TIDMSQS
RNS Number : 5305B
SQS Software Quality Systems AG
05 March 2014
5 March 2014
SQS Software Quality Systems AG
("SQS" or the "Company")
Results for the year ended 31 Dec 2013
SQS Software Quality Systems AG (AIM: SQS.L), the world's
largest supplier of independent software testing and quality
management services, today announces its results for the twelve
months ended 31 December 2013 (the "period").
Financial Highlights:
-- Turnover increased by 7.5% to EUR225.8m (FY 2012: EUR210.1m)
-- Gross margin up to 32.0% (FY 2012: 31.2%)
-- Adjusted* PBT increased by 34.5% to EUR12.4m (FY 2012: EUR9.2m)
-- Adjusted** EPS increased by 25.0% to EUR0.30 (FY 2012: EUR0.24)
-- Operating cash flow improved to EUR22.8m (FY 2012: EUR14.1m)
-- Net debt*** as of 31 December reduced to EUR2.9m (FY 2012: EUR7.9m)
-- Proposed dividend of EUR0.09 per share (FY 2012: EUR0.07 per share)
* adjusted to add back IFRS effects of EUR0.8m including
amortisation of intangible assets of acquired companies, actuarial
adjustments for pensions, net of tax effects from share capital
increase and extraordinary items of EUR2.6m for goodwill write off
SQS Nordic, EUR0.4m due diligence costs for Thinksoft and
provisions for interest from a tax audit.
** includes adjustments under * and a local tax expense which is
EUR0.4m higher than under IFRS due to deferred taxes.
*** Includes EUR5m cash outflow relating to acquisition of
Thinksoft
Operational Highlights:
-- Acquisition of majority stake of Thinksoft Global Services ("Thinksoft") for up to EUR17.5m
-- Successful placing of new Ordinary Shares to raise GBP11.4m
(before expenses) to fund, in part, the acquisition of
Thinksoft
-- Revenues from Managed Services contracts increased 24.1% to
EUR91.1m (FY 2012: EUR73.4m), now the largest business segment
accounting for 41% of total revenue (FY 2012: 35%)
-- Gross margin improved by 0.8 percentage points to 32.0% (FY
2012: 31.2%) due to an increased test centre share of delivery and
good staff utilization rates
-- Improving visibility with order intake from Managed Services of EUR112.5m (FY 2012: EUR101m)
-- Average revenue per client increased by 23% compared with FY
2012 as a result of continuing strategic focus on larger client
engagements
-- 47% of total billable headcount in offshore/nearshore test centres (FY 2012: 41%)
-- Strong growth in US business, now accounting for 3% of revenues (FY 2012: 0.2%)
Diederik Vos, Chief Executive Officer of SQS, commented, "2013
has been a year of significant progress toward our strategic goals
of increasing SQS's offshore capabilities and focussing our efforts
on servicing larger contracts. These developments are improving our
profitability and, combined with our good revenue growth in the
period, have resulted in a substantial increase in earnings.
"This progress is anticipated to be further accelerated by the
acquisition of Thinksoft, of which the first stage completed at the
end of last year, which increases our offshore headcount, deepens
our expertise in the financial services sector and expands our
international reach. Thinksoft is already delivering a number of
new opportunities and will make a full contribution to the
Company's performance in 2014.
"This, together with solid trading during the first quarter of
2014, gives us confidence in delivering continued growth in the
coming year."
Enquiries:
SQS Software Quality Systems AG Tel. +49 (2203) 91 54 0
Diederik Vos, Chief Executive Officer
Rene Gawron, Chief Financial Officer
Canaccord Genuity - Nomad and Joint Tel +44 (0) 20 7523 8000
Broker
Simon Bridges / Peter Stewart / Cameron
Duncan
Westhouse Securities - Joint Broker Tel. +44 (0)20 7601 6100
Robert Finlay / Antonio Bossi / Paul
Gillam
Walbrook PR Limited Tel. +44 (0)20 7933 8780
Bob Huxford bob.huxford@walbrookpr.com
Helen Cresswell helen.cresswell@walbrookpr.com
About SQS Software Quality Systems
SQS is the world's leading specialist in software quality. This
position stems from over 30 years of successful consultancy
operations. SQS consultants provide solutions for all aspects of
quality throughout the whole software product lifecycle driven by a
standardised methodology, offshore automation processes and deep
domain knowledge in various industries. Headquartered in Cologne,
Germany, the company now employs approximately 3,800 staff (incl.
Thinksoft). SQS (incl. Thinksoft) has offices in Germany, the UK,
Australia, Egypt, Finland, France, India, Ireland, Malaysia, the
Netherlands, Norway, Austria, Singapore, Sweden, Switzerland, South
Africa, UAE and the US. In addition, SQS maintains a minority stake
in a company in Portugal. In 2013, SQS generated revenues of 225.8
million Euros.
SQS is the first German company to have a primary listing on the
AIM (Alternative Investment Market) in London. In addition, SQS
shares are also traded on the German Stock Exchange in Frankfurt am
Main.
With over 7,000 completed projects under its belt, SQS has a
strong client base, including half of the DAX 30, nearly a third of
the STOXX 50 and 20 per cent of the FTSE 100 companies. These
include, among others, Allianz, Beazley, BP, Centrica, Commerzbank,
Daimler, Deutsche Post, Generali, JP Morgan, Meteor, Reuters, UBS
and Volkswagen as well as other companies from the six key
industries of SQS.
For more information, see www.sqs.com.
Chief Executive's Statement
Introduction
We made excellent progress during 2013 with regard to all of our
stated strategic goals. In terms of our target of approaching
EUR500m in revenues by 2017, we recorded organic growth of 7.5% to
EUR225.8m (FY 2012: EUR210.1m) and this will be enhanced by the
acquisition of Thinksoft, which will make a full contribution to
group revenues in 2014 and beyond.
We made substantial progress during the year toward our stated
strategy of growing the proportion of revenues from Managed
Services, which increased by 24.1% and now account for 41% of total
revenues (FY 2012: 35%). Managed Services is now our largest and
most profitable business segment and our continuing strategy to
grow the proportion of billable staff in our nearshore and offshore
operations increased the share of test centre staff significantly
to stand at 47% at the year end (FY 2012: 41% at year end) of total
billable headcount.
Our high margin Specialist Consultancy Services increased
revenues during the period by 0.7% to EUR36.7m (2012: EUR36.4m),
reversing the decline in revenues in this area witnessed during the
first half of 2013.
We also made excellent progress in our plans to focus on larger,
high-value contracts, such that average revenues per client
increased by 23% to EUR 523k during 2013. This significantly
increased the gross margins we achieved for our Regular Testing
Services (RTS) business to 30.2% (2012: 28.4%) with unchanged
overheads of 26.4% of RTS revenue (2012: 26.4%).
All of the above developments contributed to improving our
overall gross margin from 31.2% to 32.0% which, combined with
improving revenues, resulted in increased profitability. Adjusted*
PBT increased by 34.5% to EUR12.4m (FY 2012: EUR9.2m), including a
EUR0.6m reduction in finance costs (adjusted) when compared to 2012
helped by a movement in foreign exchange rates.
Operating cash flow improved to EUR22.8m (FY 2012: EUR14.1m)
with our EBITDA to operating cash flow conversion rate increasing
to 119% (2012: 84%) as a result of improved order and invoicing
workflow control. We continued to use our cash to significantly
reduce our net debt position, which as at 31 December 2013 stood at
EUR2.9m (31 December 2012 EUR7.9m). If we had not acquired
Thinksoft during the period we would have ended 2013 with a net
cash position of EUR2.1m.
We have also continued our rapid penetration of the extensive
and fast growing US market during the year and it is expected that
this will be further enhanced by our acquisition of Thinksoft,
announced in November 2013. Thinksoft greatly deepens our expertise
and presence in the Banking, Financial Services and Insurance
(BFSI) sectors, all part of the six key verticals on which we are
strategically focussed.
We have therefore delivered against all of our strategic
objectives during the year and our increasing scale, both as the
result of organic growth and our acquisition of Thinksoft, better
positions us to capitalise on the on-going growth within the
markets in which we operate, enabling us to bid on ever larger
contracts. We will therefore continue to deploy our existing
strategic initiatives going forward and will assess further
potential acquisition opportunities that can complement our organic
growth and accelerate progress toward our goals.
New Business
In order to improve profitability, particularly in our
traditional Regular Testing Services business segment, we have
continued to focus on larger, higher-value contracts and to
terminate lower margin contracts where profitability could not be
sufficiently improved. We achieved considerable success with this
strategy during the year, reducing the total client numbers to 424
from 486 while revenues increased by 7.5%. Together these
developments resulted in our average annual revenue per client
being 23% higher at 31 December 2013 than at 31 December 2012.
Forward visibility improved by 11% during the year with order
intake for Managed Services deals of EUR112.5m during the year (FY
2012: EUR101m). The order intake comprises a mix of both new
contracts and contract extensions. In addition to this we have
signed a number of new contracts in Specialist Consulting and
Regular Testing Services with high potential to develop into future
Managed Services engagements.
Market Overview
The software testing landscape continued to outperform the
overall IT services market during the year. The 2013 Nelson Hall
market report, showing an expected growth rate of 7% in testing
services for Europe for 2014, has yet to be updated but we are not
aware of any market reports that contradict this analysis. This
growth rate was broken down by Nelson Hall to show forecast growth
of 9.5% per annum until 2018 in 'Specialist Testing Services'
(testing services provided by organisations such as SQS in
standalone contracts) against a fall of 3% per annum until 2018 for
'Traditional Testing Services' (services bundled within a
development contract). This was ascribed to Specialist Testing
Services being perceived by clients as providing faster execution
at reduced cost, and confirms that SQS is firmly positioned in the
fastest growing segment of the market.
The 2013 Nelson Hall report further supported SQS' strategic
focus by highlighting that expected growth was most pronounced in a
number of our key sectors. These included retail&logistics
(driven by m-commerce and e-commerce), energy&utilities (driven
by deregulation) and banking (driven by regulatory compliance).
This also supports the rationale behind our acquisition of
Thinksoft which greatly complements our capabilities within the
banking sector and presence within this market.
The results of the report also supported our Managed Services
strategy in revealing that 57% of decisions to purchase software
testing services are made by efficiency seeking clients and that
there was an increasing move toward larger multi-year contracts.
Managed Services contracts are designed to deliver efficiency and
are typically significantly larger in size than Regular Testing
Services contracts.
In terms of the geographical markets in which we operate, our
core markets within Central Europe continued to perform very
strongly, particularly Germany, Austria and the Netherlands. In
Western Europe, Ireland was very strong, although the UK market
remains relatively weak. In the Nordics business continued to fall,
but at a lower rate than previously as a result of the
restructuring measures we put in place to improve utilisation and
reduce overheads. During the period we wrote off EUR2.6m of
goodwill in relation to our business in this region.
The US is our fastest growing geography, with the market
continuing to show healthy demand for our offerings. Our average
run rate of almost $1m revenue per calendar month during Q4 of 2013
is up 185% from an average of $0.35m per calendar month during Q1
and Q2 last year. We will continue to focus on increasing our
penetration of this market, building organically on our successes
in the manufacturing sector, aided by our partnership with Siemens.
The acquisition of Thinksoft has also provided us with a number of
leads in the financial sector within the US.
Acquisitions
In November of 2013 we announced the acquisition of a majority
stake of up to 52.9% of the issued share capital of Thinksoft for
up to EUR17.5m. The integration of Thinksoft into SQS is
progressing well and Thinksoft will be consolidated into the
accounts of the Company from 1 January 2014 onwards such that it
will make a full contribution to our 2014 results (less minorities
profit share at earnings per share level). Thinksoft achieved
revenues of EUR23.4m in FY 2013, with PBT of EUR5.4m. The tender
offer process is expected to complete in mid-March this year, at
which point the Company will acquire the remaining tender offer
shares and the top up shares from the founders if any are required
in order to achieve the targeted 52.9% interest in Thinksoft share
capital.
This acquisition was very much in line with our strategy of
increasing offshore resources to service our growing Managed
Services business. However, the principle rationale behind the
acquisition was not improving margin through cost savings but
increasing our sales resource, expanding our geographic presence
and improving our domain capabilities in the fast-growing Banking,
Financial Services and Insurance ("BFSI") sectors.
Thinksoft is one of the largest independent software testing
companies focused solely on the BFSI sector, with 84% of its 782
employees based in three test centres in India and the remaining
16% in customer facing sales offices in London, New York, Dubai,
Bangalore and Singapore. Therefore, the acquisition effectively
doubled our offshore delivery capability from India while adding
significant sales capability and banking experience and
expertise.
In addition, Thinksoft added new customer relationships in
geographies in which we are already present, including the UK,
India, Austria and the USA and has also expanded our reach into new
geographies including Singapore, Belgium, Australia and the Gulf
Region. As a result of the acquisition we are currently witnessing
a number of new opportunities in the Financial Services sector,
particularly in the US and APAC. We therefore hope to be able to
announce new contract wins by Thinksoft in the coming months but,
as with all substantial contracts, the bidding processes can be
relatively protracted.
SQS will continue to look at selective acquisitions to
complement our strategy, with a focus on adding regional markets in
Europe and the US.
Strategy
We made strong progress during 2013 with regard to all of our
stated strategic goals.
We remain focussed on building revenues toward our target of
EUR500m by 2017 and recorded organic growth of 7.5% to EUR225.8m
(FY 2012: EUR210.1m) and this will be considerably enhanced by the
acquisition of Thinksoft, which will make a full contribution to
revenues in 2014 and beyond.
Our three primary service offerings are Managed Services (MS) to
meet the demand of clients seeking efficiency, Specialist
Consultancy Services (SCS) to meet the demand of clients seeking
transformation and quality and Regular Testing Services (RTS) to
meet the demand of more price conscious clients, who tend to be
served on a more local basis.
We made substantial progress during the year toward our stated
strategy of increasing the proportion of revenues from Managed
Services. Revenues from Managed Services increased by 24.1% during
the year and now account for 41% of total revenues (FY 2012: 35%).
Managed Services has now become our largest business segment,
having surpassed over a year in advance our initial target of
accounting for 40% of total revenues and we have since revised this
target to 50% by 2016.
We also achieved a further increase in gross margins for our
Specialist Testing business segment which were 36.0% in FY 2013 (FY
2012: 34.9%). Revenues for Specialist Testing grew by 0.8% to
EUR36.7m during the period (2012: EUR36.4m). Although a relatively
low growth rate this reversed the trend seen at H1 2013, where
revenues had been below the previous period as a result of
specialist staff being temporarily engaged in the initial stages of
large Managed Services projects. Specialist Testing accounts for
16% of total revenues and our mid-term goal is for this business
segment to account for 20% of revenues.
We also made excellent progress in our plans to focus on larger,
high-value contracts, such that average revenues per client
increased by 23% during 2013. Regular Testing Services accounted
for 34% of total revenues in 2013, a significant reduction from 38%
in 2012. This reduction was in line with our mid-term strategy of
Regular Testing Services accounting for 25% of total revenues.
We also made progress with our continuing strategy of delivering
margin expansion through better balancing onsite and test centre
delivery on projects.
In addition, we maintain our focus on targeting new business
within the six key industry verticals in which SQS has strongest
domain, application and technology expertise. As a result of this
we have seen significant growth in the manufacturing sector and our
acquisition of Thinksoft is expected to greatly enhance our
presence and pipeline of opportunities in the fast growing BFSI
sector.
The substantial and fast-growing US market continues to be of
strategic focus and was again our fastest growing geography in
2013. The acquisition of Thinksoft is providing further
opportunities in the US and is expected to accelerate our current
growth in the region.
Dividend
In line with our stated policy of paying out 30% of adjusted
profit after tax as a dividend SQS will pay a dividend for the full
year of EUR0.09 per share (2012: EUR0.07). Subject to shareholder
approval the dividend will be paid following the AGM, on 30 May
2014. In accordance with German law, SQS pays one dividend in each
financial year.
Board
Heinz Bons, Principal Consultant at SQS, David Bellin, Chairman
of EMC Ltd (Bicester, UK) and Anne Baumeister as an additional
employee representative to comply with the requirements under
German law, were elected as additional members of the supervisory
board.
In January 2013 Ralph Gillessen was promoted internally to Chief
Marketing Officer and Riccardo Brizzi as Chief Operating Officer
both joined the SQS group main board .
Employees
As mentioned in our full year 2012 results announcement, to
satisfy increasing demand for our Managed Services offerings we
began Phase II of the expansion of our Indian test centre
facilities with the objective of increasing offshore/nearshore
headcount to 48% of total headcount by the start of 2014. We made
strong progress toward this target during the year such that
billable offshore and nearshore staff accounted for 47% of our
total headcount at 31 December 2013, up from 41% at 31 December
2012. From January 2014 onwards including the billable Thinksoft
headcount this number is at 60% of total billable staff.
Total headcount at the period end had increased 22.7% during the
period to 2,789 (31 Dec 2012: 2,272) with an additional c. 210
contractors retained during the period.
Fully loaded costs per fee earning consultant (including all
overheads, but without contractor costs) were EUR90,000 for the
year (2012: EUR96,800), down 7.1%. This decrease came from a
stronger staff mix towards test-centres and cost reductions from
weakening currencies in India and Egypt against the Euro, Sterling
and US Dollar. Despite this significant increase in permanent staff
we continued our careful focus on utilisation and as a result of
this we are pleased to announce that utilisation had further
improved and was slightly ahead of our operational targets at 193
billable days per project ready consultant on an annualised basis
(FY 2012: 192 days).
Outlook
2013 has been a year of significant progress toward our
strategic goals of increasing SQS's offshore capabilities and
focussing our efforts on servicing larger contracts. These
developments are improving our profitability and, combined with our
revenue growth in the period, have resulted in a substantial
increase in earnings.
This progress is anticipated to be further accelerated by the
acquisition of Thinksoft, of which the first stage completed at the
end of last year, which increases our offshore headcount, deepens
our expertise in the financial services sector and expands our
international reach. Thinksoft is already delivering a number of
new opportunities and will make a full contribution to the
Company's performance in 2014.
This, together with solid trading during the first quarter of
2014, gives us confidence in delivering continued growth in the
coming year.
Diederik Vos
Chief Executive Officer
5 March 2014
Financial Review
Summary
SQS Group turnover grew by 7.5% to EUR225.8m (FY 2012:
EUR210.1m) during the period.
As part of our mid-term strategy, a new organizational structure
has been put in place at the beginning of 2013. Instead of two
large regions the focus is now on the types of business.
The business units, which now represent the accounting segments
according to IFRS 8, are:
-- Managed Services (MS) to meet the demand of clients seeking
efficiency in long-term engagements (between twelve months up to
five years) of which a growing share (in many cases) is delivered
from nearshore and offshore test centres. This also includes long
term engagements for testing standard software package
products;
-- Specialist Consultancy Services (SCS) to meet the demand of
clients seeking transformation and quality in specialized projects
with skills like SAP, PLM (Product Lifecycle Management), Process
Consulting and Improvement, and Load and Performance Testing as
long as these resources are not active in MS projects; and
-- Regular Testing Services (RTS) to meet the demand of more
price conscious clients in IT projects who tend to be served with a
smaller number of consultants on a more local basis and typically
contracted for a short term (e.g. three months).
Alongside these major segments we are active via contractors (as
far as these have not been included in MS), and in training &
conferences and software product testing tools summarized as
"Other".
Due to a change in valuation of Swiss pension assets required
under IAS 19 by changes in regulations in Switzerland during 2013,
there has been a minor adjustment of the 2012 P&L (EUR-60k),
balance sheet and cash flow statement, which are therefore labelled
as "adjusted" in the attached tables. The effect of this has been
minor, with no visible effect on earnings per share for 2012.
Breakdown by business unit
Managed Services (MS)
Revenue in MS, our largest segment, amounted to EUR91.1m in the
period (2012: EUR73.4m), an increase of 24.1%. The improvement in
revenue was entirely organic and predominantly came from the
extension of existing long term managed services contracts.
Specialist Consultancy Services (SCS)
This segment only saw a small increase during the period of 0.7%
to EUR36.7m (2012: EUR36.4m). The low growth rate has been the
result of demand for these ERP, PLM and process specialists in MS
engagements (thus their revenue and margin contribution is counted
under MS above), which we expect to be of a temporary nature.
Regular Testing Services (RTS)
Revenues from this segment decreased in line with our strategic
goals during the period with a reduction of -2.8% to EUR77.0m
(2012: EUR79.3m). As a result this segment represented 34% of total
revenues during the period (2012: 38%).
Other
Revenue in the 'Other' segment amounted to EUR21.0m in the
period (2012: EUR21.0m), no change against last year. Direct
revenues from tools and trainings were lower. This is a result of
our sales focus on the growth segments MS and SCS above mainly
delivered by SQS consultants. Also in many client engagement SQS
own tools are increasingly delivered as part of the service revenue
("Software as a Service") and would thus be reported under e.g. MS
above.
Margins and Profitability
Gross profit improved by 10.2% to EUR72.3m (2012: EUR65.6m),
with the gross margin at 32.0% (2012: 31.2%). The increase in the
gross margin was mainly influenced by an improved gross margin from
Managed Services contracts with 34.2% (2012: 33.5%) due to a
growing proportion of contracts now entering a more mature life
cycle phase. Gross margin from SCS was 36.0% (2012: 34.9%) and RTS
improved to 30.2% (2012: 28.4%) as a result of our focus on more
profitable client engagements.
Adjusted* profit before tax for the period was EUR12.4m (2012:
EUR9.2m), an increase of 34.5%, with the adjusted * profit margin
rising to 5.5% (2012: 4.4%). The profit before taxes benefitted
from the improved gross margin and substantially lower finance
costs of EUR0.9m (2012: EUR1.4m) mostly due to a positive impact
from exchange rate gains of +EUR0.2m (2012: -EUR0.25m from exchange
rate losses).
Adjusted** earnings per share increased to EUR0.30 (2012:
EUR0.24) and were calculated on the undiluted and weighted average
number of shares of 28,201,084 (2012: 27,893,289) which had
increased after the placing of c. 2.6m new shares in November
2013.
* adjusted to add back IFRS effects of EUR0.8m including
amortisation of intangible assets of acquired companies, actuarial
adjustments for pensions, net of tax effects from share capital
increase and extraordinary items of EUR2.6m for goodwill write off
SQS Nordic, EUR0.4m due diligence costs for Thinksoft and
provisions for interest from a tax audit.
** includes adjustments under * and a local tax expense which is
EUR0.4m higher than under IFRS due to deferred taxes.
Costs
General & Administrative expenses (before adjustments of
EUR0.8m and EUR2.6m under * above) for the period were EUR38.5m
(2012: EUR35.6m). While slightly ahead as a percentage of revenue
to 17.1%, the absolute growth was mainly due to increased hiring,
staff training costs and investment in the US business.
Sales & Marketing costs for the period were EUR17.3m (2012:
EUR15.9m) representing 7.7% of sales (2012: 7.6%).
Research & Development expense during the period reduced to
EUR3.2m (2012: EUR3.5m) representing 1.4% (2012: 1.7%) of revenues.
Research and development investment was mainly focused on the
development of software testing tools and our proprietary PractiQ
methodology.
Cash Flow and Financing
Cash flow from operating activities increased by 62.2% to
EUR22.8m (2012: EUR14.1m). This resulted from a further improvement
of the EBITDA to operating cash flow conversion rate of 119% (2012:
84%) due to improved order and invoicing workflow, particularly
with our largest clients, despite an increase in total debtor days
to 64 (2012: 58).
Cash outflow for investments increased to EUR23.9m (2012 EUR4.4m
outflow) mainly due to an investment of EUR17.8m for the majority
of the shares of Thinksoft. Of that an amount of EUR8.2m was paid
to acquire 26% of the currently issued share capital of Thinksoft
in December 2013. The remaining EUR9.6m were paid to an escrow
account in India to fund the future acquisition of a further 26% of
the Thinksoft share capital in an open offer procedure, which is
expected to close in March 2014. As a result no control of
Thinksoft was obtained in 2013 but the company will be consolidated
in the accounts of SQS group from 1 January 2014 onwards.
A further cash outflow of EUR1.3m occurred for the second phase
of the building of our India based offshore test centre in Pune
creating another c. 350 work spaces.
Cash inflow from financing activities was EUR9.6m (2012: EUR3.5m
outflow) reflecting the further redemption of loans and lease
contracts, an increased dividend payment and an inflow of EUR13.9m
from the placing of 2.6m new shares.
Balance Sheet
We closed the period with EUR15.2m (2012: EUR11.9m) of cash on
the balance sheet and borrowings of EUR18.1m (2012: EUR19.7m). The
resulting net debt position at the period end was therefore EUR2.9m
(2012: EUR7.9m). These movements are in line with our policy to
reduce net debt by freeing up positive cash flow from operations.
Without the investment into Thinksoft we would have ended with a
net cash position of EUR2.1m.
The restructuring measures we have taken in the Nordic region
have led us to review the carrying value of those assets resulting
in a write off of EUR2.8m (incl. exchange rate differences) to now
EUR3.0m.
The number of ordinary shares in issue has increased to
30,562,679 by 2,618,507 ordinary shares for a placing and
additional 50,883 ordinary shares from the exercise of employee
stock options
Taxation
The reported tax charge of EUR3.4m (2012: EUR1.9m) includes
current tax expenses of EUR3.7m (2012: EUR2.4) and deferred taxes
of EUR-0.4m (2012: deferred taxes of EUR-0.5m). The tax rate on
local GAAP results was 30% (2012: 27%), slightly increased above
the normalized tax rate of 29% from an accrual for tax payments
resulting from a tax audit in Germany.
For the full year 2014, we expect an actual tax rate of 29%.
Foreign Exchange
Approximately 58% of the Group's turnover is generated in Euros.
For the conversion of revenues and costs generated in local
currencies into Euro, the relevant official average exchange rate
for the twelve-months-period of 2013 was chosen. For the conversion
of the balance sheet items from local currency into Euro, the
official exchange rate as at 31 December 2013 was used.
Due to a general strengthening of the Euro, foreign exchange had
a small EUR89,000 negative translational impact on earnings for the
period. Had the Pound/Swiss Franc/Indian Rupee/Swedish
Krona/US-Dollar to Euro exchange rates remained the same as in
2012, our non-Euro revenues for the period would have been EUR3.2m
higher, resulting in an increase in PBT of EUR89,000.
International Financial Reporting Standards (IFRS)
The Consolidated Financial Statements of SQS and its subsidiary
companies ("SQS Group") are prepared in conformity with all IFRS
(International Financial Reporting Standards) and Interpretations
of the IASB (International Accounting Standards Board) which are
mandatory at 31 December 2013.
The SQS Group Consolidated Financial Statements for the twelve
month period ended 31 December 2013 were prepared in accordance
with uniform accounting and valuation principles in Euros.
Rene Gawron
Chief Financial Officer
5 March 2014
Consolidated Income Statement
for the year ended 31 December 2013 (IFRS)
Year ended Year ended
31 December 31 December
2013 2012
(adjusted)
EURk (Notes) audited audited
Revenue 225,830 210,111
Cost of sales (4) 153,529 144,480
Gross profit 72,301 65,631
General and administrative expenses (4) 39,367 36,989
Sales and marketing expenses (4) 17,344 15,879
Research and development expenses (4) 3,228 3,549
Earnings from operating activities
before amortisation (EBITA) 12,362 9,214
Amortisation of goodwill 2,638 0
Profit before tax and finance costs
(EBIT) 9,724 9,214
Finance income (5) 815 1,044
Finance costs (5) 1,988 2,455
-------------- ------------
Net finance costs (5) -1,173 -1,411
Profit before taxes (EBT) 8,551 7,803
Income tax expense (6) 3,376 1,922
Profit for the year 5,175 5,881
Attributable to:
Owners of the parent 5,130 5,833
Non-controlling interests 45 48
Consolidated profit for the year 5,175 5,881
============== ============
Earnings per share, undiluted (EUR) (7) 0.18 0.21
============== ============
Earnings per share, diluted (EUR) (7) 0.18 0.21
============== ============
Adjusted earnings per share (EUR),
for comparison only (7) 0.30 0.24
============== ============
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2013 (IFRS)
Year ended Year ended
31 December 31 December
2013 2012
(adjusted)
EURk audited audited
Profit for the year 5,175 5,881
Exchange differences on translating foreign operations -1,845 1,559
Other comprehensive income to be reclassified
to profit or loss in subsequent periods -1,845 1,559
Gains/loses arising from cash flow hedges 194 -193
Re-measurement gains (losses) on defined benefit plans 408 -801
Other comprehensive income not being reclassified
to profit or loss in subsequent period 602 -994
Other comprehensive income for the year, net of tax -1,243 565
Total comprehensive income for the year, net of tax 3,932 6,446
Attributable to:
Owners of the parent 3,887 6,398
Non-controlling interests 45 48
Total comprehensive income for the year 3,932 6,446
=============== ============
Consolidated Statement of Financial Position
as at 31 December 2013 (IFRS)
31 December 31 December 1 January 2012
2013 2012
(adjusted) (adjusted)
EURk (Notes) audited audited audited
Current assets
Cash and cash equivalents 15,248 11,879 9,270
Trade receivables 49,958 42,754 40,396
Other receivables 12,433 2,751 2,657
Work in progress 7,655 9,493 7,622
Income tax receivables 467 1,134 1,097
----------- ----------- --------------
85,761 68,011 61,042
Non-current assets
Intangible assets (8) 5,699 7,608 9,620
Goodwill (8) 51,733 49,062 48,418
Property, plant and equipment 5,737 4,781 5,529
Financial assets 8,179 0 0
Income tax receivables (6) 1,494 1,050 1,229
Deferred tax assets (6) 2,383 2,212 1,884
----------- ----------- --------------
75,225 64,713 66,680
Total Assets 160,986 132,724 127,722
=========== =========== ==============
Current liabilities
Bank loans and overdrafts 7,100 7,994 6,659
Finance lease 633 652 707
Trade payables 8,700 5,487 5,470
Other provisions 9 9 10
Income tax accruals (6) 1,045 856 956
Other current liabilities 29,572 23,727 25,212
----------- ----------- --------------
47,059 38,725 39,014
Non-Current liabilities
Bank loans 11,021 11,750 11,937
Finance lease 429 1,039 1,241
Other provisions 5 5 5
Pension provisions 2,837 2,490 1,496
Deferred tax liabilities (6) 1,384 1,581 2,139
Other non-current liabilities 8,895 3,090 2,897
----------- ----------- --------------
24,571 19,955 19,715
Total Liabilities 71,630 58,680 58,729
=========== =========== ==============
Equity (9)
Share capital 30,563 27,893 27,893
Share premium 46,882 35,560 35,560
Statutory reserves 53 53 53
Other reserves -6,077 -3,867 -5,233
Retained earnings 17,863 14,352 10,715
----------- ----------- --------------
Equity attributable to owners of the parent 89,284 73,991 68,988
Non-controlling interests 72 53 5
----------- ----------- --------------
Total Equity 89,356 74,044 68,993
----------- ----------- --------------
Equity and Liabilities 160,986 132,724 127,722
=========== =========== ==============
Consolidated Statement of Cash Flows
for the year ended 31 December 2013 (IFRS)
Year ended Year ended
31 December 31 December
2013 2012
(adjusted)
EURk audited audited
Net cash flow from operating activities
Profit before taxes 8,551 7,803
Add back for
Depreciation and amortisation 9,082 7,521
Loss on the sale of property, plant and equipment 137 13
Other non-cash income not affecting payments 2,449 534
Net finance costs 1,173 1,411
------------ ------------
Operating profit before changes in the net current assets 21,392 17,282
Increase in trade receivables -7,204 -2,358
Decrease/Increase in work in progress and other receivables 1,629 -2,173
Increase in trade payables 3,213 18
Decrease in other provisions 0 -1
Increase (Decrease) in pension provisions -134 -143
Decrease (Increase) in other liabilities and deferred income 3,930 1,448
------------ ------------
Cash flow from operating activities 22,826 14,073
Interest payments -1,375 -1,640
Tax payments -3,705 -2,020
------------ ------------
Net cash flow from operating activities 17,746 10,413
Cash flow from investment activities
Purchase of intangible assets -3,135 -3,853
Purchase of property, plant and equipment -3,091 -1,000
Purchase of net assets by associated company -17,753 0
Interest received 108 481
------------ ------------
Net cash flow from investment activities -23,871 -4,372
Cash flow from financing activities
Dividends paid -1,953 -1,395
Capital increase 13,854 0
Repayment of finance loans -7,721 -6,116
Increase of finance loans 6,098 4,262
Increase of finance lease 0 423
Redemption / termination of finance lease contracts -629 -680
------------ ------------
Net cash flow from financing activities 9,649 -3,506
Change in the level of funds affecting payments 3,524 2,535
Changes in cash and cash equivalents due to exchange rate movements -155 74
Cash and cash equivalents
at the beginning of the period 11,879 9,270
------------ ------------
Cash and cash equivalents
at the end of the period 15,248 11,879
============ ============
Consolidated Statement of Changes in Equity
for the year ended 31 December 2013 (IFRS)
EURk Attributed to owners of the parent Non- Total
Cash
Share Share Statutory Other flow Translation Retained Total controlling Equity
capital premium reserves reserves hedge of foreign earnings interest
reserve operations
31 December 2011 (audited) 27,893 35,560 53 -1,134 -480 -3,619 10,504 68,777 5 68,782
Adjustment according to IAS 19
(revised) 211 211 211
1 January 2012 (adjusted) 27,893 35,560 53 -1,134 -480 -3,619 10,715 68,988 5 68,993
Dividends paid -1,395 -1,395 -1,395
Transactions with owners of the
parent 0 0 -1,395 -1,395 -1,395
Profit for the period 5,833 5,833 48 5,881
Exchange differences on translating
foreign operations 1,559 1,559 1,559
Re-measurement losses on defined
benefit
plans -801 -801 -801
Losses arising from cash flow
hedges -193 -193 -193
Total comprehensive income -193 1,559 5,032 6,398 48 6,446
31 December 2012 (adjusted) 27,893 35,560 53 -1,134 -673 -2,060 14,352 73,991 53 74,044
Cash dividends paid -1,953 -1,953 -1,953
Capital increase against cash 2,619 11,034 13,653 13,653
Capital increase from the exercise
of stock options 51 150 201 201
Transaction cost of the issue of
the
new shares -559 -559 -559
Transactions with owners of the
parent 2,670 11,184 -559 -1,953 11,342 11,342
Acquisition of non-controlling
interests -74 -74 -26 -100
Share-based payments 138 138 138
Profit for the period 5,130 5,130 45 5,175
Exchange differences on translating
foreign operations -1,845 -1,845 -1,845
Re-measurement gains on defined
benefit
plans 408 408 408
Gains arising from cash flow hedges 194 194 194
Total comprehensive income 194 -1,845 5,538 3,887 45 3,932
31 December 2013 (audited) 30,563 46,882 53 -1,693 -479 -3,905 17,863 89,284 72 89,356
Notes to the Consolidated Financial Statements at 31 December
2013
1. Description of business activities
SQS, based in Cologne, Germany, is one of the largest
independent pure play providers of software testing and quality
management services by revenue. SQS is independent from software
vendors and other IT service suppliers. It can therefore provide
unbiased opinions to customers on software products and projects it
is engaged to assess and improve. SQS offers services designed to
support the quality of software and IT systems from initial project
definition through the development stage and up to final
implementation and, thereafter, in ongoing maintenance.
For more than thirty years, SQS has been offering a
comprehensive range of consulting services for enterprise and
technical software systems to its clients who include "blue chip"
companies in a variety of sectors, such as financial services,
telecommunications, logistics and manufacturing. SQS currently has
2,789 employees at the end of 2013 (previous year 2,272 employees)
across Europe, Asia, North America and Africa. SQS has a strong
presence in Germany and the UK and offices in Austria, Egypt,
Finland, France, India, Ireland, the Netherlands, Norway, South
Africa, Sweden, Switzerland, and the United States. Furthermore,
SQS has a minor stake in an operation in Portugal and a partnership
operation in Spain.
SQS is listed on the London Stock Exchange (AIM) and is also
traded on Deutsche Börse, Frankfurt.
2. Summary of Significant Accounting Policies
Basis of preparation and statement of compliance
The Consolidated Financial Statements of SQS and its subsidiary
companies ("SQS Group" or "SQS Konzern") are prepared in conformity
with all IFRS Standards (International Financial Reporting
Standards) and Interpretations of the IASB (International
Accounting Standards Board) approved by the European Commission and
translated into the German language which are to be applied for
those financial statements whose reporting period starts on or
after 1 January 2013.
The Financial Information has been prepared on an historical
cost basis. The Financial Information is presented in Euro and
amounts are rounded to the nearest thousand (EURk) except when
otherwise indicated.
First-time application of new standards and changes in
accounting policies
SQS has applied the Standards and Interpretations of the IASB as
applicable in the EU which are binding for financial years
commencing on or after 1 January 2013.
SQS does not apply any further changed or newly passed standards
prior to the implementation date stipulated. Further, according to
the assessment of SQS, the application of these standards would not
have any material effect on the financial statements of SQS
Group.
The adoption of the following amended IFRS and IFRIC
interpretations was mandatory for accounting periods beginning on 1
January 2013:
IFRS 1 First-time Adoption of International Financial Reporting
Standards - Government Loans - Amendments to IFRS 1
IFRS 1 First-time Adoption of International Financial Reporting Standards - Regulations for hyperinflation and the removal of fixed dates of application for first-time adopters
IFRS 7 Financial Instruments: Disclosures - Offsetting Financial
Assets and Financial Liabilities (Amendment)
IFRS 13 Fair Value Measurement - Standardization of rules for measuring Fair Value
IAS 1 Presentation of Items of Other Comprehensive Income (Amendment)
IAS 12 Income Taxes - Recovery of Underlying Assets (Amendment)
IAS 19 Employee benefits - Abolition of corridor method
IFRS 10, 12, IAS 27 Investment Entities - Exemption to the
consolidation requirements for investment
entities
Furthermore, in the 2009-2011 annual improvements cycle, the
IASB issued improvements on existing standards.
The impact of new standards and amendments that require
restatements of previous financial statements of SQS Group are as
follows:
IAS 1 Presentation of Items of Other Comprehensive Income - Amendments to IAS 1
The amendments to IAS 1 introduce a grouping of items presented
in OCI. Items that will be reclassified ('recycled') to profit or
loss in the future have to be presented separately from items that
will never be reclassified. The amendment affects presentation only
and has no impact on the Group's financial position or
performance.
IAS 1 Clarification of the requirement for comparative information (Amendment)
This amendment clarifies the difference between voluntary
additional comparative information and the minimum required
comparative information. An entity must include comparative
information in the related notes to the financial statements when
it voluntarily provides comparative information beyond the minimum
required comparative period. The amendment clarifies that the
opening statement of financial position (as at 1 January 2012 in
the case of the SQS Group), presented as a result of retrospective
restatement or reclassification of items in financial statements
does not have to be accompanied by comparative information in the
related notes. As a result, the SQS Group has not included
comparative information in respect of the opening statement of
financial position as at 1 January 2012. The amendment affects
presentation only and has no impact on the Group's financial
position or performance.
IAS 19 Employee Benefits (Revised 2011)
The Group applied IAS 19 (Revised 2011) retrospectively in the
current period in accordance with the transitional provisions set
out in the revised standard. The opening statement of financial
position of the earliest comparative period presented (1 January
2012) and the comparative figures have been accordingly
restated.
As a result, the SQS Group has made certain changes in the
measurement of the obligations for pensions, especially in view of
the accounting for defined benefit plans.
The key change in the measurement of the pension obligation was
in Switzerland and relates primarily to the inclusion of risk
sharing elements in the valuation of the defined benefit liability.
These were especially employee contributions. As a result, the
adjusted value of the defined benefit obligation as at 1 January
2012 has declined.
The change in the measurement of the defined benefit obligations
relates also to the treatment of other expected administrative
costs. Furthermore, all past service costs are recognised at the
earlier of when the amendment/curtailment occurs or when the
related restructuring or termination costs are recognised (rather
than spread such costs over the term of obligations).
The interest cost and expected return on plan assets used in the
previous version of IAS 19 are replaced with a net-interest amount
under IAS 19 (Revised 2011), which is calculated by applying the
discount rate to the net defined benefit liability at the start of
each annual reporting period. The expense arising from unwinding
the interest on pension obligations is now offset against interest
income from plan assets.
All re-measurements of the net defined benefit liability were
recognised through other comprehensive income (OCI). In previous
financial statements for the year ended 31 December 2012, the
difference between the expected return of plan assets and interest
income of plan assets were recognised in profit or loss.
The adjustments to the provision for pre-retirement part-time
working arrangements result from a change in the measurement of
top-up amounts, which are now required, in accordance with revised
IAS 19, to be recognised as other long-term employee benefits.
Under the new rules, the expenses for top-up amounts are
required to be recognised over the period of the working phase of
such arrangements and then released over the period of the
work-free-phase (rather than recognising the full amount as a
provision at the start of the working phase).
The removal of the corridor approach and other amendments to IAS
19 did not have any impact on the financial statements of the SQS
Group because this approach was not applied in the previous
financial statements.
The new rules were required to be applied retrospectively.
For this reason, the statement of financial position at 1
January 2012 and at 31 December 2012 has been adjusted as
follows:
As of As of
and for 1 January
the year 2012
ended
31 December
2012
----------------------------------- ------------- -----------
EURk EURk
Statement of Financial Position:
Deferred tax assets (116) (46)
Pension provisions (536) (165)
Retained earnings 420 211
Consolidated Income Statement:
Expenses for retirement benefits (60) -
Net effect on consolidated profit (60) -
for the year
Other Comprehensive Income:
Actuarial gains (+) and losses 480 -
(-)
The adjustments resulting from revised IAS 19 did not have any
cash flow impact. For this reason, there are no changes in the cash
flow for the Group for the year 2012. However, there are some
shifts between individual reconciliation line items.
IAS 19 (Revised 2011) also requires more extensive
disclosures.
The following standards and amendments to existing standards
have been published and have been endorsed by the European
Commission for the group's accounting periods beginning after 1
January 2013 or later periods, but the group has not early adopted
them:
IFRS 9 Financial Instruments: Classification and Measurement -
Regulations for the accounting of financial instruments measured at
amortized cost or Fair Value
IFRS 10 Consolidated Financial Statements - Guidelines for
limiting the scope of consolidation
IFRS 11 Joint Arrangements - Regulations for accounting
treatment of jointly controlled entities
IFRS 12 Disclosure of Interests in Other Entities - Disclosure
requirements for interests held in other entities
IFRS 10, 11 and 12 Transitional guidelines until these standards applied
IFRS 14 Regulatory Deferral Accounts (not yet endorsed)
IAS 19 Employee Benefits Recognition of contributions from
employees or third parties to defined benefit plans
IAS 27 Separate Financial Statements - Limiting IAS 27 to separate financial statements
IAS 28 Investments in Associates and Joint Ventures - Revision
of accounting rules for associated companies and joint ventures
IAS 32 Financial Instruments: Presentation - Offsetting of
financial assets and liabilities
IAS 36 Impairment of assets - Additional disclosures relating
the different levels of Fair Value measurement as well as the
valuation methods applied and key assumptions for level 2 and level
3 valuations
IAS 39 Financial Instruments: Recognition and Measurement - Novation of derivatives
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
IFRIC 21 Levies - Recognition of obligations to pay levies (not yet endorsed)
Furthermore, in the 2010-2013 annual improvements cycle, the
IASB issued improvements on existing standards. Those amendments
have not yet been endorsed by the EU.
None of those standards and amendments will most likely have any
material impact on the annual consolidated financial statements of
the SQS Group.
Basis of consolidation
The consolidated financial statements comprise the financial
statements of SQS Software Quality Systems AG and its subsidiaries
as at 31 December each year. Subsidiary company financial
statements are prepared on a basis consistent with those of other
SQS Group companies. All companies in the SQS Group have the same
accounting reference date of 31 December.
Subsidiaries are consolidated from the date on which control is
transferred to the SQS Group and cease to be consolidated from the
date on which control is transferred out of the SQS Group. SQS
obtains and exercises control through voting rights.
All inter-company balances and transactions, including
unrealised profits arising from intra-group transactions, have been
eliminated in full.
As at 31 December 2013, the Company held interests in the share
capital of more than 20% of the following undertakings (all of
those subsidiaries have been consolidated):
Consolidated companies Country 31 December 2013 31 December 2012
of incorporation
----------------------------- ----------------------------
Share Equity Result Share Equity Result
of for of for
capital the capital the
year year
% EURk EURk % EURk EURk
SQS Group Limited, London UK 100.0 7,933 1,074 100.0 9,337 2,125
SQS Software Quality Systems
(Ireland) Ltd., Dublin Ireland 100.0 7,130 2,398 100.0 4,750 1,718
SQS Nederland BV, Utrecht The Netherlands 95.1 1,234 928 90.5 306 511
SQS GesmbH, Vienna Austria 100.0 4,595 2,314 100.0 3,781 1,732
SQS Software Quality Systems
(Schweiz) AG, Zurich Switzerland 100.0 3,118 484 100.0 1,792 (9)
SQS Group Management Consulting
GmbH, Vienna Austria 100.0 3,319 1,617 100.0 3,203 1,490
SQS Group Management Consulting
GmbH, Munich Germany 100.0 1,406 540 100.0 866 237
SQS Egypt S.A.E, Cairo Egypt 100.0 1,106 924 100.0 258 309
SQS Software Quality Systems
Nordic AB, Kista Sweden 100.0 (880) (602) 100.0 (289) (860)
SQS India, Pune India 75.0 2,567 2,107 75.0 460 329
SQS France SASU, Paris France 100.0 (95) (8) 100.0 (87) (79)
SQS USA Inc., Naperville
(Illinois) USA 75.0 (379) (2,261) 75.0 1.882
--------------------------------- ------------------- --------- -------- -------- --------- -------- -------
On 1(st) October 2013 SQS AG has acquired non-controlling
interests in SQS Nederland BV increasing its shares to 95.1% for an
amount of EUR 100k.
SQS AG holds 15% of the shares of SQS Portugal Lda with a book
value of EUR nil (at 31 December 2012: EUR nil).
On 8th November 2013 SQS AG signed a share purchase agreement in
order to acquire up to 53.57 % shares of the Indian Company
Thinksoft Global Service Limited ("Thinksoft"), Chennai. Thinksoft
Global Services Ltd. is one of largest independent software testing
companies focused on the Banking, Financial Services and Insurance
sector ("BFSI") and is listed on the Bombay Stock Exchange (the
"BSE") and National Stock Exchange (the "NSE") of India.
On 17 December 2013, SQS AG acquired a first portion of 26 % of
the shares and voting rights in Thinksoft. The purchase price for
this first portion was EUR8,179k. The second portion is likely to
be acquired in March 2014. As SQS did not control and was not able
to exercise significant influence on the entity on 31 December
2013, Thinksoft has not been consolidated yet. In the statement of
financial position the acquired shares are shown under other
financial investments.
Foreign currency translation
The Euro (EUR) is the functional and reporting currency of the
parent company and its Euroland subsidiaries. For these entities,
transactions in foreign currencies are initially recorded in the
functional currency at the exchange rates valid at the date of the
transaction. Monetary assets and liabilities denominated in such
foreign currencies are retranslated at the rates prevailing on the
balance sheet date. All differences arising from translation of
monetary items are recognised in profit or loss.
Translation differences on items whose fair value gain or loss
is recognised in other comprehensive income or profit or loss are
recognised in other comprehensive income or profit or loss,
respectively.
The following subsidiaries have their own functional
currency:
Subsidiary Functional currency
-------------------------------------- ----------------------
SQS Group Ltd. with business activity GBP (Pounds Sterling)
in UK
-------------------------------------- ----------------------
SQS Software Quality System (Schweiz) CHF (Swiss Franc)
AG
-------------------------------------- ----------------------
SQS India INR (Indian Rupee)
-------------------------------------- ----------------------
SQS India with business in USA USD (US-Dollar)
-------------------------------------- ----------------------
SQS Nordic with business in Sweden SEK (Swedish Crona)
-------------------------------------- ----------------------
SQS Nordic with business in Norway NOK (Norwegian
Crona)
-------------------------------------- ----------------------
SQS Egypt EGP (Egyptian
Pound)
-------------------------------------- ----------------------
At the reporting date, the assets and liabilities (including any
goodwill) of these subsidiaries are translated into Euros at the
exchange rate valid at the reporting date. As the exchange rates
did not fluctuate significantly in 2013, the items of the income
statements of these entities were translated at the weighted
average exchange rate for the year 2013. The exchange differences
arising on translation are recognised in other comprehensive income
and accumulated in a separate reserve in equity.
On disposal of a foreign entity, the cumulative amount of
exchange differences relating to that particular foreign entity is
reclassified from equity to profit or loss when the gain or loss on
disposal is recognised.
3. Segmental reporting
Based on the international organisational structure for SQS
group a new organizational structure is in place since 1 January
2013. Instead of different regions the focus is now on the types of
our business. Our three primary service offerings are
-- Managed Services (MS) to meet the demand of clients seeking
efficiency in long-term engagements (between six months up to five
years) of which a growing share (in many cases) is delivered from
nearshore and offshore test centres. This also includes long term
engagements for testing standard software package products,
-- Specialist Consultancy Services (SCS) to meet the demand of
clients seeking transformation and quality in specialized projects
with skills like SAP, PLM (Product Lifecycle Management), Process
Consulting and Improvement, and Load and Performance Testing as
long as these resources are not active in MS projects,
-- Regular Testing Services (RTS) to meet the demand of more
price conscious clients who tend to be served on a more local basis
and are typically contracted for a short term (e.g. three
months).
Beside these major sectors there is the business with
contractors (as far as these have not been included in MS),
training & conferences and software testing tools. Each of
these minor operating segments represent less than 10 % of the
Group's revenues and the Group's profit. Thus, all these other
segments are presented as "Other".
The group management board consisting of CEO (Chief Executive
Officer), CFO (Chief Financial Officer), COO (Chief Operating
Officer) and CMO (Chief Market Officer) monitors the results of the
operating segments separately in order to allocate resources and to
assess the performance of each segment. Segment performance is
evaluated based on operating profit.
Non-profit centres represent important functions such as
Portfolio Management, Marketing, Finance & Administration, IT,
Human Resources, and Sales Support.
The non-profit centres are not allocated to the operating
segments as they provide general services to the whole group. Their
costs are not allocated and shown under 'Non-allocated costs'.
The figures regarding the year 2012 have been amended according
to the new structure of the operating segments.
The assets and liabilities relating to the operating segments
are not reported separately to the Group Management Board. Finance
costs and income taxes are managed on a group basis. Therefore they
are not allocated to operating segments.
The following tables present revenue and profit information
regarding the SQS Group's reportable segments for the years ended
31 December 2013 and 2012.
2013 MS SCS RTS Other Total
EURk EURk EURk EURk
Revenues 91,096 36,662 77,049 21,024 225,830
Segment profit or
loss 31,111 13,184 23,305 4,701 72,301
Non-allocated costs (59,939)
Amortisation of goodwill (2,638)
EBIT 9,724
Financial result (1,173)
Taxes on income (3,376)
Result for the period 5,175
-------------------------- ------- ------- ------- ------- ---------
2012 MS SCS RTS Other Total
EURk EURk EURk EURk
Revenues 73,394 36,401 79,298 21,018 210,111
Segment profit or
loss 24,568 12,704 22,521 5,838 65,631
Non-allocated costs (56,417)
EBIT 9,214
Financial result (1,411)
Taxes on income (1,922)
Result for the period 5,881
----------------------- ------- ------- ------- ------- ---------
The following revenue information by geographical regions is
based on the location of the customer. The information disclosed
for non-current assets relates to property, plant and equipment and
intangible assets including goodwill.
Revenues from Non-current
external customers Assets
2013 2012 2013 2012
EURk EURk EURk EURk
Germany 99,852 89,896 5,489 6,482
Other 125,978 120,215 57,681 54,969
--------- ---------- ---------- ------- -------
Total 225,830 210,111 63,170 61,451
--------- ---------- ---------- ------- -------
4. Expenses
The Consolidated Income Statement presents expenses according to
function. Additional information concerning the origin of these
expenses by type of cost is provided below:
Cost of material
The cost of material included in the cost of sales in the year
ended 31 December 2013 amounted to EUR22,147k (2012: EUR24,752k).
Cost of material mainly relates to the procurement of external
services such as contracted software engineers. In addition,
certain project-related or internally used hardware and software is
shown under cost of material.
Employee benefits expenses
2013 2012
---------------------------------- -------- --------
EURk EURk
Wages and salaries 126,221 112,402
Social security contributions 15,545 15,170
Expenses for retirement benefits 2,559 2,970
---------------------------------- -------- --------
Total 144,325 130,542
---------------------------------- -------- --------
The expenses for retirement benefits include current service
costs regarding defined benefit plans and expenses for defined
contribution plans.
The average numbers of employees in the operating segments of
the SQS Group were as follows:
2013 2012
------------------------------------ ------ ------
No. No.
Onshore consultants 1,216 1,073
Offshore and nearshore consultants 955 760
Non-consultants 423 416
------------------------------------ ------ ------
Total 2,594 2,249
------------------------------------ ------ ------
Government grants
Government grants in the amount of EUR0k (2012: EUR296k) have
been granted for personnel expenses for the additional employees in
economically weak regions and have been recognised as income. Of
these an amount of EUR150k (at 31 December 2012: EUR150k) had not
yet been paid to SQS at the reporting date. There are no
unfulfilled conditions or contingencies attached to these
government grants.
Amortisation and Depreciation
Amortisation and depreciation charged in the year ended 31
December 2012 amounted to EUR9,082k (2012: EUR7,521k). Of this,
EUR3,505k (2011: EUR3,528k) was attributable to the amortisation of
development costs.
Rentals and leasing
Operating lease costs in connection with office space and
equipment in 2013 amounted to EUR6,668k (2012: EUR6,440k).
The lease contracts will expire between 2014 and 2017. Some of
them can be prolonged or renewed, some allow price alignments.
5. Net finance costs
The net finance costs are comprised as follows:
2013 2012
------------------------------------ -------- --------
EURk EURk
Interest income 108 481
Exchange rate gains 707 563
------------------------------------ -------- --------
Total finance income 815 1,044
------------------------------------ -------- --------
Interest expense (1,481) (1,646)
Exchange rate losses (507) (809)
------------------------------------ -------- --------
Total finance costs (1,988) (2,455)
------------------------------------ -------- --------
Net finance costs (1,173) (1,411)
------------------------------------ -------- --------
Of which from:
Loans and receivables 815 985
Financial assets held-to-maturity 0 59
Financial liabilities measured at
amortized cost (1,954) (2,425)
Financial liabilities measured at
fair value (34) (30)
------------------------------------ -------- --------
Interest expense relates to interest on bank loans, finance
lease liabilities and pension obligations.
6. Taxes on earnings
SQS Software Quality Systems AG in Germany is liable to
corporate income tax, the solidarity surcharge and trade income
tax. The German corporate income tax rate amounts to 15 % (2012:
15%). A 5.5% solidarity surcharge is imposed on the corporate
income tax rate being effective with a rate of 0.825%. The trade
income tax amounts to 16.6% of the taxable income. Consequently the
total income tax rate in Germany amounts to approximately 32 %.
Consolidated income tax expense is as follows:
2013 2012
--------------------- ------ ------
EURk EURk
Current tax expense 3,707 2,421
Deferred tax (331) (499)
--------------------- ------ ------
Taxes on income 3,376 1,922
--------------------- ------ ------
A reconciliation between actual tax expense and the product of
group accounting profit multiplied by the tax rate of SQS AG is as
follows:
2013 2012
--------------------------------------------- -------- ------
EURk EURk
Profit before tax multiplied by the
standard rate of
German income tax of 32 % (2012:
32%) 2,736 2,516
Adjustments in respect of current
income tax of previous years 897 392
Impairment of goodwill (no taxable
impact) 844 0
Expenses for stock options (no taxable
impact) 44 0
Taxes on dividends payed by subsidiaries 80 70
Use of not capitalised tax losses (575) (131)
Tax losses occurred in 2013 not capitalised 784 0
Expenditure not allowable for income
tax purposes 59 31
Deviating tax rates of subsidiaries (1,481) (879)
Capitalisation of the corporate tax
credit (14) (17)
Government grants 0 (60)
Other 2 0
--------------------------------------------- -------- ------
At effective income tax rate of 39.5%
(2012: 24.4 %) 3,376 1,922
--------------------------------------------- -------- ------
Deferred taxes with an amount of EUR(129)k (2012: EUR405k) were
charged to other comprehensive income.
SQS has capitalised a corporate tax credit at a present value of
EUR699k (at 31 December 2012: EUR852k). The present value has been
discounted using an interest rate of 5.5%. The tax credit will be
paid off by four further instalments until 2017. In the statement
of financial position it is presented as non-current income tax
receivable.
For the assessment of deferred tax assets and liabilities the
local tax rates of the respective entities of SQS Group are
applied.
Deferred income tax relates to the following financial
positions:
31 December 31 December
2013 2012
----------------------------------------- ------------ ------------
EURk EURk
Losses carried forward 1,331 1,056
Pensions provisions 575 772
Property, plant and equipment 178 210
Other non-current liabilities from
interest swaps 197 285
Other current liabilities from currency
swap 8 3
Other accruals 94 2
----------------------------------------- ------------ ------------
Deferred tax assets 2,383 2,328
----------------------------------------- ------------ ------------
31 December 31 December
2013 2012
--------------------------------------- ------------ ------------
Capitalised development costs (1,299) (1,448)
Capitalised customer relationships 0 (119)
Property, plant and equipment (71) 0
Trade receivables (14) (14)
Deferred tax liabilities (1,384) (1,581)
--------------------------------------- ------------ ------------
Net deferred tax assets (liabilities) 999 747
--------------------------------------- ------------ ------------
Deferred tax assets are recognised when it is considered
probable that economic benefit will flow to the entity. The
probability of future economic benefits is assessed by management
based on the taxable profits realised in the past and on the
expectations and planning regarding the foreseeable future.
Where a company has suffered losses, deferred tax assets thereon
are recognised if the ability in the future to set off the losses
with future income is permissible under the respective national
provisions. According to the planning of SQS AG, SQS Switzerland,
SQS Nordic and SQS USA, a return to taxable profits is regarded as
probable.
As the entities in France, Sweden, Finland und the US have not
generated any profit yet, the tax losses of these entities with a
cumulative amount of EUR3,628k (at 31 December 2012: EUR867k) have
not been capitalised.
7. Earnings per share
The earnings per share presented in accordance with IAS 33 are
shown in the following table:
2013 2012 (adjusted)
--------------------------------------- ----------- ----------------
EURk EURk
Profit for the year attributable to
the equity shareholders 5,130 5,833
Diluted profit for the year 5,130 5,833
--------------------------------------- ----------- ----------------
Weighted average number of the shares
in issues, undiluted 28,201,084 27,893,289
Dilutive effect from stock option
programme 677,703 492,005
Weighted average number of shares
in issues, diluted 28,878,787 28,385,294
--------------------------------------- ----------- ----------------
Undiluted profit per share EUR 0.18 0.21
Diluted profit per share EUR 0.18 0.21
Adjusted profit per share EUR 0.30 0.24
--------------------------------------- ----------- ----------------
Undiluted profit per share is calculated by dividing the profit
for the year attributable to equity shareholders by the weighted
average number of shares in issue during 2013: 28,201,084 (2012:
27,893,289).
Diluted profit per share is determined by dividing the profit
for the year attributable to equity shareholders by the weighted
average number of shares in issue plus any share equivalents which
would lead to a dilution.
Management considers that the stock options given to management
and key employees may have a dilutive effect. On a weighted average
basis shares resulting from stock option programmes amounted to
677,703 (2012: 492,005) shares. The number of potential shares is
calculated on a pro rata basis. Instruments that could potentially
dilute basic earnings per share in the future are authorised
capital and conditional capital.
The adjusted profits per share 2013 and 2012 are calculated
based on the profit after tax:
- plus the impairment loss regarding the goodwill of SQS Nordic of EUR2,638k (2012: EUR0k),
- plus amortisation costs of acquired customer relationships as
part of business combinations of EUR417k (2012: EUR1, 316k),
- plus actuarial losses on defined benefit plans of EUR36k (2012: EUR0k),
- plus amount of income taxes regarding the share capital increase of EUR239k (2012: EUR0k),
- plus tax and due diligence expenses regarding the acquisition
of Thinksoft of EUR151k (2012: EUR0k),
- plus interest expenses regarding pension obligations and plan
assets of EUR106k (2012: EUR5k )
- plus interest expenses arising from an tax audit of SQS AG of EUR214k (2012: EUR0k)
- less discounting effects regarding the corporate income tax asset of EUR44k (2012: EUR52k),
- less difference between taxes on income payable under local
GAAP and IFRS of EUR375k (2012: EUR499k) .
These adjustments result in an adjusted profit after taxes of
EUR8,512k (2012: EUR6,663k). This divided by the weighted average
number of shares in issue during the years: 28,201,084 shares
(2012: 27,893,289) shows adjusted profit per share of EUR0.30
(2012: EUR0.24).
8. Intangible assets and goodwill
The composition of this item is as follows:
Book values 31 December 31 December
2013 2012
------------------------------------- ------------ ------------
Goodwill EURk EURk
SQS UK including UK, Ireland and
South Africa 30,320 30,973
SQS Netherlands 555 555
SQS Group Management Consulting 9,100 9,100
SQS Nordic including Sweden, Norway
and Finland 3,000 5,820
SQS India 8,526 2,382
Other 232 232
------------------------------------- ------------ ------------
Goodwill 51,733 49,062
------------------------------------- ------------ ------------
Book values Remaining 31 December 31 December
useful 2013 2012
life
----------------------------- ---------- ------------ ------------
Intangible assets EURk EURk
Capitalisation 2011 0 0 863
Capitalisation 2012 1 806 1,631
Capitalisation 2013 2 1,669 0
------------ ------------
Development costs regarding
testing software 2,505 2,494
Acquired Software 1 to 3 1,025 1,886
Other development costs 4 to 5 2,169 2,811
Customer relationships 0 417
Intangible assets 5,699 7,608
----------------------------- ---------- ------------ ------------
Development costs regarding testing software were capitalised in
the year in the amount of EUR2,495k (2012: EUR2,446k). They are
amortised over a period of 36 months. The other development costs
mainly relate to the methodology "PractiQ(R) ", used by SQS to
provide Managed Services. The estimated useful life of this
intangible assets covers a period of five years.
The amortisation of software and remaining intangible assets is
allocated to the functional costs by an allocation key.
In order to test the recoverability of goodwill SQS conducted
impairment tests, comparing the value in use of each cash
generating unit with its carrying amounts.
Impairment tests were carried out for the SQS UK based business,
for SQS Netherlands, for SQS Group Management Consulting, for SQS
Nordic as well as SQS India. These are the cash generating units
which are relevant for impairment testing as they represent the
lowest level at which management of SQS Group monitors the
underlying value of goodwill.
All impairment tests are based on the value in use of each cash
generating unit. In order to determine the values in use management
has set up budgets and forecasts for each cash generating unit. The
key assumptions on which management has based its cash flow
projections are the future development (growth) of revenues, the
development of the gross margin based on the expected capacity of
the SQS-consultants and the development of general and
administrative costs as well as sales and marketing costs in
relation to revenues.
In its budgets and forecasts management projected detailed cash
flows over a period of five years. For the periods thereafter
constant cash flows were assumed.
The determination of the future cash flows is based on the state
of knowledge in October 2013. Beside growth rates regarding
revenues and profits realised in the past, management considered
the recent global economic development, the actual orders on hand,
the actual number of SQS-consultants as well as the strategy of SQS
for the coming five years. Regarding SQS Nordic a scenario was
calculated in order to assess a possible change in key assumptions
on which management based its determination of the unit's
recoverable amount as of 31 December 2013. Based on this scenario
at 31 December 2013 an impairment of EUR2,638k has been
recognised.
The budgets of the European cash generating units show a
development in revenues for 2014 between 9.7% (SQS UKISA) and an
increase of 47% (SQS Netherlands) compared to the year 2013. For
the years 2015 to 2016 the growth per year is reduced to a maximum
of 7% for each of those cash generating units. Regarding the year
2018 growth rates are expected to reach a maximum of 5%. However,
management expects that all cash generating units will grow faster
than market.
Regarding SQS India management assumes a growth of 36.5 % for
2014 and a declining growth rate between 15 % and 5 % for each of
the years from 2015 to 2018. These growth rates include the testing
business in the USA which is partly provided by SQS India.
Management expects that the gross margin ratio will be increased
slightly and that the expense ratio of general and administrative
costs as well as sales and marketing costs will only be increased
marginally for most of the cash generating units of SQS Group.
In accordance with IAS 36, the impairment tests were based on
the following assumptions:
-- Expenses and income, assets and debts in connection with
taxes on earnings, such as deferred tax assets and liabilities, tax
reimbursement claims, tax liabilities and tax accruals, were
eliminated both from the carrying amount of the cash generating
unit and from the value in use.
-- The cash flows, either in or out, from financing activities
have not been taken into account.
-- For reasons of practicability and in compliance with IAS
36.79 trade receivables and trade payables and other liabilities
were included in the calculations when estimating the future cash
flows and the book value.
-- For the transition from entity value to equity market value
which represents the value in use, the market value of liabilities
is deducted.
-- The growth rate in perpetuity was estimated in a range between nil and 1%.
-- Goodwill was allocated entirely to the carrying amount of the
cash generating unit in accordance with IAS 36.80 and IAS
36.81.
-- The discount rates applied to the cash flow projections were
pre-tax interest rates in a range between 8.4% and 12.9%.
9. Equity
Subscribed Capital
The subscribed capital amounts to EUR30,562,679 (at 31 December
2012: EUR27,893,289). This is divided into 30,562,679 (at 31
December 2012: 27,893,289) individual registered shares with an
arithmetical share in the share capital of EUR1 each. Each share
entitles the holder to one right to vote. No preference shares have
been issued. The capital is fully paid up.
The movements in the subscribed capital are as follows:
Individual Nominal
shares value
----------------------------------------------------- ----------- -----------
Number EUR
----------------------------------------------------- ----------- -----------
As at 1 January 2012 27,893,289 27,893,289
----------------------------------------------------- ----------- -----------
As at 31 December 2012 27,893,289 27,893,289
----------------------------------------------------- ----------- -----------
Capital increase against cash from conditional
capital for exercise of stock options by employees
and executives 50,883 50,883
----------------------------------------------------- ----------- -----------
Capital increase against cash contribution 2,618,507 2,618,507
----------------------------------------------------- ----------- -----------
As at 31 December 2013 30,562,679 30,592,679
----------------------------------------------------- ----------- -----------
On 24 September 2013, 50,883 share options were exercised by
issuing 50,883 new shares. The exercise price amounted to EUR3.95
per share. The capital increase was registered on the commercial
register on 20 November 2013. The remaining 121.312 share options
expired on 3 October 2013.
By resolution of the General Meeting of 20 May 2009, management
board was authorized to increase the share capital by up to
EUR8,777,096 until 30 April 2014 with the approval of the
supervisory board, by one or more issues of new registered non-par
value shares against cash and/or contributions in kind (Authorised
Capital I).
On 7 November 2013 management board resolved an increase in
share capital by issuing 2,618,507 new registered non-par value
shares with a nominal value of EUR1.00 each against cash
contribution at a price of GBP4.35 per share. The supervisory board
has consented to this resolution. The capital increase became
effective with the entry in the commercial register on 20 November
2013.
SQS had no shares in its ownership as at 31 December 2013.
Conditional capital
The General Meeting of 29 May 2013 approved the proposal of the
Supervisory Board and Management Board regarding the reduction of
the Conditional Capital II from EUR1,500,000 to EUR185,000. The
remaining Conditional Capital II was partially used in the amount
of EUR50,883 by exercising the stock options rights by employees
and executives of SQS on 24 September 2013. After the forfeited
date of 3 October 2013 no additional options rights can be
exercised.
Furthermore, the Supervisory Board is authorised to issue option
rights up to EUR1,300,000 (Conditional Capital III) until 31
December 2013. In addition, the management board is, with the
consent of the supervisory board, authorised to issue option rights
up to EUR1,300,000 (Conditional Capital IV) until 31 December
2014.
The Conditional Capital III and the Conditional Capital IV serve
to grant share options to the management board members and key
employees respectively.
The changes in the Conditional Capital II, III and IV became
effective with entry in the commercial register on 21 June
2013.
Authorised capital
After the partial using by issuing of 2,618,507 new registered
non-par value shares against cash contribution the remaining amount
of EUR6,158,589 of Authorised Capital I can be used until 30 April
2014.
The Authorised Capital II with an amount of EUR2,514,690 serves
to grant shares to employees of SQS AG and its subsidiaries and can
also be used until 30 April 2014.
The authorised capital developed as follows:
EUR
As at 1 January 2012 11,291,786
------------------------------- -----------
As at 31 December 2012 11,291,786
------------------------------- -----------
Usage of Authorised Capital I 2,618,507
------------------------------- -----------
As at 31 December 2013 8,673,279
------------------------------- -----------
Share premium
Additional paid-in capital includes any premiums received on the
issuing of the share capital.
Any transaction costs associated with the issuing of shares are
deducted or set off from additional paid-in capital, net of any
related income tax benefits. Equity-settled share-based employee
remuneration is also credited to additional paid-in capital until
related stock options are exercised.
Statutory reserves
The statutory reserves were created in accordance with Section
150 of the Stock Corporation Act (Germany). SQS AG is not allowed
to use its statutory reserves for dividends.
Other reserves
Other reserves comprise differences from the translation of
foreign operations with an amount of EUR(3,905)k (at 31 December
2012: EUR(2,060)k), IPO and other transaction costs that are
accounted for net of taxes in the amount of EUR1,693k (at 31
December 2013: EUR1,134k) and a cash flow hedge reserve regarding
the fair values of interest and currency swaps with an amount of
EUR(479)k (net of tax), (at 31 December 2012: EUR(673)k (net of
tax)).
Retained earnings
Retained earnings represent the accumulated retained profits and
losses less payments of dividends by SQS Group and the accumulated
actuarial losses on pension provisions.
The General Meeting of 29 May 2013 resolved to pay EUR0.07
dividends per share for the business year 2012 in the total amount
of EUR1,952,530.23, that have been paid to the shareholders of SQS
AG in 2013.
10. Notes to the Statement of Cash Flows
The statement of cash flows shows how the funds of the Group
have changed in the course of the business year through outflows
and inflows of funds. The payments are arranged according to
investing, financing and operating activities.
The sources of funds on which the statement of cash flows is
based consist of cash and cash equivalents (cash on hand and bank
balances).
Cologne, March 04th, 2014
SQS Software Quality Systems AG
D. Vos R. Brizzi R. Gawron R. Gillessen
This information is provided by RNS
The company news service from the London Stock Exchange
END
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