Brady Regulatory News (BRY)

13 March 2018

Brady plc ("Brady" or the "Group")

PRELIMINARY RESULTS

For the year ended 31 December 2017

Brady plc (BRY.L), a global provider of trading, risk management and settlement solutions to the energy and commodities sectors, is pleased to announce its unaudited preliminary results for the year ended 31 December 2017.

Financial Summary

On 25 January 2018 the US Recycling business was sold to AMCS Group. The business has been treated as a disposal group in the preliminary financial information and has therefore been excluded from the statutory definition of revenue and costs, and the prior year comparatives have also been re-stated to exclude the US Recycling business. The performance of the Recycling business in 2017, together with the write down of the assets to the net sale proceeds have been brought into the income statement as a single line and classified as discontinued operations. In order to facilitate a comparison to reported prior year results the analysis above shows the results of the Recycling business for revenues, adjusted EBITDA and cash.

1 EBITDA before exceptional costs comprises operating profit before depreciation, amortisation and exceptional costs

2 The majority of exceptional items comprise costs relating to the functional transformation of the Group

3 Adjusted earnings per share is based on earnings excluding exceptional items, acquired intangible asset amortisation charges and share based compensation charges and at a consistent normalised tax rate assumed to be 15%

Operational Highlights

· During the year we have streamlined the group's structure into three distinct areas: Value Enablement, Business Enablement and Product teams;

· Focussed the business to concentrate on our core Commodities and Energy products;

· Sold the Recycling business to AMCS for $6.5 million, allowing us to strengthen our balance sheet;

· Put in place the overarching product design that will enable us to deliver new and innovative products;

· Delivered new product functionality for our Concentrates solution, created a consolidated Energy platform for the Integrated Single Electricity Market and developed new functionality to support market changes for Elhub in the Nordic market and LME Smart for the London Metals exchange;

· Continued our transition to a recurring revenue model with recurring revenues rising to 66% from 62%; and

· Secured seven new customers in our core E/CTRM markets.

Outlook

Going into 2018 we have a business staffed by great people, with products that are leading edge, as evidenced by two new contract wins in 2018 already. We have committed revenues of approximately £19 million and we have cash on the balance sheet of £4.1 million at 31 December 2017, and disposal proceeds of £3.6 million received after the year end. We are highly regarded in our industry and we have a robust financial position. The period of consolidation and re-structuring is complete; in 2018 we expect to resume progress in both sales and profitability.

Ian Jenks, Executive Chairman, said,

"The strategy and plan put in place by the Board towards the end of 2016 have not changed. As with all transformations the beginning sees a lot of significant change being implemented and hard work being completed to lay the bedrock for the future of the Company. We have completed most of the work and recalibration. The fundamental pillars of the plan that we set out in last years' annual report have continued and, as a result, we are firmly on course to deliver a growth company with strong IP, a strong base of blue chip customers, a high-quality revenue stream and a high level of recurring earnings". 

For further information please contact:

About Brady

Brady plc (BRY.L) is the largest European-headquartered provider of trading and risk management software to the global commodity and energy markets. Brady combines fully integrated and complete solutions supporting the entire commodity trading operation, from capture of financial and physical trading, through risk management, handling of physical operations, back office financials and treasury settlement, for energy, refined and unrefined, soft commodities and agriculturals.

Brady has 30 years' expertise in the commodity markets with some 300 customers worldwide, who depend on Brady's software solutions to deliver vital business transactions across their global operations. Brady clients include many of the world's largest financial institutions, trading companies, miners, refiners and producers, tier one banks and a large number of London Metal Exchange (LME) Category 1 and 2 clearing members and many leading European energy generators, traders and consumers.

For further information visit: www.bradyplc.com

Brady plc: Twitter/Facebook/LinkedIn

Chairman's statement

The strategy and plan put in place by the Board towards the end of 2016 have not changed. As with all transformations the beginning sees a lot of significant change being implemented and hard work being completed to lay the bedrock for the future of the Company. We have now completed most of the work and recalibration. The fundamental pillars of the plan that we set out in last years' annual report have not changed. As a result, we believe we are firmly on course to deliver a growth company with strong IP, a strong base of blue chip customers, a high-quality revenue stream with a high level of recurring earnings.

Strategic progress

At the beginning of 2017 we set out our priorities for the year and our progress against those items is as follows:

Complete our strategic plan: During the year we reviewed all our product lines and the markets that they addressed. We concluded that we wanted to focus on our core markets in Commodities and Energy where we had the best market positions. As a result, we chose to sell the Recycling business to AMCS. The transaction closed in January 2018 and as well as allowing us to focus, it also strengthens our balance sheet with the addition of £3.6 million of cash on 25 January 2018 and a further £1.0 million due in July 2019.

Complete our Company re-organisation: We started the year organising ourselves by function with global function-based heads in place. In Q4 we further improved accountability and ownership by simplifying our structure into three teams.

· The Value Enablement team, led by Scott Hestenes, now incorporates account management and is responsible for all sales to both new and existing customers.

· The Product team, led by our new Chief Product Officer, Libby Koehn, now covers all aspects of our product from market analysis, through research and development to customer delivery.

· The Business Enablement team, led by our Chief Financial Officer, Martin Thorneycroft, is responsible for delivering support to the business from finance, human resources and business systems.

Accelerate the move of our business model towards recurring fees: This is now our default position when quoting new business. During the year we delivered £0.2 million of new business on this basis (£0.8 million on an annualised basis) and our recurring revenues rose from 62% to 66% of total revenues. This transformation will lead to higher quality and more predictable earnings.

Catch up on our technical debt and delivery backlog: After many years of under-investment we have made a substantial investment in catching up our deliveries and had a number of important "go-lives" on trading desks with our key Fintrade customers. During the year we also invested in delivering further developments on the Concentrates product, a consolidated Energy platform for the Integrated Single Electricity Market and new functionality to support market changes for Elhub in the Nordic market and LME Smart for the London Metals exchange.

Re-architect our product: We now have in place the overarching product design that will enable us to deliver new and innovative product functionality on a progressive basis to our customers and to consolidate the functionality of our various products within a reduced number of platforms.

Put our people first: The transformation that we are going through, and the scale of the changes we are implementing inevitably throw up challenges for our team to solve. In Q3 we undertook an independent survey of our employees which highlighted the need for the senior team to do a better job of engaging with employees. We have put in place a plan, that included the organisational changes already mentioned, to make sure that this happens.

As mentioned above, on 25 January 2018 the US Recycling business was disposed of by the Group for a total of £4.6 million. This business has been treated a disposal group in the preliminary financial information and has therefore been excluded from the statutory definition of revenue and costs, and the prior year comparatives have also been re-stated to exclude the US Recycling business. The performance of the Recycling business in 2017, together with the write down of the assets to the net sale proceeds, have been brought into the income statement as a single line and classified as discontinued operations.

In 2017, revenue for the Recycling business was £4.2 million, adjusted EBITDA was £0.4 million, and operating profit before adjustments to the carrying value of net assets was £0.1 million.

For the continuing businesses in 2017, i.e. excluding Recycling, our revenues were £22.9 million and adjusted EBITDA was £0.2 million. We continued our transition to a recurring revenue model and signed new agreements worth £0.8 million per annum in a full year with recurring revenues rising from 62% to 66% for the continuing business.

Our operating loss before exceptional items was £4.0 million for the continuing business compared with a loss of £0.4 million in 2016. This year we incurred non-recurring costs of £2.4 million, to reorganise the business and to address contractual disputes. The reorganisation is substantially complete and we do not expect to incur any more of these types of costs in 2018.

We start 2018 with committed recurring revenues and contracted development and services revenues of approximately £19 million and cash on hand of £4.1 million. On 25 January 2018 we received the first tranche of the disposal proceeds for the Recycling division of £3.6 million.

I would like to thank all Brady employees for their exceptional hard work during the year which means that we have in place the structure and teams to execute on the 2018 strategic imperatives which are to:

· Deliver a customer centric experience to the market

· Re-establish our technology and product leadership

· Create simplicity and efficiency in our organisation

· Create a high-performance culture and company

Summary and outlook

Going into 2018 we have a business staffed by great people, with products that are leading edge, as evidenced by two new contract wins in 2018 already. We have committed revenues of approximately £19 million and we have cash on the balance sheet of £4.1 million at 31 December 2017, and disposal proceeds of £3.6 million received in January 2018. We are highly regarded in our industry and we have a robust financial position. The period of consolidation and re-structuring is complete; in 2018 we expect to resume progress in both sales and profitability and look to the future of the Group with confidence.

Ian Jenks

Executive Chairman

Operating review

New Customers

In 2017 we secured seven new customers in our core E/CTRM markets, up from four in 2016. One of our key strategic initiatives for 2017 was to build on our market leading position in the Nordic Energy markets to develop other European markets as they deregulate. Our first target was the Integrated Single Electricity Market (I-SEM) and we have been successful in securing three new customers that serve that market.

New Organisation

In 2017 we did much of the work required to move forward with our functional reorganisation. This included the Company wide role out of the core business systems needed to create a strong support, services and development organisation committed to a "One Brady" way of working. We continue to simplify and refine those systems to give us the operational leverage that will enable us to grow efficiently. As part of our strategic review we decided to complete the consolidation of the various code bases of our Brady Credit Risk product line and subsequently reduced the size of the Bangalore team from 34 to 14 employees. We are committed to a continuous process to deliver simplicity and efficiency in our business.

In line with the strategic review conducted earlier in 2017, we decided to exit the Recycling business and completed the disposal on 25 January 2018.

We enter 2018 with our three business functions; Value Enablement, Product and Business Enablement. Our goal for this year is to re-examine our business processes and reduce the level of complexity that has resulted from the initial consolidation and subscribe the mantra of "One way of doing things "One Brady"".

New Products

We are always adding new and expanding existing functionality to our product suite and this year was no exception. In 2017 we introduced some major new features in our concentrates products, added LME Smart to our commodity offering, and Elhub and I-SEM functionality to our energy products.

Concentrates

We have further integrated and expanded the functionality of our concentrate trading module into our core physical trading solution allowing customers to capture concentrates and refined metal in a single solution. This integration extends our offering with enhanced inventory management, trade finance, flexible rule definition and assay exchange, covering the entire workflow for metal and concentrate traders and provides the most comprehensive concentrates solution available in the market. We will continue to add additional functionality to this platform during this year.

LME

Over the year we have been developing our solution for LME brokers to support a continuing programme of change at the LME in adding further products and to support regulatory changes for MIFID II. Working closely with a user group of brokers we delivered the necessary changes to meet the regulatory deadlines and provide transaction and position reporting for MIFID compliance. The LME's "Strategic Pathway" will drive further changes in the coming year as they continue to adapt and add further products.

Elhub

The Elhub project in Norway represents a substantial market and regulatory shift of the power industry towards going digital, facilitating a supplier centric model as well as optimise the usage of smart meters. The aim is to reduce manual processing and automate market processes. Elhub will be the central datahub for managing all meter data as well as supporting central market processes. Brady has adapted its core physical trading platform, back-office settlement and communications solution for being able to support Elhub. The project was initiated by Brady in close collaboration with its Norwegian customers and is now in the process of being completed. The last major milestone was M7 systems approval and Brady has delivered all milestones according to the overall national implementation plan. Brady will be up and running, ready to support our customers in managing the cut-over as planned for February 2019.

Integrated Single Electricity Market

The Integrated Single Electricity Market (I-SEM) is the new wholesale electricity market arrangement for Ireland and Northern Ireland which is designed to integrate the all-island electricity market with European electricity markets, enabling the free flow of energy across borders. Brady was one of the first movers in making a commitment to adapt our energy systems portfolio to these new market changes. Brady's I-SEM front-to-back office solution, covering financial and physical trading has passed market conformance testing and will from the date of go-live be ready to support our customers in managing trading operations.

Ian Jenks

Executive Chairman 

Financial review

Introduction

On 25 January 2018 the US Recycling business was sold to AMCS Group. The business has been treated as a disposal group in the preliminary financial information and has therefore been excluded from the statutory definition of revenue and costs, and the prior year comparatives have also been re-stated to exclude the US Recycling business. The performance of the Recycling business in 2017 together with the write down of the assets to the net sale proceeds have been brought into the income statement as a single line, and classified as discontinued operations. In order to facilitate a comparison to reported prior year results the analysis below has been done both including and excluding the Recycling business. The details of the disposal and the impact of the disposal on the Group are also shown below.

Group trading performance

Revenue mix (Continuing business)

The revenue composition is summarised in the tables below:

In 2017 the Board took the strategic decision, where possible, to renew contracts on a recurring basis and accordingly during the year the Board elected to replace £1.7 million of one-off licence revenues, with rolling agreements providing recurring licence revenues, with an annual value of £0.8 million for an initial five-year term and rolling annually thereafter.

Revenue within the continuing businesses (Energy and Commodities products) fell in total to £22.9 million, a decline of 10%. Recurring revenues now comprise 66% (2016: 62%) of our total revenues. New recurring revenues recognised in the year amounted to £0.2 million (£0.8 million on a full year basis). The impact in 2017 of lost revenues from customers who gave notice to leave in 2016 was £1.1 million. There was no impact in 2017 from customers who gave notice to leave in 2017, however, the impact in 2018 will be £0.3 million. Services and development revenues at £5.3 million, were down £1.7 million on 2016, partly due to slippage of £0.8 million on certain projects into 2018. The reduction in licence revenues is due to our strategic focus of recurring revenues as we transition the business to the recurring revenue model.

Revenue mix (Continuing and discontinued businesses)

The revenue composition is summarised in the tables below:

In addition to the movements in revenue set out above for the continuing businesses, the Recycling operations had lower licence sales in 2017 and consequently lower services and development revenues.

Gross margin

The overall gross margin before exceptional items for the continuing business decreased to 56% (2016: 61%) as a result of the reduction in the higher margin recurring and licence revenues. Gross margin before exceptional items for the continuing and discontinued business decreased from 61% in 2016 to 56% in 2017 mainly as a result of the reduction in one off licence sales in the Recycling business.

Profitability

For the continuing business adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) before exceptional items decreased to £0.2 million (2016: £3.3 million). Including the discontinued business, adjusted EBITDA before exceptional items decreased to £0.6 million (2016: £4.5 million).

Operating loss before exceptional items and tax increased to a loss of £4.0 million (2016: £0.4 million loss). Loss after exceptional items and tax increased to £6.3 million (2016: £2.7 million loss) for the continuing business.

Research and development expenditure

Total research and development spend for the continuing business amounted to £7.5 million (2016: £4.9 million). Of this, £5.4 million was expensed (2016: £3.6 million) and £2.1 million (2016: £1.3 million) was capitalised. This was a year of substantially increased investment in R&D to catch up on our technical debt and delivery backlog. During the year notable developments were made to the Concentrates product and a new platform for trading on I-SEM was built. Significant new functionality was added to support market changes for Elhub and LME Smart.

Capitalised development, which is referred to internally within Brady as Strategic Software Development (SSD), represents large strategic developments of significant new modules or functionality. These projects are selected and approved by the Board as part of the business planning and budget process. The largest single capitalised project in 2017 was £0.5 million (2016: £0.6 million) in respect of the further development of a concentrates module for the Fintrade product. This allows a customer to trade refined and unrefined metals, concentrates, raw materials, softs and agricultures all on one platform and gives Brady a unique position in the market. SSD for 2018 is expected to be approximately £3 million.

Foreign exchange rates

Foreign exchange rates used to translate the balance sheets of our subsidiaries at the 31 December have weakened against Sterling between 2016 and 2017. However, the average exchange rates used to translate the Income Statements of our subsidiaries have strengthened significantly against sterling because most of the first half of 2016 was translated at pre-Brexit rates. Compared to the 2016 average rates the 2017 average rates for the US dollar, Norwegian Krone and Swiss franc all strengthened against sterling by 5%, 7% and 6% respectively. The impact of this for the continuing business was to increase both revenue and cost by £0.9 million respectively. Including the discontinued business the impact was an increase in revenue of £1.1 million and an increase in cost of £1.1 million.

Exceptional items and disposal of the Recycling business

The exceptional items comprise:

· £1.8 million of functional transformation costs. Of which £0.7 million was in relation to consultants and temporary staff costs; £0.5 million was in respect of redundancies, £0.4 million was in respect of recruitment costs and £0.2 million in respect of a legal claim. The functional transformation is now substantially complete and we do not expect to incur any more of these types of costs in 2018;

· £0.6 million in respect of a bad debt provision and a potential legal claim resulting from certain contractual disputes

Disposal of the Recycling business

The Recycling business was disposed of on 25 January 2018 and has therefore been accounted for as a disposal group. Its financial performance for the year to 31 December 2017 has been brought into the consolidated income statement as a single line together with an adjustment to write down the net assets to its disposal carrying value. The analysis of performance for 2017 and 2016 together with the fair value adjustments is shown below:

Cash received on 25 January 2018 amounted to £3.6 million with the balance of £1.0 million to be paid 18 months from date of disposal.

Income tax

The overall tax credit for the year was £0.1 million (2016: £1.2 million charge). The charge in 2016 was higher as the Group provided additional tax of £1.0 million in relation to an ongoing tax enquiry in an overseas jurisdiction. There were no significant developments on this matter during 2017.

Earnings and dividends

After including the exceptional charges, the loss after tax increased to a loss of £8.2 million (2016: £1.9 million loss).

The weighted average number of shares in issue increased to 83.3 million (2016: 83.1 million). Basic and diluted loss per share was 9.90 pence per share (2016: loss per share of 2.23 pence). Adjusted earnings per share, as calculated by market analysts, adjusted to exclude share-based payments, amortisation of acquired intangible assets, exceptional items and, assuming a consistent normalised tax rate of 15%, decreased to 5.01 pence loss per share (2016: 2.40 pence profit per share).

The Board does not propose a dividend for the year.

Share issues

285,000 (2016: 100,000) share options held under the Company's share option schemes were exercised. The exercise proceeds following the exercise of these share options were £190,000 (2016: £47,000).

Treasury shares

The total number of ordinary shares held in treasury during the year remained at 4,306 (2016: 4,306).

Consolidated Statement of Financial Position

The Group continues to retain a strong balance sheet, with significant cash reserves and no debt.

Non-current assets

Goodwill decreased to £15.7 million from £21.7 million mainly as a result of the reclassification of the Recycling business to a disposal group (£4.4 million) together with a foreign exchange loss of £1.6 million.

Acquired software decreased to £3.2 million from £5.4 million and acquired customer relationships decreased to £1.3 million from £2.6 million as a result of the reclassification of the Recycling business, and amortisation during the period.

Excluding the Recycling business, the Group capitalised £2.1 million (2016: £1.3 million) of expenditure in relation to Strategic Software Development programmes. The Group has a continued commitment of enhancing and expanding its offerings and taking its technology forward. The bulk of expenditure incurred during the year on research and development was, however, expensed as incurred. Net of the reclassification of the Recycling business and amortisation to date, the book value of capitalised development costs decreased to £5.5 million (2016: £6.3 million).

Current assets

After adjusting for the current assets of the Recycling business, trade and other receivables decreased to £4.6 million (2016: £7.3 million), included in this, amounts recoverable on contracts decreased to £0.4 million (2016: £1.1 million). Amounts recoverable on contracts arises principally on consulting and professional services revenue which is typically invoiced in the month following provision of the service. 

Current liabilities

After adjusting for the current liabilities of the Recycling business, trade and other payables decreased to £10.7 million (2016: £12.7 million). Included in this, deferred income decreased to £5.4 million (2016: £6.9 million). Deferred income arises principally as a consequence of payments received in advance of revenue recognition with respect to both rental and licence revenues.

Cash and cash flow

Operating cash generation was £(0.1) million (2016: £2.3 million).

The Group had investment outflows of £2.8 million (2016: £2.5 million), as spending on SSD increased in 2017 compared to the prior year.

Cash in hand at 31 December 2017 for the continuing operations was £4.1 million. Cash received on disposal of the Recycling business on 25 January 2018 amounted to £3.6 million.

Martin Thorneycroft

Chief Financial Officer

Consolidated income statement

For the year ended 31 December 2017

The accompanying notes are an integral part of this preliminary financial information.

Consolidated statement of comprehensive income

For the year ended 31 December 2017

The accompanying notes are an integral part of this preliminary financial information.

Consolidated statement of changes in equity

For the year ended 31 December 2017

A reconciliation of the components of Other reserves is given in note 11.

The accompanying notes are an integral part of this preliminary financial information.

Consolidated statement of financial position

As at 31 December 2017

The accompanying notes are an integral part of this preliminary financial information.

Consolidated statement of changes in cash flows

For the year ended 31 December 2017

The accompanying notes are an integral part of this preliminary financial information.

1 General information

Brady plc ("the Company") and its subsidiaries (together, "the Group") provides trading and risk management software to the global commodity and energy markets.

The Company is a public limited company which is listed on the Alternative Investment Market ("AIM") of the London Stock Exchange (BRY) and is incorporated and domiciled in England and Wales. The address of its registered office, which is also its principal place of business, is 2A Southwark Bridge Road, London, SE1 9HA.

The Group has its main operations in the UK, Switzerland, Norway, USA, Singapore and India and sells mainly in Europe, North America and Asia Pacific. The Group legally consists of 22 companies headed by Brady plc (UK) at 31 December 2017.

The preliminary financial information has been approved for issue by the Board of Directors on 12 March 2018.

2 Significant accounting policies

Alternative performance measures

The Group uses alternative (non-Generally Accepted Accounting Practice ('non-GAAP')) performance measures of 'Adjusted EBITDA' and 'Adjusted earnings per share (EPS)'. These measures are not defined within the International Financial Reporting Standards (IFRS) and, therefore, these measures as defined by the Group may not be comparable with similarly titled measures used by other companies. The Directors do not regard these measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS. The Directors present these measures in the financial statements in order to assist investors in their assessment of the trading performance of the Group. Adjusted EBITDA and Adjusted diluted EPS exclude specific items that are considered to hinder comparison of the trading performance of the Group's businesses either year on year or with other businesses and are used for internal performance analysis and in relation to certain employee incentive arrangements. The measures are explained as follows:

(a) Adjusted EBITDA: The Group calculates this measure by making adjustments to exclude certain items from operating profit or loss namely: amortisation or impairment of acquired and other intangible assets, depreciation and exceptional items such as acquisition, integration or reorganisation costs that meet the criteria to be adjusted.

The criteria for the adjusted items in the calculation of adjusted EBITDA is operating income or expenses that are material and either arise from an irregular and significant event or the income/cost is recognised in a pattern that is unrelated to the resulting operational performance. The calculation of this measure is shown on the Consolidated Income Statement.

(b) Adjusted earnings per share ('EPS'): The Group calculates this measure by dividing adjusted profit after tax by the weighted average number of shares in issue and the calculation of this measure is disclosed in Note 7. The tax rate applied to calculate the tax charge in this measure is a normalised tax rate for the year which is 15% (2016: 15%) which results in a comparable tax charge year on year. The Group also calculates this measure by excluding amortisation on acquired intangible assets, share-based payments charge, exceptional items such as acquisition, integration or reorganisation costs, and the actual tax charge from the measurement of loss for the year.

The adjusted EPS information is considered to provide a fairer representation of the Group's trading performance.

Segment reporting

IFRS 8 requires a "management approach" under which information in the financial statements is presented on the same basis as that used for internal management reporting purposes. Segment results are reported according to the internal management reporting structure at the reporting date.

Following the functional transformation of the business, effective 1 January 2017, the Group is now organised for reporting purposes into a single, global business unit. In the previous year, the Group was organised into three business units comprising different market sectors within the ECTRM market and each business unit was able to operate globally, being Commodities, Energy and Recycling.

The internal management accounting information has been prepared on an IFRS basis but has a non-GAAP "Adjusted EBITDA" as a profit measure for the overall Group and this is reported on the face of the income statement.

Exceptional items

Material, non-recurring and incremental costs and income are identified and reported as exceptional items separately from the underlying operating expenses and income. They comprise material amounts outside of the course of normal trading activities which are one off/non-recurring.

Discontinued operations

A discontinued operation is a component of the Group that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the income statement and are shown net of tax.

Held for sale assets and liabilities

Where an asset or group of assets (a disposal group) is available for immediate sale and the sale is highly probable and expected to occur within one year, the disposal group is deemed held for sale. At this point the gross assets and gross liabilities of the disposal group are shown separately as held for sale. The value of the disposal group is measured at the lower of the carrying amount and fair value less costs of disposal.

3 Segmental information

3.1 Results by operating segment

IFRS 8 requires a "management approach" under which information in the financial statements is presented on the same basis as that used for internal management reporting purposes.

Following the functional transformation of the business, effective 1 January 2017, the Group is now organised for reporting purposes into a single, global business unit. This is the basis of the Group's external market offering and internal organisational and management structure. The Chief Operating Decision Maker (CODM), which is the Operating Board comprising the Executive Directors and certain senior management, receives financial information reported as a single business unit and the Group has determined that it has only one reportable segment as defined by IFRS 8.

The internal management accounting information has been prepared on an IFRS basis but has a non-GAAP "Adjusted EBITDA" as a profit measure for the overall group and this is reported on the face of the income statement.

3.2 Revenue by nature

The Operating Board consider that the business has three revenue streams with different characteristics, which are generated from the same assets and cost base.

3.3 Geographical areas

The Group's revenue from external customers and information about its non-current assets (excluding deferred tax) by geography is detailed below:  

Revenues from external customers in the Group's domicile, the UK, as well as its major markets, EMEA, Americas and Asia Pacific, have been identified on the basis of the customer's geographical location. Non-current assets are allocated based on their physical location.

3.4 Information about major customers

There were no customers in 2017 or 2016 who contributed 10% or more of the Group's revenue.

4 Exceptional items

Functional transformation costs

During 2017, the Group incurred functional transformation costs totalling £1,818,000 comprising redundancy costs of £502,000, recruitment costs of £399,000, consultancy and temporary staff costs of £667,000 to align the organisational structure with the future strategy of the Group and a legal provision of £250,000.

£1,336,000 of these costs were paid during 2017 with the remaining £482,000 accrued at 31 December 2017 and due to be paid in 2018.

Contract dispute

During 2017, the Group made a full provision of £523,000 against a trade receivables balance and a £100,000 legal provision relating to certain client contract disputes.

5 Income tax

6 Discontinued operations

6.1 Description

In autumn 2017, the Board decided to exit the Recycling market in the USA and initiated an active program to locate a buyer for its subsidiaries Brady US Holdings, Inc. and Systems Alternatives International LLC. The associated assets and liabilities were consequently presented as held for sale in the 2017 financial statements.

The subsidiaries were sold on 25 January 2018 and the results for 2017 are reported in the 2017 financial statements as a discontinued operation in accordance with IFRS 5. Financial information relating to the discontinued operation is set out below:

6.2 Financial performance and cash flow information

The financial performance and cash flow information presented are for the years ended 31 December 2016 and 2017.

6.2 Financial performance and cash flow information (continued)

6.3 Assets and liabilities of the disposal group classified as held for sale

The following assets and liabilities were reclassified as held for sale in relation to the discontinued operation as at 31 December 2017:

7 Earnings per share (EPS)

7.1 Basic and diluted EPS

Basic earnings per share is calculated by dividing profit for the period attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. For diluted earnings per share, the weighted average number of shares is adjusted to allow for the effects of all dilutive share options outstanding at the end of the year. Options have no dilutive effect in loss-making years, and hence the diluted loss per share for the year is the same as the basic loss per share.

7.2 Adjusted diluted EPS

8 Cash and cash equivalents

9 Share capital and premium

The Company has one class of ordinary shares which carry no right to fixed income. The share capital of Brady plc consists only of fully paid ordinary shares with a nominal value of £0.01 per share. All shares are equally eligible to receive dividends and the repayment of capital and represent one vote at shareholders' meetings of Brady plc.

During the year, the Company issued 285,000 shares as a result of share options exercised with a weighted average exercise price of £0.67 per share for total cash consideration of £190,000.

10 Treasury shares

Treasury shares comprise own shares in Brady plc purchased and retained by the Company:

11 Other reserves

The following table shows a breakdown of the balance sheet line item 'other reserves' and the movements in these reserves during the year. A description of the nature and purpose of each reserve is provided below the table.

12 Post balance sheet events

The disposal of the Recycling business is a significant adjusting event that occurred in January 2018 and is disclosed in note 6. No other adjusting events have occurred between 31 December reporting date and the date of authorisation.

13 Statement by directors

While the information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRSs') as adopted by the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRSs. The accounting policies adopted in this preliminary announcement are consistent with the Annual Report for the year ended 31 December 2017.

The financial information set out above, which was approved by the Board on 12 March 2018, is derived from the full unaudited Group accounts for the year ended 31 December 2017 and does not constitute the statutory accounts within the meaning of section 434 of the Companies Act 2006.

The Board of Brady plc approved the release of this preliminary announcement on 12 March 2018.

The Annual Report for the year ended 31 December 2017 will be posted to shareholders in due course and will be delivered to the Registrar of Companies following the Annual General Meeting of the Company. The report will also be available on the investor relations page of the Group's website. Further copies will be available on request and free of charge from the Company Secretary.