18th Mar 2008 07:00
KBC Advanced Technologies plc18 March 2008 Embargoed until 07.00 18 March 2008 KBC Advanced Technologies plc ("KBC" or "the Group" or "the Company") Preliminary results for the year ended 31 December 2007 KBC Advanced Technologies plc, a leading consultant to the energy industry,today announces its preliminary results to 31 December 2007. 12 months to 12 months to 31 December 31 December 2007 2006Revenue £38.1m £35.4mOperating profit £3.1m £1.9mBasic earnings per share 3.5p 2.1pFull year dividend per share 0.75p 0.5p Highlights• Earnings increased by 67%• Operating profit increased by 66%• Annual contract awards increased by 14% to £40m (2006: £35.4m)• Workload backlog rose 11% to £30m (2006: £27m)• High levels of activity in the energy industry continue to drive demand• Tax rate reduced from 38% to 34%• Full year dividend increased by 50% Commenting on the results, Christopher Powell-Smith, Chairman of KBC, said: "Wehave seen significant revenue and contract backlog growth over the last twoyears and the level of contract awards continues to rise. 2008 has started well,with greater revenue visibility and we remain very busy. We plan to increase ourconsulting capacity further in 2008 in order to meet rising demand whilstcontinuing to take advantage of the operational gearing in our globalinfrastructure. The principal markets in which we operate remain strong and theBoard expects this to continue driving further progress in contract awards. Wetherefore look forward to further growth in revenue and earnings in 2008 andbeyond." - Ends - For further information, please contact: KBC Advanced Technologies plcGeorge Bright, Chief Executive On 18 March: 020 7067 0700Nicholas Stone, Operations and Finance Director thereafter: 01932 236314 Weber Shandwick FinancialRichard Hews/Rachel Martin/Hannah Marwood 020 7067 0700 Notes to Editors:KBC Advanced Technologies plc, a leading independent consulting, processengineering and software group, delivers improved operating performance to theoil refining, petrochemical, and other process industries worldwide. We provideprocess consulting, strategic planning advice, energy price forecasting andmarket analysis, economic studies, capital project services, and training tohelp clients achieve their business objectives and improve their competitiveposition. The KBC human performance improvement division provides organisationaleffectiveness services, training programmes, operations manuals, and personneldevelopment services. Our consultants recommend changes for material andmeasurable improvements in profitability. To assist clients in realising suchimprovements, KBC provides implementation services and software solutions,including the KBC SIM models and Petro-SIMTM for process optimisation, andenergy optimisation software packages. Formed in 1979, KBC has offices in the UK, USA, Canada, Singapore, the Netherlands, Russia, China, and Japan. For moreinformation, visit www.kbcat.com. KBC Advanced Technologies plc ("KBC" or "the Group" or "the Company") Preliminary results for the year ended 31 December 2007 CHAIRMAN'S STATEMENT SUMMARY I am pleased to report that 2007 was another good year for KBC, with continuedgrowth in profits, turnover, contract awards and workload backlog. This growthhas been fuelled by a significant growth in our annual sales awards since 2004from almost £17m to more than £40m in 2007, an increase of 14% on 2006 (£35.4m).Workload backlog at the year end has grown from £10m in 2004 to around £30m in2007, an increase of 11% on 2006 backlog. The oil refining industry, which remains our primary market, faces manychallenges and the alignment of our services and products to the industry'scurrent needs has been the key to our success. The economic environment for ourrefining clients has generally remained good with capacity still at a premium.Despite oil prices going through the $100 per barrel level in recent months,demand for energy and oil products continues to increase, albeit at lower ratesthan in recent years. As a consequence levels of activity in the industrycontinue to be high, driving demand for our services and products. RESULTS Revenue for the year was up on 2006 by 8%, from £35.4m to £38.1m. The benefitsof delivering this revenue growth through our essentially fixed cost base isreflected in the 66% growth in operating profit. These results include revenueof £4.7m and contribution of £1.6m from our Human Performance Improvementbusiness that incorporates the acquisition of TTS Performance Systems Inc("TTS") in February 2006 (£2.1m and £0.2m in 2006). Additionally, theacquisition of Veritech in November 2006 added £1.0m of revenue and £0.5m ofcontribution (£0.14m and £0.05m respectively in 2006). After net interest theGroup realised a profit before tax of £2.9m (2006: £1.7m). Basic earnings pershare were 3.5p, an increase of 67% over 2006 (2.1p). DIVIDEND In view of the continued strong progress, the Board is pleased to recommend afinal dividend of 0.5p per share. With an interim dividend of 0.25p per share inOctober 2007, this leads to a total payment of 0.75p per share, an increase of50% over 2006 (0.5p per share). The dividend will be payable on 20 May 2008 toshareholders on the register at close of business on 9 May 2008. CURRENT TRADING AND OUTLOOK We have seen significant revenue and contract backlog growth over the last twoyears and the level of contract awards continues to rise. 2008 has started well,with greater revenue visibility and we remain very busy. We plan to increase ourconsulting capacity further in 2008 in order to meet rising demand whilstcontinuing to take advantage of the operational gearing in our globalinfrastructure. The principal markets in which we operate remain strong and theBoard expects this to continue driving further progress in contract awards. Wetherefore look forward to further growth in revenue and earnings in 2008 andbeyond. Christopher B Powell-SmithChairman BUSINESS REVIEW THE REFINING MARKET Our business continues to derive the majority of its revenues from services andtools provided to the oil refining industry. 2007 saw the continuing rise incrude oil prices, which were close to the $100 per barrel barrier at year endand have broken through it during the first quarter of 2008. The current highprice of crude is a reflection of external influences outside the underlyingsupply/demand balance. The weak US dollar and speculation in oil futures is onefactor. Political instability in the producing countries of Nigeria andVenezuela, the ongoing war in Iraq, and soured US-Iran relations have negativelyimpacted confidence in production capacity. With stocks anticipated to growduring 2008, we would expect to see some weakening of price over the course ofthe next year. For the first three quarters of 2007 refining margins were extremely healthy.However, in the fourth quarter product prices did not rise at the same rate ascrude, and margins were squeezed. This was due in part to a reduction in stocksof products and in part to the return of some elasticity of demand fromconsumers. However, global demand for energy is widely forecast to continue torise in the medium term, fuelled by the Asian economies. There are stillconsiderable engineering activities associated with new and revamp refineryconstruction, as refiners position themselves to provide capacity to meet thisdemand. As these capital projects come on line over the next few years, othersthat are currently being proposed may well be re-evaluated leading to someslowdown in new construction. Nevertheless, we still anticipate a continuedskills shortage in engineering and project management amongst our clients. 2008 will be a critical year for the future of biofuels as public awareness ofthe economic and social implications of displacing food crops for transportationfuel grows. It has always been our view that the global impact of biofuels willbe limited and, although there are opportunities for us to support theintegration of such fuels into the refining process, our focus will remain onhydrocarbon processing. On the other hand, the impetus to act on greenhouse gasemissions is now gaining momentum following the US's reluctant agreement toprogress talks on a replacement for the Kyoto Protocol in Bali last December. Finally, the consequences of high profile safety-related incidents such as theBP Texas City explosion have changed the refiners' operating focus, particularlyin North America. With regulatory bodies now having increasingly invasiveoversight, maintaining and/or improving operating standards is the primary focusfor virtually every refiner. A declining and ageing workforce makes this anincreasingly difficult challenge. KBC'S RESPONSE Over the last two years we have been very successful in aligning our servicesand products to meet the market's changing requirements. Our broadened range ofservices gives KBC exposure to a larger number of segments in the refiningindustry's planning, investment and operating activities. We now have aportfolio of services ranging from the strategic review of capital investmentopportunities to day to day operational improvements, and virtually everythingin between. Our Capital Excellence programme ("CapX") provides strategy consulting, marketanalysis and refinery configuration studies, as well as design and projectmanagement support from concept through to start-up. These services are executedeither on behalf of asset owners directly, or through the several alliances wehave developed with some of the key engineering and construction companies. Our Operational Excellence service ("OpX") is a programme that helps clientsto ensure that their existing facilities are operated in a safe, environmentallyacceptable and profitable manner. The service covers planning and scheduling,reliability and maintenance, safety, health and environment, leadership, humanperformance and continuous improvement. The addition in 2007 of Carbon Managerto our range of software will allow us to take advantage of the inevitableincrease in activity in this area. Last year we reported that recruitment and training of new consultants was achallenge for KBC. Despite the industry-wide skills shortage, it is bothpleasing and encouraging to note that during 2007 we increased our workforce by14%. Alongside this we commenced an employee training and development programmewhich is already delivering measurable results. This investment will continueduring 2008 and beyond. STRATEGY We anticipate strong demand for our CapX services over the next few years asrefinery capacity expands to meet the market demand and there is currently ahigh level of transaction activity with refining assets being bought and sold.Hence our focus will be to ensure we maximise this opportunity through thecontinued development of appropriate tools and products and by improving ourexecution efficiency. Our OpX services allow to us to concentrate on improvingour clients' efficiency, reliability and human performance improvement needs andthis will be especially important as the new capacity comes onstream. Throughoutthis period we will also continue to search for acquisition opportunities toaugment our organic growth and take advantage of our internationalinfrastructure. CONTRACT AWARDS Contract awards in 2007 amounted to more than £40m, an increase of 14% over2006. The Europe, Middle East and Africa region ("EMEA") again had a strongperformance with awards of £15.6m. Awards in the Americas were very healthy at£14.9m, underpinned by a very strong performance from the Human PerformanceImprovement ("HPI") programs. Contract awards in Asia of £9.8m were almoststatic on the prior year. The situation in Asia is essentially driven bycontract closing dates, as there is no lack of demand. We expect to see anincrease in all three regions in 2008. Key contracts awarded include: • Software contract with Valero (Americas)• Operational Excellence programme for Marathon Petroleum (Americas)• Middle East refinery design projects (EMEA)• Technical Services Partnership with Irving Oil (Americas)• Strategic Alliance with Petronas (Asia)• Technical Services Partnership with BP Raffinaderij Rotterdam (EMEA)• Planning Transformation project with Sasol (EMEA)• Reliability project with Bayer (Americas and EMEA)• Strategic Energy Review for PetroChina (Asia) CONSULTING ACTIVITIES The year started with the highest workload backlog for several years and ourfocus was upon the efficient execution of this workload. Our traditional processengineering optimisation expertise has remained in demand during the year,particularly in China and the Middle East. The Profit Improvement Programs("PIPs") at Sinopec, which commenced at the end of 2005, progressed well duringthe year with the second major contractual milestones met in September. We willalso commence a similar PIP with another major Chinese refiner, PetroChina inearly 2008. Several PIPs have been under way during the year in the Middle Eastand we expect further opportunities for this type of work in the region in thefuture. The development of our technical services business has continued with a numberof long term clients having framework agreements covering an agreed scope ofwork and timescale. Clients in this area include Irving Oil, BP RaffinaderijRotterdam, Petronas, Cepsa, Marathon Petroleum, Valero, Bayer and Rompetrol. Inaddition to providing KBC with excellent revenue and earnings visibility, thesimple framework agreements minimise potential points of friction with clientsand effectively embed KBC into their organisational structure. One feature of the current market environment is the large number of capitalexpenditure projects that involve market analysis, asset evaluation, feasibilitystudies and design optimisation. Although this work has been predominantly inEurope, there are also opportunities in other parts of the world. We have workedon a number of projects alongside engineering contractor partners ranging fromgrass roots design projects and existing facility revamps to the relocation ofexisting redundant facilities to other parts of the world. Major clients in thisarea include Sinopec, Essar in India, several Middle East refiners and anincreasing number of investment banks. Following the acquisition of TTS in February 2006, there has been a continuedfocus on the delivery of HPI services to complement the technical excellence ofKBC's consulting services. A number of KBC employees have transferred to supportHPI projects. This has helped to broaden the range of experience and skillsthroughout KBC that will enable us to meet the industry's evolving requirements.The success of these actions is clearly illustrated by the growth in revenue inthe HPI business from £2.1m in 2006 to £4.7m in 2007. In spite of thecancellation of one major contract during the year following a change ofmanagement, the resulting capacity freed up was quickly utilised.With the price of energy constituting most refineries' second highest cost, wehave seen further growth in revenue from our energy consulting activities. Theacquisition of Veritech Inc ("Veritech") in November 2006 led to a step changein energy consulting revenues in the Americas where KBC had low marketpenetration. Resource constraints were a particular issue for our energybusiness in 2007 and it remains an area for action during 2008. SOFTWARE The contribution from software in 2007 increased substantially due to a 23%increase in revenue and further growth in the installed base of Petro-SIM, KBC'sleading refinery-wide simulator, to more than 75 sites. KBC's SIM seriesreactor models were confirmed as the de facto standard in the industry with theagreement by Valero to license them for their 17 refineries. We releasedversion 3.1 of Petro-SIM with the addition of Olefin-SIM for the modelling ofethylene cracking furnaces, improvements to support on-line unit monitoring andthe generation of models to support planning and scheduling. The firstPetro-SIM monitoring applications have been commissioned at two North Americanrefineries. INDUSTRY OUTLOOK High crude oil prices and increasing product inventories will put pressure onrefining margins in 2008. New refining capacity will come on-stream towards theend of 2008, requiring refiners to ensure optimum refinery configuration andoperation. KBC is well positioned to assist in maximising efficiency and marginsthrough the use of its OpX programmes. These are a mixture of engineeringsolutions and improvements in employee performance. Although there will probablybe a slowdown in construction of grassroots refining facilities beyond 2008, themanagement of project risk will become a critical factor in achieving requiredproject returns. KBC's CapX tools and methodologies will continue to be employedin the evaluation of existing projects, and in the development of those thatadvance through to construction. Finally, as political initiatives aimed atminimising carbon emissions are mandated, KBC's energy reduction programmes,together with our Carbon Manager program will be used to implement novelsolutions in what we believe will be a large and growing market in the mediumterm. With a broadening portfolio of services and solutions, KBC is well positionedboth to meet its clients' needs and to develop its potential market. OPERATING RESULTS Group revenue increased by 8% from £35.4m to £38.2m in 2007. If measured atconstant exchange rates, the reported value would be £38.5m. This revenueincrease has also been delivered with a lower proportion of subcontractors,which had a positive impact on operating margin. If the sub-contractor revenueis ignored then the year on year increase of revenue generated by KBC resourceswould have been 11%. 2007 saw particularly strong growth in software, design and expansion relatedprocess engineering, Energy Services and HPI. With revenues increasing by 23% in2007 to £7.1m from £5.8m in 2006, software is becoming an increasingly importantsegment of our business. As these sales often include long-term maintenance andsupport agreements, they are also an important factor in improving thevisibility of projected revenue and earnings. Control of costs was again important and Group costs increased overall by only4%. Staff costs increased by 13% but direct costs decreased by 11% as a resultof the decrease in subcontractor costs. The year saw growth in employee numbersand thereby a greater proportion of our work was executed by employees with lessreliance on subcontractors, leading to the reduction in direct costs. As aresult, the margin grew from 33% to 34% on consulting revenue growth of 5%.Other operating charges decreased by 4% due to a combination of lower bad debtsand the benefit at the end of the year of the revaluation upwards of US dollarand Euro debtors, along with work in progress balances as sterling weakened. The resultant operating profit of £3.1m before net finance costs was up by£1.2m, or 66% compared to £1.9m in 2006. A measure of underlying operatingprofit for the year has been calculated and reconciled in note 3(b). It excludesthe impact of the carry forward of software development costs and provision foran onerous lease mentioned below (in 2006 only), as well as the amortisation ofintangible assets. This measure also shows a significant growth in profit to£3.2m (2006: £2.0m). Cash balances grew during the year from £1.2m to £1.3m. This resulted fromstrong cash collections during the second half of the year which turned the netoverdraft of £1.4m reported with the interim results into a positive cashbalance. Since the year end the Group has successfully agreed a three yearcommitted revolving credit facility with its main bankers for £2m. This facilityshould provide the liquidity that may be required for continued growth and topay future instalments on recent acquisitions. The finance cost of £0.3m includes £0.05m representing the unwinding of thediscount applied to the deferred consideration for the previous years'acquisitions in order to record the net present value of those future paymentson the balance sheet. PROFIT BEFORE TAX The profit before tax of £2.9m increased by 67% from £1.7m in 2006. TAX The tax charge of £1.0m for the year is a combination of a charge of £1.3m forforeign taxes incurred that are not expected to be recoverable in the nearfuture and a credit of £0.3m for deferred tax assets that are expected to berealised in the near future. These assets comprise further prior year tax lossesthat had not previously been recognised. The tax charge of £0.7m for 2006comprised a charge of £0.6m for irrecoverable foreign taxes incurred in thatyear and a charge of £0.9m on taxable profits made in the year. This was offsetby a credit for tax losses and foreign taxes withheld and expected to beutilised in future years. In both years the main reason that foreign taxes werenot expected to be recovered was the continuing use of losses brought forwardfrom earlier years. EARNINGS AND DIVIDENDS The profit after tax of £1.9m (2006: £1.1m) equates to basic earnings per shareof 3.5p, compared to 2.1p in 2006. Diluted earnings per share were 3.5p and 2.0prespectively. The final dividend of 0.5p per share proposed for the year,together with the interim dividend of 0.25p per share paid in October 2007,gives a total payment of 0.75p per share, an increase of 50% over 2006 (0.5p pershare). The dividend will be payable on 20 May 2008 to shareholders on theregister at close of business on 9 May 2008. PROVISION FOR ONEROUS LEASE The Company holds a lease for an office property occupied by the business untilMay 2001 and vacated by a subtenant in 2006. The rental market has weakenedsince 2001 and during 2006 the Board re-assessed the probable cash outflow fromthe lease and determined that an addition of £0.55m to the onerous leaseprovision was required to cover the expected cost over its remaining life. Thiswas provided in full in the 2006 financial statements. Having re-assessed in2007 the probable cash outflow from this lease, the Board has determined that nofurther provision is required. CARRY FORWARD OF SOFTWARE DEVELOPMENT COSTS Prior to 2006 the Group had written off all software development costs to theIncome Statement each year. Under UK GAAP there was discretion for Directors towrite off expenditure as incurred, irrespective of the stage of development ofthe software product. Under IAS, however, that discretion is no longer availableand under the accounting policy adopted in 2005 on conversion to IAS developmentexpenditure is carried forward when "its future recoverability can be reasonablyregarded as assured and technical feasibility and commercial viability can bedemonstrated". Last year the Board took the view that the Petro-SIM developmenthad reached this stage. Hence, after a charge for that year's amortisation, netexpenditure of £0.61m was carried forward against expected future sales. Therevenue and contribution from the software business has grown again in 2007, asnoted previously. As a result development expenditure of £0.3m incurred duringthe year on the current version of Petro-SIM has been capitalised and carriedforward, and is amortised against expected future revenue. The net impact inthese accounts of this carry forward is £0.1m after charging amortisation forthe year of £0.2m. W George Bright Nicholas P StoneChief Executive Operations and Finance Director Group Income StatementYear ended 31 December 2007 December December 2007 2006 Notes £000 £000-------------------------------------------------------------------------------Revenue 38,115 35,378Direct costs (5,619) (6,342)Staff and associate costs (21,171) (18,698)Depreciation and amortisation (762) (742)Other operating charges (7,422) (7,702)-------------------------------------------------------------------------------Operating profit 3 3,141 1,894Finance revenue 35 28Finance cost (279) (185)-------------------------------------------------------------------------------Profit before tax 2,897 1,737Tax expense (988) (663)-------------------------------------------------------------------------------Profit for the year 1,909 1,074-------------------------------------------------------------------------------Earnings per shareBasic 4 3.5p 2.1pDiluted 4 3.5p 2.0p------------------------------------------------------------------------------- Group Balance SheetAt 31 December 2007 2007 2006 £000 £000------------------------------------------------------------------------------Non-current assetsProperty, plant and equipment 1,456 1,314Goodwill 6,628 6,714Other intangible assets 1,604 1,665Deferred tax asset 2,600 2,603------------------------------------------------------------------------------ 12,288 12,296------------------------------------------------------------------------------Current assetsTrade and other receivables 16,257 13,423Current tax asset - 326Cash and short-term deposits 1,349 1,178Other financial assets - 56------------------------------------------------------------------------------ 17,606 14,983------------------------------------------------------------------------------Total assets 29,894 27,279------------------------------------------------------------------------------Non-current liabilitiesTrade and other payables (753) (1,376)Provisions (356) -Deferred tax liabilities (543) (868)------------------------------------------------------------------------------ (1,652) (2,244)------------------------------------------------------------------------------Current liabilitiesTrade and other payables (7,012) (5,752)Current tax payable (455) (6)Provisions (153) (663)Other financial liabilities (35) ------------------------------------------------------------------------------- (7,655) (6,421)------------------------------------------------------------------------------Total liabilities (9,307) (8,665)------------------------------------------------------------------------------Net assets 20,587 18,614------------------------------------------------------------------------------Equity attributable to equity holders of parentIssued capital 1,420 1,370Share premium 8,013 7,782Other reserves 984 984Own shares (2,136) (2,136)Retained earnings 12,306 10,614------------------------------------------------------------------------------Total equity 20,587 18,614------------------------------------------------------------------------------Total equity and liabilities 29,894 27,279------------------------------------------------------------------------------ Group Cash Flow StatementYear ended 31 December 2007 2007 2006 £000 £000-------------------------------------------------------------------------------Net cash flow from operating activitiesProfit before tax 2,897 1,737Finance revenue (35) (28)Finance cost 279 185-------------------------------------------------------------------------------Operating profit 3,141 1,894Depreciation and amortisation 762 742Share based payment expense 260 210Movement in working capital:- trade and other receivables (2,834) (2,144)- trade and other payables 1,080 1,332- exchange differences (18) (775)- financial assets and liabilities 91 (107)-------------------------------------------------------------------------------Cash generated from operations 2,482 1,152Finance revenue received 35 28Finance costs paid (251) (103)Income taxes paid (524) (766)-------------------------------------------------------------------------------Net cash flow from operating activities 1,742 311------------------------------------------------------------------------------- Cash flow from investing activitiesPurchase of tangible non-current assets (522) (171)Purchase of intangible non-current assets (316) (730)Purchase of subsidiary undertaking including costs (623) (1,168)Net funds acquired with subsidiary undertakings - 6-------------------------------------------------------------------------------Net cash flow from investing activities (1,461) (2,063)-------------------------------------------------------------------------------Cash flow from financing activitiesDividends paid to equity holders of parent (409) -Issue of shares 281 1,159-------------------------------------------------------------------------------Net cash flow used in financing activities (128) 1,159-------------------------------------------------------------------------------Net increase/(decrease) in cash and cash equivalents 153 (593)Cash and cash equivalents at 1 January 1,178 1,802Exchange adjustments 18 (31)-------------------------------------------------------------------------------Cash and cash equivalents at 31 December 1,349 1,178------------------------------------------------------------------------------- Group Statement of Recognised Income and ExpenditureYear ended 31 December 2007 2007 2006 £000 £000-------------------------------------------------------------------------------Attributable profit for the period 1,909 1,074Foreign currency translation (73) (835)-------------------------------------------------------------------------------Total recognised income and expenditure for the year 1,836 239------------------------------------------------------------------------------- Notes to the financial information 1 Basis of preparation The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2007 or 2006 but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theRegistrar of Companies and those for 2007 will be delivered following thecompany's annual general meeting. The auditors have reported on those accounts;their reports were unqualified, did not include references to any matters towhich the auditors drew attention by way of emphasis without qualifying theirreports and did not contain statements under the Companies Act 1985, s 237(2) or (3). The financial statements are prepared under the historical cost convention,except for certain financial instruments which are measured at fair value. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period. Although theseestimates are based on the Directors' best knowledge of current events andactions, actual results ultimately may differ from those estimates. 2 Segmental information The primary segment reporting format is determined to be business segments asthe Group's risks and rates of return are affected predominantly by differencesin the services and products provided. Secondary segment information is reportedgeographically by client location for the income statement and by operatingbusiness location for the balance sheet as this best reflects the way thebusiness is organised. The operating businesses are organised and managedseparately according to the nature of the products and services provided, witheach segment representing a strategic business unit that offers differentproducts and serves different markets. The consultancy segment delivers improved operational efficiency and financialperformance through consulting services to owners and operators of oilrefineries and process industries worldwide. The software segment produces and maintains process modelling and refinery widesimulation technology for the oil industry and other process industries. Transfer prices between geographic segments are set on an arm's length basis ina manner similar to transactions with third parties. Primary Segment is strategic business unit -------------------------------------------------------------------------------- Consultancy Software Unallocated Group £000 £000 £000 £000--------------------------------------------------------------------------------2007Income statementExternal sales 30,999 7,116 - 38,115Direct project costs (20,332) (2,355) - (22,687)Depreciation and amortisation (223) (539) (762)Sales and marketing (3,456) (3,456)Facilities and communications (4,463) (4,463)Management and support services (3,606) (3,606)--------------------------------------------------------------------------------Trading profit/(loss) (segment result) 10,667 4,538 (12,064) 3,141Finance revenue 35 35Finance cost (279) (279) -------Profit before tax 2,897Tax expense (988)--------------------------------------------------------------------------------Profit for the year 1,909-------------------------------------------------------------------------------- Consultancy Software Unallocated Group £000 £000 £000 £000--------------------------------------------------------------------------------2006Income statementExternal sales 29,611 5,767 - 35,378Direct project costs (19,973) (1,571) - (21,544)Depreciation and amortisation (189) (553) (742)Sales and marketing (3,736) (3,736)Facilities and communications (4,231) (4,231)Management and support services (3,231) (3,231)--------------------------------------------------------------------------------Trading profit/(loss) (segment result) 9,638 4,007 (11,751) 1,894Finance revenue 28 28Finance cost (185) (185) -------Profit before tax 1,737Tax expense (663)--------------------------------------------------------------------------------Profit for the year 1,074-------------------------------------------------------------------------------- 3 Group operating profit This is stated after charging/(crediting) the following: 2007 2006 £000 £000--------------------------------------------------------------------------------Depreciation and amortisation- Depreciation 385 463- Amortisation of intellectual property rights - Business combinations - 90 - Existing intellectual property rights 208 67 - Development costs carried forward 169 122--------------------------------------------------------------------------------Total 762 742--------------------------------------------------------------------------------Included in other operating charges- Operating lease rentals - Minimum lease payments 1,690 1,747 - Sublease rentals received (161) (425)- Share based payments 260 210- Net foreign exchange differences (417) 80- Onerous lease provision - 550-------------------------------------------------------------------------------- a) Research and development costsDuring 2007, the Group incurred research and development costs of £1.8m (2006:£1.7m). Of this amount £316,000 (£730,000) related to development expenditurefor Petro-SIM and has been carried forward as an intangible asset to beamortised against expected future sales. The balance was charged directlyto staff and associate costs and direct costs in the income statement. b) Underlying operating profit 2007 2006 £000 £000--------------------------------------------------------------------------------Operating profit 3,141 1,894Amortisation of acquisition intangibles 208 157Research and development costs carried forward (316) (730)Amortisation of research and development costs carried forward 169 122Onerous lease provision - 550--------------------------------------------------------------------------------Underlying operating profit 3,202 1,993-------------------------------------------------------------------------------- 4 Earnings per share Basic earnings per share is calculated by dividing after tax net profit for theyear attributable to ordinary shareholders of the parent company by the weightedaverage number of ordinary shares in issue during the year. 2007 2006 £000 £000--------------------------------------------------------------------------------Profit for the year 1,909 1,074-------------------------------------------------------------------------------- Number Number 000s 000s--------------------------------------------------------------------------------Weighted average number of ordinary shares in issue 55,758 53,826Shares owned by the KBC employee trust (1,575) (1,575)--------------------------------------------------------------------------------Number of shares used for basic and underlying earnings per share 54,183 52,251Dilution 494 2,402--------------------------------------------------------------------------------Number of shares used for diluted basis and diluted underlying earnings per share 54,677 54,653-------------------------------------------------------------------------------- Pence Pence--------------------------------------------------------------------------------Basic earnings per share 3.5p 2.1pDiluted earnings per share 3.5p 2.0pUnderlying earnings per share 3.7p 2.3pDiluted underlying earnings per share 3.7p 2.2p-------------------------------------------------------------------------------- Basic earnings per share for underlying profit as defined in note 3(b) is basedupon an after tax profit of £1.99m (2006: profit £1.19m) and on 54,183,000(2006: 52,251,000) ordinary shares, being the weighted average number ofordinary shares in issue during the period after excluding the shares owned bythe KBC Advanced Technologies plc Employee Trust. 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