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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Havelock Europa | LSE:HVE | London | Ordinary Share | GB0004149356 | 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% | 2.30 | 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
TIDMHVE
RNS Number : 9005P
Havelock Europa PLC
31 May 2018
31(st) May 2018
HAVELOCK EUROPA PLC
("Havelock" or the "Company")
Full Year Results Announcement 2017
Havelock Europa (HVE.L). the international interior solutions provider, announces its full year results for the period ended 31(st) December 2017.
This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.
Financial Highlights
-- Revenue from continuing operations of GBP53.2m (2016: GBP60.8m), down due to subdued demand in public sector business and working capital constraints
-- Gross profit reduced to GBP2.8m (2016: GBP8.1m) reflecting the combined effect of lower revenues and changes to business mix towards lower margin business
Hot Features
Premium
-- Under-absorption of fixed costs due to the lower volumes and major short-term disruption
to activities on implementation of the ERP project.
-- An increased loss before tax of GBP5.3m before exceptionals (2016: profit GBP0.2m) reflecting lower volume levels of GBP1.2m, margin leakage attributed to cash shortages and the resulting delivery cost increase of GBP3.3m and stock write-off of GBP1.0m
-- Year-end result also includes exceptional costs of GBP0.7m and a deferred tax asset write-off of GBP1.4m
-- Net debt increased to GBP3.7m (2016: GBP2.7m)
-- Funding of GBP3m received post year end from Scottish Enterprise and Bank debt in place until 2020
-- Pension deficit increased by GBP0.4m, to GBP11.8m, from the restated 2016 position
Operational Highlights
-- Major losses in the first half of 2017 triggered a revised and simplified strategy, including significant cost reductions starting in 3rd Quarter 2017
-- New senior team in place under leadership of Shaun Ormrod (appointed as CEO September 2017) -- Significant write-offs of inventory -- ERP go live, with major improvements undertaken throughout year -- Increased business in Australasia GBP4.8m (2016 GBP1.1m)
Future Outlook
-- First four months of 2018 EBITDA well ahead of prior year and tracking closely to expectations
-- Right-sized business, lowering break-even level by 15% -- New executive team focused on cash, margin and realistic forecasting -- Strong demand from current customers in the private sectors -- Significant opportunities with new customers in the hotel and leisure industries -- Expectation of business growth from recent investment in Dublin-based resource -- 2019 and beyond, market opportunities growing
Enquiries
Havelock Europa PLC www.havelockeuropa.com Shaun Ormrod 01592 648480
Bruce Middleton
WH Ireland Group PLC (Nomad)
Chris Fielding 020 7220 1650
Charlotte Street Partners
David Gaffney 0313 516 5310
CHAIRMAN'S STATEMENT
2017 proved to be a much more challenging year than expected when I became Chairman in January 2017 and invested in the business. The recovery, which I sought to trigger, has got off to a slow start. 2017 was one of the worst performances in Havelock's history, being impacted by a lower opening order book brought forward from 2016, changes to the sales mix, lower Government spending on schools, weaker fixed cost coverage and serious issues with the new ERP system. In the second half of the year and the early part of 2018, we were held back by a lack of finance, which restricted our ability to source materials timeously and deliver effectively for our customers.
This triggered a radical change in the running of the business in the concluding months of 2017. The creation of a new executive team, with experience of turnarounds, started with the appointment of a new CEO in September 2017. New financing was negotiated, with an injection of GBP3m and a two-year Bank arrangement in place by the 1(st) Quarter 2018. The right sizing of the business was started in the 4(th) Quarter 2017 and over-optimistic forecasting was eliminated. ERP, although not perfect, has been improved significantly. Inventory write-offs, including prior years, have been taken.
As a result of these actions in the last 6 months, I believe the company has taken a major step forward in its recovery plan, which is not reflected in the historical 2017 results and prior year adjustments.
Financial overview
Total revenue for the year was GBP53.2m (2016: GBP60.8m). Although sales in the private sector rose in 2017, the increase was more than offset by a weak performance in the public sector.
Gross profit reduced to GBP2.8m (2016: GBP8.1m) reflecting the combined effect of:
-- Lower revenues from a weaker order book, in part reflecting increased market uncertainty since the middle of 2016;
-- The impact of cash flow difficulties on project deliveries; and
-- Under-absorption of fixed costs due to the lower volumes, lack of speedy cost reduction and short-term disruption to activities on implementation of the ERP project.
Underlying administrative expenses were comparable year on year at GBP7.5m (2016: GBP7.5m). Loss before tax was GBP5.3m before exceptionals (2016: profit GBP0.2m) reflecting the factors described above. The year-end results also included exceptional restructuring costs of GBP0.7m (2016: GBP0.2m).
The loss in the second half of the year was higher than originally anticipated. In part, this was due to a full review of raw materials and finished goods held by the Company being carried out, resulting in slow-moving or old stock totalling GBP1.0m being fully provided for at the year-end.
At year-end, GBP1.4m of the deferred tax asset was written off and taken through profit and loss. Further details can be found in Note 11 to the financial statements.
Prior Period Adjustment
The defined benefit pension scheme has been adjusted for the impact of IFRIC 14 which led to the recognition of an additional liability of GBP4.0m in the year to 31 December 2015, reflected in the subsequent balance sheets. This liability represents the present value of contributions agreed which exceed the defined benefit pension scheme deficit. The recognition of this liability also resulted in an additional interest cost of GBP0.2m being recognised through profit and loss for the year to 31 December 2016. It also resulted in a credit through other comprehensive income for the year to 31 December 2016 in relation to re-measurement of these liabilities and an associated deferred tax movement.
Financial position
In March 2018 the Group secured new financing arrangements which provide medium term committed facilities to underpin delivery of the business plan announced to shareholders in October 2017. I would like to thank Bank of Scotland and Scottish Enterprise for their support and their strong endorsement of the turnaround plan.
Dividends
No dividend is proposed for the year.
The Board
David Ritchie resigned as Chief Executive Officer on 26 September 2017. He departed with our best wishes.
Shaun Ormrod was appointed Chief Executive Officer on 27 September 2017. His previous experience is proving invaluable to us as we reinvigorate our efforts in the market place.
Donald Borland resigned as Chief Financial Officer on 6 April 2018 having completed the major task of securing future financing and handing over to a new Finance team. We thank him for his timely and major support. Bruce Middleton was appointed as Head of Finance and Company Secretary on 6 April 2018 and further appointments to strengthen the team are being implemented.
Hakeem Yesufu, at the recommendation of Andrew Burgess (the largest shareholder), was appointed post period, on 1 May 2018, as a Non-executive Director to add his financial experience to the turnaround.
In what was an extremely challenging year, I would like to pay tribute to the continued positive attitude and focus on customer delivery displayed by our staff and, on behalf of the Board, I would like to register our thanks to all members of the Havelock team for their contribution during this very difficult time.
Future strategy
The Board, under the auspices of the new CEO, conducted a major review of its vision, mission and strategy during the year. This was communicated to shareholders in October 2017 and revised in December in light of the lack of second half recovery. The plan is focused on right sizing the business, lowering the break-even point by 15%, restructuring and slimming the organisation and improving the commercial focus with the objective of achieving a stronger operating cash flow and profit growth. Havelock is seeking to re-establish market leadership and a much higher level of design innovation across all its markets.
Outlook
With the recent injection of GBP3.0m of new financing and a much firmer two year Banking agreement, we have been able to add significantly greater stability to our business, placing the Group on a firmer footing with our suppliers, upgrading our commercial function and meeting our customers' requirements. Initial signs are positive that the new business plan is working, albeit it will take two years to deliver fully. The first four months of 2018 EBITDA are well ahead of prior year and tracking closely to expectations.
In 2018, the new management team are responding to the continuing market and seasonal challenges and are focused on cash flow, cost reduction and margin improvement.
The outlook for 2019 and beyond is positive - with new product ranges; more framework agreements; an enhanced procurement model driving a growing quote bank in the Public Sector throughout the UK; branch refurbishment programmes being rolled out by our key financial institution customers in Corporate Services; and continued strong demand from an increased portfolio of clients in the Retail and Lifestyle sector, with established investment programmes.
With a reduced cost base as part of the restructuring of the business, fresh financing, the removal of planning based on over-optimism and a new executive team in place, the Group is much better placed to improve its performance as this work flows through.
Ian Godden
Chairman
CHIEF EXECUTIVE'S REVIEW
Operational review
Since being appointed by the Board in late September 2017 to conduct a major turnaround of the business, I have been extremely busy focusing on improving customer confidence in the business, which was at an extremely low point following the half year results announced prior to my arrival. This has required a major overhaul of the commercial function, a more realistic forecasting process and further cost reductions to right size the Company, reducing the break-even point by 15%.
The company has reduced headcount in 2017 by over 13%, shut offices, replaced underperforming commercial management, slimmed the management team and undertaken a major review of inventory. We remain focused on cost control and improving margins and cash flow through enhanced operational performance, strengthening the commercial team and the pursuit of further efficiencies.
Private sector sales rose slightly in 2017. Although one of our largest clothing retail customers continued to open new stores in the UK and Europe, this was offset by lower activity from other retailers. New accounts were secured during the period, both in the UK and internationally, and we received initial contract awards in the hotel sector, delivering on our strategy to broaden the customer base and enter less seasonal segments of the market. International retail had another successful year, recording sales of 24% of Group revenue (2016: 20%).
Corporate sales were lower than in 2016, with new customers being slower to place orders than expected. We continue to target opportunities for both furniture and fit out in this sector and are encouraged by the planned investment programmes of our financial institution customers.
Public sector sales were substantially lower than in 2016, particularly in England, reflecting a weak opening order book and lower than anticipated order conversion in the first half of the year, due to a combination of the delayed roll out of the next phase of the ESFA Priority Schools Building Programme along with severe price competition. Changes made to the commercial model in Public Sector since the half year are starting to yield results. Strong progress has been made with our main contractor customers in achieving preferred/nominated supplier or framework status throughout the UK. Together with an upgrading of our business development personnel in England and leaner front-end processes, these measures are expected to ensure enhanced order intake going forward. A new nursery and early years' education product range was launched earlier this year and was well received by the market. We are now in the process of updating our secondary school range.
Gross margin at 5.3% was significantly down on the previous year (2016: 13.2%) reflecting the impact of mix, pricing pressure and lower activity levels. Cost reduction has become an even greater focus for retail customers with investment programmes subject to regular review and re-evaluation, with consequent pressure on our margins and a requirement to ensure cost effective procurement and manufacturing solutions. Fixed cost coverage, particularly in manufacturing, suffered during the period from the combined impact of lower activity levels and disruption caused during and following the implementation of the ERP project. This resulted in an under-absorption of costs and therefore a negative impact on margin.
The ERP project went 'live' during the first half of 2017 and there were a number of operational challenges as a consequence. Whilst these have been resolved, we are continuing to 'bed-in' the new processes. As well as offering cost and efficiency benefits, this system should provide a framework for the better implementation of the new business strategy and enable the business to become more agile and responsive.
Current trading and prospects
The Company is firmly committed to the plan announced to shareholders in October 2017 focused on Margin, Sales and Customer Delivery. The business has been restructured to improve its commercial focus and ensure delivery of the plan. Demand from our retail and corporate customers is currently strong, and we expect increased business in Ireland from the recent investment in our Dublin based resource. Results at the EBITDA level in the first four months of 2018 are ahead of the prior year by over 20%, largely as a result of achieving a lower cost base.
Although securing orders at acceptable margins continues to be challenging, with the recent refinancing in place, we are now in a stronger position to implement the business plan.
Shaun Ormrod
Chief Executive
31 May 2018
Consolidated Income Statement
for the year ended 31 December 2017
Result before Exceptional
exceptional costs Total
costs
GBP000 GBP000 GBP000
Revenue 53,199 - 53,199
Cost of sales (50,385) - (50,385)
Gross profit 2,814 - 2,814
Administrative expenses (7,470) (663) (8,133)
Operating loss (4,656) (663) (5,319)
Net finance costs (602) - (602)
Loss before income
tax (5,258) (663) (5,921)
Income tax charge (1,408) - (1,408)
Loss for the year
(attributable to equity
holders of the parent) (6,666) (663) (7,329)
-------------- ------------ ----------
Basic earnings per
share (16.2p) (17.8p)
Diluted earnings per
share (16.2p) (17.8p)
for the year ended 31 December 2016
Restated* Restated*
Result before Exceptional
exceptional costs Total
costs
GBP000 GBP000 GBP000
Revenue 60,809 - 60,809
Cost of sales (52,753) - (52,753)
Gross profit 8,056 - 8,056
Administrative expenses (7,525) (174) (7,699)
Operating profit/(loss) 531 (174) 357
Net finance costs (335) - (335)
Profit/(loss) before
income tax 196 (174) 22
Income tax charge (99) 35 (64)
Profit/(loss) for
the year (attributable
to equity holders
of the parent) 97 (139) (42)
-------------- ------------ ----------
Basic earnings per
share 0.3p (0.1p)
Diluted earnings per
share 0.3p (0.1p)
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2017
Restated*
2017 2016
GBP000 GBP000
Loss for the year (7,329) (42)
---------- ----------
Items that will not be reclassified
to profit or loss
Re-measurement of defined
benefit pension scheme 144 (6,249)
Tax on items taken directly
to equity (24) 1,147
Other comprehensive income
net of tax 120 (5,102)
Total comprehensive income/(expense)
(attributable to equity holders
of the parent) (7,209) (5,144)
---------- ----------
Balance Sheets
as at 31 December 2017
Group Company
Restated* Restated*
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
Assets
Non-current assets
Property, plant and equipment 2,619 2,999 2,607 2,999
Intangible assets 10,123 9,577 11,682 11,127
Investment in subsidiaries - - 5,727 5,583
Deferred tax assets 1,976 3,360 1,976 3,360
Total non-current assets 14,718 15,936 21,991 23,069
Current assets
Inventories 3,795 4,654 3,795 4,654
Trade and other receivables 12,922 10,374 12,914 10,374
Cash and cash equivalents - - - -
Total current assets 16,717 15,028 16,709 15,028
Total assets 31,435 30,964 38,701 38,097
Liabilities
Current liabilities
Interest-bearing loans
and borrowings (3,338) (2,620) (3,352) (2,620)
Trade and other payables (19,139) (13,109) (24,906) (18,979)
Total current liabilities (22,477) (15,729) (28,258) (21,599)
Non-current liabilities
Interest-bearing loans
and borrowings (338) (123) (338) (123)
Retirement benefit obligations (11,813) (11,364) (11,813) (11,364)
Total non-current liabilities (12,151) (11,487) (12,151) (11,487)
Total liabilities (34,628) (27,216) (40,409) (33,086)
Net liabilities (3,193) 3,748 (1,708) 5,011
---------- ---------- ---------- ----------
Equity
Issued share capital 4,153 3,853 4,153 3,853
Share premium 7,013 7,013 7,013 7,013
Other reserves 2,184 2,184 2,184 2,184
Revenue reserves (16,543) (9,302) (15,058) (8,039)
Total equity attributable
to equity holders of the
parent (3,193) 3,748 (1,708) 5,011
---------- ---------- ---------- ----------
These financial statements were approved by the Board of Directors on 31 May 2018 and were signed on its behalf by:
Shaun Ormrod Director
Cash Flow Statements
for the year ended 31 December 2017
Group Company
Restated* Restated*
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
Cash flows from operating
activities
(Loss)/profit for the
year (7,329) (42) (5,634) 31
Adjustments for:
Depreciation of property,
plant and equipment 250 366 249 366
Amortisation of intangible
assets 410 188 401 115
Net financing costs 602 335 544 335
Deferred tax on R&D credit - (114) - (114)
Non-cash exceptional charges - 91 - 91
IFRS 2 charge and net
movements relating to
equity-settled plans - 36 - 36
Income tax charge 1.407 64 50 64
Operating cash flows before
changes in working capital
and provisions (4,660) 924 (4,390) 924
---------- ---------- ---------- ----------
Increase in trade and
other receivables (2,547) (941) (2,974) (941)
Decrease in inventories 859 1,400 859 1,400
Increase/(decrease) in
trade and other payables 6,548 (3,146) 6,677 (3,146)
Cash contributions to
defined benefit pension
scheme (249) (134) (249) (134)
---------- ---------- ---------- ----------
Cash used in operations (49) (1,897) (77) (1,897)
Interest paid (269) (125) (269) (125)
Taxation paid (47) - (47) -
Net cash used in operating
activities (366) (2,022) (393) (2,022)
Cash flows from investing
activities
Acquisition of property,
plant and equipment (77) (131) (64) (131)
Acquisition of intangible
assets (749) (1,699) (749) (1,699)
Net cash used in investing
activities (826) (1,830) (813) (1,830)
Cash flows from financing
activities
New share capital 268 - 268 -
Receipt of loan funding 300 - 300 -
Repayment of finance lease/HP
liabilities (394) (402) (394) (402)
New finance leases 47 63 47 63
Net cash from/(used in)
financing activities 221 (339) 221 (339)
Net decrease in cash and
cash equivalents (970) (4,191) (985) (4,191)
Cash and cash equivalents
at 1 January (2,230) 1,961 (2,230) 1,961
Cash and cash equivalents
at 31 December (3,200) (2,230) (3,215) (2,230)
---------- ---------- ---------- ----------
Statement of Changes in Equity
for the year ended 31 December 2017
Group
Share Share Merger Revenue
capital premium reserve reserve Total
GBP000 GBP000 GBP000 GBP000 GBP000
Current period
At 1 January 2017 3,853 7,013 2,184 (9,302) 3,748
Loss for the year - - - (7,329) (7,329)
Other comprehensive income for the year - - - 120 120
Issue of share capital 300 - - (32) 268
At 31 December 2017 4,153 7,013 2,184 (16,543) (3,193)
--------- --------- --------- --------- --------
Previous period (Restated*)
At 1 January 2016 3,853 7,013 2,184 (4,194) 8,856
Profit for the year - - - (42) (42)
Other comprehensive income for the year - - - (5,102) (5,102)
Movements relating to share-based payments and the ESOP trust - - - 36 36
--------- --------- --------- --------- --------
At 31 December 2016 3,853 7,013 2,184 (9,302) 3,748
--------- --------- --------- --------- --------
Statement of Changes in Equity
for the year ended 31 December 2017
Company
Share Share Merger Revenue
capital premium reserve reserve Total
GBP000 GBP000 GBP000 GBP000 GBP000
Current period
At 1 January 2017 3,853 7,013 2,184 (8,039) 5,011
Loss for the year - - - (7,107) (7,107)
Other comprehensive income for the year - - - 120 120
Issue of share capital 300 - - (32) 268
At 31 December 2017 4,153 7,013 2,184 (15,058) (1,708)
--------- --------- --------- --------- --------
Previous period (Restated*)
At 1 January 2016 3,853 7,013 2,184 (3,004) 10,046
Profit for the year - - - 31 31
Other comprehensive income for the year - - - (5,102) (5,102)
Movements relating to share-based payments and the ESOP trust - - - 36 36
--------- --------- --------- --------- --------
At 31 December 2016 3,853 7,013 2,184 (8,039) 5,011
--------- --------- --------- --------- --------
Notes to the financial statements
Note 1 to the financial statements is reproduced below. The full Annual Report is available on the Company's website.
1. Accounting policies
Havelock Europa PLC is a company incorporated and domiciled in the United Kingdom.
Statement of compliance
Both the parent company financial statements and the group financial statements ("financial statements") have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRS"). On publishing the parent company financial statements here together with the group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.
Basis of preparation
The financial statements are prepared on the historical cost basis, except for certain fixed assets stated at deemed cost, whilst intangible assets are stated at amortised fair value. The assets of the pension scheme are stated at their fair value while the liabilities of the pension scheme are stated using the projected unit method.
The preparation of financial statements in conformity with Adopted IFRSs requires the directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expense. The estimates and judgements are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements is contained in the following areas.
Financial statement Critical judgement/estimate Related
area in applying accounting note
policies
---------------------------- ----------------------------------- --------
Measurement of Assessment of value in Note
the recoverable use calculations, which 9
amounts of cash-generating comprise the present value
units of expected future cash
flows from continuing operations.
Sensitivity analysis using
a range of discount rates,
growth rates and cash flow
sensitivities to assess
impairment.
---------------------------- ----------------------------------- --------
Measurement of Determination of assumptions Note
defined benefit for mortality, discount 16
pension obligations rate and inflation
Treatment of tax relating
to the deficit.
---------------------------- ----------------------------------- --------
Financial instruments Determination of the fair Note
value of Level 2 financial 17
instruments. The key estimates
used for each type of financial
asset and financial liability
are detailed further in
Note 17 to the financial
statements.
---------------------------- ----------------------------------- --------
Recoverability Level of tax losses recognised Note
of deferred tax based on future forecast 11
assets profits.
---------------------------- ----------------------------------- --------
Going concern
The Group incurred a loss before tax of GBP5.3m before exceptionals (2016: profit GBP0.2m) for the year on revenue of GBP53.2m (2016: GBP60.8m) and at the balance sheet date had net current liabilities of GBP5.8m (2016: GBP0.7m) and net liabilities of GBP3.2m (2016: GBP3.7m net assets), including an increased pension deficit of GBP11.8m (2016: GBP11.4m).
Since the year end, and under new leadership, the Group has refinanced its debt, which now consists of a GBP5.0m revolving credit facility from the bank (the "facility") and a GBP3.0m loan from Scottish Enterprise (the "SE loan"), as more fully described in the Strategic Report for the year ended 31 December 2017, as part of the Chief Executive's Review. In addition, the GBP0.2m finance lease debt and GBP0.3m loan from the chairman's pension fund continue. The facility runs for two years to March 2020, and interest on the SE loan, which is repayable in instalments from November 2020, is rolled up until November 2019.
Accordingly, the group needs to turn around its financial performance over the next two years in order to stay within the various covenants on its debt during this period and to be in a position to roll over or refinance the facility and possibly the SE loan, which incurs interest at a significant rate. There are also increasing contributions to the pension scheme deficit scheduled from GBP0.7m pa in 2018 through to GBP1.5m pa from 2022.
Cash flow forecasts have been prepared for the period through to 31 December 2020. These include an increase in revenue of 25% by 2020, the removal of GBP0.6m pa from the cost base arising from actions already in progress and the realisation of GBP1.8m of cash from excess working capital; but at the same time an outflow of GBP2.1m to clear deferred supplier payments and careful management of the timing of cash payments in the short term. As is usual in a turnaround situation, the covenants on the debt are not designed to accommodate a great deal of variance from the trajectory that formed the basis of the finance package. In particular a modest shortfall in the forecast revenue will result in a breach of covenants and, unless other measures can be implemented to remain within covenants, the Group would require a covenant waiver or similar agreement from the Bank and SE for continuation of the funding package.
Whilst the group's new leadership is committed to and very positive about the prospects of turning the business around, it remains possible, particularly when viewed from this very early stage of the turn-around, that variances sufficient to breach the covenants could occur particularly as the Group's customer base is largely in the retail and public sectors. The directors consider that they will be able to implement further cost saving measures, and are actively assessing the feasibility of such, that could remove a further GBP1.6m pa from the cost base fully effective by 2019, although some of these measures depend on successful negotiations. Such measures, if implemented in time, could avoid some of the breaches occurring. The Group would also seek to remain within covenants in such cases through the careful management or deferral of the timing of payments.
The directors are satisfied that it is most likely that the business will be successfully turned around within the trajectory necessary to keep within the debt covenants, and accordingly have prepared the financial statements on the going concern basis. Nevertheless, the conditions described above constitute a material uncertainty that may cast significant doubt over the ability of the Group and Company to continue as a going concern and so to realise their assets and settle their liabilities in the normal course of events.
Risks and uncertainties
A material disruption to the Company's business or a shortfall in operational or financial performance or a reduction in the ability to secure appropriate credit terms from suppliers could mean that the Group's ability to operate within its bank facility would be at risk. The Group addresses this risk by detailed monitoring of financial performance and of the expected outcome for each measurement period.
The Group's business has a strong seasonal element, with a peak of activity in the middle and second half of the year. This could result in peak output requirements exceeding the available capacity. The Group manages this risk by detailed and regular capacity planning reviews, with additional shifts and early production being planned.
In 2017, the Group had two clients which each constituted more than 10% of revenue. The loss of any such major client would adversely affect the Group's profitability and cash flow. The business focuses on maintaining a good working relationship with all its customers. We are continuing to pursue our strategy of diversifying the business across and within sectors to increase resilience and reduce dependence on particular markets and customers.
The Group operates in highly competitive markets and deals with major customers which increasingly employ procurement strategies designed to ensure that all purchases, and not just those of stock items, are acquired at the lowest possible cost. The business is addressing this risk by seeking production cost savings including, where appropriate, procurement from lower cost overseas suppliers.
The Group is involved as a supplier to major construction projects, which can be subject to time delays and slippage caused by both commercial and weather-related issues. The business addresses this risk by building allowance for slippage into its production forecasts and budgets.
The Group undertakes work as a sub-contractor under industry standard written contracts. The risks involved in working under such contracts are controlled by the employment of qualified and knowledgeable contract managers and quantity surveyors.
The largest element of working capital employed by the Group is trade receivables and accrued income. These are subject to credit risk and, as a consequence, the Group employs credit insurance to cover the risk on most of its commercial debtors. However, in addition to debt owed by the public sector and local government, the Group bears the credit risk on a proportion of receivables where its credit insurers are unwilling to provide cover. The Group's procedures require that material uninsured credit limits are approved by the Board. The Group also monitors the credit status of its major customers.
New accounting standards effective in 2017
The standards and interpretations that are applicable for the first time in the Group's financial statements for the year ended 31 December 2017 have no effect on these financial statements.
Basis of consolidation
The consolidated financial statements comprise Havelock Europa PLC and its subsidiaries. The financial statements of subsidiaries are prepared to the same reporting date using accounting policies consistent with those of the parent company. Intra-group transactions and balances, including any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in full. The Company accounts include information about the parent company only.
Subsidiaries
Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Foreign currency translation
Transactions and balances
Transactions in currencies other than pounds sterling are recorded at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to sterling at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at the rates prevailing at the dates when the fair value was determined. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency (e.g. property, plant and equipment purchased in a foreign currency) are translated using the exchange rate prevailing at the date of the transaction. Exchange differences arising on translation are recognised in the consolidated income statement for the period.
Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and net of any accumulated impairment losses. Certain items of property, plant and equipment that had been revalued under UK GAAP on or prior to 1 January 2004, the date of transition to Adopted IFRS, are measured on the basis of deemed cost, regarded as being the fair value at the date of transition.
Land is not depreciated. For all other property, plant and equipment, depreciation is calculated on a straight-line basis to allocate cost less residual values of the assets over their estimated useful lives on the following basis:
-- Freehold and long leasehold buildings 25-50 years -- Plant and equipment 3-10 years -- Fixtures and fittings 3-10 years -- Motor vehicles 4 years
Assets held under finance leases/HP contracts are capitalised and depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.
Intangible assets
Goodwill
All business combinations are accounted for by applying the purchase method. In respect of acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net assets acquired. In respect of acquisitions before this date, goodwill is included based on its deemed cost, which represents the amount recorded under UK GAAP. For acquisitions after 1 January 2010, any transaction costs arising on business combinations are reflected within the consolidated income statement. Contingent consideration is measured at fair value and any subsequent re-measurements are reflected within the consolidated income statement. Any pre-existing relationships arising with entities acquired are identified and reflected separately within the consolidated income statement if settled on the business combination.
Goodwill is stated at cost or deemed cost less any accumulated impairment losses (see below). Goodwill is allocated to cash-generating units and is tested annually for impairment.
On disposal of a subsidiary, the attributable goodwill is included in the determination of the gain or loss on disposal.
Negative goodwill arising from a business combination is recognised directly in the consolidated income statement.
Other intangible assets
Other intangible assets acquired by the Group are stated at cost less accumulated amortisation and net of any accumulated impairment losses. The cost of intangible assets acquired in a business combination is the fair value at acquisition date. The cost of separately acquired intangible assets, including computer software, comprises the purchase cost and any directly attributable costs of preparing the asset for use.
Amortisation of other intangible assets is charged to the consolidated income statement on a straight-line basis when the asset is available for use so as to allocate the carrying amounts of the intangible assets over their estimated useful lives as follows:
-- Computer software 3 - 12 years -- Brands 10 years
Impairment of assets
The carrying amounts of the Group's non-current assets and all financial assets, other than deferred tax, are reviewed at each balance sheet date to determine whether there is any indication of impairment. Additionally, goodwill is subject to an annual impairment test.
An impairment loss is recognised whenever the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. Recoverable amount is the higher of the fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Impairment losses are recognised in the consolidated income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Inventories
Inventories are stated at the lower of cost and net realisable value using weighted average cost. Cost comprises directly attributable purchase and conversion costs and an allocation of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and selling expenses.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank, which is available for immediate withdrawal or on short-term deposit, and cash in hand. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Dividends
Final equity dividends to the shareholders of Havelock Europa PLC are recognised as a liability in the period that they are approved by shareholders. Interim equity dividends are recognised when they are paid.
Financial instruments
Investments in subsidiaries
Investments in subsidiaries are carried at cost less any provisions for impairment.
Trade and other receivables
Trade and other receivables are stated at cost less an allowance for irrecoverable amounts.
Trade and other payables
Trade and other payables are stated at cost.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at the fair value of the consideration received, net of attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the consolidated income statement over the period of the borrowings using the effective rate of interest method.
Net financing costs
Financing costs are recognised in the consolidated income statement as an expense in the period in which they are incurred.
Employee benefits
The Group and the Company operate both defined benefit and defined contribution pension plans.
Defined benefit scheme
A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group's net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets (at bid price) are deducted. The Group determines the net interest on the net defined benefit liability/asset for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability (asset). The discount rate is the yield at the reporting date on bonds that have a credit rating of at least AA that have maturity dates approximating the terms of the Group's obligations and that are denominated in the currency in which the benefits are expected to be paid.
Re-measurements arising from defined benefit plans comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). The Group recognises them immediately in other comprehensive income and all other expenses related to defined benefit plans in employee benefit expenses in profit or loss. When the benefits of a plan are changed, or when a plan is curtailed, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment, is recognised immediately in profit or loss when the plan amendment or curtailment occurs. The calculation of the defined benefit obligations is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the present value of benefits available in the form of any future refunds from the plan or reductions in future contributions and takes into account the adverse effect of any minimum funding requirements.
Defined contribution plans
Obligations for contributions to defined contribution pension plans are recognised as an expense in the consolidated income statement as incurred.
Share-based payment transactions
The Company operates a number of equity-settled share-based compensation schemes. The fair value of options granted is recognised as an employee expense in the consolidated income statement, with a corresponding increase in shareholders' equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the share incentives on a straight-line basis. The fair value of the share incentives granted is measured using appropriate valuation models, taking into account the terms and conditions upon which the share incentives were granted. At each reporting date, the Group re-estimates the number of share incentives that are expected to vest based on non-market conditions. Any adjustment is recognised in the consolidated income statement, with a corresponding adjustment to shareholders' equity, over the remaining vesting period. The Havelock Europa Employee Share Trust holds shares in Havelock Europa PLC, which are presented in the consolidated and parent financial statements as a deduction from revenue reserves.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable net of trade discounts, cash discounts and volume rebates and excluding value added tax. Revenue from the sale of goods is recognised in the consolidated income statement when the Group has transferred the significant risks and rewards of ownership of the goods and services to the customer, the revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue from goods shipped subject to installation is recognised when the customer accepts delivery and installation is complete. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods and continuing involvement with the goods such that the risks and rewards of ownership remain with the Group. Significant contracts within the scope of IAS 11 which are for the construction of bespoke and significant projects are treated as construction contracts in accordance with IAS 11. Where the outcome of a contract can be measured reliably, revenue is recognised over the period of the contract by reference to stage of completion of the contract at the balance sheet date, with reference to third party certification where available or, if not, in proportion to the expected total cost incurred to date. Where the outcome of a contract cannot be reliably estimated, contract costs are recognised as an expense when incurred and revenue is only recognised to the extent of the contract costs incurred that it is probable will be recoverable. In both cases, any expected contract loss is recognised immediately. Retentions, generally totalling 5% of the sale value, are recognised when earned but are retained by the client throughout the contract term, with half paid upon contract completion and half released after twelve months.
Exceptional items
The Group has disclosed additional information in respect of exceptional items on the face of the consolidated income statement in order to aid understanding of the Group's financial performance. An item is treated as exceptional if it is considered that by virtue of its nature, scale or incidence it is of such significance that separate disclosure is required for the financial statements to be properly understood.
Leases/HP contracts
Finance leases/HP contracts Leases are classified as finance leases where substantially all the risks and rewards of ownership are transferred to the Group. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The corresponding liability to the finance lessor is included in the balance sheet as a lease obligation. HP contracts are treated in the same manner. Lease/HP payments are apportioned between the liability and the finance charge to produce a constant periodic rate of interest on the remaining balance of the finance lease liability. Operating leases Leases other than finance leases are classified as operating leases. Payments made under operating leases are recognised in the consolidated income statement on a straight-line basis over the lease term.
Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components, and for which discrete financial information is available. An operating segment's operating results are reviewed regularly by the chief operating decision maker (which is deemed to be the Board) to make decisions about resources to be allocated to the segment and assess its performance. Segment results that are reported to the Board include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment reporting for the Group includes revenue for each of the operating segments. No reporting of assets and liabilities is recorded at a segment level and this measure is not reported to the Board.
Taxation
Current and deferred tax is recognised in the consolidated income statement, unless the tax relates to items recognised directly in shareholders' equity, in which case the tax is recognised directly in shareholders' equity through the consolidated statement of comprehensive income. Current tax expense is the expected tax payable on the taxable income for the reporting period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to the tax payable in respect of prior years. Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax arising from initial recognition of an asset or liability, other than as a result of a business combination, that affects neither accounting nor taxable profit or loss, is not recognised. Deferred tax is calculated using tax rates that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
Non-current assets held for sale
A non-current asset or group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for sale and sale is highly probable within one year. On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell, with any adjustments taken to profit or loss. The same applies to gains and losses on subsequent re-measurement.
Earnings per share
The Group presents basic and diluted earnings per share (EPS) data for ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of shares outstanding, adjusted for the effects of all dilutive potential ordinary shares.
Amendments to existing standards that have been adopted by the Group
The Group has adopted the following new amendments to existing standards which have been endorsed by the EU.
IAS 7 Statement of Cash Flows - The amendment requires disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash and non-cash movements. Effective 1 January 2017.
IAS 12 Income Taxes - These amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. Effective 1 January 2017.
The Group's accounting policies have been updated to reflect these and additional disclosures in respect of liabilities arising from financing activities have been added to the Notes to the financial statements. The implementation of the above interpretations and amendments to existing standards has had no significant impact on the Group's financial statements.
New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2017 and have not been applied in preparing these financial statements including the following.
IFRS 9 Financial Instruments - This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 allows two measurement categories for financial assets in the statement of financial position: amortised cost and fair value. All equity instruments and derivative instruments are measured at fair value. A debt instrument is measured at amortised cost only if it is held to collect contractual cash flows and the cash flows request principal and interest, otherwise it is classified at fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL), depending on the business model it is held within or whether the option to adopt FVTPL has been applied. Changes in value of all equity instruments and derivative instruments are recognised in profit or loss unless an OCI presentation election is made at initial recognition for an equity instrument or a derivative instrument is designated as a hedging instrument in a cash flow hedge. IFRS 9 also introduces a new impairment model, an expected credit loss model which will replace the current incurred loss model in IAS 39. An impairment loss will now be recognised prior to a loss event occurring. Accounting for financial liabilities remains the same as under IAS 39 except that for financial liability designated as at FVTPL, changes in the fair value due to changes in the liability's credit risk are recognised in OCI. As well as presentation and measurement changes, IFRS 9 also introduces additional disclosure requirements.
This is effective for the Group in the period beginning 1 January 2018. The Group is currently assessing the impact of the new standard on the consolidated financial statements.
IFRS 15 - Revenue from contracts with customers - This standard replaces IAS 18 Revenue and related interpretations. It specifies how and when revenue from contracts with customers is recognised, using a principles based five-step model. New disclosure requirements including estimate and judgement thresholds will be introduced.
This is effective for the Group in the period beginning 1 January 2018. A detailed impact assessment is currently in progress for all major revenue streams, reviewing contract and analysing the revenue recognised by the Group. The areas identified to date that could potentially be impacted by the implementation of IFRS15 are as follows:
-- Long-term contracts - assessment of over-time recognition criteria and measure of progress; -- Treatment of work-in-progress; -- Assessment of performance obligations (e.g. design and manufacturing element of one job); -- Accounting of procurement services; -- Variable consideration; -- Potential loss-making contracts.
IFRS 16 Leases - This standard replaces the existing standard, IAS 17 Leases, where lessees are required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a 'right of use asset' for virtually all lease contracts. The accounting for leases by lessors remains largely unchanged.
The main impact on the Group of IFRS 16 will be for properties that the Group leases for use as office and warehousing space which are currently classified as operating leases. As a result of the new standard the properties leased will be brought onto the Statement of Financial Position at inception of a lease. At inception, the right of use asset will be measured equal to the present value of the lease liability. The present value of the lease liability takes into account prepayments and incentives and will be measured using the interest rate implicit in the lease or the incremental borrowing rate. The right of use asset will be depreciated over the life of the lease and the interest expense on the lease liability will be recognised separately.
This is effective in the period beginning 1 January 2019, with earlier adoption permitted if IFRS 15 'Revenue from contracts with customers' is also applied. The Group is currently assessing the full impact of the new standard on the consolidated financial instruments. A breakdown of the existing operating lease commitments is provided in Note 21.
IFRS 17 Insurance contracts - This standard replaces the existing standard, IFRS 4 Insurance Contracts, which was an interim standard permitting the continued application of accounting policies for insurance contracts which were being used at transition to IFRS. IFRS 17 introduces new required measurement and presentation accounting policies for such contracts which reflect the view that these contracts combine features of a financial instrument and a service contract.
IFRS 17's measurement model, which applies to groups of contracts, combines a risk-adjusted present value of future cash flows and an amount representing unearned profit. On transition retrospective application is required unless impracticable, in which case either a modified retrospective approach or a fair value approach is required.
This is effective in the period beginning 1 January 2021. The Group is currently assessing the full impact of the new standard on the consolidated financial statements but there is no material effect expected.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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(END) Dow Jones Newswires
May 31, 2018 10:46 ET (14:46 GMT)
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