Final Results

4 March 2014

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, is pleased to announce its unaudited final results for the year ended 31 December 2013.

Group Financial Summary

* excluding amortisation of acquired intangible assets

** cash and cash equivalents, less borrowings

Operational Summary and Divisional Financial Performance

· Expansion of distribution channels and steady economic recovery in the US and Canada drives 38% growth in Americas Stormwater revenues.

· Americas Wastewater revenues improve by 16% with strong order intake and the delivery of major projects.

· International business delivers first major orders in Saudi Arabia and plans expansion into China.

· Major contracts for Thames Water approach their conclusion resulting in reduced revenues and profits in the Europe Wastewater division, compounded by a sharp fall in new projects being placed by the UK water companies.

* Segment profit excludes central Group costs

Roger Lockwood, Chairman of Hydro International plc, commented:

"The 2013 year-end results, although largely in line with the Group's expectations, are nonetheless disappointing and illustrative of the need, recognised early in the year, for Hydro to take a different approach. Accordingly, we were delighted to welcome Michael Jennings as Chief Executive in July and, under his leadership, we have refined our business strategy to focus on developing more sustainable growth platforms."

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

"Most parts of our business are experiencing growth and we expect this to continue. Maintaining this momentum while we invest in building multiple, further sources of growth will ensure we have a suitably diversified, balanced business model. Broadening our scope into services to complement our core product offering, moving into new industrial application areas, and establishing a market presence in emerging regions are all growth platforms in which Hydro is focusing investment. I expect the year ahead to be one where we progress the shaping and re-balancing of our business. There is no shortage of opportunity for Hydro, and much good work is already underway."

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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, Malaysia, Singapore, Korea, Australia and New Zealand.

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

Chairman's Statement

I am pleased to present the Group's results for 2013, a year which as expected has proved to be both difficult in terms of financial performance, but equally encouraging as we start to make progress in the re-shaping of the business under new executive leadership.

Over the last three years we have been very proud to undertake and successfully deliver three major long-term contracts with a combined value of £23.5m for Thames Water through our Europe Wastewater division. Whilst all other divisions delivered improved profits, most notably in the Americas and International divisions where we continue to focus on enhancing the quality and coverage of sales distribution channels, the substantial conclusion of the Thames Water projects during 2013 has, as anticipated, presented the Group with the challenge of addressing a £5.0m reduction in revenues during the year. This has been compounded by a sharp drop in projects being placed by the UK water companies as they approach the latter stages of their five-year asset management programme.

The combination of reduced business levels in the Europe Wastewater division and growth elsewhere is reflected in Group revenues for the year which reduced by 7.2% to £32.2m (2012: £34.7m) and Group operating profit which reduced by £0.9m to £1.4m (2012: £2.3m). Headline earnings per share was 5.30 pence (2012: 11.86 pence) reflecting the reduced operational profitability and a significantly increased effective tax rate of 45.6% (2012: 24.7%) caused by the bias in results to the US and taxable losses in the UK.

The progress made across the Group's Americas and International divisions was also reflected in an 11.6% increase in overall Group order intake, helping offset the impact on the closing order book of a £5.0m reduction resulting from the completion of the Thames Water contracts. The closing order book at 31 December 2013 was £10.3m (2012: £11.6m).

Following Michael Jennings' appointment as Chief Executive, the Board has undertaken a detailed review of our strategy and the operational structures of the business. As the results for the current period demonstrate, the business is currently exposed to the cyclical environment within certain sectors of our industry. Therefore, in addition to looking to build on our platform of market-leading products, we will also look to capitalise on opportunities to develop more sustainable and secure sources of revenue, including the development and expansion of service operations and the broadening of applications for our existing wastewater products into less cyclical industrial markets. Territorial expansion is now being led from three broad regional bases. The US-based businesses are now taking the lead on the development of markets in Central and South America, with a first order for grit removal equipment secured in Brazil during the year. Our UK-based operations have assumed responsibility for supporting existing partners and identifying new opportunities across Europe, and wider International development is focused on targeted key markets in Russia, the Middle East and Asia Pacific, including China where a significant expansion of operations is planned in 2014.

The Group's cash position, which can be materially affected by the timing of cash flows associated with larger contracts, strengthened during the year, with net cash of £3.4m at the end of 2013 compared to £2.9m at the end of 2012.

Dividend

The Board's general policy has been to increase dividends progressively with growth in profits. Whilst acknowledging the financial performance during the year, the Board has confidence in the Group's financial position and future prospects. Accordingly the Board is pleased to recommend an unchanged final dividend of 3.6 pence per share. The dividend is subject to approval by shareholders and will be paid on 9 June 2014 to shareholders on the register on 16 May 2014.

Outlook

Over the coming year we will be positioning the Group to operate on a broader and more sustainable basis. This process will require investments in systems and business processes to facilitate growth, and high quality people to deliver our strategy on the ground. We also anticipate that the difficulties we have experienced in the European Wastewater business during 2013 will continue into 2014 and impact the first half-year in particular. Looking beyond the coming year, however, we see considerable opportunities for the business to capitalise on our investment and return to improved profitability.

Roger Lockwood

Chairman

3 March 2014

Chief Executive's Review

Since joining in July 2013, I have been impressed with the breadth and depth of knowledge across the Hydro Group. This expertise has been applied to the global challenges of water management, and has resulted in Hydro being a recognised industry leader, developing best-in-class solutions, with a strong track record as an innovator in its markets.

These markets have good long-term growth drivers, including: environmental legislation governing water quality and/or quantity; climate change and the increasing risk of urban flooding; population growth and greater urbanisation; the need to replace obsolete and/or ageing infrastructure; and new construction (housing, commercial/industrial premises).

With such strong fundamentals the priority now for Hydro is to re-shape and broaden the business in order to deliver sustained performance and growth. This re-shaping involves fostering and developing multiple revenue sources, of which I am initially focusing on the provision of services, the identification of complementary applications, and wider geographical expansion.

Broaden Services

Hydro aims to offer a customer-driven service that is both reliable and responsive. We will increasingly provide support throughout the product life-cycle, beyond the supply of original equipment, to ensure we are always serving the customer's business needs.

Extend Applications

Traditionally, Hydro has operated in the municipal wastewater market as well as the residential/commercial stormwater market. I have identified the need to expand our addressable markets via product range extensions and by applying Hydro's engineering and design know-how to new end markets across a number of industrial sectors.

Expand Geographies

Our core markets have been the UK and North America. There are good opportunities to channel our experience from these markets into many others around the world. Hydro has had a degree of success to date, internationally, and I hope to build on this, particularly in emerging regions which present higher relative growth rates. As an example, Hydro has recently taken steps to enter the Chinese market.

In order to help the implementation of our strategy we have established a global leadership team at the operational level. This comprises Steve Hides as President of the Americas, Martin Foyle as Managing Director of Europe (including the UK and Ireland), Clive Evans as International Business Director (focusing on Russia, the Middle East, Africa and APAC), Tony Hollox as Chief Financial Officer, Bob Andoh as Chief Technology Officer and Roger Crook who joined Hydro in December 2013 as Group Commercial Director.

Our immediate focus is centred on making the necessary investments in processes and personnel to drive the business development plan. Hydro remains financially strong and well-placed to capitalise on opportunities that arise to accelerate the implementation of this organic growth strategy through selective acquisitions.

Michael Jennings

Chief Executive

Operational Review

Group Overview

"The Group's Americas operations have made excellent progress during 2013, delivering substantial growth in their markets. However, the expected reduction in revenues derived from major wastewater contracts in the UK, coupled with a deterioration in the placement of new projects by the UK water companies, has pulled back the Group's overall performance in 2013."

As anticipated, 2013 has been a year of challenge and marked contrasts across the Group's operations. Strong growth from the Americas, supplemented by further progress by the International division, proved insufficient to counter the £5.0m reduction in revenues derived from the major contracts secured in 2010 and 2011 with Thames Water to supply Zickert Scraper technology to three large wastewater treatment plants in London. Further, as reported at the half-year, 2013 has seen a return to the uncertainty and poor project visibility experienced by the UK water company equipment supply chain in 2011, with projects being delayed or deferred. Consequently overall 2013 revenues reduced by 7.2% on 2012 levels at £32.2m, with adjusted operating profits down by £0.9m at £1.6m.

Our Americas divisions delivered a combined revenue growth of 21.7% to £16.3m (2012: £13.4m) and a 20.1% increase in operating profits to £3.6m (2012: £3.0m). This growth was driven by the delivery of major wastewater projects in Calgary, Canada and Dallas, Texas, and the ongoing success of the Stormwater division in expanding sales distribution channels across the United States and Canada. Both divisions are well placed for further growth through a combination of territorial expansion, including into Central and South America, and product range extension.

The development of effective sales channels has also been the primary focus for the European Stormwater division, building on the progress made with the major national and regional builders' merchants in the UK during 2012. Extension of the important flow control product range and further progress with the introduction of stormwater treatment products to the UK market, ahead of the introduction of National Standards for such products, generated a small improvement in profitability.

Internationally, the main focus has been on supporting the continued development of our major markets in the Middle East and Russia. Progress during 2013 included the Group's first projects in Saudi Arabia, which contributed to a £1.5m increase in revenues. International revenues accounted for 10.4% (2012: 5.4%) of Group revenues at £3.4m. In 2013 the International division also developed plans to enter the Chinese market, and business development resources were deployed into China in January 2014 as a first stage of a major programme of investment to promote selected stormwater and wastewater products.

Looking at 2014, we expect to face continued challenges in the Europe Wastewater division, particularly in the first half-year. Growth prospects are good in all other divisions and progress is being made across the Group to mitigate the impact of individual large projects by investing in projects aimed at building more sustainable sources of revenue. This investment, whilst critical to the medium-term improvement of the Group's results, will restrict our 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 sand and grit from flows of water entering a treatment process. Sand and grit can cause major problems with wear and tear on mechanical equipment downstream in the treatment process, build up in tanks and channels and impair the operation of sophisticated treatment processes such as membrane bioreactors.

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 (CSOs), 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. Further growth is planned through a combination of new product introduction, the broadening of services offered in support of installed equipment, and geographic expansion into Central and South America.

Segment performance

* - excluding amortisation of acquired intangible assets

The division saw strong growth in revenues, including the first half-year completion of the $4.0m contract for Bonnybrook WWTP, Calgary, Canada, secured in 2012, and substantial progress on the $3.6m Dallas contracts secured in early 2013.

In the face of cutbacks in US municipal budgets, demand for grit removal products continued to grow strongly during 2013, and new order intake increased by 43% on 2012 levels, reflecting the ongoing public investment needed to update ageing wastewater treatment plants and create new capacity in response to population changes. Municipal cutbacks have, however, impacted the availability of funding for Combined Sewer Overflow (CSO) projects and, as a consequence, we have redeployed our CSO resources to add to our capacity on the more buoyant grit removal sector.

The division continues to progress with initiatives aimed at driving future growth and has expanded the service team further during the year which, together with an increased investment in marketing to preserve and enhance our competitive position, has resulted in a small drop in operating profit margin to 26.0% (2012: 27.2%). International expansion received a boost during 2013 with the award of the division's first Headcell contract win outside North America in Sao Paulo, Brazil. This project is scheduled to go into service in 2014. Following the market launch of Grit Cup® with Spira Snail® in late 2012, we have received initial orders during 2013, which are expected to contribute to revenues in 2014.

Segment outlook

The closing order book at year-end is strong and the visibility of the future project pipeline remains encouraging. Opportunities to develop our fledgling services business continue to grow with the expansion of our installed base of 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 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. 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. During 2013 a long-term field testing programme in support of our latest application for approval of the Up-Flo Filter by the New Jersey Department of Environmental Protection (NJDEP) was completed. NJDEP is one of the two major approvals in the US, and is widely used as a reference by other state approving bodies across the Eastern side of the US.

Segment performance

During 2013 the division has continued the development and expansion of sales distribution arrangements in the US and Canada, building on the progress made in recent years. Our stronger market presence, supported by a steady recovery in the US residential and commercial construction sectors, has resulted in a substantial increase in stormwater revenues and orders, by 38% and 33% respectively, over 2012 levels. Improved sales distribution is progressively providing the division with the benefits of scale, reflected in the continued upward trend in operating profit margin.

Product development for the Americas Stormwater market has included a new stormwater separator designed to accommodate larger pipe sizes and higher stormwater bypass flows: the First Defense® High Capacity, which is due for market launch in early 2014.

Investment has also been made in the development of new design tools aimed at making it easy for customers to select and specify Hydro products. The division has also launched a stormwater pilot programme, providing the ability for new customers to trial our water treatment solutions. This initiative has attracted strong initial interest from the transportation and industrial sectors.

Segment outlook

North American market conditions continue to show steady improvement and further progress, supported by expanding sales distribution arrangements, is expected to continue into 2014. Hydro is working closely with its partners to provide technical and commercial support and a broadening range of market-led products and regulatory approvals.

In the longer term, we also expect to see increasing returns from developing markets in Central and South America, building on our progress to date in Mexico and Brazil.

Europe - Wastewater

The division offers a broad range of equipment and supporting 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 supply of products is supplemented by site services, including installation, spares, maintenance and major overhaul activities. The services and maintenance business is a key focus area, offering significant potential for growth.

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, started in April 2010. 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 has, however, seen 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.

Segment performance

As anticipated, divisional revenues and profits for the year reduced substantially against 2012 levels as the three major Zickert Scraper contracts awarded by Thames Water in 2010 and 2011 approached their conclusion. These contracts provided revenues during 2013 of £2.7m (2012: £7.7m) and only a small amount of work remains to be completed in early 2014. To compound the challenge presented by these concluding contracts, 2013 has seen a return to the uncertainty and poor project visibility experienced by the industry supply chain in 2011. Projects have increasingly been delayed or deferred, with some moving out as far as AMP6.

In response to the cyclical municipal market for equipment sales in the UK, we have focused on projects aimed at developing more sustainable revenues and maximising the value of our customer relationships. AMP6, which commences in 2015, is expected to encourage the UK water companies to maintain existing assets and reduce whole-life costs. This approach is expected to drive the need for more on-going service provision, and a major programme was started in 2013 to enhance our after-sales and site services team, and strengthen our offer to customers.

The division is also focusing on strategies to introduce Hydro's advanced grit management products, which form the base of our Americas business, to the UK market and to increase our presence in industrial process water markets.

Segment outlook

Whilst there are a number of significant projects expected to come forward during 2014, there remains a general lack of visibility on new prospects with the UK water companies. The combination of poor forward visibility and the known final reduction in revenues as the Thames contracts conclude is expected to impact short-term performance, particularly in the first half of 2014. The business is focused on making further progress with the 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.

In late 2011, the 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.

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

Segment performance

Following the difficult trading conditions reported in late 2012 and early 2013 we have seen a gradual improvement during the second half-year. Over this period the division made up the relative shortfall in profitability reported at the half-year, leaving the full-year results broadly in line with 2012 levels. This improvement is attributed to our success in improving and expanding sales distribution arrangements with major national and regional builders' merchants, the expansion of our range of flow controls, and a gradual stabilisation of market conditions in the UK construction sector.

Ahead of the expected introduction of National Standards for Sustainable Drainage Systems (SuDS), now expected in October 2014, the division formally launched the Group's range of stormwater treatment products in April 2013. This major initiative, supported by a toolbox of online resources, provides customers and consultant engineers with unrivalled resources to assist them in identifying the most appropriate solution to their needs and circumstances. The increasing acceptance of the need to manage stormwater quality was demonstrated by a more than 50% improvement in sales of stormwater treatment products during 2013.

Segment outlook

Trading conditions in construction product markets in the UK and Ireland are expected to remain broadly stable during 2014. The division will be looking to build on the initial improvements made during the latter part of 2013 to further enhance distribution relationships and grow our share of the key market for flow controls.

Whilst the division is expected to benefit from the formal introduction of National Standards for stormwater quality products, we are already seeing increasing opportunities for our treatment products and we expect to make further progress during 2014.

Geographic expansion into wider European markets is part of our strategy for medium to long-term growth.

International

The International 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 made good progress in the wider Middle East and Russia, which currently represent our major international markets.

During 2013 the division has taken steps to focus on specific markets and has undertaken a major project to assess the opportunity presented by China. Market-entry strategies have been assessed with the view of establishing a presence in China during 2014. Our commitment to successfully entering the Chinese market in 2014 will require a substantial investment programme to support the initial launch of selected stormwater and wastewater products for which strong potential has been identified.

Segment performance

The International division has focused efforts on developing and progressing opportunities in the Middle East, Russia and South East Asia. Whilst the speed at which many of these opportunities have progressed continues to frustrate, particularly in the Middle East, these markets continue to offer good growth prospects for Hydro over the medium to long term. The appointment, in late 2012, of a Dubai-based regional sales manager has substantially improved our visibility of, and contact with, projects in the Middle East region. This investment, whilst increasing the cost base of the division over the period, helped the business secure major orders in June 2013, valued at £2.4m, for the supply of stormwater storage and vortex flow control products to two high-profile projects in Saudi Arabia. These projects, our first within Saudi Arabia, were delivered in late 2013 and helped drive an increase in revenues to £3.4m (2012: £1.9m).

The prospects for our Wastewater products in the Middle East continue to build slowly and a number of small projects were undertaken in Qatar to supply both grit removal and "Drop Shaft" systems. Hydro Vortex Drop™ Shaft is our proprietary product to control the flow of water falling within a vertical pipe drainage system.

Following our early success in Russia during 2012, including the €2.0m contract to supply stormwater storage systems and Hydro's Downstream Defender® stormwater quality systems to the redevelopment project at St. Petersburg International Airport, we have seen a number of smaller contracts in that territory during 2013 and prospects continue to build for 2014.

The recessionary conditions reported in 2012 in our established markets such as South Korea, New Zealand and Australia, which had previously been relatively resilient to the impacts of the global economic downturn, continued into 2013.

Segment outlook

Whilst anticipating the timing of projects remains a challenge, 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, remains encouraging. Prospects are also strong in Russia and we expect to make further progress in that territory during the forthcoming year.

The benefit of anticipated improved trading in the Middle East and Russia, however, is likely to be offset by the cost of our investment in China which is not forecast to generate returns until 2015. As such, divisional profitability in 2014, and in the first half in particular, is expected to be effected ahead of medium-term growth.

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 5.7% to £11.2m (2012: £10.6m) driven largely by higher staff costs, including increased profit-related bonus costs for employees in the Group's US-based divisions, and incremental costs associated with the recruitment and remuneration of the Chief Executive. This latter element is reflected within central Group costs, which form part of administrative expenses, and which increased from £2.7m in 2012 to £2.8m in 2013. Central Group costs are shown in the segmental analysis of results in note 3.

Amortisation of acquired intangible assets

£0.17m (2012: £0.20m) 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 £0.02m (2012: £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. The comparative figure for 2012 also includes costs associated with the unwinding of discount associated with the payment of deferred consideration to the former shareholders of Eutek following its acquisition in 2008. Payments of deferred consideration ceased after the final payment was made in respect of the period to May 2013. An analysis of the net finance cost is presented in note 4.

Taxation

The effective tax rate on profits was 45.6% (2012: 24.7%) 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 23.25% (2012: 24.5%) 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 significant increase in effective tax rate during 2013 reflects the reduction in profitability of the combined UK-based operations which resulted in taxable losses for the period. The combination of taxable profits in the US at a higher rate and losses in the UK 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 above the UK statutory rate.

Earnings per share

Our adjusted earnings per share, the calculation of which is shown in note 6, decreased by 53% to 6.01 pence per share (2012: 12.71 pence per share). Earnings per share, which includes the impact of amortisation of acquired intangibles, decreased by 55% to 5.30 pence per share (2012: 11.86 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 2013, net cash (cash and cash equivalents, less borrowing) totalled £3.4m, compared to £2.9m at 31 December 2012 and £2.9m at 30 June 2013.

Cash generated from operations was an inflow of £3.0m in the year (2012: outflow of £1.0m). This includes a working capital inflow of £0.9m (2012: outflow of £3.9m). The working capital changes in the year reflect the cash received against a heavy weighting of larger wastewater contracts projects in progress at the end of 2012 for which payment was received in 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 shorter turnaround Stormwater sales.

Corporation tax payments were £1.2m (2012: £0.3m). This figure reflects higher corporation tax payments made by the Group's US operations, including payments 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 in that year.

Capital payments on two loans taken out to finance the 2008 acquisition of Eutek consumed £0.5m (2012: £0.9m) of cash reserves during the year. One of these loans, a term loan originally taken out for $4.0m, was completed in May 2013. Additionally a further £0.3m (2012: £0.2m), including the final payment in respect of the period to May 2013, was paid in deferred consideration to the former shareholders of Eutek.

Foreign exchange losses of £nil (2012: £0.1m) were incurred in 2013 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 the 2012 Annual Report.

Borrowing facilities

Our borrowing facilities comprise:

· $1.4m 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 May 2014.

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 2013 the Group maintained £4.2m (2012: £4.3m) 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

3 March 2014 3 March 2014

Group Income Statement unaudited

Year ended 31 December 2013

Consolidated Statement of Comprehensive Income unaudited

Year ended 31 December 2013

Consolidated Balance Sheet unaudited

31 December 2013

Consolidated Statement of Changes in Equity unaudited

Year ended 31 December 2013

Consolidated Cash Flow Statementunaudited

Year ended 31 December 2013

*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 2013

Notes to the preliminary announcementunaudited

Year ended 31 December 2013

1. Basis of preparation and status of information

The preliminary announcement was approved by the Board of Directors on 3 March 2014. 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 2013, 2012 or 2011, and does not contain sufficient information to comply with IFRSs.

The financial information for the years ended 31 December 2012 and 31 December 2011 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 2013 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 2013 will be dispatched to shareholders, and made available on the Group's website at www.hydro-int.com, on 22 April 2014 ahead of the AGM date of 22 May 2014. 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 22 April 2014. 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 £518,000. The dividend is subject to approval by the shareholders and will be paid on 9 June 2014 to shareholders on the register on 16 May 2014.

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

International: 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, a total of £4.1m (2012: £10.3m), representing 13% (2012: 30%) 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 23.25% (2012: 24.5%). 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 £882,000 (2012: £1,422,000); 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 losses in HRD Technologies Limited based on future profits now forecast, utilisation of state losses in Eutek Systems, Inc., set off to a degree by increased losses in Hydro International plc.

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.