RNS Number:2519I
Phoenix IT Group PLC
22 November 2007
22 November 2007
Phoenix IT Group plc
Interim Results for the six months ended 30 September 2007
Phoenix IT Group plc ('Phoenix' or 'the Group') the UK IT services company,
announces its interim results for the six months ended 30 September 2007.
Financial highlights
* Revenue up 87.1% to #101.9m (2006: #54.4m)
* Like-for-like revenues, excluding the effect of acquisitions up 7.7%
to #58.6m (2006: #54.4m)
* Profit from operations before non-recurring integration costs and
amortisation of acquired intangibles up 36% to #14.3m (2006: #10.5m)*
* Profit from operations after non-recurring integration costs and
before amortisation of acquired intangibles up 22.7% to #12.9m (2006:
#10.5m)*
* Profit before tax before non-recurring integration costs up 2% to #9.4m
(2006: #9.2m)*
* Profit before tax #7.5m (2006: #9.2m)
* Cash generated by operations of #19.3m (2006: #13.7m) representing 171.4%
(2006: 141.5%) of profit from operations (see note 16)
* Order book increased by 65.7% to #288.2m (2006: #173.9m)
* Order book on a like-for-like basis, excluding the effect of
acquisitions up 13.4% to #197.1m (2006: #173.9m)
* Diluted earnings per share adjusted for amortisation of acquired
intangibles and non-recurring integration costs of 10.7p (2006: 11.4p), and
diluted earnings per share of 7.3p (2006: 10.4p) (see note 7)
* Interim dividend increased by 15.1% to 1.83 pence per share (2006: 1.59
pence per share)
Business highlights
* Acquired control of ICM Computer Group plc ("ICM") on 29 May 2007
* Integration planning complete and implementation underway
* New Business Continuity centre opened in Farnborough in September
* Centralised operational shared service unit being established
* Growth ahead of the industry sector for all parts of the business
* Significant new contract wins in each principal operating business
* Buoyant pipeline of new sales opportunities in each market segment
* See statement of income.
Commenting on these results, Nick Robinson, Chief Executive of Phoenix said:
"The transformational acquisition of ICM Computer Group was completed on 29 May
2007, assisting the enlarged Group to report record revenues and profit from
operations. The acquisition has considerably strengthened the Group's position
in the UK Business Continuity and SME IT services markets, and has performed in
line with management expectations.
The underlying business has continued to perform well with like-for-like
revenues, excluding the effect of acquisitions, up 7.7% compared to the same
period in 2006, and the enlarged Group remains highly cash generative.
The integration is progressing as planned and the Group is confident of
achieving the anticipated synergy cost savings within the next financial year.
The sales momentum has continued since the end of the second quarter in each of
the Group's divisions, and the Group is well positioned in each of the markets
that it serves and remains confident in its long term prospects."
Enquiries:
Phoenix Tel: +44 (0)1604 769000
Nick Robinson Chief Executive Officer
Jeremy Stafford Chief Operating Officer
David Simpson Group Finance Director
Financial Dynamics Tel: +44 (0)20 7831 3113
Giles Sanderson
Harriet Keen
Haya Chelhot
Responsibility Statement
We confirm that to the best of our knowledge:
(a) the condensed set of financial statements has been prepared in accordance with IAS 34;
(b) the interim management report includes a fair review of the information required by DTR
4.2.7R (indication of important events during the first six months and description of
principal risks and uncertainties for the remaining six months of the year); and
(c) the interim management report includes a fair review of the information required by DTR
4.2.8R (disclosure of related party transactions and changes therein).
By order of the Board
Nick Robinson
Chief Executive Officer
22 November 2007
About Phoenix
The Phoenix Group is one of the UK's leading providers of a range of high
quality IT support services, including Business Continuity services, hosting,
network and systems management, network services, service desks, field services,
and professional services. The Group operates its partner services business
under the brand Phoenix IT Services and its SME and Business Continuity
operations under the brands ICM, NDR and Servo.
Interim management report
To the Members of Phoenix IT Group plc
This half year interim management report covers the six months ended 30
September 2007 and has been prepared to provide additional information to the
shareholders to assess the Company's strategies, the success of those
strategies, and the potential for those strategies to succeed in the future.
This report should not be relied on by any other party or for any other purpose.
Forward looking statements
Any forward looking statements made within this half year interim management
report have been made in good faith by the directors based on the information
available up to the date of the director's approval of this report, and these
forward looking statements should be treated with caution due to the inherent
uncertainties, including macro economic, and IT services market uncertainties,
and business risk factors which may affect the outcome.
This interim management report has been prepared for the Phoenix IT Group as a
whole and therefore it gives greater emphasis to those matters which are
significant to Phoenix IT Group plc and its subsidiary undertakings when viewed
as a whole.
Introduction
This has been a significant period of progress for the Group which saw us
complete the acquisition of ICM. It is very pleasing to see our confidence in
the commercial logic of the acquisition already being borne out as well as to
see organic revenue growth across all the Group's divisions.
Long term strategy and business objectives
The Group's strategy for adding shareholder value and accelerating growth by
entering into large IT outsourcing contracts while developing niche IT services
for niche markets was reported in our last annual report and accounts for the
period to 31 March 2007.
In the first six months of the current financial year the Group has continued to
make significant progress with the acquisition of ICM together with significant
new contract wins in each of the principal operating businesses, and most
notably in the Business Continuity division with two major contracts worth a
minimum of #8.4m (over seven years) and #12.0m (over three years) respectively.
Overview
Group revenues and profits for the period were in line with management's
expectations. The acquisition of ICM was completed at the end of May 2007 for a
cash consideration of #65.4m, including costs of #3.6m, and the issue of
14,047,184 shares in Phoenix. Consequently, the results for ICM have been
included for the four months since taking control. The transaction was a
significant strategic event in the continued expansion of the Group following
the successful acquisition of Trend Network Services (in 2004); NDR (in 2005);
and Servo (in 2006). The acquisition has strengthened the Group's position in
the UK Business Continuity services market making the Group one of only four
significant providers of these services to the UK market, and has also
strengthened the Group's position in the SME IT services and hosting markets.
The Group's other businesses have performed well in the period, with increased
like-for-like revenues of 7.7% compared to the six months ended 30 September
2006, with the partner services business, Phoenix IT Services, increasing
revenues by 7.3% despite the adverse effects of reductions in the scope and
price of the services being delivered under a then major contract, as announced
in January 2006.
Results
The like-for-like order book, excluding the effect of acquisitions increased by
13.4% to #197.1m (2006: #173.9m), and the total order book (including
acquisitions) increased by 65.7% to #288.2m (2006: #173.9m), of which 28.4% is
expected to be recognised in revenues in the next six months, and 32.7%, 19.7%,
and 10.0% in each of the next three financial years thereafter.
Group Revenues for the six months to 30 September 2007 increased by 87.1% to
#101.9m (2006: #54.4m). Like-for-like revenues increased by 7.7% compared to
2006 with the partner services business demonstrating a resumption of revenue
growth with a 7.3% increase in revenues to #48.5m (2006: #45.2m) and the
Business Continuity and disaster recovery business, NDR, increasing revenues by
9.5% to #10.1m (2006: #9.2m). For the six months to 30 September 2007 Servo's
revenues were #18.0m and ICM's revenues were #25.3m in the four months since
completing the acquisition (see note 3).
The Group operating profit before amortisation of acquired intangibles and
non-recurring integration costs* was 14.0% (2006: 19.3%) of revenues. Overall
profit margins have been impacted by the acquisition of Servo and ICM. In the
SME IT services market there are higher proportions of low margin product sales
where customers often want a single supplier of their IT products and associated
services. In the Business Continuity and disaster recovery business, the
performance has been impacted by the acquisition of the Farnborough facility
which made an as anticipated start up loss of #0.2m in the period and also by
the lower utilisation rates of the other ICM Business Continuity facilities.
The underlying margins of Phoenix IT Services and NDR have remained strong, at
18.2% (2006: 20.1%), and 27.9% (2006: 25.2%) respectively.
Profit from operations before non-recurring integration costs and amortisation
of intangibles* increased by 36.0% to #14.3 million (2006: #10.5m) and profit
before tax before non-recurring integration costs* increased by 2.0% to #9.4m
(2006: #9.2m). The tax rate of 31% is based on the estimated annual effective
rate applied to the profit before tax for the period.
Diluted earnings per share were 7.3p (2006: 10.4p) and adjusted diluted earnings
per share excluding amortisation of intangibles and exceptional costs (see note
7) were 10.7p (2006: 11.4p). The fall in earnings per share is as anticipated
and the Board believe that the ICM acquisition will be earnings enhancing
(before amortisation of intangible assets and non-recurring integration costs)
in the first full financial year following the completion of the acquisition
through continued growth and the realisation of integration benefits.
Cash & Debt
The Group continues to be cash generative with cash generated by operations (see
note 16) of #19.3m (2006: #13.7m) representing 171.4% of profit from operations
(2006: 141.5%). Net debt, including obligations under finance leases and hire
purchase contracts (see note 17), increased to #106.3m (2006: #10.5m), primarily
as a result of the ICM acquisition.
In the acquisition of ICM the Group arranged new bank facilities with Royal Bank
of Scotland plc (replacing the then existing facilities) comprising two and five
year term loans totalling #100m, a five year #30m revolving credit facility, and
a #10m overdraft facility. The Group entered into a three year interest rate
swap on 28 September 2007 at an interest rate of 5.78% plus applicable margin
against the amortising balance of the principal term loan, giving interest rate
certainty over #80m, #51.75m, and #42m of the Group's bank debt in the three
years ending 30 September 2010.
Current trade and other receivables at 30 September 2007 were #52.7m (2006:
#19.7m). This increase is due to the acquisitions of Servo and ICM in the
period and the inclusion of their respective trade and other debtors,
particularly the current element of the reverse premium due in respect of the
Farnborough lease, and prepayments of rents in accordance with the lease terms
on ICM leasehold properties.
Dividend
The confidence in the long term growth prospects of the Group is reflected in
the Board's recommendation of a 15.1% increase in the interim dividend to 1.83p
per share (2006: 1.59p per share) which will be paid on 1 February 2008 to
shareholders on the register on 11 January 2008.
* See statement of income.
Review of Operations
Phoenix IT Services
Revenues for the 6 months to 30 September 2007 were #48.5m (2006: #45.2m) an
increase of 7.3%. Operating profit of #8.8m was down on last year's comparative
of #9.1m, and consequently the operating margin declined to 18.2% (2006: 20.1%).
Adjusting for the effect of the two major contract changes in 2006, the
underlying operating margin increased from 16.9% to 17.1%. The partner order
book grew by 14.2% to #171.2m (2006: #149.9m), through a combination of new
business wins and renewals of existing contracts at the end of their term.
NDR
The NDR Business Continuity revenues increased by 9.5% to #10.1m (2006: #9.2m).
NDR's operating profit of #2.8m increased by 21.4% (2006: #2.3m) giving an
operating margin of 27.9%. At 30 September 2007 the NDR order book was #25.9m,
an increase of 8.3% over the position at the comparative period end of #24.0m.
Servo
Servo sells products and IT services to the SME market and was acquired by
Phoenix in November 2006. The management team was strengthened by the
appointment of a new Sales Director in March 2007, and, despite a slow start to
the financial year, Servo generated revenues of #18.0m in the period, with
record revenues in the second quarter, 17% higher than quarter one. Operating
profit at #1.5m represents a margin of 8.1%, which is lower than the Group
average due to the lower margin product sales which Servo's predominately SME
customer base often require as part of a composite product and services
purchase. The strategy of increasing the service revenues relative to product
revenues has continued during the period with service revenues increasing to
54.2% of total revenues (2006 pro forma: 51.6%). However, product will continue
to be part of the offering and delivered as part of a service engagement.
ICM Computer Group
Phoenix took effective control of ICM on 29 May 2007 and the results for the
period include ICM for the four months from 1 June 2007. ICM was acquired for a
total consideration comprising #65.4m (including costs of #3.6m) in cash and the
issue of 14,047,184 Phoenix Ordinary Shares. ICM delivers IT services through
two divisions:
Business Continuity Division
ICM's Business Continuity Division provides contingency plans (including mobile
recovery, on-line recovery and workplace recovery plans) to ensure that
customers can run their businesses and maintain operational capability even in a
worst case scenario.
Managed Availability Services Division
ICM's Managed Availability Services division has a range of products aimed at
increasing the operational availability of IT systems for mid-market customers
and SME's. The IT support provided by the Managed Availability division includes
hardware and software support, helpdesk, remote network management, hosting and
the outsourcing of IT departments. The IT solutions provided by the Managed
Availability Services division comprise project-based infrastructure, solutions
including consulting and professional services, hardware supply and integration,
industry standard software integration services, data connectivity and
networking solutions.
In the 4 months to 30 September 2007, ICM contributed revenues of #25.3m and
operating profit of #2.4m. Of these totals, the Business Continuity division
generated revenues of #7.4m and an operating profit of #1.1m and the Managed
availability services division generated #17.9m of revenues and #1.3m of
operating profit.
In June 2007 the Group acquired a lease on a 100,000 sq ft Business Continuity
facility in Farnborough, Hampshire and has subsequently signed two major
contracts with values of #8.4m over seven years (commencing in the period), and
#12.0m over three years (commencing November 2007). Whilst the new facility is
operating within management's budget, it made an operating loss of #0.2m in the
period to 30 September 2007. The Farnborough facility is expected to become
profitable in the next financial year.
Integration
Following the ICM acquisition, the Group has undertaken an integration review
and planning exercise and the resulting integration plan is in the process of
being executed. The integration process involves the restructuring of the Group
to give three customer facing divisions and a centralised shared services unit,
as follows:
* The Business Continuity division comprising NDR and the Business
Continuity division of ICM, which will be branded ICM. The division is being
led by Mike Osborne, who was formerly the Managing Director of the ICM
Business Continuity division. The combination of these complimentary
businesses will create a significant UK Business Continuity operation with
15 purpose built centres, over 7,500 recovery positions, extensive mobile
and IT recovery capabilities, and over 2,100 customers. It is expected that
this element of the integration plan will be largely completed by the end of
this financial year.
* Servo will be combined with ICM's Managed Availability Services division
resulting in a significant operation enjoying increased scale benefits
focused on providing IT solutions and services to a large SME customer base.
This division is being run by Neil Lloyd who joined the Group in September
2007. It is expected that the combination of these two businesses will be
largely completed by the end of this financial year.
* Phoenix IT Services, which is focused on delivering a wide range of IT
support services to typically large end users through partners, will
continue as a stand alone division, headed up by Steve Neville who has been
in senior positions with the Group for over 8 years.
* A centralised operational shared services unit will be established to
undertake certain activities on behalf of the three operating divisions to
maximise operational efficiencies. These will include logistics, field
services and datacentres. Existing activities will be progressively
transferred to the shared operations unit over the next twelve months.
The combination of Phoenix and ICM will result in a number of cost synergies for
the enlarged group, including:
* A reduction in the number of sites from which the Business Continuity
division will provide services to eliminate geographical duplication; and
* the combination of the Group's respective logistics operations and support
functions is anticipated to yield significant cost savings; and
* the increased buying power of the enlarged Group will result in cost
savings; and
* the combination of Phoenix and ICM's operations into larger units
throughout the UK will provide a greater density of coverage for both
Phoenix and ICM and therefore greater operating efficiency.
It is anticipated that cost synergies of circa #5m will be achieved in the
financial year to March 2009 and one-off integration costs of circa #6m will be
incurred over the next 18 months. The integration process is now well underway
and management are confident of a successful outcome.
Risks and uncertainties
As a result of the contracted revenues in the order book, the Group has a high
degree of forward visibility of its revenues over the next six months.
Nonetheless, there are a number of potential risks and uncertainties which could
have a material impact on the Group's performance over the remaining six months
of the current financial year and which could cause the Group's actual results
to materially deviate from expected and historical results.
Integration risk
The ongoing integration of ICM and reorganisation of the Group into three
customer facing divisions and a centralised shared services unit is expected to
yield material annual cost savings and operational efficiencies. However, this
activity may cause short term disruption to the Group. To mitigate this risk the
integration activity has been thoroughly planned and external advisers have been
used where appropriate. The resulting plans are being executed in series and are
being tested at each stage to ensure that any disruption to the Group's
customers is either eliminated or minimised.
Acquisition risk
Since November 2004 the Group has made three successful acquisitions. However,
acquisitions can involve risks that may have a material impact on the Group. The
Group mitigates this risk by undertaking thorough due diligence, and, where
practical, by contractual representations, warranties and indemnities.
Competitor risk
The IT services industry is highly competitive. Several competitors, including,
in some cases, Phoenix's partners, have longer operating histories, higher brand
recognition, greater financial, technical, marketing, personnel and other
resources than the Group. The Group's competitors have, and other potential
competitors may have, well established relationships with current and potential
partners of the Group. As a result, these competitors may be able to respond
more quickly to new or emerging technology and changes in partner requirements,
or to devote greater resources to the development, promotion and sale of their
services, than the Group. In addition, the Group may experience increased
competition from low cost outsourcing centres, including offshore centres, and
new or existing niche market participants whose costs, particularly for labour
and for service desks may be lower. Increased competition could lead to the
loss of market share, loss of material contracts, renegotiation of price levels
or a general reduction in revenues of the Group.
Macro economic risk
Whilst the Group has not seen any downturn in activity the recent tightening of
credit and increases in interest rates could lead to a slowing of growth in the
UK economy. However, while there is a risk of macro economic factors and
particularly the so called 'credit crunch' affecting direct sales activities,
this risk is mitigated by the high proportion of long term contracted annuity
business.
Management Changes
As separately announced today, from 1 January 2008, Nick Robinson will step down
as Chief Executive and become Non-executive Deputy Chairman of the Group. Nick
will remain significantly involved with the Group and has reiterated his
undertaking made to the Board in August in relation to not selling shares in
Phoenix in the medium term. It is currently expected that Jeremy Stafford, who
joined the Group as Chief Operating Officer in April 2007, will become Chief
Executive of the Group on 1 October 2008, subject to, inter alia, his
performance in the interim period.
Effective immediately, Peter Bertram, currently non-Executive Chairman, will
become Executive Chairman of the Group. It is expected that Peter will remain
in this role throughout the interim period.
The Company intends to appoint an additional independent non-executive director
in due course.
Outlook
The sales momentum has continued since the end of the second quarter in each of
the Group's divisions.
The integration is progressing as planned and the Group is confident of
achieving the anticipated synergy cost savings within the next financial year.
The Group is well positioned in each of the markets that it serves and remains
confident in its long term prospects.
Consolidated statement of income
For the six months ended 30 September 2007
Unaudited
six months Audited year
Unaudited six months to 30 September 2007 to 30 to 31 March
September 2007
2006
Before non- Non-recurring
recurring items items Total Total Total
Note #'000 #'000 #'000 #'000 #'000
Continuing operations
Revenue 3 101,885 - 101,885 54,443 126,712
Cost of sales (30,095) - (30,095) (8,621) (25,690)
Gross profit 71,790 - 71,790 45,822 101,022
Distribution costs (48,110) - (48,110) (29,453) (65,876)
Administrative expenses 4 (11,044) (1,397) (12,441) (6,674) (14,430)
Profit from operations before
amortisation of
acquired intangibles 14,291 (1,397) 12,894 10,507 22,695
Amortisation of acquired intangibles (1,655) - (1,655) (812) (1,979)
Profit from operations 3 12,636 (1,397) 11,239 9,695 20,716
Investment income 5 215 - 215 130 270
Finance costs 5,4 (3,482) (446) (3,928) (638) (1,704)
Profit before tax 9,369 (1,843) 7,526 9,187 19,282
Tax 6 (2,886) 553 (2,333) (2,848) (5,538)
Profit for the period 6,483 (1,290) 5,193 6,339 13,744
Earnings per share
Basic 7 9.4p 7.5p 10.7p 23.0p
Diluted 7 9.1p 7.3p 10.4p 22.2p
All activity is derived from continuing operations. There were no material
non-recurring costs in the six months ended 30 September 2006 or the year ended
31 March 2007. For details of the impact of acquisitions on the results see
note 4.
Consolidated statement of recognised income and expense
For the six months ended 30 September 2007
Unaudited six Unaudited six
months to 30 months to 30 Audited
September September year to 31
2007 2006 March
2007
#'000 #'000 #'000
Exchange differences on translation of foreign operations recognised
directly in equity 16 (8) (7)
Actuarial gains on defined benefit pension schemes 396 - -
Net income/(expense) recognised directly in equity 412 (8) (7)
Profit for the period 5,193 6,339 13,744
Total recognised income and expense for the period 5,605 6,331 13,737
Consolidated balance sheet
As at 30 September 2007
Unaudited Unaudited
30 September 30 September Audited
2007 2006 31 March
2007
Note #'000 #'000 #'000
Non-current assets
Goodwill 180,698 57,820 84,090
Intangible assets 9 24,077 6,203 7,090
Property, plant and equipment 9 63,742 12,019 13,777
Trade and other receivables 2,964 - -
271,481 76,042 104,957
Current assets
Inventories 10,667 6,286 6,391
Trade and other receivables 52,717 19,691 32,934
Cash and cash equivalents 7,765 10,926 5,023
71,149 36,903 44,348
Total assets 342,630 112,945 149,305
Current liabilities
Trade and other payables (39,346) (16,078) (29,110)
Current tax liabilities (3,551) (3,839) (3,339)
Obligations under finance leases and hire purchase (1,217) (1,837) (1,937)
contracts
Bank loans 10 (13,932) (4,000) (7,000)
Provisions (389) (496) (47)
(58,435) (26,250) (41,433)
Net current assets 12,714 10,653 2,915
Non-current liabilities
Obligations under finance leases and hire purchase (6,821) (3,649) (3,909)
contracts
Bank overdrafts and loans 10 (92,096) (11,946) (19,917)
Provisions (4,920) (865) (1,409)
Deferred tax liabilities (10,339) (921) (825)
Retirement benefit obligation 18 (1,536) - -
(115,712) (17,381) (26,060)
Deferred income
Due in less than one year (33,741) (21,896) (24,946)
Due after one year (18,758) (244) (423)
(52,499) (22,140) (25,369)
Total liabilities (226,646) (65,771) (92,862)
Net assets 115,984 47,174 56,443
Equity
Share capital 12 745 595 602
Share premium account 13 37,352 37,069 37,144
Merger reserve 14 57,453 - 2,239
Other reserves 1,695 1,071 1,468
Retained earnings 18,739 8,439 14,990
Total equity 115,984 47,174 56,443
The financial statements were approved by the Board of Directors and authorised
for issue on 22 November 2007.
Consolidated cash flow statement
For the six months ended 30 September 2007
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
Note #'000 #'000 #'000
Net cash from operating activities 16 11,327 10,804 23,547
Investing activities
Purchases of property, plant and equipment (7,610) (1,753) (4,437)
Proceeds on disposal of property, plant and equipment - - 33
Acquisition of subsidiary undertaking:
- Cash consideration (61,772) - (28,000)
- Costs of acquisition (3,610) - (648)
- Cash and cash equivalents acquired 771 - 2,180
Net cash used in investing activities (72,221) (1,753) (30,872)
Financing activities
Dividends paid (1,913) (1,642) (2,600)
Repayments of borrowings (49,253) - (4,000)
Increase in obligations under finance leases and hire purchase
contracts 776 486 846
New bank loans raised 113,842 - 15,000
Issue of share capital 184 271 342
Net cash from/(used in) financing activities 63,636 (885) 9,588
Net increase in cash and cash equivalents 2,742 8,166 2,263
Cash and cash equivalents at beginning of period 5,023 2,760 2,760
Cash and cash equivalents at end of period 7,765 10,926 5,023
Notes to the consolidated financial statements
For the six months ended 30 September 2007
1. Preparation of the interim financial information
The interim financial report for the half year ended 30 September 2007 has been
prepared in accordance with the Disclosure and Transparency Rules of the
Financial Services Authority and with IAS 34 Interim Financial Reporting. This
report should be read in conjunction with the annual financial statements for
the year ended 31 March 2007, which have been prepared in accordance with IFRSs.
The half year results are unaudited and were approved by the Board of Directors
on 22 November 2007.
The information for the year ended 31 March 2007 does not constitute statutory
accounts as defined in section 240 of the Companies Act 1985. A copy of the
statutory accounts for that year has been delivered to the Registrar of
Companies. The auditors' report on those accounts was not qualified and did not
contain statements under section 237(2) or (3) of the Companies Act 1985.
2. Accounting policies
The accounting policies adopted are consistent with those of the annual
financial statements for the year ended 31 March 2007, as described in those
financial statements except as noted below.
During the period the Group has adopted the following accounting policies.
(a) Financial Instruments
Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments such as interest rate swaps to
hedge risks associated with interest rate fluctuations. Such derivative
financial instruments are stated at fair value. The fair values of interest
rate swaps are determined by reference to market rates for similar instruments.
In order to qualify for hedge accounting, the Group is required to document from
inception the relationship between the item being hedged and the hedging
instrument. The Group is also required to document and demonstrate an
assessment of the relationship between the hedged item and the hedging
instrument, which shows that the hedge will be highly effective on an ongoing
basis. This effectiveness testing is performed at each period end to ensure
that the hedge remains highly effective.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated or exercised, or no longer qualifies for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
is retained in equity until the highly probable forecast 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 statement of income for the
period.
Cash flow hedges
Changes in the effective portion of the fair value of derivative financial
instruments that are designated as hedges of future cash flows are recognised
directly in equity, and the ineffective portion is recognised immediately in the
statement of income where relevant. If the cash flow hedge of a firm commitment
or forecast transaction results in the recognition of a non-financial asset or
liability, then, at the time it is recognised, the associated gains or losses on
the derivative that had previously been recognised in equity are included in the
initial measurement. For hedges that result in the recognition of a financial
asset or liability, amounts deferred in equity are recognised in the statement
of income in the same period in which the hedged item affects net profit or
loss.
(b) Retirement benefits
Defined benefit pension scheme
The Group operates a defined benefit funded pension scheme.
The costs of providing pensions under the defined benefit funded pension scheme
are estimated on the basis of independent actuarial advice, with full actuarial
valuations carried out on a triennial basis, and updated at each balance sheet
date.
The operating and finance costs of the scheme are recognised separately within
the statement of income. Actuarial gains and losses are recognised in full in
the period in which they occur and are presented in the statement of recognised
income and expense.
The retirement benefit obligation recognised in the balance sheet represents the
present value of the defined benefit obligation as adjusted for unrecognised
past service costs, and as reduced by the fair value of scheme assets.
(c) Change in accounting policies
In the current financial year, the Group will adopt International Financial
Reporting Standard 7 'Financial instruments Disclosures' (IFRS7) for the first
time. As IFRS7 is a disclosure standard, there is no impact of that change in
accounting policy on the half-yearly financial report. Full details of the
change will be disclosed in our annual report for the year ending 31 March 2008.
3. Segmental reporting
Following the acquisition of ICM Computer Group Limited, the Board has
determined that the primary segmental reporting format is by business line,
based on the Group's management and internal reporting structure. The Group's
operations are based entirely in the UK.
Segment results include items directly attributable to a segment as well as
those that can be allocated on a reasonable basis.
Inter-segment turnover has been eliminated.
Partner Business
Six months ended 30 September 2007 services continuity SME IT Total
business services
#'000 #'000 #'000 #'000
Revenue
Existing operations 48,533 10,075 17,994 76,602
Acquisition in year - ICM - 7,342 17,941 25,283
48,533 17,417 35,935 101,885
Segment result
Existing operations 8,820 2,815 1,452 13,087
Acquisition in year - ICM - 1,093 1,284 2,377
8,820 3,908 2,736 15,464
Corporate costs (1,173)
Amortisation of intangibles (1,655)
Non recurring items (1,397)
Profit from operations 11,239
Partner Business
Six months ended 30 September 2006 services continuity SME IT Total
business services
#'000 #'000 #'000 #'000
Revenue
Existing operations 45,243 9,200 - 54,443
45,243 9,200 - 54,443
Segment result 9,091 2,319 - 11,410
Corporate costs (903)
Amortisation of intangibles (812)
Non recurring items -
Profit from operations 9,695
Partner Business
services continuity
Year ended 31 March 2007 business SME IT Total
services
#'000 #'000 #'000 #'000
Revenue
Existing operations 91,529 18,836 - 110,365
Acquisition in year - Servo - - 16,347 16,347
91,529 18,836 16,347 126,712
Segment result
Existing operations 17,558 4,942 - 22,500
Acquisition in year - Servo - - 1,705 1,705
17,558 4,942 1,705 24,205
Corporate costs (1,510)
Amortisation of intangibles (1,979)
Non recurring items -
Profit from operations 20,716
4. Non-recurring items
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
#'000 #'000 #'000
Costs of reorganisation of newly acquired subsidiaries 1,397 - -
Write-off of unamortised loan costs and loan break costs following
arrangement of new bank facilities 446 - -
1,843 - -
The funding of the acquisition of ICM Computer Group (note 15) during the period
necessitated a renegotiation of the Group's borrowing facilities.
Notes to the consolidated financial statements
For the six months ended 30 September 2007
5. Finance costs and investment income
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
#'000 #'000 #'000
Finance costs
Interest on bank overdraft and loans 3,094 473 1,339
Interest on obligations under finance leases and hire 160 148 300
purchase contracts
Amortisation of loan issue costs 129 14 34
Other interest 99 3 31
Non recurring finance costs 446 - -
3,928 638 1,704
Investment income
Interest on bank deposits (192) (95) (200)
Other interest (23) (35) (70)
(215) (130) (270)
Net finance costs 3,713 508 1,434
6. Taxation
The Group tax charge represents the estimated annual effective rate of 31%
(2006: 31%) applied to the profit before tax for the period. The interim period
is regarded as an integral part of the annual period and all tax liabilities are
disclosed as such.
7. Earnings per share
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
Adjusted earnings per share excluding amortisation of acquired
intangibles and non recurring items
Basic 11.1p 11.6p 25.3p
Diluted 10.7p 11.4p 24.4p
The calculation of the basic and diluted earnings per share is based on the
following data:
EARNINGS
#'000 #'000 #'000
Earnings for the purposes of basic earnings per share and diluted earnings
per share being net profit attributable to equity holders of the parent 5,193 6,339 13,744
Amortisation of acquired intangibles 1,655 812 1,979
Non recurring items 1,843 - -
Tax on amortisation of acquired intangibles and non recurring items (1,049) (244) (594)
Earnings for the purposes of adjusted earnings per share being net profit
attributable to equity holders of the parent excluding amortisation of
acquired intangibles and non recurring items 7,642 6,907 15,129
NUMBER OF SHARES
Number Number Number
'000 '000 '000
Weighted average number of Ordinary Shares for the purposes of
basic earnings per share 68,946 59,414 59,806
Effect of dilutive potential Ordinary Shares:
Share options 2,411 1,353 2,144
Weighted average number of Ordinary Shares for the purposes of diluted 71,357 60,767 61,950
earnings per share
8. Dividends
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
#'000 #'000 #'000
Amounts recognised as distributions to Shareholders in the year:
Second interim dividend for the year ended 31 March 2007 of
3.174p (2006: nil) per share 1,913 - -
Final dividend for the year ended 31 March 2007 of nil (2006: 2.76p)
per share - 1,642 1,642
Interim dividend for the year ended 31 March 2007 of 1.59p
(2006: 1.38p) per share - - 958
1,913 1,642 2,600
Proposed second interim dividend for the year ended 31 March 2007 of 3.174p
(2006: nil) per share - - 1,913
Proposed interim dividend for the year ended 31 March 2008 of 1.83p
(2007: 1.59p) per share 1,363 944 -
1,363 944 1,913
The proposed interim dividend for the year ended 31 March 2008 is subject to
approval by the Board and has not been included as a liability as at 30
September 2007.
9. Capital expenditure
In the period, there were additions to intangible assets of #18,642,000 relating
to the purchase of ICM Computer Group (see note 15).
In the period, there were additions to property, plant and equipment of
#8,189,197 (2006: #1,753,274). There were no significant disposals of property,
plant and equipment during the period.
10. Bank loans
Unaudited Unaudited
30 September 30 September Audited
2007 2006 31 March
2007
#'000 #'000 #'000
Bank loans 106,028 15,946 26,917
The borrowings are repayable as follows:
Within one year 13,932 4,000 7,000
In more than one year but not more than two years 12,648 4,000 7,000
In more than two years but not more than five years 79,448 7,946 12,917
106,028 15,946 26,917
Less: Amounts due for settlement within 12 months (13,932) (4,000) (7,000)
Amounts due for settlement after 12 months 92,096 11,946 19,917
The funding of the acquisition of ICM Computer Group during the period
necessitated a renegotiation of the Group's borrowing facilities.
The Group entered into the new facilities on 28 March 2007.
(i) a loan of #80m. Repayments commence in September 2008 and will continue
until March 2012. The Company and certain subsidiaries (as guarantor) have
entered into a composite guarantee in favour of Royal Bank of Scotland on
account of the Company and certain subsidiaries (as principal). The loan carries
an interest rate of 1.262% above LIBOR.
(ii) a loan of #3.342m. The loan is due for repayment in full in March 2008.
The Company and certain subsidiaries (as guarantor) have entered into a
composite guarantee in favour of Royal Bank of Scotland on account of the
Company and certain subsidiaries (as principal). The loan carries an interest
rate of 1.262% above LIBOR.
(iii) a revolving credit facility of #24m. The facility is due for repayment in
full in March 2012. The Company and certain subsidiaries (as guarantor) have
entered into a composite guarantee in favour of Royal Bank of Scotland on
account of the Company and certain subsidiaries (as principal). The loan carries
an interest rate of 1.262% above LIBOR.
The loans that existed as at 31 March 2007 were repaid in full on the 12 June
2007 in advance of their due date. The total repayment amounted to #27.0m with
loan break costs incurred of #0.1m.
The Directors estimate the fair value of the Group's bank borrowings to be
equivalent to its book value. At 30 September 2007, the Group had available
#32.158m of undrawn committed borrowing facilities.
11. Financial Instruments
Cash flow hedges
During the period the Group entered into an interest rate swap to hedge risks
associated with interest rate fluctuations on the #80m term loan (note 10). The
swap was entered into on 28 September 2007 and therefore has no material effect
on the interim financial statements. The rate was fixed at 5.78% based on three
month LIBOR. The fair value of the interest rate swap is the same as the
current value.
12. Share capital
Authorised Allotted and Fully Paid
Number #'000 Number #'000
Ordinary shares of 1p each
At 1 April 2006 100,000,000 1,000 59,341,032 593
Exercise of share options - - 147,000 2
At 30 September 2006 100,000,000 1,000 59,488,032 595
Exercise of share options - - 73,850 -
New shares issued on acquisition - - 708,103 7
At 31 March 2007 100,000,000 1,000 60,269,985 602
Exercise of share options - - 156,500 2
New shares issued on acquisition - - 14,047,184 141
At 30 September 2007 100,000,000 1,000 74,473,669 745
13. Share premium account
#'000
At 1 April 2006 36,800
Premium on issue of shares 269
At 30 September 2006 37,069
Premium on issue of shares 75
At 31 March 2007 37,144
Premium on issue of shares 208
At 30 September 2007 37,352
14. Merger reserve
#'000
At 30 September 2006 -
Premium on issue of shares 2,243
Share issue costs (4)
At 31 March 2007 2,239
Premium on issue of shares 55,240
Share issue costs (26)
At 30 September 2007 57,453
15. Acquisition of subsidiary undertaking
On 29 May 2007 the Group acquired control of ICM Computer Group Limited (ICM).
The Group acquired 100% of the share capital of ICM for a cash consideration of
#61,772,000 and the issue of 14,047,184 shares in Phoenix IT Group plc. The
fair value of the equity instruments issued as consideration was the market
value on the date of acquisition. The costs of acquisition amounted to
#3,610,000. ICM is the parent company of a group of companies involved in the
provision of IT services and equipment. This transaction has been accounted for
by the purchase method of accounting.
The following table sets out the book values of the identifiable assets and
liabilities acquired and their provisional fair values to the Group. The initial
accounting for the combination has been determined provisionally because the
fair values to be assigned to the assets, liabilities and contingent liabilities
can be determined only provisionally.
Fair
value
Book to
value Revaluation Group
#'000 #'000 #'000
Fixed assets
Tangible 44,008 2,108 46,116
Goodwill 13,024 (13,024) -
Intangible asset arising on acquisition - 18,642 18,642
Current assets
Stock 4,634 (573) 4,061
Trade and other receivables 14,967 67 15,034
Tax liabilities 692 (692) -
Cash and cash equivalents 771 - 771
Total assets 78,096 6,528 84,624
Creditors
Bank loans 15,753 - 15,753
Trade and other payables 11,508 510 12,018
Provisions - 4,107 4,107
Tax liabilities - 120 120
Deferred tax 599 9,130 9,729
Retirement Benefit Obligation - 2,841 2,841
Deferred income 15,901 - 15,901
Total liabilities 43,761 16,708 60,469
Net assets 34,335 (10,180) 24,155
Goodwill 96,608
120,763
Satisfied by:
Cash 61,772
Shares 55,381
Cash - costs of acquisition 3,610
120,763
Details of the provisional fair value adjustments to the book values of the
acquired identifiable assets and liabilities are as follows:
(a) Tangible fixed assets were revalued in order to reflect their fair value to
the Group.
(b) Intangible assets arising on the acquisition relate to the valuation of the
acquired customer relationships expected to endure beyond the minimum contracted
order terms and the brand name. The intangible asset valuation has been derived
using the estimated net present value of the net future after tax cash flows
which are expected to arise from the customer relationships and the brand name.
(c) Stock was adjusted to reflect the valuation on the date of acquisition.
(d) Trade debtors were revalued by #30,000 to take account of post acquisition
credit notes raised and invoices raised.
(e) Other debtors were adjusted to take into account balances arising as a
result of the exercise of employee share options.
(f) Other creditors were adjusted to take account of additional liabilities on
the date of acquisition.
(g) Provisions comprise dilapidation provisions of #4,107,000.
(h) Corporation tax was adjusted to take account of the deduction available as a
result of the exercise of employee share options.
(i) Deferred tax assets were revalued to take account of the deferred tax
liability that arises from the other fair value adjustments and freehold
property.
(j) The goodwill recognised of #98.6m is attributable to the value of the
established workforce and infrastructure; the future growth potential,
particularly in the business continuity and disaster recovery market; and the
anticipated synergies arising from the acquisition.
ICM contributed #25,283,000 revenue and #2,377,000 to the Group's profit before
tax for the period between the date of acquisition and 30 September 2007.
If the acquisition of ICM had been on the first day of the financial period,
Group revenues for the period would have been #114,980,000 and the Group profit
attributable to equity holders of the parent would have been #5,392,000.
16. Notes to the cash flow statement
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
#'000 #'000 #'000
Profit from operations 11,239 9,695 20,716
Adjustments for:
Depreciation of property, plant and equipment 3,782 2,061 4,104
Loss on disposal of property, plant and equipment (21) - 39
Amortisation of acquired intangibles 1,655 812 1,979
Share option costs 277 418 814
Exchange difference 16 (8) (7)
Operating cash flows before movements in working capital 16,948 12,978 27,645
(Increase)/Decrease in stocks (215) 48 274
(Increase)/Decrease in receivables (7,713) 1,928 (3,733)
(Decrease)/Increase in payables (989) (1,373) 5,699
Increase in deferred income 11,229 133 1,164
Cash generated by operations 19,260 13,714 31,049
Income taxes paid (3,109) (2,861) (6,053)
Interest received 215 130 270
Interest paid (5,039) (179) (1,719)
Net cash from operating activities 11,327 10,804 23,547
Additions to fixtures and equipment during the period amounting to #2,161,281
(2006: #1,432,000) were financed by new finance leases.
17. Reconciliation of net borrowings
Unaudited Unaudited
six months six months Audited
to 30 to 30 year to 31
September September March
2007 2006 2007
#'000 #'000 #'000
Increase in cash and cash equivalents during the period 2,742 8,166 2,263
Movement in borrowings (64,905) (500) (11,831)
Borrowings of business acquired (16,398) - -
Movement in net borrowings during the period (78,561) 7,666 (9,568)
Net borrowings brought forward (27,740) (18,172) (18,172)
Net borrowings carried forward (106,301) (10,506) (27,740)
Cash and cash equivalents 7,765 10,926 5,023
Other current borrowings (15,149) (5,837) (8,937)
Non-current borrowings (98,917) (15,595) (23,826)
Net borrowings carried forward (106,301) (10,506) (27,740)
18. Retirement benefit schemes
Defined benefit scheme
The Group operates a defined benefit scheme for certain of its employees. Under
the scheme the employees are entitled to retirement benefits varying between
1.25% and 1.67% of final salary, multiplied by pensionable service, on
attainment of a retirement age of 65. No other post retirement benefits are
provided. The scheme is a funded scheme.
The most recent full actuarial valuation of the scheme's defined benefit
obligation was carried out at 6 April 2003 and updated to 30 September 2007 by a
qualified independent actuary for IAS 19 purposes.
The major assumptions used by the actuary were:
2007
%
Discount rate 5.975
Expected return on insurance contract 6.40
Expected rate of salary increases 4.15
Future pension increases 3.20
Inflation 3.50
Mortality tables used PxA92(YOB)MC
Amounts recognised in income in respect of the defined benefit scheme are as
follows:
2007
#'000
Current service cost 186
Interest cost 211
Expected return on scheme assets (185)
212
The charge for the period has been included in staff costs. Actuarial gains and
losses have been reported in the statement of recognised income and expense.
The amount included in the balance sheet arising from the Group's obligations in
respect of its defined benefit retirement benefit scheme is as follows:
2007
#'000
Present value of defined benefit obligations 13,442
Fair value of scheme assets (11,247)
Deficit in scheme 2,195
Deferred tax (659)
Liability recognised in the balance sheet 1,536
Movements in the present value of defined benefit obligations were as follows:
2007
#'000
Acquisition during the period 13,366
Current service cost 251
Interest cost 265
Benefits paid (48)
Members' contributions 144
Actuarial losses on obligation (536)
At 30 September 2007 13,442
Movements in the fair value of scheme assets were as follows:
2007
#'000
Acquisition during the period 10,524
Expected return on scheme assets 235
Contributions by employer 532
Members' contributions 144
Benefits paid (48)
Actuarial losses on scheme assets (140)
At 30 September 2007 11,247
The fair value of the scheme assets at the balance sheet date is analysed as
follows:
2007
#'000
Insurance contract 10,589
Cash 658
11,247
The scheme assets do not include any of the Group's own financial instruments,
nor any property occupied by or other assets used by the Group.
The expected rates of return on the insurance contract are determined by
reference to relevant indices published by the London Stock Exchange. The
overall expected rate of return is calculated by weighting the individual rates
in accordance with how the plan assets underlying the insurance contract are
invested.
The history of the scheme for the current and prior periods is as follows:
2007
#'000
Present value of defined benefit obligation 13,442
Fair value of scheme assets (11,247)
Deficit 2,195
Experience adjustments on scheme liabilities (536)
Percentage of scheme liabilities 3.99%
Experience adjustments on scheme assets (140)
Percentage of scheme assets 1.24%
19. Related party transactions
The Group's significant related parties are its associates as disclosed in the
Phoenix IT Group plc Annual Report and Accounts for the year ended 31 March
2007. There were no material related party transactions in the period or the
prior interim period to 30 September 2006.
INDEPENDENT REVIEW REPORT TO PHOENIX IT GROUP PLC
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2007 which comprises the statement of income, the balance sheet, the
statement of recognised income and expense, the cash flow statement and related
notes 1 to 19. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent misstatements
or material inconsistencies with the information in the condensed set of
financial statements.
This report is made solely to the company in accordance with International
Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our
work has been undertaken so that we might state to the company those matters we
are required to state to them in an independent review report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved
by, the directors. The directors are responsible for preparing the half-yearly
financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdoms' Financial Services Authority.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the European Union. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with International Accounting Standard
34, "Interim Financial Reporting," as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the quarterly financial report based on our
review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly, we
do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe
that the condensed set of financial statements in the half-yearly financial
report of the six months ended 30 September 2007 is not prepared, in all
material respects, in accordance with International Accounting Standard 34 as
adopted by the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditor
22 November 2007
London, UK
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR BFLLLDFBZFBB
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