Final results for year ended 31 December 2014

RNS Number : 0865K
Corac Group Plc
14 April 2015
 

Final results for year ended 31 December 2014

Corac (AIM: CRA), the specialist engineering group focused on the aerospace & defence and energy & process industry sectors, announces final results for the year ended 31 December 2014. 

Financial highlights

•           Revenue increased by 12% to £21.7m (2013: £19.3m)

•           Operating losses reduced by 10% to £3.9m (2013: £4.3m)

•           Adjusted EBITDA1 losses reduced by 27% to £2.1m (2013: £2.9m)

•           Group cash closed at £9.6m (2013: £13.7m)

•           Group order book increased by 22% to £17.3m (2013: £14.2m)

Business highlights:

•           Major defence contract wins with long-term revenue visibility

•           Additional projects in renewable energy and power generation

•           Restructured business development to serve key markets

•           Completed heat exchangers for major refinery project in Saudi Arabia, high temperature chemical processing in Wales and multiple cooling towers in Europe

•           Deliveries to two Asian navy programmes, and continuing to plan on UK Astute programme

•           Negotiated terms for manufacturing and commercial exploitation of steam expander technology

•           Agreed with partners to exit three upstream gas compression development projects, and ceased associated R&D investment

Phil Cartmell, Chief Executive Officer of Corac, commented:

"We have made significant progress during 2014, particularly in restructuring our market facing teams and finding a good acquisition fit in Shaw Sheet Metal. We will drive value from these achievements in the coming year whilst completing the transition of our engineering capabilities into a harmonised and effective team. With these actions driving us forward, we look forward to another successful year."

 

1    Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation and impairment of acquired intangible assets and any other acquisition-related charges, share based payment charges and exceptional items. Acquisition-related costs of £110,000 (2013: £nil) relate to the acquisition of Shaw Sheet Metal Company Ltd. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence. Exceptional items in the current year comprise termination costs of £322,000 (2013: £nil).

 

For further information please contact:




Corac Group Plc


Phil Cartmell, Chief Executive Officer

01753 285 800

Mark Crawford, Chief Financial Officer


www.corac.co.uk




Cenkos


Ivonne Cantú / Elizabeth Bowman

020 7397 8980

www.cenkos.com




Vigo Communications


Jeremy Garcia / Fiona Henson

020 7016 9570

www.vigocomms.com


 

 

NOTES TO EDITORS

 

About Corac Group plc

 

Corac Group is a specialist engineering group focused on the aerospace & defence and energy & process industry sectors. The Group designs and builds valuable solutions for critical applications in compression systems, renewable energy, atmosphere management and fabricated equipment; and provides support services through the equipment's lifetime. Corac Group shares have been trading on AIM since July 2001.



 

Chairman's Statement 

This has been a year of continued business evolution and operational progress for Corac.

We are pleased to report a solid operational performance and further progress against our previously stated growth ambitions. The Group has delivered year-on-year revenue growth and further reduced operating losses. We have also embarked on significant change to both our organisational and management structure, which will, we believe, deliver improvements in future Group performance.

Our progress to date has been encouraging, however the Board believes there is significant room for growth in each of our traditional markets, and also through the relevance of Corac's capabilities to other markets. In all of these areas, the need for innovation and operational performance is driving investment, which could yield additional gains for the Group.

Board Changes

In September 2014, the Group's Chief Financial Officer (CFO), Jon Carter, resigned from his role and the Board, and left the Group. Jon joined Corac in July 2013 and played an important role in the successful fund raising completed in December 2013. Mark Crawford resumed his responsibilities as CFO, drawing upon his experience in that role from November 2009 to July 2013.

The Board also announced the appointment of Andrew McCree as a Non-Executive Director and chairman of the Remuneration Committee. Andrew has over 35 years' experience of energy and environmental technology and consulting businesses, with an extensive knowledge of technologies and markets.  Rohan Courtney resigned from his role as a Non-Executive Director with effect from 30 September 2014. 

Outlook

2015 will be an important year for the Group as we drive through the changes to our delivery structure to support the market facing teams in the most effective way. Our goal is to create a balanced and efficient business that is set up to serve current and future customers with the most sophisticated of specialist engineering solutions designed for use in critical applications. 

In so doing, the business will be well positioned to deliver positive results for our investors and other stakeholders. 

Our market presence has delivered a strong pipeline of qualified potential sales opportunities with new and repeat customers, which provides good visibility of both near term and future business prospects. 

In line with our stated growth strategy, the Board will also consider selective acquisition opportunities where these are consistent with the specialist engineering approach in the markets we serve, and bring near-term value to the Group and its shareholders. 

 

Richard King        

Chairman



 

Chief Executive Officer's Review

Corac Group is fast establishing itself as a specialist engineering company with complementary activity in technical services and equipment support. 

Whilst the business has been evolving over the last 12 months the Group has maintained a strong trading performance, with increases in revenues and reduction in adjusted EBITDA losses. Group revenues for the year ended 31 December 2014 increased by 12% to £21.7m (2013: £19.3m). Operating losses reduced by 10% to £3.9m (2013: £4.3m) and the adjusted EBITDA loss reduced by 27% to £2.1m (2013: 2.9m).

During the year we have continued to both deliver and build upon the following strategic priorities: 

•           to work closely with and maximise return from an established global customer base;

•           to develop and seek commercial applications for new technologies that drive long-term value in changing business environments; and

•           to seek selective bolt-on acquisitions to accelerate both product and commercial organic opportunities.

We therefore launched a Group-wide initiative that started with the reorganisation of our business development into two separate, market-focused sector teams for Aerospace & Defence and Energy & Process Industries. This reorganisation is part of a wider effort to transition the Group into a truly market-led organisation, where engineering is closely aligned with the customers' needs and priorities.  

Harmonising the engineering and delivery capability will follow this year so that sector teams are able to apply the full breadth of the Group's engineered products, technical services and support to their markets.

I believe that these initiatives allow us to present the strengths of our business more effectively. They expose the full scope of our portfolio across our core markets with greater clarity. They eliminate overlap, enable focused management and give more visibility of the underlying performance of the Group. The strength and quality of our order book and opportunities in the Group's pipeline as we entered the new financial year are early indicators of progress in this regard, and position the Group for future growth. 

Strategy

Our strategy is to grow the group significantly, deliver profit and value to shareholders by exploiting its position as a specialist engineering systems provider. 

Last year we announced our intention to forge even closer connections with the markets in which we have established strong positions with major players. We stand out as a specialist engineering and technical services company, combining a history going back over 75 years with technically advanced and innovative systems, services and long-term support that can transform our customers' operations.

Our focus is to exploit what we see as an expanding market opportunity for high technology systems that can be relied upon to deliver value to their users over long service lives. To maximise the impact of these business opportunities, we intend to increase the scope of what we do for our clients and expand our reach to work with a wider range of clients and in additional markets.

We will continue to consider acquisition opportunities that deliver the following benefits for the Group:

•           to broaden the Group's service portfolio;

•           to extend its geographic reach; and

•           to take the Group into adjacent markets where there is proven demand for its services.

Markets

Corac has always excelled at critical applications in technologically and operationally complex environments, and so Aerospace & Defence and Energy & Process Industries are natural outlets for the Group's solutions. These markets face pressure to modernise, add value and innovate, and they have increasingly come to recognise the contribution of Corac's technologies and support to their long-term success.

Our focus in these areas has done much to enhance our client contact and sales prospects. We made senior business development appointments and invested in account management, sales process and back office customer relationship management. We also made better use of local representatives in remote locations to extend our geographic reach. Our business development team is now engaged at the highest levels of their respective industries, participating in networking and lobbying activities and delivering more insight and influence at the development stage of programmes. 

Investment in market research and analysis continues as we progress to a market-led sales strategy, where detailed understanding of our customers' challenges means we can work closely with them to anticipate future needs and be a step ahead in developing specialist engineering applications.

The markets in which we operate have experienced significant change this year and we are now better equipped and better balanced as a business to face these challenges. In fact, this environment should open up additional opportunities for the Group to create high value propositions that help our clients in the successful delivery of their programmes and systems. 

The fall in oil prices and pressure on upstream markets generally, has led us to re-examine our exposure to the oil sector and concentrate on projects where the technological advantages of our projects can be maximised. Technologies developed through the turbomachinery development projects continue to deliver value, such as the steam turbo-expander with Spirax Sarco Limited. The particular applications and all the lessons learned from downhole (DGC) and In-pipe (IGC) developments have been retained. As well as feeding into other projects, there is the option to restart these initiatives should market conditions and sentiment change.

Defence budgets generally are under increasing pressure, yet major platforms such as submarine capability have long-term commitments and are continuing to receive funding. Our alignment to these programmes provides some measure of insulation from general budget challenges and also provides good visibility of future income streams. Elsewhere, such as in South East Asia, national submarine programmes are a recognised response to security threats in the region and we have become established as valued contributors on those platforms. We work through industrial prime contractors in these markets and benefit from their global presence, as demonstrated by additional export orders reported in the year.

Delivery Structure

Last year we undertook a review to identify the synergies between our operating companies, and the benefits to be gained by acting as a more focused, market facing organisation. We discovered a range of good practices, plus significant overlap and under-developed capability. We decided to become more focused in structuring activities to concentrate effort for best effect.

We will migrate to a group-wide structure that recognises the various operating characteristics of different types of delivery and works to be excellent in each case. We will channel investment towards the competitive differentiation of the full range of services, with staff and facility development to maintain the highest levels of quality and reliability expected by our customers.

We now go forward with what I believe is a much simpler and more compelling set of propositions for Corac to help our clients. A harmonised operations team will co-ordinate the delivery across different products and services.

•           A specialist engineering capability to develop and deliver innovative bespoke systems and equipment to support the successful execution of client programmes

•           A technical services team that works with clients on technical solution options, with design and development capability to deliver the practical implementation of their programmes and initiatives

•           A managed services team that provides experienced, specialist practitioners to work on client sites, either to provide specialist capability or to support installed equipment for long-term, successful operation

Connecting market drivers, opportunities and delivery capability in this way is expected to drive the business forward to work under a more devolved and market-led business model. This will result in best-in-class engineering centres that are technically excellent and financially efficient. The corporate team provides strategy and direction from the centre, with market and operational teams executing and delivering locally.

Geographies

Following the announcement made on 3 March 2015 regarding the planned exit from the Slough facility, the Company will operate from two main geographical locations in the UK with other locations at which supporting activities are carried out.

Outside the UK, account management teams are actively linked to major organisations across both market sectors. This has led those teams to engage directly with global prime contractors, and also with their customer base. 

In addition, representative agents have been appointed to operate locally across the sectors in their country or region. They have been tasked with building the Corac presence, reputation and future growth prospects in their respective territories.

People

The Group is now, more than ever, a reflection of the skills, dedication and talents of our team. As we move forward to focus on key markets, experience and credibility in a sector is key, and reflected in recent commercial and business development appointments. 

Our capability in specialist engineering, technical and managed services allows expertise in each area to add value across the full breadth of our customer community. We believe that this approach broadens opportunities for our staff and makes Corac a stimulating and satisfying place to work. 

Renaming

Corac has changed dramatically in the last few years. We have diversified from the original compressor technologies into a wide range of specialised engineering programmes, and believe it is now appropriate to re-examine our overall branding and presentation to the markets we serve. It is proposed that the company name is changed to reflect our new positioning as we communicate with the market, customers and other stakeholders.

With support from our shareholders to be confirmed by a vote at the forthcoming AGM, the Company intends to be re-registered this summer as TP Group plc. This name reflects the fundamentals of what we do and what we are - technology and partnership. 

Some of the specific, product-related branding will be retained where it has lasting recognition in certain sectors, and the full Group capability will be lined up behind them to provide even greater depth of resources than those sectors could access in the past.

Summary

Underpinning the Group's strategy is our ambition to reach profitability at the earliest opportunity and build the business for long-term performance and value. 

We will move forward on three fronts to achieve this, with:

•           close links to customers and markets to ensure we are positioned to meet their engineering challenges;

•           specialist engineering capability to provide technically excellent systems from a financially efficient organisation; and

•           selected acquisitions that are consistent with our approach and add near-term value to the Group.

We have made significant progress during 2014, particularly in restructuring our market facing teams and finding a good acquisition fit in Shaw Sheet Metal. We will drive value from these achievements in the coming year whilst completing the transition of our engineering capabilities into a harmonised and effective team. With these actions driving us forward, we look forward to another successful year.

 

Phil Cartmell

Chief Executive Officer



 

Financial and Business Review 

Overview

During 2014 the focus was on the quality and control of the business to improve financial performance, reduce risk and maximise return on investment and assets with a view to providing good visibility of the future business growth. The key headline activities that underline the progress in year were:

•           Improvement at Group level with 12% revenue growth, 10% improvement in operating loss and 27% reduction in adjusted EBITDA losses 

•           ACI grew revenues by 9% and 13% growth in adjusted EBITDA as well as securing a very strong closing order book of £14.3m through high value contracts secured in year

•           Signed Heads of Terms agreement to generate commercial revenue from Corac's micro turbine and compressor technology in a renewable energy application that were subsequently converted into Corac Energy Technologies' (CET) first commercial contract as announced 24 March 2015

•           Exited from R&D projects with oil and gas customers that reduced spend in year and carried potentially long term and unpredictable cash drain

•           Significant improvement in the HTT engineering business in Manchester to deliver 19% growth in revenue and 29% increase in adjusted EBITDA 

•           Closing cash ended slightly higher than market expectations at £9.6m

Financial Review

2014 was an encouraging year for Corac Group, with improvement in both financial and operational measures.

 


2014

2013

Group KPIs 

£M

£M




Revenue

21.7

19.3

Operating loss

(3.9)

(4.3)

Adjusted EBITDA loss

(2.1)

(2.9)

Net Cash

9.6

13.7

Closing order book

17.3

14.2

 

Overall, revenues grew by 12% to £21.7m (2013: £19.3m) in a year that demonstrated the acquisitions from 2012 are now a core part of the Group's underlying solid growth performance, whilst revenues within CET were impacted by the decision to exit from loss making oil and gas projects with its DGC and IGC technologies.  

We have historically reported segment results by three business units. Going forward, following the re-organisation of our business, we will report segment results against the market sectors we serve, Aerospace & Defence and Energy & Process Industries. 

The Group continued its drive to reduce losses, achieving a 10% improvement in operating loss to £3.9m (2013: £4.3m) and a 27% improvement in adjusted EBITDA loss. Good results were returned by all three businesses with central costs remaining flat after adjusting for exceptional items and acquisition related costs. These included termination costs (£0.3m) and costs related to the acquisition of Shaw Sheet Metal Company Ltd (£0.1m).

 


2014

2013


Adjusted EBITDA

£M

£M

Change





ACI

2.6

2.3

13%

CET

(3.1)

(3.5)

11%

HTT

0.4

0.3

33%

Central costs*

(2.0)

(2.0)

0%

Adjusted EBITDA loss

(2.1)

(2.9)

27%

 

* excludes exceptional items and acquisition-related costs

 

Cash

Cash burn reduced as a result of the focus within the business on tighter financial control and also, significantly, the move away from legacy loss making R&D projects. This resulted in a reduction in  spend on R&D to £2.4m (2013: £3.0m) within CET, as the focus switched to customer funded contracts. The Group will continue to invest in commercially viable projects, but at a lower level to support further reduction in cash burn.

At the year end the elevated levels of trade receivables comprised mostly of current debt, the majority of which was not overdue and has subsequently been received. In addition, amounts due from contract customers were also elevated but reflect the nature of long term contracts with major blue chip and government customers where milestone payments are spread over the duration of the contract. Trade payables were also elevated, but as with the trade receivable and contract balances reflect the high level of activity at the year end.

Fluctuations in working capital during the year are driven by the nature of long term contracts across the Group. The first half negative cash outflow of £4.8m (which also included the £0.6m of fees paid in January 2014 associated with the prior year fund raise) was balanced by a greater inflow in the second half as forecast by the business. We also benefitted from the initial payments on large contracts secured in the last quarter.

Movements like these in working capital are part of the nature of our business, and are not indicative of poor contracts or issues on recoverability of cash.

Overall, the Group's cash balance finished at £9.6m, significantly better than market expectations. The Directors believe that the Group has sufficient cash funds to support its underlying business needs.  

Acquisition

Following the year end, the Company acquired the business and assets of Shaw Sheet Metal Co. Ltd ("SSM"). The purchase was completed for a cash consideration of £0.8m, funded using the Group's cash (£9.6m at 31 December 2014) with an expected payback of less than 3 years. SSM operates from two facilities in the Greater Manchester area and is active in laser cutting and specialist sheet metal fabrication, and will be integrated into the Group's other activities in the region.

The acquisition supports Corac's evolution as a specialist engineering company and is expected to generate further business growth.  It integrates added-value fabrication with specialist engineering services for our established energy and petrochemical processing customers. Beyond this, it allows us to open new opportunities for high-integrity fabricated products in Corac's other markets, particularly in the Aerospace & Defence sector, and gain new customers through SSM's established relationships.

Order Book

The Group order book also grew as a result of the impressive contracts won within the Aerospace & Defence sector and finished at £17.3m compared to £14.2m in 2013 which represented a growth of 22%. This order book not only sets up the group with more than one third of the 2015 market forecasted revenue, it also provides greater visibility for 2016 and beyond, giving confidence in the underlying performance in this part of our business.

Tax

The overall income tax credit has decreased to £0.2m (2013: £0.8m) which reflects changes in R&D tax credit claims and deferred tax. The Group has previously claimed for R&D tax credits under the SME R&D scheme in respect of CET's R&D activities however it now claims under the large company RDEC scheme. The deferred tax value is driven by changes in the underlying rate of corporation tax..

Exceptional and acquisition related costs

During the year the Group incurred one off costs which included termination costs (£0.3m) and costs related to the acquisition of Shaw Sheet Metal Company Ltd (£0.1m).

Principal Risks and Uncertainties 

There are a number of risks and uncertainties that could have a material impact on the Group. Risks are reviewed by the Board and appropriate processes and controls have been implemented in respect of monitoring and control.  

Principal business risks are as follows: 

•           Commercial contracts for customers may be large and long term, with risks relating to contract delivery and performance, including cost. Internal procedures are designed to ensure that risks are managed on a contract-by-contract basis so that contracts are successfully delivered to customers on time, on budget and to the highest quality specification.

•           The Group has a niche position in the naval defence market supplying specialist equipment to a relatively narrow customer base and the main external market risks relate to political and socio-economic factors.

•           Although the Group is now moving into the commercial exploitation phase of its core compression technology, concept design and development continues which carries a risk of failure to deliver within budgeted cost and timetable or with adequate operating performance and reliability. The Group has assembled a broad based team with experience of managing, developing technologies and project management and has secured appropriate external resources.

•           General economic conditions and uncertainties on potential partners' plans for capital expenditure and may affect both the scale and timing of new contracts.

•           Technological change and the potential of competitors to develop alternative solutions may threaten the business. In key areas of technology, the Group has registered patents and continues to monitor relevant third party patents. In addition, developed know-how across the Group provides an effective barrier to competition.

•           It is important to retain key employees in the development of the Group's technologies and execution of its business plan. The Group seeks to avoid over dependence upon specific employees and formally documents key areas. The Group seeks to retain staff and encourage their long-term commitment by providing competitive remuneration packages.

The principal financial risk is the management of cash during the development phase for the Group including:

•           Liquidity risk - the Group seeks to manage financial risk by ensuring that sufficient liquidity is available to meet foreseeable needs and by investing cash assets safely and profitably. The Group's policy throughout the year has been to achieve this objective through management's day-to-day involvement in business decisions rather than setting maximum or minimum liquidity ratios. Group policies are aimed at maximising liquidity and return on cash through the use of short and medium term bank deposits;

•           Foreign exchange risk - the Group undertakes contracts denominated in foreign currencies (principally Euro and US dollar) leading to an exposure in exchange rate movements for both sales and purchase transactions. Where they cannot be offset, forward exchange contracts are utilised to minimise the risk.

•           Credit risk - the Group's principal financial assets are cash and trade receivables. The credit risk associated with cash is managed by ensuring that counterparties have high credit ratings assigned by international credit rating agencies. 

•           Interest rate risk - the Group's policy throughout the year has been to place funds on deposit directly with an approved list of UK banks.

Going concern

The Directors are satisfied that, notwithstanding economic uncertainty, the Group has adequate resources to continue in business for the foreseeable future (being a minimum period of 12 months), and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors have considered forecasts that cover a period of greater than twelve months from the date of the approval of these financial statements. The forecasts take into account the Group's existing cash resources, and include consideration of certain downside scenarios, in particular in relation to CET where there is inherently greater uncertainty as to the future cash flows of that business. The Directors have also considered the mitigating actions available to them, including the ability of management to make certain reductions to the Group's discretionary expenditure if required.

Infrastructure

As announced 3 March 2015, post the year end, the directors' made the decision to optimise production facilities and engineering capability in line with the evolving business needs. As a result the Group will exit from the Slough Technology Centre exercising an early break clause in the lease. 

Heavy engineering and fabrication will continue to take place at the Dukinfield plant and the newly acquired Shaw Sheet Metal facility in Oldham. Portsmouth will become the base for the Group's high technology build, test and assembly functions. The Group's technology design and development team will be relocated to a new site just outside London, where the design team will continue to explore new applications for Corac's technology and intellectual property. 

The exit from the Slough site is planned for the second quarter of 2015 and current estimates anticipate there will be an exceptional charge of £0.9m offset by £0.5m benefits delivered in 2015. From 2016, the full year impact of savings is expected to reduce overheads by approximately £0.7m.

It is anticipated that the exit will enable the business to benefit from future cost synergies, whilst ensuring it has a sustainable operational footprint, capable of supporting a number of ongoing organic growth opportunities.



 

Business Review

Atmosphere Control International ("ACI")

ACI strengthened its senior management with the appointment of Simon Kings as Managing Director, taking over from Steve Cassidy who retired on 31 July 2014 after almost 25 years with the business. Simon is a former Naval Commodore, with 30 years' service both at sea and in a number of key MoD posts, including Head of Maritime Capability, and was the Senior Responsible Owner of the UK's shipbuilding programme, ship sensors and weapons.

This key appointment supports the approach to be more closely connected to our customers in order to identify new business opportunities. This is part of a new approach to the business sectors, to introduce new relationships through Simon's naval background and in-service experience. This has already returned value to the business, demonstrated by the increasing order book. 

ACI had a positive year, achieving strong revenue growth through the extension of contracts within the existing customer base. There was important new work and organic growth with export customers which supported the underlying growth in margins and the continuity of contracts within the existing customer base.

            

KPIs

2014

£m

2013

£m

Revenue

11.7

10.7

Operating profit

1.7

1.5

Adjusted EBITDA

2.6

2.3

Margin

22%

21%

Closing order book

14.3

5.9

 

Work completed

•           Supply of atmosphere systems for the UK Astute class submarine programme  and equipment support for these systems

•           Air filtration and HVAC systems support for the UK surface fleet.

•           Successfully delivered to an existing Asian customer a regenerative CO2 Scrubber system as part of their current boat programme.

•           Received funding to go ahead with pilot trials for a new, more efficient, CO2 scrubber system for the next generation submarine class for our Asian customer.

•           Delivered a pre-production regenerative CO2 scrubber for another Asian customer for trials purposes with high prospect of a follow-on order for additional 4 production units.

New Contracts 

•           Received orders for five Combined Oxygen Generation Systems for the UK submarine fleet, including a training plant, confirming the Navy's future commitment to our equipment.

•           Received an order for preliminary design work for complete atmosphere control equipment for the replacement of Vanguard class submarines. This should lead to further significant design and build work for many years.

•           One order from BAE Systems Marine Ltd. for two boat sets under the Royal Navy's Astute Class submarine build programme.

•           The second order is from the Ministry of Defence for an additional two systems for in-service submarine refit, and one for shore-based training. 

Corac Energy Technologies ("CET")

In 2014, CET achieved notable success in its renewable energy activities, but faced up to difficult market conditions in upstream oil and gas markets.

            

KPIs

2014

£m

2013

£m

Revenue

0.9

1.0

Operating loss

(3.5)

(4.0)

Adjusted EBITDA loss

(3.1)

(3.5)

R&D spend

2.4

3.0

Closing order book

0.5

2.9

 

The company experienced a challenging second half, but has emerged leaner and better equipped to build commercial value from its technology assets. Developments were heavily affected by falling energy prices, and the resulting constraints on investment in projects in their primary market. This coincided with technical and economic reviews of our development programmes.

We undertook a full evaluation of our compressor projects and the pipeline of future opportunities. As a result, reviews were concluded with our partners involved in developing downhole compression and in-pipe applications and agreed to cease projects in the United States, Italy and Saudi Arabia. The development team continued the design work on the platform compressor and is working with BP to position this in their project portfolio and make decisions on the next steps.

The review and exit from the three projects resulted in lower revenue than was anticipated at the start of the year, however revenues remained stable compared to the previous year at £0.9m (2013: £1.0m) which mostly came through commercial income from projects in renewable energy. The exit from these contracts also impacted the order book which fell to £0.5m at year end (2013: £2.9m). Reduced activity in the upstream market did, however, result in a reduction in R&D investment associated with those projects and thereby reduced operating losses to £3.5m (2013: £4.0m) and adjusted EBITDA losses by 11% to £3.1m (2013: 3.5m).

During the year, the company reached a landmark position in its renewable energy development programme. Using a design concept based upon Corac's core intellectual property, a development project that began in 2012 built a micro-turbine expander/generator in partnership with Spirax Sarco Engineering plc and extensively tested it at their UK location. The success of these performance and endurance tests led to a Heads of Terms agreement on future manufacturing, sales and support for the micro-turbine as a new product in their range, for sale to their global markets. As announced 24 March 2015, the Heads of Terms have now been converted into a commercial contract that will support future annual income streams in excess of £0.5m from a combination of consultancy & support services alongside future royalties from global sales.

A similar project is in progress to generate electricity from reductions in gas power in the main distribution network. There are thousands of pressure reducing stations in the UK, and tens of thousands in the United States, so in those two markets alone there is a major opportunity to generate power at a facility where energy would otherwise have been lost to the environment.

Working on controlled developments with clear business cases, supported by well-funded partners is the way forward. This began to have an effect in 2014 with R&D spend reducing by 20% to £2.4m (2013: £3.0m). We expect this trend to continue as CET focuses on commercially viable activity that can make a positive contribution to the overall performance of the Group.

Our aim is to reverse the CET cash outflows seen in 2014 driven by reduced R&D spend, and a focus on commercial contracts that make positive contributions alongside the financial benefits outlined earlier associated with the exit from the current Slough facility. 



 

Hunt Thermal Technologies ("HTT")

The business operates with three primary business streams:

•           large-scale shell and tube heat exchangers

•           bespoke extended surface heat exchangers

•           equipment support on-site at major installations

Underlying these primary business streams are industry leading thermal and mechanical design services. HTT has competitive advantage in using specialist materials to fabricate large systems, often as multiple units, that meet the most stringent integrity and safety testing regimes. During the year the business successfully completed a major U stamp external audit alongside ISO 14000 implementation progress, with full accreditation received in February 2015.

HTT has built upon the management changes of 2013 to grow revenue and convert this into an improved operating profit.  Revenue grew by almost 19% to £9.1m (2013: £7.6m).

 

                

KPIs

2014

£m

2013

£m

Revenue

9.1

7.6

Operating profit

0.3

0.1

Adjusted EBITDA

0.4

0.3

Margin

4%

4%

Closing order book

2.5

5.4

 

The operational focus at HTT was to drive the delivery of margins on contracted work, through improvements in commercial and shop floor processes, specifically improving on time deliveries. As a result, operating profits of £0.3m doubled compared to £0.1m last year delivering an improved adjusted EBITDA of £0.4m (2013: £0.3m). This improvement is expected to continue with the recent acquisition of Shaw Sheet Metal Ltd. which will bring additional parts of the production process in-house and improve margins further.

The traditional main product, shell and tube, typically sells into downstream petrochemical plants in the UK and abroad and within this business stream two major contracts were completed, with a combined contract value of £2.8m. These demonstrated large scale capability in one contract with four heat exchanger units each over 10 metres long and weighing more than 30 tonnes, and the other highlighted HTT's advanced metallurgy capability required to design and build systems to operate in extremely high temperatures.

In 2014 we experienced an increase in the call for extended surface heat exchangers. These have smaller unit value and shorter delivery times, yet carry the potential for higher margins.

The increase in extended surface heat exchangers is seen as a positive move as they carry the potential for additional engineering and fabrication services in a wider range of applications that will also utilise the engineering capabilities of the recently acquired Shaw Sheet Metal Ltd. They are used in sectors like waste energy recovery, power generation and food and beverage production. In these sectors, HTT is able to offer greater added value, through its thermal and mechanical engineering services. Typical applications delivered in 2014 include:

·      Steam to air pre-heater for an energy-from-waste site in Europe.

·      Plume abatement coils - specialised heat exchangers that work in the cooling towers of power stations and contribute to the reduction of the visible plume rising from the towers 

The equipment support and maintenance business stream also grew alongside the other business streams benefiting from two annual maintenance shutdowns where our support teams based at Alloa and Dukinfield provided critical heat exchanger refurbishment support, at times providing 24 hour cover.

The closing order book was £2.5m (2013: £5.4m) all of which is expected to be completed in the first half of 2015. The HTT business typically runs with approximately three months of order cover however there are occasions when larger individual orders are secured which push the order book higher as was the case at the end of last year when the business secured two large shell and tube contracts totalling £2.8m.

 

 

Mark Crawford                                                  

Chief Financial Officer                 



 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2014



Group



2014

2013







£000

£000





Revenue


21,693

19,330

Cost of sales


(17,554)

(15,858)





Gross profit


4,139

3,472





Distribution costs


(233)

(219)

Research and development costs


(928)

(1,049)

Administrative expenses


(6,905)

(6,544)





Operating loss


(3,927)

(4,340)

Finance income


34

4





Loss before income tax


(3,893)

(4,336)

Income tax credit


172

780





Total comprehensive loss for the year attributable to shareholders


(3,721)

(3,556)





Loss per share expressed in pence per share




Basic and diluted loss per share


(0.88)

(1.1)

 

All results relate to continuing activities.



 

Consolidated and Parent Company Statement of Financial Position

For the year ended 31 December 2014



Group

Parent Company



2014

2013

2014

2013



£000

£000

£000

£000

ASSETS






Non-current assets 






Goodwill


4,953

4,953

-

-

Other intangible assets


9,923

10,739

-

-

Property, plant  and equipment 


1,007

1,365

3

3

Investments 


-

-

19,047

16,147

Amounts owed by EBT


-

-

74

167



15,883

17,057

19,124

16,317

Current assets 






Inventories


59

221

-

-

Trade and other receivables 


7,215

4,024

1,959

683

Taxation recoverable


249

266

-

-

Cash and cash equivalents 


9,569

13,749

3,605

10,537



17,092

18,260

5,564

11,220

Total assets


32,975

35,317

24,688

27,537

LIABILITIES 






Current liabilities 






Trade and other payables 


(7,606)

(5,550)

(345)

(1,287)

Taxation payable


-

(51)

-

-



(7,606)

(5,601)

(345)

(1,287)

Non-current liabilities






Deferred taxation


(1,985)

(2,148)

-

-

Provisions


(1,355)

(1,862)

-

-



(3,340)

(4,010)

-

-

Total liabilities


(10,946)

(9,611)

(345)

(1,287)

Net assets 


22,029

25,706

24,343

26,250

EQUITY 






Share capital 


42,246

42,246

42,246

42,246

Share premium 


13,769

13,769

13,769

13,769

Capital redemption reserve 


575

575

575

575

Own shares held by the EBT


(561)

(561)

-

-

Share-based payments reserve 


1,138

1,094

1,044

1,000

Retained earnings 


(35,138)

(31,417)

(33,291)

(31,340)

Total equity 


22,029

25,706

24,343

26,250

 



 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2014

 


Group

 




Capital

Own shares

Share-based




Share

Share

redemption

held by

payments

Retained



capital

premium

reserve

EBT

reserve

earnings

Total


£000

£000

£000

£000

£000

£000

£000









Balance at 

1 January 2013

30,788

575

(551)

1,026

18,360









Issue of shares

11,458

-

(10)

-

11,448

IFRS 2 share option charge

-

-

-

68

68

Transactions with owners

11,458

-

-

(10)

68

-

11,516

Total comprehensive loss

-

-

-

-

-

(3,556)

(3,556)

Share issue costs

-

-

-

-

-

(614)

(614)









Balance at 

31 December 2013

42,246

575

(561)

1,094

25,706









IFRS 2 share option charge

-

-

-

44

44

Transactions with owners

-

-

-

-

44

-

44

Total comprehensive loss

-

-

-

-

-

(3,721)

(3,721)

Balance at 

31 December 2014

42,246

13,769

575

(561)

1,138

(35,138)

22,029

 



 

Parent Company Statement of Changes in Equity

For the year ended 31 December 2014

 


Parent Company

 




Capital

Share-based




Share

Share

redemption

payments

Retained



Capital

premium

reserve

reserve

earnings

Total


£000

£000

£000

£000

£000

£000








Balance at 

1 January 2013

30,788

13,769

575

932

(29,119)

16,945








Issue of shares

11,458

-

-

-

-

11,458

IFRS 2 share option charge

-

-

-

68

-

68

Transactions with owners

11,458

-

-

68

-

11,526

Total Comprehensive Loss

-

-

-

-

(1,607)

(1,607)

Share issue costs

-

-

-

-

(614)

(614)








Balance at 

31 December 2013

42,246

13,769

575

1,000

(31,340)

26,250








IFRS 2 share option charge

-

-

-

44

-

44

Transactions with owners

-

-

-

44

-

44

Total comprehensive loss

-

-

-

-

(1,951)

(1,951)

Balance at 

31 December 2014

42,246

13,769

575

1,044

(33,291)

24,343

 



 

Consolidated and Parent Company Statement of Cash Flows

For the year ended 31 December 2014



Group

Parent Company



2014

2013

2014

2013



 £000 

 £000 

 £000 

 £000 

Operating activities






Loss before income tax


(3,893)

(4,336)

(2,427)

(2,053)

Adjustments for:






Depreciation


523

505

1

1

Amortisation


816

816

-

-

Impairment of other intangible assets


-

76

-

-

Finance income


(34)

(4)

(34)

(4)

Share-based payment expense


44

68

40

41

Increase in impairment on loan to the EBT


-

-

93

31

Decrease/(Increase) in inventories


162

(177)

-

-

(Increase)/Decrease in trade and other receivables


(3,191)

(685)

(800)

1,029

Increase/(Decrease) in trade and other payables


2,682

(1,785)

(328)

(996)

(Decrease)/Increase in provisions


(507)

1,150

-

(150)



(3,398)

(4,372)

(3,455)

(2,101)

Income tax (paid)/received


(25)

686

-

700

Net cash used in operating activities


(3,423)

(3,686)

(3,455)

(1,401)

Investing activities

Transfer of property plant and equipment to subsidiary


-

-

-

1,590

Interest received


34

4

34

4

Purchase of property, plant and equipment


(165)

(42)

(1)

(4)

Long term loan to subsidiary


-

-

(2,896)

(5,210)

Net cash used in investing activities


(131)

(38)

(2,863)

(3,620)

Financing activities






Proceeds from issue of shares 


-

10,844

-

10,844

Purchase of own shares


-

(10)

-

-

Expenses of issue of shares 


(614)

-

(614)

-

Repayment of hire purchase liabilities


(12)

(12)

-

-

Net cash from financing activities


(626)

10,822

(614)

10,844

Net (decrease)/ increase in cash equivalents


(4,180)

7,098

(6,932)

5,823

Cash and cash equivalents at beginning of year


13,749

6,651

10,537

4,714







Cash and cash equivalents at end of year


9,569

13,749

3,605

10,537

 



 

Notes to the Preliminary Announcement

 

1. Basis of preparation

 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.  The Company expects to publish full financial statements that comply with IFRSs in May 2015.

 

This financial information does not constitute the company's statutory accounts for the years ended 31 December 2013 or 2014, but is derived from those accounts.  Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the company's annual general meeting.  The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498 (2) or (3) Companies Act 2006.

 

2. Going concern

 

The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future (being a minimum period of 12 months), and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors have considered forecasts that cover a period of greater than twelve months from the date of the approval of these financial statements. The forecasts take into account the Group's existing cash resources, and include consideration of certain downside scenarios, in particular in relation to CET where there is inherently greater uncertainty as to the future cash flows of that business. The Directors have also considered the mitigating actions available to them, including the ability of management to make certain reductions to the Group's discretionary expenditure if required.

 

3.  Segmental Reporting

 

Business segments

For management purposes, the Group is treated as three business units comprising:

·      Atmosphere Control International - activities include the provision of air purification equipment for submarines including oxygen/hydrogen generation and purification, air handling and distribution systems.

·      Corac Energy Technologies - specialises in the research and development of technologies in the field of gas compression and the design and manufacture of high speed motors and generators using proprietary permanent magnetic rotor and oil-less bearings

·      Hunt Thermal Technologies - activities include the manufacture of heat exchange equipment used in the heating and cooling of large scale industrial processes.

Central unallocated costs include plc costs and other Group operational costs that are not charged out to the operating companies.

The following table presents group revenue, profit and certain net asset information for each business segment.


2014

2013


£000

 £000 

Revenue



Atmosphere Control International

11,675

10,667

Corac Energy Technologies

937

1,049

Hunt Thermal Technologies

9,081

7,614

Group

21,693

19,330




Segment Operating Result



Atmosphere Control International

1,661

1,510

Corac Energy Technologies

(3,497)

(3,954)

Hunt Thermal Technologies

286

141

Central unallocated costs

(2,377)

(2,037)

Group

(3,927)

(4,340)




Loss from operations

(3,927)

(4,340)

Finance income

34

4

Loss before income tax

(3,893)

(4,336)

Income tax credit

172

780

Loss after tax

(3,721)

(3,556)




Segment net assets / (liabilities)



Atmosphere Control International

13,604

12,270

Corac Energy Technologies

(1,113)

2,411

Hunt Thermal Technologies

2,747

2,407

Central

6,791

8,618

Total net assets

22,029

25,706

 

Geographical segments

The Group's operations are solely in the United Kingdom although some of the Group's revenues are to customers outside the UK. All segment assets are located in the UK. The Group's revenues from external customers are analysed into the following geographical areas:


2014

2013


 £000 

 £000 

Geographical analysis - revenue



United Kingdom

16,370

14,070

Rest of European Union

1,160

2,142

North America

675

656

Asia

1,678

796

Middle East

1,484

403

Rest of the World

326

1,263




Total revenue

21,693

19,330

       

 

Information about major customers

Revenue includes sales from customers who contributed 10% or more to the Group's revenue:


2014

2013


 £000 

 £000 

ACI



                Customer 1

4,174

4,298

                Customer 2

4,642

3,087




Total revenue

8,816

7,385

 

Results by Segment

 


Atmosphere Control International

Corac Energy Technologies

Hunt Thermal Technologies

Central unallocated costs

Group


 £000 

 £000 

 £000 

 £000 

 £000 







2014






Segment operating result

1,661

(3,497)

286

(2,377)

(3,927)

Depreciation, amortisation and impairment

813

423

102

1

1,339

Acquisition-related costs

-

-

-

110

110

Exceptional items

152

-

-

170

322

Share based payments 

-

4

-

40

44

Adjusted EBITDA1

2,626

(3,070)

388

(2,056)

(2,112)







Segment operating result

1,510

(3,954)

141

(2,037)

(4,340)

Depreciation, amortisation and impairment

814

423

159

1

1,397

Share based payments 

-

27

-

41

68

Adjusted EBITDA1

2,324

(3,504)

300

(1,995)

(2,875)







1    Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation and impairment of acquired intangible assets and any other acquisition-related charges, share based payment charges and exceptional items. Acquisition-related costs of £110,000 (2013: £nil) relate to the acquisition of Shaw Sheet Metal Company Ltd. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence. Exceptional items in the current year comprise termination costs of £322,000 (2013: £nil).



 

4.   Operating Loss

The Group operating loss for the year is stated after charging the following:


Group


2014

2013


£000

£000

Staff costs



Wages and salaries

7,779

7,006

Social security costs

827

768

Other pension costs

457

384


9,063

8,158




Impairment of intangible assets

-

76

Amortisation of intangible assets

816

816

Depreciation of property, plant & equipment

523

505

Operating lease expense - rent

775

776

Auditor's remuneration  



Audit fees



Fees payable for the audit  of the Parent Company and consolidated financial    statements

21

 

21

 

Fees payable for the audit of the subsidiary companies

37

36


58

57

Non-audit fees



Fees payable for statutory and regulatory services

2

6

Corporate finance services

11

21

Tax Compliance services

17

13

Total auditor remuneration  

88

97

Included in wages and salaries is a total expense of share-based payments of £44,000 (2013: £68,000), all of which arises from transactions accounted for as equity-settled share-based payment transactions.

Staff numbers

The average number of employees, including Directors, employed by the Group during the year was as follows:


Group


2014

2013


Number

Number




Engineering   

119

120

Business Development

10

12

Administration   

42

38


171

170

Pension costs

The Group operates a money purchase and a group stakeholder pension scheme. The assets of these schemes are held separately from those of the Group in separately administered funds. The pension charge represents contributions payable by the Group to these funds and amounted to £457,000 (2013: £384,000). No contributions were prepaid or overdue at 31 December 2014 (2013: £nil). The nature of the Group's scheme is such that there is no possibility of a surplus or deficiency in funding arising from past service.

 

5.   Taxation

Credit to consolidated income statement


Group


2014

2013


£000

£000

Corporation tax over prior year provision

40

-

Corporation tax - R&D (charge)/credit



Current year - SME R&D tax credit

-

266

Current year - RDEC tax charge

(50)

-

Prior year under/(over) provision

19

(13)


9

253




Deferred tax

163

527


172

780

The Group has claimed R&D tax credits under both the SME Scheme and the RDEC Scheme.

The tax credit for the period is lower than the standard rate of corporation tax in the UK of 21.5% (2013: 23.25%).  The differences are explained as follows:


Group


2014

2013


£000

£000

Loss on ordinary activities before taxation

3,893

4,336

Loss on ordinary activities multiplied by standard rate of corporation tax in the UK of 21.5% (2013: 23.25%)

837

1,008

Effect of:



Expenses not deductible for tax purposes

(135)

(166)

Depreciation in excess of capital allowances

(58)

(82)

Share -based payments

(10)

(16)

R&D enhanced relief

54

250

Surrender of tax losses for R&D credit

(32)

(296)

Trading losses carried forward

(867)

(454)

Utilisation of losses brought forward

64

49

Other short term timing differences

147

(27)

Deferred taxation

163

527

Current year R&D tax charge

(50)

-

Adjustment in respect of prior years

59

(13)

Tax credit for the year

172

780

At the balance sheet date, the Group has approximately £19.9m (2013: £16.5m) of unrelieved tax losses for offset against future taxable profit. A deferred tax asset of £0.1m (2013: £0.1m) has been recognised in respect of £0.6m (2013: £0.5m) of such losses. No deferred tax asset has been recognised in respect of the remaining £19.3m (2013: £16.0m), due to the uncertainty of timing of the generation of future taxable profits.

 

6.   Loss per Share

The calculation of basic loss per share for the year ended 31 December 2014 is based upon a loss after tax of £3,721,000 (2013: £3,556,000) and a weighted average number of shares of 420,857,956 (2013: 310,164,087). The weighted average number of shares has been reduced by the weighted average number of shares held by the Employee Benefit Trust.

The issue of additional shares on exercise of employee share options would decrease the basic loss per share and there is therefore no dilutive effect of employee share options.

 

7.   Cash and Cash Equivalents


Group

Parent Company


2014

2013

2014

2013


£000

£000

£000

£000

Cash and cash equivalents

9,569

13,749

3,605

10,537

The funds were placed on floating interest rate deposit as follows:



Group

Parent Company



2014

2013

2014

2013


£000

£000

£000

£000

Cash at bank and in hand


9,569

13,749

3,605

10,537

 

8.   Subsequent Events

The following events have taken place between the year end and the signing of these accounts:

Acquisition of Shaw Sheet Metal Company Ltd

On 30 January 2014 the Group, through its subsidiary Hunt Thermal Technologies Ltd acquired 100% of the issued share capital of Shaw Sheet Metal Company Ltd for a consideration of £776,000 paid in cash from the Group's existing cash resources.  The company specialises in laser cutting and sheet metal fabrication. Payback of the investment is expected within three years.  Provisional estimates of the identifiable assets acquired and liabilities assumed are:


Book Value

Fair Value


(Provisional)

(Provisional)


£000

£000

Property plant & equipment

105

303

Identifiable intangible assets

-

487

Financial assets

295

310

Financial liabilities

(250)

(243)

Deferred taxation

-

(81)

Total identifiable assets

150

776

Goodwill arising on consolidation


-

Cash consideration


776

The difference between the book values and fair values relates to the revaluation of certain plant and equipment and the fair value of acquired intangible assets.  The acquired intangible assets relate to technical know-how, customer relationships and trade names acquired.

Rationalisation of Infrastructure

As announced on 3 March 2015, the Group is to streamline its operations by optimising its production and engineering capabilities at its existing Portsmouth and greater Manchester facilities.  The Slough Technology Centre is to close with the Group's technology design and development team being relocated to a new facility.

 

 

 

Notice of Annual General Meeting

The Annual General Meeting of Corac Group Plc will be held at 10.30 a.m on 21 May 2015 at Warnford Court, 29 Throgmorton Street, London EC2N 2AT