21st Jun 2005 07:01
Tribal Group PLC21 June 2005 Tribal Group plc Preliminary results for the year ended 31 March 2005Highlights: - Revenues up 23.6 per cent to £229.5m- Profit before tax* of £17.9m- Establishment of divisional structure now completed- Integration benefits starting to flow- Entry into healthcare delivery - £214m NHS contract signed during the year- £50m Ofsted school inspection contracts signed in April 2005- Forward order book up from £94m to £350m Strone Macpherson, Chairman of Tribal Group plc, commented: This was a challenging year for the Group, with significant organisationalchange which, as anticipated, affected margins adversely. The Group has,however, now completed its restructuring into seven divisions and has made goodprogress with the integration of businesses into this structure. Management hasbeen strengthened at group and divisional level. The Group's markets remain buoyant and our profile within them has continued toimprove. We are seeing an increasing number of opportunities to deliver anintegrated service solution that brings together skills from across the Group.We recently announced contracts worth £50m with Ofsted to provide schoolinspections. The Group will continue to focus primarily on organic growth. The highlight of the year was the award to Mercury Health, Tribal's healthcaredelivery business, of a £214m NHS contract to design, build and manage aregional network of five treatment centres, as part of the Government'sIndependent Sector Treatment Centre programme. This contract gives Tribal asignificant share of this new market which in time is expected to deliver up to15 per cent of NHS elective surgery. The Group continues to be well placed to take advantage of the manyopportunities arising in the markets it serves. Financial highlights: Year ended 31 March 2005 2004Turnover £229.5m £185.7m up 24%Gross revenue £179.9m £152.2m up 18%Operating profit* £22.4m £23.2m down 3%Operating margins on gross revenue* 12.4% 15.2%Profit before tax* £17.9m £20.1m down 11%(Loss)/profit on ordinary activities beforetaxation (£0.2m) £5.3mLoss on ordinary activities after taxation (£5.6m) (£0.9m)Adjusted diluted earnings per share* 15.6p 20.5p down 24%Operating cash flow before Mercury Health £17.5m £34.3mOperating profit to cash conversion* 78% 148% Note: \* The operating profit, operating margins, profit before tax and adjusteddiluted earnings per share are stated before goodwill amortisation andimpairment of £16.6m (2004: £10.7m), employee benefit trust credit of £0.2m(2004: costs of £1.0m) and exceptional items of £1.7m (2004: £3.0m) (see page 14and page 20). For further information contact: Henry Pitman, Chief Executive, Tribal Group plc Tel: 01285 886020Simon Lawton, Group Finance Director, Tribal Group plcNeil Bennett/Colin Browne, Maitland Tel: 020 7379 5151 A copy of the presentation on these results made to analysts on 21 June 2005,will be made available on the Group's website: www.tribalgroup.co.uk from 9amtoday. Tribal Group plc Chairman's statement I am pleased to report on the results of Tribal Group plc for the year ended 31March 2005. During this period, we strengthened our position as a leadingprofessional support services and consultancy business, predominantly operatingin the UK public sector. The Group is now well positioned in its core markets ofeducation; local government, housing and regeneration; health and social care;and central government. The year also saw our successful move into the directdelivery of healthcare services through Mercury Health. Results This was a challenging year for the Group with significantorganisational change which, as previously indicated, adversely affectedmargins. Nevertheless, we continued to deliver revenue growth with turnover for the yearup 24 per cent at £229.5m (2004: £185.7m). Operating profit* was £22.4m (2004:£23.2m) and operating margins* were 12.4 per cent (2004: 15.2 per cent). Profitbefore taxation* was £17.9m (2004: £20.1m), loss after tax was £5.6m (2004:£0.9m), and adjusted diluted earnings per share* were 15.6p (2004: 20.5p).Goodwill amortisation was £16.6m (2004: £10.7m) and included an impairment writedown of £5.2m (2004: £0.6m) relating to a review of the carrying value of twobusinesses. During the year, the Group generated operating cash flow before Mercury Healthof £17.5m (2004: £34.3m), representing an operating profit* to cash conversionrate of 78 per cent (H1 24 per cent and H2 114 per cent). Net debt at the yearend was £53.0m, representing gearing of 35 per cent, with interest cover of overfive times. Our gross return on capital employed was 12.3 per cent (2004: 15.0per cent). * The operating profit, operating margins, profit before tax and adjusteddiluted earnings per share are stated before goodwill amortisation andimpairment of £16.6m (2004: £10.7m), employee benefit trust credit of £0.2m(2004: cost of £1.0m) and exceptional items of £1.7m (2004: £3.0m) see page 14(consolidated profit and loss account) and page 20 (earnings per share note). Organisational restructuring During the year, the Group continued the process ofimplementing its new corporate structure. Our businesses are now managed asseven divisions: consulting, education, resourcing, technology, property,communications and healthcare delivery. The integration of businesses into thisstructure has enabled us to strengthen management and financial reportingarrangements and provide a better focus for business development. There has beena very positive response across the Group to this reorganisation and we arealready seeing the benefits of offering a more integrated package of servicesacross our customer base. The ability to do this will increasingly differentiateTribal from other competitors in our markets, opening up more opportunities andcreating barriers to entry. Major contracts During the year, we signed our largest contract to date, a £214mcontract with the NHS to design, build and manage a regional network oftreatment centres for elective surgery and diagnostic procedures. Implementationis progressing well and the first centre is expected to open in August 2005.This contract has given Mercury Health, the Group's healthcare deliverybusiness, a significant market share and places us in a strong position to bidfor the next wave of contracts, which are expected to be procured during thenext 12 months. Since the year end, the Group has announced two contracts with a combined valueof £50m with Ofsted to provide school inspection services. We are currentlypreferred bidders on further significant contracts. As a result of our contractwins, our committed revenue has increased to £350m, up from £94m. Dividend The Group paid a dividend of 1.0p per share following the announcementof the interim results last November. The board is pleased to announce that itis recommending a final dividend of 2.0p per share, making a total of 3.0p pershare for the year. Board changes I would like to record the Board's gratitude to Dominic Collinswho stood down as non-executive director on 24 March 2005 and Miles Hunt whoretired at our last Annual General Meeting on 14 September 2004. Both Dominicand Miles made significant contributions to the Group and we thank them fortheir guidance and support. There have been no other board changes during theperiod. Staff The Group is a people-based business and its success is a result of thebroad base of talented employees across the Group. We would like to put onrecord the thanks of the Board to our 2,000 employees at all levels. Theirefforts have ensured that Tribal continues to be one of the most respected,dynamic and fast-growing companies in its markets. Prospects Tribal is firmly established as a major supplier of high value-addedconsultancy and professional support services to the public sector. We are wellplaced to take advantage of opportunities to build and extend our serviceoffering, to increase the level of committed revenue by successfully bidding forlonger-term contracts, and to leverage our relationships and advisory experienceto develop delivery services in our principal markets. With the reorganisation largely completed, investment in business development,account management and bidding for long-term contracts is being increased toensure long-term revenue growth across the Group. The focus continues to be onimproving profitability, margins and operational efficiency. We are now starting to see the benefits of the significant investment we havemade over the last 18 months in developing the Group's infrastructure and in ourdivisional and central management. The Group has started the year well and, although first half results will beinfluenced by the increased weighting of trading to the second half and by ourcontinuing investment in products, services and capacity building, the Board isconfident about the Group's future prospects. Strone MacphersonChairman Chief Executive's statement During the year, our businesses have continued to strengthen their serviceoffering and have increasingly been able to offer customers an integratedpackage of services drawn from across the Group. This capability, alongside ourexcellent relationships with public sector organisations, positivelydifferentiates Tribal from its competitors. Markets We continue to operate in expanding markets and to benefit fromincreasing government expenditure, particularly in education and health. We nowwork in sectors that account for over £250bn of annual government spending.While Tribal has benefited from increasing public expenditure, the main driverto our business continues to be the growing acceptance and use of the privatesector in reforming and delivering public services. The Government's election manifesto and subsequent Queen's Speech confirmed thecontinuing and increasing use of the private sector in public service reform,particularly in education and health. In her first speech following theelection, the Secretary of State for Health, Patricia Hewitt, announced theprocurement of £3bn of elective surgery procedures from the private sectorthrough the extension of the independent sector treatment centre (ISTC)initiative. There continue to be other major opportunities as a result of a number ofspecific government initiatives. The 'Building Schools for the Future',academies and hospital PFI programmes together present very significant capitalinvestment plans until at least 2010; the Gershon Review will introduce costefficiencies across government through improved supply chain and businessprocess management and lead to a radical re-design of many services; the LyonsReview, which recommends the relocation of government departments and agenciesto areas outside London and the south-east, is generating the requirement forimproved technology and resourcing solutions; and the Children Act is re-shapingeducation and social services departments. In the year ended 31 March 2005, 94 per cent (2004: 96 per cent) of our revenueswere from the public sector and we expect to retain this focus in the immediatefuture. We are, however, starting to see opportunities to increase our presencein the private sector as we transfer and apply the skills that we have developedin the public sector. Operating review Tribal provides a range of consultancy and professional supportservices and, through Mercury Health, is moving into the delivery of publicservices. Tribal Consulting Year ended Year ended 31 March 2005 31 March 2004 £000 £000Gross revenue 55,238 42,130EBITA** 6,669 7,121EBITA margin ** 12.1% 16.9% ** before goodwill and employee benefit trust costs Consulting achieved revenue growth of 31 per cent due, in part, to a full yearcontribution from HACAS, which was acquired in July 2003. Operating profit** was down by 6 per cent and operating margins** weresignificantly lower compared to 2004. This was, in part, a consequence oforganisational restructuring but also as a result of lower utilisation rates inparts of our healthcare practice, increasing competitive pressures in certainareas and higher associate costs due to skill shortages, particularly in thefirst half of the year. Areas of underperformance were addressed and marginsacross the division improved in the second half of the year. We have now built one of the largest consultancy businesses operating in thepublic sector with expertise across local government; housing and regeneration;health and social care; and central government. Generally, the market forconsultancy remains buoyant and average fee rates remain firm.During the year, we have continued to build our local government practice byexpanding our regional coverage and developing our advisory services in areassuch as PFI and performance improvement. Our housing and regenerationconsultancy has expanded into economic development, establishing two new teamsin Edinburgh and Manchester, both of which have achieved notable contractsuccesses, including business planning for the National Nuclear Academy, theevaluation of Hull Citybuild, the city's urban regeneration company, andsecuring a substantial high profile contract with English Partnerships toprovide consultancy support to the Government's first-time buyers initiative.This business area will be further developed in 2005/06. Our housingconsultancy remains the leading adviser to registered social landlords. TheGovernment's agenda for 'sustainable communities' will ensure that this remainsan expanding market for us. A major contract completed during the year was thesetting up of Wakefield Housing Trust, the largest housing stock transfer to asingle organisation. In our health and social care consultancy, we continue to be involved inground-breaking areas of activity, including advising existing and aspirantfoundation hospital trusts; continuing support for the implementation of the NHSNational Programme for IT (NPfIT); developing the first 'productive timedelivery framework', and planning a new model for contract management to enableGP practice-based commissioning work. Other successes include the closure of ournineteenth PFI project as corporate finance adviser, membership of winning teamson four major PFI developments, including Sherwood Forest and Colchester, andfurther growth of our project support for primary care 'local improvementfinance trusts' (LIFT). At the end of the year, we established a Centre for Organisational Learning as afocal point for our HR consultancy activities. The centre has already won workwith clients such as the Forensic Science Service, Hull and East Yorkshire NHSTrust and Merton Council. In central government, we have made excellent progress, having now grown to 50consultants from a standing start two years ago. Major assignments have been wonwith the Ministry of Defence, Environment Agency, Pensions Regulator, CabinetOffice and the Foreign and Commonwealth Office. A number of recent wins, such asa senior management training programme within the Ministry of Defence, have beenagainst competition from the major international consultancy groups. Management processes have been strengthened and, as a result of our divisionalintegration exercise, all support services have been brought together in ashared service centre that will also deliver improved financial managementarrangements. Tribal Resourcing Year ended Year ended 31 March 2005 31 March 2004 £000 £000Gross revenue 24,684 20,909EBITA** 5,252 5,406EBITA margin ** 21.3% 25.9% ** before goodwill and employee benefit trust costs Resourcing achieved good levels of turnover growth, up 36 per cent to £74m, withgross revenue growth of 18 per cent in a competitive public sector market. Therehas been some pressure in certain areas on consultancy fee rates and advertisingcommission rates which, combined with increased investment in infrastructure,has resulted in lower operating margins**. The opportunities for our resourcing business continue to be driven byorganisational change within our client organisations. Our recruitmentadvertising business has continued to grow its contractual base. We now workwith over 50 local authorities and over 100 health trusts, with an additional£9m new advertising turnover secured this financial year. Whilst we saw someslowdown in advertising spend by the NHS, the market in local government andeducation has remained strong. During the year, we won several major localauthority advertising contracts including Camden, Westminster and theCambridgeshire councils' consortium; new NHS contracts with Sheffield andNottingham Primary Care Trusts; and a new university contract with NottinghamTrent. Our resourcing proposition has been further developed and now includes aweb-based product, 'careers for leaders'. Although it is still early days, thisis showing good potential and we will continue to increase our investment inthis area. We are experiencing strong growth in our healthcare supply business, whereprofit and margins have increased. We have recently opened a new office in thenorth-west and will continue to invest in this area in 2006. During the year, we established a new interim management business to targetsenior management roles in local government and housing. This has had asuccessful start and will make a good contribution in 2005/06. We expect toextend this service into other Tribal markets over the next 12 months. Although our executive resourcing business has experienced challenging marketconditions with increased competition, we continue to see good levels of growth.Over the last 12 months, we have made over 30 chief executive appointmentsacross the local government and housing sectors, work that has been important inraising the Group's profile in these markets. We are now differentiatingourselves from most of our competitors by agreeing three year preferred suppliercontracts for executive resourcing services, as we have done recently withWolverhampton Council. We also continue to develop new markets in the centralgovernment and 'not for profit' areas. Over the next year, we will be launching several new resourcing products whichwill extend our range of services and will help further to increase barriers toentry. Tribal Communications Year ended Year ended 31 March 2005 31 March 2004 £000 £000Gross revenue 9,958 6,921EBITA** 2,382 1,741EBITA margin ** 23.9% 25.2% ** before goodwill and employee benefit trust costs Within Communications, both gross revenue (up 44 per cent) and operating profit** (up 37 per cent) showed good growth, with Geronimo and Tribal MPC both makingfull year contributions following their acquisition by the Group in 2003/04. The integration of our communications businesses in education, local governmentand health is now well advanced. Based on the consolidated fee income of thedivision, we have created a top ten public relations agency as judged by PR Weekcriteria and are one of the top three companies working in the £300m per annumpublic sector communications market. Much of this work is procured throughframework arrangements. We are on all the main government frameworks includingthe Department of Health, Central Office of Information, Department for Work andPensions, Learning and Skills Council and Department for Education and Skills. We are currently responsible for developing and delivering a number of publicinformation campaigns. Our contract to deliver the UK-wide 'Aimhigher' campaign,which advises young people on the benefits of going on to higher education, isworth £5m over four years. We are also working with the Department for Work andPensions on the 'Age Positive' and 'Age Partnership' campaigns, which promoteage diversity in the workplace, and the Edge Employer Awards for the EdgeFoundation which raises awareness of the value of practical learning. Our communications work in local government continues to develop. We now haveinterim heads of communication in a range of public sector bodies, including theLondon Fire & Emergency Planning Authority and the London Borough of TowerHamlets, and are running best value communications reviews for both theCambridgeshire Constabulary and the Association of Local Government. Within the NHS and health sector, we have substantially developed our creativebusinesses with new offices opening in Nottingham and Bury St Edmunds. We are confident that our new integrated management arrangements put us in astrong position to capitalise on the growing opportunities for PR andcommunications services in the public sector. We are now well placed to expandboth our capacity and geographical coverage. Tribal Property Year ended Year ended 31 March 2005 31 March 2004 £000 £000Gross revenue 21,331 18,443EBITA** 2,658 2,819EBITA margin ** 12.5% 15.3% ** before goodwill and employee benefit trust costs Property achieved revenue growth of 16 per cent, 7 per cent of which was fromthe acquisition of Derek Hicks and Thew (DHT) in November 2004. The decline in operating profit and margins was a consequence of the significantinvestment made in extending geographic coverage and in developing capacity forcapital spending programmes such as 'Building Schools for the Future'. Our architecture business, now employing close to 300 people, has extended itsregional network to include Exeter and Liverpool. We have also set up our firstoff-shoring centre in Cape Town that will provide the business with the capacityneeded to run several major public sector PFI projects in parallel. We have alsonow fully integrated our education and healthcare practices. Our propertyservices business continues to grow and has, during the year, extended itsbuilding surveying operation and the regional spread of its project managementbusiness. We will continue to invest in the growth of this business area. We are currently involved in the major capital programmes in healthcare (PFI,independent sector treatment centres (ISTCs), local improvement finance trusts(LIFT) and Procure 21), and in education (Building Schools for the Future,academies, further education colleges and higher education institutions). Wehave well-established relationships with many of the major contractors. A number of significant contracts have been won which underpin much of ourfuture revenue growth. In health, we have recently won work at BirminghamHospital PFI; we are currently preferred bidder on the £250m Peterborough PFIhospital project; and, working with Mercury Health, are involved in the firstwave of the ISTC programme. Extending our work in higher education, we haverecently won a £40m research facility at Oxford University's Old Road campus. Infurther education, we have now established a leading market position and arewinning both property consultancy and architectural work. For example, we havebeen appointed to deliver the £40m first phase of the new campus for theMid-Kent College at Chatham; we are advising on the £25m campus redevelopment atBarking; and within the academies programme, we have won project managementcontracts in Reading and Leicester. Increasingly, there are opportunities to provide clients in the property areawith an integrated proposition. For Solihull College, we brought together ourproperty and grant funding capability; for the academies programme, we combinedour education and property project management skills. Over the next few years, we will be focusing on developing new services tocomplement our existing offering and extending our presence in our core marketswhile diversifying into related sectors such as science and higher education. Tribal Education Year ended Year ended 31 March 2005 March 2004 £000 £000Gross revenue 36,317 35,884EBITA** 5,784 6,634EBITA margin ** 15.9% 18.5% ** before goodwill and employee benefit trust costs Education achieved overall revenue growth of 1 per cent despite the decline ofour teacher training business. Excluding teacher training, the division'sactivities delivered organic growth of 20 per cent and an operating margin of 18per cent The integration of our education services and advisory businesses hasstrengthened our position as a top five education company. In April 2005, weannounced that we had won contracts worth £50m over four years to deliver schoolinspection services for Ofsted. These contracts, which increased our marketshare from 21 per cent to approximately 30 per cent, are together the largesteducational contract we have won to date. We are seeing increasing signs that weare well placed to win other large scale contracts in education. During the year, we increased investment in our education benchmarking service,extending our product into higher as well as further education, where it hasbeen used by over 100 colleges. During 2005/06, we will seek opportunities totake this business into other Tribal markets. Our highly successful school improvement programme 'Pupils' Champions!', whichcurrently provides teaching support through contracts with the DfES and LEAs toschools in disadvantaged areas, has been expanded to meet the needs of thepost-16 sector (Students' Champions) and the professional developmentrequirements of teachers (Teachers' Champions). All are now part of our overallproduct range 'Tribal's Champions'. The market for courses and conferences for teachers and FE lecturers, which nowaccounts for 4 per cent of the Group's turnover, has remained difficult, withfunding changes and switching priorities impacting delegate numbers. However,the market for distance learning continues to be very strong with over 100colleges now working with us. Our e-learning and skills for life services havealso been developing well with major contracts won with the DfES, LSC, FEcolleges and regional development agencies. Good opportunities are emerging to bring together our property and educationconsultancy expertise to support capital projects. The Building Schools for theFuture (BSF) initiative will now include primary as well as secondary schoolsand the Government has also announced an extension of the academies programme.In further education, Sir Andrew Foster is undertaking a fundamental review ofthe future management of FE colleges, with likely benefits for private sectorinvolvement. All these will create further demand for our services. Looking ahead, we are confident that opportunities will emerge for theincreasing involvement of the private sector in the delivery of education,including the opportunity in the future to run schools and colleges. Tribal Technology Year ended Year ended 31 March 2005 31 March 2004 £000 £000Gross revenue 34,391 30,457EBITA** 5,145 4,308EBITA margin ** 15.0% 14.1% ** before goodwill, employee benefit trust costs Operating profit in technology was up 19 per cent The two acquisitions madeduring the year, Aldcliffe Computer Systems and Strategic Information TechnologyServices (SITS), contributed 16 per cent to revenue growth. We have now integrated our education software businesses, managed servicesactivities, and information management services and systems operations. We arenow the market leader in many of our sectors, providing services to over 35 percent of FE colleges, 60 per cent of universities, over 50 per cent of localeducation authorities and more than 30 per cent of work-based learningproviders. We are becoming increasingly successful at winning contracts which incorporateour complete service offering of technology, consultancy and managed services.In particular, we are making strong headway in taking on the management oflearning delivery. Significant contracts during the year include a £4m contract with Total forinformation management services; a £1.5m contract with the Science LearningCentres to deliver and support an online learning environment; a £9m contractwith Ufi learndirect as a 'hub' operator to manage its learning centres acrossthe south west; and the Learning and Skills Council awarded us a contract tomanage the information, advice and guidance (IAG) service in Dorset. These winsare a direct result of investment in our bidding capabilities and our combinedservice offering as an integrated division. We are now well-positioned to bid for progressively larger contracts,predominantly in the education and skills market, but also from the privatesector where there is growing demand for our information management services. Mercury Health - healthcare delivery Year ended Year ended 31 March 2005 31 March 2004 £000 £000Gross revenue 349 7EBITA** (343) - ** before goodwill, employee benefit trust costs and exceptional items The revenue and operating loss reported for this division is in line withexpectations reflecting the start-up nature of Mercury Health and the associatedbusiness development overheads. We expensed bid costs of £1.7m in accordancewith UITF34 'Pre-contract costs' as an exceptional item. In December 2004, we signed a £214m contract with the NHS to design, build,staff and operate a regional network of treatment centres. This contract, whichruns until June 2011, was part of the £2.5bn first wave of contracts procuredunder the Government's Independent Sector Treatment Centre (ISTC) initiative.This NHS initiative was developed to seek private sector capacity to developtreatment centres to carry out over 250,000 elective surgery procedures perannum. The contract provides Mercury Health with guaranteed volumes and there will alsobe opportunities to secure additional volumes from both the NHS and the privatesector. Financing for the contract totalled £57.5m. The Group has provided equity of£17.5m and secured additional funding of £40.0m comprising non-recourse seniordebt of £33.5m and equipment lease finance of £6.5m. The implementation of the contract is well advanced and the centres located inHigh Wycombe, Haywards Heath, Portsmouth and Gillingham are scheduled to openbetween Summer 2005 and Summer 2006. A fifth centre in Havant is due to open inearly 2008. We have made excellent progress with the establishment of the Mercury Healthmanagement team, recruiting some experienced managers from the NHS and privatesector healthcare companies. As a result of this contract, Mercury Health has a significant share of thisprogressive new market. The Government has already announced that there will befurther procurements, commencing over the coming months, with a combined valueof more than £4bn over five years. Mercury Health intends to bid selectively fora number of these contracts. Mercury Health will be supported in these bids, andin the development of its existing business, by the Hospital for SpecialSurgery, one of the leading orthopaedic hospitals in the US. We expect that the NHS market for independent healthcare will grow very stronglyover the next few years, driven in part by the move to 'payment by results', andwe believe that Mercury Health is well placed to take advantage of thesedevelopments. Customers The majority of the Group's customers continue to be at the delegatedlevel of government. For example, in education: schools, colleges anduniversities; and in health: primary care trusts, acute trusts and strategichealth authorities. However, we have continued to make very good progress indeveloping our customer base in central government. Now that the re-organisation of our business is completed, we are increasing ourinvestment in business development, account management and in bidding forlonger-term contracts. We have developed bidding resource in each of ourdivisions and have also increased the size of our central team. We areparticularly targeting contract opportunities that allow us to provide anintegrated service offering, deploying skills from across the Group. The majorexample of this has been the Mercury Health contract, which brought together ourconsulting, resourcing, property and communications services. There are now manyother examples of different parts of the business successfully working together. Branding and profile From 1 April 2005, with very few exceptions, businessesacross the Group commenced trading as Tribal. This re-branding has been receivedpositively by staff and customers and it will help to raise further Tribal'sprofile in its markets. It will also assist by enabling us to present a fullyintegrated proposition to our customers. Growth During the financial year, we announced three acquisitions: SITS, astudent administration software business in the higher education market,Aldcliffe, a trainee administration software business in the work-based learningmarket, and DHT, a healthcare architectural practice based in Liverpool. Thesebusinesses are now integrated into our technology and property divisions and areall performing ahead of our expectations. The acquisitions made in the year costan aggregate initial consideration of £16.0m, paid for by a combination of cashand shares. Deferred consideration of up to £5.9m is payable in respect of theseacquisitions, principally in shares, based on increases in operating profits. At the year end, our total estimated earn-out liability in respect of the periodto 31 March 2007 was £21.8m, of which we expect to pay £14.3m in 2005/06 and£7.5m in 2006/07. Although these liabilities are primarily to be satisfied inshares, the Group always retains sufficient headroom in its banking facilitiesto finance the remaining earn-outs in cash. As previously announced, in a numberof cases, we have already crystallised earn-out payments in order to facilitateour integration process. While we do still consider there to be interesting consolidation opportunitiesin our markets, we are currently focused on delivering organic growth throughincreasing headcount, developing new services and winning new contracts. Over the year, the businesses owned for two full years or more have increasedheadcount by 12 per cent and demonstrated underlying organic revenue growth of 5 per cent. We have continued to broaden and strengthen our management teams withan increasing number of high quality senior managers joining us from majorsupport services and consultancy competitors. We have adopted a very proactiveapproach to the recruitment of consultants and senior managers. We are seeing an acceleration of cross-selling, with many examples of the Groupproviding our customers with an integrated package of services from across thebusiness. Our five sector service groups (education; health and social care;local government and housing; regeneration; and central government) are now wellestablished and are becoming more influential in developing the Group'sstrategy, marketing approach and brand profile in their respective markets. Theoperational head office in London and the network of regional hub offices aremaking a significant contribution to joint working as well as enabling us toconsolidate our office network, reducing the number of individual locations overthe next two years. Management The Group is managed through a divisional structure. We are confidentthat the benefits of integration have been achieved whilst retaining much of ourentrepreneurial culture. We have now appointed divisional CEOs to lead each of the seven divisions. Weare starting to see benefits from cost efficiencies, brand leverage, shared bestpractice, enhanced recruitment and staff development initiatives and from sharedservices provided from the Group's eight hub offices. The Group's executive management board, consisting of divisional CEOs and otherkey Group directors, is responsible for the strategic and operational managementof Tribal, assessing investment priorities and managing the Group's riskprofile. People We are a business that relies on the quality and commitment of our peopleand our success is due to the hard work and professional integrity of ourmanagement and employees across the Group. We have created a culture in whichindividuals at all levels are given a high degree of autonomy within asupportive Group framework. We have established a clear set of values whichencourage entrepreneurialism, profit focus and a dynamic culture within a strongethos of customer service, integrity and social awareness. Our staff believethey are making a substantial contribution to improving public services and tothe lives of those affected by those services. We have exceptionally talented individuals amongst our middle and seniormanagement teams. Many of our directors are nationally leading figures in theirspecialist areas. We will continue to recruit ambitious and talented individualswho will contribute to the growth of the business. These will be from a varietyof backgrounds, both public and private sector. In October 2004, we launched the second Tribal management development programmein conjunction with Henley Business School. In the last two years, 50individuals have attended. We will continue to invest further in the developmentof our senior managers and staff during 2005/06. Tribal is committed to positive and proactive communications with our employees.We have embraced the 'Information and Consultation Rights' directive andintroduced elected staff forums which are currently being rolled-out across thebusiness. We have also during the year introduced an independent andconfidential counselling service for our staff and are currently reviewing ourEmployee Assistance Programme to ensure it is delivering a valuable service in arange of areas. We are grateful to staff at all levels of the company for their effortthroughout the year and for their contribution to our continuing success. Prospects We have now completed our organisational re-structuring and arewell-advanced with our integration process. We have won several major contractswhich demonstrate the potential of the Tribal business model. The Group is nowin a strong position to take advantage of the many opportunities arising in itskey markets. Henry J PitmanChief Executive Consolidated profit and loss accountFor the year ended 31 March 2005 2005 Before 2004 Before Goodwill, Total goodwill Goodwill Total goodwill, EBT and EBT and EBT and EBT and Exceptional exceptional exceptional exceptional Items items items Note Items £000 £000 £000 £000 £000 £000Turnover(grossearnings) 2Continuingoperations 221,035 - 221,035 185,744 - 185,744Acquisitions 8,435 - 8,435 - - - 229,470 - 229,470 185,744 - 185,744Direct agencycosts (49,613) - (49,613) (33,523) - (33,523) -Gross revenue 2 179,857 - 179,857 152,221 - 152,221Cost of sales (102,772) - (102,772) (81,134) - (81,134) Gross profit 77,085 - 77,085 71,087 - 71,087 Net administrativeexpenses (54,707) - (54,707) (47,934) - (47,934)Goodwillamortisationand impairment - (16,636) (16,636) - (10,690) (10,690)Employeebenefit trustcredit/(costs) - 244 244 - (1,025) (1,025)Exceptionalitems 3 - (1,747) (1,747) - (3,040) (3,040)Totaladministrativeexpenses (54,707) (18,139) (72,846) (47,934) (14,755) (62,689) 22,378 (18,139) 4,239 23,153 (14,755) 8,398Operatingprofit 2 Continuingoperations 20,044 (17,694) 2,350 23,153 (14,755) 8,398Acquisitions 2,334 (445) 1,889 - - - 22,378 (18,139) 4,239 23,153 (14,755) 8,398Net interestpayable (4,451) - (4,451) (3,076) - (3,076) Profit/(loss)on ordinaryactivitiesbeforetaxation 17,927 (18,139) (212) 20,077 (14,755) 5,322Taxation 5 (5,367) - (5,367) (6,176) - (6,176)Profit/(loss)on ordinaryactivitiesafter taxation 12,560 (18,139) (5,579) 13,901 (14,755) (854)Minorityinterest(equity) (303) - (303) (108) - (108) Profit/(loss)for thefinancial year 12,257 (18,139) (5,882) 13,793 (14,755) (962)Dividends(equity) 6 (2,280) - (2,280) (2,090) - (2,090) Retainedprofit/(loss)for the year 9,977 (18,139) (8,162) 11,703 (14,755) (3,052)Earnings/(loss) pershareBasic 4 17.2p (25.4)p (8.2)p 22.0p (23.5)p (1.5)pDiluted 4 15.6p (23.8)p (8.2)p 20.5p (22.0)p (1.5)p Consolidated balance sheetAt 31 March 2005 31 March 31 March Note 2005 2004 £000 £000Fixed assetsIntangible assets- goodwill 7 197,188 200,798- development expenditure 740 557Tangible assets 13,047 6,356Investments 151 190 -------- -------- 211,126 207,901Current assetsStocks 9,102 2,058Debtors 8 56,959 45,245Cash at bank and in hand 12 28,335 41,740 -------- -------- 94,396 89,043 Creditors: amounts falling due within one year 9 (75,734) (67,784) -------- -------- Net current assets 18,662 21,259 -------- -------- Total assets less current liabilities 229,788 229,160 Creditors: amounts falling due after more thanone year 10 (78,489) (72,015) -------- -------- Net assets 151,299 157,145 -------- --------Capital and reservesCalled up share capital 3,748 3,448Share premium account 86,928 79,548Revaluation reserve 91 -Capital reserve 9,545 9,545Merger reserve 36,615 33,444Shares to be issued 17,934 27,172Profit and loss account (5,456) 2,861 -------- -------- Equity shareholders' funds 149,405 156,018 Equity minority interests 1,894 1,127 -------- -------- Total capital employed 151,299 157,145 -------- -------- Reconciliation of movements in consolidated shareholders' fundsAt 31 March 2005 31 March 31 March 2005 2004 £000 £000 Loss for the financial year (5,882) (962) Dividends (2,280) (2,090) New share capital subscribed (net of issue costs) 7,680 36,995Increase in revaluation reserve 91 -Movement in merger reserve 3,171 17,605Movement in shares to be issued (8,571) (10,355)Share related awards (244) 912Share related awards acquired - 248Share option exercises (578) - -------- -------- Net (reduction)/addition to shareholders' funds (6,613) 42,353 Opening shareholders' funds 156,018 113,665 -------- -------- Closing shareholders' funds 149,405 156,018 -------- -------- Consolidated cash flow statementFor the year ended 31 March 2005 31 March 31 March Note 2005 2004 £000 £000 Cash inflow from operating 11 12,240 31,293activities Returns on investments and servicingof financeInterest paid (5,547) (4,957)Interest element of finance lease (8) (14)rental paymentsInterest received 914 1,347 ------- --------Net cash outflow from returns oninvestments and servicing of finance (4,641) (3,624) TaxationCorporation tax paid (4,655) (7,772) Capital expenditure and financial 13investmentPayments to acquire tangible fixed (5,315) (3,399)assetsPayments in respect of items in thecourse of construction (2,652) -Development costs capitalised (640) (502)Payments to acquire investments (35) (10)Sales of investments 170 865Sale of tangible fixed assets 2,265 718 -------- --------Net cash outflow from capitalexpenditure and financial investment (6,207) (2,328) AcquisitionsPurchase of subsidiary undertakings (12,988) (55,813)Net cash acquired with subsidiary undertakings 5,067 7,350 -------- -------- Net cash outflow from acquisitions (7,921) (48,463) Equity dividend paid (2,135) (688) -------- -------- Cash outflow before financing (13,319) (31,582) FinancingIssue of ordinary share capital less 106 20,123issue costsRepayment of borrowings (6,231) (11,617)New secured loans less issue costs 6,095 35,243Capital element of finance lease rental payments (56) (98) ------- -------- Net cash (outflow)/inflow from financing (86) 43,651 ------- -------- (Decrease)/increase in cash in the year 13,405) 12,069 ------- -------- Consolidated cash flow statement (continued)For the year ended 31 March 2005 31 March 31 March 2005 2004 £000 £000Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash in the year (13,405) 12,069Cash outflow from movement in debt (1,680) (27,615) --------- -------- Change in net debt resulting from cash flows (15,085) (15,546)Finance leases acquired with subsidiaries (31) (1)Debt acquired with subsidiaries - (267)New finance leases (18) - --------- -------- Movement in net debt in the year (15,134) (15,814)Net debt at the start of the year (37,897) (22,083) --------- -------- Net debt at the end of the year (53,031) (37,897) --------- -------- Notes 1 Preliminary Announcement The Board of directors approved the preliminary announcement on 21 June 2005.The financial information set out above does not constitute the Group'sstatutory accounts for the years ended 31 March 2005 or 2004, but is derivedfrom those accounts. Turnover represents the amounts (excluding value added tax) derived from theprovision of goods and services to third party customers and includes the grossamounts billed in respect of commission based income. Direct agency costs comprise media payments and production costs in respect ofcommission based income. Gross revenue comprises commission and fees earned inrespect of turnover. Cost of sales includes the direct expenditure incurred in providing the goodsand services described above, including the costs of associates and the salarycosts of employed fee earners. Administrative expenses include the salary costsof non-fee earners. The comparative results for cost of sales and administrativeexpenses have been shown on a consistent basis and this has resulted in a netreclassification of £16.5m (2004: £15.3m) from administrative expenses to costof sales. There is no impact on operating profit or net assets in either period. In all other respects the financial information is prepared on a basisconsistent with the accounting policies as stated in the previous year'sfinancial statements. Statutory accounts for 2004 have been delivered to theRegistrar of Companies and those for 2005 will be delivered following thecompany's Annual General Meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under s237 (2) or(3) of the Companies Act 1985. International Financial Reporting Standards ('IFRS') The Group will adopt IFRS in its consolidated financial statements for the yearending 31 March 2006. The Group has made significant advances in assessing thefinancial impact of convergence with IFRS and in compliance with European Unionregulation the interim results for the half year to 30 September 2005 will bepresented under IFRS. 2 Segmental analysis The Group operates through seven divisions, Tribal Communications, TribalConsulting, Tribal Education, Tribal Property, Tribal Resourcing, TribalTechnology and Mercury Health. The turnover and profit before tax of the Group for the year has been derivedfrom its principal activities, wholly undertaken in the United Kingdom. Turnover Gross revenue Operating profit before goodwill, EBT and exceptional items 2005 2004 2005 2004 2005 2004 £000 £000 £000 £000 £000 £000 Communications 9,958 6,921 9,958 6,921 2,382 1,741Consulting 55,238 42,130 55,238 42,130 6,669 7,121Education 36,317 35,884 36,317 35,884 5,784 6,634Property 21,331 18,443 21,331 18,443 2,658 2,819Resourcing 74,297 54,432 24,684 20,909 5,252 5,406Technology 34,391 30,457 34,391 30,457 5,145 4,308Mercury Health 49 7 349 7 (343) -Central andbid costs - - - (5,169) (4,876)Inter segmentsales (2,411) (2,530) (2,411) (2,530) - - ------- ------- ------ ------- ------- -------- Total 229,470 185,744 179,857 152,221 22,378 23,153 -------- -------- ------- ------- -------- -------- Items below operating profit before goodwill amortisation, EBT and exceptionalitems, are not analysed by division. Notes (continued) 3 Exceptional items The exceptional items of £1,747,000 (2004: £3,040,000) are in relation tofurther bid and implementation costs incurred on the NHS Independent SectorTreatment Centre contract. In September 2004 the Board received sufficientassurance to believe the contract would reach financial close (which occurred on10 December 2004) and has capitalised subsequent bid costs post September 2004in accordance with UITF 34. 4 Earnings per share Earnings per share and diluted earnings per share are calculated by reference toa weighted average number of ordinary shares calculated as follows: 2005 2004 thousands thousandsWeighted average number ofshares outstanding: Basic weighted average numberof shares in 71,421 62,622issueEmployee share options 890 1,926Shares to be issued in respect of deferredconsideration 6,164 2,695 -------- -------Weighted average number of sharesoutstanding for dilution calculations 78,475 67,243 ------- ------- The adjusted basic and adjusted diluted earnings per share figures shown on theprofit and loss account on page 14 are included as the directors believe thatthey provide a better understanding of the underlying trading performance of theGroup. A reconciliation of how these figures are calculated is set out below: 2005 2004 Earnings (Loss)/ Earnings (Loss)/Related Shares:
Tribal Grp.