Final Results

19 March 2013

Embargoed until 07:00

Hydro International plc

("Hydro", the "Company" or the "Group")

Unaudited Final Results

Solid performance in difficult markets

Hydro International (AIM: HYD), a leading provider of environmentally sustainable and innovative products for the control and treatment of water, is pleased to announce its unaudited final results for the year ended 31 December 2012.

Financial Highlights

* excluding amortisation of acquired intangible assets

** excluding amortisation of acquired intangible assets and the associated tax effect

*** cash and cash equivalents, less borrowings

Operational Highlights

·; UK Wastewater growth driven by increased project flow under AMP5

·; US Wastewater division continues to secure major contracts, including the award of Bonnybrook WWTP in Canada worth CDN$4m in June, and a US$3.6m project in Dallas early in 2013

·; Continued improvement in US Stormwater sales channels drives record enquiry levels and growth in divisional revenues and profitability

·; New International distribution partner in Russia secured early contract for the €2m redevelopment of St. Petersburg International Airport

·; UK Stormwater division impacted by second-half year deterioration in markets for construction products and further delays in new regulatory drivers

·; Important new flow control and grit washing products launched into core UK and US markets

Roger Lockwood, Chairman of Hydro International plc, commented:

"Group revenues have grown despite tough trading conditions and Hydro remains well positioned to grow in the markets we serve. We are now embarking on various structural changes, including in our management teams, to ensure that the execution of our strategy is optimised and we take the necessary steps to capitalise on forthcoming opportunities. Hydro has an established reputation for being a leader in its markets; and is well regarded for its quality of service, products and expertise."

For further information please contact:

About Hydro International

Hydro International plc (AIM:HYD) (Hydro) is a global supplier of environmentally sustainable products and innovative solutions for the control and treatment of stormwater, wastewater and combined sewer overflows. Hydro's products use a range of advanced technologies including award-winning advanced vortex technology. Headquartered in Clevedon, North Somerset, Hydro also operates in the UK from offices in Ely, Cambridgeshire as well as across the US from bases in Portland, Maine and Hillsboro, Oregon. The Group has a growing presence outside its core US and UK markets in Ireland, Egypt, the Middle East, Mexico, the European Union, Malaysia, Singapore, Japan, Korea, Australia and New Zealand.

Please visit the website for further information www.hydro-int.com.

Chairman's Statement

The Group delivered an 11.6% growth in Group revenues to £34.7m (2011: £31.1m), with a significant performance in the second half of 2012 contributing to a new record level for the business. This growth, however, came largely from lower margin contracts for distributed products in our UK Wastewater and International divisions which, combined with a contraction in our traditionally high-margin UK Stormwater business, resulted in a 16% decrease in adjusted operating profits (which exclude amortisation of acquired intangible assets) to £2.5m (2011: £2.9m). Headline earnings per share decreased by 1% to 11.86 pence (2011: 11.95 pence), supported by a reduced tax charge for the year.

Our UK and US Wastewater businesses both secured important new contract wins and successfully progressed the delivery of large long-term contracts in 2012. In the UK, AMP 5 project flow increased markedly during the year, incrementing the continued delivery of three major Zickert Scraper contracts for Thames Water to deliver record divisional revenues. The Thames Water contracts, collectively valued at £22.8m, have contributed significantly to the Group's results since 2010 and are expected to be largely completed in the coming year.

Economic uncertainty continues to affect the UK, and markets for construction products worsened significantly during the second half of the year. This deterioration in demand, combined with delays in the introduction of new environmental regulations, caused a contraction in the UK Stormwater division. In contrast, private and public construction in the US showed modest gains in 2012 and our US Stormwater business made solid progress, helped by the continued development of our distribution relationship with Advanced Drainage Systems (ADS).

The Group's order book stood at £11.6m (2011: £18.8m) at 31 December 2012, a reduction of £7.2m primarily as a result of the completion of the major contracts for Thames Water. The timing of revenues towards the latter part of the year resulted in a decrease in net cash at the year-end to £2.9m (2011: £5.4m). As always, the closing cash position can be materially affected by the timing of cash flows associated with larger wastewater contracts and net cash increased following the year-end to £4.6m at 31 January 2013.

Dividend

The Board's general policy has been to increase dividends progressively with growth in profits. In the light of our financial performance during the year, the Board is recommending maintaining the final dividend at 3.6 pence per share. The dividend is subject to approval by shareholders and will be paid on 10 June 2013 to shareholders on the register on 17 May 2013. Dividend cover, calculated using adjusted earnings per share, is 3.53 times (2011: 3.57 times).

Sales channel improvements

2012 has seen a sustained Group-wide effort to improve the quality and efficiency of our sales processes and the reach of our direct and distributed routes to market and this remains a core area of focus as we look forward. The benefits of this programme are starting to come through, particularly in the US Stormwater and International operations.

The US Stormwater division has continued to focus on developing its 'master' distribution relationship with ADS. Through ADS, Hydro has been able to leverage the market reach of a much larger organisation, with access to a large sales-force and well established distribution network. 2012 saw the first full year of working with ADS in the Great Lakes region, and both enquiries and sales increased significantly over the previous year. Based on this success, plans are underway to expand territorial coverage with this important channel partner.

Our UK Stormwater and Wastewater businesses have reviewed existing sales approaches and routes to markets over the past year. This has resulted in the restructure of our sales teams, including the recruitment of new talent, a sharper focus on key customer relationships, and a broadening of distribution relationships.

The International division continues to implement its growth strategy, by supporting long-term distribution partners and identifying new and emerging markets with opportunities for the Group's own-developed products. The major development during 2012 came with the appointment of a distribution partner for the Russian market, with early success achieved in the award of an important contract for St Petersburg International Airport. Market assessments for other BRIC countries are on-going and, in addition to Russia, we see further opportunity and potential in Brazil, and the wider Central and South American market.

Commitment to continuous development

Hydro operates advanced hydraulic laboratory facilities in the UK and the US and is committed to maintaining its competitive advantage through the development of new and improved solutions for customers and the enhancement of existing products. This commitment is evidenced by our continued financial investment in research and product development, which amounted to 1.4% of revenue in 2012 (2011: 1.9%).

The product development process delivered important outputs in 2012, including the market launch of Hydro-Brake Optimum® in the UK, and Grit Cup™ and Spira Snail™ in the US. Further product enhancements and improvements are underway that will offer important benefit across the business.

People

The Board is committed to ensuring that we have the right people across the Group to drive our business forward. We continue to invest strongly in improving and enhancing our team by attracting high quality people to the Group, developing our commercial and technical capabilities, as well as developing talent from within.

I would like to offer my gratitude to the team on behalf of the Board for their dedicated contribution over the last year against the backdrop of a challenging trading environment.

Corporate governance

The Group is committed to the principles set out in the UK Corporate Governance Code, to the extent that they are relevant to a business of our scale, and the disclosures set out in the Annual Report are set out in accordance with that guidance.

Board changes

In January we announced Steve Hides' intention to step down as Chief Executive Officer following the appointment of a successor to the role. Thereafter Steve will be responsible for Hydro's US operations, as well as driving expansion into Central and South America. The Board and colleagues would like to acknowledge the leadership, accomplishments and dedicated service that Steve has provided the business while serving as CEO for the past 12 years.

The process for the recruitment of a new Chief Executive Officer is progressing well and the Board is currently interviewing a shortlist of high-calibre candidates.

Outlook

Despite the economic challenges in our major markets throughout 2012, the Group continued to implement a broad range of improvements and initiatives that are expected to generate new and sustainable growth opportunities in the medium to long term.

In the short-term, however, it is anticipated that growth in the US and International businesses will not make up for the approaching conclusion, in 2013 and early 2014, of the three major long-term contracts with Thames Water, secured by the UK Wastewater business in 2010 and 2011. Consequently our view is that revenue and profitability in 2013 will be materially lower than 2012 levels. In addition the anticipated timing of revenues on contracts is expected, as in previous periods, to weight results for the year significantly to the second-half.

Roger Lockwood

Chairman

18 March 2013

Group Overview and Growth Strategy

Strategy

The Group's strategy is to deliver sustained growth, based on the platform created by our core business operations in the UK and the US, supplemented by expansion into attractive international markets, and emerging opportunities for Hydro's products and services in new areas of the water sector.

We also look to support our growth objectives by looking for opportunities to acquire complementary businesses or technologies which offer either the opportunity to enhance our existing operations, or the platform from which to develop our presence in closely aligned markets.

The Group's operations are diversified in terms of our major sectors; Stormwater and Wastewater, and geography. This diversification has served the Group well, enabling the Group to maintain profitability and cash flows during the global economic turmoil of recent years.

We continue to invest in our people to ensure that the Group has the right balance of skilled resources to meet the challenges of implementing our strategy. Coupled with this is a continued focus on maximising our operational efficiency.

Business model

Hydro is committed to adding value through maintaining our focus on market-led product innovation and on improving the strength of our sales channels and developing close relationships with our customers.

Product fabrication is outsourced to a network of regional supply-chain partners, minimising the cost of transportation to customers as well as minimising the level of capital investment and fixed overhead associated with product manufacture.

Where appropriate, Hydro's range of own-developed products is supplemented by supporting distributed products to ensure a complete solution for the customer.

Key focus areas

The key strategic focus areas aimed at driving future growth include:

§ Continual improvement of sales and distribution channels.

§ International expansion.

§ Product innovation and development.

§ Targeted acquisitions.

§ Identification of applications for our technologies in new areas of the water sector.

Growth drivers

Demand in Hydro's markets is supported by the increasing global awareness of water and its value. Individual markets may be impacted by one or more of the following long-term growth drivers:

§ Environmental legislation governing water quality.

§ Climate change and the increasing risk of urban flooding.

§ Population growth and greater urbanisation.

§ The need to replace obsolete and ageing wastewater treatment equipment.

§ The need to reduce operation and maintenance costs.

§ New construction (housing, commercial/industrial premises).

Key markets

Hydro's key markets are:

§ The municipal, regulated wastewater sector in the UK and the US.

§ Residential and commercial developers, municipalities and transportation departments in the UK and the US responsible for the management of stormwater.

The Group's core market activities are supplemented by sales to international customers through regional distribution or licensing arrangements.

Operational Review

Group Overview

We have made significant investments across the business in programmes and initiatives that are expected to drive future growth. A number of these projects have started to deliver excellent results, but trading conditions remain very tough which has restricted our progress in key areas.  

Despite the challenging trading environment, particularly in the UK construction sector, the Group has delivered a 12% growth in Group revenues. This growth has, however, come largely from lower margin, distributed products and Group profitability has been impacted by the loss of high margin sales in the UK Stormwater division, and investments in growth initiatives and enhanced sales resources. Consequently operating profit reduced by 16% against the 2011 level.

Our Wastewater divisions delivered sector revenue growth of 16% to £25.1m (2011: £21.6m), whilst adjusted operating profits reduced by 7% to £4.4m (2011: £4.7m) over the period. Excluding the impact of £0.3m of reversed cost provisions during 2011 in our International division, the underlying profitability of the sector was broadly unchanged.

Growth in the UK Wastewater division was particularly strong, driven by an improvement in project flow from the UK water companies under the AMP5 programme and continued delivery against our major contracts for Thames Water. However, 2013 will see the revenues generated from the Thames contracts reduce materially as the projects start to reach their latter stages.

The US Wastewater division continued to secure key contracts over the period, including the CDN$4m Bonnybrook WWTP project in Calgary, Alberta, announced in June 2012. Early income recognition on the Bonnybrook contract helped the division grow revenues, but average margins were reduced from 2011 reflecting the different mix of products sold in the year.

Across our Wastewater businesses we continue to invest in people and programmes expected to generate growth over the medium term. The UK focus is to improve sales effectiveness and enhance relationships with the UK water companies whilst in the US, where sales channels are highly effective, the emphasis is on establishing markets for newly introduced products. Both divisions are focusing on the expansion of existing spares and service capability. Internationally there are strong Middle Eastern prospects in Saudi Arabia and Qatar and we have recruited local sales resources to support our efforts in these territories.

Total revenues from Hydro's Stormwater operations grew by 2% to £9.6m (2011: £9.4m). Operating profits, however, reduced to £0.8m (2011: £1.0m) with individual markets performing very differently. A combination of a contraction in the Group's traditional markets and delays in implementing new water quality regulations severely constrained progress in the UK in the second half of the year. Conversely the US division is making good progress with the level of business secured through new distribution channels growing steadily. The expansion of the Group's distribution arrangements in the US, both in terms of territory and product, provides a strong platform for future growth. New distribution arrangements also benefited the International division where a major early order was secured from our new partner in Russia.

Further details on the performance, market conditions and outlook for each division, are outlined in the following sector reviews.

Sector Reviews

UK and Ireland Wastewater

The division offers a broad range of equipment, with supporting services, for the primary, secondary and tertiary treatment of wastewater, largely supplied into municipal applications in the UK and Ireland. The industrial sector is also becoming an area of increasing interest.

In addition to offering proprietary Hydro products, the division is a value-added distributor of high quality third party wastewater treatment products. Revenues from these distributed products currently represent a significant proportion of total divisional sales, and a key focus for the business is to build revenues derived from proprietary Hydro products. We also continue to look to expand the portfolio of products to meet the diverse needs of our customers.

The supply of products is supplemented by site services, including installation, spares, maintenance and major overhaul activities. The service and maintenance business offers significant potential for growth, and this is a key focus area for the division.

The infrastructure spending of the UK water companies is governed by five-year regulatory cycles; these in turn are the primary driver of demand for the business. The most recent of these Asset Management Programmes, started in April 2010, is the fifth such cycle (AMP5). The profile of expenditure by the water companies on infrastructure projects which represent opportunities for the division has historically been biased to the second, third and fourth years of the AMP cycle, with the first and fifth years notably quieter. Unlike previous AMP periods, projects under AMP5 were delayed well into the second year before gaining momentum in the last quarter of 2011.

Sector performance

During 2010 and 2012 Hydro secured three major contracts, valued collectively at £22.8m, to supply Thames Water with Zickert sludge scraper technology at its principal wastewater treatment sites in London. These contracts, the longest of which is at Beckton and spans a four-year period to early 2014, have generated revenues during 2012 of £7.7m (2011: £8.4m). The remaining contracts at Mogden and Crossness are expected to conclude in early 2013.

Following the disappointing flow of AMP5 project work during 2011, the division saw a marked increase in 2012, securing a number of key contracts from the UK water companies. The successful delivery of these projects, in addition to those for Thames Water, resulted in a record financial performance for the year.

The broader development of the business was given additional impetus in the year following the appointment of a Sales and Marketing Manager in a new role for the division. This appointment is aimed at enhancing our customer focus and providing additional resources to lead the assessment of growth opportunities afforded by new markets, including industrial wastewater applications for our products and the continued expansion of our service operations.

Sector outlook

The prospects for continued AMP5-driven projects remain positive as the business approaches the end of the third year of the cycle. However, the approaching conclusion of the Thames contracts during 2013 and 2014 will inevitably have a short term impact on the division.

US Wastewater

If highly abrasive sand and grit is not removed from the waste-stream as it enters a wastewater treatment plant it can cause major problems with wear and tear on mechanical equipment, build up in tanks and channels and impair the operation of sophisticated treatment processes such as membrane bioreactors. Hydro's broad range of proprietary vortex based advanced grit removal systems, including Headcell® and Grit King®, are designed to remove the finest sand and grit, providing a high level of protection to downstream equipment and processes.

The division also offers a range of wet weather treatment systems for removing gross pollutants and suspended solids from combined sewer overflows (CSOs). CSOs occur when the level of stormwater, in a sewer system designed to carry both stormwater and wastewater, causes the system capacity to be exceeded. Hydro's products intercept and separate the pollutants from the flow, preventing them escaping to the environment.

Access to the US municipal water market is through a network of independent manufacturers' representatives, each of whom will focus on a territory comprising one or more states. The division has been very successful in building a network of high quality representatives across the US and Canada.

Sector performance

* - excluding amortisation of acquired intangible assets

The division saw revenue growth during 2012 although operating profits were slightly reduced as a result primarily of product mix. Hydro's products are now gaining much wider acceptance at some of the larger wastewater treatment plants across the US. In June 2012 the US Wastewater business won a major contract, valued at CDN $4m, to supply a Headcell® grit removal system for the City of Calgary, Alberta, Canada. This project represents our largest grit removal project to date and the momentum on large treatment plants has continued into early 2013 with the business securing a $3.6m order to supply Headcell systems for the City of Dallas, Texas. 2012 also saw work commence on production of a large project, valued at $2.5m, for the Point Loma WWTP in San Diego, California.

2012 proved to be a more challenging year on the Wet Weather side of the business with a number of projects postponed and delayed as a result of cutbacks in municipal budgets.

New initiatives started to produce results in 2012 with the launch of Grit Cup™ and Spira Snail™, expanding Hydro's range of grit washing and dewatering devices. The product was featured at WEFTEC, the major annual US water industry trade show, and early enquiries for the product have been strong. Following the introduction of Hydro-Sludge® Screen into the US market, enquiries and proposal activity have steadily increased, building on the major contract for 12 Hydro-Sludge® Screens for the Blue Plains WWTP in Washington DC, secured in late 2011, which was shipped during 2012.

Sector outlook

The closing order book at year-end remains strong and the visibility of the future project pipeline is encouraging. The US Wastewater business is taking steps to strengthen its position as market leader in fine grit removal and drive future growth through a range of new initiatives including enhancing and improving its product portfolio and by identifying opportunities and pilot testing its fine grit removal technology for new applications in adjacent sectors of the water markets.

UK and Ireland Stormwater

The UK and Irish Stormwater division has traditionally provided niche products for managing the quantity of stormwater flows in urban drainage and flood control systems. The business has a market leading position in the supply of proprietary vortex flow controls, which the Group looks to maintain through continual development and differentiation of the products. Sales of Hydro's flow controls are supplemented by the distribution of geocellular stormwater storage systems. Trading is typically derived from new-build construction activity driven by the application of regulations requiring the control and storage of stormwater within the development site.

In the UK, the historical focus on stormwater quantity has been augmented by a need to improve the quality of stormwater, driven by emerging new regulation and legislation, including the Flood and Water Management Act 2010 (FWMA). The application of the FWMA, including the introduction of national standards for Sustainable Drainage Systems (SuDS), is expected to add to the new opportunities for stormwater quality products that are already being created by the European Union Water Framework Directive. It is disappointing therefore that the timescales for the implementation of the national standards have progressively slipped and are now not expected before April 2014.

Hydro has a well-established portfolio of stormwater quality products with a strong track-record in the US and International markets, where the regulatory drivers have been in place for many years. This technology will be transferred to the UK and European markets.

In late 2011, the UK Stormwater division established a small-scale consultancy arm, providing technical professional services, design and hydraulic modelling support, including flood risk assessments, to a range of clients including local authorities and developers.

Sector performance

2012 has been a very challenging year for the division with market conditions in the construction products sector deteriorating markedly in the second half of the year. Progress with growth initiatives tied to stormwater quality objectives and SuDS has also been impaired by the extended and ongoing delays in the introduction of national standards. One such initiative was the Hydro Consultancy business, and delays in the implementation of the FWMA regulations contributed in part to a first year operating loss of £0.18m.

During the year the division has focused on overhauling sales processes and channels, including the negotiation of enhanced business relationships with the major builders' merchants in the UK. Good progress has also been made following the successful, market launch of the Hydro-Brake Optimum® flow control in April 2012. The Hydro-Brake Optimum® has received independent certification from the BBA and WRc and offers the unprecedented flexibility to designers and users to size each unit for absolute fit and performance.

Sector outlook

The outlook for the construction products sector in the UK and Ireland is not expected to improve materially during 2013. Against this backdrop, the division will be looking to improve performance by building on our enhanced distribution relationships and through further development of the product range offered to customers.

Ahead of the introduction of national standards for stormwater quality products, the early opportunities for SuDS solutions are expected to continue to develop and Hydro's established position in the UK stormwater sector provides an excellent platform from which to grow the revenues and profit contribution from this area of activity in the longer term.

US Stormwater

Stormwater runoff if left untreated can impair and degrade water quality in rivers, lakes and streams. The regulatory requirement to treat stormwater runoff and remove pollutants was first introduced by the USEPA in 1987 as the National Pollution Discharge Elimination System (NPDES), and the NPDES regulations were enhanced and extended in 2003. Hydro's US Stormwater business offers a range of advanced hydro dynamic separators (Downstream Defender® and First Defense®) and a unique fluidised bed filter (Up-Flo® Filter) for treating stormwater runoff associated with both new construction and urban retrofit projects in the US, Canada and Mexico. Hydro's products are designed to remove a wide range of gross pollutants like trash and sand to fine sediments and associated contaminants, such as heavy metals and nutrients.

Access to the US stormwater market is highly regulated, with states and other municipal authorities ensuring the efficacy of products supplied within their jurisdiction through a series of product approval regimes. In addition to a wide operational reach through effective sales channels, the attainment of key state product approvals is critical to achieving commercial success in the US. Hydro has widespread approvals for its Downstream Defender® stormwater separator product, and is actively building the base of approvals for the more recently introduced Up-Flo® Filter product.

Sector performance

During 2012 the division delivered revenue and profit growth despite the slow economic recovery in the US and uncertainty in both the private and public construction sectors. The main focus has been on the development of the sales distribution relationship with Advanced Drainage Systems (ADS). The benefits of the partnership, which was established in 2011, were clearly seen around the 11 State Great Lakes pilot territory with a 75% increase in the number of Downstream Defender® and First Defense® units installed compared to the previous year. The expansion of this relationship resulted in joint working with ADS in a further 10 States by the end of the year, including Western territories such as Colorado, Utah and New Mexico.

 Projects related to the transportation sector also remained a buoyant market for Hydro in 2012 with large contract wins for Downstream Defender® in New Jersey, South Carolina and Florida.

Targeted investment in the US Stormwater business continued in 2012 in a number of areas including long-term field testing to secure key regulatory approvals in Washington and New Jersey states, additional staff to support the developing sales channel partnerships, product enhancements, and the introduction of new customer centric design tools.

Sector outlook

The US housing and construction sectors continue to show signs of slow, but steady, improvement and this is expected to lead to an increase in demand for Hydro's stormwater treatment products in the short to medium term. Hydro is positioning itself for improvements in economic activity by extending territorial and product coverage with ADS, and by developing and launching next generation separation and filtration products.

In the longer term, we also expect to see returns from developing markets in Central and South America, building on the early progress in territories such as Mexico where the first installations of Hydro's stormwater treatment products took place during 2012.

International

The International division seeks opportunities for Hydro's own-developed technologies in territories outside the Group's principal operating markets in the UK and the US. Target markets are accessed through relationships with a combination of local distribution and licencee partners. Water is rising up the global political agenda and demand in markets, particularly in emerging and fast-growing economies, is being driven by a combination of increasing requirements for clean water, supporting regulation and legislation, urbanisation and population growth.

Global water infrastructure spending is anticipated to maintain growth over the medium to long term and the division is seeking to establish a broad base of distribution partners to ensure that key markets are successfully addressed. In other important markets, such as the Middle East and Asia Pacific, we have recently deployed local Hydro personnel with the objective of better supporting our distribution partners and improving our understanding of our regional markets.

To support the broadening of countries supplied, the division is forming strategic alliances with partners capable of offering complementary equipment to both support the sale of Hydro products and provide access to established distribution channels.

Sector performance

The focus for the International team during 2012 has been on (1) increasing Hydro's presence in emerging markets such as Malaysia and the Middle East, (2) assessing and entering attractive new markets around the world such as Russia and Turkey, and (3) consolidating Hydro's position in longstanding overseas markets such as Australia and New Zealand.

In August 2012, Hydro announced the appointment of a distributor partner for its stormwater products in Russia, the Ukraine, Belarus and Kazakhstan. Pollution control and water quality improvement are becoming key priorities in the territory and Hydro is now well placed to capitalise through our partnership with Ecoline Limited, one of Russia's leading companies for the design and delivery of stormwater solutions. The relationship delivered early success with a €2m contract to supply distributed stormwater storage systems and Hydro's Downstream Defender® stormwater quality systems to the Northern Capital Gateway Consortium, which is redeveloping St Petersburg International Airport (Pulkovo International).

Revenues and profits from the Pulkovo project provided a strong contribution to the growth in International Stormwater business during the year, helping to mitigate recessionary conditions in our established markets such as Korea, New Zealand and Australia, which had previously been relatively resilient to the impacts of the global economic downturn.

The market for Wastewater products, particularly in the Middle East, is building, but projects continue to progress at a slow rate. This is reflected in the flat revenue performance for the year, on which a small loss was incurred. The comparative profit reported in 2011 was enhanced by the release of provisions for costs on the conclusion of a major project.

Sector outlook

The level of new and existing opportunities for Hydro's grit removal products and stormwater treatment devices in the Middle Eastern region, particularly Saudi Arabia and Qatar, is encouraging. The prospects for progress in the region, and in the Russian market, during 2013 are positive, although anticipating the timing of projects remains a challenge.

Other Financial Matters

Operating profit

Operating profits for business segments are disclosed excluding the recovery of central Group costs through royalty and other management charges in note 3. This is the measure used by the Group for management purposes and presents a consistent measure of segment performance. For the purposes of segmental reporting operating profit is stated before amortisation of acquired intangible assets.

Total administrative expenses at £10.6m were increased on 2011 levels (2011: £9.7m) reflecting the impact of investment in growth initiatives, including the establishment of Hydro Consultancy, the recruitment of sales and commercial personnel across the Group, and a focused drive to improve the effectiveness of marketing activities.

The presentation of central Group costs within administrative expenses is shown in the segmental analysis of results in note 3. Group costs decreased marginally to £2.7m (2011: £2.8m), and included foreign exchange losses of £0.1m (2011: nil) associated with the revaluation of net US Dollar asset balances in the Company balance sheet.

Amortisation of acquired intangible assets

£0.2m (2011: £0.2m) of amortisation of acquired intangible assets has been charged on assets recognised following the acquisition of Eutek Systems, Inc. (Eutek) in 2008. Hydro acquired total intangible assets relating to developed technology and trademarks, which are being amortised over a period of 15 years, subject to any impairment.

Finance costs

Net finance costs for the year were £nil (2011: £0.3m). This figure includes interest on bank loans taken in 2008 to assist with acquisition funding, the unwinding of discounting applied to the value of future payments of deferred consideration payable to the former shareholders of Eutek, and the gain (or cost) associated with derivative financial instruments. The year-on-year decrease was largely attributable to small gains on the valuation of outstanding foreign exchange forward purchase contracts at 31 December 2012. In 2011 the charge for the year reflected the reversal of large gains on the equivalent valuation at 31 December 2010. Costs associated with the unwinding of discount reduced significantly reflecting the short period remaining to May 2013 after which point deferred consideration payments cease to be payable. An analysis of the net finance cost is presented in note 4.

Taxation

The effective tax rate on profits was 24.7% (2011: 30.3%). An analysis of the tax charge for the year is shown in note 5. In general terms, the difference between the effective rate of tax and the UK statutory rate of 24.5% (2011: 26.5%) largely reflects the impact of profits generated from operations based in the US, where combined federal and state tax rates are higher than those experienced in the UK. The reduction in effective tax rate during 2012 reflects the lower profitability generated from UK-based operations combined with increased tax deductions for R&D tax credits. The effective tax rate on US-based operations was also reduced over the year due to a combination of higher tax reliefs on intra-US trading of products produced within the US, and a reduction in discounting costs, which are disallowed for tax purposes, associated with deferred consideration payments to the former shareholders of Eutek Systems, Inc.

The Group should benefit from anticipated reductions in UK corporate tax rates, but, due to the territorial profile of the Group's activities, we would expect the overall effective tax rate to remain above the UK statutory rate, and above the 2012 figure.

Earnings per share

Our adjusted earnings per share, the calculation of which is shown in note 6, decreased by 1% to 12.71 pence per share (2011: 12.86 pence per share). Earnings per share, which includes the impact of amortisation of acquired intangibles, decreased by 1% to 11.86 pence per share (2011: 11.95 pence per share).

A calculation of diluted earnings per share is presented in note 6. This calculation reflects the impact of potential ordinary shares from unvested share option schemes.

Cash flow and working capital

At 31 December 2012, net cash (cash and cash equivalents, less borrowing) totalled £2.9m, compared to £5.4m at 31 December 2011 and £3.6m at 30 June 2012.

Cash generated from operations was an outflow of £1.0m in the year (2011: inflow of £3.9m). This includes a working capital outflow of £3.9m (2011: inflow of £0.5m). The working capital changes in the year reflect the heavy weighting of revenues recognised on larger wastewater contracts to the final quarter for which payment had not been received at the year-end. In general terms, such contracts typically have commercial terms that can materially affect the measure of working capital at a given point in time and require a higher level of working capital than the shorter turnaround Stormwater sales.

Corporation tax payments were £0.3m (2011: £1.1m). This figure reflects lower tax payments on account, required to be made by the Group's US operations, for which the timing of profitability was heavily biased to the final quarter of the year.

Capital payments on loans taken out to finance the 2008 acquisition of Eutek consumed £0.9m (2011: £0.7m) of cash reserves during the year. Additionally a further £0.2m (2011: £0.3m) was paid in deferred consideration to the former shareholders of Eutek.

Foreign exchange losses of £0.1m (2011: £0.1m) were incurred in 2012 on cash balances denominated in foreign currencies (principally US Dollars, Swedish Kronor and Euros).

Financial risk management

The Group operates a central treasury function that controls cash management and borrowings and our financial risks. The main financial risks we face are liquidity, foreign currency, interest rates and credit risk. We only use derivatives to manage our foreign currency risks arising from underlying operational business. Transactions of a speculative nature are prohibited.

Further details of our financial risk management policies are disclosed in note 22 of the Annual Report.

Borrowing facilities

Our borrowing facilities comprise:

·; $0.4m US Dollar term loan (secured on the Group's freehold properties) expiring in May 2013 on which interest is charged at 2.1% over US LIBOR;

·; $1.7m US Dollar term advance (secured on the Group's freehold properties) expiring in May 2018 on which interest is charged at 1.8% over US LIBOR; and

·; £3.0m facility for the provision of bonds, guarantees and/or indemnities. This facility is renewed on an annual basis with the next review to be undertaken by the Group's bank during August 2013.

As at 31 December 2012 the Group maintained £4.3m (2011: £7.5m) of cash balances.

Borrowing facilities are subject to the following financial covenants:

·; A maximum ratio of net debt to EBITDA of 2.0 times;

·; A minimum interest cover of 3.0 times

In addition, the term advance is subject to a further covenant under which the amount borrowed shall not exceed 80% of the value of the properties against which the advance is secured. During the year the Group agreed the removal of all 'cash cover' requirements associated with its loan and bonding facilities with Barclays Bank.

The Directors have assessed the future funding requirements of the Group and compared them with the level of available borrowing facilities and are satisfied that the Group has adequate resources for the foreseeable future.

On behalf of the Board

Steve Hides Tony Hollox

Chief Executive Officer Chief Financial Officer

18 March 2013 18 March 2013

Group Income Statement unaudited

Year ended 31 December 2012

Consolidated Statement of Comprehensive Income unaudited

Year ended 31 December 2012

Consolidated Balance Sheet unaudited

31 December 2012

Consolidated Statement of Changes in Equity unaudited

Year ended 31 December 2012

Consolidated Cash Flow Statementunaudited

Year ended 31 December 2012

*Represents deferred payments to the vendor of Eutek Systems, Inc, acquired in May 2008.

Reconciliation of profit to net cash flow from operating activities unaudited

Year ended 31 December 2012

Notes to the preliminary announcementunaudited

Year ended 31 December 2012

1. Basis of preparation and status of information

The preliminary announcement was approved by the Board of Directors on 18 March 2013. Whilst the financial information included in the preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, this announcement does not constitute the Group's statutory accounts for the years ended 31 December 2012, 2011 or 2010, and does not contain sufficient information to comply with IFRSs.

The financial information for the years ended 31 December 2011 and 31 December 2010 are derived from the statutory accounts for those years which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain any statements under s498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

The audit of the statutory accounts for the year ended 31 December 2012 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in the preliminary announcement.

Full audited accounts of Hydro International plc for the twelve months ended 31 December 2012 will be dispatched to shareholders, and made available on the Group's website at www.hydro-int.com, on 19 April 2013 ahead of the AGM date of 23 May 2013. The AGM will be held at the registered office of Hydro International plc at Shearwater House, Clevedon Hall Estate, Victoria Road, Clevedon, BS21 7RD. Copies of the Annual Report and Accounts will also be available from the registered office from 19 April 2013. The audited accounts will be delivered to the Registrar of Companies following the AGM.

2. Post balance sheet event

Subsequent to the year-end the directors have recommended a dividend of 3.6 pence per share to be paid, totalling £517,000. The dividend is subject to approval by the shareholders and will be paid on 10 June 2013 to shareholders on the register on 17 May 2013.

3. Segmental analysis of results

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board of Directors to allocate resources to the segments and to assess their performance. Information reported to the Group's Board of Directors for the purpose of resource allocations and assessment of segment performance is more specifically focused on the destination of products sold by the operating divisions and the combination of business activity as detailed above and the destination of the product.

The Group's reportable segments under IFRS 8 are therefore as follows:

Wastewater: UK and Ireland, the US, and International

Stormwater: UK and Ireland, the US, and International

Information regarding the Group's operating segments is reported below.

3. Segmental analysis of results (continued)

There are no intersegment sales. Within UK Wastewater, a total of £10.3m (2011: £9.2m), representing 30% (2011: 30%) of the consolidated revenue in the year, was derived from contracts either directly or indirectly with a single customer.

* Segment profit represents the operating profit earned by each segment excluding amortisation of acquired intangibles, central administration costs including director's salaries, investment revenue and finance costs, and income tax expense. This is the measure reported to the Group's Board of Directors for the purpose of resource allocation and assessment of segment performance. The accounting policies of the reportable segments are the same as the Group's accounting policies.

3. Segmental analysis of results (continued)

For the purposes of monitoring segment performance and allocating resources between segments, the Board of Directors monitor the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of other financial assets (except for trade and other receivables) and tax assets.

4. Net finance cost

5. Tax

Factors affecting tax charge for the year

The standard rate of tax for the year, based on the Group's standard rate of corporation tax is 24.5% (2011: 27.0%). The actual tax charge for the current and previous year is more than the standard rate for the reasons set out in the following reconciliation.

Factors that may affect the future tax charge

A deferred tax asset has not been recognised in respect of timing differences relating to certain losses within the Group, capital losses and state tax credits. The total gross amount of tax losses and state tax credits in respect of which no asset has been recognised is £1,422,000 (2011: £1,438,000); the related tax would be recovered if sufficient taxable profits arise in future periods in the appropriate companies in an appropriate time frame The change in value for the year, reflects the impact of foreign currencies..

6. Earnings per ordinary share

The calculation of earnings per share for each year is based on the profit after taxation for the year, divided by the weighted average number of shares in issue in the relevant year. The number of shares used in the calculation is as follows:

The diluted earnings per share for each year is calculated after the inclusion of share options, as per below:

Excluded from this calculation were share options in respect of the SAYE scheme, because they were anti-dilutive for the current period.

Adjusted earnings per share

Adjusted earnings exclude amortisation of acquisition related intangible assets and related corporation tax effect.

Reconciliation of profit after tax to adjusted profit after tax

7. Going concern

The Group's business activities, together with the main trends and factors likely to affect its future development, performance and position, and the financial position of the Group, its cash flows, liquidity position and borrowing facilities, are set out herein.

Whilst the Group has considerable financial resources, the current economic conditions create uncertainty particularly over (a) the level of demand for the Group's products; (b) the exchange rate between Sterling and the Euro and Swedish Kronor and the consequent impact on the cost of the Group's imports of products sold through its UK businesses; and (c) the exchange rate between Sterling and the US dollar and the consequence for the value of external borrowings denominated in that currency and the associated cost of servicing that debt.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current financial facilities.

After making enquiries, the Directors have concluded that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts and this Preliminary Announcement.