Interim Results
RM PLC
15 May 2006
15th May 2006
RM plc: interim results for the six months to 31 March 2006
RM plc, the leading supplier of information and communications technology (ICT)
and other services to education, announces strong results for the six months to
31 March 2006.
Good performance against a background of tough conditions in individual schools
market
• Revenue up 5% to £114.2 million (2005: £109.2 million)
• Profit before tax £2.0 million (2005: £0.9 million loss)
• Cash and cash equivalents £24.5 million, up £10.7 million from March 2005
• Dividend per share up 7% to 1.12p (2005: 1.05p)
Improving business model
• Increased contribution from successful delivery of long term projects
• Additional education project wins
• Broader range of products and services
• Developing new areas of activity: assessment, data, education resources
Customer success
• Continued increase in customer satisfaction score: 7.34 in the period
(2005 - full year: 7.21)
• One of the World's Ten Best Web Support sites for 3rd consecutive year
Commenting, Tim Pearson, CEO of RM, said:
'In the first half of 2006 we've delivered increased revenue and strong cash
generation against a background of difficult conditions in the individual
schools market. It's a performance which clearly demonstrates that RM is a much
more robust and diverse business than it was four years ago.
'We've also made further progress with our BSF activity, signing the first - and
so far only - contract to be awarded. Whilst the BSF programme has run more
slowly than anticipated, it remains an important long-term opportunity for us.
'Looking at the year as a whole, the individual schools market has shown
improvement after the weak start to the financial year; our good first-half
performance gives us more confidence in the outturn for 2006.'
- Ends -
For further information, please contact:
Tim Pearson, CEO RM plc 08709 200200
Mike Greig, Group Finance Director
Phil Hemmings, Director of Corporate
Affairs
Andrew Fenwick Brunswick 020 7404 5959
Fiona Laffan
Mark Antelme
A briefing to analysts will take place at 9.30 am on Monday 15 May 2006 at
Brunswick, 16 Lincoln's Inn Fields, London WC2A 3ED. A live audio feed will be
available to analysts and shareholders who are unable to attend this meeting in
person. Please dial telephone number: +44 (0) 1452 561263 to access this
facility. A copy of the presentation will be available on www.rm.com at 8.30 am.
International Financial Reporting Standards
This interim statement is the first that the Group has reported under
International Financial Reporting Standards (IFRS). IFRS transition information
was published in December 2005 for the year to 30 September 2005 and showed a
£1.2 million increase in profit before tax and goodwill charges for that year.
The comparative results included in this statement are restated under IFRS.
Explanation of the transition and detailed reconciliations between IFRS and UK
GAAP are included at the end of the Interim Report and Accounts.
Results
Revenue in the period was up 5% to £114.2 million (2005: £109.2 million); an
increased contribution from education projects more than offset the previously
reported weakness in the individual schools market which affected the first
quarter of the year.
Profit before tax was £2.0 million (2005: loss of £0.9 million), reflecting both
our prompt action to manage the Group's cost base in response to the weakness in
the individual schools market, and the benefit of those education projects which
have now completed their start-up phases and are contributing profit as well as
revenue.
Operating costs were slightly reduced at £29.3 million (2005: £29.4 million
excluding goodwill impairment), despite the previously indicated increased
investment in the Building Schools for the Future (BSF) initiative. BSF
expenditure during the period was £2.0 million (2005: £0.4 million).
RM continues to be a business which turns profits into cash; net cash inflow
from operating activities during the period was £10.7 million (2005: net cash
outflow of £2.1 million). Cash and cash equivalents stood at £24.5 million at
the end of the period (30 September 2005:£22.9 million; 31 March 2005: £13.8
million). Investment in PFI projects is now complete and these projects are
now cash-generative.
The Board has declared an interim dividend of 1.12p per share (2005: 1.05p), an
increase of 7%, payable on 30 June 2006 to shareholders on the register at 2
June 2006.
Market context
Education, more than any other public service investment area, was given
priority in the March 2006 Budget: the Chancellor reiterated the government's
commitment to major capital expenditure for renewing English schools, through
both the BSF programme and a separate initiative for primary schools.
The scope for ICT to contribute to education and children's services continues
to widen, with policy makers increasingly seeing ICT as a core part of their
education initiatives. For example, the Department for Education and Skills
(DfES) is leading the government's Every Child Matters programme, which brings
together all the ways in which central and local government supports children
and will further drive the need for sophisticated ICT systems.
A more resilient business model
Over recent years the Group has grown from a single company focusing on the
provision of ICT products and services to individual schools, to a group of
companies offering a broad and diverse range of products and services to a wide
education customer base. Our performance in the first half of 2006 demonstrates
how important this development has been: even in a period when, as previously
reported, the individual schools market had been weak, we have been able to
deliver a significantly improved result compared to last year.
The Group is now delivering twelve major long-term education projects and we
continue to identify further opportunities - both as part of the BSF programme
and beyond. Our education project success continued in the period with the
selection of RM's Community Connect family of network software for the next
stage of Northern Ireland's C2K programme; this will put RM's intellectual
property at the heart of the network C2K is providing for all primary and
post-primary schools in Northern Ireland.
The Group has also developed positions in new markets and broadened its
educational and technical capabilities through carefully targeted acquisitions.
Developments in the period include:
* Further growth in the first half of 2006 from TTS (the specialist
education resources business which we acquired in 2004), which, building on
the success of the Bee-Bot programmable robot, is now developing an
electronic learning products division;
* The award in January 2006 of the DfES National Pupil Database -
Achievement and Attainment Tables contract to an RM-led consortium offering
a service building on the work of Forvus (the data-analysis business which
we acquired in 2003).
In the area of assessment, we are pioneering some of the world's most innovative
technology-based approaches. For the 2006 season over 60% of English secondary
schools have registered for the Key Stage 3 ICT test we are delivering on behalf
of the Qualifications and Curriculum Authority (QCA). We will be performing
large scale exam script processing for Cambridge Assessment this summer and
SCORIS, our recently launched e-marking software application, is generating
significant interest from other examination bodies and authorities.
Individual schools
We reported, at the time of our preliminary results in November 2005, that
budget pressures resulting from both the government's workforce remodelling
programme and the introduction of teaching and learning responsibility payments
for teachers were causing weakness in the individual schools market. This
weakness marked the first quarter of the year; however, since January, there has
been evidence of recovery, with overall sales in this business area returning to
levels similar to those of the previous year.
Education software - mostly sold to individual schools - continues to present
challenges. The launch of BBC jam (the BBC's digital curriculum product),
combined with a reduction in the level of dedicated funds (electronic learning
credits), has resulted in schools spending less on software. We continue to
concentrate on developing software in areas that are less affected by the BBC's
activities.
Building Schools for the Future
In February we announced that we had signed the first (and, at the date of this
statement, the only) BSF contract to be awarded; a £6.4 million ICT contract
with Solihull Council.
At this stage in the BSF programme it is too early to draw conclusions about
RM's performance. Progress in Waves 1 and 2 of the programme has been slower
than anticipated, with only three other procurements with ICT elements reaching
preferred bidder stage so far. Whilst we have achieved our aim of reaching the
shortlist for every project for which we have bid, RM does not feature in the
successful consortia in these three projects.
As we have previously stated, the consortium nature of the programme means that
there is an element of lottery in BSF bidding. Our early experience has provided
us with a great deal of insight about how to create even more compelling bids in
future, for both for the customer and the consortia with which we work. We
expect that, as more contracts are awarded, we will significantly improve our
success rate.
Operations
Across the business our operational effectiveness continues to improve: customer
satisfaction scores have increased further; order-to-shipment times are
reducing; our support operation has been recognised, for the third consecutive
year, as one of the World's Ten Best Web Support sites; and our education
projects all continue to demonstrate innovative and effective educational use of
technology.
Customer success
As has been the case since Tim Pearson took over as CEO, the customer
satisfaction score is our most important non-financial measure. In the first
half of 2006 our aggregate customer satisfaction score increased again to 7.34,
which compares with an aggregate score of 7.21 for 2005; this is the sixth
consecutive half-year in which we have achieved an improvement in this score.
We have also made progress in measuring customer success - that is, the extent
to which RM's products and services genuinely contribute in helping our
customers to achieve educational success. In the South Yorkshire eLearning
Project, for example, we are on track to deliver the target of 18,000 level 2
ICT qualifications.
Outlook
We believe that BSF continues to be an important opportunity for RM. However, it
will remain a significant net investment in 2007: the slower than anticipated
progress of the programme means that there will be a smaller than previously
expected revenue and income contribution from BSF projects, but still
significant bid costs.
Regular readers of RM's interim results statement will know that the first half
of our year is never a good indicator of the outcome for the year as a whole.
RM's business has traditionally been seasonal in nature, with schools'
purchasing patterns meaning that the majority of revenue and an even greater
proportion of profit occur in the second half of the year.
This year, education projects are providing a greater proportion of Group
revenues than previously and have contributed to strong first-half results.
While it is always difficult to forecast the summer spending peak, the
individual schools market has shown improvement after the weak start to the
financial year. Looking at the year as a whole, good first-half performance
gives the Board more confidence in the outturn for 2006.
In the longer term, the Group is actively investing in business areas where
there is significant growth potential, with assessment, general education
resources, broader children's services, education enterprise systems and
international software markets all being pursued. We believe that education -
both in the UK and internationally - continues to offer significant
opportunities and that RM is uniquely well placed to provide innovative products
and services that help teachers to teach and learners to learn.
Consolidated income statement
for the half-year ended 31 March 2006
£'000 Notes Half-year ended Year ended
31 March 31 March 30 September
2006 2005 2005
(restated) (restated)
Revenue 2 114,185 109,211 262,707
Cost of sales (83,719) (79,558) (188,444)
Gross profit 30,466 29,653 74,263
Selling and (16,159) (15,932) (33,940)
distribution costs
Research and (7,514) (7,452) (16,688)
development expenses
Administrative expenses (5,633) (6,048) (10,551)
Other income and 3 - (1,247) (2,469)
expense
(29,306) (30,679) (63,648)
Profit/(loss) from 1,160 (1,026) 10,615
operations
Investment income 893 496 1,359
Finance costs (86) (374) (446)
Profit/(loss) before 3 1,967 (904) 11,528
tax
Tax 4 (544) (94) (3,613)
Profit/(loss) for the 1,423 (998) 7,915
period
Earnings per ordinary 5
share:
Basic 1.6p (1.1)p 8.9p
Diluted 1.6p (1.1)p 8.9p
Proposed dividend per 6
share:
Interim 1.12p 1.05p 1.05p
Final 3.80p
All activities relate to continuing operations.
The comparative figures have been restated to reflect the adoption of
International Financial Reporting Standards (IFRS). Reconciliations of the
consolidated income statement for the half-year ended 31 March 2005 and the year
ended 30 September 2005 are shown in note 10.
Consolidated statement of recognised income and expense
for the half-year ended 31 March 2006
£'000 Note Half-year ended Year
ended
31 March 31 March 30 September
Exchange differences on translation of 40 13 44
foreign operations
Actuarial gains/(losses) on defined benefit 8 4,211 688 (2,300)
pension schemes
Tax on items taken directly to equity (1,283) 66 887
Net income/(loss) recognised directly in 2,968 767 (1,369)
equity
Profit/(loss) for the period 1,423 (998) 7,915
Total recognised income and expense for the 4,391 (231) 6,546
period
Consolidated balance sheet
as at 31 March 2006
£'000 Notes Half-year ended Year ended
31 March 31 March 30 September
2006 2005 2005
(restated) (restated)
Non-current assets
Goodwill 20,771 23,437 22,221
Other intangible 1,478 1,687 1,714
assets
Property, plant and 26,134 22,733 24,643
equipment
Deferred tax assets 5,504 6,485 7,108
53,887 54,342 55,686
Current assets
Inventories 9,555 11,984 11,867
Trade and other 40,000 36,379 54,142
receivables
Cash and cash 24,503 13,849 22,942
equivalents
74,058 62,212 88,951
Total assets 127,945 116,554 144,637
Current liabilities
Trade and other (68,964) (58,740) (77,255)
payables
Tax liabilities (45) (267) (1,315)
(69,009) (59,007) (78,570)
Net current assets 5,049 3,205 10,381
Non-current
liabilities
Retirement benefit 8 (11,136) (13,720) (15,890)
obligation
Other payables due (6,721) (9,851) (9,759)
after one year
Long-term provisions (970) (2,264) (2,170)
(18,827) (25,835) (27,819)
Total liabilities (87,836) (84,842) (106,389)
Net assets 40,109 31,712 38,248
Equity 9
Share capital 1,836 1,795 1,815
Share premium 23,818 20,464 22,151
account
Own shares (654) (1,063) (1,632)
Capital redemption 94 94 94
reserve
Hedging and 84 13 44
translation reserve
Retained earnings 14,931 10,409 15,776
Total equity 40,109 31,712 38,248
The comparative figures have been restated to reflect the adoption of
International Financial Reporting Standards. Reconciliations of the consolidated
balance sheet and shareholder's equity at 31 March 2005 and 30 September 2005
are shown in note 10.
Consolidated cash flow statement
for the half-year ended 31 March 2006
£'000 Notes Half-year ended Year ended
31 March 31 March 30 September
2006 2005 2005
(restated) (restated)
Profit/(loss) from operations 1,160 (1,026) 10,615
Adjustments for:
Gain on derivatives 41 - -
Depreciation of property, plant and 4,630 4,066 8,682
equipment
Impairment of goodwill - 1,247 2,469
Gain/(loss) on disposal of property, 125 (112) (259)
plant and equipment
Decrease in provisions - (56) (150)
Share-based payment charge 588 445 988
Pension charge 885 916 1,730
Operating cash flows before movements in 7,429 5,480 24,075
working capital
Decrease in inventories 2,312 2,491 2,608
Decrease/(Increase) in receivables 14,260 15,890 (1,733)
Decrease in payables (10,712) (22,771) (4,346)
Cash generated by operations 13,289 1,090 20,604
Tax paid (1,493) (1,468) (3,743)
Pension contribution (1,504) (1,576) (3,400)
Interest received 399 - 676
Interest paid (10) (156) (36)
Net cash inflow/ (outflow) from operating 10,681 (2,110) 14,101
activities
Investing activities
Interest received 376 351 392
Proceeds on disposal of property, plant 425 770 1,084
and equipment
Purchases of property, plant and (6,439) (8,906) (15,590)
equipment
Net cash used in investing activities (5,638) (7,785) (14,114)
Financing activities
Dividends paid 6 (3,399) (3,195) (4,127)
Proceeds from share capital issue 797 51 766
Purchase of own shares (516) - (569)
Repayment of loan notes (367) (600) (600)
Net cash used in financing activities (3,485) (3,744) (4,530)
Net increase/(decrease) in cash and cash 1,558 (13,639) (4,543)
equivalents
Cash and cash equivalents at the 22,942 27,480 27,480
beginning of period
Effect of foreign exchange rate changes 3 8 5
Cash and cash equivalents at the end of 7 24,503 13,849 22,942
period
The comparative figures have been restated to reflect the adoption of
International Financial Reporting Standards.
Notes to the interim financial report
1. General information
The information for the year ended 30 September 2005 does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. A copy
of the statutory accounts for that year, prepared in accordance with UK GAAP,
has been delivered to the Registrar of Companies. The auditors' report on those
accounts was unqualified and did not contain a statement under section 237(2) of
the Companies Act 1985.
In common with other European listed companies, RM plc is required to adopt
International Financial Reporting Standards for its first consolidated financial
statements for periods beginning on or after 1 January 2005. For RM plc this
interim financial report, for the half-year ending 31 March 2006, is the first
interim report under IFRS and the first annual report under IFRS will be the
annual report and accounts for the year ending 30 September 2006. The interim
financial report is unaudited and has been prepared in accordance with the
principles of IAS34 Interim financial reporting. The interim financial report
has been prepared on the basis of the accounting policies set out in note 10.
This interim report was approved by the Board of Directors on 12 May 2006.
2. Business segments
The business operates in one primary segment, being the supply of products and
services to education.
As in previous periods further analysis of revenue is given by business
activity:
£'000 Revenue
Half-year ended Year ended
31 March 30 September
2006 2005 2005
Infrastructure software and services 39,910 37,886 87,595
Education software and services 26,255 22,893 47,459
Hardware and distribution 48,020 48,432 127,653
114,185 109,211 262,707
3. Profit/(loss) before tax
As stated in note 1, these accounts are the first which the Group has prepared
under IFRS. Presenting the accounts under IFRS is estimated to have led to an
increase in profit before tax in the half-year ended 31 March 2006 of £733,000
compared to the profit before tax and goodwill amortisation which would have
been presented under UKGAAP as it stood at 30 September 2005, the date of the
last UKGAAP financial statements. Full reconciliations of UKGAAP to IFRS results
for the comparative periods are contained at the end of this interim report.
Other income and expense relates to goodwill impairment charges in prior
periods.
The main contributing factors during this half-year continue to be pensions,
which accounts for £670,000 of the increase, the accrual for employees' unused
paid holiday entitlements which reduced by £103,000 and additional charges for
share-based payments of £81,000.
The adoption of IAS 32 and 39 Financial instruments has led to the recognition
of a £41,000 gain on open foreign exchange contracts in the half-year ended 31
March 2006. Commercially effective hedges may continue to lead to income
statement volatility in the future.
The Group operates a number of executive and employee share schemes, including
co-investment and deferred bonus plans, share options and staff share schemes.
The fair values of these schemes have been assessed using Black-Scholes and
Monte-Carlo models, as appropriate to the scheme, at the date of grant. The fair
values of the schemes are expensed over the period between grant and vesting.
During the periods reported the Group has reviewed its research and development
expenditure against the criteria outlined in the Accounting Policies. No
material expenditure is considered to have met the capitalisation criteria.
Consequently capitalised research and development expenditure is nil (2005:
nil).
4. Tax
Corporation tax for the interim period is charged at 27.6% (2005 interim:
27.4%), representing the best estimate of the weighted average annual
corporation tax rate expected for the full financial year. The effective tax
rate has been calculated excluding the impact of goodwill charges from profit
before tax in order to provide a more meaningful analysis:
£'000 Half-year ended Year
ended
31 March 31 March 30 September
2006 2005 2005
Profit/(loss) before 1,967 (904) 11,528
tax
Goodwill charges - 1,247 2,469
Profit before tax and 1,967 343 13,997
goodwill charges
Tax (544) (94) (3,613)
Effective rate 27.6% 27.4% 25.8%
5. Earnings per ordinary share
The calculation of the basic and diluted earnings per ordinary share is based on
the following data:
Half-year ended Half-year ended Year ended
31 March 2006 31 March 2005 30 September 2005
Profit Number Pence Loss Number Pence Profit Number Pence
after of per after of per after of per
tax shares share tax shares share tax shares share
£'000 '000 £'000 '000 £'000 '000
Basic 1,423 90,820 1.6 (998) 88,751 (1.1) 7,915 88,924 8.9
earnings
per
ordinary
share
Effect of - 560 - - 953 - - 434 -
dilutive
potential
ordinary
shares:
share
options
Diluted 1,423 91,379 1.6 (998) 89,704 (1.1) 7,915 89,358 8.9
earnings
per
ordinary
share
6. Dividends
Amounts recognised as distributions to equity holders in the period:
£'000 Half-year Year
ended ended
31 31 30
March March September
2006 2005 2005
Interim dividend for the half-year ended 31 March 2005 - - 932
of 1.05p per share
Final dividend for the year ended 30 September 2005 of 3,399 3,195 3,195
3.80p (2004: 3.60p) per share
3,399 3,195 4,127
The proposed interim dividend was approved by the Board on 12 May 2006 and has
not been included as a liability as at 31 March 2006:
£'000 Half-year
ended
31 31
March March
2006 2005
Proposed interim dividend for the half-year ended 31 March 2006 of 1,022 932
1.12p (2005: 1.05p) per share
7. Notes to the cash flow statement
Cash and cash equivalents (which are presented as a single class of assets on
the face of the balance sheet) comprise cash at bank and other short-term highly
liquid investments with a maturity of three months or less.
Net funds
£'000 Year ended Cash flow Non-cash Half-year ended
30 September movements 31 March
2005 2006
Cash and cash equivalents 22,942 1,558 3 24,503
Loan notes due within one (1,099) 367 (1,200) (1,932)
year
Net funds 21,843 1,925 (1,197) 22,571
Issuable loan notes (1,200) - 1,200 -
Deferred consideration (2,450) - 1,450 (1,000)
18,193 1,925 1,453 21,571
In the half-year ended 31 March 2006 the re-estimation of deferred consideration
outstanding resulted in a reduction of £1.5m to deferred consideration and a
corresponding reduction in goodwill.
8. Employee benefits - defined benefit pension scheme
In the half-years ended 31 March 2005 and 2006 the deficit on the Group's
defined benefit pension scheme has been rolled forward from the respective prior
year end. The roll forward includes actual investment returns for the periods
and market derived discount rates on liabilities of 5.05% at 31 March 2006 and
30 September 2005 (5.48% at 31 March 2005). No other assumptions, including
mortality and salary inflation, have been updated at the half-years. The next
triennial valuation of the scheme will take place as at 31 May 2006.
9. Reconciliation of shareholders' equity
£'000 Half-year ended Year ended
31 March 30 September
2006 2005 2005
Equity brought forward 38,248 34,644 34,644
Profit/(loss) for the period 1,423 (998) 7,915
Dividends paid (3,399) (3,195) (4,127)
Exchange differences on translation of foreign 40 13 44
operations
Actuarial gains/(losses) on retirement benefit 4,211 688 (2,300)
schemes
Tax (charge)/credit on items taken directly to (1,283) 66 887
equity
Share-based payment transactions 588 445 988
Movement in other reserves 281 49 197
Equity carried forward 40,109 31,712 38,248
10. Explanation of transition to IFRS
The year ending 30 September 2006 is the first year for which the Group is
presenting its financial statements under IFRS. The last financial statements
under UK GAAP were for the year ended 30 September 2005. A restatement under
IFRS of the accounts for the year ended 30 September 2005 was published in
December 2005 and the date of transition to IFRS was 1 October 2004. The
following information is presented below relating to the transition:
i) IFRS accounting policies
ii) Explanation of impact of transition to IFRS
a. IFRS adoption choices
b. Explanation of impact
iii) Reconciliations
a. Profit for the half-year ended 31 March 2005 and the year ended 30
September 2005
b. Consolidated balance sheets and shareholders' equity at 1 October
2004, 31 March 2005 and 30 September 2005
The reconciliations have been provided to enable comparison of the published 31
March 2006 interim figures with those published in the corresponding period of
the previous financial year.
i) IFRS accounting policies
The accounting policies are drawn up in accordance with those International
Accounting Standards (IAS) and IFRS issued by the International Accounting
Standards Board (IASB) that are expected to be adopted by the European Union and
available for use when the annual report and accounts for the year ended 30
September 2006 are prepared. However the accounting policies may need to be
updated for interpretations issued by the International Financial Reporting
Interpretations Committee, new standards issued by the IASB, or continuing
evolution of interpretation of existing IAS and IFRS therefore the impact of
reporting under IFRS might change. The IFRS accounting policies adopted by the
Group are listed below.
Basis of preparation
The financial statements have been prepared on the historical cost basis except
for certain financial instruments, share-based payments and pension assets and
liabilities which are measured at fair value. The preparation of financial
statements, in conformity with generally accepted accounting principles,
requires the use of estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Although these estimates are based on the
directors' best knowledge of current events and actions, actual results
ultimately may differ from those estimates.
Consolidation
The Group financial statements incorporate the financial statements of the
Company and all the subsidiaries for the periods during which they were members
of the Group.
Inter-company balances between Group businesses are eliminated on consolidation.
On acquisition, assets and liabilities of subsidiaries are measured at their
fair values at the date of acquisition with any excess of the cost of
acquisition over this value being capitalised as goodwill.
Investment in subsidiaries
In the Company accounts investments in subsidiaries are stated at cost less any
provision for impairment where appropriate.
Revenue
Revenue represents amounts receivable for goods supplied and services provided
to third-parties net of VAT and other sales-related taxes.
Revenue from the sale of goods and services is recognised upon transfer to the
customer of the significant risks and rewards of ownership. This is generally
when goods are despatched to, or services performed for, customers. Revenue on
hardware and perpetual software licences is recognised on shipment providing
there are no unfulfilled obligations that are essential to the functionality of
the delivered product. If such obligations exist, revenue is recognised as they
are fulfilled. Revenue from term licences is spread over the period of the
licence, reflecting the Group's obligation to support the relevant software
products or update their content over the term of the licence. Revenue from
contracts for maintenance, support and annually and other periodically
contracted products and services is recognised on a pro-rata basis over the
contract period. Revenue from installation, consultancy and other services is
recognised when the service has been provided.
Appropriate provisions for returns, trade discounts and other allowances are
deducted from revenue.
Revenue on long-term contracts is recognised while contracts are in progress.
Revenue is recognised proportionally to the stage of completion of the contract,
based on the fair value of goods and services provided to date.
Long-term contracts
Profit on long-term contracts is recognised when the outcome of the contract can
be assessed with reasonable certainty. Thereafter profit is recognised based
upon the expected outcome of the contract and the turnover recognised at the
balance sheet date as a proportion of total contract turnover.
If the outcome of a long-term contract cannot be assessed with reasonable
certainty no profit is recognised. Any expected loss, on a contract as a whole,
is recognised as soon as it is foreseen. The loss is calculated using a
discounted cash flow model utilising a discount rate that reflects an estimate
of the markets' assessment of the time value of money and the risks specific to
the liability. Any unwinding of the discount is included in the income statement
as other finance costs.
The balance of total cost incurred on work carried out, net of any amounts
recognised in cost of sales, is taken to the balance sheet, within trade and
other receivables, as long-term contract balances.
Where the cumulative fair value of goods and services provided exceeds amounts
invoiced the balance is included within trade and other receivables as amounts
recoverable on contracts. Where amounts invoiced exceed the fair value of goods
and services provided the excess is first set off against long-term contract
balances and then included in deferred income within trade and other payables.
Pre-contract costs are expensed until the awarding of the contract to the Group
is considered to be probable which is not before the Group has been appointed
sole preferred bidder. Once probability has been established and the contract is
expected to be awarded within a reasonable timescale and pre-contract costs are
expected to be recovered from the contract's net cash flows, then pre-contract
costs are recognised as an asset and accounted for as long-term contract costs.
Property, plant and equipment
Property, plant and equipment assets are stated at cost, less depreciation and
provision for impairment where appropriate.
Property, plant and equipment are depreciated by equal annual instalments to
write down the assets to their estimated disposal value at the end of their
useful lives as follows:
Leasehold building Up to 25 years
improvements
Plant & equipment 4 - 10 years
Computers 2 - 4 years
Vehicles 2 - 4 years
Assets purchased specifically for the delivery of long-term contracts are
written off evenly over an appropriate period in accordance with the terms of
the contract.
Computer units produced by the Group which are used for the purposes of
administration, research and development and customer demonstrations are
capitalised and carried at cost less accumulated depreciation.
Intangible assets
All intangible assets, except goodwill, are stated at cost less accumulated
amortisation and any accumulated impairment losses. Goodwill is not amortised
and is stated at cost less any accumulated impairment losses.
Goodwill
Goodwill represents the amount by which the fair value of the cost of a business
combination exceeds the fair value of net assets acquired. For business
combinations occurring before 1 October 2004, the Group's transition date to
IFRS, goodwill is carried at the value at this date. Goodwill is not amortised.
The recoverable amount of goodwill is tested for impairment annually or when
events or changes in circumstance indicate that it might be impaired. Impairment
charges are deducted from the carrying value.
Research and development costs
Research and development costs associated with the development of software
products or enhancements and their related intellectual property rights are
expensed as incurred until all of the following criteria can be demonstrated, in
which case they are capitalised as an intangible asset:
a. the technical feasibility of completing the intangible asset so that
it will be available for use or sale.
b. an intention to complete the intangible asset and use or sell it.
c. ability to use or sell the intangible asset.
d. how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself or,
if it is to be used internally, the usefulness of the intangible asset.
e. the availability of adequate technical, financial and other resources
to complete the development and to use or sell the intangible asset.
f. an ability to measure reliably the expenditure attributable to the
intangible asset during its development.
The technological feasibility for the Group's software products is reached
shortly before the products are released to manufacturing, and late in the
development cycle. Capitalised development costs are amortised over on a
straight-line basis over their useful lives, once the product is available for
use. Useful lives are assessed on a project-by-project basis.
Other intangible assets
Intangible assets purchased separately, such as software licences that do not
form an integral part of hardware and the costs of internally generated software
for the Group's use, are capitalised at cost and amortised over their useful
lives of 2-4 years.
For business combinations occurring after 1 October 2004, net assets acquired
includes an assessment of the value of separately identifiable intangible fixed
assets, in addition to other assets, liabilities and contingent liabilities
purchased. These are amortised over their useful lives.
The carrying values of intangible assets with finite lives are reviewed for
impairment when events or changes in circumstance indicate the carrying value
may be impaired. If any such indication exists, the recoverable amount of the
asset is estimated in order to determine the extent of impairment loss. Where it
is not possible to estimate the recoverable amount of an individual asset, the
Group estimates the recoverable amount of the cash-generating unit to which it
belongs.
Derivative financial instruments
Derivative financial instruments are initially recorded at cost and then for
reporting purposes remeasured to fair value at subsequent balance sheet dates.
Changes in the fair value of derivative financial instruments that are
designated and effective as cash flow hedges of forecast transactions are
recognised directly in equity. Amounts deferred in this way are recognised in
the income statement in the same period in which the hedged firm commitments or
forecasted transactions are recognised in the income statement.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise. Hedge accounting is discontinued when the hedging instrument expires or
is sold, terminated or exercised, or no longer qualifies for hedge accounting.
At that point in time, any cumulative gain or loss, on the hedging instrument
recognised in equity, is retained there until the forecasted transaction occurs.
If a hedged transaction is no longer expected to occur, the net cumulative gain
or loss recognised in equity is transferred to the income statement for the
period.
Inventories
Finished goods and work-in-progress are valued at factory cost, including
appropriate labour costs and other overheads. Raw materials and bought in
finished goods are valued at purchase price. All inventories are reduced to net
realisable value where lower than cost. Provision is made for obsolete, slow
moving and defective items where appropriate.
Share-based payments
The Group operates a number of executive and employee share schemes. For all
grants of share-based payments, the fair value as at the date of grant is
calculated using a pricing model and the corresponding expense is recognised
over the vesting period. At vesting the cumulative expense is adjusted to take
into account the number of awards actually vesting.
Employee benefits
The Group has both defined benefit and defined contribution pension schemes. For
the defined benefit plan, based on the advice of a qualified independent actuary
and using the projected unit method, the employers' portion of past and current
service cost is charged to operating profit, with the interest cost, net of
expected return on assets in the plan, reported as a financing item. Actuarial
gains or losses are recognised directly in equity such that the balance sheet
reflects the scheme's surplus or deficit as at the balance sheet date.
Contributions to defined contribution plans are charged to operating profit as
they become payable.
An accrual is maintained for paid holiday entitlements which have been accrued
by employees during a period but not taken during that period.
Employee share trusts
Employee share trusts, which hold ordinary shares of the Company in connection
with certain share schemes, are consolidated into the financial statements where
the Company controls the trust. Any consideration paid or received by the trusts
for the purchase of the Company's own shares is shown as a movement in
shareholders' equity.
Leasing commitments
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the Group. All other
leases are classified as operating leases. Assets held under finance leases are
capitalised as fixed assets and depreciated accordingly. The capital element of
future lease payments is included in borrowings and interest is charged to
income before taxation on a reducing balance basis over the term of the lease.
Hire purchase transactions are dealt with similarly, except that assets are
depreciated over their useful lives.
Rentals under operating leases are charged on a straight-line basis over the
lease term.
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantially enacted by the balance sheet date.
Deferred taxation is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax bases used in computation of taxable profit. Deferred tax
liabilities are recognised for all taxable temporary differences except in
respect of investments in subsidiaries where the Group is able to control the
reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary difference can be
utilised. Their carrying amount is reviewed at each balance sheet date on the
same basis. Deferred tax is measured on an undiscounted basis, and at the tax
rates that are expected to apply in the periods in which the asset or liability
is settled. It is recognised in the income statement except when it relates to
items credited or charged directly to equity, in which case the deferred tax is
also dealt with in equity. Deferred tax assets and liabilities are offset when
they relate to income taxes levied by the same taxation authority and when the
Group intends to settle its current tax assets and liabilities on a net basis.
Foreign currencies
Balance sheet items of overseas companies are translated into Sterling at the
year-end rates of exchange. Income statement items and the cash flows of
overseas subsidiary undertakings are translated at the average rates for the
year. Exchange differences on the translation of overseas opening net assets at
closing rates of exchange and the differences arising between the translation of
profits at average and closing exchange rates are recorded as movements in the
currency translation reserve.
Transactions denominated in foreign currencies are translated into the
functional currency of the Group entity at rates prevailing at the dates of the
individual transactions. Foreign currency monetary assets and liabilities are
translated at the rates prevailing at the balance sheet date. Exchange gains and
losses arising are charged or credited to the income statement within operating
costs.
Dividends
Dividends are recognised as a liability in the period in which the shareholders'
right to receive payment has been established.
ii) Explanation of impact of transition to IFRS
a) IFRS adoption choices
The rules for the first time adoption of IFRS are set out in IFRS 1 'First time
adoption of International Financial Reporting Standards'. In accordance with
this standard the accounting policies of the Group have been set out below and
have been applied retrospectively in determining the opening balance sheet under
IFRS. IFRS 1 allows a number of exemptions to assist with the transition to
IFRS. Where exemptions have been taken by the Group they are noted below.
Business combinations
The Group has taken advantage of the IFRS 1 option to apply IFRS 3 'Business
combinations' only prospectively from the date of transition to IFRS. The
alternative was to restate all previous business combinations. As a result all
prior business combination accounting is retained without change at the
transition date. The net amount of goodwill under UK GAAP at 1 October 2004 is
adopted as the opening balance for goodwill at that date and amortisation
previously charged under UK GAAP post-transition is removed for IFRS
restatements.
Share-based payment
Charges for share-based payments under IFRS have been recognised only for issues
that were made after 7 November 2002 and had not vested at the transition date
as prescribed by IFRS 2.
Employee benefits - defined benefit pension
The Group has elected to recognise all cumulative actuarial gains and losses
from employee benefit schemes at the date of transition. For subsequent periods
IAS 19 'Employee benefits' permits a number of options for the recognition of
actuarial gains and losses. The Group's chosen policy is to adopt the 16
December 2004 amendment to IAS 19 and recognise any variations in full
immediately in the statement of recognised income and expense.
Financial instruments
The Group has elected to apply IAS 39, 'Financial Instruments: Recognition and
Measurement' and IAS 32 'Financial Instruments: Disclosure and Presentation'
from 1 October 2005. After this date, where hedge accounting cannot be applied
under IAS 39, changes in the market value of financial instruments will be taken
to the income statement. No transitional adjustments were required to the 2004
or 2005 UK GAAP financial statements due to the chosen adoption date of IAS 32
and IAS 39.
Cumulative translation differences
The Group has deemed the cumulative translation differences for foreign
operations to be zero at the date of transition. Any gains and losses on
subsequent disposals of foreign operations will exclude translation differences
arising prior to the transition date.
b) Explanation of impact
In addition to the transition reconciliations the following explanations of the
transition adjustments are provided:
Share-based payments
Equity instruments granted to employees, including share options, co-investment
plan, staff share scheme and deferred bonus result in fair value based charge to
the income statement. The charge is dependent upon share price at grant,
performance conditions, quantity of shares/options granted, historic share price
volatility, leavers and exercise experience. Under UK GAAP share options were
not expensed. Under UK GAAP a charge was made for the co-investment plan,
deferred bonus and staff share schemes based on the intrinsic value at grant.
Employee benefits - defined benefit pension
The balance sheet reflects the pension scheme's surplus or deficit at the
balance sheet date. The employers' portion of current and past service cost is
charged to operating profit with the interest cost, net of expected return on
scheme assets included within finance costs. Actuarial gains and losses are
fully recognised in equity through the statement of recognised income and
expense. Under UK GAAP regular pension cost was charged to operating profit at a
substantially level percentage of current and future payrolls with variations
being charged over the average remaining working lives of employees. The net
amount of pension scheme assets and liabilities was not carried on the balance
sheet under UK GAAP.
Employee benefits - holiday pay
A liability is recorded for employees' entitlement to paid holiday not taken at
the balance sheet date. No equivalent liability was held under UK GAAP.
Goodwill
Goodwill is carried at its book value at the transition date of 1 October 2004
less any amounts provided subsequently for impairment. Goodwill is not amortised
but reviewed at least annually for impairment.
Under UK GAAP, goodwill was carried at cost less accumulated amortisation and
provisions for impairment. Amortisation was provided at rates to write off the
cost of goodwill over five years.
As reported in the Group's December 2005 presentation on the transition to IFRS,
in the year ended 30 September 2005 the goodwill relating to the acquisition of
Sentinel Products Ltd was impaired by £1.2m. This impairment followed a review
of the carrying value of goodwill compared to the present value of cash flows
expected to arise from the business. The value is similar in magnitude to the UK
GAAP amortisation charge for the year ended 30 September 2005.
Dividends
Dividends are not accrued until shareholders' rights to the payment are
established. Under UK GAAP dividends were treated as an adjusting post balance
sheet event and recorded in the result for the period.
Taxation
Deferred tax is provided on temporary differences that are expected to be
recovered, using a balance sheet liability method. Under UK GAAP deferred tax
was provided using a profit and loss based method.
Intangible assets
Where the Group has capitalised expenditure on self-developed software
applications which are used within the Group these have been reclassified as
intangible assets. Under UK GAAP these assets were held within tangible fixed
assets.
Research and development expenditure must be capitalised when it meets certain
criteria, as outlined in the Accounting Policies. During the periods reported
the Group has reviewed its research and development expenditure against these
criteria and no material expenditure has met the capitalisation criteria.
Consequently there is no capitalised research and development expenditure.
Long-term contract balances
Long-term contract balances have been reclassified as trade and other
receivables. Under UK GAAP these assets had been held within inventory as
long-term contract balances.
Detailed analysis of the full-year reconciling items was presented on 15
December 2005 and can be found on the Group's Web site: www.rm.com/investors.
iii) Reconciliation statements
Reconciliation of loss for the half-year ended 31 March 2005
£'000 UK GAAP Share-based Defined Holiday Goodwill Impact of IFRS
payment benefit pay IFRS
pension transition
Revenue 109,211 109,211
Cost of sales (79,856) (14) 254 58 298 (79,558)
Gross profit 29,355 (14) 254 58 298 29,653
Selling and
distribution (16,095) 7 128 28 163 (15,932)
costs
Research and (7,523) 3 56 12 71 (7,452)
development
expenses
Administrative (6,332) 12 223 49 284 (6,048)
expenses
excluding
goodwill charges
Goodwill charges (4,533) 3,286 3,286 (1,247)
Operating (34,483) 22 407 89 3,286 3,804 (30,679)
expenses
(Loss)/Profit (595) 8 661 147 816 221
from operations
before goodwill
charges
Goodwill charges (4,533) 3,286 3,286 (1,247)
Loss from (5,128) 8 661 147 3,286 4,102 (1,026)
operations
Investment 496 496
income
Finance costs (156) (218) (218) (374)
(Loss)/Profit (255) 8 443 147 598 343
before tax
before goodwill
charges
Goodwill charges (4,533) 3,286 3,286 (1,247)
Loss before tax (4,788) 8 443 147 3,286 3,884 (904)
Tax 71 12 (133) (44) (165) (94)
Loss for the (4,717) 20 310 103 3,286 3,719 (998)
period
Basic EPS (5.3)p - 0.3p 0.1p 3.7p 4.1p (1.1)p
Diluted EPS (5.3)p - 0.3p 0.1p 3.7p 4.1p (1.1)p
Reconciliation of profit for the year ended 30 September 2005
£'000 UK GAAP Share-based Defined Holiday Goodwill Impact of IFRS
payment benefit pay IFRS
pension transition
Revenue 262,707 262,707
Cost of sales (188,999) (47) 648 (46) 555 (188,444)
Gross profit 73,708 (47) 648 (46) 555 74,263
Selling and (34,224) (14) 322 (24) 284 (33,940)
distribution
costs
Research and (16,812) (6) 140 (10) 124 (16,688)
development
expenses
Administrative (11,150) 81 560 (42) 599 (10,551)
expenses
before
goodwill
charges
Goodwill (7,386) 4,917 4,917 (2,469)
charges
Operating (69,572) 61 1,022 (76) 4,917 5,924 (63,648)
expenses
Profit from 11,522 14 1,670 (122) 1,562 13,084
operations
before
goodwill
charges
Goodwill (7,386) 4,917 4,917 (2,469)
charges
Profit from 4,136 14 1,670 (122) 4,917 6,479 10,615
operations
Investment 1,359 1,359
income
Finance costs (36) (410) (410) (446)
Profit before 12,845 14 1,260 (122) 1,152 13,997
tax before
goodwill
charges
Goodwill (7,386) 4,917 4,917 (2,469)
charges
Profit before 5,459 14 1,260 (122) 4,917 6,069 11,528
tax
Tax (3,455) 183 (378) 37 (158) (3,613)
Profit for the 2,004 197 882 (85) 4,917 5,911 7,915
period
Basic EPS 2.3p 0.2p 1.0p (0.1)p 5.5p 6.6p 8.9p
Diluted EPS 2.2p 0.2p 1.0p (0.1)p 5.5p 6.6p 8.9p
Reconciliation of consolidated balance sheet and shareholders' equity at 1
October 2004 (IFRS transition date)
£'000 UK GAAP Share-based Dividends Defined Holiday Other Impact of IFRS
payment benefit pay IFRS
pension transition
Non-current
assets
Goodwill 24,737 24,737
Other 1,882 1,882 1,882
intangible
assets
Property 20,202 (1,882) (1,882) 18,320
plant and
equipment
Deferred 1,310 549 4,455 272 5,276 6,586
tax assets
46,249 549 4,455 272 - 5,276 51,525
Current
assets
Inventories 16,492 (2,017) (2,017) 14,475
Trade and 50,228 1,775 1,775 52,003
other
receivables
Cash and 27,480 27,480
cash
equivalents
94,200 (242) (242) 93,958
Total 140,449 549 4,455 272 (242) 5,034 145,483
assets
Current
liabilities
Trade and (84,663) 1,328 3,195 (906) 242 3,859 (80,804)
other
payables
Tax (1,779) (1,779)
liabilities
(86,442) 1,328 3,195 (906) 242 3,859 (82,583)
Net current 7,758 1,328 3,195 (906) - 3,617 11,375
assets
Non-current
liabilities
Retirement - (14,850) (14,850) (14,850)
benefit
obligation
Other (11,086) (11,086)
payables
due after
one year
Long-term (2,320) (2,320)
provisions
(13,406) (14,850) (14,850) (28,256)
Total (99,848) 1,328 3,195 (14,850) (906) 242 (10,991) (110,839)
liabilities
Net assets 40,601 1,877 3,195 (10,395) (634) - (5,957) 34,644
Equity
Called up 1,794 1,794
equity
share
capital
Share 20,349 20,349
premium
account
Own shares (1,010) (53) (53) (1,063)
Capital 94 94
redemption
reserve
Hedging and - -
translation
reserve
Accumulated 19,374 1,930 3,195 (10,395) (634) (5,904) 13,470
profit
40,601 1,877 3,195 (10,395) (634) - (5,957) 34,644
Reconciliation of consolidated balance sheet and shareholders' equity at 31
March 2005
£'000 UK GAAP Share- Dividends Defined Holiday Goodwill Other Impact of IFRS
based benefit pay IFRS
payment pension transition
Non-current
assets
Goodwill 20,151 3,286 3,286 23,437
Other - 1,687 1,687 1,687
intangible
assets
Property plant 24,420 (1,687) (1,687) 22,733
and equipment
Deferred tax 1,310 832 4,116 227 5,175 6,485
assets
45,881 832 4,116 227 3,286 8,461 54,342
Current assets
Inventories 17,928 (5,944) (5,944) 11,984
Trade and other 30,435 5,944 5,944 36,379
receivables
Cash and cash 13,849 - 13,849
equivalents
62,212 - 62,212
Total assets 108,093 832 4,116 227 3,286 8,461 116,554
Current
liabilities
Trade and other (60,695) 1,781 932 (758) 1,955 (58,740)
payables
Tax liabilities (267) - (267)
(60,962) 1,781 932 (758) 1,955 (59,007)
Net current 1,250 1,781 932 (758) 1,955 3,205
assets
Non-current
liabilities
Retirement - (13,720) (13,720) (13,720)
benefit
obligation
Other payables (9,851) (9,851)
due after one
year
Long-term (2,264) (2,264)
provisions
(12,115) (13,720) (13,720) (25,835)
Total (73,077) 1,781 932 (13,720) (758) (12,895) (84,842)
liabilities
Net assets 35,016 2,613 932 (9,604) (531) 3,286 (3,304) 31,712
Equity
Called up 1,795 1,795
equity share
capital
Share premium 20,464 20,464
account
Own shares (996) (67) (67) (1,063)
Capital 94 94
redemption
reserve
Hedging and - 13 13 13
translation
reserve
Accumulated 13,659 2,680 932 (9,604) (531) 3,286 (13) (3,120) 10,409
profit
Total equity 35,016 2,613 932 (9,604) (531) 3,286 - (3,304) 31,712
Reconciliation of consolidated balance sheet and shareholders' equity at 30
September 2005
£'000 UK GAAP Share- Dividends Defined Holiday Goodwill Other Impact of IFRS
based benefit pay IFRS
payment pension transition
Non-current
assets
Goodwill 17,304 4,917 4,917 22,221
Other 1,714 1,714 1,714
intangible
assets
Property 26,357 (1,714) (1,714) 24,643
plant and
equipment
Deferred 1,105 928 4,767 308 6,003 7,108
tax assets
44,766 928 4,767 308 4,917 - 10,920 55,686
Current
assets
Inventories 17,658 (5,791) (5,791) 11,867
Trade and 48,351 5,791 5,791 54,142
other
receivables
Cash and 22,942 22,942
cash
equivalents
88,951 - - 88,951
Total 133,717 928 4,767 308 4,917 - 10,920 144,637
assets
Current
liabilities
Trade and (81,958) 2,331 3,399 (1,027) 4,703 (77,255)
other
payables
Tax (1,315) (1,315)
liabilities
(83,273) 2,331 3,399 (1,027) 4,703 (78,570)
Net current 5,678 2,331 3,399 (1,027) - 4,703 10,381
assets
Non-current
liabilities
Retirement - (15,890) (15,890) (15,890)
benefit
obligation
Other (9,759) (9,759)
payables
due after
one year
Long-term (2,170) (2,170)
provisions
(11,929) (15,890) (15,890) (27,819)
Total (95,202) 2,331 3,399 (15,890) (1,027) (11,187) (106,390)
liabilities
Net assets 38,515 3,259 3,399 (11,123) (719) 4,917 (267) 38,248
Equity
Called up 1,815 1,815
equity
share
capital
Share 22,151 22,151
premium
account
Own shares (1,386) (246) (246) (1,632)
Capital 94 94
redemption
reserve
Hedging and - 44 44 44
translation
reserve
Accumulated 15,841 3,505 3,399 (11,123) (719) 4,917 (44) (65) 15,776
profit
Total 38,515 3,259 3,399 (11,123) (719) 4,917 - (267) 38,248
equity
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