Excellent profit growth has been supported by strong cash generation.
Acting Group finance director
|Underlying* operating profit (before JVs and associates)||£19.6m||£13.7m|
|Underlying* operating margin (before JVs and associates)||7.5%||5.7%|
|Underlying* profit before tax||£19.8m||£13.2m|
|Underlying* basic earnings per share||5.53p||3.67p|
|Operating profit (before JVs and associates)||£17.8m||£10.1m|
|Profit before tax||£18.1m||£9.6m|
|Basic earnings per share||5.13p||2.89p|
|Return on capital employed ('ROCE')||14.6%||9.7%|
* The basis for stating results on an underlying basis is set out in our year. The board believes that non-underlying items should be separately identified on the face of the income statement to assist in understanding the underlying performance of the Group. Accordingly, adjusted performance measures have been used throughout the annual report to describe the Group's underlying performance.
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Revenue for the year of £262.2m represents an increase of £22.8m (10 per cent) compared with the previous year. This is predominantly the result of an increase in production volumes, particularly in the second half of the year, mainly reflecting an order book which continued to grow until November 2016 when it reached a peak of £315m, its highest position for over six years. The Group's order book at 1 June 2017 of £229m represents the expected return to more normal order book levels following the mid-year peak. Historically, our June order book has represented approximately 8 to 10 months of future revenue.
Underlying operating profit (before JVs and associates) of £19.6m (2016: £13.7m) represents an increase of £5.9m since the prior year, reflecting an increased underlying operating margin (before JVs and associates) of 7.5 per cent (2016: 5.7 per cent). The operating margin has continued to benefit from the Group's operational improvement programme including ongoing improvements made to our contract management processes, improved flow of fabrication processes in our factories and the integration of our new joint venture, CMF, into our supply chain. CMF has benefited operating margins as well as the share of results from JVs and associates. The statutory operating profit (before JVs and associates), which includes the Group's non-underlying items, was £17.8m (2016: £10.1m).
The share of results of JVs and associates was a profit of £0.5m (2016: loss of £0.2m) and net finance costs were £0.2m (2016: £0.2m).
Underlying profit before tax, which is management's primary measure of Group profitability, was £19.8m (2016: £13.2m). The statutory profit before tax, reflecting both underlying and non-underlying items, was £18.1m (2016: £9.6m).
Share of results of JVs and associates
The Group's share of results from its Indian joint venture was a profit of £0.2m (2016: loss of £0.3m) reflecting another year of relative stability in the business. This is the first time that the Group has recorded a share of profits from the Indian joint venture which represents an operating margin of 9.7 per cent (2016: 7.0 per cent) less the finance expense associated with the debt structure at 31 March 2017.
Our new joint venture, CMF, contributed a Group share of profit of £0.3m (2016: £0.1m). Having successfully integrated the metal decking supply into our operations, CMF has invested further during the year allowing for the production of purlins and additional cold-formed products which will further expand the value offering and profit contribution from the business.
Underlying* profit before tax
Non-underlying items for the year of £1.8m (2016: £3.5m) comprised:
- Amortisation of acquired intangible assets – £2.6m (2016: £2.6m)
- Movement in fair value of derivative financial instruments – gain of £0.8m (2016: loss of £0.9m)
Amortisation of acquired intangible assets represents the amortisation of customer relationships which were identified on the acquisition of Fisher Engineering in 2007. These relationships will be fully amortised during the 2018 financial year.
A non-cash profit on derivative financial instruments of £0.8m was recognised in relation to the movement in fair values of foreign exchange contracts, which represents the reversal of derivative liabilities held on the prior year balance sheet on maturity of the underlying contract in the year. The Group has adopted hedge accounting during the year for all material foreign currency hedging positions (cash flow hedges), thereby mitigating the impact of fair value changes in the income statement since, to the extent that the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in other comprehensive income.
In 2015, the Group recorded a non-underlying cost of £6.0m associated with the programme of bolt replacement works at the Leadenhall building, a contract that was completed in 2013. This work is now complete and the actual costs of the programme were consistent with the non-underlying charge. Notwithstanding this, discussions remain ongoing between the Group and the other parties involved to determine where the ultimate liability for the programme costs should reside. Similar to previous years, no account has been taken of possible future cost recoveries from third parties, as these cannot be recognised under IFRS.
Net finance costs in the year were £0.2m (2016: £0.2m). The Group has been in a net funds position for all of the financial year, consequently the finance costs of £0.2m primarily represent non-utilisation fees for the revolving credit facility and the amortisation of capitalised transaction costs associated with the refinancing in 2014.
The underlying tax charge of £3.3m (2016: £2.3m) represents an effective tax rate of 17.1 per cent on the applicable profit (which excludes results from JVs and associates). This is consistent with an effective tax rate of 17.0 per cent in the prior year, reflecting an unchanged UK statutory corporation tax rate of 20 per cent over the same period. The Group's effective tax rate is lower than the UK statutory rate, primarily due to the continued recognition of deferred tax assets on losses which arose in prior periods. Almost all of the Group's operations and profits are in the UK, and we maintain an open and constructive working relationship with HMRC.
The total tax charge for the year of £2.7m (2016: £1.0m) reflects the underlying tax charge, offset by deferred tax benefits arising from the amortisation of intangible assets in the year, and also the benefit of the future reduction in UK corporation tax to 17 per cent in 2021 in the deferred tax calculation. These rate changes are categorised as non-underlying and are included in non-underlying items.
Earnings per share
Underlying basic earnings per share increased by 51 per cent to 5.53p (2016: 3.67p) based on the underlying profit after tax of £16.5m (2016: £10.9m) and the weighted average number of shares in issue of 298.9m (2016: 297.5m). Basic earnings per share, which is based on the statutory profit after tax, was 5.13p (2016: 2.89p), this growth reflects the increased profit after tax and non-underlying fair value movements on derivative financial instruments which have moved from a loss in 2016 to a profit in 2017. Diluted earnings per share, including the effect of the Group's performance share plan, was 5.09p (2016: 2.87p).
Dividend and capital structure
The Group has a progressive dividend policy. Funding flexibility is maintained to ensure there are sufficient cash resources to fund the Group's requirements. In this context, the board has established the following clear priorities for the use of cash:
- To support the Group's ongoing operational requirements, and to fund profitable organic growth opportunities where these meet the Group's investment criteria;
- To support steady growth in the core dividend as the Group's profits increase;
- To finance other possible strategic opportunities that meet the Group's investment criteria;
- To return excess cash to shareholders in the most appropriate way, whilst maintaining a good underlying net funds position on the balance sheet.
The board is recommending a final dividend of 1.6p (2016: 1.0p) per share payable on 15 September 2017 to shareholders on the register at the close of business on 18 August 2017. This dividend is not reflected on the balance sheet at 31 March 2017 as it remains subject to shareholder approval. This, together with the Group's interim dividend of 0.7p (2016: 0.5p) per share, will result in a total dividend per share for 2017 of 2.3p (2016: 1.5p).
Shareholders' funds at 31 March 2017 were £154.2m (2016: £148.2m). This equates to a total equity value per share at 31 March 2017 of 52p, compared to 50p at the end of 2016. The increase is primarily due to the increase in profit after tax for the year offset by an increase in the IAS 19 deficit on the Group's defined benefit pension scheme.
Goodwill and intangible assets
Goodwill on the balance sheet is valued at £54.7m (2016: £54.7m) and is subject to an annual impairment review under IFRS. No impairment was required either during the year ended 31 March 2017 or the year ended 31 March 2016.
Other intangible assets on the balance sheet are recorded at £1.6m (2016: £4.5m). This represents the net book value of the remaining intangible assets (customer relationships) identified on the acquisition of Fisher Engineering in 2007, along with certain software assets. Amortisation of £2.9m (2016: £2.8m) was charged in the year.
The Group has property, plant and equipment of £78.9m (2016: £77.4m).
Capital expenditure of £7.0m (2016: £5.0m) represents the continuation of the Group's capital investment programme. This included investment in the painting facilities at Lostock and Ballinamallard, development of our bridge fabrication capability, new equipment for our fabrication lines, additional investment in construction site equipment and improvements to our staff welfare facilities. We also purchased a plot of land at Dalton, which had previously been leased. Depreciation in the year was £3.6m (2016: £3.7m).
The carrying value of our investment in joint ventures and associates was £12.1m (2016: £11.6m) which consists of the investment in India of £4.6m (2016: £4.5m) and in CMF Limited of £7.5m (2016: £7.1m).
The Indian joint venture business has continued to repay its term debt with £4.1m repaid during the year, leaving a balance of £10.6m at the year-end. The Group has now agreed with its joint venture partner, JSW, to repay this outstanding term debt which will leave the business with an existing working capital debt of £14.0m, a letter of credit facility and a more balanced capital structure as it enters the next phase of its development. For the Group, this also represents an attractive use of funds considering the differential between interest rates in the UK and India.
The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £21.4m (2016: £14.6m). The increase in the liability is primarily the result of a reduction in the AA bond yield following the referendum vote to leave the European Union, as this is used as the discount rate in the calculation of scheme liabilities. The triennial funding valuation of the scheme will be carried out in 2018, with a valuation date of 31 March 2017. All other pension arrangements in the Group are of a defined contribution nature.
Return on capital employed
The Group adopts ROCE as a KPI to help ensure that its strategy and associated investment decisions recognise the underlying cost of capital of the business. The Group's ROCE is defined 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 2017, ROCE was 14.6 per cent (2016: 9.7 per cent) which exceeds the Group's target of 10 per cent through the economic cycle.
|Operating cash flow (before working capital movements)||£25.1m||£17.9m|
|Cash generated from operations||£27.4m||£24.8m|
|Operating cash conversion||112%||150%|
The Group has always placed a high priority on cash generation and the active management of working capital. The Group finished the year with net funds of £32.6m (2016: £18.7m).
Operating cash flow for the year before working capital movements was £25.1m (2016: £17.9m). Net working capital improved by £2.3m during the year mainly as a result of an increase in advance payments from customers. Excluding advance payments, year-end net working capital represented approximately two per cent of revenue. This is lower than the four to six per cent range which we have been targeting. Whilst some of this difference can be attributed to a better than normal contract payment profile around the year-end, there has also been some underlying improvement in working capital management.
In 2017, our cash generation KPI shows a conversion of 112 per cent (2016: 150 per cent) of underlying operating profit (before JVs and associates) into operating cash (cash generated from operations less net capital expenditure). This is the third successive year in which cash generation has exceeded 100 per cent and continues the Group's excellent recent record of converting profits into cash.
Net investment during the year was £5.3m reflecting capital expenditure of £7.0m less proceeds from disposals of £1.7m (mainly arising on the sale of a non-core property).
Bank facilities committed until 2019
The Group has a £25m borrowing facility with HSBC and Yorkshire Bank, with an accordion facility of a further £20m available at the Group's request. These facilities are available until July 2019. There are two key financial covenants, with net debt: EBITDA of <2.5x, and interest cover of >4x. The Group operated well within these covenant limits throughout the year ended 31 March 2017.
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. The Group has now adopted hedge accounting for the majority of transaction hedging positions, thereby mitigating the impact of market value changes in the income statement.
The Group is currently undertaking a detailed exercise comparing the current revenue recognition policies against the requirements of IFRS 15, the new revenue accounting standard which becomes effective for the Group's 2019 year-end. This assessment involves identifying the significant areas of difference and quantifying their effect on a sample of different types of contract to ensure that the impact of the new standard is fully understood and acted upon in advance of the effective date. The results of this assessment will drive the Group's choice of transition option.
Acting Group finance director
14 June 2017
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, and the pipeline of potential future orders;
- The Group's operational improvement programme which has delivered stronger financial performance and is expected to continue doing so in the 2018 financial year and beyond;
- The Group's net funds position and its bank finance facilities which are committed until 2019, 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 at least 12 months from the approval of the financial statements and therefore that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code (the 'Code'), the directors have assessed the Group's viability over a three-year period ending on 31 March 2020. The starting point in making this assessment was the annual strategic planning process. While this process and associated financial projections cover a period of five years, the first three years of the plan are considered to contain all of the key underlying assumptions that will provide the most appropriate information on which to assess the Group's viability.
This assessment also considered:
- The programmes associated with the majority of the Group's most significant construction contracts, the execution period of which is normally less than three years;
- The good visibility of the Group's future revenues for the next three years which is provided by external forecasts for the construction market, market surveys and our own order book and pipeline of opportunities (prospects).
In making their assessment, the directors took account of the Group's strategy, current strong financial position, recent and planned investments, together with the Group's main committed bank facilities. These committed bank facilities mature in July 2019. Notwithstanding the Group's current net funds position of £32.6m, the directors draw attention to the key assumption that there is a reasonable expectation that the facilities will be renewed at the appropriate time and that there will not be a significant reduction in the level of facilities made available to the Group or a significant change in the pricing.
The directors also assessed the potential financial and operational impact of possible scenarios resulting from the crystallisation of one or more of the principal risks. In particular, the impact of a reduction in margin, a reduction in revenue, a deterioration in working capital, a period of business interruption and a significant one-off event. The range of scenarios tested was considered in detail by the directors, taking account of the probability of occurrence and the effectiveness of likely mitigation actions.
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 the three-year period of their assessment.