11 Mar 2008 07:00
11th March 2008 PRELIMINARY RESULTS YEAR ENDED 31 DECEMBER 2007
Interserve, the services, maintenance and building group, announces its preliminary results for the year ended 31 December 2007.
2007 2006 Revenue ‚£1,738.0m ‚£1,408.5m +23.4% Headline profit 1 ‚£73.4m ‚£58.1m +26.3% Profit before tax 2 ‚£69.3m ‚£15.1m +358.9% Headline earnings per share 3 39.9p 31.7p +25.9% Basic earnings per share 37.5p (1.4)p Net cashflow from operating ‚£60.5m ‚£40.1m +50.9%activities Full-year dividend 16.2p 15.4p +5.2%
Chief Executive Adrian Ringrose commented,
"2007 was an excellent year for Interserve, with our earnings per share growingby an impressive 26 per cent. We returned our industrial business toprofitability, completed the initiatives we had announced for integratingMacLellan into the new Interserve structure, achieved significant growth in ourconstruction operations and opened for business in South Africa - a new marketfor our Equipment Services division."Our markets remain healthy with opportunities for further growth. Our skillsare in areas which are resilient when the economy comes under pressure -indeed, at such times organisations tend to outsource more of their activitiesas they seek toincrease efficiency, and our Facilities Management and Specialist Servicesdivisions are well placed to take advantage of such a trend. Similarly ourconstruction activities in the UK are focused in areas where governmentspending is likely to be sustained, such as education, health and the custodialsector, while our markets in the Middle East continue to be buoyant. With ahealthy pipeline of opportunities for all of our businesses, we remainconfident that the Group should continue to demonstrate good progress in 2008and beyond."Footnotes:
Headline profit comprises profit before taxation of ‚£69.3m (2006:‚£15.1m)adjusted for the impact of (‚£4.8m) amortisation of intangible assets (2006: (‚£2.1m));( ‚£0.3m) amortisation of intangible assets (associates) (2006: ‚£nil); ‚£1.0m exceptional items (2006: (‚£40.9m)).
2 Profit before tax was impacted in 2006 by: impairment of goodwill, costs associated with integrating MacLellan and professional costs associated with the accounting misstatements in Industrial Services (see note 2 to the financial statements).
3 Headline earnings per share are based on Headline profit as defined in footnote 1 above.
Chairman's statement
In 2007 Interserve built strongly on the growth of the previous year, with headline profit up 26 per cent to ‚£73.4 million (2006: ‚£58.1 million). All five operating divisions delivered results ahead of their 2006 figures.
Our results are summarised in the table below:
2007 2006 Growth Revenue ‚£1,738.0m ‚£1,408.5m 23.4% Headline profit ‚£73.4m ‚£58.1m 26.3% Profit before tax ‚£69.3m ‚£15.1m 358.9% Net cashflow from operating ‚£60.5m ‚£40.1m 50.9%activities Headline earnings per share 39.9p 31.7p 25.9% Basic earnings per share 37.5p (1.4)p People
Our people delivered an outstanding performance during the year helping usachieve several significant goals. These included further progress withintegrating our facilities services operations as well as meeting the demandsof buoyant, but still competitive, construction markets in the UK andinternationally. Although I am becoming accustomed to the dedication of theindividuals and teams working for Interserve, I still find myself impressedwith their drive to deliver what the client needs - whether proactively or inresponse to unplanned events such as the flooding that occurred in severalparts of the UK last summer. I should like to thank them for their commitment,ingenuity and willingness to "go the extra mile". It is traits such as thesewhich have enabled Interserve to forge the long-term relationships on which
itssuccess is built.BoardThere were no changes to the Board during the year. We appointed two newdirectors to the Board in January 2008. Both were internal appointmentsinvolving the managing directors of two of Interserve's divisions: BruceMelizan, who is responsible for the Facilities Management division, and StevenDance, responsible for Equipment Services. They have made valuablecontributions to the development of Interserve and their appointment will allowthe Group to benefit further from their abilities. I welcome them to the Boardand look forward to working with them in their new roles.
Dividend
On the basis of our performance in 2007 and the prospects for the Group goingforward, the directors are recommending an increased final dividend of 11.2p(2006: 10.6p), bringing the total dividend for the year to 16.2p (2006: 15.4p),an increase of 5.2 per cent. Subject to shareholder approval at the AnnualGeneral Meeting, the final dividend will be paid on 6 June 2008 to shareholderson the register at the close of business on 25 April 2008.
Prospects
The markets in which we are active, in the UK and abroad, hold excellentopportunities for Interserve. Our commitment to deliver exceptional service forour clients is a fundamental driver of our success and is particularly valuedin the current climate when operational efficiency and certainty of deliveryare more important than ever.
The Board remains very encouraged by the long-term prospects in our markets and is confident that the Group should continue to demonstrate good progress in 2008 and beyond.
Lord BlackwellChairman
11 March 2008 Directors' report - Business Review
Principal activities
Interserve is a services, maintenance and building group. We create buildingsand other structures for our clients in the public and private sectors; wemaintain many different types of buildings, the operational systems thatsupport them and a range of plant and equipment in specialist fields; and weco-ordinate a host of background services for our clients to keep theiroperations running smoothly and efficiently, allowing them to concentrate ontheir core business. Describing these buildings and other environmentscollectively as "assets" defines our role as supporting our clients byproviding a range of services across the asset life cycle.
Strategy
Established client relationships in our core markets, together with our growingexposure to international markets, are fundamental to the Group's strategicpositioning, conferring good visibility and providing stability throughout theeconomic cycle.We can deliver the best value to our clients when combining several services.This may be during one phase in the lifetime of an asset, such as where wesupply a suite of support services in live operational facilities, or acrossseveral phases from early design through construction and into ongoingfacilities management (FM). Our understanding of clients' objectives andpractices, combined with the breadth of skills and resources at our disposalacross the asset life cycle, enable us to tailor the services we offer to meetindividual client needs.We believe that our existing markets offer significant opportunities throughthe long term and that our position in them, built on the model above, isstrong. The main thrust of our strategy is therefore to develop each of ourbusinesses organically, based on the cultivation of long-term and mutuallybeneficial relationships with our clients. The breadth of our servicecapability means that we can extend and develop many of these relationships,offering enhanced value for money through removing unnecessary interfaces andgenerating mutual stability. Many of our management skills are portable and canbe brought to bear on new sectors.In addition to our core organic strategy we maintain a constant review of themarket to identify further potential acquisitions. These are intended to addvalue by extending the range of services we can offer existing clients or byenabling us to provide current services to clients in new sectors. Wesignificantly enhanced our market reach and service scope with the acquisitionof MacLellan in 2006. During 2007 we completed the initiatives we hadpreviously announced for incorporating those operations into the new Interservestructure.Operational reviewKey performance indicators 2007 2006 Change Revenue ‚£1,738.0m ‚£1,408.5m 23.4% Headline earnings per share 39.9p 31.7p 25.9% Cash conversion 4 118.6% 153.1% (34.5)% pts Future workload 5 ‚£5.7bn ‚£5.6bn 1.8% Staff turnover 6 9.9% 7.9% 25.3%
UK all-employee accident incidence 444 556 (20.1)% rate per 100,000 workforce
2007 was an excellent year for Interserve, with headline earnings per sharerising 25.9 per cent. Profit increased in each of our five divisions and growthwas particularly strong in Facilities Management and Project Services. Organicrevenue grew by 13.7 per cent.
We made strategic progress on a number of fronts during the year:
* We successfully turned around our industrial business, which is now trading
profitably.
* The MacLellan businesses have enhanced our market position, adding some ‚£
260 million of revenue including many encouraging examples of clients won
as a result of the combined skill base. In addition we are realising cost
synergies of some ‚£3 million a year.
* We achieved significant growth in our construction operations, both in the
UK and the Middle East.
* We expanded the operations of our Equipment Services division, entering the
South African market by establishing a new business with two branches,
investing in a new depot in Abu Dhabi and extending our export footprint in
north Africa.
At 31 December 2007 future workload (excluding our Middle East associates) stood at ‚£5.7 billion (2006: ‚£5.6 billion), with ‚£1.3 billion of 2008 revenue secure. In addition our share of the future workload for our Middle East associates grew by 20 per cent and now stands at ‚£240 million.
The slight rise in staff turnover was due to the inclusion, in 2007, of figuresfrom some parts of the business, principally in the security market, which hadnot previously recorded them, and to continued buoyant market conditions andassociated demand for people.
Footnotes:
4 Cash conversion is calculated as the percentage of cash generated fromoperations of ‚£65.0m (2006: ‚£49.3m) divided by the sum of: operating profit of‚£51.0m (2006: ‚£1.4m); plus amortisation of intangible assets of ‚£4.8m (2006: ‚£2.1m); plus impairment of goodwill of ‚£nil (2006: ‚£30m); less profit ondisposal of property and investments of ‚£1.0m (2006: ‚£1.3m).5 Future workload comprises contracted work plus work that has been settled andon which final terms are being agreed (principally PFI projects at preferredbidder stage).
6 Staff turnover measures the proportion of managerial, technical and office-based staff leaving the Company and its subsidiaries voluntarily over the course of the year.
Facilities Management
Facilities Management provides a broad range of integrated, or "bundled", services to the public and private sectors. We deliver the vast majority of these ourselves.
Results summary: 2007 2006 Contribution to Total Operating ‚£27.9m ‚£13.9mProfit Revenue ‚£733.1m ‚£649.5m Margin 3.8% 2.1%
This excellent progress resulted from a combination of growth from both new andexisting clients, turnaround in our industrial operations and the full-yearimpact of the trading results and integration benefits arising from the 2006MacLellan acquisition.One of our key tasks for the year was to complete the initiatives we hadannounced for integrating MacLellan. Each of the two new divisions formed atthe time, Facilities Management and Specialist Services, has undergoneconsiderable internal reorganisation as we have enhanced performance in thesupport functions and have identified opportunities in the market on which wecan capitalise by refocusing our front-end operations. The FacilitiesManagement division now addresses the market through six client-facing units,reflecting the growth opportunities we see in the UK outsourcing market.This structure allows us to tailor our delivery to the particular needs of ourtarget sectors while maximising efficiency and promoting best operationalpractice across the division. The integration is such that almost every new bidwe undertake involves people or services from both of the former organisations.Establishing this structure has also enabled us to generate annualised savingsof approximately ‚£3 million through cost rationalisation.We have made very significant progress with our industrial business, now one ofthe six business units in the FM division. The new management, enhancedcommercial controls, cost-reduction measures and focus on customer service haveturned the operation around and it is now trading profitably. Our medium-termexpectation is that margins should grow to match those in the rest of thedivision.
Our new clients and contracts won during the period included:
* CB Richard Ellis: integrated retail facilities management over three years
at two more of its shopping centres: the new Silverburn centre in Glasgow,
the largest in Scotland, and Crowngate in Worcester. * Department of Health: total facilities management at six locations in London for a three-year period. * BAA: 24x7 maintenance in Heathrow's Terminal 2.
* British Energy: replacing pipework providing cooling to the nuclear reactor
at Hartlepool Power Station. The contract was won in conjunction with
Project Services, whose role is to construct concrete ducts under the roads
and foundations for the pipe supports. * UK-based airport operator TBI: cleaning contracts covering airports at Belfast, Cardiff and Luton for five years.
* Abbey: cleaning at over 350 branches in the North and Central regions for
two years.
We have also recently been named preferred bidder for a ‚£100 million, five-yearproperty services contract with the Home Office. The contract, which has theoption of a two-year extension, will operate across Wales, Scotland andsouth-west, north-east and north-west England and includes maintenance,security, cleaning, portering, reception, catering, hospitality and energymanagement.A key plank in our development strategy is to grow our existing relationshipsthrough extending the extent and breadth of our services over time. We grew anumber of our existing contracts in this way in 2007, notably:
* Metropolitan Police, where we have a seven-year contract covering a wide
range of services in the southern half of the force's area and New Scotland
Yard. We added two new services: a four-year contract for Special Operations, providing support to police incidents and special occasions such as Notting Hill Carnival, Wimbledon and Remembrance Day; and Boarding-Up Services as an addition to the main contract, in which we
provide a 24/7 reactive service covering calls to domestic and commercial
premises following police raids and break-ins. * Croydon Council, where we maintain over 600 properties ranging from the Town Hall to libraries, youth clubs and sports grounds and provides services such as security, cleaning and catering. Following a series of presentations and open forums with local head teachers we negotiated a
planned and reactive maintenance service with, initially, 12 schools in the
borough.
* Our three operational PFI hospital contacts, where we provide a broad range
of non-clinical services both for the staff, patients and visitors and also
for the maintenance of the facilities. We undertook additional work in service variations and projects, adding just under 10 per cent to our revenue.
* Homebase, where we are responsible for cleaning throughout the stores. We
extended our contract for a further two years and increased its scope, with
the addition of 56 more stores, to cover the entire estate of 178 in the UK
and Ireland.
Our focus on client service was recognised in several industry awards duringthe year. At the Premises and Facilities Management (PFM) awards we won thePartners in Public Service category for our work with Croydon Council, and oursubsidiary Landmarc, which was created to run the nationwide Defence TrainingEstate (DTE) contract with the MoD, not only won the Partners in Multi-servicecategory but was also declared Overall Winner. Landmarc's services are wideranging and include property and infrastructure maintenance, catering,environmental and conservation support and accommodation services such as wastemanagement and cleaning. The judges noted that the partnership with the MoD wasamongst the most varied in terms of the services provided and was the mostgeographically spread of any that has been judged in the awards. Theycommented, "Landmarc and DTE have addressed these challenges with a positiveattitude and real expertise." Landmarc also won the Best Practice in a Fit-outaward at the British Institute of Facilities Management awards earlier in theyear.We received accolades in the cleaning industry's Professional Golden Serviceawards for our work on two specialised contracts: our work with the AtomicWeapons Establishment won us the Public Sector award; and we secured theOverall Winner title for our performance at the McLaren Technology Centre inWoking. This is the iconic head office of the McLaren Group, together with amanufacturing plant and research and development centre - and where, as wouldbe expected in an environment where Formula 1 cars are created and assembled,standards of cleanliness are scrupulously high.
Specialist Services
The division provides a variety of outsourced services which are usuallydelivered discretely but can form part of a bundled package through FacilitiesManagement.Results summary: 2007 2006 Contribution to Total Operating ‚£6.7m ‚£6.6mProfit Revenue ‚£190.2m ‚£137.4m Margin 3.5% 4.8%Our security and mechanical & electrical installation/maintenance operationstraded well. We have addressed the issues in the underperforming heating,ventilation and air conditioning (HVAC) and working-at-heights operations byrepositioning them and making changes to the management team, and expect thebenefits to flow through during 2008.
We were successful in securing a number of important clients such as:
* Kleinwort Benson: security-based services in two buildings, with 30
officers whose duties range from front-of-house security and reception to
control room operation, patrolling, CCTV and car parking management.
* Barclays Capital: security services in a renewal in which Barclays Wealth
was added to the contract, which now covers five buildings and involves 27
officers carrying out front-of-house, control room, patrol and CCTV duties.
* Wembley Stadium: successful renewal of stewarding and associated services
covering both sporting and non-sporting events. * Standard Life: a three-year contract for a full range of planned and reactive maintenance services to 15 UK regional offices. * Frimley Park Hospital NHS Foundation Trust: a five-year contract for
planned and reactive maintenance to all air conditioning and refrigeration
assets across the Trust estate. It covers a diverse range of equipment
including the refrigeration equipment for the mortuary and other specialist
facilities.
* Homes for Islington: a 10-year partnering agreement to provide statutory,
planned and reactive maintenance for nearly 300 lifts. Homes for Islington
is the Arms Length Management Organisation (ALMO) that manages Islington
Council's rented and leasehold homes.
We also continued to win work with in-house customers. The most significant tobe won through Project Services was the design and installation of buildingengineering services associated with the Leeds City Council Building Schoolsfor the Future programme. Initially we shall deliver services with a value ofapproximately ‚£20 million in five mainly new-build secondary schools scheduledfor completion in 2008/2009; the programme extends over a 10-year period andwill provide significant further opportunities as the Leeds estate isprogressively modernised. Meanwhile contracts in which we are involved throughFacilities Management include: South East Regional Prime for Defence Estates(managing heating systems); University College London Hospital (deliveringsecurity services); Metropolitan Police (providing security, lift maintenance,air conditioning and asbestos management); and Slough Borough Council (liftmaintenance).
The security operation comprises two businesses we acquired as part of MacLellan (MacLellan Attlaw and First Security). Prospects in the security market are attractive, offering opportunities for significant growth. In order to enhance this development potential we have instituted several changes including:
* The renaming of MacLellan Attlaw to Interserve Security, allowing us to
capitalise on the strength of the Interserve brand.
* The integration of the business development and management functions of the
two businesses while retaining the First Security brand within its London
market. This not only increases efficiency but also enhances the
opportunities for extending our relationships with some of First Security's
clients beyond the M25. * The acquisition, in January 2008, of specialist security business R&D Security. The company supplies, installs and maintains CCTV, intruder alarms, technical surveillance and access control and has a client list which includes the Ritz Hotel Group, the Metropolitan Police and the American Embassy.
Project Services
Project Services works in close collaboration with clients in the UK and the Middle East, providing professional services to lead the design and construction process in the creation of a broad range of buildings and infrastructure.
Results summary: 2007 2006 Contribution to Total Operating ‚£29.4m ‚£23.4mProfit - UK ‚£13.5m ‚£12.7m - International associates ‚£15.9m ‚£10.7m Revenue ‚£759.5m ‚£570.8m Margin (UK only) 1.8% 2.2%
Continued strong demand in our UK and particularly our Middle Eastern markets underpinned a significant increase in activity levels, resulting in a contribution to total operating profit up 26 per cent on 2006.
Fundamental to our success in both regions has been our ability to manageresources to meet demand while maintaining our reputation for timely andcost-effective delivery. We have a very clear view of the kind of work which isright for us. Factors we consider include the client's partnership style, thesize of the contract, the level of risk and the extent to which oursupply-chain relationships and ability to manage logistical complexity can bebrought into play.The majority of Project Services' UK work comes from a large number ofsmall-to-medium-scale, low-risk projects with long-standing clients who valueour understanding of their business and our input to their planning process. Inthe Middle East, where we have been active for more than 25 years, ourassociate partners play a key role in knowing the local business environmentand advising which are the right potential clients with whom we can buildmutually beneficial working relationships.
United Kingdom
In the UK the Scottish market is particularly active at the moment. Projectsinitiated during 2007 include the first phase of the refurbishment of EdinburghUniversity's main library, a postgraduate centre for Heriot-Watt University,fit-out works at BBC Scotland's new headquarters in Glasgow and the enablementworks for the Victoria Hospital, Kirkcaldy, and Queen Margaret Hospital,Dunfermline. We have also been continuing the building of Addiewell Prison inWest Lothian, a PFI project which will see 700 new prison places made availablewhen it opens at the end of the year.
A substantial proportion of our growth came from national building framework agreements. These included:
* BT, where 2007 turnover was more than ‚£70 million. * Our highest annual turnover for Barclays to date.
* The first full year of the four-year BBC framework, covering a UK property
portfolio of some 230 premises. Work undertaken has included a studio for
the new topical magazine programme "The One Show" and offices for "Top
Gear".
* NHS ProCure21, where we are one of the most successful partners, winning
work during the year valued at over ‚£70 million.
* Ongoing delivery of prison houseblocks at various locations around the UK
under the new-build and refurbishment framework agreements with the Home
Office. We have so far won more projects worth more than ‚£170 million
through these two programmes.
Among contracts secured during the year were:
* Plymouth Schools PFI: design and construction of two new schools - a
primary for 450 pupils and an "all-through school" for 1,480 which brings
together an early-years, primary, secondary and specialist school on a
single campus.
* Leeds Building Schools for the Future (BSF): the first phase comprises four
new schools and two refurbishments, providing places for some 6,000 pupils.
* Designed for Life: Building for Wales: to date we have been selected to
undertake a range of schemes with an estimated combined construction value
in excess of ‚£250 million in this framework agreement with Welsh Health
Estates.
* RAF Brize Norton, Oxfordshire: design and build of aircraft parking stands
to accommodate 18 refuelling and heavy transport aircraft. The contract was
won through our Facilities Management division's involvement in the South
East Regional Prime Contract.
* Environment Agency: we secured a place on the Second Generation National
Contractors Framework to deliver the agency's ‚£500 million programme
covering flood defence, waterways and water resource capital works. The
programme will run for four years and has an option to extend for a further
four.
* St Helens College, Merseyside: we were named Preferred Bidder on the ‚£45
million project which covers the construction of a new college and the demolition of existing facilities. * Several regional framework agreements including: Nottinghamshire County
Council, where we shall be delivering schools, libraries and offices across
the county under a programme stretching to 2010; Manchester University,
where we have been appointed to a construction framework; and Nottingham
Trent University, where the agreement covers new build, refurbishment and
small works.
Since the year end we have won a place on the Home Office's Fit-out andRefurbishment framework agreement. The four-year arrangement covers businessesacross the Home Office and the Ministry of Justice estates throughout the UKincluding the Border and Immigration Agency, the National Police ImprovementAgency and the National Probation Service. The agreement is estimated to beworth around ‚£50 million to Interserve and includes interior fit-out,refurbishment, general construction, mechanical and electrical works andnew-build projects on a design and build basis. It complements the five-year, ‚£100 million Home Office contract for property services for which the FacilitiesManagement division has recently been named preferred bidder.
We are proud of our achievements and it is particularly welcome when they are recognised independently. Among the awards we received in 2007 were:
* Recognition from Severn Trent Water in recognition of the efforts of an
Interserve-led team which battled successfully to save the Mythe Water
Treatment Works, Tewkesbury, from a second round of flooding during the
July floods that devastated parts of Gloucestershire. Resources from across
the Interserve Group were utilised at very short notice and we directed
over 200 people including other contractors and 70 Armed Forces personnel,
who all worked around the clock over a weekend to build a temporary barrier
which prevented further flooding.
* Our Victoria Footbridge project, the restoration of a historic bridge over
the River Wye, was a multiple award winner during 2007. Accolades included
a Green Apple Environmental Award, several awards from the Institution of
Civil Engineers (ICE) and from New Civil Engineer magazine.
* The fascia replacement of Westminster Bridge, which continued throughout
2007 to capture attention at the heart of the capital, also received recognition by the ICE as an outstanding civil engineering project. * We were awarded the prestigious Investors in Excellence accreditation,
demonstrating our performance against the European Foundation for Quality
Management (EFQM) Excellence Model. Project Services was the first
construction company to achieve this through the British Quality
Foundation.
We also won a number of environmental awards and were active participants in many community projects.
Middle East
Demand continues to rise in the Middle East for the high quality construction services provided by our associate companies.
In Dubai the leisure and tourism sector remains very buoyant. We completed the255-room Raffles Hotel, and three hotels in a roll-out programme for Majid AlFuttaim Group are in progress. Other notable projects completed included anearthworks and road construction project, involving the movement of 4.4 millionm‚³ of material and the creation of 24km of graded road in the relocation ofCamel City, and the construction of offices, workshops and training facilitiesfor Baker Hughes. Recent wins include a programme of eight Easy Hotels forIstithmar.
In Qatar we continue working with long-standing clients at Doha International Airport and with Siemens, Areva and ABB on the construction of further substations. New contract awards included a substantial office fit-out for Exxon Mobil. Our Spacemaker business had a particularly successful year providing accommodation units for the region's major petrochemical works including the Shell Pearl Gas-to-Liquids (GTL) project.
The Qatar-based Madina group, in which we acquired our 49 per cent beneficialinterest in June 2007, has more than met our expectations in its first sixmonths of trading. We won a two-year extension to an offshore services andonshore fabrication contract for Maersk, which will now last until March 2012,and we have continued to broaden the client base in what is a very buoyant andexciting market, as exemplified by a contract from Qatar Vinyl Company forfabrication and erection services in the construction of a new demineralisedwater plant.In Oman, work continues on the Sohar Industrial Port complex where we remainthe contractor of choice. We completed a container terminal for Hutchinson andconstruction works for an aluminium smelter power plant for Alstom, and havewon new awards for construction at Sohar including an aromatic plant for GSEngineering and a materials-handling system for Shadeed Iron & Steel Co.
Elsewhere in Oman, our market position in industrial work strengthened with award of the Barka Independent Water and Power Project (IWPP) Phase 2 for Doosan, a previous client, and a Methanol Plant in Salalah, another project for GS Engineering. We have also increased our workload in the oilfields in the interior for Occidental, another long-standing client.
As the region's markets develop, the opportunity for cross-selling our servicesamong Middle-East-based and international clients increases. We are negotiatinga contract with Baker Hughes in Qatar following the completion of the projectin Dubai, and other opportunities include the construction of hotels in Omanfor the Majid Al Futtaim Group and the roll-out of bank refurbishment/rebranding for Commercial Bank (Qatar) in its newly-acquired businesses in
theUAE and Oman.Equipment Services
Equipment Services provides temporary structural equipment and the engineering designs for its use in complex infrastructure and building projects.
Results summary:
2007 2006 Contribution to Total Operating ‚£23.9m ‚£22.6mProfit Revenue ‚£132.0m ‚£108.5m Margin 18.1% 20.8%Our progress was based on continued buoyancy in the Middle East, together withstrong growth in Europe and some encouraging signs of recovery in Australia. Weentered the South African market in 2007 with the opening of a business withtwo branches, in Durban and Pretoria. This is generating revenue and building aclient base in Gauteng and Kwa Zulu Natal provinces and we are planning thenext stage of branch development.
Among the many projects for which we designed engineering solutions and provided equipment were:
* East London Line Phase 1 - a sequence of ongoing projects in connection with the extension of the line northwards and southwards. Works include viaducts and new stations. * Wimbledon Centre Court - support for the main court structure while the court is covered with a new retractable roof.
* A74 "Cumberland Gap" bridges - the road is being upgraded from a four-lane
dual carriageway to a six-lane motorway and we have provided equipment for
the work on the two main structures concerned: Moss Band bridge, over the
West Coast railway line, and the River Esk bridge.
* Arabian Ranches road interchange, Dubai, UAE - we supplied a broad range of
equipment to create 10 box-cell bridges, each between 150 and 240 metres
long, and a cut-and-cover tunnel in the country's largest such project to
date. This is a high-growth sector and we have won several further infrastructure projects as a result of our work on the interchange. * Liquefied natural gas tanks, Abu Dhabi, UAE - equipment for the construction of four tanks 62m in diameter and 34m high. The tanks
consisted of a steel liner with an in-situ reinforced concrete facing on
the outside, built using a variety of products including climbing formwork.
Regionally:EuropeOur UK operation did well, benefiting particularly from exports to the US andthe Netherlands. We anticipate that work associated with the Olympics willbegin to flow through towards the end of the year. Ireland performed solidly,improving on the previous year's results. Spain's performance was excellent,with a substantial improvement on an already good 2006 result as we capitalisedon the investments we made to the operating infrastructure in 2005/2006.
Middle East & Africa
Our Middle East operation made the largest contribution to divisional profitand grew strongly in a buoyant market. All three of the principal countrieswhere we have offices - UAE, Qatar and Bahrain - did well and the region islooking promising for 2008. We have invested in a new depot in Abu Dhabi tofuel expected growth over the next few years and are also extending ourfootprint in the region through increased exports to north Africa, in projectssuch as the Great Man-made River pipeline project in Libya, where our equipmentis being used in the construction of massive water storage tanks along thepipeline's route.
As noted above, we invested in a start-up operation in South Africa at the beginning of 2007. The operation is performing in line with our plan, which anticipates break-even by the end of 2008.
Australasia & Far East
The performance in the Far East was poor, affected particularly by adverseconditions in Korea. Project delays also held Hong Kong and Macao back, but thePhilippines very nearly matched its record year of 2006. There are, however,signs that Macao may improve in 2008.Although the market in Australia was subdued during the first half of the year,a good recovery in the second half, led by the mineral-rich mining states ofWestern Australia, Southern Australia and Queensland, resulted in an increasedcontribution overall.PFI InvestmentsThe PFI Investments division leads all the Group's PFI activities. It managesour investment portfolio and, in many cases, delivers management services tothe Special Purpose Companies established to run the contracts. 2007 2006
Contribution to Total Operating Profit ‚£2.1m ‚£1.1m
Interest received on subordinated debt ‚£4.5m ‚£3.8m investments
‚£6.6m ‚£4.9mDuring the year we reached financial close on two contracts (Leeds BuildingSchools for the Future and Plymouth schools, where in both cases Interservewill undertake construction and provide the FM services) and were namedpreferred bidder on three more: Down & Connor and De La Salle schools, PemburyHospital, Tunbridge Wells and a second PFI contract within the Leeds BuildingSchools for the Future programme. We shall be providing FM services in thefirst two of these and both FM and construction in the third. We now have atotal of 26 PFI projects with five more at preferred bidder.Our investment commitment in the signed projects is ‚£58.4 million, of which ‚£39.1 million had been paid at 31st December. The preferred bidder projects willinvolve investment of a further ‚£15.5 million.We completed the construction of Devoran Primary School over the summer and itopened as planned for the autumn term. This was the second of two new schoolsin our Cornwall schools contract; the first, Richard Lander School, opened in2006. The project had also involved extensions, remodelling and refurbishmentfor 15 others in the county and we are now providing FM services across theentire estate. With the contract fully operational, we have a total of 20operational PFI projects. Four more are under construction and there are two inwhich we are providing interim services while construction is under way.
Beyond our five preferred bidder projects we have a strong pipeline of bids and are seeing a continued flow of opportunities coming to market.
Our PFI portfolio represents a significant source of value. For illustrativepurposes, the present value of the expected future cash flows of the currentportfolio at a range of discount rates would be:Discount rate 5.0% 6.0% 7.0% 8.0%
Projects past financial close only ‚£179.8m ‚£155.0m ‚£134.7m ‚£118.1m
Including projects at preferred ‚£197.2m ‚£168.6m ‚£145.3m ‚£126.3m bidder stage Group ServicesCosts accounted for within Group Services of ‚£16.7 million (2006: ‚£11.4million) relate to our PFI bidding activity, a range of centrally-providedservices and the Group Board. The increase in the year was due principally to ahigher level of accruals for incentive payments and share awards and toinvestments in group-wide control and communication systems, the majority ofwhich are non-recurring.OutlookOur markets remain healthy with opportunities for further growth. We delivercritical services to social infrastructure and commercial and industrial assetsat each stage in their life cycle. These are areas which are resilient when theeconomy comes under pressure. Indeed, at such times there is often a tendencyfor organisations to outsource more of their activities as they seek toincrease efficiency, and our Facilities Management and Specialist Servicesdivisions are well placed to take advantage of such a trend.Our UK public sector business is centred on areas such as health, education,defence and justice, in which the government has a continued commitment toinvestment. In the private sector our acquisition of MacLellan in 2006 enablesus to offer a broader range of facilities management skills to a wider group ofclients, while the strategic nature of the construction work we undertake forour framework partners is usually core to their future development programmes.Internationally, conditions in the Middle East remain buoyant, drivenespecially by tourism and infrastructure in Dubai and the petrochemical andindustrial sectors in Qatar and Oman respectively.With such a solid UK position, continued buoyancy in the Middle East and a goodpipeline of opportunities for each of our businesses, we remain confident thatthe Group should continue to demonstrate good progress in 2008 and beyond.
Cautionary Statement
Statements made in these Preliminary Results ("Results") reflect the knowledgeand information available at the time of their preparation. The Results containforward-looking statements in respect of the Group's operations, performance,prospects and financial condition. By their nature, these statements involveuncertainty. In particular, outcomes often differ from plans or expectationsexpressed through forward-looking statements and such differences may besignificant. Assurance cannot be given that any particular expectation will bemet. No responsibility is accepted to update or revise any forward-lookingstatement resulting from new information, future events or otherwise. Liabilityarising from anything in the Results shall be governed by English Law. Nothingin the Results should be construed as a profit forecast.
Interserve Plc
Consolidated income statement
For the year ended 31 December 2007
Year Year ended 31 ended December 2007 31 December 2006 Before Exceptional Total Before Exceptional Total exceptional items and exceptional items and items and amortisation items and amortisation amortisation of amortisation of of intangible of intangible intangible assets intangible assets assets assets Notes ‚£million ‚£million ‚£million ‚£million ‚£million ‚£million Continuing operations Revenue 1 1,738.0 - 1,738.0 1,408.5 - 1,408.5 Cost of sales (1,544.4) - (1,544.4) (1,243.9) - (1,243.9) Gross profit 193.6 - 193.6 164.6 - 164.6 Other operating 0.1 - 0.1 - - -income Administrative (138.9) - (138.9) (120.2) - (120.2)expenses Amortisation of - (4.8) (4.8) - (2.1) (2.1)acquired intangible assets Impairment of 2 - - - - (30.0) (30.0)goodwill Other 2 - - - - (12.2) (12.2)exceptional costs Total administrative (138.9) (4.8) (143.7) (120.2) (44.3) (164.5)expenses Profit on 2 - 1.0 1.0 - 1.3 1.3disposal of property and investments Operating profit 54.8 (3.8) 51.0 44.4 (43.0) 1.4 Share of result 18.5 - 18.5 11.8 - 11.8 Amortisation of - (0.3) (0.3) - - -acquired intangible assets Share of result of 18.5 (0.3) 18.2 11.8 11.8associates and joint ventures Total operating 73.3 (4.1) 69.2 56.2 (43.0) 13.2profit Investment 3 38.1 - 38.1 33.8 - 33.8revenue Finance costs 4 (38.0) - (38.0) (31.9) - (31.9) Profit before 73.4 (4.1) 69.3 58.1 (43.0) 15.1tax Tax (charge)/ 5 (21.0) 1.1 (19.9) (17.9) 3.9 (14.0)credit Profit for the 52.4 (3.0) 49.4 40.2 (39.1) 1.1year Attributable to: Equity holders of the 49.6 (3.0) 46.6 37.5 (39.1) (1.6)parent Minority 2.8 - 2.8 2.7 - 2.7interest 52.4 (3.0) 49.4 40.2 (39.1) 1.1Earnings per 7 share Basic 37.5p (1.4p) Diluted 36.9p (1.3p)
Consolidated statement of recognised income and expense For the year ended 31 December 2007
Year ended Year 31 ended 31 December December 2007 2006
Exchange differences on translation of foreign operations 3.4 (6.5)
Gain on available-for-sale financial assets -
0.2
(Losses)/gains on cash flow hedges (joint ventures) (2.0)
13.3
Gains on available-for-sale financial assets (joint 25.8
4.7ventures)
Actuarial gains on defined benefit pension 15.7
7.7schemes Deferred tax on items taken directly to equity (13.8)
(7.3)
Net income recognised directly in equity 29.1
12.1 Profit for the year 49.4 1.1 Total recognised income 78.5 13.2and expense Attributable to:
Equity holders of the parent 75.7
10.5 Minority interest 2.8 2.7 78.5 13.2 Interserve PlcConsolidated balance sheetAt 31 December 2007 2007 2006 Notes ‚£million ‚£million Non-current assets Goodwill 228.4 228.4 Other intangible assets 34.8 39.6 Property, plant and equipment 117.6 105.5 Interests in joint ventures 82.1 60.7
Interests in associated undertakings 39.3
23.3 Investments 0.1 0.1 Deferred tax asset 5.1 13.7 507.4 471.3 Current assets Inventories 15.6 15.3 Trade and other receivables 370.7 305.2 Cash and deposits 69.4 35.2 455.7 355.7 Total assets 963.1 827.0 Current liabilities Bank overdrafts and loans (4.9) (6.8) Unsecured loan notes (1.0) (1.4) Trade and other payables (478.3) (403.0) Short-term provisions (5.8) (7.0) (490.0) (418.2) Net current liabilities (34.3) (62.5) Non-current liabilities Bank loans (163.0) (140.2) Trade and other payables (17.8) (13.0) Long-term provisions (26.0) (22.3) Retirement benefit obligation 9 (83.1) (111.4) (289.9) (286.9) Total liabilities (779.9) (705.1) Net assets 183.2 121.9 Equity Share capital 10 12.5 12.4 Share premium account 10 111.9 109.3 Capital redemption reserve 10 0.1 0.1 Merger reserve 10 49.0 49.0
Hedging and translation reserves 10 38.7
18.7 Investment in own shares 10 (0.5) (0.5) Retained earnings 10 (30.1) (68.5) Equity attributable to equity holders of the parent 181.6 120.5 Minority interest 10 1.6 1.4 Total equity 183.2 121.9 Interserve Plc
Consolidated cash flow statement
For the year ended 31 December 2007
Year ended Year ended 31 December 31 December 2007 2006 Operating activities Total operating profit 69.2 13.2 Adjustments for:
Amortisation of acquired intangible 4.8
2.1assets Impairment of goodwill - 30.0
Depreciation of property, plant and 21.5
17.5equipment Gain on disposal of property and (1.0) (1.3)investments Pension payments in excess of the income (9.9) (10.4)statement charge Share of results of associates and joint (18.2) (11.8)ventures
Non-cash charge relating to share-based 2.0
0.6payments Gain on disposal of plant and equipment (8.0) (5.8) Exchange rate movements - (0.4)
Operating cash flows before movements in 60.4
33.7working capital Decrease/(increase) in inventories 0.1 (0.2) Increase in receivables (65.7) (21.8) Increase in payables 70.2 37.6 Cash generated by operations 65.0 49.3 Taxes paid (4.5) (9.2)
Net cash from operating activities 60.5
40.1 Investing activities Interest received 6.5 5.5 Increase in investment in associate (9.1)
(0.8)
Dividends received from associates and 8.4
3.5joint ventures
Proceeds on disposal of property, plant 21.5
14.0and equipment Purchases of property, plant and (43.8) (30.8)equipment Purchase of subsidiary undertaking -
(97.6)
Investment in joint ventures-PFI (2.8) (4.5)investments Disposal of investment - 0.7
Disposal of investment in associates and -
1.6joint ventures Net cash used in investing activities (19.3) (108.4) Financing activities Interest paid (9.1) (6.7) Dividends paid to equity shareholders (19.3)
(17.5)
Dividends paid to minority shareholders (2.6) (2.7) Issue of shares 2.7 0.5 Increase in bank borrowings 22.8 97.1 Repayments of obligations under finance (0.8) (0.4)leases Increase in finance leases 1.3 - Redemption of loan notes (0.4) (0.8)
Net cash (used in)/from financing (5.4)
69.5activities
Net increase in cash and cash equivalents 35.8
1.2
Cash and cash equivalents at beginning of 28.4
27.7period Effect of foreign exchange rate changes 0.3
(0.5)
Cash and cash equivalents at end of 64.5
28.4period
Cash and cash equivalents comprise
Cash and deposits 69.4 35.2 Bank overdrafts (4.9) (6.8) 64.5 28.4
Reconciliation of net cash flow to
movement in net debt
Net increase in cash and cash equivalents 35.8
1.2 Increase in bank borrowings (22.8) (97.1) Obligations under finance leases assumed with - (1.9)acquisition of subsidiary
Repayments of obligations under finance 0.8
0.4leases Increase in finance leases (1.3) - Redemption of loan notes 0.4 0.8 Change in net debt resulting from cash 12.9 (96.6)flows Effect of foreign exchange rate changes 0.3
(0.5)
Movement in net debt during the period 13.2 (97.1) Net debt - opening (114.8) (17.7) Net debt - closing (101.6) (114.8)Basis of preparation
The financial information in this announcement, which was approved by the Board of Directors on 11 March 2008, does not constitute the Company's statutory financial statements for the years ended 31 December 2007 or 2006 but is derived from these accounts.
Statutory accounts for 2006 have been delivered to the Registrar of Companiesand those for 2007 will be delivered following the Company's annual generalmeeting. The auditors have reported on these accounts; their reports wereunqualified and did not contain statements under section 237(2) or (3) of theCompanies Act 1985.While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRS), this announcement does not itself contain sufficient information tocomply with IFRS. The company expects to publish full financial statementsthat comply with IFRS in April 2008. The accounting policies used in thispreliminary announcement are consistent with those that the Directors have usedin the Group's audited financial statements for the year ended 31 December2006.
1. Business and geographical segments
Business Segments
Following the reorganisation of the Group into five operating divisions, and inorder to assist readers in understanding the year-on-year performance, we havereanalysed the comparative segmental information for 2006. There is no changein the overall Group reported results. Revenue Revenue Result Result 2007 2006 2007 2006 ‚£million ‚£ ‚£million ‚£million million Facilities Management 733.1 649.5 27.9 13.9 Specialist Services 190.2 137.4 6.7 6.6 Project Services 759.5 570.8 29.4 23.4 Equipment Services 132.0 108.5 23.9 22.6
Joint ventures - PFI Investments - - 2.1
1.1 Inter-segment elimination (76.8) (57.7) - - 1,738.0 1,408.5 90.0 67.6 Group Services (16.7) (11.4)
Profit on disposal of property 1.0
1.3and investments Amortisation of acquired (5.1) (2.1)intangible assets Impairment of goodwill - (30.0) Other exceptional costs - (12.2) 69.2 13.2 Investment revenue 38.1 33.8 Finance costs (38.0) (31.9) Profit before tax 69.3 15.1 Tax (19.9) (14.0) Profit after tax 49.4 1.1Facilities Management revenue includes ‚£7.4 million in respect of works bills(2006: ‚£28.2 million). Works bills are costs relating to services and materialsprocured on behalf of the Ministry of Defence on which no margin is allowed butfor which a management fee is received. Segment assets Segment liabilities Net (liabilities) assets / 2007 2006 2007 2006 2007 2006 ‚£ ‚£ ‚£million ‚£million ‚£ ‚£million million million million Facilities Management 181.8 211.3 (203.1) (228.3) (21.3) (17.0) Specialist Services 37.5 15.4 (45.4) (21.0) (7.9) (5.6) Project Services 200.2 151.8 (287.7) (239.3) (87.5) (87.5) Equipment Services 143.3 126.7 (31.2) (32.6) 112.1 94.1 Joint ventures - PFI 96.2 64.8 (14.1) (4.1) 82.1 60.7Investments 659.0 570.0 (581.5) (525.3) 77.5 44.7 Group Services 231.9 274.1 (26.2) (83.5) 205.7 190.6 890.9 844.1 (607.7) (608.8) 283.2 235.3 Net debt (101.6) (114.8) Net assets (excluding 181.6 120.5minority interest) Impairment Depreciation Additions to losses and property, plant recognised in amortisation and equipment and income intangible assets 2007 2006 2007 2006 2007 2006 ‚£ ‚£ ‚£ ‚£ ‚£ ‚£ million million million million million million Facilities - - 6.2 4.4 5.6 5.2Management Specialist - - 0.4 0.3 2.0 0.3Services Project - - 1.2 0.8 4.6 1.3Services Equipment - - 13.3 11.6 31.0 23.5Services Joint - - - - - -ventures - PFI Investments - - 21.1 17.1 43.2 30.3 Group - (30.0) 0.4 0.4 0.6 0.5Services Acquired - - 5.1 2.1 3.4 41.7intangible assets - (30.0) 26.6 19.6 47.2 72.5Geographical SegmentsFacilities Management and Specialist Services are predominantly based in theUnited Kingdom. The Project Services division is located in the United Kingdomand the Middle East. Equipment Services has operations in all of the geographicsegments listed below.Following the decision to separately disclose inter-segment sales, and in orderto assist readers in understanding the year-on-year performance, we havereanalysed the comparative segmental information for 2006. There is no changeto the overall group reported results.
The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services:
Revenue by Total operating geographical market profit 2007 2006 2007 2006 ‚£million ‚£ ‚£ ‚£ million million million United Kingdom 1,704.2 1,378.1 51.6 35.4 Rest of Europe 28.0 24.8 4.9 4.6 Middle East & Africa 39.7 23.3 25.3 19.4 Australasia 26.4 23.9 6.1 5.7 Far East 8.5 10.0 (2.3) (0.3) Americas 8.0 6.1 2.3 1.7 Inter-segment elimination (76.8) (57.7) - - 1,738.0 1,408.5 87.9 66.5 Joint ventures - PFI 2.1 1.1 Investments Group Services (16.7) (11.4) Profit on disposal of property 1.0 1.3 and investments Amortisation of acquired (5.1) (2.1) intangible assets Impairment of goodwill - (30.0) Other exceptional costs - (12.2) 1,738.0 1,408.5 69.2 13.2 Additions to Carrying amount of property, plant segment assets/ and equipment and (liabilities) intangible assets 2007 2006 2007 2006# ‚£ ‚£ ‚£ ‚£ million million million million United Kingdom 19.5 11.7 (128.0) (116.1) Rest of Europe 7.1 4.4 25.1 17.6 Middle East & Africa 9.8 3.3 54.2 37.5 Australasia 2.4 3.0 19.8 20.3 Far East 3.1 6.6 18.0 18.9 Americas 1.3 1.3 6.3 5.8 43.2 30.3 (4.6) (16.0) Joint ventures - PFI - - 82.1 60.7 Investments Group Services 0.6 0.5 205.7 190.6 Acquired intangible assets 3.4 41.7 - - 47.2 72.5 283.2 235.3 Net debt (101.6) (114.8) Net assets (excluding minority 181.6 120.5 interest) # Restated 2006 comparative2. Exceptional items 2007 2006 ‚£million ‚£million
Profit on disposal of property and investments 1.0
1.3 Impairment of goodwill relating to Industrial - (30.0)Services Other exceptional costs Cost of investigation of the prior year - (8.3)accounting misstatement Restructuring costs following the acquisition - (3.9)of MacLellan Total other exceptional costs - (12.2)3. Investment revenue 2007 2006 ‚£million ‚£million Bank interest 1.3 1.5 Other interest 5.2 4.0
Return on defined benefit pension 31.6
28.3assets (note 9) 38.1 33.84. Finance costs 2007 2006 ‚£million ‚£million Bank loans and overdrafts and other loans (9.1) (6.7)repayable Interest cost on defined benefit pension (28.9) (25.2)obligations (note 9) (38.0) (31.9)5. Tax 2007 2006 ‚£million ‚£million Current tax - UK 14.2 6.6 Current tax - Overseas 3.7 1.9 Deferred tax 2.0 5.5 Tax charge for the year 19.9 14.0
The UK standard rate of corporation tax is 30 per cent (2006: 30 per cent). Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
The total charge for the year can be reconciled to the profit per the incomestatement as follows: 2007 2006 ‚£million % ‚£million % Profit before tax 69.3 15.1 Tax at the UK income tax rate of 30% 20.8 30.0% 4.5 29.7%(2006: 30%) Tax effect of expenses not deductible in 0.7 1.0% 0.1 0.7%determining taxable profit Tax effect of goodwill impairment - 0.0% 9.0
59.6%
Effect of different tax rates of 0.1 0.1% (0.2)
(1.3%)
subsidiaries operating in other
jurisdictions
Effect of overseas losses unrelieved 1.0 1.4% 0.5
3.3%
Impact due to change of tax rate (1.2) (1.7%) -
0.0% Prior period adjustments (1.5) (2.2%) 0.1 0.7%
Tax charge and effective tax rate for the 19.9 28.7% 14.0 92.7% year
In addition to the income tax charged to the income statement, the followingdeferred tax charges/ (credits) have been recorded directly to equity in theyear: 2007 2006 ‚£million ‚£million
Tax on actuarial gain on pension liability 5.4
2.3
Impact of the change in tax rate relating to the deferred 1.2
-tax on the pension liability Tax on fair value adjustment on cash flow hedges (joint (0.6) 4.0ventures)
Tax on the fair value adjustment on available for sale 7.8
1.5
financial assets within the PFI Special Purpose Companies Tax on the intrinsic value of share-based payments - (0.5) Total 13.8 7.36. Dividends 2007 2006 ‚£million ‚£million
Amounts recognised as distributions to equity holders
in the period:
Final dividend for the year ended 31 December 2006 of 13.1 11.5 10.6p (2005: 10.1p) per share
Interim dividend for the year ended 31 December 2007 6.2
6.0
of 5.0p (2006: 4.8p) per share
19.3 17.5
Proposed final dividend for the year ended 31 December 14.0 13.1 2007 of 11.2p (2006: 10.6p) per share
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
7. Earnings per share
The calculation of the basic, diluted and headline earnings per share is basedon the following data:Earnings 2007 2006 ‚£million ‚£million
Earnings for the purposes of basic earnings per share 46.6 (1.6) being net profit/(loss) attributable to equity holders
of the parent Profit on sale of property and investments (1.0)
(1.3)
Amortisation of acquired intangible assets 5.1
2.1 Impairment of goodwill - 30.0 Other exceptional costs - 12.2 Tax effect of above adjustments (1.1) (3.9) Headline earnings 49.6 37.5 Earnings for the purposes of diluted earnings per 46.6 (1.6)share Number of shares 2007 2006 Number Number
Weighted average number of ordinary shares for the 124,221,097 118,480,953 purposes of basic earnings per share
Effect of dilutive potential ordinary shares:
Share options and awards 2,225,387 1,253,393
Weighted average number of ordinary shares for the 126,446,484 119,734,346 purposes of diluted earnings per share
p p Headline earnings per share 39.9 31.7 Basic earnings per share 37.5 (1.4) Diluted earnings per share 36.9 (1.3)
8. Results from the Joint-ventures-PFI investmentsand associated undertakings
Results from the Joint-ventures-PFI investments were as follows:
2007 2006 ‚£million ‚£million Revenues 69.0 55.6 Operating profit 3.6 3.1 Net interest payable (0.6) (1.5) Taxation (0.9) (0.5) Profit 2.1 1.1 Dividends - (0.5) Retained profits 2.1 0.6
Results from the associates were as follows:
2007 2006 ‚£million ‚£million Revenues 193.2 161.5 Profit after tax 16.1 10.7
9. Retirement benefitschemes
The principal pension schemes within the Group have been valued for thepurposes of IAS 19 Employee Benefits. For each of these pension schemesvaluation information has been updated by Lane Clark & Peacock LLP, qualifiedindependent actuaries, to take account of the requirements of IAS 19 in orderto assess the liabilities of the various schemes as at 31 December 2007.Actuarial gains and losses are recognised in full in the period in which theyoccur. As permitted by IAS 19, actuarial gains and losses are recognisedoutside profit or loss and presented in the statement of recognised income andexpense. The liability recognised in the balance sheet represents the presentvalue of the various defined benefit obligations, as reduced by the fair valueof plan assets. The cost of providing benefits is determined using theProjected Unit Credit Method.
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.
Assumptions 2007 2006 Retail price inflation 3.3% pa 2.9% pa Discount rate 5.8% pa 5.2% pa
Pension increases in payment:
LPI/RPI 3.2%/3.3% 2.9%/2.9% Fixed 5% 5.00% 5.00% 3% or RPI if higher (capped at 3.60% 3.50% 5%) General salary increases 4.05 - 4.80% 3.65 - pa 4.40% pa The expected rate of return on assets for the financial year ending 31 December2007 was 7.0% pa (2006: 7.4%). The rate is derived by taking the weightedaverage of the long-term expected rate of return on each of the asset classesthat the pension schemes were invested in at 31 December 2006. For 2007 adeduction of 0.4% (2006: 0.4%) was then made from the expected return on assetsfor the expenses incurred in running the schemes (where these were not metseparately).The post-retirement mortality assumption used to value the benefit obligationallows for future improvements in mortality and implies for the majority of theobligation (that associated with the Interserve Pension Scheme) that a 65 yearold current pensioner is expected to live until age: male 84.8 (2006: age 84.1)and female 86.9 (2006: age 86.9). A future pensioner who is currently aged 45and retires at age 65 is expected to live until age: male 87.2 (2006: age 85.1)and female 88.4 (2006: age 87.9).
The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:
2007 2006 2005 2004 ‚£million ‚£million ‚£million ‚£million Present value of defined 563.4 557.2 514.6 440.5benefit obligation Fair value of scheme assets (480.3) (445.8) (382.0) (311.6) Liability recognised in the 83.1 111.4 132.6 128.9balance sheet
The amounts recognised in the income statement are as follows:
2007 2006 ‚£million ‚£million Employer's part of current 13.8 12.2service cost Interest cost 28.9 25.2 Expected return on scheme assets (31.6) (28.3) Total expense recognised in 11.1 9.1profit and loss
The actual return on the schemes' assets over the year was ‚£24.8 million (2006: ‚£50.5 million).
The current allocation of the schemes' assets is as follows:
2007 2006 Current Fair value Current Fair value allocation ‚£million allocation ‚£million Equity instruments 70% 337.5 82% 366.1 Debt instruments 28% 132.8 15% 67.7 Other 2% 10.0 3% 12.0 100% 480.3 100% 445.8A reconciliation of the present value of the defined benefit obligation is asfollows: 2007 2006 ‚£million ‚£million Opening defined benefit obligation 557.2
514.6
Employer's part of current service cost 13.8
12.2 Interest cost 28.9 25.2
Contributions by plan participants 4.5
6.1 Actuarial (gain)/loss (22.5) 14.5 Benefits paid (18.5) (15.4) Closing defined benefit obligation 563.4
557.2
A reconciliation of the fair value of the schemes' assets is as follows:
2007 2006 ‚£million ‚£million Opening fair value of the schemes' assets 445.8
382.0
Expected return on plan assets 31.6
28.3 Actuarial (loss)/gain (6.8) 22.2
Contributions by the employer 23.7
22.6
Contributions by plan participants 4.5
6.1 Benefits paid (18.5) (15.4) Closing fair value of the schemes' assets 480.3 445.8 2007 2006 2005 2004 ‚£million ‚£million ‚£million ‚£million
Experience adjustments on the schemes'
assets Amount of (loss)/gain (6.8) 22.2 42.7 11.7
Percentage of the schemes' assets 1% (5%) (11%)
(4%)
Experience adjustments on the schemes'
liabilities Amount of gain/(loss) 2.0 (13.4) 0.7 1.5
Percentage of the present value of the 0% (2%) 0%
0%schemes' liabilities
Loss due to changes in assumptions
Amount of gain/(loss) 20.5 (1.1) (47.8) (15.3)
Percentage of the present value of the 4% 0% 9%
3%schemes' liabilities
Expense to be recognised immediately
outside profit or loss Actuarial gains and (losses) 15.7 7.7 (4.4) (2.1) The cumulative amount of gains and 16.9 1.2 (6.5)
(2.1)
(losses) recognised in the statement of recognised income and expense is:
Based on current contribution rates and payroll, the Group would contribute ‚£25 million to the various defined benefit arrangements during 2008.
10. Reconciliation of movements in equity
Share Share Capital Merger Hedging and
Investment Retained Attributable Minority Total
capital premium redemption reserve translation in own earnings to equity interest reserve reserves shares holders of the parent ‚£ ‚£ ‚£million ‚£ ‚£million
‚£million ‚£million ‚£million ‚£million ‚£
million million million million Balance at 1 11.4 108.8 0.1 16.4 12.7 (0.5) (56.1) 92.8 1.4 94.2January 2006 Exchange - - - - (6.5) - - (6.5) - (6.5)differences on translation of foreign operations Gain on - - - - - - 0.2 0.2 0.2available-for-sale financial assets Gains on cash flow - - - - 13.3 - - 13.3 - 13.3hedges (joint ventures) Gains on - - - - 4.7 - - 4.7 - 4.7available-for-sale financial assets (joint ventures) Actuarial gains on - - - - - - 7.7 7.7 - 7.7defined benefit pension schemes Deferred tax on - - - - (5.5) - (1.8) (7.3) - (7.3)items taken directly to equity Net income - - - - 6.0 - 6.1 12.1 - 12.1(expense) recognised directly in equity in the year Profit for the - - - - - - (1.6) (1.6) 2.7 1.1year Dividends paid - - - - - - (17.5) (17.5) (2.7) (20.2) Shares issued 1.0 0.5 - 32.6 - - - 34.1 - 34.1 Share-based - - - - - - 0.6 0.6 - 0.6payments Balance at 31 12.4 109.3 0.1 49.0 18.7 (0.5) (68.5) 120.5 1.4 121.9December 2006 Exchange - - - - 3.4 - - 3.4 - 3.4differences on translation of foreign operations Losses on cash - - - - (2.0) - - (2.0) - (2.0)flow hedges (joint ventures) Gains on - - - - 25.8 - - 25.8 - 25.8available-for-sale financial assets (joint ventures) Actuarial gains on - - - - - - 15.7 15.7 - 15.7defined benefit pension schemes Deferred tax on - - - - (7.2) - (6.6) (13.8) - (13.8)items taken directly to equity Net income - - - - 20.0 - 9.1 29.1 - 29.1(expense) recognised directly in equity in the year Profit for the - - - - - - 46.6 46.6 2.8 49.4year Dividends paid - - - - - - (19.3) (19.3) (2.6) (21.9) Shares issued 0.1 2.6 - - - - - 2.7 - 2.7 Share-based - - - - - - 2.0 2.0 - 2.0payments Balance at 31 12.5 111.9 0.1 49.0 38.7 (0.5) (30.1) 181.6 1.6 183.2December 2007
The ‚£49.0 million merger reserve represents ‚£16.4 million premium on the sharesissued on the acquisition of Robert M. Douglas Holdings PLC in 1991 and ‚£32.6million premium on shares issued in the acquisition of MacLellan plc on 20 July2007. The own shares reserve represents the cost of shares in Interserve Plcheld by the trustee of the How Group Employee Benefit Trust. The market valueof these shares at 31 December 2006 was ‚£1,205,000 (2006: ‚£924,000).
11. Acquisition
On 11 June 2007 the Group acquired a 49% beneficial interest in the Madina group, a Qatari industrial services business, for a cash consideration of ‚£9.1 million. Due to the nature and the extent of the Group's influence the investment is treated as an associate.
The carrying value of the net assets acquired have been valued according to theacquisition accounting requirements of IFRS 3 and the separate fair values ofintangible assets have been identified and recognised with the residual excessover the net assets acquired being recognised as goodwill. Acquisition Fair value Fair balance adjustments value sheet ‚£million ‚£million ‚£million Intangible assets - 3.4 3.4 Property, plant and equipment 1.7 (0.5) 1.2 Inventories 0.4 - 0.4 Trade and other receivables 1.3 - 1.3 Cash & bank balances 0.6 - 0.6 Trade and other payables (1.0) (0.1) (1.1) Other liabilities (0.2) - (0.2) Net assets 2.8 2.8 5.6 Goodwill 3.5 Consideration 9.1Included in the fair value adjustments are amounts based on managementestimates relating to events that have occurred prior to acquisition. Certainintangible assets and their related deferred tax charge have been separatelyidentified and recognised using appropriate valuation techniques based on thefair value of forecast future cash flows.
The resultant goodwill from the acquisition represents the future economic benefits arising from assets that are not capable of being individually identified and separately recognised.
INTERSERVE PLC