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Hexagon Human Capital plc

24 December 2009

Interim Results for the six months to 30 September 2009

The Board of Hexagon Human Capital plc (AIM:HHC), one of the UK's leading providers of senior interim management and executive search is pleased to announce its unaudited interim results for the six months ended 30 September 2009.  

Financial Overview

	Six months to Sept 2009	Six months to Sept 2008	Movement
Net fee income (NFI)	£7.8m	£12.6m	(38)%
Earnings before interest, taxation, amortisation and other non recurring operating costs (EBITA)	£0.9m	£3.5m	(74)%
NFI to EBITA conversion	12%	28%
Adjusted* EPS	2.92p	11.92p

* before the effect of impairment, amortisation of other intangible assets (net of deferred tax), finance charges on contingent consideration and other non recurring operating costs.     

Key Cashflow Items and Banking Facilities 

On 2 December 2009 the Company announced that it is in discussion with HMRC with a view to agreeing a new payment schedule with respect to certain tax arrears. The Company can confirm that it remains in discussion with HMRC and hopes to agree a new schedule in January of next year. 

As part of this announcement, the board of Hexagon confirmed that it was not in a position to satisfy certain lump sum termination amounts payable to Mr Jonathan Wright, former CEO, and Mr Carl Thompson, former CFO. The Company announces that it has now reached agreement with Mr Wright and has an agreement in principle with Mr Thompson which the board anticipates formalising imminently.

The new payment schedule and agreements mentioned have been negotiated based upon the results of the re-forecasting exercise which has been undertaken by the Company since early October. 

The Company is also pleased to announce that Barclays Bank continues to be supportive of Hexagon and remains in discussion to agree facilities appropriate for Hexagon's ongoing requirements. 

Commenting on the results Chairman, Robert Walker, said: 

'As outlined in the trading update released on 2 December, trading for the first half of the financial year has been difficult and that on the balance of probability the Company will be behind the current market expectations for the year to 31 March 2010. However, I am pleased to report that trading has stabilised in the three month period September to November 2009 and I am optimistic that this will continue for the remainder of the financial year.'

Enquires to:

Hexagon Human Capital plc                                                                              Tel: 020 7337 1133

Rob Walker, Executive Chairman

Brewin Dolphin Investment Banking (NOMAD)                                               Tel: 0845 213 4730

Matt Davis/ Adam Rudd

Chairman's Statement

Introduction 

As outlined in last year's Annual Report, trading for the first half of the financial year has been difficult, however I am pleased to report that trading has stabilised in the three month period September to November 2009 and I am optimistic that this will continue for the remainder of the financial year. 

Business Overview

Senior Interim Management

The interim businesses have seen increased activity towards the end of the second quarter as companies continue to hire "seasoned" professionals to help guide them through the current economic recession.

During the six months ended 30 September 2009, the division's NFI reduced to £2.9 million (2008: £4.8 million) and EBITA fell to £0.7 million (2008: £2.1 million). 

Executive Search

The search businesses have enjoyed an increase in the number of retained assignments and indications are that this is continuing into the second half. 

Euromedica has been ranked by Executive Grapevine as "No.1 Executive Search Firm in Healthcare and Life Sciences" for the third successive year.

During the six months ended 30 September 2009, the division's NFI reduced to £4.9 million (2008: £7.8 million) and EBITA fell to £0.2 million (2008: £1.4 million). 

Financial Performance

Our reported results for the Group during the period are NFI of £7.8 million (2008: £12.6 million) producing EBITA of £0.9 million (2008: £3.5 million). 

Divisional performance was as follows: 

£m	6 months to Sept 2009	6 months to Sept 2008	Movement
NFI
Interim Management	2.9	4.8	(40)%
Executive Search	4.9	7.8	(37)%
Total	7.8	12.6	(38)%
EBITA
Interim Management	0.7	2.1	(67)%
Executive Search	0.2	1.4	(86)%
Total	0.9	3.5	(74)%

The reported earnings before interest and tax (EBIT) was a loss of £1.33 million (2008: £2.36 million profit) after 
amortisation costs of £0.37 million (2008: £0.56 million) and re-organisation costs of £0.99 million (2008: write off of advisors' fees in respect of aborted acquisitions of £0.53 million). 

Net finance costs were £0.62 million (2008: £0.76 million) including net interest payable of £0.46 million (2008: £0.38 million), the finance charges on contingent consideration and the convertible loan of £0.16 million (2008: £0.38 million).

Loss before tax was £1.95 million (2008: profit £1.60 million) which we estimate will benefit from a corporation tax credit of £0.22 million (2008: tax charge £0.73 million).

Operating cash flow before interest and tax of £0.3 million (2008: £2.0 million), non-operating cash absorbed of £1.3 million (2008: £6.1 million) was primarily due to a payment of contingent consideration of £1.0 million (2008: £4.3 million) and net financing costs.  Net debt at the half year end was £10.4 million (2008: £8.9 million).

Contingent consideration outstanding has reduced to £1.5 million (2008: £7.5 million) of which the present value £1.4 million (2008: £6.9 million) is accrued in the balance sheet. The contingent consideration liability is potentially payable in the following periods: 

Gross Payable  to 31 March	2010	2011	Total
£m
Cash	0.7	0.1	0.8
Hexagon Shares	0.6	0.1	0.7
Total	1.3	0.2	1.5

It should be noted that contingent consideration is wholly dependent on EBITA performance of the individual businesses. It is the Group's policy to ensure that where EBITA performance triggers a contingent consideration payment the significant majority of such payments are self funding, e.g. are funded by the EBITA generated. Under the terms of the relevant share purchase agreements, the contingent consideration can be satisfied in a mixture of Hexagon shares and cash, the latter being satisfied from operating cash flow.

Business Development Strategy

Hexagon's strategy is to capitalise on the strength of the Group's brands. The board believes that through the continued implementation of this strategy the Group will be well positioned to benefit from an upturn in trading when it occurs.

The Group's organic growth initiatives have adapted to the current market conditions focusing on driving margin growth and limiting the expansion of consultant numbers.  However, there remains surplus fee earning capacity within the existing team, which will be supplemented by a limited number of high quality hires in the coming months. 

Through the establishment of a Group Operating Board we have increased integrated selling between our divisions resulting in improved levels of business development. 

Restructuring Programme

The board has continued to manage costs prudently and has taken the following action:

• Elimination of funding exposure in overseas offices 

• Continuing programme of reduction in central and divisional costs

• Rationalisation of the property portfolio

• More rigorous management of under performing staff

Current Trading and Outlook

Trading has recently stabilised and the three months unaudited management accounts for the period September to November 2009 show an average EBITA in excess of £200,000 per month.  Whilst continuing to focus on delivering growth in NFI and EBITA the Group, as indicated in this report, has taken a conscious decision to focus on margin improvement and selectively hiring additional fee earners.

 

Robert Walker

Chairman 

24 December 2009

Consolidated Income Statement for the six months ended 30 September 2009 - unaudited

		Unaudited  Six months ended 30 September 2009 £'000	Unaudited  Six months ended 30 September 2008 £'000	Audited  Year ended  31 March 2009  £'000
Revenue		12,816	19,923	35,073
Cost of sales		(5,042)	(7,341)	(12,540)
Net Fee Income		7,774	12,582	22,533
Administrative expenses		(8,115)	(9,690)	(25,925)
Other non recurring operating costs		(989)	(528)	(544)
Earnings before interest and tax		(1,330)	2,364	(3,936)
Analysed as:
Earnings before interest,  tax and amortisation		875	3,506	5,860
Impairment		(785)	-	(8,050)
Amortisation		(368)	(562)	(1,089)
Other non recurring operating costs		(989)	(528)	(544)
Equity-settled share-based payments		(63)	(52)	(113)
		(1,330)	2,364	(3,936)
Finance costs		(624)	(764)	(1,707)
Finance income		-	3	8
(Loss)/profit before tax		(1,954)	1,603	(5,635)
Income tax credit/(expense)		222	(731)	(932)
(Loss)/profit after taxation		(1,732)	872	(6,567)
Attributable to:
Equity holders of the parent		(1,732)	872	(6,559)
Minority interests		-	-	(8)
		(1,732)	872	(6,567)
Earnings per share
Basic (pence)		(7.94)	4.75	(34.50)
Diluted (pence)		(7.94)	4.55	(34.50)

Consolidated Balance Sheet as at 30 September 2009 - unaudited

	Unaudited  30 September 2009 £'000	Unaudited  30 September 2008 £'000	Audited  31 March 2009  £'000
ASSETS
Non-current assets
Goodwill	20,826	29,862	21,953
Other intangible assets	7,077	8,685	7,708
Property, plant and equipment	415	427	467
Held-to-maturity investments	3	3	3
Deferred tax asset	34	547	34
	28,355	39,524	30,165
Current assets
Trade and other receivables	3,502	4,706	3,998
Prepayments and accrued income	2,531	2,375	2,116
Cash and cash equivalents	-	37	-
	6,033	7,118	6,114
Total assets	34,388	46,642	36,279
LIABILITIES
Non-current liabilities
Borrowings	(6,723)	(6,717)	(6,051)
Contingent consideration on acquisitions	(1,399)	(3,064)	(1,628)
Other payables	-	(901)	-
Derivative financial instruments	(186)	(35)	(141)
Deferred tax liabilities	(1,976)	(2,427)	(2,153)
	(10,284)	(13,144)	(9,973)
Current liabilities
Bank overdraft	(1,782)	-	(760)
Trade and other payables	(6,699)	(6,773)	(6,438)
Contingent consideration on acquisitions	(25)	(3,825)	(1,490)
Borrowings	(1,943)	(2,189)	(2,644)
Current tax payable	(2,615)	(2,602)	(2,675)
	(13,064)	(15,389)	(14,007)
Total liabilities	(23,348)	(28,533)	(23,980)
Net Assets	11,040	18,109	12,299
EQUITY
Issued capital	285	252	279
Share premium	11,877	10,167	11,729
Merger reserve	5,171	5,171	5,171
Share incentive plan	(39)	-	(28)
Equity reserve	317	79	34
Foreign exchange reserve	34	6	58
Retained earnings	(6,605)	2,434	(4,936)
Capital and reserves attributable  to equity holders of the parent	11,040	18,109	12,307
Minority interests	-	-	(8)
Total equity	11,040	18,109	12,299

 

Consolidated Statement of Changes in Equity as at 30 September 2009 - unaudited

	Called up share capital £'000	Share premium £'000	Merger Reserve £'000		Share incentive plan £'000	Equity Reserve £'000	Foreign exchange reserve £'000	Retained earnings £'000	Attributable to equity holders of the parent £'000	Minority interests £'000	Total equity £'000
Balance at 1 April 2008	248	9,690	5,171		-	102	5	1,510	16,726	128	16,854
Shares issued in the period	4	477	-		-	-	-	-	481	-	481
Purchase of minority interest	-	-	-		-	-	-	-	-	(128)	(128)
Share incentive plans	-	-	-		-	-	-	52	52	-	52
Income tax on items taken directly to equity	-	-	-		-	(23)	-	-	(23)	-	(23)
Transactions with owners	4	477	-		-	(23)	-	52	510	(128)	382
Profit for the six-month period ended  30 September 2008	-	-	-		-	-	-	872	872	-	872
Other comprehensive income
Exchange differences on translation of foreign operations	-	-	-		-	-	1	-	1	-	1
Total comprehensive income for the period	_	_	_		_	_	1	872	873	_	873
Balance at 30 September 2008	252	10,167	5,171		-	79	6	2,434	18,109	-	18,109
Balance at 1 April 2008	248	9,690	5,171		-	102	5	1,510	16,726	128	16,854
Shares issued in the   period	31	2,039	-		-	-	-	-	2,070	-	2,070
Purchase of minority interest	-	-	-		-	-	-	-	-	(128)	(128)
Share incentive plans	-	-	-		(28)	-	-	113	85	-	85
Income tax on items taken directly to equity	-	-	-		-	(68)	-	-	(68)	-	(68)
Transactions with owners	31	2,039	-		(28)	(68)	-	113	2,087	(128)	1,959
Loss for the year ended 31 March 2009	-	-	-		-	-	-	(6,559)	(6,559)	(8)	(6,567)
Other comprehensive income
Exchange differences on translation  of foreign operations	-	-	-		-	-	53	-	53	-	6
Total comprehensive income for the period	-	-	-		-	-	53	(6,559)	(6,506)	(8)	(6,514)
Balance at 31 March 2009	279	11,729	5,171		(28)	34	58	(4,936)	12,307	(8)	12,299
Shares issued in the period	6	148	-		-	-	-	-	154	-	154
Provision against minority interest	-	-	-		-	-	-	-	-	8	8
Equity element of Convertible Loan	-	-	-		-	283	-	-	283	-	283
Share incentive plans	-	-	-		(11)	-	-	63	52	-	52
Transactions with owners	6	148	-		(11)	283	-	63	489	-	497
Loss for the six-month period ended  30 September 2009	-	-	-		-	-	-	(1,732)	(1,732)	-	(1,732)
Other comprehensive income
Exchange differences on translation  of foreign operations	-	-	-		-	-	(24)	-	(24)	-	(24)
Total comprehensive income for the period	-	-	-		-	-	(24)	(1,732)	(1,756)	-	(1,756)
Balance at 30 September 2009	285	11,877	5,171		(39)	317	34	(6,605)	11,040	-	11,040

Nature and purpose of reserves:

Merger reserve

The merger reserve arose as a consequence of a Group reconstruction that resulted in Hexagon Human Capital plc acquiring Hexagon Human Capital (Services) Ltd and Hexagon Management Services Ltd by way of a share-for-share exchange, together with the difference between the value of shares and the nominal value where shares have been issued as part of the consideration for acquisitions in accordance with the requirements of Merger Relief under the Companies Act 2006. 

Share incentive plan reserve

Share incentive plan reserve represents shares in the Company held by the Group.

Equity reserve

Equity reserve represents the reserve for deferred tax on share options not charged to the 
income statement.

Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from 
the translation of the financial statements of foreign subsidiaries.

Consolidated Cash Flow Statement for the six months ended 30 September 2009 - unaudited

	Unaudited  Six months ended  30 September 2009  £'000	Unaudited Six months ended  30 September 2008  £'000	Audited  Year ended  31 March 2009  £'000
Cash flows from operating activities
(Loss)/profit before taxation	(1,954)	1,603	(5,635)
Adjustments for:
Depreciation and amortisation	480	642	1,260
Impairment	785	-	8,050
Equity-settled share-based payments	63	52	113
Finance income	-	(3)	(8)
Finance costs	624	764	1,707
Operating profit before working  capital and provision changes	(2)	3,058	5,487
(Increase)/decrease in trade and other receivables	105	1,939	3,123
Increase/(decrease) in trade and other payables	246	(2,954)	(5,283)
Cash generated from operating activities	349	2,043	3,327
Income taxes (paid)/refund	(10)	(175)	(210)
Net cash flows from operating activities	339	1,868	3,117
Cash flows from investing activities
Purchase of property, plant and equipment	(60)	(114)	(224)
Purchase of subsidiary undertakings (net of cash)	(43)	45	(715)
Payments to share incentive plan	(11)	-	-
Payment of contingent consideration	(1, 005)	(4,213)	(4,687)
Interest received	-	3	8
Net cash flows used in investing activities	(1,119)	(4,279)	(5,746)
Cash flows from financing activities
Interest paid	(420)	(681)	(1,049)
Repayment of borrowings	(99)	(1,094)	(2,281)
Proceeds from borrowings	300	-	976
Net cash flows used in financing activities	(219)	(1,775)	(2,354)
Net decrease in cash and cash equivalents	(999)	(4,186)	(4,983)
Net foreign exchange difference	(23)	-	-
Cash and cash equivalents  at the beginning of the period	(760)	4,223	4,223
Cash and cash equivalents at the end of the period	(1,782)	37	(760)

Notes to the Interim Financial Statements as at 30 September 2009 - unaudited

1.    Basis of preparation

Hexagon Human Capital plc is a public limited company listed on the AIM market. Its principal activities comprise the provision of senior interim managers and executive search consultancy.

The consolidated interim financial statements are for the six months ended 30 September 2009. These financial statements have been prepared in accordance with the accounting policies expected to be followed for the year ending 31 March 2010.

The interim financial statements were approved for issue by the board of directors on 24 December 2009. 

The interim consolidated financial statements have been prepared on a historical cost basis except 
for derivative financial instruments that have been measured at fair value.

The interim consolidated financial statements are presented in pounds sterling and all values are rounded to the nearest thousand except when otherwise indicated. The principal accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 March 2009, except for the adoption of IAS 1 Presentation of Financial Statements (Revised 2007) and IFRS 8 Operating Segments.

The adoption of IAS 1 Presentation of Financial Statements (Revised 2007) does not affect the financial position or profits of the Group, but gives rise to additional disclosures. The measurement and recognition of the Group's assets, liabilities, income and expenses is unchanged, however some items that were recognised directly in equity are now recognised in other comprehensive income, for example, foreign exchange differences that arise on the retranslation of foreign operations. IAS 1 Presentation of Financial Statements (Revised 2007) requires the presentation of owner changes in equity and statement of total comprehensive income.  

The Group has only two operating segments and there is no additional disclosure under IFRS 8 Operating Segments in the interim financial statements.  

The interim report does not constitute statutory accounts. The financial information for the year ended 31 March 2009 is based upon the audited statutory accounts for that period.

The Group's statutory financial statements for the year ended 31 March 2009 prepared under IFRS have been filed with the Registrar of Companies. The Auditors' report on those financial statements was unqualified and did not contain a statement under section 237(2) of the Companies Act 1985.

These interim financial statements have been drawn up on a going concern basis, which assumes that the Group will continue in operational existence for the foreseeable future. The Group has primarily financed its acquisition strategy by debt but current market conditions have slowed, adversely impacting the cashflow of the business. The Group has significant scheduled debt repayments and outstanding liabilities. The board have taken action to address this downturn in activity, including reducing headcount and costs throughout the Group and securing arrangements to defer capital repayments under its debt obligations and schedule payment of other outstanding liabilities.

The board have continued to review the trading position of the Group, including a close dialogue with the Group's bankers and based on a rescheduling of debt obligations and payment of liabilities the board has a reasonable expectation that the Group has adequate facilities to continue in operational existence. For these reasons they continue to adopt the going concern basis in preparing the interim financial statements.

2.    Segment analysis        

The Group is managed according to two operating divisions; senior interim management and executive search.

These divisions are the basis on which the Group reports segmental information.

			Senior Interim Management			Executive Search					Group
	Six months ended 30 September 2009  £'000	Six months ended  30 September 2008  £'000		Year ended  31 March 2009  £'000				Six months ended 30 September 2009 £'000	Six months ended 30 September 2008 £'000	Year ended  31 March 2009  £'000		Six months ended 30 September 2009 £'000	Six months ended 30 September 2008 £'000	Year ended  31 March 2009  £'000
Revenue
Ongoing operations	7,920	12,087		21,078				4,896	6,042	10,822		12,816	18,129	31,900
Acquisitions	-	-		-				-	1,794	3,173		-	1,794	3,173
Total revenue	7,920	12,087		21,078				4,896	7,836	13,995		12,816	19,923	35,073
Net fee income	2,878	4,746		8,538				4,896	7,836	13,995		7,774	12,582	22,533
Result
Segment result	645	2,128		4,000				230	1,378	1,860		875	3,506	5,860
Impairment of intangible assets	-	-		(5,200)				(785)	-	(2,850)		(785)	-	(8,050)
Amortisation of intangible assets	(245)	(331)		(614)				(123)	(231)	(475)		(368)	(562)	(1,089)
Equity-settled share-based payments	(28)	(22)		(50)				(35)	(30)	(63)		(63)	(52)	(113)
Unallocated expenses	-	-		-				-	-	-		(989)	(528)	(544)
Earnings before interest and tax	372	1,775		(1,864)				(713)	1,117	(1,528)		(1,330)	2,364	(3,936)
Net finance costs												(624)	(761)	(1,699)
Profit before tax												(1,954)	1,603	(5,635)
Assets and liabilities
Segment assets	22,897	30,988		23,889				8,665	12,480	10,021		31,562	43,468	33,910
Unallocated assets	-	-		-				-	-	-		2,826	3,174	2,369
Total assets	22,897	30,988		23,889				8,665	12,480	10,021		34,388	46,642	36,279
Segment liabilities	(2,320)	(2,306)		(2,516)				(4,206)	(3,212)	(3,606)		(6,526)	(5,518)	(6,122)
Unallocated liabilities	-	-		-				-	-	-		(16,822)	(23,015)	(17,858)
Total liabilities	(2,320)	(2,306)		(2,516)				(4,206)	(3,212)	(3,606)		(23,348)	(28,533)	(23,980)
Segment net assets	20,577	28,682		21,373				4,459	9,268	6,415		25,036	37,950	27,788
Unallocated net assets	-	-		-				-	-	-		(13,996)	(19,841)	(15,489)
Total net assets	20,577	28,682		21,373				4,459	9,268	6,415		11,040	18,109	12,299

3.    Earnings per share            

	Six months ended  30 September 2009  £'000	Six months ended  30 September 2008  £'000	Year ended  31 March 2009  £'000
(Loss)/ profit for the period	(1,732)	872	(6,559)
Add back:
Impairment net of deferred tax	711	-	7,841
Amortisation of other intangible  assets net of deferred tax	563	405	784
Finance charges on contingent consideration	106	381	681
Other operating expenses	989	528	544
Minority interest	-	-	(8)
Adjusted profit for the period	637	2,186	3,283
	Number	Number	Number
Weighted average number of shares	21,816,276	18,343,591	19,013,953
Dilutive effect of share plans	600,093	796,538	775,209
Diluted weighted average number of shares	22,416,370	19,140,129	19,789,161
	Pence	Pence	Pence
Basic earnings per share	(7.94)	4.75	(34.50)
Diluted earnings per share	(7.94)	4.55	(34.50)
Adjusted earnings per share*	2.92	11.92	17.27
Adjusted diluted earnings per share*	2.84	11.42	16.59

*Adjusted earnings per share are before the effect of impairment, amortisation of other intangible assets (net of deferred tax), finance charges on contingent consideration and other non recurring operating costs.     

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