Final Results

2015 FULL YEAR RESULTS ANNOUNCEMENT

3 March 2016

Exova Group plc ("Exova"), a leading international provider of technically demanding testing and advisory services announces its full year results for the year ended 31 December 2015.

Solid performance with strong revenue growth 

· Revenue up 9.9% at constant currency; 7.9% at actual rates

o 2.3% organic growth at constant currency demonstrating the benefit of diversification

o 7.6% growth from M&A activity

· 7.7% organic growth at constant currency excluding Oil & Gas and Industrials

· Eight M&A transactions completed with encouraging pipeline

· Proposed final dividend of 2.2p per share

Notes:

1) Adjusted results is operating profit from continuing operations before separately disclosed items, 2014 management fee to private equity investor, interest and taxation.

2) 2014 pro-forma profit before tax and adjusted earnings per share have been calculated as if the post IPO capital and debt structure had been in place throughout that year.

3) Statutory results for 2014 reflect pre-IPO funding structure and IPO transaction costs.

Ian El-Mokadem, Chief Executive Officer, commented:

"We are pleased to have delivered results which are in line with our guidance, demonstrating the strength of our diversified business and our ability to respond to changing market conditions. We delivered strong overall growth, with solid organic performance enhanced by our most successful year to date for acquisitions. The Group expects to deliver modest organic growth at constant currency in 2016 due to the strength of our portfolio and model.

Our medium-term revenue expectation remains mid-single digit organic growth, supplemented by acquisitions."

Contacts

For further information please contact:

Ian Middleton, Powerscourt Group

Tel. Direct +44 (0)20 7549 0998 / +44 (0)7885 508 527

[email protected]

Sophie Moate, Powerscourt Group

Tel. Direct +44 (0)20 7549 0994 / +44 (0)7761 974 589

[email protected]

Ian Power, Investor Relations

Exova Group plc

Telephone: +44 (0) 131 476 7619[email protected]

Analyst briefing and conference call

There will be an analyst briefing and conference call today at 9.30am GMT, held at Investec Bank PLC, Room 701, 7th Floor, 2 Gresham Street, London EC2V 7QP. If you would like to attend the meeting, please contact Powerscourt Group at the above mentioned e-mail address. A copy of the presentation is available on the website.

Corporate website: www.exova.com

Exova

Exova is one of the world's leading laboratory-based testing groups, trusted by organisations to test and advise on the safety, quality and performance of their products and operations. Headquartered in Edinburgh, UK, Exova operates 145 laboratories and offices in 32 countries and employs around 4,500 people throughout Europe, the Americas, the Middle East and Asia/Asia Pacific.

Exova's capabilities help to extend asset life, bring predictability to applications, and shorten the time to market for customers' products, processes and materials. With over 90 years' experience, Exova specialises in testing across a number of key sectors from health sciences to aerospace, transportation, oil and gas and construction.

FULL YEAR REPORT 2015

BUSINESS REVIEW

The principal activities of the Group are specialist testing and advisory services and the key markets served are Aerospace; Oil & Gas and Industrials; Product and Certification; Health Sciences and Middle East.

Exova operates primarily in the Testing segment of the Testing, Inspection and Certification ("TIC") sector. It has a growing Certification business, as well as providing Inspection services in a number of niche markets and geographies.

The business comprises 145 permanent facilities in 32 countries and employs around 4,500 people.

Overview of performance

1) Adjusted items are stated before separately disclosed items, 2014 management fee to private equity investors, interest and taxation

2) 2014 pro-forma adjusted earnings per share have been calculated as if the post IPO capital and debt structure had been in place throughout that year.

3) The cash conversion ratio is calculated by dividing free cash flow by adjusted EBITDA. Free cash flow is defined as adjusted EBITDA less movement in net working capital (excluding the effect of the IPO related cost accrual), less capital expenditure net of disposals.

Revenue

Revenue for the year was £296.5m which represented organic growth at constant currency of 2.3%.

Acquisitions contributed 8.2% of growth, partly offset by two small disposals which resulted in a reduction of 0.6%. The Group reports in sterling which strengthened during the course of the year over the currencies in most of the territories in which the Group operates. This resulted in a negative translational effect of 2.0%.

Adjusted EBITA margin

Adjusted EBITA margin decreased by 100bps from 16.8% to 15.8%. This reflects the reduction in Oil & Gas and Industrials, plus business investments (including acquisitions) which negatively affected margins.

Separately disclosed items

Amortisation of intangible assets

Amortisation of intangible assets for 2015 was £8.9m, a decrease of £0.4m from £9.3m in 2014. This decrease was due to customer relationships acquired from Bodycote now fully amortised partly offset by customer relationship amortisation relating to acquisitions made over the last three years.

Restructuring costs

We incurred £4.9m of restructuring costs in 2015, compared to £2.2 m in 2014. This represents mainly staff redundancy costs relating to rationalisation and restructuring of certain laboratories and administrative departments.

Restructuring costs in 2014 mainly related to closure or disposal of three Oil & Gas and Industrials sites in Norway, Sweden and Canada and other restructuring in this sector.

Acquisition and integration costs

With eight acquisitions completed in 2015 compared to three in 2014, these costs primarily related to the acquisition and integration of BM TRADA Group Limited, Environmental Evaluation Limited, Western Technical Services Limited and on-going expenses to support the pipeline, some of which are expected to close in 2016.

IPO related costs

No IPO related costs were incurred in 2015. In 2014 £13.3m of costs relating to the IPO were incurred. These costs primarily related to commissions, legal, accounting and other adviser fees including irrecoverable VAT in connection with the IPO.

Net cash interest payable in the year decreased from £26.0m to £5.1m primarily as a result of the refinancing associated with the IPO in April 2014. The increase in pension interest in the current year relates to the retirement benefit obligation assumed with the BM TRADA Group Limited acquisition.

Earnings per share ("EPS")

Basic earnings per share for the twelve months ended 31 December 2015 was 6.8p (2014: (16.6) p).

Pro-forma adjusted earnings per share for the twelve months ended 31 December 2015 was 12.2p (2014: 11.9p). This measure calculates EPS before separately disclosed items and in 2014 was calculated as if the post IPO capital and debt structure had been in place throughout that year.

Dividend

In line with guidance given at the time of the IPO, the Board is recommending a final dividend of 2.2p per share (2014: 2.0p per share) which, together with the interim dividend of 1.0p per share represents a pay-out ratio of 26% of adjusted net income. This reflects the long-term confidence in the business. The dividend will be paid on 10 June 2016 to shareholders on the register at the close of business on 27 May 2016.

Acquisitions

During 2015 the Group completed eight acquisitions.

On 9 February 2015, the Group acquired 100% of the share capital of Environmental Evaluation Limited (EEL) for a consideration of £5.4m. The company helps UK customers meet environmental regulations through the provision of asbestos testing and inspection, stack sampling and occupational hygiene advisory services and is recognised as a leading provider of asbestos management services for the nuclear decommissioning industry. The acquisition added 83 colleagues and forms part of the Group's Health Sciences cluster.

On 13 May 2015, the Group acquired 100% of the share capital of BM TRADA Group Limited ("BM TRADA"). The purchase consideration was £11.1m (net of cash acquired) plus the assumption of a retirement benefit obligation of £11.4m (net of deferred tax). BM TRADA adds to the Group's existing Fire and Building Products testing and certification services and provides a new platform for growth in the attractive area of management systems certification. BM TRADA employs 340 people across 16 countries with annual turnover in excess of £20.0m and has become part of our Product and Certification cluster.

On 2 December 2015, the Group acquired 100% of the share capital of Western Technical Services Limited and Accusense Systems Limited, a specialist provider of non-destructive testing and inspection of components and equipment in the food, dairy, brewing and pharmaceutical industries, for a purchase consideration of £1.7m. This acquisition will form part of the Aerospace cluster.

On 31 December 2015, the Group acquired the environmental monitoring division of Resource and Environmental Consultants Limited for a purchase consideration of £0.1m. This business will be incorporated into our Health Sciences cluster.

Exova Metech, our calibration and metrology business also completed four small acquisitions, two in Sweden and two in Germany. This included the outsourcing of the in-house calibration operation of Sartorius-Werkzeuge and the acquisition of the Eisenhuth calibration businesses which increased our footprint in Germany, part of our planned expansion into northern Europe.

On 15 February 2016, the Group acquired a majority stake in Admaterials Technologies Pte Ltd (Admaterials), a Singapore based business that provides testing in the construction sector, as well as chemical, environmental and mechanical testing and certification services. Founded in 2008, Admaterials is one of the leading construction testing businesses in Singapore, as well as providing chemical, environmental and mechanical testing to a range of customers in the private and government sectors. The business has annual revenues in the region of £3.5m, a team of more than 70 specialists and will form part of our Oil & Gas and Industrials cluster.

External net debt (excluding debt issue costs)

Net debt has increased from £144.1m at 31 December 2014 to £153.0m at 31 December 2015 mainly as a result of the acquisitions made in the year.

At 31 December 2015, our term loans comprised £169.7m of non-amortising borrowings denominated in sterling, euro, Canadian dollars, US dollars and Swedish krona. The amounts drawn down on the revolving credit facility are denominated in sterling. In addition, a £78.0m revolving credit facility was undrawn at 31 December 2015. There are no repayments scheduled on our term loans until 2019.

The net debt to last twelve months Adjusted EBITDA ratio was 2.6x as at 31 December 2015 (2014: 2.5x). Based on the definition in the bank covenant, net debt to Adjusted EBITDA ratio is 2.4x (2014: 2.4x).

Presentation of results

Constant currency growth figures are provided in order to remove the impact of currency translation. We calculate growth at constant rates by translating the current and prior period revenue at the same exchange rates.

Organic growth at constant currency represents revenue growth at constant currency excluding the growth attributable to acquisitions until the acquisition has been owned for a 12 month period and excluding the revenue attributable to disposals in the year of disposal and the preceding year.

Adjusted results are stated before separately disclosed items, 2014 management fee to private equity investor, interest and taxation.

The Group presents, as separately disclosed items on the face of the income statement, those items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the period to facilitate a comparison with prior periods and a better assessment of trends in financial performance.

Foreign exchange

Exchange rates for the most significant currencies used by the Group during the year were:

OPERATING PERFORMANCE

Revenue

Adjusted EBITA

Regional Performance

Europe

Aerospace

Following a flat 2014, the European aerospace sector returned to good organic growth in 2015. Growth was driven by strong performances with the supply chains of OEMs supporting increased build rates. There has been a shift in mix for the sector towards production release testing. New material developments have helped to maintain research and development volumes despite no completely new airframe platforms being developed in Europe.

In the UK, continued investment in the latest technology enabled the sector to continue to support the development programmes of the European aerospace OEMs, work that looks set to grow further in 2016. The benefits of strong cost control and service delivery contributed to a strong performance from our Non Destructive Testing (NDT) business.

Oil & Gas and Industrials

The impact of low oil prices led to contraction and price pressure in the oil & gas testing market. Despite a relatively strong start to the year as a result of the completion of some 2014 projects, we experienced lower levels of new approved projects later in the year.

During the year cost action was taken to mitigate volume and price pressures in line with the market and we will continue to monitor our cost base closely. Additionally, and as part of the focus on diversification, we won a number of contracts with non-oil & gas customers. In our Industrials sector, the Swedish polymers business experienced a strong order book, driven by a particularly good year for chlorine testing.

Product and Certification

Fire, Building Products and Certification had another successful year across all European locations. Regulations and standards helped support the positive testing and certification pipeline. The acquisition of BM TRADA increased fire testing capacity as well as extending the overall scope of building products testing and certification. It also saw Exova enter into Management Systems and Chain of Custody certification for the first time.

Our calibration business continued to perform very well. We completed four small acquisitions - Eisenhuth, QA Viking, a calibration laboratory in Kista, Stockholm and the outsourcing of the in-house calibration operation of Sartorius-Werkzeuge, which together added around £1m of revenue on an annualised basis. As a result we have been able to extend our service range, consolidate our market position in Sweden and improve our foothold in the German market.

Health Sciences

Last year's strong organic growth continued in 2015 with further major contract wins in the food business. This was through a continued focus on food safety and integrity by both retail and manufacturing clients as well as the commissioning of new manufacturing operations and associated testing by a number of our larger clients. Our water testing business in the UK continued to perform well and, as a result, additional capacity was introduced through the opening of a new laboratory in the south of England in December. There was also continued growth in our pharmaceutical business as a result of new contract wins.

Our environmental testing business continued to flourish with the Catalyst stack emissions testing operation delivering strong double-digit growth. As part of the region's strategy to expand and develop its capability in environmental testing, this was further enhanced through the acquisition in February of Environmental Evaluation Limited (EEL). The stack emissions operations of EEL were integrated into the Catalyst business, providing increased capacity for growth across the UK. EEL's asbestos surveying operation complemented our existing business in Scotland, creating a UK-wide network for this capability.

Americas

Aerospace

Our Aerospace business continued to focus primarily on the commercial aviation market, in addition to the defence and space industries. We saw strong performance in 2015, driven by growth and expansion in our laboratories in southern California and Mexico. We continued to make investments in upgrading our capabilities and capacity, and expanded our scope of accreditations in many locations to better serve the needs of our customers. We are now well positioned to capitalise on our investments in high-growth areas such as fatigue testing and ceramic matrix composite (CMC) testing, while continuing to support testing innovations in new technically demanding service areas like additive manufacturing. With a substantial backlog in airframe orders, we expect continued growth in our Aerospace testing business.

Oil & Gas and Industrials

With the significant reduction in the oil price, the Gulf of Mexico oil and gas market experienced a slowdown in new project work. Additionally, the primary and secondary steel sectors have been significantly impacted by price pressures and cheaper imports affecting the regional markets, leading to an overall contraction in the cluster. This was somewhat mitigated by better performance in the general industrials market, both in the US and Canada. In October we opened a new laboratory in Pittsburgh, Pennsylvania our first facility in the north east of the USA, specialising in materials and corrosion testing, supplemented by failure analysis and risk assessment advisory services.

A combination of large projects, spill events, more regulatory work and growth with certain oil and gas clients helped our Western Canada business perform well in a difficult market.

Product and Certification

Revenue from our Transportation sector increased in 2015 due to the continued strength of the US Automotive market. With an increase in vehicle launches, both the Warren and Troy laboratories in Michigan experienced growth. In Warren, growth was driven by automotive interiors testing, with major programmes completed for several Tier One Automotive customers. In addition, a major project for durability of automotive axles in Warren contributed to a strong finish to 2015. The Troy laboratory benefited from several major structural durability projects for US Automotive OEMs and Tier One suppliers.

Revenue from our engine-testing programmes increased significantly due to high volumes of on-site testing work and a two-year programme extension for another test site was won.

Health Sciences

Health Sciences contracted due to a weak performance in the environment business that was impacted by severe weather conditions in the first half, which resulted in a very late start to the season and a very competitive market environment.

Several long-term agreements and continued strong demand for specialised testing and development capabilities contributed to growth in the Canadian and US pharmaceutical businesses, reaping benefits from capital investments made to support these activities. Investment in IT systems continues to help us provide an improved customer service experience. Our food laboratory in Portland, Oregon had a solid year with the addition of a new key account, broadening the client base in a tight market.

Rest of World

Middle East

The market continued to grow strongly in the Middle East, driven by continued major infrastructure spending in Saudi Arabia, Qatar and Oman. Good revenues flowed from two Metro projects and infrastructure programmes such as the 2022 World Cup in Qatar.

UAE/Oman: Government-funded projects in Oman delivered increased demand for materials testing services and we also saw significant growth in chemistry services in the UAE and Oman, generated by a large water storage project and mineral characterisation work respectively. While materials testing in Dubai grew, there was a lower level of environmental-related project work, leading to an overall contraction. The Abu Dhabi market remained relatively flat.

Saudi Arabia/Qatar: Revenues from materials testing on civil engineering projects in Saudi Arabia and Qatar increased significantly year on year due to the award of new infrastructure projects, such as the Metro projects in Riyadh and Doha, on which we expect to have significant participation in the years ahead.

Oil & Gas and Industrials

We were able to grow our overall sales in the region through the provision of our innovative, high-specification "laboratory in a box" for Subsea 7 in support of its project work in offshore Angola. Through increased investment in coatings testing, we have ensured Exova Singapore is a 'one-stop-shop' for coatings tests related to the oil & gas and marine coatings market.

Our Indian business, acquired in 2014, has been successfully integrated into the region and recently completed the development of a new state-of-the-art laboratory that will allow us to perform better sour service-related corrosion testing. We experienced headwinds in the oil & gas market and while these were less severe than in other regions, we took the necessary cost actions in the second half to mitigate their impact.

Product and Certification

In the Middle East, in our Fire business we saw a general reduction in the overall number of large projects being tendered. Australia Fire Consulting successfully extended its scope by adding fire façade testing to its portfolio.

Outlook

The Board currently expects to deliver modest organic growth at constant currency in 2016. This demonstrates the strength of our portfolio and model. With deals completed in 2015 and a strong pipeline going into 2016, we expect our M&A programme to continue to contribute significantly to overall growth. As a result of management actions taken in 2015 and the continued focus on our cost base, we expect 2016 group margins to be broadly similar to the prior year.

Our medium term revenue expectation remains mid-single digit organic growth and additional continued expansion through acquisitions with gradual margin improvement.

GROUP INCOME STATEMENT

For the year ended 31 December 2015

* Earnings per share on adjusted results are disclosed in Note 5.

GROUP STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2015

GROUP BALANCE SHEET

As at 31 December 2015

GROUP STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2015

GROUP STATEMENT OF CASH FLOWS

For the year ended 31 December 2015

NOTES TO THE FULL YEAR RESULTS ANNOUNCEMENT

For the year ended 31 December 2015

1. BASIS OF PREPARATION AND CHANGES TO THE GROUP'S ACCOUNTING POLICIES

The audited results for the year ended 31 December 2015 ("2015") have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006.

The financial information set out in the audited results does not constitute the Group's statutory financial statements for the year ended 31 December 2015 within the meaning of Section 434 of the Companies Act 2006 and has been extracted from the full financial statements for the year ended 31 December 2015.

Statutory financial statements for the year ended 31 December 2014, which received an unqualified audit report, have been delivered to the Registrar of Companies. The reports of the auditors on the financial statements for the year ended 31 December 2014 and for the year ended 31 December 2015 were unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006. The financial statements for the year ended 31 December 2015 will be delivered to the Registrar of Companies and made available to all shareholders in due course.

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:

- power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);

- exposure, or rights, to variable returns from its involvement with the investee; and

- the ability to use its power over the investee to affect its returns.

Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

- the contractual arrangement with the other vote holders of the investee;

- rights arising from other contractual arrangements; and

- the Group's voting rights and potential voting rights.

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

Restatement

During the year, the provisional fair values attributable to the 2014 acquisitions of Raufoss Offshore Limited and Metallurgical Services Private Limited were finalised. In the balance sheet the effect has been to increase goodwill by £0.6m and to reduce intangible assets and deferred tax liabilities by £0.9m and £0.3m respectively. Note 8 "Business combinations" provides further details.

New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2014, except for the adoption of a new accounting policy on joint ventures as noted below.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but not yet effective. There are no standards or interpretations effective for the first time in the financial period with a significant impact on the Group's consolidated results or financial position.

As a result of the acquisition of BM TRADA Group Limited, and the joint venture companies within that group, the Group has adopted the following accounting policy during the year:

Joint ventures

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group's investments in joint ventures are accounted for using the equity method.

Under the equity method, the investment in a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group's share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying amount of the investment and is not tested for impairment individually. The income statement reflects the Group's share of the results of operations of the joint venture. Any change in other comprehensive income of those investees is presented as part of the Group's other comprehensive income. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The aggregate of the Group's share of profit or loss of a joint venture is shown on the face of the income statement.

2. SEGMENTAL REPORTING

3. SEPARATELY DISCLOSED ITEMS 

The Group presents, as separately disclosed items on the face of the Group income statement, those items of income and expense which, because of their nature, merit separate presentation to allow users to understand better the elements of financial performance in the year to facilitate a comparison with prior years and a better assessment of trends in financial performance.

Included in the income tax credit is £2.0m (2014: £2.3m) related to the amortisation of the deferred tax liability in respect of customer relationships. The remaining income tax credit of £1.8m (2014: £1.5m) relates to restructuring, amortisation and integration costs.

4. NET FINANCE COSTS

5. EARNINGS PER SHARE

The Board is recommending a final dividend of 2.2p per share (2014: 2.0p per share). The dividend will be paid on 10 June 2016 to shareholders on the register at the close of business on 27 May 2016.

7. PROPERTY, PLANT AND EQUIPMENT

Acquisitions and disposals

During the year ended 31 December 2015, the Group capitalised assets with a cost of £17.5m including £1.8m from business combinations (note 8) (2014: £17.5m including £1.0m from business combinations).

Assets with a carrying value of £0.1m were disposed of during the year ended 31 December 2015 (2014: £0.9m).

The negative impact of foreign exchange on the total carrying amount of property, plant and equipment in the year ended 31 December 2015 was £1.0m (2014: £0.2m negative impact).

The net book value of property, plant and equipment was as follows:

Property, plant and equipment include £0.4m (2014: £0.5m) of assets held under finance leases.

Capital commitmentsAt 31 December 2015 the Group had commitments to purchase property, plant and equipment for £3.4m (2014: £2.2m).

8. BUSINESS COMBINATIONS

Restatement (note 1)

In the 2014 financial statements, the fair value of the acquisitions of Raufoss Offshore and Metallurgical Services Private Limited were provisional due to the timing of the transactions. The fair values have now been finalised resulting in adjustments to the provisional fair values attributed. The following table summarises the adjustments made to the provisional values during the year.

The fair values are set out in the following table:

Acquisitions in 2014

The aggregated fair values arising from the 2014 acquisitions are set out in the following table:

9. BANK AND OTHER BORROWINGS