Financial performance
The Annual Report 2008 has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the
European Union.
Management actions
On 26 July 2007 the Company successfully placed 5,814,610 new ordinary shares at a price of 115.0 pence per share raising £6.7 million before expenses. The funds raised will be used to help the Company grow the business both organically and by acquisition and will provide greater financial flexibility.
On 26 November 2007 the Group entered into a new facility agreement with Lloyds TSB Bank plc and the Bank of Scotland plc pursuant to which a £42.0 million revolving credit facility and a £5.0 million bonding facility was made available for a period of three years to November 2010. This replaced the previous facility of the same value.
One–off items
Significant items of a one–off nature are included within the reported operating profit. In order to give a clearer analysis of the underlying operating performance these one–off items have been excluded to derive adjusted operating profit figures.
The one-off items in 2008 related to £1.1 million of due diligence and advisors costs on the acquisition and related fundraising exercise being announced today.
Turnover and profit
Total turnover for the year was £80.9 million (2007: £75.2 million) giving growth of 8%. This reflects strong, double–digit turnover growth from AEA’s consulting private sector customer base and high turnover growth from regional and local government bodies.
Adjusted operating profit for the year was £11.0 million (2007: £8.6 million), an increase of 28%. This has resulted in the adjusted operating margin increasing from 11% to 14%, reflecting the full year impact of the Corporate Centre cost reduction programme initiated in August 2006. The Group continues to invest, specifically in its talent base, to enable future growth. Gross margins within the business have improved giving a better quality of earnings.
Operating profit was £9.9 million (2007: £9.4 million). This includes £1.1 million of acquisition and Rights Issue expenses, as noted above (2007: net gain of £0.8 million comprising pension curtailment charge of £0.8 million, pension credit due to the impact of “A-day” changes of £2.0 million and re-financing costs of £0.4 million).
Net finance cost
The net finance costs include interest on bank facilities and interest in respect of the defined benefit pension scheme accounting. These are analysed in
notes 6 and
7.
The Group’s focus on improving working capital management has resulted in a strong cash flow from the operating business, which partly offsets the legacy payments in respect of previous divestments and business closures, resulting in lower interest on debt facilities than the prior year as a result of a reduction in net debt. The net finance cost on the defined benefit pension scheme has switched from a net income of £0.2 million last year to £0.3 million net expense in 2008.
Profit before tax
Profit before tax was £8.0 million (2007: £8.0 million). This is in line with the prior year and results from improved operating margins and organic growth within the business and is offset by the one-off costs arising from the acquisition and Rights Issue. The year to March 2007 benefited from a net gain in respect of
one–off items as explained above, which has not recurred in 2008.
Taxation
AEA’s tax charge continues to be offset by brought forward losses. The overall impact of tax on the Group was a credit of £0.5 million (2007: £nil for continuing operations). This was in respect of a recovery of overseas tax. As at 31 March 2008 the recognised deferred tax asset was £4.6 million (2007: £4.6 million). Deferred tax assets are recognised for tax losses carried forward and other timing differences, to the extent that the realisation of the related tax benefit through the future taxable profits is probable. In addition the Group has an unrecognised deferred tax asset of £46.5 million (2007: £62.7 million). If conditions permit, the tax losses will be recognised and utilised in future periods.
Earnings per share
Adjusted earnings per share has increased to 7.9p (2007: 6.1p) as a result of improved operating margins and organic growth in the business. Basic earnings per share has increased to 7.0p (2007: 6.8p). Growth has been limited by the impact of one-off items in 2008 and 2007. The Group has two categories of potential dilutive ordinary shares; share options and warrants. The diluted earnings per share has increased from 6.7p to 6.8p.
Dividends and dividend policy
Given the Group’s current financial position the Board is not recommending a dividend in respect of 2008. It is the Board’s intention to pay dividends in the future commensurate with the Group’s overall profitability and when distributable reserves are available.
Net debt and cashflow
Net debt reduced from £21.4 million to £19.4 million.
Cash used in operating activities reduced to £4.0 million (2007: £7.6 million) as a result of reduced legacy payments, strong working capital management and reductions in central costs. Further improvements were achieved from reduced tax payments and lower interest costs arising from the reduction in net debt.
The underlying operating business is cash generative, generating £8.2 million (2007: £8.9 million) from operations in the year and has strong management of working capital. Over 75% of operating profit is converted into cash; with an objective of exceeding 90%, before legacy costs and funding the pension deficit.
Pensions
The Group operates a defined benefit pension scheme for a proportion of its employees. This scheme was closed to new members in 2003 and a defined contribution scheme has been operating since that date for new employees. Full details of the defined benefit scheme are disclosed in
note 27. Over the year the total net retirement benefit obligation has reduced to £60.0 million (2007: £92.2 million).
Pension funding
The latest actuarial valuation of the defined benefit pension scheme was carried out as at 31 March 2005 and indicated that the scheme had an actuarial deficit of £113.3 million. The next actuarial valuation will take place as at 31 March 2008 with the results expected in
late 2008. Any changes in longevity assumptions and discount rates will impact the actuarial liability.
In June 2006 the Group reached agreement with the trustees of the scheme regarding funding of the actuarial deficit so that it should be eliminated over a fifteen-year period. During the year ended 31 March 2008 the Group made additional contributions to the scheme of £1.2 million (2007: £10.8 million).
Pension charges
The Group accounts for pension costs under IAS 19 “Employee Benefits” with irregular gains and losses taken to the Statement Of Recognised Income and Expense (the “SORIE”), for example actuarial experience gains and losses. The defined benefit current service cost for the year was £1.8 million (2007: £2.2 million), the reduction reflecting the reducing membership. The total defined benefit pension cost charged to the Consolidated income statement was £2.1 million (2007: £3.2 million) and is analysed in
note 27.
The charge relating to defined contribution schemes amounted to £0.6 million (2007: £1.2 million), the decrease reflecting the reduction in membership following the divestments in 2007, partially offset by increased membership due to new recruits.
Pension IAS 19 valuation and accounting treatment
The Group assesses pension scheme funding with reference to actuarial valuations but for reporting purposes uses IAS 19. Under IAS 19 the Group recognised a post–retirement benefit liability of £60.0 million (2007: £92.2 million). The assumptions used in the IAS 19 valuation are detailed in
note 27. The sensitivities regarding the key assumptions are shown below:
| Assumption |
Change in
Assumption |
Indicative impact
on the scheme’s liabilities |
| Discount rate |
Increase/decrease by |
Decrease/increase by 12% |
| |
0.5 percentage points |
|
| Rate of inflation |
Increase/decrease by |
Increase/decrease by 11% |
| |
0.5 percentage points |
|
| |
|
|
| Longevity |
Increase by 1 year |
Increase by 2% |
Capital structure
The Group had 124.1 million ordinary shares in issue at 31 March 2008 (2007: 118.3 million), full details of which are shown in
note 21. Net debt at 31 March 2008 was £19.4 million (2007: £21.4 million), which comprised cash balances of £1.0 million less bank loans, other loans and finance lease creditors of £20.4 million.
At 31 March 2008 the Group’s net shareholder deficit amounted to £99.2 million (2007: £144.5 million).
Financial risk management
The Group’s operations expose it to a variety of financial risks that include the effects of credit risk, foreign exchange risk, interest rate risk and liquidity risk. AEA has in place a risk management programme that seeks to limit the potentially adverse effects of unpredictable movements in financial markets on the financial performance of the Group.
The policies set by the Board of Directors are implemented by the Group’s finance department. The department has a policy and procedures manual that sets out specific guidelines to manage interest rate risk, credit risk, foreign currency risk and circumstances where it would be appropriate to use financial instruments to manage these. The basic principles are detailed below.
Treasury management
The Group uses various financial instruments in order to manage the exposures that arise in its business operations as a result of movements in financial markets. The Group does not undertake speculative foreign exchange or interest rate dealings for which there is no underlying exposure. Treasury dealings such as investments, borrowings and foreign exchange are conducted only to support underlying business transactions. All treasury activities are focused on the management of risk. There have been no significant changes in the Group’s policies in the last year. The main risk continues to be movements in rates of interest and movements in foreign currency exchange rates. All such exposures are managed by the Chief Finance Officer (CFO) who operates within written policies approved by the Board and within the internal control framework.
Market risk
(i) Foreign exchange risk
During the year ended 31 March 2008, the Group primarily operated in the UK market and the significant majority of its sales and purchases are transacted in the Group’s functional currency. However, the element of trading that is transacted in foreign currencies does expose the Group to foreign exchange risk. The Group is also exposed to movements in exchange rates for the translation of net assets and income statements of foreign subsidiaries. However, this exposure is currently insignificant.
The Group is exposed to a number of currencies on transactions. The most significant transactional currency exposures are the US Dollar and the Euro. The Group seeks to hedge its transactional exposure by the use of forward currency contracts. The objective is to minimise the impact of fluctuations in exchange rates on future transactions and cash flows. The Group has not designated these instruments as cashflow hedges and they are accounted for at fair value through profit and loss.
The Group uses sensitivity analysis to measure the estimated effect on post tax profit of a strengthening or weakening in sterling against the Euro and US Dollar from the rates applicable at 31 March 2008. The effect on post tax profit has been calculated by applying the change in exchange rates to foreign currency exposures in existence at the balance sheet date.
At 31 March, if sterling had strengthened/weakened by 10% against the Euro, with all other variables held constant, equity and post tax profit for the year would be lower/higher by £0.1 million (2007: £0.1 million). This is mainly as a result of foreign exchange translation of Euro denominated trade receivables. |
(ii) Cashflow and interest rate risk
The Group’s interest rate risk arises from short–term borrowings. The Group’s primary loan facility is at a variable rate of interest (dependant on the movement in the London Interbank Offered Rate) and exposes the Group to interest rate risk. The Group manages these risks by using floating–to–fixed interest rate swaps, which have the economic effect of converting borrowings from floating rate to fixed rate. As at the balance sheet date £10.0 million (2007: £5.0 million) of floating rate borrowings have been swapped into fixed rate debt through the use of two separate interest rate swaps. Under these swap instruments the Group agrees with the other parties to exchange, at quarterly intervals, the difference between the floating rate and the fixed rate interest amounts that are payable/receivable on the nominal amount of swapped borrowings.
The Group uses sensitivity analyses to measure the estimated effect on post tax profit of an increase or decrease of 1% in market interest rates (100 basis points), from the rates applicable at 31 March 2008.
Assumptions made in these calculations are as follows:
- Changes in market interest rates affect the interest
income or expense of variable interest financial instruments.
- Any impact on retirement benefit liabilities has
been excluded.
- The effect on post tax profit and equity has been
calculated by applying the change in market risk to exposures in existence at the balance sheet date.
Under these assumptions a 1% increase or decrease in market interest rates, with all other variables held constant, would decrease/increase profit for the year by £0.1 million (2007: £0.2 million). This is mainly as a result of the higher/lower interest expense on floating rate borrowings. |
Liquidity risk
The Group’s liquidity risk relates primarily to the management of its availability of funding and ability to repay borrowings and trade and other payables. Entities within the Group are required by the Group’s treasury function to maintain and regularly update detailed cash forecasting models. The treasury function supports the cashflow needs of the underlying businesses and maintains financial flexibility through utilising the available funds under the Group’s revolving credit facility (
note 25). As at 31 March 2008 £23.6 million of this revolving credit facility remains unutilised and provides sufficient headroom to cover the Group’s expected operating cashflow needs over the period of the facility. The acquisition announced after the balance sheet date will be funded through a Rights Issue.
The following table analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date.
The derivative financial instruments settled net are interest rate swaps. The Group pays or receives net amounts under “pay fixed, receive floating” interest rate swaps. The amounts receivable under floating rates have been calculated using the interest rates in place at the balance sheet dates.
The derivative financial instruments settled gross are forward foreign exchange contracts. The amounts receivable/payable in foreign currencies have been calculated using the closing exchange rates at the balance sheet dates.
The amounts disclosed are the contractual undiscounted cashflows and will not, in some cases, agree to the carrying balance sheet amounts.
| At 31 March 2008 |
Less than
1 year
£m |
Between 1
and 2 years
£m |
Between 2
and 5 years
£m |
Total
£m |
| Borrowings |
20.3 |
0.1 |
– |
20.4 |
| Derivative financial instruments settled net |
– |
0.1 |
– |
0.1 |
| Derivative financial instruments settled gross – inflows |
1.3 |
0.1 |
– |
1.4 |
| Derivative financial instruments settled gross – outflows |
1.3 |
0.2 |
– |
1.5 |
| Trade and other payables - cash settled |
18.8 |
– |
– |
18.8 |
| Provisions for vacant property leases |
1.3 |
0.9 |
– |
2.2 |
| At 31 March 2007 |
Less than
1 year
£m |
Between 1
and 2 years
£m |
Between 2
and 5 years
£m |
Total
£m |
| Borrowings |
25.0 |
0.1 |
– |
25.1 |
| Derivative financial instruments settled net |
– |
– |
– |
– |
| Derivative financial instruments settled gross – inflows |
0.2 |
0.1 |
0.1 |
0.4 |
| Derivative financial instruments settled gross – outflows |
0.2 |
0.1 |
0.1 |
0.4 |
| Trade and other payables - cash settled |
20.5 |
– |
– |
20.5 |
| Provisions for vacant property leases |
1.9 |
1.3 |
0.9 |
4.1 |
Credit risk management
The Group’s credit risk arises primarily in respect of outstanding receivables and committed transactions with private customers. The majority of the Group’s sales and trade receivables relate to public sector organisations and hold a low credit risk. The Group has implemented policies that require appropriate credit checks on potential customers before contracts are agreed. The amount of exposure to any individual counterparty is subject to an agreed limit. The Group monitors and manages its exposure to counterparties.
Capital risk management
The Group’s objective when managing capital is to ensure that funds are raised in an appropriate, cost–effective manner considering the scale and timeframe of the funding requirement. The Group’s primary concern is to maintain its ability to continue as a going concern in order to provide returns for shareholders and stakeholders in the Company. It is the Board’s intention to pay dividends in the future commensurate with the Group’s overall profitability and when distributable reserves are available.
The Group takes legal, financial and taxation advice when considering changes to the capital structure of the Group.
The Group considers its total capital to be the sum of equity and net borrowings. Changes to equity during the year are detailed in note 21, Share Capital and Share Premium and note 22, Other Reserves. Changes to net borrowings during the year are detailed in note 25, Borrowings.
The Group is not subject to any externally imposed capital requirements.
Fair value estimation
The fair value of the Group’s derivative financial instruments are determined by using valuation techniques. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The Group obtains these fair values from the relevant contracting banks. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the balance sheet dates.
Legacy
All residual issues relating to the divested and closed businesses are under the control of an experienced senior manager specifically appointed to the task of resolving these issues. These legacy issues comprise decommissioning costs, onerous leases, redundancy liabilities, warranties and indemnities. The total liability is predominantly represented by provisions as detailed in
note 28, with the majority of the associated cash outflow taking place over the next two years. AEA made good progress in resolving legacy issues during the year. Progress is periodically reviewed by the Board.
Accounting policies
A description of the principal accounting policies appears in the
Notes to the Financial Statements. The policies followed are in accordance with IFRS as adopted by the EU.
The preparation of the financial statements conforming with generally accepted accounting principles, requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Any revisions to estimates are recognised prospectively.
The accounting policies and areas that require the most significant estimates and judgements to be used in the preparation of the financial statements are in relation to assessment of provisions, contract accounting and defined benefit pension schemes.
Provisions
Assessing provisions and the timing and value of utilisations is uncertain and involves judgement about uncertain events in the future. Management believes the assumptions are appropriate. Any differences between the assumptions and the actual outcome will affect results in future years.
Defined benefit pension schemes
Accounting for pensions involves judgement about uncertain events in the future, such as discount rates, the rate of inflation, the level of salary increases and the longevity of scheme members. Assumptions in respect of pensions are set after consultation with independent qualified actuaries. Management believes the assumptions are appropriate. However, a change in the assumptions used would impact the Group’s results and net assets. Any differences between the assumptions and the actual outcome will affect results in future years.
Contract accounting
Profit is recognised on contracts on a percentage completion basis, provided the outcome of the project can be reasonably foreseen. Full provision is made for estimated losses.
The projected outcome of any given contract is necessarily based on estimates of revenues and costs to completion. Whilst the assumptions made are based on professional judgements, subsequent events may mean that estimates calculated prove inaccurate, with a consequent effect on the reporting of results.
Further information in respect of critical accounting estimates and judgements, including an analysis of how various alternative assumptions / outcomes would have impacted the financial statements, is provided in note 2.4.
People
The Group employs 723 people (2007: 750 people) and has strengthened its capabilities through investment and development.
Enhancing senior management
A review of management talent resulted in the enhancement of management strength through a combination of external recruitment, a focused management development programme and ongoing coaching.
Recruitment and retention
In an increasingly competitive market the Group has enhanced its talent pool by recruiting 146 people in the year. This included the specific recruitment of project managers, people managers and sales expertise in addition to technical talent, enabling us to optimise our technical capability and positioning us well for future business growth. This was supported by the ongoing recruitment of exceptional talent at graduate level. Despite the continued targeting of our people by competitors, people turnover reduced to 13% (2007: 18%).
Training and development
Training and development investment continues and is becoming increasingly important in the competitive marketplace as we move towards achieving the position of an Employer of Choice. As the demand for skills in this area increases, business growth is enabled through strategies that support the development of internal talent. Investment drives the fast–tracking of new recruits and the continual development of employees through both structured training programmes and strategic assignment to enhance experience and capability.
Reward
A review of reward and recognition has resulted in proposals for change to be implemented in the performance year 2008/09 to reflect the individual contribution of employees.
Working environment
The introduction of an employee engagement initiative has resulted in improvements to the working environment, health and safety training, general employee communications and an appreciation of Group direction.
Information technology
The Group has a long–term contract with Steria Services Limited for the provision of IT services to operations in the UK. During the year we have continued to review our information technology infrastructure and invest where necessary to maintain secure and robust arrangements to achieve improved efficiency and effectiveness, and to take advantage of advances in technology. A detailed IT strategy has been developed and we are in the process of implementing this strategy which includes technologies to enable more flexible working arrangements, both to improve efficiency and also as part of business continuity arrangements.
Group and Company post balance sheet events
There were no post balance sheet events.
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