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RNS
Cape plc  -  CIU   

Preliminary Results

Released 07:00 15-Mar-2017

RNS Number : 4841Z
Cape plc
15 March 2017
 

    

15 March 2017

Cape plc

("Cape" or "the Company", and together with its subsidiaries, the "Group")

 

Preliminary Results

 

Cape plc (CIU.LN), an international leader in the provision of critical industrial services to the energy and natural resources sectors,
announces its preliminary results for the twelve months to 31 December 2016.

 

Robust 2016 financial results, strong trading performance and record order book; confidence in 2017 outlook

 

Financial summary

 

2016

2015

Change

Financial highlights:

 

 

 

Continuing operations:

 

 

 

Revenue

£863.5m

£711.4m

+21.4%

Adjusted operating profit

£55.4m

£52.5m

+5.5%

Adjusted operating profit margin

6.4%

7.4%

(100bps)

Adjusted profit before tax

£47.4m

£44.7m

+6.0%

Adjusted diluted earnings per share

29.9p

29.9p

-

 

 

 

 

Full year dividend per share

7.0p

14.0p

(50.0%)

Adjusted net debt

£80.4m

£109.9m

(26.8%)

 

 

 

 

Statutory results:

 

 

 

Revenue

£863.5m

£711.4m

+21.4%

Operating profit/(loss)

(£32.8m)

£39.9m

(182.2%)

Profit/(loss) before tax

(£43.6m)

£29.1m

(249.8%)

Diluted earnings/(loss) per share

(34.0p)

12.7p

(367.7%)

     

Throughout this document, various management measures are used and referred to as adjusted. These are defined and reconciled within note 8 'Adjusted measures'.

 

Highlights

 

·      Strong trading performance driven by increased activity in Asia Pacific and favourable foreign exchange:

-       UK margins were adversely impacted by oil price driven weakness in the North Sea, reduced demand from the
coal-fired power generation market and a small number of commercial issues. Corrective measures have been implemented and the business is expected to deliver a much improved performance in 2017

-       The Middle East business delivered a solid performance. A number of key contract wins and increased activity in the Kingdom of Saudi Arabia, combined with a strong performance from the SOCAR-Cape joint venture in Azerbaijan mitigated the effect of increased cost pressures, slow-downs and deferrals from customers in other parts of the region

-       The Asia Pacific business benefitted from excellent operational performance on increased project activity in Australia, South Korea and Singapore, more than offsetting continuing low levels of demand in the Australian mining sector, and intense competition across the whole Asia Pacific region

·      Strong adjusted operating cash flow of £71.5m (2015: £43.9m); significantly lower adjusted net debt of £80.4m
(31 December 2015: £109.9m)

·      Record closing order book, up 6.5% at £917.6m (2015: £861.3m)

·      Record safety performance

·      Settlement of insurer product liability litigation agreed on 12 March 2017 for a consideration of £18.0 million payable immediately and a deferred payment of up to £34.5 million payable in the period 2018 to 2023

·      Final dividend per share of 2.5 pence resulting in full year dividend of 7.0 pence; progressive dividend policy from 2018

·      The business is expected to deliver another strong trading performance in 2017

 

Commenting on the results, Joe Oatley, Chief Executive of Cape said:

 

"I am delighted to report we have delivered strong top line growth and solid earnings per share despite the challenging market backdrop, demonstrating the resilience of our strategy. The settlement of the insurer product liability litigation on 12 March 2017 has removed a significant risk to the business and its stakeholders. In light of that litigation, our focus during 2016 has been on the delivery of our organic growth strategy and I am pleased to report that this is yielding results. Whilst market pressures are expected to persist for the near-term, with a strong order book and a good start to 2017, the Board is confident that the business will deliver another strong trading performance in 2017. We continue to invest in our strategy and I remain convinced that it will deliver increased shareholder value over the medium to long-term."

 

Changes to segmental reporting

 

The Group has re-organised its geographical reporting segments during the period as outlined below. The change in reporting segments is effective from 1 January 2016 and has been performed to align external reporting with the revised internal management structure. All prior year figures have been restated accordingly.

 

Old segments

New segments

UK, Europe & CIS1

UK

MENA

Middle East2

Asia Pacific

Asia Pacific3

 

1 CIS refers to Kazakhstan, Azerbaijan and Sakhalin

2 Includes Kazakhstan and Azerbaijan

3 Includes Sakhalin

 

Analyst meeting

 

The Group will be presenting to a meeting of analysts at 9.30am today at the office of Buchanan, 107 Cheapside, London, EC2V 6DN. The presentation will shortly be available on the Company's website at: www.capeplc.com/investors/financial-results-and-presentations.aspx

 

Enquiries

 

Cape plc                                                                                                +44 (0) 1895 459 979

Joe Oatley, Chief Executive

Michael Speakman, Chief Financial Officer

Ian Wood, Head of Investor Relations           

 

Buchanan                                                                                              +44 (0) 207 466 5000

Bobby Morse, Ben Romney, Chris Judd

 

 

This announcement contains inside information.

 

 

Forward-looking statements

Certain statements in this document are forward looking. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that may or may not occur and could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Such risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the expectations, beliefs, hopes, plans, intentions, strategies and events described herein. Therefore,
forward-looking statements contained in this document regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which are based on the knowledge and information available only at the date of this document's preparation. For a description of certain factors that may affect Cape's business, financial performance or results of operations, please refer to the Principal risks on page 20 of the 2015 Annual Report and Accounts.

 

About Cape:

Cape (www.capeplc.com), which is premium listed on the main market of the London Stock Exchange, is an international leader in the provision of critical industrial services principally to the energy and natural resources sectors. Our multi-disciplinary service offering includes access systems, insulation, mechanical, specialist coatings and fireproofing, refractory linings services, environmental services, storage tanks and heat exchanger replacement and refurbishment.

 

Cape employs c. 16,000 people working across 23 countries and in 2016 reported revenue of £863.5 million.

 

 

 

Chairman's statement

 

Overview

The Group delivered a strong performance in 2016, despite the challenging market. Financial results were robust, with strong revenue growth and solid adjusted diluted earnings per share. The Group also performed well operationally, delivering our critical services for our customers and being rewarded with substantial contract awards across the Group. Given the importance we place on creating a safe working environment, I am particularly pleased that we also recorded our best ever safety performance.

 

We faced a number of other challenges during the year. At Board level, we spent a considerable amount of time working with management and our advisors on the ongoing industrial disease claim litigation, reaching a settlement agreement in relation to the insurer product liability claims on 12 March 2017. This settlement and other related industrial disease claim issues are discussed more fully in both the Chief Executive's and Chief Financial Officer's reports. There were also changes in our senior structure and Board membership as we re-domiciled the Company's centre of management and refreshed the Board and its Committees. Throughout the year, we maintained our focus on the continuous improvement of the Group's governance and controls.

 

A resilient strategy delivering strong financial results and significant contract awards

The strength of Cape's strategy has been demonstrated with a strong financial performance and a number of key contract awards in difficult market conditions during the year. Our customers focussed on cost control and cash management, which put pressure on margins and caused delays and deferrals of maintenance and construction activities. However, our broad geographical reach, balanced business and commitment to operational excellence ensured the Group delivered adjusted diluted earnings per share of 29.9 pence, in line with our performance in 2015. The award of additional scope of works at Wheatstone in Australia in 2016 is recognition by our customer of the quality and value that Cape delivers.

 

Health and safety

Our vision is to create a work environment where everyone can work safely with zero harm to themselves and their colleagues. We achieved our best ever recorded safety performance with significant improvements in both our Total Recordable Incident Rate and the number of Lost Time Incidents during the year. We will continue to drive a strong safety culture within the business; we owe it to our many employees and customers.

 

The Board and corporate governance

During the year, the Board re-domiciled the Company's centre of management from Singapore to the UK, a move we expect to provide a number of benefits to the Group.

 

As previously announced, following re-domiciliation, Samantha Tough, who is based in Western Australia, stepped down from the Board. I would like to thank Samantha for her contribution to the Group. The Nomination Committee led the search for Samantha's replacement and I am delighted to welcome Mary Reilly to the Board. Mary brings a wealth of experience from a variety of sectors, having worked for over 30 years' in an international environment as a Chartered Accountant with Deloitte LLP. We have also changed our committee memberships with Mary becoming a member of the Audit Committee, replacing Samantha, and Brian Larcombe replacing Michael Merton on the Remuneration Committee.

 

The Board has also continued to focus on strengthening Cape's performance and controls. There has been a particular focus on
anti-bribery and anti-corruption training and compliance across the Group. The Audit Committee initiated a sequenced 'deep-dive' review of important risks, policies and controls.

 

Cape people

I would like to thank all our employees for their dedication, skill and hard work during 2016. The Company continues to be led by a highly motivated and extremely effective management team, supported by highly-skilled, dedicated and determined employees. This is reflected in the improved safety performance and the delivery of strong financial results, despite the significant market challenges in all our geographies. Such results evidence our values and continue to demonstrate our management and employees' drive and commitment to deliver for our stakeholders.

 

Dividend

The Board has decided that it is appropriate to rebase the dividend given the cash impact of the recent settlement of the insurer product liability litigation. The Board is therefore recommending a final dividend per share of 2.5 pence, which, if approved by shareholders, would bring the full year dividend per share to 7.0 pence. The Board is planning to maintain the dividend at this level for 2017 and then implement a progressive dividend policy from 2018 onward. Subject to shareholders' approval at the Annual General Meeting to be held on 10 May 2017, the final dividend will be payable on 23 June 2017 to shareholders on the register as at 19 May 2017.

 

Prospects

The Company's strong financial performance in difficult market conditions, strategic achievements and the settlement of the insurer product liability litigation provide confidence in the Group's future prospects. I believe the Company is being led by a talented management team and pursuing the right strategy to deliver long-term growth in what we expect to remain challenging and competitive markets.

 

Tim Eggar

Chairman

 

 

Chief Executive's review

 

Overview

The resilience of our strategy and business model is demonstrated by another strong set of results in 2016. I am delighted to be able to report that while market conditions have clearly had an impact on our margins we have been able to deliver strong top line growth, with revenue up 21.4% compared to the prior year at £863.5 million, and solid earnings per share of 29.9 pence, which is in line with the prior year. We also achieved a robust order intake leading to a record closing order book as at 31 December 2016 of £917.6 million, up 6.5% on the prior year (31 December 2015: £861.3 million).

 

I am also delighted to report that we have had the safest year ever recorded in Cape's history with both our Total Recordable Incident Rate (TRIR) and our Lost Time Incident Frequency (LTIF) improving significantly. This is a testament to every employee's commitment to our safety culture and our desire to make Cape a safe place to work for all as we strive to achieve our vision of zero harm.

 

In light of the industrial disease product liability litigation, we focussed throughout 2016 on the delivery of our organic growth strategy and have made good progress on the key elements of that strategy during the year. Operational excellence and customer intimacy are fundamental to our sustained success, enabling us to develop stronger bonds with our existing customers and build relationships with new ones. We have continued to invest in our people through structured training and development programmes covering both managerial and technical competencies. Following their initial conception in 2015, we saw real momentum during 2016 in establishing and embedding our Technical Authorities in the Group. Our Technical Authorities now have a clearer structure in which to operate and we are already better utilising their expertise to support sales opportunities around the Cape footprint. Our focus on continuous improvement saw us continue to roll out our standardised site systems and further investment in their development to ensure that we have the best tools available to measure and manage our work and drive better productivity. These systems are recognised by many of our customers as industry-leading.

 

Within the UK, our broad portfolio of services, in particular the addition of mechanical services in 2015, helped underpin the award of a multi-million pound, five-year contract at the ConocoPhillips' Seal Sands complex on Teesside. We are also seeing the first notable successes in our efforts to target white space opportunities at existing customer sites. At each of EDF Energy's nuclear power stations in the UK a programme of customer roadshows has led to increased demand for the full range of the Group's services. We have restructured our UK and Cape Specialist Services (CSS) to better position our CSS offering for global expansion and during the year successfully secured contracts for storage tank inspection and repair with GASCO and ADOC in the Middle East. There remains a significant pipeline of specialist service opportunities across the Group's international footprint.

 

We continue to pursue our strategy of targeted geographic expansion in order to increase the Group's growth potential. We have delivered on a number of small initial contracts in Iraq and identified a number of other new target markets during the year through a careful evaluation process. These markets provide opportunities for both our traditional and specialist services. Our previous entry into Kuwait saw the team winning multiple contract awards at the Kuwait National Petroleum Company's (KNPC) Clean Fuels Project. However, a highly competitive environment in Malaysia, including greater than expected local competition, has resulted in low penetration of project work opportunities to date.

 

Excellent operational performance on a number of key projects in Asia Pacific offset commercial and market challenges elsewhere in our business, particularly in the UK, demonstrating the value of a broad geographical portfolio. Our joint venture in Azerbaijan has again performed well, delivering both construction and maintenance work to the highest standard. The Group's track record of delivery, focus on operational excellence and strong customer relationships was also fundamental to the award in late 2016 of significant additional scope of works at Chevron's Wheatstone LNG project in Australia until the completion of construction.

 

Our strong performance in 2016 has been partially overshadowed by two legal cases relating to our legacy of industrial disease claims from the period when the Group was involved in the manufacture of asbestos products. We have previously disclosed details of these new types of claims brought by insurance companies which include insurer employer liability claims ("Insurer EL Claims") and insurer product liability claims ("Insurer PL Claims") and that these Insurer PL Claims represented a potentially large and unquantifiable liability to the Company.

 

On 12 March 2017, the Company reached a settlement of the litigation relating to the Insurer PL Claims. The settlement of this litigation does not imply any acceptance of liability on Cape's behalf. Following the end of the trial on 23 February 2017, the Board received an updated opinion from Leading Counsel regarding the Insurer PL Claims litigation which reinforced the Board's view that the merits of the Group's defence are persuasive and that there are substantial evidential burdens on the litigants. Nonetheless, we were mindful that there remained a risk that this litigation could have a material adverse impact on the Scheme and in turn upon the Group and its stakeholders. The Board therefore concluded that it was in the best interests of Cape and its shareholders to settle at the agreed level, thus removing a significant risk to the business, removing the distraction of a likely protracted appeals process and enabling management to focus on the development of the core business.

 

In July 2016, a determinant judgment was issued in respect of the Insurer EL Claims trial, in which some issues were found in favour of Cape and some against. We have been granted leave to appeal and the appeal hearing will be held in July 2017.

 

Further details of the industrial disease claims are contained in notes 16 and 20, with further details of the Scheme contained in
note 21.

 

Safety

It is especially pleasing to be able to report that during 2016 we achieved our best ever recorded performance in both our TRIR and our LTIF safety metrics. The Group's TRIR reduced to 0.756 (2015: 1.271) while LTIF fell to 0.144 incidents per 1,000,000 hours worked
(2015: 0.184). My thanks go to all our people for their efforts in adopting our strong safety culture and making Cape a safer place to work. While this is a good performance, we must not be complacent and we will continue to drive a strong safety culture across the business, focussing on forward-looking measures of safety performance and the timely close out of safety observations and incidents. The safety of our people and of those people around us is central to everything we do at Cape. Our vision is to create a work environment where everyone: our employees, partners and third parties, can work safely with zero harm to themselves and their colleagues. We often work in challenging locations and environments, carrying out potentially hazardous activities, so we are continuously seeking ways to improve our safety performance, both in terms of process and culture to achieve this vision.

 

Market conditions 2016

In the early part of 2016 the price of crude oil continued to fall, reaching a low of $28 per barrel. It subsequently recovered to average around $45 per barrel for the year, still almost $10 per barrel lower than the average in 2015. This situation continued to drive our customers in the oil and gas sector to focus on cost and cash management with widespread deferral of discretionary spending. As a result, the upstream oil and gas sector continued to experience low levels of demand, a slower pace of new project awards, delay in some maintenance activities and significant pressure on pricing. Demand from the downstream and industrial markets remained solid throughout the year with customers in the refining and petrochemical sectors committing investment in both new construction projects and maintenance of existing facilities, although pressure on margins was also evident in these sectors.

 

Market conditions in the UK continued to be challenging, largely reflecting the ongoing impact of the low oil price. The offshore market in the North Sea experienced a particularly difficult period with customers deferring discretionary spending and aggressively pursuing cost reduction programmes. Consequently, margin pressures continued throughout the year and we experienced low levels of demand for the Group's specialist services in the offshore sector. As anticipated, demand from the coal-fired power station market reduced with the closure of Longannet and Ferrybridge power stations in 2016, although it was encouraging that the UK Government effectively sanctioned the start of new nuclear power station construction that could provide significant opportunities for the business in the future. Demand from the downstream and general industrial segments remained robust.

 

In the Middle East, the sustained low oil price continued to drive a strong focus by our customers on costs and cash management; a trend we expect to continue. In broad terms, the Group saw a slower pace of new project awards and delays to a number of shutdown programmes, although specific market conditions have varied across the region. Demand in the Kingdom of Saudi Arabia (KSA) continued to be robust, driven by a stable maintenance requirement and increasing activity on construction projects, predominantly in the downstream and petrochemical sectors. In the United Arab Emirates (UAE), maintenance demand remained robust but there was little new construction activity and a number of shutdown projects were postponed, leading to pressure on both volumes and pricing. In Qatar, activity in new oil and gas projects also remained low and the maintenance market experienced increased cost pressure. Whilst activity levels in Oman in the first half of the year were very low, project demand increased in the second half of 2016 as activity on the Sohar Expansion and Khazzan Projects increased. The business continued to see a ramp-up in construction activities in Kuwait, with a number of significant downstream projects moving forward. Demand in Azerbaijan also remained strong, driven by further development of Shah Deniz 2 and the Sangachal Terminal Expansion project along with fabric maintenance work.

 

Demand for the Group's services from the LNG project sector in the Asia Pacific region remained high. The Group experienced strong demand in the first half of the year for construction work on LNG modules being fabricated in Asian yards, with a substantial increase in activity in the second half of 2016 on both the floating LNG project in South Korea and LNG plant construction in Australia.

 

Elsewhere, market conditions within the Asia Pacific market remained mixed. Demand for maintenance activity in Asia was steady although competition remained strong resulting in significant pricing pressure. The offshore market across the region was negatively affected by the low oil price driving a significant fall in demand for both new project and refurbishment work. Bidding activity was high for the RAPID project in Malaysia, although competition, in particular from local suppliers, was more severe than expected.
The Australian maintenance market continued to experience both extreme pricing pressure and low demand from the resources sector, reflecting ongoing low commodity prices.

 

2016 operating performance

Despite challenging market conditions, Cape's overall operating and financial performance was strong.

 

The Group achieved a resilient order intake of £846.7 million, up 0.6% on the prior year (2015: £841.3 million). Notable contract awards were the increased scope of work at Wheatstone, multi-disciplinary contracts with ConocoPhillips, SABIC and EDF Energy in the UK along with the strategically important Jazan and KNPC construction projects in the Middle East. The significant scope expansion at Wheatstone, with Cape becoming the single contractor on site for our services, was particularly pleasing as it was a direct result of our strong operating performance and a demonstration of the tangible value of our strategy to focus on operational excellence and customer intimacy. As a result, the Group concluded 2016 with its highest ever closing order book of £917.6 million, up 6.5% on the prior year (2015: £861.3 million), with almost 60% of that order book due for delivery within 2017.

 

Revenue was 21.4% higher than the prior year at £863.5 million (2015: £711.4 million), primarily reflecting increased volumes in Asia Pacific at the Wheatstone and Karratha Gas Plant Life Extension (KLE) projects in Australia, the Shell Prelude FLNG project in South Korea and the Shell Bukom project in Singapore. The Group benefited from movements in exchange rates in the year as Sterling weakened against many of the Group's non-UK trading currencies with underlying revenues at constant currency increasing by 16.1%. Growth in Asia Pacific was partly offset by lower demand in the North Sea and the reduction in demand from the coal-fired power generation sector in the UK. Underlying revenues at constant currency in the Middle East were slightly lower than the prior year, with lower construction project revenues in Qatar almost entirely offset by increased activity across all other countries in the region.

 

Adjusted operating profit increased by 5.5% to £55.4 million (2015: £52.5 million). The Group benefitted from favourable foreign exchange movements with underlying adjusted operating profit at constant currency down by 2.1% compared to the prior year, primarily driven by lower demand and a small number of commercial performance issues in the UK offset by increased activity levels in Asia Pacific and a strong performance in Azerbaijan.

 

Operating margins fell by 100bps to 6.4% (2015: 7.4%) with a significant deterioration in UK operating margins, partially offset by a strong increase in performance in our Asia Pacific business. Whilst the UK performance was disappointing, driven by continued weakness in the offshore market and a small number of commercial issues, I am confident that the UK management team has taken appropriate corrective actions and that the business has entered 2017 on a sound footing such that it is able to deliver a much improved performance this year. As expected, the very strong margin performance in the Middle East in the first half of 2015 was not repeated in 2016, and the strong performance from our SOCAR-Cape joint venture in Azerbaijan offset margin pressures elsewhere in the region.

 

Adjusted net debt decreased significantly to £80.4 million (2015: £109.9 million) driven by strong cash conversion from an improved working capital performance and the benefit of foreign exchange movements on the translation of foreign cash balances, partially offset by increased industrial disease claims cash contributions during the year.

 

Progress on strategy

Our strategy is delivering results. The importance of our geographical diversity is demonstrated by the improved results from Asia Pacific and Azerbaijan offsetting a weaker than anticipated performance in the UK. We are convinced that our strategic intent of being the leading provider of critical industrial services in our chosen geographic markets remains compelling and will enable us to continue to deliver shareholder value over the long term. We aim to achieve this long-term success through five strategic key pillars, which deliver both stability of earnings and long-term growth: Operational excellence; Customer intimacy; Balanced business; Broadening our range of services; and Geographic expansion. Our progress in these areas during the year gives us confidence in the Group's prospects for 2017 and beyond.

 

Operational excellence

Operational excellence remains the cornerstone of our strategy as it enables Cape to deliver better value to our customers whilst protecting margins in today's challenging market conditions. The goals of our operational excellence programme remain unchanged: to attract, retain and develop the best people; to simplify and standardise our business systems and processes; to ensure that knowledge and best practice are shared around the Group; and to drive continuous improvement.

 

2016 has seen significant investment in our Technical Authorities (TAs), recruiting the right people and embedding clear lines of reporting and accountability. TAs are our leading source of technical assurance and compliance on a given product or service and help deliver shareholder value by supporting the Group's growth. Better utilisation of their expertise to support sales opportunities around the globe has played a large part in multiple commercial successes during the last year. They are also responsible for our Centres of Excellence, which are just one part of our ever improving communication toolkit for sharing best practice across the Group's global footprint.

 

During the year we also continued to roll out our standardised site systems and further invested in their development to ensure that we have the best tools available to measure and manage our work, and drive better productivity. These systems are recognised by many of our customers as industry leading.

 

Our middle and senior management development programmes are now well established within the business and are enabling us to develop more of our management talent in-house. In addition to these management development programmes, we continue to direct considerable resources to training and assessment of our skilled employees to ensure they are able to work safely and to our global standard.

 

Customer intimacy

We have built long-term relationships with several of our key customers including Bechtel, EDF Energy, BP and SABIC over a number of years. Through these relationships we have developed a deep understanding of their businesses and we use this to develop solutions, both commercial and technical, that deliver real value to those customers. This process of developing close relationships with our key customers is an important element of our long-term success. During 2016, the value of this approach, supported by excellence in operational delivery, was demonstrated by the awards of the additional scope of works at Wheatstone, cryogenic insulation activities at Prelude and successes in our efforts to target white space opportunities, particularly at EDF Energy's fleet of nuclear power stations in the UK. We have also been working with a number of customers on developing Asset Integrity inspection and compliance programmes to help extend the useful life of ageing assets, with a particular focus on corrosion under insulation.

 

Balanced business

Cape already has a balance of businesses across a range of geographies, which gives the Group an inherent stability against fluctuations in demand from any one particular region. This will continue to develop as we expand into new countries and regions around the world. In addition, we continue to actively pursue growth in our maintenance business to provide stability against the natural variability in demand from the construction project market. I am pleased to be able to report that the Group's revenue from maintenance activity has increased 9.9% in absolute terms to £521 million compared to £474 million in the prior year. New construction projects play an important role in the Group's portfolio, enabling faster organic growth while often being the vehicle to enter new territories. With the increase in construction related activities in Asia Pacific, the proportion of Cape's business derived from maintenance activities in 2016 was lower than the prior year at 60% (2015: 67%).

 

Growth through broadening our range of services

The addition of mechanical services through the 2015 acquisition of Redhall Engineering Solutions Limited, subsequently renamed Cape Engineering Services Limited (CESL), has proved successful. It underpinned the award of the multi-million pound, five-year contract at the ConocoPhillips Seal Sands complex on Teesside, in the UK, an important milestone for the UK business in the development of our broader service offering in this market.

 

We have continued to invest in our specialist service businesses during 2016 in order to provide the optimum framework in which to expand our specialist services capability across Cape's global footprint. While progress on expanding our tank construction and maintenance business into the Middle East has been slower than we had hoped, we now have a dedicated CSS team fully operational in the region with work underway on a small number of storage tank inspection and repair contracts in the UAE and Kuwait and we continue to see a strong pipeline of opportunities in the region. While low oil prices resulted in depressed levels of offshore demand for CSS in the UK, we have successfully delivered an expanded range of services onshore including tank inspection, replacement and refurbishment works by Cape Motherwell Bridge, refractory replacement works by Cape York Linings and innovative environmental services for one of our key customers, EDF Energy. This is a great example of our strategy of filling the white spaces in action and something we will continue to pursue in 2017.

 

Growth through geographic expansion

We aim to be the leading provider of our services in each of our chosen geographies. In practice we seek to grow market share in our newer, less mature regions and to defend our leading positions in our more mature regions. We have been successful in growing our share of the market in Australia with contract wins such as the increased scope of work at Wheatstone. We continue to grow both maintenance and project activities in KSA and Kuwait and we have delivered on initial contracts in Iraq, having established a base
in-country during the year. We continue to seek areas for further expansion to drive future growth.

 

Organisation and people

We employ over 16,000 employees across our global operations. Their professionalism, competency and commitment are critical to the delivery of our business. We continue to invest in developing our people and ensuring that everyone can achieve their potential at Cape. We have well established management and leadership development programmes, both for our current and future leaders. We provide specialist skills training, including the attainment of internationally recognised qualifications, to our site based employees around the world to ensure they can work safely and deliver our services to the required standard. In 2016, we completed the roll out of a global applicant tracking system to support our recruitment processes, allowing quicker and more accurate recruitment with improved data and visibility for managers. It also provides us with an opportunity to proactively contact appropriately skilled people who have previously worked for Cape. This reduces both the cost and time taken to recruit, together with greater assurance of the calibre of the individuals whom we are hiring. In 2016, we received around 3,500 applications per month globally via this system.

 

Outlook

With a robust order book and a good start to the year, the Board is confident that the business will deliver another strong trading performance in 2017. The UK business has implemented improvement measures to deal with the small number of commercial issues that affected its performance in 2016. It has also been restructured to better enable the business to pursue growth opportunities in the UK market whilst providing technical support for specialist service opportunities elsewhere in the Group. This is expected to drive a substantial margin improvement in the UK business in 2017 which should more than offset the effect of any margin pressures experienced elsewhere in the Group.

 

Conditions in the Group's end markets are expected to remain mixed in the near term with relatively weak demand from the upstream oil and gas sector being balanced by more solid demand from the downstream oil and gas and power generation sectors. Demand for maintenance services is expected to be stable over the medium to long term, with construction activity levels expected to be more volatile given investment in new projects is more affected by resource pricing. The UK nuclear new build market could provide substantial opportunity for the business in the long term, although the timing of investment remains uncertain despite the welcome approval for Hinkley Point by the UK Government.

 

Although the recent industrial disease claims litigation has required significant attention from the Board and senior management, we have remained focussed on the underlying business during this period and in particular, organic growth opportunities. The recent settlement of the insurer product liability litigation removes a material risk to the business and the distraction of a likely protracted appeals process, enabling management to focus on the development of the core business.

 

With the long-term drivers of demand for our services remaining robust, I remain confident that our strategy will deliver increased shareholder value over the medium to long term.

 

 

Joe Oatley

Chief Executive

 

 

Business review

 

UK

The UK business employs over 4,000 people and is one of the largest multi-disciplinary employers in the UK industrial services market, working with a broad range of customers across a variety of markets. 2016 has been a challenging year as customers continued to focus on cost control, putting pressure on margins. This margin pressure, combined with lower demand, poor commercial performance on a small number of contracts, in particular at Exxon Mobil Fawley, and the costs associated with restructuring resulted in significantly lower adjusted operating profit than the prior year. The UK management team has implemented a number of improvement actions and, although market conditions are expected to remain challenging through 2017, these improvements combined with a solid order book are expected to deliver a much improved performance in 2017.

 

£m

2016

Restated1

2015

 

Change

Order intake

312.4

430.7

 

(27.5%)

Order book

379.8

438.3

 

(13.3%)

Revenue

370.8

388.4

 

(4.5%)

Adjusted operating profit

14.2

31.5

 

(54.9%)

Adjusted operating profit margin

3.8%

8.1%

 

(430bps)

1 Prior year figures have been restated following the Group's change in reporting segments effective from 1 January 2016

 

Order intake of £312.4 million was 27.5% lower than the prior year (2015: £430.7 million), largely due to timing of contract awards, but also reflecting the market environment for both construction and maintenance work, particularly in the upstream oil and gas market. Important contract awards in the year were a five-year contract for fabrication, mechanical, engineering and instrumentation services at the ConocoPhillips Seal Sands facility; a three-year renewal for multi-disciplinary maintenance with SABIC UK; a five-year
multi-disciplinary maintenance contract at EDF Energy's West Burton and Cottam power stations; and a one-year extension and expansion of multi-disciplinary services for Perenco in the southern sector of the North Sea. The year-end order book was 13.3% lower than the prior year at £379.8 million (2015: £438.3 million).

 

Revenue was 4.5% lower than the prior year at £370.8 million (2015: £388.4 million), reflecting the reduction in demand from the
North Sea and plant closures in the UK coal-fired power generation market. This decrease was partially offset by increased volume from Cape Motherwell Bridge, primarily in the storage tanks business, and a full year's contribution from CESL. Excluding CESL, organic revenues fell by 7.8%.

 

The business continues to be largely maintenance driven with 90.5% of revenues (2015: 81.8%) derived from maintenance and shutdown activities. The Group is starting to see its first notable successes in its efforts to target white space opportunities, expanding the range of services delivered at existing customer sites, with more than £40 million of order intake in 2016 including an increased pull through of maintenance services across EDF Energy's nuclear fleet and Perenco's offshore assets. Elsewhere, the UK Government's approval of Hinkley Point C during the year signalled the beginning of a long awaited renaissance in the nuclear power construction market in the UK, which could provide the Group with substantial opportunities for project-related work in the future.

 

Adjusted operating profit declined 54.9% to £14.2 million compared to the prior year as operating margins decreased to 3.8%
(2015: 8.1%), driven by a combination of adverse market conditions and a number of specific commercial items. Low oil prices resulted in lower demand and pricing pressure in the offshore sector while the closure of two coal-fired power stations also impacted volumes of both day-to-day maintenance and shutdown work. The specific commercial items related to poor commercial performance on the contract at Fawley, where we now have new commercial agreements in place, and provisions taken against potential contract
close-out costs incurred on a small number of projects. These commercial impacts are not expected to re-occur in 2017.

 

During the year, the business implemented a significant restructuring programme to ensure that it was both operating with a lean overhead base and set up to capture white space growth opportunities by expanding the range of services delivered to the existing customer base in the UK. In concert with this "structured for growth" programme, the Group's specialist services business, CSS, was also restructured to ensure it was better positioned to support global expansion.

 

Although market conditions are expected to remain mixed in the near-term, the business continues to succeed in winning new customers, retaining existing customers and securing new white space opportunities which, combined with the expected improvement in operating margins following the restructuring actions taken in 2016 and the non-recurrence of the business specific items, is expected to result in a significant improvement in performance in 2017. 

 

 

 

Middle East

Cape is one of the largest providers of industrial services in the Gulf Cooperation Council states, having operated in the region for over 30 years. In the Middle East, the Group employs over 8,000 people, primarily delivering Cape's portfolio of services to the downstream oil and gas sector. While bidding activity remained high, driven by continued investment from the National Oil Companies, the continuing low oil price in 2016 saw a number of customers renew their focus on cost control, with some areas experiencing project slow-downs and work deferrals. While market conditions are expected to remain mixed in 2017, the robust order book provides confidence in the Group's prospects and strong visibility for the year.

 

£m

2016

Restated1

2015

 

Change

Order intake2

197.4

211.6

 

(6.7%)

Order book2

220.7

180.0

 

+22.6%

Revenue2

191.6

174.6

 

+9.7%

Adjusted operating profit

29.7

27.5

 

+8.0%

Adjusted operating profit margin

15.5%

15.8%

 

(30bps)

1 Prior year figures have been restated following the Group's change in reporting segments effective from 1 January 2016

2 Excludes values in respect of the SOCAR-Cape joint venture in Azerbaijan

 

Order intake of £197.4 million decreased by 6.7% compared to the prior year (2015: £211.6 million). The largest proportion of the order intake continues to come from the downstream oil and gas sector across the region. The most significant contract awards were
multi-disciplinary construction contracts from a number of suppliers at the Jazan project in KSA, including the Consolidated Contractors Company, Nasser S. Al Hajri Corporation and Daewoo; and multiple contract awards at the Kuwait National Petroleum Company's (KNPC) Clean Fuels Project. Other contracts of note include the Group's first multi-country, multi-discipline award in the region with General Electric (GE) Power Services covering a total of 64 power facilities across the Middle East; a four-year renewal for refractory maintenance services with Qatalum; insulation services at the BP Khazzan site in Oman; a two-year extension for the provision of refractory services across SABIC's facilities in KSA; and a two-year renewal of the painting services contract with BAPCO.

 

During the year, bidding activity remained high in the region with investment being maintained by the majority of National Oil Companies, although the business has experienced some areas of slow-down and deferral for both project work and shutdowns. Customers continue to focus on cost reduction which has put downward pressure on margins, but also provides opportunities for the Group to grow market share by demonstrating value creation for its customers through excellence in operational delivery. In the early part of 2017, the Group's reputation for delivery and close working relationships with our customers has secured a number of contract awards, predominantly in KSA at the Jazan Project.

 

Revenues in 2016 increased 9.7% from the prior year to £191.6 million (2015: £174.6 million). An 11.9% benefit from the movement in foreign exchange rates, reflecting a weaker Sterling versus the US dollar, more than offset a slight underlying decrease in organic revenues of 2.2%. The reduction in organic revenue reflects the anticipated lower capital project driven demand in Qatar, where revenues declined by 30.9%, largely offset by continued growth in activities elsewhere in the region. The KSA business performance remained strong, growing organically by 3.6% driven primarily by construction project work, particularly at the Jazan Refinery Project, Ma'aden's Phosphate Mining Project and maintenance activities elsewhere in the Kingdom. Volumes grew substantially in Kuwait following Cape's entry in 2015, reflecting the ramp up in activity at KNPC's Clean Fuels Project while in Oman, volumes increased significantly in the second half of the year at the Sohar Expansion and Khazzan projects.

 

The region has maintained a balanced business in line with the Group's strategy, with the proportion of revenue derived from maintenance activities broadly in line with the prior year at 51.1% (2015: 50.0%). Expansion activities are being pursued in both existing territories, such as the UAE and Oman, and into adjacent territories such as Iraq, where the Group was awarded initial small contracts from Kuwait Energy and GE during 2016. The development of the CSS offering in the region has been slower than planned, in part due to the challenging market conditions. Nonetheless, the business has successfully secured contracts for tank inspection and repair with GASCO and ADOC in 2016. There remains a visible pipeline of substantial opportunities in specialist services for the Group to target.

 

The SOCAR-Cape joint venture in Azerbaijan continued to perform well both operationally and financially. Increased revenue was driven by higher volumes associated with the 2015 awards for significant construction work at Shah Deniz 2 and the Sangachal Terminal Expansion Project, along with the two-year contract extension with BP for the provision of fabric maintenance services. In line with our accounting policy, orders and revenues are excluded from the Group result.

 

Operating margins were slightly lower at 15.5% (2015: 15.8%) as the benefit of a strong performance in Azerbaijan offset margin reductions elsewhere in the region. Adjusted operating profit was higher at £29.7 million, an 8.0% increase compared to the prior year (2015: £27.5 million). The business benefited from the impact of foreign exchange movement between Sterling and the US dollar. At constant currency, organic adjusted operating profit was 4.0% lower than the prior year, reflecting the favourable close out of a number of contracts in 2015 combined with delays in project initiation in Oman in the first half of 2016, partially offset by an improved performance in Azerbaijan, Qatar and KSA. Operating margins improved in the second half of 2016 (H1 2016 13.8%; H2 2016 17.1%), largely as a result of the ramp up in new project activity in KSA and Oman.

 

Despite the slow oil price recovery and the award of a number of new contracts in the early part of 2017, the business continues to see a strong focus on costs and cash management from the Group's customers. The strength of Cape's business in the region along with its focus on the downstream segment of the oil and gas market, lean operating model and track record of delivery provides resilience against the challenging market conditions.

 

 

 

Asia Pacific

In Asia Pacific, Cape employs around 3,500 people and supports many market sectors, including onshore and offshore oil and gas, power generation and pharmaceuticals in Asia with support provided across Australia for downstream oil and gas, minerals and mining customers. The Group's substantial growth in the region has primarily been driven by the strong operational performance provided to our customers developing LNG projects in the region. This growth has more than offset the industry-wide decline in the Australian mining sector and commodity price driven demand declines for our services elsewhere in Asia, particularly offshore. During 2017, the Group will remain focussed on delivering on its existing contracts while pursuing further opportunities in both maintenance and construction activities across the region.

 

£m

 

2016

Restated1

2015

 

Change

Order intake

 

336.9

199.0

 

+69.3%

Order book

 

317.1

243.0

 

+30.5%

Revenue

 

301.1

148.4

 

+102.9%

Adjusted operating profit

 

27.0

7.8

 

+246.2%

Adjusted operating profit margin

 

9.0%

5.3%

 

+370bps

1 Prior year figures have been restated following the Group's change in reporting segments effective from 1 January 2016

 

Order intake grew substantially in 2016, increasing to £336.9 million, up 69.3% on the prior year (2015: £199.0 million). The primary driver of this increase was the contract award in December for additional scope of works at Chevron's Wheatstone LNG Project in Australia. This very significant award of substantial additional work packages was a direct result of our strong operating and safety performance on the contract to date. Other key new awards included the Shell Bukom contract in Singapore, where the business is utilising its expertise in asset integrity, and corrosion under insulation in particular, in providing access, insulation and painting services for Shell's ethylene cracker complex; and additional cryogenic pipework insulation on Shell's Prelude FLNG vessel with Samsung Heavy Industries (SHI) in South Korea.

 

Revenue increased by 102.9% compared to the prior year, rising to £301.1 million (2015: £148.4 million). Organic growth at constant currency of 91.8% was primarily driven by the continued ramp-up of activity across a number of key projects: Wheatstone and KLE in Australia; Shell Prelude in South Korea; and Shell Bukom and Exxon Mobil Aurora in Singapore. Within Australia, activity levels remained low outside the Wheatstone and KLE contracts as demand from the mining sector in particular remained depressed. In Asia, the increased volume of project work in Singapore and South Korea more than offset the reduction in the second half of 2016 from the completion of LNG module related work in Thailand and lower offshore demand. The intensity of local competition restricted the Group's ability to penetrate the Malaysian market and the RAPID project in particular.

 

The proportion of revenue derived from construction activities increased to 71.0% (2015: 46.5%), reflecting a significant increase in construction work, in particular on the Wheatstone and Prelude projects, and a reduction in shutdown work.

 

Operational performance has been strong across the region, in particular at Chevron's Wheatstone project, Woodside's KLE refurbishment project and Shell's ground-breaking Prelude FLNG project. The strong operating performance has been mirrored by a strong safety performance. At Wheatstone, for example, the business has delivered over 2 million man hours without a lost time incident. The performance on these three projects cements Cape's reputation as a pre-eminent supplier of critical industrial services to the LNG market. The restructuring programme carried out in Australia in 2015 has given the business the flexibility to provide the significant support needed to ramp up resources for the fast-growing Wheatstone and KLE projects whilst remaining competitive in the maintenance market.

 

Adjusted operating profit increased significantly to £27.0 million (2015: £7.8 million) with 232.1% of this increase being attributable to organic growth and 14.1% reflecting favourable foreign exchange movements. As expected, the business achieved a significant improvement in operating margin in the second half of the year compared to the first half (H1 2016: 4.6%; H2 2016: 11.4%), primarily reflecting improved utilisation with increased volumes on Wheatstone, KLE and Prelude.

 

Market conditions are expected to remain mixed across the region. Nonetheless, the business enters 2017 with a robust order book and a strong pipeline of opportunities across the region, including additional LNG project work in Australia, oil and gas project activities in a number of Asian countries and ongoing maintenance work.

 

 

 

Chief Financial Officer's review

 

A summary income statement from continuing operations with explanatory discussion of the key items is provided below:

 

 

2016
£m

2015
£m

Revenue

863.5

711.4

Adjusted operating profit

55.4

52.5

Adjusted operating profit %

6.4%

7.4%

Other items

(88.2)

(3.4)

Exceptional items

-

(9.2)

Operating profit/(loss)

(32.8)

39.9

 

Revenue

Revenue from continuing operations increased by 21.4% to £863.5 million (2015: £711.4 million). Favourable foreign exchange rates, reflecting the weakening of Sterling, contributed 5.3% of the Group's revenue growth while the 2015 acquisition of CESL contributed 1.6%. Organic growth at constant currency drove the remaining 14.5% of the increase and primarily reflects the substantial growth in the Asia Pacific region with the continued ramp-up in activity across a number of key projects: Chevron's Wheatstone LNG and Woodside's Karratha Gas Plant Life Extension (KLE) in Australia; Shell Prelude in South Korea; and Shell Bukom and Exxon Mobil Aurora in Singapore. In the UK, increased volume from Cape Motherwell Bridge, primarily in the storage tanks business partly offset the oil price driven reduction in demand from the North Sea and plant closures in the coal-fired power generation market. Organic revenues in the Middle East were slightly down due to lower capital project driven demand in Qatar, where revenues declined by 30.9%, being largely offset by continued growth in activities elsewhere across the region.

 

We continue to have a good balance between maintenance and construction revenue. During the year, we delivered on our strategic objective of annual growth in maintenance revenues in absolute terms, with revenue derived from maintenance increasing 9.9% to £520.8 million (2015: £474.1 million). Maintenance revenue increased in the UK to £335.7 million (2015: £317.6 million), which included a full year contribution from CESL, while the KLE project in Australia and favourable foreign exchange rates increased maintenance related revenues in Asia Pacific to £87.3 million (2015: £69.0 million). Favourable foreign exchange rate movements also helped improve maintenance revenues in the Middle East to £97.8 million (2015: £87.5 million). Globally, revenue from construction projects increased to £342.7 million (2015: £237.3 million) mainly as a result of increased activity on the Wheatstone project in Australia and the Prelude project in South Korea.

 

Cape's largest customer represented almost 18.6% of Group revenue and related to the Group's activities in Australia (2015: 12.0%, largely related to activities in the UK, with smaller amounts in the Middle East and Asia Pacific). The Group's top ten customers represented 54.2% of revenue (2015: 44.9%).

 

Revenue split by geography1

 

£m

UK

Middle
East

Asia
 Pacific

Total

2016

 

 

 

 

H1

194.0

94.2

108.1

396.3

H2

176.8

97.4

193.0

467.2

FY 2016

370.8

191.6

301.1

863.5

2015

 

 

 

 

H1

191.8

95.4

72.3

359.5

H2

196.6

79.2

76.1

351.9

FY 2015

388.4

174.6

148.4

711.4

1 Prior year figures have been restated following the Group's change in reporting segments effective from 1 January 2016

 

Adjusted operating profit

Adjusted operating profit from continuing operations increased to £55.4 million (2015: £52.5 million), with favourable foreign exchange rates from a weaker Sterling contributing 7.6% growth and the acquisition of CESL contributing 0.1% while underlying organic performance was 2.2% lower. The Group's organic results are driven by a number of factors, highlighting the benefit of the Group's broad geographical spread. The UK experienced ongoing oil price driven pricing pressure and reduced demand in the North Sea, the closure of UK coal-fired power stations, poor commercial performance on the contract at Fawley, provisions taken against potential contract close out costs incurred on a small number of projects and additional costs associated with restructuring activities, resulting in lower adjusted operating profit. The Middle East delivered a solid performance with increased activity in Azerbaijan and KSA combined with improved margins in Qatar, partially offset by lower results elsewhere in the region. In Asia Pacific, the increase in adjusted operating profit primarily reflected higher activity levels on the Wheatstone, KLE, Prelude and Bukom projects which more than offset lower demand as a result of the low oil price, and Thailand, following LNG module completion in the first half of 2016.

 

Year ended

 

Revenue

£m

 

Adjusted operating

profit

£m1

 

Adjusted operating

profit margin

%1

2016

 

20152

2016

 

20152

2016

 

20152

Region

 

 

 

 

 

 

 

 

UK

370.8

388.4

 

14.2

31.5

 

3.8

8.1

Middle East

191.6

174.6

 

29.7

27.5

 

15.5

15.8

Asia Pacific

301.1

148.4

 

27.0

7.8

 

9.0

5.3

Central

 -

-

 

(15.5)

(14.3)

 

n/a

n/a

 

863.5

711.4

 

55.4

52.5

 

6.4

7.4

 

1 Adjusted operating profits and margins are shown prior to the reallocation of the Group's franchise fee. See note 8 on page 25 for more information

2 2015 has been restated following the Group's change in reporting segments effective from 1 January 2016

 

Other items

Other items increased to £88.2 million (2015: £3.4 million), predominantly driven by a charge of £79.2 million in relation to the industrial disease claims provision, which includes the Insurer PL Claims and claims of a similar nature, an impact of £9.7 million relating to the Insurer EL Claims' determinant judgment in July 2016 and the outcome of the 2016 triennial revaluation of the Scheme (see notes 6, 16 and 20 for more information). As previously announced, a settlement was agreed in respect of the Insurer PL Claims on 12 March 2017 (see note 23) which includes an immediate payment of £18.0 million and deferred payments of up to £34.5 million payable over the period 2018 to 2023. The present value of the settlement, as at the settlement date, net of tax, using the Group's weighted average cost of capital (WACC) is £35.3 million.

 

Other items also include £5.5 million in respect of the 2016 legal costs associated with litigation and recurring costs of Scheme administration as well as £3.5 million of post-acquisition charges recognised in the period.

 

Share of post-tax results from joint ventures

In 2016, the Group recognised a post-tax profit of £7.3 million (2015: £2.8 million), being its share of the post-tax results from joint ventures. Dividends totalling £3.9 million were received in the period.

 

Exceptional items

Exceptional items total £nil (2015: £9.2 million). 2015 included a non-cash £8.8 million goodwill impairment in Asia which was a reflection of the level and distribution of business activity across this geographically diverse regional business, and £0.4 million transaction costs relating to the acquisition of CESL in May 2015.

 

Operating loss

Operating loss was £32.8 million (2015: operating profit of £39.9 million) and reflects an adjusted operating profit of £55.4 million
(2015: £52.5 million), other items of £88.2 million (2015: £3.4 million) and exceptional items of £nil (2015: £9.2 million).

 

Finance costs

Adjusted finance costs increased slightly to £8.1 million (2015: £7.9 million) with interest cover (calculated by dividing adjusted operating profit by the adjusted finance costs) increasing to 6.8 times (2015: 6.6 times).

 

Total net finance costs amounted to £10.8 million (2015: £10.8 million) including the annual £3.2 million (2015: £3.3 million) non-cash charge relating to the unwinding of the discount on the long-term industrial disease claims provision and interest income on the industrial disease claims Scheme funds in the period of £0.4 million (2015: £0.3 million).

 

Taxation

The tax charge on adjusted profit before tax (which excludes exceptional and other items), excluding the share of post-tax result from joint ventures, was £9.6 million (2015: £8.0 million) representing an effective tax rate of 23.9% (2015: 19.1%). This is higher than 2015 primarily as a result of an increase in profits in high tax jurisdictions, such as Australia, unrecognised losses arising in Asia and the absence of the regional one-off tax incentive which ended in 2015, partially offset by the recognition of additional prior period tax losses in Australia. On an adjusted basis, the Group's overall effective tax rate, including the share of post-tax result from joint ventures, was 20.3% (2015: 17.9%). The cash tax paid during the period was £7.2 million (2015: £9.3 million) which is in line with expectations.

 

The total tax credit on loss before tax was £3.6 million (2015: charge of £8.1 million).

 

As part of the UK Government's continued efforts to improve the tax transparency and compliance of large businesses, the UK Finance Act 2016 introduced a mandatory requirement for qualifying companies to publish their tax strategy. Cape will publish its tax strategy online during 2017.

 

 

 

Discontinued operations

Due to limited opportunities of growth within Hong Kong, the Board took the decision in 2015 to exit this geographical market and is pursuing an exit through the sale of its current legal entity. As a result of this decision, the assets and liabilities within Hong Kong have been reclassified as directly associated within a disposal group held for sale in the 2016 and 2015 results.

 

A £0.3 million profit has been recognised within profit from discontinued operations in the income statement (2015: £5.2 million loss). The prior year loss primarily relates to Hong Kong, including £3.4 million for impairment of goodwill.

 

The Group holds an investment property at a discontinued site for which it is exploring potential redevelopment. The site is located on an area of freehold land adjacent to the western section of the M25 motorway in the UK. Both the current carrying value and fair value of this investment property is £2.0 million (carrying value 2015: £2.0 million; fair value 2015: £3.4 million).

 

Earnings per share

For continuing operations, the adjusted diluted earnings per share (EPS) was 29.9 pence (2015: 29.9 pence) and adjusted basic EPS was 30.2 pence (2015: 30.0 pence). 2016 EPS was in line with the prior year, reflecting higher operating performance offset by a higher effective tax rate and minority interest. The diluted weighted average number of shares increased to 122.1 million (2015: 121.6 million).

 

Dividend

Given the cash impact of the recent settlement of the insurer product liability litigation, the Board has decided that it is appropriate to rebase the dividend and is recommending a final dividend for 2016 of 2.5 pence (2015: 9.5 pence) per share. The Board is planning to maintain the dividend at this level for 2017 and then implement a progressive dividend policy from 2018 onward. In addition to the interim dividend of 4.5 pence per share (2015: 4.5 pence) paid on 7 October 2016, the total dividend for the year will be 7.0 pence per share (2015: 14.0 pence). Subject to shareholders' approval at the Annual General Meeting on 10 May 2017, the final dividend will be payable on 23 June 2017 to shareholders on the register as at 19 May 2017.

 

Acquisitions

No acquisitions were completed during the year. In May 2015, Cape acquired the UK based Redhall Engineering Solutions Limited, subsequently rebranded as CESL, for an enterprise valuation of £6.2 million including debt of £5.3 million and a working capital contribution of £0.7 million. During the year, CESL has traded slightly ahead of expectations.

 

Working capital

Trade and other receivables and inventories increased by £46.8 million to £258.3 million (2015: £211.5 million) while trade and other payables also increased by £51.5 million to £172.3 million (2015: £120.8 million). Both of these balances included the foreign exchange impacts of a weaker closing Sterling exchange rate at 31 December 2016 compared to the prior period. Overall the Group saw a decrease in net working capital of £4.7 million (at balance sheet rates) to £86.0 million (2015: £90.7 million). The Group's drive to reduce net working capital resulted in a £15.1 million improvement in the balance sheet position at the year end when compared to the half-year results.

 

Capital expenditure

The Group continues to manage its capital expenditure carefully whilst investing in upgrading and replacing equipment where appropriate. The Asset Replacement Ratio (calculated by dividing gross capex spend by the depreciation charge) decreased to 84% (2015: 126%), reflecting improved asset utilisation as a result of our Global Asset Management function limiting additional scaffold asset purchases.

 

With operational excellence a cornerstone of the Group's strategy, there was further investment in the development of its standardised site systems in order to ensure that the Group has the best tools available to measure and manage our work and drive better productivity. The Group also moved forward with its investment in a Global Enterprise Resource Planning system that in time will replace multiple legacy systems and simplify and standardise many of the Group's processes.

 

Free cash flow

The Group's free cash flow of £57.2 million (2015: £27.7 million) is more than sufficient to fund, in cash terms, the full value of the 2017 payment in relation to the Insurer PL Litigation of £18.0 million (2015: £nil) and the proposed dividend of £8.5 million
(2015: £17.0 million).

 

Financing and banking facilities

The Group's adjusted net debt decreased year-on-year by £29.5 million to £80.4 million (2015: £109.9 million) including finance lease obligations of £3.0 million (2015: £3.0 million). Balance sheet gearing (calculated by dividing adjusted net debt by total equity), excluding ring-fenced industrial disease claims Scheme funds, decreased to 48.4% (2015: 85.0%).

 

In June, the Company agreed to amend and extend its existing revolving credit facility, increasing the facility by a further £5 million to £300 million and retaining the £50 million accordion feature. The facility has a contractual maturity of 23 June 2020, extending the existing debt facility by two years, with an option to extend the facility by a further year by mutual consent.

 

  

Operating and free cash flow

 

2016

£m

Restated1

2015

£m

Adjusted operating profit2

55.4

52.5

Depreciation

18.0

15.9

Adjusted EBITDA

73.4

68.4

Non-cash items

(3.4)

(11.9)

Dividends from joint ventures

3.9

-

Decrease in working capital3

9.6

4.6

Net capital expenditure

(12.0)

(17.2)

Adjusted operating cash flow

71.5

43.9

Adjusted operating cash flow to adjusted operating profit

129.1%

83.6%

Net interest paid

(7.1)

(6.9)

Cash tax paid

(7.2)

(9.3)

Free cash flow

57.2

27.7

Dividends paid to shareholders and non-controlling interests

(18.8)

(17.0)

Acquisitions (including settlement of debt and working capital)

-

(6.2)

Decrease/(increase) in receivables from joint ventures

3.4

(1.0)

Net transfer to restricted funds

(13.0)

(5.8)

Discontinued operations

0.3

0.3

Other movements in adjusted net debt

0.4

(6.9)

Movement in adjusted net debt

29.5

(8.9)

Opening adjusted net debt

(109.9)

(101.0)

Closing adjusted net debt

(80.4)

(109.9)

 

1 The comparatives have been restated to reclassify the gain on disposal of property, plant and equipment from net capital expenditure to non-cash items. There has been no change to the total adjusted operating cash flow

2 A reconciliation of the Group's adjusted operating profit to the Group's statutory operating profit/(loss) can be found in note 7, 'Adjusted measures'

3  Converted at monthly rates of exchange

 

The ratio of adjusted net debt to adjusted EBITDA decreased to 1.1 times (2015: 1.6 times). A reconciliation of adjusted net debt and adjusted EBITDA can be found in note 8, 'Adjusted measures'.

 

In 2014 the Group entered into an interest rate cap for a period of three years, commencing in 2015 and terminating in February 2018. The derivative is for £70 million and gives protection to the Group against its Sterling borrowing costs when LIBOR exceeds the strike price of 2.5%.

 

Provision for pension

The defined benefit pension schemes had a net surplus of £10.0 million (2015: £11.3 million) as at 31 December 2016 which continues to be restricted to nil in the accounts under IFRIC 14. The latest full valuation of the defined benefit scheme was assessed by independent qualified actuaries using the projected unit method. Under the Schedule of Contributions agreed as part of this valuation process, expected annual contributions to defined benefit schemes are £0.6 million for a period of eight years and five months. The previously agreed monthly contribution rate of £14,600 ceased in June 2015.

 

Provision for estimated future asbestos related liabilities and industrial disease claims Scheme funds

The triennial actuarial valuation of the provision for historical UK asbestos related liabilities was completed in January 2017 in respect of the period up to 31 December 2016, the results of which have been included in the financial results for the year. The valuation was performed by independent actuaries, Willis Towers Watson, based on the claims data maintained by Cape and incorporates the Board's latest judgements on technical and economic assumptions as well as the impact of changes in case law. The overall pattern of claims experienced in the three years since the time of the last full valuation has shown a reduction in the overall value of claims being received when compared to previous expectations.

 

The discounted provision increased to £172.5 million (2015: £95.5 million). This reflects a charge of £79.2 million for the impact of the triennial actuarial valuation adjustment (see notes 6, 16 and 20 for more information), the provision recognised in the 2016 interim results for the Insurer EL Claims, an additional provision relating to the Insurer PL Claims following settlement in March 2017 (see note 23) with a consideration of potential further claims of a similar nature and unwinding of the discount of £3.2 million in the year less £5.4 million of claim settlements. The level of Scheme cash settlements remained in line with actuarial assumptions.

 

The gross provision for industrial disease claims of £209.3 million is discounted at rates between 0.72% and 1.92% (2015: 2.67%) being the appropriate risk free rates as at the balance sheet date, over the term of the liabilities, being approximately 40 years. The economic value of the provision, as at the balance sheet date, using the Group's WACC is a present value of £103.4 million.

 

The ring-fenced industrial disease claims Scheme funds increased to £41.8 million (2015: £32.1 million) benefiting from a cash injection from the Group's funds of £13.0 million (2015: £6.2 million) and interest received of £0.4 million (2015: £0.3 million), offset by cash settlements on Scheme claims in the year of £3.7 million (2015: £3.7 million).

 

 

 

Currencies

The Group is exposed to both translational and, to a lesser extent, transactional foreign currency gains or losses through fluctuations in foreign exchange rates through its global operations. The Group's primary currency exposures are Sterling in the UK, Australian dollars in Australia and US dollars, primarily in the Middle East.

 

Translational gains or losses: With the Group reporting in Sterling but conducting business in other currencies, the substantial weakening of Sterling during 2016 has resulted in significant currency translation effects on the primary statements and associated balance sheet metrics, such as working capital. The substantial weakening in Sterling has favourably impacted both revenue and operating profit during 2016 by 5.3% and 7.6% respectively. In 2016, around 27% (2015: 25%) of revenues were contracted in
US dollars or US dollar pegged currencies and around 26% (2015: 16%) in Australian dollars. However, the significantly lower closing Sterling exchange rate as at 31 December 2016 compared to the prior period has adversely impacted our working capital balance.

 

Transactional gains or losses: With a large proportion of the Group's operating costs matched with corresponding revenues in the same currency, the impacts of transactional foreign exchange gains or losses are limited and are recognised in the period in which they arise.

 

The following significant exchange rates applied:

 

 

2016

 

2015

Closing

Average

Closing

Average

AUD

1.71

1.81

 

2.03

2.09

USD

1.24

1.35

 

1.48

1.51

 

Treasury policies

Cape has a centralised treasury function whose objectives are to monitor and manage the treasury risks across the Group and to ensure that sufficient liquidity is available to meet the requirements of the business. Group treasury is not a profit centre and operates within a framework of policies and procedures. All hedging is carried out centrally and speculative trading is specifically prohibited by Group treasury policies.

 

Return on invested capital

Return on invested capital is defined at Group level as adjusted operating profit divided by the accounting value of equity plus adjusted net debt. Return on invested capital in 2016 was 28.5%, higher than the prior year (2015: 21.9%) driven by a lower equity value, reflecting the loss for the year and an improved net debt position.

 

Principal risks

Cape operates globally in the energy and natural resources sectors and in varied geographic markets. Cape's performance and prospects may be affected by risks and uncertainties in relation to the industry and the environments in which it undertakes its operations around the world. Those risks range from external geo-political, security and economic conditions such as geo-political events, sanctions, terrorist events, disease outbreaks or environmental hazards; key customer and market dependency risks; operational risks including HSE, contracting, project execution; cyber security; credit and other generic financial risks.

 

There are two specific sources of risk associated with the Group's historical industrial disease claims legacy liabilities. The first relates to the inherent uncertainty in predicting the future level of asbestos-related industrial disease claims and of the costs arising from such claims relating to the liabilities for which the Board believes the Group to be liable. Whilst the recent triennial actuarial revaluation was in line with expectations, there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred in the future. As such, the provision may be subject to potentially material revisions from time to time if new information becomes available as a result of future events.

 

The second source of industrial disease claims risk relates to any change in legal precedent or judgment that leads to a material expansion of the scope of liability for which the Group is held to be liable in the future. As first disclosed in the Group's 2015 Preliminary Results and as updated in the November 2016 trading update, the Group has been engaged in litigation in relation to a number of product liability claims (Insurer PL Litigation) received from insurance companies (Insurer Litigants). Following engagement with the Insurer Litigants, an agreement to settle the Insurer PL Litigation was reached on 12 March 2017, substantially reducing the risk in this area. A determinant judgment was issued in July 2016 for the Insurer EL Claims trial, in which some issues were found in favour of Cape and some against. We have been granted leave to appeal and the appeal hearing will be held in July 2017. At the same time, Aviva plc was granted leave to cross-appeal. The risks relating to industrial disease claims and the associated impact on the Group and its stakeholders are described in note 20 'Industrial disease claim provision and contingent liabilities'.

 

We operate across a number of economies and jurisdictions which therefore exposes the Group to a range of tax laws that vary significantly and are rapidly evolving toward global transparency and harmonisation. Uncertainty may occur when the Group is required to interpret laws and treaties.

 

The Group is alert to the challenges of managing risk and has systems and procedures in place across the Group to identify, assess and mitigate major business risks. As part of the long-term strategic operational excellence programme, the Group continues to improve its detailed process of project risk identification and mitigation from contract tender through to project completion.

 

The directors have reviewed the principal risks and uncertainties and are satisfied that they are relevant. A full review of the Group's principal risks and uncertainties is given in the Strategic report within the Group's Annual Report and Accounts.

 

Michael Speakman

Chief Financial Officer

 

 

Condensed consolidated income statement

for the year ended 31 December 2016

 

 

 

Note

2016

 

2015

Business

performance
£m

Exceptional

and other

items

£m

Total
£m

Business

performance
£m

Exceptional

and other

items

£m

Total
£m

Revenue from continuing operations

7

863.5

-

863.5

711.4

-

711.4

 

 

 

 

 

 

 

 

Operating profit before other items

 

48.1

-

48.1

49.7

-

49.7

 

 

 

 

 

 

 

 

Other items

9

-

(88.2)

(88.2)

-

(3.4)

(3.4)

Operating profit/(loss) before exceptional items

 

48.1

(88.2)

(40.1)

49.7

(3.4)

46.3

 

 

 

 

 

 

 

 

Share of post-tax result of joint ventures

 

7.3

-

7.3

2.8

-

2.8

 

 

 

 

 

 

 

 

Exceptional items

9

-

-

-

-

(9.2)

(9.2)

Operating profit/(loss)

 

55.4

(88.2)

(32.8)

52.5

(12.6)

39.9

 

 

 

 

 

 

 

 

Finance income

10

0.1

0.4

0.5

0.1

0.3

0.4

Finance costs

10

(8.1)

(3.2)

(11.3)

(7.9)

(3.3)

 (11.2)

Net finance costs

 

(8.0)

(2.8)

(10.8)

(7.8)

(3.0)

 (10.8)

Profit/(loss) before tax

 

47.4

(91.0)

(43.6)

44.7

(15.6)

 29.1

 

 

 

 

 

 

 

 

Income tax credit/(expense)

11

(9.6)

13.2

3.6

(8.0)

(0.1)

(8.1)

Profit/(loss) from continuing operations

 

37.8

(77.8)

(40.0)

36.7

(15.7)

21.0

 

 

 

 

 

 

 

 

Profit/(loss) from discontinued operations

9,12

                 0.3

-

                0.3

(0.3)

 (4.9)

(5.2)

Profit/(loss) for the year

 

 38.1

(77.8)

(39.7)

 36.4

(20.6)

15.8

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Owners of Cape plc

 

 

 

(41.1)

 

 

15.5

Non-controlling interests

  

 

 

1.4

 

 

0.3

 

 

 

 

(39.7)

 

 

15.8

 

 

 

 

 

 

Earnings per share attributable to the owners of Cape plc

 

 

 

 

 

 

 

Pence

 

Pence

Pence

 

Pence

Basic

 

 

 

 

 

 

 

Continuing operations

 

 30.2

 

(34.2)

 30.0

 

17.1

Discontinued operations

 

                0.2

 

                0.2

(0.3)

 

(4.3)

Total operations

13

30.4

 

(34.0)

 29.7

 

12.8

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

Continuing operations

 

29.9

 

(34.2)

 29.9

 

17.0

Discontinued operations

 

                0.2

 

                0.2

(0.3)

 

(4.3)

Total operations

13

30.1

 

(34.0)

 29.6

 

12.7

 

 

Condensed consolidated statement of comprehensive income

for the year ended 31 December 2016

 

 

 

 

2016

£m

2015

£m

Profit/(loss) for the year

 

(39.7)

15.8

Other comprehensive income

 

 

 

Other comprehensive income to be reclassified to profit or loss in subsequent periods

 

 

 

Currency translation differences

 

42.0

3.2

Net other comprehensive income to be reclassified to profit or loss in
subsequent periods

 

42.0

3.2

Other comprehensive income/(expense) not to be reclassified to profit or loss in subsequent periods:

 

 

 

Re-measurement of defined benefit pension plan

 

(1.1)

(0.8)

Tax effect

 

-

-

 

 

(1.1)

(0.8)

Movement in restriction of retirement benefit asset in accordance with IFRIC 14

 

0.7

0.9

Restriction of interest income in accordance with IFRIC 14

 

0.4

0.4

Tax effect

 

0.1

(0.1)

Net other comprehensive income not to be reclassified to profit or loss in subsequent periods

 

0.1

0.4

Other comprehensive income for the year

 

42.1

3.6

Total comprehensive income for the year

 

2.4

19.4

 

 

 

 

Attributable to:

 

 

 

Owners of Cape plc

 

0.5

19.0

Non-controlling interests

 

1.9

0.4

 

 

2.4

19.4

 

 

 

Condensed consolidated statement of financial position

at 31 December 2016

 

Note

2016

£m

2015

£m

Assets

 

 

 

Non-current assets

 

 

 

Intangible assets

14

150.3

138.6

Investment property

 

2.0

2.0

Property, plant and equipment

15

84.0

80.2

Investments accounted for using the equity method

 

7.2

2.8

Deferred tax assets

 

39.1

20.7

Restricted deposits

 

3.5

9.0

Total non-current assets

 

286.1

253.3

Current assets

 

 

 

Inventories

 

13.7

12.7

Trade and other receivables

 

244.6

198.8

Cash and cash equivalents

 

121.5

81.4

Restricted deposits

 

38.5

23.3

Non-current asset held for sale

 

0.3

-

Assets directly associated with disposal group held for sale

12

1.2

1.0

Total current assets

 

419.8

317.2

Total assets

 

705.9

570.5

Equity

 

 

 

Share capital

17

30.3

30.3

Share premium account

 

1.0

1.0

Treasury shares

17

(0.1)

-

Special reserve

17

1.0

1.0

Other reserves

17

9.6

9.6

Translation reserve

 

140.9

99.4

Retained earnings/(losses)

 

(72.0)

(14.9)

Equity attributable to equity holders of the parent

 

110.7

126.4

Non-controlling interests

 

3.0

2.9

Total equity

 

113.7

129.3

Liabilities

 

 

 

Non-current liabilities

 

 

 

Borrowings

 

198.7

190.2

Retirement benefit obligations

 

17.2

13.3

Deferred tax liabilities

 

4.7

5.4

Provision for industrial disease claims

16

137.9

90.2

Other provisions

16

3.0

2.7

Total non-current liabilities

 

361.5

301.8

Current liabilities

 

 

 

Borrowings

 

1.0

0.1

Trade and other payables

 

172.3

120.8

Current income tax liabilities

 

13.7

6.0

Provision for industrial disease claims

16

34.6

5.3

Other provisions

16

6.7

5.5

Liabilities directly associated with disposal group held for sale

12

2.4

1.7

Total current liabilities

 

230.7

139.4

Total liabilities

 

592.2

441.2

Total equity and liabilities

 

705.9

570.5

 

 

Condensed consolidated statement of changes in equity

for the year ended 31 December 2016

 

 

 

Share

capital

£m

Share premium

account

£m

Treasury shares

£m

 

Special reserve

£m

Other

reserves

£m

Translation

reserve

£m

Retained

earnings/(losses)

£m

Total

attributable

to parent

£m

Non- controlling

interests

£m

Total

equity

£m

At 1 January 2016

30.3

1.0

-

1.0

9.6

99.4

(14.9)

126.4

2.9

129.3

Profit/(loss) for the year

-

-

-

-

-

-

(41.1)

(41.1)

1.4

(39.7)

Other comprehensive
income/(expense):

 

 

 

 

 

 

 

 

 

 

Currency translation differences

-

-

-

-

-

41.5

-

41.5

0.5

42.0

Re-measurement of defined benefit pension plan

 

-

 

-

 

-

 

-

 

-

 

-

(1.1)

(1.1)

 

-

(1.1)

Movement in restriction of retirement benefit asset in accordance with
IFRIC 14

-

-

-

 

 

-

-

-

0.7

0.7

-

0.7

Restriction of interest income in accordance with IFRIC 14

-

-

-

 

-

-

-

0.4

0.4

-

0.4

Tax effect on retirement benefit asset

-

-

-

-

-

-

0.1

0.1

-

0.1

Total comprehensive income/(expense) for the year

-

-

-

 

-

-

41.5

(41.0)

0.5

1.9

2.4

Transactions with owners

 

 

 

 

 

 

 

 

 

 

Dividends

-

-

-

-

-

-

(17.0)

(17.0)

(1.8)

(18.8)

Share options

- value of employee services

-

-

-

 

-

-

-

1.6

          1.6

-

1.6

- share buyback

-

-

(0.8)

-

-

-

-

(0.8)

-

(0.8)

- exercise of share options

-

-

0.7

-

-

-

(0.7)

-

-

-

 

-

-

(0.1)

-

-

-

(16.1)

(16.2)

(1.8)

(18.0)

At 31 December 2016

30.3

1.0

(0.1)

1.0

9.6

140.9

(72.0)

110.7

3.0

113.7

 

 

for the year ended 31 December 2015

 

 

Share

capital

£m

Share premium account

£m

 

Treasury shares

£m

Special reserve

£m

Other reserves

£m

Translation reserve

£m

Retained earnings/(losses)

£m

Total attributable to parent

£m

Non- controlling interests

£m

Total

equity

£m

At 1 January 2015

30.3

1.0

-

1.0

9.5

96.3

(13.4)

124.7

2.8

127.5

Profit for the year

-

-

-

-

-

-

15.5

15.5

0.3

15.8

Other comprehensive
income/(expense):

 

 

 

 

 

 

 

 

 

 

Currency translation differences

-

-

-

-

-

3.1

-

3.1

0.1

3.2

Re-measurement of defined benefit pension plan

-

-

 

-

-

-

-

(0.8)

(0.8)

-

(0.8)

Movement in restriction of retirement benefit asset in accordance with
IFRIC 14

-

-

 

 

-

-

-

-

0.9

0.9

-

0.9

Restriction of interest income in accordance with IFRIC 14

-

-

 

-

-

-

-

0.4

0.4

-

0.4

Tax effect on retirement benefit asset

-

-

-

-

-

-

(0.1)

(0.1)

 -

(0.1)

Total comprehensive income for the year

-

-

 

-

-

-

3.1

15.9

19.0

0.4

19.4

Transactions with owners

 

 

 

 

 

 

 

 

 

 

Dividends

-

-

-

-

-

-

(17.0)

(17.0)

 -

(17.0)

Transfer to disposal group liabilities

-

-

-

-

-

-

-

-

(0.3)

(0.3)

Share options:

 

 

 

 

 

 

 

 

 

 

- value of employee services

-

-

-

-

-

-

(0.4)

(0.4)

-

(0.4)

- deferred tax on options

-

-

-

-

 0.1

-

-

0.1

-

 0.1

 

-

-

-

-

 0.1

-

(17.4)

(17.3)

 (0.3)

(17.6)

At 31 December 2015

30.3

1.0

-

1.0

9.6

99.4

(14.9)

126.4

2.9

129.3

 

 

 

Condensed consolidated statement of cash flows

for the year ended 31 December 2016

 

 

 

 

 

Note

Continuing operations 2016
£m

 

Discontinued operations 2016

£m


Total

2016
£m

 

Continuing operations 2015

£m

 

Discontinued operations 2015

£m

 

 

Total

2015

£m

Cash flows from operating activities

 

 

 

 

 

 

 

Profit/(loss) before tax

 

(43.6)

0.3

(43.3)

29.1

(0.3)

28.8

Finance costs - net

10

10.8

-

10.8

10.8

-

10.8

Share of post-tax result of joint ventures

 

(7.3)

-

(7.3)

(2.8)

-

(2.8)

Other items

 

80.4

               -

80.4

(2.1)

(4.9)

   (7.0)

Impairment of goodwill and assets held for sale

 

-

               -

-

-

5.2

     5.2

Claims settled on behalf of IDC Scheme

 

(1.7)

               -

(1.7)

(2.2)

-

(2.2)

Exceptional items - impairment of goodwill

 

-

-

-

8.8

-

8.8

Share option charge/(credit)

 

1.6

-

1.6

(0.4)

-

(0.4)

Depreciation and amortisation

14,15

21.2

-

21.2

19.3

-

19.3

Difference between pension charge and cash contributions

 

1.2

-

1.2

0.8

-

0.8

(Gain) on sale of property, plant and equipment

15

(0.4)

-

(0.4)

(0.4)

-

(0.4)

Cash reclassified to disposal group held for sale

12

-

-

-

-

(0.1)

(0.1)

Decrease in inventories

 

1.0

               -

1.0

         2.7

-

     2.7

(Increase)/decrease in trade and other receivables

 

(8.1)

            0.9 

(7.2)

      (7.9)

1.1

   (6.8)

Increase/(decrease) in trade and other payables

 

17.1

(0.7)

16.4

9.0

(0.8)

     8.2

Increase/(decrease) in provisions

 

          1.3

(0.2)

1.1

(13.1)

0.1

(13.0)

Net cash generated from continuing and discontinued operations

 

73.5

0.3

73.8

51.6

0.3

51.9

Interest received

 

0.1

-

0.1

0.1

-

0.1

Interest paid

 

(7.2)

-

(7.2)

(7.0)

-

(7.0)

Tax paid

 

(7.2)

-

(7.2)

(9.3)

-

(9.3)

Net cash flow from operating activities

 

59.2

0.3

59.5

35.4

0.3

35.7

Investing activities

 

 

 

 

 

 

Proceeds from sale of property, plant and equipment

 

15

                                          

                                             3.1

 

 

2.9

Purchase of property, plant and equipment

 15

                                       (15.1) 

 

 

(20.1)

 

Net transfer to restricted funds

 

                                       (13.0) 

 

 

(5.8)

 

Acquisition of subsidiaries net of cash acquired

 

                                                          -  

 

 

(0.2)

 

Decrease/(increase) in receivables from joint ventures

 

                                                      3.4  

 

 

(1.0)

 

Dividends received from joint ventures

 

                                                      3.9  

 

 

-

 

Net cash used in investing activities - continuing operations

 

                                          

                                         (17.7)

 

 

(24.2)

 

 

Financing activities

 

 

 

 

 

 

Settlement of debt arising on acquisition

 

 

                                           -  

 

(5.3)

 

Drawing on borrowings

19

 

                                        7.3

 

13.2

 

Dividends paid to shareholders

 

 

                                    (17.0)

 

 (17.0)

 

Dividends paid to non-controlling interests

 

 

                                      (1.8) 

 

-

 

Share buyback

 

 

                                      (0.8) 

 

-

 

Net cash flows used in financing activities - continuing operations

 

 

                                    (12.3) 

 

(9.1)

 

 

Net increase in cash and cash equivalents

 

19

 

                                      29.5 

 

2.4

 

Net foreign exchange difference on cash and cash equivalents

19

 

                                      10.6 

 

1.0

 

Cash and cash equivalents at 1 January

 

 

                                      81.4  

 

78.0

 

Cash and cash equivalents at 31 December

 

 

                                    121.5 

 

81.4

 

                             

 

 

 

 

 

Notes to the condensed consolidated financial statements

 

1 General information

The Group has prepared its condensed consolidated financial statements for the year ending 31 December 2016 in accordance with the Companies (Jersey) Law 1991 and International Financial Reporting Standards (IFRS) as adopted by the European Union. These statements do not constitute accounts prepared for the purpose of Article 105 of the Companies (Jersey) Law 1991.

 

The comparative financial information is based on the statutory accounts to 31 December 2015 which have been delivered to the Jersey Financial Services Commission. The report of the auditors on those accounts was unqualified.

 

The preliminary announcement for the year ending 31 December 2016 was approved by the Board of Directors on 14 March 2017.

 

Copies of this preliminary report will be available from the offices of Cape plc, 47 Esplanade, St Helier, Jersey, JE1 0BD and on the Group's website at www.capeplc.com. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

2 Basis of preparation

The condensed consolidated financial statements for the year ending 31 December 2016 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority.

 

2.1 Discontinued operations

The Group classifies an asset or disposal group as a discontinued operation when it has been either disposed of or classified as held for sale; or it represents a single major line of business or geographical area of operation or is part of a coordinated plan for disposal.


In the period an asset or disposal group has been disposed of, or is classified as held for sale, the results of the operation are reported as discontinued operations in the current and prior period.

 

2.2 Accounting policies

The accounting policies and methods of computation adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual audited consolidated financial statements, which will be available on the Group's website at www.capeplc.com.

 

2.3 Going concern basis

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its condensed consolidated financial statements.

 

3. New and amended standards and interpretations adopted by the Group

Several new standards and amendments apply for the first time in 2016, however they do not have a significant impact on the annual financial statements of the Group. These new standards and amendments that are applicable to the Group are listed below:

 

-    Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations

-    Amendments to IAS 27: Equity Method in Separate Financial Statements

-    Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

-    Annual Improvements to IFRSs 2012-2014 Cycle

 

b) New and amended standards and interpretations not yet adopted

The following standards and interpretations in issue which will have an effect for the Group, have not yet been adopted by the Group:

 

 

 Effective dates

Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses

1 January 2017

Amendments to IFRS 2: Clarification and Measurement of Share-based Payment Transactions

1 January 2017

IFRS 9 Financial Instruments

1 January 2018

IFRS 15 Revenue from Contracts with Customers

1 January 2018

IFRS 16 Leases

1 January 2019

 

 

The Group is currently assessing the impact of these standards and plans to adopt the new standards on the required effective date.

 

4. Prior period adjustments

The Group has re-organised its geographical reporting segments during the period as outlined in note 7 'Segment information'. The change in reporting segments has been performed to align external reporting with the revised internal management structure. All prior year figures have been restated accordingly in note 7.

 

5. Group specific accounting measures

To be able to provide readers with clear, meaningful and consistent presentation of financial performance, the Group reflects its underlying financial results in the 'business performance' column within the consolidated income statement. Business performance excludes 'Other items' and 'Exceptional items', which are considered non-operational in their nature and which are reported separately in a different column within the consolidated income statement.

 

a) Other items

Other items are those items which the directors believe are relevant to the understanding of the results for the year and which are excluded from the adjusted measures. Other items include administration expenses, financial incomes and financial costs associated with industrial disease claims and certain
post-acquisition charges, including amortisation of acquired intangibles arising from business combinations.

 

b) Exceptional items

Exceptional items are those items which are of a non-recurring nature or, in the judgement of the directors, need to be disclosed separately by virtue of their nature, size or incidence. Items which may be considered exceptional in nature include significant write-downs of goodwill and other assets, significant changes in asset values as a result of changes in accounting estimates, business acquisition costs and restructuring costs.

 

 

6. Significant judgements and estimates

Certain of the Group's accounting policies require critical accounting estimates that involve subjective judgements and the use of assumptions, some of which may relate to matters that are inherently uncertain and susceptible to change.

 

a) Judgements

Areas of judgement that have the most significant effect on the amounts recognised in the consolidated financial statements are:

 

(i) Revenue recognition and assessment of long-term contract performance

The Group generally accounts for long-term construction contracts using the percentage of completion method as performance of the contract progresses. This method requires judgement to determine accurate estimates of the extent of progress towards contract completion and may involve estimates of the total contract costs, remaining costs to completion, total revenues, contract risks and other judgements.

 

(ii) Carrying value of property, plant and equipment

Assessing whether property, plant and equipment may be impaired requires a review for indicators of impairment and, where such indicators exist, an estimate of the asset's recoverable amount by reference to value in use. Management are required to exercise significant judgement in reviewing for and identifying asset indicators of impairment and subsequently calculating value in use.

 

(iii) Trade and other receivables

The Group provides for likely non-recovery of receivables to the extent that the carrying value is more than the present value of expected future cash flows. Assessing the value of the provision requires significant management judgement and review of individual receivables based upon individual customer creditworthiness, current economic trends and analysis of historical bad debts.

 

(iv) Deferred tax assets

The Group recognises deferred tax assets on all applicable temporary differences where it is probable that future taxable profits will be available for utilisation. This requires management to make judgements and assumptions regarding the amount of deferred tax that can be recognised based on the magnitude and likelihood of future taxable profits.

 

(v) Defined benefit pension scheme

The cost and the obligation of the Group's defined benefit pension scheme is based on a number of selection assumptions. These include the discount rate, inflation rate, salary growth, longevity and expected return on the assets of the plan. Differences arising from actual experience or future changes in assumptions will be reflected in future periods.

 

b) Estimates

The key assumptions affected by future uncertainty that have a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next financial year are:

 

(i) Onerous contracts

Provision is made for future losses on long-term contracts where it is considered that the contract costs are likely to exceed revenues in future years. Estimating future losses involves assumptions of contract performance targets and likely levels of future cost escalation over time. A provision for onerous contracts of £3.0 million is recorded at 31 December 2016 (2015: £3.1 million), as shown in note 16.

 

(ii) Impairment of goodwill

Goodwill is tested at least annually for impairment. This requires estimation of the value in use of the cash-generating units to which the goodwill is allocated. Calculation of value in use requires estimation of expected future cash flows from each of the cash-generating units and also to determine a suitable discount rate to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2016 was £132.9 million (2015: £118.0 million), as shown in note 14.

 

(iii) Provision for industrial disease claims

To the extent that such costs can be reliably estimated as at 31 December 2016, a provision has been made for the costs which the Group is expected to incur in respect of lodged and future industrial disease claims for which the Board believes the Group to be liable arising from alleged exposure to previously manufactured asbestos products, notwithstanding the matters disclosed under note 20 'Industrial disease claim provision and contingent liabilities'. The most recent full actuarial valuation was completed in January 2017 in respect of the period up to 31 December 2016 and the next full valuation is scheduled to be completed in respect of the period up to 31 December 2019. The amount of the provision is based on historic patterns of claim numbers and monetary settlements as well as published tables of projected disease incidence. Key assumptions made in assessing the appropriate level of provision include the period over which future claims can be expected, the nature of claims received, the rate at which claims will be filed, the rate of successful resolution as well as future trends in both compensation payments and legal costs. Management monitors claims received on an ongoing basis as well as any other factors which would require a change to the assumptions or trigger a full actuarial review in the current year. When determining the appropriate level of provision, the Board has considered various potential, threatened and actual claim types and has relied on appropriate legal and other professional advice.

 

The total industrial disease claim provision at 31 December 2016 increased to £172.5 million (2015: £95.5 million) as a result of a number of factors, including the reduction in the discount rate used in the triennial actuarial valuation, a provision recognised for insurer employers liability claims following a determinant judgment in this litigation in July 2016, an additional provision for the insurer product liability claims following the agreed settlement reached after the year end (see note 23) and a consideration of potential further claims of a similar nature.

 

(iv) Income tax

Group entities can be subject to routine tax audits and also a process whereby tax computations are discussed and agreed with the appropriate authorities. Whilst the ultimate outcome of such tax audits and discussions cannot be determined with certainty, management estimates the level of required tax provisions on the basis of professional advice and the nature of current discussions with the tax authority concerned.

 

7. Segment information

Management has determined the operating segments based on the reports reviewed by the Board (Chief Operating Decision Maker 'CODM') that are used to make strategic decisions. The CODM considers the business from a geographic perspective and the Group reports three regional segments and a central support function. The main profit measure used by the CODM in its review is adjusted operating profit.

 

The Group has re-organised its geographical reporting segments during the year. The change in reporting segments has been performed to align external reporting with the revised internal management structure. Sakhalin is now reported within 'Asia Pacific' and both Azerbaijan and Kazakhstan are now reported within 'Middle East', with these having all previously been reported within 'UK, Europe & CIS'. Additionally, the 'UK, Europe & CIS' segment has been renamed 'UK' and 'MENA' has been renamed 'Middle East'. All prior year figures have been restated accordingly.

 

 

 

 

 

7. Segment information (continued)

Each regional segment derives its revenues from the provision of critical industrial services focussed on the energy and natural resources sectors. No operating segments have been aggregated.

 

The segment information for the year ended 31 December 2016 is as follows:

2016

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Group

£m

Continuing operations

 

 

 

 

 

Revenue

370.8

191.6

301.1

-

863.5

Adjusted operating profit /(loss) before joint ventures

14.2

19.7

21.3

(7.1)

48.1

Share of post-tax profit from joint ventures

-

7.3

-

-

7.3

Adjusted operating profit/(loss) after franchise fees

14.2

27.0

21.3

(7.1)

55.4

Other and exceptional items

 

 

 

 

(88.2)

Net finance costs

 

 

 

 

(10.8)

(Loss) before tax

 

 

 

 

(43.6)

2015 Restated

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Group

£m

Continuing operations

 

 

 

 

 

Revenue

388.4

174.6

148.4

-

711.4

Adjusted operating profit /(loss) before joint ventures

31.5

21.3

3.5

(6.6)

49.7

Share of post-tax profit from joint ventures

-

2.8

 -

-

2.8

Adjusted operating profit/(loss) after franchise fees

31.5

24.1

3.5

(6.6)

52.5

Other and exceptional items

 

 

 

 

(12.6)

Net finance costs

 

 

 

 

(10.8)

Profit before tax

 

 

 

 

29.1

 

Segmental adjusted operating profit/(loss) in the table above is shown after charging franchise fees. Adjusted operating profit before franchise

fees is set out in note 8. There were no significant sales between segments in either year.

 

Other segment items included in the consolidated income statement are as follows:

 

 

2016

 

Note

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Group

£m

Depreciation (excluding discontinued operations)

15

5.1

8.1

4.8

-

18.0

Amortisation           

14

3.2

-

-

-

3.2

 

 

 

 

 

 

 

2015

 

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Group

£m

Depreciation (excluding discontinued operations) 

15

5.2

6.5

4.2

-

15.9

Amortisation           

14

3.4

-

-

-

3.4

 

The geographical origin of revenue based on location of the entity is analysed as follows:

 

Note

2016

£m

 

Restated

2015

£m

Continuing operations

 

 

 

United Kingdom

 

368.5

385.7

Australia

 

226.1

113.6

Kingdom of Saudi Arabia

 

81.4

70.0

Qatar

 

43.6

54.6

Abu Dhabi

 

40.8

34.6

South Korea

 

37.9

0.2

Singapore

 

19.0

 0.8

Rest of the world

 

46.2

51.9

Revenue from continuing operations

 

863.5

711.4

Discontinued operations

12

6.5

5.3

Total revenue

 

870.0

716.7

 

 

 

 

 

7. Segment information (continued)

The Strategic report section in the Annual Report and Accounts provides an analysis of revenues between maintenance support services (being services to plant operators to assist with their maintenance and production support activities) and construction support services (being services to engineering and contracting companies to support major construction projects). This split in customer base and revenue does not represent an operating segment as multi-discipline services are provided to all customers and as such the segmental analysis is only presented by geographic segments. The prior year comparatives in the table on the previous page have been restated to show the revenue of South Korea separately from the rest of the world.

 

Revenue from continuing operations derived from maintenance support services was £521 million (60%) (2015: £474 million (67%)) and revenue derived from construction support services was £342 million (40%) (2015: £237 million (33%)).

 

Revenue from the largest client represented 19% of total revenue relating to project activity in Australia and the top ten clients represented 54% of revenue (2015: 45%). Revenue from the second largest client represented 10% of total revenue and related to activity across all geographic segments.

 

Segment assets consist primarily of property, plant and equipment, investments, intangible assets, inventories and trade and other receivables. Segment liabilities consist of operating liabilities.

 

The segment assets and liabilities at 31 December 2016 and capital expenditure for the year are as follows:

 

2016

 

Note

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Unallocated

£m

Group

£m

Assets - continuing

 

165.2

202.9

127.5

6.2

202.6

704.4

Assets held for sale

15

0.3

-

-

-

-

0.3

Assets directly associated with disposal group held for sale

 

12

-

-

1.2

-

-

1.2

Total assets

 

165.5

202.9

128.7

6.2

202.6

705.9

Non-current assets included in total assets

 

 

 

 

 

 

 

Goodwill and intangibles - continuing

 

58.6

57.8

33.9

-

-

150.3

Other - continuing

 

26.8

45.2

18.9

2.3

42.6

135.8

Total non-current assets

 

85.4

103.0

52.8

2.3

42.6

286.1

Liabilities - continuing

 

59.1

63.8

69.6

183.0

214.2

589.7

Liabilities - discontinued operations

 

-

0.1

-

-

-

0.1

Liabilities directly associated with disposal group held for sale

 

12

-

0.3

2.1

-

-

2.4

Total liabilities

 

59.1

64.2

71.7

183.0

214.2

592.2

Capital expenditure - property, plant and equipment

 

15

2.4

8.7

3.8

0.2

-

15.1

 

The segment assets and liabilities at 31 December 2015 and capital expenditure for the year are as follows:

 

2015 Restated

 

Note

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Unallocated

£m

Group

£m

Assets - continuing

 

185.7

163.8

76.9

8.7

134.4

569.5

Assets directly associated with disposal group held for sale

 

12

-

 

0.2

 

0.8

 

-

 

-

 

1.0

Total assets

 

185.7

164.0

 77.7

8.7

134.4

570.5

Non-current assets included in total assets

 

 

 

 

 

 

 

Goodwill and intangibles - continuing

 

61.6

48.3

28.6

0.1

-

138.6

Other - continuing

 

32.8

31.8

18.6

1.8

29.7

114.7

Total non-current assets

 

94.4

80.1

47.2

1.9

29.7

253.3

Liabilities - continuing

 

58.5

55.7

24.1

 102.4

198.7

439.4

Liabilities - discontinued operations

 

-

0.1

-

-

-

0.1

Liabilities directly associated with disposal group held for sale

 

12

-

0.5

1.2

-

-

1.7

Total liabilities

 

58.5

56.3

25.3

102.4

198.7

441.2

Capital expenditure - property, plant and equipment

 

15

8.5

9.1

2.5

-

-

20.1

 

The geographical origin of non-current assets held by the Group has not been disclosed as the necessary information is not available and the cost to develop it would be excessive. The prior year comparatives for Central and UK assets have been restated to correct the allocation of assets between these two segments. There is no effect on total assets.

 

Liabilities of discontinued operations of £0.1million (2015: £0.1 million) relate to liabilities held in India. Assets and liabilities held for sale in both 2016 and 2015 relate to the discontinuation of operations in Hong Kong and Kazakhstan.

 

 

 

7. Segment information (continued)

 

Unallocated assets and liabilities comprise:

 

 

 

2016

2015

Assets

£m

Liabilities

£m

Assets

£m

Liabilities

£m

Deferred tax

 

39.1

(4.7)

20.7

(5.4)

Current tax

 

-

(13.7)

-

(6.0)

Cash and cash equivalents

 

121.5

-

81.4

-

Restricted deposits current

 

38.5

-

23.3

-

Restricted deposits: non-current

 

3.5

-

9.0

-

Bank loans

 

-

(195.8)

-

(187.3)

Total unallocated

 

202.6

(214.2)

134.4

(198.7)

 

 

8. Adjusted measures

The Group seeks to present a measure of underlying performance which is not impacted by exceptional or other items, both considered
non-operational in nature. These measures are described as 'adjusted' and are used by management to measure and monitor performance.
Other items and exceptional items have been excluded from the adjusted measures:

 

Note

2016

£m

 

2015

£m

Profit/(loss) before tax

 

(43.6)

29.1

Other items

9a

88.2

3.4

Exceptional items

9b

-

 9.2

Interest income on restricted funds

10

(0.4)

(0.3)

Unwind of discount on provision for industrial disease claims

10

3.2

3.3

Adjusted profit before tax

 

47.4

44.7

 

 

 

 

Operating profit/(loss)

 

(32.8)

39.9

Other items

9a

88.2

3.4

Exceptional items

9b

-

 9.2

Adjusted operating profit

 

55.4

52.5

Adjusted operating profit margin

 

6.4%

7.4%

 

 

 

 

Adjusted operating profit

 

55.4

52.5

Depreciation - continuing operations

15

18.0

15.9

Adjusted EBITDA

 

73.4

68.4

 

 

 

 

Net debt

 

36.2

76.6

Unamortised borrowing arrangement costs

      

3.4

2.0

Restricted funds

 

42.0

32.3

Less: cash transferred to assets of disposal group held for sale

12

(1.2)

(1.0)

Adjusted net debt

 

80.4

109.9

 

 

 

 

Finance costs

 

(11.3)

(11.2)

Unwind of discount on provision for industrial disease claims

                 10

3.2

3.3

Adjusted finance costs

 

(8.1)

(7.9)

 

Certain central operations and management are based in Singapore with responsibility for management and development of non-UK intellectual property. Franchise agreements facilitate the charging of franchise fees from Singapore to the Group's non-UK trading businesses with such costs being reported through segment operating profit.

 

The segmental adjusted operating profit before franchise fee charges is as follows:

 

2016

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Group

£m

Revenue

370.8

191.6

301.1

-

863.5

Adjusted operating profit/(loss) before joint ventures

14.2

22.4

27.0

(15.5)

48.1

Share of post-tax result of joint ventures

-

7.3

-

-

7.3

Adjusted operating profit/(loss)

14.2

29.7

27.0

(15.5)

55.4

 

 

 

8. Adjusted measures (continued)

 

2015 Restated

UK

£m

Middle East

£m

Asia Pacific

£m

Central

£m

Group

£m

Revenue

388.4

174.6

148.4

-

711.4

Adjusted operating profit/(loss) before joint ventures

31.5

24.7

7.8

(14.3)

49.7

Share of post-tax result of joint ventures

-

2.8

 -

-

2.8

Adjusted operating profit/(loss)

31.5

27.5

7.8

(14.3)

52.5

 

9. Other items and exceptional items

 

a) Other items

 

Note

2016

£m

2015

£m

Continuing operations

 

 

 

In operating profit:

 

 

 

 Amortisation of intangibles arising on business acquisitions

14

3.2

3.4

 Post-acquisition management compensation

 

0.3

0.2

 Charge/(credit) to provision for industrial disease claims

16

             79.2

(0.6)

 Litigation costs and other expenses for industrial disease claims

 

5.5

0.4

Other items from continuing operations included within operating profit

 

88.2

3.4

 

b) Exceptional items

 

 

2016

£m

2015

£m

(i) Continuing operations

 

 

 

 Acquisition-related costs

 

-

0.4

 Impairment of goodwill

 

-

8.8

Exceptional items from continuing operations included within operating profit

 

-

9.2

 

 

Note

2016

£m

2015

£m

(ii) Discontinued operations

 

 

 

In loss from discontinued operations:

 

 

 

 Impairment of goodwill

12

-

3.4

 Impairment of assets held for sale

12

-

1.8

 Other

12

-

 0.4

 (Release) of provision for exit costs

12

                  -

(0.7)

Exceptional items included within loss from discontinued operations

 

-

4.9

 

10. Finance income and costs

 

 

Note

2016
£m

2015
£m

Interest income:

 

 

 

 Short-term bank deposits

 

0.1

0.1

 Interest on restricted funds

                 19

0.4

0.3

Finance income

 

0.5

0.4

Interest expense:

 

 

 

 Bank borrowings

 

(7.9)

(7.7)

 Finance leases

 

(0.2)

(0.2)

  Unwind of discount on provision for industrial disease claims

16

(3.2)

(3.3)

Finance costs

 

(11.3)

(11.2)

Net finance costs

 

(10.8)

(10.8)

 

 

 

 

11. Income tax

 

2016
£m


2015
£m

Current tax:

 

 

UK

2.2

2.1

Overseas

9.4

 6.8

Adjustments in respect of prior years

               1.2

(1.1)

Deferred tax:

 

 

UK

 (13.4)

1.0

Overseas

(2.4)

(0.2)

Adjustments in respect of prior years

(0.6)

 (0.5)

Income tax (credit)/expense

(3.6)

8.1

 

The difference between the actual tax charge and the charge that would have arisen using Jersey's standard corporate income tax rate of 0%
(2015: 0%) is explained in the table below:

 

2016
£m


Restated

2015
£m

Profit/(loss) before tax - continuing operations

(43.6)

29.1

Profit/(loss) before tax - discontinued operations

0.3

(0.3)

Total taxable profit/(loss)

(43.3)

28.8

 

 

 

Tax calculated at the standard rate of corporate income tax in Jersey of 0% (2015: 0%)

-

-

Adjustments in respect of prior year

0.6

(1.6)

Share option charge

   0.1

-

Effect of different overseas tax rates

(9.1)

6.1

Goodwill write-off

-

1.8

Unrelieved overseas tax

2.2

2.2

Deferred tax asset not recognised in respect of losses

5.4

(0.3)

Tax in respect of joint ventures

-

(0.6)

Expenses non-deductible

2.6

1.1

Income not taxable

(2.1)

(0.8)

Increase in tax provisions

2.4

-

Recognition of unrecognised losses

(6.6)

-

Change in tax rates

 0.6

0.2

Other

0.6

-

Discontinued operations adjustment

(0.3)

-

Tax (credit)/charge

(3.6)

8.1

 

Included within the tax credit of £3.6 million (2015: charge of £8.1 million) is a tax credit of £13.2 million (2015: charge of £0.1 million) relating to exceptional and other items. The local tax rate is applied to the underlying costs or income, however certain exceptional costs due to their very nature will not have an associated tax charge or credit. The overall effective rate applied to these costs will vary year upon year depending on the location and the nature of the cost. The Group has uncertain tax positions that are disclosed in note 20. No movements on these positions are included in the tax charge for the year.

 

Factors affecting current and future tax charges

As a Group involved in worldwide operations, Cape is subject to several factors that may affect future tax charges, principally the levels and mix of profitability in different jurisdictions, tax rates imposed and tax regime reforms. Legislation has been enacted in the UK to reduce the standard rate of corporation tax to 19% from 1 April 2017 and 17% from 1 April 2020. Any UK deferred tax balances have therefore been measured at an appropriate rate depending on when the deferred tax balance is expected to unwind.

 

 

 

 

12. Discontinued operations and assets held for sale

Analysis of the result of discontinued operations and the result recognised on the re-measurement of assets and liabilities of the disposal group is as follows:

 

2016
£m


2015
£m

Revenue

6.5

5.3

Expenses

(6.2)

(5.6)

Profit/(loss) before tax of discontinued operations

0.3

(0.3)

Deferred income tax (charge)

-

(0.2)

Exclude: share of loss attributable to non-controlling interest

-

0.2

Profit/(loss) after tax of discontinued operations before exceptional items

0.3

(0.3)

Exceptional items:

 

 

Impairment of goodwill

-

(3.4)

Impairment of assets held for sale

-

(1.8)

Other

-

(0.4)

Release/(charge) of provision for exit costs

  -

0.7

Profit/(loss) after tax of discontinued operations after exceptional items

0.3

(5.2)

 

Discontinued operations in 2016 and 2015 primarily relate to the planned termination of operations in Hong Kong.

 

The major classes of assets and liabilities directly associated with the disposal group classified as held for sale relate to discontinued operations in Hong Kong and Kazakhstan and are split as follows:

 

Assets directly associated with disposal group held for sale

Note

2016
£m

2015
£m

Trade and other receivables

 

1.7

1.8

Cash

 

1.2

1.0

Goodwill

14

3.4

3.4

Assets directly associated with disposal group held for sale before impairment

 

6.3

6.2

Impairment of assets associated with disposal group held for sale

 

(5.1)

(5.2)

Assets directly associated with disposal group held for sale after impairment

 

1.2

 1.0

 

 

Liabilities directly associated with disposal group held for sale

2016

£m

2015

£m

Trade and other payables

(2.0)

(1.2)

Liabilities directly associated with disposal group held for sale before impairment

(2.0)

(1.2)

Provision for exit costs

(0.4)

(0.5)

Liabilities directly associated with disposal group held for sale after impairment

(2.4)

(1.7)

Net (liabilities) of disposal group held for sale

(1.2)

(0.7)

 

The fair value of the net liabilities held for sale have been calculated based on the estimated realisable value on the open market less costs to sell.
This is in accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations'. The related fair values discussed above are classified as Level 3 in the fair value measurement hierarchy

 

13. Earnings per ordinary share

Basic earnings per share (EPS) for the year equals the loss after tax attributable to the Company's ordinary shareholders of £41.1 million
(2015:  profit after tax of £15.5 million) divided by the weighted average number of issued ordinary shares of 121,020,614 (2015: 121,072,777).

 

When the Group makes a profit from continuing operations, diluted EPS equals the profit attributable to the Company's ordinary shareholders divided by the diluted weighted average number of issued and potential issuance of ordinary shares. When the Group makes a loss from continuing operations, diluted EPS equals the loss attributable to the Company's ordinary shareholders divided by the basic (undiluted) weighted average number of issued ordinary shares. This ensures that EPS on losses is shown in full and not diluted by unexercised share options or awards.

 

Share options and awards are considered dilutive when the average share price during the year is higher than the average exercise price of the option or award and attainment of attaching performance criteria can be determined with appropriate certainty. Out of the 1,420,734 options granted in the current period, 1,136,038 options are not considered dilutive.

 

 

2016
Shares

2015
Shares

Basic weighted average number of shares

121,020,614

121,072,777

Adjustments:

 

 

Weighted average number of outstanding share options

1,104,473

563,679

Diluted weighted average number of shares

122,125,087

121,636,456

       

 

The basic weighted average number of shares excludes shares that the Company holds in an employee benefit trust. The weighted average number of shares held in the trust during the year was 83,323 (2015: 31,160).

 

 

 

 

13. Earnings per ordinary share (continued)

 

 

2016

 2015

Earnings

£m

EPS

pence

Earnings

£m

EPS

pence

Basic earnings/(loss) per share

 

 

 

 

Continuing operations

(41.4)

(34.2)

20.7

17.1

Discontinued operations

               0.3

               0.2

(5.2)

(4.3)

Basic earnings/(loss) per share

(41.1)

(34.0)

15.5

12.8

 

 

 

 

 

Diluted earnings/(loss) per share

 

 

 

 

Continuing operations

(41.4)

(34.2)

20.7

17.0

Discontinued operations

               0.3

               0.2

(5.2)

 (4.3)

Diluted earnings/(loss) per share

(41.1)

(34.0)

15.5

 12.7

 

 

 

 

 

Adjusted basic earnings per share - continuing operations

 

 

 

 

Earnings/(loss) from continuing operations

(41.4)

(34.2)

20.7

17.1

Amortisation of intangibles

3.2

2.6

3.4

2.8

Post-acquisition management compensation

0.3

0.3

0.2

0.2

Exceptional items

-

-

 9.2

 7.5

Industrial disease related costs and interest income

87.6

72.4

 2.8

 2.3

Tax effect of adjusting items

(13.2)

(10.9)

0.1

0.1

Adjusted basic earnings per share

36.5

30.2

 36.4

 30.0

 

 

 

 

 

Adjusted diluted earnings per share - continuing operations

 

 

 

 

Earnings/(loss) from continuing operations

(41.4)

(34.2)

20.7

 17.0

Dilutive effect of loss from continuing operations

-

0.3

-

-

Amortisation of intangibles

3.2

2.6

3.4

2.8

Post-acquisition management compensation

0.3

0.3

0.2

0.2

Exceptional items

-

-

 9.2

 7.5

Industrial disease related costs and interest income

87.6

71.7

2.8

 2.3

Tax effect of adjusting items

(13.2)

(10.8)

0.1

0.1

Adjusted diluted earnings per share

36.5

29.9

  36.4

 29.9

 

The adjusted earnings per share calculations have been calculated after excluding the impact of amortisation of intangibles, non-recurring costs, exceptional items, industrial disease claims related costs and interest income on restricted funds and the tax impact of these items.

 

 

 

 

 

14. Intangible assets

 

 

Note

Goodwill

£m

Trademarks

£m

Supply

agreements

 £m

Other

customer-

related intangibles

£m

Other

£m

Total

£m

Cost

 

 

 

 

 

 

 

At 1 January 2015

 

257.0

6.8

2.6

13.8

5.8

 286.0

Acquired through business combination

 

2.3

-

  -

 3.1

 -

 5.4

Disposals

 

-

 -

 -

 -

(0.1)

 (0.1)

Exchange adjustments

 

(7.1)

 -

 -

 -

 -

(7.1)

Transfer to assets held for sale

12

(3.4)

 -

 -

 -

-

(3.4)

At 31 December 2015

 

248.8

 6.8

 2.6

16.9

 5.7

 280.8

Exchange adjustments

 

                39.3

-

-

-

0.3

           39.6

At 31 December 2016

 

288.1

6.8

2.6

16.9

6.0

320.4

 

 

 

 

 

 

 

 

Amortisation and impairment

 

 

 

 

 

 

 

At 1 January 2015

 

129.8

 0.3

 0.7

 1.5

 5.6

137.9

Amortisation charge

 

-

 0.3

 0.9

 2.1

0.1

3.4

Impairment

 

8.8

-

-

-

-

8.8

Disposals

 

-

-

-

-

(0.1)

(0.1)

Exchange adjustments

 

(7.8)

-

-

-

-

(7.8)

At 31 December 2015

 

130.8

 0.6

 1.6

 3.6

5.6

142.2

Amortisation charge

 

-

0.3

0.9

1.9

0.1

3.2

Exchange adjustments

 

                24.4

-

-

-

0.3

           24.7

At 31 December 2016

 

155.2

0.9

2.5

5.5

6.0

170.1

Net book amount:

 

 

 

 

 

 

 

At 1 January 2015

 

127.2

6.5

 1.9

12.3

 0.2

148.1

At 31 December 2015

 

 118.0

 6.2

1.0

13.3

 0.1

138.6

At 31 December 2016

 

132.9

5.9

0.1

11.4

-

150.3

 

Impairment tests for goodwill

As required by IAS 36 'Impairment of assets', the Group tests goodwill for impairment on an annual basis. The recoverable amounts of each
cash-generating unit (CGU) is based on a value in use calculation. £8.8 million of goodwill was impaired in 2015 in relation to the Asia CGU, reflecting a downward revision in the shorter-term cash flow projections in light of current market conditions.

 

Each CGU's value in use was calculated by taking the Group's five-year cash flow forecasts and then applying a long-term growth rate to the periods beyond the fifth year, discounted back using a pre-tax discount rate. These present values were then compared to the combined carrying value of the CGUs' assets (goodwill, intangible assets and property, plant and equipment). The key assumptions used in preparing the discounted cash flows were as follows:

 

EBITDA and cash flow projections

EBITDA and capital expenditure in the five-year forecast commenced with the most recently approved annual budget, years two to five were prepared on a country by country basis by considering past performance, long-term market share and estimates of market growth by sector. All cash flows associated with future capital expenditure that would enhance the performance of the CGUs were then removed from the discounted cash flows. Cash flow projections were calculated in real rather than nominal terms.

 

Discount rate

The discount rate reflects the estimated post-tax rate of return that would be expected from a rational investor over the period of the forecast, which is then adjusted to a pre-tax discount rate by reference to the Group's five-year cash tax forecast. The post-tax discount rate was calculated using the Capital Asset Pricing Model approach, with the risk-free rate based on UK Government gilts, the beta derived via weekly observations over a five-year period and the risk premium based on a consistent long-term average return on shares. Adjustments were then made to the discount rate of each CGU to reflect different risks associated with those CGUs (both specific risk premiums and in respect of local risk free rates). The pre-tax discount rates applied are set out in the table below.

 

Long-term growth rates

Long-term growth rates were also applied to each CGU separately. Considerations to derive the growth rates included long-term GDP growth and projected growth rates in the supply and demand for energy. The long-term growth rates applied are also set out below.

 

Given the current uncertainty surrounding market conditions, management have taken a prudent view on the real long-term growth rates applied to the cash flow projections for the purpose of impairment testing, as indicated below. Management are of the opinion that over the short to medium term, actual growth rates will be in excess of those used in the projections.

 

 

 

 

14. Intangible assets (continued)

 

 

The assumptions used in the value-in-use calculations were as follows:

 

 

Goodwill

£m

Discount

rate

Long-term growth rate

Headroom

£m

UK

18.9

10.2%

 -

73.0

Middle East

57.6

12.6%

 -

105.8

Australia

22.9

11.1%

 -

 34.1

Asia

 11.1

15.1%

 -

 5.3

Motherwell Bridge

20.1

 10.2%

 -

13.0

Cape Engineering Services

 2.3

10.2%

 -

11.1

 

132.9

 

 

242.3

 

When assessing the carrying values of goodwill in the individual CGUs, management have considered the impact of cash flows arising from industrial disease claims. Under the Court approved Scheme of Arrangement (the Scheme), see note 21, the liability is shared by the Scheme companies and cash flows generated from the entire Group are used to settle those liabilities. Whilst it is not practicable to allocate industrial disease claims cash flows to specific CGUs, management have reviewed the discounted cash flows associated with this liability and are satisfied that at the Group level significant overall headroom remains.

 

Sensitivities

The table below discloses what changes in the key assumptions would cause the carrying value of the CGUs to exceed their recoverable amounts:

 

 

 

Discount rate
to reach impairment

Long-term growth rate
to reach impairment

UK

28.3%

(100.0%)

Middle East

27.9%

(68.9%)

Australia

 27.4%

(98.5%)

Asia

22.2%

 (19.9%)

Motherwell Bridge

13.7%

(5.7%)

Cape Engineering Services

49.6%

Note*

 

*  Note: while the level of headroom is significant, it is not practicable to calculate.

 

Sensitivities were also applied to the five-year cash flow compound annual growth rates. There was sufficient headroom in each of the CGUs with flat or negative growth rates still providing headroom.

 

 

 

 

15. Property, plant and equipment

During the year ended 31 December 2016, the Group acquired assets with a cost of £15.1 million (2015: £20.1 million) and received proceeds from asset sales of £3.1 million (2015: £2.9 million) as shown in the consolidated statement of cash flows representing the actual cash outflow.

 

 

 

Land and

buildings

£m

Fixtures and

fittings

£m

Plant and machinery

£m

Assets under course of construction

£m

Total

£m

Cost

 

 

 

 

 

 

At 1 January 2015

 

20.9

10.1

160.8

0.3

192.1

Exchange adjustments

 

  -

 -

 2.8

-

 2.8

Additions

 

0.6

0.6

18.1

0.8

 20.1

Reclassification

 

(0.2)

-

-

0.2

-

Acquired through business combination

 

0.5

 -

 0.1

-

0.6

Disposals

 

(0.7)

(1.4)

(9.7)

-

(11.8)

At 31 December 2015

 

21.1

9.3

172.1

1.3

 203.8

Exchange adjustments

 

2.1

0.9

24.9

0.2

28.1

Additions

 

0.8

0.5

13.1

0.7

15.1

Reclassification

 

             1.0

   (4.3)

4.3

(1.0)

-

Disposals

 

(0.1)

(0.2)

(9.7)

(0.5)

(10.5)

Transfer to non-current assets held for sale

 

(0.3)

-

-

-

(0.3)

At 31 December 2016

 

24.6

6.2

204.7

0.7

236.2

 

 

 

 

 

 

 

Accumulated depreciation and impairment

 

 

 

 

 

 

At 1 January 2015

 

5.2

8.7

100.9

-

114.8

Exchange adjustments

 

0.1

0.2

 2.0

-

2.3

Charge for the year

 

 1.1

0.8

14.0

-

15.9

Disposals

 

(0.3)

(1.3)

(7.8)

-

(9.4)

At 31 December 2015

 

6.1

 8.4

 109.1

-

 123.6

Exchange adjustments

 

0.8

0.6

17.0

-

18.4

Reclassification

 

-

 (4.1)

4.1

-

-

Charge for the year

 

1.2

0.7

16.1

-

18.0

Disposals

 

(0.1)

(0.2)

(7.5)

-

(7.8)

At 31 December 2016

 

8.0

5.4

138.8

-

152.2

 

 

 

 

 

 

 

Net book amount

 

 

 

 

 

 

At 1 January 2015

 

15.7

1.4

 59.9

0.3

77.3

At 31 December 2015

 

15.0

0.9

 63.0

 1.3

80.2

At 31 December 2016

 

16.6

0.8

65.9

0.7

84.0

 

The depreciation charge of £18.0 million (2015: £15.9 million) has been charged to cost of sales in the consolidated income statement. Exchange adjustments relate to the translation of assets held by foreign operations into the presentation currency.

 

During 2016, £0.3 million of land and buildings was reclassified to non-current assets held for sale. This is presented separately within current assets on the face of the consolidated statement of financial position. Negotiations for the sale are currently ongoing and is expected to be completed in the near future.

 

The Group leases property, plant and equipment under finance lease agreements. At 31 December 2016, the net carrying amount of property, plant and equipment includes the following amounts held under finance lease: plant and machinery £0.4 million (2015: £0.6 million) and land and buildings £1.7 million (2015: £1.8 million). Additions during the year include £nil (2015: £nil) of property, plant and machinery under finance leases.

 

In the consolidated statement of cash flows, proceeds from sale of property, plant and equipment comprise:

 

2016
£m

2015
£m

Net book amount

2.7

2.5

Gain on disposal of property, plant and equipment - continuing operations

0.4

               0.4

Proceeds from disposal of property, plant and equipment - continuing operations

3.1

2.9

 

 

16. Provisions

 

Onerous

contracts

£m

Legal

£m

Other

£m

Total

£m

Industrial disease

claims

£m

Total

Group

£m

At 1 January 2016

3.1

1.4

3.7

8.2

95.5

103.7

Utilised

(0.1)

-

(0.8)

(0.9)

(5.4)

(6.3)

Charged to the income statement

1.1

-

2.4

3.5

 79.2

82.7

Released to the income statement

(1.4)

-

-

(1.4)

                 -

(1.4)

Discount unwind

0.1

-

-

0.1

3.2

3.3

Foreign exchange

0.2

-

-

0.2

                  -

0.2

At 31 December 2016

3.0

1.4

5.3

9.7

172.5

182.2

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

Current provisions

1.8

1.4

3.5

6.7

34.6

41.3

Non-current provisions

1.2

-

1.8

3.0

137.9

140.9

 

3.0

1.4

5.3

9.7

172.5

182.2

 

2015

 

 

 

 

 

 

Current provisions

2.3

1.4

1.8

 5.5

 5.3

10.8

Non-current provisions

0.8

-

1.9

 2.7

 90.2

92.9

 

3.1

1.4

3.7

 8.2

 95.5

103.7

 

Onerous contracts

A provision is made for onerous contracts where it is considered that the contract costs are likely to exceed revenues in future years. Inherent uncertainties in measuring the provision relate to estimates of the future costs expected to be incurred and of revenues expected to be received.
The majority of this is expected to be settled in 2017, with the remaining balance expected to be settled in over one year.

 

Legal

The Group is involved in a number of legal and other disputes, including notification of possible claims. The directors, having considered the facts and circumstances of each item, including legal advice where appropriate, have established a provision to cover the costs of future settlements. Uncertainties relate to whether the Group is successful in defending any action. These are expected to be settled in 2017.

 

Other

Other provisions comprise of various provisions including disposal costs on businesses being divested, restructuring provisions, property related provisions, post-acquisition management compensation and national insurance on share based payments. Inherent uncertainties in measuring the provision relate to estimates of disposal costs associated with any businesses being divested, estimates of expected restructuring costs and expected property costs and estimates of contingent consideration on acquisitions. These costs are expected to be settled in 2017 and 2018.

 

Industrial disease claims

To the extent that such costs can be reliably estimated as at 31 December 2016, a provision has been made for the costs which the Group is expected to incur in respect of lodged and future industrial disease claims for which the Board believes the Group to be liable, arising from alleged exposure to previously manufactured asbestos products, notwithstanding the matters disclosed under note 20 'Industrial disease claim provision and contingent liabilities'. The most recent full actuarial valuation was completed in January 2017 in respect of the period up to 31 December 2016 and the next full valuation is scheduled to be completed in respect of the period up to 31 December 2019. The amount of the provision is based on historic patterns of claim numbers and monetary settlements as well as published tables of projected disease incidence. Key assumptions made in assessing the appropriate level of provision include the period over which future claims can be expected, the nature of claims received, the rate at which claims will be filed, the rate of successful resolution as well as future trends in both compensation payments and legal costs. Management monitors claims received on an ongoing basis as well as any other factors which would require a change to the assumptions or trigger a full actuarial review in the current year. When determining the appropriate level of provision, the Board has considered various potential, threatened and actual claim types and has relied on appropriate legal and other professional advice.

 

The provision for industrial disease claims is discounted at rates between 0.72% and 1.92% (2015: 2.67%) being the appropriate risk free rates as at the balance sheet date, over the term of the liabilities, being approximately 40 years.

 

The amount charged to the income statement of £79.2 million is a result of a number of factors, including the reduction in the discount rate used in the triennial actuarial valuation, a provision recognised for insurer employers liability claims following a determinant judgment in this litigation in July 2016, an additional provision for the insurer product liability claims following the agreed settlement reached after the year end (see note 23) and a consideration of potential further claims of a similar nature.

 

The directors anticipate that, assuming no material deterioration in trading performance and no material change in legal precedence or judgment, the Group will be able to sufficiently fund its subsidiary Cape Claims Services Limited to satisfy all claims that will be settled under the Scheme of Arrangement and will be sufficiently funded to satisfy all other UK claims settled outside of the Scheme of Arrangement.

 

 

 

17. Share capital and reserves

Ordinary shares of 25p each

2016

Number

of shares

 

2016

£m

2015

Number of

shares

 

2015

£m

Authorised

200,000,000

50.0

200,000,000

50.0

 

plc Scheme Share of £1 each

 

 

 

 

Authorised, issued and fully paid at 1 January and 31 December

1

-

1

-

 

Issued and fully paid:

 

 

 

 

At 1 January

121,103,937

30.3

121,103,937

30.3

Issue of shares

-

-

 -

-

Exercise of share options

-

-

 -

-

At 31 December

121,103,937

30.3

121,103,937

30.3

 

 

 

 

Treasury shares:

 

 

 

 

At 1 January

           31,160

                  -

             31,160

                  -

Share buyback

330,000

   (0.8)

 -

-

Exercise of share options

(279,646)

               0.7

 -

-

At 31 December

81,514

(0.1)

31,160

-

 

Treasury shares

The Group has an employee benefit trust holding shares to satisfy the exercise of share options. All these shares have been classified in the condensed consolidated statement of financial position as treasury shares within equity. At 31 December 2016, 81,514 (2015: 31,160) shares were held by the Cape plc Employee Benefit Trust. During April 2016, the Trust purchased 330,000 ordinary shares in the capital of the Company for the purpose of enabling the Trustee to satisfy existing awards and future awards granted by the Company. As at 31 December 2016, 279,646 options had been exercised, with the remaining 50,354 shares being held in the Trust in addition to the amount brought forward of 31,160.

 

Special reserve

The special reserve was created in 2008 by court order upon cancellation of the share premium and retained earnings. The special reserve is not distributable and restrictions exist over its use.

 

Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of financial statements of foreign operations.

 

Other reserves

Other reserves relates to hedging reserves held in respect of net investment hedges.

 

plc Scheme Share

The plc Scheme Share is held by the Law Debenture Trust Corporation plc on behalf of the Scheme creditors.

 

The rights attaching to the share are designed to ensure that Scheme assets are only used to settle Scheme claims and ancillary costs and do not confer any right to receive a distribution or return of surplus capital save that the holder will have the right to require the Company to redeem the share at par value on or at any time after the termination of the Scheme. The share carries two votes for every vote which the holders of the other classes of shares in issue are entitled to exercise on any resolution proposed during the life of the Scheme to engage in certain activities specified in the Company's Articles of Association.

 

The Company will not be permitted to engage in certain activities specified in the Company's Articles of Association without the prior consent of the holder of the share.

 

Share based payments

The Performance Share Plan (PSP) is the conditional award of ordinary shares granted at no cost to the participant employees or executive directors of the Group. Awards are made upon the terms set out in the plan and such other additional terms as the Board shall determine. Depending on the scheme, vesting of these awards is subject to Cape plc's Adjusted Diluted Earnings Per Share (DEPS) meeting the specified performance criteria over a three-year vesting period.

 

For the 2013 award, specific EPS targets for the final year of the vesting period were set to 29 pence for the minimum of 30% of the shares awarded to vest and 36 pence for all of the shares awarded to vest. The contractual life of the award is three years and is subject to continued employment. In 2016, 39% of the awards vested.

 

The final year performance criteria for the 2014 awards are based on the 2013 adjusted diluted EPS growth of the Retail Price Index (RPI) plus 3% for the minimum of 30% of the shares awarded to vest, and EPS growth of RPI plus 10% for all the shares awarded to vest, calculated on an annual compounded basis. The contractual life of the award is three years and is subject to continued employment.

 

The final year performance criteria for the 2015 awards are based on the 2014 adjusted diluted EPS growth of the Retail Price Index (RPI) plus 3% for the minimum of 30% of the shares awarded to vest, and EPS growth of RPI plus 10% for all the shares awarded to vest, calculated on an annual compounded basis. The contractual life of the award is three years and is subject to continued employment. The shares issued under the 2015 PSP have an exercise price of £nil and under the fair value model used by the Company are deemed to have a fair value equivalent to the share price on the day of grant less the fair value of the dividends foregone during the vesting period. Therefore, the shares granted at 19 March 2015 had a fair value of 201.5 pence.

 

For the 2016 award, specific EPS targets for the final year of the vesting period were set to 26 pence for the minimum of 30% of the shares awarded to vest, 29 pence for 50% of the shares awarded to vest and 33 pence for all the shares awarded to vest. The contractual life of the award is three years and is subject to continued employment. The shares issued under the 2016 PSP have an exercise price of £nil and under the fair value model used by the Company are deemed to have a fair value equivalent to the share price on the day of grant less the fair value of the dividends foregone during the vesting period. Therefore, the shares granted at 29 April 2016 and 1 September 2016 had a fair value of 191.4 pence and 174.9 pence respectively. The 2016 award also includes the implementation of a dividend equivalence, which is based upon the vesting percentage and the value of the dividends expected to be paid during the vesting period. This will be paid via cash settlements on the number of options expected to vest at the end of the vesting period. A liability of £0.1m has been recognised during 2016 and is included within other provisions.

 

17. Share capital and reserves (continued)

The Employee Incentive Plan (EIP) allows the Group to grant options to directors and senior employees. The last tranche of this scheme was awarded in 2008. The EIP carries a non-market based performance criteria. The contractual life of the options is ten years. The options become exercisable on the third anniversary of the date of grant, subject to a growth in earnings per share over that period exceeding an average 3% compounded annually above the growth in the consumer price index over the same period. Exercise of an option is subject to continued employment.

 

Options are valued using the Black-Scholes option pricing model. The fair value per option granted and the assumptions used in the calculation for the current year are as follows:

 

Employee Incentive Plan

Weighted average fair value at measurement date

80.9p

Share price at grant date

269.0p

Exercise price

269.0p

Vesting period

3 years

Expected option life

3.95 years

Risk free interest rate

2.18%

Expected share price volatility

28%

 

The expected share price volatility is based on historic volatility. The expected option life is the average expected period to exercise. The risk free rate of return is the yield on a five-year zero coupon UK Government bond. The assumed dividend yield is zero.

 

The number and weighted average exercise price of the share options under the PSP and the share awards under the EIP are as follows:

Performance Share Plan

Number of
share options 2016

Number of
share options 2015

Outstanding at 1 January

3,057,630

2,352,771

Exercised

(279,646)

-

Granted

1,420,734

1,237,636

Forfeited

(200,972)

(246,279)

Lapsed

(552,862)

(286,498)

Outstanding at 31 December

3,444,884

3,057,630

 

On 29 April 2016 and 1 September 2016, 1,380,303 and 40,431 share options respectively were awarded to executive directors and employees under the Performance Share Plan which vest after three years subject to performance criteria being met (2015: 1,237,636). If the criteria are met, the awards vest at no cost to the employees and executive directors. The weighted average price of share options exercised during the period was 230.5 pence.

 

Out of the 3,444,884 outstanding PSP awards (2015: 3,057,630), 76,220 shares were exercisable (2015: nil). All PSP share options are at no cost to the participant. 279,646 options were exercised in the year (2015: none).

 

Employee Incentive Plan

Weighted

average

exercise price

2016

pence

Number

of share

options

2016

Weighted

average

exercise price

2015

pence

Number

of share

options

2015

Outstanding at 1 January

269.0

10,000

269.0

 10,000

Outstanding at 31 December

269.0

10,000

269.0

10,000

 

All of the options outstanding at 31 December 2016 were exercisable (2015: all were exercisable).

 

Share options and awards outstanding at the end of the year have the following expiry date and exercise prices:

 

Performance Share Plan expiry date

2016

2015

31 March 2018

 76,220

913,798

31 March 2019

 914,723

943,980

19 March 2020

1,094,541

1,199,852

29 April 2021

1,318,969

-

01 September 2021

40,431

-

 

3,444,884

3,057,630

 

Employee Incentive Plan expiry dates

Exercise price per share
pence

2016

2015

22 March 2017

269.0

 10,000

10,000

 

 

 10,000

10,000

 

The total charge for the year, including national insurance, relating to employee share based payment plans was £1.9 million (2015: credit of £0.4 million), of which £1.8 million (2015: £0.4 million) related to equity settled share based payment transactions and £0.1 million related to cash settled share based payment transactions (2015: £nil). At 31 December 2016, there is an amount of £0.5 million (2015: £0.3 million) included within 'other' provisions as per note 16, which relates to national insurance payable on share based payment charges.

 

 

 

18. Dividends per share

An interim dividend was paid on 7 October 2016 amounting to 4.5 pence per share (2015: 4.5 pence per share). Interim dividends are recognised when paid. A final dividend in respect of the year ended 31 December 2016 of 2.5 pence per share (2015: 9.5 pence per share), amounting to £3.0 million, is to be proposed at the Annual General Meeting convened for 10 May 2017, making a total dividend of 7.0 pence per share for the year
(2015: 14.0 pence per share). These condensed consolidated financial statements do not reflect this final dividend payable.

 

19. Reconciliation of net cash flow to movement in net debt (excluding restricted deposits)

 

 

2016
£m

2015
£m

Net increase in cash and cash equivalents including net foreign exchange differences

40.1

3.4

Drawing on borrowings

(7.3)

(13.2)

Finance leases and borrowings on acquisition

-

(0.8)

Foreign exchange movements on foreign currency denominated loans

(3.5)

 1.8

Movement in cash transferred to disposal group held for sale

0.2

(0.1)

Movements in adjusted net debt during the year

29.5

(8.9)

Adjusted net debt excluding restricted deposits - opening

(109.9)

(101.0)

Adjusted net debt excluding restricted deposits - closing

(80.4)

(109.9)

 

Adjusted net debt excluding restricted deposits is calculated by deducting current and non-current borrowings from cash and cash equivalents (see note 8).

 

Analysis of cash flows relating to restricted deposits

 

 

Note

2016
£m

2015
£m

At 1 January

 

32.3

29.9

Payment of Scheme creditors

 

(3.7)

(3.7)

Interest received

10

0.4

 0.3

Receipt of funds

 

13.0

 6.2

Transfer of funds

 

-

(0.4)

At 31 December

 

42.0

32.3

 

20. Industrial disease claim provision and contingent liabilities

The Board considers that the provision of £172.5 million for industrial disease claims as at 31 December 2016 captures all expected material industrial disease scheme liabilities for which the Board believes the Group to be liable at the balance sheet date.

 

The Group continues to receive claims, from both individuals and insurance companies, in connection with historical alleged exposure to asbestos. Where claims are determined to have merit, the costs are provided for and claims are settled in the ordinary course, otherwise claims are defended.
As legal precedent in the area of industrial disease claims continues to evolve, new developments and new types of claims give rise to inherent uncertainty in both the future level of asbestos-related disease claims and of the legal and other costs arising from such claims. If any such claim were to be successful, it might lead to future claims against the Group which may result in a significant additional liability over and above that recognised under the existing provision and which could have material and continuing impacts on the Group and its stakeholders, including but not limited to impacting the implementation of the Group's strategic plans, potentially including the Company's capacity to pay a dividend and a material reduction in the percentage of each claim paid out to individual claimants (in respect of damages and claimant legal costs) under the Cape Scheme.

 

The Group has previously disclosed that Cape Intermediate Holdings Limited (CIH) has been engaged in litigation funded by Aviva plc, RSA Group and Zurich Insurance Group (Insurer PL Litigants) in respect of historic and current payments made by them in their capacity as providers of employer liability insurance in relation to claims by employees and former employees of third-party companies arising from asbestos-related diseases (Insurer PL Litigation). The six-week trial in respect of the Insurer PL Litigation concluded on 23 February 2017, following which the Board received an updated opinion from Leading Counsel which reinforced the Board's view that the merits of the Group's defence are persuasive and that there are substantial evidential burdens upon the Insurer Litigants. Nonetheless, and as previously disclosed, the Board was mindful that there remains a risk that the Insurer PL Claims litigation could have a material adverse impact on the Scheme, and in turn upon the Group and its stakeholders. The Board therefore concluded that it was in the best interests of Cape and its shareholders to settle at the agreed level outlined below, thus removing a significant risk to the business,  removing the distraction of a likely protracted appeals process and enabling management to focus on the development of the core business. On 12 March 2017 the Group reached agreement to settle the Insurer PL Claims litigation for a consideration of £18.0 million payable immediately and a deferred payment of up to £34.5 million payable in the period 2018 to 2023, enabling this litigation to be resolved outside of the court process. These payments and an additional allowance to reflect the potential of further claims of a similar nature, discounted using an appropriate discount rate, have been charged to profit or loss during the year and included in the industrial disease claims provision held as at 31 December 2016 as per note 16. The settlement of the Insurer PL Claims litigation does not imply any acceptance of liability on Cape's behalf.

 

As also previously disclosed, Aviva plc has sought to establish contribution and indemnity claims (Insurer EL Claims) against the Group in respect of employee liability settlements that it has made in response to policies that Aviva underwrote for a liquidated Cape subsidiary during the period 1956 to 1966 and for which Aviva has already benefited from the associated insurance premiums. A sequence of preliminary court hearings were held during the year in respect of the Insurer EL Claims culminating in a determinant judgment on 19 July 2016, with some issues found in favour of the Cape and some against. Cape has been granted leave to appeal on the majority of potential appeal issues it had raised. At the same time, Aviva plc was granted leave to cross-appeal. The appeal hearing will be held in July 2017.

 

During 2014, a fatality of a Cape employee was suffered at a client's offshore installation. The investigation by the enforcing authorities is ongoing.
At the date of the statement of financial position no amounts have been provided in respect of this matter. It is not practicable to provide an estimate of the financial effect and there is uncertainty relating to the amount or timing of any outflow.

 

The Group is responding to an enquiry by HMRC with regard to the UK tax consequences of a transfer of intellectual property to Singapore in 2011. HMRC has challenged the accounting treatment adopted in the audited financial statements, and the gain arising thereon. Cape's analysis is that the accounting treatment applied is correct and in line with the relevant accounting standards. In 2015, a tax tribunal determined that the accounting treatment adopted in a case which has similarities with the accounting for the transfer of the Cape intellectual property was in line with the accounting standards being applied, and that a company cannot be forced to apply a different interpretation where the treatment adopted is valid. The Board expects to successfully defend against the HMRC challenge based on tax and accounting advice received. The possible UK corporation tax liability that may arise in connection with the enquiry is up to £14.0 million as at 31 December 2016.

 

 

 

20. Industrial disease claim provision and contingent liabilities (continued)

The Group is required to issue trade finance instruments to certain customers. These include tender bonds, performance bonds, retention bonds, advance payment bonds and standby letters of credit. At 31 December 2016, the Group's bank facilities relating to the issue of bonds, guarantees and letters of credit amounted to £66.3 million (2015: £59.3 million).

 

21. The Scheme of Arrangement

On 14 June 2006, the Cape Scheme became effective and binding upon the following 13 companies:

 

Cape Intermediate Holdings Limited (formerly Cape Intermediate Holdings plc)

Cape Building Products Limited

Cape Calsil Systems Limited

Cape Contracts International Limited

Cape Durasteel Limited

Cape East Limited

Cape Industrial Services Limited

Cape Industries Limited

Cape Insulation Limited

Cape Specialist Coatings Limited

Predart Limited

Somewatch Limited

Somewin Limited

 

The Cape Scheme is a court-sanctioned scheme established to provide recompense for individual claimants in respect of asbestos-related industrial diseases contracted as a result of Cape's historic use of asbestos in manufacturing processes and who are unable to recover under insurance policies. The Cape Scheme also provides a structural protection for the Group's trading stakeholders.

 

The detailed terms of the Scheme are set out in the Scheme itself, a copy of which has been filed with the Registrar of Companies, which is also on the Cape plc website www.capeplc.com/investors/shareholder-information/shareholder-documents, the Articles of Association of Cape Intermediate Holdings Limited (CIH), Cape Claims Services Limited (CCS) and Cape plc and a number of other ancillary agreements. The effect of the Scheme as a whole can be summarised as follows:

 

(a) While Scheme creditors retain their rights against Scheme companies, and may bring proceedings against Scheme companies for declaratory relief to determine whether they have a claim and, if so, of what amount, their rights, subject as provided in sub‑paragraphs (k) and (m) below are only enforceable against CCS under the terms of the Scheme guarantee.

 

(b) CCS was funded in the first instance with a sum of £40.0 million which represented what was considered to be a sufficient sum to discharge CCS's liabilities to Scheme creditors payable over at least eight years from 1 January 2006. The use of these funds is restricted to the payment of established Scheme claims and Scheme creditor costs.

 

(c) The sum of £40.0 million was not calculated by reference to an estimate of the likely amount of Scheme claims. It simply represented the aggregate of the amount that Cape was able to raise from its shareholders and the level of debt which Cape could reasonably maintain for the purposes of the Scheme. Of fundamental importance to the Scheme are the provisions as to topping up of that sum described below.

 

(d) Every three years an assessment of the projected Scheme claims against Scheme companies payable by CCS over the following nine years is undertaken, by reference to which there will be established the Funding Requirement.

 

(e) In the event that an assessment reveals a shortfall between the Scheme assets and the Funding Requirement, Cape will top up CCS's funding over the following three years provided that sufficient cash is available, Cape's obligation being limited to 70% of the Group's consolidated adjusted operational cash flow (including, for example, adjustments to take account of acquisitions, an element of capital expenditure and repayment of borrowing facilities). During 2016, a top up of £13.0 million was made to the Scheme (2015: £6.2 million).

 

(f) Should Cape not be able to meet its top up obligation in any one year, it will be required to make good the shortfall in the next year, again subject to sufficient cash being available.

 

(g) Alongside the Funding Requirement there is the Scheme Funding Requirement which will be assessed every year by reference to projected Scheme claims against Scheme companies payable by CCS over the next six years.

 

(h) If at any time the ratio of the Scheme assets to the Scheme Funding Requirement (the Scheme Funding Percentage) falls below 60%, CCS will have the ability to reduce the percentage (the Payment Percentage) of each established claim which it pays to Scheme creditors until such time as the Scheme Funding Percentage is restored to 60%.

 

(i) Cape plc is permitted to pay dividends provided that at the time of payment (i) the Scheme Funding Percentage in relation to the last preceding financial year was certified to be not less than 110%, (ii) the directors of Cape plc certify that they anticipate that the Scheme Funding Percentage for the current and following financial year will be not less than 110% and (iii) the Payment Percentage has not at any time within the previous 40 business days been below 100%. Any distribution which Cape plc proposes to make to its shareholders may not, without the consent of the Scheme Shareholder, exceed the greater of (i) 50% of the consolidated adjusted operating profit of the Group for the last preceding financial year and (ii) the aggregate of any permitted dividends made in the preceding financial year. This restriction therefore places a cap on the amount of dividends that Cape plc may pay in any one year.

 

(j) There have been established special voting shares (the Scheme Shares) in CCS, CIH and Cape plc which are held by an independent third party (the Scheme Shareholder) on trust for Scheme creditors. The Scheme Shares have special rights which are designed to enable the Scheme Shareholder to protect the interests of Scheme creditors.

(k) In the case of certain Scheme creditors (Recourse Scheme Creditors), who are those Scheme creditors whose claims are in whole or in part the subject of a contract of insurance (Recourse Scheme Claims), their rights to enforce their Recourse Scheme Claims against a relevant Scheme Company will revive in certain circumstances. These circumstances are where the relevant Scheme Company is insolvent or where there has been a specified reduction in the Payment Percentage and if the Scheme creditor was able to bring about the insolvency of the relevant Scheme Company he would be able to recover greater compensation from the Financial Services Compensation Scheme (FSCS) or, in certain circumstances, from a solvent insurer than is available from CCS at that time under the Scheme. There will be a specified reduction if either (i) the Payment Percentage has been reduced below 100% but above 50% and the Scheme creditor has not been paid in full after 12 months or (ii) the Payment Percentage is reduced to 50% or below.

 

l) Each Scheme Company will agree to hold on trust for any Scheme creditor concerned the proceeds of any policy of insurance (or any compensation received from the FSCS) referable to that Scheme claim.

 

 

21. The Scheme of Arrangement (continued)

(m) The restriction described in sub-paragraph (a) above will not apply to proceedings to enforce the right to confer under sub‑paragraph (l) above.

 

(n) There are provisions contained in two reimbursement agreements which preserve certain rights of proof by CCS and Cape plc respectively in any insolvency of Cape plc or any of the other Scheme companies.

 

(o) In support of the above, on 6 May 2011, CIH, Cape plc and CCS entered into a new Guarantee and Funding Agreement whereby Cape plc agreed to make certain additional funding available to CIH in connection with CIH's commitments under the Funding Agreement, as well as to guarantee all present and future payment obligations of Cape plc and CCS under the Funding Agreement. In addition, a Scheme Share in Cape plc (referred to in paragraph (j) above) was issued to the Scheme Shareholder which has similar rights to the Scheme Shares in CIH and CCS and which will afford the Scheme Shareholder substantially the same rights to those provided by the Scheme Shares in CIH and CCS.

 

22. Related party transactions

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Other related party transactions are disclosed below.

 

As at the year-end there was a net balance of £4.0 million (2015: £7.4 million) owed by joint ventures. These amounts are unsecured, have no fixed date of repayment and are repayable on demand. Amounts owed by joint ventures are assessed for recoverability and, where necessary, provided for in line with normal commercial transactions. Sales by the Group to joint ventures during the year amount to £13.1 million (2015: £20.6 million).

 

23. Post balance sheet events

As disclosed in note 20, the six-week trial in respect of the Insurer PL Claims litigation concluded on 23 February 2017. Subsequent to this date, the Group reached agreement to settle this litigation for a consideration of £18.0 million payable immediately and a deferred payment of up to £34.5 million payable in the period 2018 to 2023, enabling this litigation to be resolved outside of the court process. These amounts and an additional charge to reflect the potential of further claims of a similar nature, discounted using an appropriate discount rate, have been charged to profit and loss during the year and are included in the industrial disease claims provision held as at 31 December 2016 as per note 16.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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