Servelec Interim Results 2015

27 August 2015

Servelec Group PLC

("Servelec" or the "Company")

Half year results for the six months to 30 June 2015

Good first half with strong growth prospects giving confidence for the full year

Servelec Group plc ("Servelec" or the "Group"), the UK-based technology group which provides software, hardware and services predominantly to the UK Healthcare, Social Care, Oil & Gas, Nuclear, Power and Utilities sectors, today announces its results for the six months ended 30 June 2015.

FINANCIAL HIGHLIGHTS

* after adding back amortisation and share based payments expense.

** order entry is the total contract value of revenue from an order received in the period.

*** after adding back acquired amortisation, share based payments expense and the related tax adjustment.

· Revenue increased 20% to £30.0m (H1 2014: £25.0m).

· 25% growth in underlying operating profit to £6.3m (H1 2014: £5.0m). Organic growth of 6%.

· Order entry up to £44.1m (H1 2014: £29.0m).

· Excellent cash generation at 168% of underlying operating profit (H1 2014: 173%).

· Adjusted EPS is 6.9p (H1 2014: 5.7p).

OPERATIONAL HIGHLIGHTS 

Health & Social Care

· Successful integration of Corelogic and acquisition of Aura both broaden Servelec's offering and strengthens the positioning for the North Refresh and the market moving towards converged care.

· Significant success in the refresh in London and the South with 20 out of 30 trusts retained and 10 trusts already migrated off the National Programme solution.

· Further win from North New with other tenders at preferred bidder status - sales activity in North New and North Refresh continues and will spread over a longer period as trusts take advantage of extensions to facilitate their exit from the NPfIT.

· Servelec Healthcare named preferred supplier for deployment of PICS (Prescribing Information and Communications System) at Royal Orthopaedic Hospital, Birmingham.

Automation

· Servelec Technologies confirmed as nominated RTU supplier for AMP6 projects by a number of existing water companies. Order entry to commence during H2 2015 and into 2016.

· Strengthening of Controls management team delivering results in a competitive marketplace with record order entry achieved in Power & Nuclear.

· New major contract to upgrade systems on an offshore platform received early July with others expected to follow.

Alan Stubbs, Chief Executive Officer, commented:

"The Group has delivered a good performance in the first half of 2015 with the overall result in line with expectations demonstrating the strength of our diversified business model.

We are delighted with the performance delivered by our Health & Social Care division and contribution from Servelec Corelogic. In addition, Aura has already achieved some successful tender activity under the Servelec brand for its Flow product.

Recent contract wins in Controls, including record order entry for Power & Nuclear contracts and a new large contract for the upgrade of systems for an offshore oil platform, provide confidence for the full year result. In Technologies we are awaiting the commencement of procurement for AMP6 and expect order entry in the second half of the year.

The Board is confident about the prospects of the Group and overall outlook for the business."

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Notes to Editors

Servelec Group plc is a UK-based technology group, with significant intellectual property, providing software, hardware and services predominantly to the UK healthcare, oil and gas, nuclear, power, water, utilities and broadcast sectors.

Servelec has two operating segments; Servelec Health & Social Care and Servelec Automation:

- Servelec Health & Social Care specialises in the design, development and implementation of Electronic Patient Record (EPR), Patient Administration Systems (PAS), bed management software and Social Care Case Management software within secondary care and social care settings and is a market leader in the Mental Health, Community Health and Social Care sectors in England.

- Servelec Automation provides complex, mission-critical control systems to large blue-chip companies mainly in the UK, focusing on the oil and gas, nuclear, power, water, utilities and broadcast industries. Servelec Automation also provides services from consultancy through to design, implementation, delivery, installation and on-going customer support and maintenance.

CHIEF EXECUTIVE'S REVIEW

The six months ended 30 June 2015 has produced a good start to the year for Servelec Group. Our Health & Social Care division has performed well whilst in the Automation division a strong performance in Technologies partially offset a lower result from the Controls business driven by difficult market conditions in the Oil & Gas sector.

Group revenue increased 20% to £30.0m (H1 2014: £25.0m). Underlying operating profit grew 26% to £6.3m (H1 2014: £5.0m). Order entry was up by 52% to £44.1m compared to £29.0m in H1 2014 although market conditions have led to a lack of large project wins in Automation during H1. Cash generation from operations has been excellent at £11.2m (H1 2014: £8.9m) enhanced by the remainder of the BT contract monies from the R2 go-lives.

Health & Social Care

Our Health & Social Care division has performed very strongly in the first half of the year with operating profit increasing to £4.8m (H1 2014: £3.3m). Revenue was much stronger than prior year at £15.6m (H1 2014: £7.4m). Excluding acquisitions revenue was up 34%. The business benefited from a strong order book built in the London Refresh, increased take up of hosting services and a full period's revenue contribution from Servelec Corelogic acquired in December 2014 (£5.5m). Order entry in the first half of the year was triple that in the corresponding period building our order bank to £62.3m (H1 2014: £24.5m). These results are ahead of expectations as Social Care delivered a stronger than anticipated result.

Healthcare

Healthcare revenue increased strongly during the year as the business worked through the substantial order bank announced at FY14. The proportion of revenue from outside the BT contracts increased further to 70% (H1 2014: 46%). The London Refresh bidding activity is now complete with 20 of the 30 trusts choosing to re-confirm Servelec's RiO as their chosen software suite. As at the end of June we had already successfully migrated 10 of these trusts over from the National Programme for IT (NPfIT), with the remainder on schedule to complete migration before the NHS deadline of October 2015. Hosting activity also increased, with 18 of these 20 trusts taking up Servelec's hosting offering. Hosting contracts are typically 5 years in duration with recurring revenue, adding further to the certainty of future revenue. We are now seeking to deepen our direct relationships with trusts, which we believe will provide further opportunity for upsell and to build stronger customer retention.

Sales focus has now moved to winning additional new business in the North from the North New (those trusts who did not take a full solution from the NPfIT) and the North Refresh where we are carefully targeting trusts in the North, North East and Midlands who had a system from TPP or iSoft solution as part of the CSC contract for NPfIT.

During the first half of the year Servelec confirmed a further contract in North New and has recently been confirmed as preferred supplier for a deployment, demonstrating our ability to succeed in tender activity where we are not the incumbent, with 13 trusts still to come to market.

In the North Refresh, we await the main tranche of tender activity. Servelec has identified 22 hospital based community health trusts to target with its market leading RiO product in addition to a significant number of acute trusts where Oceano and Flow would be a strong offering. Servelec is well placed on frameworks that support procurement in the North and we are confident about our potential in this market. Whilst the core Oceano product has already been successfully deployed in University Hospital Birmingham (UHB), Portsmouth and Cornwall, we continue to further develop and improve our product for the acute market with a 'buy or build' strategy to add relevant speciality modules to further enhance its attractiveness to buyers.

Following the acquisition of Aura in May 2015, Flow, which manages patient flow and bed management in hospitals, has been integrated into Servelec's Oceano and RiO products. The product will continue be sold on a standalone basis. We are pleased that we have already achieved tender activity success for Flow under Servelec's ownership and we will deploy the product into a large hospital in Ireland before the end of the year.

We are also pleased to have been named as preferred bidder for deployment of PICS at Royal Orthopaedic Hospital with work to commence in the second half of 2015 providing a further important reference site for this key product.

Social Care

The integration of Servelec Corelogic into the Health & Social Care division has continued and the management team is now bringing these operations closer together to maximise the joint potential of these individually successful businesses. In line with this, Garry McCord, previously Delivery and Development Director for Servelec Healthcare, has taken up the role of CEO of Servelec Corelogic.

Servelec Corelogic has delivered a successful first half with four significant wins, including a contract for c.£2m for the deployment of its market leading software, Mosaic, at Dundee City Council. This is a good start to 2015. There is significant scope to build further market share as two-thirds of councils remain on legacy systems and continue to come out to tender.

Sales activity ahead of the Government's Converged Care agenda is strong and we have recruited additional sales resource to respond to current levels of demand.

Converged Care

Although formal tender activity around Converged Care is yet to begin we are seeing interest from existing customers in piloting new ways of working to satisfy the requirements of this Government backed initiative. We are working with customers in Somerset and South West London to support the sharing of data across healthcare and social care settings, either through data surfacing (where we are working with competitor providers) or through integrated working where Servelec is the incumbent across both settings.

We see further opportunities for this type of work as we maximise the potential of our shared customer footprint through the introduction of an account director role within the Health & Social Care sales team. This role will identify regions of significant overlap, track progress of vanguard sites and move Health and Social Care IT solutions closer together where this is beneficial to the client.

Automation

As previously indicated the Automation division has delivered a mixed performance. Operating profit for the division was broadly level at £3.0m (H1 2014: £3.1m). A strong profit performance in Technologies partially offset the anticipated lower result from Controls, due to reduced large project order entry earlier in the year. Revenue across the division was down 18% to £14.4m (H1 2014: £17.6m). As challenging conditions for Controls continues and water companies continue to prepare for procurement in relation to AMP6, order entry was broadly level with H2 2014. In relation to prior year, order entry and order bank fell by 19% and 23% respectively, however, we expect this to recover significantly in the second half of the year.

Servelec Controls

Servelec Controls delivered a lower result due to market conditions previously mentioned with operating profit down 41% to £1.0m (H1 2014: £1.7m) and revenue down 13% to £6.3m (H1 2014: £7.2m). As we continue to work closely with our clients, order entry is improving and the order bank increased to £6.0m from a low of £4.6m at 31 December 2014.

In Power & Nuclear, the increased focus on individual markets, created by the strengthening of the management team in February, is beginning to deliver results with a number of new contract wins creating record order entry towards the end of the first half year.

A sizable capital project for a large energy operator for the upgrade of ESD systems on an offshore platform, delayed from 2014, has now been confirmed. A number of other large projects have been booked in Power & Nuclear including a 12 month contract worth £1m for the detailed design, implementation and testing of a PLC and SCADA based Control System which will support waste retrieval from silos at a major decommissioning site and implementation and support contracts with The National Grid.

The contracts have been awarded in a very competitive environment and reflect the strength of Servelec Controls' track record and customer relationships.

Servelec Technologies

Servelec Technologies has delivered a strong profit result in the first half of the year, up 43% to £2.0m (H1 2014: £1.4m) as a result of continued operational improvements and a focus on the distribution channels. Revenue and order entry were both down on prior year as the procurement of AMP6 projects, anticipated in H1, was delayed.

Servelec Technologies is well placed to succeed in AMP6 where we are seeing an increasingly positive pipeline of work approaching tender. A number of new and existing customers have already confirmed Servelec Technologies as their nominated RTU supplier for the delivery of projects related to AMP6 and order entry is expected in the second half of the year. Pilot projects undertaken in 2014 have also delivered positive results.

· MISER, one of Servelec's proprietary Business Optimisation products, has been monitoring and optimising performance across an area of Wessex Water's network for a year, leading to estimated 10% savings in electricity and dosing chemical costs at three key sites - c. £6m per year in savings. Further cost savings were also achieved for clients through a reduction in emergency callouts due to early potential pipe failure warnings generated by the MISER system. A full roll-out of the solution has now commenced.

· FlowSure, flow anomaly detection software, has been successfully evaluated by Wessex Water and very recently by Sutton and East Surrey Water (S&ESW) in an offline trial.

· A contract was been awarded by Irish Water for analysis to assess investment requirements across their water network utilising PIONEER.

A number of wins outside UK water have been confirmed in the first half of the year, growing our global footprint. The contracts include a major four-year Framework Contract with InfraBel, the Belgium railway company and a contract with new customer Irish Water for analysis to estimate Capital Maintenance investment requirements for an Interim Revenue Control period.

This growth will be supported in the remainder of 2015 and into 2016 by the rebrand of Tynemarch, Semaphore and Servelec Systems into the combined Servelec Technologies brand during the second half and re-launch of the Servelec Technologies website.

Outlook

Health & Social Care has delivered a strong result in the first half of the year. We expect a lull in order entry in Healthcare in the second half of the year, before further tender activity related to the North Refresh expands in 2016. Profit performance for the full year will be supported by higher margin licence and maintenance income initiated after the go lives of London Refresh contracts, with 10 already live and the remainder on schedule for completion to meet the October 2015 deadline.

In Automation, we are seeing a good pipeline and diversification of business. We see the contract from a major energy supplier for upgrade work as the beginning of further such activity. This, alongside the procurement of AMP6 projects in the second half of the year, will help build a strong order bank for 2016.

We are confident for the 2015 full year results. For 2016 our outlook remains the same, although we do expect that the mix will change to reflect current market conditions.

CHIEF FINANCIAL OFFICERS REVIEW

The Group has traded well in the first half of 2015 with continued growth in both underlying operating profit and revenue. Underlying operating profit increased 25% to £6.3m (H1 2014: £5.0m). Expensed R&D costs increased to £2.4m (H1 2014: £2.2m) reflecting additional spend by new acquisitions Corelogic and Aura. Excluding R&D by new acquisitions, R&D reduced 27%. Overheads has also benefitted from cost reduction activity undertaken in 2014 and a one off cash receipt relating to a previously fully provided debtor.

Revenue increased by 20% to £30.0m (H1 2014: £25.0m), which included £5.7m contribution from the acquisition of Corelogic in December 2014 and Aura in May 2015. Excluding the contribution of acquisitions, revenue dropped 3% as the strong performance in Healthcare was offset by a lower result in Automation.

Administration and other expenses (including amortisation and share based payments) increased to £8.7m (H1 2014: £7.0m) principally due to the acquisition of Corelogic and Aura Healthcare.

After accounting for a full six months of the amortisation of acquired intangibles and the charge due to share based payments, overall operating profit was up on prior year at £4.9m (H1 2014: £4.4m).

The effective tax rate for the period is 24% (H1 2014: 23.6%) due to the higher tax rates in overseas operating countries resulting in a profit for the financial period from continuing operations of £3.7m (2014: £3.4m).

Adjusted EPS has increased to 6.9p (H1 2014: 5.7p).

Cashflow from operating activities was excellent at £11.2m (H1 2014: £8.9m), benefiting from the unwinding of the NPfIT work in progress in line with the exit of trusts from the National Programme in London and the South. Servelec ended the period with no debt and cash balances of £5.7m (H1 2014: £14.6m) having repaid the £6m loan notes issued for the acquisition of Corelogic.

Capital expenditure of £0.9m (H1 2014: £0.4m) includes further investment in the IT infrastructure for the provision of hosting services via third party data centres in Healthcare.

Central costs includes £0.1m of FX translation loss on an inter-company Australian dollar loan.

DIVIDEND

The Board is pleased to declare an interim dividend of 1.65p per share to be paid on 23 October 2015 to shareholders on the register at the close of business on 25 September 2015.

RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 31 December 2014. A detailed explanation of the risks summarised below, and how the Group seeks to mitigate the risks, can be found on page 28 to 29 of the annual report which is available at www.servelec-group.com

Regulatory

Changes to legislation may cause customers to divert their spending on the Group's products.

Public Sector Healthcare Spending

A key driver of the Group's business is the level of UK Government spending on IT relating to healthcare delivery. The rate of growth in expenditure on healthcare related IT may reduce significantly.

Competitor Activity

The Group may face significant competition from both domestic and overseas competitors.

Operational

The Group's business involves providing customers with highly reliable software and hardware. If the software or hardware contain undetected defects, the Group may fail to meet its customer's performance requirements or otherwise satisfy the contract specifications.

Revenue recognition

The Group recognises revenue on projects based on the percentage complete of the individual project. A key element of this calculation is the estimation of the costs to complete on contracts, which is an inherent risk of project accounting.

People

The ability of the Group to retain and attract appropriately qualified and experienced staff is key to the continued success of the business.

Currency

The Group is exposed to translation foreign exchange risk.

Information Technology

Loss of data from failure of systems or cyber-attack.

Oil Price

The US $ price of oil in the global market has reduced significantly at the end of 2014 and the beginning of 2015 which may delay the start of major projects.

Going concern

As stated in note 2 to the condensed financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Servelec Group plc

Statement of directors' responsibilities

The directors confirm that to the best of their knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

· the interim management report includes a fair review of the information required by: 

a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annual report that could do so.

The directors of Servelec Group plc are listed in the Annual Report for the year ended 31 December 2014. A list of current directors is maintained on the Group website at www.servelec-group.com

By order of the Board

Alan Stubbs Mike Cane

Chief Executive Chief Financial Officer

Servelec Group plc

Independent Review Report to Servelec Group plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2015 which comprises the condensed Group income statement, the condensed Group statement of comprehensive income, the condensed Group statement of financial position, the condensed Group statement of changes in equity, the condensed Group cash flow statement and the related notes 1 to 13. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2015 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Leeds

27 August 2015

Servelec Group plc

Condensed Group income statement

For the six months ended 30 June 2015

* EBITA equals operating profit from continuing operations excluding acquired intangible amortisation.

** After adding back acquired amortisation, share based payments expense and the related tax adjustment.

Servelec Group plc

Condensed Group statement of comprehensive income

For the six months ended 30 June 2015 

Servelec Group plc

Condensed Group statement of financial position

Approved by the Board on 27 August 2015.

Servelec Group plc

 Condensed Group statement of changes in equity

Servelec Group plc

Condensed Group Cash flow statement

For the six months ended 30 June 2015

Servelec Group plc

Notes to the financial statements

1. Corporate Information

Servelec Group plc is a limited liability company, incorporated and registered under the laws of England and Wales, whose shares are publicly traded. 

The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2015 comprise the Company and its subsidiaries (together referred to as the "Group") were approved by the Board on 27 August 2015. These statements have not been audited but have been reviewed by the Group's auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

These interim condensed consolidated financial statements do not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2014 have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

New standards and interpretations

There are no accounting standards or interpretations that have become effective in the current reporting period which have had a material effect on the net assets, results and disclosures of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

2. Accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2015 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34 "Interim Financial Reporting" as adopted by the European Union. It does not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2014.

The accounting policies, presentation and methods of computation applied by the Group in these interim condensed consolidated financial statements are the same as those applied in the Group's latest audited annual consolidated financial statements for the year ended 31 December 2014.

Going Concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

 3. Segment information

For management purposes, the Group is organised into business divisions according to the nature of the products and services. It has two divisions and three reportable segments as follows:

· The Health & Social Care division specialises in the design, development and implementation of Electronic Patient Record (EPR) and Patient Administration Systems (PAS) and Social Care Case Management software within secondary care and social care settings and is a market leader in the Mental Health, Community Health and Social Care sectors in England.

· The Automation division is engaged in the provision of complex, mission critical systems to the oil & gas, power, nuclear and water industries. The division specialises in safety systems, protection systems, control systems and wide area telemetry control systems. The division also offers business optimisation consultancy and remote telemetry units, which are designed and manufactured in house.

The Health & Social Care division is made up of two operating segments, Healthcare & Social Care, which have been aggregated as the Board considers that they have similar economic characteristics.

The Automation division is made up of two operating segments, Controls and Technologies.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss, which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the consolidated financial statements. This measurement basis excludes the effect of central services, non-recurring expenditure, amortisation, share based payments and group financing costs which are not allocated to operating segments.

Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.

The following tables present revenue and profit information for continuing operations regarding the Group's business segments for the six months ended 30 June 2015, 30 June 2014 and the year ended 31 December 2014.

Operating assets and liability information are measured on a Group basis and so have not been disclosed at segment level.

Adjustments and eliminations

The segment revenue for the Health & Social Care segment includes £586,000 in respect of one off licence income received as part of the transition of the national IT programme to a regionalised IT programme.

Segment profit for each operating segment excludes net finance costs of £33,000 (H1 2014: income of £41,000).

4. Research and Development costs

5. Property, Plant and Equipment

During the six months ended 30 June 2015, the Group acquired assets with a cost of £898,000 (six months to 30 June 2014: £396,000). £754,000 relates to computer equipment in the healthcare segment.

6. Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

The following reflects the income and share data used in the basic earnings per share computation:

Adjusted earnings per share

7. Dividends paid and proposed

Based on weighted average number of shares.

The proposed interim dividend of 1.65p was approved by the Board on 27 August 2015 and has not been included as a liability as at 30 June 2015.

 8. Income tax expense

The tax charge on continuing operations for the period is based on an effective rate of 24.0% (2014: 23.6%).

Tax rate changes that were substantially enacted at the balance sheet date have been factored into the calculation of the effective tax rates.

 9. Financial instruments and financial risk management objectives and policies

There are no material differences between fair value and the book value of any of the financial instruments.

The fair value of contingent consideration, which is classified as a level 3 financial instrument, has been estimated based on management's profit projections.

Contingent consideration

The consideration has been assumed at the maximum amount of £195,000 (£450,000 at 30 June 2014 and £150,000 at 31 December 2014) and discounted at the market interest rate.

Sensitivity

In respect of £145,000 of the contingent consideration, should profit projections for the 3 year earn out period fall by 15% the fair value of contingent consideration would reduce to nil. Should profit projections fall by 5% then the fair value of contingent consideration would reduce by 50%.

Should profit projections increase then the fair value of contingent consideration will not change.

In respect of the £50,000 contingent consideration the performance target has been achieved post 30 June 2015 and so there will be no change in value.

10. Issued capital and reserves

Authorised shares

Ordinary shares issued and fully paid

On 23 December 2014 the Group issued 1,061,665 18p shares as part of the consideration for the purchase of the Corelogic group of companies on 15 December 2014.

11. Share based payments

Group executive share option plan (ESOP)

Share options were granted to employees, as determined by the Remuneration Committee. The exercise price of the options is equal to the market price of the shares on the date of grant. The options only vest in accordance with the performance conditions for each executive as determined by the Remuneration Committee. Conditions are based on operating profit targets for the year to 31 December 2015, provided the employee remains in the group's employment for 3 years. The options cannot be exercised within 3 years and have a maximum life of 10 years. The option will be settled by the issue of new shares and there are no cash settlement alternatives.

Save-as-you-earn (SAYE) scheme

The Company has an all-employee Save As You Earn share option plan whereby employees may enter into a savings contract under which they agree to save up to a maximum of £500 per month (or such limited as may be permitted by the tax legislation governing SAYE schemes from time to time) for 3 to 5 years.

Deferred share bonus plan (DSBP)

Share awards were granted to senior executives, as determined by the Remuneration Committee. The exercise price of the awards is nil. Awards will be subject to time pro-rating.

Long term incentive plan (LTIP)

Share options were granted to senior executives, as determined by the Remuneration Committee. The exercise price of the options is nil. The options only vest in accordance with the performance conditions for each executive as determined by the Remuneration Committee provided the employee remains in in the group's employment for 3 years. The options cannot be exercised within 3 years and have a maximum life of 10 years. The option will be settled by the issue of new shares and there are no cash settlement alternatives.

Further details of the vesting conditions are in the Remuneration Committee report on pages 44 to 51 of the Annual Report for the year ended 31 December 2014.

The following tables summarise the number and weighted average exercise prices (WAEP) of and movements in, share options during the period.

There are 1,005 options exercisable at the period end.

The fair value of the options granted and the assumptions used in the model are set out below.

The fair value of the share options is measured at the grant date taking into account the terms and conditions upon which the instruments were granted. The cost of the options is recognised over expected vesting period. Until the liability is settled it is re-measured at each reporting date with changes in fair value recognised in profit or loss.

The expense recognised during the six months to 30 June 2015 is £271,000 (six months to 30 June 2014 £203,000).

12. Related party disclosures

Identity of related parties

Servelec Group plc is the ultimate parent company.

The consolidated financial statements of the Group include:

Servelec Healthcare Limited supplies software and IT solutions and services into the healthcare and social services markets. Servelec Aura Limited and Servelec Aura Ireland Limited provide software to the healthcare sector that controls bed management and patient flows across hospitals, clinics and primary care centres. Servelec Corelogic Limited and Corelogic Mosaic Pty supply adult and children's social care case management software, together with associated financial management modules. Corelogic Global Limited, Aura Healthcare Consulting Limited and Immix Health UK Limited are dormant companies and Framework Systems and Solutions Private Limited supplies development resources to the Group.

Servelec Systems Limited is involved in the design, manufacture, installation and commissioning of control and management information systems, the development, manufacture and sale of electronic and microprocessor monitoring equipment. Servelec Controls Limited, a systems integrator, is principally engaged in the supply of computer based information solutions and services. Servelec Technologies Limited is a global provider of SCADA and specialist software solutions, Remote Telemetry Units (RTUs) and consultancy services. Servelec Controls (Motherwell) Limited became a non-trading subsidiary with effect from 1 April 2011 and Seprol Limited is dormant. Tynemarch Holdings Limited is a holding company and Tynemarch Systems Limited delivers optimisation software and consultancy, predominantly in the water industry. Semaphore Belgium SA, Semaphore Australia Pty Limited and Semaphore Inc are companies involved in the design, manufacture and sale of electronic and microprocessor monitoring equipment.

On 31 March and 26 June 2015, the Group repaid loan notes amounting to £2,000,000 and £4,000,000 to the previous owner of Servelec Corelogic limited, who is a subsidiary director.

There are no other material related party transactions.

13. Acquisition of Aura Healthcare Limited

On 5 May 2015, the Group acquired 100% of the voting shares of Aura Healthcare Limited (now Servelec Aura Limited), a developer of software for the healthcare sector that controls bed management and patient flows across hospitals, clinics and primary care centres enabling improved care of patients.

The provisional fair values of the identifiable assets and liabilities of Aura Healthcare Limited as at the date of acquisition were:

The goodwill of £1,384,000 comprises the value of the assembled workforce and expected value of synergies. Goodwill is allocated entirely to the Healthcare segment. None of the goodwill is expected to be deductible for income tax purposes.

All receivables are expected to be collected and fair value equals gross value.

From the date of acquisition, Aura Healthcare Limited has contributed £194,000 of revenue and a loss of £97,000 to the profit before tax from continuing operations of the Group. If the combination had taken place at the beginning of the year, Group revenue from continuing operations would have been £30,512,000 and the profit before tax from continuing operations for the Group would have been £4,501,000.

The fair value of the consideration given is £50,001.

A further maximum amount of £300,000 will become payable, contingent on the attainment of certain performance conditions over a 3 year period ending April 2018, which will be satisfied by the issue of shares at the prevailing share price at the time of issue. This amount will be treated as remuneration and therefore has not been included in the total consideration figure.

Transaction costs of £73,000 have been expensed and are included in administrative expenses.

This information is provided by RNS

The company news service from the London Stock Exchange