10 Mar 2010 07:00
News Release10 March 2010 ANNUAL RESULTS ANNOUNCEMENT YEAR ENDED 31 DECEMBER 2009
Interserve, the international services, maintenance and building group, announces its annual results for the year ended 31 December 2009.
2009 2008 Change Revenue £1,906.8m £1,800.0m
+5.9%
Headline total operating profit (1) £85.7m £84.2m(2) +1.8%Headline pre-tax profit (3) £78.3m £81.4m(2) (3.8)%Profit before tax £89.2m £79.9m +11.6%
Headline earnings per share (4) 49.7p 46.7p +6.4%
Basic earnings per share 54.9p 43.5p +26.2%Net debt £37.3m £109.2m (65.8)%Full-year dividend 17.5p 17.0p +2.9%Good progress in 2009
* Headline earnings per share (4) up 6.4 per cent to 49.7 pence
* Dividend up 2.9 per cent to 17.5 pence per share
Strong revenue visibility
* Group visibility: 80 per cent of anticipated (5) 2010 revenues, 58 per cent
of anticipated 2011 (5) revenues (prior year comparables: 79 per cent and
42 per cent respectively)
* Won work with a whole-life value of more than £2 billion in 2009, augmented
by contract awards in 2010 to date of c. £500 million
Strong financial position
* Net debt reduced by 65.8 per cent to £37.3 million, representing cash conversion of over 200 per cent (6) * Significant actions successfully completed to reduce pension funding shortfall and future volatility - accounting deficit (net of taxation) reduced by 37.7 per cent to £68.6 million
Strong platform for long-term growth
* Building strong core businesses based on long-term, value-added client relationships * Capturing emerging opportunities for integrated solutions * Expanding international growth with fuller service offering Chief Executive Adrian Ringrose commented, "Interserve made good progressduring difficult conditions in 2009. Whilst the Group is not immune to thecurrent economic challenges, it benefits from a solid and balanced UK position,continued opportunities internationally, good revenue visibility and a strongbalance sheet. Given the risks in the external environment, 2010 will be achallenging year, particularly in the first half. However, we are focused ontaking advantage of the opportunities for renewed growth, as and when ourmarkets recover. Our confidence in the Group's future prospects is reflected inthe Board's recommendation of the continuation of our progressive dividendpolicy."
Footnotes:
1. Headline total operating profit comprises total operating profit of £96.6m
(2008: £82.7m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2008: (£5.0m)); (£0.4m) amortisation of acquired
intangible assets (associates) (2008: (£0.3m)); £16.3m exceptional items
(2008: £nil).
2. Adjusted for a presentational change in the basis of taxation of our Qatari
associate companies, as previously communicated in the 2009 half-year
report. Whilst there is no impact on Group earnings per share it has
resulted in a reduction in reported operating profits from associate
companies, matched by an equal reduction in the Group tax charge. Applying
the current basis of taxation to 2008, the reported operating profits from
associate companies in that period has been reduced by £3.8 million.
3. Headline pre-tax profit comprises profit before taxation of £89.2m (2008: £
79.9m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2008: (£5.0m)); (£0.4m) amortisation of acquired
intangible assets (associates) (2008: (£0.3m)); £16.3m exceptional items
(2008: £nil).
4. Headline earnings per share are based on Headline pre-tax profit as defined
in footnote 3 above.
5. Based on 2010 consensus revenues of £1.89 billion, 2011 consensus revenues
of £1.89 billion.
6. Cash conversion is calculated as the percentage of cash generated by
operations of £41.0m (2008: £58.6m) adjusted for the cash impact of
exceptional items £73.1m (2008: £nil), divided by the sum of: operating
profit of £67.9m (2008: £54.4m); plus amortisation of acquired intangible
assets of £5.0m (2008: £5.0m); less exceptional items of £16.3m (2008: £ nil). - Ends -
For further information please contact:
Adrian Ringrose, Chief Executive 0118 932 0123 Tim Jones, Group Finance Director 0118 932 0123 Matt Jones, Head of Investor Relations 0118 960 2280 Elizabeth Morley / Tom Roberts 020 7379 5151 Maitland
About Interserve
Interserve's vision is to be The Trusted Partner of all our stakeholders. Weare a services, maintenance and building group operating in the public andprivate sectors in the UK and internationally. We offer advice, design,construction and facilities management services for society's infrastructureand provide a range of plant and equipment in specialist fields. Interserve isbased in the UK and is a FTSE 250 company. It has revenue of £1.9 billion and aworkforce of over 50,000 people worldwide.
Chairman's statement
Interserve performed well in the difficult market conditions of 2009,generating headline total operating profit of £85.7 million (2008: £84.2million (2)) and reducing net debt to £37.3 million (2008: £109.2 million).Headline earnings per share rose to 49.7 pence (2008: 46.7 pence). The Groupbenefited from its strategy of focusing on long-term client relationships,offering integrated solutions, and developing its international presence acrossthe asset life cycle. As a result, whilst those businesses exposed to the UKprivate sector suffered as their customers responded to the recession, ouroverall performance remained solid, boosted in particular by strong trading inthe Middle East.
Our results are summarised in the table below:
2009 2008 Change Revenue £1,906.8m £1,800.0m +5.9%
Headline total operating profit (1) £85.7m £84.2m(2) +1.8% Headline pre-tax profit (3)
£78.3m £81.4m(2) (3.8)%Profit before tax £89.2m £79.9m +11.6%Headline earnings per share (4) 49.7p 46.7p +6.4%Basic earnings per share 54.9p 43.5p +26.2%Net debt £37.3m £109.2m (65.8)%Full year dividend 17.5p 17.0p +2.9%Pension schemeAs part of this results statement we announce today the conclusion of ourtriennial valuation negotiation with the Interserve Pension Scheme trustee. Thefunding shortfall of £224 million as at 31 December 2008 will be recovered overthe period to 2017. We have already taken significant steps to reduce thisshortfall by making further contributions, totalling £75.1 million, which willresult in cash contributions from 2010 of approximately £22 million per annum,an increase of approximately £10 million per annum as compared to our previousfunding plan.This agreement concludes a year in which we have completed a number of actionsto significantly improve our pension scheme funding position whilst reducinganticipated future growth and volatility in net liabilities. We have workedwith the trustee of the scheme to complete the closure of the majority of thescheme to future accrual, to develop and execute an innovative structure torealise value from our PFI portfolio, and to revise the scheme investmentstrategy.
People
On behalf of the Board I would like to thank all of our people for theirefforts and contribution to Interserve's achievements during the last 12months. 2009 has been a difficult year for many people within the Group, giventhe focus on cost and headcount reduction and the curtailment of pensionbenefits. Against this backdrop the Board is confident that, with our wealth oftalented, dedicated people, we will continue to navigate our way through theseuncertain economic conditions and realise our potential for growth anddevelopment.
Board
As noted in the 2008 annual report, John Vyse retired on 3 April 2009 and Nick Keegan retired at the Annual General Meeting on 12 May 2009, whilst David Thorpe joined as a new non-executive director on 1 January 2009.
Dividend
On the basis of our performance in 2009 and the prospects for the Group goingforward, the directors are recommending an increased final dividend of 12.0p(2008: 11.7p), bringing the total dividend for the year to 17.5p (2008: 17.0p),an increase of 2.9 per cent and a continuation of our progressive dividendpolicy. Subject to shareholder approval at the Annual General Meeting, thefinal dividend will be paid on 8 June 2010 to shareholders on the register atthe close of business on 23 April 2010.
Prospects
Our principal markets offer good prospects for sustained long-term growth, and we believe that our business model of concentrating on long-term client relationships in our core sectors of expertise is a key strength, given the visibility of future workload it brings.
In the UK, prospects for increased outsourcing, a healthy UK construction orderbook and demand for social infrastructure should provide growing opportunities,where our complementary range of business capabilities means we are well placedto help customers deliver value-for-money services. We are continuing to takeconcerted action to reduce our cost base in a number of our newer public sectorFacilities Management contracts where trading has been weaker than anticipated;this, together with pressure on discretionary spending, will have an impact onthis division's results in the short term.In the Middle East our businesses have continued to trade well in 2009,benefiting from the geographic and sectoral diversity of our local partnershipsand their close links within the region. We believe medium-term growth driversfor the region as a whole remain attractive, notwithstanding a quieter Dubaiconstruction market. Given our plans to expand both our service offering andgeographical footprint to capture more of the opportunities in these markets,we remain positive about our prospects for growth in the Middle East.Given the risks in the external environment, 2010 will be a challenging year,particularly in the first half. However, the Board remains confident that theGroup has a strong base from which to sustain long-term growth.Lord BlackwellChairman10 March 2010Footnotes:
1. Headline total operating profit comprises total operating profit of £96.6m
(2008: £82.7m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2008: (£5.0m)); (£0.4m) amortisation of acquired
intangible assets (associates) (2008: (£0.3m)); £16.3m exceptional items
(2008: £nil)).
2. Adjusted for a presentational change in the basis of taxation of our Qatari
associate companies, as previously communicated in the 2009 half-year
report. Whilst there is no impact on Group earnings per share it has
resulted in a reduction in reported operating profits from associate
companies, matched by an equal reduction in the Group tax charge. Applying
the current basis of taxation to 2008, the reported operating profits from
associate companies in that period has been reduced by £3.8 million.
3. Headline pre-tax profit comprises profit before taxation of £89.2m (2008: £
79.9m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2008: (£5.0m)); (£0.4m) amortisation of acquired
intangible assets (associates) (2008: (£0.3m)); £16.3m exceptional items
(2008: £nil).
4. Headline earnings per share are based on Headline pre-tax profit as defined
in footnote 3 above.
Directors' report - Business review
Principal activities
Interserve is an international services, maintenance and building group. We offer advice, design, construction and support services for society's infrastructure and provide a range of plant and equipment in specialist fields.
Strategy
Interserve's vision is to be The Trusted Partner of all our stakeholders,bringing together all of our capabilities to create innovative solutions thatsupport long-term relationships with our customers, offering rewarding careersfor our staff and underpinning sustained value creation for shareholders. Ourstrategy for fulfilling this vision consists of three core elements:Build strong core businesses based on long-term, value-added clientrelationships: Our well-established client relationships have been cultivatedover a long period of time and have withstood previous business and economiccycles. As a result, around three-quarters of our revenues are derived fromservices to the public and utilities sectors whose long-term contracts and highlevel of repeat business confer strong visibility during uncertain economicperiods.
* We sustained revenue visibility at 80 per cent of anticipated 2010 revenues
(corresponding prior year figure of 79 per cent).
* We extended our existing relationships with key long-term customers such as
Defra, Thames Water, Cumberland Infirmary, Shell Qatar and Doosan Heavy
Industries.
* We were awarded new long-term contracts with Sandwell Metropolitan Council,
NHS Scotland and Ealing Council.
Capture emerging opportunities for integrated solutions: The balanced nature of the Group's businesses across the asset life cycle enables us to select the best opportunities whichever market or sector they are in. Our culture and organisational flexibility allow us to transfer expertise across our activities. They also give us the potential to grow into new markets and services where we can provide additional value to our existing clients.
* We successfully leveraged our project management knowledge, and utilised an
existing relationship held by our security business, to secure a major
integrated multi-site outsourcing contract with HSBC during 2009. The
contract underlines our growing credentials in the private-sector bundled
outsourcing market, which we expect will lead to further opportunities to
develop our position in this sector.
* We expect to be able to grow our services offering in the Middle East at a
faster rate than our construction and equipment hire businesses, such that
we anticipate that there will be a more balanced contribution from these
three activities in the region in the medium term, replicating the Group's
activity profile. This process has begun with the success achieved by our
Madina business and, more recently, some initial facilities management
contracts in the region.
* We expect to maintain a balanced contribution to Group profits from support
services, construction services and equipment services through the economic
cycle. * We won our first support services contract in the UK private healthcare sector, a market that offers attractive growth opportunities.
Expand international growth with fuller service offering: We have extensivesectoral and geographic reach in our existing businesses; however, our marketsare constantly evolving and we seek to develop into related skills, sectors andgeographies as part of our growth strategy.
* The geographical balance of the Group has been enhanced as the
international operations continue to contribute strongly to Group results.
The UK now contributes approximately 40 per cent of profits with
international businesses contributing 60 per cent (based on the proportion
of total operating profit before Group Services).
* Our strong presence in the Middle East has given us a platform from which
to explore market opportunities for our support services business, which
has won its initial contracts in the region, and also for our equipment
services business in Saudi Arabia, a construction market with strong growth
potential.
* Whilst both the UK and the Middle East region continue to offer positive
growth opportunities, over the medium term we expect to be able to generate
faster growth from new geographies and existing overseas markets.
Given our core skills and capabilities are transferable across sectors and geographies we expect more examples of such strategic developments to arise, underpinning our confidence in the Group's future.
Operational reviewKey performance indicators 2009 2008 Change Revenue £1,906.8m £1,800.0m +5.9% Headline earnings per share 49.7p 46.7p +6.4% Cash conversion (1) 201.6% 98.7% +102.9% pts Future workload (2) £6.5bn £6.5bn - Staff turnover (3) 5.6% 8.6% (3.0)% pts
UK all-employee accident incidence 344 429 (19.8)% rate per 100,000 workforce
Interserve performed well in 2009, with headline earnings per share rising 6.4per cent. Noteworthy achievements in relation to our key performance indicatorsincluded:
* Cash conversion was exceptionally strong in 2009 at 201.6 per cent (2008:
98.7 per cent), leading to a reduction in net debt to £37.3 million at 31
December 2009 (31 December 2008: £109.2 million). This performance resulted
principally from a reduction in the level of capital expenditure and from
positive working capital movements, the latter in part due to an inflow of
advances received from customers.
* Winning work with a whole-life value that exceeded £2 billion, contributing
to a future workload (2) at the year end of £6.5 billion and offering the
Group good revenue visibility. This workload includes £1.7 billion of work
for 2010 and £1.1 billion of work for 2011.
* Our Middle East operations achieved another year of strong growth, with
like-for-like (4) profit growth of 35.8 per cent. This region now comprises
approximately 53 per cent of the Group's operating profits before Group
Services and will remain an important driver of Interserve's future
earnings growth, as evidenced by the expansion of our equipment services
business into Saudi Arabia and the establishment of a support services presence in the region. * Generating revenue growth of 5.9 per cent despite the tough economic
conditions, with a notable 55 per cent growth in the health sector, a key
focus of continued government investment.
* Lowering the UK all-employee accident incidence rate by 20 per cent to 344
injuries per 100,000 workforce. Maintaining a safe and healthy environment
is fundamental to our success and being accident-free is one of our core
goals. Footnotes:
1. Cash conversion is calculated as the percentage of cash generated by
operations of £41.0m (2008: £58.6m) adjusted for the cash impact of
exceptional items £73.1m (2008: £nil), divided by the sum of: operating
profit of £67.9m (2008: £54.4m); plus amortisation of acquired intangible
assets of £5.0m (2008: £5.0m); less exceptional items of £16.3m (2008: £
nil).
2. Future workload comprises contracted work plus work that has been settled
and on which final terms are being agreed (principally PFI projects at
preferred bidder stage). It includes our share of Middle East associates'
future workload.
3. 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.
4. Adjusted for a presentational change in the basis of taxation of our Qatari
associate companies, as previously communicated in the 2009 half-year
report. Whilst there is no impact on Group earnings per share it has
resulted in a reduction in reported operating profits from associate
companies, matched by an equal reduction in the Group tax charge. Applying
the current basis of taxation to 2008, the reported operating profits from
associate companies in that period has been reduced by £3.8 million.
Outlook
In the UK our clients are increasingly under pressure to reduce budgets, toimprove efficiencies and to maximise the effectiveness of their availableresources given the prevailing economic environment. We are well-positioned tobenefit from this trend, given our strong capabilities across a broad range ofmarkets, our proven track record in delivering change and our ability to createinnovative solutions. The longer-term outlook is also attractive, with risingdemand from a growing and ageing population to improve the socialinfrastructure. Challenges are evident in the near-term, as customers are underpressure to curtail discretionary expenditure and the competitive environmenthas intensified. Against this backdrop we have focused on maintaining a healthyfuture workload of £6.5 billion, affording strong revenue visibility. We expectour support services businesses to face another challenging year, with ongoingconcerted cost reduction initiatives on a number of newly secured public sectorcontracts. Our UK construction business has a healthy order book for 2010 andwe expect it to maintain its solid 2009 performance.In the Middle East, our geographical spread, the diversity of services weprovide, our local partners, the high quality customers with whom we haveworked for many years and our exposure to markets with good medium-termprospects, such as Qatar, Abu Dhabi, Oman and Saudi Arabia, will continue topresent us with growth opportunities in the coming years. The economic outlookfor the region remains positive and we expect to be able to grow our existingbusinesses as well as capture more of the available market by expanding bothour service offering and geographical footprint. In 2010 we expect ourconstruction businesses to show further progress, with lower profits from Dubaioffset by continuing growth from Qatar and Abu Dhabi.In Equipment Services, given the outlook in certain markets we will continue totake action to lower costs and limit capital expenditure as we maintain focuson equipment utilisation. At the same time, we are constantly looking for newgrowth markets in which to utilise the equipment fleet, illustrated by therecent expansions into Saudi Arabia and South Africa, and expect to continue todevelop the business going forward. After an exceptionally strong 2009, weexpect the 2010 equipment services operating margin to return to the historicalrange achieved by the division, which will impact the division's profitcontribution relative to the prior year. This will be most evident in the firsthalf, given the division posted a record 25.4 per cent operating margin in thefirst half of 2009.Overall, we expect 2010 to be a challenging year, with the first half beingparticularly impacted by the anticipated reduction in contribution fromEquipment Services and continued cost and margin pressures in Support Services.However, we are focused on taking advantage of the opportunities for renewedgrowth, as and when our markets recover.
Support Services
As highlighted in the operational reviews below, we have increasingly been delivering activities performed by our Specialist Services division to our Facilities Management clients. As of January 2010 we have simplified the management structure by combining Facilities Management and Specialist Services to form Support Services.
Facilities ManagementFacilities Management (FM) provides a broad range of integrated services to thepublic and private sectors, predominantly in the UK, the majority of which wedeliver ourselves. The division addresses the market through five client-facingunits which allows us to tailor our delivery to the particular needs of ourtarget sectors while maximising efficiency and promoting best operationalpractice across the division.Results summary: 2009 2008 Change Revenue £862.6m £793.3m +8.7%
Contribution to Total Operating Profit £22.1m £32.8m (32.6)% Margin
2.6% 4.1% (1.5)%
pts
Whilst delivering strong revenue growth from the recently won contracts, theoperating performance was materially impacted by weakness in the privatesector, significant mobilisation and transition costs on recently won publicsector contracts, and investment in the division's infrastructure and costbase.Our businesses exposed to the private sector experienced lower volumes, mostnotably in our higher margin access activity, together with margin pressure, asmany of our clients reduced demand for discretionary work given the uncertaineconomic environment.In the public and utilities sectors activity levels remained solid, benefitingfrom our long-term contracts in the defence, health and government sectors.Notwithstanding pressure on discretionary spend in the near-term as part of theUK public sector's focus on fiscal deficit reduction, these remain attractivegrowth markets, underpinned by long-term trends towards outsourcing ascustomers continue to seek to reduce costs and improve operational efficiencyby purchasing bundled services. We continue to see good potential in thismarket given there are a limited number of service providers with the abilityto deliver full scope FM contracts, and we continue to develop our businessinfrastructure to enable us to remain well-positioned to benefit from thispotential. We deliver value to clients through enhanced operationalefficiencies over the life of a contract, however, the early phases ofcontracts generally involve significant rationalisation and investment. Giventhe large number of new public sector contracts taken on in 2009, this ishaving a significant impact on near-term earnings. We are continuing toidentify and realise contract cost reduction opportunities, in addition to the£3 million of annualised savings from actions taken in 2009.
During the year we made further progress in three key areas of strategic development for the division, namely:
* National Service Centre ("NSC"). Having opened this facility in the
Midlands in late 2008 the NSC now services five major clients and manages
over 70,000 calls a month. Client feedback has been positive and we look
forward to adding additional contracts and technologies to this facility
over time to further benefit both our own productivity and our customers'
service levels.
* Sustainability. Since its launch in 2008 we are encouraged by the traction
that our RENEWABLES sustainability initiative has gained and the
recognition that it has achieved within the industry. We believe that this
will serve to further enhance our credentials in an area that is of
increasing importance to our clients, and where we believe that we have a
differentiated offering.
* A greater overseas presence. After gaining a footprint in Europe via the
Foreign and Commonwealth Office contract in 2008 the business developed a
presence in the Middle Eastern market during 2009, leveraging the
relationships and infrastructure that our Project Services operation has in
the region and our proven track record of delivering outsourcing contracts
in the UK. Having secured some initial contracts in the UAE, including a
significant three-year project with the military across over 220 locations,
we are encouraged by the pipeline of opportunities in the region and are
confident of being able to enhance our position in the market during 2010.
The business continued to develop its future workload during the year, winningcontracts in both the public and private sectors. Our defence business secureda two-year extension to its contract to deliver facilities management servicesin the Falklands Islands and Ascension Island, worth approximately £24 million.In local government, we were awarded a 10-year contract with Ealing Councilworth £5 million a year, supplementing similar contracts we have with Croydonand Slough councils. Two 25-year contracts to provide facilities managementservices to schools across Northern Ireland have been added to the division'sfuture workload following the attainment of financial close on these PublicPrivate Partnership (PPP) projects, whilst in the public healthcare sector wewon a 19-year contract worth over £2.5 million a year to deliver services atseven sites in Leeds for the Leeds Partnership NHS Foundation Trust.We were awarded our first private sector healthcare contract, spanning twoyears and providing facilities services at CircleBath, a new hospital beingopened in early 2010 by Circle, Europe's largest private healthcarepartnership. In the industrial sector, we secured a £20 million contract inconnection with a large evaporator plant at the Sellafield nuclear powerstation. We also won a three-year contract to deliver integrated supportservices across four sites for the heavy engineering division of Alstom, whilstour commercial business was awarded a two-year contract to be the supplier ofcleaning and associated services across Argos's 745 UK stores.Of particular note is our success in winning the HSBC integrated facilitiesservices contract, worth £200 million and involving the transfer of over 2,400people to Interserve as we deliver services at over 1,600 retail and 120 officesites across the UK, Channel Islands and the Isle of Man. One of the largestsuch contracts in the UK, Interserve's responsibilities include the delivery ofservices to the HSBC group headquarters in Canary Wharf in addition to anestate that includes ATM cash machines, retail branches, commercial centres,offices, data centres, sports and social facilities, and training centres. Wecommenced service provision on 1 December 2009.It is pleasing that the success of our long-term client partnering continues tobe recognised at industry awards. At the Premises and Facilities Management(PFM) awards we won the Partners in Healthcare award for the partnershipbetween Interserve and the University College London Hospital NHS Trust. Theaward recognised not only the strength of our partnership, but noted also howinnovative it has been, in particular in relation to the achievement of keysustainability goals. Our sustainability credentials were further strengthenedwith the award of the Human Capital Award for Innovation for the successfuldevelopment and implementation of our RENEWABLES initiative, complementing theprestigious Sustainability in Real Estate Award that we received at the CoreNetGlobal UK Awards earlier in the year.
Specialist Services
This division provides a variety of specialised outsourced services which areeither delivered discretely or as part of a bundled package to customers of theFacilities Management or Project Services divisions. Such services comprisesecurity, mechanical and electrical (M&E) design, installation and maintenanceand technical services (including asbestos surveying and remediation, liftmaintenance, heating, ventilation and air conditioning (HVAC)). Around half ofits revenues are generated from the private sector.Results summary: 2009 2008 Change Revenue £172.5m £168.2m +2.6%
Contribution to Total Operating Profit £0.0m £1.0m n/a Margin
- 0.6% (0.6)%
pts
The division returned a break-even result for the year. However, followingmanagement action to implement restructuring initiatives during the early partof 2009 there was a return to profitability during the latter part of 2009,marking an improvement in performance after two consecutive six-month periodsof losses. Moreover, we remain on track to deliver annualised cost savings ofapproximately £3 million from 2010. Whilst there has been an encouragingimprovement in the visibility of future work for the public-sector facingsegment, the remainder of the division faces challenging markets. Given thisoutlook, the Board has determined that it is appropriate to reduce the carryingvalue of goodwill associated with these activities. As such, the 2009Consolidated Income Statement includes a non-cash exceptional impairment chargeof £30.0 million.The division continues to make important contributions supporting our clientsthroughout the Group, such as HSBC, Defra and the Sandwell Building Schools forthe Future (BSF) programme. The recently commenced HSBC FM contract hasgenerated work for Specialist Services, with contracts to provide monthlywindow cleaning services to 1,651 branches and 75 offices across the UK and todeliver nationwide planned and reactive maintenance to 746 lifts of all typesand manufacturers. Our consulting business has also been awarded a contract toprovide programme management expertise for small works projects across HSBC'sestate. On the Defra contract we are providing security guarding and passengerlift maintenance, and our consulting business has delivered a programme ofenergy and water surveys across the estate in order to help ensure that Defraexceeds its key sustainability targets. Following on from earlier successeswith Project Services on the Leeds BSF project the division has also won workon the Sandwell BSF programme.Despite encountering tough market conditions the division was also awardedseveral notable third-party contracts during the year, including a majorcapital plant replacement project for the Bank of England; provision ofmechanical and electrical installation at a major residential development onLondon's South Bank; and a contract to provide a merchandising security systemto Tesco Express stores across the UK and Ireland.
Project Services
Project Services works in close collaboration with clients in the UK and theMiddle East, leading the design and construction process in the creation of abroad range of buildings and infrastructure. The majority of Project Services'UK work comes from low-risk projects with long-standing clients, and aroundthree-quarters of this activity is in the public and utilities sectors. In theMiddle East, where we have been active across the region for around 30 years,our associate partners play a key role in understanding the local businessenvironment, advising on suitable clients, and providing direction and supportin developing long-term, mutually beneficial working relationships. In anuncertain economic environment such partnerships have been, and will remain, ofvital importance.Results summary: 2009 2008 (1) Change Revenue (UK only) £820.5m £770.8m +6.4%
Contribution to Total Operating Profit £40.7m £35.9m +13.4% - UK
£17.6m £15.2m
+15.8%
- International associates (1) £23.1m £20.7m
+11.6%
Margin (UK only) 2.1% 2.0% +0.1%
pts
The strong demand experienced in our Middle Eastern construction markets in recent years continued during 2009, outside of Dubai, resulting in a like-for-like increase in contribution from international associates of 11.6 per cent. The UK business performed very well in a more competitive environment, delivering both revenue and profit growth and reporting an improved margin of 2.1 per cent.
Footnote:
1. Adjusted for a presentational change in the basis of taxation of our Qatariassociate companies, as previously communicated in the 2009 half-year report.Whilst there is no impact on Group earnings per share it has resulted in areduction in reported operating profits from associate companies, matched by anequal reduction in the Group tax charge. Applying the current basis of taxationto 2008, the reported operating profits from associate companies in that periodhas been reduced by £3.8 million.
United Kingdom
In the UK we continued to secure a high level of repeat business with keycustomers in our chosen sectors of expertise: education, health, custodial, andwater and highways infrastructure. Whilst anticipating some near-term pressureon public sector capital spending the business has positioned itself well, andwe are greatly encouraged by our future workload, in particular the currentworkload for 2011. At the end of 2009 the UK future workload contained ahealthy £0.4 billion of work for 2011, which compares favourably with the prioryear comparative figure of £0.2 billion.2009 was another busy year for our education business. We completed a furtherthree schools in the Leeds BSF programme and are nearing completion of twoleisure centres within the programme (which are the first non-educational PFIprojects within the BSF programme). We added the £280 million Sandwell BSFproject to our workload in the middle of 2009, and separately won a £77 millioncontract to construct the new Sandwell College during 2010. In November 2009 wewon a place on both sectors of Partnership for Schools' new £4 billion NationalContractors' Framework for Academies. Work totalling £650 million is alreadyvisible for the first six months of the framework, which is expected to run forfour years.In health, we delivered work arising from each of the framework agreements inEngland (ProCure21), Wales (Designed for Life: Building for Wales) and Scotland(NHS Scotland: Frameworks Scotland), generating revenues of almost £160 millionduring the year. We are currently working on over 50 projects under theProCure21 framework, including a project worth approximately £20 million toexpand facilities at Christie Hospital, Manchester, one of the largest cancertreatment centres in Europe; two major schemes for Birmingham and SolihullMental Health, worth around £40 million in total; and a new £20 million centrefor women, children and babies at the Royal Bolton Hospital.Our leading position as a prison contractor for the Ministry of Justice wasenhanced in 2009. We completed the £32 million extension works at HMP ForestBank, and were awarded major contracts for the construction of a new youngoffender institution at Belmarsh, and a new facility for the Youth JusticeBoard at Glen Parva, worth £110 million and £70 million respectively, alongwith a new prison block at HMP Acklington. Over 1,000 new prisoner places willbe provided by these three new projects.In infrastructure, we continued to develop our strong relationships with thewater utilities, the Highways Agency and the Environment Agency. Our successfulrenewal of frameworks for the Highways Agency for specialist concrete repairsand highways/structures maintenance has secured revenues approaching £25million per annum. Of particular note is the progress made in the waterinfrastructure sector, where we were successful in securing places on the AMP5framework contracts with United Utilities and South West Water. Nearingcompletion is the Thames Gateway desalination plant for Thames Water. We havealso been awarded two contracts totalling £60 million by the same client toconstruct new facilities and upgrade existing works at their Riversidewastewater treatment plant. We expect the water sector to provide a steadythroughput of work over the coming years.Several other sectors also contributed to divisional earnings. These includethe defence sector, where a major project at RAF Benson was completed and theconstruction of a new hangar at RAF Brize Norton is ongoing. The delivery ofthe refurbished Turnberry Hotel and Golf Resort in time for The Open was anotable achievement within the commercial sector. We also have places on arange of multi-year construction frameworks for local authorities such as NorthYorkshire County Council, and have been appointed to multi-authorityframeworks, including the Construction Framework South West and YORBuildprogrammes.During 2009 we continued to win recognition and accolades from industry bodiesfor our achievements, including further recognition for our Leeds BSF team asthey were awarded Integrated Supply Chain of the Year at the annual BuildingAwards hosted by Building Magazine. The division's sustainability credentialswere strengthened with our work at the Thames Gateway desalination plant beingawarded the Most Sustainable Project at the Annual Awards Ceremony of GlobalWater Intelligence. Elsewhere we received the Gold RoSPA award for our workwith Severn Trent Water, and our KMI joint venture is a 2009 winner of aConstruction News Quality in Construction Award for its environmental work atthe newly built Hodder Service Reservoir. It is also very pleasing to note thatwe were named the Best Building Contractor with over 500 employees in the BestPlaces to Work in Construction 2009 awards and were awarded maximum five-starRecognised for Excellence status, by the British Quality Foundation, followingtheir independent evidence-based assessment scored against the EFQM ExcellenceModel.Middle East
Our Middle East associate businesses traded well during 2009 and we remain positive about the outlook for the region, despite the decline in activity in Dubai.
In our most significant market, Qatar, activity levels remained healthy. Wecontinued to work with our blue-chip long-term clients including Siemens,Shell, ABB, Exxon Mobil, HSBC and Qatar National Bank to continue the expansionof petrochemical capacity and facilities at Ras Laffan Industrial City, and thedevelopment of social infrastructure and commercial space in and around Doha.Notable awards included the recently announced five-year services contract withShell and construction work at Education City, supplementing the work wonearlier in the year at Ras Laffan with Oryx and Baker Hughes. Whilst there hasbeen a temporary slowdown in project awards in recent months, the pipeline ofopportunities in Qatar remains strong, including developments at Dohaland,Energy City, Lusail City, further expansion at Ras Laffan Industrial City andthe Qatar-Bahrain Friendship Bridge. Given this market environment we expect tosee an improvement in workload as 2010 progresses, and are encouraged by thecontract awards announced separately today with a combined value of over £90million.In the UAE, the market in Dubai slowed during 2009 as many planned schemes werere-appraised in light of the financial difficulties many developers faced. Wewon contracts in 2009 with Majid Al Futtaim, the Dubai World Trade Centre andDucab, though expect activity levels to remain muted in the near term and have,accordingly, reduced employee numbers by approximately 2,000. There remains,however, a good stream of opportunities in the growing Abu Dhabi constructionmarket, where the oil wealth provides a sustainable development basis, and wewould expect that this will mitigate the lower activity levels in Dubai overtime.In Oman, the construction market environment improved as 2009 progressed, andwe are encouraged by the outlook. The Sultanate's desire to develop its socialinfrastructure and diversify the economy away from oil and gas is leading tonew opportunities and awards in the commercial, residential, leisure, educationand judicial sectors, though work undertaken in 2009 remained focused on thepetrochemical and industrial sectors. During the year we completed work on apower and desalination plant at Barka for Doosan Heavy Industries, and we arenearing completion of the construction of further Permanent Accommodation forContractors units for Renaissance Services, worth approximately £48 million.
Equipment Services
Equipment Services provides temporary structural equipment and the engineeringdesigns for use in complex infrastructure and building projects, generatingrevenue through both hire contracts and equipment sales (of both new and usedcomponents). The division operates across a wide range of geographies andmarket sectors, enabling the transfer of equipment to areas of high demand tooptimise asset productivity and mitigating the effects of country-specific
cyclicality.Results summary: 2009 2008 Change Revenue £157.1m £171.7m (8.5)%
Contribution to Total Operating Profit £35.9m £29.6m +21.3% Margin
22.9% 17.2% +5.7%
pts
The division maintained its strong performance from the first half through theremainder of the year, posting an exceptional full-year contribution to TotalOperating Profit of £35.9 million. Our progress was based on continued strengthin the Middle East, which was boosted by the impact of several major hirecontracts in the UAE, together with another improved, healthy contribution fromAustralia. This offset a more challenging environment across Europe and therest of Asia. Where appropriate, cost reduction measures have been implementedin order to mitigate the tough near-term demand outlook in these territories.These are expected to realise cost savings of around £2 million during 2010.Regionally:Middle East andAfricaOur Middle East operation had a particularly strong year, benefiting fromseveral significant contracts during the year, including work at Yas Island forthe Formula One race track and associated facilities and a major contract atthe new Dubai airport terminal. Our Abu Dhabi operation is allowing us tooptimise fleet utilisation by migrating equipment to this growing market fromDubai, where activity levels are expected to be modest going forward. Exportsto the North African countries of Libya, Morocco and Algeria made usefulcontributions and the business continues to broaden its scope with India andIraq expected to add to the region's export markets during 2010.Our start-up South African operation continues to develop and we look forwardto progress in 2010. During 2009 we established an operation in Saudi Arabia,the largest addressable construction market in the Gulf, and expect thebusiness to begin contributing to divisional profit during 2010.
Australasia andFar East
Our market-leading Australian business had another good year, boosted by theinfrastructure and mining markets. We worked on the largest civil engineeringproject undertaken in the Darwin area, the A$400 million Tiger Brennan Driveproject, which involved road building, earth works and bridge construction.With the commercial and residential sectors expected to remain subdued inAustralia during 2010, much now depends on the size and timing of any fiscalstimulus and its translation into higher infrastructure spending. Thecontribution from the Far East remained weak, affected particularly by adverseconditions in Korea and Hong Kong. With a limited outlook in these territorieswe have been taking action to downsize operations and redeploy fleet to moreattractive markets, and anticipate an improved performance in 2010.
Europe
With challenging market conditions across the region throughout 2009 the focushas been on reducing the cost base and capital expenditure. Headcount has beenlowered by around 15 per cent in the UK and Spain and approximately 40 per centin Ireland, where the trading environment has been particularly poor. Thanks tothese early cost reduction initiatives the region performed creditably. In 2010the UK is expecting to benefit from additional work for the Olympics (havingalready completed a major project at the Olympic Aquatics Centre in 2009), EastLondon Line, Crossrail and M25 widening, though activity in the commercialsector is likely to remain at the current low level. Spain and Ireland are notexpected to improve significantly in the near term. The businesses in theregion will continue to prioritise fleet utilisation and cost reduction untilsuch time as the demand environment improves.
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. 2009 2008 Change
Contribution to Total Operating Profit £4.7m £2.8m +67.9% Interest received on subordinated debt £4.6m £4.7m (2.1)% investments
_____ ______________ £9.3m £7.5m +24.0%2009 has been a particularly active period with respect to our PFI portfolio,with new projects being added and considerable value being generated via thetransfer of a large part of the portfolio to the Interserve Pension Scheme, acash disposal and a debt repayment.Of most significance was the announcement in November 2009 of the transfer ofthe Group's interest in 13 PFI investments, across a range of sectors, to theInterserve Pension Scheme (the "Scheme") through an innovative transaction torealise value from the substantial long-term cash flow streams inherent withinthe PFI portfolio. Interserve will continue to manage the investments on behalfof the Scheme, and retains all current arrangements for the delivery offacilities services worth a whole-life value of over £1.3 billion. All futureinterest and dividend income will be payable to the Scheme. The valuation of £61.5 million represented an effective discount rate of 6.5 per cent and amultiple of 2.6 times invested capital. The Group has recorded an exceptionalprofit of £33.2 million in the 2009 Consolidated Income Statement.Separately, cash amounting to £15 million was released from the portfolio viathe sale of our interests in the Sheffield Schools project and the repayment ofthe majority of our subordinated debt in the UCLH project. Going forward, weexpect further cash generation from the mature projects in the portfolio, whichwill assist in the funding of new projects.We also added to the portfolio, reaching financial close on four contractsduring 2009. Three of these contracts were in Northern Ireland, including theacute hospital at Enniskillen and two schools projects in Down & Connor andDownpatrick. As well as injecting equity into the PFI projects, Interserve willbenefit from the income streams flowing from the 25-year services contractswith the schools and the 30-year services contract at the hospital. Theremaining project to reach financial close was the Sandwell BSF programme,which is worth more than £280 million in construction and services revenues toInterserve over 25 years. Work has already begun on the first two schoolswithin this project, which are due to be fully operational in 2011.Following the above transactions our investment commitment in signed projectstotals £54.3 million, of which £19.8 million had been paid at 31 December 2009.The preferred bidder project that we secured in January 2009, in partnershipwith United Utilities, for a £500 million waste-treatment contract inDerbyshire, will involve further investment of around £12 million.
We are short-listed on a number of projects across several sectors and we expect to make further progress in developing our PFI portfolio, and generating additional value from it, over the coming years.
Group Services
Costs accounted for within Group Services of £17.7 million (2008: £17.9 million) relate to our PFI bidding activity, a range of centrally-provided services and the Group Board.
Financial review
The Chairman's statement and the Business review provide an overview of the Group's results for 2009. This report provides further information on key aspects of the performance and financial position of the Group.
Financial performance
The income statement for the period is summarised below:
£ million 2009 2008 Increase Revenue 1,906.8 1,800.0 +5.9%Headline operating profit 85.7 88.0 (2.6)%
Investment revenue and finance costs (7.4) (2.8) Headline profit before taxation 78.3 85.2
(8.1)%
Amortisation of acquired intangible assets (5.4) (5.3)
Exceptional items 16.3 - Profit before taxation 89.2 79.9 +11.6%Taxation on Headline profit (12.4) (23.6)
Taxation on amortisation and exceptional items (4.4) 1.4
Profit for the year 72.4 57.7 +25.5%Headline EPS 49.7p 46.7p +6.4%Dividend per share 17.5p 17.0p +2.9%
Revenue and operating profit
Revenue growth of 5.9 per cent represents growth of existing contracts, new wins and the full year benefit of contracts awarded in 2008.
Average exchange rates used in the preparation of these results were:
Average rates Closing rates 2009 2008 2009 2008 US$ 1.56 1.86 1.59 1.45Aus$ 1.99 2.18 1.78 2.10€ 1.12 1.26 1.11 1.03
The presentation of results from our Middle East associates incorporates achange in the basis of taxation of our associate companies in Qatar. Whilstthere is no impact to the Group earnings per share it has resulted in areduction in reported operating profits from associate companies, matched by anequal reduction in the Group tax charge. Had the current basis of taxation beenin place during 2008, the impact would have been to reduce reported operatingprofits from Project Services associate companies in that period by £3.8million.Adjusting for the change in Middle East tax classification, headline operatingprofit increased by 1.8 per cent over prior year, due to a strong performanceparticularly in overseas businesses.
Investment revenue and finance costs
The net charge for the year of £7.4 million can be analysed as follows:
£ million 2009 2008 Net interest on Group debt (3.2) (7.6)Interest due on PFI sub debt 4.6 4.7 IAS 19: Expected return on Scheme assets 24.4 32.6Interest cost on pension obligations (33.2) (32.5)Group net interest charge (7.4) (2.8)
Average net debt was £62 million (2008: £102 million). Net interest on Group debt was lower than the prior year reflecting a lower level of net debt and reduced interest rates during the period.
Following decreases in pension fund asset values in 2008, 2009 results reflected reduced assumed returns on Interserve Pension Scheme ("the Scheme") assets to £24.4 million (2008: £32.6 million), resulting in an increased non-cash net interest cost.
Exceptional items
The Group recorded a net exceptional gain before tax of £16.3 million in 2009(2008: £nil).£ million 2009 2008 Profit on disposal of property and investments: - PFI assets contributed to Pension Scheme 33.2 -- Other 4.1 -Pension curtailment gain 20.6 -OFT fine (11.6) -Impairment of goodwill (30.0) -Exceptional items before taxation 16.3 -
Profit on disposal of property and investments
In November 2009, the Group announced an agreement to dispose of its interestin a portfolio of 13 PFI investments, valued at £61.5 million, into the Schemeresulting in an exceptional profit of £33.2 million in the 2009 IncomeStatement (including £26.1 million of IAS 39 revaluations on available-for-salefinancial assets and cash flow hedges previously credited directly to equity).
All future interest and dividend income over the lifetime of these investments will be payable to the Scheme.
The agreed valuation of £61.5 million represents an effective discount rate of6.5 per cent and a multiple of 2.6 times invested capital. Consequently theScheme's funding shortfall at the end of 2009 was reduced by this valuation andthe Group recorded an exceptional profit of £33.2 million in the 2009 IncomeStatement. The resulting reduction in Group operating profits, arising from theloss of income from these investments, will be largely offset in the GroupIncome Statement by the corresponding increased return on assets in the Scheme,as reported within the net interest charge.
Curtailment gain
As previously announced, the Board decided to close the main defined benefitscheme to future accrual for all non-passport members from the end of 2009. Asa result of completing the consultation process and finalising the closure, acurtailment gain of £20.6 million has been recognised in the ConsolidatedIncome Statement.
OFT fine
Following its investigation into the construction industry the Office of FairTrading announced fines for 103 companies. The Group fine of £11.6 million
hasbeen paid in full.Impairment of goodwill
Given the uncertain demand outlook in the markets served by the SpecialistServices division the Board has determined that it is necessary to impair thecarrying value of goodwill associated with these activities. As such, the 2009Consolidated Income Statement includes a non-cash exceptional impairment chargeof £30.0 million.Taxation
The tax charge for the year of £16.8 million represents an effective rate of18.8 per cent on profit before taxation. This reflects a number ofnon-recurring items, including the impact of non taxable exceptional items, therelease of £5.2 million of deferred tax liabilities relating to unremittedearnings from overseas associates (following the enactment of the 2009 FinanceAct in July 2009) and prior period adjustments. The impact of these on theunderlying effective rate is analysed below to arrive at an underlyingeffective tax rate of 23.8 per cent. This rate reflects the previouslydescribed change in basis of taxation of our associate companies in Qatar.
2009 2008 £million % £million % Profit before taxation 89.2 79.9 Standard rate 25.0 28.0% 22.8 28.5%Current year adjustments (3.8) (4.3)% 0.5 0.6%Underlying tax charge and 21.2 23.8% 23.3 29.2%effective rate
Non-taxable exceptional items 1.3 1.5% -
-Tax on unremitted earnings (5.2) (5.8)% - -Prior period adjustments (0.5) (0.6)% (1.1) (1.4)%Taxation charge and effective rate 16.8 18.8% 22.2 27.8% DividendThe directors recommend a final dividend for the year of 12.0 pence, to bringthe total for the year to 17.5 pence, an increase of 2.9 per cent over lastyear. This dividend is covered 2.8 times by headline earnings per share and
4.6times by free cash flow.Net debt and cash flow
Year-end net debt was £37.3 million (2008: £109.2 million), having benefited from free cash flow generation of £100.9 million (2008: £22.8 million).
£ million 2009 2008 Operating profit before exceptional items and 56.6 59.4amortisation of intangible assets Depreciation and amortisation 24.5 22.6Net capital expenditure (15.9) (34.6)Gain on disposal of property, plant and (7.2) (9.0)equipment Share-based payments 3.1 3.5Working capital movement 52.6 (7.2)Operating cash flow 113.7 34.7
Pension contributions in excess of the income (15.5) (10.7) statement charge
Dividends received from associates and joint 17.6 13.5ventures Tax paid (15.7) (14.0)Other 0.8 (0.7)Free cash flow 100.9 22.8Dividends paid (24.5) (23.5)Investments, acquisitions and disposals 68.6 (7.7)Special pension contribution (61.5) -Other non-recurring (11.6) 0.8Decrease / (increase) in net debt 71.9 (7.6)
The extremely strong operating cash flow of £113.7 million (2008: £34.7 million) was driven by the actions that we have taken to reduce capital expenditure and a reduction in working capital.
With the benefit of a £15.0 million net inflow of advances received from customers (2008: £16.5 million outflow) working capital provided a net inflow of £52.6 million.
Tax paid at £15.7 million (2008: £14.0 million) remains lower than the Consolidated Income Statement charge incurred by the Group due principally to timing differences and the tax deductions for pension deficit payments.
Capital expenditure has been reduced in the period following a period ofsustained investment in Equipment Services' geographical strength throughoutthe Middle East and infrastructure in Facilities Management - depreciation inthe period exceeded net capital expenditure by £8.6 million.Investments and acquisitions inflow of £68.6 million in 2009 reflects £76.2million of cash released from the PFI portfolio via the disposal of investmentsto the pension scheme, the sale of our interest in the Sheffield Schoolsproject and the repayment of the majority of our subordinated debt in theUniversity College London Hospital project less additional equity and sub-debtinvested in other PFI joint venture companies.Other non-recurring items of £11.6 million represent the payment in full of theOFT fine.Pensions
At 31 December 2009 the Group pension deficit under IAS 19, net of deferred tax, was £68.6 million (2008: £110.2 million):
£ million 2009 2008 Defined benefit obligation 627.4 534.2Scheme assets (532.1) (381.1)Deferred tax thereon (26.7) (42.9)Net deficit 68.6 110.2
The reduction in the deficit during the year was driven by the contribution ofPFI investments, cash contributions in excess of the Income Statement charge,increases in asset values and the curtailment gain resulting from the closureof the Scheme to future accrual for all non-passport members from the end ofDecember 2009. This was partially offset by an increase in the value of thedefined benefit obligation due to a fall in the discount rate and increasedinflationary expectations.
Defined benefit liabilities and funding
The Group's principal pension scheme is the Interserve Pension Scheme, comprising approximately 92 per cent of the total defined benefit obligations of the Group.
The latest triennial valuation as at 31 December 2008 has recently beencompleted with an assessed ongoing funding shortfall, at that date, of £224million. The Group has agreed with the Trustee of the Scheme that it will aimto eliminate this deficit over the period to 31 December 2017. During 2009 theGroup paid deficit funding contributions of £13.6 million and also transferredits interest in a portfolio of 13 PFI investments to the Scheme, as anadditional one-off deficit contribution. In addition, the Group currentlyexpects to pay £22 million per annum, increasing by 2.8 per cent each year,into the Scheme above the funding of ongoing accrual of benefit for the next 8years to meet this deficit. In practice, the level of contributions will bereviewed at the next formal valuation, due as at 31 December 2011.
A number of further actions have been completed during the period, designed to reduce both the funding shortfall and the risk in accrued liabilities:
* The defined benefit scheme was closed to future accrual for all
non-passport members from the end of 2009. This has resulted in a £20.6
million curtailment gain reported in the Group Income Statement.
* PFI investments, valued at £61.5 million, contributed through an innovative
structure. * A full investment strategy review has been completed, and initial conclusions implemented, in conjunction with the Trustee of the Scheme.
This has reduced investment risk through greater asset diversification and
matching of inflation and interest volatility with Scheme liabilities.
Investment risks
At 31 December 2009 the Scheme assets were invested in a mixed portfolio thatconsisted of a balance of performance-seeking assets (such as equities) andlower-risk assets (such as gilts and corporate bonds). As at 31 December 2009,46 per cent of the Scheme assets were invested in performance-seeking assets(2008: 62 per cent).
The agreed investment objectives of the Scheme are:
* to secure, with a high degree of certainty, liabilities in respect of all
defined benefit members; and
* to adopt a long-term strategy which aims to capture outperformance from
equities and move gradually into bonds to reflect the increasing maturity
of the defined benefit membership with a view to reducing the volatility of
investment returns.
The majority of equities held by the Scheme are in international blue chipentities. The aim is to hold a globally diversified portfolio of equities, withan ultimate target of 50 per cent of equities being held in UK and 50 per centin US, European and Asia Pacific equities.
IAS 19 assumptions and sensitivities
Assumptions adopted in assessment of the Group charge and funding position under IAS 19 are reviewed and updated as necessary under advice from our actuarial advisers, Lane Clark & Peacock LLP. At the balance sheet date mortality rates remain unchanged and are based on an adjustment to the "00 series tables" using the "medium cohort" mortality improvement projection strengthened with a minimum underpin to the annual rate of improvement (1.0 per cent for males and 0.5 per cent for females).
The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:
Assumption adopted Sensitivity Indicative change in liabilities 2009 2008 Key financial assumptions Discount rate 5.6% 6.3% +/- 0.5% -/+ 8% -/+ £53m Inflation 3.5% 2.9% +/- 0.5% +/- 6% +/- £35m Real salary increases 1.5% 1.5% +/- 0.5% +/- 0.2% +/- £1m Life expectancy (years) Current pensioners 1 Men 85.8 85.7 ) Women 87.8 87.7 ) Future pensioners 2 ) + 1 year +3% +£17m Men 87.7 87.6 ) Women 89.0 88.9 )
1 Life expectancy of a current pensioner aged 65
2 Life expectancy at age 65 for an employee currently aged 45.
PFI/PPP Investments
The credit in the Income Statement relating to the performance of the Group's share of the PFI equity portfolio is analysed as follows:
£ million 2009 2008 Share of operating profit 4.8 3.8Net finance credit 3.0 1.4Taxation (3.1) (2.4)
Share of profit included in Group Total Operating Profit 4.7 2.8
Assets created under PFI contracts have been assessed in relation to the balance of risks and rewards assumed by the Group and are accounted for as financial assets, classified as available-for-sale. As such these assets are held at their assessed fair value at the balance sheet date, with movements over the period being taken directly to equity.
Having successfully disposed of 14 investments during the period, including thetransfer of its interest in a portfolio of 13 investments to the Scheme, at thebalance sheet date the Group had £54.3 million of committed investment in 20PFI/PPP projects which had reached financial close. Of this £19.8 million hadbeen invested at that date, with the balance due to be invested over the nextthree years.£ million Investment Remaining Total to date commitment 1 January 2009 46.9 27.5 74.4New projects achieving financial close - 14.9 14.9Loans and capital advanced 7.9 (7.9) -Repayment of sub-debt (8.2) - (8.2)Disposal of investments (26.8) - (26.8)31 December 2009 19.8 34.5 54.3The Group's share of gross liabilities of £587.1 million (2008: £787.2 million)principally represents non-recourse debt within these ventures to fund capitalbuilding programmes and working capital requirements.On one further project, Derby Waste, the Group has been nominated as preferredbidder but had not reached financial close at the year end. Financial close onthis project will entail a further investment commitment of approximately £12.0million.Our PFI portfolio represents a significant source of value. For illustrativepurposes, the present value of the expected future cash flows of the currentportfolio excluding projects at preferred bidder stage at a range of discountrates would be:Discount rate 6.0% 8.0% 10.0%
12.0% Projects past financial close only £120.7m £86.7m £63.5m £47.2m
Treasury risk management
The Group operates a centralised Treasury function whose primary function is tomanage interest rate, liquidity and foreign exchange risks. The Treasuryfunction is not a profit centre and it does not enter into speculativetransactions. It aims to reduce financial risk in the Group by the use ofhedging instruments. Management and control of identified risks is carried outby reference to a framework of policies and guidelines approved by the Boardwithin which Treasury must operate.
Liquidity risk
The Group seeks to maintain sufficient facilities to ensure that it has accessto funding to meet current and anticipated future requirements determined frombudgets and medium term plans.
The Group has access to committed borrowing facilities of £250 million:
Amount of Date of facility expiry
Syndicated revolving credit facility £225 million May 2011 Bi-lateral credit facility
£25 million June 2012
Market price risk
The objectives of the interest rate policy for the Group are to match fundingcosts with operational revenue performance and to ensure that adequate interestcover is maintained in line with Board approved targets and banking covenants.
Group borrowings are principally denominated in sterling and mostly subject to floating rates of interest linked to LIBOR. The Group has in place interest rate caps and swaps which limit interest rate risk. The weighted average duration to maturity of these instruments is a little over two years.
Foreign currency risk
Transactional currency translation
The revenues and costs of a trading entity will typically be denominated in itsfunctional currency. Where a material trade is transacted in non-functionalcurrency, the entity is required to take out instruments through thecentralised Treasury function to hedge the currency exposure. The instrumentsused will normally be forward currency contracts. The impact of retranslatingany entity's non-functional currency balances into its functional currency wasnot material.
Consolidation currency translation
The Group does not hedge the impact of translating overseas entities trading results or net assets into the consolidation currency.
In preparing the consolidated financial statements, profits and losses from overseas activities are translated at the average exchange rates applying during the year.
The balance sheets of overseas entities are translated at the year-end exchangerates. The impact of changes in the year-end exchange rates, compared to therates used in preparing the 2008 consolidated financial statements, has led toa reduction in consolidated net assets of £21.3 million (2008: £48.8 millionincrease).Going concern
The Group's business activities, together with the factors likely to affect itsfuture development, performance and position are set out in the Businessreview. The financial position of the Group, its cash flows, liquidity positionand borrowing facilities and details of its financial risk management aredescribed in the Financial review.The majority of the Group's revenue is derived from long-term contracts, whichprovides the Group with a strong future workload and good forward revenuevisibility. The Group has access to committed debt facilities totalling £250million until at least May 2011. As a consequence, the directors believe thatthe Group is well placed to manage its business risks successfully despite thecurrent uncertain economic outlook.After making enquiries, the directors have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. For this reason, they continue to adopt the going concernbasis in preparing the financial statements.
Principal risks and uncertainties
Interserve operates in a business environment in which a number of risks anduncertainties exist. While it is not possible to eliminate these completely,the established risk-management and internal control procedures, which areregularly reviewed by the Group Risk Committee on behalf of the Board, aredesigned to manage their effects and so to contribute to the creation of valuefor the Group's shareholders as we pursue our business objectives. The Groupcontinues to be dependent on effective maintenance of its systems and controls.Over and above that, the principal risks and uncertainties which the Groupaddresses through its risk-management measures are:
Market change
Among the market changes which could affect Interserve's business are: shiftsin the economic climate both in the UK and internationally; a deterioration inthe profile of our counterparty risk; alterations in the UK government's policywith regard to expenditure on improving public infrastructure, buildings andservices; delays in the procurement of government-related projects; saturationof or a downturn in our markets in the Middle East; fluctuations in theproportion of our earnings derived from associates and joint ventures; shiftsin the political climate in some of the regions in which we operate; changes inour competitors' behaviour; and the imposition of unusually onerous contractconditions by major clients. Any of these might result in a failure to win newor sufficiently profitable contracts in our chosen markets or to complete thosecontracts with sufficient profitability.The Group seeks to mitigate these risks by fostering long-term relationshipswith its clients and partners, its predominantly governmental/quasigovernmental medium to long-term revenue streams, careful supply chainmanagement and by operating in various regions of the world, including theMiddle East, where we are able to transfer resources to maximum effect betweenthe differing economies of that region. The Group also has in place syndicatedand bi-lateral committed loan facilities. We constantly monitor marketconditions and assess our capabilities in comparison to those of ourcompetitors. Whether we win, lose or retain a contract we analyse the reasonsfor our success or shortcomings and feed the information back at both tacticaland strategic levels. We constantly monitor our cost base and take action toensure it is suitable given the prevailing market environment. In 2009 thisresulted in some cost reduction initiatives, which are discussed in theOperational review.
Major contracts
As Interserve focuses on large-volume relationships with certain major clientsfor a significant part of its revenue, termination of one or more of theassociated contracts would be likely to reduce revenue and profit for theGroup. In addition, the management of such contracts entails potential risksincluding mis-pricing, inaccurate specification, failure to appreciate risksbeing taken on, poor control of costs or of service delivery, sub-contractorinsolvency and failure to recover, in part or in full, payments due for workundertaken. In PFI/PPP contracts, which can last for periods of around 30 yearsand typically require the Special Purpose Companies (SPCs) established byInterserve and one or more third parties to provide for the future capitalreplacement of assets, there is a risk that such a company may fail toanticipate adequately the cost or timing of the necessary works or that theremay be increases in costs, including wage inflation, beyond those anticipated.Among the Group's mitigation strategies are targeting work within, orcomplementary to, its existing competencies, the fostering of long-termrelationships with clients, operating an authority matrix for the approval oflarge bids, monthly management reporting with key performance indicators atcontract and business level, the use of monthly cost-value reconciliation,supply chain management, taking responsibility for the administration of ourPFI/PPP SPCs, securing Board representation in them and ensuring that periodicbenchmarking and/or market testing are included in long-term contracts.
Key people
The success of Interserve's business is dependent on recruiting, retaining,developing motivating and communicating with appropriately skilled, competentpeople of integrity at all levels of the organisation. The members of themanagement team contribute to Interserve's ability to obtain, generate andmanage opportunities. We have various incentive schemes and run a broad rangeof training courses for people at all stages in their careers. With activehuman resources management and Investors in People accreditation in many partsof the Group, we manage our people professionally and encourage them to developand fulfil their maximum potential with Interserve.
Health and safety regime
The nature of the businesses conducted by the Group involves exposure to healthand safety risks for both employees and third parties. Management of theserisks is critical to the success of the business and is implemented through theadoption and maintenance of rigorous operational and occupational health andsafety procedures. A commitment to safety forms part of Interserve's missionstatement and the subject leads every Board meeting both at Group anddivisional level. Each member of the Executive Board undertakes dedicatedvisits to look at health and safety measures in place at our operational sitesand we have ongoing campaigns across the Group emphasising its importance.
Financial risks
The Group is subject to certain financial risks which are discussed in the Financial review.
In particular Interserve carries out major projects which from time to timerequire substantial amounts of cash to finance working capital, capitalexpenditure and investment in PFI projects. Failure to manage working capitalappropriately could result in the Group being unable to meet its tradingrequirements and ultimately to defaulting on its banking covenants. Interservehas policies in place to monitor the effective management of working capital,including the production of daily balances, weekly cash reports and forecaststogether with monthly management reporting.
Interserve recognises a pension deficit on its balance sheet. The deficit's value is sensitive to several key assumptions, and any significant changes in these may result in the Group having to increase its pension scheme contribution with a resultant impact on liquidity.
Damage to reputation
Issues arising within contracts, from Interserve's management of its businessesor from the behaviour of its employees at all levels can have broaderrepercussions on the Group's reputation than simply their direct impact.Control procedures and checks governing the operation of our contracts and ofour businesses are supported by business continuity plans and arrangements formanaging the communication of issues to Interserve's stakeholders.
Consolidated income statement
For the yearended 31 December 2009
Year ended 31 December 2009 Year ended 31 December 2008 Before Exceptional Total Before Exceptional Total exceptional items and exceptional items and items and amortisation items and amortisation amortisation of acquired amortisation of acquired of acquired intangible of acquired intangible intangible assets intangible assets assets assets Notes £million £million £million
£million £million £million
Continuing operations Revenue 3 1,906.8 - 1,906.8 1,800.0 - 1,800.0Cost of sales (1,683.1) - (1,683.1) (1,576.8) - (1,576.8)Gross profit 223.7 - 223.7 223.2 - 223.2Administration (167.1) - (167.1) (163.8) - (163.8)expenses Amortisation of - (5.0) (5.0) - (5.0) (5.0)acquired intangible assets Impairment of 4 - (30.0) (30.0) - - -goodwill Other exceptional 4 - 9.0 9.0 - - -items Total administration (167.1) (26.0) (193.1) (163.8) (5.0) (168.8)expenses Profit on disposal 4 - 37.3 37.3 - - -of property and investments Operating profit 56.6 11.3 67.9 59.4 (5.0) 54.4Share of result 29.1 - 29.1 28.6 - 28.6Amortisation of - (0.4) (0.4) - (0.3) (0.3)acquired intangible assets Share of result of 10 29.1 (0.4) 28.7 28.6 (0.3) 28.3associates and joint ventures Total operating 85.7 10.9 96.6 88.0 (5.3) 82.7profit Investment revenue 5 31.6 - 31.6 39.9 - 39.9Finance costs 6 (39.0) - (39.0) (42.7) - (42.7)Profit before tax 78.3 10.9 89.2 85.2 (5.3) 79.9Tax (charge)/credit 7 (12.4) (4.4) (16.8) (23.6) 1.4 (22.2)Profit for the year 65.9 6.5 72.4 61.6 (3.9) 57.7Attributable to: Equity holders of 62.2 6.5 68.7 58.3 (3.9) 54.4the parent Minority interest 3.7 - 3.7 3.3 - 3.3 65.9 6.5 72.4 61.6 (3.9) 57.7 Earnings per share 9 Basic 54.9p 43.5pDiluted 53.7p 42.7p
Consolidated statement of comprehensive income
For the year ended 31 December 2009
Notes Year Year ended 31 ended 31 December December 2009 2008 £million £million Profit for the 72.4 57.7period Other comprehensive income Exchange differences on (21.3) 48.8
translation of foreign operations
Loss on (0.4) (1.3)available-for-sale financial assets Gains/(losses) on cash flow hedges 28.8
(79.1)
(joint ventures) (Losses)/gains on available-for-sale (16.8)
109.2
financial assets (joint ventures)
Actuarial losses on defined (31.0) (80.7)benefit pension schemes Deferred tax on items 7 5.3 14.2taken directly to equity Other comprehensive (35.4) 11.1expense net of tax Total comprehensive 37.0 68.8income Attributable to: Equity holders of 33.3 65.5the parent Minority interest 3.7 3.3 37.0 68.8Consolidated balance sheetAt 31 December 2009 31 December 31 December 31 December 2009 2008 2007 Notes £million £million £million Non-current assets Goodwill 198.9 228.9 228.4Other intangible assets 31.9 33.4 34.8Property, plant and equipment 148.8 156.8 117.6Interests in joint ventures 67.4 114.0 82.1Interests in associated undertakings 57.0 72.5 39.3Investments - - 0.1Deferred tax asset 31.4 19.2 5.1 535.4 624.8 507.4 Current assets Inventories 20.1 27.8 15.6Trade and other receivables 355.3 372.1 370.7Cash and deposits 60.9 61.3 69.4 436.3 461.2 455.7 Total assets 971.7 1,086.0 963.1 Current liabilities Bank overdrafts (11.6) (3.1) (4.9)Unsecured loan notes - - (1.0)Trade and other payables (482.7) (466.0) (468.3)Current tax liabilities (8.5) (13.8) (10.0)Short-term provisions (23.1) (14.0) (5.8) (525.9) (496.9) (490.0) Net current liabilities (89.6) (35.7) (34.3) Non-current liabilities Bank loans (85.0) (165.5) (163.0)Trade and other payables (9.0) (5.1) (9.4)Non-current tax liabilities (9.1) (9.1) (8.4)Long-term provisions (25.7) (24.0) (26.0)Retirement benefit obligation 11 (95.3) (153.1) (83.1) (224.1) (356.8) (289.9) Total liabilities (750.0) (853.7) (779.9) Net assets 221.7 232.3 183.2 Equity Share capital 12.5 12.5 12.5Share premium account 112.7 112.7 111.9Capital redemption reserve 0.1 0.1 0.1Merger reserve 49.0 49.0 49.0Hedging and translation reserves 69.3 108.3 38.7Investment in own shares (0.5) (0.5) (0.5)Retained earnings (24.1) (51.8) (30.1)Equity attributable to equity 219.0 230.3 181.6holders of the parent Minority interest 2.7 2.0 1.6Total equity 221.7 232.3 183.2
Reconciliation of movement 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 £millionBalance at 1 12.5 111.9 0.1 49.0 38.7 (0.5) (30.1) 181.6 1.6 183.2January 2008 Total comprehensive - - - - 69.6 - (4.1) 65.5 3.3 68.8income Dividends paid - - - - - - (20.6) (20.6) (2.9) (23.5)Shares issued - 0.8 - - - - - 0.8 - 0.8Purchase of - - - - - (0.2) - (0.2) - (0.2)Company shares Company shares - - - - - 0.2 (0.2) - - -used to settle
share-based payment obligations
Share-based payments - - - - - - 3.2 3.2 - 3.2Balance at 31 12.5 112.7 0.1 49.0 108.3 (0.5) (51.8) 230.3 2.0 232.3December 2008 Total - - - - (13.1) - 46.4 33.3 3.7 37.0comprehensive income Disposal of - - - - (25.9) - - (25.9) (25.9)available-for-sale
financial assets (joint ventures)
and related cash flow hedges recycled through the income statement Dividends paid - - - - - - (21.5) (21.5) (3.0) (24.5)Shares issued - - - - - - - - - -Purchase of - - - - - - - - - -Company shares Company shares - - - - - - - - - -used to settle share-based payment obligations Share-based - - - - - - 2.8 2.8 - 2.8payments Balance at 31 12.5 112.7 0.1 49.0 69.3 (0.5) (24.1) 219.0 2.7 221.7December 2009
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 Group plc in2006.The own shares reserve represents the cost of shares in Interserve Plc held bythe trustees of the How Group, Bandt and Interserve Employee Benefit Trust. Themarket value of these shares at 31 December 2009 was £0.5 million (2008: £0.5million).
Consolidated cash flow statement
For the year ended 31 December 2009
Year ended Year ended 31 December 31 December 2009 2008 Notes £million £million Operating activities Total operating profit 96.6 82.7 Adjustments for:
Amortisation of acquired intangible assets 5.0
5.0
Impairment of goodwill 4 30.0
-
Amortisation of capitalised software development 0.1
-
Depreciation of property, plant and equipment 24.4
22.6
Profit on disposal of property and investments 4 (37.3)
-
Pension payments in excess of the income (15.5)
(10.7)
statement charge Special pension contribution (61.5)
-
Pension curtailment 4 (20.6)
-
Share of results of associates and joint ventures10 (28.7) (28.3) Charge relating to share-based payments
3.1
3.5
Gain on disposal of property, plant and equipment (7.2)
(9.0)
Operating cash flows before movements in working capital (11.6) 65.8 Decrease/(increase) in inventories
6.9
(7.5)
Decrease in receivables 13.8
11.2
Increase/(decrease) in payables 31.9 (10.9)Cash generated by operations 41.0 58.6Taxes paid (15.7) (14.0)
Net cash from operating activities 25.3
44.6 Investing activities Interest received 7.2 7.3
Dividends received from associates and joint 10 17.6
13.5
ventures Proceeds on disposal of property, plant and 15.1
20.2equipment Capital expenditure (31.0) (54.8)
Purchase of subsidiary undertaking -
(0.3)
Investment in joint ventures - PFI investments (7.9)
(8.2)
Disposal of investments 68.0
0.1
Receipt of loan repayment - PFI investments 8.2
0.4
Receipt of loan repayment - associated undertakings 0.3
0.3undertakings Net cash used in investing activities 77.5 (21.5) Financing activities Interest paid (5.8) (10.2)Dividends paid to equity shareholders 8 (21.5)
(20.6)
Dividends paid to minority shareholders (3.0)
(2.9)
Issue of shares -
0.8
(Repayment of)/increase in bank loans (80.5)
2.5
Movement in obligations under finance leases (0.3)
(0.2)
Redemption of loan notes -
(1.0)
Net cash used in financing activities (111.1)
(31.6)
Net decrease in cash and cash equivalents (8.3)
(8.5)
Cash and cash equivalents at beginning of period 58.2
64.5
Effect of foreign exchange rate changes (0.6)
2.2
Cash and cash equivalents at end of period 49.3
58.2
Cash and cash equivalents comprise Cash and deposits 60.9 61.3Bank overdrafts (11.6) (3.1) 49.3 58.2
Reconciliation of net cash flow to movement in net debt
Net decrease in cash and cash equivalents (8.3)
(8.5)
Repayment of/(increase in) bank loans 80.5
(2.5)
Movement in obligations under finance leases 0.3
0.2
Redemption of loan notes -
1.0
Change in net debt resulting from cash flows 72.5
(9.8)
Effect of foreign exchange rate changes (0.6)
2.2
Movement in net debt during the period 71.9 (7.6)Net debt - opening (109.2) (101.6)Net debt - closing (37.3) (109.2)
Notes to the Consolidated Financial Statements
For the year ended 31 December 2009
1. General information
Interserve Plc (the Company) is a company incorporated in the United Kingdomunder the UK Companies Act 2006. The financial information in thisannouncement, which was approved by the Board of Directors on 10 March 2010,does not constitute the Company's statutory financial statements for the yearsended 31 December 2009 or 2008 but is derived from these accounts.Statutory accounts for 2008 have been delivered to the Registrar of Companiesand those for 2009 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 498(2), (3) or (4) ofthe Companies Act 2006. The Company expects to publish its statutory accountsthat comply in April 2010. 2. Accounting policies
These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.
The annual financial statements have been prepared on a going concern basis inaccordance with International Financial Reporting Standards (IFRS) adopted foruse in the European Union and therefore comply with Article 4 of the EU IASRegulation and with those parts of the Companies Act 2006 that are applicableto companies reporting under IFRS.The accounting policies and methods of computation followed in these financialstatements are consistent with those as published in the Group's Annual Reportand Financial Statements for the year ended 31 December 2008 which areavailable on the Company's website at www.interserve.com. In addition, theaccounting policies used are consistent with those that the directors intend touse in the Annual Report and Financial Statements for the year ending 31December 2009.
3. Business and geographical segments
The Group is organised into five operating divisions, as set out below. The Group internally reviews and allocates resources to each of these operating divisions and each has a divisional managing director that reports into and forms part of the executive board.
* Facilities Management: provision of outsourced support services to public-
and private-sector clients.
* Specialist Services: mechanical and electrical design, installation and
maintenance; asbestos surveying and remedial work; security services and
specialist cleaning operations. * Project Services: design, construction and maintenance of buildings and infrastructure. * Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.
* PFI Investments: transaction structuring, and management of, the Group's
PFI activities. The Joint ventures - PFI Investments segmental figures
represent the Group's share of its PFI special purpose companies.
For the year ended 31 December 2009
Segment information about these operating divisions is presented below.
Revenue Result 2009 2008 2009 2008 £million £million £million £million Facilities Management 862.6 793.3 22.1 32.8Specialist Services 172.5 168.2 - 1.0Project Services 820.5 770.8 40.7 39.7Equipment Services 157.1 171.7 35.9 29.6Joint ventures - PFI Investments - - 4.7 2.8Group Services - - (17.7) (17.9)Inter-segment elimination (105.9) (104.0) - - 1,906.8 1,800.0 85.7 88.0 Amortisation of acquired intangible assets (5.4) (5.3)Exceptional items (note 4) 16.3 -Total operating profit 96.6 82.7Investment revenue 31.6 39.9Finance costs (39.0) (42.7)Profit before tax 89.2 79.9Profit after tax 72.4 57.7 Segment assets Segment Net assets/ liabilities (liabilities) 2009 2008 2009 2008 2009 2008 £million £million £million £million £million £million Facilities Management 184.6 206.9 (201.4) (232.5) (16.8) (25.6)Specialist Services 36.7 36.6 (41.7) (43.2) (5.0) (6.6)Project Services 199.8 217.3 (304.9) (290.7) (105.1) (73.4)Equipment Services 178.5 209.9 (40.1) (53.9) 138.4 156.0Joint ventures - PFI 69.6 136.9 (2.2) (22.9) 67.4 114.0Investments 669.2 807.6 (590.3) (643.2) 78.9 164.4 Group Services, goodwill and 241.8 215.5 (64.4) (40.4) 177.4 175.1acquired intangible assets
911.0 1,023.1 (654.7) (683.6) 256.3 339.5 Net debt (37.3) (109.2)Net assets (excluding 219.0 230.3minority interests)
For year ended 31 December 2009
Depreciation and Additions to property, amortisation plant and equipment and intangible assets 2009 2008 2009 2008 £million £million £million £million Facilities Management 4.7 4.9 7.3 8.1Specialist Services 0.5 0.5 0.8 0.3Project Services 2.8 2.0 3.4 3.8Equipment Services 16.3 14.6 19.5 41.2Joint ventures - PFI - - - -Investments 24.3 22.0 31.0 53.4 Group Services 5.6 5.9 - 2.5 29.9 27.9 31.0 55.9Geographical segmentsFacilities Management and Specialist Services are predominantly based in theUnited Kingdom. The Project Services division is located in the United Kingdomand in the Middle East. Equipment Services has operations in all of thegeographic segments listed below.
The table below provides an analysis of the Group's sales by destination, irrespective of the origin of the goods/services.
Revenue by Total operating geographical market profit 2009 2008 2009 2008 £million £million £million £million United Kingdom 1,865.3 1,748.0 39.6 49.1Rest of Europe 27.1 32.2 0.3 4.3Middle East and Africa 79.8 75.1 52.0 42.1Australasia 31.7 33.6 9.1 8.6Far East 5.5 7.7 (1.2) (1.8)Americas 3.3 7.4 (1.1) 0.8Group Services - - (17.7) (17.9)
Joint ventures - PFI Investments - - 4.7
2.8Inter-segment elimination (105.9) (104.0) - - 1,906.8 1,800.0 85.7 88.0 Amortisation of acquired intangible assets (5.4) (5.3)Exceptional Items (note 4) 16.3 - 96.6 82.7
For the year ended 31 December 2009
Non-current assets 2009 2008 £million £million United Kingdom 117.5 162.6Rest of Europe 19.8 23.3Middle East and Africa 108.7 117.6Australasia 16.0 14.9Far East 4.8 8.3Americas 4.2 4.5Group Services, goodwill and acquired intangible assets 233.0 274.4 504.0 605.6 Deferred tax asset 31.4 19.2 535.4 624.8 4. Exceptional items 2009 2008 £million £million
Profit on disposal of property and investments 37.3
-
Impairment of goodwill relating to Specialist services (30.0)
-Other exceptional items 9.0 - 16.3 -
The £37.3 million exceptional gain on disposal of property and investmentsabove includes the profits on disposal of a portfolio of 13 PFI investments for£61.5 million in November 2009 and the sale of Sheffield Schools PFI for £7.2million in April 2009. The disposal of the portfolio of 13 PFI Investments wasto the Interserve Pension Scheme, reducing the retirement benefit obligation by£61.5 million. As a result of these disposals £25.9 million of fair valueadjustments on the PFI financial assets and related cash flow hedges wererecycled through the Income Statement. 2009 2008 £million £millionOther exceptional items Pension curtailment 20.6 -
Cost incurred in settling the OFT fine (11.6)
-
Total other exceptional items 9.0
-
In December 2009 the non-passport section of the Interserve Pension Scheme wasclosed to future accrual of benefits. As a result a £20.6 million curtailmentgain has been recognised. Following its investigation into the constructionindustry the Office of Fair Trading (OFT) issued the Group with a fine of £11.6million relating to two instances of cover pricing in October and December2000. The Company paid the fine in November 2009.
For the year ended 31 December 2009
5. Investment revenue 2009 2008 £million £million Bank interest 2.2 1.4Other interest 5.0 5.9
Return on defined benefit pension assets 24.4
32.6 31.6 39.9 6. Finance costs 2009 2008 £million £million
Bank loans and overdrafts and other loans repayable (5.8) (10.2) Interest cost on pension obligations
(33.2) (32.5) (39.0) (42.7) 7. Income tax expense 2009 2008 £million £million Current tax - UK 6.6 13.4Current tax - overseas 3.2 4.6Deferred tax 7.0 4.2Tax charge for the year 16.8 22.2
Corporation tax is calculated at 28% (2008: 28.5%) of the estimated taxable profit for the year. 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: 2009 2008 £million % £million % Profit before tax 89.2 79.9
Tax at the UK income tax rate of 28.0% (2008: 25.0 28.0% 22.8 28.5% 28.5%)
Tax effect of expenses not deductible in 2.7 3.0% 1.3
1.6%
determining taxable profit Non-taxable exceptional items 1.3 1.5% -
-
Tax effect of share of results of associates (8.1) (9.1%) (1.7) (2.1%) Release of deferred tax on unremitted earnings (5.2) (5.8%) -
-
on overseas associates Effect of overseas losses unrelieved 1.6 1.8% 0.9
1.1%
Prior period adjustments (0.5) (0.6%) (1.1)
(1.4%)
Tax charge and effective tax rate for the year 16.8 18.8% 22.2 27.8%
For the year ended 31 December 2009
In addition to the income tax charged to the income statement, the followingdeferred tax charges/(credits) have been recorded directly to equity in theyear: 2009 2008 £million £million Tax on actuarial loss on pension liability (8.7)
(22.6)
Tax on loss on available-for-sale financial assets (0.1)
(0.4)
Tax on fair value adjustment on cash flow hedges 8.1
(22.1)
(joint ventures)
Tax on the fair value adjustment on available-for-sale (4.6) 30.5 financial assets within the PFI Special Purpose
Companies Tax on the intrinsic value of share-based payments -
0.4 Total (5.3) (14.2) 8. Dividends Dividend 2009 2008 per share pence £million £million
Final dividend for the year ended 31 December 2007 11.2 - 14.0Interim dividend for the year ended 31 December 2008 5.3 - 6.6Final dividend for the year ended 31 December 2008 11.7 14.6
-
Interim dividend for the year ended 31 December 2009 5.5 6.9
-
Amount recognised as distribution to equity 21.5
20.6
holders in the period Proposed final dividend for the year ended 31 12.0 15.0 December 2009
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.
9. Earning per share
The calculation of the basic, diluted and headline earnings per share is basedon the following data: 2009 2008 £million £millionEarnings Earnings for the purposes of basic earnings per 68.7
54.4
share being net profit attributable to equity
holders of the parent Adjustments: Exceptional items (16.3) -
Amortisation of acquired intangible assets 5.4
5.3
Tax effect of above adjustments 4.4
(1.4)
Headline earnings 62.2
58.3
Earnings for the purposes of diluted earnings per share 68.7 54.4
For the year ended 31 December 2009
Number of shares 2009 2008 Number Number
Weighted average number of ordinary shares for 125,213,738 124,935,731 the purposes of basic and headline earnings per
share
Effect of dilutive potential ordinary shares:
Share options and awards 2,817,503 2,396,690
Weighted average number of ordinary shares for 128,031,241 127,332,421 the purposes of diluted earnings per share
Earnings per share 2009 2008 Pence Pence Headline earnings per share 49.7 46.7Basic earnings per share 54.9 43.5Diluted earnings per share 53.7 42.7
10. Results from joint venture and associated undertakings
2009 2008 Project Facilities Joint Total Project Facilities Joint Total Services Management ventures - Services
Management ventures - PFI PFI Investments Investments £million £million £million £million £million £million £million £millionRevenues 319.1 88.1 156.7 563.9 284.2 83.1 134.5 501.8Operating profit 28.9 1.8 4.8 35.5 25.2 1.8 3.8 30.8Net interest 0.7 - 3.0 3.7 0.2 - 1.4 1.6receivable Taxation (6.5) (0.5) (3.1) (10.1) (0.9) (0.5) (2.4) (3.8)Group share of 23.1 1.3 4.7 29.1 24.5 1.3 2.8 28.6profit Amortisation of (0.4) - - (0.4) (0.3) - - (0.3)acquired intangibles Total operating 22.7 1.3 4.7 28.7 24.2 1.3 2.8 28.3profit Dividends (13.9) (1.0) (2.7) (17.6) (12.4) (0.7) (0.4) (13.5)Retained profits 8.8 0.3 2.0 11.1 11.8 0.6 2.4 14.8
11. Retirement benefit schemes
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.
Assumptions 2009 2008 2007 Retail price inflation 3.5% pa 2.90% pa 3.30% pa Discount rate 5.60% pa 6.30% pa 5.80% pa
Pension increases in payment:
LPI/RPI 3.40%/3.50% 2.70%/2.90% 3.20%/3.30% Fixed 5% 5.00% 5.00% 5.00% 3% or RPI if higher (capped 3.70% 3.50% 3.60% at 5%) General salary increases 4.25 - 5.00% pa 3.65 - 4.40% pa 4.05 - 4.80% pa
For the year ended 31 December 2009
The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:
2009 2008 2007 2006 2005 £million £million £million £million £million Present value of defined 627.4 534.2 563.4 557.2 514.6benefit obligation Fair value of schemes' (532.1) (381.1) (480.3) (445.8) (382.0)assets Liability recognised in 95.3 153.1 83.1 111.4 132.6the balance sheet
The amounts recognised in the income statement are as follows:
2009 2008 £million £million
Employer's part of current service cost 11.0
14.6
Interest cost 33.2
32.5
Expected return on plan assets (24.4)
(32.6)
Gains on curtailments and settlements (20.6)
-
Total (credit) / expense recognised in the (0.8)
14.5
income statement The current service cost is included within operating profit. The interest costand expected return on assets are included within financing costs. Thecurtailment gain, which arose on the decision in 2009 to close the InterservePension Scheme to future accrual of benefits to the majority of members, isshown within exceptional items in the income statement.12. Share capital Shares Share capital thousands £million As at 1 January 2008 124,751.4 12.5Share options exercised 265.0 -As at 31 December 2008 125,016.4 12.5Share awards issued 351.4 -At 31 December 2009 125,367.8 12.5
For the year ended 31 December 2009
13. Related parties
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period, Group companies entered into the following transactions with related parties who are not members of the Group:
Sales of goods Purchases of Amounts owed Amounts owed goods and services and services by related to related parties parties 2009 2008 2009 2008 2009 2008 2009 2008 £million £million £million £million £million £million
£million £million Joint ventures 195.5 213.2 - - - 0.9 - -- PFI Investments Associates 135.4 125.9 3.0 2.3 1.6 2.1 - 0.3
Sales and purchases of goods and services to related parties were made on normal trading terms.
The amounts outstanding shown in the above table are unsecured and will besettled in cash. No guarantees have been given or received on these amounts. Noprovisions have been made for doubtful debts in respect of the amounts owed
byrelated parties.14. Contingent liabilities
In the normal course of business, the Group is involved in disputes and litigation with third parties. Appropriate provision has been made in these financial statements for all material uninsured liabilities resulting from proceedings that are, in the opinion of the directors, likely to materialise.
The Company and certain subsidiary undertakings have, in the normal course ofbusiness, given performance guarantees and provided indemnities to thirdparties in relation to performance bonds and other contract related guarantees.These relate to the Group's own contracts and to the Group's share of thecontractual obligations of certain joint ventures and associated undertakings.The Group acts as guarantor for the following: Maximum guarantee Amounts utilised 2009 2008 2009 2008 £million £million £million £million Associated undertakings' 18.4 11.8 0.2 0.8borrowings Joint venture and associated 180.7 169.0 111.2 138.5undertakings' bonds and guarantees Total 199.1 180.8 111.4 139.3Non-statutory accountsThe information in this annual results announcement does not constitutestatutory accounts within the meaning of section 435 of the Companies Act 2006(the "Act"). The statutory accounts for the year ended 31 December 2009 will bedelivered to the Registrar of Companies in England and Wales in accordance withsection 441 of the Act. The auditor has reported on those accounts. Its reportwas unqualified and did not contain a statement under section 498(2), (3) or(4) of the Act.
The Directors' report is the "management report" for the purposes of DTR 4.1.8R.
Annual report
The Company's annual report and accounts for the year ended 31 December 2009 is expected to be posted to shareholders by 7 April 2010. Copies of both this announcement and the annual report and accounts will
be available to the public at the Company's registered office at Interserve House, Ruscombe Park, Twyford, Reading, Berkshire RG10 9JU and through the Company's website at www.interserve.com.
Cautionary statement
Statements made in these Annual Financial Results ("Results") reflect theknowledge and information available at the time of their preparation. TheResults contain forward-looking statements in respect of the Group'soperations, performance, prospects and financial condition. By their nature,these statements involve uncertainty. In particular, outcomes often differ fromplans or expectations expressed through forward-looking statements and suchdifferences may be significant. Assurance cannot be given that any particularexpectation will be met. No responsibility is accepted to update or revise anyforward-looking statement resulting from new information, future events orotherwise. Liability arising from anything in the Results shall be governed byEnglish Law. Nothing in the Results should be construed as a profit forecast.
Responsibility statement of the directors in respect of the annual results announcement
The annual report contains the following statements regarding responsibility for the financial statements and Directors' report included in the annual report:
"The directors confirm that, to the best of their knowledge:
a) the Company and Group financial statements in this Annual report, which havebeen prepared in accordance with UK GAAP and IFRS, respectively, give a trueand fair view of the assets, liabilities, financial position and profit of theCompany and of the Group taken as a whole; and(b) the Directors' report contained in this Annual report includes a fairreview of the development and performance of the business and the position ofthe Company and the Group taken as a whole, together with a description of theprincipal risks and uncertainties that they face."
By order of the Board
A M Ringrose T C JonesChief Executive Group Finance Director
10 March 2010
vendor