REG - Cohort PLC - Final Results - Part 1
Released: 28/06/2010
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Cohort PLC
28 June 2010
COHORT PLC
PRELIMINARY RESULTS ANNOUNCEMENT
FOR THE YEAR ENDED 30 APRIL 2010
"Tough year, positive outlook"
Cohort plc, the independent technology group, today announces its preliminary results for the year ended 30 April 2010.
Highlights include:
2010 2009Restated %
· Revenue £78.1m £76.7m 2
· Adjusted operating profit £4.1m £6.3m (34)
· Adjusted profit before tax* £4.0m £6.0m (34)
· Profit before tax £2.7m £4.6m (40)
· Net funds £3.0m £3.7m (19)
· Adjusted earnings per share* 8.10 pence 12.83 pence (37)
· Proposed final dividend per share 1.4 pence 1.2 pence 17
* Excludes exceptional items, amortisation of other intangible assets and share of results of joint ventures.
The figures for the year ended 2009 have been restated to take account of the prior year overstatement.
Commenting on the results, Nick Prest CBE, Chairman of Cohort plc said: "Cohort has come through a difficult year, closing
with a record order book of more than £112m which provides a basis for a recovery in profitability. The Board is focused
on improving operational performance so that the Group can take advantage of emerging opportunities."
"The proportion of Cohort's business being derived from outside the UK defence market (principally export defence, space
and transport) is increasing and the Board's view is that the Strategic Defence and Security Review can provide
opportunities for nimble, cost effective companies such as Cohort. We expect to be able to trade satisfactorily through
the review period and grow our business when the landscape becomes clear."
For further information please contact:
Cohort plc 01491 845 630
Andy Thomis, Chief Executive
Simon Walther, Finance Director
Investec Investment Bank 020 7597 5970
Keith Anderson
Hogarth Partnership Limited 020 7357 9477
Reg Hoare
NOTES TO EDITORS
Cohort plc (www.cohortplc.com) is an independent technology group working primarily for defence (air, land and sea), wider
government and industry clients, through three market-facing subsidiary companies:
· SCS (www.scs-ltd.co.uk) - a defence consultancy, combining technical expertise with practical experience and domain
knowledge. Owned by Cohort since flotation in March 2006.
· MASS (www.mass.co.uk) - a specialist defence and aerospace business focused mainly on electronic warfare,
information systems and electronic systems development. Acquired by Cohort in August 2006.
· SEA (www.sea.co.uk) - an advanced surveillance systems and software house with hardware development capability
operating in the defence, space and transport market sectors. Acquired by Cohort in October 2007.
Cohort (AIM: CHRT) was admitted to London's Alternative Investment Market in March 2006. It has its headquarters in
Oxfordshire and, through its operating companies, employs in total around 500 core staff there and at bases in Bristol,
Berkshire, Cambridgeshire, Lincolnshire and Somerset.
CHAIRMAN'S STATEMENT
Cohort has experienced a difficult year, with accounting problems and a significant deterioration in trading performance at
SCS. SEA also performed below expectations. On the positive side MASS performed strongly and the Group has closed the year
with a record order book, which provides a basis for a recovery in profitability.
Key financials
In the year ended 30 April 2010, Cohort posted revenueof £78.1m (2009: £76.7m). This included revenueof £26.4m (2009:
£29.2m) from Systems Consultants Services Limited (SCS), £21.5m (2009: £20.6m) from MASS Consultants Limited (MASS) and
£30.2m (2009: £26.9m) from SEA Group Limited (SEA). Both MASS and SEA grew their revenues but SCS suffered a decline in
sales from 2009 as a result of more difficult market conditions and withdrawal from unprofitable areas of activity.
The Group's adjusted operating profit was £4.1m (2009: £6.3m). This included adjusted operating profit from SCS of £0.1m
(2009: £1.5m), from MASS of £3.5m (2009: £2.9m) and from SEA of £1.6m (2009: £3.1m). Cohort Group overheads were £1.1m
(2009: £1.2m).
The Group operating profit of £2.9m (2009: £5.0m) was after charging £0.7m in respect of relocation and restructuring.
Profit before tax was £2.7m (2009: £4.6m) and profit after tax was £2.3m (2009: £3.8m).
Basic earnings per share were 5.63 pence (2009: 9.28 pence). Adjusted earnings per share were 8.10 pence (2009: 12.83
pence). The adjusted earnings per share were based upon profit after tax, excluding amortisation of other intangible
assets, exceptional items and share of result of joint ventures.
The net funds at year end were £3.0m (2009: £3.7m) after the purchase by MASS of its new building for £3.0m.
Dividends
The Board is recommending a final dividend of 1.4 pence per ordinary share (2009: 1.2 pence), making the full year dividend
in respect of the year ended 30 April 2010 2.05 pence per ordinary share (2009: 1.75 pence), a 17% increase. This will be
payable on 8 September 2010 to shareholders on the register at 6 August 2010 subject to approval at the Annual General
Meeting on 2 September 2010. The Board continues to maintain a progressive dividend policy.
SCS
SCS had a very difficult year, uncovering significant accounting errors which had disguised a deterioration in
profitability caused by a combination of overhead cost increases, under-utilisation of core consulting staff, pricing
pressure and the assumption of new business at inadequate margins.
Stanley Carter led a major restructuring of SCS in the final quarter of the financial year which has reduced the cost base
significantly, reducing the annual payroll cost by £2.0m. We expect an improved performance from SCS in the current year.
SCS has moved into a new office in Theale which provides a better working environment for the business and will facilitate
improved working practices. From 1 June 2010, Andy Thomis took over from Stanley as acting Managing Director of SCS. As
separately announced today, Bill Bird will be joining SCS as full time Managing Director from 6 September 2010. Bill has
considerable experience in the defence and consultancy sectors.
SEA
SEA underperformed against its financial targets in the year, primarily as a result of cost increases on a small number of
fixed price contracts and slower order intake in some areas. A re-organisation has been effected which has resulted in
closure of the loss making Offshore division and a restructuring of the three defence divisions into two. At the same time
management systems have been modified to ensure tighter project control. SEA has had a record year for order intake of
£39.2m, has made particularly good progress in its Space division, and overall has a strong customer offering. We expect
its financial performance to improve in the current year.
MASS
MASS traded strongly in the year and posted record figures for sales, profits, cash generation and order intake. The
company will move into its new premises in the near future and is well placed to build further on its good position.
Shortly after the end of the financial year MASS completed the acquisition of Abacus EW Consultancy Limited (Abacus EW), an
Electronic Warfare training company based near MASS at Lincoln. Abacus EW brings additional capability and export customers
to the MASS presence in the Electronic Warfare support market.
Board and Personnel
There were no changes to the Cohort Board in the course of the year. The Executive team responded well to a difficult
series of problems. Stanley Carter stepped in as Managing Director of SCS in December and the Board is grateful to him for
his work in overseeing the necessary restructuring. On behalf of the Board I would like to thank all our employees for
their hard work and dedication during a none too easy period for Cohort.
Outlook
Following a very good year for order intake with total orders of £143.6m (2009: £65.7m) the Group order book at 1 May 2010
stood at £112.7m (2009: £47.2m). This provides a good platform for the future.
The difficulties encountered at SCS, and to a lesser extent at SEA, are a matter of regret to the Board. All shareholders,
Board, staff and external stakeholders have been affected. The absolute priority is to return the Group to a satisfactory
level of operating performance, which will in turn open up wider strategic options for the business.
Cohort obtains approximately 70% of its business from the UK defence market, directly or indirectly, and there are obvious
uncertainties for the direction of this market generated by the overall climate for UK public expenditure and the Strategic
Defence and Security Review (SDSR) currently being conducted by the UK Government. But the proportion of Cohort's business
being derived from outside the UK defence market (principally export defence, space and transport) is increasing and the
Board's view is that the SDSR can provide opportunities for nimble, cost effective companies such as Cohort. We expect to
be able to trade satisfactorily through the review period and grow our business when the landscape becomes clear.
Nick Prest CBE
Chairman
CHIEF EXECUTIVE'S REVIEW
This has been a challenging year for Cohort. In December 2009 it became apparent that SCS's financial performance in
2008/9, as published in our Annual Report and Accounts, had been significantly overstated. This left us with three
immediate issues: identifying the cause and extent of the error, putting corrective measures in place and dealing with the
operating problems that had been obscured by the overstatement. We reported on progress in addressing these issues both in
our Interim Results on 9 December 2009 and in our Business and Trading Update on 18 March 2010. Although there is still
work to do, the restructured SCS with a new Managing Director appointed and its cost base significantly reduced is now on a
much firmer footing.
Despite a promising start to the year SEA too has also experienced operating problems, as a result of project difficulties
and slower than anticipated order intake in some areas. We have responded by withdrawing from loss-making activities and
rationalising our activities in the marine sector into a single division. As a result, SEA too goes into the new financial
year on a more solid basis.
The year has also seen some major successes. MASS has once again had a record year, with some significant orders, notably
the £55m contract to provide technical support to the MOD. SEA's space business continued its rapid and profitable growth,
and the company won a strategically important order to provide the External Communication System for Astute submarines. SCS
has seen strong performance in its Logistics activities. The record order book at the year-end provides a good base for the
2010/11 financial year.
Group overview
Cohort is an independent group whose constituent companies provide a wide range of technical advice, support, managed
services and certain niche products, the latter characterised by high tech design and low volume manufacture. Our approach
has been to maximise the autonomy afforded to our subsidiary companies, allowing them the space to be innovative,
responsive to customer needs, and agile in their market positioning. At the same time we have sought to provide advice,
mentoring and business development support from the strong Cohort central team, and give customers the confidence to place
large orders with us that they might have been reluctant to award to smaller privately owned businesses.
We have looked hard at this basic concept as a result of the operating problems that have arisen and have concluded that it
remains fundamentally sound. Nevertheless we have significantly enhanced our central financial controls and monitoring
procedures to ensure there is no repetition of the events of last December. We have also appointed a new auditor, KPMG,
with the aim of providing additional confidence to shareholders and the board. Work continues to correct the shortcomings
in SCS's internal processes and controls under close supervision from Cohort. This supervision will be sustained until we
are certain that the issue has been fully resolved.
In August Cohort's executive team will relocate from its Henley-on-Thames office to make use of spare capacity at SCS's new
leased facility in Theale.
Trading subsidiaries
SCS
As reported extensively elsewhere in this Report, SCS has had a difficult year, but has nevertheless seen continuing
profitable growth in some areas of its activity, including support engineering and logistic information systems. It was a
pleasing indication of customer confidence to be awarded a further year's extension to the long-running training support
contract at the UK's Permanent Joint Headquarters valued at £2.2m.
The company has recently moved from its offices in Henley-on-Thames to Theale, south of Reading. With a significantly
reduced cost base and a new and experienced Managing Director appointed, SCS is now better placed to face the challenges
and uncertainties of the current defence market.
SEA
SEA grew its revenue again after a record year in 2008/9, achieving turnover of £30.2m, up 12%. One major contributor to
this was its space business, which won a number of orders for European Space Agency programmes and achieved sales well in
excess of expectations. SEA's submarine business also grew significantly, thanks to a large and strategically important
order for a communications system. SEA's profitability was affected by problems on some of its projects, in particular a
loss-making contract for a customer in the offshore sector, as well as slower than expected order intake in its transport
business. Profit was £1.6m, down from its record level of £3.1m in 2008/9.
Towards the end of the year, SEA carried out a restructuring exercise, rationalising several of its divisions to reduce
cost and refocus its activities in the defence sector, and withdraw from unprofitable activities. With a strong order book
it is positioned to deliver an improvement in performance in 2010/11.
MASS
MASS has had another record year, with revenue of £21.5m and a trading profit of £3.5m. Good performance was achieved in
all three of its divisions. With support from Cohort, in May MASS acquired Abacus EW Consultancy Ltd, a Lincoln-based EW
training business. Abacus EW is an excellent match for MASS's existing business in this area and brings with it new
capabilities, customers and opportunities.
MASS's continuing growth has meant it has become increasingly compressed within its St Neots headquarters. The company has
now acquired a new and larger facility adjacent to its existing building that will provide it with a long term home, with
options for expansion if needed.
Outlook
We have taken action to deal with the problems that have emerged over the last year. As a result our businesses are leaner
and better equipped for the challenges ahead. Nevertheless, UK defence, and public sector spending more widely, face a
turbulent time under the new government, with a Strategic Defence and Security Review underway and a tough new approach to
spending commitments. There will certainly be risks for Cohort. It is possible that crude spending curbs might be
introduced that could affect all defence suppliers, though historically these have never been long-lasting. Our operational
model, which focuses on customer-friendly, strategically nimble businesses with high-tech capabilities and fast
decision-making, is better suited to this new environment than any of the alternatives. Although we have some exposure to
defence programmes that may be subject to delay, cancellation or cutbacks, much of our work tends to focus on short-term
operational needs which have a high priority and are unlikely to go away. The international situation remains tense and
unstable in many regions of the world, and our export activities are growing. There will be domestic opportunities too: as
government seeks to rationalise its areas of activity, opportunities will emerge for businesses like ours which can carry
out the same activities with greater flexibility and cost-effectiveness. Not least, we go into the new financial year with
a record order backlog of well over £100m. Overall I am confident that we will emerge strongly from the uncertainties of
the coming months, ready to take swift advantage of opportunities, and to thrive when the new landscape becomes clear.
Andy Thomis
Chief Executive
FINANCE DIRECTOR'S REVIEW
The following review explains in further detail the significant financial issues arising during the year ended 30 April
2010 and highlights other matters over and above what is included in the primary financial statements and accompanying
notes.
Prior year restatement
The prior year restatement of the Group's result for the year ended 30 April 2009 are analysed in detail at note 7 to the
financial statements as well as in other notes.
The prior year restatement arose from a series of errors in the Group's subsidiary SCS, resulting in an overstatement of
amounts recoverable on contracts for the year ended 30 April 2009 of £1,837,000.
All comparative figures for the year ended 30 April 2009 have been restated accordingly. The highlight restatement figures
were as follows:
£000
Reduction in revenue 1,837
Reduction in profit before tax 1,837
Reduction in trade and other receivables 1,837
Reduction in tax charge 514
Reduction in tax creditor 514
The tax adjustment to the prior year restatement of £514,000 is 28% of £1,837,000.
The restatement was independently reviewed by KPMG. No restatement was required for the year ended 30 April 2008.
The impact on the Group's comparative effective tax rates for the total Group tax charge and the current tax charge for the
year ended 30 April 2009 was as follows:
As previously reported£000 Restatement £000 As restated £000
Profit before tax 6,454 (1,837) 4,617
Total tax charge 1,372 (514) 858
Effective tax rate (%) 21.3 18.6
Profit before tax 6,454 (1,837) 4,617
Current tax charge 1,299 (514) 785
Effective tax rate (%) 20.1 17.0
The overstatement of amounts recoverable on contracts arose from errors on fixed price contracts as follows:
i. Incorrect transfer of data from SCS's old accounting system to its new accounting system.
ii. Errors in posting transactions.
iii. A failure to properly review at regular intervals the amounts recoverable on contracts for recoverability.
iv. A failure to review and check cost to complete projections with project management.
These errors were identified by management in November 2009 and the Cohort Board confirms that there was no evidence of
intentional misstatement by the SCS management.
SCS replaced its head of finance at the time of identifying the error.
Since uncovering the error which masked the underlying poor operational performance, SCS has ended its loss making
activities and carried out a major restructuring and cost reduction exercise. The total number of staff has reduced from
almost 140 at the beginning of 2009/10 financial year to below 100.
It is also undertaking an overhaul of its business processes. The priority processes are:
i. Invoicing
ii. Fixed price contract revenue and profit recognition
iii. Project review
iv. Project control
Revenue
The segmental analysis (note 2) presents the Group's revenue by subsidiary. The revenue is further analysed as shown in the
table below.
The significant changes in revenue for the year ended 30 April 2010 compared with the year ended 30 April 2009 are an
increase in Aerospace (mainly space) by 95% and a fall in Transport of 25%, the latter reflecting the completion of a major
contract for Transport for London during the year ended 30 April 2010.
Defence revenue overall has remained virtually level with a fall in MOD revenue of 3%, offset by a rise in export defence
revenue of 23%.
Revenue analysis 2010 2009 (restated)
By sector £m % £m %
Direct to United Kingdom MOD 40.3 43.2
Indirect to United Kingdom MOD, where the Group acts as a sub-contractor or partner 16.8 15.7
Total to the United Kingdom MOD 57.1 73 58.8 77
Export defence customers 7.5 6.1
Total defence revenue 64.6 83 64.9 85
Transport 3.4 4.5
Space 8.2 4.2
Other commercial 1.9 3.1
Non-defence revenue 13.5 17 11.8 15
Total revenue 78.1 100 76.7 100
2010 2009 (restated)
By type of work £m % £m %
Technology solutions 34.5 44 30.3 40
Advisory services 17.0 22 20.2 26
Manpower provision 11.6 15 11.8 15
Managed services 9.8 13 9.0 12
Product 5.2 6 5.4 7
Total revenue 78.1 100 76.7 100
The analysis of revenue for the year ended 30 April 2009 has been restated (see note 7) reducing revenue by just over £1.8m
from the previously reported £78.6m to £76.7m. This adjustment has been reflected in the above table by a reduction in
revenue direct to the United Kingdom MOD of £1.1m and Indirect to United Kingdom MOD by £0.7m and also a reduction of £1.8m
in Advisory Services.
Adjusted operating profit
The adjusted operating profit is presented to reflect the trading profit of the Group and excludes amortisation of other
intangible assets, share of result of joint ventures and exceptional items. This allows the Group to present its trading
performance in a consistent format year on year.
The adjusted operating profit is stated after charging the cost of share-based payments of £259,000 (2009: £184,000) which
is allocated to each business in proportion to its employee participation in the Group's share option schemes.
The adjusted operating profit of SEA (and the Group) is after a net charge of £231,000 (2009: credit of £47,000) in respect
of marking forward foreign exchange contracts to market at 30 April 2010. The forward foreign exchange contracts are used
to hedge the forward sales of currency on Euro denominated trading contracts.
Looking forward, the cost base of SCS has fallen as a result of the restructuring during this year with an annual saving of
£2.0m. The moving of SCS from its previous facility in Henley-on-Thames to a more appropriate facility in Theale increases
its operating cost by approximately £0.2m per annum.
At MASS, the moving of the business in St Neots from its present leased office to a bespoke freehold facility will increase
its annual operating cost by £0.2m per annum.
SEA's cost base is not expected to change significantly with cost savings in loss making divisions being offset by
investment in other growing divisions, especially Aerospace and Marine.
Exceptional items (see note 3)
The key items charged as exceptional items were as follows:
· Restructuring cost at SCS of £0.3m. In addition to the removal of 26 posts as a result of redundancy, further
natural wastage has reduced core staff levels from nearly 140 people to below 100 producing an expected annualised cost
saving of £2.0m.
· Restructuring at SEA comprises redundancy costs from the rationalisation of the Offshore division and the three
Defence divisions into two: Marine, and Land and Air. The cost of £0.1m reduced the headcount by 8. The annualised saving
from this restructuring is expected to be £0.4m. In addition, £0.2m of stock write off in respect of offshore products was
charged as an exceptional item.
· Relocation costs at MASS of over £0.1m have been recognised as an exceptional item due to their one-off nature.
Tax
The Group's tax charge for the year ended 30 April 2010 of £457,000 (2009: £858,000) was at an effective rate of 16.6 %
(2009: 18.6%) of profit before tax. This includes a current year corporation tax charge of £961,000 (2009: £785,000), a
rate of 35.0% (2009: 12.7%)of profit before tax, a prior year tax charge of £135,000 (2009: £nil) and a deferred tax credit
of £639,000 (2009: charge of £73,000).
The reported current tax rate is higher than the standard rate due to disallowed items (for tax purposes), in particular;
general provisions, amortisation of other intangible assets and prudent recognition of R&D tax credits. The effective
current tax rate, after taking account of appropriate deferred tax items in respect of the current year is approximately
22%.
The Group's overall tax rate was below the standard corporation tax rate of 28%. The majority of the reduction in the
effective rate of tax was due to the recognition of brought forward tax losses at SEA and research and development (R&D)
credits at MASS and SEA for the year ended 30 April 2010.
The Group's businesses are only allowed to claim the lower R&D tax credit allowance available to larger companies,
currently 30%. This accounts in part for the higher current year corporation tax rate compared with 2009 whenthe Group was
able to receive the larger reliefavailable to smaller and medium sized entities for the period from 1 August 2008 to 30
April 2009.
Looking forward, the Group's overall tax charge will continue to rise for this reason. Nevertheless I would expect the
Group tax charge to remain at or slightly above 20% and certainly below the standard rate of 28%, based upon expected R&D
spend and reliefs remaining available. The Group retains a prudent position in respect of R&D tax credits previously
claimed.
The impact on the Group of the recent budget announcement by the Government to reduce headline corporation tax rates over
the next four years cannot be fully determined until the R&D tax credit regime going forward is known.
Provisions
The Group's provisions at 30 April 2010 are as per note 18.
The Group's provisions have increased by 68% since 30 April 2009 reflecting a number of specific issues and prudence in
cost to complete recognition on fixed price contracts.
Specific provision changes, accounting for £0.6m of the £1.0m overall increase in provisions, were as follows:
· Provision against the NASNET contract at SEA.
· Provision for an onerous lease at MASS for its leased property in St Neots.
· Redundancy provision at SCS.
· Other property related provisions.
Accounting policies
The following standards, and changes to existing standards and interpretations, are relevant to these accounts:
· Revised IFRS 3 Business Combinations and amendments to IAS 27. These standards are applicable for accounting
periods commencing after 1 July 2009 but have been adopted early from 1 May 2009. These standards affect the future
accounting for acquisitions. There is no retrospective impact.
· Amendments to IAS 1 Presentation of Financial Statements - these amendments revise requirements for the presentation
of the financial statements and do not affect the Group's overall reported results.
· Amendments to IFRS 2 Share-based Payments: Vesting Conditions and Cancellations - these amendments concern certain
aspects of the valuation of share-based payments and the impact of a cancellation by a grantee. These amendments have not
had a significant impact on the charges recognised to date for share-based payments.
· Amendments to IFRS 7 Financial Instruments: Disclosure - these amendments require additional disclosure of the basis
of fair value measurements and liquidity risks.
· IFRS 8 Operating Segments - this standard amends the requirements for disclosure of segmental performance and does
not have any effect on the Group's overall reported results. Note 2 reflects the new requirements.
· Amendment to IAS 23 Borrowing Costs - the amendment generally eliminates the option to expense borrowing costs
attributable to the acquisition, construction or production of a qualifying asset as incurred, and instead requires the
capitalisation of eligible borrowing costs as part of the cost of the specific asset. There is no significant impact, as
the Group generally funds qualifying assets from gross cash resources and consequently does not have significant eligible
borrowing costs.
The Group does not consider that any other standards, amendments or interpretations issued by the IASB, but not yet
applicable, will have a significant impact on the financial statements.
One key area of management judgement is revenue recognition and more especially profit recognition on long term fixed price
contracts. This judgement is reflected in the level of work in progress and especially contract accruals and provisions.
The other key area of judgement is where work is undertaken on behalf of customers prior to formal contract award. This
work is only taken to the balance sheet, for subsequent charging to cost of sales when revenue is recognised where the
prospect of contract award is virtually certain. This level of work is relatively low across the Group amounting to £0.5m
of work in progress at 30 April 2010.
Treasury facilities
At 30 April 2010 the Group had facilities with its banking provider, RBS as follows:
£m Term at commencement of facility
Overdraft facility for working capital requirements 2.5 364 days
Structured debt facility for acquisitions 10.0 364 days with 3 year term out
Of the structured debt facility of £10.0m, £3.0m was drawn to part finance the acquisition of SEA and remains drawn at 30
April 2010. The £2.5m overdraft facility was not drawn at 30 April 2010. In addition, the Group has £0.6m of mortgage
debt with RBS which was acquired with SEA.
The Group's facilities are due for renewal in October 2010 and the Board expects these to be renewed.
At 30 April 2010, the Group had in place forward foreign exchange contracts to sell Euro 13.0m at a £ Sterling equivalent
value of £11.4m. These forward contracts are used by the Group to manage its risk exposure to foreign currency on trading
contracts where it either or both receives and pays currency from customers and suppliers respectively. These forward
exchange contracts are entered into when customer contractsare considered effective. The Group does notenter into
speculative foreign exchange dealing.
Exposure to interest and foreign exchange risk in not a significant risk with the Group having net funds. The Group's
foreign exchange exposure, primarily at SEA and relating to receivables from the European Space Agency, is hedged using
forward contracts.
The Group's bank covenants were all satisfied at 30 April 2010 based upon its latest internal forecasts the Group does not
anticipate any breaches. The covenants are assessed quarterly with a measured and reported twelve month look back and an
assessment of the next twelve months.
The Group takes a prudent approach to treasury policy with its overriding objective being protection of capital. In
implementing this policy, deposits are held with at least AA rated institutions and deposits are generally held on short
(less than 3 months) duration to maturity. This matches the Group's cash resources with its internal 13 week cash
forecasts retaining flexibility whilst trying to ensure an acceptable return on its cash. All of the Group's cash is
managed through a set-off arrangement enabling the most efficient use of the Group's cash from day to day, under the
supervision of the Group's finance function.
Deposit rates during 2009/10 have been low, typically below 0.4% compared with the Group's weighted interest rate on its
borrowings of 3.7%. The Group has retained its debt during the period despite the unfavourable comparative interest rates
to ensure it has had facilities available to support its working capital demands, invest in new facilities during 2009/10
and acquire Abacus EW in May 2010. The small size of the Abacus EW acquisition was best suited to cash settlement rather
than equity which would have been relatively expensive and dilutive at the current share price.
The Group's liquidity remains good with profit conversion to cash remaining above 100% (See KPIs on page 14). The Group
has historically had low levels of working capital with many of its contracts being less than one year in duration and
reliability of its customer base making debt risk low. During 2010, working capital levels have risen slightly, as
described below.
Goodwill and other intangible assets
The Group has recognised goodwill and other intangible assets in respect of the acquisition of MASS and SEA. The other
intangible assets are in respect of contracts acquired in each case and are to be amortised over the life of the earnings
associated with the contracts acquired.
The goodwill, which is not subject to amortisation but to annual impairment testing, arises from the intangible elements of
the acquired businesses for which either the value or life is not readily derived. This includes, but is not limited to,
reputation, customer relations, contacts and market synergies with existing Group members. The goodwill relating to the
acquisitions of MASS and SEA has been tested for impairment as at 30 April 2010 and no impairment is to be recognised in
either case. The impairment test for the goodwill in respect of SEA is more sensitive to the Group's weighted average cost
of capital (WACC) with no impairment at the Group's WACC of 11.5%. A slight impairment (£0.3m) in the SEA goodwill would
arise if the WACC increased to 13.5%.
Working capital
The working capital of the Group, defined as inventory plus trade and other receivables less trade and other payables, has
risen from £6.6m net assets (after adjusting for the prior year restatement) to £8.1m net assets, an increase of £1.5m
(23%), despite only a 2% rise in revenue. The increase in working capital was primarily due to the unwinding of advance
receipts and increasing work in progress, particularly at SEA in respect of work with the European Space Agency (ESA) where
supplier payments have been delayed by internal ESA issues.
The year-end days' debtors in sales have decreased slightly from 52 days in 2009 to 50 days in 2010. This calculation is
based upon dividing the revenue by month, working backwards from April into the trade debtors balance (excluding unbilled
income and work in progress) at the year-end, a more appropriate measure than calculating based upon the annual revenue as
it takes into account the heavy weighting of the Group's revenue in the last quarter of each year.
The Group has a working capital facility of £2.5m with RBS which was not utilised during the year. The Group had cash at 30
April 2010 of just over £6.6m (2009: £7.5m). Advance receipts on contracts at the year end were £1.7m (2009: £2.5m).
The Group generated £4.0m of cash from operating activities (operating profit was £3.6m before amortisation of intangible
assets) which was offset by investment of £4.0m in fixed assets and investments. The net cash outflow reflected the
dividends paid of nearly £0.8m.
Performance indicator Description 2010 2009
Change in revenue Change in total Grouprevenue comparedto the prior year 2% 34%
Change in adjusted operating profit Change in Group profit before tax, amortisation of other intangible assets, share of result of joint ventures and exceptional items. (34%) 3%
Order book visibility Orders for next financial year expected to be delivered as revenue, presented as a percentage of consensus market revenue forecasts for the year. 58% cover on forecast 2011 revenue of £76.7m 48% cover on forecast 2010 revenue of £82.3m
Change in adjustedearnings per share Annual change in earnings per share, before amortisation of other intangible assets, share of result of joint ventures and exceptional items. (37%) (12%)
Operatingcash conversion Net cash generated from operations before tax ascompared to the profitbefore tax. 155% 166%
The indicators shown above have been identified by the Directors as giving the best overall indication of the Group's
long-term success. Revenue growth gives a quantified indication of the rate at which the Group's business activity is
expanding. The adjusted profit trend provides an indication of whether additional revenue is being gained without profit
margins being compromised, and whether any acquisitions are value enhancing. Order book visibility, based upon expected
revenue during the year to come, provides a measure of confidence in the likelihood of achievement of future forecasts.
Change in adjusted earnings per share is an absolute measure of the Board's management of the Group's return to
shareholders including tax and interest. Operating cash conversion measures the ability of the Group to convert profit to
cash.
The performance indicators for the year ended 30 April 2009 have been restated for the correction of the overstatement at
SCS (see note 7).
Simon Walther
Finance Director
CONSOLIDATED INCOME STATEMENT
For the year ended 30 April 2010
Notes Year ended30 April 2010 £000 Year ended 30 April 2009(restated)£000
Revenue 2 78,129 76,734
Cost of sales (56,666) (54,001)
Gross profit 21,463 22,733
Administrative expenses (including amortisation of intangible assets and exceptional items) (18,573) (17,684)
Operating profit 2 2,890 5,049
Comprising:
Adjusted operating profit 2 4,109 6,263
Amortisation of other intangible assets (595) (540)
Exceptional items 3 (624) (674)
Operating profit 2 2,890 5,049
Share of result of joint ventures - (224)
Finance income 38 95
Finance costs (180) (303)
Profit before tax 2,748 4,617
Tax expense 4 (457) (858)
Profit for the year 2,291 3,759
All profit for the year is attributable to equity shareholders of the parent and derived from continuing operations.
The consolidated income statement for the year ended 30 April 2009 has been restated (note 7) for the prior year
overstatement of revenue and profit before tax.
Year ended30 April 2010 Pence Year ended 30 April 2009(restated)Pence
Earnings per share 5
Basic 5.63 9.28
Diluted 5.62 9.21
Adjusted earnings per share 5
Basic 8.10 12.83
Diluted 8.09 12.74
Dividends per share paid and proposed in respect of the year 6
Interim 0.65 0.55
Final 1.40 1.20
2.05 1.75
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 April 2010
Notes At30 April 2010 £000 At30 April 2009 (restated)
£000
ASSETS
Non-current assets
Goodwill 31,043 31,043
Other intangible assets 632 1,227
Property, plant and equipment 7,930 4,727
Deferred tax asset 1,015 266
40,620 37,263
Current assets
Inventories 440 359
Trade and other receivables 22,837 22,438
Derivative financial instruments 15 178
Cash and cash equivalents 6,656 7,511
29,948 30,486
Total assets 70,568 67,749
LIABILITIES
Current liabilities
Trade and other payables (15,117) (16,164)
Current tax liabilities (1,804) (993)
Derivative financial instruments (53) (68)
Other loans - (32)
Bank borrowings (3,171) (3,167)
Provisions 8 (2,411) (1,528)
(22,556) (21,952)
Non-current liabilities
Bank borrowings (444) (615)
Deferred tax liability (1,053) (920)
Provisions 8 (155) -
(1,652) (1,535)
Total liabilities (24,208) (23,487)
Net Assets 46,360 44,262
Equity
Share capital 4,079 4,059
Share premium account 29,519 29,297
Hedge reserve 11 (49)
Share option reserve 379 266
Retained earnings 12,372 10,689
Total equity attributable to the equity shareholders of the parent 46,360 44,262
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 April 2010
Year ended30 April 2010 £000 Year ended 30 April 2009(restated)£000
Profit for the year 2,291 3,759
Cash flow hedges - gains/(losses) taken to equity (net of tax charge of £23,000; 2009: credit of £19,000) 60 (49)
Comprehensive income for the year 2,351 3,710
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 April 2010
Year ended30 April 2010 £000 Year ended 30 April 2009(restated)£000
At 1 May as previously reported 45,585 40,843
Prior year adjustment at SCS (1,323) -
At 1 May restated 44,262 40,843
Comprehensive income for the year as previously reported 2,351 5,033
Prior year adjustment at SCS - (1,323)
Comprehensive income for the year restated 2,351 3,710
Equity dividends paid (754) (627)
Total recognised income and expense 1,597 3,083
Exercise of share options 242 152
Share-based payments 259 184
At 30 April 46,360 44,262
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 April 2010
Notes Year ended30 April 2010£000 Year ended 30 April 2009£000
Net cash generated from operating activities 9 3,961 7,271
Investing activities
Interest received 38 95
Proceeds on disposal of property, plant and equipment 35 6
Purchases of property, plant and equipment (3,795) (432)
Acquisition of subsidiaries, net of cash acquired (280) (4,673)
Net cash used in investing activities (4,002) (5,004)
Financing activities
Dividends paid (754) (627)
Repayment of borrowings (199) (174)
Proceeds on issue of shares 242 152
Net cash out from financing activities (711) (649)
Net (decrease)/increase in cash and cash equivalents (752) 1,618
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