4th Sep 2007 07:01
Hydro International PLC04 September 2007 HYDRO INTERNATIONAL plc Interim results for the six months to 30 June 2007 KEY INDICATORS ------------------- ----------- ----------- 6 months ended 6 months ended 30 June 2007 30 June 2006Statutory:Revenue £11.0m £11.0mProfit before tax £836k £646kBasic earnings per share 4.52p 3.32pNon-Statutory:Adjusted profit before tax* £736k £646kAdjusted basic earnings per share* 3.82p 3.32pCash and cash equivalents £2.9m £2.3mClosing order book £10.8m £7.2m *excluding exceptional other operating income CHAIRMAN'S STATEMENT Highlights •Profit before tax increased to £836k, including £100k of exceptionallicensing income •Earnings per share (diluted) increased to 4.47p from 3.29p •Major contract awards in the UK Wastewater business •Strong closing order book of £10.8m, up 50% on 30 June 2006 Financial Performance The first half of 2007 has delivered a financial result broadly in line with ourexpectations. The early part of the period continued to be affected by thesluggish order intake in the UK and US wastewater sectors as reported at theyear-end. This position has, however, significantly improved through the period,including the major UK and Belgian orders announced to the market in March andApril, and we close the half-year with a strong forward order book. Profitability was enhanced by the mix of products and the receipt of £100kexceptional license income from Egypt. Operating Review As reported in the Group's 2006 Annual Report the UK regulated water industryhas been slow to start planned capital expenditure under the fourth assetmanagement programme (AMP4). The industry entered the third year of AMP4 inApril and the signs are now evident of programmes moving forward. In March andApril the Group announced major contracts for its innovative sludge scraper anddisc filter systems totalling £3.4m. In addition to these headline contractsthere has been a significant upturn in contracts generally in the UK wastewatersector, reflecting the comprehensive product portfolio that Hydro has to offerand an increasing focus on building relationships with key UK water companies. In April the Group also announced the award of a prestigious river clean upproject in Namur, Belgium. This project utilises Hydro's combined sewer overflowtechnology as part of a 3 year contract and is valued at £1.3m. The UK Stormwater business continues to make solid financial progress with salesand order intake both increased on the same period in 2006. Regulations in placeto control the quantity of stormwater run-off from new developments continue tobe the main drivers for this business. The more common occurrence of extremerainfall events has heightened awareness of the impact of climate change on theUK's drainage infrastructure. Hydro's stormwater product portfolio has beendeveloped to mitigate the effects of such high intensity rainfall. The implementation of the EU Water Framework Directive (WFD) is also expected towiden the UK stormwater market over the coming years to include productstargeted at improving the quality of stormwater discharges. Hydro is wellpositioned to address the need using its award winning suite of stormwatertreatment products currently employed in the US and other international markets.In November of this year Hydro International are sponsoring the Water Seminarsession of the national Environment Agency Conference titled 'EnvironmentalFutures 07 - Adapting to Change' which provides a platform to discuss thepending programme of delivery and technological requirements of the WFD. Hydro's US wastewater operations finished 2006 with several key projects delayeddue to pressure on municipal budgets caused by rising stainless steel costs.Pricing remains an ongoing issue, but there is now a good flow of projects beingbid and order intake is substantially increased on 2006. The US Stormwater market continues to make progress with newly establisheddistribution networks starting to yield results in terms of increased orderintake. Progress has been made in securing approvals for the new Up-FloTM filterwhich are the key to establishing product acceptance in the US market. The Irish market for stormwater products has had a difficult period of tradingin the first six months. A general slowdown in construction activity and ahighly competitive market resulted in a slight downturn in sales for the periodalthough future prospects for the territory remain positive. Overseas the Group has continued to build on the expanded relationships withexisting distributors and licensees. Of particular note is the continuing demandfor Up-FloTM filter with significant orders received from New Zealand andinitial interest from our distributor in South Korea. The Group is currentlyevaluating new export opportunities in the EU and South East Asia Innovation team focus for the first half has been concerned with new productdevelopment. In the second half the team will be launching new and improvedversions of the vortex flow controls and stormwater liquid solid separationdevices products in the UK and Irish markets. Outlook The increase in profits for the first half year's trading was substantially asanticipated. The upturn in order intake on the wastewater side of the businessis encouraging, as is the growing demand for Up-FloTM filter in the US andoverseas markets. Expansion of the direct sales force and new distributionnetworks should also generate growth from the US stormwater business. We anticipate further growth in the second half of the year. Roger Lockwood Chairman 4 September 2007 Nominated Adviser and Broker KBC Peel Hunt Ltd Julian Blunt 0207 418 8990 Hydro International plc Group Income Statement unaudited for the six months ended 30 June 2007 ------------------- ------ ----------- ----------- ------------Continuing operations Note 6 months ended 6 months ended Year ended 30 June 2007 30 June 2006 31 December 2006 £000 £000 £000 ------------------- ------ ----------- ----------- ------------ Revenue 11,047 11,021 22,396------------------- ------ ----------- ----------- ------------Gross profit 4,088 3,809 7,969Administrative expenses (3,365) (3,161) (6,169)Exceptional otheroperating income (3) 100 - -------------------- ------ ----------- ----------- ------------Operating profit beforeexceptional otheroperating income 723 648 1,800Exceptional otheroperating income 100 - -------------------- ------ ----------- ----------- ------------Operating profit 823 648 1,800Finance revenue (4) 54 31 76Finance costs (4) (41) (33) (42)------------------- ------ ----------- ----------- ------------ Profit before tax 836 646 1,834Tax (197) (180) (469)------------------- ------ ----------- ----------- ------------Profit for the period 639 466 1,365------------------- ------ ----------- ----------- ------------Earnings per ordinaryshare (5) 4.52p 3.32p 9.70pDiluted earnings perordinary share (5) 4.47p 3.29p 9.59p------------------- ------ ----------- ----------- ------------Earnings per ordinaryshare (excludingexceptional otheroperating income (5) 3.82p 3.32p 9.70pDiluted earnings perordinary share (excludingexceptional otheroperating income) (5) 3.77p 3.29p 9.59p------------------- ------ ----------- ----------- ------------ Hydro International plc Group Statement of Recognised Income and Expense unaudited for the six months ended 30 June 2007 6 months ended 6 months ended Year ended 30 June 2007 30 June 2006 31 December 2006 £000 £000 £000 ---------------------- ----------- ----------- ------------Profit for the period 639 466 1,365Currency translationdifferences on foreigncurrency net investments (10) (22) (66)---------------------- ----------- ----------- ------------Total recognised income andexpense 629 444 1,299---------------------- ----------- ----------- ------------ Group Statement of Changes in Equity unaudited for the six months ended 30 June 2007 6 months ended 6 months ended Year ended 30 June 2007 30 June 2006 31 December 2006 £000 £000 £000 ---------------------- ----------- ----------- ------------Opening shareholders' funds 6,425 5,357 5,357Total recognised income andexpense 629 444 1,299Dividend (325) (282) (282)Proceeds from issue of newshares 8 52 51---------------------- ----------- ----------- ------------Net increase in shareholders'funds 312 214 1,068---------------------- ----------- ----------- ------------Closing shareholders' funds 6,737 5,571 6,425---------------------- ----------- ----------- ------------ Hydro International plc Group Balance Sheet unaudited 30 June 2007 30 June 2007 30 June 2006 31 December 2006 £000 £000 £000 ---------------------- ------------ ----------- ------------ASSETS 1,399 1,399 1,399Non-current assets 186 256 248Intangible assets - Goodwill 2,046 2,172 2,096Intangible assets - OtherProperty, plant and equipmentDeferred tax assets 21 19 33Trade receivables 121 135 77---------------------- ------------ ----------- ------------ 3,773 3,981 3,853 ---------------------- ------------ ----------- ------------Current assets 597 586 338Inventories and work inprogress 7,572 5,790 6,387Trade receivables 232 235 231Other receivables 2,856 2,252 2,677Cash and cash equivalents---------------------- ------------ ----------- ------------ 11,257 8,863 9,633 ---------------------- ------------ ----------- ------------TOTAL ASSETS 15,030 12,844 13,486---------------------- ------------ ----------- ------------ LIABILITIES Current liabilitiesTrade and other payables (7,260) (6,371) (6,028)Current tax payable (345) (204) (315)Deferred tax liability - - (39)Bank loans and overdrafts (28) (20) (27)Obligations under financeleases (4) (8) (7)Derivative financialliabilities (38) (19) (12)---------------------- ------------ ----------- ------------ (7,675) (6,622) (6,428)Non-current liabilitiesTrade and other payables (2) (4) (4)Deferred tax liability (202) (194) (191)Bank loans and overdrafts (412) (447) (433)Obligations under financeleases (2) (6) (5)---------------------- ------------ ----------- ------------ (618) (651) (633) ---------------------- ------------ ----------- ------------TOTAL LIABILITIES (8,293) (7,273) (7,061)---------------------- ------------ ----------- ------------ ---------------------- ------------ ----------- ------------ NET ASSETS 6,737 5,571 6,425---------------------- ------------ ----------- ------------ EQUITY 707 706 706Share capital 938 932 931Share premium account (76) (22) (66)Foreign currency translationreserve 5,168 3,955 4,854Retained earnings---------------------- ------------ ----------- ------------TOTAL EQUITY 6,737 5,571 6,425---------------------- ------------ ----------- ------------ Hydro International plc Group Cash Flow Statement unaudited for the six months ended 30 June 2007 30 June 2007 30 June 2006 31 December 2006 £000 £000 £000 --------------------------- ---------- ---------- ---------- Cash flows from operating activities:Cash generated fromoperations 777 1,073 1,748Interest received 54 31 76Interest paid (41) (14) (42)Corporation tax paid (194) (117) (239)--------------------------- ---------- ---------- ----------Net cash generated fromoperating activities 596 973 1,543--------------------------- ---------- ---------- ---------- Cash flows from investing activitiesPurchases of property, plantand equipment (55) (52) (117)Proceeds from sale ofproperty, plant and equipment - - 3Purchases of intangibleassets (26) (89) (141)--------------------------- ---------- ---------- ----------Net cash used in investingactivities (81) (141) (255)--------------------------- ---------- ---------- ---------- Cash flows from financing activitiesProceeds from the issue ofshares to shareholders 8 52 51Repayment of borrowings (20) (22) (41)Finance lease capitalpayments (6) (9) (11)Dividends paid toshareholders (325) (282) (282)--------------------------- ---------- ---------- ----------Net cash generated fromfinancing activities (343) (261) (283)--------------------------- ---------- ---------- ---------- Net increase in cash and bankoverdrafts 172 571 1,005Cash and bank overdrafts atthe beginning of the period 2,677 1,703 1,703Exchange gains/(losses) oncash and bank overdrafts 7 (22) (31)--------------------------- ---------- ---------- ----------Cash and bank overdrafts atthe end of the period 2,856 2,252 2,677--------------------------- ---------- ---------- ---------- Reconciliation of profit to net cash flow from operating activities unaudited for the six months ended 30 June 2007 30 June 2007 30 June 2006 31 December --------------------------- 2006 £000 £000 £000 ---------- ---------- ---------- --------------------------- Profit for the period 639 466 1,365Finance costs (13) 2 (34)Corporation tax expense 197 180 469Depreciation 113 96 220Amortisation of intangibles 74 61 114Decrease/(increase) ininventories and work inprogress (259) 26 274Decrease/(increase) in tradeand other receivables (1,230) 441 (130)(Decrease)/increase in tradeand other payables 1,230 (199) (542)Increase in derivativefinancial instruments 26 - 12--------------------------- ---------- ---------- ----------Net cash generated fromoperations 777 1,073 1,748--------------------------- ---------- ---------- ---------- Notes to the Interim Announcement unaudited 1. Basis of preparation The Interim Report was approved by the directors on 3 September 2007. The next annual statements of the Group will be prepared in accordance withInternational Financial Reporting Standards (IFRS), as adopted for use in theEU. Accordingly, the interim report has been prepared in accordance with therecognition and measurement criteria of IFRS and the disclosure requirements ofthe Listing Rules that would be applicable if the company were admitted to theofficial list. The financial information contained in these interim financialstatements has been prepared on the basis of IFRS that the directors expect tobe applicable as at 31 December 2007. The Interim Report has been drawn up using the accounting policies as set out onpages 15 to 20. The financial information for the six month period ended 30 June 2007 and 2006has not been audited by the Group's auditors and does not constitute accountswithin the meaning of s240 of the Companies Act 1985. The financial informationfor the year ended 31 December 2006 is an abridged version of the Group'saccounts which received an unqualified auditors' report and did not contain astatement under s237(2) or (3) of the Companies Act 1985. The group's accountsfor the year ended 31 December 2006 have been adjusted for the adoption of IFRSas detailed within note 6. The Group's accounts prepared under UK GAAP have beenfiled with the Registrar of Companies. 2. Segmental analysis of results The primary format used for segmental reporting is by business segment as thisreflects the internal management structure and reporting of the Group. Segmentresults, assets and liabilities include only items directly attributable to asegment. Business segments The Group comprises the following business segments: Stormwater The control of stormwater flows and the removal of trash, oil and sediment fromthese flows, largely for application in the existing urban environment and fornew residential and commercial development. Water and wastewater treatment The full range of treatment products for screening, grit removal, primary,secondary and tertiary treatment, for application in the municipal and regulatedwater industry. Geographic segments Hydro International has a worldwide presence in both business segments throughits subsidiary selling offices and through a distributor and licensee network. 2 Segment analysis of results (continued) Analysis by business segment 6 months to 30 6 months to 30 Year ended 31 --- June 2007 June 2006 December 2006 £000 £000 £000 ---Segment revenueStormwater 6,289 6,021 12,216Water andwastewater 4,758 5,000 10,180------------------ ------------ ------------ -----------Consolidated 11,047 11,021 22,396------------------ ------------ ------------ ----------- Segment operating profit (excluding exceptional other operating income)Stormwater 740 725 1,617Water andwastewater 164 37 516Group costs (181) (114) (333)------------------ ------------ ------------ -----------Consolidated 723 648 1,800------------------ ------------ ------------ ----------- Exceptionalotheroperatingincome 100 - - Net financerevenue 13 (2) 34 Taxation (197) (180) (469) ------------------ ------------ ------------ -----------Profit aftertax 639 466 1,365------------------ ------------ ------------ ----------- 6 months to 30 6 months to 30 Year ended 31 June 2007 June 2006 December 2006 £000 £000 £000 Assets------------------ ------------ ------------ -----------Stormwater 6,813 6,092 5,872Water andwastewater 5,839 4,044 5,043Group andunallocated 7,071 6,536 7,143Eliminations (4,693) (3,828) (4,572)------------------ ------------ ------------ ----------- Total 15,030 12,844 13,486 ------------------ ------------ ------------ ----------- Liabilities------------------ ------------ ------------ -----------Stormwater 2,889 2,617 2,134Water andwastewater 6,488 5,528 5,769Group andunallocated 3,609 2,956 3,730Eliminations (4,693) (3,828) (4,572)------------------ ------------ ------------ ----------- Total 8,293 7,273 7,061 ------------------ ------------ ------------ ----------- Capital expenditure------------------ ------------ ------------ -----------Stormwater 8 28 44Water andwastewater 1 20 47Group andunallocated 72 93 167------------------ ------------ ------------ ----------- Total 81 141 258 ------------------ ------------ ------------ ----------- 2 Segment analysis of results (continued) 6 months to 30 6 months to 30 Year ended 31 June 2007 June 2006 December 2006 £000 £000 £000Depreciation and amortisation------------------ ------------ ------------ -----------Stormwater 28 28 57Water andwastewater 31 32 70Group andunallocated 128 97 207------------------ ------------ ------------ ----------- Total 187 157 334 ------------------ ------------ ------------ ----------- Items have been classed as unallocated when it is not possible to identify towhich segment they should be allocated, it was considered this gave a truerrepresentation than allocating the items on a relevant basis. Analysis by geographical segment 6 months to 30 6 months to 30 Year ended 31 --- June 2007 June 2006 December 2006 £000 £000 £000 ---Revenue by destination------------------ ------------ ------------ -----------UK 8,263 7,995 16,309Europe 685 824 1,535North America 1,700 1,891 3,759Rest of theworld 399 311 793------------------ ------------ ------------ ----------- Total 11,047 11,021 22,396 ------------------ ------------ ------------ ----------- Revenue by origin------------------ ------------ ------------ -----------UK 8,458 8,286 16,682Europe 634 769 1,495North America 1,955 1,966 4,219------------------ ------------ ------------ ----------- Total 11,047 11,021 22,396 ------------------ ------------ ------------ ----------- Profit/(loss) before tax by origin------------------ ------------ ------------ -----------UK 651 662 1,575Europe 90 98 233North America 95 (114) 26------------------ ------------ ------------ ----------- Total 836 646 1,834 ------------------ ------------ ------------ ----------- Net assets by origin------------------ ------------ ------------ -----------UK 5,925 5,032 5,742Europe 348 157 270North America 464 382 413------------------ ------------ ------------ ----------- Total 6,737 5,571 6,425 ------------------ ------------ ------------ ----------- 3. Exceptional other operating income The exceptional other operating income received during the period is one offlicence fee income. 4. Net finance revenue 6 months ended 6 months ended Year ended 31 December 30 June 2007 30 June 2006 2006 £000 £000 £000 -------------------- ----------- ----------- ----------- Bank deposit interestreceivable 54 31 71Other interest receivable - - 5-------------------- ----------- ----------- -----------Finance revenue 54 31 76-------------------- ----------- ----------- ----------- On bank loans and overdrafts (15) (14) (29)-------------------- ----------- ----------- -----------On finance leases and hirepurchase contracts - - (1)Other interest (26) (19) (12)-------------------- ----------- ----------- -----------Finance costs (41) (33) (42)-------------------- ----------- ----------- ----------- -------------------- ----------- ----------- -----------Net finance revenue 13 (2) 34-------------------- ----------- ----------- ----------- 5. Earnings per share Earnings per ordinary share are based on profit on ordinary activities aftertaxation, divided by a weighted average of 14,126,859 (2006 - 14,016,361) sharesin issue during the period. The diluted earnings per share are calculated afterthe inclusion of share options and the weighted average of ordinary shares usedin the calculation is 14,282,394 (2006 - 14,178,440). 6. Adoption of International Financial Reporting Standards This note explains how Hydro International plc financial performance for the 12month period ended 31 December 2006, and its financial position as at that datepresented under IFRS differs to that reported under UK GAAP. As at As at As at 31 December 30 June 31 December 2006 2006 2005 £000 £000 £000 ------ ---------------- ------ ---------- --------- ---------- Net assets underUK GAAP 6,436 5,642 5,471Adjustments (before taxation) Goodwill (i) 97 49 - Research and development (ii) 22 20 15 Patents and trademarks (iii) 73 73 64 Derivative financial liabilities (iv) (12) (19) - Taxation (v) (191) (194) (193)-------------------- ------ ---------- --------- ----------Net assets underIFRS 6,425 5,571 5,357-------------------- ------ ---------- --------- ---------- Year to Half year to 31 December 30 June 2006 2006 £000 £000 ------ ---------------- ------ ---------- --------- Profit for the periodunder UK GAAP 1,262 423Adjustments (before taxation) Goodwill (i) 97 49 Research and development (ii) 7 5 Patents and trademarks (iii) 9 9 Derivative financial liabilities (iv) (12) (19) Taxation (v) 2 (1)-------------------- ------ ---------- ---------Profit for the periodunder IFRS 1,365 466-------------------- ------ ---------- --------- i) Goodwill Under IFRS 3, goodwill is no longer amortised on a straight line basis butinstead is subject to annual impairment testing. Consequently, the goodwillbalances were reviewed for impairment as at 1 January 2006 and 31 December 2006and no further adjustments were identified. ii) Research and development Under UK GAAP all expenditure on research and development was written off to theprofit and loss as incurred. IAS 38 requires that all development costs meetingspecified criteria be capitalised as intangible assets. As part of its IFRS transition project, Hydro International plc reviewed alldevelopment projects, to determine whether the criteria in IAS 38 were met. Thekey eligibility criteria for capitalisation relate to: a) Identification of development costs. In general, research anddevelopment activities are closely related and it is not until the technicalfeasibility of the project can be determined with reasonable certainty thatdevelopment costs can be separately identified; and b) The generation of future economic benefit. Intangible assets are notrecognised unless the project is expected to generate future economic benefitexceeding the amount capitalised. Certain external expenditure on internal product development meet all thecriteria of IAS 38 however internal costs such as employee costs and applicableoverheads were not easily identifiable, and therefore have not been capitalised.These costs will be identifiable going forward and therefore will be capitalisedas appropriate in the future. iii) Patents and trademarks Under UK GAAP all internally generated patents and trademarks were written offto the profit and loss as incurred. IAS 38 requires that intangible assets arerecognised when the following are satisfied: a. Future economic benefits that are attributable to the assetwill flow to the entity; and b. The cost of the asset can be measured reliably. Certain expenditure on patents and trademarks satisfy the requirements of IAS 38and have therefore been capitalised. iv) Derivative financial instruments IFRS classes foreign exchange contracts as derivatives and requires that theyare included on the balance sheet at fair value with the movement going toincome statement. Previously under UK GAAP the fair value of forward exchangecontracts taken out to reduce risk are required to be disclosed in the notes tothe accounts. v) Deferred tax Under UK GAAP, deferred tax was provided on timing differences between theaccounting and taxable profit (an income statement approach). Under IFRS,deferred tax is provided on temporary differences between the book carryingvalue and tax base of assets and liabilities (a balance sheet approach). As aresult, the Group's IFRS balance sheet includes an additional deferred taxliability in respect of fair value property revaluations. In addition, deferredtax has been recognised on the adjustments between UK GAAP and IFRS with themajority of the net deferred tax liability relating to the adjustments for thedifference between the book carrying value and the tax base of land andbuildings. 7. Copies of the interim results will be distributed to shareholders and madeavailable to the general public at the Company's registered office, and on thecompany's website at www.hydro-international.biz. INDEPENDENT REVIEW REPORT TO HYDRO INTERNATIONAL PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2007 which comprises the group income statement,the group balance sheet, the group cash flow statement, the group statement ofrecognised income and expense, the group statement of changes in equity, therelated notes 1 to 7 and appendix 1. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. This report is made solely to the company, in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare also responsible for ensuring that the accounting policies and presentationapplied to the interim figures are consistent with those applied in preparingthe preceding annual accounts except where any changes, and the reasons forthem, are disclosed. As disclosed in note 1, the next annual financial statements of the group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules that would be applicable if thecompany were admitted to the Official List. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. Deloitte & Touche LLP Chartered Accountants Bristol 3 September 2007 APPENDIX 1 ACCOUNTING POLICIES Basis of preparation and accounting The Group is preparing its group financial statements in accordance withInternational Financial Reporting Standards and its interpretation issued by theInternational Accounting Standards Board. These are the Group's first consolidated financial statements prepared inaccordance with IFRS. Certain optional exemptions to this general principle areavailable under IFRS 1 and the significant first-time adoption choices made bythe Group are as follows: •The Group has elected not to apply IFRS 3 retrospectively to business combinations that took place before 1 January 2006 (the transition date). As a result, in the IFRS opening balance sheet, goodwill arising from past business combinations of £1,398,770 remains as stated under UK GAAP at this date. •The Group has elected to reset the foreign currency translation reserve to zero at 1 January 2006. Going forward, IFRS requires amounts taken to reserves on the retranslation of foreign subsidiaries to be recorded in a separate foreign currency translation reserve and be included in the future calculation of profit or loss on sale of the subsidiary. •The Group has elected to deem the revaluation at 1 January 2006 of property, plant and equipment to be the deemed cost, where it had previously been revalued. The group financial statements have been prepared under the historical costconvention subject to the items referred to in the adoption of IFRS 1 and thederivative financial instruments note below. The accounting policies set outbelow have been consistently applied in preparing an opening IFRS balance sheetat 1 January 2006 for the purpose of transition to IFRS and, for preparing the2006 and interim 2007 financial information, and will be applied in preparingthe group financial statements for the year ended 31 December 2007. The preparation of group financial statements in conformity with IFRS's requiresthe directors to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision only effects that period, or in the periodof revision and future periods if the revision affects both current and futureperiods. The key areas where estimates have been used and assumptions appliedare in the impairment testing of goodwill and in assessing the useful economiclives of development assets. Consolidation The group financial statements incorporate the financial statements of theparent company and its subsidiaries for the period to 30 June. The financialstatements of the parent company and subsidiaries are prepared in accordancewith UK Generally Accepted Accounting Principles (UK GAAP). Adjustments are madein the group accounts to bring into line any dissimilar accounting policies thatmay exist between UK GAAP and IFRS. The financial statements of subsidiaries are included in the group financialstatements from the date that control commences until the date control ceases. Revenue Revenue is the amount receivable for the provision of goods and services fallingwithin the Group's ordinary activities, net of trade and early settlementdiscounts, value added tax and similar sales taxes, but excluding intra-groupsales Revenue from the provision of goods is recognised when the risks and rewards ofownership of goods have been transferred to the customer. The risks and rewardsof ownership are deemed to have been transferred when the goods are ready to beshipped to, or ready to be picked up by, the customer. Revenue from services, other than those that arise from construction contracts(see below), are recognised when the service provided to the customer has beencompleted. Provided that the outcome of construction contracts can be assessed withreasonable certainty, the revenue is calculated as that proportion of the totalcontract value which costs incurred (including costs committed on items in theprocess of construction with suppliers), to date bear to total expected costsfor that contract. Losses on these contracts, if any, are recognised in theperiod when such losses become probable and can be reasonably estimated. Revenue from the provision of goods and all services is only recognised when theamounts to be recognised are fixed or determinable and collectability isreasonably assured. Foreign currencies Items included in the financial statements of each of the Group's subsidiaryundertakings are measured using the currency of the primary economic environmentin which the subsidiary undertaking operates (the "functional currency"). Thegroup financial statements are presented in sterling, which is thepresentational currency of the Group and the functional currency of the parentcompany. The trading results of overseas subsidiary undertakings are translated intosterling using average rates of exchange ruling during the relevant financialperiod. For the purposes of presenting group financial statements, the assets andliabilities of the group's foreign operations are translated as exchange ratesprevailing on the balance sheet date. Income and expense items are translated atthe average exchange rates for the period, unless exchange rates fluctuatesignificantly during the period, in which case the exchange rates at the date oftransactions are used. Foreign currency transactions entered into during the year are translated intosterling at the rates of exchange ruling on the dates of the transaction (or anaverage rate). Monetary assets and liabilities denominated in foreign currenciesare retranslated at the rate of exchange ruling at the balance sheet date. Allcurrency translation differences are taken to the income statement. In order to hedge its exposure to certain foreign exchange risks, the Groupenters into forward contracts and options (see below for details of the Group'saccounting policies in respect of such derivative financial instruments). As permitted by IFRS 1, the Group has elected to deem the cumulative currencytranslation differences of the Group to be £nil as at 1 January 2006. Goingforward, IFRS requires amounts taken to reserves on the retranslation of foreignsubsidiaries to be recorded in a separate foreign currency translation reserveand be included in the future calculation of profit or loss on sale of thesubsidiary. Intangible assets Goodwill Goodwill represents the excess of the costs of an acquisition over the fairvalue of the Group's share of the net identifiable assets of the acquiredsubsidiary undertaking at the date of acquisition. Goodwill arising on theacquisition of subsidiary undertakings is included in intangible assets. In respect of acquisitions prior to 1 January 2006, goodwill is included on thebasis of its deemed cost, which represents the amount recorded under UK GAAP ontransition to IFRS. The classification and accounting treatment of businesscombinations that occurred prior to 1 January 2006 has not been reconsidered inpreparing the Group's opening IFRS balance sheet at 1 January 2006. Goodwill isstated at cost or deemed cost less any impairment losses. The carrying value ofgoodwill is reviewed at each balance sheet date and is allocated tocash-generating units. An impairment loss is recognised whenever the carryingvalue of an asset or its cash-generating unit exceeds its recoverable amount.Impairment losses are recognised in the Income Statement. Goodwill is allocated to cash-generating units for the purpose of impairmenttesting. Each of those cash-generating units represents the lowest level withinthe Group at which the associated goodwill is monitored for management purposesand are not larger than the primary or secondary reporting segments determinedin accordance with IAS 14 "Segmental Reporting". Patents The cost of patents, where it is probable that there will be future economicbenefits and the cost can be reliably measured, are capitalised. This includesboth purchased patents and the direct costs of application associated withinternally generated patents. Such patent costs are valued at cost onacquisition and amortisation provided so as to write off the intangible fixedassets by equal annual instalments over a period of five years, which is theirestimated useful life. Provision is made for any impairment. The costs ofmaintaining patents on the Group's products are expensed as such items occur. Research and development In accordance with IAS 38 'Intangible assets' expenditure incurred on researchand development excluding known recoverable amounts on contracts, isdistinguished as relating either to a research phase or to a development phase. All research phase expenditure is charged to the income statement in the periodin which it is incurred. An internally-generated intangible asset arising fromthe Group's development is recognised only if all of the following conditionsare met: • An asset is created that can be identified; • It is probable that the asset created will generate futureeconomic benefits; and • The development cost of the asset can be measured reliably. Expenditure that cannot be classified into these two categories is treated asbeing incurred in the research phase. The Group considers that, due to thecomplex nature of new equipment programmes, it is not possible to distinguishreliably between research and development activities until relatively late inthe programme. Expenditure capitalised is amortised over its useful economic life, up to amaximum of 15 years from the entry-into-service of the product. The intangibleassets are assessed for impairment bi-annually, or earlier if there areindications of impairment. Computer software Computer software that is not integral to an item of property, plant andequipment is recognised separately as an intangible asset and is carried at costless accumulated amortisation and accumulated impairment losses. Amortisation iscalculated using the straight-line method so as to charge the cost of thecomputer software to the income statement over its estimated useful life (2years). Property, plant and equipment Freehold land is not depreciated. Other assets are depreciated by equalinstalments by reference to their estimated useful lives and residual values atthe following rates: - Freehold property 2.0-5.0% - Computer hardware 20.0-33.3% - Motor vehicles 25.0 % - Fixtures, fittings and equipment 20.0 % Items of property, plant and equipment are stated at cost or deemed cost lessaccumulated depreciation. Certain items of property that had been revalued tofair value on or prior to 1 January 2006, the date of transition to IFRS, aremeasured on the basis of deemed cost, being the revalued amount at the date ofthat revaluation. Leases As Lessee Assets held under finance leases, which are leases where substantially all therisks and rewards of ownership of the asset have been transferred to the Group,are capitalised in the balance sheet at their fair value and depreciated overtheir useful lives. The capital elements of future obligations under financeleases are included in liabilities in the balance sheet and analysed betweencurrent and non current amounts. The interest elements of future obligationsunder finance leases are charged to the income statement over the period of thelease and represent a constant proportion of the balance of capital repaymentsoutstanding in accordance with the effective interest rate method. Leases where the lessor retains substantially all the risks and rewards ofownership are classified as operating leases. The costs of operating leases (netof any incentives received from the lessor) is charged to the income statementon a straight line basis over the periods of the leases. As Lessor Rentals receivable under operating leases are included in revenue on astraight-line basis. Impairment of assets Assets that have an indefinite useful life, such as goodwill, are not subject toamortisation are tested annually for impairment or when events or changes incircumstance indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are tested for impairment wheneverevents or changes in circumstance indicate that the carrying amount may not berecoverable. An impairment loss is recognised for the amount by which the asset's carryingamount exceeds its recoverable amount. The recoverable amount is the higher ofan asset's fair value less costs to sell and value in use. For the purposes ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows. Inventories Inventory and work in progress are valued at the lower of cost and netrealisable value on a first-in, first-out basis. Cost comprises direct materialsand, where applicable, other direct costs such as carriage and delivery. Netrealisable value represents the estimated selling prices less all estimatedcosts of completion and costs to be incurred in marketing, selling anddistribution. Taxation The tax charge on the profit or loss for the year comprises current payable anddeferred tax. Current tax, including UK corporation tax and foreign tax, is provided atamounts expected to be paid (or recovered) using the tax rates and laws thathave been enacted or substantively enacted by the balance sheet date. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of the assets and liabilitiesfor financial purposes and the amounts used for taxation purposes. Deferred tax is determined using tax rates (and laws) that have been enacted orsubstantively enacted by the balance sheet date and are expected to apply whenthe related deferred tax asset is realised or the deferred tax liability issettled. Deferred tax assets are recognised only to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilised. Deferred tax is not provided on temporary differences arising on investmentsubsidiaries where the timing of the reversal of the temporary difference iscontrolled by the Group and it is probable that the temporary difference willnot reverse in the foreseeable future. Cash and cash equivalents Cash and cash equivalents comprise cash balances and short term (with anoriginal maturity less than three months) deposits. Bank overdrafts are shownwithin borrowings in current liabilities on the balance sheet to the extent thatthere is no right of offset and practice of net settlement with cash balances. Financial instruments Non-derivative financial instruments comprise of trade and other receivables,cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plusany directly attributable transaction costs. Subsequent to initial recognitionnon-derivative financial instruments are measured as described below. A financial instrument is recognised if the Group becomes a party to thecontractual provisions of the instrument. Financial assets are derecognised ifthe Group's contractual rights to the cash flows from the financial asset expireor if the Group transfers the financial asset to another party without retainingcontrol or substantially all risks and rewards of the asset. Regular waypurchases and sales of financial assets are accounted for at trade date, i.e.,the date that the Group commits itself to purchase or sell the asset. Financialliabilities are derecognised if the group's obligations specified in thecontract expire or are discharged or cancelled. Cash and cash equivalents comprise cash balances and call deposits. Loans and receivables Fixed deposits, principally comprising funds held with banks and tradereceivables, are classified as loans and receivables. Loans and receivables areheld at amortised cost. Other liabilities Borrowings, trade payables and other payables are classified as otherliabilities. Other liabilities are held at amortised cost. Held for trading The Group holds derivative financial instruments, forward exchange contracts, tomanage its foreign currency risk exposure. Derivatives are classified as heldfor trading. Held for trading instruments are held at fair value. Changes infair value are included in the income statements as they arise. Pension costs The Group contributes to the personal pension schemes of certain employees. Theassets of such schemes are held separately from those of the Group. Warranty provisions A provision for warranties is recognised when the underlying products orservices are sold. This provision is based on historical warranty cost data,known issues and management's best estimate of the expenditure required tosettle the obligation at the balance sheet date. Share-based payments All share options granted by the Group were granted prior to 7 November 2002,and therefore there is no requirement for the compensation cost in respect ofthese schemes, that is based on fair value, to be recognised. Share capital The company only has one class of shares, ordinary shares, which are classifiedas equity. Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction from proceeds, net of tax. Government grants Government grants are recognised as income over the periods necessary to matchthem with the related costs which they are intended to compensate. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HYD.L