Tclarke Regulatory News (CTO)

TClarke plc - Results for the year ended 31st December 2013

*Underlying profit is profit from continuing operations adjusted for amortisation of intangible assets and non-recurring costs

· Final dividend increased by 5% to 2.10p per share

· Revenue and profit increased despite continuing margin pressures

· Order book up £20m to £250m and continues to be replenished

· £8m overdraft facility renewed

· New £5m Revolving Credit Facility agreed February 2014

· Strategy focused on profitable growth with pipeline of opportunities identified

· Russell Race retiring as Chairman at AGM - David Henderson to assume Chairmanship after AGM

New contracts secured include:

Mark Lawrence, Chief Executive commented:

"The Company performed strongly last year, despite continuing challenges facing the construction sector. We were pleased to secure a number of new prestigious projects throughout the UK and our order book now stands at £250 million. I still believe there are considerable opportunities in the UK construction market. Looking ahead for the rest of this year, as our markets recover we feel confident that we are well positioned to resume our growth. As a sign of our confidence we have increased the final dividend by 5%."

-ends-

Date: 18th March 2014

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Chairman's statement

Reflecting on 2013

While the recession may appear to be officially over, its effects were still being felt in construction throughout 2013. Demand from the public sector remained suppressed and private sector confidence, though returning, was by no means translated into the demand that is a feature of buoyant markets.

In January 2014 we reported that one major contract was nearing completion but the final account settlement remained outstanding. We can confirm that the project, within our Mission Critical Division, has now achieved practical completion, however it is disappointing that while TClarke complied with its contractual obligations diligently and proactively, the principal contractor continues to frustrate the account settlement process. The board, having reviewed an independently produced assessment of our account, continues to believe that we should vigorously pursue our full entitlement. At this stage we continue to recognise no profit or loss on this contract. As a result our year end cash position was also impacted but we recorded a net cash position of just over £1 million as at 31st December 2013.

Our headline numbers are all the more creditable given the pressures on margins that have persisted for several years now, and I am pleased to be able to announce a 5% increase in the proposed final dividend to 2.10p per share (2012: 2.00p per share).

Looking behind the headlines, as this report, in line with new reporting standards, sets out to do, you can see how in 2013 TClarke not only achieved sound financial figures, but also set itself for growth in ways that make compelling business sense.

A responsible company

In 2013 TClarke-sponsored sports teams turned out on playing fields across the country, our operatives dressed in pink and danced, wore wigs, went back to the 80s and put on Christmas jumpers - all in the name of charity.

At the same time we worked to achieve a range of new accreditations to improve our environmental and safety performance to deliver projects on every scale, from private homes to the Fife Renewables Innovation Centre and the new Brent Civic Centre - one of the first buildings to achieve the BREEAM Outstanding mark for its environmental performance. 

TClarke in 2013 continued to train, to take on apprentices - both school leavers and adults - and create and sustain real engineering jobs. This is one very clear mark of our approach of which I'm particularly proud.

We have a primary duty to our shareholders - to create growth and value - and not only do we believe that our responsible approach is the right way to go about doing that - we also believe it is the most effective way.

Handing over after 16 years with TClarke

After the Annual General Meeting in May I shall be stepping down as Chairman of TClarke after 16 years with the company. So I feel it right to remark now on the nature of the brand and business with which I have been privileged to enjoy this long association.

'Authenticity' is something that marketing people work hard to present in the brands they promote - because being genuine and trustworthy is something customers value very highly. TClarke has more of this quality than most. This is an organisation that has retained a high reputation in the industry throughout my years of involvement. It is an organisation that motivated young people are excited to join. It is an organisation that, right across the country, can introduce you to customers with whom it has highly effective and long-term relationships. TClarke in 2014 is a fine British engineering company. It was also, during 2013, a company that worked extremely hard to organise itself for profitable growth, while some others in the market were primarily focused on survival. This places TClarke exceptionally well to take advantage of improving market conditions.

David Henderson will assume the Chairmanship role following the conclusion of the Annual General Meeting.

Looking ahead

We are a prudent and realistic organisation and over the years that approach has stood us in good stead. So while we do not see significant market recovery happening until 2015, we do look to 2014 with considerable relish. The work we have done in recent years to shape our organisation and market offer began to deliver in 2013, and so in 2014 I expect that process to gather pace. In as much as we are realistic about the continued delay of full recovery, we are also realistic about the market demand for the highest levels of quality, reliability and capability to deliver. As construction becomes more complex, as the need to drive down cost and project time-frame increases, as the push to improve safety goes on, there is considerable advantage in having the ability to win the most challenging projects and then adding that fresh experience to the portfolio for next time. This is what keeps our competitive edge - and that in turn gives us strong prospects for growth and value creation.

Thanks to our people and all our stakeholders

As a final note, I would like to take the opportunity to thank our people across Britain, working in our manufacturing facilities to design vast prefabricated modules with fine precision, working on extraordinary FM challenges for some of Britain's most famous engineering companies, working on homes, offices, factories, academies, hospital units and iconic projects nationwide, showing their skills and professionalism and passing all that on to the next generation of TClarke engineers. I am very proud indeed to have been associated with them and their work. I am proud of the working relationships they have forged. I should also like to thank our supply chain partners and our clients for their work and collaboration. Finally, I should like to thank our shareholders for their continued support. The company in which we are all stakeholders is one that continues to grow and make progress in the right way - and to be a very positive force in the places in which it operates.

Russell Race

Chairman

18th March 2014

Chief Executive Officer's review

Reflections on 2013

For TClarke, this was a key year - a year in which the impact of our medium-term strategy began to deliver results across the whole organisation, despite the market conditions.

There was modest growth in UK GDP in every quarter during 2013; however this slow recovery did not result in any major change in business conditions in the construction industry. Price-driven competition retained its grip across our markets and we continued to see some competitors exit our markets and many competitors continued to make non-economic bids in order to keep going.

With the extremely challenging market conditions persisting for yet another year, the continued excellence in performance which our people have achieved is all the more creditable. In winning safety awards and client commendations up and down the country, in finding new ways to collaborate, in winning work and in building our reputation for quality, our people demonstrated that there is substance to the brand commitments we make.

I am also very pleased to report on all the work in 2013 that was carried out to shape and improve our business; throughout the year we executed on our strategic plans to further integrate various aspects of our nationwide operations, introduce new areas of skill and service and indeed to successfully develop our new business units - particularly the Mission Critical and Transport teams which enjoyed breakthrough years in their respective sectors.

How we performed during 2013

TClarke, throughout these challenging times, has worked incredibly hard to find and win opportunities where our combination of advantages allows us to tender for and win work at realistic rates. Margins remain under severe pressure; but nonetheless, with our commitment only to tender for work at commercially viable rates, we still managed to increase the value of our order book during the period from £230 million to £250 million. We are fortunate to be involved in many complex and high profile projects in 2013 and into 2014.

2013 was also very much the year in which effective, nimble, cross-group collaborations became a reality for TClarke. Major contracts across sectors including residential, commercial, data centres and large-scale industrial FM were won due to cross selling, new combinations of regional teams, new combinations of specialist teams and newly combined marketing activities. Organic growth of this kind has been a key strategic objective and is the result of a range of group integration programmes.

A clear strategic business vision

Our vision of 'achieving world class performance in the quality of our work, the strength of our relationships and the value we can create, through innovation, for all our stakeholders' is focused on further developing our strengths for the needs of a changing, challenging and rewarding industry. In order to achieve that vision, our stated medium-term strategy is 'to sustain world class building services capability and build a "growth-ready" platform capable of exploiting existing and fast changing opportunities for value creation'. In essence, this is all about retaining and enhancing our traditional strengths, but also developing our organisation so that we can act quickly and decisively where opportunities arise.

Preparing a 'platform for growth'

We see the potential for significant and sustained growth in our business in several areas of our operation. In recent years we have successfully executed a strategic plan that has seen us develop from a London electrical contractor with a range of independent regional businesses into what in 2013 could clearly be seen as a full service nationwide building services contractor. In 2013 we continued with a series of 'back of house' programmes to further integrate our systems and processes and integrate our marketing and bid and tender activities.

These projects delivered value for us in many ways. Perhaps the most readily noticeable was our ability to grow an entirely new operation across Wales at low cost and in rapid time - where we were able to enter the market with a reputable team and, due to our integration projects, have that team fully supported with group systems and resources on tap from day one. During 2013 that team established itself as a major building services player in this part of the UK, winning significant clients with long-term prospects and significant revenue for the group. Over the same time, we also identified, bid for, won and delivered projects in Birmingham to establish our presence in the West Midlands. Critically, we were able to do this the right way - delivering the high quality of expertise, service and delivery for which the TClarke brand is known.

Our people

In 2013 TClarke had 100 apprentices in training and a core nationwide resource of 1200 highly-skilled, highly motivated, directly employed people. As we have worked during the year to re-engineer our group for increased efficiency and growth potential, it has been an equally central strategic objective to retain the longstanding focus on our people, which drives our success.

Safety remains our number one priority and our investment in a comprehensive in-house safety organisation continued through 2013 with new safety campaigns delivered throughout the year. In 2013, as well as our ongoing investment in training, we invested considerable resources to develop our technical capabilities in new areas like Building Information Modelling (BIM).

Opportunities and priorities looking forward

Although we are hopeful that there may be some uplift in market conditions during 2014, we do not at present see a meaningful recovery happening in the construction sector until 2015. As the market picks up, clients and principal contractors will place a higher premium on securing the high quality, reliable and large-scale resources necessary for their projects.

In 2014 our business priorities will be:

Safety

Safety will remain our number one priority and subject to ongoing investment and innovation in order to take best care of our people.

Quality

Although we are an organisation that has earned a reputation for good quality work and focused its business model around the ability to deliver quality work through quality people, nonetheless quality is hard to measure in ways that are useful in analysing and improving business methods and performance. Nonetheless our business strategy does identify areas where the market is redefining best practice models - particularly in innovation and relationships. And so, during 2014 we will develop our definition of quality to stay ahead of these changes.

Delivery of our strategy for growth

Our vision and strategy is laid out in some detail. It is a comprehensive plan clearly aligned to evolving market needs, the economic cycle and our business strengths. We will continue to focus on delivery of all parts of this plan so that we can take full advantage of the opportunities for growth and improving financial performance.

During 2014 we will be introducing a new high quality in-house Design & Build operation based in new premises in Colchester. As with all of our successful specialist market propositions, we will do this with a focus on quality from the outset and with a clear intent towards significant growth opportunities.

Mark Lawrence

Group Chief Executive

18th March 2014

Financial review

Group performance

The construction sector continued to face a challenging operating environment in 2013, so it is pleasing to be able to report improved revenue and profit for the year.

The efforts we have made to manage our cost base and the discipline we have maintained in only bidding for work at commercially viable rates have been vindicated, with underlying profit margin maintained on an increased revenue. Our underlying administrative costs have fallen £0.8m (3.8%) year on year in spite of revenue increasing by 12%.

The net finance cost was £0.6m (2012: £0.5m), including a £0.5m (2012: £0.4m) non-cash pension scheme finance charge.

Revenue

Revenue growth was driven by our South division, with the delivery of some significant projects across the region and clients valuing the quality, drive and commitment of our people at all levels. Our North and Scotland divisions have continued to make steady progress, and have benefited from the collaborative working arrangements that are now embedded within the group, although overall revenue was down in both regions (the North having benefited from some significant one-off projects for a major Facilities Management client the previous year and the housing sector in Scotland having to contend with skill shortages across all trades which have delayed building programmes).

Non-underlying items of expenditure

Non-underlying items of expenditure comprise £0.3m (2012: £0.3m) amortisation of intangible assets and £0.6m (2012: £0.9m) non-recurring costs (2013: £0.6m exceptional subcontractor claim costs, 2012: £0.4m restructuring costs, £0.3m long-term employee benefits arising out of previous acquisitions, and £0.2m adjustments to deferred consideration in respect of prior year acquisitions). Further analysis of these costs is provided in Note 2 to the financial information. Exceptional subcontractor claim costs relate to a one-off historic subcontractor issue which crystallised during 2013 but had previously been expected to result in no liability to the group, and the cost of successfully defending a multitude of adjudication claims brought by a single subcontractor.

Tax

Tax expense was £0.6m (2012: £0.4m), giving an effective tax rate of 36.3% (2012: 29.2%, having benefited from adjustments to prior year tax computations). The effective tax rate is high compared with the standard corporation tax rate for the year of 23.25% due to the disproportionate impact of non-taxable items in a low profit environment and the impact of the reversal of deferred tax assets caused by the falling statutory tax rate. We expect the effective tax rate to fall as profitability recovers.

Dividends

The board is proposing a final dividend of 2.10p (2012: 2.00p), giving a total dividend for the year of 3.10p (2012: 3.00p), which is covered 1.4 times by underlying earnings.

The final dividend will be paid, subject to shareholder approval, on 16th May 2014 to those shareholders on the register at 16th April 2014. The shares will trade ex-dividend on 22nd April 2014. A dividend reinvestment plan (DRIP) is available to shareholders.

Cash flow and funding

The group's cash balances decreased to £1.0m at 31st December 2013 (2012: £5.6m), due to the prolonged process of agreeing final account settlements. This has been a feature of the recession over the last few years, however the impact has been particularly severe this year with a major contract in our Mission Critical division completing just after year end. The group had in place throughout the year an £8m overdraft, renewable annually. The group is funded by share capital and retained reserves, in addition to its banking facilities, and there are no plans to change this structure.

Post balance sheet events

Since the end of the year, the company has successfully negotiated a £5m Revolving Credit Facility committed until 31st March 2017, in addition to renewing its £8m overdraft facility.

Pension obligations

In accordance with IAS 19 'Employee Benefits', an actuarial gain of £1.2m has been recognised in the year (2012: loss £1.9m), with the pension scheme deficit decreasing by £1.0m to £10.9m (2012: £11.9m). The decrease in the deficit reflects the beginnings of an upward shift in bond prices, on which the discount rate is based, from historically low levels, and improving investment performance.

The last triennial valuation of the pension scheme as at 31st December 2009 showed a deficit of £7.9 million, which represents a funding level of 71.5%. The group has put in place a deficit reduction plan to eliminate the deficit over a number of years, with total employer contributions remaining at 16% of pensionable salary for three years, rising to 18% from 1st January 2014. Employer contributions for 2014 will amount to approximately £1.1m. The group has provided security to the pension scheme in the form of a charge over property assets with a market value of £3.1 million. The next triennial valuation, as at 31st December 2012, is still in progress at the date of this report.

Contingent liabilities

A subsidiary company is one of a number of parties that are subject to a substantial damages claim in respect of work carried out in 2007. Damages were awarded against the company, which were settled by the company's insurers during the year. The award is subject to appeal and the apportionment of costs, which are believed to be substantial, has not yet been determined. Although there is considerable uncertainty with regard to this claim it is considered unlikely that a liability will ultimately fall to the group and no provision has been made in respect of this claim in the financial statements. Further details of which are given in Note 10.

Accounting policies

The group's accounting policies are consistent with the accounting policies applied in previous years.

Net assets

A significant part of the group's net assets are represented by goodwill in the underlying businesses. The board has undertaken a rigorous impairment review as at 31st December 2013, and has concluded that no impairment is necessary.

Net assets excluding goodwill and other intangible assets improved to £1.3m (2012: £0.4m), and the group's net current assets increased to £4.7m (2012: £4.2m).

Audit opinion

The auditor's report on the financial statements is unqualified, but does include an emphasis of matter paragraph concerning the recoverability of the Group's position in respect of a major project in our Mission Critical division. Further details of this project are included in Note 2 to the financial information.

Outlook

The strength of our order book and our performance throughout the recession leave us well placed to grow the business as confidence returns to our markets.

Martin Walton

Finance Director and Company Secretary

18th March 2014

Principal risks and uncertainties

The principal risks and uncertainties faced by the group and the controls and mitigating factors on place are as follows:

Market conditions

The markets in which we operate have been extremely difficult over the last four years. Public sector cutbacks and low levels of confidence in the private sector have restricted the opportunities available in the construction sector generally, increasing market competition for the remaining work.

The group operates throughout the UK with no overreliance on any one sector. We are actively seeking to develop further relationships with key clients, contractors and suppliers, to build on our financial strength and reputation.

The board remains committed to the principle that we will not bid for work below commercially acceptable rates. It continues to make conservative assessments of final accounts from project completions and the likely outcome for a number of ongoing projects. We have aligned our cost base to reflect workloads; further realignments could be undertaken if considered appropriate to reflect changes in the prevailing market conditions.

Contractual and operational risk

At any time there may be several hundred contracts in progress across the country. Inadequate supervision would result in poor quality and low productivity, both of which would result in loss of reputation and profit. Failure to deliver projects to time, quality or budget, and contractual disputes that can arise over the scope and valuation of contracts, may make the ultimate outcome of contracts uncertain.

We are continually assessing and managing operational risk through the bidding stage to the final commissioning of an installation and handover to the client. We have experienced teams of estimators, and all bids are reviewed by a director and checks carried out to avoid incorrect or non-competitive pricing. Our contract engineers, supervisors, surveyors and skilled tradespeople receive regular training to meet our demanding standards. All key suppliers and subcontractors are subject to regular performance reviews. Our business information systems monitor profit and cash flow throughout the life of a contract, and regular review meetings are held at the contract and business unit level to monitor progress and identify and address issues as they arise.

Regulatory risks

The group is subject to complex and evolving tax, legal and regulatory requirements. A breach of laws and regulations could lead to litigation, investigations or disputes, resulting in additional costs being incurred, civil and/or criminal proceedings and reputational damage.

The group monitors legal and regulatory developments in the areas in which it operates, and seeks legal or other specialist advice as appropriate. It is group policy to require that all subsidiaries, employees, suppliers and subcontractors comply with applicable laws and regulations. Training is provided on legal and regulatory changes as required.

Reputational risks

The group's ability to tender for new business and to maintain strong relationships with customers, suppliers, employees and other stakeholders is dependent on how it is perceived by others.

The group works hard to maintain its reputation in all areas. The group supports high standards of business ethics, sustainability and compliance policies, and has a strong commitment to improving health and safety at work for all. Feedback is sought from key stakeholders on a regular basis, and actions arising from this feedback discussed and agreed at an appropriate level.

People

Providing a consistently high quality service to our clients is only possible with the right people: attracting and retaining high calibre staff is key to our success. This is achieved through a remuneration system linked to performance, strongly embedded training schemes throughout the group and by providing opportunity and encouragement to help our people reach their full potential.

The group remains committed to providing the best training for all members of staff and draws on the expertise of its people from all group companies across the UK. However as a result of the current market conditions we have and will continue to align our business at all levels to match our current expectations. We have continuous dialogue with the trade unions and continue to review our policies and procedures in managing this risk.

Health and safety

Failure to manage health, safety and environmental risks could cause serious injury or loss to employees or third parties and expose the group to significant financial and reputational loss and litigation.

At TClarke, health, safety and environmental considerations are at the forefront of every working and management decision and one of the prime elements considered before any undertaking. This is achieved through our senior managers participating in a recognised safety leadership scheme and operatives receiving ongoing topical health, safety and environmental training. The Group Managing Director is the board member responsible for monitoring our overall health and safety and safety performance.

Pensions

The group is exposed to funding risks arising from changes in longevity, inflation and investment assumptions in relation to its defined benefit pension scheme.

The defined benefit pension scheme is open to qualifying senior management and staff within the group. Following consultation with members, the group altered the structure of the scheme in 2010 from a final salary scheme with an accrual rate of 1/60th to a Career Average Revalued Earnings scheme with an accrual rate of 1/80th. The scheme remains open to new members. Ongoing funding and regulatory requirements are monitored in conjunction with external actuarial advisers and regular meetings are held with the pension scheme trustees.

Cost inflation

Commodity prices of copper and steel are major component parts within our industry. In addition, UK prices of materials that we procure could be adversely affected by any weakness of sterling.

The majority of projects we secure do not allow for the recovery of increased labour and material costs. We have in place formal supplier framework agreements across the UK to manage and, where possible, mitigate this risk, with prices locked in through procurement at the beginning of a contract wherever possible.

Labour rates are monitored regularly to ensure tender rates are realistic and increases are managed.

Credit and counterparty risk

The group's main financial assets are contract and other trade receivables and cash and bank balances. These assets represent the group's main exposure to credit risk, which is the risk that a counterparty will fail to discharge its obligations, resulting in financial loss to the group. The group may also be exposed to financial and reputational risk through the failure of a subcontractor or supplier.

The financial strength of counterparties is considered prior to signing contracts and reviewed as contracts progress where there are indications that a counterparty may be experiencing financial difficulty. Procedures include the use of credit agencies to check the creditworthiness of existing and new clients and the use of approved suppliers' lists and group-wide framework agreements with key suppliers.

Applications for payment are made as work progresses and, as far as commercially practicable, contractual terms are negotiated to minimise the gap between work being performed and receipt of payment.

Liquidity risk

The group's business is dependent on the availability of cash resources, banking facilities and the ability to provide performance and other bonds as necessary.

The group manages liquidity risk by maintaining adequate reserves and banking facilities, monitoring cash flows and matching maturity profiles of financial assets and liabilities within the bounds of its contractual obligations. The group arranges banking facilities and places surplus cash on deposit only with large UK financial institutions.

The group has in place an £8 million overdraft facility to help manage short-term fluctuations in working capital, and since the year end has arranged a committed three year £5m Revolving Credit Facility (subject to certain covenants).

Cash flow interest rate risk

The group is exposed to changes in interest rates on its bank borrowings and deposits.

The group's financial instruments comprise cash and cash equivalents, bank deposits, overdraft facilities, finance leases, contract and other trade receivables, and trade balances and similar balances arising directly from operations. Surplus cash is placed on instant access, short-term or long-term deposits at fixed or floating rates, taking into account future cash requirements based on short and medium-term cash projections. The group does not trade in speculative financial instruments.

Consolidated income statement

for the year ended 31st December 2013

Consolidated statement of financial position

as at 31st December 2013

Consolidated statement of cash flows

for the year ended 31st December 2013

Consolidated statement of changes in equity

for the year ended 31st December 2013

Notes to the preliminary financial statements

Note 1 - Basis of preparation

TClarke plc (the 'company') is a company listed on the London Stock Exchange, incorporated in the United Kingdom. The consolidated preliminary financial statements (the 'financial information') comprise the financial statements of the company and its subsidiaries (together the 'group') and are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union, IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS and have been prepared on a going concern basis under the historic cost convention as modified by the revaluation of land and buildings.

The financial information does not constitute the company's statutory accounts for the year ended 31st December 2013 or 2012 but is derived from the audited financial statements for the year ended 31st December 2013. Statutory accounts for the year ended 31st December 2012 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31st December 2013 will be delivered to the Registrar of Companies in due course and will be available on the company's website at www.tclarke.co.uk. The auditors have reported on those accounts; their reports were unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for the year ended 31st December 2012 or for the year ended 31st December 2013. The audit report on the accounts for the year ended 31 December 2013 contains an emphasis of matter in respect of the recoverability of a contract balance in respect of a major project within our Mission Critical division, further disclosure of this matter is made in Note 2 'Significant judgements and sources of estimation uncertainty'.

The following standards have been adopted for the first time for the financial year beginning on or after 1st January 2013:

· IAS 19, 'Employee benefits', was amended in June 2011 and is applicable with effect from 1st January 2013. The main impact on the group is to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability. The other significant change introduced by the standard is to require all past service costs to be recognised immediately, however, the group already accounted for past service costs in full. The revised standard had no significant impact on reported profit or net assets in either year.

· Amendment to IAS 1, 'Financial statement presentation' regarding other comprehensive income was applicable with effect from 1 January 2013. The main change resulting from these amendments is a requirement for entities to group items presented in 'other comprehensive income' (OCI) on the basis of whether or not they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments).

There are no other standards, interpretations or amendments that are effective for the first time for the financial year beginning on or after 1st January 2013 that have had a material impact on the group's financial statements.

Note 2 - Significant judgements and sources of estimation uncertainty

In the application of the group's accounting policies, which are described above, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities at the reporting date and the amounts of revenue and expenses incurred during the period that may not be readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. 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 the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The estimates and assumptions that have the most significant impact are set out below.

Revenue and margin

The recognition of revenue and profit on construction contracts is a key source of estimation uncertainty due to the difficulty of forecasting the final costs to be incurred on a contract in progress and the process whereby applications are made during the course of the contract with variations, which can be significant, often being agreed as part of the final account negotiation. The directors also take into account the recoverability of contract balances and trade receivables and allowances are made for those balances which are considered to be impaired.

Receivables on a major contract

There is one major contract in particular which was nearing completion at the year-end but for which the final account settlement remains outstanding. The project, within our Mission Critical Division, has now achieved practical completion, however the principal contractor is continuing to frustrate the account settlement process. Amounts receivable includes £6.5m of uncertified applications in respect of this contract, and further applications for payment have been made after the year end. The Board, having reviewed an independently produced assessment of our account, consider that it is appropriate to continue to recognise the contract on the basis that full recovery of our costs up to and after the year end is probable. At this stage we continue to recognise no profit or loss on this contract.

Contingent liabilities

The recognition of contingent liabilities is a source of estimation uncertainty due to the judgement around when a liability should be recognised and when disclosure is appropriate. The group is one of a number of parties subject to a damages claim in respect of work carried out in 2007. There is considerable uncertainty around the quantum of any liability that may arise in respect of this claim, further details of which are given in Note 10 below.

Fair value of consideration and assets and liabilities acquired in business combinations

Key judgements in estimating the fair value of assets and liabilities acquired in business combinations include the identification and measurement of identifiable intangible assets, and the valuation of contract balances and receivables. Key judgements in determining the fair value of consideration payable include assessment of the monetary amount of contingent consideration that will be transferred in the future and the appropriate discount rate to be applied. There were no acquisitions undertaken during the year or the preceding year.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating unit giving rise to the goodwill, including the estimation of the timing and amount of future cash flows generated by the cash generating unit and a suitable discount rate.

Retirement benefit obligations

The costs, assets and liabilities of the defined benefit scheme operated by the group are determined using methods relying on actuarial estimates and assumptions. Details of the key assumptions are set out in Note 7 below, and include the discount rate, expected return on assets, rate of inflation and mortality rates. The group takes advice from independent actuaries relating to the appropriateness of the assumptions. Changes in the assumptions used may have a significant effect on the income statement, statement of comprehensive income and the statement of financial position.

Note 3 - Segmental information

The group provides electrical and mechanical contracting and related services to the construction industry and end users.

For management and internal reporting purposes the group is organised geographically into three regional divisions; the South, the North and Scotland, and an internal property division reporting to the Chief Executive, who is the chief operating decision maker. The measurement basis used to assess the performance of the divisions is underlying profit from operations, stated before amortisation of intangible assets and non-recurring costs, (adjustments to purchase consideration, long-term employee benefit costs arising from acquisitions, restructuring costs, and exceptional subcontractor claim costs). All assets and liabilities of the group have been allocated to segments apart from the retirement benefit obligation, and tax assets and liabilities.

All transactions between segments are undertaken on normal commercial terms. All the group's operations are carried out within the United Kingdom, and there is no significant difference between revenue based on the location of assets and revenue based on location of customers.

Segment information about the group's continuing operations is presented below:

Non-recurring costs

1. Exceptional claim settlement costs relate to the settlements of a sub-contractor claim against the group for work carried out in previous years and the costs of successfully defeating adjudication claims brought by a subcontractor for works carried out during the year. Costs of settlement and defence of this level are not normal for the business and are not expected to recur.

2. Restructuring costs consist of termination payments and other costs associated with restructuring the business.

3. In accordance with the agreement for the acquisition of DG Robson Mechanical Services Limited ('DGR') on 25th August 2010 the group was required to pay additional amounts to the vendors contingent on DGR's results for the first two years post acquisition. The adjustment to purchase consideration is the difference between the contingent consideration payable in respect of the year ended 24th August 2012, and the amount accrued as part of the purchase consideration at the date of acquisition (£0.2m). The £0.4m paid in cash in 2013 was fully provided at 31st December 2013.

4. Long-term employee benefits related to accrued bonuses in respect of certain key employees of DGR arising out of pre-acquisition agreements whereby bonuses are deemed to vest post-acquisition as a result of the acquisition by the group.

Note 4 - Taxation

Note 5 - Earnings per share

A. Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to owners of the company by the

weighted average number of ordinary shares in issue during the year.

B. Diluted earnings per share

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The company has three categories of dilutive potential ordinary shares: share options granted under the Savings Related Share Option Scheme and conditional share awards and options granted under the Equity Incentive Plan. Options granted under the Equity Incentive Plan are considered to be non-dilutive for the year ended 31st December 2012.

For the share options, a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

C. Underlying earnings per share

Underlying earnings per share represents profit for the year from continuing operations adjusted for amortisation of intangible assets, long-term employee benefit expenses arising from acquisitions, adjustments to purchase consideration, restructuring costs, and exceptional subcontractor claim costs, and the tax effect of these items, divided by the weighted average number of shares in issue. Underlying earnings is the basis on which the performance of the operating divisions of the business is measured.

Underlying earnings per share

Note 6 - Dividends

The directors are proposing a final dividend of 2.10 p (2012: 2.00 p) per ordinary share totalling £0.9m (2012: £0.8m). Subject to approval at the annual general meeting, the final dividend will be paid on 16th May 2014 to shareholders on the register as at 22nd April 2014. The shares will go ex-dividend on 16th April 2014. This dividend has not been accrued at the balance sheet date. A dividend reinvestment plan is available to shareholders. Those shareholders who have not elected to participate in the plan, and who would like to do so in respect of the 2013 final payment, may do so by contacting Capita Registrars on 0871 664 0300 (Lines are open 8:30am - 5:30pm Mon-Fri. Calls cost 10p a minute plus network charges). The last day for election for the final dividend reinvestment is 26th April 2014 and any requests should be made in good time ahead of that date.

Note 7 - Pension commitments

The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method. The amount included in the consolidated statement of financial position arising from the group's obligations in respect of its defined benefit retirement scheme is as follows:

Note 8 - Notes to the statement of cash flows

b. Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments that are readily convertible into cash, less bank overdrafts, and are analysed as follows:

Note 9 - Related party transactions

The remuneration of the directors of the company was £0.9m (2012:£0.9m), including pension contributions of £0.1 (2012: £0.1m).

The remuneration of key management (including directors of subsidiary companies) was £3.6m (2012: £4.7m), including termination payments of £0.1m (2011: £0.2m). Pension contributions in respect of key management (including subsidiary directors) were £0.4m (2012: £0.4m) and other long term benefits included in the remuneration charge were £nil (2012:£0.3m).

In January 2013 the group paid £0.4m to the vendors of DG Robson Mechanical Services Limited as deferred consideration for the acquisition of the company in August 2010. The vendors of DG Robson Mechanical Services Limited are members of key management. The amount of the deferred consideration was contingent on post acquisition results. £0.2m was accrued at the time of acquisition and a further £0.2m charged to the income statement in the year ended 31st December 2012.

Transactions between the company and its subsidiary undertakings, which are related parties, have been eliminated on consolidation and are not disclosed in this note. There were no other related party transactions requiring disclosure in the financial statements.

Note 10 - Contingent liabilities

A subsidiary company is one of a number of parties that are subject to a damages claim in respect of work carried out in 2007. Damages amounting to £3.4m have been awarded against the company by the High Court, which have been paid in the year by the company's insurers. Costs, which are believed to be substantial, have yet to be apportioned between the various parties to the damages claim, and the damages claim itself is subject to an appeal by the company's insurers acting on the company's behalf. If the appeal is unsuccessful the apportionment of costs against the company, together with the original award of damages, may exceed the company's single incident insurance cover of £5m. The company believes, having taken legal advice, that there are real prospects of the appeal being successful. There is also uncertainty as to both the magnitude and apportionment of costs which is dependent on the court process. On that basis it is unlikely that a liability will ultimately fall to the company.

Note 11 - Subsequent events

In February 2014 the Company successfully negotiated a £5m committed three year Revolving Credit Facility (RCF) and renewed its £8m overdraft facility. The RCF incurs interest at 3% per annum above LIBOR on drawn balances and the company is charged a fee equivalent to 1.5% of the unused facility. The RCF includes financial covenants around interest cover and net leverage ratios which are tested quarterly. The revised terms of the overdraft facility provide that interest will be charged at 2.75% above base rate.

Note 12 - Annual General Meeting

The 102nd Annual General Meeting will be held at 200 Aldersgate, St Paul's, London EC1A 4HD on Friday 9th May 2014 at 10.00 am.

Statement of directors' responsibilities in respect of the financial information

We confirm that to the best of our knowledge:

(a) the financial information, prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union, gives a true and fair view of the assets, liabilities and financial position and profit of the group; and

(b) the business and financial review includes a fair review of the development and performance of the business and the position of the group, together with a description of its principal risks and uncertainties.

On behalf of the board

Russell Race Chairman

Mark Lawrence Chief Executive

Martin Walton Finance Director

18th March 2014