Interim results for six months ended 30 June 2012

FOR RELEASE 0700hrs 11 September 2012

Specialist Energy Group plc

("Specialist Energy Group", the "Group" or the "Company")

Specialist Energy Group plc - Unaudited interim results for the six months ended 30 June 2012

Specialist Energy Group plc (AIM: SEGR), the specialist engineering group, today announces its interim results for the six month period ended 30 June 2012. The results include the contribution from its operating subsidiary, Hayward Tyler Group Limited ("Hayward Tyler"), a market leader in the design, manufacture and service of critical application pumps and motors to the power generation and oil and gas markets.

Financial Highlights:

§ £5.0 million raised from MBE Mineral Technologies Pte Limited ("MBE") in May 2012 through a successful equity issue priced at 50 pence per ordinary share, a premium of 108% to the market price prior to the announcement;

§ New banking and borrowing arrangements of £14.0 million concluded post period (15 August 2012), which together with the new equity, provide a much stronger platform for the Group;

§ Net debt decreased to £5.6 million at 30 June 2012 (31 December 2011: £10.0 million) as a result of the equity proceeds;

§ H1 revenues flat at £14.3 million (H1 2011: £14.4 million);

§ Gross profit margin decreased to 31% (H1 2011: 34%) as a result of the manufacturing business;

§ EBITDA* of £0.7 million (H1 2011: £0.8 million);

§ Operating profit* of £0.4 million (H1 2011: £0.5 million);

§ Profit before tax of £0.3 million (H1 2011: loss of £0.2 million).

* measured on a trading basis

Business Highlights:

§ Order intake in H1 2012 was £15.9 million (H1 2011: £16.5 million); further strong contract wins in July saw order intake rise to £20.3 million to the end of July against £18.8 million for the equivalent period last year;

§ Hayward Tyler's largest ever oil and gas related contract secured with a value of £2.7 million in July;

§ A second syngas project valued at USD1.6 million (£1.0 million) won by Hayward Tyler's business in the USA in June;

§ Hayward Tyler's Luton operations restructured and the Group head office closed, which together are expected to deliver annualised cost savings of around £1.0 million;

§ Significant progress made on the supply chain development project with MBE Cologne;

§ New board composition following completion of the new financing arrangements.

Ewan Lloyd-Baker, Chief Executive Officer, commented:

"We expect to see a substantial improvement in the operational performance of the Group in the second half driven in part by the elimination of loss making contracts in the manufacturing division, savings from the restructuring of the Luton operations, a significantly strengthened balance sheet and a stronger Q4 2012 performance by the aftermarket business which has been held back by financial constraints prior to the new financing. These changes combined with an improving outlook mean that the Board therefore looks to the future with increased confidence."

Enquiries:

Interim Statement

Introduction

To date 2012 has proved to be an eventful period for the Company with the successful completion of new financing arrangements for the business, closure of the Company's head office in London, the restructuring of the Luton operations of Hayward Tyler Group Limited ("Hayward Tyler") and the development of the supply chain with McNally Bharat, all of which will help to underpin the future development and growth of the Group.

New Financing Arrangements

On 15 May 2012 the Company announced that it had raised £5.0 million new equity before expenses from MBE Mineral Technologies Pte Limited ("MBE") at a share price of 50 pence per ordinary share, a premium of 108% to the market price prior to the date of the announcement and that the funds would be used to settle existing derivative instruments and to facilitate the Company's new borrowing arrangements with Standard Chartered Bank ("SCB") and MBE.

These new borrowing arrangements, which were concluded on 15 August 2012, extend debt maturity, increase the amount of borrowing facilities available and provide a much stronger platform for the Company and its subsidiary, Hayward Tyler. The new facilities comprise:

§ Six year term loan of £4.0 million from MBE;

§ One year revolving credit facility, renewable annually, of £7.0 million from SCB;

§ Bonds and guarantees facility of £3.0 million from SCB for the issue of performance bonds to support the ordinary course of business;

§ Foreign exchange facility to hedge operational cash flows.

Accordingly, the derivative instruments and borrowings from Lloyds TSB Bank plc and the borrowings from Nationwide Building Society have been cancelled and repaid. Further details of the new financing arrangements are given in note 12.

Board Members 

On completion of the equity issue Deepak Khaitan, Subir Dasgupta and Prabir Ghosh joined the Board. Upon completion of the new borrowing arrangements, Ron Emerson and Chris Every stood down from the Board. The Company thanks both Ron Emerson and Chris Every for their support as non-executive directors over the past few years, particularly during the re-banking process, and welcomes the new members to the Board.

Overview

Revenue in the first half of 2012 was £14.3 million (H1 2011: £14.4 million) as a result of lower manufacturing revenue offset by stronger turnover in Hayward Tyler's aftermarket business in the USA. Gross profit margin fell to 31% in the period (H1 2011: 34%) as a result of loss making contracts in the manufacturing division. Encouragingly the initial benefits of various cost reduction exercises have helped to reduce the impact of a lower profit margin and this delivered a trading operating profit of £0.4 million (H1 2011: £0.5 million). Further details of the financial performance are given in the Financial Review below.

Order intake in H1 2012 was £15.9 million (H1 2011: £16.5 million), which resulted in an order book of £20.2 million at 30 June 2012 (30 June 2011: £21.5 million). Strong contract wins after the half year have seen order intake rise to £20.3 million to the end of July 2012 against £18.8 million for the equivalent period last year.Significant wins include Hayward Tyler's largest ever oil and gas related contract valued at over £2.7 million for a range of sea-water lift and firewater pumps for the Hebron field off the coast of Newfoundland. Hayward Tyler has also won a further syngas project in South Korea valued at USD1.6 million (£1.0 million). This project is only the second of its type worldwide, Hayward Tyler having already won and successfully delivered the first to GE.

Manufacturing

Revenue from the manufacturing division was £4.7 million (H1 2011: £6.1 million), with the reduction reflecting the lower levels of new unit order intake in 2011. Gross profit margin fell, as a result of loss making contracts caused by a combination of supply chain issues, contract levies and warranty costs. This performance delivered an operating loss of £1.6 million (H1 2011: operating loss of £0.6 million).

As previously noted, given the performance of the manufacturing division, the decision was made to appoint two senior interim staff to lead a programme to restructure the Luton operations and to develop the supply chain. The restructuring led to a reduction in headcount of 32 people by the end of May 2012 across all departments including Hayward Tyler's Managing Director and Sales and Marketing Director, representing around 15% of employees based at the Luton site. At H1 2012 this restructuring project had cost £0.7 million, which will rise to £1.0 million in the full year, but it is expected to provide annualised savings of £1.0 million. Significant progress is being made on supply chain initiatives to provide improved reliability and further cost savings. These initiatives include a supply chain development project with MBE Cologne that will see part of the manufacturing process being pushed down the supply chain allowing Hayward Tyler to concentrate on its core strengths of technical and engineering expertise. Together with other projects, such as tighter project management including stronger commercial management, and a continuous improvement programme, these initiatives are expected to provide a more flexible cost base for the Group and remove the unexpected contract levies and warranty costs, which have impacted the performance of this division so negatively.

Aftermarket

Aftermarket revenue increased to £9.6 million (H1 2011: £8.3 million) driven by a strong performance from Hayward Tyler's business in the USA particularly from the nuclear sector, recovering from the lows post Fukushima, and from services work. Gross profit margin improved as a result of mix, which generated an operating profit of £2.9 million (H1 2011: £1.9 million). The strong performance of the aftermarket business illustrates the benefit of having an installed base on which to provide a service offering.

Outlook

The new financing arrangements and the steps being taken to make the manufacturing division more flexible are expected to provide greater financial security to the Group.

The Board expects to see a substantial improvement in the operational performance of the Group in the second half driven in part by the elimination of loss making contracts in the manufacturing division, savings from the restructuring of the Luton operations and a stronger Q4 2012 performance by the aftermarket business based in the UK, which has been held back by financial constraints prior to the new financing. These changes combined with an improving outlook mean that the Board therefore looks to the future with increased confidence.

E Lloyd-Baker

Chief Executive Officer

10 September 2012

Finance Review

Basis of reporting

The Group financial statements in this report have been prepared in accordance with International Financial Reporting Standards ("IFRSs"). To provide clarity to the results they have been analysed between trading and non-trading where trading represents the underlying business performance and non-trading includes the one-off costs of restructuring, refinancing costs, movements in provisions against receivables where collectability is in doubt due to political uncertainty and the non-cash fair valuing of derivative contracts.

Results overview

Revenue for the first half of 2012 was £14.3 million (H1 2011: £14.4 million). Gross profit margin decreased to 31% (H1 2011: 34%), driven by the increased losses in the manufacturing division, which delivered a trading operating profit of £0.4 million (H1 2011: £0.5 million). The trading EBITDA (earnings before interest, tax, depreciation and amortisation) for the period was £0.7 million (H1 2011: £0.8 million) (see note 5).

The Group is exposed to the US Dollar through its operating business in the USA and from UK exports to China. On a constant exchange rate* basis revenue in H1 2011 would have been higher by £0.1 million and operating profit in H1 2011 would have been marginally higher.

There was a non-trading operating loss of £0.5 million in the first half of the year (H1 2011: £nil), which relates to the cost of restructuring of the Luton operations (£0.7 million) offset by a reduction in the provision for doubtful debts (£0.2 million) as a result of collections. This provision was established at 31 December 2011 with a value of £0.8 million against receivables from jurisdictions where, due to political uncertainty, the collectability of part or all of the receivables was in doubt. The restructuring cost is expected to rise to £1.0 million by the end of the year and provide annualised savings of around £1.0 million.

Trading finance costs represent underlying interest payable and were £0.3 million (H1 2011: £0.3 million) and non-trading finance costs were £46,000 (H1 2011: £28,000), which relate to one-off costs associated with the re-banking process. These costs are expected to rise to around £0.7 million following completion of the new facilities in August 2012. Gains and losses relating to movements in fair values of derivatives are recorded in the income statement. This has given rise to a gain of £0.8 million in the period (H1 2011: loss of £0.4 million).

There is a trading tax charge for the period of £0.5 million (H1 2011: £0.3 million), which represents tax payable on profits in the USA. There is a non-trading tax charge of £0.1 million (H1 2011: £0.1 million).

There was a trading loss for the period of £0.4 million (H1 2011: £0.1 million), which delivered a trading loss per share of 1.12 pence (H1 2011: loss of 0.19 pence). The total loss for the period was £0.3 million (H1 2011: loss of £0.6 million), which delivered a loss per share of 0.86 pence (H1 2011: loss of 1.69 pence).

Statement of financial position

Total equity increased by £3.9 million in H1 2012 mainly as a result of the equity proceeds (£5.0 million) offset by estimated equity costs (£0.5 million), loss for the period (£0.3 million) and movement on the foreign currency translation reserve (£0.2 million).

Borrowings

Net debt decreased to £5.6 million (H1 2011: £9.4 million) from £10.0 million at year end mainly as a result of the proceeds of new equity. On a pro forma basis, if the re-banking process had been completed at the same time as the equity issue, net debt at 30 June 2012 would have been £9.5 million before costs.

Pensions

Within the UK the Group operates a defined benefit plan, with benefits linked to final salary, and a defined contribution plan. With effect from 1 June 2003 the defined benefit plan was closed to accruals and new UK employees offered membership of the defined contribution plan. The majority of UK employees are members of one of these arrangements.

A full actuarial valuation of the defined benefit plan is produced every three years (the last one being as at 1 January 2011 with a revised valuation due to be completed no later than 31 March 2015), however, a valuation is prepared annually to 31 December for the purposes of the annual report by independent qualified actuaries. The net obligation at 31 December 2011 was £2.5 million and this has been maintained at 30 June 2012.

Further comment on pensions is given in note 9 to these financial statements. 

N Flanagan

Chief Financial Officer

10 September 2012

* constant exchange rate is calculated by rebasing prior half year figures at current half year rates 

Consolidated interim income statement

* Anti-dilutive where there is a loss, therefore loss per share does not increase

Consolidated interim statement of financial position

Consolidated interim statement of comprehensive income

Consolidated interim statement of changes in equity

Consolidated cash flow statement

Notes to the interim financial statements

1. General Information

Specialist Energy Group plc's consolidated financial statements are presented in Pounds Sterling (£), which is also the functional currency of the ultimate parent company.

The principal operating business of Specialist Energy Group plc is Hayward Tyler Group Limited ("Hayward Tyler"). Established in 1815 in the UK, Hayward Tyler designs, manufactures and services a comprehensive range of fluid filled electric motors and pumps. These units are custom designed to meet the most demanding of applications and environments. Focused on the power generation (conventional and nuclear), oil & gas (topside and deep subsea) and industrial markets, Hayward Tyler is a market leader in its technology solutions. Furthermore, Hayward Tyler supplies and services a range of mission critical motors and pumps for the Royal Navy submarine fleet in the UK. Hayward Tyler also undertakes service, overhaul and upgrading of third party motor and pump equipment across all sectors.

In addition to the head office in Luton, England, Hayward Tyler has manufacturing and service support facilities in Kunshan (China), in Delhi (India), in East Kilbride (Scotland) and in Vermont (USA). These facilities and staff provide cover 24 hours 7 days a week for maintenance, overhaul and repair.

2. Basis of preparation

These unaudited condensed consolidated interim financial statements of Specialist Energy Group plc are for the six months ended 30 June 2012. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of Specialist Energy Group plc for the year ended 31 December 2011. The financial information for the year ended 31 December 2011 set out in these interim consolidated financial statements does not constitute statutory accounts as defined in the Companies Act 1931 to 2004. The Group's statutory financial statements for the year ended 31 December 2011 have been filed with the Companies Registry. The auditor's report on those financial statements was unqualified and did not contain a statement under section 15.4 of the Isle of Man Companies Act 1982.

3. Accounting policiesThe condensed interim consolidated financial statements have been prepared in accordance with the accounting policies adopted in the last annual financial statements for the year ended 31 December 2011.

4. Segmental reporting

Management currently identifies the Group's two service lines, Manufacturing and Aftermarket, as operating segments.

The activities undertaken by the Manufacturing segment include the manufacture of pumps and motors. The activities of the Aftermarket division include the servicing of, and provision of spares for, a wide range of pumps and motors.

The measurement policies the Group uses for segment reporting are the same as those used in its financial statements, except that:

- post-employment benefit expenses;

- expenses relating to share-based payments; and

- research costs relating to new business activities

are not included in arriving at the operating profit of the operating segments. In addition, corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment. The measurement methods used to determine reported segment profit or loss are consistently applied. No asymmetrical allocations have been applied between segments.

Segmental information can be analysed as follows for the reporting periods under review:

The Group's revenues from external customers and its non-current assets (other than goodwill and deferred tax assets) are divided into the following geographical areas:

Revenues from external customers in the Group's domicile, United Kingdom, as well as its major market the USA have been identified on the basis of the customers' geographical location. Non-current assets are allocated based on their physical location.

5. Trading EBITDA

The trading earnings before interest, tax, depreciation and amortisation is as follows:

6. Finance costs

Finance charges of £46,000 (H1 2011: £28,000) represent non-trading expenses and relate to one-off costs associated with the re-banking process. These costs are expected to rise to around £0.7 million following completion of the new facilities in August 2012. The gain arising on fair value of derivative contracts is a mark-to-market and a non-cash item.

7. Loss per share

The calculation of the basic loss per share is based on the loss attributable to the shareholders divided by the weighted average number of ordinary shares of the Company in issue during the period

The calculation of diluted earnings/(loss) per share is based on the basic earnings/(loss) per share, adjusted to allow for the issue of shares and the post tax effect of dividends and/or interest, on the assumed conversion of all dilutive options and other dilutive potential ordinary shares.

* Anti-dilutive where there is a loss, therefore loss per share does not increase.

8. Tax

Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available in future against which deductible temporary differences can be utilised. This recognition is supported by the profitability of the trading operations of the business.

9. Pension

No interim valuation of the pension liability has been carried out at 30 June 2012. As a result no actuarial gain or loss has been recognised in the consolidated statement of other comprehensive income and no change has been made to the net obligation for pensions recognised in the statement of financial position from that at 31 December 2011. The gains and losses for the full year together with any surplus or deficit at the year-end will be presented in the Annual Report and Accounts of the Group for the year to 31 December 2012.

The net obligation for pensions recognised in the statement of financial position as at 31 December 2011 was £2.5 million. This obligation was determined using actuarial assumptions developed by management under consideration of expert advice provided by Alexander Forbes, independent actuarial advisers. The assumptions included a discount rate of 4.6%, which was based on prevailing relevant bond yields at the time, and an inflation rate of 2.8% per annum, based on the market's expectation of future inflation at that time. As at 30 June 2012, there has not been a material change in such bond yields nor the expectations for inflation.

10. Share capital

Shares authorised and issued are summarised below.

May 2012 issue

On 15 May 2012, a total of 10,000,000 ordinary shares of 1p were issued by the Company at 50p per share, raising gross proceeds of £5.0 million before expenses. The premium arising on this share issue of £4.4 million after the deduction of expenses has been reflected in share premium.

Each share in issue has the same right to receive dividend and the repayment of capital and represents one vote at the shareholders' meeting of Specialist Energy Group plc.

11. Share options

Details of the share options outstanding at 30 June 2012 are set out below.

None of the Directors hold any options.

12. New financing arrangements

On 15 May 2012 the Company announced that it had issued 10,000,000 new ordinary shares priced at 50 pence to MBE Mineral Technologies Pte Limited ("MBE") raising £5.0 million before expenses and that the funds raised would be used to settle existing derivative instruments and to facilitate new borrowing arrangements. On 15 August 2012 the Company announced that it had completed the new borrowing and guarantee facilities with Standard Chartered Bank ("SCB") and MBE, which allowed it to repay existing borrowings from Lloyds TSB Bank plc and Nationwide Building Society and to settle the derivative instruments. The derivatives were settled at a cost of £3.6 million (value at 30 June 2012: £3.3 million, value at 31 December 2011: £4.0 million).

The Company now has access to the following facilities:

As part of the arrangements, the Company and certain of its subsidiaries were required to enter into security arrangements as follows:

Note 1 - The security for the SCB facilities includes (a) charges over the moveable fixed assets, inventory and receivables of Hayward Tyler Limited ("HTL") and Hayward Tyler Fluid Handling Limited ("HTFHL") and (b) the pledge of its shares in HTL and HTFHL by Hayward Tyler Group Limited.

Note 2 - The security relating to the MBE term loans has been provided directly to MBE's lender to secure a USD15.0 million term loan from Axis Bank. This security includes (a) a standard security over the freehold property at 41-43 Glenburn Road, East Kilbride, Scotland and an assignment of related rental income owned by Redglade Associates Limited, (b) a mortgage over the freehold property at 1 Kimpton Road, Luton, England and an assignment of related rental income owned by Redglade Investments Limited and (c) a pledge of shares in Hayward Tyler Inc, the Company's US subsidiary by its parent company Hayward Tyler Holding Inc.

The new facilities extend debt maturity, increase the amount of borrowing facilities available and provide a much stronger platform for the Group from a consortium of funders who are more appropriate for the Group's export markets of China and India.