12 Mar 2007 07:00
PRELIMINARY RESULTS YEAR ENDED 31 DECEMBER 2006
Interserve, the services, maintenance and building group, announces its preliminary results for the year ended 31 December 2006.
Revenue up 16 per cent to ‚£1,408.5 million (2005: ‚£1,214.5 million)
Profit before tax, exceptional items and amortisation: up 61 per cent to ‚£
58.1 million (2005: ‚£36.0 million) [after exceptional items and amortisation: ‚£15.1 million (2005: ‚£36.2 million)] Net cashflow from operating activities up 15 per cent to ‚£40.1 million (2005: ‚£34.8 million) Earnings per share before exceptional items and amortisation: up 68 per cent to 31.7p (2005: 18.9p) [after exceptional items and amortisation: (1.4)p (2005: 19.0p)] Full-year dividend: increased by 4.8 per cent to 15.4p (2005: 14.7p)
Chief Executive Adrian Ringrose commented,
"Our trading performance emphatically demonstrated the strength of each ofInterserve's three main operating divisions, with headline earnings per sharerising by 68 per cent to 31.7 pence (2005: 18.9 pence). We also made theexciting acquisition of MacLellan Group plc, which opens up new markets,augments the range of services we can offer to existing clients and enables usto bid for work using the combined skills and scale of the two organisations.The integration of MacLellan and of the Industrial Services division into ourFacilities Services operation is well advanced."In addition to trading strongly we won a notable amount of new business during2006 which will generate revenue going forward. Our future workload at 31December had grown to ‚£5.6 billion, up 17 per cent on 2005 (‚£4.8 billion). Withthe underlying strength of the business demonstrated in our 2006 performance,our record future workload and the opportunities created by our acquisition ofMacLellan, Interserve's future prospects are encouraging." - Ends -
For further information please contact:
Adrian Ringrose, Chief Executive 0118 932 0123
Tim Jones, Group Finance Director 0118 932 0123
Neil Bennett / Elizabeth Morley 020 7379 5151
The Maitland Consultancy
Chairman's statement
Interserve's overall trading performance in 2006 was very strong, resulting inheadline profit(1) growth of 61.4 per cent to ‚£58.1 million (2005: ‚£36.0 million).The Group's strategy was significantly advanced through the acquisition ofMacLellan Group plc, strengthening access to the private sector facilitiesmanagement (FM) market and adding further breadth to our service capabilities.
Our results are summarised in the table below:
2006 2005 Growth Revenue ‚£1,408.5m ‚£1,214.5m 15.9% Headline profit ‚£58.1m ‚£36.0m 61.4% Profit before tax ‚£15.1m ‚£36.2m (58.3)% Net cashflow from operating ‚£40.1m ‚£34.8m 15.2%activities
Headline earnings per share(2) 31.7p 18.9p 67.7% Basic earnings per share (1.4)p 19.0p We have concluded the operational and strategic review of our IndustrialServices business following the forensic investigation previously reported. Aspart of this we have reviewed the carrying value of goodwill for this business,for which an impairment of ‚£30 million is reflected in profit before tax.
People
2006 was a year of considerable progress for the Group, involving a significantacquisition and an extensive reorganisation together with further impressiveorganic growth despite the setback in Industrial Services. I am greatlyimpressed with the way our people responded at all levels, both in terms ofmanaging change and also with their determination to continue deliveringservices, developing client relationships and winning new business. It istestimony to their efforts that Interserve has performed so well and, on behalfof the Board, I should like to thank them for their ongoing dedication.
Prospects
The Group's outstanding trading performance demonstrates both its skills andits resilience. While we remain dependent on the continued buoyancy of ourmarkets, the additional opportunities available through the MacLellanacquisition, the strength of our businesses and a ‚£5.6 billion future workloadgive the Board confidence in the prospects for the Group's continued growth.
Dividend
The directors are therefore recommending a final dividend of 10.6p (2005: 10.1p), bringing the total dividend for the year to 15.4p (2005: 14.7p). Subject to shareholder approval at the Annual General Meeting, the final dividend will be paid on 8 June 2007 to shareholders on the register at the close of business on 23 March 2007.
Lord BlackwellChairman12 March 2007(1) Headline profit comprises profit before taxation of ‚£15.1m (2005: ‚£36.2m)adjusted for the impact of ‚£30m impairment of goodwill (2005: ‚£nil); ‚£2.1mamortisation of intangible assets (2005: ‚£nil); ‚£12.2m costs associated withintegrating MacLellan and professional costs associated with the accountingmisstatements in Industrial Services (2005: ‚£nil); and, set against thesecosts, an exceptional gain of ‚£1.3m from the sale of a PFI asset (2005: ‚£0.2mfrom property disposals).
(2)Headline earnings per share are based on Headline profit as defined in footnote 1 above (see note 7 to the accounts).
Operational reviewOur trading performance emphatically demonstrated the strength of each ofInterserve's three main operating divisions. Headline earnings per share roseby 68 per cent to 31.7 pence (2005: 18.9 pence). We also made the excitingacquisition of MacLellan, which opens up new markets, augments the range ofservices we can offer to existing clients and enables us to bid for work usingthe combined skills and scale of the two organisations. We have made goodprogress with the integration of MacLellan and of the Industrial Servicesdivision into our Facilities Services operation.In addition to delivering an excellent performance during the year weaccelerated the pace at which we won new business, which will support ourgrowth in the future. Our future workload on 31 December 2006 was ‚£5.6 billion(2005: ‚£4.8 billion) - over half the increase coming from organic growth, witharound ‚£360 million being the acquired MacLellan order book.
Facilities Services
Facilities Services has developed an excellent reputation through the provision and management of an integrated range of FM services to the public sector.
Results summary:
2006 2005
Contribution to Total Operating Profit ‚£21.4m ‚£17.8m
Revenue (net of works bills)(3) ‚£447.8m ‚£383.3m Margin 4.8% 4.6%This strong performance - with an increase of 20 per cent in total operatingprofit - resulted both from new contracts and from our continued success ingrowing existing contracts. Our South East Prime contract, covering the MoD'sestate in London and the south-east of England, was a notable example of suchgrowth: in 2006, its first full-year of operation, revenue more than doubled.
(3) Works bills (pass-through costs on certain MoD contracts on which no margin can be earned) were ‚£28.2m (2005: ‚£60.9m).
Our new contracts are a mixture of those which have an immediate impact and those which will do so in future years once the facilities in which we shall deliver our services have been constructed. They include:
* Croydon Council: a ‚£60 million, seven-year contract providing a broad range
of services in over 600 properties from the Town Hall to libraries, youth
clubs and sports grounds (where we not only maintain the building fabric,
plant and equipment but also provide services such as security, cleaning
and catering for the buildings' occupants).
* MoD Cyprus Prime Contract: worth ‚£100 million over five years. Interserve
is providing maintenance, repair and minor construction services covering
buildings and infrastructure including roads, water and power.
* Holy Cross College PFI, Strabane, Northern Ireland: we shall deliver
services worth ‚£15 million over the college's 25-year life beginning in
2008.
* MoD Corsham PFI - preferred bidder: a ‚£180 million contract where, once
constructed, we shall provide a range of FM services to this key
communications centre over its 25-year operational phase.
* Metropolitan Police: worth ‚£150 million over seven years, this contract for
a broad range of services begins in April 2007 and continues the
relationship Interserve has had with the client since 1999.
* Tunbridge Wells (Pembury) Hospital PFI - first choice bidder: once the new
seven-storey hospital has been built we shall deliver FM services over a
30-year period.
* Derry Schools PFI, Northern Ireland - preferred bidder: we shall provide FM
services in two new schools over 25 years following their construction.
The integration of MacLellan and of Industrial Services with our FacilitiesServices operations is at an advanced stage. We have now reorganised into twobusiness streams: Facilities Management (FM) and Specialist Services. FMprovides a range of services which we "bundle" together and manage on behalf ofour clients, while Specialist Services offers a number of individual servicesto clients with discrete requirements (although we also incorporate ourSpecialist Services into FM contracts where appropriate). The two sections ofthe division already share many of the same back-office and support functionsand this will increase as the integration of the businesses reaches completion.We expect to achieve ‚£3 million of annualised cost savings as a result of
thisintegration programme.MacLellan
Results summary (there are no 2005 comparators):
20 July - 31 December 2006 Contribution to Total Operating Profit ‚£5.2m Revenue ‚£114.1m Margin 4.6%
This is in line with our expectations at the time of acquisition.
Amongst the new work secured in 2006 are an integrated shopping centremanagement contract for PRUPIM's (part of Prudential plc) portfolio of 14retail schemes, a two-year renewal of the contract to clean all of Tesco'sstores in Eire and a three-year contract with Cable and Wireless covering 72sites in the UK. MacLellan's pedigree was underscored by the PFM (Premises andFacilities Management) Awards 2006 where we won in three out of 12 categories.MacLellan is already making a significant contribution to the Group. We arecross-selling its services, particularly the specialist security and windowcleaning capabilities, into both existing and new contracts such as UniversityCollege London Hospitals, Network Rail and the London Borough of Croydon. Thishas so far generated revenue of ‚£7 million. The benefits of combining theskills of both organisations have already been proven in securing contractssuch as those with the Metropolitan Police, Daimler Chrysler, the Office forNational Statistics and Fujitsu-Siemens, worth over ‚£160 million in aggregate.
Industrial Services
Industrial Services, now integrated within the Facilities Services division,provides specialised, maintenance-led services on industrial and similar sites.It also supplies access equipment to these sites where required.
Results summary:
2006 2005 Contribution to Total Operating ‚£(6.1)m ‚£(5.4)mProfit Revenue ‚£154.1m ‚£148.9m Margin (4.0)% (3.6)%As previously reported, upon uncovering accounting misstatements in thedivision we made wide-ranging changes to the management team. These involvedthe secondment of a number of senior managers from across the Group andsubsequently the recruitment of external personnel to provide leadership, toenhance operational, commercial and financial control measures and to effectthe assimilation of the business into the established review and reportingsystems of the Facilities Services division.In light of our reappraisal of Industrial Services' historic profitability wehave undertaken an operational and strategic review of the division's futureprospects. This has included a critical evaluation of the contract and costbases, together with a root-and-branch review of the organisational structureand, as a result of integrating the business into our Facilities Servicesoperations, the amalgamation of the two back-office support infrastructures. Wehave concluded that the industrial FM market remains attractive, particularlyfor a business with the broad service range that we offer. With a moreefficient organisational structure and benefiting from improved businessdevelopment focus, we judge that it is capable of making a profitablecontribution to the Group's future results and are implementing our plansaccordingly.
We have continued to win work with new and existing clients despite the challenges faced by the business during the year. These include:
* Two further contracts with Scottish Power where we are now carrying out overhead line refurbishment on three separate lines; * We have continued our relationship with BAE Systems, winning a further contract to provide the access equipment and conduct the blasting and
painting in all machinery spaces and deckheads on new Type 45 destroyers
for the Royal Navy.
* A further contract with long-term client Urenco to provide mechanical and
electrical maintenance and installation, structural steelwork, painting,
insulation and other services at its state-of-the-art uranium enrichment
site at Capenhurst in the north-west of England.
* A two-year framework agreement with Central networks for the provision of
high-voltage transmission refurbishment services to its Eastern area
substations and underground and overhead cables.
* A contract awarded by North London Waste Authority to deliver Insulation
Services on its Edmonton Solid Waste Incineration Plant for a three-year
period with a two-year option to extend.
The industrial sector is still comparatively young in its use of outsourced services, and we believe that our consolidation model, where we displace several single-service providers and give the client one point of contact and improved co-ordination of services, is one the market is finding highly attractive.
Project Services
Project Services works in close collaboration with clients in the UK and certain overseas markets, providing professional services to lead the design and construction process in the creation of a broad range of buildings and infrastructure.
Results summary: 2006 2005 Contribution to Total Operating ‚£23.4m ‚£18.3mProfit - UK ‚£12.7m ‚£12.2m - International ‚£10.7m ‚£6.1m Revenue ‚£556.0m ‚£514.2m Margin (UK only) 2.3% 2.4%The division performed very well, with total operating profit rising more than25 per cent. The majority of this came from the impressive growth in ourinternational operations in the Middle East, which have continued to benefitfrom the ongoing demand for reliable, high quality construction of the type weare well placed to deliver. Our UK operation maintained its sound tradingrecord, with increased profits at a stable margin.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. Wedeliver these through our highly efficient network of regional offices, whichare able to call on local resources as necessary as well as having the back-upof our central functions. Framework agreements are a case in point, where ourcentral management team interacts with the client, architects and otherconsultants while the regional teams manage on-site delivery and theperformance of the supply chain. We undertake more extensive building work,including PFI contracts such as prisons and schools and the more complexprojects under ProCure21 for the NHS, through our Strategic Projects unit.In all cases the feature of our service that clients value most highly is ourability to deliver logistically-complex projects consistently, on time and tobudget. Among the larger UK contracts won in 2006 are: * Two major educational projects: + Plymouth Schools PFI - preferred bidder: a primary school and a ground-breaking `all-through school' which brings together an early-years, primary, secondary and specialist school on a single
campus. Once these are constructed we shall deliver FM services over a
25-year period. This contract has since reached financial close.
+ Leeds Building Schools for the Future - preferred bidder: we shall
initially be creating 14 schools with a capital works value of ‚£220
million and shall then provide FM services over 25 years. * Addiewell Prison PFI: we are building a ‚£70 million facility for the Scottish Prison Service to house 700 prisoners. * Four framework agreements with an aggregate value of ‚£400 million:
+ Welsh Health Estates' programme Designed for Life: Building for Wales.
+ The BBC, working across its UK portfolio. + Barclays, refurbishing offices and branches throughout the country. + BT, developing exchanges to form part of BT's 21st Century Network.
* NHS Procure Scotland, Fife: worth ‚£40 million and involving phased work at
two major hospitals linked to a separate PPP development.
Each of our principal associate companies in Qatar, the United Arab Emiratesand Oman (where we increased our holding in the associate from 33 to 49 percent), contributed strongly to Project Services' outstanding internationalperformance. We completed several major projects including three works packagesat the existing Doha airport, the majority of a series of 49 electricitydistribution substations throughout Qatar, the addition of new exhibition hallsat the Dubai World Trade Centre and an engineer-procure-commission (EPC)contract at the Sohar refinery in Oman involving the creation of various plantand general buildings, substations and other facilities such as a laboratory,medical centre, mosque and fire station.
We also won a number of significant new contracts in the Middle East during the year including:
* In Qatar: + The provision of airline facilities at the New Doha International Airport. + The construction of two main power stations and a further 35 substations across the country. * In the UAE: + We have begun building a 554-room hotel complex as part of a staged programme based on a partnering agreement with Majid Al Futtaim Hospitality.
+ We are creating two new championship golf courses - "Fire" and "Earth"
- designed by Greg Norman near Dubailand. * In Oman our success at the Sohar Industrial Complex continues with: + a contract to build a power station for an aluminium smelter plant and + a further EPC project associated with an aromatics chemical plant.
Equipment Services
Equipment Services provides temporary structural equipment and the engineering designs for its use in complex infrastructure projects.
Results summary:
2006 2005 Contribution to Total Operating ‚£22.6m ‚£20.5mProfit Revenue ‚£108.3m ‚£107.2m Margin 20.9% 19.1%We maintained a healthy level of investment in our equipment fleet and this,combined with the strategic development of our Middle East operations, hascontributed to the growth in both total operating profit and margin in 2006,following the already excellent performance of 2005.The business generates revenue through both hire contracts and equipment sales(of both new and used components). The relative proportions of these remainedlargely unchanged from 2005 and followed the typical pattern, with slightlymore revenue coming from hire than sale. Some of the larger projects undertakenin 2006 were:
* Dubai Mall: when complete this is scheduled to be the world's largest
shopping centre. We are still involved in the project and have a total of
some 14,000 tonnes of equipment on site covering many of our different product ranges. * Al Hamad Hospital, Qatar: based primarily on the Alshor Plus shoring system, a variety of "flying" and other tables were used in conjunction with heavily loaded tall supports to help creat the Hamad City Main
Hospital and its car park. Once completed this will be the largest hospital
complex in the world.
* The Pearl: our equipment is being used to make 26 bridges to give access to
this huge land reclamation project off the coast of Qatar. It is the biggest bridge-building project in the world. * Tricastle, Ireland: we hired out 4,500 square metres of formwork for a
10-month period to enable our client to create a multi-million euro mixed
development consisting of a shopping centre, hotel, office space and apartments. * Ciopsa Bridge, Spain: in a complex piece of engineering design and
implementation, we provided formwork tables (and supports) which were moved
using electric motors and cables to create a series of spans in four viaducts along a section of motorway running from Valencia into France. * East Tsing Yi viaduct, Hong Kong: this is part of the Route 8 project
linking Sha Tin in the Eastern New Territories to Tsing Ma Bridge and on to
Lantau. We are supplying a mixture of off-the-shelf and purpose-designed
equipment for the construction of the piers and beams supporting the road
deck and parts of the deck itself.
Regionally:Middle EastWe have continued to expand our presence in the Middle East to take advantageof the dynamic market conditions and the region now houses our largest designcapability. Our export business from our Middle East operations to territoriesin the region where we do not yet have distribution centres grew alongside
ourestablished markets.EuropeThe UK traded well, with a strong performance in the building market offsettinga weaker infrastructure market. The result was further buoyed by export sales.We invested in people and facilities in Ireland and increased profitsignificantly in a market growing in both the infrastructure and commercialsectors. In Spain our investment in a new distribution centre is bearing fruitas, in a strong infrastructure market, we had a record year. We believe thisgrowth is likely to be sustained.
Australasia
Although the Australian market was relatively buoyant in 2004 and 2005, aslowdown in commercial and residential activity in Victoria and New South Walesled to a reduction in contribution in 2006. Our performance in New Zealand alsopeaked in 2004/2005 but, despite the country's economy now being in recession,our cost containment and introduction of new products helped sustain profits.
Far East
Our business in this region is somewhat smaller than our others and provides amixed picture. Hong Kong's infrastructure spending was weak in 2006 althoughthere are prospects of improvement in the near term offered by the likelihoodof casino developments in Macao. Korea remains highly competitive. We had arecord year in the Philippines, where we have the largest local base of anyinternational supplier.
PFI Investments
The 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. 2006 2005 Contribution to Total Operating Profit ‚£1.1m ‚£0.6m Interest received on subordinated debt ‚£3.8m ‚£2.6minvestments ‚£4.9m ‚£3.2m
The growing maturity of our PFI portfolio as more projects move into their operational phases means that the contribution from interest on subordinated debt investments has become increasingly important.
With the completion of two further facilities during 2006 - Dungannon Collegein Northern Ireland and the Hadley Learning Community in Telford - we now have19 fully operational projects plus five under construction, in three of whichwe are providing interim services. We sold our interest in one PFI contract,Oxford Littlemore hospital, at the beginning of 2006 for ‚£1.6 million,generating an exceptional profit of ‚£1.3 million.At the end of the year our total investment commitment for signed contracts was‚£53.8 million of which we had already invested ‚£36.3 million. We were alsonamed preferred or first-choice bidder on five further projects (one of whichhas since reached financial close), bringing our total commitment to ‚£71.4million. As detailed in the Facilities Services and Project Services sectionsabove, these are: * Plymouth Schools (Project and Facilities) - reached financial close in early 2007 * MoD Corsham (Facilities) * Leeds Building Schools for the Future (Project and Facilities) * Tunbridge Wells Hospital (Facilities) * Derry Schools (Facilities)
We see PFI as a significant source of value. For illustrative purposes, the present value of the expected future cashflows of the current portfolio at a range of discount rates would be:
Discount rate 5.0% 6.5% 8.0% 9.5%
Projects past financial close only ‚£165m ‚£130m ‚£105m ‚£90m
Including projects at preferred bidder ‚£190m ‚£150m ‚£115m ‚£95m stage Group ServicesThe costs accounted for within Group Services are principally those relating toour PFI bidding activity, a range of centrally-provided services and the GroupBoard. The reduction in the 2006 figure to ‚£11.4 million (2005: ‚£14.8 million)was achieved through continued rationalisation of the property portfolio andlower Board and staff costs.Outlook
The markets in which Interserve has chosen to operate are, overall, growing healthily. We have positioned ourselves to take advantage of this through targeted investment in new facilities and capabilities at local and regional level as well as with the Group's acquisition of MacLellan.
The acquisition gives our Facilities Services operations increased access,breadth and scale in a range of growth sectors. The demand for outsourcedservices is still expanding. The potential UK market for FM, already worth morethan ‚£100 billion a year, is expected to increase at a real annual growth rateof between 2-3 per cent(4). Within this market the Total Facilities Managementsector, which embodies our integrated approach, is forecast to be the fastestgrowing segment.Project Services has built a reputation in the UK and the Middle East for theconsistent delivery of projects on time and to budget. This is underpinned by acommitment to fostering long-term relationships both with clients and with oursupply chains. The UK market is showing steady growth and real GDP in the UAE,Qatar and Oman is forecast to grow at annual averages of 6, 8 and 4 per centrespectively over the next three years(5). With this foundation the opportunitiesfor the division remain positive.
The outlook for Equipment Services is encouraging. Prospects in the Middle East remain strong and in aggregate the European market is also likely to grow, while conditions in the Far East and Australasia are more challenging. In pursuit of our ambitions to expand the business geographically we have identified a promising potential market in South Africa and also plan to commence other new operations in 2007.
Our markets are attractive and our ability to succeed in them was demonstratedby the notable value of new business generated in the year. Our future workloadgrew organically by 10 per cent to ‚£5.3 billion (2005: ‚£4.8 billion).MacLellan's order book boosted this total to ‚£5.6 billion, representing anincrease of 17 per cent overall. With the underlying strength of the businessdemonstrated in our 2006 performance, our record future workload and theopportunities created by our acquisition of MacLellan, we are confident in theprospects the future holds for Interserve.
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.
(4) Source: MBD report March 2006
(5) Source: Business Monitor International
Interserve Plc
Consolidated income statement
For the year ended 31 December 2006
Year Year ended 31 ended December 2006 31 December 2005# 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 1,408.5 - 1,408.5 1,214.5 - 1,214.5
Cost of sales (1,243.9) - (1,243.9) (1,073.1)
- (1,073.1) Gross profit 164.6 - 164.6 141.4 - 141.4 Other operating - - - 0.1 - 0.1income Distribution (28.0) - (28.0) (27.6) - (27.6)costs Administrative (92.2) - (92.2) (83.6) - (83.6)expenses Amortisation of 9 - (2.1) (2.1) - - -acquired intangible assets Impairment of 2 - (30.0) (30.0) - - -goodwill Other exceptional 2 - (12.2) (12.2) - - -costs Total administrative (92.2) (44.3) (136.5) (83.6) - (83.6)expenses Profit on 2 - 1.3 1.3 - 0.2 0.2disposal of property and investments Operating profit 44.4 (43.0) 1.4 30.3 0.2 30.5 Share of result of 11.8 - 11.8 6.7 - 6.7associates and joint ventures Total operating 56.2 (43.0) 13.2 37.0 0.2 37.2profit Investment 3 33.8 - 33.8 27.4 - 27.4revenue Finance costs 4 (31.9) - (31.9) (28.4) - (28.4) Profit before tax 58.1 (43.0) 15.1 36.0 0.2 36.2 Tax (charge)/ 5 (17.9) 3.9 (14.0) (11.9) - (11.9)credit Profit for the 40.2 (39.1) 1.1 24.1 0.2 24.3year Attributable to: Equity holders of the 37.5 (39.1) (1.6) 21.5 0.2 21.7parent Minority interest 2.7 - 2.7 2.6 - 2.6 40.2 (39.1) 1.1 24.1 0.2 24.3Earnings per share 7 Basic (1.4p) 19.0p Diluted (1.3p) 18.9p
Consolidated statement of recognised income and expense For the year ended 31 December 2006
Year ended Year 31 ended 31 December December 2006 2005# ‚£million ‚£million
Exchange differences on translation of foreign operations (6.5) 3.9
Gain on available-for-sale financial assets 0.2
-
Gains/(losses) on cash flow hedges (joint ventures) 13.3
(18.4)
Gains on available-for-sale financial assets (joint 4.7
24.1ventures) Actuarial gains/(losses) on defined benefit 7.7 (4.4)pension schemes Deferred tax on items taken directly to equity (7.3)
(0.4)
Net income recognised directly in equity 12.1
4.8 Profit for the year 1.1 24.3
Total recognised income for the year 13.2
29.1
Prior periods adjustment - correction of -
(17.7)
accounting misstatement (net of tax)
Total recognised income 13.2 11.4 Attributable to: Equity holders of the parent 10.5 8.8 Minority interest 2.7 2.6 13.2 11.4 # Restated (see note 13) Interserve PlcConsolidated balance sheetAt 31 December 2006 2006 2005# Notes ‚£million ‚£million Non-current assets Goodwill 8 228.4 154.3 Other intangible assets 9 39.6 - Property, plant and equipment 105.5 99.5 Interests in joint ventures 60.7 43.0
Interests in associated undertakings 23.3
17.0 Investments 0.1 - Deferred tax asset 13.7 32.0 471.3 345.8 Current assets Inventories 15.3 14.8 Trade and other receivables 305.2 244.7 Cash and deposits 35.2 39.3 355.7 298.8 Total assets 827.0 644.6 Current liabilities Bank overdrafts and loans (6.8) (11.6) Unsecured loan notes (1.4) (2.2) Trade and other payables (403.0) (333.1) Short-term provisions (7.0) - (418.2) (346.9) Net current liabilities (62.5) (48.1) Non-current liabilities Bank loans (140.2) (43.1) Trade and other payables (13.0) (9.8) Long-term provisions (22.3) (18.0) Retirement benefit obligation 12 (111.4) (132.6) (286.9) (203.5) Total liabilities (705.1) (550.4) Net assets 121.9 94.2 Equity Share capital 12.4 11.4 Share premium account 109.3 108.8 Capital redemption reserve 0.1 0.1 Merger reserve 49.0 16.4
Hedging and translation reserves 18.7
12.7 Retained earnings (68.5) (56.1) Investment in own shares (0.5) (0.5)
Equity attributable to equity holders of the parent 120.5
92.8 Minority interest 1.4 1.4 Total equity 121.9 94.2 # Restated (see note 13) Interserve PlcReconciliation of movements in equityFor the year ended 31 December 2006 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 11.4 107.9 0.1 16.4 4.8 (0.5) (41.4) 98.7 1.7 100.4January 2005 Prior period - - - - - - (17.7) (17.7) - (17.7) adjustment - correction of accounting misstatement net of tax Balance at 1 11.4 107.9 0.1 16.4 4.8 (0.5) (59.1) 81.0 1.7 82.7January 2005 as restated # Exchange - - - - 3.9 - - 3.9 - 3.9 differences on translation of foreign operations Losses on cash - - - - (18.4) - - (18.4) - (18.4) flow hedges (joint ventures) Gains on - - - - 24.1 - - 24.1 - 24.1 available-for-sale financial assets (joint ventures) Actuarial losses - - - - - - (4.4) (4.4) - (4.4) on defined benefit pension schemes Deferred tax on - - - - (1.7) - 1.3 (0.4) - (0.4)items taken directly to equity Net income - - - - 7.9 - (3.1) 4.8 - 4.8 (expense) recognised directly in equity in the year Profit for the - - - - - - 21.7 21.7 2.6 24.3year Dividends paid - - - - - - (16.3) (16.3) (2.9) (19.2) Shares issued - 0.9 - - - - - 0.9 - 0.9 Share based - - - - - - 0.7 0.7 - 0.7payments Balance at 31 11.4 108.8 0.1 16.4 12.7 (0.5) (56.1) 92.8 1.4 94.2December 2005 # Exchange - - - - (6.5) - - (6.5) - (6.5) differences on translation of foreign operations Gain on - - - - - - 0.2 0.2 - 0.2 available-for-sale financial assets Gains on cash flow - - - - 13.3 - - 13.3 - 13.3 hedges (joint ventures) Gains on - - - - 4.7 - - 4.7 - 4.7
available-for-sale financial assets (joint ventures) Actuarial gains on - - - - - - 7.7 7.7 - 7.7 defined 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
# Restated (see note 13) 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 July2006. 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 ‚£924,000 (2005: ‚£835,000).Interserve PlcConsolidated cash flow statementFor the year ended 31 December 2006 Year ended Year ended 31 December 31 2006 December 2005# Notes ‚£million ‚£million Operating activities Operating profit 13.2 37.2 Adjustments for:
Amortisation of acquired intangible assets 2.1
- Impairment of goodwill 30.0 -
Depreciation of property, plant and equipment 17.5
16.6
Gain on disposal of property and investments (1.3)
(0.2)
Pension payments in excess of the income statement (10.4) (1.1)charge Share of results of associates and joint ventures (11.8)
(6.7)
Non-cash charge relating to share based payments 0.6
0.7
Gain on disposal of property, plant and equipment (5.8) (4.2) Currency (0.4) (0.2)
Operating cash flows before movements in working capital 33.7 42.1
(Increase)/decrease in inventories (0.2)
0.7 Increase in receivables (21.8) (19.4) Increase in payables 37.6 22.1 Cash generated by operations 49.3 45.5 Taxes paid (9.2) (10.7)
Net cash from operating activities 40.1
34.8 Investing activities Interest received 5.5 4.6
Increase in investment in associate (0.8)
-
Dividends received from associates and joint ventures 3.5
1.6
Proceeds on disposal of property, plant and equipment 14.0
15.6
Purchases of property, plant and equipment (30.8)
(27.4)
Purchase of subsidiary undertaking 10 (97.6)
-
Investment in joint ventures-PFI investments (4.5) (6.5) Disposal of investment 0.7 -
Disposal of investment in associates and joint ventures 1.6 1.0
Net cash used in investing activities (108.4) (11.1) Financing activities Interest paid (6.7) (4.2) Dividends paid to equity shareholders (17.5)
(16.3)
Dividends paid to minority shareholders (2.7) (2.9) Issue of shares 0.5 0.9 Increase/(decrease) in bank borrowings 97.1
(4.6)
Repayments of obligations under finance leases (0.4) (0.1) Redemption of loan notes (0.8) (1.7) Net cash from/(used in) financing activities 69.5
(28.9)
Net increase/(decrease) in cash and cash equivalents 1.2
(5.2)
Cash and cash equivalents at beginning of period 27.7
32.6
Effect of foreign exchange rate changes (0.5)
0.3
Cash and cash equivalents at end of period 28.4
27.7
Cash and cash equivalents comprise
Cash and deposits 35.2 39.3 Bank overdrafts and loans (6.8) (11.6) 28.4 27.7
Reconciliation of net cash flow to movement in net debt Net increase/(decrease) in cash and cash equivalents 1.2
(5.2)
(Increase)/decrease in borrowings (97.1)
4.6
Obligations under finance leases assumed with acquisition (1.9)
-of subsidiary
Repayments of obligations under finance leases 0.4
0.1 Redemption of loan notes 0.8 1.7
Change in net debt resulting from cash flows (96.6)
1.2
Effect of foreign exchange rate changes (0.5)
(1.1)
Movement in net debt during the period (97.1)
0.1 Net debt - opening (17.7) (17.8) Net debt - closing (114.8) (17.7)# Restated (see note 13)Basis of preparationThe financial information in this announcement, which was approved by the Boardof Directors on 12 March2007, does not constitute the Company's statutory accounts for the years ended31 December 2006 or 2005 butis derived from these accounts.Statutory accounts for 2005 have been delivered to the Registrar of Companiesand those for 2006 will bedelivered following the Company's annual general meeting. The auditors havereported on these accounts;their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act1985.While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The company expects to publish full financial statementsthat comply with IFRSs in April 2007.
The financial statements have been prepared on the historical cost basis.
Interest paid within the cash flow statement has been re-presented and is shownwithin financing activities in accordance with latest guidance (interest paidwas previously shown within investing activities).
1. Business and geographical segments
Business Segments Sales revenue Result (external) 2006 2005# 2006 2005# ‚£ ‚£ ‚£ ‚£ million million million million Facilities Services 476.0 444.2 21.4 17.8 Industrial Services 154.1 148.9 (6.1) (5.4) Project Services 556.0 514.2 23.4 18.3 Equipment Services 108.3 107.2 22.6 20.5 MacLellan 114.1 - 5.2 -
Joint ventures - PFI Investments - - 1.1
0.6 1,408.5 1,214.5 67.6 51.8 Group Services (11.4) (14.8)
Amortisation of acquired intangible assets (2.1)
- Impairment of goodwill (30.0) - Other exceptional costs (12.2) -
Profit on disposal of property and investments 1.3
0.2 1,408.5 1,214.5 13.2 37.2 Investment revenue 33.8 27.4 Finance costs (31.9) (28.4) Profit before tax 15.1 36.2 Tax (14.0) (11.9) Profit after tax 1.1 24.3# Restated (see note 13)Facilities Services revenue includes ‚£28.2 million in respect of works bills(2005: ‚£60.9 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.Inter segment sales are not material and have been excluded from the abovefigures. Segment assets Segment Net assets / liabilities (liabilities) 2006 2005# 2006 2005# 2006 2005# ‚£ ‚£ ‚£ ‚£ ‚£ ‚£ million million million million million million Facilities Services 99.0 89.3 (176.3) (166.2) (77.3) (76.9) Industrial Services 63.0 67.2 (29.2) (48.6) 33.8 18.6 Project Services 151.8 133.5 (239.3) (225.5) (87.5) (92.0) Equipment Services 126.7 127.0 (32.6) (35.9) 94.1 91.1 MacLellan 64.7 - (43.8) - 20.9 - Joint ventures - PFI 64.8 45.2 (4.1) (2.2) 60.7 43.0Investments 570.0 462.2 (525.3) (478.4) 44.7 (16.2) Group Services 274.1 155.1 (83.5) (28.4) 190.6 126.7 844.1 617.3 (608.8) (506.8) 235.3 110.5 Net debt (114.8) (17.7)
Net assets (excluding minority 120.5
92.8interest) # Restated (see note 13) Impairment losses Depreciation and Additions to recognised in amortisation property, plant income and equipment and intangible assets 2006 2005 2006 2005 2006 2005 ‚£ ‚£ ‚£ ‚£ ‚£ ‚£ million million million million million million Facilities Services - - 0.3 0.6 1.7 0.3 Industrial Services - - 3.4 3.5 3.1 4.7 Project Services - - 0.8 0.6 1.3 1.3 Equipment Services - - 11.6 11.6 23.5 19.4 MacLellan - - 1.0 - 0.7 - Joint ventures - PFI - - - - - -Investments - - 17.1 16.3 30.3 25.7 Amortisation of acquired 2.1 - - -intangible assets Group Services (30.0) - 0.4 0.3 0.5 1.7 Acquired intangible - - - - 41.7 -assets (30.0) - 19.6 16.6 72.5 27.4Geographical SegmentsFacilities Services, Industrial Services and MacLellan are predominantly basedin the United Kingdom. The Project Services division is located in the UnitedKingdom and the Middle East. Equipment Services has operations in all of thegeographic segments listed below.
The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services:
Sales revenue Total operating by geographical profit market (external) 2006 2005# 2006 2005# ‚£ ‚£ ‚£ ‚£ million million million million United Kingdom 1,320.4 1,126.9 35.4 25.2 Rest of Europe 24.8 18.9 4.6 2.4 Middle East & Africa 23.3 30.3 19.4 17.1 Australasia 23.9 26.7 5.7 7.1 Far East 10.0 9.2 (0.3) (1.3) Americas 6.1 2.5 1.7 0.7 1,408.5 1,214.5 66.5 51.2
Joint ventures - PFI Investments 1.1
0.6 Group Services (11.4) (14.8)
Profit on disposal of property and 1.3
0.2investments
Amortisation of acquired intangible (2.1)
-assets Impairment of goodwill (30.0) - Other exceptional costs (12.2) - 1,408.5 1,214.5 13.2 37.2
Inter segment sales are not material and have been excluded from the above
figures. # Restated (see note 13) Additions to Carrying amount property, plant of segment and equipment assets / and (liabilities) intangible assets 2006 2005# 2006 2005# ‚£ ‚£ ‚£ ‚£ million million million million United Kingdom (106.6) (149.2) 11.7 11.6 Rest of Europe 4.2 16.4 4.4 4.0 Middle East & Africa 20.3 28.0 3.3 2.6 Australasia 18.2 22.5 3.0 3.6 Far East 37.7 17.3 6.6 2.6 Americas 10.2 5.8 1.3 1.3 (16.0) (59.2) 30.3 25.7
Joint ventures - PFI Investments 60.7 43.0 -
- Group Services 190.6 126.7 0.5 1.7 Acquired intangible assets - - 41.7 - 235.3 110.5 72.5 27.4 Net debt (114.8) (17.7)
Net assets (excluding minority 120.5 92.8
interest) # Restated (see note 13)2. Exceptional items
Exceptional items are those items that the Group consider to be non recurring and material in nature that should be brought to the reader's attention.
2006 2005 ‚£million ‚£million
Profit on disposal of property and investments 1.3
0.2
Impairment of goodwill relating to Industrial (30.0)
-Services (note 8) Other exceptional costs
Cost of investigation of the prior year accounting (8.3)
-misstatement (see note 13)
Restructuring costs following the acquisition of (3.9)
-MacLellan
Total other exceptional costs (12.2)
-3. Investment revenue 2006 2005 ‚£ ‚£ million million Bank interest 1.5 1.8 Other interest 4.0 2.8
Retirement benefits return on assets 28.3
22.8(note 12) 33.8 27.44. Finance costs 2006 2005 ‚£ ‚£ million million Bank loans and overdrafts and other loans repayable (6.7) (4.2)within 5 years Interest cost on retirement benefits (25.2) (24.2)liabilities (note 12) (31.9) (28.4)Borrowing costs included within the share of results from joint ventures is netof ‚£4.8 million (2005: ‚£7.2 million) of interest included in the cost ofqualifying assets during the year. This interest arose on project specificfinance.5. Tax 2006 2005# ‚£ ‚£ million million Current tax - UK 6.6 7.9 Current tax - Overseas 1.9 2.8 Deferred tax 5.5 1.2 Tax charge for the year 14.0 11.9The total charge for the year can be reconciled to the profit per the incomestatement as follows: 2006 2005# ‚£million % ‚£ % million Profit before tax 15.1 36.2 Tax at the UK income tax rate of 30% 4.5 29.7% 10.9 30.1%(2005: 30%)
Tax effect of expenses not deductible in 0.1 0.7% 2.0
5.5%determining taxable profit
Tax effect of goodwill impairment 9.0 59.6% -
0.0%
Effect of different tax rates of subsidiaries (0.2) -1.3% (0.3) -0.8% operating in other jurisdictions
Effect of overseas losses unrelieved 0.5 3.3% 1.0
2.8% Prior period adjustments 0.1 0.7% (1.7) -4.7% Tax charge and effective tax rate for 14.0 92.7% 11.9 32.9%the year # Restated (see note 13) In addition to the income tax charged to the income statement, a deferred taxcharge of ‚£7.3 million (2005: ‚£0.4 million) has been charged directly to equityin the year, ‚£2.3 million charge (2005: ‚£1.3 million credit) relating toactuarial losses on the Group's defined benefit pension scheme and ‚£5.5 millioncharge (2005: ‚£1.7 million) relating to fair value adjustments on interest rateswaps and available-for-sale financial assets within the Group's PFI SpecialPurpose Companies and ‚£0.5 million credit (2005: ‚£nil) relating to the tax onthe intrinsic value of the share based payments.6. Dividends 2006 2005 ‚£million ‚£million
Amounts recognised as distributions to equity
holders in the period: Final dividend for the year ended 31 December 2005 of 10.1p 11.5 11.0(2004: 9.7p) per share Interim dividend for the year ended 31 December 2006 of 4.8p 6.0 5.3(2005: 4.6p) per share 17.5 16.3
Proposed final dividend for the year ended 31 December 2006 13.1 11.5 of 10.6p (2005: 10.1p) per share
7. Earnings per share
The calculation of the basic and diluted earnings per share is based on thefollowing data:Earnings 2006 2005# ‚£million ‚£million
Earnings for the purposes of basic earnings per share being (1.6) 21.7 net profit attributable to equity holders of the parent
Profit on sale of property and (1.3) (0.2)investments Amortisation of acquired 2.1 -intangible assets Impairment of goodwill 30.0 - Other exceptional costs 12.2 -
Tax effect of above adjustments (3.9)
- Headline earnings 37.5 21.5
Earnings for the purposes of diluted (1.6)
21.7earnings per share # Restated (see note 13) Number of shares 2006 2005 Number Number
Weighted average number of ordinary shares for the 118,480,953 113,990,232 purposes of basic earnings per share
Effect of dilutive potential ordinary shares: Share options and awards 1,253,393 602,944
Weighted average number of ordinary shares for the 119,734,346 114,593,176 purposes of diluted earnings per share
p p Headline earnings per share 31.7 18.9 Basic earnings per share (1.4) 19.0 Diluted earnings per share (1.3) 18.98. Goodwill
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination as follows:
At 1 Acquired Impaired At 31 At 31 January December December 2006 2006 2005 ‚£million ‚£million ‚£million ‚£million ‚£million Facilities Services: Maintenance 14.3 - - 14.3 14.3 Engineering 11.5 - - 11.5 11.5 Facilities Management 89.8 - - 89.8 89.8 MacLellan - 104.1 - 104.1 - Industrial Services 38.7 - (30.0) 8.7 38.7 154.3 104.1 (30.0) 228.4 154.39. Other intangible assetsOn acquisition of MacLellan Group plc the following separable intangible assetswere identified: Customer Other Total relationships ‚£million ‚£million ‚£million Cost As at 1 January 2006 - - - Acquisition of subsidiary 41.0 0.7 41.7 At 31 December 2006 41.0 0.7 41.7 Accumulated Amortisation As at 1 January 2006 - - - Charge for the year 2.1 - 2.1 At 31 December 2006 2.1 - 2.1 Carrying Amount As at 31 December 2006 38.9 0.7 39.6 As at 31 December 2005 - - - Useful lives 7-10 years 5 years10. AcquisitionsOn 20 July 2006 the Group acquired all of the share capital of MacLellan Groupplc for a combination of ‚£89.2 million in cash (including acquisition costs of‚£4.3 million) and the issue of 9.4 million new shares with a fair value of ‚£33.6 million to the shareholders of MacLellan Group plc in exchange for theirholdings in MacLellan.The acquisition was accounted for using the acquisition method of accountingunder IFRS 3 and the separate fair values of intangible assets have beenidentified and recognised with the residual excess over the net assets acquiredbeing recognised as goodwill. Acquisition Fair value Provisional balance adjustments fair value sheet ‚£million ‚£million ‚£million Intangible assets - 41.7 41.7
Property, plant and equipment 6.0 (0.7)
5.3 Investments 0.8 - 0.8 Deferred tax assets 0.8 - 0.8 Inventories 0.6 (0.3) 0.3 Trade and other receivables 37.8 (1.1) 36.7 Cash 15.3 - 15.3 Bank overdrafts and loans (23.7) - (23.7) Trade and other payables (38.4) 1.4 (37.0) Short term provisions (4.3) (1.1) (5.4) Long-term provisions (1.2) (2.4) (3.6) Deferred tax - (12.5) (12.5) Net assets (6.3) 25.0 18.7 Goodwill 104.1 Consideration 122.8Included in the fair value adjustments are provisional amounts based onmanagement estimates relating to events that have occurred prior to acquisitionand are likely to crystallise during 2007. In particular, certain intangibleassets and their relating deferred tax charge have been separately identifiedand recognised using appropriate valuation techniques based on the fair valueof forecast future cash flows (see note 9 other intangible assets) andprovisions relating to long term contracts and deferred consideration. Althoughit is anticipated that there will be no material change to the valuations givenabove, due to the nature of the adjustments involved the amounts are shown asprovisional until management can gain fuller understanding of these costs.
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.
Since the acquisition, in the period to 31 December 2006 the MacLellan Grouphas contributed ‚£114.1 million in revenue, ‚£5.1 million in profit before taxand ‚£3.9 million in profit after tax. In addition the company contributed ‚£5.9million to operating cash flows, paid ‚£0.1 million and ‚£1.3 million in interestand tax respectively and utilised ‚£0.7 million for capital expenditure.
If the acquisition had occurred at the beginning of the year the results of the Group for the year ending 31 December 2006 would have been as follows:
2006 ‚£million Revenue 1,542.0 Profit before tax 10.4
The consideration for 100% of the share capital is made up as follows:
Number of Fair value ‚£million shares Cash paid 81.9 Purchase of share options 3.0 Acquisition costs incurred 4.3 Cash consideration 89.2 Shares issued in exchange for MacLellan 9,418,230 ‚£3.57 per 33.6shares share Total consideration 122.8
Cash consideration (from above)
89.2 Cash acquired (15.3)
Bank loans and overdrafts acquired
23.7 Net cash impact on the Group 97.6
11. Results from the Joint-ventures-PFI investments
Results from the Joint-ventures-PFI investments were as follows:
2006 2005 ‚£million ‚£million Revenues 55.6 59.4 Operating profit 3.1 2.4 Interest receivable 25.3 19.4 Interest payable (31.6) (28.2) Less: interest capitalised 4.8 7.2 Taxation (0.5) (0.2) Profit 1.1 0.6 Dividends (0.5) (0.2) Retained profits 0.6 0.4
12. Retirement benefit schemes
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 2006.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 2006 2005 Retail price inflation 2.9% pa 2.6% pa Discount rate 5.2% pa 4.9% pa
Pension increases in payment:
LPI/RPI 2.9%/2.9% 2.5%/2.6% Fixed 5% 5.00% 5.00%
3% or RPI if higher (capped at 5%) 3.50% 3.30%
General salary increases 3.65 - 3.35 - 4.1% pa 4.40%pa The expected rate of return on assets for the financial year ending 31 December2006 was 7.4% pa (2005: 7.6%). 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 2005. For 2006 adeduction of 0.4% was then made from the expected return on assets for theexpenses incurred in running the schemes (where these were not met separately).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 84.1(2005: age 84.0)and female 86.9 (2005: age 86.9). A future pensioner who is aged 65 in 2025 isexpected to live until age: male 85.1 (2005: age 85.1) and female 87.9 (2005: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:
2006 2005 ‚£million ‚£million Present value of defined benefit obligation 557.2 514.6 Fair value of scheme assets (445.8) (382.0) Liability recognised in the balance 111.4
132.6
sheet
The amounts recognised in the income statement are as follows:
2006 2005 ‚£million ‚£million
Employer's part of current service cost 12.2
9.6 Interest cost 25.2 24.2 Expected return on scheme assets (28.3)
(22.8)
Total expense recognised in profit and loss 9.1
11.0
The actual return on the schemes' assets over the year was ‚£50.5 million (2005: ‚£65.5 million).
The current allocation of the schemes' assets is as follows:
2006 2005 Current Fair Current Fair value value allocation ‚£million allocation ‚£million Equity instruments 82% 366.1 86% 330.2 Debt instruments 15% 67.7 11% 40.3 Other 3% 12.0 3% 11.5 100% 445.8 100% 382.0A reconciliation of the present value of the defined benefit obligation is asfollows: 2006 2005 ‚£million ‚£million Opening defined benefit obligation 514.6
440.5
Employer's part of current service 12.2
9.6cost Interest cost 25.2 24.2
Contributions by plan participants 6.1
6.6 Actuarial loss 14.5 47.1 Benefits paid (15.4) (15.8) Bulk transfer - 2.4 Closing defined benefit obligation 557.2
514.6
A reconciliation of the fair value of the schemes' assets is as follows:
2006 2005 ‚£million ‚£million Opening fair value of the schemes' 382.0 311.6assets
Expected return on plan assets 28.3
22.8 Actuarial gain 22.2 42.7
Contributions by scheme members 6.1
6.6 Contributions by the employer 22.6 11.7 Benefits paid (15.4) (15.8) Bulk transfer - 2.4 Closing fair value of the schemes' 445.8 382.0assets 2006 2005 ‚£million ‚£million
Experience adjustments on the schemes' assets
Amount of gain 22.2 42.7
Percentage of the schemes' assets 5%
11%
Experience adjustments on the schemes'
liabilities Amount of (loss)/gain (13.4) 0.7
Percentage of the present value of the schemes' (2%)
0%liabilities
Loss due to changes in assumptions
Amount of (loss) (1.1) (47.8)
Percentage of the present value of the schemes' -
9%liabilities
Expense to be recognised immediately outside profit
or loss Actuarial gains and (losses) 7.7 (4.4)
The cumulative amount of gains and (losses)
recognised in the statement of recognised income and (expense) is: 1.2
(6.5)
Based on current contribution rates and payroll, the Group would contribute ‚£23 million to the various defined benefit arrangements during 2007.
13. Accounting misstatement in Industrial Services
Following the organisational restructuring and Board change announced on 20thJuly, Industrial Services was integrated into the Facilities Services Division,the subsequent programme of internal reviews brought to light informationrelating to the misstatement of accounting balances within the formerIndustrial Services Division. The investigation was carried out by KPMG LLPand Linklaters and their reports have confirmed that certain control processeswithin Industrial Services had been repeatedly circumvented over a period offive or more years.The impact of correcting these cumulative misstatements is to reduce net assets(primarily amounts recoverable on contracts and debtor balances) by ‚£25.9million on a post-tax basis as at 31 December 2005. As a result the accountsfor the year ended 31 December 2005 and for the previous period have beenrestated as summarised in the table below. The current cash position of the
Group is unaffected. Total prior Year ended 31 December period 2004 adjustment 31 December and earlier 2005 ‚£million ‚£million ‚£million Impact on income statement Decrease in revenue (29.8) (14.6) (15.2) Decrease in operating profit (37.0) (11.7) (25.3) Decrease in tax 11.1 3.5 7.6 Decrease in profit for the period (25.9) (8.2) (17.7)Impact on the balance sheet 31 December 31 December 2005 2004 and earlier ‚£million ‚£million Decrease in plant, property and (3.2) (1.5)equipment Decrease in inventories (0.2) (0.1) Decrease in trade and other receivables - amounts (22.2) (12.9)recoverable on contracts Decrease in trade and other (7.6) (2.3)receivables - debtors Increase trade and other payables - (3.8) (8.5)accruals (37.0) (25.3)
Trade and other payables - tax 9.5
7.6 Deferred tax 1.6 - Decrease in equity (25.9) (17.7)
INTERSERVE PLC