Earnings Release • Mar 21, 2013
Earnings Release
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National Storage Mechanism | Additional information
RNS Number : 5112A
Smart Metering Systems PLC
21 March 2013
Smart Metering Systems plc
("SMS", "the Company" or the "Group")
Final results for the year ended 31 December 2012
Smart Metering Systems plc (AIM: SMS.L), the integrated metering services company that connects, owns, operates and maintains current generation and new advanced metering assets and databases is pleased to announce final results for the 12 months to 31 December 2012.
Financial Highlights
· Revenue increased by 32% to £21.0m (2011: £16.0m)
· Recurring meter rental increased by 40% to £9.3m (2011: £6.6m) representing 44% of total revenue
· Gross profit increased by 50% to £13.3m (2011: £8.9m)
· Gross profit margin increased by 8% to 63%
· Adjusted EBITDA* increased by 59% to £9.0m (2011: £5.7m)
· EBITDA margin increased by 7% to 43%
· Basic earnings per share increased by 77% to 5.18p (2011:2.93p)
· Final dividend of 1.15p per ordinary share making 1.65p for the full year
· New banking club arrangement announced on 2 August 2012 for £45.0m with Barclays Bank PLC (lead bank), Clydesdale Bank PLC and Lloyds Bank PLC, replacing all existing facilities
· Available cash resources of £31.1m at 31 December 2012
(*Excluding exceptional items and fair value adjustments).
Operational Highlights
· Total meter portfolio increased by 34% to 341,000 (2011: 254,000) of which 95% are domestic, with substantial growth since half year (H1 2012: 283,275) and currently over 365,000
· Increase of 74% in capital investment in meter assets to £16.0m (2011: £9.2m) an increase in average monthly run rate of meter installations to £1.3m investment in 2012 (2011: £0.76m)
· Increase in annualised recurring meter rental revenue as at 31 December 2012 of 42% to £10.8m (2011: £7.6m) and at 28 February 2013 £11.5m.
· Significant new contracts
· Gas suppliers
§ Scottish and Southern Energy: c180,000 domestic meters
§ Scottish and Southern Energy: Initial order of 760 I&C meters and ADM™ devices
§ Total Gas and Power: Initial Quantity of 15,000 I&C meters and ADM™ devices
§ Contract Natural Gas: Initial Quantity of 1,475 I&C meters and ADM™ devices with exclusive arrangement to the balance of their portfolio estimated at over 20,000 I&C meters
§ DONG Energy Sales for I&C meters and ADM™ devices
§ E.ON Energy Solutions for gas metering services for both domestic and I&C sectors
· Energy brokers: providers of brokerage services to small, medium and large group consumers
§ BIU, Solis, Energi, Imserve and ISS for ADM™ devices and gas meters
· ADM™
§ First sales post-trial periods with a number of customers of over 2,000 units
§ Trials commenced in the Water and LPG markets in the UK
· Increase of 26% in Asset installation revenue to £11.8m (2011: £9.4m) of which Gas Connection business increased turnover by 10% to £6.5m (2011: £5.9m)
Alan Foy, Chief Executive Officer, commented:
"In our second year since our AiM admission we have delivered another strong set of results against our strategy of ongoing accumulation of meter assets and the introduction of our smart meter technology ADM™. Our second half performance in particular has been very pleasing building on contracts won in 2011 and 2012. We continue to strengthen our team and our financial resources and look to 2013 for another successful year."
| Smart Metering Systems plc | 0141 249 3850 |
| Alan Foy, Chief Executive Officer | |
| Glen Murray, Finance Director | |
| Cenkos Securities | 0131 220 6939 / 0207 397 8900 |
| Ken Fleming | |
| Neil McDonald | |
| Kreab Gavin Anderson | 020 7074 1800 |
| Chris Philipsborn | |
| Anna Schoeffler |
Notes to Editors
About Smart Metering Systems
Established in 1995, Smart Metering Systems plc based in Glasgow, connects, owns, operates and maintains metering systems and databases on behalf of major energy companies and energy brokers.
Currently the Company is concentrating its efforts on offering its unique integrated services to the UK industrial and commercial gas market in which its customers have an 80% market share.
The Company has further applications for gas with its ADM™ device which allows "smart" functions such as remote reading and half hourly consumption data to be offered to customers in addition to the normal metering services. Longer term the Company also has additional applications for water and LPG.
The Company was admitted to the AiM market in July 2011 and is now part of the FTSE AiM 50 index. For more information on SMS please visit the Company's website: www.sms-plc.com
Chairman's and Chief Executive Officer's statement
We are pleased to announce another strong set of results for the year ended 31 December 2012. The results reflect the cumulative effect of the increase in meters in 2011 and the increasing number of contracts signed during 2012.
Our Business
Our business operation is based on connecting, owning, operating and maintaining metering systems and databases on behalf of major energy companies and energy brokers.
Our core focus is on gas meters in the UK, where we aim to:
· be the market leader in the independent ownership of industrial and commercial meters;
· establish ADM™ as the industry standard smart metering solution for Industrial and Commercial (I&C) clients; and
· grow our domestic meters business organically and potentially through new contracts.
We will also seek out new domestic and international markets for our products and services to widen our footprint in the UK and establish an international presence.
Operational Review
During 2012 we have made substantial progress in all three areas of our business. Following a strong first half where we saw our meter portfolio increase by 30,000, this accelerated substantially in the second half with a further 57,725 added, leading to a 34% increase year-on-year in our gas meter portfolio. The progress we have made in establishing long term recurring revenue was evidenced by an increase in year-end annualised recurring meter rental revenue of 42% to £10.8m and£42k data provision sales from our ADM™ device.
Industrial and Commercial meters
During 2012 we were delighted to announce a number of major new contracts for the provision of gas meters within the I & C market with Contract Natural Gas, Total Gas and Power, DONG Energy Sales and E.ON Energy Solutions. The current estimates are for a total programme in excess of 22,000 meters to the end of 2014, of which over 2,000 had already been delivered by 31 December 2012.
In addition, SMS has also contracted with five energy brokers who provide brokerage and energy management services to small, medium and large group consumers for the provision of the ADM™ device and gas meters. The broker business is at present a small but growing part of our portfolio. The increase in customer base during 2012 now means that SMS has contracts in place with over 80% of the total I & C meter market.
Once installed, these meters will be on SMS's long-term index linked contracts and provide recurring revenue for the lifetime of the assets (expected to be 25 years).
The size of I & C meters is typically much greater than that of domestic meters and therefore the revenue per meter is substantially higher: the equivalent number of domestic meters for these 22,000 contracts would be in the order of 300,000.
Our transactional gas connections business continues to be cash generative and secure gas meter ownership for the Group; it has performed in line with management expectations.
ADM™
The ADM™ device is SMS's advanced metering solution which allows for remote meter reading on a half-hourly basis and has been designed in line with our own customer requirements. The ability of remote reading alongside SMS's full service capability in the I&C market provides a major opportunity for the Company in extending the service we offer and the ability to seek out further markets for our overall service. All new contracts announced in 2012 allow for the introduction of the ADM™ device into I&C premises during meter replacement programmes.
The large I&C market (estimated by SMS at greater than 300,000 meters) has to move to an advanced metering solution of which around 60,000 of the very large category have to be completed or contracted to be completed by 2014.
The small I&C market (estimated by SMS at over 1.2m meters) has until 2014 to either opt for an advanced metering solution such as the ADM™ device or alternatively they can be included in the government's proposed domestic roll out of smart meters.
SMS believes that both market segments will find the ADM™ device an attractive solution, based on its competitive price and ease of installation.
The Company received full European Patent Approval for ADM™ in August and continues to progress the potential use of the ADM™ device in other sectors such as the UK's water and LPG industries where trials have commenced.
Domestic Meters
SMS was successful during 2012 in obtaining two further contracts in the domestic market. In May SMS was contracted by SSE to provide Meter Operations Services in all regions outside of Scotland and the South-East of England for two years. In November, a similar contract was agreed with E.ON Energy Solutions. The current estimate is that these two contracts will add a further c.180,000 units to the SMS meter portfolio over the lifetime of the contracts of which 90,000 have been delivered to date.
Significantly, the new agreement with SSE replaced an existing agreement that the customer had with the market leader in the domestic asset management business and marks a deepening of SMS's relationship with SSE.
Financial Review
Results for the year
During 2012, the Company increased revenue by 32% to £21.0m as a result of increasing meters under ownership and management and the contracted annual RPI increase. Recurring meter rental revenue, in line with the Company's strategy, increased to 44% of total revenue in 2012 compared to 41% in the same period in 2011.
Administration expenses, at £6.1m (excluding exceptional costs), were up 39% compared to 2011, substantially due to investment in staff numbers which have increased from 42 to 77 in line with the growth of the Company and its listed status and increased depreciation due to the increased meter base held by the Company.
Finance costs increased from £535k to £739k due to higher outstanding debt in the period as a result of the increase in meter investment.
Gross profit increased from £8.9m to £13.3m and adjusted EBITDA from £5.7m to £9.0m.
Cash and borrowings
As at 31 December 2012, the Company had debt of £20.4m compared to £11.2m in 2011, cash balances of £6.5m (2011: £7.3m), unused facilities of £24.6m and gearing of 85% (2011:32%)
In August, SMS announced a new banking club arrangement with three major UK banks. The £45.0m facility with Barclays Bank PLC (lead bank), Clydesdale Bank PLC and Lloyds Bank PLC replaced the existing arrangement with Clydesdale Bank PLC. SMS intends to use the new facility to fund the purchase of meter assets during a phased installation over the course of the next 24 months in line with the recent substantial contract wins. Interest is paid quarterly at 2.9% plus three month rolling LIBOR on the outstanding balance with drawn funds repaid equally over ten years. 1.45% is paid on undrawn funds. SMS has entered into a hedging arrangement to swap three-month rolling LIBOR, currently at c.0.51%, to a fixed 0.90-0.92% over four years for c.70% of the facility.
Net debt at 31 December 2012 was £13.9m (2011: £3.9m)
Capital investment in meters was £16.0m in 2012 compared to £9.2m in 2011.
Treasury policies
The Company uses interest rate swaps to manage interest rate fluctuations on interest-bearing loans and borrowings which means that the Company pays a fixed interest rate rather than being subject to fluctuations in the variable rate.
Interest rate swaps covered an amount of £13.2m as at 31 December 2012 (2011: £5.5m) and there was an interest rate cap over an amount of £nil as at 31 December 2012 (2011: £5.5m).
The interest rate swap results in a fixed interest rate of 0.90-0.92%. The termination date for the derivatives is 15 September 2016.
People
During 2012 we continued to add to our management team and staff with the appointment of Derek Lithgow as Chief Operating Officer, Stan Chaloner as Group Sales Director and John Duke as Supply Chain Director, reflecting both the growth in the business and future opportunities. During the year SMS moved to larger premises in Glasgow following the expansion in staff numbers.
Steve Timoney, who founded the business in 1997 and has acted as Deputy Chairman since the Company's admission to AIM in 2010, has decided to retire from the business at the conclusion of the next Annual General Meeting (AGM). The Board wishes Steve all the best in his retirement and thanks him for the outstanding support he has given Alan Foy in his position as Chief Executive for the last five years. The Company will seek to recruit an additional non-executive director.
The most important part of our business is ensuring that we provide the highest quality of service to our customers, a value that continues to underpin the business. The results this year reflect the continued dedication of our staff in this endeavour and we would like to thank them for their continued support.
Dividend
At the time of our admission to AiM, we stated that we intended to adopt a dividend policy that will take account of the Group's profitability, underlying growth prospects and availability of cash and distributable reserves, while maintaining an appropriate level of dividend cover.
SMS is therefore delighted to announce a proposed final cash dividend of 1.15p for the financial year ended 31 December 2012 to shareholders. In addition to the interim dividend of 0.5p this will make a full year distribution of 1.65p. The final dividend will be will be paid on 31st May 2013 to those shareholders on the register (record date) on 26th April 2013 with an ex-dividend date of 24th April 2013.
Outlook
With further increases in recurring meter rental revenue as a result of contracts won in 2012, the increasing take up of the ADM™ device and the increased banking facilities agreed during 2012, we look forward again to a strong performance in 2013.
Smart Metering Systems plc
Annual report and accounts 2012
Consolidated statement of comprehensive income
For the year ended 31 December 2012
| 2012 | 2011 | ||
| Notes | £'000 | £'000 | |
| Revenue | 1 | 21,029 | 15,964 |
| Cost of sales | 2 | (7,759) | (7,109) |
| Gross profit | 13,270 | 8,855 | |
| Administrative expenses | 2 | (7,337) | (5,050) |
| Profit from operations | 2 | 5,933 | 3,805 |
| Attributable to: | |||
| Operating profit before exceptional items | 7,176 | 4,482 | |
| Exceptional items and fair value adjustments | 2 | (1,243) | (677) |
| Finance costs | 5 | (739) | (535) |
| Finance income | 5 | 33 | 41 |
| Profit before taxation | 5,227 | 3,311 | |
| Taxation | 6 | (914) | (1,121) |
| Profit for the year attributable to equity holders | 4,313 | 2,190 | |
| Other comprehensive income | - | - | |
| Total comprehensive income | 4,313 | 2,190 |
The profit from operations arises from the Group's continuing operations.
Earnings per share attributable to owners of the parent during the year:
| Notes | 2012 | 2011 | |
| Basic earnings per share (pence) | 7 | 5.18 | 2.93 |
| Diluted earnings per share (pence) | 7 | 5.00 | 2.90 |
Consolidated statement of financial position
As at 31 December 2012
| 2012 | 2011 | ||
| Notes | £'000 | £'000 | |
| Assets | |||
| Non-current | |||
| Intangible assets | 9 | 1,916 | 1,885 |
| Property, plant and equipment | 10 | 36,104 | 21,327 |
| 38,020 | 23,212 | ||
| Current assets | |||
| Inventories | 12 | 373 | 83 |
| Trade and other receivables | 13 | 3,091 | 1,606 |
| Cash and cash equivalents | 14 | 6,455 | 7,317 |
| Other current financial assets | 18 | - | 18 |
| 9,919 | 9,024 | ||
| Total assets | 47,939 | 32,236 | |
| Liabilities | |||
| Current liabilities | |||
| Trade and other payables | 15 | 8,201 | 6,379 |
| Bank loans and overdrafts | 16 | 2,150 | 1,328 |
| Commitments under hire purchase agreements | 17 | 3 | 3 |
| Other current financial liabilities | 18 | 170 | 339 |
| 10,524 | 8,049 | ||
| Non-current liabilities | |||
| Bank loans | 16 | 18,299 | 9,845 |
| Obligations under hire purchase agreements | 17 | 10 | 13 |
| Deferred tax liabilities | 20 | 2,510 | 1,873 |
| 20,819 | 11,731 | ||
| Total liabilities | 31,343 | 19,780 | |
| Net assets | 16,596 | 12,456 | |
| Equity | |||
| Share capital | 22 | 833 | 833 |
| Share premium | 8,653 | 8,653 | |
| Other reserve | 24 | 1 | 1 |
| Retained earnings | 7,109 | 2,969 | |
| Total equity attributable to equity holders of the parent company | 16,596 | 12,456 |
Consolidated statement of changes in equity
For the year ended 31 December 2012
| Share | Share | Other | Retained | ||
| capital | premium | reserve | earnings | Total | |
| Attributable to the owners of the parent company: | £'000 | £'000 | £'000 | £'000 | £'000 |
| As at 1 January 2011 | - | - | 1 | 1,526 | 1,527 |
| Profit for the year | - | - | - | 2,190 | 2,190 |
| Transactions with owners in their capacity as owners: | |||||
| Share bonus issue (Note 22) | 666 | - | - | (666) | - |
| Shares issued (Note 22) | 167 | 9,833 | - | - | 10,000 |
| Share issue costs | - | (1,180) | - | - | (1,180) |
| Dividends (Note 8) | - | - | - | (180) | (180) |
| Share options | - | - | - | 99 | 99 |
| As at 31 December 2011 | 833 | 8,653 | 1 | 2,969 | 12,456 |
| Profit for the year | - | - | - | 4,313 | 4,313 |
| Transactions with owners in their capacity as owners: | |||||
| Dividends (Note 8) | - | - | - | (417) | (417) |
| Share options | - | - | - | 244 | 244 |
| As at 31 December 2012 | 833 | 8,653 | 1 | 7,109 | 16,596 |
Consolidated statement of cash flows
For the year ended 31 December 2012
| 2012 | 2011 | |
| £'000 | £'000 | |
| Cash flow from operating activities | ||
| Profit before taxation | 5,227 | 3,311 |
| Finance costs | 739 | 535 |
| Finance income | (33) | (41) |
| Fair value movement on derivatives | (151) | 249 |
| Depreciation | 1,599 | 956 |
| Amortisation | 238 | 234 |
| Share-based payment expense | 244 | 99 |
| Increase in inventories | (290) | (83) |
| (Increase) in trade and other receivables | (1,485) | (438) |
| Decrease in trade and other payables | 1,835 | 128 |
| Cash generated from operations | 7,923 | 4,950 |
| Taxation | (290) | - |
| Net cash generated from operations | 7,633 | 4,950 |
| Investing activities | ||
| Payments to acquire property, plant and equipment | (16,380) | (9,332) |
| Disposal of property, plant and equipment | 4 | 180 |
| Payments to acquire intangible assets | (269) | (388) |
| Finance income | 33 | 41 |
| Net cash used in investing activities | (16,612) | (9,499) |
| Financing activities | ||
| New borrowings | 10,947 | 3,148 |
| Capital repaid | (1,671) | (1,211) |
| Net outflow from other long-term creditors | (3) | - |
| Finance costs | (739) | (535) |
| Net proceeds from share issue | - | 8,820 |
| Dividend paid | (417) | (180) |
| Net cash generated from financing activities | 8,117 | 10,042 |
| Net increase in cash and cash equivalents | (862) | 5,493 |
| Cash and cash equivalents at the beginning of the financial year | 7,317 | 1,824 |
| Cash and cash equivalents at the end of the financial year (Note 14) | 6,455 | 7,317 |
Accounting policies
The Company is incorporated and domiciled in the UK. The Group's activities consist of the rental and management of gas meters and that of laying infrastructure pipes for industrial and commercial premises and the provision of specialist technical advice on the use and management of energy for industrial and commercial users.
Basis of preparation
The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2012 or 2011. Statutory accounts for 2011 have been delivered to the registrar of companies, and those for 2012 will be delivered in due course. The auditors have reported on those accounts; their reports were(i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
Going concern
Management prepares budgets and forecasts on a rolling 24 month basis. These forecasts cover operational cashflows investment capital expenditure. The Group has committed bank facilities which extend to July 2014 and available cash resources at 31 December 2012 of £31.1m.
Based on the current projections and facilities in place the Directors consider it appropriate to continue to prepare the financial statements on a going concern basis.
Basis of consolidation
The consolidated financial statements incorporate the consolidated financial statements of the Company and all Group undertakings being UK Gas Connection Limited, UK Meter Assets Limited, UKMA (AF) Limited and UK Data Management Limited. These are adjusted, where appropriate, to conform to Group accounting policies and are prepared to the same accounting reference date. The Company was incorporated on 27 October 2009. The Group was formed on 24 December 2009 through the acquisition of the entire share capital of UK Gas Connection Limited and UK Meter Assets Limited (the only subsidiaries in existence at that time).
Whilst the Group was newly formed, the ultimate ownership of all companies remained unchanged and, as such, the financial statements have been prepared based on a reconstruction under common control, reflecting the Group results for the current and prior years as though the Group structure has always existed.
Use of estimates and judgments
The preparation of the financial statements requires the use of estimates and assumptions. Although these estimates are based on management's best knowledge, actual results ultimately may differ from these estimates.
The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are the estimation of share-based payment costs. The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgments relating to the probability of meeting non-market performance conditions and the continuing participation of employees.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts and VAT.
Revenue is recognised when the significant rewards and risk of ownership have been passed to the buyer. The risk and rewards of ownership transfer when the Company fulfils its contractual obligations to customers by supplying services, or when they have the right to receive the income.
Meter rental income
Rental income is recognised when the Company is contractually entitled to it. Rental income is calculated on a daily basis and invoiced monthly. Rental contracts do not operate on a fixed term basis.
Gas connection
Revenue from gas connection contracts is recognised upon delivery of the related service, in line with our contractual entitlement.
Data management
Data provision income is recognised when the Company is contractually entitled to it. Data provision income is invoiced in advance and is recognised in a straight line over the contract period.
Segment reporting
An operating segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Operating segments are reported in a manner consistent with the reports made to the chief operating decision maker which are consistent with the reported results.
The Company considers that the role of chief operating decision maker is performed by the Board of Directors.
Financial assets
Initial recognition and measurement
Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.
The Group's financial assets include cash and short-term deposits, trade and other receivables, loans and other receivables, quoted and unquoted financial instruments and derivative financial instruments.
Financial liabilities
Initial recognition and measurement
Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, net of directly attributable transaction costs.
The Group's financial liabilities include trade and other payables, bank overdraft, loans and borrowings, financial guarantee contracts and derivative financial instruments.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability and the difference in the respective carrying amounts is recognised in the income statement.
Offsetting of financial instruments
Financial assets and financial liabilities are offset, and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
Initial recognition and subsequent measurement
The Group uses derivative financial instruments such as interest rate swaps to hedge its interest rate risk. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The Group has not designated any derivatives for hedge accounting.
Current versus non-current classification
Derivative instruments that are not designated as effective hedging instruments are classified as current or non-current or separated into a current and non-current portion based on an assessment of the facts and circumstances (i.e. the underlying contracted cash flows).
Where the Group will hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond twelve months after the reporting date, the derivative is classified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item.
Derivative instruments that are designated as, and are effective hedging instruments, are classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and non-current portion only if a reliable allocation can be made.
Exceptional items
The Group presents as exceptional items on the face of the income statement those material items of income and expense which, because of the nature or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in that year, so as to facilitate comparison with prior periods and to assess better trends in financial performance.
Research and development
Expenditure on pure and applied research activities is recognised in the income statement as an expense as incurred.
Expenditure on product development activities is capitalised if the product or process is technically and commercially feasible and the Group intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads.
Capitalised development expenditure is stated at cost less accumulated amortisation and accumulated impairment losses.
Amortisation is calculated, when the product or system is commercialised or in use, so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows:
| Amortisation | 20% on cost straight line |
Intangible assets
Intangible assets acquired separately from third parties are recognised as assets and measured at cost.
Following initial recognition, intangible assets are measured at cost at the date of acquisition less any amortisation and any impairment losses. Amortisation costs are included within the net operating expenses disclosed in the statement of comprehensive income.
Intangible assets are amortised over their useful lives as follows:
| Software | 12.5% straight line |
Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. The Company does not have any intangible assets with indefinite lives.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced in intervals, the Group recognises such parts as individual assets with specific useful lives and depreciation, respectively.
All other repair and maintenance costs are recognised in the income statement as incurred.
Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows:
| Short leasehold property | 20% on cost |
| Plant and machinery | 5% on cost |
| Fixtures and fittings | 15% on cost |
| Equipment | 33% on cost |
Land is not depreciated.
An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognised. The asset's residual values, useful lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate.
All fixed assets are initially recorded at cost.
Impairment of assets
Property, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For purposes of assessing impairment assets that do not individually generate cash flows are assessed as part of the cash-generating unit to which they belong. Cash-generating units are the lowest levels for which there are cash flows that are largely independent of the cash flows from other assets or groups of assets.
Inventories
Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits as defined above, net of outstanding bank overdrafts.
Hire purchase agreements
Assets held under hire purchase agreements are capitalised and disclosed under tangible fixed assets at their fair value. The capital element of the future payments is treated as a liability and the notional interest is charged to the statement of comprehensive income in proportion to the remaining balance outstanding.
Leased assets and obligations
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.
All other leases are operating leases and the annual rentals are charged to the statement of comprehensive income on a straight line basis over the lease term.
Pension costs
The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group. The annual contributions payable are charged to the statement of comprehensive income.
Share-based payments
The costs of equity-settled share-based payments are charged to the income statement over the vesting period. The charge is based on the fair value of the equity instrument granted and the number of equity instruments that are expected to vest.
Taxation
Tax currently payable is based on the taxable profit for the year. Taxable profit differs from accounting profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is measured using tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The deferred tax balance is calculated based on tax rates that have been enacted or substantively enacted by the reporting date.
Adoption of the international accounting standards
New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2013 and not early adopted
| Standard | Key requirements | Effective date |
| IFRS 1, Government Loans | The amendments provide relief to first-time adopters of IFRSs by allowing prospective application of IFRS 9 or IAS 39 and paragraph 10A of IAS 20 to government loans outstanding at the transition to IFRS. | 1 January 2013 |
| IFRS 7, Financial Instruments: Offsetting Financial Assets and Financial Liabilities' | The amendments require entities to disclose information about the rights of offset and related arrangements for financial instruments under an enforceable master netting agreement or similar agreement. | 1 January 2013 |
| IFRS 9, Financial Instruments | The standard is the first standard issued as part of a wider project to replace IAS 39. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The classification depends on the entity's business model and the contractual cash flow characteristics of the instrument. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. | 1 January 2015 |
| IFRS 10, Consolidated financial statements | The standard's objective is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. It builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent Company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. | 1 January 2014 |
| IFRS 11, Joint arrangements | IFRS 11 is a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement rather than its legal form. There are two types of joint arrangement: joint operations and joint ventures. Proportional consolidation of joint ventures is no longer allowed. | 1 January 2014 |
| IFRS 12, Disclosures of interests in other entities | IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. | 1 January 2014 |
| IFRS 13, Fair value measurement | IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. | 1 January 2014 |
| Amendment to IAS 1, Financial statement presentation regarding other comprehensive income | The main change resulting from these amendments is a requirement for entities to group items presented in 'other comprehensive income' (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. | 1 July 2012 |
| Amendment to IAS 19, Employee benefits | These amendments eliminate the corridor approach and calculate finance costs on a net funding basis. | 1 January 2013 |
| IAS 27 (revised 2011), Separate financial statements | IAS 27 (revised 2011) includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. | 1 January 2013 |
| IAS 28 (revised 2011), Associates and joint ventures | IAS 28 (revised 2011) includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11. | 1 January 2014 |
| IAS 32, Offsetting Financial Assets and Financial Liabilities | The amendments clarify existing application issues relating to the offsetting requirements. | 1 January 2014 |
There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on Smart Metering Systems plc.
None of the above interpretations would have an impact on this financial information if applied.
Notes to the financial statements
For the year ended 31 December 2012
1 Segmental reporting
For management purposes, the Group is organised into two core divisions, management of assets and installation of meters, which form the basis of the Group's reportable operating segments. Operating segments within those divisions are combined on the basis of their similar long-term economic characteristics and similar nature of their products and services, as follows:
The management of assets comprises regulated management of gas meters within the UK.
The installation of meters comprises installation of domestic and industrial and commercial gas meters throughout the UK.
Management monitors the operating results of its divisions separately for the purpose of making decisions about resource allocation and performance assessment. The operating segments disclosed in the financial statements are the same as reported to the Board. Segment performance is evaluated based on gross profit or loss excluding operating costs not reported by segment, depreciation, amortisation of intangible assets and exceptional items.
The following tables present information regarding the Group's reportable segments for the years ended 31 December 2012 and 31 December 2011:
| Asset | Asset | Total | ||
| management | installation | Unallocated | operations | |
| 31 December 2012 | £'000 | £'000 | £'000 | £'000 |
| Segment/Group revenue | 9,254 | 11,775 | - | 21,029 |
| Operating costs | (2,194) | (5,565) | - | (7,759) |
| Segment profit - Group gross profit | 7,060 | 6,210 | - | 13,270 |
| Items not reported by segment: | ||||
| Other operating costs | - | - | (4,266) | (4,266) |
| Depreciation | (918) | - | (672) | (1,590) |
| Amortisation | (238) | - | - | (238) |
| Exceptional items and fair value adjustments | - | - | (1,243) | (1,243) |
| Profit before interest and tax | 5,904 | 6,210 | (6,181) | 5,933 |
| Net finance costs | - | - | (706) | (706) |
| Profit before tax | 5,904 | 6,210 | (6,887) | 5,227 |
| Tax expense | (914) | |||
| Profit for year | 4,313 |
| Asset | Asset | Total | ||
| management | installation | Unallocated | operations | |
| 31 December 2011 | £'000 | £'000 | £'000 | £'000 |
| Segment/Group revenue | 6,614 | 9,350 | - | 15,964 |
| Cost of sales | (1,973) | (5,136) | - | (7,109) |
| Segment profit - Group gross profit | 4,641 | 4,214 | - | 8,855 |
| Items not reported by segment: | ||||
| Other operating costs | - | - | (3,182) | (3,182) |
| Depreciation | (918) | - | (38) | (956) |
| Amortisation | (235) | - | - | (235) |
| Exceptional items and fair value adjustments | - | - | (677) | (677) |
| Profit before interest and tax | 3,488 | 4,214 | (3,897) | 3,805 |
| Net finance costs | - | - | (494) | (494) |
| Profit before tax | 3,488 | 4,214 | (4,391) | 3,311 |
| Tax expense | (1,121) | |||
| Profit for year | (2,190) |
All revenues and operations are based and generated in the UK.
The Group has one major customer that generated turnover within each segment as listed below:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Customer 1 - Asset Management | 5,511 | 4,380 |
| Customer 1 - Asset Installation | 4,228 | 2,860 |
| 9,739 | 7,240 |
No segmentation is presented for the majority of Group assets and liabilities as these are managed centrally, independently of operating segments.
Those assets and liabilities that are managed and reported on a segmental basis are detailed below.
Segment assets and liabilities
| Asset | Asset | Total | |
| management | installation | operations | |
| 31 December 2012 | £'000 | £'000 | £'000 |
| Assets reported by segment | |||
| Intangible assets | 1,916 | - | 1,916 |
| Plant and machinery | 35,791 | - | 35,791 |
| Inventories | 373 | - | 373 |
| 38,080 | |||
| Assets not reported by segment | 9,859 | ||
| Total assets | 47,939 | ||
| Liabilities reported by segment | |||
| Obligations under hire purchase agreements | 13 | - | 13 |
| 13 | |||
| Liabilities not reported by segment | 31,333 | ||
| Total liabilities | 31,346 |
| Asset | Asset | Total | |
| management | installation | operations | |
| 31 December 2011 | £'000 | £'000 | £'000 |
| Assets reported by segment | |||
| Intangible assets | 1,885 | - | 1,885 |
| Plant and machinery | 21,125 | - | 21,125 |
| Inventories | 83 | - | 83 |
| 23,093 | |||
| Assets not reported by segment | 9,143 | ||
| Total assets | 32,236 | ||
| Liabilities reported by segment | |||
| Obligations under hire purchase agreements | 16 | - | 16 |
| 16 | |||
| Liabilities not reported by segment | 19,764 | ||
| Total liabilities | 19,780 |
2 Income statement by nature and items of expenditure included in the consolidated income statement
| 2012 | 2011 | |
| £'000 | £'000 | |
| Revenue | 21,029 | 15,964 |
| Direct rental costs | (2,194) | (1,973) |
| Direct subcontractor costs | (4,556) | (4,437) |
| Other direct sales costs and systems rental | (1,001) | (699) |
| Staff costs | (2,665) | (1,965) |
| Depreciation: | ||
| - owned assets | (1,568) | (948) |
| - leased assets | (31) | (8) |
| Amortisation | (238) | (234) |
| Auditor's remuneration: | ||
| - as auditor | (43) | (59) |
| - other services | (22) | (188) |
| Exceptional costs | (1,243) | (677) |
| Operating lease costs: | ||
| - plant and equipment | (30) | (25) |
| Other operating charges | (1,505) | (946) |
| Operating profit | 5,933 | 3,805 |
| Finance costs | (739) | (535) |
| Finance income | 33 | 41 |
| Profit before taxation | 5,227 | 3,311 |
Included in exceptional items and fair value adjustments expenses are: i) £Nil (2011: £329,000) that relates to costs incurred during the listing process, ii) £(151,000) (2011: £249,000) relates to the interest rate hedge fair value adjustment, iii) £652,518 (2011: £Nil) of costs associated with restructuring debt facilities, iv) £395,300 (2011: £Nil) settlement of hedge, v) £243,675 (2011: £99,000) that relates to share-based payments, and vi) £102,650 (2011: £Nil) TUPE costs relating to a contract win during the year.
Amounts paid to our auditors during the year totalled £65,480 (2011: £247,000).
This can be analysed as:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Statutory audit (Baker Tilly UK Audit LLP) | 43 | 59 |
| Reporting accountant services (Baker Tilly Corporate Finance LLP) | - | 167 |
| Taxation services (Baker Tilly Tax and Accounting Limited) | 19 | 15 |
| Non-statutory audit services (Baker Tilly UK Audit LLP) | 3 | 6 |
| 65 | 247 |
3 Particulars of employees
The average number of staff employed by the Group, including Executive Directors, during the financial year was:
| 2012 | 2011 | |
| Number | Number | |
| Number of administrative staff | 5 | 5 |
| Number of operational staff | 54 | 34 |
| Number of sales staff | 3 | - |
| Number of IT staff | 3 | - |
| Number of Directors | 3 | 3 |
| 68 | 42 |
The aggregate payroll costs, including Executive Directors, of the above were:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Wages and salaries | 2,170 | 1,711 |
| Social security costs | 256 | 195 |
| Staff pension costs | 40 | 40 |
| Director pension costs | 18 | 19 |
| 2,484 | 1,965 |
4 Directors' emoluments
The Directors' aggregate remuneration in respect of qualifying services were:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Emoluments receivable | 518 | 586 |
| Fees | 50 | 333 |
| Value of Group pension contributions to money purchase schemes | 4 | 3 |
| Other pension | 14 | 16 |
| 586 | 938 |
| 2012 | 2011 | |
| Emoluments of highest paid Director | £'000 | £'000 |
| Total emoluments | 350 | 310 |
| Pension contributions | 13 | 10 |
The number of Directors who accrued benefits under Company pension schemes was as follows:
| 2012 | 2011 | |
| Number | Number | |
| Money purchase schemes | 1 | 2 |
5 Finance costs and finance income
| 2012 | 2011 | |
| £'000 | £'000 | |
| Finance costs | ||
| Bank loans and overdrafts | 738 | 533 |
| Finance leases | 1 | 2 |
| Total finance costs | 739 | 535 |
| Finance income | ||
| Bank interest receivable | 33 | 41 |
6 Taxation
| 2012 | 2011 | |
| £'000 | £'000 | |
| Analysis of charge in the year | ||
| Current tax: | ||
| Current income tax expense | 200 | 212 |
| Over provision in prior year | 77 | - |
| Total current income tax | 277 | 212 |
| Deferred tax: | ||
| Origination and reversal of temporary differences | 637 | 909 |
| Tax on profit on ordinary activities | 914 | 1,121 |
The charge for the period can be reconciled to the profit per the consolidated statement of comprehensive income as follows:
| Profit before tax | 5,227 | 3,311 |
| Tax at the UK corporation tax rate of 24.5% (2011: 26.5%) | 1,281 | 877 |
| Expenses not deductible for tax purposes | 45 | 228 |
| Adjustments to tax charge in respect of previous periods | (174) | 51 |
| Change in tax rate | (221) | (35) |
| R&D enhanced deductions | (17) | - |
| Tax expense in the income statement | 914 | 1,121 |
7 Earnings per share
The calculation of EPS is based on the following data and number of shares:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Profit for the year used for calculation of basic EPS | 4,313 | 2,190 |
| Amortisation of intangible assets | 238 | 235 |
| Exceptional costs | 1,243 | 677 |
| Tax effect of adjustments | (355) | (92) |
| Earnings for the purpose of adjusted EPS | 5,439 | 3,010 |
| Number of shares | 2012 | 2011 |
| Weighted average number of ordinary shares for the purposes of basic EPS | 83,339,747 | 74,709,610 |
| Effect of potentially dilutive ordinary shares: | ||
| - share options | 2,957,911 | 728,577 |
| Weighted average number of ordinary shares for the purposes of diluted EPS | 86,297,658 | 75,438,187 |
| Earnings per share: | ||
| - basic (pence) | 5.18 | 2.93 |
| - diluted (pence) | 5.00 | 2.90 |
| Adjusted earnings per share: | ||
| - basic (pence) | 6.53 | 4.03 |
| - diluted (pence) | 6.30 | 3.99 |
The Directors consider that the adjusted earnings per share calculation gives a better understanding of the Group's earnings per share.
8 Dividends
| 2012 | 2011 | |
| £'000 | £'000 | |
| Equity dividends | ||
| Paid during the year: | ||
| Dividends on equity shares £0.005 (2011: £600) | 417 | 180 |
| Total dividends | 417 | 180 |
9 Intangible assets
| Research and | |||
| development | Software | Total | |
| £'000 | £'000 | £'000 | |
| Cost | |||
| As at 1 January 2011 | 171 | 1,810 | 1,981 |
| Additions | 388 | - | 388 |
| As at 31 December 2011 | 559 | 1,810 | 2,369 |
| Additions | 269 | - | 269 |
| As at 31 December 2012 | 828 | 1,810 | 2,638 |
| Amortisation | |||
| As at 1 January 2011 | 14 | 235 | 249 |
| Charge for year | - | 235 | 235 |
| As at 31 December 2011 | 14 | 470 | 484 |
| Charge for year | 3 | 235 | 238 |
| As at 31 December 2012 | 17 | 705 | 722 |
| Net book value | |||
| At 31 December 2012 | 811 | 1,105 | 1,916 |
| At 31 December 2011 | 545 | 1,340 | 1,885 |
| At 1 January 2011 | 157 | 1,574 | 1,731 |
10 Property, plant and equipment
| Short leasehold | Plant and | Fixtures | |||
| property | machinery | and fittings | Equipment | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Cost | |||||
| As at 1 January 2011 | 31 | 13,852 | 24 | 133 | 14,040 |
| Additions | - | 9,168 | 1 | 163 | 9,332 |
| As at 31 December 2011 | 31 | 23,020 | 25 | 296 | 23,372 |
| Additions | 72 | 16,200 | 91 | 17 | 16,380 |
| Disposals | - | - | (13) | - | (13) |
| As at 31 December 2012 | 103 | 39,220 | 103 | 313 | 39,739 |
| Depreciation | |||||
| As at 1 January 2011 | 12 | 977 | 4 | 96 | 1,089 |
| Charge for year | 6 | 918 | 5 | 27 | 956 |
| As at 31 December 2011 | 18 | 1,895 | 9 | 123 | 2,045 |
| Charge for year | 12 | 1,534 | 11 | 42 | 1,599 |
| Disposals | - | - | (9) | - | (9) |
| As at 31 December 2012 | 30 | 3,429 | 11 | 165 | 3,635 |
| Net book value | |||||
| At 31 December 2012 | 73 | 35,791 | 92 | 148 | 36,104 |
| At 31 December 2011 | 13 | 21,125 | 16 | 173 | 21,327 |
| At 1 January 2011 | 19 | 12,875 | 20 | 37 | 12,951 |
Hire purchase agreements
Included within the net book value of £36,104,000 (2011: £21,327,000, 2010: £12,951,000) is £115,000 (2011: £145,000, 2010: £Nil) relating to assets held under hire purchase agreements. The depreciation charged to the consolidated financial statements in the year in respect of such assets amounted to £31,000 (2011: £8,000, 2010: £23,000).
The assets are secured by a bond and floating charge (note 16).
11 Financial asset investments
Subsidiary undertakings
| Country of | Proportion of | |||
| incorporation | Holding | shares held | Nature of business | |
| All held by the Company: | ||||
| UK Gas Connection Limited | Scotland | Ordinary shares | 100% | Gas utility management |
| UK Meter Assets Limited | Scotland | Ordinary shares | 100% | Gas utility management |
| UK Data Management Limited | Scotland | Ordinary shares | 100% | Data management |
| UKMA (AF) Limited* | England | Ordinary shares | 100% | Leasing |
* The shareholding in this company is indirect via a subsidiary company.
12 Inventories
| 2012 | 2011 | |
| £'000 | £'000 | |
| Inventories | 373 | 83 |
13 Trade and other receivables
| 2012 | 2011 | |
| £'000 | £'000 | |
| Trade receivables | 1,270 | 480 |
| Prepayments | 60 | 24 |
| Accrued income | 1,516 | 965 |
| Other receivables | 32 | 63 |
| VAT recoverable | 213 | 74 |
| Other debtors | - | - |
| 3,091 | 1,606 |
The debtors above include the following amounts falling due after more than one year:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Other receivables | - | 34 |
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The Group's credit risk is primarily attributable to trade receivables. The amounts presented in the statement of financial position are net of allowances for doubtful receivables. There was no allowance for doubtful receivables in the year (2011: £Nil, 2010: £Nil). The ageing profile of trade receivables past due date is shown below:
| 2012 | 2011 | |
| £'000 | £'000 | |
| 31-60 days | 148 | 20 |
| 60-90 days | 56 | 15 |
| Over 90 days | 49 | 10 |
| 253 | 45 | |
| Allowance for doubtful receivables | - | - |
| 253 | 45 |
Trade receivables are non-interest-bearing and are generally on 30-90 days terms.
Trade receivables due from related parties at 31 December 2012 amounted to £Nil (2011: £34,000, 2010: £31,000).
Receivables are all in Sterling denominations.
The Directors are of the opinion that none of the overdue debts as at 31 December 2012 (2011: £Nil, 2010: £Nil) require impairment.
14 Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group. The carrying amount of the asset approximates the fair value. All balances are held in Sterling.
During each period, there were no amounts of cash placed on short-term deposit.
For the purposes of the cash flow statement, cash and cash equivalents comprise:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Cash | 6,455 | 7,317 |
| Bank overdraft | - | - |
| 6,455 | 7,317 |
15 Trade and other payables
| 2012 | 2011 | |
| £'000 | £'000 | |
| Current | ||
| Trade payables | 3,434 | 2,035 |
| Other payables | 12 | 10 |
| Other taxes | 176 | 143 |
| Corporation tax | 148 | 161 |
| Deferred income | 88 | - |
| Accruals | 4,343 | 4,030 |
| 8,201 | 6,379 |
The maturity profile of trade payables is given below:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Current | 2,518 | 1,530 |
| 31-60 days | 607 | 281 |
| 60-90 days | 42 | 39 |
| Over 90 days | 266 | 185 |
| 3,433 | 2,035 |
Trade payables are non-interest-bearing and are normally settled on 30-45 day terms.
All trade liabilities are Sterling denominated.
16 Bank loans and overdrafts
| 2012 | 2011 | |
| £'000 | £'000 | |
| Current | ||
| Bank loans | 2,150 | 1,328 |
| Bank overdrafts | - | - |
| 2,150 | 1,328 | |
| Non-current | ||
| Bank loans | 18,299 | 9,845 |
| Bank overdraft | - | - |
| 18,299 | 9,845 |
Bank loans at 31 December 2012 relate to a new term loan facility of £45.0m that was finalised in August 2012.
The term loan is available for 24 months, is payable in equal quarterly instalments based on a ten year repayment profile, with a final repayment date of 31 July 2017. The term loan attracts interest at a rate of 2.9% over the three month LIBOR. 1.45% is paid on undrawn funds.
The banks have a bond and floating charge over current and future property and assets.
The Group has fixed the bank interest payable through an interest rate swap (see note 18).
17 Commitments under hire purchase agreements
Future minimal commitments under hire purchase agreements are as follows:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Current | ||
| Amounts payable within one year | 3 | 3 |
| Non-current | ||
| Amounts payable between two to five years | 10 | 13 |
| Amounts payable after more than five years | - | - |
| 10 | 13 |
The Group has hire purchase contracts for various items of computer equipment. These leases have terms of renewal but no purchase options and escalation clauses. Renewals are at the option of the specific entity that holds the lease.
The Directors consider that the future minimum lease payments under hire purchase contracts approximate to the present value of the minimum payments. Obligations under hire purchase contracts are secured on the underlying assets.
18 Other financial liabilities and assets
The Group's treasury policy and management of financial instruments, which form part of these financial statements, are set out in the Financial Review.
| 2012 | 2011 | |
| £'000 | £'000 | |
| Other financial assets | - | 18 |
| Non-current liabilities | ||
| Other financial liabilities | 170 | 339 |
Other financial assets and liabilities relate to the fair value adjustment on interest rate swaps.
The Group uses interest rate swaps to manage interest rate risk on interest-bearing loans and borrowings which means that the Group pays a fixed interest rate rather than being subject to fluctuations in the variable rate. The Group has not designated these derivatives as cash flow hedges.
The interest rate swaps cover an interest rate swap for an amount of £13,200,000 as at 31 December 2012 (2011: £5,500,000, 2010: £3,800,000) and an interest rate cap over an amount of £Nil as at 31 December 2012 (2011: £5,500,000, 2010: £4,000,000).
The interest rate swap results in a fixed interest rate of 0.90-0.92%.
The termination date for the derivatives is 15 September 2016.
The movement in the fair value is shown below:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Interest rate swap | ||
| Opening position | 18 | 99 |
| Adjustment to fair value | (18) | (81) |
| Closing position | - | 18 |
| Interest rate cap | ||
| Opening position | (339) | (171) |
| Adjustment to fair value | 169 | (168) |
| Closing position | (170) | (339) |
Fair values
The Directors do not consider there to be any material differences between the fair values and carrying values of any financial assets or liabilities recorded within these financial statements at the balance sheet date other than as set out below.
Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
| • | Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; |
| • | Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and |
| • | Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. |
At 31 December 2012, the Group held the following financial instruments measured at fair value:
| 31 December | ||||
| 2012 | Level 1 | Level 2 | Level 3 | |
| Liabilities measured at fair value | £'000 | £'000 | £'000 | £'000 |
| Financial liabilities at fair value through the income statement: | ||||
| Interest rate derivatives | 170 | - | 170 | - |
Fair value has been assessed on a Mark to Market basis.
The above liabilities are shown on the statement of financial position as other current financial assets and other current financial liabilities.
During the reporting period ended 31 December 2012, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.
19 Financial risk management
The Board reviews and agrees policies for managing the risks associated with interest rate, credit and liquidity risk. The Group has in place a risk management policy that seeks to minimise any adverse effect on the financial performance of the Group by continually monitoring the following risks:
Interest rate risk
The Group's interest rate risk arises as a result of both its long and short-term borrowing facilities.
The Group seeks to manage exposure to interest rate fluctuations through the use of fixed interest rate swaps.
Interest rate sensitivity
The following table demonstrates the sensitivity to a change in interest rates on loans and borrowings, after the impact of hedge accounting. The Group's profit before tax is affected through the impact on floating rate borrowings as follows:
| Effect on profit | ||
| Increase/decrease | before tax | |
| Pound Sterling | in basis points | £'000 |
| 2012 | 1% | 65 |
| 2011 | 1% | 51 |
Interest rate risk profile of financial liabilities
The interest rate profile of the financial liabilities of the Group (being bank loans and overdrafts, obligations under finance leases and other financial liabilities) as at each period end is as follows:
| Fixed rate | Variable rate | ||
| financial liabilities | financial | ||
| liabilities | Total | ||
| £'000 | £'000 | £'000 | |
| 2012 | 13,213 | 7,249 | 20,462 |
| 2011 | 5,516 | 5,673 | 11,189 |
| 1 January 2011 | 5,000 | 4,434 | 9,434 |
The fixed rate financial liabilities relates to the portion of the banking facility that is fixed through hedging instruments.
The following is the maturity profile of the Group's financial liabilities as at 31 December:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Fixed rate | ||
| Less than one year | 1,324 | 642 |
| Two to five years | 5,289 | 2,430 |
| Over five years | 6,600 | 2,444 |
| 13,213 | 5,516 | |
| Variable rate | ||
| Less than one year | 803 | 630 |
| Two to five years | 3,212 | 2,521 |
| Over five years | 3,234 | 2,522 |
| 7,249 | 5,673 |
Interest rate risk profile of financial assets
The Group's financial assets at 31 December 2012 comprise cash and trade receivables. The cash balance of £6,455,000 (2011: £7,317,000, 2010: £1,835,000) is a floating rate financial asset.
Fair values of financial liabilities and financial assets
The fair values, based upon the market value or discounted cash flows of financial liabilities and financial assets held in the Group, were not materially different from their book values.
Foreign currency risk
The Group's exposure to the risk of changes in foreign exchange rates is insignificant as primarily all of the Group's operating activities are denominated in Pound Sterling.
Liquidity risk
The Group manages its cash in a manner designed to ensure maximum benefit is gained whilst ensuring security of investment sources. The Group's policy on investment of surplus funds is to place deposits at institutions with strong credit ratings.
The ageing and maturity profile of the Group's material liabilities are covered within the relevant liability note.
Credit risk
Credit risk with respect to trade receivables is due to the Group trading with a limited number of companies who are generally large utility companies or financial institutions. Therefore, the Group does not expect, in the normal course of events, that these debts are at significant risk. The Group's maximum exposure to credit risk equates to the carrying value of cash held on deposit and trade and other receivables.
The Group's maximum exposure to credit risk from its customers is £2,786,000 (2011: £1,445,000, 2010: £1,078,000) as disclosed in note 13 - trade and other receivables.
The Group regularly monitors and updates its cash flow forecasts to ensure it has sufficient and appropriate funds to meet its ongoing operational requirements whilst maintaining adequate headroom on its facilities to ensure no breach in its banking covenants.
Capital management
Capital is the equity attributable to the equity holders of the parent. The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure, and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, sell assets, return capital to shareholders or issue new shares.
The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by EBITDA. Net debt is calculated as total borrowings less cash. EBITDA is calculated as operating profit before any significant non-recurring items, interest, tax, depreciation and amortisation.
20 Deferred taxation
The movement in the deferred taxation asset during the period was:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Opening deferred tax liability | 1,873 | 964 |
| Increase in provision through income statement | 637 | 909 |
| Closing deferred tax liability | 2,510 | 1,873 |
All movements identified have gone through the income statement.
The Group's provision for deferred taxation consists of the tax effect of temporary differences in respect of:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Excess of taxation allowances over depreciation on fixed assets | 2,788 | 2,329 |
| Tax losses available | (239) | (371) |
| Fair value of interest rate swaps (net) | (39) | (85) |
| 2,510 | 1,873 |
The deferred tax included in the income statement is as follows:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Accelerated capital allowances | 459 | 924 |
| Tax losses | 132 | 50 |
| Movement in fair value of interest rate swaps | 46 | (65) |
| 637 | 909 |
21 Related party transactions
A number of key management personnel hold positions in other entities that result in them having control or significant influence over the financial or operating policies.
A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel and related entities on an arm's length basis.
During the period, the Group entered into the following transactions with related parties:
During the year the Group paid rent amounting to £41,500 (2011: £41,500, 2010: £65,500) to the Directors' pension scheme, Eco Retirement Benefit Scheme, for the use of certain premises. Both Stephen Timoney and Alan Foy are trustees of the scheme. At the year-end date, an amount of £4,150 (2011: £4,150, 2010: £6,414) was outstanding in this regard.
During the year, the Group paid dividends to S Timoney and A Foy of £125,024 and £66,675 respectively.
Remuneration of key management which includes executive and non-executive directors together with certain management personnel:
| At | At | |
| 31 December 2012 | 31 December 2011 | |
| £'000 | £'000 | |
| Salaries and other short term employee benefits | 754 | 953 |
22 Share capital
| 2012 | 2011 | |
| £'000 | £'000 | |
| Allotted and called up: | ||
| 83,339,747 ordinary shares of £0.01 each | ||
| (2011 and 2010: 83,339,747 ordinary shares of £1 each) | 833 | 833 |
On 17 June 2011 each of the 300 ordinary shares of £1 each then in issue was sub-divided into 100 ordinary shares of £0.01 each.
On 17 June 2011 4,980,000 ordinary shares of £0.01 each were issued to Steve Timoney and Alan Foy by means of a bonus issue.
On 20 June 2011 61,663,080 ordinary shares of £0.01 each were issued to Steve Timoney and Alan Foy by means of a bonus issue.
On 8 July 2011 16,666,667 ordinary shares were issued for £0.60.
23 Share-based payments
On 20 June 2011 the Company adopted both an Approved Company Share Option Plan (the CSOP) and an Unapproved Company Share Option Plan (the Unapproved Plan).
CSOP
The CSOP is open to any employee of any member of the Group up to a maximum value of £30,000 per employee. No option can be exercised within three years of its date of grant.
Unapproved plan
The Unapproved Plan is open to any employee, Executive Director or Non-executive Director of the Company or any other Group company who is required to devote substantially the whole of his time to his duties under his contract of employment. Except in certain specified circumstances no option will be exercisable within five years of its grant.
| At 31 | Exercise | ||||||
| At 1 January | December | price | Date | ||||
| Plan | 2012 | Granted | Lapsed | 2012 | (pence) | exercisable | Expiry date |
| CSOP | 578,952 | - | (6,579) | 572,373 | 76.0 | 15/7/14 | 15/7/21 |
| CSOP | - | 39,088 | - | 39,088 | 153.5 | 28/5/15 | 28/5/22 |
| CSOP | - | 12,097 | - | 12,097 | 248.0 | 3/12/15 | 3/12/22 |
| Unapproved | 3,082,333 | - | - | 3,083,333 | 60.0 | 20/6/16 | 20/6/21 |
| Unapproved | 717,500 | - | - | 717,500 | 60.0 | 20/6/12* | 20/2/21 |
| Unapproved | - | 1,162,629 | - | 1,162,629 | 153.5 | 28/5/17 | 28/5/22 |
| Unapproved | - | 805,660 | - | 805,660 | 248.0 | 3/12/17 | 3/12/22 |
*Only 50% of the options can be exercised at this date.
Valuation
The fair value of all options granted has been estimated using the Black-Scholes option model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the year ended 31 December 2012:
| Unapproved | ||
| CSOP | plan | |
| Dividend yield | 1.25% | 1.25% |
| Expected share price volatility | 40% | 40% |
| Risk-free interest rate | 0.40% | 0.77% |
| Expected life of option (years) | 3 | 5 |
| Option strike price (£) | 2.48 | 2.48 |
| Share price (£) | 2.48 | 2.48 |
The weighted average fair value of share options issued during the year was £1.82.
24 Other reserve
This is a non-distributable reserve that arose by applying merger relief under s162 CA06 to the shares issued in 2008 in connection with the Group restructuring. This was previously recognised as a merger reserve under UK GAAP. Under IFRS, this has been classed as an "other reserve".
25 Commitments under operating leases
The Group has entered into commercial leases for office space. These leases have lives between one and 15 years with no renewal option included in the contracts. There are no restrictions placed upon the Group by entering into these leases.
Future minimum rentals payable under non-cancellable operating leases as at each year end are as follows:
| 2012 | 2011 | |
| £'000 | £'000 | |
| Future minimal commitments under operating lease agreements are as follows: | ||
| Payable within one year | 65 | 68 |
| Payable within two and five years | 704 | 166 |
| Payable after five years | 176 | 218 |
| 945 | 452 |
26 Ultimate controlling party
There is no ultimate controlling party by virtue of the structure of shareholdings in the Group.
27 Contingent liability
The Group is the subject of an ongoing HMRC enquiry in respect of payments made to Employee Benefit Trusts in prior years. Whilst the outcome of the enquiry is, as yet, uncertain, the beneficiaries of the Trusts have provided the Company with indemnities against any additional tax that may become payable as a result of these enquiries.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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