RNS Number:2608U
InTechnology PLC
17 November 2005
17 November 2005
InTechnology plc
Interim Results for the six months ended 30 September 2005
InTechnology plc ("InTechnology" or "the Company"), the leading European
provider of data storage, security and network solutions and managed services,
announces interim results for the six months ended 30 September 2005.
Financial highlights
* Turnover for the Group at #131.8m (2004: #132.4m)
- Managed Data Services revenues up 17%
- European Specialist Distribution turnover increased by 26%
- UK Specialist Distribution revenues declined by 10%
* Gross profit margin declined from 18.7% to 17.3%
* Earnings before interest, tax, amortisation of goodwill and exceptional
items were #0.1m (2004: #1.2m)
* Group operating loss was #13.0m (2004: #1.1m)
* Loss before tax and amortisation of #11.7m (2004: profit of #0.2m)
including exceptional charges of #10.6m
Operational highlights
* Cost reduction programme initiated - expected to lead to #6m annual
savings
* Managed Data Services division:
- First reported period of profitability
- First contract wins from new IBM relationship
- Several new services launched and well received
- Now well positioned for profitable growth with a strong pipeline of
prospects
* Specialist Distribution division:
- Performance impacted by trading environment
- Investment into sales teams and vendor and customer interface
- Cost base being adjusted to restore divisional profitability
Commenting on the results, Peter Wilkinson, Chief Executive Officer made the
following statement:
"As reported in our trading updates during the summer, InTechnology's Specialist
Distribution division experienced pricing pressure, leading to a financial
performance which was below expectations. In contrast we saw a strong
performance from the Managed Data Services division, where we continued to build
on our profitable position.
"We have completed the restructuring process in the UK and have embarked on
reorganisation in Continental Europe and I am confident that both the UK and
Continental European Distribution businesses will experience increased
profitability."
Andrew Kaberry, Finance Director commented:
"Much time has been spent implementing corrective action to the Specialist
Distribution divisions in the UK and Continental Europe during the first half of
the year. This reorganisation has led to an exceptional charge of #4.2m in
these results but we believe that it will lead to annual cost savings of #6m.
The results also show an impairment charge relating to our Continental European
business of #6.4m. This charge reflects the fact that it is taking longer to
return all five country subsidiaries to profitability."
For further information:
InTechnology plc 020 7786 3400
Peter Wilkinson / Andrew Kaberry
Financial Dynamics 020 7831 3113
James Melville-Ross / Hannah Sloane
Chief Executive Officer's Statement
Overview
The performance of the Group during the first half-year has been dominated by
severe pricing pressure in our Specialist Distribution divisions. This led us
to take immediate corrective action to reduce the operating cost base, which we
announced on 5th August 2005. This setback to the Specialist Distribution
divisions, which in recent years have reported good profits and cash flows, was
in contrast to a good performance by the Managed Data Services division.
The Managed Data Services division earned a profit before interest, tax and
amortisation of goodwill for the first half this year of #0.5m (2004: #1.7m
loss), having previously achieved monthly profit on the same basis during the
second half of last year.
Much senior management time has been spent implementing corrective action to the
Specialist Distribution divisions in the UK and Continental Europe. As a result
an exceptional reorganisation charge of #4.2m has been incurred in the first
half year which we estimate will lead to annual cost savings of #6m. We have
completed these corrective actions in the UK and are presently implementing the
cost reductions in the Continental European subsidiaries.
In light of the reorganisation program we have also performed an impairment
review of the Managed Data Services, UK and Continental European Specialist
Distribution divisions in accordance with FRS 11 (see note 6 for further
details). Based on our current forecasts the net assets of the Continental
European business are impaired and the half year results include a #6.4m
impairment charge, of which #5.1m relates to goodwill.
Trading and Operating Performance
Group turnover during the first half of the year was #131.8m (2004: #132.4m),
with growth in Managed Data Services of 17% and European Specialist Distribution
of 26% offset by a revenue decline in UK Specialist Distribution of 10%.
Gross profit declined by 8% to #22.8m (2004: #24.8m) reflecting a decline in
gross profit margins to 17.3% (2004: 18.7%). Managed Data Services gross
margins increased, but were more than offset by a fall in gross profit margins
in the Specialist Distribution divisions, particularly in Europe where margins
were severely impacted particularly in the first four months by US Dollar/Euro
exchange rate volatility.
Operating costs before exceptional items and amortisation of goodwill were lower
at #22.7m (2004: #23.6m) reflecting some of the cost reduction plans implemented
during the second quarter. Net operating expenses were #35.7m (2004: #26.0m).
Earnings before interest, tax, amortisation of goodwill and exceptional items
were #0.1m (2004: #1.2m) reflecting increased earnings in Managed Data Services
but lower earnings in UK and Continental European Specialist Distribution.
The Group incurred a loss before tax and amortisation of goodwill of #11.8m
(2004: profit #0.2m) after net interest expense of #1.1m (2004: #1.0m). Loss on
ordinary activities before tax was #14.1m (2004: #2.2m).
InTechnology ended the period with gross cash of #7.4m (2004: #8.9m) and net
debt including finance leases and term loans of #25.0m (30 September 2004:
#16.8m: 31 March 2005: #22.2m). The increase in debt reflects the lower
earnings in both Specialist Distribution divisions. Capital expenditure was
#1.7m (2004: #3.2m).
Specialist Distribution Division
The UK Specialist Distribution business which distributes to corporate resellers
of enterprise storage and security products, including software, operates from
London, Reading and our head office in Harrogate. Revenues declined by 10% to
#84.8m (2004: #94.5m), and gross profit margins fell to 11.3% (2004: 12.9 %)
caused by a difficult trading environment throughout the UK IT market and in
particular lower storage product sales. Earnings before interest, tax,
amortisation of goodwill and exceptional charges were #0.7m (2004: #3.4m).
Along with others in our sector we have experienced trading conditions that have
led to pressure on margins which continue to be caused by both vendors and
customers. These pressures intensified in the latter stages of our first
quarter.
To alleviate the pressure on operating margins, we immediately commenced a cost
reduction programme incurring exceptional charges of #2.5m (2004: #nil) to
achieve estimated annual divisional savings of #4.1m. Staff numbers were
reduced by 42 and office space has been reduced.
In addition we accelerated organisational changes to bring more resource into
our sales teams and we have taken a more proactive approach to sales in our
storage and security divisions in the UK. We are seeing the benefits of this
approach coming through already. We are also enhancing the important back
office functions by continuing to invest in our IT Systems which interface with
vendors and customers.
Our modus operandi in the Specialist Distribution business has always been to
adjust our operating cost base to market conditions and to drive greater volume
from that cost base. Our immediate challenge is to restore this division to
previous levels of profitability. Control of working capital will ensure
healthy cash generation, and our record in controlling inventory and accounts
receivable has always been good.
In Continental Europe we have expanded our Specialist Distribution portfolio to
include network products in certain countries in addition to security products
and software.
Revenues increased by 26% to #34.9m (2004: #27.7m), but gross margins fell to
#4.3m (2004: #5.2m) as intense pricing pressure, together with unfavourable
exchange rate movements of #1.0m (2004: #nil), impacted the first half year.
The loss before interest, tax, amortisation of goodwill and exceptional charges
was #1.1m (2004: #0.5m profit).
We carried out a fundamental review of the division and are implementing
restructuring of all our Continental European subsidiaries in order to restore
them to profitability. An amount of #1.7m specific to Continental Europe is
included in the exceptional costs of reorganisation.
The operating losses in this division are disappointing particularly in light of
the revenue growth achieved. Much of this increase occurred in Southern Europe,
which in turn increased the Group's working capital requirement because of the
comparatively high debtor days in this area. The reorganisation being
implemented should restore this Division to profitability by reducing its
operating cost base.
Managed Data Services Division
Managed Data Services revenues increased by 17% to #12.0m (2004: #10.3m) with
operating profits before interest, tax, amortisation of goodwill and exceptional
charges of #0.5m (2004: #1.7m loss). It is most satisfying to report our first
period of profitability for the Division.
Last year and again in June 2005 we said that this Division was firmly
positioned to embark on further profitable growth. All the new services that
were mentioned in our preliminary results in June have been launched and have
been well received. Since the launch of our VBAK service in 2000 we have
continued to expand our portfolio and now have a broad range of services all
based around our core competencies of data storage, networks and hosting. The
services are:
VBAK Private Hosting Suite
Data Replication Internet Access
Managed Firewall Voice over IP
Long Term Storage Information Life Cycle Management
Virtual Private Networks Dedicated Hosting Racks
At 30 September 2005 our annual recurring revenues were #25.3m (2004: #20.7m)
Outlook
In common with most other companies in our sector, the first half of the year
has been dominated by margin pressures in the distribution market. We have
taken immediate action to restore the Group to profitability.
Having completed our restructuring in the UK, we have now commenced
reorganisation in Continental Europe. We plan for a swift increase in UK
Specialist Distribution profitability and expect the Continental European
Specialist Distribution business to reduce operating losses during the second
half year.
The prospects for Managed Data Services are encouraging; we have expanded our
range of services and increased our ability to cross sell to the existing
customer base.
Peter Wilkinson
Chief Executive Officer
17 November 2005
Consolidated profit & loss account
For the 6 months ended 30 September 2005
6 months ended 6 months ended Year ended
30 September 30 September 31 March
2005 2004 2005
(Unaudited) (Unaudited) (Audited)
Note #'000 #'000 #'000
Turnover 131,779 132,420 283,522
Cost of sales (108,990) (107,583) (230,579)
Gross profit 22,789 24,837 52,943
Net operating expenses before depreciation,
amortisation of goodwill and
exceptional items (19,734) (20,496) (42,204)
Depreciation (2,999) (3,152) (6,388)
Amortisation of goodwill (2,372) (2,320) (4,635)
Exceptional costs of reorganisation 5 (4,215) - -
Exceptional impairment charge 6 (6,423) - -
Net operating expenses (35,743) (25,968) (53,227)
Group operating loss 1, 2 (12,954) (1,131) (284)
Net interest payable (1,134) (1,036) (2,181)
Loss on ordinary activities
before taxation (14,088) (2,167) (2,465)
Tax on loss on ordinary activities 3 400 (64) (110)
Loss sustained for the period (13,688) (2,231) (2,575)
EBITAE 56 1,189 4,351
EBITA (4,159) 1,189 4,351
Loss per share (pence) 4
Basic and diluted (9.88) (1.61) (1.84)
EBITAE comprises earnings before interest, taxation, amortisation of goodwill
and exceptional items.
EBITA comprises earnings before interest, taxation, amortisation of goodwill and
exceptional impairment charge.
There is no difference between the loss on ordinary activities before taxation
and the loss sustained for the period ended 30 September 2005 and their
historical cost equivalents.
Consolidated balance sheet
As at 30 September 2005
30 September 30 September 31 March
2005 2004 2005
(Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000
Fixed assets
Intangible assets 67,342 75,516 74,813
Tangible assets 12,066 13,497 14,773
79,408 89,013 89,586
Current assets
Stock 10,897 10,660 13,179
Debtors 91,348 84,038 105,399
Cash at bank and in hand 7,432 8,864 10,488
109,677 103,562 129,066
Creditors - amounts falling due
within one year (103,702) (89,008) (118,174)
Net current assets 5,975 14,554 10,892
Total assets less current liabilities 85,383 103,567 100,478
Creditors - amounts falling due
after more than one year (5,725) (13,630) (9,001)
Provisions for liabilities & charges (1,934) (50) -
Net assets 77,724 89,887 91,477
Capital and reserves
Called up share capital - equity 1,411 1,388 1,411
- non-equity 480 480 480
Share premium account 188,668 188,508 188,668
Revaluation reserve 1,754 - 1,754
Profit and loss account (114,589) (100,489) (100,836)
Shareholders' funds (including non-equity interests) 77,724 89,887 91,477
Shareholders' funds comprise:
Equity interests 75,484 87,647 89,237
Non-equity interests 2,240 2,240 2,240
77,724 89,887 91,477
Consolidated cash flow statement
For the 6 months ended 30 September 2005
6 months ended 6 months ended Year ended
30 September 2005 30 September 2004 31 March 2005
(Unaudited) (Unaudited) (Audited)
Note #'000 #'000 #'000
Net cash inflow/(outflow)
from operating activities 7 251 (878) (2,000)
Returns on investments
and servicing of finance
Interest received 59 107 160
Interest element of finance lease payments (127) (133) (282)
Interest paid (1,054) (968) (2,033)
Net cash outflow from returns
on investments and servicing of finance (1,122) (994) (2,155)
Taxation paid (128) (470) (1,135)
Capital expenditure and financial investment
Purchase of tangible fixed assets (1,132) (2,110) (6,106)
Sale of tangible fixed assets 26 28 1,542
Net cash outflow from capital expenditure and
financial investment (1,106) (2,082) (4,564)
Acquisitions
Purchase of subsidiary undertakings
(including costs) - (900) (980)
Net cash outflow from acquisitions - (900) (980)
Net cash outflow before financing (2,105) (5,324) (10,834)
Financing
Issue of ordinary share capital - 92 275
Net (decrease)/increase in borrowings (71) (1,114) 6,615
Capital element of finance lease payments (868) (1,219) (1,991)
Net cash (outflow)/inflow from financing (939) (2,241) 4,899
Decrease in cash in the period 8 (3,044) (7,565) (5,935)
1. Basis of preparation
The financial information included in this interim statement for the 6 months
ended 30 September 2005 does not constitute statutory accounts within the
meaning of section 240 of the Companies Act 1985 and is not audited or reviewed.
In preparing this interim statement, management have considered the
requirements of FRS 21 'Events after the balance sheet date' and FRS 22 '
Earnings per share' which are applicable for accounting periods beginning on or
after 1 January 2005. There have been no other changes to the accounting
policies as set out in the 2005 Report and Accounts. The financial information
relating to the year ended 31 March 2005 has been extracted from the statutory
accounts for that year which have been filed with the Registrar of Companies and
on which the auditors gave an unqualified opinion.
2. Segmental information
Turnover by destination Turnover by source
6 months 6 months Year 6 months 6 months Year
ended ended ended ended ended ended
30 September 30 September 31 March 30 September 30 September 31 March
2005 2004 2005 2005 2004 2005
(Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000 #'000 #'000 #'000
Geographical
analysis
United Kingdom 95,075 104,411 217,761 96,865 104,729 220,339
Continental Europe 36,110 25,565 64,970 34,914 27,691 63,183
North America 380 2,214 207 - - -
Africa 110 186 68 - - -
Rest of the World 104 44 516 - - -
Total 131,779 132,420 283,522 131,779 132,420 283,522
Operating (loss)/profit by source
6 months 6 months Year
ended ended ended
30 September 30 September 31 March
2005 2004 2005
(Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000
Geographical
analysis
United Kingdom (3,870) (614) (403)
Continental Europe (9,084) (517) 119
Total (12,954) (1,131) (284)
Turnover Operating profit/(loss)
before goodwill amortisation
and exceptional items
6 months 6 months Year 6 months 6 months Year
ended ended ended ended ended ended
30 September 30 September 31 March 30 September 30 September 31 March
2005 2004 2005 2005 2004 2005
(Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000 #'000 #'000 #'000
Business analysis
Specialist Distribution 119,760 122,163 261,449 (446) 2,916 6,321
Managed Services 12,019 10,257 22,073 502 (1,727) (1,970)
Total 131,779 132,420 283,522 56 1,189 4,351
Operating (loss)/profit
after goodwill amortisation
and exceptional items
6 months 6 months Year
ended ended ended
30 September 30 September 31 March
2005 2004 2005
(Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000
Business analysis
Specialist Distribution (11,204) 1,739 3,967
Managed Services (1,750) (2,870) (4,251)
Total (12,954) (1,131) (284)
The segmental analysis above excludes net interest payable of #1,134,000 (30
September 2004: #1,036,000, 31 March 2005: #2,181,000) which is not analysed by
business segment.
3. Tax on loss on ordinary activities
The corporation tax credit for the 6 months to 30 September 2005 is #400,000 (30
September 2004: #64,000 charge, 31 March 2005: #110,000 charge). Taxation has
been calculated by applying the directors' best estimate of the effective tax
rate for the period, which is 29% in the UK and approximately 2% in respect of
European operations (30 September 2004: 41% UK, 37% Europe, 31 March 2005: 30%
UK, 46% Europe) to the profit or loss, before goodwill amortisation, for the
period.
4. Loss per share
Basic loss per share is calculated by dividing the loss attributable to ordinary
shareholders of #13,688,000 (30 September 2004: #2,231,000, 31 March 2005:
#2,575,000) by the weighted average number of ordinary shares in issue during
the period of 138,569,582 (30 September 2004: 138,569,582, 31 March 2005:
139,575,879).
The adjusted basic and diluted earnings per share have been calculated to
provide a better understanding of the underlying performance of the Group as
follows:
6 months ended 6 months ended Year ended
30 September 2005 30 September 2004 31 March 2005
(Unaudited) (Unaudited) (Audited)
Basic and diluted Basic and diluted Basic and diluted
(Loss)/ (Loss)/ (Loss)/ (Loss)/ (Loss)/ (Loss)/
earnings earnings earnings earnings earnings earnings
per share per share per share
#'000 pence #'000 pence #'000 pence
Loss attributable to
ordinary shareholders (13,688) (9.88) (2,231) (1.61) (2,575) (1.84)
Amortisation of goodwill 2,372 1.71 2,320 1.67 4,635 3.32
Exceptional costs of
reorganisation (note 5) 4,215 3.04 - - - -
Exceptional impairment
charge (note 6) 6,423 4.64 - - - -
Adjusted basic (loss)/earnings
per share (678) (0.49) 89 0.06 2,060 1.48
The loss attributable to ordinary shareholders and the weighted average number
of ordinary shares for the purpose of calculating the diluted earnings per
ordinary share are identical to those used for basic earnings per ordinary
share. This is because the exercise of share options would have the effect of
reducing the loss per ordinary share and is therefore not dilutive under the
terms of FRS 22 'Earnings per share'.
5. Exceptional costs of reorganisation
The exceptional costs of reorganisation of #4,215,000 (30 September 2004: #nil,
31 March 2005: #nil) relate to headcount reductions of #2,747,000, property
related costs of #761,000 and fixed asset write-offs of #707,000. Restructuring
costs of #1,644,000 (30 September 2004: #nil, 31 March 2005: #nil) have been
paid in the period.
6. Exceptional impairment charge
In light of the reorganisation (note 5) the Board has conducted an impairment
review of the carrying value of goodwill arising on the acquisition of HOLF
Technologies Limited and VData Limited in July 2000 together with the Allasso
Group of companies in July 2003 in accordance with FRS 11 'Impairment of fixed
assets and goodwill'.
The Directors have considered the recoverable amounts by reference to the net
present value of estimated current and future cash flows of the relevant income
generating units.
The Directors considered it appropriate to use a cost of capital relevant to the
risks and stage of development associated with each income generating unit.
The exceptional impairment arises in respect of the Allasso companies based in
continental Europe and referred to as the Group's Continental European
Specialist Distribution Division, the after tax cost of capital used being 6.6%.
The Directors have concluded that the carrying value of the assets, including
goodwill, exceed the higher of net realisable value and value in use by
#6,423,000, and accordingly an impairment charge of this amount has been made in
the profit and loss account for the period ended 30 September 2005. The
impairment charge has been made as #5,117,000 against remaining goodwill and
#1,306,000 against remaining net assets of #3,714,000.
7. Reconciliation of operating loss to net cash (outflow)/inflow from operating
activities
6 months ended 6 months ended Year ended
30 September 30 September 31 March
2005 2004 2005
(Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000
Operating loss (12,954) (1,131) (284)
Depreciation of tangible fixed assets 2,999 3,152 6,388
Exceptional costs of reorganisation - fixed asset 287 - -
depreciation
Goodwill amortisation 2,372 2,320 4,635
Exceptional impairment charge (note 6) 6,423 - -
Loss/(profit) on sale of tangible fixed assets 341 27 (262)
Exchange movements (11) - 14
Decrease/(increase) in stocks 1,834 163 (2,368)
Decrease/(increase) in debtors 6,364 10,566 (12,901)
(Decrease)/increase in creditors and provisions (7,404) (15,975) 2,778
Net cash inflow/(outflow) from operating activities 251 (878) (2,000)
8. Reconciliation of movement in net debt
6 months ended 6 months ended Year ended
30 September 30 September 31 March
2005 2004 2005
(Unaudited) (Unaudited) (Audited)
#'000 #'000 #'000
Decrease in cash in the period (3,044) (7,565) (5,935)
Net cash outflow from decrease in finance leases 868 1,219 1,991
Cash outflow/(inflow) from repayment/(advance) of debt 71 1,114 (6,615)
Change in net funds resulting from cash flows (2,105) (5,232) (10,559)
Non-cash changes:
Exchange movements (14) (69) (91)
Inception of new finance leases (594) (1,079) (1,070)
Debt issue costs (38) (38) (75)
Movement in net funds in the period (2,751) (6,418) (11,795)
Net debt at start of period (22,200) (10,405) (10,405)
Net debt at end of period (24,951) (16,823) (22,200)
9. Shareholder information
The interim announcement will be posted to shareholders on 25 November 2005.
Further copies are available on request from the registered office of the
Company at Nidderdale House, Beckwith Knowle, Harrogate, HG3 1SA.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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