TIDMMMC
RNS Number : 6640M
Management Consulting Group PLC
30 April 2018
30 April 2018
This announcement contains inside information
Management Consulting Group PLC
Preliminary Results
Management Consulting Group PLC ("MCG" or the "Group"), the
global professional services group, today announces its preliminary
results for the year ended 31 December 2017. These results reflect
continuing operations of the Group, comprising Proudfoot, and
discontinued operations relating to the Kurt Salmon business.
Key points
-- Investment in and progress made at Proudfoot implementing our
new offering and strategy in Europe, Asia and key sectors such as
natural resources. Slower pace of change across some areas of the
business, notably in the Americas. Operating costs reduced by
around 20% during the year.
-- Reported revenues of GBP35.1m (2016: GBP45.2m). Underlying*
operating loss of GBP8.3m (2016 loss: GBP8.8m) including foreign
exchange losses of GBP1.4m.
-- After non-underlying items, including impairments against
goodwill, retained net loss of GBP31.0m for FY2017 (2016 retained
net loss: GBP0.1m).
-- Cash balances at 31 December 2017 were GBP21.0m (30 June
2017: GBP28.4m) including GBP8.6m of cash reserved for contingent
creditors of the Group.
-- As previously announced, MCG is exploring a fundraising
backed by a letter of intent from its major shareholder, Blue Gem
Capital Partners LLP ("BlueGem"), to offset risks to its short-term
funding position.
*Being operating loss before goodwill impairment and other
non-underlying costs and credits. See note 5
Nick Stagg, Chairman and Chief Executive, commented:
"Proudfoot continues to deliver value to clients and remains a
distinctive and recognised brand and is an established global
operator in key sectors. It needs additional change and investment
in order to further the transformation we started in 2017 and start
to create value for shareholders. Due to the uncertainty regarding
the timing of potential claims under the various disposals carried
out in 2015/6 and the longer time frame to execute the turn round
in Proudfoot, we will look to raise additional finance to ensure
that we can complete the changes in Proudfoot and deliver value to
shareholders."
For further information please contact:
Management Consulting Group PLC
Chairman and Chief
Nick Stagg Executive 020 7710 5000
Notes to Editors
Management Consulting Group PLC (MMC.L) provides professional
services across a wide range of industries and sectors. For further
information, visit www.mcgplc.com.
Market Abuse Regulation
The information contained within this announcement is deemed by
the Group to constitute inside information as stipulated under the
Market Abuse Regulation. Upon the publication of this announcement
via a regulatory information service, this inside information is
now considered to be in the public domain.
The person responsible for arranging for the release of this
announcement on behalf of the Group is Nick Stagg, Chairman and
Chief Executive.
Forward-looking statements
Certain information contained in this announcement constitutes
forward looking information. This information relates to future
events or occurrences or the Company's future performance. All
information other than information of historical fact is forward
looking information. The use of any of the words "anticipate",
"plan", "continue", "estimate", "expect", "may", "will", "project",
"should", "believe", "predict" and "potential" and similar
expressions are intended to identify forward looking information.
This information involves known and unknown risks, uncertainties
and other factors that may cause actual results or events to differ
materially from those anticipated in such forward looking
information. No assurance can be given that this information will
prove to be correct and such forward looking information included
in this announcement should not be relied upon. Forward-looking
information speaks only as of the date of this announcement.
The forward looking information included in this announcement is
expressly qualified by this cautionary statement and is made as of
the date of this announcement. The Group does not undertake any
obligation to publicly update or revise any forward looking
information except as required by applicable securities laws.
Chairman and Chief Executive's statement
After the transformational transactions of 2016, we focused in
2017 on the recovery of Proudfoot, the Group's only continuing
business. Our strategic focus has been in 2017 and remains in 2018
on the transformation of the Proudfoot business.
The year started with a creative rebrand of Proudfoot which,
whilst rooted in our 75 years of client success, was designed to
showcase our ability to work with senior executives and their
frontline teams to transform their business and deliver lasting
change. Proudfoot continues to focus on operations transformation
as its core offering adding new offerings such as Proudfoot Digital
Ready and mixing a global presence across a wide range of
industries with particular focus on sectors such as natural
resources. Throughout the year, the Proudfoot teams continued to
demonstrate tangible success to our clients in a wide variety of
projects and assignments, delivering significant and sustainable
financial benefits. We have made large scale changes to the nature
of the solutions we now deliver, whilst being true to our purpose
for clients; achieving "tomorrow's results, today". Clients and
peers recognised our impact, with an award for our work in natural
resources for Rio Tinto in the Best International Project category
at the 2018 MCA Awards and our work for Santa Monica Seafood
winning us their Service Provider of the Year award. Proudfoot was
put on Forbes annual list of Best Consulting Firms in America We
invested in new hires, to retain our key talent and in our
intellectual property. In the markets where change has been rolled
out earliest - Europe and Asia notably - we saw growth.
Group revenues were GBP35.1m in 2017, 22% lower than in 2016
(GBP45.2m). Whilst we were able to grow in Europe and Asia, our
activity in North America, where the new model was starting its
roll-out, was low. The second half of the year was particularly
weak with revenues of GBP13.5m compared to GBP19.5m in the second
half of 2016. Whilst maintaining selective investment, the Group
has continued to reduce its cost base successfully: underlying
operating costs were GBP43.4m in 2017 compared to GBP54m in 2016, a
reduction of nearly 20%. However, the Group still reported an
underlying operating loss of GBP8.3m for the year as a whole.
Excluding foreign exchange losses, the underlying operating loss
would have been GBP7.1m, showing good progress compared to 2016.
The reported loss for the period was GBP31.0m (2016: loss
GBP0.1m).
Reflecting the operating losses as well as restructuring costs,
the Group's cash and cash equivalents fell to GBP21.0m as at 31
December 2017 (from GBP38.1m as at 31 December 2016). Of this
GBP21.0m, EUR8.0m (approximately GBP7m) was held in escrow accounts
connected with the sale of parts of the Kurt Salmon business. We
continued to manage the residual activities and liabilities linked
to our discontinued businesses and overall the impact of
discontinued activities on our 2017 financial statements is
substantially less than in 2016, in line with our expectations.
Agreement was reached with Wavestone as announced on 27 April 2018
with respect to some claims, nonetheless, there remains risk and
uncertainty linked to the discontinued activities, notably in
respect of warranty claims and therefore the timing and release of
the escrow funds.
As we look ahead to 2018, we remain confident in the potential
of the Proudfoot model to deliver sustainable improvement and
change for our customers and we will seek to maintain the momentum
of the transformation we have started, even if the pace of change
has been slower than expected. We also expect to continue to work
to reduce our cost base further across the Group as a whole. In
this context we are finalising the sale to management of our
business in Brazil.
The Board highlights the risks to the Group's short-term funding
position created by contingent liabilities relating to the disposal
of parts of the Kurt Salmon business in 2016 in the 2017 report to
shareholders and this is also commented on by our external auditors
in their 2017 Audit report. As previously announced and having
received a letter of intent from its major shareholder, Blue Gem,
the Board is now working to finalise its plans for a fundraising
which would offset these risks on an expedited basis.
Nick Stagg
Financial and operating review
After the transformational transactions of 2016, we focused in
2017 on the recovery of Proudfoot whose operations and service
offering were substantially reorganised during the year.
The continuing operations of the Group comprise Proudfoot and
the commentary below on the 2017 results and the 2016 comparatives
chiefly relate to that business. Discontinued activities are
largely related to the residual transitional service agreements and
other contractual obligations and contingent liabilities related to
the business disposals undertaken by the Group.
Proudfoot's reported revenue for 2017 was 22% lower at GBP35.1m
(2016: GBP45.2m). Although first half 2017 revenues of GBP21.6m
showed growth compared to the second half of 2016, this was not
sustained in the second half of 2017. Second half revenues were
GBP13.5m and the latter part of the year was particularly weak,
notably in North America. Given the lower revenues, and despite
substantial cost reduction measures, the Group reported an
underlying operating loss of GBP8.3m (2016: loss of GBP8.8m) for
the year as a whole, as defined in key points. Excluding foreign
exchange losses, the underlying operating loss would have been
GBP6.9m, showing good progress compared to 2016. The reported
operating loss was GBP31.0m (2016: loss GBP0.1m)
Review of continuing operations
2017 was a year of large-scale change and selective investment
at Proudfoot. We invested to maintain our key talent and in new
hires as well as in our know-how and intellectual property. We
undertook a creative rebrand of Proudfoot which, whilst rooted in
our 75 years of client success, was designed to showcase our
ability to work with senior executives and their frontline teams to
transform their business and deliver lasting change. We have made
changes to the nature of the solutions we now deliver, whilst being
true to our purpose for clients; achieving "tomorrow's results,
today".
Throughout the year, the Proudfoot teams continued to
demonstrate tangible benefits to our clients in a wide variety of
projects and assignments, delivering significant and sustainable
financial benefits. In the markets where change has been rolled out
earliest - Europe and Asia notably - we saw growth in our revenues.
Our main challenge looking forward is to deliver a similar impact
in North America where the new model was starting to be rolled out
during the year.
At the start of 2017, we recognised the need to focus on
continued change in Proudfoot, and the business fundamentally
changed its structure and sales model and introduced new additional
services during the course of the year. To our core capabilities of
Proudfoot Analytics and Proudfoot People Solutions, we have added
new offerings such as Proudfoot Digital Ready which enables
management to lead digital change through their people processes
and decision-making. This has driven our recent success with
European and Asian clients where the model was rolled out first. We
have also continued to merge our selling activities with our
delivery capabilities, driving greater customer satisfaction with
the added benefit of streamlining our cost base. Structurally, we
have removed several layers of management across the business,
therefore focusing on bringing our most senior expertise directly
into our client teams.
Proudfoot appointed a new Chief Executive, Pam Hackett, who has
a 30-year history with the business and led the Asian and European
businesses previously. Organized globally, Proudfoot has two sector
verticals (Natural Resources and Industrials). Our capability
verticals (Digital Ready and MRO) cross multiple sectors. These
four verticals are complimented by local market specific sector and
capability strengths. Proudfoot's principal hubs are in the
Americas, EMEA and Asia. Proudfoot practices global staffing of
engagements matching expertise to client needs. Our natural
resources business frequently requires us to operate in remote
locations such as Rio Tinto's vast Oyu Tolgoi development in the
Gobi Desert, Mongolia. Approximately 98% of 2017 revenues were
generated outside the UK. The same proportion of revenues were
billed in currencies other than Sterling, with the US Dollar
representing approximately 45% of the total.
Work for clients in the natural resources sector continued to
represent a significant proportion of Proudfoot's activities, at
around 30% of total revenues in 2017 (2016: 42%). Clients in this
sector continued to be holding back investments given the uncertain
outlook in some commodity markets and this had a significant
adverse impact on Proudfoot's revenues in 2017, as in previous
years. However, we continued to expand our work with larger global
mining groups. We have also been successful in expanding our client
base in related sectors such as building materials and with general
industrial and manufacturing companies. Clients and peers
recognised our impact, with our assignment in natural resources for
Rio Tinto receiving an award in the Best International Project
category at the 2018 MCA awards and our work for Santa Monica
Seafood winning us their Service Provider of the Year award.
Proudfoot was put on Forbes annual list of Best Consulting Firms in
America.
Our business remains geographically diverse. Revenues from
clients based in Europe, Africa and Asia region represented
approximately 42% of total revenues in 2017 (2016: 29%) and
revenues from clients based in the Americas represented
approximately 44% of total revenues in 2017 (2016: 62%).
In Europe, our business was focused principally on clients based
in the UK, France and Germany, deriving much of our revenues from
projects outside these clients' home countries. Further progress
was made during the year in enhancing the sales and delivery
functions through selective recruitment and management changes.
Revenues from European-based clients in 2017 were 11% ahead of the
previous year with significant repeat business.
Although small, our business with clients in Asia based out of
our Hong Kong office showed improvement compared to a poor 2016,
benefitting from the management and personnel changes made last
year.
Revenues from clients in North America was disappointing,
falling from GBP15.3m in 2016 to GBP12.2m in 2017. This performance
reflected that the introduction of Proudfoot's new business
offerings and models and the substantial associated changes in
front-line staff were only getting started during this period.
Management remains committed to the key US market and is continuing
to implement a series of initiatives to promote an improved
performance in a market which remains broadly favourable.
Although Proudfoot continues to have a strong reputation and
presence in South America, the Group expects to change its delivery
model for these markets further in 2018.
Our activity with clients in Africa suffered from the relatively
low level of investment amongst natural resources clients, which
has been the mainstay of our local office in South Africa.
Looking forward
Management is now focusing on further enhancing the front-end
capabilities of the business and building long term client
relationships, building on those parts of the offering which are
distinctive and drive value for clients. Action continues to be
taken to mitigate the profit impact of lower revenues by reducing
headcount and discretionary expenditure, although a significant
element of the operating costs of the Proudfoot business relate to
the sales function and the infrastructure of the business across a
range of geographies and these are less easily flexed downwards
without reducing the potential for revenue recovery and growth in
the future.
The Board is conscious that the turnaround of the business is
taking longer than expected but intends to continue to promote the
changes needed to restore the Group's growth and profitability.
Loss for the period from continuing operations
The Group has reported a net non-underlying charge of GBP0.8m
(2016 GBP0.5m). This comprises a charge of GBP1.1m relating to
restructuring of the Proudfoot business, a GBP0.4m provision for
future pension payments and a credit of GBP0.7m relating to the
partial release of a provision in respect of the closure of the
Proudfoot post-retirement medical benefit scheme.
Operating loss from continuing operations reflects the impact of
foreign exchange movements on cash and cash equivalents balances
held in currencies other than sterling. These impacts increased the
operating loss by GBP1.4m in 2017.
The operating loss from continuing operations also reflects a
charge of GBP16.7m for the impairment of goodwill relating to
Proudfoot. Goodwill is tested annually for impairment, based on
determining recoverable amounts from value-in-use calculations. The
Board reviewed the carrying value of Proudfoot goodwill at 31
December 2017 and concluded that the recoverable amount was lower
than the value of goodwill then recorded at cost in the Group
balance sheet. Consequently, the Group has reported an impairment
charge and Proudfoot goodwill is reflected in the Group balance
sheet at zero. Notwithstanding the value-in-use assessment in
relation to the Proudfoot goodwill, the Board's expectation and
belief is that the recent weak trading performance of the business
will not persist in the medium term and the business will achieve
profitability but at a slower pace than previously expected and
recognises the uncertainty of the current trading conditions.
After the above non-recurring expenses and intangible asset
impairments, there was an operating loss from continuing operations
of GBP25.8m (2016: loss of GBP39.6m).
The net interest expense from continuing operations was lower at
GBP0.5m (2016: GBP1.2m). In accordance with IAS 19 the reported net
interest charge for 2017 includes an imputed charge in relation to
defined benefit pensions of GBP0.6m (2016 GBP0.8m).
The loss before tax on continuing operations was GBP26.3m (2016
loss of GBP40.8m). The tax charge on continuing operations was
GBP4.5m (2016: GBP2.2m credit). The movement in the deferred tax
asset from GBP8.1m to GBP0.1m is reflected primarily by a balance
sheet reclassification of GBP0.6m and an impairment of the deferred
tax assets in the US of GBP7.2m, split between the P&L
(GBP3.3m) and reserves GBP3.9m). The charge in the income statement
represents the impairment of US tax losses and other temporary
differences and the charge through reserves represents the
impairment of the temporary difference on the US pension scheme.
The continuing high tax charge on continuing operations in 2017
reflects the impact of unrelieved losses in certain jurisdictions
driven largely by loss-making operations and the impact of project
specific withholding taxes in Proudfoot.
Discontinued operations
Discontinued operations comprise residual transitional service
agreements and obligations including contingent liabilities of the
businesses that were sold in 2016. The disposals during 2016
comprised:
-- The sale of the French and related operations of Kurt Salmon
(namely the businesses in Belgium, Luxembourg, Switzerland and
Morocco together with two New York-based practices in the United
States) to Wavestone which completed on 7 January 2016 for net
proceeds of GBP58.6m. The Group agreed as part of this disposal to
place EUR8 million in escrow to cover certain agreed continent
liabilities;
-- The sale of the US healthcare consulting business of Kurt
Salmon to ECG Management Consultants, which completed on 29 July
2016 for net proceeds of GBP6.2m;
-- The sale of the global retail and consumer goods consulting
operations of Kurt Salmon to Accenture, which completed on 1
November 2016 for net proceeds of GBP125.1m.
Certain existing back-office operations of Kurt Salmon in the
United States did not form part of the disposals. As a result,
certain office leases, supplier and other contracts and back office
personnel supporting Kurt Salmon were retained by MCG following
completion and were used to support transitional service agreements
with the acquirers of the Kurt Salmon businesses. The results of
these transitional services activities are included in reported
discontinued operations in 2017 and 2016 including a provision for
the estimated net cost of providing these services up to the
expected termination dates, on the basis that these obligations
relate to onerous contracts.
The total loss from discontinued operations for 2017 was GBP0.3m
(2016: profit of GBP38.5m).
Loss for the period
Taking into account the loss from discontinued operations, the
reported loss for the Group for the year attributable to
shareholders was GBP31.0m (2016: GBP0.1m loss).
The underlying loss per share attributable to continuing
operations was 2.6p (2016: loss of 1.6p) and the basic loss per
share attributable to continuing operations was 6.1p (2016: loss of
7.6p).
Balance sheet
Intangible Assets
Intangible assets of GBP0.2m (2016: GBP17.7m) relate solely to
computer software assets following the impairment of goodwill.
Deferred tax assets
The balance sheet includes GBP0.1m of deferred tax assets (2016:
GBP8.3m). In 2017 and 2016, these principally relate to the US
operations. The year on year decrease represents a reduction in the
value of losses carry-forward given the reduction in the US tax
rate and a further write down of US tax losses to reflect the low
probability of using the remaining losses against taxable income in
the US.
Net cash
At 31 December 2017, the Group reported cash and cash
equivalents in the Group balance sheet of GBP21.0m (2016:
GBP38.1m).
Reported cash balances at 31 December 2017 include approximately
GBP8.6m of cash which is required to be retained to support certain
contingent creditors of the Group, in particular EUR8m was held in
escrow in relation to the indemnity obligations to Wavestone, the
acquirer of the French and related operations of Kurt Salmon.
Although a substantial proportion of this cash is expected to
become available to the Group for general corporate purposes as the
contingent obligations fall away over time, the exact amount and
timing is subject to uncertainty. Agreement was reached with
Wavestone as announced on 27 April 2018 with respect to some
claims.
Pensions
The retirement benefits obligation reflected in the Group
balance sheet at 31 December 2017 relates to the net liability
under a part-funded US defined benefit pension scheme of GBP7.2m,
an unfunded French retirement obligation of GBP0.3m, and a legacy
Kurt Salmon UK defined pension scheme which shows a closing asset
position of GBP0.2m. The US defined benefit pension scheme is not
open to new employees and existing members are not accruing further
benefits. The net post-retirement obligation for defined benefit
schemes decreased from GBP11.6m at 31 December 2016 to GBP7.3m at
31 December 2017, principally as a result of the actuarial gains
experienced in the US scheme but also as a result of members
leaving the UK scheme. During 2017 the fund was managed on a basis
to reduce as far as possible the deficit between liabilities and
assets whilst maintaining an appropriate risk profile. This was
achieved by having 60% of the fund in equities and 40% in bonds.
This has been moved to a more conservative 60% in bonds and 40% in
equities at the start of 2018.
Provisions
Provisions principally relate to the cost of leases for surplus
property, other onerous contracts, restructuring costs and other
liabilities linked to the 2016 disposals and have decreased from
GBP7.7m at 31 December 2016 to GBP4.7m at 31 December 2017. The
reduction in provision principally relates to the utilisation of
the provisions set up to cover the transitional service agreements
and onerous leases in Atlanta and San Francisco.
Net assets
The net assets of the Group have decreased from GBP32.6m at 31
December 2016 to GBP2.1m at 31 December 2017, primarily due to
retained loss for the year from the business.
Dividends
The Board does not intend to declare a dividend for 2017.
Going concern
The Group's risk factors likely to affect its future
development, performance and position, are set out in the principal
risks and uncertainties section in this announcement. The financial
position of the Group is described in this financial and operating
review. In addition, note 2 of the consolidated financial
statements include the Group's objectives, policies and processes
for managing its capital and its exposures to risk. The Group
prepares regular business forecasts which are reviewed by the
Board. Forecasts are adjusted for sensitivities, which address the
principal risks to which the Group is exposed, and consideration is
given to actions open to management to mitigate the impact of these
sensitivities. The Board used assumptions for 2018 in line with
previous guidance. In particular, the Board noted that Proudfoot
grew revenues in Q1 2018 compared with a particularly low Q4 in
2017 and early indications are for a continuation of this trend
into Q2. Nonetheless, the Board concluded that revenues for the
year ending 31 December 2018 are likely to be lower than revenue
reported in 2017. The Board assumed that management would be
successful in continuing its work to reduce costs across the Group
as a whole. For 2019, the Board assumed that Proudfoot's revenues
would rise but not to the levels seen in 2016. In assessing
sensitivities, the Board took into account the slower than expected
pace of change at Proudfoot and the disappointing revenues in past
periods.
The Group continues to manage the liabilities related to the
disposals made in 2015 and 2016 and in particular to negotiate the
release of funds held under the escrow arrangements which guarantee
certain contingent liabilities relating to the disposal of parts of
the Kurt Salmon business in 2016.
While the Board remains confident as to the Group's overall
position in terms of the release of the outstanding Kurt Salmon
escrow funds, it considers that uncertainties around the ongoing
negotiations create undue risk to the Group's short-term funding
position and therefore it is actively considering options to manage
this including raising new funds for the Company.
BlueGem, which currently holds 24.38% of the Group's issued
share capital and has two representatives on the Board, has
confirmed in writing its support for a fundraising and its
intention, in principle and subject to certain conditions, to
commit new funds of up to EUR4 million (approximately GBP3.5
million) to the Company as part of such a fundraising in a form and
amount to be agreed. The Board is now working to finalise its plans
for the fundraising on an expedited basis.
The Board has concluded that its forecasts indicate that the
Group has adequate resources to be able to operate for the
foreseeable future. For this reason, the going concern basis has
been adopted in preparing the financial statements. However, the
Board has also noted the risks and uncertainties related to those
forecasts referred to above as well as to the fundraising intention
referred to above and has concluded that these material
uncertainties cast significant doubt on the Company's ability to
continue as a going concern. For further details please refer to
note 2 to the consolidated financial statements.
Outlook
Proudfoot grew revenues in Q1 2018 compared with a particularly
low Q4 in 2017 and early indications are for a continuation of this
trend into Q2. The customer reaction to our offering continues to
be strong where we win work. We are building up the necessary sales
and marketing teams and infrastructure to promote our offering more
effectively and the Board remains confident in the power of the
Proudfoot model to deliver sustainable improvement and change for
our customers. Nonetheless, revenues for the year ending 31
December 2018 are likely to be lower than revenue reported in 2017.
In addition, Management is continuing its work to reduce costs
across the Group as a whole.
The Group continues to manage the liabilities related to the
disposals made in 2015 and 2016 and in particular to negotiate the
release of funds held under the escrow arrangements which guarantee
certain contingent liabilities relating to the disposal of parts of
the Kurt Salmon business in 2016. As previously announced, the
Board considers that the uncertainties around these negotiations
create undue risk to the Group's short-term funding position and
therefore it is actively considering options to manage this
including raising new funds for the Company.
BlueGem, which currently holds 24.38% of the Group's issued
share capital and has two representatives on the Board, has
confirmed in writing its support for a fundraising and its
intention, in principle and subject to certain conditions, to
commit new funds of up to EUR4 million (approximately GBP3.5
million) to the Company as part of such a fundraising in a form and
amount to be agreed. As previously announced, the Board is now
working to finalise its plans for the fundraising on an expedited
basis.
Principal risks and uncertainties
Identifying key areas
The directors have carried out a robust assessment of the
principal risks facing the Group, including those that would
threaten its business model future performance, solvency or
liquidity.
Risk management process
The risk management process can be summarized as follows
Identify risk, then assess, develop mitigation plans, reassess
and report to the Board
1. Demand for services provided by Proudfoot in the markets and
sectors in which it operates
Proudfoot operates in several geographies and industry sectors
and demand for its services can be affected by global, regional or
national macro-economic conditions and conditions within individual
industry sectors. Proudfoot operates in a competitive environment,
where other consulting firms seek to provide similar services to
its clients. Changes in demand for Proudfoot's services can
significantly impact revenues and profits.
In response to anticipated changes in demand and competitive
pressures, the Group made changes in 2017 to Proudfoot's offering
to exploit opportunities for growth in geographies and sectors
where demand is increasing. Proudfoot operates a flexible model and
can deploy staff to areas of higher demand to optimise utilisation.
Part of the total remuneration paid to senior employees is in the
form of variable pay related to financial performance, which
provides some profit mitigation in the event of a decline in
revenues.
Level/increasing
Market conditions in 2017 varied between the key sectors and
geographies in which Proudfoot operates, in some cases showing
positive trends, in others negative ones. Demand from natural
resources clients, a key sector for Proudfoot's services, remained
weak in 2017.
2. Development and retention of key client relationships
Proudfoot typically contracts with clients for the delivery of
project related consulting services over relatively short periods.
Individual clients may change their preferred suppliers or may
change the quantity of such services or the price at which they buy
such services. Failure by Proudfoot to develop and retain client
relationships could result in a significant reduction in the
Group's revenues. Potential unforeseen contractual liabilities may
arise from client engagements that are not completed
satisfactorily.
The changes made to Proudfoot's business processes in 2017 are
designed to promote and enhance client relationships, and to
generate revenues over longer periods than those of a typical
single project. This includes different contracting models as well
as a continued focus on the delivery of high quality work that
meets clients' expectations. Our human resources management
policies emphasise the importance of maintaining and developing
client relationships. Potential contractual liabilities arising
from client engagements are managed through the control of
contractual conditions and insurance arrangements.
Increasing
Proudfoot has retained key client relationships and continued to
work to develop new long-term relationships but the latter is
taking longer than expected.
3. Recruitment and retention of talented employees
The Group is dependent on the recruitment and retention of key
personnel to develop and maintain relationships with clients and to
deliver high quality services. Any failure to attract and retain
such personnel, or which results in their unforeseen departure from
the business, may have detrimental consequences on the Group's
financial performance.
The Group has remuneration policies and structures that reward
good performance consistent with prevailing market levels of
remuneration. For senior employees, a significant element of total
remuneration is variable and linked to financial and other
performance measures, which provides opportunities for enhanced
rewards. The Group is actively looking to hire from as broad a pool
of talent as possible.
Increasing
Staff retention has been managed effectively and we have
recruited in areas of the business which are being developed but
the need to reduce costs presents an additional risk to
retention.
4. Optimisation of the Group's intellectual capital
The intellectual capital of the Proudfoot business, including
its methodologies and its track record of successful sale and
delivery of assignments to clients, is a key asset which must be
maintained, continually developed and protected, so that its
offerings remain distinctive and attractive to clients. It is
possible that employees who exit the business may appropriate this
intellectual capital for use by themselves or by the Group's
competitors.
The Group maintains a comprehensive knowledge management system
to record its methodologies and track record of client assignments.
It develops and refreshes these continually in response to, and in
anticipation of, market demand. The Group protects its intellectual
property through appropriate contractual arrangements with
employees and others, and through legal action where necessary.
Level
We have continued to invest to develop new offerings and to
build our intellectual capital.
5. Fluctuations in foreign currency exchange rates
The Group reports its results and financial position in Pounds
Sterling but operates in and provides services to clients in many
countries around the world, conducting most of its business in
other currencies. In particular, a significant proportion of the
Group's business is conducted in US Dollars. Fluctuations in
prevailing exchange rates may have a significant impact on reported
revenues and profits.
Where appropriate, the Group will undertake hedging to mitigate
currency risk. This is rarely undertaken since the Group's cost
base is, in broad terms, located in those countries in which the
Group generates revenues. The currencies in which costs and
revenues are denominated are therefore, to a great extent, matched
and this tends to reduce the impact of exchange rate fluctuations
on reported profits.
Level
Currency volatility has had an impact on reported revenues and
operating results in 2017.
6. Management of residual liabilities
Description
In 2016, the Group completed three major disposals. As part of
these disposals, the Group agreed to provide certain transition
service and also retained responsibility for certain contingent
liabilities relating to the businesses sold and placed certain of
its cash balances in escrow as guarantees. The amount of actual
costs and the timing and amount of the release of cash from escrow
could vary from our initial assumptions reducing the amount of
liquidity available for the Group's continuing operations.
Agreement was reached with Wavestone as announced on 27 April 2018
with respect to some claims.
Mitigation
The initial contractual arrangements were structured to limit in
amount and time the overall potential liabilities of the Group and
management monitors the actual costs and potential liabilities.
Increasing
Whilst transition services agreements have been effectively
managed, there remains risk to the effective timing of release from
these liabilities (including of cash reserved to cover them) given
arising warranty claims from the acquirors.
7. Pension liabilities
Description
The Group has a number of retirement plans covering both current
and former employees, including defined benefit plans notably in
the US and the UK. The US defined benefit pension scheme is not
open to new employees and existing members are not accruing further
benefits. The net post-retirement obligation for defined benefit
schemes decreased from GBP11.6m at 31 December 2016 to GBP7.2m at
31 December 2017, principally as a result of the actuarial gains
experienced in the US scheme but also as a result of members
leaving the UK scheme. There is a risk that the amount of the
liability changes depending on the changes in the actuarial value
of the liability in the schemes. In addition, there is a risk that
trustees of the various plans request the Group to take a different
approach to funding deficits which could involve calls on the
Group's cash resources.
Mitigation
The Group maintains an active dialog with the trustees of the
plans. In addition, the Group has actively been promoting to plan
members the possibility to exit plans and part of the reason for
the decline in the net obligation in 2017 was members leaving the
UK plan.
Level
Group income statement
2017 2016
Note GBP'000 GBP'000
----------------------------------------------- ---- -------- --------
Continuing operations
Revenue 35,103 45,193
Cost of sales (18,646) (23,711)
----------------------------------------------- ---- -------- --------
Gross profit 16,457 21,482
----------------------------------------------- ---- -------- --------
Administrative expenses - underlying (24,761) (30,327)
----------------------------------------------- ---- -------- --------
Loss from operations - underlying (8,304) (8,845)
Administrative expenses - non-underlying
- impairment 5 (16,665) (30,358)
Administrative expenses - non-underlying
other 5 (1,483) (2,304)
Administrative expenses - non--underlying
credit 5 664 1,894
----------------------------------------------- ---- -------- --------
Total administrative expenses (42,245) (61,095)
----------------------------------------------- ---- -------- --------
Operating loss (25,788) (39,613)
Investment revenues 7 224 64
Finance costs 7 (719) (1,220)
----------------------------------------------- ---- -------- --------
Loss before tax (26,283) (40,769)
Tax 8 (4,485) 2,209
----------------------------------------------- ---- -------- --------
Loss for the period from continuing operations (30,768) (38,560)
(Loss)/Profit for the period from discontinued
operations 12 (251) 38,505
----------------------------------------------- ---- -------- --------
Loss for the period (31,019) (55)
----------------------------------------------- ---- -------- --------
(Loss)/earning per share - pence
From loss from continuing operations for
the year attributable to owners of the
Company
Basic 9 (6.1) (7.6)
Diluted 9 (6.1) (7.6)
Basic - underlying 9 (2.6) (1.6)
Diluted - underlying 9 (2.6) (1.6)
----------------------------------------------- ---- -------- --------
From the loss for the period:
Basic 9 (6.1) 0.0
Diluted 9 (6.1) 0.0
Basic - underlying 9 (2.6) (0.9)
Diluted - underlying 9 (2.6) (0.9)
----------------------------------------------- ---- -------- --------
Group statement of comprehensive income
2017 2016
GBP'000 GBP'000
Loss for the year (31,019) (55)
------------------------------------------------------- ---------- ----------
Items that will not be subsequently reclassified
to profit and loss:
Actuarial gains/(losses) on defined benefit
post-retirement obligations 3,838 (574)
Tax on items taken directly to comprehensive
income (3,867) (186)
------------------------------------------------------- ---------- ----------
(29) (760)
------------------------------------------------------ ---------- ----------
Items that may be reclassified subsequently
to profit and loss:
Gain on available-for-sale investments - 7
Exchange differences on translation of foreign
operations 643 (20,667)
------------------------------------------------------- ---------- ----------
643 (20,660)
------------------------------------------------------ ---------- ----------
Total comprehensive expense for the year attributable
to owners of the Company (30,405) (21,475)
------------------------------------------------------- ---------- ----------
Group statement in changes of equity
Shares
Share held
by
Share Share Merger compensation employee Translation Other Retained
benefits
capital premium reserve on reserve trust reserve reserves earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Balance at
1 January
2016 84,538 82,664 5,683 4,179 (1,855) 17,291 6,082 (69,276) 129,306
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Loss for the
year - - - - - - - (55) (55)
Other
comprehensive
expense - - - - - (20,667) 7 (760) (21,420)
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Total
comprehensive
expense - - - - - (20,667) 7 (815) (21,475)
Shares issued 107 359 - - - - - - 466
Cancellation
of deferred
shares (79,534) - - - - - - 79,534 -
Cancellation
of share premium - (75,000) - - - - - - (75,000)
Share-based
payments - - - 1,521 - - - - 1,521
Lapsed/vested
shares - - - (5,474) - - - 1,521 (3,953)
Shares
transferred
from employee
benefit trust - - - - 1,747 - - - 1747
Recycling
of merger
reserve
investment - - (5,683) - - - - (5,683) -
Recycling
of reserve - - - - - - 975 (975) -
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Balance at
31 December
2016 5,111 8,023 - 226 (108) (3,376) 7,064 15,672 32,612
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Loss for the
period - - - - - - - (31,019) (31,019)
Other
comprehensive
income/(expense) - - - - - 643 - (29) 614
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Total other
comprehensive
income - - - - - 643 - (31,048) (30,405)
Share-based
payments - - - (63) - - - - (63)
Lapsed/ vested
shares - - - (5) - - - - (5)
Shares
transferred
from ESOP - - - - 5 - - - 5
Balance at
31 December
2017 5,111 8,023 - 158 (103) (2,733) 7,064 (15,376) 2,144
------------------ --------- --------- -------- ------------ -------- ----------- -------- --------- ---------
Group balance sheet
2017 2016
GBP'000 GBP'000
------------------------------- -------- --------
Non--current assets
Intangible assets and goodwill 151 17,724
Property, plant and equipment 358 1,108
Other receivables 395 -
Deferred tax assets 79 8,324
-------------------------------- -------- --------
Total non--current assets 983 27,156
-------------------------------- -------- --------
Current assets
Trade and other receivables 4,075 7,212
Current tax receivables 965 1,404
Cash and cash equivalents 20,979 38,067
Total current assets 26,019 46,683
-------------------------------- -------- --------
Total assets 27,001 73,839
-------------------------------- -------- --------
Current liabilities
Trade and other payables (11,390) (20,162)
Current tax liabilities (1,391) (1,070)
-------------------------------- -------- --------
Total current liabilities (12,781) (21,232)
-------------------------------- -------- --------
Net current assets 13,238 25,451
-------------------------------- -------- --------
Non--current liabilities
Retirement benefit obligations (7,320) (11,577)
Deferred tax liabilities (24) (707)
Long-term provisions (4,732) (7,711)
-------------------------------- -------- --------
Total non--current liabilities (12,076) (19,995)
-------------------------------- -------- --------
Total liabilities (24,857) (41,227)
-------------------------------- -------- --------
Net assets 2,144 32,612
-------------------------------- -------- --------
2017 2016
GBP'000 GBP'000
---------------------------------------- --------- ---------
Equity
Share capital 5,111 5,111
Share premium account 8,023 8,023
Share compensation reserve 158 226
Shares held by employee benefits trust (103) (108)
Translation reserve (2,733) (3,376)
Other reserves 7,064 7,064
Retained earnings (15,376) 15,672
---------------------------------------- --------- -------
Equity attributable to owners of the
Company 2,144 32,612
---------------------------------------- --------- -------
Group cash flow statement
2017 2016
Note GBP'000 GBP'000
--------------------------------------------- ---- -------- ---------
Net cash outflow from operating activities 11 (15,014) (15,214)
--------------------------------------------- ---- -------- ---------
Investing activities
Interest received 224 65
Purchases of property, plant and equipment (108) (414)
Purchases of intangible assets (15) (239)
Net proceeds from disposal - 188,950
--------------------------------------------- ---- -------- ---------
Net cash generated from investing activities 101 188,362
--------------------------------------------- ---- -------- ---------
Financing activities
Dividends paid - (7)
Proceeds from borrowings - 9,663
Repayment of borrowings - (78,697)
Return of Capital - (75,000)
--------------------------------------------- ---- -------- ---------
Net cash used in financing activities - (144,041)
--------------------------------------------- ---- -------- ---------
Net (decrease)/increase in cash and cash
equivalents (14,913) 29,107
Cash and cash equivalents at beginning
of year 38,067 20,737
Effect of foreign exchange rate changes (2,175) (11,777)
--------------------------------------------- ---- -------- ---------
Cash and cash equivalents at end of year 20,979 38,067
--------------------------------------------- ---- -------- ---------
Cash and cash equivalents comprise cash and short-term bank
deposits with an original maturity of three months or less, net of
outstanding bank overdrafts. The carrying amount of these assets is
approximately equal to their fair value. Cash and cash equivalents
at the end of the reporting period as shown in the consolidated
statement of cash flows can be reconciled to the related items in
the consolidated balance sheet position as shown above.
Included within the 2017 Group cash balance of GBP21.0m and
Company cash balance of GBP16.4m is GBP8.6m (2016: GBP9.6m) of cash
which is not available for use by the Group. This represents cash
held in restricted bank accounts which is required to be retained
to support indemnity obligations to Wavestone, the acquirer of the
French and related operations of Kurt Salmon and in support of the
Kurt Salmon UK pension scheme, which became PLC Company's
obligation following the sale of the Kurt Salmon retail and
consumer goods operations.
Notes
1. Basis of preparation
The financial information included in this statement does not
constitute the Company's statutory accounts for the years ended 31
December 2017 or 2016 but is derived from those accounts. Statutory
accounts for 2016 have been delivered to the Registrar of Companies
and those for 2017 will be delivered following the Company's annual
general meeting. [The auditor has reported on those accounts; their
reports were unqualified, did not draw attention to any matters by
way of emphasis without qualifying their reports and did not
contain statements under Section 498 Companies Act 2006.]
While the financial information included in this preliminary
announcement has been computed in accordance with International
Financial Reporting Standards (IFRS), this announcement does not
itself contain sufficient information to comply with IFRS.
The Group's Annual Report and Accounts and notice of Annual
General Meeting will be sent to shareholders and will be available
at the Company's registered office at St Paul's House, 4(th) Floor,
10 Warwick Lane, London, EC4M 7BP, United Kingdom and on our
website: www.mcgplc.com.
2. Accounting policies
The financial information has been prepared in accordance with
IFRS. These financial statements have been prepared in accordance
with those IFRS standards and IFRIC interpretations issued and
effective or issued and early adopted as at the time of preparing
these statements (as at 31 December 2017). The policies have been
consistently applied to all the periods presented.
Full details of the Group's accounting policies can be found in
note 2 to the 2016 Annual Report which is available on our website:
www.mcgplc.com.
3. Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Strategic Report. The Group prepares regular
business forecasts which are reviewed by the Board. Forecasts are
adjusted for sensitivities, which address the principal risks to
which the Group is exposed, and consideration is given to actions
open to management to mitigate the impact of these sensitivities.
The Board used assumptions for 2018 in line with previously
announced guidance. In particular, the Board noted that Proudfoot
grew revenues in Q1 2018 compared with a particularly low Q4 in
2017 and early indications are for a continuation of this trend
into Q2. Nonetheless, the Board concluded that revenues for the
year ending 31 December 2018 are likely to be lower than revenue
reported in FY2017. The Board assumed that management would be
successful in continuing its work to reduce costs across the Group
as a whole. For 2019, the Board assumed that Proudfoot's revenues
would rise but not to the levels seen in 2016. In assessing
sensitivities, the Board took into account the slower than expected
pace of change at Proudfoot and the disappointing result revenues
in past periods.
The Group continues to manage the liabilities related to the
disposals made in 2015 and 2016 and in particular negotiate the
release of funds held under the escrow arrangements which guarantee
certain contingent liabilities relating to the disposal of parts of
the Kurt Salmon business in 2016.
While the Board remains confident as to the Group's overall
position in terms of the release of the outstanding Kurt Salmon
escrow funds, it considers that the ongoing negotiations create
undue risk to the Group's short-term funding position and therefore
it is actively considering options to manage this including raising
new funds for the Company.
BlueGem Capital Partners LLP, which currently holds 24.38% of
the Group's issued share capital and has two representatives on the
Board, has confirmed in writing its support for a fundraising and
its intention, in principle and subject to certain conditions, to
commit new funds of up to EUR4 million (approximately GBP3.5
million) to the Company as part of such a fundraising in a form and
amount to be agreed. The Board is now working to finalise its plans
for the fundraising on an expedited basis.
The Board has concluded that its forecasts indicate that the
Group has adequate resources to be able to operate for the
foreseeable future. For this reason, the going concern basis has
been adopted in preparing the financial statements. However, the
Board has also noted the risks and uncertainties related to those
forecasts referred to above as well as to the fundraising intention
referred to above and concluded that these material uncertainties
cast significant doubt on the Group and Company's ability to
continue as a going concern.
The principal uncertainties can therefore be summarised as
follows:
-- The timing and quantum of the release of cash from escrow in
connection with the disposal of Kurt Salmon is uncertain.
-- The source and quantum of the current immediate fund-raising
plans is the subject of a letter of intent, but that intention is
neither binding nor guaranteed. The ability to achieve the forecast
revenues and reduce the cost base of the business appropriately is
inherently uncertain and therefore the quantum of the Group's
financing requirements is uncertain and its sufficiency is
dependent on achieving at least the sensitised forecast
outturn.
Accordingly, there is a material uncertainty related to events
or conditions that may cast significant doubt on the Group and
Company's ability to continue as a going concern and, therefore,
the Group and Company may be unable to realise its assets and
discharge its liabilities in the normal course of business.
4. Segmental information
The Group's continuing operating segment is one professional
services practice, Proudfoot. This is the basis on which
information is provided to the Board of Directors for the purposes
of allocating certain resources within the Group and assessing the
performance of the business. All revenues are derived from the
provision of professional services.
(a) Geographical analysis
The Group operates in three geographical areas; the Americas,
Europe and the Rest of World. The following is an analysis of
financial information by geographic area:
(i) Revenue and underlying operating loss by geography
Rest of
Americas Europe World Group
------------------------------------------- -------- ------- ------- --------
Year ended 31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------- -------- ------- ------- --------
Revenue - continuing operations 15,377 14,762 4,964 35,103
Loss from operations before non-underlying
expenses (6,224) (1,527) (533) (8,304)
Non-underlying expenses (1,192) (142) (149) (1,483)
Non-underlying income 664 - - 664
------------------------------------------- -------- ------- ------- --------
Loss from operations before impairment (6,752) (1,669) (702) (9,123)
------------------------------------------- -------- ------- ------- --------
Goodwill impairment (16,665)
------------------------------------------- -------- ------- ------- --------
Loss from operations (25,788)
Investment revenue 224
Finance costs (719)
------------------------------------------- -------- ------- ------- --------
Loss before tax (26,283)
------------------------------------------- -------- ------- ------- --------
Included in revenues arising from Americas are revenues of
approximately GBP3.6m which arose from sales in 2017 to the Group's
largest customer. No other single customer contributed to 10% or
more to the Group's revenue in either 2016 or 2017.
Rest of
Americas Europe World Group
------------------------------------------- -------- ------- ------- --------
Year ended 31 December 2016 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------- -------- ------- ------- --------
Revenue - continuing operations 27,822 13,190 4,181 45,193
Loss from operations before non-underlying
expenses and amortisation of acquired
intangibles (4,418) (1,867) (2,560) (8,845)
Non-underlying expenses and amortisation
of acquired intangibles (2,278) (953) (213) (3,444)
Non-underlying income 1,808 737 489 3,034
------------------------------------------- -------- ------- ------- --------
Loss from operations before impairment (4,888) (2,083) (2,284) (9,255)
------------------------------------------- -------- ------- ------- --------
Goodwill impairment (30,358)
------------------------------------------- -------- ------- ------- --------
Loss from operations (39,613)
Investment revenue 64
Finance costs (1,220)
------------------------------------------- -------- ------- ------- --------
Loss before tax (40,769)
------------------------------------------- -------- ------- ------- --------
4. Segmental information (continued)
(a) Geographical analysis (continued)
(ii) Net assets by geography
Rest of
Americas Europe World Group
At 31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- -------- ------- -------- --------
Assets
Intangibles 152 - - 152
Other segment assets 2,400 3,417 901 6,718
---------------------------------- -------- ------- -------- --------
2,552 3,417 901 6,870
Unallocated corporate assets 20,131
---------------------------------- -------- ------- -------- --------
Consolidated total assets 27,001
---------------------------------- -------- ------- -------- --------
Liabilities
Segment liabilities (10,909) (5,692) (2,269) (18,870)
Unallocated corporate liabilities (5,987)
---------------------------------- -------- ------- -------- --------
Consolidated total liabilities (24,857)
---------------------------------- -------- ------- -------- --------
Net assets 2,144
---------------------------------- -------- ------- -------- --------
Rest of
Americas Europe World Group
At 31 December 2016 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- ------- -------- --------
Assets
Intangibles, including goodwill 11,254 6,470 - 17,724
Other segment assets 12,152 3,869 466 16,487
----------------------------------- -------- ------- -------- --------
Total assets allocated to segments 23,406 10,339 466 34,211
Unallocated corporate assets 39,628
----------------------------------- -------- ------- -------- --------
Consolidated total assets 73,839
----------------------------------- -------- ------- -------- --------
Liabilities
Segment liabilities (20,260) (6,688) (1,478) (28,426)
Unallocated corporate liabilities (12,801)
----------------------------------- -------- ------- -------- --------
Consolidated total liabilities (41,227)
----------------------------------- -------- ------- -------- --------
Net assets 32,612
----------------------------------- -------- ------- -------- --------
5. Loss before tax
Loss before tax has been arrived at after (crediting)/charging
the following:
2017 2016
Note GBP'000 GBP'000
---------------------------------------------- ---- ------- -------
Net foreign exchange losses/(gains) 1,366 (153)
Amortisation of intangible assets 1,503 1,333
Depreciation of property, plant and equipment 815 328
(Profit)/loss on disposal of fixed assets - (54)
Non-underlying items impairment 16,665 30,358
Non-underlying items other 1,483 2,304
Non--underlying items income (664) (1,894)
Staff costs 7 25,681 34,535
---------------------------------------------- ---- ------- -------
The GBP18.1m (2016: GBP32.7m) of non-underlying expense
comprises GBP16.7m of goodwill impairment, GBP1.0m of
restructuring-related redundancy costs and employee severance,
GBP0.3m in connection to a provision charge for a former Proudfoot
employee's ongoing contractual pension payments and GBP0.1m in
relation to advisory fees incurred for restructuring. The GBP0.7m
credit (2016: GBP1.9m) arises due to a release of the provision in
relation to the closure of the Proudfoot Defined Benefit Medical
Scheme in December 2016. GBP32.7m of non-underlying expense in 2016
comprises GBP30.3m of goodwill impairment, GBP1.7m of restructuring
related redundancy costs and employee severance and GBP0.6m
relating to a write off of capitalised software costs. Of the
GBP1.9m credit, GBP1.6m relates to the closure of the Proudfoot
Defined Benefit Medical Scheme, and GBP0.3m is in respect of a
provision release.
6. Staff numbers and costs
The average number of persons employed by the Group (including
executive directors) during the year, analysed by category, was as
follows:
2017 2016
Number Number
-------------------- ------ ------
Sales and marketing 44 53
Consultants 122 161
Support staff 48 60
--------------------- ------ ------
Total 214 274
--------------------- ------ ------
The number of Group employees at the year-end was 197 (2016:
281).
The aggregate payroll costs were as follows:
2017 2016
GBP'000 GBP'000
------------------------------ ------- -------
Wages and salaries 22,179 28,593
Social security costs 2,679 4,316
Other including pension costs 823 1,626
------------------------------- ------- -------
25,681 34,535
------------------------------ ------- -------
7. Investment revenues and finance costs
2017 2016
Investment revenue GBP'000 GBP'000
------------------------------------------ ------- -------
Interest receivable on bank deposits and
similar income 224 64
------------------------------------------- ------- -------
2017 2016
Finance costs GBP'000 GBP'000
------------------------------------------ ------- -------
Interest payable on bank overdrafts and
loans and similar charges (77) (468)
Finance costs on retirement benefit plans (642) (752)
------------------------------------------- ------- -------
(719) (1,220)
------------------------------------------ ------- -------
8. Tax
The income tax expense for the year is based on the effective
United Kingdom statutory rate of corporation tax for the period of
19.25% (2016: 20%). Overseas tax is calculated at the rates
prevailing in the respective jurisdictions.
The tax charge for the year can be reconciled to the pre-tax
loss from continuing operations per the income statement as
follows:
Recognised in the income Before Before
statement: Non- Non-underlying
Income tax expense on underlying Non-underlying Total items Non-underlying
continuing items 2017 items 2017 2017 2016 items Total
operations GBP'000 GBP'000 GBP'000 GBP'000 2016 GBP'000 2016 GBP'000
------------------------------- ----------- -------------- -------- --------------- -------------- -------------
Current tax
Current year 991 - 991 1,860 (3) 1,857
Adjustment in respect of
prior years 95 - 95 (2,353) - (2,353)
------------------------------- ----------- -------------- -------- --------------- -------------- -------------
Current tax (credit)/expense 1,086 - 1,086 (493) (3) (496)
------------------------------- ----------- -------------- -------- --------------- -------------- -------------
Deferred tax
Current year 3,204 6 3,210 (3,171) 190 (2,981)
Adjustment in respect of
prior years 189 - 189 1,268 - 1,268
------------------------------- ----------- -------------- -------- --------------- -------------- -------------
Deferred tax (credit)/expense 3,393 6 3,399 (1,903) 190 (1,713)
------------------------------- ----------- -------------- -------- --------------- -------------- -------------
Total income tax
Income tax (credit)/expense
on continuing activities 4,479 6 4,485 (2,396) 187 (2,209)
------------------------------- ----------- -------------- -------- --------------- -------------- -------------
The deferred tax charge of GBP3.2m relates to the re-assessment
of the deferred tax recognition policy with regard to US temporary
differences (GBP3.3m), offset by a credit (GBP0.1m) with regard to
temporary differences recognised in other jurisdictions
9. Earnings per share
The calculation of the basic and diluted loss per share is based
on the following data:
2017 2016
-------- ---------- ------------ ------------------------------------
All Continuing Discontinued All Continuing Discontinued
Earnings GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- -------- ---------- ------------ -------- ---------- --------------
(Loss)/ profit for the
period (31,019) (30,768) (251) (55) (38,560) 38,505
Add back: non-underlying
items 1,070 819 251 39,856 30,768 9,088
Add back: amortisation
of acquired intangibles - - - 527 - 527
Add back: non-underlying
items - Impairment 16,665 16,665 - - - -
Adjustment for (profit)/loss
on disposals - - - (42,779) - (42,779)
Reduction in tax charge
due to add backs (192) (192) - (2,134) (359) (1,775)
---------------------------------- -------- ---------- ------------ -------- ---------- --------------
Underlying (loss)/profit
for the period (13,476) (13,476) - (4,585) (8,151) 3,566
---------------------------------- -------- ---------- ------------ -------- ---------- --------------
2017 2016
Number Number
Number of shares (million) (million)
---------------------------------- -------- ---------- ------------ -------- ---------- --------------
Weighted average number
of ordinary shares for
the purposes of basic earnings
per share, and basic excluding
non-underlying items and
amortisation of acquired
intangibles 511 505
Effect of dilutive potential
ordinary shares:
Restricted share plans 0 0
---------------------------------- -------- ---------- ------------ -------- ---------- --------------
Weighted average number
of ordinary shares for
the purposes of diluted
earnings per share 511 505
---------------------------------- -------- ---------- ------------ -------- ---------- --------------
2017 2016
-------- ---------- ------------ ----------------------------------
Loss per share All Continuing Discontinued All Continuing Discontinued
---------------------------------- -------- ---------- ------------ -------- ---------- ------------
Basic (loss)/profit per
share for the year attributable
to the owners of the company (6.1) (6.1) 0.0 0.0 (7.6) 7.6
Diluted (loss)/profit per
share for the year attributable
to the owners of the company (6.1) (6.1) 0.0 0.0 (7.6) 7.6
Basic (loss)/profit per
share - excluding non-underlying
items and amortisation
of acquired intangibles (2.6) (2.6) 0.0 (0.9) (1.7) 0.7
Diluted (loss)/profit per
share - excluding non-underlying
items and amortisation
of acquired intangibles (2.6) (2.6) 0.0 (0.9) (1.7) 0.7
---------------------------------- -------- ---------- ------------ -------- ---------- ------------
The average share price for the year ended 31 December 2017 was
7.2p (2016: 16.5p).
10. Intangible assets and goodwill
The GBP16.7m impairment charge for goodwill relates to the
impairment of Proudfoot goodwill. The Directors have reviewed the
underlying value in use calculations and given the uncertainty over
the outlook have determined that it is appropriate to fully impair
the goodwill balance.
GBP1.3m of amortisation charge relates to the amortisation of
Kurt Salmon software retained by the Group and is offset against
the utilisation of the TSA provision. The remainder of the
amortisation charge is recognised within administration expenses in
the income statement.
Analysis of goodwill
Goodwill acquired in a business combination is allocated to the
cash-generating units ("CGUs") that are expected to benefit from
that business combination. Following the disposal of Kurt Salmon,
the remaining goodwill relates to Proudfoot.
The recoverable amount of goodwill is determined based on
value-in-use calculations. The key assumptions used for
value-in-use calculations as at 31 December 2017 are that the CGU
will trade broadly in accordance with projections prepared for the
three years 2018 - 2020. The key assumptions underlying the
forecasts are revenue and EBITA. EBITA is deemed to be a reasonable
proxy for cash and assumed EBITA margins are consistent with past
experience and industry norms.
The projections are based on budget 2018 and projections for
2019 and 2020. The 2018 budget has been prepared on a bottom-up
basis, taking into account market and economic factors and have
been approved by the Board.
For longer term financial projections, cash flows are
extrapolated based on long-term average growth rates of 2%. The
rates used to discount the forecast post-tax cash flows are 12.8%
which represents the Group's weighted average cost of capital,
based on the risk-free rate with an additional premium added to
reflect market risk and the size of the Group. Goodwill is tested
against the value in use of the business as one CGU, given the
integrated nature of the business. It cannot reasonably be
allocated to a lower level of CGU.
This review, together with recognition of the inherent
uncertainty within the forecast, resulted in a value-in-use of nil,
and accordingly the goodwill has been fully written down to this
value to reflect the recoverable amount being below the carrying
value.
11. Notes to the cash flow statement
2017 2016
GBP'000 GBP'000
------------------------------------------------- -------- --------
Operating loss from continuing operations (25,788) (39,613)
Operating loss from discontinued operations (251) (3,876)
-------- --------
Operating loss (26,039) (43,489)
Adjustments for:
Depreciation of property, plant and equipment 273 759
Amortisation of intangible assets 223 1,533
Profit on disposal of fixed assets - (3)
Adjustment for the cost of share awards (87) 668
(Decrease)/increase in provisions (2,598) 1,244
Goodwill impairment 16,665 30,358
Other non-cash items 1,045 2,108
------------------------------------------------- -------- --------
Operating cash flows before movements in working
capital (10,518) (6,822)
Increase in receivables 3,160 1,725
Decrease in payables (6,739) (5,607)
------------------------------------------------- -------- --------
Cash used in operations (14,097) (10,704)
Income taxes paid (840) (3,665)
Interest paid (77) (845)
------------------------------------------------- -------- --------
Net cash outflow from operating activities (15,014) (15,214)
------------------------------------------------- -------- --------
12. Discontinued operations
Discontinued operations comprise residual transitional service
agreements and obligations including contingent liabilities of the
business that were sold in 2016. The Disposals during 2016
comprised:
-- The Sale of the French and related operations of Kurt Salmon,
including Belgium, Luxembourg, Switzerland and Morocco to
Wavestone.
-- The sale of the US healthcare consulting business of Kurt
Salmon to ECG Management Consultants.
-- The sale of the global retail and consumer goods consulting
operations of Kurt Salmon to Accenture.
The results of the discontinued operations, which have been
included in the consolidated income statement within the loss from
discontinued operations line, were as follows:
Kurt Salmon Kurt Salmon
France and Kurt Salmon Retail and
related operations Healthcare Consumer goods Total
2017 2017 2017 2017
GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------------- ------------------- ----------- --------------- -------
Revenue - - - -
Cost of sales - - - -
----------------------------------------- ------------------- ----------- --------------- -------
Gross profit - - - -
Administrative expenses - underlying - - - -
----------------------------------------- ------------------- ----------- --------------- -------
(Loss)/profit from operations - - - -
- underlying
Administrative expenses - non-underlying (1,396) - (1,143) (2,539)
Administrative expenses - non-underlying
credit - - 2,288 2,288
Total administrative expenses (1,396) - 1,145 (251)
----------------------------------------- ------------------- ----------- --------------- -------
(Loss)/profit from operations (1,396) - 1,145 (251)
Net finance costs - - - -
----------------------------------------- ------------------- ----------- --------------- -------
(Loss)/profit before tax (1,396) - 1,145 (251)
Attributable tax expense - - - -
----------------------------------------- ------------------- ----------- --------------- -------
(Loss)/profit after tax (1,396) - 1,145 (251)
Net (loss)/profit attributable
to discontinued operations (1,396) - 1,145 (251)
----------------------------------------- ------------------- ----------- --------------- -------
The French and related operations of Kurt Salmon non-underlying
expenses relate to a provision for future employee related
litigation claims arising post sale of this business to
Wavestone.
The Kurt Salmon Consumer Group net non-underlying credit relates
to a release of surplus TSA onerous space and contract provisions
following the sublet of the legacy San Francisco office (GBP2.3m)
and charges relating to provision for tax claims arising from the
sale of the business to Accenture of net GBP0.3m and GBP0.8m of
provision relating to the continued administration of the legacy
Kurt Salmon UK defined benefit pension scheme.
12. Discontinued operations (continued)
Kurt Salmon Kurt Salmon Kurt Salmon Total
France and Healthcare Retail and 2016
related operations 2016 Consumer goods GBP'000
2016 GBP'000 2016
GBP'000 GBP'000
----------------------------------------- ------------------- ----------- --------------- --------
Revenue - 8,729 72,543 81,272
Cost of sales - (7,282) (47,049) (54,331)
----------------------------------------- ------------------- ----------- --------------- --------
Gross profit - 1,447 25,494 26,941
Administrative expenses - underlying (63) (2,951) (18,188) (21,202)
----------------------------------------- ------------------- ----------- --------------- --------
(Loss)/profit from operations
- underlying (63) (1,504) 7,306 5,739
Administrative expenses - non-underlying (6) (419) (11,649) (12,074)
Administrative expenses - non-underlying
credit 81 - 2,905 2,986
Amortisation of acquired intangibles - - (527) (527)
----------------------------------------- ------------------- ----------- --------------- --------
Total administrative expenses 12 (3,370) (27,459) (30,817)
----------------------------------------- ------------------- ----------- --------------- --------
Profit/(loss) from operations 12 (1,923) (1,965) (3,876)
Net finance cost - - (188) (188)
----------------------------------------- ------------------- ----------- --------------- --------
Profit/(loss) before tax 12 (1,923) (2,153) (4,064)
Attributable tax expense - - (210) (210)
----------------------------------------- ------------------- ----------- --------------- --------
Profit/(loss) after tax 12 (1,923) (2,363) (4,274)
Profit/(loss) on disposal from
discontinued operations 244 (10,661) 53,196 42,779
----------------------------------------- ------------------- ----------- --------------- --------
Net profit/(loss)t attributable
to discontinued operations 256 (12,584) 50,833 38,505
----------------------------------------- ------------------- ----------- --------------- --------
INDEPENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF MANAGEMENT
CONSULTING GROUP PLC ON THE PRELIMINARY ANNOUNCEMENT OF MANAGEMENT
CONSULTING GROUP PLC
As the independent auditor of Management Consulting Group Plc we
are required by UK Listing Rule LR 9.7A.1(2)R to agree to the
publication of Management Consulting Group Plc's preliminary
announcement statement of annual results for the period ended 31
December 2017.
The preliminary statement of annual results for the period ended
31 December 2017 includes summary financial statements, related
disclosures required by the Listing Rules, Chairman's Statement,
and financial and operational overview. We are not required to
agree to the publication of the trading statement and overview from
management.
The directors of Management Consulting Group Plc are responsible
for the preparation, presentation and publication of the
preliminary statement of annual results in accordance with the UK
Listing Rules.
We are responsible for agreeing to the publication of the
preliminary statement of annual results, having regard to the
Financial Reporting Council's Bulletin "The Auditor's Association
with Preliminary Announcements made in accordance with UK Listing
Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Management
Consulting Group Plc is complete and we signed our auditor's report
on 30 April 2018. Our auditor's report contains an emphasis of
matter referring to material uncertainties relating to going
concern. This is due to the fact that that the board approved
forecasts for the business contain a number of assumptions upon
which there is significant uncertainty. The principal uncertainties
are:
- The timing and quantum of the release of cash from escrow in
connection with the disposal of Kurt Salmon is uncertain.
- The source and quantum of the current immediate fund-raising
plans are the subject of a letter of intent, but that intention is
neither binding nor guaranteed. The ability to achieve the forecast
revenues and reduce the cost base of the business appropriately is
inherently uncertain and therefore the quantum of the Group's
financing requirements is uncertain and its sufficiency is
dependent on achieving at least the sensitised forecast
outturn.
As of the date of our report, those uncertainties mean there is
a significant doubt about the entity's ability to continue as a
going concern.
Our audit report on the full financial statements sets out the
following key audit matters which had the greatest effect on our
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team, together with how
our audit responded to those key audit matters and the key
observations arising from our work:
Carrying value of goodwill
The goodwill in relation to Proudfoot represented a significant
asset on the balance sheet of GBP16.0 million at the previous year
end. The Group recorded an impairment against the goodwill in the
current year to reduce the carrying value to nil in line with the
directors' assessment of the recoverable amount. This is the result
of judgements and uncertainties in relation to forecasting future
cash flows, associated discount rates and growth rates.
We tested management's assumptions used in the impairment model
for goodwill, described in note 9 to the financial statements.
We considered and evaluated the key assumptions which we judged
to be the quantum and certainty of future cash flows, growth rates
and the discount rates applied, through consideration of the
assessment of CGUs in accordance with IAS 36, our understanding of
the future prospects of the business (with particular focus on
assessment of forecasts against historical forecast accuracy),
benchmarking against comparator businesses, and comparison against
the market rate and the prevailing Group cost of capital.
We have tested the mechanics of the impairment model prepared by
management by validating the relevant calculations.
We concur with the impairment charge recognised in relation to
goodwill and the carrying value of GBPnil.
Revenue recognition
We consider that the risk specifically relates to the valuation
and cut-off of revenue. Due to the high level of judgement
involved, we consider this to be the presumed fraud risk relating
to revenue as required by International Standards on Auditing. The
majority of consultancy revenue is recognised based on time worked
by staff with regard to the expected recovery rate applicable to
the projects being delivered. When considered with amounts invoiced
to clients, revenue is deferred or accrued based upon the estimate
of the fair value of work delivered where the consultancy has the
right to consideration at the balance sheet date. There is
judgement involved in the estimate of this fair value, in relation
to proportion of work delivered and recoverable rate thereof. There
is also judgement involved in assessing the recoverability of aged
or overdue debts. The Group had GBP1.8 million trade receivables at
31 December 2017 (31 December 2016: GBP3.1 million).
We also consider the recognition of non-traditional fees ("NTF")
to be a risk. The timing of recognition of the fees is determined
based on contractual conditions and management's judgement as to
whether the conditions have been met at year end.
We assessed the revenue recognition policies applied in the
Group, including the valuation and timing of revenue
recognition.
We performed substantive tests on a sample of projects, agreeing
fees and project dates to contracts. Independent recalculation was
performed on a sample of the accrued and deferred income balances
by reference to the revenue recognised and pre year end billing,
accrued balances were assessed against post year end billings. Time
reports were assessed and used to recalculate revenue recognised
for the year under review. We assessed the recognition criteria for
NTFs with reference to relevant contracts. We considered whether
the revenue recognition policies adopted complied with IFRS.
We tested in detail the provision for bad debts through
consideration of overdue debts and aged accrued income and
assessing the level of provision against any risk, to determine
whether projects had been adequately reviewed for debtor
recoverability.
We concur with the treatment adopted in relation to revenue
recognition and provisioning for bad debts.
Recoverability of deferred tax assets
The Group had GBP7.6 million of deferred tax assets at the
previous year end. There is judgement in relation to the
recognition of deferred tax assets, in particular those in overseas
jurisdictions due to the judgement in assessing the probability
that sufficient future taxable profits will be generated against
which the deferred tax asset can be offset. In 2017, the deferred
tax asset has been written down to GBP0.1 million, due to tax rate
changes in the US and the write off of the remaining balance due to
uncertainty over the existence of sufficient taxable profits in
future against which to recover the deferred tax assets.
We tested and evaluated the appropriateness of management's
assumptions and estimates in relation to the likelihood of
generating future taxable profits to support the recognition of
deferred tax assets as described in note 15 to the financial
statements, considering those assumptions and supporting forecasts
and estimates with reference to recent performance, as well as the
appropriateness of tax disclosures.
We used our internal tax specialists to assess tax rates against
local tax legislation and review supporting documentation as well
as assessing management's assumptions and estimates in accordance
with accepted tax accounting practice.
We concur with the treatment adopted in relation to deferred tax
assets.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we did not provide a separate opinion on these
matters.
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement of annual results of Management Consulting Group PLC
we carried out the following procedures:
(a) checked that the figures in the preliminary announcement
covering the full year have been accurately extracted from the
audited financial statements and reflect the presentation to be
adopted in the audited financial statements;
(b) considered whether the information (including the management
commentary) is consistent with other expected contents of the
annual report;
(c) considered whether the financial information in the
preliminary announcement is misstated;
(d) considered whether the preliminary announcement includes a
statement by directors as required by section 435 of CA 2006 and
whether the preliminary announcement includes the minimum
information required by UKLA Listing Rule 9.7A.1;
(e) Read the management commentary, any other narrative
disclosures and any final interim period figures and considered
whether they are fair, balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on
the financial statements is to the company's members as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for our audit report or this report, or for the
opinions we have formed.
Deloitte LLP
Statutory Auditor
London, UK
30 April 2018
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FKKDNBBKBAQN
(END) Dow Jones Newswires
May 01, 2018 02:00 ET (06:00 GMT)
Management Consulting (LSE:MMC)
Historical Stock Chart
From Apr 2024 to May 2024
Management Consulting (LSE:MMC)
Historical Stock Chart
From May 2023 to May 2024