11 Mar 2009 07:00
ANNUAL RESULTS ANNOUNCEMENT YEAR ENDED 31 DECEMBER 2008
Interserve, the services, maintenance and building group, announces its annual results for the year ended 31 December 2008.
Strong financial performance
2008 2007 Change Revenue £1,800.0m £1,738.0m +3.6%Headline total operating profit (1) £88.0m £73.3m
+20.0%
Headline pre-tax profit (2) £85.2m £73.4m
+16.1%
Headline earnings per share (3) 46.7p 39.9p +17.0%Basic earnings per share 43.5p 37.5p +16.0%Net debt £109.2m £101.6m +7.5%Full-year dividend 17.0p 16.2p +4.9%
Record future workload and strong revenue visibility
* Future workload £6.2 billion
* Visibility over 79 per cent of anticipated 2009 (4) revenues
Resilient and balanced business mix
* Well positioned on key public sector programmes in the UK * New growth sectors entered in waste treatment and sustainability * Further international diversity; expanded into Abu Dhabi and northern Europe
Chief Executive Adrian Ringrose commented,
"2008 was another successful year for Interserve. Whilst the Group is notimmune to the current economic challenges, with a solid UK position, continuedopportunities in the Middle East, a record order book, strong visibility and arobust balance sheet we believe that the Group's operations are well placed todeliver another year of progress."
Footnotes:
1. Headline total operating profit comprises total operating profit of £82.7m
(2007: £69.2m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2007: (£4.8m)); (£0.3m) amortisation of acquired
intangible assets (associates) (2007: £0.3m); nil exceptional items (2007:
(£1.0m)).
2. Headline pre-tax profit comprises profit before taxation of £79.9m (2007: £
69.3m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2007: (£4.8m)); (£0.3m) amortisation of acquired
intangible assets (associates) (2007: £0.3m); nil exceptional items (2007:
(£1.0m)).
3. Headline earnings per share are based on Headline pre-tax profit as defined
in footnote 2 above.
4. Based on 2009 consensus revenues.
- 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 InterserveInterserve'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 £1.8 billion and aworkforce of over 50,000 people worldwide.
Chairman's statement
Interserve continued to trade strongly in 2008, with headline pre-tax profit up16.1 per cent to £85.2 million (2007: £73.4 million). The Group benefited fromits long-term, trust-based client relationships, the strength of itscomplementary range of business capabilities which enable us to offer solutionsencompassing every stage of an asset's life cycle, and from our exposure to adiversified mix of customers and markets.
Our results are summarised in the table below:
2008 2007 ChangeRevenue £1,800.0m £1,738.0m +3.6%
Headline total operating profit (5) £88.0m £73.3m +20.0% Headline pre-tax profit (6)
£85.2m £73.4m +16.1%Profit before tax £79.9m £69.3m +15.3%
Headline earnings per share (7) 46.7p 39.9p +17.0% Basic earnings per share
43.5p 37.5p +16.0%Net debt £109.2m £101.6m +7.5%Full year dividend 17.0p 16.2p +4.9%Headline total operating profit growth of 20.0 per cent was boosted by currencymovements and favourable contract settlements in our Middle East constructionbusiness. On a constant-currency basis the headline total operating profitgrowth was 14.2 per cent.
People
Central to the Group's success is the quality, commitment and dedication of ourpeople. Only through their efforts are we able to deliver real value to ourcustomers and continue to build and develop the positive long-termrelationships that make our business such a success. Yet again our peopledelivered an excellent performance during the year and, on behalf of the Board,I would like to thank all of them for their ongoing dedication and contributionto Interserve's success.
Board
Last December we announced a number of planned changes to the Board. John Vyseretires on 3 April 2009 after 15 years' service with the Group and more thanseven years as a director. He has provided outstanding leadership to ourProject Services division since 2002 and has played a pivotal role in thedevelopment of our successful Middle East partnerships. Nick Keegan will retireat this year's AGM after completing his second three-year term as anon-executive director and having served as Chairman of the Audit Committeefrom 2005 to 2007. On behalf of the Board, I would like to thank both John andNick for their enormous contributions to the Group's development and wish themwell for the future. I would also like to welcome David Thorpe who joined theBoard as a new non-executive director on 1 January 2009, bringing with him atremendous range of experience in the outsourcing sector across government andinternational markets.
Dividend
On the basis of our performance in 2008 and the prospects for the Group goingforward, the directors are recommending an increased final dividend of 11.7p(2007: 11.2p), bringing the total dividend for the year to 17.0p (2007: 16.2p),an increase of 4.9 per cent. Subject to shareholder approval at the AnnualGeneral Meeting, the final dividend will be paid on 5 June 2009 to shareholderson the register at the close of business on 24 April 2009.
Prospects
Positive market trends in outsourcing and long-term structural requirements forsocial infrastructure underpin our confidence in the UK, where ourcomplementary range of business capabilities means we are well placed to helpcustomers deliver value for money services. During 2009 we expect that a robustUK public and privatised sector will offset what is likely to remain achallenging and uncertain environment for our operations exposed to the privatesector. In the Middle East the geographical spread of our businesses and thehigh quality customers with whom we have worked for many years provide a strongbase from which to continue our growth.Despite the uncertain economic backdrop, the Board remains encouraged by thelong-term prospects in our markets and believes that the Group's operations arewell placed to deliver another year of progress in 2009.Lord BlackwellChairman11 March 2009Footnotes:
5. Headline total operating profit comprises total operating profit of £82.7m
(2007: £69.2m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2007: (£4.8m)); (£0.3m) amortisation of acquired
intangible assets (associates) (2007: £0.3m); nil exceptional items (2007:
(£1.0m)).
6. Headline pre-tax profit comprises profit before taxation of £79.9m (2007: £
69.3m) adjusted for the impact of (£5.0m) amortisation of acquired
intangible assets (2007: (£4.8m)); (£0.3m) amortisation of acquired
intangible assets (associates) (2007: £0.3m); nil exceptional items (2007:
(£1.0m)).
7. Headline earnings per share are based on Headline pre-tax profit as defined
in footnote 6 above.
Directors' report - Business review
Principal activities
Interserve is a services, maintenance and building group operating in the public and private sectors in the UK and internationally. We offer advice, design, construction and facilities management 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:Developand maintainlong-term client relationships: Our well-established clientrelationships have been cultivated over a long period of time and havewithstood previous business and economic cycles. As a result we have become thetrusted partner for many of our customers. Around two-thirds of our businesscomprises services to the public and privatised sectors whose long-termcontracts and high level of repeat business confers strong visibility duringuncertain economic periods.
Strategic progress:
* Improved revenue visibility to 79 per cent of anticipated 2009 revenues compared to a corresponding prior year figure of 70 per cent. * We were awarded new long-term contracts with Defra, the Foreign and Commonwealth Office and the Home Office. Build a well-balanced Group, active across the asset life cycle: The balancednature of the Group's businesses across the asset life cycle enables us toselect the best opportunities whichever market or sector they are in. Ourculture and organisational flexibility allows us to transfer expertise acrossour activities. It also gives us the potential to grow into new markets andservices where we can provide additional value to our existing clients.
Strategic progress:
* Sector teams have now been formed to give enhanced focus on specialist end
markets, working across our functional organisational structure.
* We successfully integrated the Madina Group which we purchased in 2007,
giving us significant and complementary new services in Qatar.
Develop new markets and models: We have extensive sectoral and geographic reachin our existing businesses; however, our markets are constantly evolving and weseek to develop into related skills, sectors and geographies as part of ourgrowth strategy.
Strategic progress:
* We developed our relationship with United Utilities to create a new venture
in the waste treatment sector, a new sector for us with substantial growth
potential.
* We identified a requirement for leadership across the government sector on
issues such as sustainability and carbon management. We created a new
business unit delivering advice in these areas, which aided us in winning
significant new work with Defra.
* Our strong presence in the Middle East gives us a platform from which to
explore new market opportunities for our facilities management operation
(UAE) and equipment services business (Saudi Arabia), and our contract with
the Foreign & Commonwealth Office has taken our facilities management
capabilities into Europe.
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.
Key performance indicators 2008 2007 Change Revenue £1,800.0m £1,738.0m +3.6% Headline earnings per share 46.7p 39.9.p +17.0% Cash conversion (8) 98.7% 118.6% (19.9)%pts Future workload (9) £6.2bn £5.7bn +8.8% Staff turnover (10) 8.6% 9.9% (1.3)%pts UK all-employee accident incidence 429 444 (3.4)% rate per 100,000 workforce
2008 was another successful year for Interserve, with headline earnings per share rising 17.0 per cent. Noteworthy achievements during the year included:
* Our future workload grew to a record level of £6.2 billion.
* Our Middle East operations achieved significant growth, including the
successful integration of the Qatar-based Madina Group in which we acquired
a 49 per cent stake in 2007 and which is already exceeding expectations.
* We developed new growth sectors, notably in waste treatment and sustainability. * We expanded into new markets in Abu Dhabi (construction and equipment services) and northern Europe (facilities management). In key sectors of government investment we achieved significant growth duringthe year, substantially in advance of Group revenue growth of 3.6 per cent. Ineducation, revenues jumped by 43.0 per cent, boosted by work on the LeedsBuilding Schools for the Future (BSF) programme, whilst in health turnover grewby 18.9 per cent as the ProCure21 programme provided a steady flow of worktogether with new relationships in facilities management. Our strong positionmanaging the MoD's defence estate was reinforced by a 25.8 per cent increase inrevenues from this sector.At 31 December 2008 future workload (excluding our Middle East associates)stood at £6.2 billion (2007: £5.7 billion), with £1.6 billion relating to 2009(up 19.5 per cent on the equivalent figure for 2008). In addition our share ofthe future workload for our Middle East associates grew by 37 per cent and nowstands at £325 million.Net debt at 31 December 2008 was £109.2 million (31 December 2007: £101.6million) and cash conversion for the year measured 98.7 per cent (2007: 118.6per cent). Despite outflows from a reduction in advance payments received wewere able to deliver a creditable cash conversion ratio approaching 100 percent.
Footnotes:
8. Cash conversion is calculated as the percentage of cash generated byoperations of £58.6m (2007: £65.0m) divided by the sum of: operating profit of£54.4m (2007: £51.0m); plus amortisation of acquired intangible assets of £5.0m(2007: £4.8m); less profit on disposal of property and investments of nil(2007: £1.0m).9. Future workload comprises contracted work plus work that has been settledand on which final terms are being agreed (principally PFI projects atpreferred bidder stage).10. Staff turnover measures the proportion of managerial, technical andoffice-based staff leaving the Company and its subsidiaries voluntarily overthe course of the year.OutlookWe deliver critical services to social infrastructure and commercial andindustrial assets at each stage in their life cycle. We create value bydelivering operational efficiency, performance improvement and value for moneysolutions. These outcomes are attractive and resilient at all points in theeconomic cycle, but particularly in more challenging times. During 2009 weexpect a robust public and privatised sector, which accounts for two-thirds ofour activity, will offset what is likely to remain a challenging and uncertainenvironment for our operations exposed to the private sector.Our UK public sector business is centred on areas such as health, education,defence and custodial, in which the government has a continued commitment toinvestment. In particular, central government has set in motion a number ofmajor outsourcing programmes to reduce costs within its own departments, withthe Defra support contract we won in December 2008 being an example of this,and we expect this trend to continue. However, the private sector markets inwhich we operate within the UK are expected to remain weak and to mitigatethese pressures we have put in place a number of cost reduction measures acrossthe affected businesses.
Internationally, given the outlook in certain markets, we will continue to take action to lower costs and limit capital expenditure across our Equipment Services business as we continue to focus on equipment utilisation.
In the Middle East as a whole, our geographical spread, the diversity of services provided, the high quality customers with whom we have worked for many years and our exposure to growth markets such as Qatar, Abu Dhabi, Oman and Bahrain will continue to present us with good opportunities in the coming years.
With a solid UK position, continued opportunities in the Middle East, a recordorder book, strong visibility and a robust balance sheet we believe that theGroup's operations are well placed to deliver another year of progress, despitethe challenging economic environment.
Facilities Management
Facilities Management (FM) provides a broad range of integrated, or "bundled",services to the public and private sectors, predominantly in the UK. We deliverthe vast majority of these services ourselves, differentiating us from ourcompetitors in most markets.Results summary: 2008 2007 ChangeRevenue £793.3m £733.1m +8.2%
Contribution to Total Operating profit £32.8m £27.9m +17.6% Margin
4.1% 3.8%
+0.3% pts
The Facilities Management division addresses the market through five client-facing units which allows us to tailor our delivery to the particular needs of our target sectors while maximising efficiency and promoting best operational practice across the division.
Our performance was strong, delivering 17.6 per cent growth in operatingprofit. Market conditions in the UK sector remained favourable in 2008,underpinned by long-term trends towards outsourcing as customers continue toseek to reduce costs and improve operational efficiency by purchasing bundledservices. We continue to see significant potential in this market as there is alimited number of service providers with our scale and capability that are ableto deliver full scope FM contracts.
During the year we made progress in three key areas of strategic development, namely:
* Sustainability. There is an increasing requirement for us to support our
current and future customers in achieving key sustainable targets and in
mid 2008 we launched our RENEWABLES sustainability programme to help
clients meet these objectives, and are greatly encouraged by the traction
that this initiative has gained.
* A greater overseas presence. The Foreign and Commonwealth Office (FCO)
contract has given us a footprint in northern Europe for the first time.
* Enhanced customer service centre. We opened a new centralised helpdesk/
service centre in Redditch during 2008. We believe this initiative will
further assist us develop and maintain our client relationships.
Our business developed strongly in this environment, maintaining a customer retention rate in excess of 90 per cent and winning new clients and contracts during the year, including:
* Defra: a 15-year Sustainable Built Environment Workplace Support contract,
with a core services value of approximately £500 million. The contract
encompasses a range of operational facilities management services such as
buildings maintenance and waste management as well more strategic services
such as energy procurement, professional and project services and fleet
management. Uniquely, Interserve will use its RENEWABLES programme to play
a major role in helping Defra to reach and exceed its sustainability
targets.
* FCO: a £70 million contract to provide a range of facilities management
services across the FCO's estate, including not only the UK but also 14
diplomatic missions in Europe. The contract is for seven years, with a
possible extension of up to three further years.
* MoD Corsham PFI: a £194 million contract for the provision of a range of
facilities management services to the MoD's new centre of excellence for
communications once its 25-year operational phase commences in 2011.
* GDF Storage (a subsidiary of GDF Suez): a multi-million pound contract for
the provision of mechanical, electrical and instrumentation services
required for a new underground gas storage facility in Cheshire.
It is pleasing that the success of our long-term client relationships continuesto be recognised at industry awards. At the Premises and Facilities Management(PFM) awards we won the Overall Winner award for the partnership betweenInterserve's Project Armada and the MoD. This is the second consecutive yearthat Interserve has won the Overall Award - on both occasions winning it inpartnership with the MoD. Project Armada is a £460 million, 25-year contract tocreate, operate and maintain the MoD's new Single Living Accommodation at theFleet Accommodation Centre in Devonport.Elsewhere our associate, PriDE, won the prestigious Sustainability Award at theBritish Institute of Facilities Management (BIFM) awards in 2008. The PriDEjoint venture with Southern Electric Contracting (SEC) is a 7-year, £380million contract involving estate management and construction at almost 100 MoDsites in south-east England. Initiatives such as the development andimplementation of a Sustainable Development Management System earned a clientendorsement for PriDE as the `leading environmental champion on the militaryestate'.Specialist ServicesThis division provides a variety of specialised outsourced services which areusually delivered discretely but can form part of a bundled package tocustomers of the Facilities Management or Project Services divisions. Suchservices comprise security, mechanical and electrical (M&E) design,installation and maintenance and technical services (including asbestossurveying and remediation, lift maintenance, heating, ventilation and airconditioning (HVAC)). Around two-thirds of its revenues are generated from theprivate sector.Results summary: 2008 2007 ChangeRevenue £168.2m £190.2m (11.6)%
Contribution to Total Operating profit £1.0m £6.7m (85.1)% Margin
0.6% 3.5%
(2.9)% pts
The results for this division were disappointing, with two of the threeoperations being heavily impacted by the challenging private sector marketconditions during 2008 and several one-off charges. As a result, and givenmarket conditions are not expected to improve in the near term, we haveimplemented a number of cost reduction measures across the division. Ourengineering services operation was affected by reduced private sector clientspending which exacerbated competitive pressures and increased margin dilution.Our security business has a significant dependence on the financial sector inthe City of London. In the current economic environment this client base hasmade substantial spending cuts which, in a highly competitive marketplace,resulted in sharp reductions in profitability.Against this challenging backdrop there was progress elsewhere in the division.The HVAC operation is recovering after management action to address the issueshighlighted last year. Our strategy of leveraging existing Interserve Groupcustomer relationships in the public sector resulted in several significantcontract wins; for instance the Corsham PFI contract led to the award of an £18million contract for our engineering services team. This project comprises M&Eservices for new-build office and living accommodation, a new sports facilityand significant security and external works. The design for the works hasalready commenced with installation beginning in early 2009 and completionscheduled for 2013. Following on from earlier successes with Project Serviceson the Leeds BSF programme the division also won work valued in excess of £10million on two new leisure centres and Swallow Hill secondary school.
Despite encountering tough market conditions the division was awarded several notable contracts during the year, including:
* British Airways Maintenance: we won a £10 million, five-year extension to
our contract for the provision of services at British Airways' maintenance
sites in Cardiff and Glasgow.
* Land Registry: our technical services operation was awarded a contract for
planned and reactive maintenance for the Land Registry. The contract term
is for three years with an opportunity to add an additional two years.
* London Borough of Lambeth: we won a four-year £12 million contract to
provide a full range of maintenance services for all 12 corporate council
buildings within the Borough with reactive repairs also undertaken to an
additional 68 council buildings.
* Atlas Elektronik: the provision of mechanical, electrical and general
building maintenance. Atlas Elektronik's manufacturing facility in Newport
produces specialist communication equipment for the military.
* DTZ: the provision of security services for DTZ's estate across south-east
England.
* Civil Justice Centre, Bristol: a £5.9 million contract for the installation
of the mechanical, electrical and public health services at this new centre
in Bristol, comprising eight civil courts, six hearing rooms and one family
proceeding room. Project Services
Project Services works in close collaboration with clients in the UK and the Middle East, providing professional services to lead the design and construction process in the creation of a broad range of buildings and infrastructure.
Results summary: 2008 2007 ChangeRevenue (UK only) £770.8m £759.5m
+1.5%
Contribution to Total Operating profit £39.7m £29.4m +35.0%
- UK £15.2m £13.5m
+12.6%
- International associates £24.5m £15.9m
+54.1%
Margin (UK only) 2.0% 1.8%
+0.2% pts
Continued strong demand in our Middle Eastern markets underpinned a significantincrease in activity levels, resulting in a contribution to total operatingprofit up 35.0 per cent on 2007. These results were buoyed by the weakness ofsterling and favourable contract settlements in the Middle East. Nevertheless,constant-currency growth was a substantial 28.9 per cent and our UK operationsposted stronger margins.Fundamental to our success in both regions has been our ability to manageresources to meet demand while maintaining our reputation for timely andcost-effective delivery. We have a very clear view of the kind of work which isright for us. Factors we consider include the client's partnership style, thesize of the contract, the level of risk and the extent to which oursupply-chain relationships and ability to manage logistical complexity can bebrought into play.The majority of Project Services' UK work comes from a large number ofsmall-to-medium-scale, low-risk projects with long-standing clients who valueour understanding of their business and our input to their planning process.Around three-quarters of our activity is in the public and privatised sector.In the Middle East, where we have been active across the region for more than25 years, our associate partners play a key role in knowing the local businessenvironment and advising which are the right potential clients with whom we canbuild mutually beneficial working relationships. In an uncertain economicenvironment, such partnerships are of vital importance.
United Kingdom In the UK we continued to secure a high level of repeat business with key customers in our chosen sectors of expertise: education, health, custodial, defence, and water and highways infrastructure.
During 2008 we completed three schools in the Leeds BSF programme (worth c. £80million in revenue) and began construction on four more. Major awards elsewherein the education sector included Kingswood School, Corby (£21 million), TorbayCommunity College (£23 million) and St Helens College, Merseyside (£22million). In total we completed 12 new schools (generating revenues in the yearof £128 million) and refurbished a further 10 (worth £40 million in the year).In health we extended our nationwide coverage by securing a place soon afteryear end as one of five contractors on the £600 million NHS Scotland FrameworksScotland programme, which complements our existing framework agreements inEngland (ProCure21) and Wales (Designed for Life: Building for Wales). We arecurrently working on 70 projects totalling £140 million in the health sector.Significant contract awards in the year included:
* A £19 million hospital at Malvern for Worcestershire Primary Care Trust.
* The £45 million development of the Children's Hospital for Wales in Cardiff. * A new £30 million maternity ward and day surgery for Poole Hospital, Dorset.
* The refurbishment of the Acute Hospital in Bangor and construction of a new
Accident & Emergency department at Withybush Hospital, Haverfordwest
(combined value £62 million).
* The £18 million adult mental health unit at Wrexham Maelor Hospital.
Our leading position as a prison contractor was further enhanced in 2008. Wedelivered the £80 million 796-place HMP Addiewell prison near Edinburgh on timeand within budget and we also won work worth over £50 million for prisonextensions and refurbishments at HMP Forest Bank, HMP Bronzefield and HMP HolmeHouse. Our work in this sector extends to detention centres, and during theyear we completed the new £42 million Gatwick immigration centre. With acontinuing shortage in UK prison capacity we believe this sector will continueto provide a long-term pipeline of opportunities whilst fulfilling an importantneed for the country.In infrastructure we continued to develop our strong relationships with clientssuch as Thames Water, United Utilities and the Highways Agency. In July 2008 wewere part of the consortium to be awarded £200 million worth of work on theThames Gateway Water Treatment Plant for Thames Water. We completed projectswith a value of £28 million for United Utilities via our KMI joint venture aspart of its AMP4 capital investment programme, and undertook a similar level ofwork with Severn Trent. In the roads sector our regional framework agreementswith the Highways Agency in the south east, midlands and north east continuedto deliver a good stream of work during 2008. We completed the A38 DobwallsBypass, worth £30 million, and our work to add five new roundabouts on the A1helped remove bottlenecks and significantly improved traffic flow.In addition to cementing our strong position in these sectors we continue toexplore new opportunities to use our skills and expertise. This has lead to ourfirst appointment as preferred bidder in the waste sector, a PFI/PPP jointventure in Derby with United Utilities for the construction of waste treatmentplants. Driven by increasing regulatory requirements from the EU we believethis sector has significant growth potential.
During 2008 we continued to win recognition and accolades from industry bodies for our achievements, including:
* The Leeds BSF programme won two national awards at the Excellence in BSF
Awards.
* The A66 Long Newton junction won a Green Apple Award for Environmental Best
Practice from the Green Association plus the Target Zero Safety Award from
the Highways Agency.
* Our renovation of the A166 bridge over the River Derwent at Stamford Bridge
received recognition from the Institute of Civil Engineers for its
excellence in civil engineering.
* Following previous awards in 2007 the fascia replacement of Westminster
Bridge won another prestigious award, the 2008 IStructE Heritage Award for
Infrastructure, which is one of the world's leading awards for structural
engineering excellence.
Middle East Demand continued to rise in the Middle East for the high quality construction services provided by our associate companies.
In our most significant market in the region, Qatar, activity levels remainedextremely buoyant in 2008. Our associate companies continued to work with theirmajor long-term customers including Siemens, Areva, ABB, Exxon Mobil and QatarNational Bank. New awards included the construction of an office block and twoamenities blocks for the Qatar Gas Transport Company Ltd and a new hotel forQatar Airways. Notably, our mechanical and electrical service business becamethe first contractor selected by Qatar Cool to carry out `hot tapping' ofunderground chilled water pipe-work, a fast-growing solution in the provisionof air conditioning to commercial and residential developments.The Madina Group, operating both offshore and onshore in the oil, gas andpetrochemical industries and providing fabrication, installation, testing,commissioning, manpower and training services, continues to go from strength tostrength. The company's major customers include Maersk, Total, Qatar VinylCompany (QVC), Shell, Gulf Drilling and most recently Ras Gas. Significantcontracts carried out this year include an upgrade for Total comprising thefabrication and installation of a topside module on one of their offshoreplatforms, and a contract to provide training in leadership, supervision,health, safety and the environment for the Shell Pearl Gas-to-Liquids project.New contracts won include a three-year contract with Ras Gas to carry out plantmodification and maintenance and a two-year contract with Total to providefabrication and installation services. During 2008 we constructed a newfabrication facility at Ras Laffan. It is also our intention to develop acomplementary electrics and instrumentation capability to sit alongside ourexisting service provision.In the UAE, the market in Dubai has slowed in recent months as many plannedschemes are re-appraised in light of the current economic climate. Thereremains, however, a good stream of tenders which, together with work alreadysecured, will underpin workload through 2009 and into 2010. We completed workon the Ibis Novotel in Port Saeed during the year and we commenced furtherhotels, in Barsha and Deira, all for the Majid Al Futtaim Group. Our specialistdivisions completed the fit-out of all the Atlantis Hotel restaurants forKersner to great acclaim and have recently secured fit-outs for the FairmontHotel, Palm Jumeirah and the Marina Hotel on Yas Island, Abu Dhabi. We havealso secured new construction and facilities services opportunities in AbuDhabi, a growing market for us which will counter the more subdued market inDubai.In Oman, we successfully completed a further three PAC (Permanent Accommodationfor Contractors) unit extensions for Renaissance Services during the year. Thiswas followed later in the year by the award of two large new PACs, again forRenaissance Services, the largest contract ever awarded to our Omani associatecompany. We extended our relationship with Occidental through a three-yearagreement for civil and infrastructure works at the Mukhaizna oilfield.We entered 2009 with current year future workload equivalent to around 75 percent of 2008 revenues, which is a strong platform for another successful yearin the region.Equipment ServicesEquipment Services provides temporary structural equipment and the engineeringdesigns for use in complex infrastructure and building projects. The businessgenerates revenue through both hire contracts and equipment sales (of both newand used components) and operates out of three regional hubs in the UK, MiddleEast and Australia.Results summary: 2008 2007 Change Revenue £171.7m £132.0m +30.1%
Contribution to Total Operating profit £29.6m £23.9m +23.8% Margin
17.2% 18.1%
(0.9)% pts
Our progress during 2008 was based on continued buoyancy in the Middle Easttogether with a record year in Australia which offset a more challengingenvironment in Europe. The weakness of sterling boosted the division's results,contributing 10.4 percentage points of the overall growth of 23.8 per cent. Thedivision also benefited from the substantial fleet investment made in recentyears and from our strategy of operating across a wide range of geographies andmarket sectors. This enables the transfer of equipment to areas of high demand,thus optimising asset productivity and mitigating the effects of inherentcountry-specific cyclicality.
Among the many projects for which we designed engineering solutions and provided equipment were:
* Saadiyat Island Expressway, Abu Dhabi, UAE - support for eight bridge
structures totalling 55,700 square metres of deck area, plus a
cut-and-cover tunnel structure approximately 870 metres in length. The
transformation of Saadiyat Island into a residential and leisure hub is one
of the UAE capital's most important development projects.
* Third Millennium Bridge, Spain - formwork and falsework solutions to
construct the world's largest suspended concrete arch bridge. Encompassing
six traffic lanes, two bicycle lanes and two pedestrian lanes, the bridge
provided visitor access for the International Expo Zaragoza in 2008.
* Raine Square Development, Perth, Western Australia - support during the
construction of this A$550 million landmark development in Perth. The
building includes a number of unique features such as the use of twin lifts
- the first of their kind in Australia - which can travel in either the
same or opposing direction within the one lift shaft, reducing the lift
shaft size by half and increasing the net lettable area of the building.
* Royal London Hospital - shoring and soffit panel system for the
construction of the 17-storey reinforced concrete frame, which represents
phase one of the 10-year £1 billion redevelopment of the Royal London
Hospital in Whitechapel. Regionally:Middle East andAfricaOur Middle East operation again performed strongly in excellent marketconditions and now contributes more than half of divisional profit. All threeof the principal countries where we have offices (UAE, Qatar and Bahrain) didwell. Our new Abu Dhabi operation in the UAE is allowing us to optimise fleetutilisation by migrating equipment to this new market from Dubai, where thefrenetic market activity of recent years has abated. Significant new contractsinclude work at Yas Island and on the Saadiyat Island Expressway. We alsoleveraged the existing strong relationships that our Project Servicesassociates have in the region to win work supplying equipment for thestructural elements of the International Hotel at Doha Airport in Qatar andEast Hotel at the Mall of the Emirates in Dubai. During 2009 we plan to extendour footprint in the region to Saudi Arabia, the largest addressableconstruction market in the Gulf.
Exports to the North African countries of Libya, Morocco and Algeria continue to make good contributions. Our operation in South Africa consolidated its position since opening in 2007 and we look forward to progress in 2009.
Australasia andFar EastOur Australian business had a record year, boosted by infrastructure and miningmarkets. 2009 is likely to prove more challenging as new mining projects arepostponed, although civil engineering works are likely to maintain a healthyactivity level. Despite a robust performance from the Philippines 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 actions to downsize operations and redeploy fleet to morebuoyant markets.
Europe
After a strong first half our UK business suffered as the economy contractedduring the latter part of the year, which led to a fall in commercial buildingactivity. Work associated with major infrastructure projects across London,such as the East London line, the Olympics facilities and Crossrail, is likelyto result in a robust UK civil engineering market in 2009, but the commercialmarket is likely to continue to struggle. Our Irish and Spanish operations alsoexperienced a very strong start to 2008 before slowing during the second halfof the year. In all our European operations we have cost reduction programmesunderway as the environment is expected to remain challenging during 2009.
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. 2008 2007
Change
Contribution to Total Operating Profit £2.8m £2.1m
+33.3%
Interest received on subordinated debt investments £4.7m £4.5m +4.4% _____ _____ ______ £7.5m £6.6m +13.6%During the year we reached financial close on five contracts. This included twofurther projects within the Leeds BSF programme, the Swallow Hill secondaryschool and two new leisure centres at Morley and Armley. This latter project isnotable for being the first ever non-education PFI contract in the BSFprogramme. The remaining three deals that closed were Pembury Hospital inTunbridge Wells, Derry schools in Northern Ireland and the MoD's communicationscentre at Corsham. Interserve is providing both construction and FM services tothe Leeds BSF projects and FM services to the three other contracts.
We were named preferred bidder on two new projects during the year: Down & Connor schools and Enniskillen hospital, both in Northern Ireland. More recently we also secured preferred bidder status for the Derby PPP waste treatment contract. This latter project is particularly pleasing as it represents a new sector where we see strong long-term prospects, driven by increasing regulation from the EU. We shall be providing FM services to the Down & Connor and Enniskillen projects. At the Derby waste treatment plant we will perform the construction and United Utilities will operate the plant.
Construction was completed on four projects during the year, all of which arenow fully operational. At University College London Hospital the 676-bedElizabeth Garrett Anderson wing opened, whilst elsewhere Holy Cross College inNorthern Ireland, the Plymouth schools project and the MoD's FleetAccommodation Centre in Devonport all moved into their operational stage. Wenow have a total of 23 operational PFI projects, with eight more underconstruction (in two of which we are providing interim services whileconstruction is under way). In its entirety our PFI portfolio now comprises 31closed PFI projects plus three more at preferred bidder stage.Our investment commitment in signed projects has now reached £74.4 million, ofwhich £46.9 million had been paid at 31 December 2008. The two preferred bidderprojects that we secured during the year will involve investment of a further £10.0 million.
The requirement for investment by government in social infrastructure remains strong, albeit the current funding issues are likely to mean that the environment for closing PFI deals will be more challenging in 2009, in particular for the larger deals.
Group Services
Costs accounted for within Group Services of £17.9 million (2007: £16.7 million) relate to our PFI bidding activity, a range of centrally-provided services and the Group Board.
Directors' report - Financial review
The Chairman's statement and the Business review provide an overview of the Group's results for 2008. This report provides further information on key aspects of the performance and financial position of the Group.
Net debt and cash flow
Year-end net debt was £109.2 million (2007: £101.6 million), representing free cash flow of £22.8 million (2007: £42.9 million).
£million 2008
2007
Operating profit before exceptional items and A 59.4 54.8 amortisation of intangible assets
Depreciation 22.6 21.5
Gain on disposal of property, plant and equipment (9.0) (8.0) Share-based payments
3.5 2.0Pension contributions in excess of the income (10.7)
(9.9)
statement charge Working capital movement (7.2) 4.6
____________________________________________________________________________
Cash generated by operations B 58.6 65.0
____________________________________________________________________________
Cash conversion % B / A 98.7%
118.6%
Cash generated by operations 58.6 65.0Dividends received from associates and joint ventures 13.5 8.4Tax paid (14.0) (4.5)Net capital expenditure (34.6) (23.7)Other (0.7) (2.3)
___________________________________________________________________________
Free cash flow 22.8 42.9Dividends paid (23.5) (21.9)Investments and acquisitions (7.7) (11.9)Other non-recurring 0.8 4.1
___________________________________________________________________________
(Increase)/decrease in net debt (7.6)
13.2
Despite a £16.5 million outflow of advances received from customers on construction contracts and a £10.7 million pension deficit payment, cash conversion approaching 100 per cent was achieved in the period.
Tax paid at £14.0 million (2007: £4.5 million) remains lower than the IncomeStatement charge incurred by the Group due principally to timing differences,the tax deductible nature of pension deficit payments and, in 2007, the refundof tax overpaid in earlier years and the utilisation of brought forward taxlosses.
Capital expenditure has increased primarily due to investment in Equipment Services' geographical strength throughout the Middle East and infrastructure in Facilities Management.
Investments and acquisitions of £7.7 million in 2008 principally reflects netadditional equity and sub-debt investment in PFI joint venture companies alongwith the initial cash consideration of £0.3 million on the acquisition of R & DHoldings Ltd. In 2007 the majority of the £11.9 million of investments andacquisitions related to the £9.1 million of consideration for the acquisitionof Madina Group (the balance being net additional equity and sub-debt in PFIjoint venture companies).DividendThe directors recommend a final dividend for the year of 11.7 pence, to bringthe total for the year to 17.0 pence, an increase of 4.9 per cent over lastyear. This dividend is covered 2.7 times by headline earnings per share and 1.0times by free cash flow.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 2008 2007Share of operating profit 3.8 3.6Net finance credit / (cost) 1.4 (0.6)Taxation (2.4) (0.9)
Share of profit included in Group Total Operating profit 2.8 2.1
The increase in contribution reflects the increasing scale and maturity of the Group's PFI portfolio.
Interest on non-recourse debt held within concession contracts is capitalisedas a cost of construction until the project is completed and is amortised overthe remaining income generating life of the asset.
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.
At the balance sheet date the Group had £74.4 million of committed investmentin 31 PFI/PPP projects which had reached financial close. Of this £46.9 millionhad been invested at that date, with the balance due to be invested over thenext three years.The Group's share of gross liabilities of £787.2 million principally representsnon-recourse debt within these ventures to fund capital building programmes andworking capital requirements.On a further two projects the Group has been nominated as preferred bidder butthese had not reached financial close at the year end. Since the year end, theGroup has also been appointed preferred bidder on a further project, DerbyWaste. Completion of these projects will entail a further investment commitmentof approximately £18.0 million.Intrinsically the fair value of these investments is determined by discountingfuture cash flows that the projects are expected to generate, offset whereappropriate by the cash flow hedges that are in place. As a result of a fall inlong-term interest rates, that drive the discount rate used, the net presentvalue of these future cash flows and therefore the "interest in joint ventures"has increased. In 2008, £21.7 million net gain was taken to equity as a resultof this revaluation (2007: £16.5 million net gain).Our PFI portfolio represents a significant source of value. For illustrativepurposes, the present value of the expected future cash flows of the currentportfolio at a range of discount rates would be:Discount rate 6.0% 8.0% 10.0% 12.0% Projects past financial close only £175.5m £133.1m £103.9m £83.3m Including projects at preferred £179.4m £135.4m £105.1m £83.7m bidder stage PensionsAt 31 December 2008 the Group pension deficit under IAS 19, net of deferredtax, was £110.2 million (2007: £59.8 million). The increase in the deficitduring the year was driven by decreases in asset values and strengthenedmortality assumptions offset in part by an increase in the liability discountrate, lower inflationary expectations and cash contributions in excess of theincome statement charge.
Defined benefit liabilities and funding:
The Group has a number of defined benefit schemes, whose liabilities aremeasured by discounting the best estimate of future cash flows to be paid bythese schemes using the projected unit credit method. This amount is reflectedin the consolidated balance sheet. The projected unit credit method is anaccrued benefits valuation method in which the scheme liabilities makeallowance for projected earnings. By contrast, the accumulated benefitobligation is an actuarial measure of the present value of benefits for servicealready rendered which differs from the projected unit credit method in that itincludes no allowance for future real salary increases. At the balance sheetdate the accumulated benefit obligation was £514 million, which compares to theprojected unit credit measure of £534 million.The Group's principal pension scheme is the Interserve Pension Scheme (the"Scheme"), comprising approximately 94 per cent of the total defined benefitobligations of the Group. The defined benefit section of the Scheme is closedto all but a very few new entrants and those employees who, under agreement,transfer under TUPE to the Group. A defined contribution section of the Schemehas been established for all new eligible employees.Work in relation to the latest triennial valuation due as at 31 December 2008is currently in progress which is likely to identify a funding shortfall inexcess of the accounting deficit of £153.1 million recognised in the balancesheet as at that date. The most recently completed triennial valuation of theScheme was performed by the Scheme Actuary as at 31 December 2005 and assesseda funding shortfall of £75 million following which a recovery plan was agreedresulting in the Group paying an additional £13.3 million into the Scheme in2008 (2007: £12.9 million) above the funding of ongoing accrual of benefit. Areview of the Scheme structures is underway. Once this is concluded, and theresults of the latest valuation are available, the Group will agree with theTrustee of the Scheme a revised deficit and schedule of cash contributions.
Investment risks:
At 31 December 2008 the Scheme assets were invested in a diversified portfoliothat consisted primarily of equity and debt securities. As at 31 December 2008,61 per cent of the Scheme assets were invested in equities (2007: 70 per cent).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.In conjunction with Interserve Plc, the Scheme Trustee regularly reviews itsinvestment allocation. The existing long-term asset allocation strategy adoptedby the Trustee is a dynamic strategy, which aims to gradually switch fromassets which are expected to deliver a higher return over the long term, suchas equities, to lower-risk assets such as corporate bonds and index-linkedgilts. The switching process, which is determined by a number of pre-definedrules, reflects the maturing nature of the Scheme.
IAS 19 assumptions and sensitivities:
Assumptions adopted in assessment of the Group charge and funding positionunder IAS 19 are reviewed and updated as necessary under advice from ouractuarial advisers, Lane Clark & Peacock LLP. During the year mortalityassumptions were marginally strengthened to reflect future improvements in lifeexpectancy. At the balance sheet date mortality rates are based on anadjustment to the "00 series tables" using the "medium cohort" mortalityimprovement projection strengthened with a minimum underpin to the annual rateof improvement (1.0 per cent for males and 0.5 per cent for females). Furtherdetails are provided in the following table.
The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:
Assumption adopted Sensitivity Indicative change in liabilities 2008 2007 Key financial assumptions Discount rate 6.3% 5.8% +/- 0.5% -/+ 9% -/+ £46m Inflation 2.9% 3.3% +/- 0.5% +/- 6% +/- £33m Real salary increases 1.5% 1.5% +/- 0.5% +/- 1% +/- £7m Life expectancy (years) Current pensioners 1 Men 85.7 84.8 Women 87.7 86.9 + 1 year +2% +£13m Future pensioners 2 Men 87.6 87.2 Women 88.9 88.4 1 Life expectancy of a current pensioner aged 652 Life expectancy at age 65 for an employee currently aged 45.
Acquisitions
R & D Holdings Ltd
On 11 January 2008, the Group acquired 100 per cent of the share capital of R &D Holdings Ltd, for a total consideration of £1.0 million of which £0.7 millionis deferred and contingent. The business supplies and installs CCTV, intruderalarms, technical surveillance and access controls.A fair value exercise has been performed and £1.1 million of intangible assets,representing licences and customer relationships, and £0.5 million of goodwillhave been recognised. The intangible assets will be amortised over an averagelife of five years, resulting in an amortisation charge of £0.3 million perannum.Madina Group
The Madina business, acquired in June 2007, continues to meet our expectations and no revisions to our preliminary assessment of fair values have been necessary.
Investment revenue and finance costs
The net charge for the year of £2.8 million can be analysed as follows:
£million 2008 2007 Net interest on Group debt (7.6) (7.1)Interest due on PFI sub debt 4.7 4.5 IAS 19: Expected return on Scheme assets 32.6 31.6Interest on liabilities (32.5) (28.9) Group net interest credit / (charge) (2.8) 0.1
The average net debt was £102 million (2007: £88 million).
Following decreases in pension fund asset values, 2009 results will reflect reduced assumed returns on Scheme assets, resulting in an increased non-cash interest cost.
TaxationThe tax charge for the year of £22.2 million includes a charge of £23.6 millionon profits before amortisation of intangible assets and profit on disposal ofproperty and investments, representing an effective rate of 27.8 per cent. Thisrate reflects the mix of the Group's businesses both within the UK andoverseas.
The effective rate is impacted by the favourable resolution of prior period issues and the effect of share of results of associates and joint ventures being presented net of the associated tax charge.
Treasury
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.
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 tofloating rates of interest linked to LIBOR. The Group has in place interestrate caps and swaps which limit interest rate risk on approximately one-thirdof Group borrowings. The weighted average duration to maturity of theseinstruments is a little over two years.
Liquidity risk
The Group seeks to maintain sufficient facilities to ensure that it has access to funding to meet current and anticipated future funding requirements determined from budgets 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
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 retranslatingan entity's non-functional balances into its functional currency was notmaterial.
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 impact of fluctuations in exchange rates during the year, compared to the rates used in preparing the 2007 consolidated financial statements has lead to an increase in reported revenue and profit as follows:
£million Project Equipment Total Services Services Revenue - 11.9 11.9 Total Operating Profit 1.8 2.5 4.3 In preparing the consolidated financial statements, the balance sheets ofoverseas entities are translated at the year-end exchange rates. The impact ofchanges in the year-end exchange rates, compared to the rates used in preparingthe 2007 consolidated financial statements, has lead to an increase inconsolidated net assets of £48.8 million.
Consolidated income statement
For the yearended 31 December 2008
Before Exceptional Year Before Exceptional Year exceptional items and ended 31 exceptional items and ended 31 items and amortisation December items and amortisation December amortisation of acquired 2008 amortisation of acquired 2007 of acquired intangible of acquired intangible intangible assets Total intangible assets Total assets assets £million £million £million £million £million £millionContinuing operations Revenue 3 1,800.0 - 1,800.0 1,738.0 - 1,738.0Cost of sales (1,576.8) - (1,576.8) (1,544.4) - (1,544.4)_________________________________________________________________________________________________Gross profit 223.2 - 223.2 193.6 - 193.6 Administration expenses (163.8) - (163.8) (138.8) - (138.8)Amortisation of - (5.0) (5.0) - (4.8) (4.8)acquired intangible assets Total administration (163.8) (5.0) (168.8) (138.8) (4.8) (143.6)expenses Profit on disposal of property - - - - 1.0 1.0and investments Operating profit 59.4 (5.0) 54.4 54.8 (3.8) 51.0 Share of result 28.6 - 28.6 18.5 - 18.5Amortisation of acquired - (0.3) (0.3) - (0.3) (0.3)intangible assets Share of result of 9 28.6 (0.3) 28.3 18.5 (0.3) 18.2associates and joint ventures
_________________________________________________________________________________________________
Total operating 3 88.0 (5.3) 82.7 73.3 (4.1) 69.2profit Investment revenue 4 39.9 - 39.9 38.1 - 38.1Finance costs 5 (42.7) - (42.7) (38.0) - (38.0)_________________________________________________________________________________________________Profit before tax 85.2 (5.3) 79.9 73.4 (4.1) 69.3 Tax (charge)/credit 6 (23.6) 1.4 (22.2) (21.0) 1.1 (19.9)Profit for the year 61.6 (3.9) 57.7 52.4 (3.0) 49.4 Attributable to: Equity holders of the parent 58.3 (3.9) 54.4 49.6 (3.0) 46.6Minority interest 3.3 - 3.3 2.8 - 2.8 61.6 (3.9) 57.7 52.4 (3.0) 49.4 Earnings per share Basic 8 43.5p 37.5pDiluted 8 42.7p 36.9p
Consolidated statement of recognised income and expense For the year ended 31 December 2008
Year ended Year 31 December ended 31 2008 December 2007 £million £million
Exchange differences on translation of foreign operations 11 48.8
3.4Loss on on available-for-sale financila assets 11 (1.3) -Losses on cash flow hedges (joint ventures) 11 (79.1) (2.0)
Gains on available-for-sale financial assets(joint ventures) 11 109.2
25.8
Actuarial (losses)/gains on defined benefit pension schemes 11 (80.7)
15.7Deferred tax on items taken directly to equity 11 14.2 (13.8) Net income recognised directly in equity 11.1 29.1Profit for the year 57.7 49.4 Total recognised income and expense 68.8 78.5 Attributable to: Equity holders of the parent 65.5 75.7Minority interest 3.3 2.8
______________________________________
68.8 78.5Consolidated balance sheetAt 31 December 2008 2008 2007 £million £millionNon-current assets Goodwill 228.9 228.4Other intangible assets 33.4 34.8Property, plant and equipment 156.8 117.6Interests in joint ventures 114.0 82.1Interests in associated undertakings 72.5 39.3Investments - 0.1Deferred tax asset 19.2 5.1
___________________________________________________________________________
624.8 507.4Current assets Inventories 27.8 15.6Trade and other receivables 372.1 370.7Cash and deposits 61.3 69.4
___________________________________________________________________________
461.2 455.7Total assets 1,086.0 963.1
___________________________________________________________________________
Current liabilities Bank overdrafts (3.1) (4.9) Unsecured loan notes - (1.0) Trade and other payables (466.0) (468.3)Current tax liabilities (13.8) (10.0)Short-term provisions (14.0) (5.8)
____________________________________________________________________________
(496.9)
(490.0)
Net current liabilities (35.7)
(34.3)
___________________________________________________________________________
Non-current liabilities Bank loans (165.5) (163.0)Trade and other payables (5.1) (9.4) Non-current tax liabilities (9.1) (8.4)Long-term provisions (24.0) (26.0)Retirement benefit obligation 10 (153.1) (83.1)
___________________________________________________________________________
(356.8) (289.9)Total liabilities (853.7) (779.9)Net assets 232.3 183.2 Equity Share capital 11 12.5 12.5 Share premium account 11 112.7 111.9Capital redemption reserve 11 0.1 0.1Merger reserve 11 49.0 49.0Hedging and translation reserves 11 108.3 38.7Investment in own shares 11 (0.5) (0.5)Retained earnings 11 (51.8) (30.1)
__________________________________________________________________________
Equity attributable to equity holders of the parent 230.3 181.6 Minority interest
11 2.0 1.6
__________________________________________________________________________
Total equity 232.3 183.2Consolidated cash flow statementFor the year ended 31 December 2008 Year ended Year ended 31 December 31 December 2008 2007 £million £millionOperating activities Total operating profit 82.7 69.2Adjustments for: Amortisation of acquired intangible assets 5.0
4.8
Depreciation of property, plant and equipment 22.6
21.5
Gain on disposal of property and investments -
(1.0)
Pension payments in excess of the income statement charge (10.7) (9.9) Share of results of associates and joint ventures
(28.3)
(18.2)
Non-cash charge relating to share-based payments 3.5
2.0
Gain on disposal of property, plant and equipment (9.0) (8.0) _______________________________________________________________________________Operating cash flows before movements in working capital 65.8 60.4(Increase)/decrease in inventories (7.5)
0.1
Decrease/(increase) in receivables 11.2
(65.7)
(Decrease)/increase in payables (10.9)
70.2
_______________________________________________________________________________
Cash generated by operations 58.6 65.0 Taxes paid (14.0)
(4.5)
_______________________________________________________________________________
Net cash from operating activities 44.6
60.5
_______________________________________________________________________________
Investing activities Interest received 7.3
6.5
Increase in investment in associate -
(9.1)
Dividends received from associates and joint ventures 13.5 8.4Proceeds on disposal of property, plant and equipment 20.2 21.5Capital expenditure (54.8)
(43.8)
Purchase of subsidiary undertaking 13 (0.3)
-
Investment in joint ventures - PFI investments (8.2)
(3.2)
Disposal of investment 0.1
-
Receipt of loan repayment - PFI investments 0.4
0.4
Receipt of loan repayment - associated undertakings 0.3
-
_______________________________________________________________________________
Net cash used in investing activities (21.5)
(19.3)
_______________________________________________________________________________
Financing activities Interest paid (10.2)
(9.1)
Dividends paid to equity shareholders (20.6)
(19.3)
Dividends paid to minority shareholders (2.9) (2.6)Issue of shares 0.8 2.7Increase in bank loans 2.5 22.8Movement in obligations under finance leases (0.2)
0.5
Redemption of loan notes (1.0)
(0.4)
_______________________________________________________________________________
Net cash used in financing activities (31.6)
(5.4)
Net (decrease)/increase in cash and cash equivalents (8.5)
35.8
Cash and cash equivalents at beginning of perion 64.5
28.4
Effect of foreign exchange rate changes 2.2
0.3
Cash and cash equivalents at end of period 58.2
64.5
Cash and cash equivalents comprise Cash and deposits 61.3 69.4Bank overdrafts (3.1) (4.9) 58.2 64.5 Reconciliation of net cash flow to movement in net debt Net (decrease)/increase in cash and cash equivalents (8.5)
35.8
Increase in bank loans (2.5)
(22.8)
Movement in obligations under finance leases 0.2
(0.5)
Redemption of loan notes 1.0
0.4
Change in net debt resulting from cash flows (9.8)
12.9
Effect of foreign exchange rate changes 2.2
0.3
Movement in net debt during the period (7.6) 13.2 Net debt - opening (101.6) (114.8)Net debt - closing (109.2) (101.6)Notes to the consolidated financial statementsFor the year ended 31 December 2008
1. General information
Interserve Plc (the Company) is a company incorporated in the United Kingdom.The financial information in this announcement, which was approved by the Boardof Directors on 11 March 2009, does not constitute the Company's statutoryfinancial statements for the years ended 31 December 2008 or 2007 but isderived from these accounts.Statutory accounts for 2007 have been delivered to the Registrar of Companiesand those for 2008 will be delivered following the Company's annual generalmeeting. The auditors have reported on these accounts; their reports wereunqualified and did not contain statements under section 237(2) or (3) of theCompanies Act 1985. The Company expects to publish its statutory accounts thatcomply in April 2009.2. 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 1985 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 2007 and are availableon the Company's website at www.interserve.com. In addition these accountingpolicies used are consistent with those that the directors intend to use in theAnnual Report and Financial Statements for the year ending 31 December 2008.
3. Business and geographical segments
The Group is organised into five operating divisions, as set out below. These divisions are the basis on which the Group reports its primary segment information.
* 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.
Segment information about these operating divisions is presented below.
Revenue Result 2008 2007 2008 2007 £million £million £million £millionFacilities Management 793.3 733.1 32.8 27.9Specialist Services 168.2 190.2 1.0 6.7Project Services 770.8 759.5 39.7 29.4Equipment Services 171.7 132.0 29.6 23.9Joint ventures - PFI Investments - - 2.8 2.1Group Services (17.9) (16.7)Inter-segment elimination (104.0) (76.8) - - 1,800.0 1,738.0 88.0 73.3 Profit on disposal of property - 1.0and investments Amortisation of acquired (5.3) (5.1)intangible assets______________________________________________________________________________Total operating profit 82.7 69.2Investment revenue 39.9 38.1 Finance costs (42.7) (38.0)Profit before tax 79.9 69.3Tax (22.2) (19.9)
______________________________________________________________________________
Profit after tax 57.7 49.4 Segment assets Segment Net assets/ liabilities (liabilities) 2008 2007 2008 2007 2008 2007 £million £million £million £million £million £million Facilities Management 206.9 181.8 (232.5) (203.1) (25.6) (21.3)Specialist Services 36.6 37.5 (43.2) (45.4) (6.6) (7.9)Project Services 217.3 200.2 (290.7) (287.7) (73.4) (87.5)Equipment Services 209.9 143.3 (53.9) (31.2) 156.0 112.1Joint ventures - PFI 136.9 96.2 (22.9) (14.1) 114.0 82.1Investments
_______________________________________________________________________________
807.6 659.0 (643.2) (581.5) 164.4 77.5Group Services, 215.5 231.9 (40.4) (26.2) 175.1 205.7goodwill and acquired intangible assets
_______________________________________________________________________________
1,023.1 890.9 (683.6) (607.7) 339.5 283.2 Net debt (109.2) (101.6)
_______________________________________________________________________________
Net assets 230.3 181.6(excluding minority interest) Depreciation and Additions to amortisation property, plant and equipment and intangible assets 2008 2007 2008 2007 £million £million £million £million Facilities Management 4.9 6.2 8.1 5.6Specialist Services 0.5 0.4 0.3 2.0Project Services 2.0 1.2 3.8 4.6Equipment Services 14.6 13.3 41.2 31.0Joint ventures - PFI Investments - - -
-
22.0 21.1 53.4
43.2
______________________________________________________________________________
Group Services 5.9 5.5 2.5
4.0
______________________________________________________________________________
27.9 26.6 55.9 47.2Geographical segmentsFacilities Management and Specialist Services are predominantly based in theUnited Kingdom. The Project Services division is located in the United Kingdomand has investments in associates in the Middle East. Equipment Services hasoperations in all of the geographic segments listed below.
The table below provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services.
Revenue by Total operating geographical profit market 2008 2007 2008 2007 £million £million £million £millionUnited Kingdom 1,748.0 1,704.2 49.1 51.6Rest of Europe 32.2 28.0 4.3 4.9Middle East & Africa 75.1 39.7 42.1 25.3Australasia 33.6 26.4 8.6 6.1Americas 7.4 8.0 0.8 2.3Group Services (17.9) (16.7) Joint ventures - PFI Investments 2.8 2.1Inter-segment elimination (104.0) (76.8) - - 1,800.0 1,738.0 88.0 73.3
_______________________________________________________________________________
Profit on disposal of property and investments -
1.0
Amortisation of acquired intangible assets (5.3)
(5.1)
_______________________________________________________________________________
82.7 69.2 Additions to Carrying amountof property, plantand segment assets/ equipment and (liabilities) intangible assets 2008 2007 2008 2007 £million £million £million £millionUnited Kingdom 17.6 19.5 (156.6) (128.0)Rest of Europe 5.9 7.1 35.5 25.1Middle East & Africa 25.3 9.8 133.9 54.2Australasia 2.8 2.4 19.3 19.8Far East 1.1 3.1 11.4 18.0Americas 0.7 1.3 6.9 6.3
_______________________________________________________________________________
53.4 43.2 50.4
(4.6)
Joint ventures - PFI Investments - - 114.0
82.1
Group Services, goodwill and acquired 2.5 4.0 175.1 205.7 intangible assets
_______________________________________________________________________________
55.9 47.2 339.5 283.2 Net debt (109.2) (101.6)Net assets (excluding minority interest) 230.3 181.64. Investment revenue 2008 2007 £million £millionBank interest 1.4 1.3Other interest 5.9 5.2Return on defined benefit pension assets 32.6
31.6
_______________________________________________________________________________
39.9 38.15. Finance costs 2008 2007 £million £millionBank loans and overdrafts and other loans repayable (10.2)
(9.1)
Interest cost on pension obligations (32.5)
(28.9)
______________________________________________________________________________
(42.7) (38.0)6. Income tax expense 2008 2007 £million £millionCurrent tax - UK 13.4 14.2Current tax - overseas 4.6 3.7Deferred tax 4.2 2.0
_______________________________________________________________________________
Tax charge for the year 22.2
19.9
Following the 1 April 2008 change in the UK standard rate of corporation tax from 30% to 28% the average rate of corporation tax for the year was 28.5% (2007: 30%). 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: 2008 2007 £million % £million % Profit before tax 79.9 69.3
Tax at the UK income tax rate of 28.5% (2007:30%) 22.8 28.5% 20.8 30.0% Tax effect of expenses not deductible in
1.3 1.6% 1.6
2.3%
determining taxable profit
Tax effect of share of results of associates (1.7) (2.1%) (0.8) (1.2%) Effect of overseas losses unrelieved
0.9 1.1% 1.0
1.4%
Impact due to change of tax rate - 0.0% (1.2)
(1.7%)
Prior period adjustments (1.1) (1.4%) (1.5)
(2.2%)
Tax charge and effective tax rate for the year 22.2 27.8% 19.9 28.7%
In addition to the income tax charged to the income statement, the followingdeferred tax charges/(credits) have been recorded directly to equity in theyear: 2008 2007 £million £millionTax on actuarial (loss)/gain on pension liability (22.6)
5.4
Impact of the change in tax rate relating to the -
1.2
deferred tax on pension liabilities Tax on loss on available-for-sale financial (0.4)
-
assets Tax on fair value adjustment on cash flow hedges (22.1)
(0.6)
(joint ventures) Tax on the fair value adjustment on available for 30.5
7.8
sale financial assets within the PFI Special Purpose Companies Tax on the intrinsic value of share-based payments 0.4 - ______________________________________________________________________________Total (14.2) 13.87. Dividends Dividend 2008 2007 per share pence £million £millionFinal dividend for the year ended 31 December 2006 10.6 - 13.1 Interim dividend for the year ended 31 December 2007 5.0 - 6.2
Final dividend for the year ended 31 December 2007 11.2 14.0
-
Interim dividend for the year ended 31 December 2008 5.3 6.6
- Amount recognised as distribution to equity 20.6
19.3
holders in the period
Proposed final dividend for the year ended 31 11.7 14.6
December 2008 8. Earning per share The calculation of the basic, diluted and headline earnings per share is basedon the following data:Earnings 2008 2007 £million £million Earnings for the purposes of basic earnings per share 54.4
46.6
being net profit attributable to equity holders of the parent Profit on sale of property and investments -
(1.0)
Amortisation of acquired intangible assets 5.3
5.1
Tax effect of above adjustments (1.4)
(1.1)
Headline earnings 58.3
49.6
Earnings for the purposes of diluted earnings per share 54.4 46.6Number of shares 2008 2007 Number Number
Weighted average number of ordinary shares for the 124,935,731 124,221,097 purposes of basic earnings per share
Effect of dilutive potential ordinary shares: Share options and awards 2,396,690
2,225,387
_____________________________________________________________________________________
Weighted average number of ordinary shares for the 127,332,421 126,446,484 purposes of diluted earnings per share
Earnings per share 2008 2007 p pHeadline earnings per share 46.7
39.9
Basic earnings per share 43.5
37.5
Diluted earnings per share 42.7
36.9
9. Results from joint venture and associated undertakings
2008 2007 Project Facilities Joint ventures - Project
Facilities Joint ventures -
Services Management PFI Investments Total Services
Management PFI Investments Total
£million £million £million £million £million £million £million £million Revenues 284.2 83.1 134.5 501.8 193.2 56.0 69.0 318.2Operating 25.2 1.8 3.8 30.8 15.9 0.7 3.6 20.2profit Net interest 0.2 - 1.4 1.6 - - (0.6) (0.6)receivable/ (payable) Taxation (0.9) (0.5) (2.4) (3.8) - (0.2) (0.9) (1.1)
____________________________________________________________________________________________________________________
Operating 24.5 1.3 2.8 28.6 15.9 0.5 2.1 18.5profit Amortisation (0.3) - - (0.3) (0.3) - - (0.3)of acquired intangible assets
____________________________________________________________________________________________________________________
Total 24.2 1.3 2.8 28.3 15.6 0.5 2.1 18.2operating profit Dividends (12.4) (0.7) (0.4) (13.5) (7.9) (0.5) - (8.4)
____________________________________________________________________________________________________________________
Retained 11.8 0.6 2.4 14.8 7.7 - 2.1 9.8profits
10. 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 2008 2007 Retail price inflation 2.90%pa 3.30% pa Discount rate 6.30% pa 5.80% pa Pension increases in payment: LPI/RPI 2.70%/2.90% 3.20%/3.30% Fixed 5% 5.00% 5.00% 3% or RPI if higher (capped at 5%) 3.50% 3.60% General salary increases 3.65 - 4.40% pa 4.05 -
4.80% pa
The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:
2008 2007 2006 2005 £million £million £million £million Present value of defined benefit 534.2 563.4 557.2 514.6obligation Fair value of scheme assets (381.1) (480.3) (445.8) (382.0)
______________________________________________________________________________
Liability recognised in the balance 153.1 83.1 111.4 132.6 sheet
The amounts recognised in the income statement are as follows:
2008
2007
£million
£million
Employer's part of current service cost 14.6
13.8
Interest cost 32.5
28.9
Expected return on scheme assets (32.6)
(31.6)
________________________________________________________________________________
Total expense recognised in the income statement 14.5
11.1
Actuarial gains and losses are recognised in full in the period in which theyoccur. They are recognised directly in equity and presented in the statement ofrecognised income and expense.The current service cost is included within operating profit. The interest costand expected return on assets are included within financing costs. The actualreturn on the schemes' assets over the year was a loss of £108.5 million (2007:gain of £24.8 million).
11. Reconciliation of movement in equity
Hedging Attributable Capital and Investment to equity Share Share redemption Merger translation in own
Retained holders of Minority
capital premium reserve reserve reserves shares
earnings the parent interest Total
£million £million £million £million £million £million £million £million £million £millionBalance at 1 12.4 109.3 0.1 49.0 18.7 (0.5) (68.5) 120.5 1.4 121.9January 2007 Exchange - - - - 3.4 - - 3.4 - 3.4differences on translation of foreign operations Gain on - - - - - - - - -available-for-sale financial assets Gains on cash flow - - - - (2.0) - - (2.0) - (2.0)hedges(joint ventures) Gains on - - - - 25.8 - - 25.8 - 25.8available-for-sale financial assets(joint ventures) Actuarial gains on - - - - - - 15.7 15.7 - 15.7defined benefit pension schemes Deferred tax on - - - - (7.2) - (6.6) (13.8) - (13.8)items taken directly to equity Net income - - - - 20.0 - 9.1 29.1 - 29.1(expense) recognised directly in equity in the year Profit for the - - - - - - 46.6 46.6 2.8 49.4year Dividends paid - - - - - - (19.3) (19.3) (2.6) (21.9)Shares issued 0.1 2.6 - - - - - 2.7 - 2.7Share-based - - - - - - 2.0 2.0 - 2.0payments
_____________________________________________________________________________________________________________________
Balance at 31 12.5 111.9 0.1 49.0 38.7 (0.5)
(30.1) 181.6 1.6 183.2December 2007
_____________________________________________________________________________________________________________________
Exchange - - - - 48.8 - - 48.8 - 48.8differences on translation of foreign operations Loss on - - - - (1.3) - - (1.3) - (1.3)available-for-sale financial assets Losses on cash - - - - (79.1) - - (79.1) - (79.1)flow hedges (joint ventures) Gains on - - - - 109.2 - - 109.2 - 109.2available-for-sale financial assets (joint ventures) Actuarial loss on - - - - - - (80.7) (80.7) - (80.7)defined benefit pension schemes Deferred tax on - - - - (8.0) - 22.2 14.2 - 14.2items taken directly to equity
_____________________________________________________________________________________________________________________
Net income - - - - 69.6 - (58.5) 11.1 - 11.1(expense) recognised directly in equity in the year Profit for the - - - - - - 54.4 54.4 3.3 57.7year 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 Purchased own - - - - - 0.2 (0.2) - - -shares used to settle share-based payment obligations Share-based - - - - - - 3.2 3.2 - 3.2payments
_____________________________________________________________________________________________________________________
Balance at 31 12.5 112.7 0.1 49.0 108.3 (0.5) (51.8) 230.3 2.0 232.3December 2008 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 Plcheld by the trustees of the How Group, Bandt and Interserve Employee BenefitTrust. The market value of these shares at 31 December 2008 was £524,000 (2007:£1,205,000)12. Share capital Shares Share capital Thousands £millionAs at 1 January 2008 124,751 12.5Share options exercised 265 -At 31 December 2008 125,016 12.513. Acquisitions On 11 January 2008, the Group acquired 100% of the share capital of R & DHoldings Ltd, for a total consideration of £1.0 million of which £0.7 millionis deferred and contingent consideration. A fair value exercise has beenperformed and £1.1 million and £0.5 million of intangible assets and goodwill,respectively, has been recognised.
14. 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 goodsand Purchases of goods services and services 2008 2007 2008 2007 £million £million £million £millionJoint ventures - PFI 213.2 198.2 - -Investments Associates 125.9 76.6 2.3 1.2 Amounts owedby Amounts owed to related parties related parties 2008 2007 2008 2007 £million £million £million £million Joint ventures - PFI 0.9 0.8 - -Investments Associates 2.1 2.5 0.3 0.3
Sales and purchases of goods and services to related parties were made on normal trading terms.
The amounts outstanding per the above table are unsecured and will be settledin 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.15. Contingent liabilities
The Company and its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. Appropriate provision has been made in these accounts 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 of the Group's share of thecontractual obligations of certain joint venture and associated undertakings.The Group acts as guarantor for sums not exceeding £11.8 million (2007: £5.5million) in respect of associated undertakings' borrowings and £169.0 million(2007: £97.0 million) in respect of joint venture and associated undertakings'bond and guarantees. At 31 December 2008 £0.8 million (2007: £0.2 million) hadbeen utilised in borrowings and £138.5 million (2007 £65.3 million) inguarantees.As part of the Office of Fair Trading's ongoing review of tender activity inthe construction sector, it wrote to the Group with regard to potentialbreaches of competition law in respect of 16 tenders submitted between 2000 and2005. These tenders represent a very small proportion of the bidding activityduring this period. In April 2008, the OFT published its Statement ofObjections against 112 companies in the construction sector in England,including the Group. The Statement of Objections alleges suspected `coverpricing' by the Group on three construction industry tenders between October2000 and September 2001. The Group has taken the opportunity to makerepresentations before any final decision is made. Given the stage of the OFT'sreview it is not possible to predict whether this will have a materiallyadverse effect on the Group's financial position or results of operations.
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.Major contractsAs 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.
Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed under note 14.
Key management compensation is disclosed in the Directors' Remuneration Reportin the Annual Report and Financial Statements for the year ended 31 December2008.
During the period, Group companies entered into transactions with related parties who are not members of the Group, the details of which can be found under note 14.
Non-statutory accounts
The information in this annual results announcement does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985(the "Act"). The statutory accounts for the year ended 31 December 2008 will bedelivered to the Registrar of Companies in England and Wales in accordance withsection 242 of the Act. The auditor has reported on those accounts. Its reportwas unqualified and did not contain a statement under section 237(2) or (3) ofthe Act.Annual reportThe Company's annual report and accounts for the year ended 31 December 2008 isexpected to be posted to shareholders by 8 April 2009. Copies of both thisannouncement and the annual report and accounts will be available to the publicat 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 this annual results announcement ("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 directors confirm that, to the best of their knowledge:
(a) the Group financial statements in this annual results announcement, which have been prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and of the Group taken as a whole; and
(b) the Directors' report contained in this annual results announcement includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.
By order of the Board
A M Ringrose T C JonesChief Executive Group Finance Director
vendor