DELIVERY ON STRATEGY
FINANCIAL POSITION
PRINCIPAL RISKS
RELATED PARTY TRANSACTIONS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
OUTLOOK
DELIVERY ON STRATEGY
AEA is now a new Company. Over the last two years, the Company has been transformed into one of the World’s leading advisors to governments on climate change, energy and sustainability.
The acquisition of Project Performance Corporation (PPC) in 2008 and the recent acquisition of Eastern Research Group (ERG) means that AEA now has the foundations it needs to deliver strong growth. In the near term this is expected to come principally from the US. The Group is grateful for the strong support of its shareholders and management is determined to repay their confidence.
A good start has been made. The decision to be more aggressive with our bidding is starting to pay dividends and as a result our US revenue rose by 28% in the first half. Going forward we will continue to focus on building the order book and expect revenue and profit to rise strongly in future years as a result. Key orders in the period were with the Department of Energy $9.8 million, Patent and Trademark Office $6.6 million and the Department of Justice $6.2 million. The outlook for our US business is encouraging and good growth in orders, revenue and profit is expected in the second half.
The transformational acquisition of ERG, a key contractor for the EPA and other US Federal agencies, will open up further, larger opportunities in the US. ERG will add significant expertise to the Group, which can now provide the full spectrum of technical services across energy, natural resources and water to existing and new clients. These capabilities are supported by strong IT and data services. ERG also has a strong order book with over $90 million of new contracts in the last few months. The Group’s forward order book now stands at around $600 million. Following this acquisition the Group now derives the majority of its revenue from the US market for the first time in its history.
In Europe, the market has remained difficult with the UK Government progressively reigning in public spending – a dynamic re-emphasised by the government’s spending review in October 2010. Management took action earlier in the year to ensure costs were appropriately aligned with market conditions. However, if this environment persists, then inevitably there will be an impact on the Group’s performance. Whilst much of AEA’s work is underpinned by evolving regulation the Group remains very cautious about the UK Government sector in the short to medium term. The Group is also able to mitigate some of these market impacts by redeploying UK people to work on US projects.
AEA is now in a strong position to move forward. The scale of opportunity in the US is exciting and the Group expects to be able to deliver good growth in future years.
Back to top
FINANCIAL POSITION
AEA anticipated that the first six months of the year would be a period of transition. Management took action in Europe in particular to reduce costs but inevitably because of the curtailment of UK Government expenditure, performance was impacted. In Europe the orders fell by 53% and whilst there have been some delays in the US, performance is now back on track.
Group revenue was down marginally to £50.6 million (2009: £51.0 million). In Europe revenue decreased by 16% as a result of the tough market conditions. The full effects of the slowdown in Europe were substantially outweighed by a 28% increase in revenue in the US in 2010 to £22.6 million (2009: £17.6 million), with a strong performance in US Federal Government, particularly in energy, environment and climate change.
Adjusted operating profit decreased by 50% to £2.1 million in the first half of 2010 (2009: £4.2 million). The main reasons behind this fall were increased bidding costs in the US and the significant reduction in revenue in Europe. The Group anticipated the slowdown in European orders at the outset of the year and took action to reduce overhead expenditure in Europe, mainly through rightsizing the European business. The operating loss of £6.7 million compares to an operating profit of £3.2 million in 2009. The additional reasons for this included charging £0.6 million (2009: £0.6 million) of amortisation of acquired intangibles and £2.4 million (2009: £0.6 million) of integration and restructuring costs. Finally there were Group reorganisation and acquisition costs of £5.8 million (2009: £nil) as a result of the ERG transaction. In 2009 there was a net pension credit from the Scheme closure of £0.2 million compared to £nil in 2010.
Overall total net finance costs have decreased by £0.8 million. Net bank interest payable increased to £0.8 million
(2009: £0.4 million) due to increases in average interest rates over the period and higher levels of average debt. Net finance costs were positively impacted by a £1.4 million decrease in the non-cash net pension charge to £1.1 million
(2009: £2.5 million), which results from a £3.0 million increase in the expected return on defined benefit pension scheme assets.
There was a loss before tax of £8.8 million in the first half of the year (2009: profit £0.2 million). The adjusted profit before tax was £1.1 million (2009: £3.7 million). The detailed calculations reconciling these two measures are set out in the table under the Consolidated income statement.
Overall the Group had a tax charge of £0.2 million for the first half of the year (2009: £0.1 million).
The adjusted earnings per share figure is 0.3 pence (2009: 1.5 pence). Basic earnings per share reduced to a loss of
3.9 pence (2009: nil pence) per share. The detailed calculations are set out in note 10.
Net debt and cash flow
The Group has continued to make good progress in strengthening cash from business operations. In the first six months despite the drop in revenue in Europe, Group cash generated from business operations rose to £2.3 million
(2009: £0.6 million outflow). The turnaround has been achieved by rigorous management of working capital. Going forward the Group sees further opportunities for improvement in working capital and in particular in the US. Cash used in operations improved by £0.3 million from the first half of 2009.
Payments relating to integration and restructuring costs were £2.4 million (2009: £0.6 million), payments for acquisition and Group reorganisation costs were £0.2 million (2009: £nil), payments to settle legacy issues were £2.5 million
(2009: £1.4 million) and payments to reduce the pension deficit were £0.6 million (2009: £1.1 million).
Net debt increased from £26.2 million at 31 March 2010 to £31.7 million, an increase of £5.5 million. The overall movement in net debt is shown in the table under the Consolidated statement of cash flows.
Legacy provisions
The Group’s legacy provisions in the first half of the year have been utilised as cash outflow of £2.5 million and amounts invoiced of £0.6 million and, as a result, have reduced to £5.9 million at 30 September 2010 (31 March 2010: £9.0 million).
Pensions
The net balance sheet liability for retirement benefits has increased to £161.8 million (31 March 2010: £139.8 million,
30 September 2009: £137.6 million). This increase has mainly occurred as a result of changes to the financial assumptions used in calculating the present value of the funded obligation. In particular, the gap between the discount rate and the inflation assumption has reduced since 31 March 2010 (the discount rate has fallen from 5.6% to 5.0% while the inflation assumption has fallen from 3.6% to 3.1%). The detailed disclosures are set out in note 7.
The UK Government announced its intention in June and July 2010 to change the measure of inflation for the purposes of statutory minimum rates at which pensions must increase for both public and private sector defined benefit schemes. This change will reference the consumer prices index as the measure of inflation rather than the retail prices index as is currently the case. If the change in index had been effective as at 30 September 2010, the Actuary estimates that there would be a 2% reduction in the Scheme liabilities as at that date.
Back to top
PRINCIPAL RISKS
The mitigation of risk is a key part of the management of AEA. The Group has a well established risk management process that complies with the United Kingdom’s Financial Services Authority’s Combined Code on Corporate Governance and addresses strategic risks and risks specific to individual businesses and contracts including operational risks, financial risks, strategic risks, environmental and safety risks.
The Board keeps under review the potential effect of economic circumstances and the changing profile of the principal risks, including the effect of ERG being within the Group from 9 November 2010 and ensures the appropriate management of risk. The principal risks and uncertainties faced by the Group for the period to 30 September 2010, excluding the impact of the acquisition, are as follows:
|
•
|
|
achieving organic growth;
|
|
•
|
|
changes in the competitive environment resulting from government policy;
|
|
•
|
|
recruitment and retention of sufficient high calibre people;
|
|
•
|
|
retirement benefits;
|
|
•
|
|
legacy provisions;
|
|
•
|
|
exchange risk; and
|
|
•
|
|
preparedness for climate change.
|
These have not changed significantly since the publication of the AEA Technology plc 2010 Annual Financial Report and are described in detail on pages 12 and 13 of that document.
Back to top
RELATED PARTY TRANSACTIONS
There have been no related party transactions that have had a material effect on the financial position or performance of the Group in the first half of the financial year.
Back to top
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors listed below (being all the Directors of AEA Technology Group plc) confirm that, to the best of their knowledge, this set of consolidated financial statements has been prepared in accordance with International Accounting Standard 34 as adopted by the European Union, and that the Half-Year Management Report herein includes a fair review of the information required by the Disclosure and Transparency Rules DTR 4.2.7 and DTR 4.2.8 of the United Kingdom Financial Services Authority.
Neither AEA Technology Group plc nor the Directors accept any liability to any person in relation to the Half-Year Financial Report except to the extent that such liability could arise under English law. Accordingly any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Section 90A and Schedule 10A of the Financial Services and Markets Act 2000.
On behalf of the Directors
Back to top
OUTLOOK
The Group is now positioned as a leading technical advisor to the UK and US Governments and expects to be able to deliver strong growth in orders, revenue and profit particularly in the US. The two acquisitions provide a very strong base from which we can also leverage our experience in Europe, which for many years has been at the forefront on solving challenges in energy, sustainability and climate change around the World. In the UK in the short term, the Group expects market conditions to remain challenging. Management will continue to take action to mitigate these impacts, while ensuring it capitalises on opportunities that do exist in an evolving situation.
By order of the Board
|
Andrew McCree
|
|
Alice Cummings
|
|
CEO
|
|
CFO
|
|
25 November 2010
|
|
|
Back to top