Business and Trading Update

RNS Number : 7633I

Cohort PLC

18 March 2010

 



18 March 2010                                                                                                           AIM: CHRT

PRESS RELEASE

 

COHORT PLC

("Cohort", the "Company" or the "Group")

Business and Trading Update

Establishing the right platform for growth in 2010/11

Cohort plc, the independent technology group, today announces the following update on developments surrounding accounting issues at its wholly-owned subsidiary, Systems Consultants Services Ltd (SCS), as indicated in December 2009 and provides further guidance on trading in the current year.

Restatement of SCS Results

After the discovery of an income overstatement amounting to approximately £1.85m at SCS, announced on 3 December 2009, an assessment of the appropriate accounting treatment was undertaken with the assistance of the Group's auditors, Baker Tilly. The announcement on 9 December 2009 of the Group's interim results for the half year ended 31 October 2009 included a restatement of the results for the year ended 30 April 2009, with revenue and profit being reduced by £0.6m. The balance of the income overstatement, £1.2m, was accounted for in the six months ended 31 October 2009.

Since the announcements in December and the appointment of an interim Finance Director at SCS, a more detailed review of the income overstatement has been undertaken, tracking back the main contracts on which income had been overstated to determine accurately the correct phasing of income recognition. This analysis, which has been independently reviewed by KPMG, confirms that the value of the overstatement was £1.85m and indicates that substantially all of it arose in financial year 2008/9.  In light of the above findings and discussions with KPMG the Board has concluded that the appropriate accounting treatment for the income overstatement is to restate the Group's results for the year ended 30 April 2009.  The restated results for 2008/9 and the first half of 2009/10 show that SCS had:

·        in the year ended 30 April 2009 revenues of £29.3m and trading profit of £1.5m - compared with the originally reported result of revenues of £31.2m and trading profit of £3.3m;

·        in the six months ended 31 October 2009 revenues of £14.1m and trading profit of £0.3m -compared with the originally reported result in December 2009 of £12.8m revenue and a trading loss of £0.9m.

Investigation of causes of income overstatement

The Board of Cohort has, in its further investigation of the matter, confirmed its initial view that there is no evidence of intentional misstatement on the part of SCS staff, and that the proximate causes of the overstatement were:

·        difficulties and errors in the implementation of a new accounting and management information system from May 2008 onwards;

·        a lack of effective communication and coordination between project management and finance functions resulting in a failure to recognise discrepancies between accounting reports and actual project status;

·        management shortcomings in the finance function at SCS; and 

·        a lack of adequate balance sheet review, including work in progress.

Senior management at SCS did not identify, grip and resolve these problems in a timely manner.

Sir Robert Walmsley, independent Director of Cohort, has undertaken a formal review of the governance of SCS by Cohort, and the role of the Cohort Board and Audit Committee, in relation to the SCS financial problems. His main conclusion, while recognising that the problems originated within SCS, was that there were areas for improving both Cohort's internal governance and the governance of its subsidiaries.

The report has made a series of detailed recommendations covering management methods and processes within SCS and, where relevant, other subsidiaries and within Cohort at both Executive and Board level. The recommendations relate primarily to the integrity of financial systems and reporting, the method of interaction between the Cohort Executive and subsidiaries, and the functions of the Board and Audit Committee in overseeing the quality of management, processes and information at subsidiary level. All these recommendations either have been or will be implemented.

The report has been reviewed by a third party specialist in corporate governance, Independent Audit Limited, who has confirmed that the report is thorough and objective and that the conclusions and recommendations are reasonably based.

Since the beginning of 2010 Stanley Carter, Cohort Board member and founder of SCS, has been running SCS as interim Managing Director and an interim Finance Director has also been appointed.

The Board has considered carefully the role of Cohort Directors in relation to the SCS difficulties and the appropriate response.  The Board has concluded that it would be unhelpful to the process of recovering the Group's profitability to have Board changes at this time. Management bonuses paid to Cohort Directors in relation to the Group's financial performance in 2008/9 will be repaid.

Following the discovery of the SCS income overstatement the Board decided to review the Group's audit arrangements.  A tender and review exercise has been mounted and as a result the Board has selected KPMG as the Company's auditor.

SCS Restructuring

The income overstatement disguised for a period an underlying deterioration in trading performance at SCS. Revenue in 2008/9 was £29.3m (2007/8 £26.1m) and trading profit was £1.5m (2007/8 £2.3m). Revenue in the first half of 2009/10 was £14.1m (2008/9 £13.0m) and trading profit was £0.3m (2008/9 £0.5m). The deterioration in profitability at SCS has arisen from low margins or losses arising in business diversification areas, under-utilisation of core consulting staff, and growth in overheads. A restructuring programme is being carried out under which the company is withdrawing from loss making areas, reducing staff so as to improve utilisation, and trimming overheads. The company is also being reorganised so as to streamline management and centralise business support activities, allowing the consulting business areas to focus fully on winning and delivering business. The restructuring, which is expected to be largely complete by 30 April 2010, will produce annualised cost savings in excess of £2m, facilitating the achievement of a satisfactory operating margin in 2010/11.

A new Managing Director is currently being recruited for SCS, which has recently completed its move to new offices at Theale.  The Board is confident that SCS's business model remains sound.

Current Trading, Outlook and Strategy

For the financial year ending 30 April 2010 the Board expects SCS approximately to break even before restructuring costs.  MASS continues to trade well.  At SEA, we expect good results in Aerospace and Underwater but weaker performance in Maritime and Transport divisions. In addition losses have been incurred on a legacy project in the Offshore division. As a result we anticipate that SEA's result for the year will be below previous expectations. A review is underway to determine whether any changes in organisation are required to optimise future performance.

Looking ahead to 2010/11 the Board anticipates a much improved performance compared with the current year. MASS and SEA expect to close the current year with order books substantially ahead of the position at the beginning of the year and we expect SCS to trade profitably following its restructuring.

Cohort was established to pursue growth organically and by acquisition in defence and related markets for technical services and products. The difficulties experienced this year are a major setback for our strategy. The primary focus of the Board is on restoring value through demonstration of improved operating performance. There is underlying strength in the Cohort businesses and the Board is confident that this will show itself in improved returns for shareholders in due course.

ENDS

For further information, please contact

Cohort plc Nick Prest, Chairman Andrew Thomis, Chief Executive	[phone]
Investec Keith Anderson, Daniel Adams	[phone]
Hogarth Partnership Limited           Julian Walker, Vicky Watkins	[phone]

Note to Editors

Cohort plc (www.cohortplc.com) is an independent technology group working primarily for defence (air, land and sea), wider government and industry clients, through three market-facing subsidiary companies:

·    MASS (www.mass.co.uk) - a specialist systems house with considerable experience in the defence market and a focus on Information Systems.  Based in Cambridgeshire, MASS was acquired by Cohort in August 2006;

·    SCS(www.scs-ltd.co.uk) - an independent defence consultancy, combining technical expertise with practical experience and domain knowledge. Owned by Cohort since flotation in March 2006;

·    SEA (www.sea.co.uk) - an advanced surveillance systems and software house with hardware development capability operating in the defence, space, transport and offshore market sectors. Acquired by Cohort in October 2007.   

Cohort(AIM: CHRT) was admitted to London's Alternative Investment Market in March 2006. It has its headquarters in Oxfordshire and, through its operating companies, employs in total around 500 core staff there and at bases in Bristol, Cambridgeshire, Oxfordshire, Lincolnshire and Somerset.

 

END

 

 

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