Group finance director
The board recommends the reintroduction of a final dividend of 0.5p per share."
Revenue for the year of £201.5m compared with £231.3m in the prior year. The reduction directly reflects the focus for the year being on operating margin recovery rather than revenue growth.
Revenue for the year of £201.5m compared with £231.3m in the prior year. The reduction directly reflects the focus for the year being on operating margin recovery rather than revenue growth. Improved tendering disciplines contributed to the move away from winning work at uneconomic rates or with insufficient allowance for risk. The benefits of this approach, alongside improved operational processes, are evident in the underlying operating profit (before results of JVs and associates) of £9.0m, an increase of £1.4m over the prior year level of £7.6m, reflecting an increased operating margin of 4.5 per cent (2014: 3.3 per cent). Margins are progressing on track to achieve our previously stated 5 to 6 per cent target for the 2015/16 financial year. The share of results of JVs and associates was a loss of £0.2m (2014: £3.0m) and net finance costs were £0.4m (2014: £0.6m). Underlying profit before tax, which is management's primary measure of Group profit, was £8.3m (2014: £4.0m). The statutory profit after tax, reflecting both underlying and non-underlying items was £0.1m (2014: £2.6m loss).
Share of losses of JVs and associates
The Group's share of losses from its Indian joint venture was £0.2m (2014: £3.0m). This significant reduction reflects the measures put in place to strengthen management and reduce overheads, alongside higher volume throughput in the factory.
Non-underlying items for the year of £8.5m (2014: £8.1m) consist of the following:
- Contract remedial costs – £6.0m (2014: £nil)
- Amortisation of acquired intangible assets – £2.6m (2014: £2.7m)
- Valuation of derivative financial instruments – £0.1m favourable (2014: £nil)
The contract remedial costs relate to a programme of bolt replacement works at the Leadenhall building, a contract that was completed in 2013. They are treated as non-underlying costs in accordance with the Group's stated policy. This programme is being undertaken in conjunction with British Land, Laing O'Rourke and Arup and is likely to continue until the end of the calendar year. The liability of the Group and the other parties for the programme costs has not yet been determined and, therefore, the charge represents certain costs incurred at year-end, together with management's best estimate of the remaining cost to the Group. This is based on the current requirements of the programme and before taking account of possible future recoveries, as these cannot be recognised under IFRS.
|Underlying operating profit (before results of JVs and associates)||£9.0m||£7.6m|
|Underlying operating margin||4.5%||3.3%|
|Underlying profit before tax||£8.3m||£4.0m|
|Underlying basic earnings per share||2.31p||0.88p|
|Operating profit /(loss) (before results of JVs and associates)||£0.5m||(£0.1m)|
|Profit/(loss) after tax||£0.1m||(£2.6m)|
Net finance costs in the year were £0.4m (2014: £0.6m). The reduction reflects the Group's move into a net funds position for most of the year, coupled with reduced bank facility costs following the refinancing which was completed in October 2014.
The underlying tax charge of £1.4m represents an effective tax rate of 17.0 per cent on the applicable profit (which excludes results from JVs and associates). This compares with an effective tax rate of 20.2 per cent in the prior year. The reduction over prior year mainly reflects the UK statutory corporation tax rate which reduced from 23 per cent to 21 per cent on 1 April 2014.
The total tax credit for the year of £0.3m (2014: £1.4m) reflects the underlying tax charge, offset by deferred tax benefits arising from the amortisation of intangible assets in the year, together with the current tax credit on the contract remedial costs associated with the Leadenhall building.
Earnings per share
Underlying basic earnings per share was 2.31p (2014: 0.88p). This calculation is based on the underlying profit after tax of £6.9m and 297,503,587 shares, being the weighted average number of shares in issue during the year.
Basic earnings per share, based on the statutory profit after tax, is 0.05p (2014: -0.89p). There was no difference between basic and diluted earnings per share in the year (2014: no difference).
The board recommends the reintroduction of a final dividend of 0.5p per share payable on 11 September 2015 to shareholders on the register at the close of business on 14 August 2015. This dividend is not reflected on the balance sheet at 31 March 2015 as it remains subject to shareholder approval.
During the year, the board considered what the dividend policy of the Group should be. The Group intends to follow a progressive dividend policy. Funding flexibility will be maintained to ensure there are sufficient cash resources to fund the Group's requirements. Additional dividends will be paid when the Group's cash generation exceeds the requirements of the business, and where its underlying financial position remains strong.
Shareholders' funds at 31 March 2015 were £140.6m (2014: £143.4m). The reduction is primarily due to the non-underlying Leadenhall remedial costs coupled with an increase in the IAS 19 deficit on the Group's defined benefit pension scheme.
Goodwill on the balance sheet is valued at £54.7m (2014: £54.7m) and is subject to an annual impairment review under IFRS. No impairment existed either at 31 March 2015 or at 31 March 2014.
Other intangible assets on the balance sheet are valued at £7.1m (2014: £9.8m). This represents the net book value of the intangible assets identified on the acquisition of Fisher Engineering in 2007, along with certain software assets. Amortisation of £2.7m was charged in the year.
The Group has property, plant and equipment of £76.6m (2014: £74.1m). Capital expenditure in the year was £6.6m (2014: £2.2m). This included new equipment for our fabrication lines in Dalton and Northern Ireland, additional equipment for use on our construction sites, and a new canteen and employee welfare facility at our Dalton factory. Depreciation in the year was £3.6m.
The Group's ongoing replenishment levels of capital expenditure are expected to be £4–5m per annum.
During the year the Group sold its investment property in Leeds for £3.9m. This was acquired several years ago, had no relevance to the Group's core steel fabrication activities and the sale price was within £0.1m of the property's book value.
The Group invested a further £1.7m of equity in its Indian joint venture in the first half of the year, primarily to fund the historical losses of the business. With the joint venture now operating at close to break-even levels, the need for further equity injections to finance trading losses should be much reduced.
The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £16.5m (2014: £12.5m). The increase in the deficit is mainly as a result of the reduction in the assumption for corporate bond yields which is used to set the discount rate, partly offset by strong performance of the scheme's assets. Notwithstanding this, the 2014 triennial valuation of the scheme was completed during the year and resulted in the Group's deficit contributions being maintained at £1m per annum.
The Group is now adopting return on capital employed (ROCE) as an additional key performance indicator (KPI) to help ensure that its strategy and associated investment decisions recognise the underlying cost of capital of the business. The Group's ROCE will be calculated as underlying operating profit divided by the average of opening and closing capital employed. Capital employed is shareholders' equity excluding retirement benefit obligations (net of tax), acquired intangible assets and net funds. For the 2014/15 financial year, ROCE on this basis was 6.1 per cent and the Group's target is for ROCE to exceed 10 per cent over the whole economic cycle.
The Group finished the year with net funds of £6.4m (2014: £0.3m). Operating cash flows for the year before working capital movements were £6.6m. Net working capital, excluding the impact of Leadenhall remedial costs, increased by £1.2m during the year and represented 8.4 per cent of revenue at the year-end. This is a little higher than the 5 to 7 per cent range within which working capital has stabilised over the past 18 months but the difference can be attributed to the slower than expected final settlement of two older contracts.
Net investment during the year was £3.0m, with £5.7m in capital expenditure and £1.7m of additional equity investment in India. Offsetting this was the proceeds of £3.9m from the sale of the Group's investment property in June 2014.
The Group entered into a new banking facility in October 2014 with Yorkshire Bank (part of National Australia Bank) and HSBC. The new facilities are for £25m, with an accordion facility of a further £20m available at the Group's request, and are available until July 2019. There are two key financial covenants, with net debt: EBITDA of <2.5x, and interest cover of >4x. Other terms and conditions represent a return to normality in comparison with the terms required by the banks at the time of the rights issue in 2013. This new facility provides a solid foundation for the Group, with supportive partners, as it continues to improve its core profitability and implement its wider strategy.
Group treasury activities are managed and controlled centrally. Risks to assets and potential liabilities to customers, employees and the public continue to be insured. The Group maintains its low risk financial management policy by insuring all significant trade debtors.
The treasury function seeks to reduce the Group's exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate, secure and cost-effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably.
The Group continues to have some exposure to exchange rate fluctuations, currently between sterling and the euro. In order to maintain the projected level of profit budgeted on contracts, foreign exchange contracts are taken out to convert into sterling at the expected date of receipt.
In determining whether the Group's annual consolidated financial statements can be prepared on the going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities. The following factors were considered as relevant:
- The UK order book, which is strengthening, and the pipeline of potential future orders.
- The Group's operational improvement plan which has delivered stronger financial performance and is expected to continue doing so in the 2015/16 financial year and beyond.
- The Group's net funds position and its new committed bank finance facilities, including both the level of those facilities and the covenants attached to them.
Based on the above, and having made appropriate enquiries and reviewed medium-term cash forecasts, the directors consider it reasonable to assume that the Group has adequate resources to continue for the foreseeable future and therefore that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
Group finance director
17 June 2015
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Case study: Manchester Victoria Station
Client: Network Rail
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