Final Results

06 March 2012

Embargoed until 07:00

Hydro International plc

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

Unaudited Final Results

Strong progress, solid financial performance

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 2011.

Financial Highlights

* excluding amortisation of acquired intangible assets

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

*** cash and cash equivalents, less borrowings

Operational Highlights

·; UK Wastewater success in delivering major contracts for Thames Water.

·; US Wastewater secured the Group's largest Hydro-Sludge™ Screen order to date, with a prestigious $1.7m contract for a major treatment plant in Washington DC.

·; Improvement in sales channels drive 12% growth in US Stormwater revenues.

·; International expansion plans accelerated with the appointment of an International Business Director and new distribution arrangements in Japan.

·; Strategic expansion planned into new markets for Hydro technology across the water sector; including municipal drinking water and industrial water applications.

·; Hydro Consultancy business launched to meet demand for flood risk advice and support stormwater sales in the UK.

Steve Hides, CEO of Hydro International plc, commented:

"Hydro has made strong progress and the Group as a whole delivered a solid financial performance, with revenue and profits in 2011 increased in line with expectations. This result has been achieved by adhering to a proven business model and a focus on managing our business to maximise the potential in core areas. We have also developed the Group's strategy, which is now being implemented to create a robust platform for future growth across the broader water sector, both in our core markets of the UK and US, but also increasingly internationally."

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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 of its core US and UK markets in Ireland, Egypt, Middle East, Mexico, European Union, Malaysia, Singapore, Japan, Korea, Australia and New Zealand.

Please visit the website for further information www.hydro-international.biz.

Chairman's Statement

I am delighted to report excellent progress in developing the Group's growth strategy, which has helped us deliver a solid financial performance against the backdrop of challenging market conditions. During 2011 Hydro has focused on improving sales channels and implementing important product and operational improvements that are starting to deliver significant benefits to our business.

Results

Despite on-going economic uncertainty, and a lack of substantive recovery in construction markets, progress in wastewater markets during 2011 has seen the Group increase revenues by 10% to £31.1m (2010: £28.2m), ahead of the 2008 pre-recessionary levels of trading for the first time. Adjusted operating profits (which exclude amortisation of acquired intangible assets) increased by 9% to £2.9m (2010: £2.7m) and adjusted earnings per share also rose by 11% to 12.86 pence (2010: 11.54 pence).

During 2011 the Group has made excellent progress in fulfilling the exceptional long-term contracts for Thames Water received in 2010 and early 2011, mitigating the impact of protracted delays in projects being released by the UK water companies under the current Asset Management Programme (AMP5). The closing order book at 31 December 2011 was £18.8m; this was reduced from the unusually high level of £23.7m at 31 December 2010, as expected, but still represents a strong order pipeline in comparison to previous years. Net cash at the year-end increased to £5.4m (2010: £4.1m).

Dividend

In-line with our policy to increase dividends progressively, and in recognition of our financial performance during the year, the Board is recommending a final dividend of 3.6 pence per share, an increase of 9%. Dividend cover (calculated using adjusted earnings per share) is 3.57 times (2010: 3.50 times).

Focus on enhancing sales channels

A key priority during 2011 was the improvement of the quality, efficiency and reach of our sales channels and we are pleased to report that significant steps forward have been made across the Group, particularly in the US and International divisions.

The US Wastewater division has progressively developed and enhanced its exceptional network of independent manufacturers' representatives; these are the key sales channel for this division. The business has worked closely with its representatives to identify additional products to offer the market, building on the success of the Group's grit removal portfolio. In late 2010 the team launched the Hydro-Sludge™ Screen, a Hydro product that has been successfully promoted in the UK for many years, and in December 2011 the division secured a prestigious $1.7m order to supply sludge screens to a major wastewater treatment plant in Washington DC.

US Stormwater has forged new 'master' distribution relationships with two major partners, Advanced Drainage Systems (ADS), and ACF Environmental, in selected states. These distributors give Hydro access to the market reach of much larger organisations, with substantial sales-forces. Further expansion of these arrangements is planned in 2012, and ultimately there will be scope to extend operations to full US national coverage.

In June 2011 the Group appointed an International Business Director with a clear remit to develop and implement a strategy for expansion of the Group's existing overseas distribution network. The division has made progress, entering into a new distribution agreement in Japan for the Group's stormwater products, and is in the process of developing relationships with local partners in a wide range of territories including Brazil, Russia, Romania and Turkey.

Commitment to development

Hydro's success over many years has been founded on our ability to bring new approaches and innovative technologies to market. Investment in advanced computational modelling techniques has continued across the Group to great effect, reducing the cost and time to evaluate product improvements and bring new developments to market. We are committed to a process of continuous improvement, further enhancing our products and processes to offer new and improved solutions to our customers. Our level of investment in research and development remained consistent at 1.9% of revenue (2010: 1.8%).

People

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

Over the last two years Hydro has strengthened the management team, and new talent has been brought into a number of front line sales and marketing functions, including the 2011 appointments of an International Business Director, a Business Development Manager in the US Stormwater division, and a National Sales Manager in the UK Wastewater business. The impact of these and previous appointments has been substantial in strengthening the commercial foundations for future growth.

Our core values are Innovation, Integrity, Teamwork, Sustainability and Accountability. We encourage our employees to act in such a way as to embody our values in their dealings with colleagues, customers, suppliers and business partners. We are proud of their upholding of these values, and the significant progress made by the Group over the last year is a testament to the hard work and commitment of the entire Hydro team, and I would like to offer my sincere thanks on behalf of the Board.

Corporate governance

The Group is committed to the principles set out in the UK Corporate Governance Code, to the extent that they are relevant to a business of our scale, and the disclosures to be set out in the 2011 Annual Report will be the first to be set out in accordance with that guidance. During the year the Board undertook a detailed assessment of its performance, with no major changes considered necessary as a result.

In December 2011 the Board approved the appointment of the senior independent non-executive director, Michael Stevens, as Chairman of the Remuneration Committee.

Outlook

Despite the many economic uncertainties in global markets, the Group has made solid progress during 2011 and made important improvements to the business across the board. We are pleased with the momentum we carry into 2012, and are looking forward to making further progress in the year ahead.

Roger Lockwood

Chairman

5 March 2012

Group Overview and Growth Strategy

Business model

Hydro aims to deliver value to shareholders by operating in specialised global water markets where technology and application know-how provide the opportunity to generate growth and sustain high returns through strong competitive advantage. Markets typically have high barriers to entry and demand supported by long-term resilient growth drivers.

Hydro focuses its resources on the development and commercial realisation of its products and services. All product fabrication is outsourced to a network of regional supply-chain partners, minimising the cost of transportation to customers as well as minimising the level of capital investment and fixed overhead associated with product manufacture.

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

Strategy

The Group's strategy is to deliver sustained organic growth from the solid platform created by our core business operations, supplemented by expansion into buoyant international markets, and emerging opportunities for Hydro's products in new areas of the water sector.

Over the last three years there has been a shift in the balance of the Group's revenue and profits generated from operations, with the greater proportion now derived from the wastewater sectors. This shift has been driven by a combination of acquisition, and the success in securing increasingly large-scale contracts, including the recent contract wins with Thames Water in the UK. This has coincided with the downturn in the global economy, slowing construction markets, and adversely impacting our Stormwater operations. The core of our business strategy therefore is focused on maintaining and building upon the growing strength of the Group's Wastewater business, and returning our Stormwater businesses to sustained growth.

Our business is well placed to benefit from the growing global recognition of the importance and value of water. Clean water is essential to life, and growth in urban population centres places demands on the entire hydrological cycle from water supply to waste disposal. In 2012 we will continue a project started during 2011 to look across the broader water sector for new sources of growth. This process has already identified emerging opportunities to apply our products and services to new areas of the water sector, including the agricultural, industrial and drinking water sectors.

Where appropriate we consider the scope for the acquisition of complementary businesses or technologies to support the implementation of our strategy.

In addition, improving the efficiency of the Group's operations remains a key focus. During 2012 we will be undertaking a full review of operational and financial systems and structures with a view to delivering real improvements in customer-facing processes and streamlined supporting functions.

Key focus areas

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

§ International expansion.

§ Product innovation and development.

§ Targeted acquisitions.

§ Improvements to sales and distribution channels.

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

Growth drivers

In general terms, demand in Hydro's markets is supported by the increasing global awareness of water and its value. More specifically individual markets may be impacted by one or more of the following long-term growth drivers:

§ Environmental legislation governing water quality.

§ Climate change and the increasing risk of urban flooding.

§ Population growth and greater urbanisation.

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

§ The need to reduce operation and maintenance costs.

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

Key markets

Hydro's key markets are:

§ The municipal, regulated and industrial water and wastewater industries in the UK and US.

§ The supply of products to manage stormwater to residential and commercial developers, municipalities and transportation departments in the UK and US.

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

Operational Review

Group Overview

Hydro has made excellent progress and the Group as a whole delivered a solid performance, with revenue and adjusted operating profits in 2011 increased in line with our medium-term organic growth target of 10% per annum.

Our Wastewater divisions performed particularly well with sector revenues growing by 15% to £21.6m (2010: £18.8m), and adjusted operating profits rising 13% to £4.7m (2010: £4.2m) over the period. A number of significant wastewater contracts were secured over the last 12 months, helping to mitigate the impact of delays in the UK where order intake was affected by extended delays running into the second year of the AMP5 programme. This situation now appears to be improving with contract flow gaining pace in early 2012. Political unrest in the Middle East, and Egypt in particular, took its toll on our International Wastewater activities which have generated important revenue and profits over recent years. With a gradual return to stability in the region, we expect to make further progress with sales of our grit removal systems in the future. The focus for our Wastewater operations will be to sustain and build on the recent success.

Trading in Hydro's Stormwater operations, which are exposed to the continuing challenges confronting global economies and depressed construction activity, was maintained at £9.4m (2010: £9.4m). Operating profits, however, reduced to £1.0m (2010: £1.4m) due to a combination of product mix, increased competition, and the cost of building distribution channels and gaining regulatory approvals in the US. We have implemented a number of important new initiatives, including the overhaul of our US sales channels and the launch of a consultancy arm to support the UK business; we expect these to have a positive effect in the medium-term.

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

Sector Reviews

UK and Ireland Wastewater

The division offers a broad range of equipment, with supporting services, for the primary, secondary and tertiary treatment of wastewater, largely in municipal applications in the UK and Ireland.

In addition to offering proprietary Hydro products, the division is a major distributor of high quality third party wastewater treatment products. Revenues from such distributed products currently represent the greater share of total divisional sales, and a key focus for the business is to build the proportion of revenues derived from proprietary Hydro products. We also continue to look to expand the portfolio of products we can offer to match the needs of our customers.

The supply of products is supplemented by site services, including installation and maintenance activities. Service and maintenance business offers significant potential for growth, and further investment in expanding our activities is planned in 2012.

The infrastructure spending of the UK water companies is governed by five-year regulatory cycles. The most recent of these Asset Management Programmes, which are the primary driver of demand for the business, started in April 2010, and is the fifth such cycle (AMP5). 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 closely followed this pattern in the first year (2010/11), but the relatively low level of investment continued for a further six months into the second year, before gaining momentum in the last quarter of 2011.

Sector performance

Over the last two years, Hydro has been successful in securing three major contracts to supply Thames Water with Zickert sludge scraping technology at their principal wastewater treatment sites in London. The division secured the third of these contracts, at the Crossness site in February 2011, for the value of £3.2m; this builds on the contracts at Beckton and Mogden secured in 2010 valued at £19.6m. The three Zickert contracts for Thames Water, the longest of which is at Beckton and spans a four-year period to early 2014, have collectively generated revenues during 2011 of £8.4m (2010: £4.3m). These contracts have driven our growth during 2011, and mitigated the low level of general AMP-driven activity in the year.

The division has carefully managed the delivery of contracts, and closely controlled overhead costs, to increase operating profits to £1.4m (2010: £0.6m).

Sector outlook

The sector has seen an increase in competitive pressure over the last two years as market participants compete for the low levels of business coming out to tender. It remains to be seen whether the impact of this pressure on contract margins eases as the flow of contracts increases. However, the outlook for 2012 is positive, with further revenues derived from the on-going Thames contracts supplemented by an anticipated rebound in more general AMP5-driven contracts. This view is supported by the high level of project enquiries seen over the last twelve months in particular, and the division is well placed to grow during 2012.

US Wastewater

The division specialises in the application of vortex separation technologies to address the problem of grit removal from incoming flows to municipal wastewater treatment works. Hydro's proprietary grit removal products offer a market-leading ability to remove fine grit which would otherwise impact on the efficiency of downstream treatment processes. The business also offers products for removing suspended solids and pollutants from combined sewer overflows, flows of wastewater and stormwater that exceed the capacity of the sewer system or overload the wastewater treatment plant during periods of high rainfall.

Access to the US municipal water market is through a network of independent manufacturers' representatives, each of whom will focus on a territory comprising one or more states. The division has been very successful in building a network of high quality representatives, and much of the division's success in recent years is attributed to the management and performance of the sales channel in promoting Hydro technology.

Providing market-leading grit removal products remains a clear priority, and we are committed to maintaining our investment in customer-focussed programmes aimed at ensuring the division retains its competitive advantage. We are also taking the opportunity to introduce new product lines to our high-performing network of sales representatives. A good example of this is provided by the launch of the Hydro-Sludge™ Screen, a product which has been successfully sold in the UK for many years, to the US market. The US Wastewater division made great progress with the Hydro-Sludge™ Screen during 2011 culminating in the Group's largest Hydro-Sludge™ Screen order to date, received in December, for a treatment plant in Washington DC.

Sector performance

* - excluding amortisation of acquired intangible assets

The division maintained the strong financial performance delivered in 2010, supported by the delivery of a $2.8m contract to supply two large Storm King® units for a combined sewer overflow project for the City of Boonville, Indiana. The division also secured further substantial orders during 2011, including the Washington DC Hydro-Sludge™ Screen order referred to above, and a $2.5m contract to supply SlurryCup™ grit washing devices for the Point Loma Wastewater Treatment Plant in San Diego, California.

In 2010 the adverse conditions in the US economy generally provided savings in fabrication costs from the supply chain. These conditions were sustained into 2011, helping to support overall operating margins at 31% (2010: 30.9%). However, the Group expects the pressure on fabrication costs to increase as growth returns to the wider US economy.

Sector outlook

US Wastewater has good visibility of projects into 2012, with underlying demand from the market expected to remain stable. Hydro will remain focussed on identifying the opportunities for proprietary products in the US municipal water market, principally in the arena of grit removal. The division is also looking to build on the success achieved in grit removal applications, by looking for further application areas for our technologies in closely related water sectors. In addition, the wide range of strategic initiatives in progress is further expected to cement demand and provide the opportunity for further growth over the medium term.

UK and Ireland Stormwater

The UK and Irish Stormwater division provides niche products aimed at managing stormwater flows in urban drainage and flood control systems. The business has a market-leading position in the supply of proprietary vortex flow controls, which we look to maintain through continual development and differentiation of the product. Sales of Hydro's flow controls are also supplemented by the distribution of geocellular stormwater storage systems. Trading is typically derived from new-build construction activity, and the application of regulations requiring the control and/or treatment of stormwater within the development site.

In the UK, the historic focus on stormwater quantity has been augmented by a need to improve the quality of stormwater, driven by emerging new regulation and legislation, including the Flood and Water Management Act 2010 (FWMA). The application of the FWMA, including the introduction of national standards for sustainable drainage systems (SUDS), is expected to add to the new opportunities for stormwater quality products that are already being created by the European Union Water Framework Directive. Alongside the requirement for stormwater management as part of new-build construction, the emerging stormwater quality markets are also creating new opportunities for retro-fit projects into the existing urban drainage infrastructure.

Hydro has a well-established portfolio of stormwater quality products with a strong track-record in the US and International markets, where the regulatory drivers have been in place for many years. This technology will be transferred to the UK and European markets. In addition, new products are also being introduced to the UK and 2011 has seen the market launch of the Hydro FilterraTM Bioretention System, which uses natural process to remove contaminants in Stormwater.

In late 2011, the UK Stormwater division established Hydro Consultancy, providing technical professional services, design and hydraulic modelling support, including flood risk assessments, to a range of clients including local authorities and developers. Staffed by a small team, with extensive sector experience in major consultancy firms, Hydro Consultancy aims to offer cost effective, best-practice solutions.

Sector performance

The underlying performance of the UK and Irish Stormwater division has been relatively flat over the past two years with reductions in public sector spending to a large extent, offset by a modest increase in private sector house building and commercial development projects. Within the public sector, however, the opportunities for large-scale flood alleviation projects have been impacted, and signature projects such as those at White Cart Water and Wigan Dam, undertaken in 2009 and 2010, have been slow to develop during 2011, with a consequent impact on revenues and profitability.

Sector outlook

The general economic outlook in the UK and Ireland is not expected to improve materially during 2012. Against a backdrop of flat new-build construction levels, the division will be looking to reinforce market share by enhancing its product offering and working closely with key builder's merchant partners to ensure the optimum awareness and promotion of Hydro's technologies.

The new opportunities for stormwater quality products are expected to continue to develop and, with Hydro's history as a leader in the UK stormwater sector, the Group has an excellent platform from which to grow the revenues and profit contribution from this area of activities.

US Stormwater

The US Stormwater market is governed by legislation aimed at improving the quality of stormwater flows in drainage systems. The division offers a range of vortex separation and filtration products targeting suspended sediments and pollutants in stormwater run-off. The majority of trading has typically been derived from the application of regulations requiring the treatment of stormwater on new-build construction activity.

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

 Sector performance

During 2011, the division has focused on improving its distribution sales channels, and took a major step forward by establishing pilot distribution projects with two "master" distribution partners; Advanced Drainage Systems (ADS), and ACF Environmental. ADS have focused on 11 key mid-western states around the Great Lakes, with ACF Environmental operating in a core tranche of eastern-seaboard states. The two master distributors enable Hydro to leverage the market reach of a much larger organisation, with access to a significantly increased sales-force, and ultimately the scope to scale operations to full US national coverage.

Early results from the new master distribution channels have proved successful, and the division delivered a 12% (17% in local currency) year-on-year increase in revenues. This is a highly encouraging start considering the slow recovery in US construction markets, and the highly competitive nature of the stormwater sector. The division has also stepped up its programme of investment in product approvals with a major field testing project initiated as part of the process of gaining the strategically important west coast approval with the Washington State Department of Ecology for the Up-Flo® Filter product.

For the first time, the US Stormwater division has led a move into the Mexican stormwater market. In December 2010 Hydro signed a distribution agreement with Soluciones Hidropluviales, and progress has been made during 2011 with initial stock of product delivered into the territory.

The cost of product approvals, and investment in establishing the distribution sales channel, has suppressed growth in operating margins in the year.

Sector outlook

Looking forward, the division is now better placed than ever to capitalise on greater access to US markets. Whilst the US market for stormwater quality products is highly competitive, the division is looking to maximise the opportunity presented by the ADS and ACF Environmental relationships to target growth in market share. With industry forecasts suggesting modest growth in US construction markets the division is aiming to make good progress over the coming year.

International

The International division seeks opportunities for Hydro's proprietary wastewater, stormwater, and combined sewer overflow (CSO) technologies in territories outside the Group's principal operating markets in the UK and US. Target markets are typically accessed through relationships with a combination of local distribution and licensee partners. Demand in markets, particularly in emerging and fast growing economies across the world is being driven by a combination of increasing requirements for clean water, supporting regulation and legislation, urbanisation and population growth.

Global water infrastructure spending is anticipated to maintain growth over the medium to long term and the division is seeking to establish a broad base of distribution partners to ensure that key markets are successfully addressed. The Group has identified priority markets in Asia Pacific, the Middle East, Eastern Europe and Latin America where we will focus shorter term effort and resources. To support the broadening of countries supplied, the division is also examining the scope to form strategic alliances with partners capable of offering a wider range of high quality stormwater and wastewater treatment equipment to both complement the sale of Hydro products and provide access to established distribution channels.

Sector performance

In June, the International team was enhanced with the appointment of an International Business Director. The immediate focus for this role has been to review and develop the strategic plan for expanding the Group's international operations, with a particular focus on the opportunities presented by European and BRIC countries.

Over the last three years the Group has enjoyed considerable success in the Middle East, particularly in Egypt, where grit removal equipment has been supplied into the Villages Projects along the River Nile. Opportunities to build on this success have stalled as a consequence of continuing political instability in the region, and revenues have been impacted as a result. Despite the turmoil in the Middle East during 2011, the division has continued to engage in discussions, and actively pursue projects in the region, particularly in Saudi Arabia and Qatar.

Profits from international Wastewater activities were enhanced by the release of provisions for costs on conclusion of a major Storm King® project for the City of Namur in Belgium.

Stormwater revenues and profits showed limited growth, with construction activity in international markets remaining relatively subdued during 2011. Progress was made, however, with the appointment of a new distributor in Japan, and strong interest in Malaysia, culminating in the award of a contract to supply Downstream Defender® to the prestigious "River of Life" project in Kuala Lumpur.

Sector outlook

The prospects for progress during 2012 are good, both from stormwater opportunities in the Asia Pacific region, and initial wastewater projects in new focus territories. The medium-term outlook for development in the Middle East region appears positive, with a number of opportunities for Hydro grit removal applications, although predicting the timing of projects remains a challenge.

Other Financial Matters

Operating profit

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

Total administrative expenses were broadly unchanged on 2010 levels at £9.7m (2010: £9.6m); the presentation of central Group costs within this sum is shown in the segmental analysis of results in note 3. Group costs decreased marginally to £2.8m (2010: £2.9m), including foreign exchange gains of £nil (2010: £0.1m gain) associated with the revaluation of net US dollar asset balances in the Company balance sheet.

Amortisation of acquired intangible assets

£0.2m (2010: £0.3m) of amortisation of acquired intangible assets has been charged on assets recognised following the acquisition of Eutek Systems, Inc. (Eutek) in 2008. Excluding goodwill, Hydro acquired a total of £2.3m of intangible assets through the acquisition. The majority of these assets relate to developed technology and trademarks, which are being amortised over a period of 15 years, subject to any impairment.

Finance costs

Net finance cost for the year was £0.3m (2010: £0.1m). This figure includes interest on bank loans taken in 2008 to assist with acquisition funding, the unwinding of discounting applied to the value of future payments of deferred consideration payable to the former shareholders of Eutek, and the gain or cost associated with derivative financial instruments. The year-on-year increase was largely attributable to the reversal of recognised gains in 2010 on the valuation of foreign exchange forward purchase contracts at 31 December 2010. Additional losses were recognised on new forward purchase contracts taken out during the year. An analysis of the net finance cost is presented in note 4.

Taxation

The effective tax rate on profits was 30.3% (2010: 37.5%). An analysis of the tax charge for the year is shown in note 5. The difference between the effective rate of tax and the UK statutory rate of 27% largely reflects the impact of profits generated from operations based in the US, where combined federal and state tax rates are higher than those experienced in the UK. The reduction in effective tax rate over the year reflects the greater proportion of profits generated from the UK and the one-off benefit of adjustments to prior year tax estimates.

The Group should benefit from anticipated reductions in UK corporate tax rates, but due to the territorial profile of the Group's activities, we would expect the overall effective tax rate to remain above the UK statutory rate, and above the 2011 figure, reflecting the absence of one-off beneficial adjustments.

Earnings-per-share

Our adjusted earnings-per-share, the calculation of which is shown in note 6, increased by 11% to 12.86 pence per share (2010: 11.54 pence per share). Earnings-per-share, which includes the impact of amortisation of acquired intangibles, increased by 15% to 11.95 pence per share (2010: 10.43 pence per share).

A diluted earnings-per-share calculation reflects the impact of potential ordinary shares from unvested share option schemes.

Cash flow and working capital

At 31 December 2011, Net Cash (cash and cash equivalents, less borrowing) totalled £5.4m, compared to £4.1m at 31 December 2010 and £3.3m at 30 June 2011.

Cash generated from operations was £3.9m in the year (2010: £4.6m). This includes a working capital inflow of £0.5m (2010: £1.6m). The working capital changes in any given year are principally due to the timing of large contracts, typically on the Wastewater side of the business. These contracts may have commercial terms that can materially affect the measure of working capital at a given point in time. In general terms, such contracts require a higher level of working capital than the shorter turnaround Stormwater sales. During 2011 the Group made initial payments to suppliers in relation to the large Zickert Scraper contracts received during 2010, and against which initial payments had been received from customers in that year.

Corporation tax payments were £1.1m (2010: £0.8m). This figure reflects the higher anticipated profitability of the Group and increased corporation tax payments on account as a consequence.

Capital payments on loans taken out to finance the 2008 acquisition of Eutek consumed £0.7m (2010: £0.8m) of cash reserves during the year. Additionally a further £0.3m (2010: £0.3m) was paid in deferred consideration to the former shareholders of Eutek.

Foreign exchange losses of £0.1m (2010: gains of £0.1m) were incurred in 2011 on cash balances denominated in foreign currencies (principally US dollars, Swedish Kronor and Euros).

Financial risk management

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

Further details of our financial risk management policies are disclosed in note 22 of the 2010 Annual Report.

Borrowing facilities

Our borrowing facilities comprise:

§ $1.3m US dollar term loan (secured on the Group's freehold properties) expiring in May 2013 on which interest is charged at 2.1% over US LIBOR;

§ $2.0m 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

§ £3.5m facility for the provision of bonds, guarantees and/or indemnities. The Group is obliged to place cash on deposit with Barclays Bank as security for this facility in the sum of the lower of 30% of the total value of all bonds issued under the facility, or 100% of the bonds issued above a £2.0m threshold. This facility is renewed on an annual basis with the next review to be undertaken by the Group's bank during April 2012.

§ The Group has relinquished the previous overdraft facility with Barclays Bank.

As at 31 December 2011 the Group maintained £7.5m (2010: £7.0m) of cash balances.

Borrowing facilities are subject to financial covenants which specify a maximum ratio of net debt to EBITDA of 2.0 times, and a minimum interest cover of 3.0 times. The covenant testing the Group's cash generation in comparison to the level of debt service payments (loan capital plus interest) has been removed and replaced with a 'cash cover' test. Under this test the Group is required to hold aggregate cash balances in its accounts at Barclays Bank equivalent to at least 45% of the value of outstanding primary loans and external bonds issued by that bank. In addition, the term advance is subject to a further covenant under which the amount borrowed shall not exceed 80% of the value of the properties against which the advance is secured.

At 31 December 2009 the Group did not meet the minimum ratio of cash flow to debt service and, as such, presented the full balance outstanding on both the bank loan and term advance as current liabilities in the balance sheet as at 31 December 2009. The Group has met the requirements of all banking covenants at each measurement date in both 2010 and 2011, including at 31 December 2011 and 31 December 2010. The Group has consequently reverted to showing a proportion of the outstanding loans as non-current liabilities.

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

On behalf of the Board

Group Income Statement unaudited

Year ended 31 December 2011

Consolidated Statement of Comprehensive Income unaudited

Year ended 31 December 2011

Consolidated Balance Sheetunaudited

31 December 2011

Consolidated Statement of Changes in Equity unaudited

Year ended 31 December 2011

Consolidated Cash Flow Statement unaudited

Year ended 31 December 2011

*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 2011

Notes to the preliminary announcement unaudited

Year ended 31 December 2011

1. Basis of preparation and status of information

The preliminary announcement was approved by the Board of Directors on 5 March 2012. 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 2011, 2010 or 2009, and does not contain sufficient information to comply with IFRSs.

The financial information for the years ended 31 December 2010 and 31 December 2009 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 2011 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 2011 will be dispatched to shareholders, and made available on the Group's website at www.hydro-international.biz, on 12 April 2012 ahead of the AGM date of 24 May 2012. 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 12 April 2012. The audited accounts will be delivered to the Registrar of Companies following the AGM.

2. Post balance sheet event

Subsequent to the year end the directors have recommended a dividend of 3.6 pence per share to be paid, totalling £517,000. The dividend is subject to approval by the shareholders and will be paid on 6 June 2012 to shareholders on the register on 4 May 2012.

3. Segmental analysis of results

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

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

Wastewater: UK and Ireland, the US, and International

Stormwater: UK and Ireland, the US, and International

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

3. Segmental analysis of results (continued)

There are no intersegment sales. Within UK Wastewater, a total of £9.2m (2010: £4.4m), representing 30% (2010: 16%) of the consolidated revenue in the year, was derived from contracts either directly or indirectly with a single customer.

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

3. Segmental analysis of results (continued)

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

4. Net finance cost

5. Tax

Factors affecting tax charge for the year

The standard rate of tax for the year, based on the Group's standard rate of corporation tax is 27.0% (2010: 28.0%). The actual tax charge for the current and previous year is more than the standard rate for the reasons set out in the following reconciliation.

Factors that may affect the future tax charge

A deferred tax asset has not been recognised in respect of timing differences relating to certain losses within the Group, capital losses and state tax credits. The total gross amount of tax losses and state tax credits in respect of which no asset has been recognised is £1,438,000 (2010: £1,657,000); the related tax would be recovered if sufficient taxable profits arise in future periods in the appropriate companies in an appropriate time frame.

6. Earnings per ordinary share

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

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

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

Adjusted earnings per share

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

Reconciliation of profit after tax to adjusted profit after tax

7. Going concern

The Group's business activities, together with the main trends and factors likely to affect its future development, performance and position, and the financial position of the Group, its cashflows, 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.