Financial Review (2010 Preliminary Results)

Alan Dunsmore
Finance Director

Overview

The Group's results for 2010 reflect the impact of the continuing difficult trading conditions in the UK market.
Capacity was reduced by 20% at the end of 2009 and the Group was able to operate at this new capacity throughout the year, increase its market share and maintain a relatively strong order book in these difficult conditions.

During the year, the Company's Indian joint venture business commenced trading on schedule and good progress is being made as this business moves towards its initial full operating capacity.

Revenue and Operating Profit

Revenue fell by 24% to £266.7m (2009: £349.4m).
This reflects the reduction in production capacity and lower contract pricing compared with the previous year.
Pricing reached its nadir in the first half of the year but a combination of increasing steel prices and continuing capacity reductions by our competitors led to more stable pricing towards the year end, although still at very tight margins.

The operating profit before non-underlying items of £16.2m was 69% down on the previous year (2009: £51.8m).
Operating profit margins reduced from 14.8% to 6.1% in the year, reflecting the reduced capacity and lower margins highlighted above, although the worst pricing impacts were, to some extent, compensated by the successful conclusion of more profitable contracts which commenced in the previous years.

Share of Losses of Associate Companies

Operating profit includes the Group's 50% share of the results of its Indian joint venture.
There is both an underlying and a non-underlying element to these results.
The underlying loss of £0.4m (2009: nil) represents the initial losses after the commencement of commercial production towards the end of 2010.
The non-underlying loss of £1.4m (2009: £1.0m) represents the Group's share of the joint venture's pre-operating costs throughout the year.
The Group's share of losses from the joint venture for 2009, which also related to pre-operating costs, have been re-classified as non-underlying for consistency.

Finance Costs

Net finance costs for the Group amounted to £0.9m (2009: £1.0m).
The reduction reflects a lower level of average net debt levels throughout the year, compared with the previous year.

Non-Underlying Items

• Amortisation of acquired intangibles - £2.7m (2009: £4.4m).
• Share of pre-operating losses of Indian joint venture - £1.4m (2009: £1.0m).
• Impairment in valuation of Investment Property - £2.1m (2009: nil).
  The Group has an investment property, purchased in 2007, which was previously held at its fair value of £6.1m.
  The Directors have reviewed both the resale and rental prospects for this property in light of the continuing market weakness for commercial property and have concluded that its fair value is £4.0m.
  Consequently, an impairment charge of £2.1m has been taken in the year.
• Movements in the valuation of derivative financial instruments - nil (2009: gain £3.4m).
• Release of provisions no longer required – £2.0m gain (2009: nil).
  During the year, good progress was made in reducing the Group’s exposure to potential liabilities under legal claims.
  Consequently, the Directors’ best estimate of known legal claims in process has reduced from £2.6m to £0.6m.

Taxation

The underlying tax charge of £4.2m represents an effective rate of 26.6% (on applicable profit which excludes results of associates) compared with 28.3% in the previous year.
This was aided by the satisfactory conclusion of some outstanding matters relating to previous years.

The total tax charge for the year was £3.5m which represents an effective tax rate of 27.0%.
The impairment of the investment property does not attract tax relief and the negative impact of this is partially offset by the deferred tax benefit from the reduction of the UK corporation tax rate to 27.0%.
As the impact of both of these points is non-underlying, it is reflected in Other Items.

Earnings per Share

Underlying basic earnings per share was at 12.50p, a decrease of 70% over the previous year.
This calculation is based on the underlying profit after tax of £11.1m and 88,973,821 shares, being the weighted average number of shares in issue during the year.

Basic earnings per share, based on profit after tax after non-underlying items is 8.58p (2009: 35.34p).

For 2010, there is no difference between basic and diluted earnings per share (2009: underlying 40.91p, total 35.16p).

Dividend

The Board recommends a final dividend of 2.50p payable on 16 June 2011 to shareholders on the register at the close of business on 20 May 2011.
This will give a total dividend for the year of 7.50p.

Balance Sheet

Shareholders' funds decreased slightly during the year from £132.5m to £130.9m.
This equates to a total equity value per share at 31 December 2010 of 146.7p, compared with 149.5p at the end of 2009.
This decrease reflects the dividend paid during the year being higher than the profit after tax.

Goodwill on the Balance Sheet is valued at £54.7m (2009: £54.7m) and is subject to an annual impairment review under IFRS 3. No impairment existed at either 31 December 2010 or 2009.

Other intangible assets on the Balance Sheet are valued at £20.5m (2009: £23.2m) and represent the net book value of the intangible assets identified on the acquisition of Fisher Engineering in 2007.
Each class of asset identified is being amortised on a straight line basis over varying periods.
The amortisation charged in the year was £2.7m (2009: £4.4m), giving a total amortised at the year-end of £18.5m (2009: £15.8m).

The Group now has property, plant and equipment and investment property totalling £86.9m (2009: £91.0m).
Depreciation charged in the year amounted to £4.5m (2009: £5.2m) and the investment property was impaired by £2.1m (2009: nil).
Capital expenditure in the year was £3.0m (2009: £4.8m).
This included some replacement of older equipment across the Group and also some safety equipment for protection of site workers on high-rise buildings.

During the year the Group invested £2.9m (2009: £2.4m) as equity into the joint venture company in India.

The Group's capital expenditure in 2011 in the UK is not expected to be more than £3m.

Unlike the rest of the Group, Atlas Ward has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £8.4m as at 31 December 2009.
At 31 December 2010, the deficit increased to £8.5m and is shown as a liability in the Group Balance Sheet.
The increase in the deficit is as a result of the changes in the assumptions made, including a reduction in corporate bond yields and an increase in mortality rates, offset by slightly lower inflation expectations.

Cash Flow

There was an expected outflow of cash during the year to leave year end net debt at £15.0m (2009: net cash £11.5m).
This movement reflects an outflow from operating activities of £11.2m, and also includes dividends of £8.9m and investment in capital expenditure and the Indian joint venture of £3.0m and £2.9m, respectively.
The outflow from operating activities reflects the reversal of the particularly favourable contract working capital position at 31 December 2009, but also reflects the impact of higher steel prices on working capital and an overall extension of customer payment cycles as weak market conditions persist.
Management continues to monitor customer credit risk very closely and credit insurance remains a key factor in mitigating this risk.
The outflow also includes corporation tax payments of £5.4m.

The Group continues to operate within the parameters of its £40m revolving credit facility, renewed during the year, with RBS and Yorkshire Bank, a member of National Australia Bank Group.

Treasury

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, the Euro and the US Dollar.
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.

Going Concern

In determining whether the Group's annual consolidated financial statements can be prepared on a 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 key areas of uncertainty considered by the Directors were as follows;

• The UK order book, which currently stands at £226m, the pipeline of potential orders, including the relative attractiveness of the market sectors which are feeding that pipeline, and the anticipated conversion of this pipeline.
• The implications of the continuing challenging economic environment on the Group’s revenues and profits. 
  The Group undertakes forecasts and projections of trading and cash flows on a regular basis. 
  Whilst this is essential for targeting performance and identifying areas of focus for management to improve performance and mitigate the possible adverse impact of a deteriorating economic outlook, they also provide projections of working capital requirements;
• The impact of the very competitive environment within which the Group operates, including pressures on margins and counterparty risks.
  This included an assessment of the current stage of the economic cycle of the construction industry, the prospects for any recovery in the short to medium term, and the potential development of the competitive environment.
• The impact on our business of key suppliers being unable to meet their obligations to the Group including the ability of the Group to find alternative suppliers who could also enable the business to continue trading satisfactorily.
• The potential mitigating actions that could be taken in the event that revenues are worse than expected, to ensure that operating profit and cash flows are protected; and
• The committed finance facilities to the Group, including both the level of the facilities and the banking covenants attached to them.
  The Group has access to a £40m revolving credit facility to meet day to day working capital requirements, which is available until March 2013.
  This facility provides the Group with sufficient headroom both on the facility itself and on the bank covenants in place.
  This position is forecast to continue for the foreseeable future.

Having considered all the factors impacting the Group’s business, including downside sensitivities, the Directors are satisfied that the Group will be able to operate within the terms and conditions of the Group financing facilities for the foreseeable future.

Summary

Alan Dunsmore
Finance Director