Preliminary Results

RNS Number : 6104S

Hargreaves Services PLC

14 September 2010

 



FOR IMMEDIATE RELEASE

14 September 2010

HARGREAVES SERVICES PLC

(the "Company" or the "Group")

Preliminary results for the year ended 31 May 2010

Hargreaves Services plc (AIM:HSP), the UK's leading energy support services provider announces its preliminary results for the year ended 31 May 2010.

Highlights of the year

	Year ended  31 May 2010	Year ended 31 May 2009	Change %
Revenue	£459.8m	£503.1m	-8.6%
Operating Profit	£35.2m	£29.8m	+18.1%
Underlying Operating Profit (1)	£38.7m	£33.5m	+15.5%
Profit Before Tax	£30.7m	£26.2m	+17.4%
Underlying Profit Before Tax (2)	£34.3m	£28.6m	+20.1%
Diluted EPS	75.6p	67.3p	+12.4%
Underlying Diluted EPS (2)	88.8p	76.3p	+16.5%
Proposed Full Year Dividend	13.5p	11.8p	+14.4%

·      Underlying profit before tax increased by £5.7m to £34.3m

·      Underlying diluted EPS up 16.5% from 76.3p to 88.8p

·      Proposed full year dividend up 14.4% to 13.5p

·      Strong performance in Energy & Commodities, Transport and Industrial Services

·      Excellent progress made in European expansion - 25% increase in volume

·      Group well placed to focus on organic growth and cash generation

Commenting on the interim results, Chairman Tim Ross said:

"I am pleased to report that the Group has completed another successful year and delivered a further set of record results. The Group is well placed to drive further profit growth and cash generation and the Board continues to view the long-term future with confidence."

(1) Underlying Operating Profit is stated excluding the amortisation of acquired intangibles and including share of profit in jointly controlled entities

(2) Underlying Profit Before Tax and EPS are stated excluding the amortisation of acquired intangibles

Hargreaves Services Gordon Banham, CEO Iain Cockburn, Finance Director 0191 373 4485 Buchanan Communications Tim Anderson / James Strong 0207 466 5000 Brewin Dolphin Graeme Summers / Matt Davis / Andy Emmott 0845 213 1000 RBS Hoare Govett Limited Hugo Fisher / Stephen Bowler 020 7678 8000

Chairman's Statement

Results

I am pleased to report that the Group has completed another successful year and delivered a further set of record results. Underlying profit before tax for the year increased 20.1% from £28.6m to £34.3m whilst revenue declined due to the impact of falling commodity prices by £43.3m, from £503.1m to £459.8m. This again demonstrates our robust and unique trading model whereby we seek to achieve a fixed gross profit per tonne, and wherever possible, eliminate commodity price risks. Underlying diluted EPS increased by 16.5% from 76.3p to 88.8p. With no major acquisitions in the year this growth is largely organic.  

With the exception of Maltby Colliery, businesses across the Group performed in line with, or ahead of, management expectations.  

The Group remains well financed following the new banking facilities signed in September 2009 and the business is operating comfortably within its covenant levels. Having completed two years of heavy investment at Maltby, the focus will now, as planned, return to increasing cash generation.

Dividend

The Board has carefully considered the appropriate level of dividend, balancing the desirability of progressive dividend policy with the maintenance of capital in the business to support the growth potential and reduction of core debt levels. Given the strong performance in the year to 31 May 2010 and the encouraging outlook, the Board has decided to recommend a final dividend of 9.1 pence per share, bringing the dividend for the year to 13.5 pence per share, an increase of 14.4%. The final dividend is proposed to be paid on 17 November 2010 to all shareholders on the register at the close of business on 15 October 2010.

People

Our staff remain key to our business and I would like to thank them for their continued loyalty, hard work and cooperation in what has been a challenging economic period. I would particularly like to acknowledge the support that we are getting from our customers, employees and union representatives as we jointly face up to the challenge of improving Maltby's production consistency, reducing operating expenses and maximising proceeds to secure a successful future for the mine.

Development

Although we do not rule out acquisition activity when opportunities become available, we intend to focus on the many organic growth opportunities available to the Group. In February 2009 we announced that we intended to consider a move from AIM to the Official List. Whilst it still remains our ambition to grow the size and profitability of the business to the point where a move to the Official List would be a natural step in the Group's evolution, in the absence of a strategic imperative that would require and justify such a move, our intention will be to remain on AIM and continue to enjoy the benefits offered by the AIM market.

Outlook

With the change to the new face having been completed at Maltby, we are hopeful that production consistency will now improve. The Board is encouraged by the start that has been made to the current financial year by the rest of the Group and believes that the Group is well placed to drive further profit growth and cash generation. The Board therefore continues to view the long-term future with confidence.

Tim Ross                                                                                                                                                              
Chairman                                                                                                                                              14 September 2010

Group Business Review

Overview

The Group has continued its strong track record of growth during the year, developing the many growth and synergy opportunities in both the UK and Europe.

The Group operates in four distinct divisions, and each, in their own right, is now a major player or the market leader in its discipline. It is however the team work of these divisions, unique in the energy sector, which sets us apart from our competitors. I would like to reiterate the Chairman's comments and thank all our more than 2,500 employees who work so closely together, not only within respective Energy & Commodities, Production, Transport, and Industrial Services Division teams, but also as a united team to deliver a highly-valued and first-rate service to our many major blue-chip customers. Each division plays an important role as a link in our unique supply chain model and each has made a contribution to making Hargreaves what it is today.

Energy & Commodities is by far our largest division in terms of revenues and profits. It continues to perform particularly well, helping to source and market speciality coals from both our own Production Division and our many third-party producers, with whom we have built long-standing and mutually beneficial relationships over many years. Alongside sourcing products, Energy & Commodities' role is to gain accreditation as a quality supplier to the broad spectrum of blue-chip customers and end-user markets we serve. As can be seen from the growth of the division over the last few years, our unique model, backed up by quality assurance, reliability and value for money, continues to win not only repeat business but an ever growing market share and wider customer base.

Within Production, the performance at Maltby has been a disappointment. It is a testament to the strength of the Group as a whole that we have been able to deliver such positive overall Group results despite these challenges. The problems were particularly disappointing given the investment we have made in the mine. After further delays and disruption, the problematic face T11 was finally completed at the end of July 2010. Although the mine is slightly behind targeted production in the current year due to delays in completing T11, I am hopeful that this shortfall can be recovered as they develop the new T24 panel with new specification equipment benefiting from the lessons we have learnt on T11. We will continue to focus on initiatives to improve the consistency of production at Maltby, reduce costs and maximise proceeds. 

Coke has been produced at Monckton for over 130 years, and the site continues to deliver consistent, stable production levels. Monckton has also benefited from the efforts of the Energy & Commodities team which has doubled the potential customer base for its finite production. Although being mindful of the long-term trading relationships with many of our existing customers stretching back over 50 years, this has provided additional competition that has helped to increase proceeds for this unique, high quality, low phosphorous coke. It will also help us extend the average length of sales contracts, thus reducing future price volatility. 

At MRT (Monckton Rubber Technologies), through the combined efforts of the Industrial Services team which streamlined and increased production, and the Energy & Commodities team which has found improved proceeds through accessing markets in Europe and the UK for rubber, fibre and wire, we have established a solid profitable business to move forward in 2010-11.

The Transport Division continues to grow both as a supplier to third parties and to the Energy & Commodities Division and its customer base. The division services a variety of blue-chip and local authority customers in waste, chemical and the bulk materials sectors, working on a variety of contracts with durations of up to five years. Many of these customers have been our business partners for over ten years.

Industrial Services, by working closely with the other divisions, has been able to demonstrate its added value to many new customers of the wider Group, whilst continuing to compete for business from its core of long-term trading partners in the utilities sector. Again, helped by its reputation for quality, many of this Division's contracts are of long duration, typically three to five years.

As the Chairman noted, the poor performance at Maltby should not detract from the solid performance of the rest of the Production Division and also of the wider Hargreaves Group.  Maltby is an important part of the Group but as the Group scales in size, its inherent volatility and therefore relative importance and impact on Group results decreases. Whilst delivering impressive growth we have made a number of new management appointments and have successfully strengthened the Group's management team. I believe this team is well placed to take the Group forward through its next stage of development and I would like to take this opportunity to welcome the new arrivals to the Group and thank everyone for their contribution and support in the last year.

Our Markets

The last twelve months have seen continued volatility in commodity prices and exchange rates. The solid performance of the Group in the last period, particularly in our trading activities, continues to validate the effectiveness of our risk mitigation model of securing absolute fixed margins underpinned by an increasing volume base.

The market price for coal and coke continues to be driven by strong global demand and, although our short-term exposure to floating prices is limited through hedges and back-to-back contracts, we remain encouraged by the current and forward prices for coal and coke. The current and forward prices represent a significant premium to our own contracted group production from both Maltby and Monckton. Coal burn in the UK has reduced to levels that have not been seen for over a decade, mainly as a result of increased availability of cheap gas and also reduced demand for power due to the recession. In addition to the decline in coal burn, many power stations have taken the opportunity to reduce inventory. This reduction in stock levels, combined with the drop in overall burn, has resulted in a significant decrease in coal imports. This is evidenced in the Financial Review and shows our coal tonnage to power stations has, as indicated in our Interim Statement, dropped. However, we derive the bulk of our profits in the Energy & Commodities Division from the less cyclical and more diverse speciality coal markets. These markets include sized coals for the domestic and commercial heating markets and industrial customers in the cement, steel, ferro-alloy and ferro-silicate sectors. I am pleased to report that we have made excellent progress in increasing the supply of these more specialist solid fuels in Europe. As you note from the Review of Operating Performance by Business Unit, we have seen resulting strong increases in volume, margins and profits.

Although other non-thermal coal markets were also subdued in the earlier part of the financial year as steel, alloy and cement producers dealt with the consequences of the recession, demand and prices recovered strongly as the year progressed.

In pricing terms, whilst we have seen a slight reduction in trading coke margins year-on-year, due to de-stocking early in our financial year we have seen a strong improvement in the margins on the speciality coal.

Demand for biomass has remained subdued with minimal external volume being traded through our RocFuel business. Demand levels have been low due to unfavourable economics for co-firing of biomass in coal-fired stations and due to the uncertainty over future subsidy levels adding further delays to many biomass energy projects including, as previously announced, our own RocPower initiative.

In our transport markets, our Tanker volumes have remained robust throughout the recession. Competition and price pressures remain high but we have worked hard to maintain our reputation for quality and service and have continued to be disciplined about ensuring that we only take on new business on a basis that is sustainable for the term of the contract.

The Dry Bulk transport fleet was impacted by the recession with volumes affected in the construction and aggregate markets which have not yet returned to anything like their pre-recession levels. However, we were already well into that cycle by the start of the last financial year and had taken the action necessary to re-size and re-shape our Bulk fleet accordingly. Pricing pressure has always been high and will always remain a feature of this market.

The Waste fleet has performed well. Our long-term waste contracts continue to provide benefits of visibility and resilience to recessionary pressures on our Bulk transport fleet.

Finally, in Industrial Services, we have continued to benefit from the forward visibility of our repeat term contracts with our many long-term established blue-chip customers. The sector remains competitive with strong pressure from our customers to look for and drive additional cost saving measures. However, the success rate we have continues to demonstrate our ability to win not only repeat business from our existing customers, but also new business by being able to deliver the right service at the right price.

Strategic Focus

We have established a strong position sourcing and supplying solid fuels in the energy markets in the UK. We have always recognised that by working in the speciality un-commoditised niche markets, added value and margin can be driven from the supply of speciality coals, cokes and biomass. 

We have a clear strategic focus to continue to build on our foundation as the UK's leading supplier of speciality solid fuels and related logistical and industrial support services. In that regard, we are currently working on three opportunities to grow our business - Europe, the Tower Colliery project and the Renewables sector.

Europe

Whilst the UK will always be a key market for us, we have long recognised the strategic importance of Europe and the transferability of our expertise in speciality solid fuels to these markets. We set up Hargreaves Raw Material Services GmbH in 2006 and more recently, Hargreaves Carbon Products NV in Belgium. These businesses and their management teams provide a foundation for advancing into the continental European markets.

Our own research indicates that the size of the continental European coal and coke market is just under one billion tonnes per year. Whilst power station coal flows dominate the total market tonnages as they do in the UK, the market for speciality coals in Europe is in excess of 20 times the size of the equivalent UK market due to the greater amount of steel production and heavy industrial manufacturing.

Whilst these markets are served today by a range of well-established competitors, we believe that the unique model we have developed in the UK is transferable to many of these markets. Five years ago our market share in the UK was a fraction of its size today. Through offering the broadest portfolio of quality products to customers and leveraging our supplier relationships and bulk buying power, we are confident that we can continue to win market share both in the UK and will also be able to replicate our model in Europe.

We believe that this strategy can be delivered largely by organic means without the need for major capital expenditure or commitment. In the short- and medium-term, investment in strategic assets is an option but not a requirement as the product flows in Germany, Belgium and Poland can be built using third-party stockyard and transport service providers.

Tower

Subject to a positive planning decision, the Tower project is an exciting opportunity for the Group allowing us to work with the cooperative representing the former miners and owners of Tower Colliery in Wales, to not only deliver a fully remediated site suitable for housing and industrial development for the local community, but also allowing us to apply our unique expertise to this production asset. We anticipate total production of nearly six million tonnes over seven years. Working alongside the Tower team, we will be delivering logistics services and helping to market the Welsh steam and semi-anthracite coals to power station customers in the UK and specialist coal users in both the UK and Europe.

Renewables

In the Renewables sector, through our RocPower project we have delivered a viable, environmentally friendly and unique solution that will contribute a potentially significant profit stream for the Group and help the UK to hit its green energy targets. We believe that we have a viable, scalable and environmentally sustainable solution to the Government's energy challenges and are disappointed by the Government's threatened u-turn on future subsidy levels. We will continue to progress planning on the next two sites in the UK but at the same time we will be working with the UK Government and DECC to secure approval of guaranteed Renewable Obligation Certificate (ROC) accreditation post-2013 to allow us to continue to build further plants through 2011. We will also continue to look at other logistics and trading opportunities, where we can deploy our existing assets and skills, in the renewable and waste-to-energy sectors.

Future of the Coal-Fired Sector in the UK

In all the discussion around greenhouse gas emissions and the coal-fired power generation sector in the UK, it is easy to forget that speciality coals and cokes play a vital and irreplaceable role in our everyday lives. Steel could not be produced economically without coke produced from coking coal such as that from Maltby. Our speciality coals are used in many applications, from the production of specialised steel additives to solar panel manufacture. They are a unique and irreplaceable element in their production and as such will continue to play a large part in the industrial future.

Coal will play a continuing part in the UK, European and Global energy mix and it is clear that coal has a long future as part of this mix.

Future Strategy and Outlook

We believe that the Group remains well-positioned to deliver its short- and medium-term targets and the significant opportunities that exist to grow the Group organically. We will continue to focus on the development of the Group's growth strategies.

I am confident, that with the support of all stakeholders, we can deliver the necessary support and implement the changes that will ensure a satisfactory profit and return on the investment from Maltby. The next twelve months will see us promote organic growth and synergies across the Group with specific focus on managing the expansion of our successful coal supply model into continental Europe; supporting and developing the Tower project through planning, development and production; and working with DECC and UK Government to secure the correct regulatory framework to allow us to roll out the RocPower model at further locations.

Whilst we are doing this, we will continue to maintain a close focus on working capital and cash generation. All in all, I am very pleased with the results delivered by the Group, in particular the development of the business and strength and teamwork demonstrated by the management team and employees across the Group.

Gordon Banham                                                                                                                                                  
Group Chief Executive                                                                                                                       14 September 2010

Review of Operating Performance by Business Unit

Group Overview

The Group has continued to show strong trading performance and underlying growth in its core businesses.

Revenues for the full year decreased by 8.6% from £503.1m to £459.8m. Underlying operating profit increased by 15.5% from £33.5m to £38.7m. Reported operating profit increased from £29.8m to £35.2m. Group underlying operating margin increased from 6.7% to 8.4% due in a large part to the impact of falling commodity prices on the relatively fixed, absolute gross profit per tonne that our business models seeks to achieve.

Although the Group conducted no material acquisitions in the year to 31 May 2010, the revenue and operating profit comparisons with the prior year benefit from the acquisition of Coal4Energy in January 2009.

Reconciliation of operating profit to underlying operating profit, by segment is as follows:

		Production	Energy & Commodities	Transport	Industrial	Total
		2010	2010	2010	2010	2010
		£000	£000	£000	£000	£000
Segment operating profit		8,496	20,727	3,761	2,255	35,239
Intangible amortisation		-	1,630	393	1,569	3,592
Share of loss in jointly controlled entities		(107)	(52)	-	-	(159)
Underlying operating profit		8,389	22,305	4,154	3,824	38,672

		Production	Energy & Commodities	Transport	Industrial	Total
		2009	2009	2009	2009	2009
		£000	£000	£000	£000	£000
Segment operating profit		10,512	14,941	2,968	1,425	29,846
Intangible amortisation		-	-	446	1,962	2,408
Share of profit in jointly controlled entities		-	1,216	-	-	1,216
Underlying operating profit		10,512	16,157	3,414	3,387	33,470

Energy & Commodities Division

Our Energy & Commodities Division encompasses our solid fuel trading activities, including power station coal and other more specialised carbon-based energy products such as sized coals, coke and biomass. Power station coal is a fairly commoditised product offering low margin potential. More specialised products such as sized coals for the domestic and commercial heating markets and industrial customers in the cement, steel, ferro-alloy and ferro-silicate sectors, offer greater margin opportunity to add value to the product and hence generate higher margins.

The Energy & Commodities Division had another very strong year. Gross revenues decreased by £58.5m from £322.4m to £263.9m, reflecting decreases in commodity prices and a reduction in volume of power station coal sold. However, commodity price fluctuations have limited impact on our profits. Underlying operating profit increased from £16.2m to £22.3m due to increased volumes and strong margins in the speciality coal markets, the markets that we regard as the key profit drivers for the Division.

The table below provides a breakdown on volumes and margins within the Energy & Commodities Division.

2010	UK	Rest of Europe		Total		Power Station Coal	Other Products		Total
Tonnes sold (000s)	1,635	623		2,258		1,067	1,191		2,258
Operating margin per tonne (£)	10.16	7.75		9.50		2.69	15.59		9.50
Operating profit from trading (£m)	16.6	4.8		21.4		2.9	18.5		21.4
JCE & non-trading (£m)				0.9					0.9
Total segment underlying operating profit (£m)				22.3					22.3
2009
Tonnes sold (000s)	1,948	497		2,445		1,674	771		2,445
Operating margin per tonne (£)	5.71	8.34		6.24		2.96	13.36		6.24
Operating profit from trading (£m)	11.2	4.1		15.3		5.0	10.3		15.3
JCE & non-trading (£m)				0.9					0.9
Total segment underlying operating profit (£m)				16.2					16.2

Note: Operating margin per tonne included profits on handling third-party product volumes through port operations.

Overall, volumes traded dropped from 2,445k tonnes to 2,258k tonnes but average profit per tonne improved from £6.24 to £9.50, due to an increase in the amount of speciality products in the mix. Operating profit from trading activities increased from £15.3m to £21.4m and accounted for the increase in the overall divisional profits.

Both volumes and profits from European trading activities increased with European volumes increasing 25.4% to 623k tonnes and contribution to divisional operating profit increasing from £4.1m to £4.8m.

The volumes we supplied to power stations dropped from 1,674k tonnes in 2009 to 1,067k tonnes in the year ended 31 May 2010. Average margin per tonne reduced by £0.27, from £2.96 per tonne to £2.69 per tonne.

In contrast, volumes of other (speciality) products sold increased by 420k tonnes from 771k tonnes to 1,191k tonnes. Of this increase, 303k tonnes was attributable to a full year effect in respect of the acquisition of Coal4Energy (including Maxibrite). The average operating margin per tonne improved from £13.36 to £15.59 due to a reduction in the acquisition cost of sized coals in the UK and an increase in our coal margins in Europe.

Volume of biomass traded through RocFuel to external customers was negligible as many operators have deferred and delayed projects, as the co-firing of biomass with coal has been uneconomical due to the high price of biomass relative to coal. Our RocFuel business remains active and we still believe that biomass will have an important role to play in UK electricity generation once the Government clarifies the uncertainty on ROC subsidies that is currently hanging over the biomass sector.

On 28 May 2010 we disposed of our ash interests when we sold our 50% shareholding in Evonik Hargreaves Limited (the holding company for Hargreaves Coal Combustion Products Limited) to our partner Evonik GmbH. This will leave Evonik free to invest in longer-term ash processing technologies. The Group looks forward to continuing its ongoing trading relationship with Evonik, providing support services including transport and material handling. As a result of the disposal we have realised a gain on disposal of just under £1.0m and secured a long-term transport contract.

The disposal of the ash business follows the acquisition of Coal4Energy (including Maxibrite) in January 2009 and the disposal of Lytag in 2008. This completes the focussing and simplification of the Energy & Commodities Division.

Production Division

The Production Division encompasses the operations at Maltby Colliery, Monckton Coke Works, MRT, and this year with the advent of the first operational RocPower site, the results of RocPower. The Tower project, assuming planning is granted, will also be included in the Production Division in the current financial year.

Gross revenues for the division increased by £7.4m from £78.9m to £86.3m. Underlying operating profit fell by £2.1m from £10.5m to £8.4m.

In the year to 31 May 2010, as previously announced, production at Maltby was inconsistent. Total saleable production decreased from 1,089k tonnes to 1,057k tonnes due to a number of geological and mechanical problems in the production of the T11 face. This was particularly disappointing due to the investment we had made in new underground equipment.

Excellent progress was made in accelerating the harvesting of coal fines, finding new markets for the fines products either as a standalone product or as part of a blend. This has partially offset the impact of the disappointing underground production. In the year, we signed a number of new contracts including one with Drax power station. These contracts will help us maintain the progress we have made in extracting value from the pond fines at Maltby. We have also commenced initiatives to develop other fines lagoons at Maltby and have signed contracts to provide access to fines at a number of other third-party locations which will help to extend the life of fines production.

All standard power station coal produced at Maltby continues to be sold to Drax under long-term contract. Coking coal is processed into coke at Monckton. External coal sales from Maltby generated £38.9m of revenue compared to £39.2m in the prior year.

Since the end of the year we have completed the face change from the old T11 to the new T24. The face change took place without major incident and without any face gap. The face change was however delayed due to the problems in completing the T11 panel, as previously announced. Production up to the face change on the old face T11 continued to be problematic. We will continue to rigorously review progress at the mine and work closely with staff, management, unions and customers to ensure we have a viable operation for the longer-term.

Performance at Monckton remained consistent and revenues increased by £5.2m from £37.6m to £42.8m. Coke sales increased by £6.4m from £32.7m to £39.1m as stock levels were reduced, whilst the sale of by-products fell by £1.2m from £4.9m to £3.7m reflecting a full year effect of lower by-product prices.

The average price achieved per tonne of coke was £171 per tonne on the sale of 229k tonnes compared to £162 per tonne on 201k tonnes sold in the prior year with volumes benefiting from the sale of the excess product that was in stock at the beginning of the year. During the year we signed a three-year contract with Xstrata in South Africa, a new customer for Monckton, to supply up to 100k tonnes of coke per annum. This will help secure visibility for the Group and reduce price volatility.

Demand for Monckton coke remains high and discussions are underway with a number of customers to move from the traditional annual supply contracts to longer-term contracts.

In the year to 31 May 2010, we largely completed the commissioning of the first RocPower site at Commonside Lane near Featherstone. In the last few months we have obtained considerable operational experience with the site and although the commissioning period has taken longer than planned, we are pleased to report that the site is well placed to deliver its budget for the current year. In the last financial year, net operating loss incurred during the commissioning phase was £0.5m on revenue of £0.4m.

As we reported in June, in the face of uncertainty over the guaranteed level of the future ROC subsidy scheme, and in line with the majority of other operators in the biomass field, we have decided to delay further investment. We will continue to progress the planning application for the second and third sites but will not commit any further capital spend to these sites until the position on the future grandfathering is clarified by UK Government. Although we are disappointed at the delay, we believe that this is the prudent and sensible way to proceed.

MRT has made excellent progress and we are confident that it will contribute to Group profit this year. The operating loss for the year reduced from £0.7m to £0.3m, revenues in the year increased from £2.1m to £4.2m, finally providing the scale to deliver profitability. The plant has been running at a profitable run rate during the current year-to-date.

The Tower Colliery project is progressing very well. The site investigation work was completed in the year to 31 May 2010. The planning applications were submitted in March 2010 with final registration taking place in July 2010. A planning decision is expected in the current financial year.

Under the terms of the joint venture agreement, the Group advanced £2m to the joint venture vehicle, Tower Regeneration Limited, in August 2009 to secure the land and mining rights from Tower Colliery Limited. This was in addition to the £1m paid by the Group directly to Tower Colliery Limited in January 2009. A further £0.9m was advanced in the year to the joint venture in the form of a loan to fund site investigation and planning preparations bringing the total investment to date to £3.9m. £2.9m of this amount is in the form of loans that will be repaid by Tower Regeneration Limited from Tower Colliery Limited's profit share when production commences.

Industrial Services Division

The Industrial Services Division delivered another steady year, again benefiting from good visibility from its long-term contract base. Gross revenue increased by £4.0m from £56.4m to £60.4m. Underlying operating profit increased from £3.4m to £3.8m.

Despite continuing budgetary pressures in the power stations sector, the Division has continued to make steady progress with key contract wins and renewals.

New contract wins included the hard services contract signed with EON covering two coal-fired and two gas-fired power stations, expected to yield £15.0m over 5 years, and a new £1.0m ducting project was also awarded by EDF at Cottam power station. Due to the successful completion of the first ducting project, a further 3 projects have since been awarded without competitive tender. Contract renewals included a 5-year extension to our key contracts at Ferrybridge power station.

Following the end of the financial year, the Division successfully renewed three 5-year material handling contracts at Rugeley power station. This will not only secure existing business for the next five years but will also provide an excellent platform to bid for incremental contract work in the future.

The Division has continued to demonstrate its high service levels and operational excellence. Nine of the Division's site locations achieved 5-star ratings from the British Safety Council for their Health and Safety programs.

We are now starting to see the benefits of the investment in additional business development resource that we announced last year. The sales pipeline for Industrial Services is as strong as it has ever been.  In the coming year our focus will be to drive further growth from that pipeline of opportunities and we are confident we will deliver.

Transport Division

The Transport Division's gross revenues increased by £5.1m from £67.6m to £72.7m due principally to increased Tanker revenues. Underlying operating profit increased by £0.8m from £3.4m to £4.2m. The increase in profits was due mainly to additional gross profit from incremental tanker revenues and as a result of efficiency improvements and investment in the Bulk and Waste fleets discussed in last year's Statement.

The Tankers business unit had a strong year. The increased revenues were as a result of improving tanker volumes, assisted by the acquisition of vehicles and contracts from Stiller Tankers Limited. In addition to acquiring vehicles and a number of customer relationships, the Tankers business has also completed a move into a new larger purpose-built depot which will provide a base for future expansion.

The Dry Bulk business unit again benefited from a strong performance in the Waste fleet. The Waste fleet continued to benefit from its long-term contracts. In the year a 5-year contract renewal was won with SITA in the North East. Offsetting the strong performance of the Waste fleet, the rest of the Dry Bulk fleet continued to deal with challenging market conditions. The investment and efficiency programs implemented last year have helped to reduce costs. Two new depots in the North West have been added to the Division's network to expand geographic coverage. New contracts, including a new 3-year contract for movements of coal into EON's Ratcliffe power station and a new exclusive contract with UK Coal for the new Parkwall opencast, will help ensure volumes can be maintained.

Fleet size has increased by 12% from 374 vehicles to 420 vehicles, again due mainly to the vehicles acquired with the Stiller contracts.

The focus of the Transport Division in the current financial year will be to drive additional organic growth, wherever possible, leveraging cross-selling opportunities with other activities within the Group to enable customers to derive additional synergy benefits.

Financial Review

Results Overview

Group revenue for the year was £459.8m compared to £503.1m for the previous year, a decrease of 8.6%. The key drivers of organic growth came from the Energy & Commodities Division, both in the UK and Europe.

Underlying profit before tax increased from £28.6m to £34.3m. Reported profit before tax increased from £26.2m to £30.7m. As previously reported the Group spent £0.2m investigating a potential transaction with UK Coal PLC during the year and has charged this amount against profits.

Interest

The net interest charge for the Group was £4.4m compared to £4.9m for the previous year. The drop in interest reflects lower interest costs offset by increased debt levels, resulting from financing capital expenditure and increased working capital requirements.

Taxation

The tax charge in the year was £9.4m compared to £7.5m in the previous year. There were no material changes in the effective tax rates.

Earnings Per Share

Basic earnings per share for the year were 77.5 pence (2009: 68.5 pence) and diluted earnings per share were 75.6 pence (2009: 67.3 pence). Underlying diluted earnings per share, after adding back amortisation of acquired intangibles, increased by 16.5% from 76.3 pence to 88.8 pence.

Dividend

The Board has recommended a final dividend of 9.1 pence (2009: 8.0 pence) bringing the proposed dividend for the full year to 13.5 pence, an increase of 14.4% in the total dividend for the year. The proposed dividend is covered 5.7 times by underlying earnings (2009: 5.8 times).

Net Assets

Net assets increased by £18.1m from £71.7m at 31 May 2009 to £89.8m at 31 May 2010. Net tangible fixed assets increased by £14.4m from £71.2m to £85.6m as a result of continued investment in plant and equipment, particularly at Maltby Colliery. Net fixed asset additions of £29.0m were offset by a depreciation charge for the year of £14.6m (2009: £13.6m). Working capital increased by £23.0m in the year to £84.4m. Working capital in the UK and Europe amounted to £54.2m and £30.2m respectively. The working capital balance in the UK included approximately £6.4m of extra coal held over the summer for a specific contract with EDF that was announced in the Interim Statement. This coal is due to be shipped between October and April. The decrease of £2.1m in goodwill and intangibles arose from amortisation of acquired intangibles totalling £3.6m, offset by goodwill and intangibles arising from the investment in the Tower project of £1.1m and goodwill arising on other acquisitions of £0.4m.

Net Debt

Group net debt, comprising cash and cash equivalents, bank overdraft and other interest-bearing loans and borrowings was £88.2m at 31 May 2010, an increase of £19.0m from the £69.2m reported at 31 May 2009. The gearing ratio of the Group at 31 May 2010 was 98% compared to 97% at 31 May 2009. 

Cash Flow

Cash flow generated from operating activities (before interest and income tax paid) was £28.1m in the year compared to £21.4m in the previous year.

Cash flow generated from operations included a £24.6m outflow relating to an increase in working capital. Of this increase, £2.4m related to monies advanced to Tower Regeneration Limited to fund development of the joint venture project. The remaining £22.2m related to an increase in trading working capital.

Stock held in the UK business for the EDF contract accounted for approximately 120,000 tonnes, or £6.4m of the increase. This coal is due for delivery between October 2010 and April 2011.

Group stock days improved slightly from 58.9 days at 31 May 2009 to 57.6 days at 31 May 2010, despite the impact of the extra EDF coal. Both Group trade debtor and creditor days dropped slightly, reflecting a change in the mix, with shorter-cycle European trading balances in the year-end numbers. Group trade creditor days reduced by 5.4 days, from 40.0 days at 31 May 2009 to 34.6 days at 31 May 2010. Group debtor days reduced by 5.9 days, from 35.4 days to 29.5 days.

There will continue to be an element of seasonality in our working capital levels, with a tendency to build coal stocks over the first half of the year, and reduce stocks over the second half. Significant movements in commodity prices will affect the net value of working capital positions. The timing of larger vessels and customer orders will always create volatility in working capital positions, particularly in the European business.

Assuming commodity prices do not increase significantly and trading volumes do not increase substantially beyond planned levels, we do not expect to see a material increase in working capital levels for the UK business in the current year. In Europe, a core underlying stock has already been established, and further increases in working capital should be dealt with comfortably within the existing facilities. Working capital increases should lag behind increases in sales growth as economies of scale are exploited. The stock at the year-end was higher than budgeted and was commensurate with the high run rate of trading over the end of last financial year, rather than the average trading across the full year.

Aside from occasional exceptional contracts such as the EDF contract, stock and other working capital positions are generally very short-term in nature and given the rapid turn, management continue to be comfortable using current facilities to finance these positions.

Total capital expenditure for the year (net of disposal proceeds of £1.9m) was £26.6m compared to £18.1m in the prior year. Of the capital expenditure, £8.8m was financed through finance leases and £19.7m was paid in cash. The depreciation charge for the year was £14.6m (2009: £13.6m). The capital expenditure program last year included the acquisition of the second face equipment set (shearer, armoured face conveyor and stage loader) together with an upgrade to the roof supports. This completes the program of strategic underground investment at Maltby.

The disposal of the ash joint venture (Evonik Hargreaves Limited) raised £1.8m. Acquisitions accounted for an outflow of cash of £3.0m (2009: £10.1m). The acquisition outflow included the final £1.2m of deferred consideration from the AJS acquisition and £1.5m in respect of the acquisition of vehicles and customer relationships from Stiller Tankers.

Borrowings & Facilities

During the year, the Group was financed by a mixture of cash flows from operations, trade credit, short-term borrowings, longer-term borrowings and finance leases. Operating leases are used in conjunction with asset financing to balance the flexibility afforded by asset ownership and the efficient use of capital. 

In September 2009, the Group completed a new 3-year multi-bank committed facility consisting of a £35m invoice finance facility and an £80m revolving credit facility ("RCF"). At the end of the year these were drawn £9.8m and £53.1m respectively.

The Group continues to be able to borrow at competitive rates and is operating comfortably within its banking covenants. The key covenants on the RCF are interest cover and leverage, measured as a ratio of net debt to EBITDA. As at 31 May 2010 interest cover was 12.1 times, comfortably over the covenant minimum of 4 times and leverage was 1.7 times, comfortably under the maximum 2.5 times permitted.

The European business continues to operate on a facility of €40m from Commerzbank. At the end of the year the net debt on this facility was £13.2m.

Capital Management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern, whilst maximising the return to shareholders. The capital structure of the Group consists of debt, which includes borrowings, cash and cash equivalents, and equity attributable to equity holders of the parent, comprising capital, reserves and retained earnings.

The capital structure is reviewed regularly by the Group's Board of Directors. The Group's policy is to maintain gearing at levels appropriate to the business. The Board principally reviews gearing determined as a proportion of debt to earnings before interest, tax and depreciation. The Board also takes consideration of gearing determined as the proportion of net debt to total capital. It should be noted that the Board reviews gearing taking careful account of the working capital needs and flows of the business. In the trading businesses, where working capital cycles are regular, predictable and generally less than 90 days, the Board is comfortable to maintain higher levels of debt and gearing as measured against EBITDA.

Going Concern

After making enquiries, the Directors have formed the opinion at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.             

Iain Cockburn                                                                                                                                                     
Group Finance Director                                                                                                                        14 September 2010

Consolidated Statement of Comprehensive Income

for year ended 31 May 2010

	Note	2010	2009
		£000	£000
Revenue	2	459,779	503,093
Cost of sales		(385,393)	(433,800)
Gross profit		74,386	69,293
Other operating income/(expense)		1,593	(511)
Administrative expenses		(40,740)	(38,936)
Operating profit	2	35,239	29,846
Financial income		2,031	1,683
Financial expenses		(6,394)	(6,577)
Share of (loss)/profit in jointly controlled entities (net of tax)		(159)	1,216
Profit before tax	2	30,717	26,168
Income tax expense	4	(9,370)	(7,459)
Profit for the year		21,347	18,709
Other comprehensive income
Foreign exchange translation differences		(781)	640
Effective portion of changes in fair value of cash flow hedges		1,486	8,134
Actuarial gains and losses on defined benefit pension plans		(3,028)	(170)
Tax recognised on other comprehensive income		434	(2,578)
Dividend waived		(15)	-
Other comprehensive income for the year (net of tax)		(1,904)	6,026
Total comprehensive income for the year		19,443	24,735
Profit attributable to:
Equity holders of the company		20,560	18,025
Minority interest		787	684
Profit for the year		21,347	18,709
Total comprehensive income attributable to:
Equity holders of the company		18,760	23,871
Minority interest		683	864
Total comprehensive income for the year		19,443	24,735
Basic earnings per share (pence)	5	77.53	68.53
Diluted earnings per share (pence)	5	75.61	67.27

Consolidated Balance Sheet

at 31 May 2010

		2010	2009
		£000	£000
Non-current assets
Property, plant and equipment		85,605	71,240
Intangible assets		34,607	36,685
Investments in jointly controlled entities		-	953
Derivative financial instruments		3	-
		120,215	108,878
Current assets
Inventories		81,956	60,693
Derivative financial instruments		517	754
Trade and other receivables		62,371	55,026
Cash and cash equivalents		16,983	1,062
		161,827	117,535
Total assets		282,042	226,413
Non-current liabilities
Other interest-bearing loans and borrowings		(73,265)	(24,331)
Retirement benefit obligations		(6,177)	(4,429)
Provisions		(8,986)	(9,557)
Derivative financial instruments		(770)	(113)
Deferred tax liabilities		(5,823)	(5,724)
		(95,021)	(44,154)
Current liabilities
Bank overdraft		(24,189)	(9,486)
Other interest-bearing loans and borrowings		(7,729)	(36,421)
Trade and other payables		(59,889)	(54,333)
Income tax liabilities		(4,489)	(7,159)
Derivative financial instruments		(941)	(3,191)
		(97,237)	(110,590)
Total liabilities		(192,258)	(154,744)
Net assets		89,784	71,669

Consolidated Balance Sheet

at 31 May 2010

		2010	2009
		£000	£000
Equity attributable to equity holders of the parent
Share capital		2,660	2,639
Share premium		30,429	29,434
Other reserves		211	211
Translation reserve		(31)	646
Merger reserve		1,022	1,022
Hedging reserve		(690)	(1,762)
Capital redemption reserve		1,530	1,530
Retained earnings		51,813	35,792
		86,944	69,512
Minority interest		2,840	2,157
Total equity		89,784	71,669

                      Consolidated Statement of Changes in Equity
                 for year ended 31 May 2010

	Share capital	Share premium	Trans-lation reserve	Hedging reserve	Other reserves	Capital redemption reserve	Merger reserve	Retained earnings	Total parent equity	Minority interest	Total equity
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Balance at 1 June 2008	2,627	29,177	186	(7,618)	29	1,530	1,022	20,427	47,380	681	48,061
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	-	18,025	18,025	684	18,709
Other comprehensive income
Foreign exchange translation differences	-	-	460	-	-	-	-	-	460	180	640
Effective portion of changes in fair value of cash flow hedges	-	-	-	8,134	-	-	-	-	8,134	-	8,134
Actuarial gains and losses on defined benefit pension plans	-	-	-	-	-	-	-	(170)	(170)	-	(170)
Tax recognised on other comprehensive income	-	-	-	(2,278)	-	-	-	(300)	(2,578)	-	(2,578)
Total other comprehensive income	-	-	460	5,856	-	-	-	(470)	5,846	180	6,026
Total comprehensive income for the year	-	-	460	5,856	-	-	-	17,555	23,871	864	24,735
Transactions with owners recorded directly in equity
Issue of shares	12	257	-	-	-	-	-	-	269	-	269
Equity settled share-based payment transactions	-	-	-	-	-	-	-	648	648	-	648
Dividends	-	-	-	-	-	-	-	(2,838)	(2,838)	-	(2,838)
Acquisition of subsidiary	-	-	-	-	-	-	-	-	-	612	612
Acquisition of jointly controlled entities	-	-	-	-	182	-	-	-	182	-	182
Total transactions with owners	12	257	-	-	182	-	-	(2,190)	(1,739)	612	(1,127)
Balance at 31 May 2009	2,639	29,434	646	(1,762)	211	1,530	1,022	35,792	69,512	2,157	71,669

Consolidated Statement of Changes in Equity
                 for year ended 31 May 2010

	Share capital	Share premium	Trans-lation reserve	Hedging reserve	Other reserves	Capital redemption reserve	Merger reserve	Retained earnings	Total parent equity	Minority interest	Total equity
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Balance at 1 June 2009	2,639	29,434	646	(1,762)	211	1,530	1,022	35,792	69,512	2,157	71,669
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	-	20,560	20,560	787	21,347
Other comprehensive income
Foreign exchange translation differences	-	-	(677)	-	-	-	-	-	(677)	(104)	(781)
Effective portion of changes in fair value of cash flow hedges	-	-	-	1,486	-	-	-	-	1,486	-	1,486
Actuarial gains and losses on defined benefit pension plans	-	-	-	-	-	-	-	(3,028)	(3,028)	-	(3,028)
Tax recognised on other comprehensive income	-	-	-	(414)	-	-	-	848	434	-	434
Dividend waived	-	-	-	-	-	-	-	(15)	(15)	-	(15)
Total other comprehensive income	-	-	(677)	1,072	-	-	-	(2,195)	(1,800)	(104)	(1,904)
Total comprehensive income for the year	-	-	(677)	1,072	-	-	-	18,365	18,760	683	19,443
Transactions with owners recorded directly in equity
Issue of shares	21	995	-	-	-	-	-	-	1,016	-	1,016
Equity settled share-based payment transactions	-	-	-	-	-	-	-	948	948	-	948
Dividends	-	-	-	-	-	-	-	(3,292)	(3,292)	-	(3,292)
Total transactions with owners	21	995	-	-	-	-	-	(2,344)	(1,328)	-	(1,328)
Balance at 31 May 2010	2,660	30,429	(31)	(690)	211	1,530	1,022	51,813	86,944	2,840	89,784

Consolidated Cash Flow Statement

for year ended 31 May 2010

		2010	2009
		£000	£000
Cash flows from operating activities
Profit for the year		21,347	18,709
Adjustments for:
Depreciation		14,565	13,596
Amortisation of intangible assets		3,592	2,408
Net finance expense		4,363	4,894
Share of loss/(profit) in jointly controlled entities		159	(1,216)
(Profit)/loss on sale of property, plant and equipment		(624)	193
(Profit)/loss on sale of investments		(969)	318
Equity settled share-based payment transactions		948	648
Income tax expense		9,370	7,459
Translation of minority interests		(104)	179
		52,647	47,188
Change in inventories		(22,099)	(15,909)
Change in trade and other receivables		(8,135)	15,213
Change in trade and other payables		7,613	(23,201)
Change in provisions and employee benefits		(1,966)	(1,934)
		28,060	21,357
Interest paid		(4,030)	(3,955)
Income tax paid		(11,484)	(8,323)
Net cash from operating activities		12,546	9,079
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		1,947	1,495
Proceeds from sale of investments		1,750	-
Dividends received		127	117
Acquisition of subsidiaries, net of cash acquired		(1,304)	(9,547)
Acquisition of property, plant and equipment		(19,712)	(7,110)
Acquisition of other investments		-	(590)
Minority interest contribution		-	39
Acquisition of trade and assets		(1,743)	-
Net cash from investing activities		(18,935)	(15,596)
Cash flows from financing activities
Proceeds from the issue of share capital		35	269
Proceeds from new loan		-	9,000
Repayment of borrowings		(21,811)	(6,374)
Payment of finance lease liabilities		(7,511)	(5,724)
Proceeds from/(repayment of) invoice discounting facility		9,027	(9,310)
Dividends paid		(3,292)	(2,838)
(Repayment of)/proceeds from issue of promissory notes		(21,874)	15,115
Proceeds from revolving credit facility		52,628	-
Net cash from financing activities		7,202	138
Net increase/(decrease) in cash and cash equivalents		813	(6,379)
Cash and cash equivalents at 1 June		(8,424)	(1,025)
Effect of exchange rate fluctuations on cash held		405	(1,020)
Cash and cash equivalents at 31 May		(7,206)	(8,424)

1              Basis of preparation and status of financial information

The financial information set out above has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU (Adopted IFRSs).

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 May 2010 or 2009. Statutory accounts for 2009 have been delivered to the registrar of companies, and those for 2010 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

These results were approved by the Board of Directors on 14 September 2010.

2              Segmental information

The introduction of IFRS 8 Operating segments, which is effective for accounting periods beginning on or after 1 January 2009, has required a reassessment of the reportable segments within the Group. The analysis by industry segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board of Directors (the Chief Operating Decision Maker as defined by IFRS 8) to make strategic decisions.

The sectors distinguished as reportable segments are Production, Energy & Commodities, Transport, and Industrial.  A short description of these sectors is as follows:

·      Production: produces coal, coke and also recycles tyres for customers throughout the UK and Europe;

·      Energy & Commodities: provides coal, coke, minerals and biomass to a range of industrial, wholesale and public sector energy consumers;

·      Transport: provides bulk and liquid transport logistics to UK customers; and

·      Industrial: provides quality assured contract management services to the power generation, utilities, chemicals and minerals industries.

These segments are combinations of subsidiaries and divisions, have separate management teams and offer different products and services.

The segment results, as reported to the Board of Directors, are calculated under the principles of IFRS.

The table below sets out information for each of the Group's reportable segments. The origination and destination of principally all operations is in the UK. 

		Production	Energy & Commodities	Transport	Industrial	Total
		2010	2010	2010	2010	2010
		£000	£000	£000	£000	£000
Revenue
Total revenue		86,256	263,949	72,746	60,358	483,309
Inter-segment revenue		(5,800)	(7,269)	(10,100)	(361)	(23,530)
Revenue from external customers		80,456	256,680	62,646	59,997	459,779
Segment operating profit		8,496	20,727	3,761	2,255	35,239
Share of loss in jointly controlled entities		(107)	(52)	-	-	(159)
Net financing costs		(1,653)	(1,784)	(663)	(263)	(4,363)
Profit before taxation		6,736	18,891	3,098	1,992	30,717
Depreciation charge		(9,179)	(531)	(3,260)	(1,595)	(14,565)
Amortisation of intangibles		-	(1,630)	(393)	(1,569)	(3,592)
Capital expenditure		23,199	721	4,349	1,998	30,267
Net assets
Segment assets		93,091	107,053	29,488	14,029	243,661
Segment liabilities		(38,220)	(62,856)	(17,167)	(12,699)	(130,942)
Segment net assets		54,871	44,197	12,321	1,330	112,719
Jointly controlled entities		-	-	-	-	-
Segment net assets including share of jointly controlled entities		54,871	44,197	12,321	1,330	112,719
Unallocated net assets						(22,935)
Total net assets						89,784

Unallocated net assets include goodwill and intangibles (£34.6m), revolving credit facility (£53.1m), derivative financial instruments (£1.2m) and other corporate items (£3.2m).

Included within revenue is £109.0m (2009: £124.6m) of revenue which originates in Europe. All other revenue originates in the UK.

		Production	Energy & Commodities	Transport	Industrial	Total
		2009	2009	2009	2009	2009
		£000	£000	£000	£000	£000
Revenue
Total revenue		78,941	322,388	67,620	56,431	525,380
Inter-segment revenue		(10,250)	(1,171)	(9,027)	(1,839)	(22,287)
Revenue from external customers		68,691	321,217	58,593	54,592	503,093
Segment operating profit		10,512	14,941	2,968	1,425	29,846
Share of profit in jointly controlled entities		-	1,216	-	-	1,216
Net financing costs		(1,180)	(2,632)	(741)	(341)	(4,894)
Profit before taxation		9,332	13,525	2,227	1,084	26,168
Depreciation charge		(8,224)	(933)	(3,386)	(1,053)	(13,596)
Amortisation of intangibles		-	-	(446)	(1,962)	(2,408)
Capital expenditure		12,130	2,320	3,913	1,346	19,709
Net assets
Segment assets		75,249	69,896	26,563	15,668	187,376
Segment liabilities		(32,980)	(62,599)	(19,415)	(8,751)	(123,745)
Segment net assets		42,269	7,297	7,148	6,917	63,631
Jointly controlled entities		-	953	-	-	953
Segment net assets including share of jointly controlled entities		42,269	8,250	7,148	6,917	64,584
Unallocated net assets						7,085
Total net assets						71,669

Unallocated net assets include goodwill (£36.7m), bank loans (£21.4m), deferred consideration (£2.1m), derivative financial instruments (£2.6m) and other corporate items (£3.5m).

3              Acquisitions

On 2 November 2009, the Group obtained total control of Forward Sound Limited, a jointly controlled entity with Evans & Reid Coal Company Limited, satisfied by £85,000. The company is a holding company. 

In the seven months to 31 May 2010, Forward Sound contributed profit after tax of £45,000 to the consolidated profit after tax for the year. If the acquisition had occurred on 1 June 2009, Group revenue would have been an estimated £459.8m and profit after tax would have been an estimated £21.3m. In determining these amounts, management has assumed that any fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 June 2009.

				Pre-acquisition carrying amounts		Fair value adjustments	Recognised values on acquisition
				£000		£000	£000
ASSETS
Non-current assets
Intangible assets					1,000	-	1,000
Deferred tax assets					23	-	23
LIABILITIES
Current liabilities
Trade and other payables					(584)	-	(584)
Net identifiable assets and liabilities					439	-	439
Share of Forward Sound owned							(492)
Goodwill on acquisition							138
Net purchase consideration and costs of acquisition							85
Satisfied by:
Consideration paid							85

In October 2009, the Group acquired certain assets from Stiller Tankers Limited and in March 2010 acquired the trade and assets of DWL Engineering Services Limited. These acquisitions have been aggregated in the table below as they are deemed to be individually immaterial.

It is impracticable to determine the result these acquisitions have contributed to the consolidated profit after tax for the year as they have been integrated into existing businesses.

				Pre-acquisition carrying amounts		Fair value adjustments	Recognised values on acquisition
				£000		£000	£000
ASSETS
Non-current assets
Property, plant and equipment					1,716	-	1,716
Current assets
Inventories					5	-	5
Trade and other receivables				123		-	123
LIABILITIES
Current liabilities
Trade and other payables					(93)	(362)	(455)
Interest-bearing loans and borrowings					(51)	-	(51)
Net identifiable assets and liabilities					1,700	(362)	1,338
Goodwill on acquisition							374
Net purchase consideration and costs of acquisition							1,712
Satisfied by:
Consideration paid							1,442
Deferred consideration							270
							1,712

On 27 January 2009, the Group acquired the remaining 50% of the issued share capital of Coal4Energy Limited, a jointly controlled entity with UK Coal plc, satisfied by £9,122,000 cash. Coal4Energy Limited has an 85.2% controlled subsidiary, Maxibrite Limited. The company sells light industrial and domestic coal to the UK market. 

In the four months to 31 May 2009, the Coal4Energy Group contributed profit after tax of £2,493,000 to the consolidated profit after tax for the year. If the acquisition had occurred on 1 June 2008, Group revenue would have been an estimated £560.3m and profit after tax would have been an estimated £20.4m. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 June 2008.

				Pre-acquisition carrying amounts		Fair value adjustments	Recognised values on acquisition
				£000		£000	£000
ASSETS
Non-current assets
Property, plant and equipment				731		-	731
Intangible assets					3,175	8,148	11,323
Current assets
Inventories				800		-	800
Trade and other receivables				16,742		-	16,742
Cash and cash equivalents				828		-	828
LIABILITIES
Non-current liabilities
Interest-bearing loans and borrowings					(137)	-	(137)
Deferred tax liabilities					(32)	(2,281)	(2,313)
Current liabilities
Trade and other payables					(19,577)	-	(19,577)
Income tax liabilities					(230)	-	(230)
Interest-bearing loans and borrowings					(98)	-	(98)
Net identifiable assets and liabilities					2,202	5,867	8,069
Minority interest share of assets							(401)
Share of Coal4Energy Group owned							(901)
Goodwill on acquisition							2,355
Net purchase consideration and costs of acquisition							9,122
Satisfied by:
Consideration paid							9,122

As part of the arrangements for the acquisition the terms of a supply agreement were renegotiated, leading to the recognition of an intangible asset of £8,148,000 for the preferential agreement based on discounted future cash flows for the duration of the supply contract. There were no fair value adjustments to the existing assets and liabilities.

The intangible assets are being amortised over the weighted average expected life of the contracts, which is 60 months. The goodwill is not being amortised but will be reviewed annually for impairment.

4              Taxation

Recognised in the statement of comprehensive income

	2010	2009
	£000	£000
Current tax expense
Current year	7,849	8,860
Adjustments for prior years	(451)	(58)
Foreign tax - current year	1,416	1,234
Current tax expense	8,814	10,036
Deferred tax expense/(credit)
Origination and reversal of temporary differences	94	(2,579)
Adjustments for prior years	462	2
Deferred tax expense/(credit)	556	(2,577)
Tax expense in income statement (excluding share of tax of equity accounted investees)	9,370	7,459
Share of tax of equity accounted investees	(122)	561
Total tax expense	9,248	8,020

Tax recognised in other comprehensive income

	2010	2009
	£000	£000
Deferred tax
Effective portion of changes in fair value of cash flow hedges	(414)	(2,278)
Actuarial gains and losses on defined benefit pension plans	848	(300)
	434	(2,578)

Reconciliation of effective tax rate

	2010	2009
	£000	£000
Profit for the year	21,347	18,709
Total tax expense (including tax on equity accounted investees)	9,248	8,020
Profit excluding taxation	30,595	26,729
Tax using the UK corporation tax rate of 28% (2009: 28%)	8,567	7,484
Effect of tax rates in foreign jurisdictions	218	162
Difference in effective tax rate	-	12
Non-deductible expenses	452	418
Under/(over) provided in prior years	11	(56)
Total tax expense (including tax on equity accounted investees)	9,248	8,020

For the years ended 31 May 2010 and 31 May 2009, the Group was subject to UK corporation tax at a base rate of 28%. 

Factors that may affect future tax expenses

On 28 July 2010 a change in the rate of corporation tax was substantively enacted, with corporation tax reduced from 28% to 27% with effect from 1 April 2011. As this change was after the balance sheet date, deferred tax balances have not been calculated based on the new rate. Further reductions in the corporate tax rate have also been proposed along with reduced rates of capital allowances.

An accurate calculation of the impact of the proposed changes is not possible however the reduction in the corporate tax rate to 27% is likely to reduce the deferred tax balances by approximately £200,000.

5              Earnings per share

All earnings per share disclosures relate to continuing operations as the Group had no discontinued operations in either 2009 or 2010.

Earnings per share for the ordinary shares are as follows:

	2010	2009
Ordinary shares
Basic earnings per share	77.53p	68.53p
Diluted earnings per share	75.61p	67.27p

The calculation of earnings per share is based on the profit for the year attributable to equity holders and on the weighted average number of shares in issue and ranking for dividend in the year.

Ordinary shares

	2010	2009
	£000	£000
Profit for the year attributable to equity holders	20,560	18,025
Weighted average number of shares	26,519,310	26,302,652
Earnings per ordinary share	77.53p	68.53p

The calculation of diluted earnings per share is based on the profit for the year and on the weighted average number of ordinary shares in issue in the year adjusted for the dilutive effect of the share options outstanding (effect on weighted average number of shares: 673,013, effect on earnings per ordinary share: 1.92 pence).

	2010	2009
	£000	£000
Profit for the year attributable to equity holders	20,560	18,025
Weighted average number of shares	27,192,323	26,792,996
Diluted earnings per ordinary share	75.61p	67.27p

6              Dividends

The aggregate amount of dividends comprises:

	2010	2009
	£000	£000
Final dividends paid in respect of prior year but not recognised as liabilities in that year	2,122	1,839
Interim dividends paid in respect of the current year	1,170	999
	3,292	2,838
Proposed dividend of 9.1p per share (2009: 8p)	2,421	2,112

The proposed dividend has not been included in liabilities as it was not approved before the year-end.

7              Annual report

The Annual Report will be posted to shareholders on or around 12 October 2010 and copies will be available from the Company Secretary, Hargreaves Services plc, West Terrace, Esh Winning, Durham, DH7 9PT, or from the Investor Relations section of the Group website at www.hargreavesservices.co.uk

 

 

END

 

 

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