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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Lakehouse | LSE:LAKE | London | Ordinary Share | GB00BSKS1M86 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 35.00 | 35.00 | 37.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMLAKE
RNS Number : 9018U
Lakehouse plc
24 January 2017
Lakehouse plc
Full year results for the year ended 30 September 2016
Restructured business positions Group for turn-around transition period
Bob Holt, Chairman of Lakehouse, the support services group, commented:
"FY16 has been a challenging year for Lakehouse but one we believe will prove to be transformational, having focused on reviewing the strategy of the Group, stabilising operational performance with a view to improvement and controlling costs at every level, whilst retaining a high quality of client service.
We have taken tough decisions to exit some business streams within Property Services alongside bringing in a new management team to stabilise operations in the remainder of the division and reset the dial. The core businesses of Compliance, Energy Services and Construction are well established, excellent businesses who have a clear vision of what needs to be delivered.
Looking forward, our strategy will be evolutionary but we are confident that, with our newly stabilised Group, the long term fundamentals of the commercial markets in which we operate will provide us opportunities to deliver consistent performance, grow sustainably and to return value to shareholders.
The new year has started satisfactorily and current trading is in line with management expectations."
Financial overview:
As previously reported, revenue and profitability principally reflect the under-performance of the Property Services division, formerly Regeneration, together with the impact of carbon pricing reductions within Energy Services, offset in part by the successful contribution of recent acquisitions
Ø Underlying(2) revenues of GBP305.8m (2015: GBP336.6m); statutory revenues of GBP333.8m (2015: GBP340.2m)
Ø Underlying EBITA(1) of GBP10.9m (2015: GBP22.2m), representing a margin of 3.6% (2015: 6.6%)
Ø Underlying(2) profit before tax of GBP9.9m (2015: GBP21.6m)
Ø Statutory operating loss of GBP31.7m (2015: profit GBP4.6m)
Ø Statutory loss before tax of GBP33.3m (2015: profit of GBP3.2m)
Ø Underlying(2) basic earnings per share of 5.2p (2015: 13.7p); statutory basic loss per share of 18.6p (2015: earnings per share 1.9p)
Ø Underlying operating cash conversion(3) of 121%; statutory operating cash outflow 171%
Ø Businesses acquired since IPO have been integrated well and contributed GBP60.0m of revenues and GBP5.5m of underlying EBITA year on year
Ø New contract wins in Q4 within Energy Services and Compliance, securing recurring annual revenues of GBP15m per annum
Ø Group order book of GBP543m (2015:GBP595m) reflects caution in bidding within Property Services; however value of frameworks increased from GBP1.3bn to GBP1.6bn in the year
Ø Forward visibility of revenues were 87% of forecast revenue for FY17 at November 2016 (like for like 2015: 77%)
Ø Net debt of GBP20.6m (2015: net cash GBP6.6m)
Ø Board proposes a final dividend of 0.5p per share, taking the total to 1.5p for the year (2015: 1.9p)
Outcome of the operating review:
Ø Operating Profit includes GBP12.2m of Exceptional and Other Items, reflecting management action taken to address the challenges faced by the Group
Ø In addition, a GBP19.2m Exceptional non-cash goodwill and intangible assets impairment charge has been incurred, predominantly in relation to impairment of goodwill in Property Services
Strategic progress:
Ø Reviews of operations and strategy complete and actions taken to enable the Group to move forward in a stronger and more focused state
Ø Substantially new operational management team in place within Property Services
Enquiries
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Bob Holt, Executive Chairman Camarco
Telephone: 07778 798816 Tom Huddart
Jeremy Simpson, Chief Financial Telephone: 020
Officer 3757 4992
Telephone: 01708 758 800
Notes to editors:
Lakehouse plc is an asset and energy support services group that constructs, improves, maintains and provides services to homes, schools, public and commercial buildings with a focus on the UK public sector and regulated markets. The Group was founded in 1988 and is headquartered in Romford, Essex. It employs 2,250 staff from 33 offices throughout the UK. We deliver services through four divisions:
-- Compliance, which delivers a range of regulated and legislated services, primarily to local authority and housing association clients
-- Energy Services, which provides domestic insulation, energy efficiency products and advice, primarily for social housing landlords, the "Big Six" key independent energy companies and Scottish Government
-- Property Services, which provides planned refurbishment, repair and maintenance and responsive maintenance for social housing providers
-- Construction, which delivers extension, refurbishment, rationalisation and new build works, primarily in the education market and with a particular focus on schools
Definitions
1. EBITA is earnings before interest, tax and amortisation of acquisition intangibles. Underlying EBITA is defined as operating profit before deduction of Exceptional and Other Items, as outlined in note 3 and on the face of the Statement of Comprehensive Income. Underlying EBITA is the same as "Operating profit before exceptional and other items" on the face of the Statement of Comprehensive Income, but used as terminology in light of being a key performance measurement for management in the Group.
2. As set out in the income statement, other underlying numbers are stated before Exceptional and Other Items (discussed further in note 3). In the case of underlying revenue, this excludes amounts from businesses being exited and, for the current year, revenues associated with the Smart Meter mobilisation period. Underlying profit after tax and underlying earnings per share are net of an imputed tax charge.
3. Underlying operating cash conversion is operating cash flow, plus the cash impact of Exceptional and Other Items (discussed further in notes 3 and 12), as a percentage of underlying EBITA.
Executive Chairman's Statement
Introduction
I was appointed to the Board in July 2016, following the earlier departure of a number of executive and non-executive directors and with the business facing a number of operational challenges. Since my appointment, I have looked to structure the business so as to continue delivering a quality service to our customers whilst building a platform for more consistent performance and sustainable growth. I am pleased to report that the management of the Group have embraced the changes implemented and I believe that the market outlook for the range of services the Group provides is strong.
It would be remiss of me not to pay tribute to Steve Rawlings, the founder of Lakehouse, who sadly passed away in July 2016. Steve was the architect for the great progress achieved by Lakehouse in its formative years. I should also like to thank those directors since departed from the Board for their contribution to the Group during a difficult period.
My initial focus has been on reviewing the strategy of the Group and stabilising operational performance with a view to improvement and controlling costs at every level. We are focusing the businesses on markets where we can operate effectively and creating an environment where entrepreneurship is allowed to prosper. Importantly, I believe a small central function is right for a group like Lakehouse, where we rely on our leaders in the Group's Divisions to take decisions and drive the business forward on a day to day basis.
Our decision to withdraw from self-delivered externals work within Property Services was clear, as we had fallen short operationally at a number of levels. Following this restructuring, I felt that renaming what was known as the "Regeneration" Division as "Property Services" better reflected the services we will be offering moving forward. We have brought in new management who understand the core risks in this market, from pricing, through operational management to controls and processes and they are doing an excellent job in returning Property Services to an acceptable level of performance. This will, however, take time and we took a very cautious approach to bidding for new work in the second half of the year in this Division as we sought to stabilise operations. We are therefore setting modest expectations in the near term.
We are fortunate that the other three Divisions, Compliance, Energy Services and Construction have excellent business models, underpinned by strong and experienced management and with a strong pipeline of opportunity.
Whilst the Group's order book has declined from GBP595m to GBP543m this reflects our focus on managing risk within Property Services. Our value of frameworks however increased from GBP1.3bn to GBP1.6bn which we expect to provide a strong workflow in the future.
Trading performance
The trading performance for the year was disappointing with underlying EBITA of GBP10.9m (2015: GBP22.2m) on underlying revenues of GBP305.8m (2015:GBP336.6m, which includes GBP28.4m of revenues from businesses being exited, which are reported within Other Items in the 2016 accounts). Reported total Group statutory revenues were GBP333.8m (2015: GBP340.2m) with an operating loss of GBP31.7m (2015: GBP4.6m profit), reflecting a number of significant one-off cost items in the year.
Businesses acquired since IPO have been integrated well and contributed GBP60.0m of revenues and GBP5.5m of underlying EBITA year on year. This includes the results of Aaron Heating Services and Precision Lift Services which were acquired towards the start of this financial year for a total consideration of GBP16.8 million.
As part of the operational review, the Board took the decision that it was not sustainable to continue with the provision of directly delivered externals work within the Property Services division and this business is being exited. The GBP6.6m of pre-tax contract losses from this business are significant and reported within Other Items in the 2016 accounts. The comparative figure of GBP2.5m for FY15 relates to the previous exit from our former Development business.
We also felt it important to highlight the significant GBP2.5m investment we have made in smart metering within Energy Services, predominantly training its workforce to the highest standard of regulation. We see our smart metering business providing significant growth opportunities in the medium term.
Inevitably with the level of change we have experienced this year, we have seen one-off events that led to GBP3.1m of net Exceptional Items. We also recognised a GBP19.2m impairment against goodwill and intangible assets, predominantly in relation to the Property Services business, in light of its financial performance.
I have stressed to the team that the New Year marks a transition from the old world to the new and I want us to now look forward collectively with confidence in the future.
Lakehouse has undergone a number of changes during 2016 and I am pleased that we have come out of a very challenging period as a strong and focused Group. I have stressed to the Group's leadership that our overriding objective has to be to deliver on our promises, financially as a public listed company, but without compromising on protecting our employees or falling short in levels of customer service. If we do this, it will give our invested stakeholders - clients, customers, communities, financial partners, people, shareholders and suppliers - the confidence to support the Group and participate in its future growth and success.
Strategy
Lakehouse has an established strategy and although FY16 has been challenging for the Group, significant elements of our strategy have been very successful and I am satisfied that the future strategy for the Group will be one based on evolution rather than radical change. However, it is critical that everyone within our business appreciates the importance of delivering on our promises as without this passion and commitment, any strategy counts for nothing.
I have been particularly pleased with the performance of the businesses we have brought into the Group through acquisition, which, with our existing operations, have allowed us to build market-leading Compliance and Energy Services divisions. The services offered by these businesses are complementary and offer considerable growth potential through increased penetration of our extensive client base together with the geographic opportunities offered by a national footprint.
In our Construction division, we have a business that is very focused on its core education and public buildings markets and is highly experienced in delivery. This means that we can earn excellent returns on capital, whilst remaining cost competitive for clients.
It is important that we deliver on the strategy for these three Divisions as much of the narrative concerning the Group in the past year has surrounded Property Services. This Division has had its historical issues but under new and capable management and with modest expectations for growth, I am confident we can focus on the improvements in operational delivery that will allow this business to thrive in the future and deliver value for all stakeholders.
The Group has a cohesive structure, with leading positions in key markets, based on delivering a core range of services where there is sustainable demand. We will look to build on these strengths in developing the Group moving forward.
Dividend
The Board is looking to adopt a progressive dividend policy which recognises shareholder need whilst retaining sufficient capital for future growth. The Board propose a final dividend of 0.5p per share for the year which, subject to shareholder approval, will be paid on 6 April 2017 to shareholders on the register at 10 March 2017. This represents a total dividend of 1.5p per share for the year (2015: 1.9p).
People
We continue to invest in our people, giving them the skills they need to deliver for our customers and advance their own careers. Without doubt this has been a difficult period for all stakeholders and I want to thank everyone in Lakehouse for their hard work, commitment and contribution in difficult circumstances.
Outlook
The Board has now been settled and management have taken action to address the problems faced by Property Services, which will comprise a far smaller part of the Group in the future. The Board looks forward to working together with its staff and wider stakeholders to build on the significant potential we have across the Group to deliver future growth and returns for our investors.
Bob Holt
Executive Chairman
Operational Review
Financial performance
Underlying revenue was 9.2% lower at GBP305.8m (2015: GBP336.6m) and underlying EBITA declined by 50.9% to GBP10.9m from GBP22.2m in the prior year, representing a margin of 3.6% (2015: 6.6%). The self-delivered externals businesses being exited, which are reported in Other Items in FY16, made a GBP2.4m profit on revenues of GBP28.4m for the comparative period in FY15, when they were included within the underlying results. The decline in underlying EBITA over and above this reflected a GBP8.4m fall in Property Services, together with the GBP3.0m year on year impact from a reduction in carbon pricing for energy efficiency measures. The results included a full year contribution from Orchard Energy (acquired in July 2015) and Sure Maintenance (acquired in September 2015), together with 11 months from Aaron Heating Services and nine months from Precision Lift Services. Year on year, the full year impact of these acquisitions contributed an estimated GBP60.0m in revenues and GBP5.5m of underlying EBITA.
Statutory revenue was 1.9% lower at GBP333.8m (2015: GBP340.2m). Operating losses were GBP31.7m (2015: GBP4.6m operating profit), after Exceptional and Other Items, being Other Items of GBP9.1m (2015: GBP2.5m), net Exceptional Items of GBP3.1m (collectively totalling GBP12.2m), impairment of goodwill and intangible assets acquired of GBP19.2m (2015: GBPnil) and amortisation of acquisition intangibles of GBP11.2m (2015: GBP6.5m), which are discussed further in the Financial Review below and Note 3.
Underlying profit before tax was GBP9.9m, down 54.2% (2015: GBP21.6m) and underlying profit after tax was GBP8.2m (2015: GBP17.5m), resulting in underlying basic earnings per share of 5.2p (2015: 13.7p). Loss before tax was GBP33.3m (2015: profit before tax GBP3.2m) and loss after tax was GBP29.3m (2015: profit after tax GBP2.4m), resulting in basic losses per share of 18.6p (2015: earnings of 1.9p).
Looking forward
During the final quarter of the year the Group had a successful period of contract awards. In our Energy Services and Compliance businesses we secured recurring revenues of GBP15m per annum and our contracting businesses were awarded GBP20m of new work. We are pleased to have visibility over 87% of forecast revenues for the current year (as at November 2016), compared to 77% at the same point in FY16.
The Group's order book stood at GBP543m at 30 September 2016, a 9% reduction on the prior year of GBP595m, which reflects our focus on managing risk within Property Services. Our value of frameworks however increased from GBP1.3bm to GBP1.6bn which, with a sales pipeline of GBP3.2bn (2015: GBP2.8bn), we expect to provide a strong workflow in the future.
As we discuss below, our Compliance, Energy Services and Construction Divisions are all excellent businesses that have performed very well in difficult circumstances. We are confident that under new leadership, improved operational disciplines and selective bidding, the Property Services business will recover and prosper.
The Board recognises the Group has performed below investor expectations this year, however our managers and staff have continued to listen to clients, win work, deliver excellent service and pay our supply chain promptly. This shows the resilience of the Group and the Board would like to register its thanks to staff, clients, suppliers and our financial partners for their ongoing support and commitment in the year.
Compliance
(29% of Group Underlying Revenue)
Compliance: year ending 30 September 2016 2015 Change ------------------------------------- ---- ----- ------- Revenue (GBPm) 91.0 36.6 148.5% Underlying EBITA (GBPm) 6.2 4.5 36.8% Underlying EBITA margin 6.8% 12.3% -550ppt ------------------------------------- ---- ----- -------
The Compliance Division comprises planned and responsive maintenance, installation and repair services predominantly to local authority and housing association clients, in the areas of gas, fire and electrical, water and air hygiene and lifts. These services cover clients' social housing and public building assets, as well as industrial and commercial properties. The Division is seeing the benefits of a wider pool of clients and mandatory services that provide significant future opportunities.
Overall, revenue increased by 149% to GBP91.0m (2015: GBP36.6m), with the contribution from acquisitions an estimated GBP56.1m. EBITA increased 37% at GBP6.2m (2015: GBP4.5m), resulting in an underlying EBITA margin of 6.8%, down by 550 ppt, reflecting the expected mix impact from our new acquisitions and unexpected performance challenges in our Allied Protection (Fire) business, discussed further below. We expanded our Gas Compliance services with the acquisitions of Sure Maintenance in September 2015 and Aaron Heating Services in November 2015. Precision Lift Services was acquired in December 2015 to complete the range of services offered by the Division. Integration is a key focus of the Group and the acquired businesses are all performing well, contributing approximately GBP4.2m of EBITA year on year. We are seeing the benefit of operational improvements and procurement savings in the enlarged Division, which we expect will see margins improve towards our long term target of high single to low double digit percentages.
Gas Compliance
The three Gas Compliance businesses (Sure, Aaron and K&T) make up some three quarters of the Division and had a strong year, albeit with differing characteristics. K&T has historically operated within the dense metropolitan areas of London, while Sure and Aaron worked in the wider geographic regions of the North West and East Anglia respectively. K&T has enjoyed higher margins as a result of higher engineer efficiency and procurement leverage, which we have carried over into Sure and Aaron with considerable success during 2016. We have seen an improvement in margins during the year in both businesses, arising mainly from procurement savings; keener materials pricing has also allowed us to secure profitable work that these businesses would have historically struggled to win.
We are seeing the benefits of the extensive geography served by the three Gas Compliance businesses and expect future growth to come from filling in territorial gaps and providing adjacent services to clients. We also anticipate future margin improvement through better fleet utilisation, benchmarking engineer performance and seeking to provide a best in class service.
During the year, Gas Compliance secured a number of notable wins. These included gas servicing and maintenance for Brighton and Hove City Council over five years to September 2020; gas servicing and maintenance and a separate heating installation contract for Havebury Housing Partnership over three years to May 2019 and mechanical and electrical maintenance over three years for the Salvation Army. We also re-secured a key contract installation and maintenance framework for Flagship Housing (to 2018).
Other Compliance
Our other Compliance businesses represent the balance of the Division and comprise Allied Protection (Fire), H2O Nationwide (Air & Water) and Precision Lift Services (Lifts).
H2O Nationwide performed very well as we succeeded in developing a social housing client base, which was core to our strategy on acquiring the business. During the year, H2O Nationwide won a key framework for the South East Consortium which enabled them to secure works for social housing client Moat Homes; we also secured a three year water hygiene monitoring contract for the London Borough of Redbridge in the period. H2O Nationwide has historically been focused on industrial and commercial clients and management performed extremely well in mobilising the new social housing contracts, whilst preserving client service.
Precision Lift Services made a slow start under our ownership as a small number of new key contracts were delayed but the business saw significant improvement towards the end of the year as these contracts were brought on and mobilised. Precision Lift Services was successful in securing contracts with Brentwood Borough Council, the London Borough of Wandsworth, South Essex Homes and Southend Borough Council during the year. We remain optimistic with regards to the future opportunities for this business.
Allied Protection had a poor year, with a GBP2m adverse movement in profits. This was largely due to the non-repeat of significant volumes of project work delivered in 2015 as two key clients unexpectedly withdrew budgets. We saw some recovery in this work towards the end of the year, albeit less than expected and in the absence of sufficient volume, margins were very weak. Given the nature of the work involved, our service and repair business has historically been operated at a lower margin and a focus on operational improvement saw a pleasing improvement in the year. We tend to secure project work where the Group has a long term service and repair contract, so this is an important development for Allied's future. We were successful in securing several key contracts including a five year emergency lighting and fire alarm testing contract for London Borough of Hammersmith and Fulham, a six year contract for Guinness Partnership Ltd providing fire safety equipment and maintenance and a contract providing door set installation for Canterbury City Council over three years to January 2018. These contracts both provide scale for further margin improvement and opportunity to build the projects pipeline among a broader base of major clients.
The other Compliance businesses have significant opportunities to cross-sell within the client base of our Gas Compliance companies and we saw considerable success to that effect during the year including a five year fire alarm and emergency lighting systems for the London Borough of Kensington Chelsea and fire compartmentation works for Wandle Housing, both K&T Heating clients. In addition K&T Heating introduced H2O Nationwide and Lakehouse to Arun District Council, resulting in successful tenders for works including a renewables and roofing scheme and plant room Legionella testing. Precision Lift Services is already carrying out projects for Notting Hill Housing and London Borough of Tower Hamlets, both existing clients of K&T Heating and Allied Protection. Additionally the other Compliance businesses are beginning to secure a broader geographic client base, with Allied winning a 5 year GBP1m contract with Accord Housing (Nottingham) and H2O securing a four year contract with Alliance Homes via the West Works framework.
Looking forward
Compliance now includes 108 frameworks, up considerably from 56 at 30 September 2015, with an aggregate potential value of GBP447m (30 September 2015: GBP88m). The Compliance Divisional board is now well established and we believe we have created a market leading business, offering a range of specialist services which frequently have important regulatory drivers for the Group's clients. This is an area where the Group has considerable expertise and capability and with the benefits of increasing scale and broadening range of complimentary and adjacent services, the Board expects the Compliance Division to deliver attractive returns, relative to the Group average, over time.
Energy Services
(22% of Group Underlying Revenue)
Energy Services: year ending 30 September 2016 2015 Change ------------------------------------------ ----- ----- ------- Revenue (GBPm) 67.4 68.0 -0.9% Underlying EBITA (GBPm) 8.0 9.6 -16.1% Underlying EBITA margin 11.9% 14.1% -220ppt ------------------------------------------ ----- ----- -------
Energy Services provides a range of energy efficiency services for social housing and private homes through its Everwarm subsidiary. Everwarm also uses these services to deliver carbon emissions savings for energy companies, enabling them to meet their legislative targets. In addition, the division offers renewable technologies, smart metering services through Providor and energy brokerage and consultancy through Orchard Energy, to customers throughout the UK.
Revenue decreased by 0.9% to GBP67.4m (2015: GBP68.0m), with the year on year benefit of the Orchard Energy acquisition approximately GBP3.9m. EBITA decreased by 16.1% to GBP8.0m (2015: GBP9.6m), with the Orchard Energy acquisition contributing approximately GBP1.3m year on year. This resulted in an underlying EBITA margin of 11.9%, which was 220 ppt lower than last year, the major factor being the impact of carbon pricing as discussed below. In addition, we closed the Energy South business during the year, which was managed by the Property Services team, but reported segmentally as part of Energy Services in 2015 when we reported revenues of GBP7.3m and profits of GBP1.1m within underlying items.
Everwarm
We saw, as expected, 2016 evolving as a transitional year prior to the new Energy Company Obligation ("ECO") policy commencement in April 2017. As the current ECO policy moved into its final phase we saw a stabilisation in carbon prices, with the results and margins in Everwarm in line with management expectations and resulting in a GBP3.0m decrease in underlying EBITA year on year.
The Group holds a one-third share in the Warmworks joint venture, along with Changeworks and the Energy Saving Trust. Warmworks operates the HEEPS programme, which is now fully mobilised and performing very well. We discussed at the half year that whilst volumes have been growing steadily within Warmworks, referrals to Everwarm were behind expectations. These pleasingly picked up during the second half and we expect further improvement in 2017.
Providor Metering
We were delighted to announce in August 2016, the award of a GBP37m contract with Scottish Power for the installation of domestic smart meters across Northern Scotland, Wales and North West England. The Group expects to install more than 450,000 meters over the course of the contract's five year term. We have also secured smart meter contracts with Utilita, Ovo and E, the former two also mobilising during the year. Total mobilisation costs of GBP2.5m have been reported as an Other Item in the Consolidated Statement of Comprehensive Income, as highlighted in August. This has been a complicated logistics process and the Providor team have done a terrific job in achieving above average levels of operational performance under our new contracts.
Disappointingly, Providor's major customer acquired two of its competitors during the year, bringing this capability in house. This led to the unexpected cancellation of anticipated work, with the most profitable activities moving first. We have taken a provision against our exit from those activities and other non-profitable work streams within Exceptional and Other items, discussed in the Financial Review and Note 3.
In light of such a rapid transformation for Providor, the Group expects FY17 to be one of consolidation for its metering activities as we seek to deliver top quartile performance for our clients on our smart metering contracts. The Group remains encouraged by demand in the metering market and expects this to increase as the challenges faced by utility companies intensify.
Orchard Energy
Orchard Energy, our energy procurement and advisory services business, had an excellent year with monthly contract brokerage signings exceeding GBP0.7m per month on average during the second half of the year. We continue to grow these activities, in addition to our advisory and water utility services offerings, which we expect to help drive growth in 2017, along with geographic opportunities.
Divisional contract position
In addition to the wins in Providor and Orchard discussed above, Energy Services was awarded places on frameworks during the year including the provision of energy efficiency measures for the London Housing Consortium and energy saving measures and insulation systems for Luton Borough Council (both to 2020). Other notable wins in the year include a four year framework with the Scottish Government to provide non-domestic energy works to December 2019, a solid wall project for Fife Council (Kirkcaldy) and bathroom replacement works for Aberdeenshire.
Looking forward
Energy Services is now on 36 frameworks, up from 32 at 30 September 2015, with an aggregate value of GBP427m (30 September 2015: GBP294m).
As previously reported, in relation to bidding insulation contracts, the energy efficiency sector is exceptionally complex. Everwarm has class-leading levels of compliance in submitting claims, which is fundamental to earning an adequate return, an understanding which we do not see among all market participants. Notwithstanding a slow pace of evolution, we continue to believe that the English market represents a significant future opportunity for the Division, given the Group's long standing customer relationships and experience in delivering these services, not least Scottish Government's Home Energy Efficiency Programme for Scotland ("HEEPS").
Energy Services delivers specialist works and has high levels of expertise in complex markets and should over time, deliver a consistently high return. Given the transitional nature of the market and mobilisation of smart metering services, we expect 2017 to be one of consolidation for the Division. We remain optimistic about the future prospects for Energy Services and expect opportunities to arise from the new ECO transitional period, prior to the full programme in 2018, together with the deregulation of the water market from April 2017. This, with our continuing involvement in the UK domestic smart meter installation programme, underpins a sizeable proportion of Divisional revenue growth from 2018.
Property Services
(32% of Group Underlying Revenue)
Property Services: year ending 30 September 2016 2015 Change -------------------------------------------- ---- ----- ------- Revenue (GBPm) 98.1 161.7 -39.3% Underlying EBITA (GBPm) 0.8 10.5 -92.6% Underlying EBITA margin 0.8% 6.5% -570ppt -------------------------------------------- ---- ----- -------
Property Services provides planned and responsive maintenance services for social housing clients, which are mainly local authorities and housing associations. The Division operates through two businesses:
-- Lakehouse Property Services (formerly Regeneration
South): operates in London and the South East;
-- Foster Property Maintenance ("Foster" - formerly
Regeneration East): operates in East Anglia
At the half year, we highlighted operational challenges in our directly delivered externals business managing growth in this work, in particular inventory, staff and site contractors. This business comprised two departments - Roofing and Energy South (managed by the Lakehouse Property Services team, but reported in 2015 segmentally as part of Energy Services). In May 2016, we instigated an operational improvement programme, focused on managing a balanced position of risk and return on capital. The conclusion was to close both departments as the risks of delivering this work directly were too great and, following the operational review, it was determined by the Board to exit these operations. The total losses on the contracts within these businesses are expected to amount to GBP6.6m pre-tax (on revenues of GBP25.3m), which have been excluded from the underlying result and reported as Other Items.
Property Services revenue was GBP98.1m in the year, down GBP63.6m (39.3%). Businesses being exited and reported within Other Items in 2016, recorded revenues of GBP21.1m within underlying revenues in the comparative period. Underlying EBITA declined by GBP9.7m (92.6%) to GBP0.8m, resulting in an underlying EBITA margin of 0.8%, which was 570 ppt lower than last year. Businesses being exited in 2016 made profits of GBP1.3m in the comparative period, where they were reported within the underlying results. The balance of GBP8.4m related to a deterioration in both performance and the trading environment during the year.
As reported in February 2016, the 1% rent cap imposed on social landlords has had a significant impact on our market as clients sought to cut costs in response. This has taken a number of forms - some budgets simply were cut, procurement under frameworks delayed and certain clients sought to fragment frameworks in the expectation that multiple suppliers on individual lots would improve competitiveness. We have responded to this change in market dynamics by challenging the return on capital at a client level and withdrawing from contracts that are not economic. We have also taken the opportunity to review our staff base, particularly in parts of the business where performance was not adequate. With new leadership in this Division and a focus on those relationships where we can earn an acceptable return, we expect to move forward as a smaller, leaner and more focused business.
Lakehouse Property Services
As a result of difficult market conditions, as well as the previously reported operational issues, Lakehouse Property Services has had an exceptionally difficult year. The Board has taken action to address this by withdrawing from some activities and restructuring the cost base. The focus of the businesses is to deliver high levels of client service whilst ensuring returns are acceptable through strong operational management and we are very encouraged by the approach taken by the new management team.
The major contributors to the reduction in revenues and margins in the year arose from the previously announced cessation of the Hackney contract in 2015, together with lower revenues from Camden. Camden re-procured their planned maintenance framework in multiple lots during the year, seeking cost savings by directly managing a wide and diverse supply chain themselves. We were successful in securing positions on half of the lots but future work will be subject to successfully tendering individual works; when seeking to participate, we will ensure this offers an adequate balance of risk and return for the business.
Notwithstanding a reduction in bidding activity in the year, Lakehouse Property Services nevertheless had a number of good wins, including a place on Fusion21's national kitchen and bathroom installation works framework to March 2020 and places on the major works framework for the London Boroughs of Southwark (until 2019), Newham (until 2021) and Barking and Dagenham (until 2021) and separate internal and external frameworks for the Vale of Aylesbury Housing Trust. We also won a significant number of contracts including fire safety works for the London Borough of Ealing, two one-year contracts with Wandsworth Council for window and roof renewals and an external refurbishment contract for two social housing blocks with Portsmouth City Council.
Foster
Foster has faced very different challenges from Lakehouse Property Services this year. Operational performance and client service remained good through the year and Foster was successful in re-securing its position on the key Eastern Procurement framework for responsive repairs and voids to May 2020, planned internal works to September 2019 and roofing works to May 2020, which was important for its future prospects. However, a number of Eastern Procurement members drastically cut or withdrew budgets and the mix of remaining work resulted in Foster seeing a significant fall in profitability during the year.
Whilst it was important for Foster to re-secure its place on the Eastern Procurement Framework for planned maintenance throughout the East Anglia region, the management team undertook an active drive to diversify the service offering to existing and new clients in the region. Refurbishing student accommodation has been, and continues to be, a productive work stream, with future works at the University of East Anglia being negotiated off the back of the scheme undertaken this year. Similar works have been undertaken in Cambridge this year at Tripos Court for Flagship Housing Association on behalf of Cambridge University. There are a large number of military bases in the region that will provide future opportunities, such as Bodney Army Camp where we won a programme of major upgrading works in the year and will continue to be targeted.
Foster sought also to grow into the Midlands and to expand its responsive maintenance business. Neither performed as we had hoped, mainly due to a lack of scale. Recognising this at an early stage, we reorganised the Midlands business by absorbing ongoing contracts into existing departments and have become more selective in bidding within the region. We are reviewing all commercial options to improve returns from responsive maintenance.
During the year Foster Property Services was awarded places on ten important frameworks, including Efficiency East Midlands (to February 2020), South East Consortium (to 2020), Fusion 21 and the United Lincolnshire NHS trust (to 2018). In addition, Foster secured several significant works contracts including Central Bedfordshire Kitchen and Bathroom refurbishment programme and the design and construction of the Wade House housing block for Havebury Housing Partnership.
As part of the operational review of Property Services during the year, we identified a number of areas for potential improvement in Foster, especially with regard to materials and cash management. We also concluded there was a need to simplify the management structure and now have a smaller, ambitious team to take the business forward.
We conducted a review of the value of capitalised goodwill attaching to Foster at year end. In light of current trading performance and the re-basing of the profitability achievable on key frameworks, such as the Eastern Procurement Framework, we concluded that the forecast level of profitability in this business does not support continued recognition of the goodwill balance. We therefore wrote down the entire goodwill balance of GBP17.4m, details of which are outlined below in the Financial Review and notes 3 and 7.
Looking forward
We are being highly selective in taking on further work in Property Services, which is evidenced in the reduction in the Group's total order book. Property Services is now on 71 frameworks, up against 53 at 30 September 2015 but with an aggregate value of GBP370m (down against 30 September 2015: GBP540m).
With the significant number of challenges and management changes within the year it is reassuring that we have managed to secure positions on some key frameworks within our core operating regions providing future opportunities with clients who have money to spend. Our new management teams are focused on building on Lakehouse's reputation for winning and delivering works successfully for our clients and managing an adequate balance of risk and return. Property Services is a Division which under the right leadership, provides the Group with strong customer relationships and good forward visibility on revenues. Looking forward, the Board believes that this is a business which under new management, strong operational control and selective bidding, should be capable of delivering a consistent mid to high single digit return.
Construction
(17% of Group Underlying Revenue)
Construction: year ending 30 September 2016 2015 Change --------------------------------------- ---- ---- ------ Revenue (GBPm) 52.1 73.4 -29.1% Underlying EBITA (GBPm) 3.6 4.8 -25.5% Underlying EBITA margin 6.9% 6.6% 30ppt --------------------------------------- ---- ---- ------
Construction is a public buildings services business that delivers extension, refurbishment, rationalisation and new build works, primarily in the education market, with a particular focus on schools.
Revenue decreased by 29.1% to GBP52.1m (2015: GBP73.4m). EBITA decreased by 25.5% to GBP3.6m (2015: GBP4.8m). This resulted in an underlying EBITA margin of 6.9%, which was 30 ppt higher than in the prior year, reflecting an improved contract mix and tight commercial management of our contracts.
We discussed at the half year that factors under the control of our clients had caused a reduction in revenues and this had a similar impact for the full year. The principal cause has been a move from single stage to two stage procurement. The difference between the two contractual structures means that we will be awarded a contract but can then face a significant period before mobilising as a result of the need to address a number of project considerations, which can include planning, review of design / affordability and project-specific matters such as rights of way, land purchase and environmental factors. This is good from a risk management perspective, but very frustrating when reporting performance as we saw 17 projects delayed by these factors. We estimate that this directly reduced our revenues by one third in the year, with a consequential impact on EBITA and cash. These projects are all live or will be mobilized in the first half of the new financial year and as a consequence, we head into 2017 with a very strong order book.
The Construction team has a disciplined approach to bidding and contract management, with a strong and long-serving workforce who have an excellent grasp of commercial considerations on their projects. This allowed us to earn excellent margins of 6.9% on our contracts during the year and to see few of the commercial disputes that we have experienced in Property Services.
In light of the opportunities that have presented themselves, our typical project range has moved upwards in the year, with works secured having an average value of GBP3.5m to GBP4m (2015: GBP2.5m to GBP3.0m). We had significant success in securing major frameworks in the year, including Essex County Council's four-year school expansion programme to April 2020 and Kent County Council's education, public buildings and commercial framework to September 2019. Key contract wins in the year included:
-- Orchardside School Enfield - design and construct
of a new specialist GBP7.5m teaching facility for
challenged pupils.
-- Brentside High School - design and construct of a
new GBP8.6m classroom block and dining facility procured
under the LCP framework.
-- Gloucester Archive Building - design and construct
of a new GBP2.0m bespoke archiving facility for the
local authority
-- Isleworth and Sion Boys School - design and construct
of a new GBP5.2m teaching block and science laboratories
for Hounslow Council
-- Lindon Farm - design and construct of a GBP4.2m living
accommodation block for adults with autism for Surrey
CC.
Looking forward
The number of frameworks declined to 29 from 40 as at 30 September 2015, reflecting our plans as we sought to focus on key clients where we can build predictability into the business model and to bid selectively on projects where we can earn an adequate return on capital. The frameworks had an aggregate value of GBP353m (30 September 2015: GBP420m), representing a 16% higher average value per framework. These frameworks provide more than enough opportunity for the Construction Division to continue to grow, whilst maintaining an acceptable rate of return. We remain excited about the prospects for Construction in a market with strong underlying growth fundamentals.
Financial review
The Operational Review provides a detailed overview of our trading performance during the year. This Financial Review therefore covers other aspects of the Statement of Comprehensive Income, Statement of Financial Position and Cash Flows.
Trading overview
Group underlying revenue in the year decreased by 9.2% to GBP305.8m (2015: GBP336.6m), principally reflecting the year on year impact of businesses being exited and the wider decline in Property Services, partially offset by the impact of acquisitions. Underlying EBITA decreased to GBP10.9m (2015: GBP22.2m). We exclude Exceptional and Other Items in calculating underlying EBITA to provide a more appropriate view of underlying operating performance. Underlying EBITA margins fell to 3.6% in the year against 6.6% in FY15. The decline in underlying EBITA reflected a GBP9.7m fall in Property Services (discussed in the Property Services review above), together with the GBP3.0m year on year impact from a reduction in carbon pricing for energy efficiency measures. As discussed in the Operational Review above, the results for the year included a full year contribution from acquisitions of an estimated GBP60.0m in revenues and GBP5.5m of underlying EBITA.
Operating expenses increased 37.1% to GBP32.6m in the year (2015: GBP23.7m) reflecting the new businesses acquired in the past 18 months. Central costs increased by 6.5% to GBP7.7m (2015: GBP7.2m), reflecting the full year costs of being a listed company, together with higher costs associated with the infrastructure required to accommodate recent acquisitions. As part of the operational review conducted in May 2016, we concluded that a number of services historically delivered centrally would be best managed at a divisional level. This led to more than 100 staff either being redeployed or exiting the Group, as we seek to maintain a lean central structure going forward.
We reported an operating loss of GBP31.7m (2015: profit of GBP4.6m) in light of the charges for Exceptional and Other Items discussed below. The loss after tax was GBP29.3m (2015: profit of GBP2.4m).
Exceptional and Other Items, including amortisation of acquisition intangibles
Exceptional and Other Items in the year reduced the Group's profit before tax by GBP43.2m (2015: GBP18.4m) and related to the following items:
2016 2015
GBPm GBPm
--------------------------------------------------------------- ----
Contract losses on businesses being exited 6.6 2.5
Smart metering mobilisation costs 2.5 -
-------------------------------------------------------- ----- ----
Total Other Items 9.1 2.5
-------------------------------------------------------- ----- ----
Exceptional Items:
Acquisition costs 0.6 0.8
Contract costs - 2.9
Impairment of receivables 2.6 -
Restructuring and EGM costs 2.5 0.8
IPO costs - 4.1
-------------------------------------------------------- ----- ----
Total exceptional costs 5.7 8.6
Release of deferred consideration (2.6) -
-------------------------------------------------------- ----- ----
Total net Exceptional Items 3.1 8.6
-------------------------------------------------------- ----- ----
Impairment of goodwill and intangible assets acquired 19.2 -
Amortisation of acquisition intangible assets 11.2 6.5
-------------------------------------------------------- ----- ----
42.6 17.6
-------------------------------------------------------- ----- ----
Unamortised financing costs included in finance expense - 0.4
Unwinding discount of deferred consideration 0.6 0.4
-------------------------------------------------------- ----- ----
Total Exceptional and Other Items 43.2 18.4
-------------------------------------------------------- ----- ----
Contract losses on businesses being exited
At the half year, we highlighted operational challenges in our directly delivered externals business within Property Services managing growth in this work, in particular inventory, staff and site contractors. This business comprised two departments - Roofing and Energy South (managed by the Lakehouse Property Services team, but reported in 2015 segmentally as part of Energy Services). In May 2016, we instigated an operational improvement programme, focused on managing a balanced position of risk and return on capital. The conclusion was to close both departments as the risks of delivering this work directly were too great and, following the operational review, it was determined by the Board to exit these operations. The total losses on the contracts within these businesses are expected to amount to GBP6.6m pre-tax (on revenues of GBP25.3m), which have been excluded from the underlying result and reported as Other Items. These activities made a GBP2.4m profit on revenues of GBP28.4m in 2015, when they were included within the underlying results.
The comparative figure for 2015 of GBP2.5 million represented further costs incurred on certain legacy contracts of our now ceased social housing development business (reported under the Construction Division).
Smart metering mobilisation costs
The Group made encouraging progress within Providor (acquired in May 2015) in mobilising its domestic smart meter installation programme with Scottish Power and other leading utilities. Engineer efficiency is a key performance indicator in this activity and we have seen steady improvement each month, since mobilisation in July 2016. The GBP2.5m cost incurred in the year (on revenues of GBP2.8m) was in line with the expectations set out in August 2016 and represented costs associated with training and retaining engineers in Providor, along with mobilisation complexities associated with planning work, documenting installations, inventory management and systems development. We remain confident of the future prospects for this business.
Exceptional Items
Acquisition costs comprise legal, professional and other expenditure in relation to acquisition activity during the year and amounted to GBP0.6m (2015: GBP0.8m). Contract costs, which were GBPnil in FY16 (2015: GBP2.9m), represented exceptional remediation expenses associated with the resolution of historic matters on a specific contract in 2015 ("The Contract").
Impairment of receivables of GBP2.6m (2015: GBPnil) reflects the provision taken against receivables in relation to a small number of contract settlements on which there is a range of possible outcomes for the Group in terms of both cash flow and impact on the Income Statement. This predominantly relates to a sum receivable within Property Services relating to The Contract, discussed above. This is a matter that has been ongoing since 2014 and does not reflect underlying trading in the year. A small element related to the withdrawal from industrial and commercial metering activities, discussed above in the Energy Services operational review. The provisions were made in line with the Group's accounting policy for receivables, but highlighted as an Exceptional Item in light of their unusual nature. Management will continue to seek a full and advantageous settlement for the Group.
We incurred a GBP2.5m charge in relation to restructuring and EGM costs in the year. In May 2016, we indicated an operational improvement programme would be initiated by the Board to focus initially on the Property Services Division, in which we made significant progress during the second half of the year. The Group recorded a GBP1.0m exceptional cost to cover the costs of redundancy for over 100 staff associated with this exercise, which included the rationalisation of certain central functions. There has also been a great deal of change at Board level this year and the Group took a charge of GBP1.5m associated with the departure of former directors, the two Extraordinary General Meetings held during the year and other one-off expenses. The prior year item of GBP0.8m related to the write-off of certain fixed assets and legal fees in relation to reshaping the Group structure.
Release of deferred consideration of GBP2.6m (2015: GBPnil) represented the renegotiation of sums due to the former owners of H2O Nationwide Limited (GBP0.6m) and no further sums being due to the former owners of Providor Limited (GBP1.5m) and Sure Maintenance Limited (GBP0.5m), in light of the requisite performance conditions under the Sale and Purchase Agreement not being met.
IPO costs of GBPnil (2015: GBP4.1m) comprised legal, professional and incidental expenditure incurred in relation to the IPO in March 2015.
Impairment of goodwill and intangible assets acquired
Impairment of goodwill and intangible assets acquired was GBP19.2 million for the year (2015: GBPnil) relating predominantly to the write-down of GBP17.4m of goodwill in relation to Foster. The impairment of Foster reflected the reduced actual and expected performance of this business, discussed above in the Property Services operational review. The GBP1.8m balance related to value attaching to the contract with a major industrial and commercial customer in Providor, who cancelled work unexpectedly during the year. Although we succeeded in replacing these revenues with the Scottish Power contract, accounting standards require us to review carrying values based on the historic customer base alone. Accordingly, this is not necessarily indicative of management expectations of the prospects for Providor.
Amortisation of acquisition intangibles was GBP11.2 million (2015: GBP6.5 million), with the increase reflecting a full year impact of Providor, Orchard Energy and Sure Maintenance together with the acquisitions of Aaron Heating Services and Precision Lift Services during the year.
Accelerated amortisation of financing costs
Finance costs of GBPnil (2015: GBP0.4m) represented the write-off of unamortised costs on the term loan we replaced with a new revolving credit facility in December 2014, ahead of the IPO.
Unwinding discount of deferred consideration
Unwinding discount of deferred consideration reflects the present value of deferred sums, discounted at a post-tax rate of 8.5%, due on outstanding payments for acquisitions.
All items discussed above in relation to "Exceptional and Other items" are considered non-trading because they are not part of the underlying trading of the Group and in the case of Exceptional Items, impairment of goodwill and accelerated amortisation of finance costs are not expected to recur year to year. Contract losses on businesses being exited relate to businesses that have been closed and smart metering mobilisation costs reflect the one-off nature of mobilising our new domestic smart metering programme, which we expect will carry on into the first half of the year to 30 September 2017.
Finance expense
The total finance expense for the year represented the interest charged on our debt facilities (net of finance income), together with the amortisation of debt raising costs, which totalled GBP1.0m (2015: GBP0.6m).
The total finance expense of GBP1.6m included the unwinding of discounts on deferred consideration figure of GBP0.6m (2015: GBP0.4m), discussed above and treated as a non-operating item.
Tax
The tax charge on underlying profit before tax of GBP9.9m was GBP1.7m, representing an effective rate of 17.3%, which compares with the statutory corporation tax rate of 20%. The difference was due to prior year tax adjustments.
The effective tax rate on the statutory loss before tax for the year was 12.1% which is lower than the UK statutory corporation tax rate of 20% due to a combination of permanent differences together with the enacted reductions in the UK corporation tax rate and prior year credits. The increase in permanent differences from GBP2.0m to GBP15.2m is due to a non-deductible impairment of goodwill relating to Foster Property Maintenance of GBP17.4m and non-taxable income of GBP2.6m relating to a release of deferred consideration.
Our net cash tax payment for the year was GBP0.3m for continuing operations (2015: a statutory credit of GBP2.7m), reflecting carried forward tax losses. During the year, the Group has received the anticipated cash tax refund from HMRC which formed the corporation tax receivable on the 30 September 2015 balance sheet. The Group has also made tax payments on account during the year. As these payments on account are no longer expected to be required as the Group has generated a tax loss, this has resulted in a net receivable with regard to corporation tax as at 30 September 2016.
The net deferred tax asset as at 30 September 2016 was GBP0.2m (2015: liability of GBP1.9m), with the movement mainly relating to acquisition intangibles, where a credit of GBP3.1m to the P&L was offset by an additional GBP1.5m deferred tax liability in relation to the acquisition intangibles of Aaron Heating Services and Precision Lift Services.
In the year, the Group has increased its gross tax losses but due to a reduction in the UK's corporation tax rate, the carried forward tax credit reduced from GBP3.1m to GBP2.6m. The carried forward tax losses mainly arose on the exercise of share options at the time of the IPO and were eligible for Group tax relief. The credits to set up the deferred tax asset arising on these tax losses were recognised in equity and as such, the tax charges and credits relating to the utilisation of these will also be recognised in equity. Therefore, this should not impact the Group's effective tax rate. The remaining tax credit relates to four Group companies and may be utilised over a period of greater than one financial year.
The Group has recognised a deferred tax asset arising on tax losses of GBP2.6m on the basis of a combination of taxable temporary differences (GBP0.1m) and forecast taxable profits (GBP2.5m) which is consistent with the Board's anticipation of improving profitability as outlined above.
Year ended 30 September (GBPm) 2016 2015 --------------------------------------------------------------------------- ------ ------ Underlying EBITA 10.9 22.2 Less: Exceptional and Other Items (42.6) (17.6) Finance expense (1.6) (1.4) Tax 4.0 (0.8) (Loss)/profit for the year attributable to the equity holders of the Group (29.3) 2.4 --------------------------------------------------------------------------- ------ ------
Earnings per share
Underlying basic earnings per share were 5.2p (2015: 13.7p), based on underlying earnings of GBP8.2m (2015: GBP17.5m). Underlying earnings are stated after adding back GBP37.4m of Exceptional and Other Items (after tax).
Our statutory losses for the year were GBP29.3m (2015: statutory earnings of GBP2.4m). Based on the weighted average number of shares in issue during the year of 157.5m, this resulted in basic losses per share of 18.6p (2015: basic earnings per share 1.9p).
Further details are contained in note 6.
Dividend
The Board has proposed a final dividend for the year of 0.5p per share, which is in addition to the interim dividend of 1.0p paid in the year. This represents a total dividend payable for the year of 1.5p (2015: 1.9p).
Subject to approval at the AGM, the final dividend will be paid on 6 April 2017 to shareholders on the register at the close of business on 10 March 2017.
Cash flow performance
Our underlying operating cash flow for the year was an inflow of GBP13.2m (2015: GBP25.6m), reflecting a strong underlying cash conversion of 121% (2015: 115%). We calculate underlying operating cash conversion as cash generated from operations, excluding the cash impact of Exceptional and Other Items, divided by underlying EBITA. We believe this measure provides a consistent basis for comparing cash generation consistently over time. On a statutory basis, we saw an operating cash outflow of GBP3.0m (2015: inflow of GBP19.1m), representing an outflow of 171% (2015: inflow of 97%).
As we highlighted at the half year, the timing of revenues, method of contract delivery and customer contractual terms can all have an impact on working capital and consequently, cash conversion. Generally, as revenues rise under a packaged subcontractor model, there is a cash benefit, as we are paid more quickly by our clients than we pay our supply chain (referred to as "net negative work in progress"); conversely as revenues fall, we may find payments to subcontractors do not fall in proportion to lower revenues, resulting in negative work in progress turning positive and a cash outflow. We therefore felt the cash impact of the poor performance in Property Services and contract delays in Construction during the year and whilst the former is likely to be permanent, we expect the delays in Construction to be temporary and so see some recovery as revenues pick up. We have also seen increased financial and resourcing pressure faced by clients, making it harder to reach reasonable account settlements. After an operating outflow of GBP11.4m (outflow of GBP8.7m after taking account of the cash impact of Exceptional and Other Items) in the first half of the year, we saw a strong cash performance across every division in the second half, with the net operating outflow reducing to GBP3.0m for the full year and an underlying inflow of GBP13.2m after taking account of the cash impact of Exceptional and Other Items.
After factoring in the matters highlighted above, together with the impact of the Exceptional and Other Items in the Statement of Financial Position at the year end, we expect to continue to target an average annual operating cash conversion of 80% over the long term.
Net debt
Our net debt balance stood at GBP20.6m at 30 September 2016 (2015: net cash of GBP6.6m). This increase reflected predominantly, payments for acquisitions of GBP17.7m, the GBP1.1m owed to the former owner of our Manor Road housing development (discussed in provisions below) and GBP4.6m in respect of the dividends paid during the year. The balance was accounted for predominantly by a GBP3.0m net operating cash outflow, which included a GBP16.2m cash cost of Exceptional Items, discussed further in note 12.
Banking arrangements
We had drawn GBP21m under our revolving credit facility at the year end. At the date of issuing this report we had drawn GBP28m, reflecting our normal winter working capital requirements. Royal Bank of Scotland ("RBS") remain very supportive of the Group and to show our commitment to managing our banking arrangements within our means and also to reduce the cost of non-utilisation fees, we requested that RBS reduce our Revolving Credit Facility ("RCF") to GBP40m and further reduce the facility to GBP35m in April 2017. We agreed this formally in a variation to our RCF in January 2017, which included a revision to our banking covenants reflecting the lower earnings expectations of the Group, but at a higher rate of interest. We retain a GBP5m overdraft facility
These revised arrangements provide the Group with funding support that will ensure the Group is able to plan for future growth, particularly in bidding with confidence on new contracts.
Balance sheet
The principal items in our Balance Sheet are goodwill, intangible assets and working capital.
30 Sept 30 Sept
2016 2015
GBPm GBPm
---------------------------------------------------------------- -------
Goodwill and intangibles 69.3 83.5
Tangible and other fixed assets 4.7 4.2
-------------------------------------------------------- ------ -------
Total non-current 74.0 87.7
-------------------------------------------------------- ------ -------
Current assets 75.7 85.9
(Debt) / cash (0.3) 6.5
Current liabilities (68.4) (84.2)
-------------------------------------------------------- ------ -------
Net current assets 7.0 8.2
-------------------------------------------------------- ------ -------
Non-current liabilities (9.7) (10.1)
Debt (20.3) (0.3)
-------------------------------------------------------- ------ -------
Net assets 51.0 85.5
-------------------------------------------------------- ------ -------
Net current assets (excluding cash) 7.3 1.7
Net negative work in progress (packaged subcontractors) (12.0) (18.0)
-------------------------------------------------------- ------ -------
The principal movement in net assets reflected a reduction of GBP14.2m in goodwill and intangibles, reflecting GBP11.2m in amortisation of acquisition intangibles and GBP19.2m in impairment charges, discussed above and in notes 3, 7 and 8, offset in part by GBP15.0m of additional acquired goodwill & intangibles relating to acquisitions made in the year, discussed in note 13.
Net current assets (excluding cash) rose to GBP7.3m (30 September 2015: GBP1.7m). The acquisitions of Aaron Heating Services and Precision Lift Services contributed GBP2.3m, with the balance of the increase relating predominantly to a GBP6.0m reduction in net negative work in progress relating to packaged subcontractors to GBP12.0m (30 September 2015: GBP18.0m). This arose from a reduction in revenues in our Property Services business and the timing of projects in Construction, both of which employ packaged subcontractor models and are in line with the trends highlighted at the half year.
Deferred consideration on acquisitions is analysed below.
Provisions
Provisions as at 30 September 2016 stood at GBP4.9m (30 September 2015: GBP6.4m). During the year, we utilised GBP3.2m of provisions in line with our expectations, with GBP1.1m due to the former owner of the land at our Manor Road housing development, GBP1.5m in relation to specific costs of the Contract (discussed in Exceptional Items above) and GBP0.6m of other items. We provided a further GBP0.8m in relation to specific risks and also recognised GBP0.9m as part of fair value accounting on acquisitions for potential risks and liabilities.
Further details are set out in note 11.
Acquisitions
The Group made two acquisitions in the year:
-- Aaron Heating Services (November 2015): gross consideration
of GBP9.2m, comprising GBP2.6m of net assets (including
cash of GBP0.3m), GBP3.0m of acquired intangibles
(net of deferred tax) and GBP3.6m of goodwill.
-- Precision Lift Services (December 2015): gross consideration
of GBP7.5m, comprising GBP0.7m of net assets (including
cash of GBP0.5m), GBP3.2m of acquired intangibles
(net of deferred tax) and GBP3.6m of goodwill.
Further details are set out in Note 13.
Deferred consideration
A number of the acquisitions made by the Group in recent years incorporate deferred consideration as part of the transaction terms, some of which depend on the performance of the businesses post-completion.
The table below shows the movement in the total discounted deferred consideration payable and the amount outstanding at the year end.
Additions,
At 30 including At 30
September discount Release of September Expected
Payments
2015 in unwind deferred 2016 payment
Acquired business (GBPm) year (GBPm) (GBPm) consideration (GBPm) date
----------------- ---------- ------------ ---------- -------------- ---------- --------
Allied Protection 3.3 (3.0) - - 0.3 Nov 2016
Oct 2016/
H2O Nationwide 2.3 (0.4) - (0.6) 1.3 Nov 2017
Providor 1.5 - - (1.5) - n/a
Orchard Energy 1.6 - 0.6 - 2.2 Dec 2017
Sure Maintenance 0.5 - - (0.5) - n/a
Aaron Heating Services - (1.4) 2.4 - 1.0 Dec 2017
Precision Lift Services - - 1.1 - 1.1 Dec 2018
------------------------ --- ----- --- ----- --- ---------
9.2 (4.8) 4.1 (2.6) 5.9
------------------------ --- ----- --- ----- --- ---------
Risks
The Board considers strategic, financial and operational risks and identifies actions to mitigate those risks. Key risks and their mitigation are disclosed in the annual report for the year ended 30 September 2016, discussed in note 1 ("2016 Annual Report").
As we discussed above in Exceptional Items, we provided against certain receivables under the Group's accounting policy. We are pursuing legal avenues with regard to full recovery in relation to these matters, but consider it important to maintain a prudent basis of accounting.
We are conscious that unbilled balances represent a significant risk in our industry and we conducted a thorough review of recoverability at the year end, providing against uncertain items where necessary.
We continue to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income.
Going Concern statement
The Directors acknowledge the Financial Reporting Council's 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies' issued in October 2009. The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the 2016 Annual Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review above and in the 2016 Annual Report. In addition, Note 31 to the consolidated financial statements within the 2016 Annual Report includes details of the Group's approach to financial risk management, details of its financial instruments and hedging activities, and its exposure to credit risk and liquidity risk. In assessing the Group's ability to continue as a going concern, the Board reviews and approves the annual budget and three year plan, particularly for the following 16 months, including forecasts of cash flows, borrowing requirements and covenant headroom. The Board reviews the Group's sources of available funds and the level of headroom available against its committed borrowing facilities and associated covenants. The Group's financial forecasts, taking into account possible sensitivities in trading performance, indicate that the Group will be able to operate within the level of its committed borrowing facilities and within the requirements of the associated covenants for the foreseeable future. RBS remain very supportive of the Group and to show our commitment to managing banking arrangements within our means and also reduce the cost of non-utilisation fees, we requested that RBS reduce our RCF to GBP40m and further reduce the facility to GBP35m in April 2017. We agreed this formally in a variation to our RCF in January 2017, which included a revision to our banking covenants reflecting the lower earnings expectations of the Group, but at a higher rate of interest. The facility will mature in December 2018, albeit RBS has the option to extend this to December 2019. The Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts.
Viability statement
The Directors have considered section C.2.2 of the 2014 Corporate Governance Code and, taking account of the Group's current position, prospects and principal risks, confirm they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, over the three year period to 30 September 2019. A three year period is considered appropriate in light of the lifecycle of the Group's order book, beyond which, management has less visibility. This assessment was performed alongside the Group's consideration of principal risks and annual three year financial planning process.
The Group performs a series of risk reviews during the year, managed through a Risk Committee and included in monthly operational reviews conducted with each division; the outcome is presented to the Audit Committee twice annually for review and challenge. This ensures that all matters of significance are considered and key risks brought to the attention of the Board.
The Group's three year financial plan ('Plan') is built on a bottom-up basis by business and segment and utilises the data provided in the Group's order book, framework contracts and opportunity pipeline. The Plan is reviewed in detail with each division through a series of reviews and tested for a range of sensitivities, which quantify the principal risks facing the business, including contract losses, financial shortfalls and increased working capital demands. Management consider such risks insofar as they possess or can determine the information to do so, and there will always be an element of inherent uncertainty, particularly as regard matters outside their direct control, such as Government policy, client procurement policies and potential claims and disputes brought against the Group by others. Sensitivities are also tested against available banking facilities to ensure sufficient headroom and remaining compliant with banking covenants. In this assessment, we assumed RBS agrees to a renewal of our banking facilities in December 2018.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
For the year ended 30 September 2016
Responsibility statement of the directors on the annual report
This responsibility statement below has been prepared in connection with the company's full annual report for the year ended 30 September 2016. Certain parts thereof are not included within this announcement.
We confirm to the best of our knowledge that:
1. The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole;
2. The strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and
3. The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.
This responsibility statement was approved by the board of directors on 24 January 2017 and signed on its behalf by:
Jeremy Simpson
Chief Financial Officer
24 January 2017
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2016
Underlying Exceptional Underlying Exceptional
results and other results and other
before items before items
exceptional (see exceptional (see
and other note and other note
items 3) items 3)
Notes 2016 2016 2016 2015 2015 2015
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Revenue 2 305,787 28,051 333,838 336,633 3,565 340,198
Cost of sales (265,724) (34,335) (300,059) (290,671) (6,089) (296,760)
Gross profit 40,063 (6,284) 33,779 45,962 (2,524) 43,438
Other operating
expenses (29,691) (2,865) (32,556) (23,738) - (23,738)
Share of results
of joint venture 537 - 537 - - -
Operating profit
before exceptional
and other items 10,909 (9,149) 1,760 22,224 (2,524) 19,700
Exceptional
costs 3 - (5,742) (5,742) - (8,656) (8,656)
Exceptional
income 3 - 2,672 2,672 - - -
Impairment
of goodwill
and intangible
assets acquired 3 - (19,204) (19,204) - - -
Amortisation
of acquisition
intangibles 3 - (11,156) (11,156) - (6,465) (6,465)
-------------------- ----- ------------ ----------- --------- ------------ ----------- ---------
Operating (loss)
/ profit 2 10,909 (42,579) (31,670) 22,224 (17,645) 4,579
Finance expense (1,070) (587) (1,657) (639) (758) (1,397)
Investment
income 46 - 46 20 - 20
------------ ----------- --------- ------------ ----------- ---------
(Loss) / profit
before tax 9,885 (43,166) (33,281) 21,605 (18,403) 3,202
Taxation 4 (1,707) 5,720 4,013 (4,116) 3,300 (816)
------------ ----------- --------- ------------ ----------- ---------
(Loss) / profit
for the year
attributable
to the equity
holders of
the Group 8,178 (37,446) (29,268) 17,489 (15,103) 2,386
============ =========== ========= ============ =========== =========
(Loss) / earnings
per share
Basic 6 (18.6p) 1.9p
Diluted 6 (18.6p) 1.7p
============ =========== ========= ============ =========== =========
Underlying
earnings per
share
Basic 6 5.2p 13.7p
Diluted 6 5.1p 12.3p
============ =========== ========= ============ =========== =========
The accompanying notes are an integral part of this consolidated statement of comprehensive income.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 30 September 2016
2016 2015
Notes GBP'000 GBP'000
Non-current assets
Goodwill 7 47,338 56,267
Other intangible assets 8 21,947 27,199
Property, plant and equipment 2,826 3,126
Interests in joint venture 537 -
Trade and other receivables 1,359 1,131
-------- -------
74,007 87,723
-------- -------
Current assets
Inventories 5,187 4,635
Amounts due from customers under
construction contracts 3,161 2,053
Trade and other receivables 65,633 77,538
Corporation tax receivable 1,451 1,683
Deferred tax asset 229 -
Cash and cash equivalents - 6,934
-------- -------
75,661 92,843
-------- -------
Total assets 149,668 180,566
-------- -------
Current Liabilities
Amounts due to customers under
construction contracts 690 574
Trade and other payables 65,801 80,344
Loans and borrowings 9 71 -
Finance lease obligations 222 403
Provisions 11 1,904 3,279
68,688 84,600
-------- -------
Net current assets 6,973 8,243
-------- -------
Non-current liabilities
Trade and other payables 6,236 5,013
Loans and borrowings 9 20,586 -
Finance lease obligations 164 340
Provisions 11 2,974 3,170
Deferred tax liability - 1,979
-------- -------
29,960 10,502
-------- -------
Total liabilities 98,648 95,102
-------- -------
Net assets 51,020 85,464
======== =======
Equity
Called up share capital 15,753 15,753
Share premium account 25,314 25,314
Share-based payment reserve 776 709
Own shares (290) (290)
Merger reserve 20,067 20,067
Retained earnings (10,600) 23,911
Equity attributable to equity
holders of the company 51,020 85,464
======== =======
The financial statements of Lakehouse plc (registered number 09411297) were approved by the board of directors and authorised for issue on 23 January 2017. They were signed on its behalf by:
J J C Simpson
Director
The accompanying notes are an integral part of this consolidated statement of financial position.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 September 2016
Share Share-based
Share premium payment Own Merger Retained Total
capital account reserve shares reserve earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October 2014 - 31,820 1,068 - 1 15,917 48,806
Profit for the
period - - - - - 2,386 2,386
Conversion of
share options - 628 (1,205) - - 1,205 628
Group restructuring 12,382 (32,448) - - 20,066 - -
Issue of share
capital 3,371 25,314 - - - - 28,685
Share-based payment
charge - - 846 - - - 846
Purchase of own
shares - - - (290) - - (290)
Current tax -
Excess tax deductions
related to share-based
payments - - - - - 2,506 2,506
Deferred tax - - - - - 1,897 1,897
-------- -------- ----------- ------- -------- --------- --------
At 30 September
2015 15,753 25,314 709 (290) 20,067 23,911 85,464
Loss for the period - - - - - (29,268) (29,268)
Dividends paid
(note 5) - - - - - (4,568) (4,568)
Share-based payment
charge - - 67 - - (67) -
Current tax -
Excess tax deductions
related to share-based
payments - - - - - (608) (608)
-------- -------- ----------- ------- -------- --------- --------
At 30 September
2016 15,753 25,314 776 (290) 20,067 (10,600) 51,020
======== ======== =========== ======= ======== ========= ========
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 September 2016
2016 2015
Notes GBP'000 GBP'000
Cash flows from operating activities
Cash (used in) / generated from
operations 12 (3,014) 19,099
Interest paid (808) (460)
Interest received 46 11
Taxation (268) (1,903)
-------- --------
Net cash (used in) / generated
from operating activities (4,044) 16,747
-------- --------
Cash flows from investing activities
Purchase of shares in subsidiary,
net of cash acquired (17,672) (29,745)
Purchase of property, plant
and equipment (819) (1,169)
Purchase of intangible assets (291) (491)
Sale of property and equipment 160 328
Loan to associate (250) -
Disposal of subsidiary business - 40
Net cash used in investing activities (18,872) (31,037)
-------- --------
Cash flows from financing activities
Proceeds from issue of shares - 30,000
Proceeds from issue of pre-existing
shares - 975
Dividend paid to shareholders (4,568) -
Proceeds from bank borrowings 21,000 -
Repayment of bank borrowings - (11,667)
Repayments to finance lease
creditors (357) (237)
Purchase of own shares - (290)
Finance issue costs (164) (472)
Share issue costs paid - (1,315)
Net cash generated from financing
activities 15,911 16,994
-------- --------
Net (decrease) / increase in
cash and cash equivalents (7,005) 2,704
Cash and cash equivalents at
beginning of year 6,934 4,230
Cash and cash equivalents at
end of year (71) 6,934
======== ========
The accompanying notes are an integral part of this consolidated statement of cash flows.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
1. Basis of Preparation and significant accounting policies
Lakehouse plc is a company incorporated in the United Kingdom under the Companies Act, registered number 09411297. The address of the registered office is 1 King George Close, Romford, Essex RM7 7LS.
The consolidated financial statements are presented in Pounds Sterling because that is the currency of the primary economic environment in which the Group operates.
These results for the year ended 30 September 2016 are an excerpt from the Annual Report & Accounts 2016 and do not constitute the Group's statutory accounts for 2016 or 2015. Statutory accounts for Lakehouse plc for the year to 30 September 2015 have been delivered to the Registrar of Companies, and the Lakehouse plc statutory accounts for the year to 30 September 2016 will be delivered by 31 January 2017. The Auditor has reported on both those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under Sections 498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation.
Whilst the financial information included in this Annual Results Release has been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union (EU), this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS are included in the Annual Report & Accounts 2016 which will be available at www.lakehouse.co.uk.
The accounting policies adopted are consistent with those followed in the preparation of the Lakehouse plc Group's Annual Report & Accounts for the year ended 30 September 2015 except for the adoption of IFRS 10, IFRS 12 and IAS 28 'Investment entities', IAS 1 'Disclosure Initiative', IAS 27 'Equity Method in Separate Financial Statements', IAS 16 and IAS 38 'Clarification of Acceptable Methods of Depreciation and Amortisation', IFRS 11 'Accounting for Acquisitions of Interests in Joint Operations', IAS 16 and IAS 41 'Bearer Plants' and IAS 19 'Defined Benefit Plans: Employee Contributions'. The adoption of these standards has had no impact on the results or financial position of the Group.
The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Directors regard the foreseeable future as no less than 12 months following publication of its annual financial statements, so in practical terms, 16 months from the statement of financial position date. Please see further information for the Directors assessment in the financial review.
Underlying business performance
The Group believes that the measure of underlying EBITA and presentation of underlying operating profit, profit before tax, profit after tax and earnings per share provide useful information on underlying trends to shareholders. These measures are used by the Group for internal performance analysis and incentive compensation arrangements for employees.
The terms "underlying EBITA", '"underlying", "contract losses on businesses being exited" and "exceptional items" are not defined terms under IFRS and may therefore not be comparable with similarly titled profit measures reported by other companies. It is not intended to be a substitute for, or superior to, GAAP measurements of profit.
The term "underlying" refers to the relevant measure being reported for continuing operations excluding Exceptional and Other Items, (which include amortisation of acquisition intangibles). EBITA is earnings before interest, tax and amortisation of acquisition intangibles. Adjusted EBITA is stated before Exceptional and Other Items.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
2. Operating segments
The Group's chief operating decision maker is considered to be the Board of Directors. The Group's operating segments are determined with reference to the information provided to the Board of Directors in order for it to allocate the Group's resources and to monitor the performance of the Group.
The Board of Directors has determined an operating management structure aligned around the four core activities of the Group, with the following operating segments applicable:
-- Compliance: focused on gas, fire, electrics, air and water and lift compliance activities, where we contract predominantly under framework agreements. Services comprise the following:
- installation, maintenance and repair-on-demand of gas appliances and central heating systems; - compliance services in the areas of fire protection and building electrics; - air and water hygiene solutions; and - service, repair and installation of lifts
-- Energy Services: we offer a range of services in the energy efficiency sector, including external, internal and cavity wall insulation, loft insulation, gas central heating and boiler upgrades. The services are offered under various energy saving initiatives including the Energy Company Obligation ("ECO") and the Scottish Government's HEEPS ("Home Energy Efficiency Programme for Scotland") Affordable Warmth programme. Clients include housing associations, social landlords, local authorities and private householders and we have trading relationships with the "big six" and other leading utility suppliers. We also provide renewable technologies, metering services and energy advisory and brokerage services to customers throughout the UK.
-- Property Services: formerly called "Regeneration" and focused on planned and responsive maintenance services for social housing. A significant part of our services is the project managing delivery and ongoing resident liaison in delivering planned services such as new kitchens, bathrooms, roofs and windows. The segment also has a small responsive maintenance business. We contract with customers predominantly under framework agreements, where the number of suppliers will vary from one to a small group. The segment formerly included a directly delivered 'externals' business that the Board decided to close in 2016.
-- Construction: focused on small to medium sized building projects, normally under framework agreements with an emphasis on the education sector. The business targets refurbishment projects for public buildings with a typical value of GBP3.5m to GBP4.0m and tends to avoid large scale building projects. The segment also formerly included a social housing development business, which we exited in 2015 and in relation to which, contract losses were disclosed separately in the prior year so as not to distort the underlying trading position of the Group and the Construction segment.
The accounting policies of the reportable segments are the same as those described in the accounting policies section.
All revenue and profit is derived from operations in the United Kingdom only.
The profit measure the Group used to evaluate performance is Underlying EBITA. Underlying EBITA is defined as operating profit before deduction of exceptional and other items, as outlined in note 3 and on the face of the Statement of Comprehensive Income.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
2. Operating segments (continued)
The Group accounts for inter-segment trading on an arm's length basis. All inter-segment trading is eliminated on consolidation.
The following is an analysis of the Group's revenue and Underlying EBITA by reportable segment:
2016 2015
GBP'000 GBP'000
Revenue
Compliance 91,023 36,625
Energy Services 67,436 68,047
Property Services 98,143 161,733
Construction 52,051 73,439
------- -------
Total segment revenue 308,653 339,844
Inter-segment elimination (2,866) (3,211)
------- -------
Total underlying revenue 305,787 336,633
------- -------
Mobilisation of smart
metering contract 2,803 -
Contract revenue on businesses
being exited 25,248 3,565
------- -------
Revenue from external
customers 333,838 340,198
======= =======
Intra segment trading comprises services provided by the Compliance segment for the Property Services segment and are charged at prevailing market prices.
Reconciliation of underlying
EBITA to (loss) / profit
before taxation
2016 2015
GBP'000 GBP'000
Underlying EBITA by segment
Compliance 6,169 4,509
Energy Services 8,026 9,570
Property Services 780 10,510
Construction 3,606 4,838
Central (7,672) (7,203)
-------- -------
Total underlying EBITA 10,909 22,224
Mobilisation of smart
metering contracts (2,493) -
Contract losses on businesses
being exited (6,656) (2,524)
Exceptional costs (5,742) (8,656)
Exceptional income 2,672 -
Impairment of goodwill
and intangible assets
acquired (19,204) -
Amortisation of acquisition
intangibles (11,156) (6,465)
-------- -------
Operating (loss) / profit (31,670) 4,579
Finance costs (1,657) (1,397)
Investment income 46 20
(Loss) / profit before
taxation (33,281) 3,202
======== =======
The improvement to IFRS 8 issued in April 2009 clarified that a measure of segment assets should be disclosed only if that amount is regularly provided to the chief operating decision maker.
None of the Group's major customers accounted for more than 10% of Group revenue for 2016 or 2015.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
3. Exceptional and other items, including amortisation of acquisition intangibles
2016 2015
GBP'000 GBP'000
Contract losses on businesses being
exited 6,656 2,524
Smart metering mobilisation costs 2,493 -
------- -------
Total Other Items 9,149 2,524
Acquisition costs 642 803
Contract costs - 2,891
Impairment of receivables 2,567 -
Restructuring 2,533 832
IPO costs - 4,130
------- -------
Total exceptional costs 5,742 8,656
Release of deferred consideration (2,672) -
------- -------
Total exceptional costs, net of
exceptional income 3,070 8,656
Impairment of goodwill and intangible
assets acquired 19,204 -
Amortisation of acquisition intangible
assets 11,156 6,465
------- -------
42,579 17,645
Unamortised financing costs included
in finance expense - 355
Unwinding discount of deferred consideration 587 403
------- -------
Total before taxation 43,166 18,403
Taxation (5,720) (3,300)
------- -------
Total after taxation 37,446 15,103
======= =======
Exceptional and other items in the year reduced the Group's profit after tax by GBP37.5m and relate to the following items:
Contract losses on businesses being exited
At the half year, we highlighted operational challenges in our directly delivered externals business managing growth in this work, in particular inventory, staff and site contractors. This business comprised two departments - Roofing and Energy South (managed by the Lakehouse Property Services team, but reported in 2015 segmentally as part of Energy Services). In May 2016, we instigated an operational improvement programme, focused on managing a balanced position of risk and return on capital. The conclusion was to close both departments as the risks of delivering this work directly were too great and, following the operational review, it was determined by the Board to exit these operations. The total losses on the contracts within these businesses are expected to amount to GBP6.6m pre-tax (on revenues of GBP25.3m), which have been excluded from the underlying result and reported as Other Items. These activities made a GBP2.4m profit on revenues of GBP28.4m in 2015, when they were included within the underlying results. The comparative figure for 2015 was GBP2.5m, representing further costs incurred on certain legacy contracts of our now ceased social housing development business (reported under the Construction division)).
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
3. Exceptional and other items, including amortisation of acquisition intangibles (continued)
Smart metering mobilisation costs
Smart metering mobilisation costs of GBP2.5m (revenue of GBP2.8m) (2015: GBPnil) represent costs associated with training and retaining engineers, along with mobilisation complexities to do with planning work, documenting installations, inventory management and systems development. These are very significant in the context of the profits of the Energy Division and are non-recurring costs to be incurred at the start of the contract, as such; they have been separately highlighted as an 'Other Item'.
Exceptional costs and income
Acquisition costs comprise legal, professional and other expenditure in relation to acquisition activity during the year and amounted to GBP0.6m (2015: GBP0.8m).
Contract costs of GBPnil (2015: GBP2.9m) relate to exceptional remediation expenses associated with the resolution of historic matters on a specific contract ("The Contract").
Impairment of receivables of GBP2.6m (2015: GBPnil) reflects the provision taken against receivables in relation to a small number of contract settlements on which there is a range of possible outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income. This predominantly relates to a sum receivable within Property Services relating to the Contract, discussed above. This is a matter that has been ongoing since 2014 and does not reflect underlying trading in the year. A small element related to the withdrawal from industrial & commercial metering activities, discussed above in the Energy Services operational review. The provisions were made in line with the Group's accounting policy for receivables, but highlighted as an Exceptional Item in light of their unusual nature. Management will continue to seek a full and advantageous settlement for the Group.
We incurred a GBP2.5m charge in relation to restructuring and EGM costs in the year. In May 2016, we indicated an operational improvement programme would be initiated by the Board to focus initially on the Property Services division, in which we made significant progress during the second half of the year. The Group recorded a GBP1.0m exceptional cost to cover the costs of redundancy for the staff associated with this exercise, which included the rationalisation of certain central functions. There has also been a great deal of change at the Board level this year and the Group took a charge of GBP1.5m associated with exiting former directors, the two Extraordinary General Meetings held during the year and other one-off expenses. The prior year item of GBP0.8m related to the write-off of certain fixed assets and legal fees in relation to reshaping the Group structure.
IPO costs of GBPnil (2015: GBP4.1m) comprise legal, professional and incidental expenditure incurred in relation to the IPO in March 2015.
Release of deferred consideration of (GBP2.6m) (2015: GBPnil) relates to the renegotiation of sums due to the former owners of H2O Nationwide Limited (GBP0.6m) and no further sums being due to the former owners of Providor Limited (GBP1.5m) and Sure Maintenance Limited (GBP0.5m), in light of the requisite performance conditions under the Sale and Purchase Agreement not being met.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
3. Exceptional and other items, including amortisation of acquisition intangibles (continued)
Impairment of goodwill and intangible assets acquired
Impairment of goodwill and intangible assets acquired was GBP19.2m for the year (2015: GBPnil) relating to the write-off of GBP17.4m of Goodwill in relation to Foster Property Maintenance Limited and GBP1.8m in relation to the contract with a major industrial & commercial customer, previously recognised in acquisition intangibles associated with Providor Limited. Further background is provided in the Financial Review, together with notes 7 and 8.
Amortisation of acquisition intangibles
Amortisation of acquisition intangibles was GBP11.2m for the year (2015: GBP6.5m), with the increase reflecting a full year impact of H2O Nationwide, Providor, Orchard Energy and Sure Maintenance together with the acquisitions of Aaron Heating Services and Precision Lift Services during the year.
Accelerated amortisation of financing costs
Finance costs of GBPnil (2015: GBP0.4m) represent the write-off of unamortised costs on the term loan we replaced with a new revolving credit facility in December 2014, ahead of the IPO.
Unwinding discount of deferred consideration
Unwinding discount of deferred consideration reflects the present value of deferred sums. Contingent consideration is discounted at a post-tax rate of 8.5%, due on outstanding payments for acquisitions. Non-contingent deferred cash consideration is discounted at a post-tax rate of between 2% and 3%.
All items discussed above in relation to "Exceptional and Other items" are considered non-trading because they are not part of the underlying trading of the Group and in the case of Exceptional Items, impairment of goodwill and accelerated amortisation of finance costs are not expected to recur year to year. Contract losses on businesses being exited relate to businesses that have been closed and smart metering mobilisation costs reflect the one off nature of mobilising our new domestic smart metering programme.
Risk Management
We continue to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income.
In quantifying the likely out turn for the Group, the key judgements and estimates will typically include:
-- an estimation of liability based on commercial and / or legal assessment; -- fair value assessment of a Statement of Financial Position item; and -- a commercial assessment of potential further liabilities.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
4. Tax on (loss) / profit on ordinary activities
2016 2015
GBP'000 GBP'000
Current tax
Current year 151 2,200
Current tax - prior year adjustment (173) (324)
-------- -------
Total current tax (22) 1,876
Deferred tax (3,991) (1,060)
-------- -------
Total tax on (loss) / profit on ordinary
activities (4,013) 816
======== =======
The tax assessed for the year is lower / higher
than the standard rate of corporation tax in the
UK. The differences are explained below;
2016 2015
GBP'000 GBP'000
(Loss) / profit before tax (33,281) 3,202
Effective rate of corporation tax
in the UK 20.00% 20.50%
(Loss) / profit before tax at the
effective rate of corporation tax (6,656) 657
Effects of:
Expenses not deductible for tax purposes 3,043 419
Adjustment of deferred tax to closing
tax rate (268) 35
Current tax - prior year adjustment (173) (324)
Deferred tax - prior year adjustment (154) 29
Deferred tax asset not recognized 195 -
-------- -------
Tax (credit) / charge for the year (4,013) 816
======== =======
In addition to the amounts charged to the consolidated
statement of comprehensive income, the following
amounts relating to tax have been recognised directly
in equity:
2016 2015
GBP'000 GBP'000
Current tax - excess deductions related
to share-based payments on exercised
options - 2,506
Deferred tax (608) 1,897
-------- -------
Changes in estimated excess tax deductions
relating to share based payments (608) 4,403
======== =======
Factors that may affect future charges
The Finance (No 2) Act 2015, which provides for reductions in the main rate of corporation tax from 20% to 19% effective from 1 April 2017 and to 18% effective from 1 April 2020, was substantively enacted on 26 October 2015. Subsequently, the Finance Act 2016, which provides for a further reduction in the main rate of corporation tax to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. These rate reductions have been reflected in the calculation of deferred tax at the statement of financial position date.
The closing deferred tax asset at 30 September 2016 has been calculated at 17%, reflecting the tax rate at which the deferred tax asset is expected to be utilised in future periods.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
5. Dividends
The proposed final dividend for the year ended 30 September 2016 of 0.5p per share amounting to GBP0.8m and representing a total dividend of 1.5p for the full year (2015: 1.9p per share), will be paid on 6 April 2017 to the shareholders on the register at the close of business on 10 March 2017. The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
6. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
2016 2015
Number Number
Weighted average number of ordinary
shares for the purposes of basic
loss / earnings per share 157,527,103 127,776,310
Diluted
Effect of dilutive potential ordinary
shares:
Share options 2,897,178 14,122,892
----------- -----------
Weighted average number of ordinary
shares for the purposes of diluted
loss / earnings per share 160,424,281 141,899,202
=========== ===========
(Loss) / earnings for the purpose
of basic and diluted earnings per
share being net profit attributable
to the owners of the Company (GBP'000) (29,268) 2,386
Basic (loss) / earnings per share (18.6p) 1.9p
Diluted (loss) / earnings per share (18.6p) 1.7p
Earnings for the purpose of underlying
earnings per share being underlying
net profit attributable to the owners
of the Company (GBP'000) 8,178 17,489
Adjusted basic earnings per share 5.2p 13.7p
Adjusted diluted earnings per share 5.1p 12.3p
The number of shares in issue at 30 September
2016 was 157,527,103.
The weighted average number of Ordinary shares in issue during the year excludes those accounted for in the own shares reserve.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
7. Goodwill
GBP'000
At 1 October 2015 56,267
Recognised on acquisition of Aaron
Heating Services Limited 3,667
Recognised on acquisition of PLS
Holdings Limited 3,626
Impairment of Foster Property Maintenance
Limited (17,421)
Adjustment to goodwill of Providor
Limited 446
Adjustment to goodwill of Orchard
(Holdings) UK Limited 602
Adjustment to goodwill of Sure Maintenance
Group Limited 151
--------
At 30 September 2016 47,338
========
Goodwill arising on consolidation represents the excess of the fair value of the consideration transferred over the fair value of the Group's share of the net assets of the acquired subsidiary at the date of acquisition.
The adjustments relating to businesses acquired in the previous year relate to finalisation of fair value accounting within 12 months of being acquired.
Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there is an indication that goodwill may be impaired. Goodwill acquired in a business combination is allocated to cash generating units ("CGUs") according to the level at which management monitors that goodwill.
Goodwill is carried at cost less accumulated impairment losses.
The carrying value of goodwill is allocated to the following CGUs:
2016 2015
CGU Segment GBP'000 GBP'000
K&T Heating Services Limited Compliance 3,774 3,774
Allied Protection Limited Compliance 3,717 3,717
Foster Property Maintenance
Limited Property Services - 17,421
Everwarm Ltd Energy services 17,476 17,476
H2O Nationwide Limited Compliance 2,209 2,209
Providor Limited Energy services 3,037 2,591
Orchard (Holdings) UK
Limited Energy services 5,607 5,005
Sure Maintenance Group
Limited Compliance 4,225 4,074
Aaron Heating Services
Limited Compliance 3,667 -
PLS Holdings Limited Compliance 3,626 -
------- -------
47,338 56,267
======= =======
An asset is impaired if its carrying value exceeds the unit's recoverable amount which is based upon value in use. At each reporting date impairment reviews are performed by comparing the carrying value of the CGU to its value in use. At 30 September 2016 the value in use for each CGU was calculated based upon the cash flow projections of the latest board approved three-year forecasts together with a further two years estimated and an appropriate terminal value based on perpetuity. This is discussed further below.
Future budgeted and forecast profits are estimated by reference to detailed bottom-up budgeting process undertaken by the Group.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
7. Goodwill (continued)
The estimated growth rates are based on past experience and knowledge of the individual sector's markets. The Directors believe that the Group's core markets of social housing, public buildings, education and energy services, underpinned by Government policy, will continue to present strong growth opportunities for the CGUs outlined above respectively. Management believe that future growth in these markets is underpinned by a number of factors including:
-- A pipeline of new tenders -- Further opportunities to work with other group companies -- Client demand for safe buildings; and -- Adjacent market opportunities.
The assumptions used in the impairment reviews at 30 September 2016 are outlined below:
For years one to three the value in use calculation is based on the latest board approved three-year forecasts, which is adjusted for non-cash items. The growth rates applied in these first three years varies by business, but sit in a range between 1% and 29% for revenue growth. The growth rate applied to the cash flows in years four and five was 2% (2015: 2%). A terminal growth rate of 1% (2015: 1%) was applied. The pre-tax discount rate applied was 11.4% (2015: 10.3%), with the post-tax discount rate being 8.5% (2015: 8.5%). A sensitivity analysis has been completed; this was based on a reduction in revenue of 20% per year, a reduction in operating profit margin of between 1 and 3% and an increase in the discount rate of 1%. The directors consider that reasonably possible changes in the key assumptions would not cause the carrying amount to exceed its recoverable amount.
As outlined in our trading statement of 1 February 2016, the Group is operating against a backdrop of active cost reductions taking place within client organisations, resulting in part from a requirement for social landlords to reduce rents by 1% p.a. for the next four years. This was particularly felt within the Property Services division. Despite our success in securing positions on key frameworks, including resecuring Eastern Procurement, the expected level of tenders from these frameworks has not materialised at the rate previously expected. On reviewing the expected cash flows for Foster Property Maintenance, management concluded that they were not sufficient to maintain any Goodwill. There was no Goodwill elsewhere in the Property Services division.
Following a detailed review, and based on the latest board approved three-year forecasts (which assume modest revenue growth of approximately 1% per year and some marginal EBITA improvement) and a growth rate in EBITA of 1.5% in years four and five with a terminal growth rate of 0.75% the goodwill in Foster Property Maintenance was written off in the year, resulting in a charge of GBP17.4m; the determined remaining recoverable amount of CGU was GBP2.9m which was determined with reference to a 'value in use' basis. The pre-tax discount rate used was 12.5% (2015: 10.3%), reflecting the increased level of risk associated with the forecast trading position. A 100 basis point increase in the discount rate would reduce the value in use by 8%, whereas a 50 basis point adjustment to the years 4 to 5 growth rates or the terminal growth rate would have a 3% impact on the value in use.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
8. Other intangible assets
Acquisition intangibles
---------------------------------------
Contracted
customer
Computer order Customer Non-compete
software book relationships agreements Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cost
At 1 October 2015 1,322 24,338 13,772 2,508 41,940
Recognised upon
acquisition - 2,212 4,588 950 7,750
Additions 291 - - - 291
Disposals (2) - - - (2)
--------- ---------- -------------- ----------- -------
At 30 September
2016 1,611 26,550 18,360 3,458 49,979
--------- ---------- -------------- ----------- -------
Amortisation
At 1 October 2015 702 9,818 4,045 176 14,741
Amortisation charge 352 6,616 3,663 877 11,508
Impairment - 1,783 - - 1,783
At 30 September
2016 1,054 18,217 7,708 1,053 28,032
--------- ---------- -------------- ----------- -------
Carrying value
At 30 September
2016 557 8,333 10,652 2,405 21,947
========= ========== ============== =========== =======
At 30 September
2015 620 14,520 9,727 2,332 27,199
========= ========== ============== =========== =======
Contracted customer order book
The value placed on the order book is based upon the cash flow projections over the contracts in place when a business is acquired. Due to uncertainties with trying to forecast revenues beyond the contract term, the Directors have valued contracts over the contractual term only. The value of the order book is amortised over the remaining life of each contract which typically range from one to five years.
As we outlined in our trading statement of 2 August 2016, the Group's former major metering customer, in the industrial and commercial sector, decided to take installation in house during the year, following a number of acquisitions among our competitors. The customer contract had been valued at GBP1.8m within the contracted customer order book in Providor Limited and in light of the customer's action, this sum was impaired during the year, in light of no further cash flows being anticipated to arise from this arrangement.
Customer relationships
The value placed on the customer relationships are based upon the non-contractual expected cash inflows forecast on the base business over and above contracted revenues. The value of customer relationships is amortised over five years.
Non-compete agreement
The value placed on the non-compete agreements are based upon the non-compete clause and knowledge and know-how of the former owners of the acquired businesses. The value of non-compete is amortised over five years.
The annual post-tax discount rate employed in the calculation of the acquisition intangibles is 13.00% (2015: 13.00%) which is higher than the Group WACC used for impairment purposes to reflect the added risks associated with the valuation of an intangible asset in isolation from a business.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
9. Borrowings
2016 2015
GBP'000 GBP'000
Bank loans and credit facilities
at amortised cost:
Current 71 -
Non-current 20,586 -
------- -------
20,657 -
======= =======
Maturity analysis of bank loans
and credit facilities falling due:
In one year or less, or on demand 71 -
Between one and two years - -
Between two and five years 20,586 -
After more than five years - -
------- -------
20,657 -
======= =======
In December 2014, the Group renegotiated its bank facilities to provide an overdraft facility of GBP5m together with a Revolving Credit Facility ("RCF") of GBP30m, which was extended to GBP45m in December 2015. The Group agreed a variation to the RCF in January 2017 with Royal Bank of Scotland reduce the RCF to GBP40m and further reduce the facility to GBP35m in April 2017. The variation to the RCF included a revision to the banking covenants, which reflect the lower earnings expectations of the Group, and a higher rate of interest.
10. Net debt
2016 2015
GBP'000 GBP'000
(Overdraft) / cash and cash equivalents (71) 6,934
Bank loans and credit facilities (20,586) -
Unamortised finance costs (included
in other receivables) 414 418
Unamortised finance costs (included
in borrowings) - -
Finance lease obligations (386) (743)
-------- -------
(20,629) 6,609
======== =======
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
11. Provisions
Property Legal
development and other Total
GBP'000 GBP'000 GBP'000
At 1 October 2015 1,100 5,349 6,449
Identified on acquisition - 762 762
Additional provision - 885 885
Utilised in the year (1,100) (2,118) (3,218)
------------ ---------- -------
At 30 September 2016 - 4,878 4,878
============ ========== =======
Current provisions - 1,904 1,904
============ ========== =======
Non-current provisions - 2,974 2,974
============ ========== =======
Property development
Property development costs represent sums due to the former owners of the land relating to the Manor Road housing development under the terms of the sale. This sum was paid in October 2015.
Legal and other
Other costs relate to property dilapidation obligations, potential contract settlement costs and other potential legal settlement costs. The largest figure relates to the potential contract settlement costs which have been made on management review of contractual obligations faced on legacy contracts and include The Contract costs referred to in note 3. These are expected to result in an outflow of economic benefit over the next one to three years.
The Group continue to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income.
In quantifying the likely out turn for the Group, the key judgements and estimates will typically include:
-- an estimation of liability based on commercial and / or legal assessment -- fair value assessment of a Statement of Financial Position item -- a commercial assessment of potential further liabilities
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 September 2016
12. Cash (used in) / generated from operations
2016 2015
GBP'000 GBP'000
Operating (loss) / profit (31,670) 4,579
Adjustments for:
Depreciation 1,621 1,017
Amortisation of intangible assets 11,479 6,841
Impairment of goodwill and intangible
assets acquired 19,204 -
Equity-settled share based payments - 846
Profit on disposal of property,
plant and equipment (95) (98)
Provisions (2,334) (1,037)
Changes in working capital:
Inventories 478 2,166
Amounts owed by customers under
construction contracts (1,108) 1,194
Amounts owed to customers under
construction contracts 116 (1,736)
Trade and other receivables 16,706 1,692
Trade and other payables (17,411) 3,635
Cash (used in) / generated from
operations (3,014) 19,099
======== ========
Underlying operating cash conversion
calculation
Cash (used in) / generated from
operations (3,014) 19,099
Cash impact of Exceptional and Other
Items in the period 16,226 6,540
-------- --------
Underlying cash generated from operations 13,212 25,639
======== ========
Underlying operating profit before
exceptional items and amortisation
of acquisition intangibles 10,909 22,224
======== ========
Underlying cash conversion 121% 115%
======== ========
Statutory operating cash conversion
calculation
Cash (used in) / generated from
operations (3,014) 19,099
======== ========
Statutory operating profit before
exceptional items and amortisation
of acquisition intangibles 1,760 19,700
======== ========
Statutory cash conversion (171%) 97%
======== ========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations
2016 acquisitions:
Aaron Heating Services Limited
On 2 November 2015 the Group acquired the entire share capital of Aaron Heating Services Limited for consideration as detailed below. Aaron Heating Services Limited's principal activity is that of installation and maintenance of plumbing and heating systems.
The acquisition of Aaron Heating Services complemented the Group's existing gas compliance businesses: K&T Heating, which operates in London and the South East, and Sure Maintenance, which operates in the North of England and the Midlands. The acquisition will allow Lakehouse to extend its geographic footprint in the gas servicing and maintenance market to provide national coverage to key clients, as well as provide opportunities for adjacent services.
The effect of the acquisition on the Group's assets and liabilities were as follows:
Fair
value Provisional
Book fair
value adjustments value
GBP'000 GBP'000 GBP'000
Assets
Non-current
Property, plant and equipment 632 (130) 502
Current
Inventories 1,436 (598) 838
Trade and other receivables 4,431 (17) 4,414
Cash and cash equivalents 293 - 293
------- ----------- -----------
Total assets 6,792 (745) 6,047
------- ----------- -----------
Liabilities
Non-current
Deferred tax (74) - (74)
Provisions - (151) (151)
Current
Trade and other payables (3,265) 17 (3,248)
------- ----------- -----------
Total liabilities (3,339) (134) (3,473)
------- ----------- -----------
Net assets acquired 3,453 (879) 2,574
Intangibles acquired 3,679
Deferred tax recognised
in respect of intangibles
capitalised (699)
Goodwill capitalised 3,667
-----------
9,221
===========
Satisfied by:
Cash consideration 6,975
Contingent deferred consideration 2,246
-----------
9,221
===========
Gross contractual receivables invoiced to the customer at the date of acquisition was GBP1,877,000.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations (continued)
Contingent deferred consideration has been calculated based on the expectations of future performance in the Group's three year plan compared to the calculation methodology set out in the Share Purchase Agreement. The contingent deferred consideration may vary depending on the underlying trading performance of the businesses. The Aaron Heating Services Limited intangible assets are recognised and valued at GBP3.7m. This represents the expected value to be derived from the acquired customer related contracts, acquired customer relationships and the value placed on the non-compete agreement. The value placed on these customer-related contracts and relationships is based on the expected post-tax cash inflows over the estimated remaining life of each contract. The cash flows are initially reduced by 10% after year 1 with further deductions thereafter which the Directors consider is commensurate with the risks associated with capturing returns from the customer relationships, and then discounted using a post-tax discount rate of 13%. The estimated life for customer contracts is assumed to be the remaining life of each contract, and the customer relationships are estimated to have a life of six years.
The Directors consider the value assigned to goodwill represents the workforce acquired, expected synergies to be generated, and access to adjacent business activities as a result of this acquisition. It is not expected that any goodwill will be deductible for tax purposes. All costs of the acquisition have been recognised as an exceptional expense in the statement of comprehensive income in the period in which it was incurred, the total cost recognised is GBP239,000.
Post-acquisition results
The results for Aaron Heating Services Limited since the acquisition date, included within the consolidated statement of comprehensive income for the period ended 30 September 2016, are:
GBP'000
Revenue 24,395
-------
Profit from operations 1,122
Interest -
-------
Profit before tax 1,122
Taxation (227)
-------
Profit for the period 895
=======
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations (continued)
PLS Holdings Limited
On 5 May 2015 the Group acquired the entire share capital of PLS Holdings Limited for consideration as detailed below. PLS Holdings Limited's principal activity is providing lift installation, modernisation and maintenance services.
The acquisition of PLS Holdings provided a complimentary service offering to the Group's existing Compliance businesses. The acquisition will create new opportunities for collaboration and the cross-selling of additional and more comprehensive compliance services to local authorities and housing associations.
The effect of the acquisition on the Group's assets and liabilities were as follows:
Fair Provisional
Book Value Fair
value Adjustments Value
GBP'000 GBP'000 GBP'000
Assets
Non-current
Property, plant and equipment 60 (26) 34
Current
Inventories 341 (148) 193
Trade and other receivables 1,975 (148) 1,827
Cash and cash equivalents 506 - 506
------- ------------ -----------
Total assets 2,882 (322) 2,560
------- ------------ -----------
Liabilities
Non-current
Provisions - (182) (182)
Current
Trade and other payables (1,689) (7) (1,696)
------- ------------ -----------
Total liabilities (1,689) (189) (1,878)
------- ------------ -----------
Net assets acquired 1,193 (511) 682
Intangibles acquired 3,996
Deferred tax recognised
in respect of intangibles
capitalised (759)
Goodwill capitalised 3,626
-----------
7,545
===========
Satisfied by:
Cash consideration 6,484
Contingent deferred consideration 1,061
-----------
7,545
===========
Gross contractual receivables invoiced to the customer at the date of acquisition was GBP1,112,000.
Contingent deferred consideration has been calculated based on the expectations of future performance in the Group's three year plan compared to the calculation methodology set out in the Share Purchase Agreement. The contingent deferred consideration may vary depending on the underlying trading performance of the businesses.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
13. Business Combinations (continued)
The PLS Holdings Limited intangible assets are recognised and valued at GBP4.0m. This represents the expected value to be derived from the acquired customer related contracts, acquired customer relationships and the value placed on the non-compete agreement. The value placed on these customer-related contracts and relationships is based on the expected post-tax cash inflows over the estimated remaining life of each contract. The cash flows are initially reduced by 10% after year 1 with further deductions thereafter which the Directors consider is commensurate with the risks associated with capturing returns from the customer relationships, and then discounted using a post-tax discount rate of 13%. The estimated life for customer contracts is assumed to be the remaining life of each contract, and the customer relationships are estimated to have a life of six years.
The Directors consider the value assigned to goodwill represents the workforce acquired, expected synergies to be generated, and access to additional customers and markets as a result of this acquisition. It is not expected that any goodwill will be deductible for tax purposes. All costs of the acquisition have been recognised as an exceptional expense in the Statement of Comprehensive Income in the period in which it was incurred, the total cost recognised is GBP253,000.
Post-acquisition results
The results for PLS Holdings Limited since the acquisition date, included within the consolidated statement of comprehensive income for the period ended 30 September 2016, are:
GBP'000
Revenue 7,277
-------
Profit from operations 183
Interest -
-------
Profit before tax 183
Taxation (18)
-------
Profit for the period 165
=======
Results of all business combinations occurring during the year
Assuming the acquisition date for all business combinations that occurred during the year had been 1 October 2015, the consolidated statement of comprehensive income for Lakehouse plc for the year ended 30 September 2016, would have been:
GBP'000
Revenue 337,633
--------
Loss from operations (31,507)
Interest (1,635)
--------
Loss before tax (33,142)
Taxation 3,985
--------
Loss for the period (29,157)
========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2016
14. Summary of consideration paid and payable in respect of acquisitions
The sums below represent sums paid and payable in respect of acquisitions in the year:
Aaron Bury
Allied H2O Orchard Sure Heating PLS Metering
Protection Nationwide Providor (Holdings) Maintenance Services Holdings Services
Limited Limited Limited UK Limited Limited Limited Limited Limited Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 October
2015 3,267 2,384 1,497 1,562 511 - - - 9,221
Total
discounted
consideration
payable
for additions
in the
year ended
30 September
2016 - - - - - 9,221 7,545 75 16,841
Revaluation
of deferred
consideration - (607) (1,504) 408 (561) - - - (2,264)
Unwinding
of discount 13 (3) 107 163 50 163 94 - 587
Paid in
year (2,990) (442) (100) - - (8,368) (6,498) (75) (18,473)
---------- ---------- -------- ---------- ----------- --------- --------- --------- --------
At 30
September
2016 290 1,332 - 2,133 - 1,016 1,141 - 5,912
========== ========== ======== ========== =========== ========= ========= ========= ========
The fair value of the consideration has been assessed in accordance with the Sale & Purchase Agreements and expected future trading performance. The non-current element of the expected settlement has been discounted using a Pre-Tax discount rate that reflects the time value of money.
The total deferred consideration may vary between GBP3.5m and GBP6.5m depending on the underlying trading performance of the businesses.
15. Events after the reporting date
The Group agreed a variation with Royal Bank of Scotland in January 2017 to reduce the RCF to GBP40m and further reduce the facility to GBP35m in April 2017. The variation to the RCF included a revision to the banking covenants, which reflect the lower earnings expectations of the Group, and a higher rate of interest.
Since the 30 September 2016 there has been a subsequent agreement to adjust the deferred consideration, in regards to Orchard (Holdings) UK Limited, from GBP2.1m to GBP1.8m which will be paid by 28 February 2017.
This information is provided by RNS
The company news service from the London Stock Exchange
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