MARKET PROSPECTS
AEA’s experience in emissions, climate change and energy goes back several decades. The Group has been a leading advisor to governments in the development of energy policy over many years and is an internationally recognised authority on emissions and their impact on climate change.
AEA’s entry into the US market has begun well and a range of exciting, new growth opportunities have now opened up. AEA is now a leading advisor to the US Government on energy efficiency. The Group is deploying a number of senior specialists from the UK to advise Federal Government on policy and programme matters in this area.
The US Government faces a considerable challenge in improving energy efficiency across the economy and in achieving a significant reduction in emissions. It will need to invest huge sums in order to achieve this aim and to implement international agreements such as proposed for the Copenhagen Conference. AEA’s experience in advising governments on policy development, the implementation of measures, knowledge networks and behavioural change is attracting considerable interest from a range of US Government departments.
The Group’s strategy in the US is to focus initially on the Federal Government to develop its position as a leading advisor in energy efficiency, climate change and the impact on resources such as water. As the federal market starts to put in place a regulatory framework, AEA will seek to leverage this position by exploiting some very exciting growth opportunities in corporate America.
In Europe the position is more complex. The Group has made huge progress in transforming the efficiency and commerciality of its operations, delivering a much-improved performance despite UK Government cutbacks. A particular highlight in the first six months has been order intake, which is up 17%. Utilisation and productivity have also been strong at the project level. Europe remains a huge potential market for the Group for environmental and climate change expertise. However, the market continues to be tough, with margins being continually challenged as the UK Government, in particular, looks to save money.
Looking forward, in the UK the spectre of significant cuts in public sector spend means that there will be limited growth opportunities. However, the European business will continue to develop its focus in the UK private sector, which offers greater growth opportunities over the next two years. AEA’s expertise will also be utilised to drive growth in the US.
FINANCIAL POSITION
AEA has made good progress in the first half of the year. There has been a strong performance in orders, which are up by 84% to £63.1 million (2008: £34.3 million). Orders grew by 17% in Europe to £32.4 million (2008: £27.6 million), whilst orders in the US were £30.7 million compared to £6.7 million in the period following the acquisition of PPC in August 2008.
Revenue increased by 43% to £51.0 million (2008: £35.6 million). In Europe revenue increased by 4%, despite difficult market conditions, with strong growth in resource efficiency, air, water and the transport practice area. In the US revenue in 2009 was £17.6 million (2008: £3.6 million) with a strong performance in US Government, particularly in climate change and energy, compensating for a challenging private sector market.
Adjusted operating profit increased by 8% to £4.2 million (2008: £3.9 million). Operating profit decreased by 24% to £3.2 million (2008: £4.2 million) after £0.6 million (2008: £0.1 million) of amortisation of acquired intangibles and £0.6 million of one-off integration costs (2008: £nil) and a net pension credit from the Scheme closure of £0.2 million (2008: £nil).
The Group continued its global investment strategy by increasing expenditure in the IT platform to enable working on US projects and targeting investment in growing market opportunities within the area of US energy efficiency and climate change. Within the first half of the year the Group has also strengthened its global commercial, resourcing and knowledge leadership capabilities.
Net bank interest payable has reduced to £0.4 million (2008: £0.6 million) due to reductions in average interest rates over the period. Net finance costs have been impacted by an increase in the non cash net pension charge of £1.7 million to £2.5 million (2008: £0.8 million). Overall total finance costs have increased by £1.7 million, which is the main reason that profit before taxation has reduced to £0.2 million
(2008: £2.9 million). Excluding the non cash net pension charge of £2.5 million, a £0.6 million amortisation charge on acquired intangibles, £0.6 million of one-off integration costs and a net pension credit from the Scheme closure of £0.2 million, the adjusted profit before tax was £3.7 million (2008: £3.4 million) being 9% growth.
Overall the Group has a tax charge of £0.1 million for the six months (2008: £nil).
The adjusted earnings per share is 1.6 pence (2008: 2.0 pence). Basic earnings per share reduced to nil pence
(2008: 1.7 pence) per share. See note 10 for the detailed calculations.
New bank facility
As at 30 September the Company had a £47.0 million bank facility with Lloyds TSB Bank plc and Bank of Scotland. A new £47.0 million facility with the same banks, entered into in November 2009 for a period of three years, replaces this facility.
Net debt and cash flow
Net debt increased from £27.3 million at 31 March 2009 to £32.0 million, an increase of £4.7 million. The total cash used in operations improved by £1.0 million to £3.7 million (2008: £4.7 million). Within this the cash used in business operations was £0.6 million (2008: net cash inflow £0.9 million), payments relating to integration costs following the acquisition of PPC in August 2008 were £0.6 million (2008: £nil), payments to settle legacy issues of £1.4 million (2008: £2.8 million) and payments to reduce the pension deficit were £1.1 million
(2008: £2.8 million).
The overall movement in net debt also includes net interest and tax paid of £0.4 million (2008: £0.6 million), a net cash outflow of £0.3 million (2008: £0.2 million) in respect of capital expenditure and a net cash outflow of £0.3 million (2008: £1.1 million) due to foreign exchange. In 2008 there was also a net cash inflow of
£0.4 million in relation to proceeds from new equity issues after the cost of acquiring PPC.
Legacy provisions
The Group’s legacy provisions have been utilised as cash outflow in line with expectations in the six months and have reduced to £9.7 million at 30 September 2009 (31 March 2009: £10.9 million).
Pensions
The net balance sheet liability for retirement benefits has increased to £137.6 million
(31 March 2009: £108.2 million,
30 September 2008: £56.0 million). This increase has occurred as a result of changes to the financial assumptions used in calculating the present value of funded obligations. In particular, the discount rate used to calculate the value of the liability for pension obligations decreased to 5.6%
(31 March 2009: 6.6%,
30 September 2008: 7.0%), significantly increasing the net present value. This is partially offset by increases in the market value of assets held by the pension scheme.
The defined benefit scheme (“the Scheme”) was closed to future accrual and no further benefits will be built up after 31 July 2009. From 1 August 2009 employees can build up benefits in relation to employment with AEA on a defined contribution basis.
PRINCIPAL RISKS
The mitigation of risk is a key part of the management of AEA. The Company has a well established risk management process that complies with the FSA’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 principal risks and uncertainties faced by the Group have not changed significantly since the publication of the 2009 Annual Financial Report and these are described on pages 9 and 10 of that document.
The Board keeps under review the potential effect of economic circumstances and the changing profile of the principal risks and ensures appropriate management of risk.
RELATED PARTY TRANSACTIONS
There have been no related party transactions that have a material effect on the financial position or performance of the Group in the first six months of the financial year.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors confirm that 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.
The Directors of AEA Technology plc are listed within the section on Board of Directors contained in this
Half-Year Financial Report.
OUTLOOK
AEA is very well positioned to take advantage of a growing market for climate change in the US and UK. Management have taken significant steps to improve the business and this is beginning to deliver a much better performance in tough market conditions. The acquisition of PPC in the US has been a great success delivering good orders growth and justifying the strategy of leveraging AEA's strong technical base into that market. Whilst there must be caution about market conditions in the UK, the Climate Change Bill requires businesses to report their emissions and progress in energy efficiency. AEA is now able to advise as well as help its customers report against these ever growing requirements. The Board looks forward to the future with confidence.
By order of the Board
| Andrew McCree CEO 18 November 2009 |
Alice Cummings CFO |