18th Sep 2006 07:19
Ricardo PLC18 September 2006 18 September 2006 Ricardo plc Preliminary results for the year ended 30 June 2006 Ricardo plc is the leading UK independent automotive consultancy, employing1,700 people. The company has technical centres in the UK, USA, Germany, CzechRepublic and offices in Tokyo and Shanghai, the global client list includes theworld's major automotive OEMs and Tier1 suppliers from the passenger car,commercial vehicle, military, motorsport and related sectors. HIGHLIGHTS •Turnover up 9% to £173m (2005: £158m) •Underlying profit before tax (excluding pensions credit) up 26% to £10.8m (2005: £8.6m) •Profit before tax including pensions credit £14.5m (2005: £8.6m) •Underlying earnings per share (excluding pensions credit) up 27% to 18.8p (2005: 14.8p) •Proposed final dividend raised to 6.7p, totalling 9.4p for the year (2005: 9.0p) •Order book increased 4% to £72.2m (2005: £69.7m), pipeline of prospects remains strong driven by technology and geographical investments •Profits up from a broader geographical, sector and client base with strong results from UK and Strategic Consulting •Ricardo Germany small operating profit in last 5 months •Pensions deficit reduced by £11m Commenting on the results, Dave Shemmans, Chief Executive said: "I am very pleased with this set of results that again show stronger revenuesand growth in profits. Strategic Consulting had a strong year, and the UKbusiness delivered good results with increasing margins, not forgetting a newworld diesel powered land speed record. The engineering led recovery in Germanyis underway with a pleasing response from the increasing German customer base. Overall we have had a satisfactory start to the new year, despite activity beinglower than last year for the US and, as expected, in Strategic Consulting. TheUK and Germany are ahead of prior year and the Group's order prospects in totalcontinue to build. This together with our strategy of increasing the geographic,sector and customer spread, gives us confidence for further progress in the newfinancial year." Further enquiries: Ricardo plcDave Shemmans, CEO Tel: 01273 455611Andrew Goodburn, Finance Director Tel: 01273 455611Website: www.ricardo.com Gavin Anderson & CompanyFergus Wylie/Daniel Hunter Tel: 020 7554 1400 Notes to Editors: Ricardo is a leading global provider of technology, engineering solutions andstrategic consulting to the world's automotive industries. It is headquarteredin the UK, with international offices in the US, Europe and Asia. It is listedon the London Stock Exchange ("RCDO.L"). The Group combines business, product and process strategy with fundamentaltechnical research and the implementation of large-scale new product developmentprogrammes to help its clients with business strategy and restructuring, processre-engineering, vehicle, electronics & software, engine, transmission anddriveline design, as well as more traditional engineering, testing and systemsintegration. Ricardo serves a wide and balanced customer base represented by the leadingglobal automakers, vehicle component and system manufacturers, and automotiveregulatory agencies. It also serves other sectors such as motorcycle, heavy-dutytruck, off-road and military vehicles, marine and locomotive propulsion systemmanufacturers, as well as leading teams in all forms of motorsport. Review of the Year Overall, our profit improvement continues and we are seeing the benefits of ourre-focused strategy to broaden the geographic reach and client base, which hashelped us to deliver a significant profit increase despite poor marketconditions in Germany. Asian clients are contributing strongly, and thecommercial vehicle and military sectors are bringing an improving balance toRicardo's business. Annual Results and Dividend This is the first set of annual results presented under International FinancialReporting Standards. Underlying group profit before tax (which excludes an exceptional pensionscredit of £3.7m) was up 26% to £10.8m (2005: £8.6m) on revenue for the financialyear of £173m (2005: £158m). Earnings per share excluding the pensions creditwas up 27% to 18.8p (2005: 14.8p). There was a cash generation in the year of£5m and net borrowings reduced to £5.8m, representing a gearing of 12% (2005:30%). Despite the continued challenges facing some of the major global carmanufacturers, the Group order book increased year on year to £72.2m from £69.7mlast year, with a strong pipeline of prospects. Under IAS19, the deficit in our defined benefit pension scheme reduced from£34.7m to £23.6m due mainly to a better than anticipated return from the equityinvestments in the fund, a slightly improved bond yield in the past twelvemonths and the effect of capping pensionable salaries to inflation. The effectof the capping reduced the deficit by £3.7m, which under IAS19 is reflected inthe income statement as a pensions credit rather than through reserves. We continue to benefit from research and development government tax incentivesin both the UK and North America, which has resulted in a low tax rate sinceApril 2002. Whilst we expect these tax incentives to continue, an increasingproportion of the work we undertake in the UK is for new customers, particularlyin China and India where payments are often subject to withholding taxes, so ouroverall tax rate may increase a little. This year, as we have started to rebuild profitability, we are proposing toincrease the total dividend to 9.4p per share, the first increase for threeyears. This gives a dividend cover of two times. The proposed final dividend of6.7p will be paid on 24 November 2006 to all shareholders on the register atclose of business on 27 October 2006. Business Overview With the exception of Germany all areas of the business have shown improvedresults with the operating profits in the UK and Strategic Consulting up 55% and44% respectively. Germany, underpinned by investments in people and facilities,and with an increased customer base, has returned to a small operating profitfor the last 5 months of the financial year. It is also generating business forother divisions. The US continued to grow, up 10% on prior year operatingprofits, on the back of client diversification. Our business focus and investments remain targeted at increasing the strengthand robustness of our client base and the delivery of higher value-addedservices based on technology and innovation. Control and electronics isoperating at full capacity as we see continued demand in hybrid programmes andvehicle electronics. Our diesel programmes also continue to grow reflecting theglobal demand for fuel economy and emissions control. Our investments into dualclutch transmissions technology are also being actively exploited withincreasing revenue streams. The team in Prague has now grown to over 100 as we continue to invest in thisdevelopment centre. This expansion has been across the board in our mechanical,electronic and software capabilities. Prague is proving increasingly successfulas it matures in providing all divisions across the group with a high qualitycost effective engineering resource. Technical Consulting Our technical consulting business has well-equipped centres in the UK, NorthAmerica, Germany and the Czech Republic, and satellite offices in Japan andChina. With this diversity we are able to draw together the best team availableto service our client needs. UK We have significantly increased turnover and profits against the prior year witha solid balance of engine, transmissions, vehicle and electronics activity froma diverse customer base in terms of both geography and sector. Continuing emissions legislation and a growing market share for diesel in boththe passenger car and commercial vehicle sectors is resulting in increasingdemand for technology that has benefited our engines business. Meanwhile, demandfor our gasoline engine activity is being driven by many of our Asian clients,as they look to establish their own products for both domestic and exportmarkets. Over the year we have been involved in some high profile supercar programmes aswell as in the commercial, passenger car and motorsport sectors. This hasresulted in growing demand for engineering expertise that has seen ourtransmissions business return to good levels of activity. Following our researchinto dual clutch technology and safety-related torque vectoring, we havereceived orders from European and Asian clients which are both OEM and Tier 1 innature. The vehicle business has had a much improved period with a good spread ofcustomers from Europe and Asia, driven by continued activity on establishedprogrammes supporting new passenger car product introductions plus increasingactivity from the commercial vehicle sector driven by emissions legislation,fuel economy improvement and a drive to reduce product cost. The militarybusiness has had a particularly strong year and continues to grow, driven byworld events and the expansion of the EU. The significant interest in hybrid technology, both at the research level andproduction implementation stage has continued the growth of our controls andelectronics business. We continue to run at high levels of capacity and willinvest accordingly to maintain our position in this key strategic technology,which we continue to believe will be key to the future of automotiveengineering. The programme with Shanghai Automotive Industry Corporation ("SAIC") continuesto progress well with new product development being conducted both withinRicardo 2010 and other parts of Ricardo UK. The relationship continues todevelop and SAIC both through Ricardo 2010 and directly has become a wellestablished customer for Ricardo. We anticipate that SAIC will exercise itsoption to acquire Ricardo 2010 in the coming year (refer to note 3), however wedo not anticipate that the exercise of this option will have any material impacton our results for the new financial year. We were also delighted that our technology and people were key to breaking theworld diesel land speed record with JCB by over 100mph, achieving 350mph thissummer. We have not only demonstrated that we have the world's fastest dieseltechnology but have also demonstrated this year one of the world's mostefficient powertrains by way of our 76mpg diesel-hybrid vehicle in conjunctionwith PSA. USA Our strategy to broaden our client base in the passenger car, commercial vehicleand military sectors in the US has continued to be successful. Our US businesshas delivered increased turnover and profits during a difficult period for theUS automotive industry. We continue to work with all the major passenger carOEMs, though the market remains highly competitive. Our commercial vehiclesbusiness is performing well, benefiting from a healthy client base and on-goingdemand in the marketplace. As manufacturers strive to meet the deadline of the2007 and 2010 emissions legislation, we continue to see high demand for our newheavy-duty test bed centre in Chicago. At the same time the North Americanmarket is catching up with the global marketplace and we are seeing increasingactivity in electronics, hybrid, diesel and transmissions which has also led togood demand of our Detroit based test beds. We have restructured the development and marketing of our global softwareproducts to report into the US and we are pleased to see the lead product, WAVE,performing strongly in the market. We have also introduced two new design andanalysis products, FEARCE and SABR, and software sales overall are contributingwell. Germany The German automotive industry saw little improvement throughout the year,however despite the market, the actions we have taken have started to showresults. While we report a small loss for the period this occurred in the firstseven months of the year (excluding £0.2m in respect of a senior managementtermination at the end of the financial year). The engineering side of thebusiness, which has until recently been of a lower value-added nature than therest of Ricardo's business and targeted at fewer customers, has made significantprogress in the second half on the back of people and facility basedinvestments. It has returned to an operating profit for the last 5 months, ishelping develop new German based clients and is starting to win larger highvalue-added programmes which not only benefit the German business but alsoinclude pass through work to other divisions. Our investment in people, tools and facilities such as heavy-duty test cellscontinues to increase the level of high value-added capability. By adopting amore client-focused organisation in line with the rest of the Group and byadding a much stronger cross-selling team philosophy, we have enhanced theleadership of the business through structural changes. We are already seeing theinitial results of these investments in terms of test-bed commitment andincreased orders from a broader client base including the commercial vehicle andother automotive sectors. Whilst we anticipate our German business returning toprofit in the new financial year we remain cautious of the outlook until theGerman industry returns to more buoyant levels. Asia We continue to expand our capability and staff in this important region.Following the opening of our office in Shanghai earlier in the year, in thesecond half we decided to develop our presence by establishing a modestTechnical Centre, with the encouragement of our growing customer base. Togetherwith our presence in Japan these offices are the front line to our Asian clientbase, which is becoming increasingly important, delivering 21% of our orderintake this year. At the moment the work secured in the Asian regions (includingJapan, China, India, Korea and Malaysia) is primarily fed back to the UKoperations. However, we believe that as our Asian customers increasingly haveglobal operations, this will positively impact our US, Czech and Germanoperations in the future. Strategic Consulting Our Strategic Consulting operation had a strong year delivering key programmesfor high quality clients globally. It increased turnover and profits from anexpanded client base. Our work has now evolved significantly from Ricardo'shistoric automotive practices in terms of the nature of the programmes. Wecontinue to secure work against more traditional consultancy market leaders,displacing many incumbent positions. Automotive-specific, deep-content management consultancy continues to be wellreceived by clients and contributes well to the group results. Product cost downand quality improvement remain the core activities by volume. Businessrestructuring and turnaround advisory services are also in demand together withan increasing market for product and technology strategy through to marketintroduction strategies. We continue to develop the service offerings in thebusiness to ensure we remain at the centre of thought leadership in theindustry. Geographically our highly mobile teams are now operating on a global basis withcustomers in the US, Europe and Asia. Moreover, the consulting business haspassed through significant levels of technical consulting business in the yearto the rest of the Group as the customers move from strategy to productdevelopment. Research and Development Research and development remains a core element to the continued success of ourbusiness. Our past investment in R&D has enabled us to identify technologies forhybrids, low emission diesels, next generation transmissions and active safetyas key future directions. During the year our internally funded research and development spend at primecost increased by 15% from £3.9m to £4.5m. We will continue to invest in ourintellectual capital as we look to maintain our innovative edge to solve theautomotive industry's key issues, as well as forecast future products andtechnologies and industry trends that will enable us to successfully guide ourclients through an increasingly complex and important legislative environment. At the same time, we have also increased our R&D output by focusing onleveraging matching R&D funds from clients and government bodies. Areas that weare concentrating on include next generation diesel technology for commercialvehicles and passenger cars, future hybrid vehicle technology, fuel efficientand high performance downsized gasoline engines exploiting 2stroke/4strokeswitching concepts, drive-by-wire for active safety and advanced torquevectoring transmissions for improved safety and handling. We are also looking atsoftware systems that are designed to reduce product development time and cost,while at the same time improving quality. Strategy To exploit the opportunities provided by the changing automotive landscape,Ricardo has put in place a new strategy and direction to firmly establish itselfas the premium global deep content automotive consultancy. Ricardo willcontinually review and enhance this strategy together with its technology andproduct offerings to retain its position as a natural first choice at the heartof the sector It is clear that the global industry faces many challenges, from the strategicto the specific, from the system to the component, from process to the productand from the global to the national. Ricardo is positioned to apply itsintellectual capital to these issues and provide profit enhancing solutions tothe global industry. Its mission is to add value through innovation andtechnology, with professionalism in all it does. Uniquely positioned with offerings from blue-chip management consultancy,strategic consulting, advanced research, model year product development and postproduction support, Ricardo can apply itself to solving the most challengingglobal strategic and delivery issues, whether at the component/system level (eg.engine, transmission, driveline, electronics, chassis) or at the whole vehiclelevel. Ricardo prides itself on flexibility, innovation, technical excellenceand fast track assured delivery. The strategy of the business is underpinned by four cornerstones which reflectthe changing and challenging nature of the automotive industry: • Avoidance of cyclicality and dependency in geography, technology and customer• Focused high quality growth• High value services• High productivity and value through global operation People There have been a number of management changes implemented during the period tostrengthen the operations in Germany, Japan and the UK, to bolster programmedelivery and to move towards a more co-ordinated Group operation where we canmaximise the resources across the Group, improve quality and avoid duplication.These changes have brought on the best of the internal talent and also attractedexternal expertise where necessary. The management team has been strengthenedwith the external recruitment of a president for our Japanese operation, AkioOkomura and a new business development director for the UK, Raul Meyer. Both ofthese roles have been filled with experienced automotive industry people whohave spent a major part of their career with blue-chip management consultants.In addition we have strengthened the technical leadership with the recruitmentof a new head of vehicle engineering, Don Irvine, and a new head of heavy-dutyengines, Peter Heuser. Post the year end, a new US based head of our control andelectronics business ("C&E"), Karina Morley, has been appointed, which willincrease our penetration of the US C&E market and build the business globally.We look forward to their contribution and impact in the market place. Despitethe skills shortage in some areas we have managed to increase total staffnumbers in the year with high quality staff, mostly into Prague and the RicardoMidlands Technical Centre in the UK. I am pleased to report that Paula Bell has been appointed to join the board ofdirectors on 9 October 2006 and take over from Andrew Goodburn as Group FinanceDirector with effect from the Annual General Meeting on 10 November 2006, beforehe retires in January 2007. I would like to thank Andrew for his excellentservice to Ricardo in a vital role, and wish him a long and happy retirement. Outlook This year finished slightly ahead of market expectations, albeit against a morechallenging European market than anticipated. The outlook for the globalautomotive market remains mixed, with continuing strong activity in Asia offsetby a subdued Europe and the well publicised problems of the US car industry. Overall we have had a satisfactory start to the new year, despite activity beinglower than last year for the US and, as expected, in Strategic Consulting. TheUK and Germany are ahead of prior year and the Group's order prospects in totalcontinue to build. This together with our strategy of increasing the geographic,sector and customer spread, gives us confidence for further progress in the newfinancial year. D Shemmans Consolidated Income Statementfor the year ended 30 June 2006 Notes 2006 2005 Continuing operations Revenue 2 173.1 158.1 --------------------------------------------------------------------------------Operating profit 2 15.8 10.4--------------------------------------------------------------------------------Operating profit excluding pensions credit 12.1 10.4(underlying)Pensions credit 3.7 --------------------------------------------------------------------------------Finance income 1.4 0.8Finance costs (2.7) (2.6)--------------------------------------------------------------------------------Profit before taxation 14.5 8.6--------------------------------------------------------------------------------Profit before tax excluding pensions credit 10.8 8.6(underlying)Pensions credit 3.7 --------------------------------------------------------------------------------Taxation (2.3) (1.1) --------------------------------------------------------------------------------Profit for the year 12.2 7.5--------------------------------------------------------------------------------Profit for the year excluding pensions 9.6 7.5credit (underlying)Pensions credit 2.6 ---------------------------------------------------------------------------------Profit attributable to minority interest 0.1 0.1Profit attributable to equity shareholders 12.1 7.4--------------------------------------------------------------------------------Earnings per ordinary share 4 Basic 24.0p 14.8pDiluted 3.9p 14.8p -------------------------------------------------------------------------------- Consolidated Statement of Recognised Income and Expensefor the year ended 30 June 2006 2006 2005 £m £m ------------------------------------------------------Currency translation differences on net investment inforeign operations (0.2) 0.2 Actuarial gains/(losses) on the defined benefit pension scheme 6.7 (7.9) Tax on actuarial gains/(losses) on the defined benefit pension scheme (2.0) 2.3--------------------------------------------------------------------------------Net income and expense recognised directly in equity 4.5 (5.4) Profit for the financial year 12.2 7.5--------------------------------------------------------------------------------Total recognised income for the year 16.7 2.1--------------------------------------------------------------------------------Attributable to minority interest 0.1 0.1Attributable to equity shareholders of the parent 16.6 2.0-------------------------------------------------------------------------------- Consolidated Balance Sheetas at 30 June 2006 Notes 2006 2005 £m £m -----------------------------------------------------------------Assets Non current assets Goodwill 15.9 15.6 Other intangible assets 1.5 1.0Property, plant and equipment 45.2 46.7Deferred tax assets 8.7 8.0-------------------------------------------------------------------------------- 71.3 71.3--------------------------------------------------------------------------------Current assets Inventories 7.0 6.9Trade and other receivables 47.3 43.1Current taxation 0.2 1.6Deferred tax assets 0.6 4.5Cash and cash equivalents 49.8 28.8Assets classified as held for sale 3 7.5 2.0-------------------------------------------------------------------------------- 112.4 86.9 --------------------------------------------------------------------------------Total assets 183.7 158.2-------------------------------------------------------------------------------- Liabilities Current liabilities Bank loans and overdrafts (45.0) (21.5)Trade and other payables (38.9) (35.4)Current tax liabilities (2.5) (4.9)Deferred tax liabilities (0.6) (0.7)Provisions (0.5) (0.4)Liabilities directly associated with non-current assetsclassified as held for sale 3 (7.5) (2.0)-------------------------------------------------------------------------------- (95.0) (64.9)--------------------------------------------------------------------------------Net current assets 17.4 22.0--------------------------------------------------------------------------------Non current liabilities Bank loans (10.6) (18.5)Retirement benefit obligations (23.6) (34.7)Deferred tax liabilities (4.4) (3.4)-------------------------------------------------------------------------------- (38.6) (56.6)--------------------------------------------------------------------------------Total liabilities (133.6) (121.5)--------------------------------------------------------------------------------Net assets 50.1 36.7-------------------------------------------------------------------------------- Shareholders' equity Ordinary shares 12.7 12.5Share premium 13.3 12.2Other reserves 0.6 1.2Retained earnings 22.9 10.3--------------------------------------------------------------------------------Total shareholders' equity 49.5 36.2Minority interest in equity 0.6 0.5--------------------------------------------------------------------------------Total equity 50.1 36.7-------------------------------------------------------------------------------- Consolidated Cash Flow Statementfor the year ended 30 June 2006 Notes 2006 2005 £m £m -----------------------------------------------------------------Cash flows from operating activities Cash generated from operations 5 20.0 11.2 Interest received 1.4 0.8Interest paid (2.7) (2.6)Tax (paid)/refunded (1.4) 0.3--------------------------------------------------------------------------------Net cash from operating activities 17.3 9.7--------------------------------------------------------------------------------Cash flows from investing activities Proceeds of sale of property, plant and equipment 0.3 0.2Purchase of intangible assets (1.1) (0.9)Purchase of property, plant and equipment (7.3) (5.4)--------------------------------------------------------------------------------Net cash used in investing activities (8.1) (6.1)--------------------------------------------------------------------------------Cash flows from financing activities Net proceeds from issue of ordinary share capital 1.3 0.2Net proceeds from issue of new bank loan - 15.5Repayment of borrowings (0.5) (17.2)Dividends paid to shareholders (4.6) (4.6)Dividends paid to minority interests - (0.1)--------------------------------------------------------------------------------Net cash used in financing activities (3.8) (6.2)--------------------------------------------------------------------------------Effects of exchange rate changes (0.5) (0.2)--------------------------------------------------------------------------------Net increase / (decrease) in cash and cash equivalents 4.9 (2.8) Cash and cash equivalents at 1 July 7.8 10.6 --------------------------------------------------------------------------------Cash and cash equivalents at 30 June 12.7 7.8-------------------------------------------------------------------------------- At 1 July Cash and cash equivalents 28.8 25.5Bank overdrafts (21.0) (14.9)-------------------------------------------------------------------------------- 7.8 10.6-------------------------------------------------------------------------------- At 30 June Cash and cash equivalents 49.8 28.8Bank overdrafts (37.1) (21.0)-------------------------------------------------------------------------------- 12.7 7.8-------------------------------------------------------------------------------- Notes 1. Basis of preparation This preliminary announcement has been prepared on the basis of the accountingpolicies as set out in the financial statements for the year ended 30 June 2006,which have been prepared for the first time in accordance with InternationalFinancial Reporting Standards ("IFRS"). The financial information herein doesnot amount to full statutory accounts within the meaning of section 240 of theCompanies Act 1985 (as amended). The figures for the year to 30 June 2005 havebeen extracted from the unaudited IFRS restatements issued on 21 December 2005,subject to certain minor adjustments and reclassifications, which werethemselves based on the Annual Report and Accounts 2005 which has been filedwith the Registrar of Companies and on which the auditors gave an unqualifiedaudit report and did not include a statement under section 237(2) or (3) of theCompanies Act 1985. In our press release of 21 December 2005 we disclosed theimpact of IFRS on our accounting policies. Underlying results such as underlying operating profit, profit before tax,profit for the year and earnings per share exclude the impact of exceptional oneoff profits and losses such as those arising from pension curtailments,exceptional levels of redundancies and impairments. 2. Segmental reporting Business Segments Continuing operations - revenue and results Technical Consulting Strategic Consulting Total 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m-------------------------------------------------------------------------------------------------Revenue earned 159.2 149.2 13.9 8.9 173.1 158.1Adjustment forinter-segmental revenue (3.8) (2.5) 3.8 2.5 - --------------------------------------------------------------------------------------------------Revenue from third parties 155.4 146.7 17.7 11.4 173.1 158.1-------------------------------------------------------------------------------------------------Segment result (beforepensions credit) 9.5 8.6 2.6 1.8 12.1 10.4Pensions credit 3.7 --------------------------------------------------------------------------------------------------Operating profit 15.8 10.4Finance income 1.4 0.8Finance costs (2.7) (2.6) ----------------- Profit before tax 14.5 8.6 Tax (2.3) (1.1) ----------------- Profit for the year 12.2 7.5 ----------------- Divisional results By operating unit reflecting the revenue and profit generated by the staff inthose businesses: Revenue earned Operating profit 2006 2005 2006 2005 £m £m £m £m --------------------------------------------Technical ConsultingUK 98.6 85.2 8.5 5.5North America 35.4 34.1 2.2 2.0Germany 24.1 29.7 (0.5) 1.6Rest of the world 1.1 0.2 (0.7) 0.5-------------------------------------------------------------------------------- 159.2 149.2 9.5 8.6Strategic Consulting 13.9 8.9 2.6 1.8-------------------------------------------------------------------------------- 173.1 158.1 12.1 10.4-------------------------------------------------------------------------------- 3. Ricardo 2010 (Consultants) Limited In May 2005, Ricardo signed an agreement with Shanghai Automotive IndustryCorporation ("SAIC") to set up a UK research and development centre for them atour Leamington premises. A new wholly owned subsidiary named Ricardo 2010(Consultants) Limited ("2010") recruited a team of approximately 150 engineers(mainly ex-Rover). Ricardo derives its income from this contract by charging2010 fees for managing and administering the R&D centre plus a service chargefor the facility provided. 2010 is also a customer for normal Ricardo services.Under the terms of the agreement, SAIC has an option to acquire 2010 for £1 andcan give three months notice to exercise this option from 1 July 2006. As wefully expect this option to be exercised within our new financial year ended 30June 2007, we have treated 2010 as an asset held for sale within the financialstatements for the year ended 30 June 2006. SAIC have indicated to us that afterexercising their option they intend to remain at our Leamington premises for theforeseeable future and Ricardo will continue to provide administrative services.We also undertake significant engineering projects for SAIC in the corebusiness. 4. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of shares outstandingduring the year, excluding those held in the ESOP and those held by the LTIPwhich are treated as cancelled for the purposes of the calculation. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. The group has one class of dilutive potential ordinary shares: thoseoptions granted to employees where the exercise price is less than the marketprice of the Company's ordinary shares during the year. Where it is not possibleto determine whether or not the performance criteria for the award to vest havebeen met until the end of the performance period, the shares are excluded fromthe calculation. Reconciliations of the earnings and the weighted average number of shares usedin the calculations are set out below. 2006 2005Continuing Operations Number* of Per Share Number* of Per Share Earnings shares amount Earnings shares amount £m millions pence £m millions pence--------------------------------------------------------------------------------Basic EPS Profit attributableto ordinary shareholders 12.1 50.4 24.0 7.4 49.9 14.8 Effect of dilutivesecurities:Options 0.1 0.1 --------------------------------------------------------------------------------Diluted EPS 12.1 50.5 23.9 7.4 50.0 14.8-------------------------------------------------------------------------------- * weighted average The above earnings per share is significantly affected by a pensions credit of£3.7m (£2.6m net of tax) being included in earnings. The table below thereforeshows underlying basic and diluted earnings per share excluding this impact. Continuing 2006 Per 2005 PerOperations Underlying Number* of share Underlying number* of share Earnings Shares amount Earnings shares amount £m millions pence £m millions pence------------------------------------------------------------------------------Basic underlying EPS Profit attributableto ordinary shareholdersexcluding pensionscredit 9.5 50.4 18.8 7.4 49.9 14.8Effect ofdilutivesecurities:Options 0.1 0.1--------------------------------------------------------------------------------Diluted underlying EPS 9.5 50.5 18.8 7.4 50.0 14.8-------------------------------------------------------------------------------- * weighted average 5. Cash flow from operating activities 2006 2005 £m £m ---------------------------------------------------------Continuing operations Profit from operations before pensions credit 12.1 10.4 Adjustments for: Share based payments 0.3 0.1Depreciation and amortisation 9.0 9.3-------------------------------------------------------------------------------Operating cash flows before movements in working capital 21.4 19.8(Increase)/decrease in inventory - (0.6)(Increase)/decrease in trade and other receivables (4.3) (10.5)Increase/(decrease) in payables 3.5 2.9Increase/(decrease) in provisions 0.1 0.1Pension payments in excess of pension costs (0.7) (0.5)-------------------------------------------------------------------------------Cash generated by operations 20.0 11.2------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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