Final Results
RM PLC
27 November 2006
27 November 2006
RM announces preliminary results for year to 30 September 2006
RM the leading supplier of information and communications technology (ICT) and
other services to education, announces results for the year to 30 September
2006.
Financial highlights: achieved planned profit growth
• Profit before tax: up 26.2% to £14.5m (2005: £11.5m)
• Profit before tax (before amortisation of acquisition related
intangible assets and goodwill impairment*): up 4.3% to £14.6m (2005: £14.0m)
• Diluted EPS: 11.5p (2005: 8.7p)
• Dividends (proposed and paid): up 6.6% to 5.17p (2005: 4.85p)
• Net cash inflow from operating activities: £24.2m (2005: £14.1m)
• Net funds less deferred consideration: up £10.3m to £28.5m (2005:£18.2m)
Operational highlights
• Further increases in profit margin - even after increased investment in BSF
• Four BSF project wins
• Another year of increase in customer satisfaction score
• Further progress in building a more robust business model
*amortisation of acquisition related intangible assets in 2006 was £0.1m (2005:
nil); goodwill impairment in 2006 was nil (2005: £2.5m)
Commenting on the results, Tim Pearson, CEO of RM, said:
'The work we have done to develop and improve RM's business has shown real
benefits this year. Despite market conditions, we have grown profit and
continued our investment in the Group's long-term future.
'The market environment that characterised the second half of 2006 looks set to
continue in the current year. We will continue to invest in the longer term
opportunity of BSF and our recent wins reinforce my confidence that we will be a
major ICT provider to this programme. BSF bid costs in 2007 are likely to be
similar to 2006. In 2007 we anticipate further benefit from education projects.
'We have sharpened the focus of the Group on the growth opportunities available
in the wider education marketplace. Our combination of education focus,
technical capability and scale, make us uniquely well-suited for providing
products and services that help teachers to teach and learners to learn.'
- Ends -
For further information, please contact:
Tim Pearson, CEO
Mike Greig, Group Finance Director RM plc 08709 200200
Phil Hemmings, Director of Corporate Affairs
Andrew Fenwick
Fiona Laffan Brunswick 020 7404 5959
Mark Antelme
A briefing to analysts will take place at 10.30am on Monday 27 November 2006 at
Brunswick, 16 Lincoln's Inn Fields, London, WC2A 3ED. A live audio feed will be
available to those analysts and shareholders unable to attend this meeting in
person. To access this facility: +44 (0) 1452 561 263.
High resolution images are available for the media to view and download free of
charge from www.vismedia.co.uk
A copy of the presentation will be available at www.rm.com from 8.30am on
27 November 2006.
Operations
Strong performance in 2006
We achieved our planned level of profit growth in 2006, even after increasing
our long-term investment in the Building Schools for the Future (BSF)
initiative. Profit before tax and amortisation of acquisition related intangible
assets was £14.6m. This represents an increase of 4.3% over 2005's profit before
tax and goodwill impairment of £14.0m. After acquisition related intangible
amortisation of £0.1m in 2006 and goodwill impairment of £2.5m in 2005, profit
before tax as shown in the income statement increased by 26.2% to £14.5m (2005:
£11.5m).
Operating costs (excluding amortisation of acquisition related intangible assets
and goodwill impairment) reduced to £58.3m (2005: £61.2m). This decrease was
achieved even after expensing an additional £2.0m of BSF bid costs (2006: £3.8m;
2005: £1.8m) and reflects a rapid response to the first quarter's tough market
conditions and strong cost management.
The Group's focus remains on achieving profit growth rather than increased
revenue. Total Group revenue was almost identical to last year's at £262.3m
(2005: £262.7m). Increased revenue from education projects and education
resources offset revenue reductions in hardware and in educational software.
Our very strong cash performance continued. Net cash inflow from operating
activities was £24.2m (2005: £14.1m). At 30 September 2006, cash and cash
equivalents stood at £30.1m (2005: £22.9m).
The Board is proposing a 6.6% increase in the final dividend per share to 4.05p
(2005: 3.80p). Subject to approval at the AGM, this will be paid on 2 February
2007 to shareholders on the register on 5 January 2007, making the full year
dividend per share 5.17p (2005: 4.85p).
RM's externally reviewed customer satisfaction score increased further to 7.41
(2005: 7.21). The Group's annual staff survey showed an increase in the overall
employee satisfaction score for the year to 73.2% (2005: 72.0%).
Making progress across the Group
Improvements in the Group's business model have allowed us to make very good
progress, despite challenging conditions in our individual schools ICT business.
A year ago we reported that head teachers in England were facing pressures, both
on their time and on their schools' budgets, as a result of the introduction of
new pay arrangements for teachers. These pressures impacted RM through the first
half of the year. Our individual schools business was also affected by a decline
in the amount of money schools spent on educational software as a result of the
decreasing effectiveness of Electronic Learning Credits (eLCs - government
funding intended for purchasing education software), which were meant
to provide support for UK industry in the face of the BBC's entry into the
market.
These revenue declines were offset by strong performance in other areas of the
Group's operations. Our portfolio of education projects has grown in number,
revenue and profit, and our education resources business, centred on TTS, made
excellent progress during the year.
Four clear growth areas
During the year we have sharpened the focus of the business, identifying four
clear areas of activity:
• Systems and Infrastructure
• Assessment and Data
• Education Management Software
• Education Resources (including education software)
Systems and Infrastructure: Individual Schools
RM Community Connect is the most widely used whole-school networking solution in
UK schools. Most secondary and primary schools now have well-developed network
installations and the previously-described budget pressures have contributed a
modest decrease in network sales. Looking ahead, we will introduce upgrades to
Community Connect in 2007, which support both Windows Vista and 'thin-client'
computing.
Our differentiated PC strategy continues to work well. We increased the
proportion of PCs sold from the RM One and RM Mobile One ranges, which allowed
us to increase average selling prices during 2006. During the year we also
introduced ecoquiet, a low-energy, low-noise, low-heat PC, which fits very well
with the DfES' Sustainable Schools Strategy and the BSF programme.
Systems and Infrastructure: Education Projects and BSF
Our education projects portfolio has progressed well, contributing to
educational success for our customers and delivering high levels of technical
innovation. Of particular note this year are SYeLP (the South Yorkshire
eLearning Programme) and Glow.
SYeLP, a very ambitious economic regeneration programme, will reach conclusion
during FY2007. With the explicit aim of improving ICT skills in the South
Yorkshire region, SYeLP is very much an education project, rather than a managed
infrastructure service. The RM team involved has shown great tenacity and
educational understanding and our partnership with the four local authorities
has beaten its target of achieving 18,000 new ICT qualifications, something
which will genuinely improve life chances.
Glow is another groundbreaking education project. When complete it will provide
a secure, personalised education intranet for all learners, teachers, parents
and carers in Scotland. Early stage functionality was demonstrated at the
Scottish Learning Festival in Glasgow in September and the service is in pilot
trials with Local Authorities. We know of no other project of this ambition and
scale being undertaken anywhere in the World and it positions RM as a leader in
the emerging market area of Education Enterprise Solutions and Learning
Platforms.
The BSF programme has started more slowly than we anticipated. However, in those
projects that have identified their preferred suppliers, our progress has been
in line with our targets. During the year we were awarded the first BSF
contract, a £6.4m project in Solihull, and were preferred bidder for
Stoke-on-Trent City Council's BSF project. Since the close of the financial year
we have been appointed preferred bidder for a further two BSF contracts: Leeds
City Council and Knowsley Metropolitan Borough Council.
We reached the final shortlist on the large majority of BSF projects that we
have bid for during the year, and have been awarded the contract or appointed
preferred bidder in four out of twelve projects. As the BSF programme rolls out
over the next ten to fifteen years, it will have a significant impact on the
educational ICT market in English secondary schools. The consortium nature of
many BSF procurements means that decisions over ICT will not always be made
entirely on the basis of the quality of the ICT supplier. However, our progress
so far - and our unrivalled track record in delivering complex,
educationally-focused ICT projects - gives us confidence to continue investing
in what is a major opportunity for RM.
Assessment and Data
Our Assessment and Data business is developing well.
The innovative on-screen Key Stage 3 ICT test we are developing on behalf of the
QCA was used by approximately half of the UK's secondary schools this year. This
test received an eGovernment Excellence award in the UK eGovernment National
Awards, and is widely viewed as a pathfinder for on-screen testing. We have also
worked with a number of other examination boards to pilot on-screen tests,
including developing a science GCSE test with AQA.
Our large scale e-Marking pilots with Cambridge Assessment went well over the
summer and we have also provided e-Marking services for other examination
boards. With SCORIS, our e-Marking software system, we have developed a strong
capability in this area. In the future we anticipate that e-Marking will develop
into a long-term contracted services business.
The combination of RM's large project experience, and our Forvus subsidiary's
specialist data analysis skills, means that the Group is well positioned to
respond to the growing requirement for sophisticated, data-based school
management tools. An RM-led consortium was awarded the £16m English National
Pupil Database -Achievement and Attainment Tables contract in January 2006. We
are also delivering the RAISEonline searchable database of English school
performance data for Ofsted.
Education Management Systems
The launch in 2006 of IntegrisG2, a Web-delivered school management system,
gives RM a technical lead over competing solutions. Integris uses a hosted
database model centred on Local Authorities, which means that individual schools
are no longer required to maintain their own local database. We believe there
would be significant savings to the UK education service if all schools adopted
this approach.
Education Management Systems is also an international business for RM. The
acquisition of CAZ Software for £1.7m in July 2006 consolidates our position -
and provides scale - in the Australian school management software market. The
combination of our existing RM Asia Pacific business with CAZ Software, makes us
the clear market leader in Australia and provides opportunities for further
growth in the Pacific Rim.
Education Resources
TTS, the Group's specialist education resources business continues to expand.
The range of products available from TTS has widened with the acquisition of
Music Education Supplies Ltd (MES), a specialist music education supplier, and
the introduction of a special educational needs catalogue under the brand
SpecialDirect.com. We have strengthened TTS' systems and infrastructure, as we
indicated we would at the time of its acquisition. TTS Shopping, a new Web
presence developed in conjunction with the Group's central IS team, has
increased the value of online orders significantly. Since year end, we have also
purchased a new 45,000 square foot distribution centre in Nottinghamshire which
provides scope for further growth.
Education software in the UK has fared less well; sales fell year-on-year,
reflecting more general problems in this market - in particular the decreasing
effectiveness of eLCs. We have also now begun to see the impact of the BBC jam
service. This service is being developed under an approval from the Department
of Culture, Media and Sport which explicitly states it must be 'distinctive and
complementary' from commercial products; it is unclear so far that BBC jam meets
this condition. Our research and development investment in this business area
decreased. We are only choosing to invest further where there is a clear market
need which is not threatened by the BBC's activities.
Customer success
There is no better way of securing the future of the business than making sure
today's customers are highly satisfied with the level of service they receive.
Since Tim Pearson took over as CEO of RM in 2002, improving the satisfaction
levels of those customers who choose to work with us has been a major focus for
the management team. Our first step was to introduce an externally reviewed
customer satisfaction score and we're pleased that, in each year since, we have
seen that score increase. In 2006 we have widened our focus to include customer
success; that is, helping our customers achieve success measured in their own
terms.
We're proud that RM's current customers are pleased to work with us. However,
schools with less recent experience of the Group have tended to take a less
positive view, perhaps because they are not aware of how RM has changed in
recent years. Our increasing customer satisfaction score suggests that when we
work with schools, we get things right for them. A priority for the year ahead
is achieving this reputation with all potential customers.
Prospects
The Government places great importance on education and the Chancellor's 2006
Budget speech suggested that this is likely to continue. Priorities include: the
renewal of the school estate, with primary as well as secondary schools
scheduled for redevelopment over the next decade; environmental and
sustainability issues; moving towards a more modern, ICT-based assessment
system; and addressing the equality of ICT provision across all pupils.
Compared with five years ago, longer-term projects mean that RM's business has
improved visibility. However, we remain a seasonal business, with more than half
of our revenue and an even greater proportion of profits arising in the second
half of the year; as a consequence it is difficult to make any meaningful
comment on performance for 2007 at this time.
The market environment that characterised the second half of 2006 looks set to
continue in the current year. We are continuing to invest in the longer term
opportunity of BSF and bid costs in 2007 are likely to be at a similar level to
2006. In 2007 we anticipate some further benefit from Education Projects.
Looking further ahead, our recent BSF wins reinforce our confidence that RM will
be a major ICT provider to this initiative. We have sharpened the focus of the
Group on the growth opportunities available in the wider education marketplace.
Our combination of education focus, technical capability and scale, make us
uniquely well-suited for providing products and services that help teachers to
teach and learners to learn. We look forward to providing even higher levels of
service, to the benefit of all of our stakeholders during 2007.
Finance
Transition to International Financial Reporting Standards (IFRS)
This is the first set of accounts that RM has presented under IFRS.
The table below is provided for illustrative purposes to summarise the impact of
the transition to IFRS from UK Generally Accepted Accounting Practice (GAAP).
UK GAAP is as adopted in the 2005 financial statements; it has not been updated
for subsequent changes in UK GAAP.
Year to 30 September 2006 2005
£'000 unaudited
IFRS profit before tax 14,544 11,528
Amortisation of acquisition related intangible assets 53 -
Goodwill impairment - 2,469
IFRS profit before tax
before amortisation of acquisition related intangible
assets and goodwill impairment 14,597 13,997
Pensions (1,233)* (1,260)
Research & Development - -
Share based payments (104) (14)
Holiday pay accrual 30 122
Foreign exchange hedging investments 14 -
2005 UK GAAP profit before tax and goodwill charges 13,304 12,845
____________________________________________________________________________
Goodwill charges (7,386)
2005 UK GAAP profit before tax 5,459
_____
note: had the Group reported under UK GAAP in 2006 it would have recorded
pensions and share based payment adjustments similar to those shown under IFRS
*the 2006 pensions impact is calculated as the difference between
the IFRS charge and an estimated SSAP 24 charge
The table shows that for both 2005 and 2006 IFRS profit before tax (before
amortisation of acquisition related intangible assets and goodwill impairment)
under IFRS is over £1m greater than under 2005 UK GAAP.
The largest contribution to this is the reduction in pension charge under IFRS.
There were no research and development projects in either year which met the
criteria for capitalisation, so no research and development costs were
capitalised. RM is unusual in that the adoption of IFRS 2, share-based payments,
led to an increase in profits. The principal reason for this is that the costs
of the Group's co-investment plan were already charged to the profit and loss
account under UK GAAP. The total charge for share based payments was £0.8m in
2006 under IFRS.
Revenue and profits
Revenue for the year was £262.3m. This is almost identical to last year's
£262.7m and masks substantial progress in improving the Group's business mix.
There has been significant growth in infrastructure software and services and
education software and services over the last five years. The most significant
contributor to this growth is the increase in revenue from large, long term
contracts.
The Group operates in one primary segment: the supply of products and services
to education. However, the following additional revenue and gross profit
information by business activity is provided to aid investors in understanding
the business.
FY2006 FY2005
Restated under IFRS
Gross Gross Gross Gross
Revenue Profit Profit Revenue Profit Profit
£m m % £m £m %
Infrastructure software & services 88.1 26.7 30.3 87.6 25.3 28.9
Education software & services 57.7 23.7 41.1 47.5 28.2 59.4
PC,distribution & education resources 116.5 20.7 17.8 127.6 20.8 16.3
_______________________________________________________________________________
Total 262.3 71.1 27.1 262.7 74.3 28.3
_______________________________________________________________________________
The major change from 2005 is in education software and services, where revenue
increased by £10.2m but gross profit declined by £4.5m. This is principally due
to revenue from the Glow project which, reflecting the early stage of the
project, was included at zero margin in accordance with the Group's accounting
policies. There was also a significant reduction in higher margin curriculum
software revenues as a result of the decreasing effectiveness of eLCs as
described earlier in this Review. The decline in the education software and
services gross profit percentage from 59.4% to 41.1% in turn explains the
decline of 1.2 pp in the overall gross profit percentage to 27.1%.
PC, distribution and education resources revenues were £116.5m, with increased
revenue from TTS and decreased revenues from hardware. PC hardware now
represents less than 30% of the Group's total revenues and interactive
whiteboard revenues have reduced following the ending of a government scheme.
The gross profit improvement to 17.8%, achieved against a challenging hardware
market, reflects the increased contribution from education resources and the
success of the Group's differentiated PC hardware products.
Operating costs
£m FY2006 FY2005
Restated under IFRS
____________________________________________________________________________
Selling and distribution 33.2 33.9
Research and development 14.9 16.7
Administration 10.2 10.6
____________________________________________________________________________
Operating costs
before amortisation of acquisition related
intangible assets and goodwill impairment 58.3 61.2
Amortisation of acquisition related intangible assets 0.05 -
Goodwill impairment - 2.5
____________________________________________________________________________
Total 58.4 63.7
____________________________________________________________________________
A year ago, with individual schools facing significant budget issues, the
Group's expenditure plans were revised downwards from the original budget.
Operating costs (excluding amortisation of acquisition related intangible
assets) reduced to £58.3m (£2.9m below the previous year's figure excluding
goodwill charges).
Expenditure on bidding for BSF contracts increased by £2.0m to £3.8m (2005:
£1.8m). Despite this increase, total selling and distribution costs decreased by
£0.7m to £33.2m (2005: £33.9m), reflecting reductions in sales and marketing
expenditure in our individual schools and further and higher education
businesses, and in bidding for non-BSF projects. Further increases in Web-based
sales helped contribute to more cost effective selling and distribution.
Research and development charged to the income statement reduced by £1.8m to
£14.9m in response to market conditions, particularly in the area of educational
software. The Group also continued R&D activities related to projects including,
in particular, the Glow Project. As they are project related, the costs of these
developments are included in cost of sales.
The amortisation of acquisition related intangible assets in the year arose from
the acquisitions of CAZ Software and MES. IFRS requires that separately
identifiable intangible assets be capitalised and then amortised. Many
investment analysts believe that profit before such amortisation charges gives a
better guide to business performance; accordingly we have provided figures for
profit before tax and operating costs excluding these charges in addition to
reporting profit before tax.
Investment income of £1.9m (2005: £1.4m) includes £0.9m of income from the sale
of finance lease debt arising from the provision of leases to customers (2005:
£0.7m). This element is included within cash flows from operating activities in
the consolidated cash flow statement.
The finance cost has fallen because the interest on the pension scheme liability
has been outweighed by higher than expected asset returns.
Profit margins
Profit before tax (before amortisation of acquisition related intangible assets,
goodwill charges and 2002's exceptional item) as a percentage of revenue has
risen to 5.6% in 2006 from 2.5% in 2002. Of the increase of 0.7pp from the 4.9%
that was originally reported under UK GAAP in 2005, 0.4pp relates to the
transition to IFRS and 0.3pp to underlying improvement.
The cost of bidding for BSF contracts was equivalent to 1.4% of revenue in 2006.
The three recent BSF contract wins will not contribute to profit before 2008 and
consequently BSF will remain an investment in 2007.
Cashflow
The Group continued its record of excellent cash generation in 2006. This
reflects the continuing focus on turning profits into cash, together with
excellent working capital management.
Net cash flow from operating activities was excellent at £24.2m, an increase of
£10.1m over 2005 (£14.1m). The majority of the improvement arose from movements
in working capital of £8.3m. Operating cash flow, before movements in working
capital, was £25.3m (2005: £24.1m).
Cash and cash equivalents increased by £7.2m to £30.1m (2005: £22.9m). Net funds
less deferred consideration increased by £10.3m to £28.5m (2005: £18.2m).
£m 30 Sep 30 Sep
2006 2005
Cash & cash equivalents 30.1 22.9
Issued loan notes (0.9) (1.1)
___________________________________________________________
Net funds 29.2 21.8
Issuable loan notes - (1.2)
Deferred cash consideration (0.7) (2.4)
___________________________________________________________
Net funds less deferred consideration 28.5 18.2
___________________________________________________________
During the year the deferred contingent consideration relating to the 2003
acquisition of Forvus was finalised at £0.7m. This resulted in a £1.7m reduction
in deferred consideration and a corresponding reduction in goodwill.
The Group's core business remains seasonal, as a result of peak demand from
schools over the summer months. As a consequence of strong cash generation,
average cash balances across the year were £18.4m in 2006 up from £8.0m in 2005,
and the minimum cash balance was £7.3m in 2006 compared to borrowings of £nil in
2005.
Balance sheet
Capital expenditure on property, plant and equipment was £8.9m, £3.5m of which
related to the Glow project, £1.6m to PFI contracts and £3.8m to other capital
expenditure. Depreciation was £9.1m and, after taking into account disposals and
the transfer of the TTS building to assets held for resale (£1.1m), property,
plant and equipment decreased by £2.1m to £22.5m (2005: £24.6m).
Other intangible assets increased by £1.7m due to the acquisition of software
assets (£0.8m), and assets arising on acquisition (£1.4m).
Within working capital; inventories decreased by £1.1m to £10.8m reflecting
effective stock control, trade and other receivables decreased by £2.8m to
£51.4m as a result of a reduction in long term contract balances and trade and
other payables increased by £1.6m to £78.9m.
The IAS 19 pension scheme deficit of £18.7m and related deferred tax asset of
£5.6m are included in retirement benefit obligation and deferred tax assets
respectively. The net deficit is £13.1m (2005: £11.1m). Further details about
the Group's pension scheme deficit are given in the Pensions section below.
Tax
The Group measures its tax rate as percentage of profit before amortisation of
acquisition related intangible assets and goodwill impairment. On this basis the
Group's tax rate in 2006 was 27.8% compared with 27.1% in 2005. These rates are
below the standard UK corporation tax rate as the Group benefits from enhanced
tax deductions on qualifying research and development projects.
IFRS fundamentally changes the calculation of deferred tax. In addition, some
elements of tax previously accounted for in profit and loss account are now
included in the Statement of Recognised Income and Expense (SORIE). In
particular, IFRS requires any tax deduction on share schemes in excess of that
relating to the standard IFRS 2 income statement charge to be passed through the
SORIE.
Pensions
The triennial valuation of the Group's defined benefit pension scheme, which has
been closed to new members for four years, showed a deficit of £12.7m as at 31
May 2006. This is only slightly improved on the previous valuation (31 May 2003:
£12.9m) because the effect of deficit recovery payments was offset by other
changes, in particular improved longevity assumptions. The Group has adopted the
latest available mortality tables, PA92 medium cohort for both the triennial and
the IAS 19 valuations. The triennial valuation produced a smaller deficit than
the IAS 19 deficit of £18.7m which is included on the balance sheet. This is
principally as a result of the different approaches and rates used to discount
the liabilities of the scheme.
The Group has taken the following actions to address the deficit:
• The £1.3m pa additional annual cash contributions agreed with the scheme
Trustees in 2003 will continue.
• The savings from a salary sacrifice scheme for pension contributions
implemented in 2006 will be paid into the scheme. The additional annual cash
contributions have consequently increased to £1.7m pa.
• The Group will make an exceptional cash contribution of £3.5m during
calendar year 2007
• Active members retiring at 60 are required to compensate the Group for
the higher cost of providing this benefit by sacrificing an additional 3.1% of
salary.
• Future increases in current service costs will be passed on to members.
• The Group is consulting with active members of the scheme over the
introduction of one of the following options:
a. Introduction of a 5.0% per annum cap on pensionable salary increases. As
well as reducing the risk to the Group of future salary increases, this
would provide an immediate reduction in liabilities of £3.5m. In
compensation the contributions of active members would be reduced by 1.2%
or 1.5%, depending on retirement age;
b. Additional salary sacrifices averaging approximately 5.5% to compensate
the Group for the benefit foregone of option A, reflecting that the Group
will be required to commit extra resources to funding the deficit.
The combined effect of these actions is anticipated to be a much accelerated
closure of the deficit, combined with no increase in the income statement charge
and use of some cash resources. The consultation will conclude in January 2007,
with changes implemented in February 2007.
Preliminary Announcement
Consolidated income statement
for the year ended 30 September 2006
£'000 2006 2005
(restated)
Notes
Revenue 262,310 262,707
Cost of sales (191,177) (188,444)
__________________________________________________________________________
Gross profit 71,133 74,263
__________________________________________________________________________
Selling and distribution costs (33,166) (33,940)
Research and development expenses (14,918) (16,688)
Administrative expenses (10,193) (10,551)
Amortisation of acquisition related intangible assets (53) -
Other expenses - (2,469)
__________________________________________________________________________
(58,330) (63,648)
__________________________________________________________________________
Profit from operations 12,803 10,615
Investment income 1,876 1,359
Finance costs (135) (446)
__________________________________________________________________________
Profit before tax 14,544 11,528
Tax 3 (4,055) (3,790)
__________________________________________________________________________
Profit for the period attributable to equity
holders of the parent 10,489 7,738
__________________________________________________________________________
Earnings per ordinary share: 4
Basic 11.6p 8.7p
Diluted 11.5p 8.7p
Paid and proposed dividends per share: 5
Interim 1.12p 1.05p
Final 4.05p 3.80p
All activities relate to continuing operations.
The comparative figures have been restated to reflect the adoption of
International Financial Reporting Standards (IFRS).
Consolidated statement of recognised income and expense
for the year ended 30 September 2006
£'000 2006 2005
Note
Exchange differences on translation of
foreign operations (48) 44
Actuarial gains and losses on defined
benefit pension scheme 13 (3,914) (2,300)
Tax on items taken directly to equity 3 1,287 1,064
__________________________________________________________________________
Net loss recognised directly in equity (2,675) (1,192)
__________________________________________________________________________
Profit for the year 10,489 7,738
__________________________________________________________________________
Total recognised income and expense for
the year attributable to equity holders
of the parent 7,814 6,546
__________________________________________________________________________
Consolidated balance sheet
as at 30 September 2006
£'000 2006 2005
(restated)
Notes
Non-current assets
Goodwill 6 22,332 22,221
Other intangible assets 7 3,462 1,714
Property, plant and equipment 22,483 24,643
Deferred tax assets 3 7,394 7,108
__________________________________________________________________________
55,671 55,686
Current assets
Inventories 10,815 11,867
Trade and other receivables 8 51,361 54,142
Cash and cash equivalents 30,092 22,942
__________________________________________________________________________
92,268 88,951
Non-current assets held for sale 10 1,094 -
__________________________________________________________________________
Total assets 149,033 144,637
Current liabilities
Trade and other payables 9 (78,871) (77,255)
Tax liabilities 9 (1,416) (1,315)
__________________________________________________________________________
(80,287) (78,570)
__________________________________________________________________________
Net current assets 11,981 10,381
__________________________________________________________________________
Non-current liabilities
Retirement benefit obligation 13 (18,707) (15,890)
Deferred tax liabilities 3 (234) -
Other payables 9 (6,793) (9,759)
Provisions (737) (2,170)
__________________________________________________________________________
(26,471) (27,819)
__________________________________________________________________________
Total liabilities (106,758) (106,389)
__________________________________________________________________________
Net assets 42,275 38,248
__________________________________________________________________________
Equity attributable to equity holders of
the parent
Share capital 1,836 1,815
Share premium account 23,877 22,151
Own shares (954) (1,632)
Capital redemption reserve 94 94
Translation reserve (4) 44
Retained earnings 17,426 15,776
__________________________________________________________________________
Total equity 11 42,275 38,248
__________________________________________________________________________
The comparative figures have been restated to reflect the adoption of IFRS.
Consolidated cash flow statement
for the year ended 30 September 2006
£'000 2006 2005
(restated)
Profit from operations 12,803 10,615
Adjustments for:
Gain on derivatives (14) -
Depreciation of property, plant and equipment 9,071 7,636
Amortisation of acquisition related intangible assets 53 -
Amortisation of other intangible assets 342 1,070
Impairment of goodwill - 2,469
Loss/(Gain) on disposal of property, plant and
equipment 77 (259)
Decrease in provisions (233) (150)
Share-based payment charge 803 988
Pension charge 2,358 1,730
__________________________________________________________________________
Operating cash flows before movements in working
capital 25,260 24,099
Decrease in inventories 1,211 2,608
Decrease/(Increase) in receivables 3,035 (1,733)
Increase/(Decrease) in payables 585 (4,370)
__________________________________________________________________________
Cash generated by operations 30,091 20,604
Tax paid (3,110) (3,743)
Pension contribution (3,554) (3,400)
Income on sale of finance lease debt 854 676
Interest paid (36) (36)
__________________________________________________________________________
Net cash inflow from operating activities 24,245 14,101
Investing activities
Interest received 784 392
Proceeds on disposal of property, plant and equipment 743 1,084
Purchases of property, plant and equipment (8,903) (14,859)
Purchases of other intangible assets (803) (731)
Acquisition of subsidiaries, net of cash acquired (2,281) -
__________________________________________________________________________
Net cash used in investing activities (10,460) (14,114)
Financing activities
Dividends paid (4,473) (4,127)
Proceeds from share capital issue, net of share issue
costs 831 766
Repayment of borrowings assumed in acquisitions (322) -
Purchase of own shares (816) (569)
Share buy backs (65) -
Repayment of loan notes (1,790) (600)
__________________________________________________________________________
Net cash used in financing activities (6,635) (4,530)
__________________________________________________________________________
Net increase/(decrease) in cash and cash equivalents 7,150 (4,543)
__________________________________________________________________________
Cash and cash equivalents at the beginning of year 22,942 27,480
Effect of foreign exchange rate changes - 5
__________________________________________________________________________
Cash and cash equivalents at the end of year 30,092 22,942
__________________________________________________________________________
The comparative figures have been restated to reflect the adoption of IFRS.
Notes to the report and accounts
1. Preliminary results
The preliminary results for the year to 30 September 2006 have been prepared in
accordance with International Financial Reporting Standards (IFRS) as adopted by
the European Union and applied in accordance with the Companies Act
1985. However, this announcement does not contain sufficient information to
comply with IFRS. The Group expects to publish full financial statements that
comply with IFRS in December 2006 which will be delivered before the Company's
Annual General Meeting in January 2007.
This is the first year in which the Group has prepared its financial statements
under IFRS and the comparative information for the year to 30 September 2005,
which was originally prepared under UK Generally Accepted Accounting Practice
(UK GAAP), has been restated to comply with IFRS. An explanation of the
transition to IFRS and the reconciliations from the previously published UK GAAP
financial statements to IFRS were contained in the interim financial statements
published on 12 May 2006.
This Preliminary Announcement does not constitute the Group's statutory accounts
for the years ended 30 September 2006 or 30 September 2005, but is derived from
those accounts. Statutory accounts for the year to 30 September 2005, which
were prepared in accordance with UK GAAP, have been delivered to the Registrar
of Companies. The auditors have reported on these accounts; their reports were
unqualified and did not contain statements under s237 (2) or (3) of the
Companies Act 1985.
This Preliminary Announcement was approved by the Board of Directors on 24
November 2006.
2. Business segments
The business operates in one primary segment, being the supply of products and
services to education.
The Group operates primarily in the UK, with no other geographical segment being
material for disclosure.
3. Tax
a) Analysis of tax charged in income statement
£'000 2006 2005
Current taxation
UK corporation tax at 30% (2005: 30%) based on the
profit for the year 3,448 3,581
Adjustment in respect of prior years 94 (155)
__________________________________________________________________________
Total current tax 3,542 3,426
Deferred taxation
Temporary differences 461 47
Adjustment in respect of prior years 52 317
__________________________________________________________________________
Total deferred tax 513 364
__________________________________________________________________________
Total income statement tax charge 4,055 3,790
__________________________________________________________________________
In addition to the amount charged to the income statement £1,287,000 (2005:
£1,064,000) of tax has been credited to equity through the statement of
recognised income and expense. The credit comprises a tax credit on the equity
component of share-based payments of £113,000 (2005: £ 374,000) and a tax credit
on actuarial gains and losses of £1,174,000 (2005: £690,000).
Further analysis of the Group's deferred tax assets and liabilities is shown
below.
b) Factors affecting the tax charge for the period
The difference between the total tax shown above and the amount calculated by
applying the standard rate of UK corporation tax to the profit on ordinary
activities before tax is as follows:
£'000 2006 2005
Profit on ordinary activities before tax 14,544 11,528
Tax at 30% thereon: 4,363 3,458
Effects of:
- goodwill charges not deductible for tax purposes - 740
- other expenses not deductible for tax purposes 56 92
- other temporary timing differences 125 (202)
- research and development tax credit (625) (600)
- effect of overseas (profits)/losses (10) 140
- prior period adjustments 146 162
__________________________________________________________________________
Tax 4,055 3,790
__________________________________________________________________________
The Group's effective tax rate of 27.8% (2005: 27.1%) has been calculated
excluding the impact of goodwill charges and acquisition related intangible
amortisation from profit before tax in order to provide a more meaningful
analysis:
£'000 2006 2005
Profit before tax 14,544 11,528
Goodwill charges and amortisation of acquisition related
intangible assets 53 2,469
__________________________________________________________________________
Profit before tax and goodwill charges and amortisation
of acquisition related intangible assets 14,597 13,997
Tax charge on profit before goodwill charges and
amortisation of acquisition related intangible assets 4,055 3,790
__________________________________________________________________________
Effective rate 27.8% 27.1%
Tax credit on other recognised income and expense (1,287) (1,064)
__________________________________________________________________________
Tax charge on total recognised income and expense 2,768 2,726
__________________________________________________________________________
Deferred tax
The following are the major deferred tax assets and liabilities recognised by
the Group and movements thereon during the current and prior reporting period.
£'000 Accelerated Retirement Short-term Acquisition Total
tax benefit Share-based timing related
depreciation obligations payment differences intangible
assets
At 1 October 2004 536 4,455 814 781 - 6,586
(Credit)/charge to income (272) (378) 277 9 - (364)
Charge to equity - 690 197 - - 887
Exchange differences - - - (1) - (1)
_______________________________________________________________________________________________
At 1 October 2005 264 4,767 1,288 789 - 7,108
(Credit)/charge to income (106) (331) (137) 61 - (513)
Charge/(charge) to equity - 1,174 (256) - - 918
Acquisition of subsidiaries - - - - (353) (353)
_______________________________________________________________________________________________
At 30 September 2006 158 5,610 895 850 (353) 7,160
_______________________________________________________________________________________________
Certain deferred tax assets and liabilities have been offset above. The
following analysis shows the deferred tax balances before offset, as shown in
the balance sheet:
£'000 2006 2005
Deferred tax assets 7,394 7,108
Deferred tax liabilities (234) -
_______________________
7,160 7,108
_______________________
4. Earnings per ordinary share
The calculation of the Group basic and diluted earnings per ordinary share is
based on the following data:
2006 2005
Weighted Pence Weighted Pence
Profit average per Profit average per
after number share after number share
tax of tax of
£'000 shares £'000 shares
'000 '000
Basic earnings per ordinary
share 10,489 90,755 11.6 7,738 88,924 8.7
Effect of dilutive
potential ordinary shares:
share options 560 (0.1) - 434 -
______________________________________________________________________________
Diluted earnings per
ordinary share 10,489 91,315 11.5 7,738 89,358 8.7
Effect of amortisation of
acquisition related
intangible assets and
goodwill charges 53 - - 2,469 - 2.7
______________________________________________________________________________
Diluted earnings per
ordinary share excluding
amortisation of acquisition
related intangible assets
and goodwill charges 10,542 91,315 11.5 10,207 89,358 11.4
______________________________________________________________________________
Earnings per share figures are also reported before amortisation of acquired
intangibles and goodwill charges because this is considered a more consistent
measure of underlying performance.
5. Dividends
Amounts recognised as distributions to equity holders in the year:
£'000 2006 2005
Final dividend for the year ended 30 September 2005 of 3.80p (2004:
3.60p) per share 3,399 3,195
Interim dividend for the year ended 30 September 2006 of 1.12 p
(2005: 1.05p) per share 1,022 932
_____________
4,421 4,127
_____________
The proposed final dividend was approved by the Board on 24 November 2006 and is
subject to approval by shareholders at the Annual General Meeting and has not
been included as a liability as at 30 September 2006:
£'000 2006 2005
Proposed final dividend for the year ended 30 September 2006 of
4.05p (2005: 3.80p) per share 3,688 3,399
_____________
6. Goodwill
Goodwill increased by £0.1 million in the year due to goodwill arising on the
acquisitions of Caz Software Pty Ltd (£1.2 million) and Music Education Supplies
Ltd (£0.6 million) offset by a reduction amounting to £1.7 million in the
deferred consideration arising on the 2003 acquisition of Sir (UK) Ltd (trading
as Forvus).
7. Other intangible assets
Other intangible assets increased by £1.8 million due to additions in the year
of £0.8 million and amounts acquired on subsidiary acquisitions of £1.4 million
offset by an amortisation charge for the year of £0.4 million, including the
amortisation of acquisition related intangibles of £0.05 million.
8. Other financial assets
Trade and other receivables
£'000
2006 2005
Current
Trade receivables 41,863 43,364
Long-term contract balances 5,490 6,967
Other receivables 725 524
Prepayments and accrued income 3,283 3,287
__________________
51,361 54,142
__________________
9. Other financial liabilities
Trade and other payables
£'000
2006 2005
Current
Trade payables 20,544 20,753
Other taxation and social security 9,682 8,452
Other payables - deferred consideration 703 -
Other payables - other 1,624 1,814
Accruals 24,527 19,221
Amounts due from long term contract customers 43 4,075
Deferred income 20,864 21,841
Loan notes 884 1,099
__________________
78,871 77,255
__________________
Tax liabilities 1,416 1,315
Non-current
Employee benefits - other 60 -
Other payables - deferred consideration - 2,450
Deferred income:
- due after one year but within two years 5,334 4,979
- due after two years but within five years 1,399 2,330
__________________
6,793 9,759
__________________
10. Non-current assets held for sale
The Group's subsidiary TTS Group Ltd is in the process of moving buildings. Its
previous offices and warehouse facilities are being actively marketed and it is
expected that these premises will be sold in the near future. The building is
held at £1.1 million representing its net book value prior to being reclassified
and this is lower than the estimated fair value.
11. Reconciliation of shareholder's equity and reserves
£'000 Share Share Own Capital Hedging Retained Total
capital premium shares redemption and earnings equity
account reserve translation
reserves
Group
At 1 October 2004 1,794 20,349 (1,063) 94 - 13,470 34,644
Profit for the year 7,738 7,738
Exchange differences 44 44
on translation of
foreign operations
Actuarial gains and (2,300) (2,300)
losses on defined
benefit scheme
Tax credit on items 1,064 1,064
taken directly to
equity
Purchase of shares (569) (569)
Transfer in respect 1,057 (1,057) -
of issue of shares
to employee trusts
Share-based payment 988 988
transactions
Dividends paid (4,127) (4,127)
Share issues 21 745 766
__________________________________________________________________________________________
At 1 October 2005 1,815 22,151 (1,632) 94 44 15,776 38,248
Profit for the year 10,489 10,489
Exchange differences (48) (48)
on translation of
foreign operations
Actuarial gains and (3,914) (3,914)
losses on defined
benefit scheme
Tax credit on items 1,287 1,287
taken directly to
equity
Purchase of shares (816) (816)
Repurchase of shares (65) (65)
Transfer in respect 916 (916) -
of issue of shares
to employee trusts
Share-based payment 1,494 (1,613) (119)
awards exercised in
year
Share-based payment 803 803
transactions
Dividends paid (4,421) (4,421)
Share issues 21 810 831
__________________________________________________________________________________________
At 30 September 2006 1,836 23,877 (954) 94 (4) 17,426 42,275
__________________________________________________________________________________________
12. Net funds
£'000 2005 Cash flow Non-cash movements 2006
Cash and cash
equivalents 22,942 7,150 - 30,092
____________________________________________________________________________
Loan notes due (1,099) 590 (375) (884)
Net funds 21,843 7,740 (375) 29,208
Issuable loan notes (1,200) 1,200 - -
Deferred consideration
(Note 6) (2,450) - 1,747 (703)
____________________________________________________________________________
18,193 8,940 1,372 28,505
____________________________________________________________________________
13. Retirement benefit schemes
Defined contribution schemes
The Group operates or contributes to a number of defined contribution schemes
for the benefit of qualifying employees in its subsidiary companies. The assets
of these schemes are held separately from those of the Group. The total cost
charged to income of £2.0 million (2005: £0.4 million) represents contributions
payable to these schemes by the Group at rates specified in employment
contracts. As at 30 September 2006 £0.2 million (2005: £ 0.1 million) due in
respect of the current reporting period had not been paid over to the schemes.
Defined benefit scheme
The Group operates one defined benefit pension scheme, the Research Machines plc
1988 Pension Scheme. The scheme provides benefit to qualifying employees and
former employees of Research Machines plc, 3T Productions Ltd and Softease Ltd,
but was closed to new members with effect from 1 January 2003. Under the scheme
employees are entitled to retirement benefits of 1/60th of final salary for each
qualifying year on attainment of retirement age of 60 or 65 years and additional
benefits based on the value of individual accounts. No other post-retirement
benefits are provided. The scheme is a funded scheme.
The assets of the scheme are held separately from those of the Group in a
trustee-administered fund.
The most recent actuarial valuation of plan assets and the present value of the
defined benefit obligation were carried out for statutory funding purposes at 31
May 2006 by a qualified independent actuary. The valuation of plan assets was
updated to 30 September 2006 and liabilities rolled forward to this date under
IAS 19. The present value of the defined benefit obligation and the related
current service cost was measured using the projected unit credit method.
The triennial valuation for statutory funding purposes showed a deficit of £12.7
million as at 31 May 2006 (31 May 2003: £12.9m). The cost of future provision
was revised to 21.4% for Normal Retirement Age 60 (2003: 20.4%) and 15.3% for
Normal Retirement Age 65 (2003: 13.1%)
Actions taken by the Group in response to the triennial valuation are described
in the Business Review. The potential impacts of these actions have not been
reflected within the results below:
IAS 19 valuation
Key assumptions used:
2006 2005
Rate of increase in salaries 3.80% 3.80%
Rate of increase of pensions in payment 2.70% 2.70%
Rate of increase of pensions in deferment 2.70% 2.70%
Discount rate 5.05% 5.05%
Inflation assumption 2.70% 2.70%
Mortality assumptions have been updated to the PA92 medium cohort tables (2005:
PMA92 and PFA92 mortality tables for pensioners and the same tables with an age
adjustment of 4 years for non-pensioners). The impact of this change was to
increase the deficit by £4.3 million which in terms of weighted average life
expectancy in years is as follows:
2006 2005
Male Female Male Female
Pensioner member age 65 21.8 24.7 16.9 19.9
(current life expectancy)
Non-pensioner member age 45 23.0 25.8 20.3 23.3
(life expectancy at 65)
Defined benefit pension scheme charges recognised in income are as follows:
£'000 2006 2005
Current service cost, recognised within
operating profit 2,358 1,730
Interest cost 3,744 3,320
___________________________________________________________
Expected return on scheme assets (3,645) (2,910)
Cost recognised within finance cost 99 410
_________________
2,457 2,140
_________________
The increased current service cost reflects the introduction of the salary
sacrifice scheme discussed in the Business Review. This has the impact of
increasing the Group's cost of providing the defined benefit pension but is
offset by lower salary costs and National Insurance savings.
Amounts recognised directly in equity in respect of the defined benefit pension
scheme are as follows:
£'000 2006 2005
Actuarial gains and losses (2,101) (2,300)
Experience gains and losses (1,813) -
_________________
(3,914) (2,300)
_________________
The actual return on scheme assets was £6.6 million (2005: £8.8 million).
The amount included within the balance sheet arising from the Group's
obligations in respect of its defined benefit scheme, and the expected rate of
return on scheme assets are as follows:
£'000 2006 2005
Equities 6.90% 47,241 6.80% 42,330
Bonds 4.40% 19,634 4.30% 14,200
________________________________________________________________________
Total fair value of scheme assets 66,875 56,530
Present value of defined benefit
obligations (85,582) (72,420)
________________________________________________________________________
Deficit in scheme and liability
recognised in balance sheet (18,707) (15,890)
Related deferred tax asset 5,612 4,767
________________________________________________________________________
Net pension deficit (13,095) (11,123)
________________________________________________________________________
The expected return on scheme assets is based upon the expected out-performance
of equities over government bonds over the long term. The bond rate is based on
the addition of a risk loading to the long term risk free rate of return.
This information is provided by RNS
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