Preliminary Results
RM PLC
19 November 2007
RM announces preliminary results for year to 30 September 2007
RM, the leading supplier of information and communications technology (ICT) and
other services to education, announces results for the year to 30 September
2007.
Financial highlights
• Revenue: £270.9m (2006: £262.3m)
• Profit before tax (adjusted*): up 6% to £15.5m (2006: £14.6m)
• Profit before tax: £18.4m (2006: £14.5m)
• BSF bid costs expensed: £3.6m (2006: £3.8m)
• Diluted EPS*: 12.3p (2006: 11.5p)
• Dividends (proposed and paid): 5.49p (2006: 5.17p)
• Net funds less deferred consideration: £27.4m (2006: £28.5m)
* before exceptional pension credit of £3.5m in 2007, and amortisation of
acquisition related intangible assets
Operational highlights
• Clear leader in BSF (Building Schools for the Future)
• New Education Resources businesses growing well
• Progress across all four business focus areas
• Further strong growth in committed revenues to £330m (2006: £240m)
Commenting on the results, Tim Pearson, CEO of RM, said:
'2007 has been a very good year for RM - with committed revenues growing
strongly over last year.
'We have clearly established ourselves as the leading ICT supplier to the BSF
programme, winning five of the nine projects announced during the year. There's
been good progress in all four of our focus areas, with particularly good growth
in our new general education resources businesses. We're also pleased with the
growth in our international businesses. Customer satisfaction, which is
fundamental to the Group's long-term success, has seen further improvement.
'Looking ahead, BSF is a massive opportunity for RM. Whilst it's a long-term
investment, RM is exceptionally well-placed and, with the contracts we've
already won and those we expect to win, we anticipate that profits will exceed
bid costs in 2010.
'RM is a group wholly focused on education. With consistent education spending
increases - both in the UK and across the world - we're aiming for growth.'
- 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
Mark Antelme Brunswick 020 7404 5959
Raphael Mazet
A briefing to analysts will take place at 9.00am on Monday 19 November 2007 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, call +44 (0) 1452 561 263.
A copy of the presentation will be available at www.rm.com from 8.30am on 19
November 2007.
Context
In 2007 we established ourselves as the leading ICT supplier to the Government's
BSF (Building Schools for the Future) programme, winning five of the nine
contracts announced in the year. We've also made good progress in all four of
our focus areas (Learning Technologies, Assessment & Data Services; Education
Resources and Education Management Systems); seen further strong growth in
committed revenues; and achieved further increases in both customer and employee
satisfaction.
RM is wholly focused on the education market; we believe that the opportunities
available in this market provide scope for stable and profitable growth. With
four separate focus areas and a growing international presence, RM is a diverse
and exciting group of businesses.
In the UK, the Government's Comprehensive Spending Review, announced in October,
reinforced education as a central public priority in the UK. Total education
spending will increase - in real terms - by 2.8% year-on-year in the next three
government years. Looking further ahead, the Office of National Statistics
forecasts that the population of school-age children, which has been declining
in recent years, will start to grow again from 2010.
Results
Results for the year were in line with expectations and fully met the Board's
targets.
Group revenue increased to £270.9m (2006: £262.3m).
Profit before tax was £18.4m (2006: £14.5m); this includes an exceptional credit
of £3.5m related to a reduction in the Group's pension deficit. Profit before
tax before this exceptional credit and before amortisation of acquisition
related intangible assets was up 6% to £15.5m (2006: £14.6m) - a strong
performance in a year when we also continued to invest in the strategic
development of the Group by bidding for projects and by accelerating investment
in new product development. This profit is after expensing BSF bid costs of
£3.6m (2006: £3.8m).
RM's dividend has increased every year since the Group floated in 1994 and,
reflecting our continued good progress and the Board's confidence in the Group's
future, the Board is recommending a further increase this year. A proposed final
dividend of 4.3p, will increase the full-year dividend by 6.2% to 5.49p (2006:
5.17p).
At 30 September 2007, net funds less deferred consideration were £27.4m (2006:
£28.5m). Cash outflows in the year included a special pension payment of £2m,
acquisitions of £4.5m and dividend payments of £4.8m.
RM's externally reviewed customer satisfaction score, which has increased
year-on-year since we started measuring it in FY2002, increased further to 7.64
(on a scale of one to ten; 2006: 7.41). The Group's overall employee
satisfaction score for the year was 74.6% (2006: 73.2%), the third year of
improvement.
Committed revenues (order book, deferred revenues and projects at preferred
bidder stage) at 30 September 2007 were £330m (30 September 2006: £240m;
September 2002: £100m), demonstrating the progress we have made in improving
visibility of future business.
Learning Technologies
RM Community Connect is a central part of the ICT infrastructure we supply both
to individual schools and to large education projects, and is the most widely
used network management system in UK schools. During 2007 we introduced a range
of upgrades designed to support Microsoft Windows Vista and 'thin-client'
computing. However, the majority of our development activity in this area was
focused on the introduction of Community Connect 4, a major new release which we
anticipate will drive additional sales volume in FY2008.
Against a recent downward trend, PC sales increased during 2007, benefiting from
the Government's Computers for Pupils (CfP) scheme which provides direct funding
to provide home access to PC hardware for disadvantaged pupils. RM is working
with over 20 local authorities, including London Grid for Learning, where we
provide 3G mobile filtered Internet connectivity and other manufacturers' PCs,
as well as a range of RM hardware products. Increasingly, PC supply is about
addressing complex operational and logistical issues in educational
environments; something RM is very well qualified to do.
Our ecoquiet range of low-power PCs has performed very well this year,
significantly exceeding the sales target we set for it. We also continue to
develop our PC hardware range and have recently introduced the revolutionary RM
Asus miniBook. The miniBook offers full network computing facilities at prices
starting at £169, which is a breakthrough in achieving 1:1 pupil:computer
ratios. RM has exclusive UK education rights to the product, which has been
extremely well received by commentators and educationalists.
We have commented over a number of years on the increasing importance of
learning platforms to schools. Learning platforms are sophisticated information
systems that support teaching and learning processes, and facilitate
communication and collaboration between, teachers, learners and parents/carers.
Through the Glow project in Scotland, RM is a leading provider of this kind of
system. Glow continues to go well, completing acceptance tests during the year
and being fully launched at the Scottish Learning Festival in September. Our
target for FY2008 is successful large-scale deployment.
We've also made good progress in building an installed base of learning
platforms in English local authorities - both throughout BSF activities and
through direct sales. Over the next two years establishing a position as one the
major suppliers of learning platforms is extremely important to RM. During 2007,
we have significantly increased investment in product development to ensure that
Kaleidos, RM's learning platform, is the market-leading learning product.
BSF
BSF, a 10-15 year programme to renew all secondary schools in England, will
transform the secondary school ICT market and is massive long-term growth
opportunity for RM. Of the £45 billion central government and local authority
funding allocated to the programme, c.£5 billion will be spent directly on ICT;
in addition, schools will add to this from their own budgets. BSF will result in
the market moving to long-term managed ICT service contracts.
BSF offers significant opportunity in addition to the initial projects. ICT
suppliers who are selected for BSF contracts are well-placed to win additional
business in the form of contract extensions, future BSF waves in the same local
authorities, and additional ICT business from the BSF schools. Taken together
these additional business opportunities represent a larger potential market than
the initial contracts themselves, with success entirely dependent on ensuring
long-term happy customers.
RM is emerging as the clear BSF ICT market leader: during 2007, we won five out
of the nine projects where decisions were made; and, in total, we have won seven
out of eighteen projects awarded. BSF projects now account for over £70m of the
Group's committed future revenues.
We intend to build on our early lead in the BSF programme. FY2008 is a very big
year for project decisions and we have increased our bid cost budget for the
year to c.£4.3m.
Education Resources: general curriculum resources
We entered the general education resources market in 2004 with the acquisition
of TTS Group. General curriculum resources is an attractive business for RM,
offering both synergies (a common customer base, similar requirement for
education domain knowledge and school-focused systems and processes) and access
to a different part of a school's budget.
Since the acquisition of TTS Group, we've achieved significant growth in this
area - both organically and through further acquisition; in 2007, revenues were
in excess of £20m. Organic growth has included: introduction of new catalogues;
development of own brand products, including Electric Education products such as
BeeBot; increased online trading; and the development of Special Direct, a
Special Education Needs (SEN) business.
In 2008 we anticipate further growth, driven by recent acquisitions and by the
recently-won Tesco Sport for Schools and Clubs contract.
• DACTA, which we acquired for a net cost of £3.8m in May 2007, is a
specialist distributor of branded products to education
establishments. DACTA holds exclusive European educational
distribution rights for a number of high-profile brands, including
LEGO; LEGO's interactive products are widely usedby schools for
teaching ICT and Craft, Design & Technology. DACTA also provides the
Group with access to a Europe-wide network of education dealers,
which can act as a channel for other Group products.
• SpaceKraft, which we acquired for a net cost £4.4m in October 2007,
after year-end, has two main areas of activity: it is a catalogue-
based supplier of differentiated SEN and early years products, which
will bring further scale to our existing SEN activity; and also
designs and installs sophisticated 'sensory environments' and soft
play rooms, which are used to provide multi-sensory stimulation for
SEN pupils, and which are often specified as part of BSF programmes.
• Tesco Sport for Schools and Clubs is a voucher-based scheme through
which Tesco shoppers collect vouchers that can be exchanged by
schools and sports clubs for sports equipment. The contract, which
complements our existing Tesco Computers for Schools contract, was
won against strong competition from the existing supplier,
demonstrating that the Group is now firmly established as one of the
UK's leading education resources suppliers.
Education Resources: education software
As we have previously reported, education software has been a difficult market
in the UK for some years; consequently, it has not been a high investment
priority for RM. There are now reasons to anticipate improvement: the suspension
of BBC jam removed a threat from the market; the growing use of Learning
Platform software increases the need for online learning materials; and the move
towards 1:1 pupil:computer ratios is likely to result in online materials
replacing textbooks. We are concentrating our development activities in the
emerging, high potential areas of content generation and Web 2.0 creativity and
collaboration.
Increasingly, our education software products are designed and developed for the
international - and particularly the North American - market. In FY2007, our US
subsidiary, RM Educational Software Inc had a very successful year, with revenue
doubling. We anticipate further revenue growth in the US in FY2008.
Assessment and Data Services
Over the last three years we have been working with examination boards and
providers of qualifications to use ICT to transform - and in some cases
outsource - the processes behind testing, examination and assessment.
On-screen marking is increasingly becoming mainstream and, during 2007, we were
appointed by Cambridge Assessment (Europe's largest assessment agency) as their
long-term, strategic supplier of outsourced on-screen marking services. This
contract is likely to be worth in excess of £21m over five years and is an
excellent platform for developing further this part of the Group's business. We
already have pilots in place with a number of other examination boards and
qualification providers.
We are also working with AQA, one of the UK's three leading examination boards,
to develop on-screen testing, which allows learners to take tests using
computers.
The UK increasingly uses detailed pupil performance and assessment data to drive
educational improvement. Through the acquisition of Forvus in July 2003, RM
became a major provider of data collection, collation, analysis and presentation
services for schools, local authorities and central government. In particular,
we are responsible for providing data for the annual school performance tables
in England. The acquisition of SERAP during 2007 reinforces our position in this
market, bringing two key providers of these services together in the RM Group.
Education Management Systems
As we have previously reported, the development and market deployment of
IntegrisG2, our innovative, Web-delivered school management platform, is the
major activity in our Education Management Systems business. The primary school
version of this software is now complete, with the secondary school and Welsh &
Australian versions still in development. During the year we have secured
further local authority contract wins and the software is included in a number
of our BSF proposals and projects.
We are currently bidding for a contract in the State of Victoria in Australia,
where we already provide school management software. The contract is to provide
an educational intranet of similar scale to Glow and with similar technical
development requirements. Our proposed solution builds on our the Group's unique
expertise in this area. RM does not usually provide information about projects
still in bid phase; however, in this case, we think our ability to compete for
this kind of business is a clear demonstration of the Group's capabilities and
growing international presence.
Customers
Customer satisfaction, the Group's most important non-financial measure, has
increased year-on-year since we started measuring it in 2002.
After two years of being selected as finalists in the HDI (Help Desk Institute)
annual awards, this year we won the 2007 Support Team Excellence Award; we have
also been selected as finalists in the 2007 National Customer Service awards. We
believe that achieving consistently high levels of customer satisfaction is the
one of the most effective ways of delivering long-term success for our
shareholders; these awards demonstrate the very high standard of customer
service we are delivering.
Prospects
As we always say at the time of our preliminary results statement, it is too
early in the year to give any meaningful outlook for FY2008 as a whole. RM is a
seasonal business, with the majority of revenue and profit occurring in the
second half. However, the substantial year-on-year increase in committed
revenues clearly shows that the visibility of RM's future business is much
improved.
BSF remains the single most important driver of the Group's future success. By
any measure, we've had an excellent year for project wins in FY2007 and have set
our future project win rate (by value) target higher as a result. BSF is a
long-term investment case - longer than many others in the software and computer
services sector. The projects won in FY2007 will not significantly impact
revenues and profits before FY2009/10, whilst bidding costs for these projects
have already been expensed. However, with the projects we have already won and
those we expect to win over the next few years, we anticipate the profit
contribution from BSF will exceed bid costs in FY2010.
Each of our focus areas is progressing well: Learning Technologies has an
extremely strong set of innovative products covering all of the important areas
of schools ICT infrastructure; Education Resources has now reached significant
scale; Assessment and Data Services has moved from piloting and exploration to
delivering mainstream outsourced examination services; and Education Management
Systems is reaching the end of a period of investment in product development.
RM is a group of business wholly focussed on education. With consistent
education spending growth - both in the UK and across the world - we're aiming
for growth.
Finance
Basis of preparation
This is the second year in which the Group has reported its results under
International Financial Reporting Standards (IFRS).
The income statement is presented in a columnar format in order to highlight the
Group's preferred measure of profit before tax, which we believe provides a
clear view of underlying business performance. This measure of profit is:
• before amortisation of acquisition related intangible assets (which
is in accordance with general market practice);
• before recognising an exceptional credit relating to the Group's
pension scheme;
• after share-based payment charges;
• after expensing BSF (Building Schools for the Future) bid costs.
Profit before expensing BSF bid costs is also provided for comparative purposes.
The Group did not capitalise any research & development expenditure in FY2007 or
prior years, as no material expenditure met the criteria for capitalisation.
Revenue and profits
Revenue for the year increased by £8.6m to £270.9m (2006: £262.3m).
Acquisitions made in FY2007 and the incremental revenue from including
acquisitions made in FY2006 for the full year contributed £4.8m of this
increase. Organic growth across the business accounted for the balance of £3.8m.
International revenues doubled to £8.8m, reflecting significant growth in the US
, Australia and Europe.
RM continues to operate in a single primary segment: the supply of products and
services to education. To help investors in their analysis of the business, and
to provide a comparison with similar information provided in prior years, the
table provided below shows the Group's revenue and gross profit by broad
business activity:
FY2007 FY2006
Revenue Gross profit Revenue Gross profit
£m £m % £m £m %
----------------- ------ ----- ----- ------ ----- -----
Infrastructure software &
services 90.4 30.3 33.5 88.1 26.7 30.3
Education software &
services 50.7 20.1 39.7 57.7 23.7 41.1
PCs, distribution &
education resources 129.8 23.1 17.8 116.5 20.7 17.8
----------------- ------ ----- ----- ------ ----- -----
Total 270.9 73.5 27.2 262.3 71.1 27.1
Significant changes in the Group's revenues between FY2006 and FY2007 included:
an increase in PC and distribution revenue, reflecting RM's success as a
supplier to the Government's Computers for Pupils scheme; general education
resources revenue increased through a combination of organic growth and the
acquisition of DACTA; BSF generated revenues of £2.9m in the year, compared to
£1.1m last year; the completion of the South Yorkshire e-learning project in
early 2007 and the revenue recognition profile of the Glow project resulted in
less revenue being recognised on these projects than in FY2006.
Infrastructure software and services accounted for 41% of gross profit. Profit
in this area includes an increasing contribution from the Group's long-term
project portfolio, with a very small initial contribution from BSF contracts.
Education software and services gross profit decreased by £3.6m. This reflects
continued weakness in the education software market and a difficult year for 3T
Productions following the cancellation of contracts with the BBC after the
suspension of BBC jam. Glow contributed its first profit in FY2007.
Gross profit percentage for PCs, distribution and education resources was almost
unchanged at 17.9%.
Profit before tax before amortisation of acquisition related intangible assets
and exceptional pension credit increased 6% to £15.5m (2006: £14.6m). Including
these items profit before tax was £18.4m (2006: £14.5m).
Operating costs
Operating costs FY2007 FY2006
-------------- ----------- -----------
Selling & distribution 34.0 33.2
Research & development 14.9 14.9
Administrative* 11.1 10.2
-------------- ----------- -----------
Operating costs 60.0 58.3
-------------- ----------- -----------
*before amortisation of acquisition related intangible assets and exceptional
pension credit
Operating costs, before amortisation of acquisition related intangible assets
and the FY2007 exceptional pension credit, were £60.0m (2006: £58.3m). £1.3m of
the increase relates to acquisitions made in FY2007 and the full year effect of
acquisitions made in FY 2006.
Selling & distribution costs includes costs of bidding for BSF projects of £3.6m
(2006: £3.8m). Bidding costs incurred prior to appointment as preferred bidder
continued to be expensed in the year.
Research & development costs were unchanged from last year at £14.9m. The Group
also performs research and development activities directly related to specific
projects, which are included in cost of sales for those projects.
Investment income earned in the year was £2.0m (2006: £1.9m) and includes £0.7m
(2006: £0.9m) arising from the sale of finance lease debt related to the
provision of leases to customers.
Profit margin
Profit margin (profit before tax before amortisation of acquisition related
intangible assets and the FY2007 exceptional pension credit as a percentage of
total revenue) increased to 5.7% (2006: 5.6%). Profit margin has increased
year-on-year since 2002.
BSF is an exceptional investment programme for RM. It will transform the nature
of RM's secondary school activity, increasing the overall market size and move
the nature of the business from individual school sales to long-term,
multi-school contracts. Bidding for BSF contracts is a long and complex
activity; individual contracts can take anything between three or four years to
contribute to profit, whilst bid costs are expensed at the start of the project.
Bidding for BSF contracts 2007 cost £3.6m or 1.3% of revenue (2006: £3.8m or
1.4% of revenue).
Profit before tax, before amortisation of acquisition related intangible assets,
the FY2007 exceptional pension credit and before BSF bid costs was £19.1m (2006:
£18.4m), giving a profit margin before BSF bid costs of 7.1% (2006: 7.0%). On
the same basis, diluted EPS was 15.1p (2006: 14.5p).
Cash and cash flows
The Group ended the year with cash and cash equivalents of £29.3m, a level
similar to last year (2006: £30.1m).
£m 30 Sep 2007 30 Sep 2006
---------------- -------- --------
Cash & cash equivalents 29.3 30.1
Issued loan notes (0.2) (0.9)
---------------- -------- --------
Net funds 29.1 29.2
Issuable loan notes (1.7) -
Deferred cash consideration - (0.7)
---------------- -------- --------
Net funds less deferred consideration 27.4 28.5
---------------- -------- --------
The issuable loan notes amounting to £1.7m relate to the acquisition of DACTA
Ltd
Net operating cash flows before movements in working capital remained strong and
comparable with last year at £22.0m (2006: £21.7m). Cash outflows during the
year included:
• Dividends paid £4.8m (2006: £4.5m)
• A special pension payment of £2.0m (2006: £ nil) - see Pensions
below
• Net purchases of property, plant and equipment and non-acquisition
related software of £6.8m (2006: £9.0m)
• Acquisitions of subsidiaries which, net of cash, amounted to £2.8m
(2006: £2.3m). A further £1.3m (2006: £1.8m) was paid in the year in
respect of previous acquisitions.
The Group's business activities are seasonal, due to the peak demand from
schools in the summer months. Average cash balances in the year were £14.9m
(2006 £18.4m) whilst the Group had a maximum overdraft of £1.8m (2006: cash
£7.3m) in early September. The Group uses committed bank facilities to manage
its short term cash requirements during the seasonal peak.
Subsequent to the year end the Group acquired SpaceKraft Limited for a net cost
of £4.4m and paid the second £1.5m element of the special pension payment.
Balance sheet
Goodwill increased by £2.3m to £24.6m and acquisition related intangible assets
increased by £2.3m to £3.3m following the acquisition of DACTA and SERAP.
Capital expenditure of £7.5m on property, plant and equipment, was down £1.4m on
last year, and included the purchase of the new TTS building (£2.7m) and £0.5m
on data centres. The previous TTS building was sold for £1.3m. Depreciation
charged in the year amounted to £8.8m (2006: £9.1m).
There was a £4.7m decline in deferred tax assets to £2.7m primarily resulting
from the reduction in the pension deficit.
Within working capital, key features are the impact of including the balance
sheets of the acquisitions made in the year and the effect of a busy summer.
Inventories increased by £2.9m to £13.7m, trade and other receivables by £7.4m
to £58.8m and current liabilities by £6.9m to £87.2m. Long-term contract
balances amounting to £6.1m (2006: £5.5m) are included within trade and other
receivables. Deferred revenues totalling £27.7m (2006: £27.6m) are included in
both current and non-current liabilities.
Tax
The Group's tax charge, measured as a percentage of profit before amortisation
of acquisition related intangible assets and the FY2007 exceptional pension
credit, was 26.8% (2006: 27.8%). This rate is below the standard UK corporation
tax rate, principally reflecting the benefit the Group gains from enhanced tax
deductions on qualifying research and development activities.
In total RM paid and collected tax on behalf of HMRC amounting to £48.0 m (2006:
£43.9m). This includes corporation tax of £3.5m (2006 £3.1m), employment taxes
£23.9m (2006: £22.0m) and VAT £20.4m (2006: £18.4m)
Pensions
Significant progress has been made in addressing the deficit in the Group's
defined benefit pension scheme. At the year end, the IAS19 pension deficit had
been dramatically reduced to £3.3m from £18.7m at 30 September 2006, a reduction
of £15.4m
Management action in the year accounted for £7.2m of the reduction:
• 5% cap on pensionable salary increases reduced the deficit by £3.5m
- this is disclosed as an exceptional credit in the income
statement.
• A special payment of £2.0m paid in the first half of the financial
year.
• The additional deficit reduction payment continued at £1.7m in
FY2007.
Market related movements accounted for the balance of the reduction of £8.1m -
these arise from asset values, discount rate and inflation assumptions.
The Group has left the longevity assumption unchanged, applying the PA92 Medium
Cohort tables. Life expectancy assumptions have increased three times since
2002.
The final £1.5m special payment made in October 2007, and the continuation of
the £1.7m per annum deficit reduction payment, would eliminate the current
deficit during 2008. However, defined benefit valuations remain volatile and the
table below provides an analysis of the sensitivity of the Group's pension
deficit to changes in certain key assumptions.
Sensitivity analysis
Change in assumption Increase/(decrease) in deficit
------------- ---------------
0.1% increase in discount rate (£1.9m)
0.1% increase in inflation £1.3m
1 year increase in life expectancy £1.3m
---------------------- ------
Acquisitions
On 21 May 2007, the Group acquired DACTA Ltd for a net cost of up to £3.8m.
DACTA provides branded learning products (including LEGO Education products) to
educational establishments through a Europe-wide network of dealers.
On 2 August 2007, the Group's subsidiary, Forvus, acquired the assets of SERAP
for a net cost of £0.7m. SERAP provides specialised education data matching and
reporting services for Government Departments & Agencies and Local Authorities.
Subsequent to year end, on 1 October 2007, the Group acquired SpaceKraft Ltd for
a net cost of up to £4.4m. SpaceKraft is one of the UK's leading suppliers of
special educational needs and early years products and services.
Shareholder return
The Group's share price at close of business on 28 September 2007 was 191.5p (29
September 2006: 180p), an increase of 6.4%. Market capitalisation at the same
date was £177m (2006: £165m).
An interim dividend of 1.19p per share was paid to shareholders in June; a
proposed final dividend of 4.30p increases the total dividend per share by 6.2%
to 5.49p (2006: 5.17p). Dividend yield for the year was 3.06% (2006: 3.20%),
based on the share price at the start of the year.
Diluted earnings per share (before amortisation of acquisition related
intangible assets and the FY2007 exceptional pension credit) were 12.3p (2006:
11.5p).
Preliminary Announcement
Consolidated income statement
for the year ended 30 September 2007
£'000 2007 2006
Notes Before Amortisation of Total
amortisation of acquisition
acquisition related
related intangible
intangible assets and
assets and exceptional
exceptional pension credit
pension credit
Revenue 270,910 270,910 262,310
Cost of sales (197,376) (197,376) (191,177)
----------------- ----- -------- -------- ------- -------
Gross profit 73,534 73,534 71,133
----------------- ----- -------- -------- ------- -------
Selling and
distribution costs (33,979) (33,979) (33,166)
Research and
development
expenses (14,886) (14,886) (14,918)
Administrative
expenses (11,174) (11,174) (10,193)
Amortisation
of acquisition
related
intangible assets (580) (580) (53)
Exceptional
pension credit 3,500 3,500 -
----------------- ----- -------- -------- ------- -------
(60,039) 2,920 (57,119) (58,330)
----------------- ----- -------- -------- ------- -------
Profit from
operations 13,495 2,920 16,415 12,803
Investment
income 4 2,047 2,047 1,876
Finance costs 5 (27) (27) (135)
----------------- ----- -------- -------- ------- -------
Profit before
tax 15,515 2,920 18,435 14,544
Tax 3 (4,153) (877) (5,030) (4,055)
----------------- ----- -------- -------- ------- -------
Profit for the
period
attributable to
equity holders of
the parent 11,362 2,043 13,405 10,489
----------------- ----- -------- -------- ------- -------
Earnings per ordinary
share: 6
Basic 12.4p 2.2p 14.6p 11.6p
Diluted 12.3p 2.2p 14.5p 11.5p
Paid and proposed dividends
per share: 7
Interim 1.19p 1.12p
Final 4.30p 4.05p
All activities relate to continuing operations.
Consolidated statement of recognised income and expense
for the year ended 30 September 2007
£'000 2007 2006
Note
Exchange differences on translation of foreign
operations 194 (48)
Actuarial gains/(losses) on defined benefit pension
scheme 12 7,565 (3,914)
Tax on items taken directly to equity 3 (2,096) 1,287
----------------------------- ----------- -------
Net income/(loss) recognised directly in equity 5,663 (2,675)
----------------------------- ------------ -------
Profit for the year 13,405 10,489
----------------------------- ------------ -------
Total recognised income and expense for the year
attributable to equity holders of the parent 19,068 7,814
----------------------------- ------------ -------
Consolidated balance sheet
as at 30 September 2007
£'000 2007 2006
Notes
Non-current assets
Goodwill 24,626 22,332
Acquisition related intangible assets 3,267 1,002
Other intangible assets 2,395 2,460
Property, plant and equipment 21,125 22,483
Deferred tax assets 3 2,739 7,394
-------------------------- ------- -------- --------
54,152 55,671
Current assets
Inventories 13,701 10,815
Trade and other receivables 8 58,803 51,361
Cash and cash equivalents 11 29,321 30,092
-------------------------- ------- -------- --------
101,825 92,268
Non-current assets held for sale - 1,094
-------------------------- ------- -------- --------
Total assets 155,977 149,033
Current liabilities
Trade and other payables 9 (86,006) (78,871)
Tax liabilities 9 (1,221) (1,416)
-------------------------- ------- -------- --------
(87,227) (80,287)
-------------------------- ------- -------- --------
Net current assets 14,598 11,981
-------------------------- ------- -------- --------
Non-current liabilities
Retirement benefit obligation 12 (3,269) (18,707)
Deferred tax liabilities 3 (135) (234)
Other payables 9 (5,182) (6,793)
Provisions (2,252) (737)
-------------------------- ------- -------- --------
(10,838) (26,471)
-------------------------- ------- -------- --------
Total liabilities (98,065) (106,758)
-------------------------- ------- -------- --------
-------------------------- ------- -------- --------
Net assets 57,912 42,275
-------------------------- ------- -------- --------
Equity attributable to equity holders of the
parent
Share capital 1,854 1,836
Share premium account 25,727 23,877
Own shares (998) (954)
Capital redemption reserve 94 94
Translation reserve 190 (4)
Retained earnings 31,045 17,426
-------------------------- ------- -------- --------
Total equity 10 57,912 42,275
-------------------------- ------- -------- --------
Consolidated cash flow statement
for the year ended 30 September 2007
£'000 2007 2006
Notes
Profit from operations 16,415 12,803
Adjustments for:
Loss/(gain) on derivatives 55 (14)
Amortisation of acquisition related intangible
assets 580 53
Depreciation of property, plant and equipment 8,793 9,071
Amortisation of other intangible assets 1,010 342
(Gain)/Loss on disposal of property, plant and
equipment (657) 77
Decrease in provisions (195) (233)
Share-based payment charge 1,038 803
Defined benefit pension cash contribution in excess
of charge to profit (1,573) (1,196)
Exceptional pension credit (3,500) -
---------------------------- ----- -------- --------
Operating cash flows before movements in working
capital 21,966 21,706
(Increase)/Decrease in inventories (1,934) 1,211
(Increase)/Decrease in receivables (6,492) 3,035
Increase in payables 4,508 585
--------------------------- ----- -------- --------
Cash generated by operations 18,048 26,537
Additional special defined benefit pension
contribution (2,000) -
Tax paid (3,470) (3,110)
Income on sale of finance lease debt 4 688 854
Interest paid (27) (36)
--------------------------- ----- -------- --------
Net cash inflow from operating activities 13,239 24,245
Investing activities
Interest received 4 872 784
Proceeds on disposal of property, plant and
equipment 2,004 743
Purchases of property, plant and equipment (7,482) (8,903)
Purchases of other intangible assets (1,303) (803)
Acquisition of subsidiaries, net of cash acquired (2,767) (2,281)
--------------------------- ----- -------- --------
Net cash used in investing activities (8,676) (10,460)
Financing activities
Dividends paid (4,801) (4,473)
Proceeds from share capital issue, net of share
issue costs 1,280 831
Repayment of borrowings assumed in acquisitions - (322)
Purchase of own shares (559) (816)
Share buy backs - (65)
Repayment of loan notes and deferred consideration (1,316) (1,790)
-------------------------- ----- -------- --------
Net cash used in financing activities (5,396) (6,635)
-------------------------- ----- -------- --------
Net (decrease)/increase in cash and cash equivalents (833) 7,150
-------------------------- ----- -------- --------
Cash and cash equivalents at the beginning of year 30,092 22,942
Effect of foreign exchange rate changes 62 -
-------------------------- ----- -------- --------
Cash and cash equivalents at the end of year 11 29,321 30,092
-------------------------- ----- -------- --------
Notes to the report and accounts
1. Preliminary results
The preliminary results for the year to 30 September 2007 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 which
will be delivered before the Company's Annual General Meeting in January 2008.
This Preliminary Announcement does not constitute the Group's statutory accounts
for the years ended 30 September 2007 or 30 September 2006, but is derived from
those accounts. Statutory accounts for the year to 30 September 2006, which
were prepared in accordance with IFRS, 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 19
November 2007.
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 2007 2006
Current taxation
UK corporation tax at 30% (2006: 30%) based on the profit
for the year 4,242 3,448
Adjustment in respect of prior years 109 94
----------------------------------- -------- --------
Total current tax 4,351 3,542
Deferred taxation
Temporary differences 1,076 461
Adjustment in respect of prior years (397) 52
----------------------------------- -------- --------
Total deferred tax 679 513
----------------------------------- -------- --------
Total income statement tax charge 5,030 4,055
In addition to the amount charged to the income statement £2,096,000 of tax has
been charged to equity through the statement of recognised income and expense
(2006: credit of £1,287,000). The charge comprises a tax credit on the equity
component of share-based payments of £263,000 (2006: £ 113,000) a tax debit
arising from the change in tax rate of £89,000 and a tax debit on actuarial
gains and losses of £2,270,000 (2006: credit £1,174,000).
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 2007 2006
Before Amortisation of Total
amortisation of acquisition
acquisition related
related intangible
intangible assets and
assets and exceptional
exceptional pension credit
pension credit
Profit on
ordinary activities
before tax 15,515 2,920 18,435 14,544
Tax at 30% thereon: 4,655 877 5,532 4,363
Effects of:
- impact of change
in tax rate on
brought forward
deferred tax asset 62 - 62 -
- other expenses not
deductible for tax
purposes 59 - 59 56
- other temporary
timing differences 278 - 278 125
- research and
development tax
credit (502) - (502) (625)
- effect of overseas
(profits)/losses (111) - (111) (10)
- prior period
adjustments (288) - (288) 146
-------------- -------- --------- ------- -------
Tax 4,153 877 5,030 4,055
The Group's effective tax rate of 26.8% (2006: 27.8%) has been calculated
excluding the impact of acquisition related intangible amortisation and the
exceptional pension credit from profit before tax:
£'000 2007 2006
Before Amortisation of Total
amortisation of acquisition
acquisition related
related intangible
intangible assets and
assets and exceptional
exceptional pension credit
pension credit
------------------------------- -------- ------- -------- --------
Profit before tax 15,515 2,920 18,435 14,597*
Tax charge 4,153 877 5,030 4,055
------------------------------- -------- -------- -------- --------
Effective rate 26.8% 30.0% 27.3% 27.8%
* before £53,000 amortisation of acquisition related intangible assets
Deferred tax
Deferred tax assets and liabilities have been calculated using the rate of UK
Corporation Tax expected to apply when the relevant timing differences reverse.
A number of changes to the UK tax system were announced in the March 2007 Budget
Statement and are expected to be enacted in the 2007 and 2008 Finance Acts. The
changes relating to the decrease in the corporation tax rate from 30% to 28%
from 1 April 2008 have been substantively enacted at the balance sheet date, and
therefore included in these financial statements. The impact of this change in
rate on Group deferred tax balances was a debit to the tax charge in the income
statement of £62,000 and a debit to the equity reserve of £89,000.
4. Investment income
£'000 2007 2006
Bank interest 872 784
Income of sale of finance lease debt 688 854
Net finance income on defined benefit pension scheme 300 -
Other finance income 187 238
------- -------
2,047 1,876
------- -------
5. Finance costs
£'000 2007 2006
Interest on bank overdrafts and loans 21 5
Interest on loan notes 6 31
Other finance costs - 99
------- -------
27 135
------- -------
6. Earnings per ordinary share
The calculation of basic and diluted earnings per ordinary share is shown below:
Adjusted diluted earnings per share have also been presented which remove the
impact of the amortisation of acquisition related intangible amortisation and
also the exceptional pension credit.
2007 2006
Profit Weighted Pence Profit Weighted Pence
after average per after average per
tax number of share tax number of share
shares shares
£'000 '000 £'000 '000
Basic earnings per
ordinary share 13,405 91,780 14.6 10,489 90,755 11.6
Effect of dilutive
potential ordinary
shares:
share options - 505 (0.1) - 560 (0.1)
------- ------- ------- ------- ------- -------
Diluted earnings
per ordinary
share 13,405 92,285 14.5 10,489 91,315 11.5
Effect of
amortisation
of acquisition
related
intangible
assets and
exceptional
pension credit (2,043) - (2.2) 53 - -
------- ------- ------- ------- ------- -------
Diluted earnings
per ordinary
share adjusted
for amortisation
of acquisition
related intangible
assets and
exceptional
pension credit 11,362 92,285 12.3 10,542 91,315 11.5
During the year the Group expensed £3.6m (2006: £3.8m) of BSF bid costs. Profit
before tax before amortisation of acquisition related intangible assets, the
2007 exceptional pension credit and BSF bid costs was £19.1m (2006:£18.4m).
To understand the impact of bid costs expensed in relation to the Building
Schools for the Future programme, the following reconciliation is provided:
2007 2006
Profit Weighted Pence Profit Weighted Pence
after average per after average per
tax number of share tax number of share
shares shares
£'000 '000 £'000 '000
Diluted earnings per
ordinary share
adjusted for
amortisation of
acquisition related
intangible assets
and exceptional
pension credit 11,362 92,285 12.3 10,542 91,315 11.5
------- ------- ------- ------- ------- -------
Effect of Building
Schools for the
Future bid costs 2,544 - 2.8 2,694 - 3.0
------- ------- ------- ------- ------- -------
Diluted earnings 13,906 92,285 15.1 13,236 91,315 14.5
per ordinary share
adjusted for
amortisation of
acquisition
related intangible
assets, exceptional
pension credit
and Building
Schools for the Future
bid costs
7. Dividends
Amounts recognised as distributions to equity holders in the year:
£'000 2007 2006
Final dividend for the year ended 30 September 2006 of 4.05p
(2005: 3.80p) per share 3,688 3,399
Interim dividend for the year ended 30 September 2007 of 1.19p
(2006: 1.12p) per share 1,113 1,022
------------------------------------ ------ ------
4,801 4,421
The proposed final dividend of 4.30p per share was approved by the Board on 16
November 2007. The dividend is subject to approval by shareholders at the Annual
General Meeting and the expected cost of £4.0 million has not been included as a
liability as at 30 September 2007.
8. Other financial assets
£'000 2007 2006
Current
Trade receivables 47,943 41,863
Long-term contract balances 6,079 5,490
Other receivables 432 725
Prepayments and accrued income 4,349 3,283
-------- --------
58,803 51,361
-------- --------
9. Other financial liabilities
£'000 2007 2006
Current
Trade payables 26,520 20,544
Other taxation and social security 11,046 9,682
Other payables - deferred consideration - 703
Other payables - other 793 1,624
Accruals 24,873 24,527
Amounts due to long term contract customers - 43
Deferred income 22,528 20,864
Loan notes 246 884
-------- --------
86,006 78,871
-------- --------
Tax liabilities 1,221 1,416
-------- --------
Non-current
Employee benefits - other - 60
Deferred income:
- due after one year but within two years 3,660 5,334
- due after two years but within five years 1,492 1,399
- due after five years 30 -
-------- --------
5,182 6,793
-------- --------
10. 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
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
on
translation
of foreign
operations (48) (48)
Actuarial gains
and losses on
defined benefit
scheme (3,914) (3,914)
Tax credit
on items taken
directly to
equity 1,287 1,287
Purchase of
shares (816) (816)
Repurchase
of shares (65) (65)
Transfer in
respect of
issue of
shares to
employee
trusts 916 (916) -
Share-based
payment
awards
exercised in
year 1,494 (1,613) (119)
Share-based
payment
transactions 803 803
Dividends
paid (4,421) (4,421)
Share
issues 21 810 831
---------- ------ ------- ------ -------- --------- ------- ------
At 1 October
2006 1,836 23,877 (954) 94 (4) 17,426 42,275
Profit for
the
year 13,405 13,405
Exchange
differences
on
translation
of
foreign
operations 194 194
Actuarial
gains and
losses on
defined
benefit
scheme 7,565 7,565
Tax charge
on
items taken
directly to
equity (2,096) (2,096)
Purchase of
shares (559) (559)
Transfer in
respect of
issue of
shares to
employee
trusts 588 (588) -
Share-based
payment
awards
exercised in
year 515 (904) (389)
Share-based
payment
transactions 1,038 1,038
Dividends
paid (4,801) (4,801)
Share issues 18 1,262 1,280
---------- ------ ------- ------ -------- --------- ------- ------
At 30
September
2007 1,854 25,727 (998) 94 190 31,045 57,912
---------- ------ ------- ------ -------- --------- ------- ------
11. Net funds
£'000 2006 Cash flow Non-cash 2007
movements
Cash and cash equivalents 30,092 (833) 62 29,321
Loan notes (884) 612 26 (246)
--------------- --------- --------- --------- ---------
Net funds 29,208 (221) 88 29,075
Issuable loan notes - (1,710) - (1,710)
Deferred consideration (703) 703 - -
--------------- --------- --------- --------- ---------
28,505 (1,228) 88 27,365
--------------- --------- --------- --------- ---------
12. Retirement benefit obligation - 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 RM Education 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 2007 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%).
As described in the report and accounts for the year ended 30 September 2006 and
the Group's interim report and accounts for the period ended 31 March 2007, the
Group conducted a consultation exercise with active members of the Group's
defined benefit pension scheme. Following conclusion of the exercise in January
2007, members voted for the introduction of a 5% cap on pensionable salary
inflation which has been implemented from February 2007. The impact of this is a
reduction of £3.5m in the pension scheme deficit, which has been reflected as an
exceptional credit in the income statement, in line with IAS 19 Employee
Benefits. The roll forward of includes the impact of the pensionable salary
inflation cap.
Additionally, the Group paid a special pension contribution of £2.0m into the
pension scheme in March 2007 and has paid an additional special pension
contribution of £1.5m after the balance sheet date in October 2007. The £1.5m
has not been recorded against the scheme deficit at 30 September 2007. These
cash payments were in addition to the Group's current service contributions and
£1.7m per annum deficit catch up payments agreed with the scheme's trustees in
2006.
Following the above actions and updating to reflect current market conditions,
the deficit on the scheme has fallen by £15.4m to £3.3m with the related
deferred tax asset also falling.
IAS 19 valuation
Key assumptions used:
2007 2006
Rate of increase in salaries 3.70% 3.80%
Rate of increase of pensions in payment 3.30% 2.70%
Rate of increase of pensions in deferment 3.30% 2.70%
Discount rate 5.80% 5.05%
Inflation assumption 3.30% 2.70%
Mortality assumptions continue to be based on the PA92 medium cohort tables
which give average life expectancies as follows:
2007 2006
Male Female Male Female
Pensioner member age 65 21.8 24.7 21.8 24.7
(current life expectancy)
Non-pensioner member age 45 23.0 25.8 23.0 25.8
(life expectancy at 65)
Defined benefit pension scheme (credit)/charges recognised in income are as
follows:
£'000 2007 2006
Current service cost 3,668 2,358
Exceptional pension credit (3,500) -
------------------------------ ------- -------
Cost recognised within operating profit 168 2,358
Interest cost 4,258 3,744
Expected return on scheme assets (4,558) (3,645)
------------------------------ ------- -------
(Income)/Cost recognised within finance (income)/cost (300) 99
------------------------------ ------- -------
(132) 2,457
The increased current service cost reflects the introduction of the salary
sacrifice scheme in 2006. 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 2007 2006
Actuarial gains and losses 7,565 (2,101)
Experience gains and losses - (1,813)
-------------------------- -------- --------
7,565 (3,914)
The actual return on scheme assets was £6.1 million (2006: £6.6 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 2007 2006
Equities 7.40% 54,974 6.90% 47,241
Bonds 4.90% 24,698 4.40% 19,634
----------------- ------- ------- ------- -------
Total fair value of scheme assets 79,672 66,875
Present value of defined benefit (82,941) (85,582)
obligations ------- ------- ------- -------
-----------------
Deficit in scheme and liability recognised
in balance sheet (3,269) (18,707)
Related deferred tax asset 915 5,612
----------------- ------- ------- ------- -------
Net pension deficit (2,354) (13,095)
----------------- ------- ------- ------- -------
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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