Final Results

3 March 2015

Embargoed until 07:00

Hydro International plc

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

Unaudited Final Results

Hydro International (AIM: HYD), a leading provider of environmentally sustainable and innovative products for the control and treatment of water, announces its unaudited final results for the year ended 31 December 2014.

Group Financial Summary

* excluding amortisation of acquired intangible assets

** cash and cash equivalents, less borrowings

2014 Highlights

· Adjusted profit before tax up 19% to £1.9m (2013: £1.6m) following a strong second half of the year.

· Profitable growth funds the ongoing programme of strategic investments being made to fuel further growth, including:

- International territorial expansion, particularly into China and the wider Asia Pacific region

- New product development to broaden our range, expanding our addressable markets

- Initial activities to build presence in industrial markets

- Continuing extension of the scope of the Group's services offering and capability

- Progression of new Group-wide business systems implementation

· Group revenue and adjusted operating profits up by 2% and 28% respectively in constant currency terms.

· Group order intake in the year increases 12% to £35.1m (2013: £31.2m) with good progress across all divisions other than AMEA, where the Ukraine crisis resulted in the suspension of projects in Russia in the second half of the year.

· Closing order book increases by 33% to £13.7m (2013: £10.3m).

Roger Lockwood, Chairman of Hydro International plc, commented:

"2014 has marked a turning point for the Group. While remaining very much a work in progress, the Group's development on a wide range of fronts, both financial and operational, demonstrates that Hydro is now on course to deliver continuing growth in all areas of the business in line with our strategy of building a high quality global business for the long term."

Michael Jennings, Chief Executive of Hydro International plc, further commented:

"With a solid year of increased orders behind us, we expect to deliver more growth during 2015 and beyond. Maintaining this momentum while we continue to make focused investments to build multiple, further sources of growth will ensure we have a suitably diversified, balanced business model. Hydro is developing well as a business and I am very positive about the outlook and our wider prospects as a global company."

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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 North American and UK markets in territories including: Ireland, the Middle East, Mexico, Brazil, Russia, the European Union, China, Malaysia, Singapore, Korea, Australia and New Zealand.

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

Chairman's Statement

The Group has delivered improved profitability while pressing ahead with its substantial programme of investments in high quality people, systems and processes aimed at providing a broad and stable platform for future business growth.

The Group has seen a 12% overall growth in orders to £35.1m (2013: £31.2m) with progress made in constant currency terms across all divisions other than AMEA. Revenues grew strongly in Americas and Europe Stormwater with the launch of new products and improving construction market conditions, while Europe Wastewater continues to feel the effects of the cyclical procurement of the UK water industry. The progress made across the Group's operations was also reflected in a 33% increase in the closing order book at 31 December 2014, which was £13.7m (2013: £10.3m).

Growth in the proportion of total revenues derived from the Group's range of higher-margin proprietary products and services resulted in an increased average gross margin of 45.3% (2013: 39.4%). Increased gross profitability enabled the Group's additional investments in people and products, while yielding a 23% increase in operating profit to £1.75m (2013: £1.42m). Headline earnings per share were 6.80 pence (2013: 5.30 pence) reflecting the increased operational profitability and, as expected, a second year in which the Group's effective tax rate remained high at 43.2% (2013: 45.6%), caused by the bias in results to the US together with taxable losses in the UK.

The Group's net cash position, which can be materially affected by the timing of cash flows associated with larger contracts, remains solid at £2.3m (2013: £3.4m), having strengthened during the second half of the year from £1.4m at 30 June 2014.

In the 2013 Annual Report we set out Hydro's strategy for growth by both building on our platform of market-leading products and looking to capitalise on opportunities to develop more stable sources of revenue. During 2014 the Group has made very encouraging progress with our plans to develop and expand service operations, broaden the applications for our products into less cyclical industrial markets, and expand internationally into targeted key markets, including China and the wider Asia Pacific regions. Momentum has been maintained into early 2015, with the purchase of the operating assets and brand of Settled Solids Management (SSM) based in Florida, US. SSM is an established specialist provider of services to remove sand and grit from wastewater treatment plants. These operational services, which will be integrated within the Americas Wastewater division, are based around a patented Vertical Grit Separator system, and are well aligned with Hydro's world-leading grit removal technologies.

Dividend

The Board's general policy has been to increase dividends progressively with growth in profits. Whilst the financial performance during the year is encouraging, and the Board has confidence in the Group's financial position and future prospects, we remain some way below the profit levels experienced in 2011 when the dividend was increased to 3.6 pence per share. Accordingly the Board is proposing an unchanged final dividend of 3.6 pence per share. Subject to approval by shareholders at the Annual General Meeting in May, the dividend will be paid on 8 June 2015 to shareholders on the register on 15 May 2015.

Board changes

I have informed the Board of my intention to retire at the 2015 Annual General Meeting. It is the Board's intention to elect Ian Griffiths as Chairman at that time. Ian, who joined as a non-executive director in October 2014, has considerable board experience, having served as an executive director on the Board of GKN plc from 2001 to 2006, and as a non-executive director on the board of Ultra Electronics Holdings plc from 2003 to 2012. He has also been a non-executive director of Renold plc since 2010. I am sure Hydro will benefit from Ian's stewardship and I wish him every success in his role.

Outlook

The Group continues to make the investments in people and processes required to implement our strategy to capitalise on the considerable opportunities available in our markets and facilitate long-term growth. In the short-term Hydro's results for 2015 are expected to remain strongly biased to the second half of the year.

Roger Lockwood

Chairman

2 March 2015

Chief Executive's Review

I am encouraged by the progress being made on many fronts across Hydro. We are building a stronger business on a platform of market-leading technologies and solutions. We are also building one global organisation with the capability to take these solutions to markets the world over, to compete, and win. In 2014 we showed we are going in the right direction and I expect this to continue in the year ahead.

Strategy in action

Hydro is set up to provide value-added products and services to specialised segments within the wider water industry. The major market drivers for our business remain positive: urbanisation and population growth; environmental and water-related regulation; construction and infrastructure investment; climate change; and operational imperatives around energy efficiency and extended product life cycle requirements.

Our strategy ensures that in understanding these drivers we are exploiting our technology and applications expertise to establish a competitive advantage and generate premium margins. The crux of this, in reality, is adapting core capabilities within Hydro and applying beyond the markets where we already exist. We are tasking ourselves to win market share but, more pertinently, to increase the size of the markets which we serve. This underpins our ability to deliver both significant and sustainable growth. To facilitate the increase in our addressable markets we are in the middle of a major and continuous investment phase whereby we put in place the people and resources to enter new countries and new segments, all with a broader range of products and services.

People

There are many enablers which are in place to ensure that this strategy, when put into action, delivers successfully. The most important of these is the people who make up the Hydro organisation.

Hydro has a fantastic group of employees who have all played their part in bringing the Group to where it is today. During 2014 we launched 'One Hydro' which is our way of encapsulating our goal to become one global company in everything we do. We believe by harnessing the expertise and experience from all corners of Hydro, we can provide a better solution and service to our customers, as well as providing a distinct advantage compared to our competitors. As part of developing 'One Hydro' we have checked the pulse of the organisation by conducting an all-employee survey to develop a set of values which we feel best represent what it means to work for Hydro and how these values are reflected in the way we conduct our business. We want Hydro to be the best place to work for our employees and the best place for our customers to find solutions to their needs.

Moving forward into 2015

The team at Hydro is fully focused on living up to our commitments in driving short-term financial performance. We are equally determined to ensure we do not lose sight of the underlying expectation to broaden our business such that we will capitalise on the long-term financial potential of the Group. Balancing these, occasionally conflicting aims, is the unavoidable challenge faced by any ambitious business. With this in mind, during 2015, we expect to continue our steady financial improvement while we continue to invest in multiple growth initiatives which will underpin our significant growth prospects for 2016 and beyond.

Michael Jennings

Chief Executive

Operational Review

Group Overview

"The Group's operations have made very encouraging overall progress during 2014, delivering substantial growth in most of our major markets."

As anticipated, 2014 has been a year in which Hydro has seen growth in underlying profitability that has been used, in part, to fund a major programme of investments aimed at providing a broad platform for future growth. Trading levels are reflected in order intake, which has increased by 12% across the year to £35.1m (2013: £31.2m). Overall 2014 revenues were unchanged on 2013 levels at £32.2m (2013: £32.2m), but underlying this headline figure, revenues in Americas and Europe Stormwater grew strongly, offset by lower revenues in Europe Wastewater and AMEA, both of which are susceptible to major project flows. Group revenues expressed in constant currency increased by 2% over 2013 levels. Adjusted operating profits increased by £0.3m to £1.9m.

Regional Financial Performance

* Segment profit excludes amortisation of acquired intangible assets and central Group costs

† AMEA - Asia, Middle East & Africa

Our Americas divisions delivered a combined revenue growth of 10% to £18.0m (2013: £16.3m) and a 12% increase in segment operating profits to £4.04m (2013: £3.61m). This growth was driven by the strengthening market position of the Wastewater division, the expansion of Wastewater services lines of business and the further territorial expansion of the Stormwater division, where sales distribution channels across the United States and Canada were extended. Both divisions are well placed for further growth through a combination of product range extension and territorial expansion, including into Central and South America.

In Europe, the ongoing development of improved sales channels, and product range extension has also been the primary focus for Stormwater, supported by improved market conditions, particularly for housing construction activity in the UK. Europe Wastewater project flow has improved during 2014, reflected in a 55% increase in orders compared to the difficult year in 2013, and we have continued to expand after-sales services. Total segment revenues were held back by the low Wastewater order book entering 2014, closing 3% lower than 2013 at £12.2m (2013: 12.6m). A beneficial movement in the mix of sales towards higher-margin proprietary products helped drive a 98% improvement in segment operating profits to £1.01m (2013: £0.51m).

Internationally, the AMEA division has struggled to progress projects in Russia during the second half of the year following the political crisis in Ukraine. The Middle East has also moved more slowly than expected, which, together with Russia, has pulled back revenue to £2.0m (2013: £3.4m). The focus of the AMEA team remains territorial expansion and we have been encouraged by early progress in China following the deployment of business development personnel in early 2014. Resources have also been deployed in Singapore, with a remit to focus on the wider Asia Pacific region, including Hydro's existing distribution partners in Australia and New Zealand.

Growth prospects for 2015 are good across the Group's operations. The programme of investments in high-quality people, systems and processes aimed at building more sustainable sources of revenue will also continue into 2015 and this investment, whilst critical to the medium-term improvement of the Group's results, will serve to contain our short-term financial progress in the coming year.

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

Segment Reviews

Americas - Wastewater

The Americas Wastewater division is focused on creating value by applying Hydro's proprietary vortex-based technology to the challenge of removing highly abrasive grit from flows of water entering a treatment process. Grit can cause major problems with excess wear and impaired operation of equipment downstream in the treatment process as well as building up in tanks and channels.

The division has established a market-leading position in removal of fine grit from flows of municipal wastewater as it enters a treatment plant, and has also developed solutions in applications including the removal of gross pollutants and suspended solids from Combined Sewer Overflows (CSO), the treatment of industrial process water, and the removal of sediments from water extracted from rivers for use in drinking water treatment plants.

Our major markets are the municipal water markets in the US and Canada, which are accessed through a network of independent manufacturers' representatives, each of whom focus on a territory comprising one or more states or provinces. The division has been very successful in building a network of high quality representatives across the US and Canada. Growth is anticipated through a combination of new product introduction, the broadening of existing services offered in support of installed equipment, and geographic expansion into Central and South America.

Segment performance

* - excluding amortisation of acquired intangible assets

The Americas Wastewater division traded strongly across the year, with constant currency orders and revenues increased by 1% and 11% respectively over 2013 levels. The division's core grit removal products have achieved a level of general acceptance and maturity in North American markets which is progressively providing increased access to larger-scale projects. The division is also looking to build on its strong market position by increasing the depth of the product range available to customers. An example of this is provided by the three-fold growth increase in orders for the GritCup® and SpiraSnail® products following their market launch in late 2012.

Additional investments have also been made during the year to further develop the division's service capability, ensuring that Hydro can participate fully across the grit removal market and support the lifetime of our products with the customer. Revenues from services-related activities grew by 79% in the year. In January 2015 the division also purchased the operating assets and brand of Settled Solids Management (SSM) based in Florida, US. SSM is an established specialist provider of services to remove sand and grit from wastewater treatment plants. These operational services are based around a patented Vertical Grit Separator system and are well aligned with Hydro's world-leading grit removal technologies.

The division made progress with diversification beyond purely municipal wastewater applications for products, and first orders were received for grit removal in drinking water applications, which along with the non-municipal industrial market, is a target sector for future growth.

Segment outlook

The visibility of future municipal grit removal projects remains encouraging. The division is focusing on reinforcing its market position, including new product introductions, and opportunities to build service lines of business and penetrate industrial markets for grit removal equipment.

Americas - Stormwater

The Americas Stormwater division offers a range of equipment for improving the quality of stormwater run-off associated with new construction and urban retrofit projects. Products are designed to remove a wide range of gross pollutants, including trash, sand, fine sediments and their associated contaminants, such as heavy metals and nutrients.

The division's major markets are the US and Canada, with an emerging presence in Mexico and Brazil. Markets are accessed via a network of national and regional distributors operating within the construction industry with strong contractor relationships. Distribution partners are supported by regional business managers operating within a designated territory.

Access to stormwater markets is typically highly regulated, with state 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. Hydro has widespread approvals for its core Downstream Defender® stormwater separator product, and continues to build the base of approvals for other products.

Segment performance

The division experienced a second consecutive year of strong growth. In constant currency terms, orders increased by 37% and revenue by 27% as US construction levels recovered to their highest point since 2008. The division also progressed an ongoing programme to develop and expand sales distribution arrangements in the US and Canada, including the appointment of regional business development personnel into California and the US Pacific Northwest. In November 2014 Jim Newkirk was appointed as Director and General Manager. Jim has held senior leadership roles in the environmental and infrastructure sectors, including with Waste Management, Veolia Water and Aegion in the US.

Efforts to grow business levels in Central and South America are also ongoing, focusing initially on markets where we have an existing distribution presence, in Brazil, where we are progressing plans to open a regional office during 2015, and Mexico.

The product range for the Americas Stormwater market has been enhanced by the market launch of First Defense High Capacity®, designed to accommodate larger pipe sizes and higher stormwater bypass flows, and order intake is building at an encouraging rate. The investment of tooling and moulds required for the production of First Defense High Capacity® by our fabrication partners has contributed to the increase in capital expenditure incurred by the division to £130,000 (2013: £88,000).

Segment outlook

Territorial and distribution channel expansion, including a first full year from new markets in California and the US Pacific Northwest, together with an increased contribution from newer products is expected to drive continuing growth during 2015. The division is also investing in additional sales resources to facilitate an approach to targeted industrial markets, including ports and harbours, where the challenges of stormwater management create excellent opportunities for Hydro.

Central and South American markets are expected to contribute over the longer term, building on our progress to date in Mexico and Brazil.

Europe - Wastewater

The division offers a broad range of equipment and supporting site services to the municipal wastewater market in the UK and Ireland. In addition to offering Hydro's own developed products, the division is a value-added distributor of high quality third party products. Revenues from these distributed products currently represent a significant proportion of total sales, and a key priority for the business is to grow revenues derived from Hydro's own products.

The spending of the UK water companies is governed by five-year regulatory cycles termed Asset Management Programmes (AMPs) and AMP5, the most recent such cycle, concludes in March 2015, followed by the launch of AMP6. The profile of expenditure by the water companies on infrastructure projects has historically been biased to the second, third and fourth years of the AMP cycle, with the first and fifth years notably quieter. AMP5 saw a major variation from this pattern with project flow late to get started, being delayed until well into the second year, and early to decline in year four. AMP6 is expected to provide a greater encouragement to the UK water companies to maintain existing assets and reduce whole-life costs, driving the need for more ongoing service provision.

Segment performance

As expected, divisional revenues and profits for the year reduced against 2013 levels as the major Zickert Scraper contracts undertaken for Thames Water concluded in early 2014. These contracts provided revenues during 2014 of £0.1m (2013: £2.7m).

Following a frustrating year for order intake during 2013, where projects were consistently delayed or deferred, business levels improved markedly during 2014. This growth included a 44% increase in orders from services-related activities, which is seen as further evidence of the expected shift in the focus of the UK water companies under the upcoming AMP6 programme to better maintain existing assets and reduce whole-life costs. This approach is expected to drive the need for more ongoing service provision, and the major programme started in 2013 to enhance our after-sales and site services team, and strengthen our offer to customers, was continued throughout 2014.

The division also saw encouraging early order levels from industrial customers following the deployment of sales resources to look for opportunities in non-municipal wastewater markets.

As reported in 2013, the division is also focusing on the introduction of Hydro's advanced grit management products, which form the base of our Americas business, to the UK market. During 2014 the division has been working closely with a number of UK water companies to examine their specific challenges, and costs, associated with fine grit. This effort has been supported by the development of a pilot unit to allow customers to trial the technology at their own site.

Segment outlook

Whilst the division has improved visibility on projects, the timing of specific prospects remains difficult to anticipate, particularly across the change from AMP5 to AMP6. However, the division is expecting growth in 2015, in particular from continuing development of services and industrial opportunities, which are expected to provide significant additional sources of revenue over the medium term.

Europe - Stormwater

The 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 vortex flow controls, which we look to maintain through continual development of the range of products. Trading is largely derived from new 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 regulations and legislation, including the Flood and Water Management Act 2010 (FWMA). The application of the FWMA, including the anticipated introduction of National Standards for Sustainable Drainage Systems (SuDS), is expected to increase new opportunities for stormwater quality products. Hydro has a strong range of stormwater quality products, which have been sold into US and International markets for many years.

The division also includes a small-scale consultancy arm, providing specialist professional services in the areas of hydraulic modelling and flood risk assessment to a range of clients including local authorities and developers.

Trading is currently largely within the UK and Ireland, supplemented by small-scale distribution arrangements in Spain and Poland.

Segment performance

The Europe Stormwater division has seen strong growth over the year, reporting the highest level of revenues since 2009. Growth is attributed to a combination of enhanced sales channels, product range expansion and continuing growth in UK construction levels, particularly in the housing sector.

The division now has sales distribution arrangements in place with each of the major national, and a substantial proportion of regional, builders' merchants across the UK, ensuring that customers have widespread access to Hydro's products. These arrangements have been expanded to include a growing range of products following further additions to the Group's portfolio of flow control and stormwater treatment products. Market demand for stormwater treatment products continues to build in advance of the introduction of national standards in the UK for SuDS, which have been delayed well into 2015 at the earliest. The increasing acceptance of the need to manage stormwater quality was demonstrated by a second consecutive year of sales growth of stormwater treatment products exceeding 50% over the preceding year.

Segment outlook

Trading conditions in construction markets in the UK and Ireland are expected to show steady growth during 2015. The division will be looking to continue progress during 2015 through a combination of further product range expansion and increasing market demand, in particular for stormwater treatment products. The division is also broadening its consultancy services to include specialist water pollution management capability.

Asia, Middle East and Africa (AMEA)

The AMEA division seeks opportunities for Hydro's proprietary stormwater and wastewater technologies in territories outside the Group's principal operating markets in Europe and the Americas. Water continues to sit high on the global political agenda and target markets are identified by assessing a range of factors, including the availability of funding for water projects, the existence of applicable regulation and legislation, the degree of urbanisation and population growth, and the existing position of markets for stormwater and wastewater products. Markets in which we identify potential are typically accessed through relationships with local distribution partners supported on a regional basis by our own business development personnel.

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

The division has longstanding relationships in Australia, New Zealand, South Korea and Egypt. Egypt in particular was a strong market for Hydro's grit removal equipment prior to the political instability that took hold in early 2011. More recently we have established relationships in the wider Middle East, Russia, and China, where a market presence was fully established in early 2014.

Segment performance

Progress in the AMEA division has been hampered by the developing political difficulties in Ukraine, impacting the progression of opportunities in Russia. Whilst the number of identified opportunities in Russia remains very strong, municipal projects are struggling to secure the funding required to proceed. More has been achieved in the Middle East, and the market continues to offer clear growth prospects, but the speed at which identified opportunities have progressed has once again been frustrating. The relative decline in major stormwater storage projects in Russia during the period resulted in an increased proportion of higher-margin proprietary products. The effect of this is seen in segment profit margins, which have increased despite a reduction in revenues.

The division has continued to focus on territorial expansion, and dedicated regional business development resources have been placed into both China and the wider Asia Pacific region during the year. Early efforts in China have focused on the appointment of distribution partners in targeted regions. Whilst a number of early orders for stormwater treatment products were secured in the year, parallel work has also been ongoing to establish Hydro's presence in municipal wastewater treatment markets. A pilot grit removal plant was placed into territory in the second half-year, and a number of customer site trials have been arranged for 2015.

Segment outlook

The interest in, and the level of new and existing opportunities identified for, Hydro's grit removal products and stormwater treatment devices, particularly in Saudi Arabia and Qatar, remains encouraging. However, as in previous years, anticipating the timing of projects in the Middle East remains a challenge. Additionally, the prospects for further progress in Russia remain inherently uncertain at this time.

Following the initial work to enter the Chinese market during 2014, the division expects to secure first orders for wastewater grit removal products during 2015.

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, profit is stated before amortisation of acquired intangible assets in the Americas Wastewater division.

Total administrative expenses increased by 14.0% to £12.8m (2013: £11.2m) driven largely by the Group's investment programmes, including territorial expansion into China, the wider Asia-Pacific region, and the California and Pacific Northwest areas of the United States. The Group has also strengthened the leadership team through the appointment of Jim Newkirk as Director and General Manager of the Americas Stormwater division. The Group also incurred increased employee bonus costs, driven by improved operational profit levels.

Central Group costs, which form part of administrative expenses, increased from £2.8m in 2013 to £3.4m in 2014. This figure includes the first full year of Michael Jennings' costs following his appointment in 2013 as Chief Executive, the appointment of Roger Crook as Group Commercial Director and latterly the appointment, including related recruitment costs, of Ian Griffiths as non-executive director. Central Group costs are shown in the segmental analysis of results in note 3.

Amortisation of acquired intangible assets

£0.14m (2013: £0.17m) of amortisation of acquired intangible assets relates to developed technology and trademarks recognised in connection with the acquisition of Eutek Systems, Inc. (Eutek) in 2008. These intangible assets are being amortised over a period of 15 years, subject to any impairment.

Net finance costs

Net finance costs for the year were £0.03m (2013: £0.02m). This figure includes interest on bank loans taken in 2008 to assist with acquisition funding, interest income received on short-term deposits, and the gain (or cost) associated with derivative financial instruments. An analysis of the net finance cost is presented in note 4.

Taxation

The effective tax rate on profits was 43.2% (2013: 45.6%) and 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 21.49% (2013: 23.25%) 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. As reported in 2013, the high effective tax rate reflects the combination of taxable profits in the US, at a relatively high tax rate, and losses in the UK, which have given rise to an exceptional effective rate in excess of our highest rate of tax payable.

In the short term the effective tax rate is expected to remain relatively high, reflecting the continuing bias in profits to the US. Future profitable growth of the Group's UK-based divisions, which includes our International operations, is expected to normalise the effective tax rate over the medium term, but, due to the territorial profile of the Group's activities, we would expect the overall effective tax rate to remain well above the UK statutory rate.

Earnings per share

Our adjusted earnings per share, the calculation of which is shown in note 6, increased by 23% to 7.40 pence per share (2013: 6.01 pence per share). Earnings per share, which includes the impact of amortisation of acquired intangibles, increased by 28% to 6.80 pence per share (2013: 5.30 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 2014, net cash (cash and cash equivalents, less borrowing) totalled £2.3m, compared to £3.4m at 31 December 2013 and £1.4m at 30 June 2014.

Cash generated from operations was an inflow of £0.9m in the year (2013: inflow of £3.0m). This includes a working capital outflow of £1.5m (2013: inflow of £0.9m). As in previous periods the principal impact on cash generation has been the timing of receipts and payments on the larger contracts typically seen in the Group's Wastewater divisions, but also including payments made in relation to major stormwater storage projects in the Middle East secured during 2013. 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 typically shorter turnaround Stormwater sales.

Corporation tax payments were £0.4m (2013: £1.2m). This figure reflects the timing of corporation tax payments on account made by the Group's US operations, including payments made in respect of 2012 for which the results were heavily biased to the final quarter of that year, and for which payments on account had not been due until 2013.

During 2014 the Group made significant investments in fixed assets, including the purchase of new business systems, which will be implemented fully during 2015, and pilot equipment used to provide prospective customers with the opportunity to undertake a real-life demonstration of our equipment at their site. The use of pilot equipment has been a powerful sales approach for new or innovative technologies.

Capital payments on a loan taken out to finance the 2008 acquisition of Eutek consumed £0.2m (2013: £0.5m) of cash reserves during the year. The reduction in loan capital payments reflects the completion of one such loan in May 2013.

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 the 2013 Annual Report.

Borrowing facilities

Our borrowing facilities comprise:

· $1.1m 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;

· £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 May 2015; and

· £0.5m overdraft facility. This facility is renewed on an annual basis with the next review to be undertaken by the Group's bank during May 2015.

The term advance is 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; and

· the amount borrowed shall not exceed 80% of the value of the properties against which the advance is secured.

As at 31 December 2014 the Group maintained £3.0m (2013: £4.2m) of cash balances.

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.

Michael Jennings Tony Hollox

Chief Executive Chief Financial Officer

2 March 2015 2 March 2015

Group Income Statement unaudited

Year ended 31 December 2014

Consolidated Statement of Comprehensive Income unaudited

Year ended 31 December 2014

Consolidated Balance Sheet unaudited

31 December 2014

Consolidated Statement of Changes in Equity unaudited

Year ended 31 December 2014

Consolidated Cash Flow Statement unaudited

Year ended 31 December 2014

*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 2014

Notes to the preliminary announcement unaudited

Year ended 31 December 2014

1. Basis of preparation and status of information

The preliminary announcement was approved by the Board of Directors on 2 March 2015. 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 2014, 2013 or 2012, and does not contain sufficient information to comply with IFRSs.

The financial information for the years ended 31 December 2013 and 31 December 2012 is derived from the statutory accounts for those years which have been delivered to the Registrar of Companies. The auditor 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 2014 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 12 months ended 31 December 2014 will be dispatched to shareholders, and made available on the Group's website at www.hydro-int.com, on 21 April 2015 ahead of the AGM date of 21 May 2015. 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 21 April 2015. 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 £519,000. The dividend is subject to approval by the shareholders and will be paid on 8 June 2015 to shareholders on the register on 15 May 2015.

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:

Americas: Wastewater and Stormwater

Europe: Wastewater and Stormwater

Asia, Middle East and Africa (AMEA): Wastewater and Stormwater

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

3. Segmental analysis of results (continued)

There are no inter-segment sales. Within Europe Wastewater less than 10% (2013: 13%) of consolidated revenues for the year were derived from contracts either directly or indirectly with a single customer. Within Americas Stormwater a total of £3.1m, representing 10% (2013: less than 10%) of consolidated revenues for 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 Directors' 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 monitors 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 21.49% (2013: 23.25%). 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 trading and capital losses within the Group. The total gross amount of tax losses in respect of which no asset has been recognised is £685,000 (2013: £882,000); 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 recognition of previously unrecognised trading losses and the utilisation of previously unrecognised US state tax losses.

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 the 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.