REG - Tribal Group PLC - Final Results <Origin Href="QuoteRef">TRBG.L</Origin> - Part 2
16/03/2016 07:13
- Part 2: For the preceding part double click ID:nRSP2167Sa
delivered an operating profit £2.7m in 2015 (2014:
£3.2m), stated before allocation of costs of central support services which
will not transfer to Servelec Group plc. These non-transferring activities
include IT services, HR, finance, legal, marketing and head office costs.
Additionally, the operating profit for 2015 is stated before exceptional
charges of £1.0m (2014: £nil).
On a consistent basis with the above, other than expensing all development
expenditure incurred in the period, the Synergy business generated EBITDA of
£2.9m (2014: £3.2m). Management estimates that the cost of non-transferring
support activities relating to the Synergy business was approximately £0.6m
(2014: £0.6m). On this basis, the Synergy business generated an indicative
standalone EBITDA of £2.3m (2014: £2.6m).
Subject to shareholder approval, completion of the disposal is expected to
take place at the beginning of April 2016.
Funding arrangements
On 28 January 2014, Tribal entered into a revolving credit facility (the
"Facility") with Lloyds Banking Group, HSBC and Clydesdale Bank (collectively
"the Banks"). This facility is committed until June 2018, subject to
compliance with covenants. Under the terms of the facility, £45m is available
under a revolving credit facility and £5m is available as an overdraft
facility. Pursuant to an agreement reached on 21 December 2015, the Banks
agreed to waive the financial covenant tests that would otherwise have been
applicable under the Facility on 31 December 2015.
In addition to the Facility, the Group has bilateral bank guarantee facilities
with HSBC and Lloyds Banking Group of £8.5m as at 31 December 2015. During the
course of January 2016, these facilities were extended to 31 December 2016.
Going concern
The Group's business activities, recent trading performance, key performance
indicators, and principal risks and uncertainties are described within the
2015 Annual Report and Accounts. As a result of the challenging trading
environment in which the Group is currently operating, the Group's
profitability has weakened, and its net debt has increased. As at 31 December
2015, the Group had net debt of £32.5m, funded by a revolving credit facility
(the "Facility") provided by Lloyds Banking Group, HSBC and Clydesdale Bank
(collectively "the Banks"), which is committed until June 2018. Under the
terms of the Facility, non-contingent deferred consideration relating to
historic acquisitions is deemed to fall within the definition of net debt for
covenant purposes. Including these amounts, net debt as defined under the
terms of the Facility was £34.9m as at 31 December 2015. The Group generated
adjusted EBITDA of £8.2m for the year ended 31 December 2015. The Group's
leverage ratio (measured as the ratio of net debt to EBITDA) as at 31 December
2015 was 4.2x, compared to a maximum permissible under the Facility of 3x.
Pursuant to an agreement reached on 21 December 2015, the Banks agreed to
waive the financial covenant tests that would otherwise have been applicable
under the Facility. Had this waiver not been provided, the Group would have
been in breach of the terms of the Facility. However, this waiver only
represents a "one-time alleviation" that does not fundamentally address the
Group's future funding requirements. As part of an assessment of the Group's
working capital and financing position, the Group has prepared a detailed
bottom up two year trading budget and cash flow forecast for the period
through to December 2017, being at least 12 months after the date of approval
of the financial statements. This is in addition to consideration given to the
Group's longer-term strategic planning during the second half of 2015. In
assessing the forecast, the Directors have considered:
· the timing of delivery, milestones and cash flows arising from key
contracts, in particular the TAFE Queensland, SALM and Ofsted Early Years
contracts;
· the Group's sales pipeline and order backlog, and in particular larger
new customer deal flow and likely timing of related revenue and cash receipts
arising from these potential deals;
· the progress made by the Group in re-establishing momentum in sales
performance;
· competitive pressures and trends in technology usage in the education
management markets in the UK, Australia and New Zealand, and (to the extent
that it provides a leading indicator of trends elsewhere) the US;
· the status of the Group's existing financial arrangements and
associated covenant requirements;
· trading risks presented by economic conditions in the education market,
particularly in relation to national and state government budgets and spending
levels in the UK, Australia and New Zealand; and
· the availability of (and costs of) mitigating actions should business
activities fall behind current expectations, including the deferral of
discretionary overheads and restricting cash flows.
Additionally, detailed sensitivity analysis has been performed on these
forecasts to consider the impact of severe, but plausible, reasonable worse
case scenarios on the Group's bank facility headroom and covenant
requirements. The scenarios, which sensitised the forecasts for specific
identified risks, modelled reduction in anticipated levels of underlying
EBITDA, delays in contract milestone cash receipts, and an associated increase
in net debt. These scenarios included significant delays and / or terminations
of important contracts, and slippage of larger new business opportunities
which are currently in the sales team's pipeline, and continued loss of sales
momentum over an extended period. These sensitised scenarios included modest
allowance for mitigating actions that can be taken if needed. Based on the
application of these scenarios, the analysis shows no headroom on covenant
test dates for the foreseeable future.
The Directors have acknowledged the latest guidance on going concern. They
have made appropriate enquiries and taken into account factors which are
detailed in the Strategic Report within the 2015 Annual Report and Accounts.
The Group has agreed to sell its Synergy business for £20.25m (the Disposal).
The Group is also seeking to raise £21 million (gross of estimated costs of
£1.8m) via a Rights Issue in order to achieve a more appropriate capital
structure which will eliminate its indebtedness, and thereby to create
headroom on its near-term covenants to an acceptable level and is necessary to
support the going concern principle. The Rights Issue is fully underwritten
by Investec Bank PLC. As a consequence, the Directors believe that the Group
is well placed to manage its risks. The Rights Issue and Disposal are,
however, subject to shareholder approval.
In making these statements, the directors have made the following key
assumptions:
· the Disposal is approved by shareholders;
· the Rights Issue is approved by shareholders;
· the Rights Issue completes during March or April 2016;
· suitable bank facilities continue to be available to the Group on
normal market terms; and
· the net proceeds from the Rights Issue and Disposal will be used to
reduce indebtedness arising under the Facility during April 2016.
If the Rights Issue and Disposal do not proceed to completion, as there is no
headroom the Group is forecast to exceed the maximum leverage ratios permitted
under the existing Facility as at 30 June 2016 and subsequent test dates. In
this case, there is no guarantee that the Banks would agree to a subsequent
waiver or amendment of the covenants in the future, and in the event that the
covenants were breached the Banks would be entitled to demand repayment in
full of the Facility. In such circumstances, the Group would not have
sufficient cash resources available to repay the Facility, without:
· borrowing money from other sources (which might not be available at
that time, or might not be available on as favourable terms as the existing
Facility); or
· selling assets of the Group at a time which is not of the Group's
choosing, and therefore this might result in a failure to realise the full
value of such assets, or may not be possible at all.
Adoption of the going concern basis
The Directors, having considered the forecasts, the risks, associated
mitigating actions, and the probability of both the Rights Issue and Disposal
being approved by shareholders and proceeding, have a reasonable expectation
that adequate financial resources will continue to be available for the
foreseeable future. Thus, they continue to adopt the going concern basis in
preparing the financial statements. However, as both the Rights Issue and
Disposal have not yet been approved by shareholders there remains a material
uncertainty which may cast significant doubt over the Group's ability to
continue as a going concern and therefore it may be unable to realise its
assets and discharge its liabilities in the normal course of business.
16 March 2016
Responsibility statement of the directors on the annual report
The annual report contains the following statements regarding responsibility
for the financial statements and business review included in the annual
report:
"The directors confirm that, to the best of their knowledge:
· the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the company and the
undertakings included in the consolidation taken as a whole;
· the strategic report includes a fair review of the development and
performance of the business and the position of the company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face; and
· the annual report and financial statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the company's performance, business model and
strategy."
By order of the Board
Ian Bowles Steve Breach
Chief Executive Group Finance Director
16 March 2016
Consolidated income statement
For the year ended 31 December 2015
Note Adjusted£'000 Other items(note 3)£'000 Year ended 31 December 2015 Total£'000 Adjusted£'000 Other items(note 3)£'000 Year ended 31 December 2014 Total£'000
Continuing operations
Revenue 106,725 - 106,725 123,703 - 123,703
Cost of sales (68,676) - (68,676) (74,028) - (74,028)
Gross profit 38,049 - 38,049 49,675 - 49,675
Other administrative expenses (35,165) (46,420) (81,585) (35,166) (17,079) (52,245)
Amortisation of IFRS 3 intangibles - (1,686) (1,686) - (1,729) (1,729)
Total administrative expenses (35,165) (48,106) (83,271) (35,166) (18,808) (53,974)
Operating profit/(loss) 2,884 (48,106) (45,222) 14,509 (18,808) (4,299)
Investment income 4 49 - 49 58 - 58
Finance costs 5 (1,083) (1,041) (2,124) (1,149) (876) (2,025)
Profit/(loss) before tax 1,850 (49,147) (47,297) 13,418 (19,684) (6,266)
Tax (697) 2,558 1,861 (2,830) 1,348 (1,482)
Profit/(loss) for the year from continuing operations 1,153 (46,589) (45,436) 10,588 (18,336) (7,748)
Discontinued operations
(Loss)/profit from discontinued operations - (80) (80) - (196) (196)
Profit/(loss) for the year 1,153 (46,669) (45,516) 10,588 (18,532) (7,944)
Earnings per share
From continuing operations
Basic and diluted 7 1.2p (49.3)p (48.1)p 11.3p (19.7p) (8.4p)
From continuing and discontinued operations
Basic and diluted 7 1.2p (49.4)p (48.2)p 11.3p (19.7p) (8.4p)
Consolidated statement of comprehensive income
for the year ended 31 December 2015
Year ended 31 December 2015 £'000 Year ended 31 December 2014 £'000
Loss for the year (45,516) (7,944)
Items that will not be reclassified subsequently to profit or loss:
Re-measurement of defined benefit pension schemes (169) (773)
Deferred tax on measurement of defined benefit pension schemes* 34 155
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations (720) (674)
Total comprehensive loss for the year attributable to equity holders of the parent (46,371) (9,236)
* The prior year comparative has been restated to reclassify a deferred tax
charge of £359,000 on share option charges taken directly to equity
Consolidated balance sheet at 31 December 2015
Note 2015£'000 2014£'000
Non-current assets
Goodwill 8 38,311 77,810
Other intangible assets 9 14,784 23,249
Property, plant and equipment 3,431 2,983
Retirement benefit surplus 88 121
Deferred tax assets 3,213 2,469
59,827 106,632
Current assets
Inventories 133 611
Trade and other receivables 10 25,985 28,137
Cash and cash equivalents 3,896 9,345
30,014 38,093
Total assets 89,841 144,725
Current liabilities
Trade and other payables 11 (7,043) (15,076)
Accruals (9,671) (12,228)
Deferred income (22,376) (23,684)
Current tax liabilities (169) (3,368)
Borrowings (2,160) -
Provisions (3,845) (10,170)
(45,264) (64,526)
Net current liabilities (15,250) (26,433)
Non-current liabilities
Borrowings (34,207) (21,023)
Deferred tax liabilities (2,119) (2,631)
Provisions (2,091) (1,898)
(38,417) (25,552)
Total liabilities (83,681) (90,078)
Net assets 6,160 54,647
Equity
Share capital 4,743 4,743
Share premium 21 21
Other reserves 20,503 25,757
Retained earnings (19,107) 24,126
Total equity attributable to equity holders of the parent 6,160 54,647
Consolidated statement of changes in equity
For the year ended 31 December 2015
Sharecapital£'000 Sharepremium£'000 Otherreserves£'000 Retainedearnings£'000 Totalequity£'000
Balance at 1 January 2014 4,685 - 28,042 35,503 68,230
Total comprehensive income for the year - - - (9,236) (9,236)
Acquisition of own shares - - (2,735) - (2,735)
Issue of share capital 58 21 - - 79
Dividends - - - (1,587) (1,587)
Use of own shares to settle share-based payment scheme vesting - - 768 - 768
Charge to equity for share-based payments - - (318) (195) (513)
Tax on charge to equity for share-based payments* - - - (359) (359)
Balance at 31 December 2014 and 1 January 2015 4,743 21 25,757 24,126 54,647
Total comprehensive income for the year - - - (46,371) (46,371)
Dividends - - - (1,794) (1,794)
Use of own shares to settle share-based payment scheme vesting - - 1,970 - 1,970
Charge to equity for share-based payments - - (904) (1,364) (2,268)
Tax on charge to equity for share-based payments - - - (24) (24)
Transfer from merger reserve - - (6,320) 6,320 -
Balance at 31 December 2015 4,743 21 20,503 (19,107) 6,160
* The prior year comparative has been restated to reclassify a deferred tax
charge of £359,000 on share option charges taken directly to equity
Consolidated Cash Flow Statement
for the year ended 31 December 2015
Note Yearended31December2015£'000 Yearended 31December2014£'000
Net cash (used in)/from operating activities 12 (6,216) 19,717
Investing activities
Interest received 49 58
Proceeds on disposal of discontinued operations - 321
Purchases of property, plant and equipment (1,679) (1,345)
Expenditure on product development and business systems (5,138) (5,156)
Acquisitions and deferred consideration (4,510) (15,100)
Net cash outflow from investing activities (11,278) (21,222)
Financing activities
Interest paid (811) (571)
Purchase of own shares - (2,735)
Proceeds on issue of shares - 21
Equity dividend paid (1,794) (1,587)
Fees for waiver of loan covenant (200) -
Draw down of borrowings and loan arrangement fees 12,912 8,332
Net cash from financing activities 10,107 3,460
Net (decrease)/increase in cash and cash equivalents (7,387) 1,955
Cash and cash equivalents at beginning of year 9,345 7,555
Effect of foreign exchange rate changes (222) (165)
Cash and cash equivalents at end of year 1,736 9,345
Notes to the financial statements
1. General Information
The basis of preparation of this preliminary announcement is set out below.
The financial information in this announcement does not constitute the
Company's statutory accounts for the years ended 31 December 2015 or 31
December 2014.
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 December 2014 or 2015, but is
derived from those accounts. Statutory accounts for 2014 have been delivered
to the Registrar of Companies and those for 2015 will be delivered following
the company's annual general meeting. The auditors have reported on those
accounts: their report on the year ended 31 December 2015 was unqualified but
did draw attention by way of an emphasis of matter to a material uncertainty
related to the company's ability to continue as a going concern details of
which are included in the Financial Review above. The audit report for the
financial statements for the year ended 31 December 2014 did not draw
attention to any matters by way of emphasis and was again unqualified. The
audit reports for both years did not contain statements under s498 (2) or (3)
of the Companies Act 2006.
Whilst the financial information included in this preliminary announcement has
been completed in accordance with International Financial Reporting Standards
(IFRSs), this announcement itself does not contain sufficient information to
comply with IFRSs.
The financial information has been prepared on the historical cost basis,
except for financial instruments.
Copies of this announcement can be obtained from the Company's registered
office at King's Orchard, 1 Queen Street, Bristol BS2 0HQ.
The full financial statements which comply with IFRSs will be posted to
shareholders on or around 8 April 2016 and are available to members of the
public at the registered office of the Company from that date, and are now
available on the Company's website: www.tribalgroup.com.
2. Business segments
Information reported to the Group's Chief Executive for the purposes of
resource allocation and assessment of segment performance is focussed on the
nature of each type of activity. The principal activities are product
development and customer services, implementation services, professional and
business solutions and quality assurance solutions. The Group's reportable
segments under IFRS 8 are therefore as follows:
Product Development and Customer Services ("PD & CS"), representing the
delivery of software and subsequent maintenance and support services;
Implementation Services ("IS"), representing of activities through which we
deploy and configure our software for our customers;
Professional and Business Solutions ("PBS"), representing a portfolio of
performance improvement tools and services, including analytics, benchmarking
and transformation services; and
Quality Assurance Solutions ("QAS"), representing inspection and review
services which support the assessment of educational delivery.
In accordance with IFRS 8 'Operating Segments', information on segment assets
is not shown, as this is not provided to the Chief Operating decision-maker.
Inter-segment sales are charged at prevailing market prices.
Year ended 31 December 2015
PD& CS£'000 IS£'000 PBS£'000 QAS£'000 Eliminations£'000 Consolidated£'000
Revenue 46,131 16,910 13,771 30,482 (569) 106,725
Adjusted segment operating profit 2,023 1,140 229 2,900 - 6,292
Unallocated corporate expenses (3,408)
Adjusted operating profit 2,884
Amortisation of IFRS 3 intangibles (1,686)
Other items (46,420)
Operating loss (45,222)
Investment income 49
Finance costs (2,124)
Loss before tax (47,297)
Tax 1,861
Loss for the year from discontinued operations (80)
Loss after tax and discontinued operations (45,516)
Revenues of approximately 18% (2014: 19%) have arisen within our QAS segment
from the Group's largest customer and revenues of approximately 6% (2014: 10%)
have arisen within our PD & CS and IS segments from the Group's second largest
customer.
Included within other items is goodwill impairment of £38.8m (of which £23.6m
arises in respect of the PD & CS segment, £9.7m arises in respect of the QAS
segment, and £5.5m arises in respect of the PBS segment) and impairment of
development costs of £8.0m, which relates solely to the PD & CS segment. Prior
year amounts included £12.8m and £2.6m of impairment charges related to
goodwill and development costs respectively.
Year ended 31 December 2014
PD& CS£'000 IS£'000 PBS£'000 QAS£'000 Eliminations£'000 Consolidated£'000
Revenue 49,675 19,495 20,377 34,621 (465) 123,703
Adjusted segment operating profit 11,192 2,871 515 4,039 - 18,617
Unallocated corporate expenses (4,108)
Adjusted operating profit 14,509
Amortisation of IFRS 3 intangibles (1,729)
Other items (17,079)
Operating loss (4,299)
Investment income 58
Finance costs (2,025)
Loss before tax (6,266)
Tax (1,482)
Loss for the year from discontinued operations (196)
Loss after tax and discontinued operations (7,944)
Geographical information
Revenue from external customers
2015£'000 2014£'000
UK 72,350 86,599
Asia Pacific 23,699 25,972
North America and rest of the world 10,676 11,132
Total adjusted revenue 106,725 123,703
Non-current assets
2015£'000 2014£'000
UK 40,162 85,624
Asia Pacific 19,655 20,980
North America and rest of the world 10 28
59,827 106,632
The Group's revenues from its major products and services were as follows:
Continuing operations
2015£'000 2014£'000
Licence and development 14,203 21,820
Implementation 12,585 19,495
Maintenance 30,304 24,542
Other Systems related 5,949 3,313
Performance & Business Solutions 13,771 20,377
Quality Assurance Solutions 30,482 34,621
Eliminations (569) (465)
106,725 123,703
3. Other items
2015£'000 2014£'000
Operating loss from closed businesses - (100)
Other items as (charges)/credits to income statement
- Acquisition costs (198) (397)
- Gain on bargain purchase 405 -
- Movement in deferred consideration 1,020 228
Acquisition related costs 1,227 (169)
- Impairment of goodwill (38,802) (12,849)
- Impairment of development costs and related charges (7,989) (2,630)
Impairment charges (46,791) (15,479)
- Onerous contracts 294 (788)
- Costs on closure of SLS business (823) -
- Property related 210 (543)
- Strategy & recruitment costs (537) -
Other exceptional items (856) (1,331)
Other administrative costs (46,420) (17,079)
- Amortisation of IFRS3 intangibles (1,686) (1,729)
Total administrative costs (48,106) (18,808)
- Unwinding of discount on deferred contingent consideration (585) (876)
- Fees associated with waiver of loan covenant (456) -
Exceptional financing items (1,041) (876)
(49,147) (19,684)
Tax on other items 2,558 1,348
(46,589) (18,336)
IAS1, paragraph 97 requires separate disclosure of such items that are
considered material by nature or value, that they require separate disclosure
in the financial statements. As such, 'other items' are not part of the
Group's underlying trading activities and include the following:
Acquisition costs: items include the gain on bargain purchase of Callista
(2015 - £0.4m; 2014 - £nil), costs directly related to the acquisition of
subsidiary undertakings (2015 - £0.2m: 2014 - £0.4m) and movements in deferred
consideration arising subsequent to the expiration of the one year measurement
period post acquisition.
Impairment charges: impairment charges have arisen in respect of goodwill
(2015 - £38.8m: 2014 - £12.8m) and other intangible assets (2015 - £8.0m: 2014
- £2.6m). Further detail is provided around the assumptions and basis of the
goodwill impairment charge in note 8. The impairment of other intangible
assets relates solely to development costs, and results chiefly from the
Group's review of its product portfolio as at the year end date, and
specifically their expected ability to generate future revenue. Given the
lower than anticipated performance in the current year, this review has
identified a number of modules that are no longer considered to generate
sufficient revenue to justify their carrying value and therefore they have
been impaired. Such impairment charges include £0.6m (2014 - £0.1m) relating
to costs arising in the current period, capitalised as part of the Group's
ongoing development roadmap, and subsequently impaired at the date of the
annual impairment review.
Other exceptional items: in addition, certain other costs are presented
outside of adjusted profit, as they are considered sufficiently unusual and/or
material to warrant separate disclosure. These include the following:
- A property related credit of £0.2m (2014: charge of £0.5m), related to the
rent free period on relocation of the Group's head office (2014 - onerous
lease charge arising on the exit of the previous property).
- In October 2015, the Group made a decision to close its SLS business. The
operation provided services to Further Education colleges. As a result, the
Group has recognised a charge of £0.8m (2014 - £nil) related to closure costs
for this business, which principally relates to redundancy costs, onerous
lease charges and the impairment of related assets.
- A £0.3m credit (2014 - £0.8m charge) relating to adjustments to onerous
contract provisions arising on withdrawal from those markets where we are
committed to multi-year maintenance deals which necessitate a minimum level of
staffing which will not be covered by revenue.
- £0.5m related to costs associated with the recruitment of executive
management and also a detailed strategy review undertaken in the period (2014
- £nil).
Amortisation of IFRS intangibles - amortisation arising on the fair value of
intangible assets acquired is separately disclosed as other items (2015 -
£1.7m: 2014 - £1.7m)
Financing charges - consistent with the treatment of movements in deferred
consideration, the unwind of the discount on deferred consideration is
separately presented as other financing charges in the income statement (2015
- £0.6m: 2014 - £0.9m). In addition, costs of £0.5m were incurred in respect
of obtaining the waiver of the covenants on the Group's Revolving Credit
Facility.
Taxation - the tax charge or credit arising on the above items is presented on
a consistent basis with the underlying cost or credit to which it relates and
therefore is also presented separately on the face of the income statement.
4. Investment income
2015£'000 2014£'000
Net interest receivable on retirement benefit obligations 34 54
Other interest receivable 15 4
49 58
5. Finance costs
2015£'000 2014£'000
-Interest on bank overdrafts and loans 695 510
-Amortisation and write off of loan arrangement fees 272 577
-Other interest payable 116 62
Financing costs 1,083 1,149
-Unwinding of discount on liabilities 585 876
-Fees associated with waiver of loan covenants 456 -
Other financing costs 1,041 876
2,124 2,025
6. Dividends
2015£'000 2014£'000
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 December 2014 of 1.20 pence 1,133 1,031
(year ended 31 December 2013: 1.10 pence) per share
Interim dividend for the year ended 31 December 2014 of 0.70 pence 661 556
(year ended 31 December 2014: 0.60 pence) per share
1,794 1,587
Proposed final dividend for the year ended 31 December 2015 of nil pence - 1,138
(year ended 31 December 2014: 1.20 pence) per share
The interim dividend for 2015 was approved by the Board on 11 August 2015 and
was paid on 16 October 2015 to ordinary shareholders who were on the register
on 18 September 2015. No final dividend has been proposed.
7. Earnings per share
Earnings per share and diluted earnings per share are calculated by reference
to a weighted average number of ordinary shares calculated as follows:
2015thousands 2014thousands
Weighted average number of shares outstanding:
Basic weighted average number of shares in issue 94,435 94,061
Employee share options - -
Weighted average number of shares outstanding for dilution calculations 94,435 94,061
Diluted earnings per share only reflects the dilutive effect of share options
for which performance criteria have been met. Current share incentive schemes
vest based on cumulative EPS for a three year period with the earliest vesting
based on the Group's results for the three years to 31 December 2015. None of
the 804,416 of the remaining share options that were issued in 2013 met the
performance criteria.
The maximum number of potentially dilutive shares excluding the 2012 grant,
based on options that have been granted but have not yet met vesting criteria,
is 1,531,955 (2014: 1,712,593).
The adjusted basic and diluted earnings per share figures shown on the
consolidated income statement are included as the Directors believe that they
provide a better understanding of the underlying trading performance of the
Group. A reconciliation of how these figures are calculated is set out below:
2015 2014
Continuing£'000 Discontinued£'000 Total£'000 Continuing£'000 Discontinued£'000 Total£'000
Net loss (45,436) (80) (45,516) (7,748) (196) (7,944)
Earnings per share: Basic and diluted (48.1)p (0.1)p (48.2)p (8.2)p (0.2)p (8.4)p
Adjusted earnings per share: Basic and diluted 1.2p 11.3p
(Loss)/profit for year Earnings per share
2015 2014 2015 2014
Loss for the year attributable to equity shareholders (45,516) (7,944) (48.2)p (8.4)p
Add back : discontinued operations 80 196 0.1p 0.2p
Loss for the year from continuing operations (45,436) (7,748) (48.1)p (8.2)p
Add back:
Amortisation of IFRS 3 intangibles (net of tax) 1,197 1,233
Impairment of goodwill 38,802 12,849
Gain on bargain purchase (405) -
Impairment of development costs (net of tax) 6,323 2,028
Unwinding of discount on deferred contingent consideration 585 877
Other items (net of tax) 1,107 1,577
Movement in deferred contingent consideration (1,020) (228)
Total adjusting items (net of tax) 46,589 18,336 49.3p 19.5p
Adjusted earnings 1,153 10,588 1.2p 11.3p
8. Goodwill
2015£'000 2014£'000
Cost
At beginning of year 120,239 108,232
Additions - 12,513
Exchange differences (697) (506)
At end of year 119,542 120,239
Accumulated impairment losses
At beginning of year 42,429 29,580
Impairment 38,802 12,849
At end of year 81,231 42,429
Net book value
At end of year 38,311 77,810
At beginning of year 77,810 78,652
Goodwill acquired in a business combination is allocated, at acquisition, to
the cash-generating units (CGUs) that are expected to benefit from the
business combination. The carrying amount of goodwill has been allocated as
follows:
2015£'000 2014£'000
Product development and customer services 25,808 50,063
Implementation services 8,969 8,969
Professional and business solutions 3,534 9,073
Quality assurance solutions - 9,705
38,311 77,810
The Group is organised into four business segments - Product development and
customer services ("PD & CS"), Implementation services ("Implementation"),
Professional and business solutions ("PBS") and Quality assurance solutions
("QAS"). These segments represent CGU groups for the purposes of goodwill
testing. The additions to goodwill in the prior period arise entirely in
relation to the PD & CS segment (£7.5m in relation to the acquisition of Sky
Software and £5.0m in relation to the acquisition of Human Edge. The Group
tests goodwill annually for impairment, or more frequently if there are
indications that goodwill might be impaired.
The recoverable amounts of the CGU groups are determined from value in use
calculations. The key assumptions for the value in use calculations are those
regarding the discount rates, longer term growth rates, and expected changes
to selling prices, sales volumes and direct costs during the period. The
assumptions made reflect a cautious view of the short term position, and
incorporate certain sensitivities and risks, over and above those incorporated
in management's base case budgets. This is considered appropriate given
current performance and the risks apparent in the business during 2015.
Management estimates discount rates using pre-tax rates that reflect current
market assessments of the time value of money and the risks specific to the
CGU groups. The growth rates are based on internal two year budgets and
general market rates thereafter. Changes in selling prices, sales volumes and
direct costs are based on past practices and expectations of future changes in
the market.
The Group prepares cash flow forecasts derived from the most recent financial
budgets approved by management for the next two years and updated for latest
expectations in the light of the outturn results for 2015. Cash flows forecast
for 2017 have been extrapolated into perpetuity based on an estimated growth
rate of 1% for all CGUs, except PBS and QAS where a 0% rate has been used
(2014: 2%, except PBS where a 0% rate has been used). A lower rate has been
used in PBS and QAS to reflect the maturity of certain businesses within the
PBS portfolio, as well as the anticipated conclusion of the remaining Early
Years inspections contract with Ofsted in March 2017, resulting in greater
uncertainty in the remaining business subsequent to this date. These rates do
not exceed the average long term growth rates for the relevant market.
The rate used to discount the forecast cash flows is 14% across all CGUs
(2014: 14%, except for PBS where 16% was used). This rate has been chosen to
reflect the directors' assessment of risk associated with the Group. A
consistent rate is considered appropriate across all CGUs, give risk
incorporated into the underlying forecast position and the level of risk
adjustment incorporated into this discount rate, compared with the Group's
underlying weighted average cost of capital. The rate used for PBS has
decreased in the current year given more stability in the underlying business,
subsequent to the closure of the SLS and Careers business units.
The significant downturn in the Group's performance over the course of 2015 ,
coupled with conservative estimates of the future trading of the Group have
led to material impairments being recorded to a value of £38.8m (2014: £12.8m)
across the PD&CS, PBS and QAS CGUs:
PD&CS: An impairment of £23.6m has been recorded in respect of the PD&CS CGU.
Remaining goodwill is £25.8m. The impairment charge is based on the Group's
most recent cash flow forecasts, adjusted for forecasting volatility and known
operational challenges. If the sale of the Synergy business completes (see
note 15 - Post balance sheet events), it is estimated that goodwill of £15.4m
will be allocated in arriving at the profit on disposal of the business. The
CGU will then have residual goodwill of £10.3m. The underlying CGU, excluding
Synergy, was loss making in 2015. Average cash flows of £3m per annum are
required in 2016 and 2017 to support the carrying value of goodwill. If the
profitability of the business does not recover in 2016 and 2017, the residual
goodwill of £10.3m is impaired. This is considered to be a reasonably
possible change. However the Directors consider the carrying value to be their
best estimate of the recoverable value.
Implementation Services: The Implementation Services CGU is the only segment
with headroom remaining against the value in use calculated. Goodwill is £9.0m
and headroom is £1.7m, based on the Group's most recent cash flow forecasts,
adjusted for forecasting volatility and known operational challenges. If the
sale of the Synergy business completes (see note 15 - Post balance sheet
events), goodwill of £3.7m will be allocated in arriving at the profit on
disposal of the business. The CGU will have remaining goodwill of £5.3m. The
underlying CGU, excluding Synergy, generated operating profit (which
approximates cash flows) of £0.6m. A reasonably possible change which assumes
cash flows continue at this level in 2016 and 2017 would lead to an additional
£4.1m impairment. However the Directors consider the carrying value to be
their best estimate of the recoverable value.
PBS: PBS closed its Careers business during the first half of 2015 and its SLS
business during the second half of 2015 and has used the most recent cash flow
forecasts for the division in its impairment calculations. As a result, a
further impairment has arisen during the course of 2015 of £5.5m (2014:
£3.6m). Cash flow forecasts assume underlying profitability to remain
consistent with 2015. A reasonably possible downside scenario of a 5%
decrease in profitability and cash flows would result in an increase in the
impairment charge of £0.1m.
QAS: during 2014, Ofsted announced its intention to in-source its schools
inspection contract held by the Group's QAS business, with the contract
ceasing in August 2015. The remaining Ofsted contract, relating to Early
Years inspections, was extended a further 18 months during the prior year to
March 2017. During the second half of 2015 Ofsted have confirmed that they
will in-source the contract at this date; cash flow assumptions for this
contract therefore cease at this date. As a result, a further impairment has
bene recognised in the period of £9.7m (2014: £9.2m) resulting in the full
impairment of goodwill in respect of this CGU.
9. Other intangible assets
Software£'000 Customer contracts & relationships £'000 Development costs£'000 Business systems£'000 Total£'000
Cost
At 1 January 2014 - 3,785 24,874 4,440 33,099
Additions 7,035 2,948 4,837 319 15,139
Disposals - - (78) (24) (102)
Exchange differences (288) (133) - - (421)
At 1 January 2015 6,747 6,600 29,633 4,735 47,715
Written off - - (3,268) (11) (3,279)
Additions 292 185 4,083 1,055 5,615
Disposals - - (403) (86) (489)
Exchange differences (405) (172) (30) (5) (612)
At 31 December 2015 6,634 6,613 30,015 5,688 48,950
Amortisation
At 1 January 2014 - 2,618 10,220 3,529 16,367
Charge for the year 924 805 3,303 514 5,546
Impairment loss - - 2,583 - 2,583
Disposals - - (4) (24) (28)
Exchange differences - - (2) - (2)
At 1 January 2015 924 3,423 16,100 4,019 24,466
Written off - - (3,268) (11) (3,279)
Charge for the year 1,248 438 3,364 398 5,448
Impairment loss - - 7,989 - 7,989
Disposals - - (359) - (359)
Exchange differences (44) (61) 5 1 (99)
At 31 December 2015 2,128 3,800 23,831 4,407 34,166
Carrying amount
At 31 December 2015 4,506 2,813 6,184 1,281 14,784
At 31 December 2014 5,823 3,177 13,533 716 23,249
Software and customer contracts and relationships have arisen from
acquisitions and are amortised over their estimated useful lives, which are
3-6 years and 3-12 years respectively. The amortisation period for development
costs incurred on the Group's product development is 3 to 7 years, based on
the expected life-cycle of the product. Fully amortised development costs with
a gross book value of £3.3m have been written off in the year.
Amortisation of development costs is included in cost of sales; the
amortisation for software, customer contracts and relationships and business
systems is included within administrative expenses.
An impairment of £8.0m (2014: £2.6m) has been recognised in the current year
in respect of development costs. , in light of operational issues encountered
in the second half of 2015 there was a deterioration in
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