadership in our sector and we remain confident about the long-term strength of the market for our products in North America.

Latin America ("Latam")

The Latam market is a large, diverse and fast growing market, within which Pace serves Satellite, Cable, IPTV and hybrid operators across the region, with Brazil and Mexico the key markets.

The overall PayTV market has expanded significantly over the last few years and continues to display strong digital subscriber growth with 6% CAGR predicted from 2014 to 201814. This growth is led by a number of factors including greenfield markets, deregulation, the 2016 Olympics in Brazil and growing competition between operators in the region. Demand for PayTV is strong at all levels of technology; Standard Definition ("SD") continues to support analogue to digital transition, High Definition ("HD") and high-end Personal Video Recorders ("PVRs") to meet growing consumer expectations and Pace deployed Media Servers with operators in the region during 2014.

Revenue in Latam increased by 4.1% to $373.2m (2013: $358.4m). Pace continues to have a diverse business in Latam, providing products to eight of the ten largest PayTV providers in the region and has made good progress in widening out the solutions delivered to this market. The Company is strategically well positioned with key customers in the region and remains confident that strong revenues and profitability will continue.

Europe

Europe remains a fragmented and highly customer specific territory for Pace. Revenues in Europe were down by 10.1% to $291.2m (2013: $323.9m), primarily due to a reduced win rate of new products in prior years, which adversely affected revenue up to H1 2014. Sales performance has improved and key wins in new and existing customers delivered a 48.7% growth in H2 2014 compared to H1 2014.

Single-digit digital subscriber growth is predicted in the underlying European PayTV market15. We expect significant growth in the Media Server segment of the market as operators in Europe follow the innovation of North American operators and in 2014 Pace shipped Media Servers to two European operators; Liberty Global and Get.

In addition, the Group is seeing increasing demand from operators for integrated solutions, incorporating Pace hardware and software assets, that can be quickly deployed and that enable the operator to innovate and differentiate in highly competitive markets. Pace is focused on developing opportunities in this area of the market, and has a number of projects underway.

Rest of World

Rest of World covers a diverse range of markets which are developing at different rates: the highly developed markets in Australia, New Zealand and South East Asia, the "fast following" markets in Middle East and Africa, and the fast growing Indian market. Revenues in Rest of World are up 29.9% to $320.0m (2013: $246.4m). This increase was due to strong demand for new products launched in H2 2013 and 2014.

The Company remains confident that these markets will provide significant growth opportunities both at the high end of the market with HD, PVR and Media Server products, and also as the uptake of PayTV and digitisation continues in emerging greenfield markets allowing Pace to increase its footprint with new customers through Software and Integrated Solutions.

Board changes

Mike Inglis was reappointed as a Non-executive Director on the Board on 13 March 2014.

The Board accepted Roddy Murray's resignation as Chief Financial Officer and Director on 27 July 2014.

In line with best practice corporate governance, the Company rotated a number of roles within the Board on 18 November 2014. John Grant was appointed Senior Independent Director and remains Chairman of the Audit Committee, and Mike Inglis was appointed Chairman of the Remuneration Committee. Pat Chapman-Pincher remains as an Independent Non-Executive Director.

Mark Shuttleworth joined the Board and was appointed as Chief Financial Officer on 12 January 2015.

2015 outlook

Considerable progress has been made in delivering on our strategy in 2014 and there remains further opportunity in 2015 to build on this success to develop and improve the performance of the Company.

The Board is confident that the Group will make further progress in 2015:

· Revenues for 2015 expected to be c. $2.75bn.

· Adjusted EBITA for 2015 is expected to be c. $255m.

· Strong cash flow will continue, and Pace expects to generate in the range of $185m to $195m of free cash flow.

Pace is well positioned to capitalise on major market trends over the next 3 to 5 years.

Financial Review

The financial position of Pace improved significantly in 2014. This improvement is reflected in the 6.1% increase in revenue (to $2,620.0m), a 24.5% increase in adjusted EBITA (to $241.1m) and a 66.7% reduction in pro forma net debt since the acquisition of Aurora Networks.

Pace has become a more profitable Company with operating margin increasing from 7.8% to 9.2%. In addition, free cash flow has remained strong at $204.0m (84.6% of adjusted EBITA), due to the continued benefits of robust cash management and working capital in-flows. As a result of the strong cash flow, the net debt has been reduced by $186.1m (66.7%) since the completion of the acquisition of Aurora Networks on 6 January 2014.

Group trading results

*Pre-exceptional costs and amortisation of other intangibles

Group Revenue of $2,620.0m (2013: $2,469.2m) increased by 6.1%, driven by the Networks business and strong demand for STBs and Media Servers partly offset by lower revenue from Gateways and flat revenue from Software and Services. Underlying revenue (excluding Networks) decreased by 4.6% to $2,355.4m (2013: $2,469.2m). In the year, 47% of revenue was generated by the top 3 customers (2013: 57%).

Gross profit of $532.5m (2013: $448.2m) is up 18.8%. Gross margin percentage in 2014 was 20.3%, an increase of 2.1ppt on 2013, reflecting the higher margin contribution from Networks.

Operating costs pre-exceptional charges and amortisation of other intangibles increased by $36.8m (14.5%) to $291.4m (2013: $254.6m) reflecting the inclusion of the Networks cost base. Further progress has been made in improving operating efficiency across the Company during the year, both in the core Pace business and Pace Networks.

The IAS 38 net credit (capitalisation and amortisation of development expenditure) was $20.8m reflecting an intense period of development activity ahead of product launches throughout the year and the first year of capitalisation of Networks product development.

Adjusted EBITA was $241.1m (2013: $193.6m); an operating margin of 9.2% against 7.8% in 2013. Underlying adjusted EBITA (excluding Networks) was $193.7m with operating margin increasing 0.4ppt to 8.2%.

Exceptional costs of $7.3m (2013: $12.2m) relate to the Aurora Networks acquisition and integration costs ($5.8m) and restructuring and reorganisation costs across the business ($1.5m).

Amortisation of other intangibles, primarily reflecting the charge for intangible assets related to acquisitions made in 2010 and 2014, was $52.9m (2013: $42.6m). The increase was due to the Aurora Networks acquisition.

Segmental analysis

The Group operates through SBUs. Pace Americas, Pace International and Pace Networks are deemed by the Board to represent operating segments under IFRS 8, with revenues and EBITA as follows:

Movements in revenue are described below. Although not wholly consistent, revenues from STB and Media Servers, Gateways and Software and Services in North America belong primarily to the Americas SBU, in Europe and Rest of World belong largely to the International SBU, and in Latin America belong to both the Americas and International SBUs. All revenue from Network products across all regions belong to the Networks SBU, which is the new operating segment for the Aurora Networks acquisition.

Pace Americas' revenue decreased by $118.6m (7.1%) in 2014 with a strong H2 2014 only partially offsetting a weaker H1 2014, operating margin increased to 9.6% (2013: 9.1%). The performance of Pace International improved as revenue increased by $4.8m (0.6%) and operating margin increased to 11.1% (2013: 10.5%). Pace Networks had a strong first year with revenue of $264.6m and an operating margin of 17.9%.

Other amounts include unallocated central costs that are not classified as reportable segments under IFRS 8. The loss in Other, primarily Corporate costs, increased by 6.9% to ($44.8)m (2013: $(41.9)m).

Finance costs

Net financing costs of $5.2m (2013: $8.0m) reflect the improved terms of the new borrowing facilities despite an increase in average net debt during the period. Finance costs include $1.6m (2013: $2.1m) for amortisation of facility arrangement and associated fees.

Profit before tax

Profit before tax was $175.7m (2013: $130.8m); an increase of $44.9m (34.3%) on 2013.

Taxation

The tax charge of $27.7m (2013: charge $34.1m) equates to a full year effective tax rate of 15.8% (2013: 26.1%). The rate reduction reflects a mix of expected recurring items, including lower corporate tax rates in the UK and the impact of the Aurora Networks acquisition, and non-recurring items. Based on the current expected regional mix of trading, the effective tax rate for 2015 is expected to be in the range of 19% to 21%. The cash cost of corporate tax was $11.5m (2013: $23.8m).

Profit after tax

Profit after tax was $148.0m (2013: $96.7m); an increase of $51.3m (53.1%) on 2013.

Earnings per share

Basic earnings per share ("EPS") was 47.4c (2013: 31.2c), an increase of 51.9%. Adjusted basic EPS, which removes the tax affected impact of the exceptional costs and amortisation of other intangibles to reflect underlying performance, is 63.6c (2013: 44.3c), an increase of 43.6%.

Balance sheet

Intangible development expenditure assets increased by $20.6m (2013: $8.1m increase) due to an increased number of development projects and the first year of capitalisation of Networks product development under IAS 38.

Tangible fixed assets increased in the period primarily due to the inclusion of Aurora Networks ($6.9m). Capital expenditure of $26.0m (2013: $21.6m) was offset by the depreciation charge of $29.0m (2013: $25.0m). The $26.0m capital expenditure reflected an increase of $4.4m from 2013 due to the inclusion of Networks and is in-line with the expected ongoing level for the Group.

Working capital

In the period following the acquisition of Aurora Networks, the pro forma working capital increased by $16.5m (13.1%) to $142.5m, as the increase in core Pace, due to the phasing of revenue in the year, offset the reduction in the Networks SBU.

Inventory increased by $11.2m (7.1%) to $168.0m during the period reflecting the inclusion of Aurora Networks inventory. Average stock turn in the period was 8.2 times against 8.4 times in 2013.

Debtor days increased by 6 days to 66 days at December 2014 reflecting a change in sales mix.

Creditor days at 31 December 2014 remained at 90 days.

Debt

In the period following the acquisition of Aurora Networks, the pro forma net debt reduced by $186.1m (66.7%) from $279.2m to $93.1m. During the year, two scheduled facility re-payment instalments were paid of $15.5m each in June and December 2014. 

A key target for the Group is to reduce the balance sheet leverage (calculated as net debt divided by adjusted EBITDA over the preceding 12 months). At 31 December 2014, the net debt / Last Twelve Months ("LTM") adjusted EBITDA ratio was 0.34x, well within the 2x net debt to EBITDA ratio target.

Liquidity and cash flows

A key performance measure for the Group is free cash flow, which was $204.0m (2013: $209.0m) and represented 84.6% of adjusted EBITA (2013: 108.0%). Cash outflows from interest payable net of interest received were $3.6m (2013: $5.9m). Cash spent on exceptional costs was $8.0m (2013: $10.4m).

The Board is confident that the Group will continue to be strongly cash flow positive in 2015 and that the Group's committed bank facilities are more than sufficient to meet its short to medium term funding needs.

Foreign currency

In the period, approximately 81.7% of the Group's revenues were denominated in US Dollars (2013: 81.2%), 10.9% in Brazilian Real (2013: 10.7%), 4.3% in Euro (2013: 7.7%), 2.5% South African Rand (2013: 0%), 0.4% in Sterling (2013: 0.4%) and 0.2% Australian Dollar (2013: 0%).

The impact of non-US Dollar revenues, costs and overheads continues to be addressed through Pace's foreign exchange hedging strategy.

Critical accounting policies

The Directors consider that the Group has the following critical accounting policies, as they require the use of estimates and are subjective in their nature:

- Impairment

- Royalty and warranty provisions

- Intangible assets - capitalised development costs

- Acquisition accounting

Dividend

The Board has recommended a final dividend of 4.75 c per share (2013: 3.66c per share). The full year proposed dividend increases 27.5% to 7.00c per share (2013: 5.49c per share). The increase reflects the Board's confidence in the outlook for the Company, its improving financial position and is in line with the progressive dividend policy introduced in 2009.

Dividends will be paid in sterling, equivalent to 3.093 pence per share. This is based on an exchange rate of £ = $1.5358, being the closing rate applicable on 2 March 2015, the date on which the Board resolved to recommend the final dividend. The proposed dividend will be payable on 3 July 2015 to shareholders on the register on 5 June 2015. 

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2014

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2014

CONSOLIDATED BALANCE SHEET

AT 31 DECEMBER 2014

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2014

NOTES

1 Basis of preparation and business environment

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements.

Basis of preparation

The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost convention as modified by the revaluation of derivative instruments.

Functional and presentational currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in US dollars which is the Company's functional and presentational currency.

The US Dollar/Pound Sterling exchange rate at 31 December 2014 was 1.56 (2013: 1.64).

Going concern

The Group has borrowing facilities in place until January 2019. At 31 December 2014 these are in the form of a $310 million term loan, which is subject to repayment through instalments every six months plus a final payment, and a $150 million revolving credit facility. These facilities are subject to financial performance covenants which the Group currently complies with.

The Group has prepared a financial and working capital forecast based upon trading assumptions and other short-term and medium-term plans. The Group has sensitised these plans for a number of potential scenarios, including working capital management and revenue reduction, and has concluded that the Group will continue to meet its financial performance covenants and will have adequate working capital available to continue in operational existence for the foreseeable future.

Significant judgements, key assumptions and estimation uncertainty

The Group's main accounting policies affecting its results of operations and financial condition are set out in the Group's financial statements. Judgements and assumptions have been required by management in applying the Group's accounting policies in many areas. Actual results may differ from the estimates calculated using these judgements and assumptions. Key areas of estimation uncertainty and critical accounting judgements are as follows:

Warranty provisions

Pace provides product warranties for its products. Although it is difficult to make accurate predictions of potential failure rates or the possibility of an epidemic failure, as a warranty estimate must be calculated at the outset of a product before field deployment data is available, these estimates improve during the lifetime of the product in the field.

A provision for warranties is recognised when the underlying products are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. The level of warranty provision required is reviewed on a product by product basis and provisions are adjusted accordingly in the light of actual performance.

Royalty provisions

Pace's products incorporate third party technology, usually under licence. Inadvertent actions may expose Pace to the risk of infringing third party intellectual property rights. Potential claims can still be submitted many years after a product has been deployed. Any such claims are always vigorously defended.

Provisions for royalty claims are recognised when it is considered more likely than not that an outflow of economic resources will be required to settle a claim that has resulted from the sale of a product allegedly using technology of a patent owner, and the amount of the outflow can be reliably measured. The directors have made provision for the potential outflow based on the latest information available, which represents the best estimate of the expenditure required to settle the present obligation. Having taken legal advice, the Board considers that there are defences available that should mitigate the amounts being sought. The Group will vigorously negotiate or defend all claims but, in the absence of agreement, the amounts provided may prove to be different from the amounts at which the potential liabilities are finally settled.

Impairment Reviews

As is required by International Accounting Standards, the Group carries out impairment reviews of its non-financial assets on an annual basis, or when indicators of impairment exist. Such reviews involve assessing the value in use of an asset or cash generating unit ("CGU") by reference to its estimated future cash flows, discounted to their present value. The judgements in relation to impairment reviews relate to the assumptions applied in calculating the value in use, and the future performance expectations.

Intangible assets - Capitalised Development Costs

The Group business includes a significant element of research and development activity. Under accounting standards, principally IAS 38 'Intangible Assets', there is a requirement to capitalise and amortise development spend to match costs to expected benefits from projects deemed to be commercially viable. The application of this policy involves the on-going consideration by management of the forecasted economic benefit from such projects compared to the level of capitalised costs, together with the selection of amortisation periods appropriate to the life of the associated revenues from the product.

Acquisition Accounting

As part of the accounting for business combinations it is necessary to perform a purchase price allocation exercise to identify appropriate categories of intangible assets that have been purchased. Such an exercise involves judgement with regard to the types of assets identified, the value of those assets and the useful economic lives applied with regard to amortisation rates. The amounts recognised are calculated by reference to management forecasts and assumed discount rates, obsolescence curves and attrition rates.

For significant acquisitions, whilst the Directors use appropriate qualified independent valuation advisors to assist in the purchase price allocation work, the exercise inherently requires significant judgement and estimation to be taken.

Financial information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2014 or 2013. Statutory accounts for 2013 have been delivered to the registrar of companies, and those for 2014 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

2 Segmental analysis

In accordance with IFRS 8 "Operating Segments", the chief operating decision-maker ("CODM") has been identified as the Board of Directors which reviews internal monthly management reports, budget and forecast information to evaluate the performance of the business and make decisions.

The Group determines operating segments on the basis of SBU areas, being the basis of which the Group manages its worldwide interests.

During the period the Group created a new SBU named Pace Networks, which contains the Aurora Networks, Inc. business acquired in 2014. In addition, certain other activities were restructured and split out across the Pace International and Pace Americas SBUs.

The Group has the following operating segments which are also reportable segments for the purpose of IFRS 8:

• Pace Americas;

• Pace International;

• Pace Networks.

Other amounts include unallocated central costs that are not classified as reportable segments under IFRS 8.

Performance is measured based on segmental adjusted EBITA, as included in the internal management information which is reviewed by the CODM. Adjusted EBITA is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments, relative to other entities that operate within these industries.

Revenues disclosed on the following page materially represent revenues to external customers and where appropriate, pricing is determined on an arm's length basis. There are no material inter-segment transactions.

The tables below present the segmental information on the revised basis, with prior periods amended to conform to the current period presentation.

Major customers

In 2014 the Group has three customers which individually account for more than 10% of the Group's total revenue, being 24%, 13% and 10%. In the prior year the Group also had three customers which accounted for 24%, 17% and 16% of the Group's total revenue. All of the revenue from these customers is within the Pace Americas and Pace Networks reporting segments in 2014, and within the Pace Americas reporting segment in 2013.

Geographical analysis

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers.

Segment assets are based on the geographical location of the assets. The split of non-current assets by location is as follows:

Non-current assets relate to property, plant and equipment and intangible assets, and, as required under IFRS 8, exclude deferred tax assets, financial instruments and post-employment benefit assets.

The Group has four main revenue streams, being Set-top boxes ("STB") and Media Servers, Gateways, Software & Services, and Networks. These revenue streams arise in each operating segment and are not defined by geographical location.

The following table provides an analysis of the Group's revenue streams according to those classifications:

3 Exceptional costs

Acquisition costs in 2014 and 2013 relate to integration costs and professional service fees in respect of the acquisition of Aurora Networks, Inc on 6 January 2014. Restructuring and reorganisation costs in 2014 and 2013 relate to different restructuring programmes within the Group and represent the costs of redundancy and restructuring. Aborted acquisition costs in 2013 relate to professional service fees in respect of aborted acquisitions.

4 Taxation

5 Earnings per ordinary share

The calculation of basic earnings per share is based on a profit after tax of $148.0m (2013: $96.7m) divided by the weighted average number of ordinary shares in issue of 312,334,970 (2013: 309,740,316), excluding shares held by the Employee Benefits Trust.

Diluted earnings per ordinary share varies from basic earnings per ordinary share due to the effect of the notional exercise of outstanding share options.

To better reflect underlying performance, adjusted earnings per share is also calculated (adjusting profit after tax to remove amortisation of other intangibles and exceptional items, post tax). The earnings amount is calculated as follows:

The Group's effective tax rate of 15.8% (2013: 26.1%) has been used to calculate the tax effect of adjusted items.

6 Dividend per ordinary share

In addition, the directors are proposing a final dividend for 2014 of 4.75 cents per ordinary share, which amounts to $14.9m (2013: $11.4m) based on the ordinary shares as at the year end. This will be payable on 3 July 2015 to shareholders on the register at 5 June 2015, subject to approval by shareholders at the forthcoming Annual General Meeting, and has not been included as a liability in these Financial Statements.

7 Intangible assets

8 Provisions

Other provisions mainly relate to retirement and exceptional restructuring provisions within the Group, along with professional fees to be incurred in relation to the Aurora acquisition and certain other provisions.

9 Free cash flow

10 Business combinations

On 6 January 2014 the Group acquired 100% of the share capital of Aurora Networks Inc, a group of companies leading the development and manufacture of advanced, next-generation Optical Transport and Access Network solutions for broadband networks that support the convergence of video, data and voice applications, for a cash consideration of $323.5m. Prior to the acquisition the Group had no interest in the acquiree, and an explanation of the rationale for the acquisition is set out in the 2013 Annual Report and Accounts.

In the period from the acquisition date to 31 December 2014, Aurora Networks Inc contributed revenue of $264.6m and adjusted EBITA of $47.4m. If the acquisition had occurred on 1 January 2014, the consolidated results would not be materially different. 

Details of the net assets acquired and goodwill are as follows:

There was no contingent consideration as part of the acquisition.

Goodwill relates to the assembled workforce and expected synergies with the wider Pace Group.

The assets and liabilities arising from the acquisition are as follows:

Inventories of $62.9m at 6 January 2014 have been reduced by $20.0m as a fair value adjustment was made within the measurement period, to write down inventories to their recoverable amount.

11 Post balance sheet events

There are no significant or disclosable post balance sheet events.

Circulation to shareholders

The Annual Report and Accounts will be made available in due course to Pace shareholders via Pace's website (www.pace.com) unless a shareholder has requested to receive a printed copy. The Annual Report and Accounts will be available to the public from the Company's registered office at Pace plc, Victoria Road, Saltaire, West Yorkshire, BD18 3LF.