Financial Review (2009 Preliminary Results)

Peter Davison
Finance Director

Overview

Revenue of £349.4 million and underlying profit before tax of £49.8 million have fallen 11.4% and 5.1% respectively compared with 2008.

Basic earnings per share, based on the underlying profit after tax, reduced by 5.2% to 40.00p.
The Board declared a second interim dividend, in lieu of the final dividend, of 5.00p per share on 25 February, payable on 29 March 2010, resulting in a total dividend for the year of 15.00p per share.

Retained profit after tax (after non-underlying items) of £31.3 million (2008: £24.0 million) has been transferred to reserves.

We ended the year with net cash of £11.6 million, a significant improvement on the net borrowings at the end of 2008 of £15.8 million.

Revenue

Group revenue fell by 11.4% to £349.4 million (2008: £394.3 million).
Despite this reduction in revenue, capacity at all the Group’s production facilities was fully utilised throughout the year.
The reduction is attributable to a number of factors;

• The outsourcing of third party products and services, such as decking or cladding, which the Group is sometimes asked to provide to its clients. 
  These generate incremental revenue in addition to the revenue generated by steel.
  During 2009 these third party products and services were not as prevalent in the mix of contracts undertaken by the Group.
• The general lowering of sales prices during the year, particularly towards the end.
• The stage of completion of contracts in that revenue recognition on those contracts can be significantly different from one year to another.

Operating Profit

The Group's underlying operating profit reduced slightly by 7.7% to £50.8 million.
Underlying operating margins, expressed as a percentage of revenue, increased to 14.6% compared to 14.0% achieved in 2008.
The improvement reflects the very strong mix of work in the order book throughout 2009.
In addition, incremental products supplied by the Group were lower than in the previous year.
As margins on these products are not as high as those achieved on steel, a reduction in the volume equates to better margins overall.
The Group’s relative purchasing power also helped in protecting its margins from the reduction in the overall selling price during the year.

For the first time the results also incorporate those of the Group’s joint venture in India.
Progress remains on plan and within budget with production in the new facility expected to commence later this year.
The joint venture generated a loss of almost £2.0 million to December 2009, in line with budget.
This related primarily to salary costs and other pre-operative expenses together with set up costs.
Consequently, our 50% share of this loss, taken to our Income Statement, amounts to £991,000.

Finance Costs

Net finance costs for the Group amounted to £1.0 million (2008: £2.6 million).
The reduction reflects both lower borrowings and lower interest rates during the year.

Profit Before Tax

Non-Underlying Items

• Amortisation of acquired intangibles - £4.4 million (2008: £9.2million).
• Movements in the valuation of derivative financial instruments - gain £3.4 million (2008: loss £0.7 million). 
  The Group enters into contracts in other currencies and fixes the contract profit by locking in the exchange rate at the time of accepting this work.
  Each year due to the change of the value of Sterling against these currencies between the date when the forward exchange contracts were put in place during the year and the year end a fair value creditor has been accrued in the Balance Sheet on these contracts.
  The gain in 2009 reflects the reduction in the creditor to £0.2 million (2008: £3.6 million) in the Balance Sheet.
• Restructuring costs in the year - £2.3 million (2008: Nil).
  These are primarily redundancy costs as a result of the capacity reductions throughout the Group.
• Development costs written-off - £2.4 million (2008: Nil). 
  These costs were expended by the Group over the last several years on the development of a pedestal mounted power work platform for use on sites in the erection of steel, particularly on high rise buildings.
  Changing market conditions have led the Directors to conclude that the future economic value of these machines cannot be guaranteed and that consequently the carrying value of this intangible asset has been written off in the year.

Re-Structuring

Capacity across the Group was reduced by approximately 20% including a reduction of 15% in the number of employees.
In addition wages and salaries have been reduced substantially and in some cases other terms and conditions amended for the remaining employees.

The cost to the Group of carrying out these redundancies amounted to £2.3 million.
This cost has been included on the Income Statement as a non-underlying item in the "Other Items" column.
In addition, overhead expenditure is continually being reviewed in order to generate savings and to match with the current level of capacity.
The actions taken are expected to save the Group £10 million per annum on salaries, wages and other overhead costs.
Management will continue to monitor its operations and cost base to maintain market competitiveness.

Taxation

The total tax charge for the year was £12.8 million, representing an effective tax rate of 29.0% (2008: 43.7%).
The high rate in 2008 reflected a one-off charge of £6.3 million due to changes to the Industrial Buildings Allowance regime during that year.

Earnings per Share

Basic earnings per share, based on profit after tax after non-underlying items were 35.3p (2008: 27.1p).

Underlying diluted earnings per share were 39.8p (2008: 42.2p).
This calculation is based on the underlying profit after tax of £35.4 million and 89,048,692 shares, being the weighted average number of shares in issue, allowing for contingent shares under a share based payments scheme.

Diluted earnings per share, based on profit after tax after non-underlying items were 35.2p (2008: 27.0p).

Dividend

The second interim dividend is being paid in lieu of the final dividend which is normally paid in June.
It will be paid on 29 March 2010 to shareholders on the register on 5 March 2010 with the ex-dividend date being 3 March 2010.

Balance Sheet

The Group’s Balance Sheet continues to strengthen with shareholders’ funds increasing by £12.7 million to £132.5 million.
This equates to a total equity value per share at 31 December 2009 of 149.5p, compared with 135.2p at the end of 2008.

Goodwill on the Balance Sheet is valued at £54.7 million (2008: £54.7 million) and is subject to an annual impairment review under IFRS 3. No impairment existed at either 31 December 2009 or 2008.

Other intangible assets on the Balance Sheet are valued at £23.2 million (2008: £30.1 million) and are made up as follows;

1. Intangible Assets Acquired in Acquisition £23.2m (2008: £27.7m)
   Intangible assets identified when we acquired Fisher Engineering in 2007 were valued at £39 million.
   These assets are amortised on a straight-line basis over a varying period of time for each class of asset.
   The amortisation charged in the year was £4.4m (2008: £9.2 million), giving a total amortised at the year end of £15.8 million (2008: £11.4 million).
2. Development Costs £Nil (2008: £2.4m)
   At 31 December 2008 this represented capitalisation of the Group’s costs in the development of the pedestal mounted powered work platform.
   During 2009 these costs were written-off, as outlined above.

The Group now has property, plant and equipment and Investment Property totalling £91.0 million.
Depreciation charged in the year amounted to £5.2 million.
Capital Expenditure in the year was reduced from that expended in previous years at £4.8 million.
This included £3.7 million on general improvements to buildings and development of external storage areas at our production sites, with the balance primarily being the maintenance to and improvement of existing plant and machinery.

During the year the Group also invested £2.4 million as equity into the joint venture company in India.

Combined expenditure in 2010 on capital expenditure in the UK and equity injections into the Indian joint venture is not expected to be more than £5million.

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 £6.7 million as at 31 December 2008.
At 31 December 2009, the deficit increased to £8.4 million 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, in particular increases to both the inflation rate and mortality rates used.
This increase in deficit was despite there being a better than expected return on the scheme’s assets in the year.

The provision held in the accounts of £2.6 million in respect of an alleged leak to a roof of a contract carried out by Atlas Ward Structures Limited has been under regular review by the Directors.
Although there has been a partial judgement in our favour, the client is appealing against the decision.
Consequently, it was decided that the provision should remain in place at its current level.

Cash Flow

Management of the Group's cash has always been of prime importance to the Board and this remains the case with cash being tightly controlled.
At the end of 2008 net borrowings were £15.8 million.
During 2009, particularly towards the end of the year, careful cash management resulted in borrowings being eliminated and we ended the year with a net cash balance of £11.6 million.
This position was significantly better than expected, helped by a £10 million unwinding of the amount of cash held in working capital at the end of the year.
The Group has recently agreed a new revolving credit facility with RBS and Clydesdale Bank Plc, a member of the National Australia Bank Group, as joint lenders until March 2013.
This facility is for £40 million and leaves the Group very comfortably within the limits of its facility.

During the year £65.4 million of cash was generated from operations.

Outflows of cash during the year included dividends of £17.7 million, corporation tax paid of £13.2 million, the purchase of property, plant and equipment, net of sale proceeds, of £3.6 million and £2.4 million injected as equity into our Indian joint venture.

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 exposure to exchange rate fluctuations, currently between Sterling, the Euro and the 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.

Following the actions taken last year on the Group re-structuring there will be further efforts made to ensure the Group’s financial controls, cash management and appropriate accounting and treasury policies remain robust.
This will involve the installation of a new accounting software system throughout the Group during the current year.

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 factors considered by the Directors were as follows;

• The order book, which currently stands at £219m;
• 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 increasingly competitive environment within which the Group operates, including pressures on margins and counterparty risks;
• The impact on our business of key suppliers being unable to meet their obligations to the Group;
• 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.
  The Group has recently re-negotiated its banking facilities.
  It now has access to a £40 million revolving credit facility to meet day to day working capital requirements.
  The Group had sufficient headroom on its old facility of £70 million as well as its banking covenants at 31 December 2009.
  The new 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.
  The new bank facility is available until March 2013.

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.
In addition, the Group does not expect to have to refinance or renegotiate its facilities during the next 12 months.
The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the 2009 Annual Report.

Retirement

My thanks must go to John Severs, one of the original founders of the Company who I worked with for 19 years, and to Tom Haughey my Chief Executive Officer for the past 3 years. In addition, Peter Emerson has been a good friend and colleague since he joined the Group in 1996. I also express my sincere thanks to all of my colleagues for their friendship and support of the past 22 years, in particular my own staff, many of whom have been with me for the majority of my tenure.

I am delighted to hand over the reins as Finance Director to Alan Dunsmore who, I am sure, will help drive the Group forward in the future.

Following the Annual General Meeting I will continue in the role of Company Secretary, albeit on a part-time basis.

Summary

It is particularly pleasing that the Group’s borrowings have been reduced further and we actually ended the year with net funds of £11.6 million.
This position obviously leaves the Group with substantial headroom on its borrowing facilities.

The Group has continued to improve its already healthy financial position which, together with its relatively strong order book of £219 million, means it is well placed to trade satisfactorily despite the current recession.

Peter Davison
Finance Director