ANNUAL REPORT 2011 AVESCO GROUP PLC
www.avesco.com
05
Group and the additional opportunities that the Olympics presents.
TAXATION Whilst we continue to have the benefit of past trading losses in some territories and our investment in new equipment remains at a level such that capital allowances are considerable, the increasing size of our CT Asia Pacific business and the restrictions on the uses of losses in some US states means that we were subject to local taxes in those regions totalling £0.2m (2010: £0.2m).
The continuing profitable trading performance of our businesses means we need to recognise more of our past tax losses as assets on the balance sheet. Consequently, we have increased our deferred tax asset at the year end by £1.6m to £6.1m (2010: £4.5m), but have also increased our deferred tax liability by an equal amount to £3.0m (2010: £1.4m), mainly due to our CTUS business being able to benefit from accelerated capital allowances, such that the net effect on the profit and loss account is negligible.
Tax losses included in the asset represent £5.2m (2010: £3.8m), with the balance of £0.9m (2010: £0.7m) being the temporary difference between the tax base and the book value of property, plant and equipment. The majority of the deferred tax liability relates to temporary differences between the tax base and the book value of property, plant and equipment.
Further potential deferred tax assets amounting to £7.3m at the year end (2010: £8.8m) remain unrecognised on the balance sheet.
CASH GENERATION AND CAPITAL EXPENDITURE Cash generation in 2011 was extremely pleasing, with the Group producing an overall reduction in net debt of £1.6m, after investing a further £18.0m of cash in property, plant and equipment. The continued focus on cash management has seen another £1.7m released from working capital during the year (2010: £2.2m), contributing to the £19.4m (2010: £20.1m) of cash generated from operations. With asset disposals of £2.3m (2010: £2.1m) more than offsetting net interest and tax payments of £1.5m (2010: £1.2m) the Group was able to further reduce net debt to £12.1m (2010: £13.7m).
With gearing now only 33% we are well placed to make the strategic additional equipment investment that should enable us to maximise our returns during the 2012 Olympic year, whilst leaving asset levels optimised for subsequent years.
NET ASSETS AND FINANCING The Group remains in a healthy financial position going into 2012, with net assets of £37.1m (2010: £37.3m), equivalent to £1.46 (2010: £1.49) per share. This excludes any possible uplift arising from a favourable outcome to the Complete litigation.
In anticipation of the opportunities that the London 2012 Olympics presents to the Group, we have increased our borrowing facilities with HSBC from £24m to £32m. The main component of the new facilities is a £20m multi currency revolving loan, which is in place until June 2015, with the balance comprising a combination of overdraft and leasing lines.
With year end net debt a modest £12.1m, £7.5m in cash and a further £24.7m available in undrawn
facilities the Group remained comfortably within its finance and banking facilities of some £44.3m.
BUSINESS RISKS The Group’s business is subject to many different risk factors, which will have varying degrees of significance at any particular time. Although not an exhaustive list, management consider the most important risks and uncertainties to the business to be as follows:
Economic and business cycle: The Group’s customers are principally corporates whose expenditure on services provided by the Group may be discretionary in nature and may therefore be affected by changes in the economic and business cycle. Some of the possible actions that the Group may take to counteract a sudden downturn may take time to have effect. However, we have sought to minimise the impact of any economic slowdown by seeking, wherever practicable, to match major items of capital expenditure to the requirements of our largest clients, and by limiting infrastructure obligations and other capital commitments to a level appropriate to the foreseeable needs of the business, after taking account of market trends and developments.
Dependence on key personnel: The Group’s future success will be dependent on key employees and their on-going relationships with clients and suppliers. It is believed that the Group is of a size that no one individual represents a significant risk to the Group. The Group also encourages client or supplier contacts to be maintained by more than one individual. Key staff are incentivised through a mixture of sales commission, profit related bonuses and participation in the Group LTIP scheme. Main Board Directors are incentivised as detailed in the Directors’ Remuneration Report.
Equipment failure or loss: The Group’s hire stock comprises complex, high value equipment which is subject to the risks of electronic or mechanical failure as well as physical loss, damage or theft. The Group endeavours to minimise these risks through rigorous quality control measures, security precautions and insurance cover. The geographical spread of the Group’s businesses further reduces the potential risk which might arise from any one loss or failure.
Future funding: The Group’s capital requirements will depend on numerous factors, including its ability to operate successfully to its business model. If funding requirements vary materially from its plans, we may require further financing in addition to our existing bank facilities sooner than anticipated. However, in order to minimise this risk, the Group endeavours to build in contingencies to its financial forecasting. In addition, the Group will often have the ability to re-direct cash inflow intended for capital expenditure to other uses.
Exposure to counterparty credit risk: It is believed that no one client represents a material risk to the Group. However, where there may be a credit concern or where significant up front costs will be incurred in relation to a client’s event, the Group will endeavour to obtain a deposit or other security for payment.
Counterparty risk with financial institutions: The Group’s policy is to maintain a range of types of
borrowing facilities from a number of major financial institutions. The Group is dependent upon contractual arrangements with these institutions to provide funding on agreed terms when requested to do so.
Effect of foreign currency: The Group in general does not hedge the foreign currency risk arising from sales by an operation denominated in a currency other than its functional currency. In most cases substantial deposits on such sales are received at the time of the order and the remaining balances are, to a large extent, matched by overseas costs. The exceptions to this policy are generally related to the purchase of tangible assets or other large one off transactions, where the currency risk is usually hedged using forward foreign exchange contracts. In respect of the translation of foreign currency assets, the Group endeavours to match a significant amount of foreign currency assets by funding overseas operations through borrowings or loans denominated in the overseas currency.
JOHN CHRISTMAS FINANCE DIRECTOR 12 January 2012
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