Costain Regulatory News (COST)

15 Mar 2006 07:03

Costain Group PLC15 March 2006 Costain Group PLC("Costain" or the "Group") Preliminary results for the year ended 31 December 2005 Costain, the international engineering and construction group, announcesincreased turnover and profit for the year ended 31 December 2005 and theconclusion of a strategic review Financial highlights 2005 2004 % change Turnover £773.2m £695.2m 11Operating Profit £25.6m £9.3m 175Profit before tax £25.0m £10.5m 138Underlying Profit* £20.7m £19.5m 6Earnings per share 6.7p 2.5p 168 * Profit before tax and before IFRS restatements in relation to Spanishproperty, share based payments and hedging costs Operational highlights • New strategy in place : 'Being Number One' • New Chief Executive and senior management appointments • Record forward order book up 73% to £1.9bn (2004: £1.1bn) • Building on excellent market positions • Balance sheet restructured : dividend payment and pension deficit being addressed Commenting, the Chairman, David Jefferies, said: "The Group made good progress in 2005. We are particularly pleased with theforward order book which not only stands at record levels but, more importantly,substantially includes secure work over a five-year term of which a significantproportion is repeat business. The current year has started well. In-line with our 'Being Number One' strategy,2006 will see a greater emphasis on establishing market leading positions inselected sectors and this, combined with other actions, will help ensure thatCostain achieves its new objective for the next three years of double-digitgrowth in both turnover and underlying profitability." 15 March 2006 ENQUIRIES:Costain Group PLC Tel: 01628 842 444Andrew Wyllie, Chief ExecutiveCharles McCole, Finance DirectorGraham Read, Public Relations College Hill Tel: 020 7457 2020Mark GarrawayMatthew Gregorowski CHAIRMAN'S STATEMENT I am pleased to report that the Company continued to make good progress in 2005.The year saw a number of major developments including the appointment of a newChief Executive, the successful restructuring of the balance sheet and a recordforward order book including long-term contracts that give the Group anoutstanding quality and visibility of sustainable earnings. In September 2005, Andrew Wyllie formally succeeded Stuart Doughty as ChiefExecutive. Andrew joined from Taylor Woodrow Construction Limited where he wasManaging Director. We were delighted to have found someone of Andrew's immenseexperience of, and track record in, the industry. Since joining Costain, Andrewhas completed a strategic review and this was recently approved by the Board. Hesets out in detail the key components of the 'Being Number One' strategy in hisChief Executive's Report. Following the significant water contract wins of the first half, the latter partof the year also recorded some notable successes including a major contract onthe M1 motorway, Costain's largest road project to date, further work on the M25motorway and a nuclear decommissioning contract. These awards further reinforcedCostain's strategy of targeting sectors where it can establish leading marketpositions through partnering relationships with major clients and developlong-term framework agreements. Results This is the first set of annual results that the Group is reporting underInternational Financial Reporting Standards ("IFRS") which, as previouslyreported, have no impact upon the underlying cash flows or trading activities ofthe Group but do impact on the timing of accounting for both revenue and profitrecognition from the Group's property development activities in Southern Spain. Such revenue can now only be recognised when risk associated with ownership ofthe land is transferred to the purchaser and all significant acts (such asinfrastructure works) are complete. The impact of this change is to defer salesrecognised by the joint venture. As was previously explained in the announcementpublished on 17 August 2005 on the "Transfer to IFRS", this reduced the Group'searnings for the year ended 31 December 2004 by £6.4m. As expected, the majorityof these infrastructure works were completed in 2005 and the correspondingprofit recognised. The results for the year ended 31 December 2005 show a turnover of £773.2m(2004: £695.2m). As expected, the balance of earnings for the year was moreweighted towards the second half with a full-year profit before tax of £25.0m(2004: £10.5m). Profit after tax of £23.6m (2004: £8.8m) includes a contributionof £14.0m from the Alcaidesa joint venture and £3.5m profit on the sale of halfof the Company's shareholding in Kings College Hospital PFI. Earnings per sharewere 6.7p (2004: 2.5p). At the year-end, the forward order book was £1.9bn (2004: £1.1bn) up 73%, ofwhich £760m relates to 2006 and of which 70% is repeat order business. The Group has no significant borrowings and net cash balances at the full-yeartotalled £74.0m (2004: £62.6m), including the Group's share of cash held byjoint arrangements (construction joint ventures) of £22.0m (2004: £18.9m). Thecontinuing changing profile of the business into framework/partnered clientrelationships will result in a more evenly balanced cash flow profile goingforward. Pensions Following discussions with the Trustee of the Costain Pension Scheme the Boardagreed that the final salary scheme would be closed to new employees who wouldhave the opportunity to join a defined contribution scheme. This change waseffective as of 1 June 2005. In addition, the final salary scheme is beingchanged to a Career Average Revalued Earnings (CARE) scheme with effect from 1April 2006. The Company is increasing its contributions to the Costain PensionScheme from 15.6% of pensionable salaries to 21.6% of pensionable salaries alsowith effect from 1 April 2006. The active members of the Pension Scheme are alsoincreasing their contributions from 8% to 10% from the same date. These stepshave been taken to help address the deficit on the Group's pension scheme. Dividend In April last year, shareholders approved a restructuring of the Group's balancesheet, by way of a reduction of share capital and cancellation of the sharepremium account. Following the restructuring, the Company's distributablereserves were re-set at nil. As reported last year, this will allow the Board toconsider, subject to prevailing trading conditions, a resumption of a finaldividend payment in respect of 2006. As well as prevailing trading conditions, a resumption of dividend payments mustalso take into account our obligation to address the deficit on the Group'spension scheme which, as at the year-end, stood at £69.5m net of deferred tax. Following extensive discussions with the Trustee of the Costain Pension Scheme,the Board has agreed that a resumption of dividend payments will be matchedpound for pound by a payment into the scheme. The Pensions Regulator, havingbeen approached by the Board, has agreed the proposal in principle and formalclearance will be sought at the appropriate time. Board Charles McCole, Finance Director, had previously notified the Board that hewished to pursue new opportunities in the future and did not feel able to give along term commitment to the Company. The Board was therefore pleased to announceon 6 March 2006 that Anthony Bickerstaff FCCA, Finance Director of TaylorWoodrow Construction Limited, would succeed Charles McCole as Finance Directorat a date to be finalised but expected to be not later than June 2006. CharlesMcCole will remain with the Company to ensure a smooth handover. AnthonyBickerstaff has considerable experience both in the industry and the financearena. He will be an able successor to Charles McCole, who has made asignificant contribution to our successful recovery and whom we wish well forthe future. Outlook The Group made good progress in 2005. We are particularly pleased with theforward order book, which not only stands at record levels but, moreimportantly, includes secure work over a five-year term of which a significantproportion is repeat business. The current year has started well, with continuing high levels of customer spendin our targeted markets. Our 'Being Number One' strategy will see a greateremphasis on establishing market leading positions in selected sectors and this,combined with other actions, will help ensure that Costain achieves its newobjective of double-digit growth in both turnover and underlying profitabilityover the next three years. David G JefferiesChairman CHIEF EXECUTIVE'S REPORT I am delighted to have been given the opportunity to lead one of the UK's bestknown construction and engineering companies. My impression of Costain before my arrival in August 2005 was of a company witha strong brand, quality contracts and talented people - all of the raw materialsneeded to take a business forward. Since joining, I have met many of the Group's skilled and dedicated people andspoken to a wide range of customers. There is much to inspire confidence. Mypredecessor, Stuart Doughty, and his team had achieved a great deal. Thebusiness has grown, there is a good order book with an emphasis on long-termrelationships and there is a belief, both internally and externally, in theGroup's ability to build on its recovery. When I arrived, I said that my intention was to embark on a course of 'evolutionnot revolution'. That remains the case. I have spent a considerable amount oftime analysing the strengths of Costain and the areas which could and will beimproved. A clear conclusion was that, as the Group expanded during its recoveryphase, resources in certain parts of the business, especially in Building, werestretched. Management teams in those areas have been significantly strengthenedand working practices brought into line with those in the rest of the Group. With my fellow Executive Board Directors, I have completed a strategy document -'Being Number One'. This has been approved by the Board and will provide thefoundation for future Costain success. 'Being Number One' 'Being Number One' is about striving for leadership through focus andexcellence. Capitalising on our core strengths, it is a strategy to ensure thatwe are the best in everything we do. Our approach is underpinned by a stronglyheld belief that developing strong market positions is a pre-requisite forsustainable profitability and cashflow. To grow and to create strong market positions, we need to adopt a greater focusin fewer areas of operation. This will enable us to commit more resources tothose areas where we believe we have competitive advantage and where we cangenerate the greatest return. Greater focus will also allow us to play to our core strengths, including areputation for technical capability coupled with exceptional customer service.Costain's recent successes have highlighted, in many areas, a quality anddelivery of a far higher calibre than that of the competition. Now we mustensure that this is a consistent theme across all of our operations and thateveryone in the business strives for continual excellence. This is not new territory for Costain and our people are very ambitious. We arealready the market leader in Asset Management in the Water sector where, in2005, we were successful in renewing all of our five year framework contractsand, in most cases, with enhanced opportunity of increased turnover. Our peopleregularly receive awards and praise for their work. We have a skills base secondto none, which is enhanced through our training and general developmentprogrammes. The components of success are to be found in many parts of the business. Ourpriority is to ensure that they are replicated across the whole Group. 2006 Objectives To ensure that we deliver our strategy, we have set some clear objectives for2006 which are:- •To maintain our priority on the management of Health and Safety, with zero tolerance for accidents •To focus our efforts and develop even stronger positions in our key targeted markets •To achieve progress towards our three year objective of double-digit growth in turnover and underlying profit •To provide a challenging and stimulating working environment where our people enjoy their jobs, can fulfil their potential and are recognised for their efforts •To ensure we achieve improved customer satisfaction scores by providing excellent and innovative project and framework solutions •To continue to develop our supply chain through closer working relationships with a reduced number of key suppliers •To implement Best Practice and rigorous risk management across Costain to ensure that our operations are as efficient and effective as possible Safety, Health and Environment I have made it clear, both internally and externally that safety will continueto be Costain's first priority. Everybody in the business has a corporate andindividual responsibility to ensure that our operations are properly andeffectively managed in a safe, healthy and environmentally controlled manner. Wewill adopt a zero tolerance to accidents. We cannot afford to fail in this area, not least because we know that excellenthealth, safety and environmental performance also has a direct correlation withbottom line business results. It makes good business sense for both the Companyand our customers. We are working closely with the Health and Safety Executive (HSE) and the MajorContractors Group on the introduction of further initiatives relating tospecific issues including noise, lifting, vibration white finger, stress andasbestos working. The Costain Safety, Health and Environment (SHE) culture will be developedthrough continuous improvement across our operations. Although our currentperformance places us in the upper quartile of our industry peer group of MajorContractors, we are still not satisfied, and are aiming for Costain to berecognised as being at the very vanguard of SHE leadership. Achieving leading market positions Our strategy is focused on building long-term partnership and frameworkrelationships with large sophisticated 'blue chip' customers, who have theability to place repeat orders with Costain. These major customers are looking for Costain to deliver much more than justconsistently high quality projects. Within long-term framework relationships,they are also looking for us to be proactive in delivering tangible benefits totheir businesses. To do this on a consistent basis requires us to have adetailed knowledge of their operations and the challenges that they face,whether they be a water utility, a retailer or Government department. To providesuch a service naturally requires a high degree of sector expertise, aspecialist supply chain and teams led by knowledgeable people. All of the major customers in the industry are moving - in one form or another -towards longer-term relationships with contractors, and are increasinglydemanding higher levels of sector expertise and service. Our future success willdepend on our ability to focus and properly align our organisation to be at theforefront of meeting these sector specific needs. In the water sector, we are already the number one contractor, and we have everyintention of retaining that position. Costain's success in water is the resultof a focused strategy in pursuit of the market leading position and thedeployment of specialist teams to deliver results. Drawing on the water model, we intend to repeat that success elsewhere,specifically in the roads, health, education, nuclear, rail, marine, retail,airport and oil & gas sectors. We will also seek to grow our Spanish landdevelopment activity. In all of these markets, we already have a significantpresence on which we intend to build, and our skills are recognised in UK andinternational markets. In roads, for example, we are currently number two and hold the leading positionin the Highways Agency Capability Assessment Toolkit (CAT 2) that measures acontractor's capabilities. Recently, in joint venture, we pre-qualified for theM25 PFI scheme, which is valued at £1.5 billion. This is the largest single PFIroad scheme to be issued to the UK roads market. Pursuing awards such as thiswill help to achieve our goal of attaining the market leader position. We have made good progress in other sectors too such as education and health.Key individuals, with specialist sector knowledge, have been appointed andhigh-quality teams are actively pursuing new opportunities. The construction market is generally buoyant, and there is a high demand for theservices provided by Costain. This positive environment is good news and allowsus to be more selective in ensuring that we achieve profitable growth. Financial Growth It is important that we continue to grow our business so that we can achieveeven stronger market positions, provide numerous career opportunities for ourpeople and deliver increasing returns for our shareholders. We will deliver our 2006 profit and turnover targets through a range ofinitiatives such as customer targeting, product innovation, effective keyaccount management and building stronger relationships with clients. Thisobjective is underpinned by having already secured £760m of turnover for 2006. People Our success will depend largely on the quality of our people. Simply put, to bethe best and to be Number One, we will need to continue to recruit, retain anddevelop the very best people. We have a vibrant, challenging and growing business - and an environment thatprovides tremendous opportunities for everybody. Our policy is to provide properrecognition and reward for the efforts of both individuals and teams, whereappropriate. We are committed to linking reward to performance. We are prioritising training and development, detailed performance reviews andsuccession planning. We have already put in place an Executive DevelopmentProgramme for senior management advancement. The majority of participants havealready been promoted. As we continue to grow we must further develop project management, designmanagement and commercial skills through forums and the general sharing of bestpractice. Customer Satisfaction Improving customer satisfaction by understanding their needs and exceeding theirexpectations through excellent delivery is essential to achieving repeat orders.We must also work to enhance our reputation with our customers so that theyrecommend us to others. Key Account Managers have been appointed for each of our customers. It is theirjob to manage and co-ordinate the overall Costain relationship with thatcustomer. It is also their responsibility to maximise the number of projects andservices that we provide to that customer from across the Costain organisation. We ask our customers to provide regular detailed feedback on our performanceincreasingly using the Costain Heartbeat approach, which is the Company'sin-house scorecard to measure performance. We monitor the feedback by project,division and across the whole of Costain and, we take appropriate action wherenecessary. It is encouraging that our customer performance results generally indicate asteady improvement. However, detailed analysis indicates that there is stillroom for specific improvement. Enhanced targets have been set for 2006 to ensurethat we continue to enhance our reputation with our customers. Supply Chain Costain recognises the potential for enhanced performance through developinglong-term partnership relationships with suppliers. These mutually beneficial relationships, based on trust and a common set ofobjectives, deliver real business benefits to both parties. By providing greatercertainty of future workload to our suppliers, we generate commitment, encourageinnovation, strip out duplicated and abortive costs, improve efficiency andincrease reliability. To achieve this, we are concentrating on supplier development within key tradesand have set a specific supply chain action plan. This includes a reduction inthe number of suppliers. Risk Management When a customer purchases a project from Costain, that customer rightly expectsthe very best service that we can offer. Likewise, it goes to the heart of ourvalues that Costain people are committed to doing a good job. Consequently, we have set out clear procedures to help ensure that we deliverour objective of consistently high levels of service. These processes are calledthe Implementation of Best Practice (IBP) and are mandatory on every Costainproject. I am committed to ensuring we have a strong focus on processes, and that theseare constantly reviewed and updated to ensure that they are still as relevant,efficient and effective as they should be. An important area that will receivemuch attention in 2006 is design management. We must also appreciate that there are risks associated with some of the thingsthat we do, and so live risk registers are maintained on every project. Riskassessments are carried out on all of our activities and, where appropriate,detailed method statements are put in place. Risks and opportunities are also reviewed at a corporate level, and a newExecutive Investment Panel has been formed to review all major new projectopportunities. Conclusion 'Being Number One' is as much about corporate culture as it is about strategy.It highlights and focuses on Costain's strengths which will be the buildingblocks for the future. Everybody at Costain must aim to be and supply the best.There must be a commitment at all times to premier performance and mediocritywill not be accepted. This is already part of the Costain culture and that iswhy I am optimistic about the future. All our stakeholders - who includeshareholders, clients, suppliers, local communities and employees - are lookingto Costain to maintain the momentum into the future as we seek to occupy theNumber One position in everything we do. Andrew WyllieChief Executive OPERATING REVIEW Civil Engineering In Civil Engineering, profit was £16.0 million on a turnover of £329.8 million.Of our record £1.9bn orderbook at the end of 2005, 77% is in the core civilengineering activity. Water 2005 brought continued success for Costain in securing further long-termprogramme delivery framework contracts from Water companies for the next fiveyears, which positions Costain as the leading delivery contractor in the UKWater market. As the delivery of AMP3 comes to a close, Costain will have delivered over £600million of capital work to the UK Water Companies in 700 projects to quality,time and best whole life value. We have resecured contracts with increased scope and value for our existingcustomers, United Utilities and Yorkshire Water, to add to those contractsre-secured with Thames Water and Dwr Cymru Welsh Water late last year. In June,we were awarded a £60 million five year framework for clean water process anddistribution by a new customer, Bristol Water Company, which built on specificcontracts undertaken for this client in its AMP3 programme. These frameworkshave been fully integrated into our Asset Management organisation and we nowhave significant projected capital spend committed in the second and third yearsof AMP4. April 2005 saw the award from Southern Water to Costain of the largestindividual programme framework secured to date. Costain is working alongsideUnited Utilities and Montgomery Watson Harza in a joint venture company, 4Delivery Limited, to deliver Southern Water's complete capital process programmein AMP4, worth £750 million over the next five years. Over 40% of the totalprogramme is currently under design and work commenced on site within 12 weeksof the transfer of 120 existing Southern Water delivery staff to our newventure. This delivery model is at the forefront of the market place andsuccessful performance will give Costain the ability to develop furtherlong-term security in the Water market well beyond 2010. By March 2006, we willhave commenced construction on 80 of the 270 contracts to be undertaken. Major capital projects in Water continue to sit alongside these long-termframeworks as part of our strategy in AMP4 to continue to grow asset management.We are now in the final stages of commissioning our £100 million Design & BuildPerry Oaks/Iver South scheme for Thames and BAA, to provide new sewerageprocessing and transfer operations from the Terminal 5 site at Heathrow. Thiswill be fully operational in July 2006, well before the Terminal opens. On the K3 Costain Black & Veatch Joint Venture for Southern Water, wesuccessfully delivered the £15 million Lewes Old Town Flooding Scheme to supportthe EA and DEFRA in eliminating the town centre inundation suffered in 2003. The£110 million AMP3 programme was completed in February 2006 when the last of the54 schemes at Romsey Waste Water Treatment Works was handed over three monthsearly. From the reputation gained both here and during the Southern Water K3 programme,Costain was successful with Black & Veatch in winning the £66 million majorcoastal sewerage upgrade at Margate and Broadstairs, Kent. This three yearcontract commenced in April 2005 and gives Costain the opportunity to continueto deploy its tunneling and marine skills as part of capital process deliverypedigree, for water companies. The project is forging ahead of programme and theteam has delivered some innovative value solutions for Southern Water. The award of these contracts in 2005 has lifted the forward order book in Waterto £820 million at 2005 prices and gives the Division a platform forstrategically developing the business alongside our water company partners. Theforward order book does not include the potential to extend the frameworkcontracts for a further period of five years. Costain with its joint venture partner Severn Trent commenced in Spring 2005delivery of work and waste water services to approximately 1500 Ministry ofDefence sites under Aquatrine 'C' PFI project which continues to go well. Roads In the Roads sector, Costain scored another notable achievement when the £34million Sirhowy Way PFI contract in South Wales was successfully deliverednearly four months ahead of schedule and is now being maintained as part of the30-years concession period. At £85 million the Porth Relief Road is the largestlocal authority highway scheme in the UK. Costain is on target to substantiallycomplete this logistically complicated ECI contract by the end of the year. Substantial road contract additions to the forward order book have been securedduring 2005 with the award of three Highways Agency ECI Contracts: A2/M25 (£138million), M25 Holmesdale (£57 million) and M1 J10-13 Joint Venture (£429million). Costain won the new Walton Bridge over the Thames for Surrey County Council(value £14 million) and an upgrade of the J9 Interchange on the M62 at Rochdale,together with an adjoining major remediation and infrastructure contract for abusiness park (value £24 million) for Wilson Bowden PLC and the Highways Agency.Costain is well advanced with this major project for a developer who specialisesin brownfield sites nationally and who will be releasing major plots inSeptember 2006 with overall completion in April 2007. Rail In Rail, we are ahead of programme to deliver the major rail infrastructure forChelsfield Plc to allow that company's development at White City Retail City toproceed. Costain constructed new viaducts and, at the end of February 2006 builtretaining walls on the LUL Hammersmith and City Line together with demolishingredundant infrastructure. At the end of July 2005 the major viaduct was slidinto position during a 72-hour possession. As a result of the success with thisclient, we have been awarded further new station works for LUL on the project toa value of between £8 million and £12 million. These performances have providedsignificant opportunities to develop market share in the South East Rail Sector. Work on the Channel Tunnel Rail Link Contract at St Pancras continues and theconstruction of the new Thames Link Station infrastructure was completed. Thefocus now is on finishing the new Midland Mainline Station, which is due to beopened in 2006. Despite the complexity of the scheme, 2.7 million man-hours werecompleted with zero lost-time accidents, a testament to the quality of themanagement and supervision. King's Cross Underground redevelopment nears completion with only minorarchitectural finishings and commissioning remaining. The station will open insummer 2006. A contract for the refurbishment of Battersea Park Railway Station,part of the redevelopment of Battersea Power Station, was awarded in the lastquarter of 2005 with a value of £20 million. Nuclear Decommissioning Moving the Costain capital delivery model and skills developed in the Watermarket into the developing Nuclear Decommissioning market has been a keyexpansion priority over the last 12 months. In 2005, we have delivered a seriesof small decommissioning projects at AWE Aldermaston, Burghfield and Harwellfacilities. Out-performance has now been recognised with a preferred bidderposition on a long-term framework under the control of the NuclearDecommissioning Authority (NDA) at Aldermaston and a £6 million contract atWinfrith for the Dragon facility for the United Kingdom Atomic Energy Authority. In addition, at Trawsfyndd in North Wales, we have recently secured a five-yearmajor civils works framework for decommissioning work at the Transfer Stationestimated at £35 million over the five-year contract period and work commencedin November 2005 on the foundations of the low level waste (LLW) store. Costain is building from these framework contracts and has significantopportunity to bid for decommissioning contracts at Hinkley Point, Winfrith,Chapelcross and Sellafield in Q1/Q2 of 2006. Marine With regard to Coastal Defence Works, in March 2005, HRH Duke of York opened thenew harbour and arm at West Bay, Dorset. This high quality three year £18million contract was delivered on some of the most exposed coastline in theSouth West. In the North, another arduous coastal defence scheme for DEFRA atWithernsea on Spurn Head, Humberside. In the second half of 2005, Costain won a£4.2 million coastal protection scheme at Whitstable. As a leading contractor in container port development, our teams are currentlylocked in the final tender stages of bidding for the £250 million plus portdevelopment at Felixstowe Landguard for Hutchison Whampoa. The client hasreceived full unconditional planning consent and we anticipate this contractwill commence construction in June, 2006. As reported in our Interim Statement2005 the final settlement of the Felixstowe Stage Two development is in part thesubject of an insurance claim as a result of ground movement in the early partof the contract. We were also selected to bid to P&O on a shortlist of five contractors for itsflagship port development within Thames Gateway Development at "London GatewayPort". Two bids submitted for this £300 million new container port have beenextended until the end of July 2006, while the takeover of P&O by Dubai WorldPorts is completed. In addition, 2006 will bring further significant port expansion marineopportunities at Hull, Brixham and Stranraer. Costain is hopeful of securing amajor port infrastructure contract to construct over the next three years and,in addition has a team engaged in winning a position on the next EnvironmentAgency national framework due to be awarded in early 2007. Airports At the New Robin Hood Airport at Doncaster, Costain handed over aircraft standsand taxi-ways worth £10 million, built in less than six months to allow PeelHoldings to open the Airport on programme in March 2005. This was Costain'sfifth consecutive successful delivery to Peel Holdings. Fresh from success at Doncaster, we were awarded a three year aircraft pavementframework by Manchester Airport for all its airports valued in excess of £50million and we have just completed the first major project being new charterstands at Manchester Airport (value £22 million) and a taxi-way widening at EastMidlands Airport. Building In Building, turnover was £321.6 million which delivered a profit of £4.3million. The Building Division grew by 36% in 2005 completing the year with a turnover inexcess of £300 million, thus establishing Costain as a major national player inthe sector. As referred to in the Chief Executive's review, this rapid growthstretched resources and has resulted in some lower margin business. These issuesare being addressed, key management appointments have been made and robustactions taken to strengthen procurement and operational controls across thebusiness. The volume of new work taken on has given the division the criticalmass to enable it to be more selective in tendering future projects which in themedium term will lead to enhanced profit. Winning the 2005 Major Contractor of the Year Award by Building Magazine,reflecting the views of our clients, was evidence of the progress made duringthe year. Health In the Health sector, financial close was reached on Shropshire PFI and theCompany entered into a contract with Nations Healthcare on its £34 million DayTreatment Centre facility at Queens Medical Centre. ProCure21 has continuedthrough the year and contracts were completed on £30 million of new schemes. Also during the year, construction was completed on the Kent Care Homes PFI andthe operational phase is underway. The Broadmoor project was also successfullycompleted for West London Mental Health NHS Trust in September 2005. The Companysold half of its shareholding in King's College Hospital PFI in 2005, realisinga profit of £3.5 million. This is the first investment that has been sold intothe secondary market. It is intended to sell the balance in 2006. Preferred Bidder status was achieved on the 3 Shires PFI project, the firstbatched PFI project for the NHS with a total capex value of approximately £60million. Construction is underway at Kingston Hospital PFI. Education Good progress has been made in the education sector. The Ealing and Kent SchoolsPFI projects both reached financial close. The John Madejski Academy and theGlen Eyre Campus for the University of Southampton also reached contract close.Stockley Academy and the University of Kent at Canterbury Phase 6 were finishedsuccessfully. The focus that has been put into developing a market position and capability inEducation has led to the significant success in achieving preferred bidderstatus on the pathfinder Bradford Building Schools For The Future project whichwill deliver new schools through an education partnership, using PFI andtraditional contracts. As with the 3 Shires project in the Health sector,success in these major programmes significantly improves the profile of thecontracted workload. This in turn enables the building of ever-stronger supplychain relationships and the development of innovative solutions to differentiateCostain's capabilities Retail In Retail, the relationship with Tesco remains strong and Costain worked on awide variety of schemes under its construction framework contract. The EnfieldTown Centre redevelopment for ING Real Estate Development UK progressed wellduring the course of the year. Costain has also been appointed to review and assess the current situationregarding completion of the Tesco store and tunnel at Gerrards Cross. Theproject was stopped in 2005 after the collapse of the rail tunnel. Costain wasnot involved in the tunnel construction work. International In International, turnover was £24.7 million which delivered a loss of £2.9million. Work is under way at the Costa Azul project in Mexico, despite procedural delaysin obtaining permits. Costain in joint venture with China Harbour Engineeringhas been granted a time extension and additional costs. In Africa, the Tambuwara wastewater treatment project in Nigeria was awardedmid-year. There have been problems in closing out historical projects in otherareas of Africa which have impacted on the result for 2005. Appropriateprovisions have been made. Oil, Gas & Process In Oil, Gas & Process, turnover was £52.1 million which delivered a loss of £1.0million. Costain was awarded a £30 million contract by Conoco Phillips for theengineering, procurement and construction of a VOC recovery facility to beinstalled at the North Sea Petroleum Terminal, Seal Sands, Middlesbrough. Theproject is proceeding according to schedule and budget. Also, during 2005,WINGAS (a JV of Wintershall and Gazprom) awarded Costain the Front EndEngineering Design of an underground gas storage facility that will be locatedin the east of England. There are several other such facilities being plannedaround the UK. Costain's expertise in the design of 'package plant' has been utilised in theexecution of the Modulerised Active Effluent treatment Plant project for theBritish Nuclear Group at Hunterston, Scotland. The project is scheduled to becompleted in 2007. In the Middle East, we executed the shutdown and overhaul of the ADGAS LNG TrainII located on Das Island, Abu Dhabi. Once again, the project was completedsafely, within budget and ahead of schedule. In Iran, political uncertaintiesresulted in delays to the progress of several projects, a situation that wemonitor closely. In international gas processing, Costain is executing, together with Techint, aproject for the engineering, procurement and construction of the world's largestnitrogen rejection plant for Pemex, Mexico. In addition, we undertook earlydesign work for facilities that will be located in Pakistan and Egypt. Costainoffers its proprietary cryogenic technology to customers involved in theenhanced production of hydrocarbons in gas processing and in LNG. Property Development In Property Development, turnover was £45.0 million which delivered a profitafter tax of £14.0 million. The Group's Spanish property development business, Alcaidesa Holding SA, inwhich Costain holds a 50% interest, had another successful year. The businesshas consolidated its original development schemes on the Costa del Sol nearGibraltar, and expanded its activities into Granada province in the municipaldistricts of Salobrena and Motril ensuring a long term business stream for thecompany. During 2005 infrastructure in Alcaidesa's La Linea 2 land holding was completedincluding the servicing of all developable land with some 4.2 kms of roads andthe provision of water, electricity and telecommunication services to all plots.This enabled the company to complete a number of substantial land sales toSpanish residential developers and to meet its financial objectives. Inaddition, a new environmentally sensitive water treatment plant was completedwhich will process waste water from the entire Alcaidesa development withcleansed water being stored in new dams and used to irrigate the Alcaidesa golfcourses. A second golf course is under construction and should be ready for play beforethe end of 2006. This new course will be run in conjunction with the adjacentexisting 18 hole links course and both will be serviced by a new club housecurrently being built which will include restaurant, bar and event facilities. During the year, Alcaidesa was able to acquire a further 98 hectares ofdevelopable land immediately adjacent to its San Roque 3 land holding to add tothe 209 hectares already owned. This enlarged land holding, once detailedplanning consent has been achieved, should permit about 3,000 residential unitsto be built plus hotels, retail and two further golf courses. At Salobrena, the company acquired a further 3.5 hectares of developable landnext to land purchased in 2004 and also made excellent progress in negotiatingan improved planning consent with the Local Authority which it is hoped willlead to a new consent during the course of 2006. The activities in Salobrena, and the options over land held in the nearby townof Motril, have led to Alcaidesa opening a new office in Motril from which theexpansion of the Granada region will be centred. Further expansion ofAlcaidesa's developments on the Costa del Sol are in detailed negotiation withthe expectation of securing in mid 2006 land and water rights to build asubstantial yacht marina and commercial development close to Gibraltar. Safety, Health and Environment (SHE) For the sixth consecutive year, Costain achieved a reduction in its AccidentFrequency Rate ("AFR") which now stands at 0.25 and places the Company in thetop quartile of the Major Contractors Group. However, we are not satisfied withthat performance and are constantly looking to improve. Costain's Health & Safety performance was recognised at the 2005 RoSPA Awardsceremony when Costain received 38 awards in recognition of the efforts made tokeep Health & Safety at the forefront of the Company ethos and to generate astrong culture. Costain has also set out to raise the profile of the Environment within thebusiness. This has been achieved by the delivery of a one-day site-specificenvironmental awareness course across all operating divisions of the business.In addition, our environmental management system has been developed, updated andimproved by our own enhanced team of highly qualified environmental specialists.This has now been formally acknowledged by the BSI, who recommended Costain Ltdfor an upgrade to ISO14001: 2004, the updated international environmentalstandard, following its audit of our systems in September 2005. All sites with a duration of over six weeks are now registered on theConsiderate Constructors Scheme. A key priority is to minimise the impact of ourworks on the local neighbourhoods in which Costain operates. Costain hasreceived a number of excellent audit scores, giving the opportunity to gainfurther recognition as a caring, professional contractor and to enhance stillfurther Costain's brand and reputation. To assist and continue the drive towards a more sustainable Costain, promotionand development of the Save It campaign, aimed at reducing waste throughimproved material and resources management, recycling and reuse of material,have continued. Roadshows, which outline the aims of the campaign and how toachieve them, have been completed across the Company and further benchmarkingand monitoring are planned for the year ahead. FINANCIAL REVIEW IFRS restatement This is the first set of annual results that the Group is reporting underInternational Financial Reporting Standards ("IFRS"), which have no impact uponthe underlying cash flows or trading activities of the Group but do impact onthe timing of accounting for both revenue and profit recognition from theGroup's property development activities in Southern Spain. The impact of this change on the previously reported results for the year ended31 December 2004 is to reduce profit after tax by £6.4 million. In respect of the year ended 31 December 2005, the impact of the change is toincrease profit after tax by £7.2 million. Further details are set out below. Results Profit before tax for the year ended 31 December 2005 under IFRS increased by138% over the previous year to £25.0 million on turnover including jointarrangements (construction joint ventures) up 11.2% to £773.2 million. Underlying profit (being the profit before tax and before IFRS restatements inrespect of Spanish property, share based payments and hedging costs) for theyear ended 31 December 2005 was £20.7 million, up 6.2% on the previous year. Net interest payable amounted to £0.6 million (2004: £1.2 million receivable)including a pension finance cost of £2.8 million (2004: £1.1 million cost). Basic earnings per share increased 168% to 6.7p (2004: 2.5p). Cash flow and borrowings The Group generated a cash inflow of £11.4 million (2004: £8.0 million outflow),reflecting an improvement in working capital. The net cash position of £74.0 million (2004: £62.6 million) includes £1.2million of borrowings. Order book Order book improved during the year with a work in hand position of £1.9 billion(2004: £1.1 billion) at the end of the year and of which 70% is repeat orderbusiness. Shareholder funds The Group has positive net operating assets of £47.0 million (2004: £25.1million) sustaining the continued improvement of the last few years. However,the impact of the deficit in the pension scheme produced negative shareholderequity of £22.5 million (2004: £44.6 million negative). Treasury controls Policy The Group's treasury and funding activities are undertaken by a centralisedtreasury function, its primary activities are to manage the Group's liquidity,funding and financial risk, principally arising from movements in interest ratesand foreign currency exchange rates. The Group's policy is to ensure thatadequate liquidity and financial resource are available to support the Group'sgrowth development, while managing these risks. The Group's policy is not toengage in speculative transactions. Group Treasury operates as a service centrewithin clearly defined objectives and controls and is subject to periodic reviewby Internal Audit. Foreign currency exposure Translation exposure: the results of the Group's overseas activities aretranslated into sterling using the cumulative average exchange rates for theperiod concerned. The balance sheets of overseas subsidiaries are translated atclosing exchange rates. Transaction exposure: the Group has transactional currency exposure arising fromsubsidiaries' commercial activities overseas in currencies other than thesubsidiaries' operating currencies. In such circumstances, the Group requiresits subsidiaries to use forward currency contracts to minimise the currencyexposure unless a natural hedge exists elsewhere within the Group. Interest rates risks and exposure The Group holds financial instruments for two main purposes: to finance itsoperations and to manage the interest rate and currency risks arising from itsoperations and its sources of finance. Various financial instruments (forexample, trade debtors, trade creditors, accruals and prepayments) arisedirectly from the Group's operations. The Group finances its operations througha mixture of working capital and bank borrowings. With the Group's low level ofborrowings, the main exposure to interest rate fluctuations arises from surpluscash, which is generally deposited with one of the Group's relationship banks. Liquidity risk Group policy is to ensure that projected financing needs are supported byadequate committed facilities. The Group negotiated borrowing facilities with its relationship banks to amaturity date of 30 June 2007. In addition to its borrowing facilities, theGroup has extended its contract bonding facilities with its relationship banksand surety companies, all of which facilities subsist until 30 June 2007. Going concern The Directors believe, after due and careful enquiry, that the Group hassufficient resources for its present requirements and, therefore, consider itappropriate to adopt the going concern basis in preparing the 2005 financialstatements. International Financial Reporting Standards The Group has prepared its consolidated financial statements for the year ended31 December 2005 in accordance with International Financial Reporting Standards(IFRS) as required by EU Law (IAS Regulation EC 1606/2002). Basis of preparation The financial information has been prepared on the basis of the recognition andmeasurement requirements of IFRS in issue that are either endorsed by the EU andeffective/or available for early adoption at 31 December 2005. As permitted by IFRS1 First time adoption of IFRS, the Group has adopted IAS 32and IAS 39 Financial instruments with effect from 1 January 2005: comparativefigures have not been restated. The Group has also decided to adopt early theDecember 2004 amendment to IAS 19 Employee Benefits. The Group issued a document setting out the impact of the transition toInternational Financial Reporting Standards on 17 August 2005 which is availableon its website (www.costain.com) or from the Company Secretary. The main changes relate to revenue recognition accounting for derivativefinancial instruments and share based payments. Revenue Recognition Alcaidesa, the Group's Spanish property development interest, has sold parcelsof land that were subject to the completion of certain infrastructure. Sales andprofits in respect of such developments were recognised on exchange of contractwith costs to complete on the infrastructure element recognised accordingly. Under IFRS, these developments fall within the scope of IAS 18, where referenceis specifically made to situations where the seller is obliged to performsubstantial acts to complete under the contract. Revenue and thus profit inrespect of such acts should be recognised only when the act is performed. Given the specific circumstances existing within these developments we considerthat the appropriate treatment under IFRS is to view these arrangements, whereseparable, as two transactions, firstly the sale of the land and secondly theprovision of the infrastructure. In such circumstances, revenue and profit arerecognised on the land sale element of each transaction on exchange of legaltitle and when all conditions for revenue recognition under IAS 18 are met. Inrespect of the infrastructure, the proportion of revenue and profit related tothe provision of these facilities is deferred until such works are complete. The impact of IAS 18 has been to defer the amount of profit shown within theGroup's share of profits from joint ventures and associates in previous years.Profit after tax for the 12 months to 31 December 2004 has reduced by£6.4million and 2005 increases by £7.2million. Financial Instruments IAS 39 is relevant to the Group for the first time this year. Retrospectiveadjustment is not required however the Group must fair value derivativefinancial instruments. Management have identified derivative financialinstruments on the balance sheet date within the Group to be forward contractsto buy and sell foreign currency and interest rate RPI SWAP arrangements withinthe PFI activity. The Group has assessed the effectiveness of the hedgingarrangements and the ineffective portion of the hedge is posted to the incomestatement and the effective hedges are posted directly to reserves. Share Based Payments IFRS2 requires the Group to fair value share incentives using an appropriatemodel and spread fair value over the vesting period of the options. The Grouphas used a Black Scholes model to value share options and has resulted in a £0.2million charge to the income statement. Unaudited Preliminary Results Announcement Consolidated income statement Year ended 31 December Notes 2005 2004 £m £m ---------- ---------Revenue (Group and share of joint ventures 2 773.2 695.2and associates)Share of joint ventures and associates 6 (95.1) (22.0) ---------- ---------Group revenue 678.1 673.2 Cost of sales (650.7) (645.0) ---------- ---------Gross profit 27.4 28.2 Administrative expenses (18.7) (18.0) ---------- --------- Group operating profit 8.7 10.2 Sale of interest in joint venture 3.5 - Share of results of joint ventures and 6 13.4 (0.9)associates ---------- --------- Profit from operations 25.6 9.3 Finance income 3 23.5 22.9Finance costs 3 (24.1) (21.7) ---------- ---------Net financing (costs)/income (0.6) 1.2 ---------- --------- Profit before tax 25.0 10.5 Income tax expense 5 (1.4) (1.7) ---------- --------- Profit for the period 2 23.6 8.8 ---------- --------- Attributable to:Equity holders of the parent 23.6 8.8Minority interest - - ---------- --------- 23.6 8.8 ---------- --------- Earnings per share - basic 4 6.7p 2.5pEarnings per share - diluted 4 6.5p 2.5p During the year and the previous year, no businesses were acquired or disposedand therefore all results arise from continuing operations. Consolidated statement of recognised income and expense Year ended 31 December Notes 2005 2004 £m £m Exchange differences on translation of foreign (0.9) (0.4)operationsCash flow hedges:Effective portion of changes in fair value(net of tax) during period - Group (0.6) -Effective portion of changes in fair value(net of tax) (2.7) -during period - joint ventures and associatesFair value adjustment of asset held for sale 3.4 -Actuarial gains/(losses) on defined benefitpension schemes (net of tax) 0.2 (16.0) ---------- ---------Net expense recognised directly in equity (0.6) (16.4) ---------- --------- Profit for the period 23.6 8.8 ---------- ---------Total recognised income and expense for the period 8 23.0 (7.6) Effect of change in accounting policy:Effect of adoption of IAS 32 and 39, net oftax, on 1January 2005 (with 2004 not restated) on 0.2 -hedging reserve -GroupEffect of adoption of IAS 32 and 39, net oftax, on 1January 2005 (with 2004 not restated) on (1.9) -hedging reserve -joint ventures and associates ---------- --------- 21.3 (7.6) ---------- --------- Attributable to:Equity holders of the parent 21.4 (7.6)Minority interest (0.1) - ---------- --------- 21.3 (7.6) ---------- --------- Consolidated balance sheet As at 31 December Notes 2005 2004 £m £mASSETSNon-current assetsProperty, plant & equipment 5.9 4.9Intangible assets 3.5 0.5Investments in joint ventures 27.6 11.6Investments in associates 0.2 -Loans to joint ventures 0.2 2.6Loans to associates 3.0 2.7Other investments 4.4 1.0Other debtors 10.2 5.7Deferred tax assets 31.1 31.6 --------- --------Total non-current assets 86.1 60.6 --------- --------Current assetsInventories 2.0 1.0Trade and other receivables 166.5 152.3Cash and cash equivalents 7 75.2 64.1 --------- --------Total current assets 243.7 217.4 --------- --------Total assets 329.8 278.0 ========= ========EQUITYShare capital 17.8 35.3Share premium 0.4 119.5Special reserve 13.1 -Fair value reserve 3.4 -Foreign currency translation reserve (1.2) (0.4)Hedging reserve (5.0) -Retained earnings (51.0) (199.0) --------- --------Total equity attributable to equityholders of the parent (22.5) (44.6)Minority interest - 0.1 --------- --------Total equity 8 (22.5) (44.5) --------- --------LIABILITIESNon-current liabilitiesInterest bearing loans and borrowings 0.2 0.5Retirement benefit obligations 99.3 99.5Other payables 7.2 3.0Long-term provisions 6.8 3.1 --------- --------Total non-current liabilities 113.5 106.1 --------- --------Current liabilitiesTrade and other payables 233.3 212.1Current tax liabilities 3.2 2.2Overdrafts 7 0.2 0.6Interest bearing loans and borrowings 0.8 0.4Provisions 1.3 1.1 --------- --------Total current liabilities 238.8 216.4 --------- --------Total liabilities 352.3 322.5 --------- --------Total equity and liabilities 329.8 278.0 ========= ======== Consolidated cash flow statement Year ended 31 December Notes 2005 2004 £m £mCash flows from operating activities Profit for the period 23.6 8.8Adjustments for:Depreciation and amortisation 1.5 1.1Investment income 3 (23.5) (22.9)Interest expense 3 24.1 21.7Share based payments expense 8 0.2 -Income tax expense 5 1.4 1.7Sale of interest in joint venture (3.5) -Share of profit of joint ventures and 6 (13.4) 0.9associatesRelease of provisions against investment (0.3) - --------- --------Operating profit before changes in workingcapital and 10.1 11.3provisions (Increase)/decrease in inventories (1.1) 0.6Increase in receivables (15.1) (38.3)Increase in payables 24.2 18.8Movement in provisions and employee benefits (3.0) (2.9) --------- --------Net cash from/(used by) operations 15.1 (10.5) Interest paid (0.1) (0.3)Income taxes paid - - --------- --------Net cash from/(used by) operating activities 15.0 (10.8) --------- -------- Cash flows from investing activitiesInterest received 2.4 2.6Additions to property, plant and equipment (2.4) (1.7)Additions to intangible assets (3.1) -Additions to investments (0.2) (0.4)Capital repayments by investments 1.3 0.2Dividend received from joint venture - 4.4Loans to joint ventures and associates (net) (2.6) (2.8) --------- --------Net cash (used by)/from investing activities (4.6) 2.3 --------- -------- Cash flows from financing activitiesIssue of ordinary share capital 0.5 0.9New loans 0.4 -Payment of finance lease liabilities (0.3) (0.2) --------- --------Net cash from financing activities 0.6 0.7 --------- -------- Net increase/(decrease) in cash and cash 11.0 (7.8)equivalents Cash and cash equivalents at beginning of 63.5 71.7periodEffect of foreign exchange rate changes 0.5 (0.4) --------- --------Cash and cash equivalents at end of period 75.0 63.5 --------- -------- NOTES TO THE PRELIMINARY ANNOUNCEMENT 1 General information The financial information set out in this announcement does not constitute thecompany's financial statements for the years ending 31 December 2005 or 2004.Statutory financial statements for 2004, which were prepared under UK GAAP, havebeen delivered to the Registrar of Companies. The auditors have reported on the2004 financial statements; their report was unqualified and did not contain astatement under section 237(2) or (3) of the Companies Act 1985. The statutoryfinancial statements for 2005, which are being prepared under InternationalFinancial Reporting Standards as adopted by the European Union (EU), will befinalised on the basis of the financial information presented by the directorsin this preliminary announcement and will be delivered to the Registrar ofCompanies in due course. Statement of compliance The financial information set out in this announcement has been presented forthe first time in accordance with International Financial Reporting Standards(IFRS) adopted for use in the EU and its interpretations adopted by theInternational Accounting Standards Board. An explanation of the transition from UK GAAP to Adopted IFRS has been presentedin note 9 and a reconciliation of the reported financial performance, financialposition and cash flows of the Group is also provided in note 9. The Group hasdecided to adopt early the December 2004 amendment to IAS19 Employee benefits. As permitted by IFRS1 First time adoption of IFRS, the Group has adopted IAS 32and IAS 39 Financial instruments with effect from 1 January 2005: comparativefigures have not been restated. IFRS 1 also grants certain exemptions from thefull requirements of IFRS in the transition period. The following exemptionshave been taken in these financial statements: • Business combinations - Business combinations that took place prior to 1 January 2004 have not been restated. • Employee benefits - All cumulative actuarial gains and losses on defined benefit plans have been recognised in equity at 1 January 2004. • Cumulative translation differences - Cumulative translation differences for all foreign operations have been set to zero at 1 January 2004. However, whilst the financial information has been prepared on this basis, thisannouncement does not itself contain sufficient information to comply with IFRS. Significant accounting policies Costain Group PLC (the 'Company') is a company incorporated in the UnitedKingdom. The financial information presented in this announcement has beenprepared in accordance with the same accounting policies as the statutoryfinancial statements for the year ended 31 December 2004 save for those changesarising from IFRS applicable as at 31 December 2005. These changes are presentedin note 9 and the detailed accounting policies were included in the IFRSTransition Statement of 17 August 2005. The accounting policies will bepresented in full in the Group's annual report and accounts. NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 2 Business and geographical segment information by origin In the opinion of the directors, the business segments are Civil Engineering,Building, Oil Gas & Process, International, which undertake engineering andconstruction projects, the Group's property development operations in Spain andcentral costs (which comprise mainly corporate expenses.) These represent theGroup's primary segments. Secondary segments are presented geographically. Year ended Civil Building Oil, Gas& International Property Central Total31 December Engineering Process Development costs2005 £m £m £m £m £m £m £mRevenueGroup Revenue 309.1 315.5 44.5 9.0 - - 678.1Share ofrevenue ofJVs and associates 20.7 6.1 7.6 15.7 45.0 - 95.1 --------- ------- ---------- --------- ---------- ------- ------Total revenue 329.8 321.6 52.1 24.7 45.0 - 773.2 --------- ------- ---------- --------- ---------- ------- ------ Groupoperatingprofit 16.0 1.2 (1.2) (2.5) - (4.8) 8.7Share ofresults ofJVs andassociates - (0.4) 0.2 (0.4) 14.0 - 13.4Sale ofinterest in JV - 3.5 - - - - 3.5 --------- ------- ---------- --------- ---------- ------- ------Segment result 16.0 4.3 (1.0) (2.9) 14.0 (4.8) 25.6 --------- ------- ---------- --------- ---------- -------Net financingcosts (0.6)Income taxexpense (1.4) ------Profit forthe period 23.6 ------ Year ended Civil Building Oil, Gas& International Property Central Total31 December Engineering Process Development costs2004 £m £m £m £m £m £m £mRevenueGroup Revenue 392.1 225.9 41.9 13.3 - - 673.2Share ofrevenue ofJVs and associates - 10.1 4.1 2.7 5.1 - 22.0 --------- ------- ---------- --------- ---------- ------- ------Total revenue 392.1 236.0 46.0 16.0 5.1 - 695.2 --------- ------- ---------- --------- ---------- ------- ------ Groupoperatingprofit 18.4 0.2 (3.9) (0.4) - (4.1) 10.2Share ofresults ofJVs and associates - (0.3) 0.1 (0.2) (0.5) - (0.9) --------- ------- ---------- --------- ---------- ------- ------Segment result 18.4 (0.1) (3.8) (0.6) (0.5) (4.1) 9.3 --------- ------- ---------- --------- ---------- -------Net financingcosts 1.2Income taxexpense (1.7) ------Profit forthe 8.8period ------ NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued Revenue Segment Results 2005 2004 2005 2004 £m £m £m £mUnited Kingdom 673.4 661.4 16.3 9.8Spain 45.0 5.1 14.0 (0.5)Rest of the 54.8 28.7 (4.7) -world -------- -------- -------- -------- 773.2 695.2 25.6 9.3 -------- -------- -------- -------- 3 Net financing (costs)/income 2005 2004 £m £mInterest income 2.4 2.6Expected return on the assets of the pension scheme 21.1 20.3 ------- --------Financial income 23.5 22.9 ------- --------Interest expense (0.1) (0.3)Losses on foreign currency forward contracts (0.1) -Expected increase in the present value of the schemeliabilities (23.9) (21.4) ------- --------Financial expenses (24.1) (21.7) ------- -------- ------- --------Net financing (costs)/income (0.6) 1.2 ------- -------- 4 Earnings per share The calculation of earnings per share is based on profit attributable toordinary shareholders of £23.6m (2004: £8.8m) and the number of shares set outbelow: 2005 2004Weighted average number of shares for basicearnings per share calculation 353,355,346 351,190,999Dilutive potential ordinary shares:SAYE Scheme 7,945,390 6,417,591 ---------- ----------Weighted average number of shares for fullydiluted earnings per share calculation 361,300,736 357,608,590 ---------- ---------- 5 Income tax expense 2005 2004 £m £mOn profit for the year:United Kingdom corporation tax at 30% (1.0) (0.2)Overseas taxation - (0.1) -------- -------Current tax charge for the year (1.0) (0.3)Deferred taxation (0.4) (1.4) -------- -------Total income tax expense in income statement (1.4) (1.7) -------- ------- NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 2005 2004 £m £mTax reconciliation:Profit before tax 25.0 10.5 -------- -------Income tax at 30% (7.5) (3.1)Rate adjustments relating to overseas profits 0.1 0.1Share of results of joint ventures and associates at 30% 4.0 (0.2)Sundry disallowed expenses and profitsrelieved by capital losses (0.6) (0.4)Reversal of temporary differences 2.6 1.9 -------- -------Total income tax expense in income statement (1.4) (1.7) -------- -------Deferred tax recognised directly in equity:Relating to defined benefit pension schemes (0.1) 7.0Relating to cash flow hedges 0.1 - -------- ------- - 7.0 -------- ------- The income tax expense above does not include any amounts for joint ventures andassociates, whose results are disclosed in the income statement net of tax. 6 Investments The analysis of the Group's share of joint ventures and associates is set outbelow: 2005 2004 Alcaidesa Other Associates Total Alcaidesa Other Associates Total joint joint joint joint venture ventures venture ventures £m £m £m £m £m £m £m £mRevenue 45.0 37.5 12.6 95.1 5.1 16.3 0.6 22.0 -------- ------- -------- ------ -------- -------- -------- ------- Profit beforetax 22.5 0.8 (1.1) 22.2 (0.8) (0.1) (0.2) (1.1)Income taxexpense (8.5) (0.3) - (8.8) 0.3 (0.1) - 0.2 -------- ------- -------- ------ -------- -------- -------- -------Profit for theperiod 14.0 0.5 (1.1) 13.4 (0.5) (0.2) (0.2) (0.9) -------- ------- -------- ------ -------- -------- -------- ------- Non-currentassets 7.4 0.7 2.0 10.1 11.3 0.2 1.5 13.0Current assets 40.2 68.0 20.5 128.7 27.2 60.4 1.9 89.5Currentliabilities (15.6) (23.9) (7.5) (47.0) (21.7) (7.3) (2.0) (31.0)Non-currentliabilities (5.5) (43.7) (14.8) (64.0) (3.9) (54.6) (1.4) (59.9) -------- ------- -------- ------ -------- -------- -------- -------Investments injoint venturesand associates 26.5 1.1 0.2 27.8 12.9 (1.3) - 11.6 -------- ------- -------- ------ -------- -------- -------- ------- Financialcommitments 9.5 4.3 ------ Capitalcommitments 36.3 20.7 ------ Net interest payable by joint ventures and associates in 2005 was £1.6m (2004:£0.6m). The financial commitments relate to joint ventures involved in Private FinanceInitiative (PFI) schemes and the capital commitments to construction work beingundertaken by the Costain Group. All figures are the Group's share. NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 7 Cash and cash equivalents Cash at bank and in hand is analysed below and includes the Group's share ofcash held by joint arrangements of £22.0m (2004: £18.9m). 2005 2004 £m £mCash and cash equivalents 75.2 64.1Bank overdrafts (0.2) (0.6) -------- ---------Cash and cash equivalents in the 75.0 63.5statement of cash flows -------- --------- 8 Capital and reserves Share Share Special Fair Translation Hedging Retained Total Minority Total capital premium reserve value reserve reserve earnings interests equity account reserve £m £m £m £m £m £m £m £m £m £m At 1 January2004 34.5 119.4 - - - - (191.8) (37.9) 0.1 (37.8) Totalrecognisedincome &expense - - - - (0.4) - (7.2) (7.6) - (7.6)Shares issued 0.8 0.1 - - - - - 0.9 - 0.9 ------ ------- ------- ------- --------- ------- ------- ------ ------- ------At 31 December2004 35.3 119.5 - - (0.4) - (199.0) (44.6) 0.1 (44.5) ------ ------- ------- ------- --------- ------- ------- ------- ------ ------Implementationof IAS 39 - - - - - (1.7) - (1.7) - (1.7) ------ ------- ------- ------- --------- ------- ------- ------ ------- ------At 1 January2005 35.3 119.5 - - (0.4) (1.7) (199.0) (46.3) 0.1 (46.2) Totalrecognisedincome &expense - - - 3.4 (0.8) (3.3) 23.8 23.1 (0.1) 23.0Share basedpayments - - - - - - 0.2 0.2 - 0.2Capitalreduction (17.6) (119.5) 13.6 - - - 123.5 - - - Shares issued 0.1 0.4 (0.5) - - - 0.5 0.5 - 0.5 ------ ------- ------- ------- --------- ------- ------- ------ ------- ------At 31 December2005 17.8 0.4 13.1 3.4 (1.2) (5.0) (51.0) (22.5) - (22.5) ------ ------- ------- ------- --------- ------- ------- ------ ------- ------ Special reserve On 18 May 2005, Court approval of a capital restructuring was granted underwhich the deficit on the Company's profit and loss account was eliminated usinga special reserve created from restructuring the share capital and the sharepremium. NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 9 Explanation of transition to IFRS As stated in note 1, the financial statements for the year ended 31 December2005 will be the Group's first consolidated financial statements prepared inaccordance with IFRS. The accounting policies, which were set out in the IFRS Transition Statement of17 August 2005, have been applied in preparing the financial statements for theyear ended 31 December 2005, the comparative information presented here for theyear ended 31 December 2004 and in the preparation of an opening IFRS balancesheet at 1 January 2004 (the Group's date of transition). In preparing its opening IFRS balance sheet, the Group has adjusted amountsreported previously in financial statements prepared in accordance with UK GAAP.An explanation of how the transition from previous GAAP to IFRS has affected theGroup's financial position, financial performance and cash flows is set out inthe following tables and the notes that accompany the tables. Reconciliations - UK GAAP to IFRS CONSOLIDATED INCOME STATEMENTYear ended 31 December 2004 Impact of transition to IFRS ---------------------------- Under UK Alcaidesa Joint Financing Under GAAP Ventures/ IFRS Associates £m £m £m £m £mRevenue 673.2 - - - 673.2 Cost of sales (645.0) - - - (645.0) -------- -------- -------- -------- -------Gross profit 28.2 - - - 28.2 Administrativeexpenses (18.0) - - - (18.0) -------- -------- -------- -------- ------- Groupoperatingprofit 10.2 - - - 10.2 Group share ofjoint venturesoperatingresults 8.9 (9.2) 0.3 - -Group share ofassociatesoperatingresults (0.2) - 0.2 - - Share ofprofit ofjoint venturesand associates - - (0.9) - (0.9) -------- -------- -------- -------- ------- Profit fromoperations 18.9 (9.2) (0.4) - 9.3 Other financecharges (1.1) - - 1.1 -Net interest 1.7 - 0.6 (2.3) - Finance income - - - 22.9 22.9Finance costs - - - (21.7) (21.7) -------- -------- -------- -------- ------- Profit beforetax 19.5 (9.2) 0.2 - 10.5 Income taxexpense (4.3) 2.8 (0.2) - (1.7) -------- -------- -------- -------- ------- Profit for theperiod 15.2 (6.4) - - 8.8 -------- -------- -------- -------- ------- Attributable to:Equity holdersof the parent 15.2 (6.4) - - 8.8Minority interests - - - - - -------- -------- -------- -------- ------- Earnings pershare - basic 4.3p (1.8p) - - 2.5pEarnings pershare -diluted 4.3p (1.8p) - - 2.5p Reconciliations - UK GAAP to IFRS - continued Changes in accounting policies - income statement Explanatory notes on the impact of IFRS adjustments to the consolidated incomestatement IAS 18 Revenue recognition Alcaidesa, the Group's Spanish property development interest, has sold parcelsof land that were subject to the completion of certain infrastructure. Sales andprofits in respect of such developments were recognised on exchange of contractwith costs to complete on the infrastructure element recognised accordingly. Under IFRS, these developments fall within the scope of IAS 18, where referenceis specifically made to situations where the seller is obliged to performsubstantial acts to complete under the contract. Revenue and thus profit inrespect of such acts should be recognised only when the act is performed. Given the specific circumstances existing within these developments we considerthat the appropriate treatment under IFRS is to view these arrangements, whereseparable, as two transactions, firstly the sale of the land and secondly theprovision of the infrastructure. In such circumstances, revenue and profit arerecognised on the land sale element of each transaction on exchange of legaltitle and when all conditions for revenue recognition under IAS 18 are met. Inrespect of the infrastructure, the proportion of revenue and profit related tothe provision of these facilities is deferred until such works are complete. The impact of IAS 18 has been to defer the amount of profit shown within theGroup's share of profits from joint ventures and associates. Profit after taxfor 12 months to 31 December 2004 has reduced by £6.4m. IAS 28 Investments in associates and IAS 31 Interests in joint ventures Under UK GAAP, the group share of operating profits of associates and jointventures was presented on the face of the income statement after group operatingprofit. The group share of interest and tax of associates was included withinthe relevant Group totals. Under IFRS, the Group share of profit after tax ofassociates and joint ventures is presented on the face of the income statementafter Group operating profit. IAS 1 Income statement reclassifications and IAS 19 Retirement benefitobligations There are a number of reclassifications between income statement and balancesheet captions that arise from the application of various IFRS. Under IFRS theexpected return on assets of the pension scheme and interest income are shown asfinance income and the interest on pension scheme liabilities and interest andfinance charges payable are shown as finance costs. Reconciliations - UK GAAP to IFRS - continued CONSOLIDATED BALANCE SHEET As at 1 January 2004 (Transition) Impact of transition to IFRS ------------------------------- Under UK Reclassified Pension Translation Intangible P&L Under GAAP Reserve Assets Reserves IFRS £m £m £m £m £m £m £mASSETSNon-current assetsProperty,plant &equipment 4.9 - - - (0.2) - 4.7Intangibleassets - - - - 0.2 - 0.2Other debtors - 3.2 - - - - 3.2Deferred taxassets - 2.6 23.5 - - - 26.1Investments in associates - - - - - - -Investments injoint ventures 17.6 - - - - (0.8) 16.8Loans to jointventures 2.5 - - - - - 2.5Loans to associates - - - - - - -Otherinvestments 1.0 - - - - - 1.0 ------- --------- ------- --------- -------- ------- -------Totalnon-currentassets 26.0 5.8 23.5 - - (0.8) 54.5 ------- --------- ------- --------- -------- ------- -------Current assetsInventories 1.6 - - - - - 1.6Trade andotherreceivables 122.4 (5.8) - - - - 116.6Cash & shortterm deposits 72.0 - - - - - 72.0 ------- --------- ------- --------- -------- ------- -------Total currentassets 196.0 (5.8) - - - - 190.2 ------- --------- ------- --------- -------- ------- -------Total assets 222.0 - 23.5 - - (0.8) 244.7 ======= ========= ======= ========= ======== ======= =======EQUITYShare capital 34.5 - - - - - 34.5Share premium 119.4 - - - - - 119.4Cum. translation reserve - - - - - - -Retainedearnings (190.6) - (0.4) - - (0.8) (191.8) -------- --------- -------- --------- -------- -------- -------- (36.7) - (0.4) - - (0.8) (37.9)Minorityinterest 0.1 - - - - - 0.1 -------- --------- -------- --------- -------- -------- --------Total equity (36.6) - (0.4) - - (0.8) (37.8) -------- --------- -------- --------- -------- -------- --------LIABILITIESNon-currentliabilitiesInterestbearing loansand borrowings 0.9 - - - - - 0.9Retirementbenefitobligations 54.5 - 23.9 - - - 78.4Other payables 1.7 - - - - - 1.7Long-termprovisions - 3.8 - - - - 3.8 -------- --------- -------- --------- -------- -------- --------Totalnon-currentliabilities 57.1 3.8 23.9 - - - 84.8 -------- --------- -------- --------- -------- -------- --------CurrentliabilitiesTrade andother payables 191.8 - - - - - 191.8Current taxliabilities 2.1 - - - - - 2.1Overdrafts 0.3 - - - - - 0.3Interestbearing loansand borrowings 0.2 - - - - - 0.2Provisions andotherliabilities 7.1 (3.8) - - - - 3.3 -------- --------- -------- --------- -------- -------- --------Total currentliabilities 201.5 (3.8) - - - - 197.7 -------- --------- -------- --------- -------- -------- --------Totalliabilities 258.6 - 23.9 - - - 282.5 -------- --------- -------- --------- -------- -------- --------Total equityandliabilities 222.0 - 23.5 - - (0.8) 244.7 ======== ========= ======== ========= ======== ======== ======== Reconciliations - UK GAAP to IFRS - continued CONSOLIDATED BALANCE SHEET As at 31 December 2004 Impact of transition to IFRS ----------------------------------------------------- Under UK Reclassified Pension Translation Intangible P&L Under GAAP Reserve Assets Reserves IFRS £m £m £m £m £m £m £mASSETSNon-current assetsProperty,plant &equipment 5.4 - - - (0.5) - 4.9Intangibleassets - - - - 0.5 - 0.5Other debtors - 5.7 - - - - 5.7Deferred taxassets - 1.7 29.9 - - - 31.6Investments in associates - - - - - - -Investments injoint ventures 19.0 - - - - (7.4) 11.6Loans to jointventures 2.6 - - - - - 2.6Loans toassociates 2.7 - - - - - 2.7Otherinvestments 1.0 - - - - - 1.0 ------- --------- ------- --------- -------- ------- ------Totalnon-currentassets 30.7 7.4 29.9 - - (7.4) 60.6 ------- --------- ------- --------- -------- ------- ------Current assetsInventories 1.0 - - - - - 1.0Trade andotherreceivables 159.7 (7.4) - - - - 152.3Cash and shortterm deposits 64.1 - - - - - 64.1 ------- --------- ------- --------- -------- ------- ------Total currentassets 224.8 (7.4) - - - - 217.4 ------- --------- ------- --------- -------- ------- ------Total assets 255.5 - 29.9 - - (7.4) 278.0 ======= ========= ======= ========= ======== ======= ======EQUITYShare capital 35.3 - - - - - 35.3Share premium 119.5 - - - - - 119.5Cum.translationreserve - - - (0.2) - (0.2) (0.4)Retainedearnings (191.6) - (0.4) 0.2 - (7.2) (199.0) -------- --------- -------- --------- -------- -------- ------- (36.8) - (0.4) - - (7.4) (44.6)Minorityinterest 0.1 - - - - - 0.1 -------- --------- -------- --------- -------- -------- -------Total equity (36.7) - (0.4) - - (7.4) (44.5) -------- --------- -------- --------- -------- -------- -------LIABILITIESNon-currentliabilitiesInterestbearing loansand borrowings 0.5 - - - - - 0.5Retirementbenefitobligations 69.2 - 30.3 - - - 99.5Other payables 3.0 - - - - - 3.0Long-termprovisions - 3.1 - - - - 3.1 -------- --------- -------- --------- -------- -------- -------Totalnon-currentliabilities 72.7 3.1 30.3 - - - 106.1 -------- --------- -------- --------- -------- -------- -------CurrentliabilitiesTrade andother payables 212.1 - - - - - 212.1Current taxliabilities 2.2 - - - - - 2.2Overdrafts 0.6 - - - - - 0.6Interestbearing loansand borrowings 0.4 - - - - - 0.4Provisions andotherliabilities 4.2 (3.1) - - - - 1.1 -------- --------- -------- --------- -------- -------- -------Total currentliabilities 219.5 (3.1) - - - - 216.4 -------- --------- -------- --------- -------- -------- -------Totalliabilities 292.2 - 30.3 - - - 322.5 -------- --------- -------- --------- -------- -------- -------Total equityandliabilities 255.5 - 29.9 - - (7.4) 278.0 ======== ========= ======== ========= ======== ======== ======= Reconciliations - UK GAAP to IFRS - continued Explanatory notes on the impact of IFRS adjustments to the consolidated balancesheet at 31 December 2004 IAS 1 Current/non current assets and liabilities Non-current receivables have been reclassified on the face of the balance sheetas non-current assets and provisions have been reallocated to non-currentliabilities. Assets and liabilities relating to defined benefit plans have been classified asnon-current (IAS 19). Assets and liabilities relating to defined contributionplans normally are current and have been classified as such. IAS 19 Employee benefits Costain Group PLC adopted early the amendments to FRS 17 for UK GAAP reportingand has recognised the defined benefit pension plan liability (based on theprojected unit credit method) in full as at 31 December 2003. The Group hasnominated to recognise any actuarial gains or losses in the statement ofrecognised income and expense. There are no significant accounting differencesbetween FRS 17 and IAS 19 in relation to accounting for defined benefit pensionobligations where the company has nominated to recognise actuarial lossesdirectly in equity. The finance cost of the pension plan liabilities will beshown separately as a finance cost and the expected return on plan assets willbe shown as finance income. The Group intends to have actuarial updates at each half-year for the definedbenefit pension plan and a full actuarial review at least every 2 years asrequired by the trust deed. However, IAS 19 requires employee benefit schemes' financial assets to be valuedat fair value. For relevant financial assets this means the bid price whereasFRS 17 specifies using mid market price. This has the effect of reducing assetvalues and thereby increasing the deficit by £0.6m. IAS 12 Income taxes Costain Group has a significant defined benefit pension scheme liability. UnderUK GAAP this has given rise to a deferred tax asset based on the company's UKcorporation tax rate, which has been netted against the defined benefit pensionscheme liability. IAS 12 requires that the deferred tax asset be grouped withother deferred tax assets. Deferred tax assets relating to retirement benefit obligations have beenreclassified from non-current liabilities to non-current assets. IAS 21 The effects of changes in foreign exchange rates UK GAAP requires exchange differences on a monetary item forming part of areporting entity's net investment in a foreign operation to be taken to theSTRGL. Under IFRS, IAS 21 requires such exchange differences to be recognised ina separate component of equity in the reporting entity's consolidated financialstatements. Cumulative translation differences on foreign operations are deemed to be zeroat 1 January 2004. A £0.2m exchange difference relating to 2004 has been movedfrom retained reserves to a cumulative translation reserve. IAS 38 Intangible assets Under UK GAAP, computer software costs attributable to major business systemsimplementations and material software licenses were capitalised as plant andequipment. Under IFRS, software development, purchased software and softwarelicences should be classified as an intangible asset. At 31 December 2004, under IFRS, computer software of £0.5m has beenreclassified from plant and equipment to intangible assets. IAS 18 Revenue recognition The income statement IFRS adjustment required for Alcaidesa revenue recognitioncauses a reduction in the carrying value of joint venture net assets of £0.8m at1 January 2004 and £7.4m at 31 December 2004. IFRS 2 Share based payments Equity settled share options granted after 7 November 2002 and not vested at thedate of transition have been valued at the date of grant and an expenserecognised over the period that the service benefit is to be provided by theemployees under the terms of the schemes. At 31 December 2004, under IFRS, the charge for equity settled options wasimmaterial and charges will commence in 2005. Reconciliations - UK GAAP to IFRS - continued CONSOLIDATED CASH FLOW STATEMENT For the year to 31 December 2004 Impact of transition to IFRS ----------------- Under UK GAAP Alcaidesa Under IFRS £m £m £mCash flows from operatingactivities Profit for the period 15.2 (6.4) 8.8 ---------- -------------- --------Adjustments for:Depreciation 1.1 - 1.1Investment income (22.9) - (22.9)Interest expense 22.3 (0.6) 21.7Share of profit of associates (8.7) 9.6 0.9Tax expense 4.3 (2.6) 1.7 ---------- -------------- --------Operating profit before changes in working capital and provisions 11.3 - 11.3 (Increase)/decrease in inventories 0.6 - 0.6Decrease/(increase) in receivables (38.3) - (38.3)(Decrease)/increase in payables 18.8 - 18.8Decrease in provisions (2.9) - (2.9) ---------- -------------- --------Cash generated from the operations (10.5) - (10.5) Interest paid (0.3) - (0.3) ---------- -------------- --------Net cash from operating activities (10.8) - (10.8) ---------- -------------- --------Cash flows from investingactivitiesInterest received 2.6 - 2.6Acquisition of plant (1.7) - (1.7)Additions to investments (0.4) - (0.4)Capital repayments by investments 0.2 - 0.2Dividends received 4.4 - 4.4Amounts invested in joint ventures (2.8) - (2.8) ---------- -------------- --------Net cash from investing 2.3 - 2.3activities ---------- -------------- -------- Cash flows from financingactivitiesIssue of ordinary share capital by Costain Group PLC 0.9 - 0.9Payment of finance lease liabilities (0.2) - (0.2) ---------- -------------- --------Net cash from financing activities 0.7 - 0.7 ---------- -------------- --------Net decrease in cash and cashequivalents (7.8) - (7.8)Cash and cash equivalents atbeginning of year 71.7 - 71.7Effect of foreign exchange ratechanges (0.4) - (0.4) ---------- -------------- --------Cash and cash equivalents at endof year 63.5 - 63.5 ========== ============== ======== This information is provided by RNS The company news service from the London Stock Exchange