TPG.L Regulatory News (TPG)

2 April 2019

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

TP Group plc

("TP Group" or the "Company" or the "Group")

Final Results for the year ending 31 December 2018

TP Group (AIM: TPG), the specialist services and engineering group, announces its audited results for the year ended 31 December 2018.

Financial highlights:

• Revenue1 ahead of forecast and up 40% to £39.0m (2017: £27.9m), underpinned by strong customer momentum during the period

• Of the revenue growth, £5.4m was derived from acquired companies Polaris Consulting (Holdings) Ltd. ("Polaris") and Westek Technology Ltd.

• Adjusted operating profit2 ahead of forecast and up 85% to £4.0m (2017: £2.1m) driven by focus on improving margin and delivery performance

• Operating losses reduced to £nil (2017: £1.0m loss), reflecting one-off acquisition-related expenses and further depreciation and amortisation relating to investments in the business

• Closing cash ahead of forecast at £22.4m (2017: £21.9m), driven by strong working capital performance

• Order intake of £43.2m (2017: £44.7m) and closing order book up 16% to £48.3m (2017: £41.7m)

Operational highlights:

• Polaris now fully integrated, awarded £1m of MoD funding to continue its work on Artificial Intelligence systems

• Acquired Westek Technology Ltd in November 2018, enhancing the Group's electronic design and packaging capabilities, as well as the addition of major customers specialising in the construction of aircraft and land vehicles

• Signed a five-year framework agreement with Naval Group for work on atmosphere management systems on-board both submarine and surface ships

• The Group's Advanced Manufacturing Facility in Manchester opened in February 2018, enabling the Group to deliver complex engineering solutions in high value, premium markets

• Signed partnership agreement with US-based Micropore Inc., affording access to markets and customers in the UK and in Micropore's territories

• Continued to grow international presence with established relationships across France, Germany, Australia, the Middle East and South East Asia

• The Group is ideally placed to capitalise on the substantial opportunities in our markets and is focused on delivering another solid year of progress, both organically and by acquisition.

Phil Cartmell, Chief Executive Officer of TP Group, commented:

"2018 has been an excellent year for TP Group. We now have a business of significant scale and international reach, which we fully intend to leverage over the coming years. As we enter the next phase of our plan and engage more actively with customers and partners overseas, we envisage the Group will grow further, extending into new geographies and sectors.

"We have seen a strong start to 2019 supported by a large order book, which has grown substantially since last year.

"We continue to invest in the growth of our business, remain excited by the global market opportunities and are focused on delivering further shareholder value."

Additional narrative to the results will be published in the Group's Annual Report and Accounts that will be available in due course on the Company website at:

https://www.tpgroup.uk.com/investors/results-reports-presentations/

1  2017 revenue has been restated to reflect the impact of IFRS 15

2  Adjusted operating profit is defined as operating loss adjusted to add back depreciation of property, plant and equipment and right-of-use assets, amortisation of intangible assets and impairment gains or losses on non-current assets, changes in fair value of contingent consideration, acquisition consideration accounted for as employment costs owing to on-going service conditions, any other acquisition-related charges, share based payment charges and non-operating costs. Non-operating costs are those items believed to be exceptional in nature by virtue of their size and or incidence. The directors of the Company believe this measure is more reflective of the underlying performance of the Group than equivalent GAAP measures. This is primarily due to the exclusion of non-cash items, such as share-based payments, impairment, depreciation and amortisation, as well as acquisition and non-operating costs. This provides shareholders and other users of the financial statements with the most representative year-on-year comparison of operating performance. This measure and the separate components remain consistent with 2017.

For further information, please contact:

Notes to Editors

TP Group designs and develops advanced technologies, engineers complex equipment and systems, and provides support throughout their operational life. The Company's shares have been traded on AIM since July 2001.

Chairman's statement

This is my third Annual Report as Chairman of TP Group. I am pleased to report that the strategy we set out is now delivering year-on-year sustainable growth. Our focus has been to balance carefully between delivering expectations in the near-term whilst building a robust and increasingly international business. This will equip us well for the opportunities ahead and provide greater security in the current economic climate.

Our strategy is focused on our core strengths - providing the best in the development and delivery of highly complex, high value, low volume equipment and systems that are critical to our customers' activities.

We have maintained the growth trend of recent years to deliver another strong performance in 2018, which reflects continued progress by the leadership team and the efforts of the wider staff. This approach and these results give us confidence that the business is well positioned to withstand, or even perhaps take advantage of the current Brexit turbulence.

2018 performance

I am pleased to report a 40% increase in revenue to £39.0m (2017: £27.9m) and an increase in adjusted operating profit of 85% to £4.0m (2017: £2.1m) and operating losses reduced to nil (2017: £1.0m loss). The Group closed the year with a cash balance of £22.4m (2017: £21.9m) generating a net inflow of £0.5m, even after using £3.0m cash to pay for acquisitions. These results are all at or ahead of market expectations, driven by an order intake of £43.2m (2017: £44.7m). Order intake in the year was 10% above revenue, which led to a closing order book 16% higher than last year at £48.3m (2017: £41.7m), putting us in a very good position to continue our growth trajectory into 2019.

Building capability and reach

Throughout 2018 we have invested in our facilities and people to strengthen our offering to key customers and work with them more effectively. We invested in factory equipment, business systems and talented people so that we can deliver on our strategic priorities to deliver the best high-integrity systems and equipment to our excellent customer community.

We have also added breadth in products, skills and customers via acquisition. Firstly, we completed the integration of Polaris Consulting Ltd, and then in November we acquired Westek Technology Ltd.

These transactions have added to our services and equipment propositions, brought talented and like-minded people into the business and gained access to new customers both in the UK and overseas.

During the year we have put considerable effort into developing new international relationships. This not only enables us to access new technologies and capabilities but also to open new markets for our existing capabilities.

Reclassification

The Group was reclassified under the FTSE sector definitions from Industrial Engineering (2750) to Aerospace & Defence (2710). This became effective on 24 December 2018. The new classification is more closely aligned with the Group's operational footprint and better reflects our business moving forward as the majority of our strategic focus, revenue and profits is derived from clients across the Defence, Intelligence & Security and Space sectors.

Board and governance

The Board has worked with a good balance of support and challenge, applying its strengths and insights to support the Group as it implemented the growth strategy.

In February, Simon Kings stepped down as an executive director and left the Group. The Board was restructured, and the Group made two appointments to the senior management team to support business development and key account management activities.

As an established company on AIM, TP Group is committed to high standards of governance. The Quoted Companies Alliance (QCA) Corporate Governance Code was adopted by the Company in line with AIM requirements on 28 September 2018. Work continues to comply as fully as possible with the principles and provisions contained therein. We operate a robust framework of systems and controls to maintain high standards throughout the Company and more details can be found in the Directors' Report.

The Board believes that effective corporate governance assists us in the delivery of our corporate strategy, the generation of sustainable shareholder value and the safeguarding of all our stakeholders' long-term interests.

Our people

I am pleased to note that as we have grown, we have been able to attract talented people at all levels of the business to help us on this path, and this says a lot about the attractiveness of the Group to our range of stakeholders.

On behalf of the Board, I would like to thank our employees for their hard work and dedication as well as our suppliers, business partners and shareholders for their continued support over the last year.

Building for the future

We continue to build on the strong foundations created in 2018 and before as we continue to position the business for future success. I remain confident that we have the right strategy in terms of competitive propositions and high-value customers, with investment and acquisition plans to deliver on a wider international stage. I believe we have a powerful blend of talent, technologies and the right management team to generate further value for shareholders in 2019.

Andrew McCree

Non-Executive Chairman

Chief Executive's statement

Business performance

We delivered a strong performance in 2018 and find ourselves in an excellent position as we look at the business going forward. We achieved first-rate growth in our three key measures - the order book rose 16%, revenue increased 40% and adjusted operating profit grew by 85%. Furthermore, operating loss reduced to nil from a loss of £1.0m in 2017. All of this was delivered whilst integrating one corporate acquisition, completing another and investing in our capability and technology for the road ahead.

I am particularly pleased that the Group has also achieved a strong cash flow performance, a fundamental KPI for the business, with cash increasing by £0.5m to £22.4m.

With strong revenue growth and cash generation, we were able to balance profitability and investment. We are still working on our long-term growth plan which will deliver increasing profit in line with market expectations whilst investing in people, precision manufacturing and business technologies that equip us well for what lies ahead.

This year's results, more than ever, show how the Group is well placed to succeed on multiple fronts operationally, whilst working hard behind the scenes to build an exciting future.

We built upon our reputation, relationships and excellent offerings in our markets to drive order intake well ahead of revenue which ensures our continuing growth.

Further details on our financial performance are covered in the Group Chief Financial Officer's report.

Competitive leadership

TP Group has an enviable position as a supplier of high-integrity packaged equipment. These are low-volume, high-value projects where we are trusted for our expertise, experience and innovation. This was a deliberate choice and the foundation of our strategy that places us at the premium end of the markets we serve.

An emerging technological challenge in certain defence platforms is for quiet operations, and TP Group's engineers have always had this high on their priority lists. Our systems are among the quietest in the world at present and we are working with our prime contracting partners to improve this even further.

Part of our acquisition strategy is to seek out the next wave of leading technologies to build future competitive advantage. For example, Polaris has a small team working on Artificial Intelligence systems with some very innovative ideas. We recognised the potential in this area and invested to build critical mass in this team. In October, Polaris was awarded almost £1 million of MoD funding to continue this development as leaders of a consortium including Thales and Exeter University.

Major customers

We are very aware that customer trust and loyalty is a pillar of our competitive advantage and hence our strategy. We have grown beyond our UK heritage and this year signed a five-year framework agreement with Naval Group that covers both submarine and surface ships. That agreement has already yielded a £2 million contract for advanced equipment.

One of our key metrics is the number of accounts that generate more than £1 million in annual revenue. This year, six such organisations together accounted for 67% of our revenue. Our goal is to take other existing accounts and develop them in this way. David Lomax joined us from BAE Systems, one of our existing major accounts, to lead this initiative and will benefit the Group by applying his experience from the buy-side of such relationships. He will help us to strengthen our links with companies like TKMS and Baker Hughes GE, with the latter awarding a follow-on £6.4 million contract just after the year-end, that reflects very positively on the work we have done on the original contract and the potential from this relationship.

Investing in capability and technology

Our plan throughout the year was to invest to build a business for the future. We continued to invest in precision manufacturing in Manchester and formally opened the Advanced Manufacturing Centre in February 2018. This facility differentiates us from our peers in UK manufacturing, and creates a competitive advantage to succeed in demanding environments like nuclear fabrication. The manufacturing leadership has also committed to continuous improvement through staff training and a workplace organisation approach known as Five-S that has improved operational efficiencies in both locations.

Quality systems are also key to our competitive advantage and the Group has committed significant effort and investment to ensure compliance with GDPR and the primary standards for quality, environment and health and safety. We are also working with market-specific bodies to demonstrate our commitment to performance through initiatives such as Fit4Nuclear. We were an early subscriber to this initiative and continue to support its evolution.

Work has continued throughout the year to adopt Group-wide business systems that will drive operational efficiency and allow us to compete better on a global scale as a joined-up business. We have already benefited from the Group-wide financial system that became fully operational this year, and great progress has been made on the Professional Services Management System and Group ERP and CRM systems. The result is a business that is better informed, better connected and able to grow as we build or acquire new capability and new customers.

People

Alongside our investment in advanced facilities and business technologies, we are also investing in people. New roles have been created as we have grown, and we have worked hard on staff development programmes across the Group. A Group-wide Core Values programme was also launched and rolled out to all staff early this year.

Acquisitions and partnerships

Since the fundraising in July 2017, we have completed two acquisitions and have been actively reviewing other opportunities to build our capability, geographic reach and customer community. During 2018, we integrated Polaris into the CaPS business stream and benefited greatly from their cost engineering skills becoming part of our portfolio of services.

In November 2018 we acquired, for an initial consideration of £3.0m, Westek Technology Ltd. This is consistent with our overall business approach, because they deliver packaged equipment as we do, and add new major customers for the Group who build aircraft and land vehicle platforms. They also bring significant electronic design and packaging experience that will add to the existing work we do on control system cabinets.

In addition to reviewing acquisition opportunities, we have also worked on developing a number of strategic commercial and technological partnerships. These often involve international companies where we can form a technical alignment that builds a stronger joint proposition which provides local access to markets and customers in the UK and in the partners' locations.

One example is the link with Micropore Inc. in the United States. We have collaborated to produce new enclosures for their Carbon Dioxide removal materials that will be commercially available this year, and made a joint proposition to the MoD that was rewarded with a £1.2m contract just after the year-end. We are also working on other relationships in Europe and the United States.

Geographic expansion

TP Group has operated from a UK base and delivered a consistent value of export business in recent years. As we grow, we need to take steps to build on that heritage and grow our international presence. We have established relationships in France, Germany, Australia, the Middle East and South East Asia, and it has become clear this year that our UK-based precision engineering capability is well regarded in the global market.

During 2018, we increased our overseas account management and business development activity through a combination of direct sales and local agents or partners who extend our reach in specific territories. Business development meetings have been carried out in the United States, Australia, the UAE and South East Asia, and we are confident of winning additional business from these activities.

Outlook

TP Group is stronger and strategically better placed today than when we delivered our strategic milestone of break-even in 2015.

Since then, three acquisitions and substantial investment for organic growth have created a global consulting and systems engineering Group. There is more to come in this area and I will continue to update all stakeholders as initiatives mature.

We now have a business of significant scale and international reach. This too will grow as we enter the next phase of our plan and engage more actively with customers and partners overseas.

We have a proven executive management team and have built a strong team of operational leaders with the experience and bandwidth to exploit market opportunities to the full and deliver efficiently and carefully under the Group strategy.

With these features, I believe the Group is well-positioned to capitalise on the substantial opportunities in our markets in line with our strategic objectives and deliver another good year of progress.

Phil Cartmell

Chief Executive Officer

CFO's Financial Review

I am pleased to report that TP Group has continued to deliver against our strategy with improved adjusted operating profit and closing order book, alongside a strong closing cash position.

It is pleasing to note that this performance has been derived from both business streams, and the investment in our CaPS business is now yielding positive returns. As a growing and entrepreneurial business, we will continue to invest in people, capability and systems to deliver our long-term goals.

Group KPIs

We have delivered strongly against all our KPIs. We have balanced the interests of growth and in-year performance with investment to ensure that we are well placed to deliver sustainable and improving returns.

Order book

The Group's closing order book increased by 16% to £48.3 million (2017: £41.7 million). This was drawn from the successful closure of significant long-term contracts in the defence sector, alongside a recovery in demand in the energy market. This included the second call-off of £12.5 million against the COGS framework agreement with BAE Systems, the extension of our work with Army HQ worth up to £2.3 million and a £2.0 million order from Naval Group for export equipment under our five-year framework agreement. In the energy sector, we have worked hard to secure the second phase order on the nuclear condenser systems project with Baker Hughes GE. This contract was secured just after the year-end in early January 2019, and at £6.4 million, gives us a strong start to the current year. This type of work is consistent with our strategy to pursue premium market opportunities where competition becomes more capability and quality driven with a consequential improvement in gross margins.

2017 was a record high in the Group's closing order book and to continue growing from that position through 2018 is a notable achievement and reflects upon the investment made in business development and marketing resources across the Group.

Revenue

Revenue increased by 40% to £39.0 million (2017: £27.9m), with growth delivered across the Group.

We benefited from a strong opening order book and with continuing order capture well ahead of the revenue conversion, demand remained high throughout the year. Growth from the existing business was significant, contributing £10.3 million, which includes £4.6m related to Polaris which was acquired in December 2017. The remaining £0.8 million came from the acquisition of Westek in November 2018.

Technology and Engineering continued to improve throughput and ran at consistently high operating efficiencies. The business stream's revenue increased by 25% to £27.7 million (2017: £22.1m). This reflects the initiatives and investment by local management teams in both Portsmouth and Manchester to pursue continuous improvement and lean methods as part of an ongoing performance culture.

Consulting and Programme Services benefited from a blend of growth in established programmes, new contract engagements and additional revenues from the Polaris acquisition. The consolidated CaPS business, with revenues of £11.3 million (2017: £5.8 million) now has a critical mass that enables access to a wider range of larger and more complex programmes where they can compete effectively to drive future growth.

Adjusted operating profit

Adjusted operating profit increased by 85% to £4.0m (2017: £2.1m), primarily as a result of additional volume and an operational focus on improving margins and delivery performance.

The existing business contributed £1.7m of this increase, the balance coming from the acquisition of Westek.

In the Technology & Engineering business stream, revenue growth noted above was converted at similar gross margins to the prior year, coupled with close control of overheads which led to another improved adjusted operating profit position of £4.9 million (2017: £4.0m).

It is pleasing to note that the strategy of investment in Consulting and Programme Services is beginning to deliver improving returns as the business stream reaches a significant scale.

Adjusted operating profit for CaPS improved by £1.0 million in 2018 to a profit of £0.2 million, from a loss in 2017 of £0.8m.

The CaPS business will continue to build on this position and invest in people, processes and systems to support long-term business growth. We recognise that this investment does not necessarily translate to adjusted operating profit immediately as there is a lag from investment in the business infrastructure and capability to the delivery of both top-line growth and operating margins.

Group operating loss

The Group's operating loss reduced to nil, an improvement of £1.0 million from 2017. This was driven by an increase in the underlying profitability of the business as noted above, offset by a number of factors:

· an increase in depreciation and amortisation (£0.5m) relating to the investments made in the business, specifically the Advanced Manufacturing Centre and the adoption of IFRS 16 (refer below for further information); and

· an increase in acquisition-related expenses of £0.4 million.

Cash and bank balances

Year-end Group cash of £22.4 million (2017: £21.9m), was up on the prior year-end position, notwithstanding the acquisition of Westek for an initial purchase price of £3.0 million. This was achieved through strong working capital performance across the business.

Acquisitions, investments and disposals

The Company announced the acquisition of Westek Technology Ltd. in November 2018. The purchase was completed for an initial consideration of £3.0 million on a normalised net asset basis, funded from the Group's cash resources. Further consideration of up to £0.5 million is payable on delivery of certain employment transition activities within 12 months following completion of the acquisition.

The Group incurred £0.7 million of acquisition-related costs (2017: £0.2m) predominantly relating to the transaction noted above and additional search fees and services received. These were charged to the Statement of Comprehensive Income in the year.

Previous acquisitions led to earn-out payments of £0.3 million in year and the directors have agreed the remaining earn-out payments in relation to ALS Technologies and Polaris, which will be settled in 2019.

The Group continues to invest in the facilities, equipment and systems to build capability and develop our propositions. Across the Group, £0.9 million was invested in 2018.

The major investment was in the continuing enhancement of the Advanced Manufacturing Centre and supporting infrastructure at the Manchester facility, plus further investment in IT and systems infrastructure across the Group to support operational efficiency improvements through refined business processes and methods.

As noted last year, the directors reached an agreement with the local management to dispose of the trade and assets of our low-end fabrication activity, based in Oldham, Lancashire, under a management buy-out. These assets, following their impairment, were valued at less than £0.1 million on completion at 27 April 2018 and were disposed of for a total consideration of £0.3 million payable over the next 3 years.

Non-operating items

During the year, the Group incurred one-off non-operating costs of £0.8 million (2017: £0.7m). These relate to the business transformation actions required by the strategic plan, including employment-related restructuring costs and earn-out provisions relating to Polaris and Westek.

Finance costs

Finance costs of £0.1 million were incurred, predominantly relating to the fair valuation of a forward currency exchange contract and financing fees in relation to funding of the Advanced Manufacturing Centre.

Taxation

The Group expects to recover tax payments on account of £0.2m for the 2018 financial year (2017: £nil).

Results and dividends

The directors continually evaluate Group performance, and do not currently recommend the payment of a dividend (2017: £nil).

Adoption of IFRS 15 and IFRS 16

The Group has adopted IFRS 15 "Revenue from Contracts with Customers" and applied the practical expedient methodology, under which contracts beginning and ending in 2017 or that were completed prior to 1 January 2017 are not restated. The impact of this is a reduction in opening reserves of £3.2 million. Refer to note 1 below for further details.

The Board has decided, in accordance with the early adoption provisions of IFRS 16 "Leases" to implement the standard one year ahead of requirement. Rather than apply IFRS 16 retrospectively in accordance with IAS 8 "Accounting Policies, Changes in Accounting Estimates", the Group is permitted to apply IFRS 16:c5(b) under which comparative information is not restated. The Group has recognised the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings at 1 January 2018, the date of initial application. The impact of this is a reduction in reserves of £0.7 million and the creation of a right-of-use asset valued at £4.5 million as of 1 January 2018 with an opening lease liability of £5.2 million. Refer to note 1 to the financial statements below for further details.

Brexit

As Brexit negotiations progress, the Group has looked at the potential impacts on the business. In the year ended 31 December 2018 a substantial amount of the Group's revenues originate in the UK and were related to the UK defence market, and therefore ultimately to UK government defence spending. To the extent that this is impacted by Brexit, it may have a knock-on impact on the Group depending on Government decisions on current and future programmes.

Our strategy is to increase our level of overseas work and the nature of our approach to this may be impacted by Brexit. In 2018 the amount of revenue from non-UK customers in the European Union was less than 5%. Most of this revenue was attributable to long-term defence contracts in France and Germany and these are not expected to be materially impacted by any short-term uncertainty surrounding the EU exit process. This is a consequence of:

· our competitive position in the key global programmes we support; and

· the long-term nature of the contracts and low number of deliverables provides the business ample opportunity to ensure the requisite delivery paperwork is in place well ahead of time.

We are also potentially subject to low-level exposure to supply of raw materials, most notably steel, from the EU. A number of positions have been adopted to mitigate our risks on pricing and availability from the EU supply chain. A very small section of our supply chain is based in or sources from Europe. Where possible we are looking to source from else-where but in any event the nature of the goods means that under WTO rules we expect them to attract low levels of tariffs (c2%). Similar to our deliveries to customers, the business has excellent visibility of when these goods are required and we can plan receipt accordingly to tie into customer build programs.

In the UK defence market (and indeed wider Government spend across our sectors) activity levels appear to remain high and we are encouraged by recent bid and contract activity. Until the Brexit outcomes are known, however, it is not possible to predict accurately the true impact on the UK economy and our activity within it.

In Europe, whilst the activity only represents a small percentage of Group revenue, we see limited reason for concern, as an example last year we signed a five-year framework agreement to facilitate further defence related work with Naval Group in France.

Auditor

As part of our continued drive to adopt the highest possible standards of corporate governance and to tie in to the final year of service for the current audit partner, before his rotation off the engagement, the directors have undertaken a competitive tender process for the 31 December 2019 year-end audit. The directors have resolved to appoint RSM UK Audit LLP as auditors following the completion and issuance of these financial statements. Deloitte LLP has indicated its willingness to remain in office until RSM UK Audit LLP are appointed.

Going concern

The directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors have considered forecasts that cover a period of at least twelve months from the date of the approval of these financial statements.

The forecasts take into account the Group's existing cash resources of £22.4 million, which provides sufficient insulation against any reasonable downside scenarios and risks.

Whilst there might be some disruption in the short term on some of its projects, TPG has limited concern that Brexit could impact on its ability to deliver against its forecast targets. Based on:

· the quality of TPG's order book and the programs it is on (both globally and in the UK);

· the limited number of activities the business has in the EU and the strong position it holds on them;

· the mitigation actions the business is putting in place; and

· the limited impact we expect Brexit to have on the defence market (both in the UK and in the EU).

Derren Stroud

Chief Finance Officer

Divisional review - Consulting & Programme Services (CaPS)

TP Group's consultants enable the transformation and evolution of our clients' systems and operations to meet strategic objectives and business vision. We use well-established systems engineering and project management principles to consider the system holistically and optimise both the technical system and its practical implementation.

Our consultants bring domain-leading knowledge, skills and experience to work within client teams or take full responsibility for the delivery of outcomes. 

Business performance

· Revenue £11.3m, up 95% (2017: £5.8m)

· Adjusted operating profit £0.2m (2017: £0.8m loss)

· Operating loss £0.5m (2017: £1.2m)

· Closing order book £6.1m up 99% (2017: £3.1m)

2018 was a year of accelerated performance for the CaPS business unit. It achieved critical mass and established a reputation with its customers that was rewarded with strong renewal business, a critical feature of this business model, and new order capture. This was achieved through the combination of organic growth and the addition of Polaris which delivered an improvement of £1million in adjusted operating profit.

Building on strong relationships

Our team has been working with Army HQ since 2016 and has extended this work to provide a range of customer services including management support of the programme, benefits, schedule, stakeholders, dependencies and risk management as part of an overall transformational change. This grew with the award of a £1.2m contract in 2018 with the potential for follow-on work of similar value.

Creative commercial methods

TP Group founded the Enterprise Technical Alliance (ETA) to deliver a simple contracting mechanism for the MoD to engage with a group of Small/Medium Enterprises (SMEs) for specialist, agile and responsive support to major programmes.

The ETA was selected as part of the Ministry's Submarine Enduring Naval Design Partnering where we can provide early phase submarine design and technology studies, through-life technology management studies and support for submarines, systems and equipment.

This provides a valuable business stream and builds our reputation, presence and profile for future programmes where we can apply our innovation and technical capability.

Innovative technical development

Following the Polaris acquisition, the Group has invested to build the team developing advanced Artificial Intelligence solutions. They were recognised with £0.9 million of government funding to work with prime contractors and academic institutions on the development of autonomous navigation systems for future unmanned naval missions.

Outlook

In 2019 the CaPs business will focus on continuing to build on our reputation as a trusted provider of services in the defence and security sectors. There are growth opportunities available in Artificial Intelligence, space and intelligence programmes, and we will pursue these fully whilst also linking with our engineering colleagues to promote the integrated proposition of TP Group. 

Divisional review - Technology & Engineering (T&E)

Our highly skilled multidisciplinary engineering teams apply our advanced technology to produce solutions for our customers which can be relied upon for long service life, in challenging or dangerous environments.

We have experience of working in highly regulated industries and safety critical environments across the whole lifecycle from concept to disposal.

Based upon 75 years of engineering heritage and leveraging our unique knowledge, skills and experience, we combine a range of high-end capabilities to produce high-integrity equipment from our factory facilities in Portsmouth and Manchester.

Business performance

· Revenue £27.7m, up 25% (2017: £22.1m)

· Adjusted operating profit £4.9m, up 21% (2017: £4.0m)

· Operating profit £2.6m (2017: £2.3m)

· Closing order book £42.3m (2017: £39.8m)

2018 was a year of organic growth and improved efficiency in the T&E business unit.

Demand across the business remains high. Much of this demand is over multi-year projects, but the closing order book still equates to more than 17 months' work at the 2018 run-rate, so future visibility of factory loading is very encouraging.

Profitability has improved through various production efficiency initiatives and integrated working between the sites.

Recovering oil & gas business

Improving confidence in the downstream processing sector, along with the step-change in Manchester's precision manufacturing capability has boosted order intake, with new contracts in India and Saudi Arabia. Prospects in downstream oil and gas are better than they have been for many years.

Continuing presence in defence programmes

The Royal Navy is celebrating 50 years of the Continuous At-Sea Deterrent, known as CASD. Since April 1969 there has always been one submarine from Clyde Naval Base carrying out Operation Relentless. TP Group, through its current and preceding iterations has been connected with this programme throughout, and we are proud to be associated with its critical contribution to national security.

Investing in production systems

We have implemented the FactoryMaster ERP system and a shop floor data capture system to deliver business intelligence that leads to more efficient planning and manufacturing with improved quality assurance. We are also optimising layout and process at both primary manufacturing sites. This includes the re-purposing and refurbishment of a 10,000 square foot area in Manchester as a specialist fabrication cell to support cross-Group working on equipment packages.

Westek acquisition

Late in 2018 we acquired Westek Technology Ltd. We have already seen progress in customer outreach with new contracts in the UAE and elsewhere, and first steps in adding to their manufacturing capacity to meet demand.

Outlook

The focus for 2019 is to work towards three main goals. We aim to:

· protect our core business by continuously improving quality assurance, efficiency and customer interaction;

· build upon our experience with packaged gas management equipment to pursue technical development in new fields like carbon capture and the hydrogen economy; and

· invest in further developments of our high-integrity clean fabrication and assembly.

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2018

All comprehensive income relates to shareholders of the Parent Company and all amounts relate to continuing activities.

1 The Group has applied IFRS 15 and IFRS 9 at 1 January 2018 and has restated 2017 as disclosed in note 1

2 The Group has applied IFRS 16 at 1 January 2018 and is not required to restate 2017 as disclosed in note 1

Consolidated and Parent Company Statement of Financial Position

At 31 December 2018

1 The Group has applied IFRS 15 and IFRS 9 at 1 January 2018 and has restated 2017 as disclosed in note 1

2 The Group has applied IFRS 16 at 1 January 2018 and is not required to restate 2017 as disclosed in note 1

Consolidated Statement of Changes in Equity

For the year ended 31 December 2018

1 The Group has applied IFRS 15 at 1 January 2018 and has restated 2017 as disclosed in note 1

Parent Company Statement of Changes in Equity

For the year ended 31 December 2018

Consolidated and Parent Company Statement of Cash Flows

For the year ended 31 December 2018

1 The Group has applied IFRS 16 at 1 January 2018 and is not required to restate 2017 as disclosed in note 1

Notes to the Financial Statements

1 Basis of preparation

The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 31 December 2018, but is derived from those accounts. Statutory accounts for 2017, which were prepared under accounting standards adopted by the EU, have been delivered to the registrar of companies and those for 2018 will be delivered following the Company's Annual General Meeting. The Auditor has reported on these accounts; its report was (i) unqualified, (ii) did not include any references to any matters to which the auditors drew attention by way of emphasis of matter without qualifying and (iii) did not contain statements under sections 498 (2) or (3) of the Companies Act 2006.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in June 2019.

The consolidated and Parent Company financial statements have been prepared in accordance with applicable International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board as adopted by the European Union. The Group presents the consolidated financial statements in pounds sterling, which is the Parent Company's functional and presentation currency, and all values are rounded to the nearest thousand except when otherwise indicated.

The financial statements have been prepared under the historical cost convention. The measurement bases and principal accounting policies of the Group and Parent Company are set out below. The accounting policies adopted are consistent with those of the previous financial year with exception of matters noted below.

Changes in accounting policies

New and amended IFRS standards that are effective for the current year

The Group has initially applied IFRS 9 "Financial Instruments", IFRS 15 "Revenue from Contracts with Customers" and IFRS 16 "Leases" from 1 January 2018. A number of other new standards are also effective from 1 January 2018 but they do not have a material effect on the Group's financial statements.

IFRS 9 Financial Instruments

As a result of the adoption of IFRS 9 "Financial Instruments", the Group has adopted consequential amendments to IAS 1 Presentation of Financial Statements which require impairment of financial assets to be presented in a separate line item in the income statement. Previously, the Group's approach was to include the impairment of trade receivables in other expenses. Consequently, the Group reclassified impairment losses amounting to £32,000, recognised under IAS 39 "Financial Instruments: Recognition and Measurement", from 'other expenses' to 'impairment loss on trade receivables and contract assets' in the Income statement for the year ended 31 December 2017.

i) Classification and measurement of financial assets

The Group has applied the requirements of IFRS 9 to instruments that continue to be recognised as at 1 January 2018 and has not applied the requirements to instruments that have already been derecognised as at 1 January 2018. Comparative amounts in relation to instruments that continue to be recognised as at 1 January 2018 have been restated where appropriate.

All recognised financial assets that are within the scope of IFRS 9 are required to be measured subsequently at amortised cost or fair value on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The adoption of IFRS 9 has not had a significant effect on the Group's accounting policies related to financial liabilities and derivative financial instruments.

The following table and the accompanying notes explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group's financial assets and financial liabilities as at 1 January 2018.

Trade and other receivables that were classified as loans and receivables under IAS 39 are now classified at amortised cost.

ii) Impairment of financial assets

IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' model. The new impairment model applies to financial assets measured at amortised cost and contract assets, but not to investments in equity instruments. Under IFRS 9, credit losses are recognised earlier than under IAS 39.

For assets in scope of the IFRS 9 impairment model, impairment losses are generally expected to increase and become more volatile. The Group has determined that the application of IFRS 9's impairment requirements at 1 January 2018 results in additional allowance for impairments as follows:

iii) Hedge accounting

The Group does not apply hedge accounting.

IFRS 15 Revenue from Contracts with Customers

The Group has adopted IFRS 15 Revenue from Contracts with Customers retrospectively, applying the practical expedient method under which contracts beginning and ending in 2017 or that were completed prior to 1 January 2017 are not restated. The financial impact to comparative periods on adoption of this standard is described in the tables below.

IFRS 16 Leases

The Group adopted IFRS 16 on 1 January 2018. Rather than apply IFRS 16 retrospectively in accordance with IAS 8, the Group is permitted to apply IFRS 16 c5(b) under which comparative information is not restated. The Group has recognised the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings at 1 January 2018, the date of initial application.

The adoption of IFRS 16 has resulted in a right-of-use asset valued at £4.5m being recognised at 1 January 2018, with an opening lease liability of £5.2m and a cumulative loss adjustment to retained earnings of £0.7m. A depreciation expense of £0.5m and an interest expense of £0.2m for the year to 31 December 2018 has been recognised, replacing the operating expense in respect of rental payments of £0.6m. The net impact is a £0.1m reduction in operating loss and a £0.2m improvement in adjusted operating profit for year to 31 December 2018. A weighted average incremental borrowing rate of 4% has been applied to property leases and 5% on motor vehicles and other office equipment.

Re-measurement of accounting for acquisition of Polaris Consulting (Holdings) Limited

In 2018 the Group finalised its accounting for the acquisition including agreeing the deferred consideration with the sellers of Polaris Consulting Holdings Ltd and identifying further pre-acquisition information which required a revision to the provision accounting disclosed in the financial statements for the year ended 31 December 2017. See note 26.

The tables below show the effect of IFRS 15 and re-measurement of the acquisition accounting for Polaris Consulting (Holdings) Limited on the balance sheet as at 31 December 2017, and the effect on the Income statement for the year ended 31 December 2017. Opening balance sheet adjustments at 1 January 2017 have been presented in the Consolidated Statement of Changes in Equity.

Consolidated Statement of Financial Position

At 31 December 2017

In the current year, the Group has applied a number of amendments to IFRS Standards and Interpretations issued by the International Accounting Standards Board (IASB) that are effective for an annual period that begins on or after1 January 2018. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.

· IFRS 2 (amendments) "Classification and Measurement of Share‑based Payment Transactions";

· IAS 40 (amendments) "Transfers of Investment Property";

· Annual Improvements to IFRS Standards 2014 - 2016 Cycle;

· Amendments to IAS 28 "Investments in Associates and Joint Ventures"; and

· IFRIC 22 "Foreign Currency Transactions and Advance Consideration".

Consolidated income statement

Year ended 31 December 2017

Other

At the date of authorisation of these financial statements, the following other Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

· Annual Improvements to IFRS Standards 2015-2017 cycle;

· IFRIC 23 Uncertainty over Income Tax Treatments (effective 1 January 2019);

· Amendments to IFRS 9 Prepayment Features with Negative Compensation (effective 1 January 2019);

· Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (effective 1 January 2019); and

· Amendments to IAS 19 Employee Benefit Plan Amendment, Curtailment or Settlement (1 January 2019).

At the date of authorisation of these financial statements, the directors have considered the other standards and interpretations which have not been applied in these financial statements, were in issue but not yet effective (and in some cases, had not yet been adopted by the EU). Application of these standards may result in some changes in presentation of information within the Group's financial statements, but they are not expected to have a material impact on the results of the Group.

Going concern

The Board has reviewed the potential impact of Brexit. Although the final outcome is unclear the business has considered the impact of labour mobility, regulatory issues, taxation and foreign exchange. Due to the nature of the Group's activities and our operating model, the Board believes that the going concern of the business will not be materially impacted by Brexit, irrespective of the form it takes.

The directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future, and accordingly continue to adopt the going concern basis in preparing the accounts. In reaching this conclusion, the directors have considered forecasts that cover a period of at least twelve months from the date of the approval of these financial statements and mitigating actions available to them, including the ability of management to make certain reductions to the Group's discretionary expenditure if required.

2.1 Segment revenues and results

The following is an analysis of the Group's revenue and results from the continuing operations by reportable segment.

Segment revenue reported above represents revenue generated from external customers.

The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 2. Segment profit or loss represents the profit before tax earned by each segment without allocation of central administration costs and directors' salaries, other gains and losses, as well as finance costs.

1 Adjusted operating profit is defined as operating loss adjusted to add back depreciation of property, plant and equipment and right-of-use assets, amortisation of intangible assets and impairment gains or losses on non-current assets, changes in fair value of contingent consideration, acquisition consideration accounted for as employment costs owing to on-going service conditions, any other acquisition-related charges, share based payment charges and non-operating costs. Non-operating costs include £579,000 in respect of termination payments. Non-operating costs are those items believed to be exceptional in nature by virtue of their size and or incidence. The directors of the Company believe this measure is more reflective of the underlying performance of the Group than equivalent GAAP measures. This is primarily due to the exclusion of non-cash items, such as share-based payments, impairment, depreciation and amortisation, as well as acquisition and non-operating costs. This provides shareholders and other users of the financial statements with the most representative year-on-year comparison of operating performance. This measure and the separate components remain consistent with 2017. 

2.2 Geographical segments

The following is an analysis of the Group's revenue from continuing operations from its products and services:

Revenue from continuing operations from external customers and non-current assets are all generated from operations in the UK. All segment assets are located in the UK.

Information about major customers

Revenue includes sales from customers who contributed 10% or more to the Group's revenue:

The Group operating loss for the year is stated after charging the following:

Share-based payment expense of £165,000 (2017: expense £375,000) all arises from transactions accounted for as equity-settled share-based payment transactions and are non-cash in nature.

Staff numbers

The average number of employees, including directors, employed by the Group during the year was as follows:

Retirement benefits

The Group operates a defined contribution retirement benefit plans for all qualifying employees of the Group. The assets of these plans are held separately from those of the Group in separately administered funds.

The total expense recognised in profit or loss of £694,000 (2017: £595,000) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 31 December 2018, contributions of £62,000 (2017: £88,000) due in respect of the 2018 (2017: £nil) reporting remained outstanding. The amounts were paid subsequent to the end of the reporting period.

The calculation of basic earnings per share for the year ended 31 December 2018 is based upon a profit after tax of £175,000 (2017 (restated) - loss after tax of £1,153,000) and a weighted average number of shares of 758,565,854 (2017 - 588,908,520). The weighted average number of shares has been reduced by the weighted average number of shares held by the Employee Benefit Trust.

The issue of additional shares on exercise of employee share options would decrease the basic profit per share and there is therefore no dilutive effect of employee share options.

1 Restricted cash of £460,000 (2017 - £531,000) is included in Prepayments and Other Debtors

Polaris Consulting (Holdings) Limited

On 12 December 2017, the Group, through its Parent Company, acquired 100% of the issued share capital of Polaris Consulting (Holdings) Limited for an initial consideration of £1,499,000 and a maximum deferred contingent consideration of £2,000,000 based on the performance of the business. The initial consideration, paid in cash using the Group's existing cash resources, has been adjusted for net debt retained in the business.

During the financial year the Group finalised its accounting for the acquisition including agreeing the deferred consideration with the sellers of Polaris Consulting Holdings Ltd and identifying further pre- acquisition information which required a revision to the provisional accounting disclosed in the financial statements for the year ended 31 December 2017. The financial statements for this period have been therefore restated to reflect this as disclosed in note 2.1.

Westek Technology Limited

On 2 November 2018, the Group, through its Parent Company, acquired 100% of the issued share capital of Westek Technology Limited for an initial consideration of £3,000,000 and a maximum deferred consideration of £500,000 dependent on certain employment related transition activities. The deal has been concluded on a cash free, debt free, normalised net asset basis, resulting in a £155,000 adjustment to the initial consideration. Westek is a leading provider of rugged, high performance computer servers and ancillary equipment for military and industrial customers predominantly in the UK, Europe and the United States, many of whom are not currently supplied by TP Group. The business operates from a facility in Wiltshire.

The acquisition of Westek is a strategic addition of proven capability in the design and manufacture of advanced electronic systems, providing specialist high-performance products. This capability also offers vertical integration with the rugged control systems already delivered with TP Group's packaged equipment offerings.

Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows:

Goodwill of £903,000 is primarily applicable to the assembled workforce acquired as part of the transaction. Acquisition costs of £275,000 arose as a result of the transaction. These have been recognised as part of administrative expenses in the Consolidated Statement of Comprehensive Income.

Had the acquisition of Westek Technology Limited been effective from 1 January 2018, the revenue for the Group would have been approximately £42,310,000, and the operating profit for the year would have been approximately £554,000. The directors consider these values to represent an approximate measure of performance of the combined Group on an annualised basis and to provide a reference point for future periods.

There are no subsequent events to note since the reporting date and the signing of these financial statements.

8 Notice of Annual General Meeting

The Annual General Meeting of TP Group Plc will be held on 6 June 2019 at a venue to be confirmed in due course.