10 Aug 2010 07:00
10 August 2010INTERSERVE HALF-YEAR RESULTS
* Trading in line with expectations
* Confident of strong second-half performance
* Interim dividend up 1.8%
Interserve, the international services, maintenance and building group, announces its half-year results for the six months ended 30 June 2010.
H1 2010 H1 2009 Revenue £944.5m £951.2m Headline profit (1) £30.0m £39.3m Profit before tax £27.3m £40.0m
Headline earnings per share (2) 17.5p 23.1p
Basic earnings per share 15.9p 24.2p Net debt £53.1m £85.1m Interim dividend 5.6p 5.5p
(1) Headline profit comprises profit before taxation of £27.3m (H1 2009: £
40.0m) adjusted for the impact of (£2.5m) amortisation of intangible assets
(H1 2009: (£2.5m)); (£0.2m) amortisation of intangible assets (associates)
(H1 2009: £0.2m); and £nil exceptional items (H1 2009: £3.4m)).
(2) Headline earnings per share are based on Headline profit as defined in note
1 above (see also note 6 to the unaudited condensed financial statements).
Chief Executive Adrian Ringrose commented,
"Trading in the half-year was in line with the Board's expectations. ProjectServices delivered an excellent result, Support Services is making goodprogress based on moving performance in several key public sector contracts toplanned levels of profitability and Equipment Services, after an exceptional2009, performed creditably in a challenging environment.Uncertainties persist in our markets, but we remain confident that the secondhalf will show a significant uplift on the first half and that we have a stronginternational platform from which to sustain long-term growth at attractivemargins. Consequently, the Board is continuing with its progressive dividendpolicy." - 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
Neil Bennett, Maitland 020 7379 5151 Interim management reportChairman's statement
Headline profits of £30.0 million in the first half were in line with ourexpectations but some 24 per cent lower than a strong performance in the sameperiod last year. Despite difficult market conditions, Project Servicesdelivered an excellent performance, with both our UK and internationaloperations posting improved results that led to a 30 per cent increase indivisional profits. However, as expected, this was more than offset by reducedcontributions across the rest of the Group, notably from Equipment Services,which performed creditably in tougher market conditions but was not able toreplace several large hire contracts that helped deliver a record 2009 resultfor the division. Support Services revenues increased due to the full-yearimpact of prior-year contract wins, but its performance was affected by thetransition of several public sector contracts to planned levels ofprofitability and weak private sector market conditions. We are now welladvanced in taking these public sector contracts to higher margin levels andexpect to see a significantly improving result from Support Services as theyear progresses.We consider our international reach to be a major strength. We have continuedto grow our geographic footprint, developing further opportunities incomplementary markets and services. Our strong position in the Middle East,built up over more than 25 years, is enabling us to take advantage of ongoingopportunities in the region. We continue to prosper in existing markets such asQatar and Oman and have entered new markets such as Saudi Arabia. During theperiod we were awarded our first major support services contract in the UAE andinvested £0.4 million for a 49 per cent stake in Occupational TrainingInstitute LLC (OTI), a services company that provides training and consultancyto the petrochemical industry in Oman. In July we committed to invest around £5million for a 49 per cent stake in a construction business operating insouthern India.
Balance sheet
The Group maintains a strong financial position, with net debt as at 30 June2010 of £53.1 million (30 June 2009: £85.1 million). During the first half wesuccessfully completed the renewal of our £250 million committed debtfacilities, which now extend until 2013.Changes in market conditions resulted in the pension deficit increasingslightly to £75.8 million (31 December 2009: £68.6 million), net of tax, dueprincipally to lower than expected asset returns in the first half. Followingthe range of actions taken last year to improve significantly the fundingposition and reduce future volatility we believe that we now have a robust andaffordable funding plan to address the remaining shortfall over the next sevenyears without restricting our ability to support our growth ambitions.
Dividend
Reflecting our confidence in the ability of the Group to sustain its record oflong-term growth and cash generation, the Board has approved a further increasein the interim dividend. An interim dividend of 5.6p (H1 2009: 5.5p) will bepaid on 25 October 2010 to shareholders on the register at close of business on24 September 2010.BoardAs announced in June, Group Finance Director, Tim Jones, has tendered hisresignation in order to take up the position of Group Finance Director atMitchells & Butlers plc. Our search for his successor is progressing well andTim will be remaining at Interserve for an appropriate period to ensure asmooth and orderly transition. On behalf of the Board, I would like to thankTim for all his work over the last seven years. He has made a huge contributionas Group Finance Director and we wish him well in his future career.
Prospects
We are confident that margin recovery in Support Services and growth from ourinternational markets will generate improved second-half earnings and sustainlong-term growth, supported by a substantial future workload of £5.7 billion.In the UK we are making progress in delivering planned margins in SupportServices with an initial target to achieve sustainable margins across thedivision that are comparable with our peer group. This margin improvement isprimarily dependent on internal actions rather than market conditions, and canbe delivered in the current, less benign, demand environment. However, themedium-term demand environment is positive; the benefits of outsourcing as ameans of reducing cost and improving service delivery in an uncertain economicenvironment will be essential in enabling the UK government to meet itsexpenditure objectives. With a Support Services business founded on long-term,value-added client relationships in the UK public sector, we are well placed tocontinue to be successful in this market.In recent years we have developed and increased our exposure to internationalmarkets, generating opportunities to expand both our service offering andgeographical footprint at attractive margins. Around 50 per cent of Groupprofits are currently derived from outside the UK. We expect this overseascontribution to remain significant, as our existing international markets suchas Qatar, Oman and Australia offer attractive growth prospects and we continueto expand into new territories such as Saudi Arabia and, most recently, India.Both of the latter countries have young, fast-growing populations but arelative lack of infrastructure to support this growth, providing a fertileenvironment for our business. We will continue to look further foropportunities to expand our international reach.With our significant international exposure, margin enhancement plan in SupportServices and substantial future workload we are confident that we have a strongplatform to deliver long-term growth.Lord BlackwellChairman10 August 2010Business reviewStrategy
Interserve's vision is to be The Trusted Partner, bringing together all of our capabilities to create innovative solutions that support long-term customer relationships, offering rewarding careers for our staff and underpinning sustained value creation for shareholders.
Our strategic objectives for fulfilling this vision consist of the following elements:
Build strong core businesses based on long-term, value-added client relationships:
Our well-established client relationships have been cultivated over a long period of time and have withstood previous business and economic cycles, delivering a high level of repeat business and conferring strong visibility during uncertain economic periods.
Strategic progress:
* We have a substantial future workload of £5.7 billion, due in large part to
the strong existing relationships we have with major clients such as Thames
Water, United Utilities, Leeds City Council, Shell and Siemens, all of whom
extended their work with us in the first half.
* We were named Best Facilities Management Provider in the Public Private
Finance Awards 2010, recognising our ability to implement strong
partnerships with the public sector in pursuit of improving working
practices and efficiencies.
Capture emerging opportunities for integrated solutions:
The broad reach of the Group's expertise across the asset life cycle enables usto structure `one-stop-shop' solutions to match our clients' support needsacross markets and sectors. Our culture and organisational flexibility allowsus to transfer expertise across our activities. It also gives us the potentialto grow into new markets and services where we can provide additional value
toour existing clients.Strategic progress:
* Since securing the HSBC integrated multi-site outsourcing contract last
year we have grown our relationship with this client through the provision
of a number of extended and additional services both in the UK and,
latterly, in the Middle East.
Expand international growth with fuller service offering:
We have extensive sectoral and geographic reach in our existing businesses; however, our markets are constantly evolving and we seek to develop into related skills, sectors and geographies as part of our growth strategy.
Strategic progress:
* Our successful and long-standing Project Services partnerships in the
Middle East are providing opportunities for our Support Services business
to win new work in the region. Notably, this year we have won one of the
largest support services contracts in the UAE, and look forward to
developing this business stream further.
* Having successfully developed a services offering for the petrochemical
sector in Qatar via the 2007 acquisition of Madina Group, we have now
invested in a business offering similar services to the Omani petrochemical
sector, a sector where we already have strong relationships via our
construction operation.
* The recent entry into Saudi Arabia by our Equipment Services business is
gaining, winning its initial contracts in the Kingdom and actively pursuing
an attractive pipeline of opportunities.
Given that our core skills and capabilities are transferable across sectors andgeographies, we expect more examples of such strategic developments to arise,underpinning our confidence in the Group's future.
Key Performance Indicators
H1 2010 H1 2009 Change Revenue £944.5m £951.2m (0.7)% Headline earnings per share 17.5p 23.1p (24.2)% Cash conversion (3) (47.1)% 128.5% (175.6)% pts Future workload £5.7bn £6.7bn (14.9)% Annualised staff turnover (4) 8.7% 7.4% +1.3%
pts
Annualised all-employee accident 379 366
+3.6%
incidence rate per 100,000 workforce (3) Cash conversion is calculated as the percentage of cash generated by
operations of £(8.0)m (H1 2009: £37.9m) divided by the sum of: operating
profit of £14.5m (H1 2009: £30.4m); plus amortisation of intangible assets
of £2.5m (H1 2009: £2.5m); less profit on disposal of property and investments of £nil (H1 2009: £3.4m).
(4) Staff turnover measures the proportion of managerial, technical and
office-based staff leaving voluntarily over the course of the period. The
figures for January-June have been doubled to give an annual equivalent.
The half-year performance was in line with the Board's expectations, withheadline earnings per share of 17.5p (H1 2009: 23.1p) on revenue of £944.5million (H1 2009: £951.2 million). Revenue growth from the full year impact ofprior-year contract wins in our Support Services division was offset by lowerrevenues in Project Services and Equipment Services. At the headline earningsper share level the performance reflected, as expected, a return to a morebalanced hire/sale mix in Equipment Services following an exceptionally strong2009 performance and a Support Services result affected by the transition ofseveral key public sector contracts to planned levels of profitability.Net debt as at 30 June was £53.1 million (H1 2009: £85.1 million) whilstaverage net debt during the first half was £12.0 million. Cash conversion inthe period was impacted by an anticipated reduction in advance payments andincreased pension contributions. On a rolling 12-month basis cash conversionwas over 150 per cent.Being accident free is one of our five key goals and maintaining a safe andhealthy environment is fundamental to our success, so it is encouraging that wehave been able to maintain a historically low UK all-employee incidence rateduring the first half. It is also pleasing to see that our efforts over recentyears in improving this non-financial key performance indicator were rewardedduring the period. We received the Safe Working Award for 2009 from the
Engineering Construction Industry Association and two further sector awards from RoSPA: the Outstanding Facilities Sector Award and Defence Sector Award.
Future workload
Our future workload comprises forward orders and pipeline. Forward orders arethose for which we have secured contracts in place. Pipeline covers contractsfor which we are in bilateral negotiations and on which final terms are beingagreed. We include our share of work won by our Middle East associates.The future workload at the end of the period stood at £5.7 billion, comprising£4.5 billion of forward orders and £1.2 billion relating to pipeline. Thereduction from the year-end future workload level of £6.5 billion reflects thefollowing movements during the first half:
* New contract wins amounting to £0.8 billion;
* Delivery of £1.0 billion of work;
* A reduction in the estimated value of pipeline in light of recent
discussions with UK public sector clients, amounting to £0.6 billion, the
majority of which relates to 2013 onwards.
Principal risks and uncertainties
The principal risks and uncertainties which could have a material impact uponthe Group's performance over the remaining six months of the 2010 financialyear, together with the mitigation strategies adopted, and which could causethe actual results to differ materially from those expected, have not changedsignificantly from those set out on pages 24 and 25 of the Business Reviewincluded in the Group's 2009 annual report and financial statements.
These risks and uncertainties may be summarised as:
* Market change * Major contracts * Key people * Health & safety regime * Financial risks * Damage to reputation Segmental reviewInterserve's divisions create and deliver integrated and single-servicesolutions that offer real benefits in meeting our clients' outsourced servicerequirements. Our divisions are supported by a Group Services function whichprovides a range of central services and encompasses our financing and PFIbidding activities. Group Services' costs in the half year were £10.1 million(H1 2009: £8.0 million), the increase reflecting non-recurring restructuringcharges.Support Services was formed in January 2010 when we combined FacilitiesManagement and Specialist Services, reducing costs, simplifying the managementstructure and reflecting the increasing amount of work delivered by ourSpecialist Services division to our Facilities Management clients. FacilitiesManagement provided a broad range of integrated services to the public andprivate sectors, the vast majority of which we deliver ourselves, whileSpecialist Services provided a variety of single-service solutions, such assecurity, mechanical and electrical design, installation and maintenance andtechnical services.Results summary: H1 2010 H1 2009 Change Revenue £538.2m £503.8m +6.8% Contribution to Total Operating £8.9m £10.7m (16.8)%Profit Operating margin 1.7% 2.1% (0.4)% ptsSupport Services delivered a contribution to Total Operating Profit of £8.9million and a margin of 1.7 per cent in the period. Revenues continued to growduring the period, reflecting the full-year impact of contracts won andmobilised during 2009. The margin is still significantly below the level webelieve the business can deliver on a sustainable basis, and primarily reflectspreviously highlighted cost pressures in the early stages of several major newpublic sector integrated outsourcing contracts, together with weakness in theprivate sector and the absorption of around £1.8 million of non-recurringheadcount reduction costs. We are making good progress in moving performance ina number of public sector contracts to planned levels of profitability.Contract wins in the period included plant and equipment replacement work atthe NEC in Birmingham and the successful re-bid of a four-year contract withthe Metropolitan Police Service (MPS) to provide special events servicesthroughout London and the home counties, continuing a relationship with the MPSthat began in 1999. The division had a future workload of £4.3 billion at theend of June, of which around 85 per cent represented forward orders. Includedwithin this workload is £0.5 billion of work scheduled for the second half of2010 and a further £0.7 billion scheduled for delivery in 2011.Revenues from existing public sector contracts remained relatively stableduring the period, although early signs of a reduction in discretionary workhave emerged as clients postpone some projects pending finalisation of theComprehensive Spending Review. However, beyond the near term, the demanddrivers for this business remain attractive. Our customers, in particularcentral and local governments, are under pressure to reduce budgets, to improveefficiencies and to maximise the effectiveness of their available resourcesgiven the current challenging economic environment. At the same time, theycontinue to face rising demand from a growing and ageing population to improvethe delivery of existing services. We are well positioned to help them givenour strong capabilities across a broad range of markets, our proven trackrecord in delivering change and our ability to create innovative solutions, asevidenced by our recent selection on a government framework contract whichpre-qualifies us for work commissioned by public sector bodies in hard, softand managed services. We expect this business to generate good medium-termgrowth as a result.In the private sector many of our clients remain subdued by the currenteconomic climate, resulting in reduced demand for some of our services, andthis has continued to weigh on the division's performance. However, we remainconfident that the recently-mobilised HSBC contract will provide a boost to ourprivate sector integrated outsourcing credentials as we bid for new contracts,and we look forward to improving momentum as and when the economy recovers. Thecontract has already provided opportunities for us to grow the scope of theservices we provide to this client, notably in security, construction andconsulting.Within the division's result the former Specialist Services businesses lost £2million (H1 2009: £1.6 million loss), reflecting continued difficult tradingconditions and consequent restructuring costs. Following the creation ofSupport Services the new divisional leadership has conducted a thorough reviewof financial performance and business operations. This has resulted inadditional senior management changes within the security and technical servicesbusinesses and we expect to make further reductions to the cost base.
Given the attractive medium-term demand characteristics for Support Services we have continued to develop our infrastructure to support future growth. The National Service Centre is currently managing around 80,000 calls a month servicing five key clients. Client feedback has been positive and capacity exists to expand this facility over time, further improving our productivity.
The business also continues to expand overseas, notably in the Middle Eastwhere it can leverage existing Group relationships and business infrastructure.In the UAE we were awarded during the period one of the largest supportservices contracts in the country, and with a growing pipeline of opportunitieswe are excited about the business's future in the Gulf.Looking forward, once the above-mentioned public sector contracts have achievedtheir planned levels of profitability, and as the private sector economyrecovers, we expect Support Services to meet our initial target for marginsthat are comparable with our peer group. As future growth leverages theinvestment in infrastructure and our overseas development continues there isthe potential for further margin improvement.Project Services is a leading construction business providing professionalservices to enable the creation of a broad range of buildings andinfrastructure. First-half trading was strong in both the UK and Middle East,producing a contribution to Total Operating Profit of £23.5 million (H1 2009: £18.1 million).Results summary: H1 2010 H1 2009 Change Revenue (UK only) £380.8m £406.4m (6.3)%
Contribution to Total Operating £23.5m £18.1m
+29.8%Profit - UK £10.9m £7.1m +53.5% - International associates* £12.6m £11.0m +14.5% Operating margin (UK) 2.9% 1.7% +1.2% pts
Operating margin (Middle East) 10.3% 8.6% +1.7%
pts
* After interest and tax
In the UK over half of the business's activity is generated via PFI andlong-term framework contracts which deliver a relatively predictable flow ofwork. The UK's future workload has remained broadly stable compared to thestrong year-end position, at around £1.2 billion. Included within this workloadis £0.3 billion of work scheduled for the second half of 2010 and a further £0.4 billion scheduled for delivery in 2011. Nevertheless, activity levels aremoderating as the government seeks to reduce public sector spending, initialsigns of which are reflected in the slight year-on-year decline in revenues.Within this environment, performance in the UK was excellent in the first half,generating an above-trend margin of 2.9 per cent as the business benefited fromfinal account settlements on a number of contracts.We expect this strong performance to continue in the near term, although we aremore cautious on the outlook beyond 2011 when the impact of anticipated reducedpublic spending on capital projects would be felt. We are actively targetingnew sectors, including waste and retail, to offset some of the potentialshortfall in work from our traditional segments such as education andcustodial. Moreover, while the government has announced that there will be nonew Building Schools for the Future projects, we believe that we are wellplaced to participate in any replacement programme of lower cost schoolbuildings. As ever, we remain focused on aligning our cost base with expectedworkload levels.New wins in the UK during the period included a £30 million contract to designand build the new Leeds West Academy for Leeds City Council and a contract toextend and refurbish Siblands SLD Secondary School in Thornbury, SouthGloucestershire, which was our first project under the Construction FrameworkSouth West framework announced late last year. Also in the local governmentsector we were awarded two multi-year construction framework agreements withNorth Yorkshire County Council and the East Midlands Property Alliancerespectively, with a combined anticipated value to Interserve of £30 million.In June the state-of-the-art Help for Heroes Rehabilitation Complex at HeadleyCourt, Surrey was opened. As well as being the main contractor for this projectthe Group's consulting business was also involved, providing project, cost anddesign management and technical advice - a good example of how knowledge andexperience across the Group can be brought to bear for the benefit of ourclients.We had another successful period in our infrastructure business. We won a major£70 million project in Preston to design and construct new storm water tunnelsfor United Utilities, as part of the KMI+ joint venture, and finalised a £60million contract to construct new facilities and upgrade existing works forThames Water at its Riverside wastewater treatment plant. In June adesalination plant built by our joint venture with Acciona for Thames Water wasopened; the only four-stage desalination plant to be built in the world.In the Middle East, which contributes more than half of the division's TotalOperating Profit, our diversity across the region, both sectoral andgeographic, together with the strength of our local partnerships, has enabledour associate companies to deliver another strong first-half performance and,despite tougher trading conditions in Dubai, the level of dividends remittedfrom the region more than doubled. Our associate companies across the regioncontinued to secure new contracts during the period, improving the region'sfuture workload to £234 million at 30 June as compared to the year-end positionof £197 million.In our largest market, Qatar, new contracts were secured in both services andconstruction activities. Our services workload was bolstered by a five-year, £30 million contract at the Shell Gas-To-Liquids facility at Ras LaffanIndustrial City and a three-year services contract with Maersk Oil for thesupply of manpower and equipment to onshore and offshore facilities, wortharound £20 million. Our Qatari construction business was awarded a £40 million,two-year contract to design and construct two energy centres to service the newEducation City being developed near Doha, and further substation contracts witha combined value in excess of £100 million, the majority of which is with ourlong-term client, Siemens.The Qatari government has outlined a continuation of its expansionary fiscalpolicy, which, together with its support of the more subdued banking and realestate sectors, is expected to ensure that relatively attractive activitylevels are maintained going forward. With the recent rapid expansion ofLiquified Natural Gas (LNG) production capabilities at Ras Laffan drawing to anend the government has been keen to ensure there is adequate infrastructure tosupport the LNG sector and continues to seek further diversification of itseconomy. Developments such as Education City, the Heart of Doha redevelopment,New Doha International Airport, Dohaland and Lusail City are all examples ofsuch intent. We believe that our offering, which encompasses construction,equipment services and support services, positions us well to continue to winwork in this buoyant environment.In the UAE we won a multi-million pound contract at the new Saadiyat Beach Clubdevelopment in Abu Dhabi, and whilst Dubai is experiencing significantly lowerlevels of activity than last year we nevertheless continued to secure new work,becoming the exclusive provider of highways maintenance services to the DubaiRoads and Transport Authority and winning a £50 million contract to expand andimprove the Ritz Carlton Hotel on Dubai's waterfront.In Oman notable wins included two contracts for the design and construction ofbuildings for Al Hosn Investments, with a combined value of around £20 million.Building on the success of our services operations feeding the petrochemicalsector in Qatar, we have recently entered the Omani industrial services market,where we have long-term relationships in the same sector, via an investment of£0.4 million for a 49 per cent stake in OTI, a leading health and safetytraining and consultancy services provider. Prospects for Oman remain promisingas the government continues its strategy of diversifying the economy away froma reliance on oil production by boosting its industrial and services sectors.
Equipment Services is a global leader in the supply of specialised equipment (formwork and falsework) used in creating major concrete structures, often requiring complex specification and design work.
Results summary: H1 2010 H1 2009 Change Revenue £68.4m £80.4m (14.9)% Contribution to Total Operating £7.7m £20.4m (62.3)%Profit Operating margin 11.3% 25.4% (14.1)% pts
The division performed creditably in challenging market conditions, posting afirst-half contribution to Total Operating Profit of £7.7 million. Aspreviously indicated, the record prior year margin benefited from a number ofmajor hire projects in the UAE which were not replicated during this period.Cash conversion remained well over 100 per cent in the period resulting fromthe continued focus on limiting net capital expenditure and transferringunder-utilised assets from areas of low utilisation to locations with higherdemand or new markets such as Saudi Arabia.It is pleasing and noteworthy that the division's geographic reach and successin increasing its overseas business (by 185 per cent over the last six yearsacross over 30 countries) has been recognised with the award of the prestigiousQueen's Award for Enterprise: International Trade 2010 in June.The Middle East region remains the largest market for the division, with thebusiness operating in the UAE, Qatar, Bahrain, Oman and, more recently, SaudiArabia, and exporting to the majority of neighbouring countries. During thefirst half of 2010 our equipment was used on what is currently the largestbuilding project in Abu Dhabi, the Nation Towers, whilst in Oman we areproviding formwork and propping solutions to the Group's constructionoperation, Douglas OHI, on the Oman Residence project. We continued to grow inQatar, working on projects such as the construction of utility tunnels tosupply water and electricity to the new Lusail City, and are involved on majorbridge structures in Bahrain (Sitra Bridges) and Saudi Arabia (Abha Bridge).However the aggregate of work in these countries was insufficient to replacethe slowdown in the UAE during the period.We traded well in Australasia, producing another strong result, largely due tohealthy demand in the mining and infrastructure sectors which helped offset aweaker commercial market. Major projects included the impressive RectangularSoccer Stadium and the M80 Ring Road Upgrade in Melbourne where our formworkand shoring solutions are supporting bridge widening. Our Far East businessesrecorded an improved, albeit small, contribution to Total Operating Profit onstronger activity levels.Trading conditions in Europe continued, as expected, to be challenging duringthe period. Our UK operation delivered modest growth despite a toughenvironment, benefiting from Olympics-related work, infrastructure projectssuch as the Tyne Tunnel and cost-reduction programmes, all of which helpedoffset a weak commercial sector. The markets in Spain and Ireland remained veryquiet. We have taken action to lower the cost base in both and to moveunder-utilised equipment to more attractive markets, but the near-termprospects in these countries remain challenging.Our business in Chile is playing an important role in helping restore thenation's infrastructure after the February earthquake and we are involved inthe construction of the new Hydro Electric plant in Laja in the south of thecountry.Looking forward, after the exceptionally strong performance in 2009 the MiddleEast operations are expected to continue to experience quieter marketconditions this year, with the anticipated growth in construction activity inAbu Dhabi taking longer to materialise than previously expected. However, theestablishment of trading operations in Saudi Arabia is progressing, withinitial contracts having been secured, and we are pursuing an attractivepipeline of opportunities. The Saudi Arabian construction market is the largestin the Gulf region and the government has plans for new investment in housingand retail, water and power, railways, airports, seaports and education, all ofwhich we expect will provide significant opportunities for growth in the comingyears.Our businesses in Australasia, the Far East and South America are expected toperform well; in particular, our Australian operation should benefit from thecontinued strength of the mining industry and associated civil engineering. Therest of our international operations, which operate in Europe and South Africa,are likely to continue to face more challenging near-term market conditions asthey are dependent on the strength of local construction markets. We have takenaction to mitigate the anticipated lower demand levels by reducing costs andcapital expenditure where necessary, and will continue to review the situationin each territory going forward.PFI Investments H1 2010 H1 2009 Change
Contribution to Total Operating £1.8m £1.8m
-Profit Interest received on subordinated £1.0m £2.4m (58.3)%debt investments Total contribution to Group £2.8m £4.2m (33.3)%results
After an extremely active period in 2009 the year to date has been a period ofconsolidation with respect to our PFI portfolio. The portfolio continues tomake a healthy contribution to Group earnings, with a total contribution topre-tax profit of £2.8 million. This reduction on the first half of 2009principally reflects the transfer of the Group's interest in 13 investments,valued at £61.5 million, into the Interserve Pension Scheme in November 2009.The New Leaf Leisure Centres in Armley and Morley, built as part of phase threeof our successful Leeds Building Schools for the Future (BSF) programme,reached operational stage in May and June respectively, and we have now begunthe provision of ongoing facilities support for the next 25 years.As at 30 June 2010 we had 20 signed contracts (30 June 2009: 33), of which 12are now operational and eight under construction, with one more at preferredbidder stage. The reduction in number of contracts since June 2009 reflects theabove-mentioned transfer of the Group's interest in 13 investments into theInterserve Pension Scheme. Our total investment commitment on the 20 signedcontracts was £54.3 million at 30 June 2010 (30 June 2009: £75.6 million), ofwhich £25.8 million (30 June 2009: £39.1 million) had already been paid. Thepreferred bidder project will, consequent on financial close, involveinvestment of around £12 million.PFI is an efficient, proven and transparent means of delivering socialinfrastructure. With our considerable expertise and track record in delivering,operating and financing using PFI structures we believe we are well placed tobenefit from the further evolution of similar contracting and fundingarrangements for public sector investments. We are shortlisted on a number ofprojects in the health, waste, police and custodial sectors, and we expect tomake further progress in developing and generating value from our portfolio.
Outlook
Despite UK public sector uncertainties we are confident of a strong second-half performance, driven by margin improvement in Support Services and continued international growth.
With our significant international exposure, margin enhancement plan in SupportServices and substantial future workload we are confident that we have a strongplatform to deliver long-term growth at attractive margins.
Responsibility statement
The names and functions of the directors of Interserve Plc are as listed in theGroup's Annual Report for 2009. A list of current directors is maintained onthe Group website: www.interserve.com.
The directors confirm to the best of their knowledge:
a) the condensed set of financial statements has been prepared in accordance
with IAS 34 as adopted by the European Union; and b) the interim management report includes a fair review of the important
events during the first six months and description of the principal risks
and uncertainties for the remaining six months of the year, as required
by DTR 4.2.7R of the Disclosure and Transparency Rules of the Financial
Services Authority (DTR); and c) the interim management report includes a fair review of the information required by DTR 4.2.8R. By order of the BoardAdrian Ringrose Tim Jones Chief Executive Group Finance Director 10 August 2010
INDEPENDENT REVIEW REPORT TO INTERSERVE PLC
We have been engaged by the Company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30 June2010 which comprises the consolidated income statement, the consolidatedstatement of comprehensive income, the consolidated balance sheet, theconsolidated statement of changes in equity, the consolidated statement of cashflows and related notes 1 to 11. We have read the other information containedin the half-yearly financial report and considered whether it contains anyapparent misstatements or material inconsistencies with the information in thecondensed set of financial statements.This report is made solely to the Company in accordance with InternationalStandard on Review Engagements (UK and Ireland) 2410 "Review of InterimFinancial Information Performed by the Independent Auditor of the Entity"issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the Company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the Company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in note 2, the annual financial statements of the Group areprepared in accordance with IFRSs as adopted by the European Union. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with International Accounting Standard34, "Interim Financial Reporting," as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview.Scope of Review
We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 June 2010 is not prepared, in allmaterial respects, in accordance with International Accounting Standard 34 asadopted by the European Union and the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority.Deloitte LLPChartered Accountants and Statutory AuditorsLondon, United Kingdom10 August 2010Unaudited condensed consolidated income statementFor the six months ended 30 June 2010 Six months ended 30 June 2010 Six months ended 30 June 2009 Before Before exceptional Exceptional exceptional Exceptional items and items and items and items and amortisation amortisation amortisation amortisation of acquired of acquired of acquired of acquired intangible intangible intangible intangible assets assets Total assets assets Total £m £m £m £m £m £m Continuing operations Revenue 944.5 - 944.5 951.2 - 951.2 Cost of sales * (862.1) - (862.1) (845.2) - (845.2) Gross profit 82.4 - 82.4 106.0 - 106.0 Administration expenses (65.4) - (65.4) (76.5) - (76.5) Impairment of goodwill - - - - - - Amortisation of acquired - (2.5) (2.5) - (2.5) (2.5)intangible assets Other exceptional Items - - - - - - Total administration (65.4) (2.5) (67.9) (76.5) (2.5) (79.0)expenses Profit on disposal of - - - - 3.4 3.4property and investments Operating profit 17.0 (2.5) 14.5 29.5 0.9 30.4 Share of results of 14.8 - 14.8 13.5 - 13.5associates and joint ventures Amortisation of acquired - (0.2) (0.2) - (0.2) (0.2)intangible assets Total share of result of 14.8 (0.2) 14.6 13.5 (0.2) 13.3associates and joint ventures (note 5) Total operating profit 31.8 (2.7) 29.1 43.0 0.7 43.7 Investment revenue 18.1 - 18.1 15.0 - 15.0 Finance costs (19.9) - (19.9) (18.7) - (18.7) Profit before tax 30.0 (2.7) 27.3 39.3 0.7 40.0 Tax (charge)/credit (6.0) 0.7 (5.3) (8.9) 0.7 (8.2)(note 4) Profit for the period 24.0 (2.0) 22.0 30.4 1.4 31.8 Attributable to: Equity holders of the 22.0 (2.0) 20.0 28.9 1.4 30.3parent Minority interest 2.0 - 2.0 1.5 - 1.5 24.0 (2.0) 22.0 30.4 1.4 31.8 Year ended 31 December 2009 Before exceptional Exceptional items and items and amortisation amortisation of acquired of acquired intangible intangible assets assets Total £million £million £million Continuing operations Revenue 1,906.8 - 1,906.8 Cost of sales * (1,697.5) - (1,697.5) Gross profit 209.3 - 209.3 Administration (152.7) - (152.7)expenses * Impairment of - (30.0) (30.0)goodwill Amortisation of - (5.0) (5.0)acquired intangible assets Other exceptional - 9.0 9.0Items Total administration (152.7) (26.0) (178.7)expenses Profit on disposal of - 37.3 37.3property and investments Operating profit 56.6 11.3 67.9 Share of results of 29.1 - 29.1
associates and joint ventures
Amortisation of - (0.4) (0.4)acquired intangible assets Total share of result 29.1 (0.4) 28.7of associates and joint ventures(note 5) Total operating profit 85.7 10.9 96.6 Investment revenue 31.6 - 31.6 Finance costs (39.0) - (39.0) Profit before tax 78.3 10.9 89.2 Tax (charge)/credit (12.4) (4.4) (16.8)(note 4) Profit for the period 65.9 6.5 72.4 Attributable to: Equity holders of the parent 62.2 6.5 68.7 Minority interest 3.7 - 3.7 65.9 6.5 72.4
* Business unit overheads in the former Specialist Services businesses have been reallocated in the prior period comparatives from administration expenses to cost of sales in line with the current Support Services division's classification. This reclassification does not impact on operating profit.
Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 Earnings per share (note 6) pence pence pence Basic 15.9 24.2 54.9 Diluted 15.5 23.6 53.7
Dividend per share: 2010 unpaid and 2009 5.6 5.5
17.5
paid (note 7)
Unaudited condensed consolidated statement of comprehensive income For the six months ended 30 June 2010
Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million Profit for the period 22.0 31.8 72.4 Other comprehensive income Exchange differences on translation of 4.3 (26.1) (21.3)foreign operations (Losses)/gains on available-for-sale (0.8) 0.2
(0.4)
financial assets (excluding joint
ventures) (Losses)/gains on cash flow hedges (joint (40.1) 46.9 28.8ventures) Gains/(losses) on available-for-sale 32.2 (32.0)
(16.8)
financial assets (joint ventures) Actuarial losses on defined benefit (22.3) (54.4) (31.0)pension schemes
Deferred tax on items taken directly to 8.8 11.0
5.3equity (note 4) Other comprehensive expense net of tax (17.9) (54.4)
(35.4)
Total comprehensive income/(expense) 4.1 (22.6)
37.0 Attributable to: Equity holders of the parent 2.1 (24.1) 33.3 Minority interest 2.0 1.5 3.7 4.1 (22.6) 37.0Unaudited condensed consolidated balance sheetAt 30 June 2010 30 June 2010 30 June 2009 31 December 2009 £million £million £million Non-current assets Goodwill 198.9 228.9 198.9 Other intangible assets 30.5 33.5 31.9 Property, plant and equipment 138.6 143.6 148.8 Interests in joint ventures 67.2 117.7 67.4 Interests in associated 62.2 69.0 57.0undertakings Deferred tax asset 32.4 35.5 31.4 529.8 628.2 535.4Current assets Inventories 18.1 21.6 20.1 Trade and other receivables 387.8 395.3 355.3 Cash and deposits 49.6 70.4 60.9 455.5 487.3 436.3 Total assets 985.3 1,115.5 971.7 Current liabilities Bank overdrafts (11.4) (13.7) (11.6) Trade and other payables (494.2) (492.7) (482.7) Current tax liability (7.1) (16.4) (8.5) Short-term provisions (23.2) (15.5) (23.1) (535.9) (538.3) (525.9) Net current liabilities (80.4) (51.0) (89.6) Non-current liabilities Bank loans (90.0) (140.0) (85.0) Trade and other payables (9.2) (4.8) (9.0) Non-current tax liability (9.1) (9.1) (9.1) Long-term provisions (25.5) (22.6) (25.7) Retirement benefit obligation (105.3) (205.1) (95.3) (239.1) (381.6) (224.1) Total liabilities (775.0) (919.9) (750.0) Net assets 210.3 195.6 221.7 Equity Share capital 12.6 12.5 12.5 Share premium account 112.7 112.7 112.7 Capital redemption reserve 0.1 0.1 0.1 Merger reserve 49.0 49.0 49.0 Hedging and translation reserves 67.5 92.9 69.3 Investment in own shares (0.5) (0.5) (0.5) Retained earnings (34.7) (73.2) (24.1) Equity attributable to equity 206.7 193.5 219.0holders of the parent Minority interest 3.6 2.1 2.7 Total equity 210.3 195.6 221.7
Unaudited condensed consolidated statement of changes in equity For the six months ended 30 June 2010
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
£m £m £m £m £m £m £m £m £m £m Balance at 31 12.5 112.7 0.1 49.0 108.3 (0.5) (51.8) 230.3 2.0 232.3December 2008 Total - - - - (15.2) - (8.9) (24.1) 1.5 (22.6)comprehensive income Dividends paid - - - - - - (14.6) (14.6) (1.4) (16.0) Disposal of - - - - (0.2) - - (0.2) - (0.2)available-for-sale financial asset and related cash flow hedges recycled through the income statement Share-based - - - - - - 2.1 2.1 - 2.1payments Balance at 30 June 12.5 112.7 0.1 49.0 92.9 (0.5) (73.2) 193.5 2.1 195.62009 Total - - - - 2.1 - 55.3 57.4 2.2 59.6comprehensive income Dividends paid - - - - - - (6.9) (6.9) (1.6) (8.5) Disposal of - - - - (25.7) - - (25.7) - (25.7)available-for-sale financial asset and related cash flow hedges recycled through the income statement Share-based - - - - - - 0.7 0.7 - 0.7payments Balance at 31 12.5 112.7 0.1 49.0 69.3 (0.5) (24.1) 219.0 2.7 221.7December 2009 Total - - - - (1.8) - 3.9 2.1 2.0 4.1comprehensive income Dividends paid - - - - - - (15.1) (15.1) (1.1) (16.2) Shares issued 0.1 - - - - - - 0.1 - 0.1 Share-based - - - - - - 0.6 0.6 - 0.6payments Balance at 30 June 12.6 112.7 0.1 49.0 67.5 (0.5) (34.7) 206.7 3.6 210.32010
Unaudited condensed consolidated statement of cash flows For the six months ended 30 June 2010
Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million Operating activities Total operating profit 29.1 43.7 96.6 Adjustments for: Amortisation of acquired intangible assets 2.5 2.5 5.0 Impairment of goodwill - - 30.0
Amortisation of capitalised software 0.4 -
0.1development
Depreciation of property, plant and 12.2 12.4
24.4equipment Profit on disposal of property and - (3.4) (37.3)investments Pension payments in excess of current (13.5) (6.8) (15.5)service cost Special pension contribution - - (61.5) Pension curtailment - - (20.6) Share of results of associates and joint (14.6) (13.3) (28.7)ventures
Charge relating to share-based payments 0.6 2.1
3.1
Gain on disposal of property, plant and (5.9) (3.3) (7.2)equipment Operating cash flows before movements in 10.8 33.9 (11.6)working capital Decrease in inventories 2.4 4.4 6.9
(Increase)/decrease in receivables (32.2) (28.4)
13.8 Increase in payables 11.0 28.0 31.9 Cash generated by operations (8.0) 37.9 41.0 Taxes paid (1.5) (6.5) (15.7)
Net cash from operating activities (9.5) 31.4
25.3 Investing activities Interest received 1.9 2.8 7.2
Dividends received from associates and 13.4 5.2
17.6joint ventures Proceeds on disposal of property, plant and 10.6 6.6 15.1equipment Capital expenditure (7.4) (14.5) (31.0) Investment in joint ventures - PFI (6.3) (3.0) (7.9)investments Disposal of investment - 7.2 68.0
Receipt of loan repayment - PFI investments - 7.6
8.2
Receipt of loan repayment - associated - 0.1
0.3undertakings Net cash generated in investing activities 12.2 12.0 77.5 Financing activities Interest paid (2.4) (2.0) (5.8) Dividends paid to equity shareholders (15.1) (14.6)
(21.5)
Dividends paid to minority shareholders (1.1) (1.5)
(3.0)
Increase/(repayment) in bank loans 5.0 (25.5)
(80.5)
Movement in obligations under finance (0.3) (0.1) (0.3)leases Net cash used in financing activities (13.9) (43.7)
(111.1)
Net decrease in cash and cash equivalents (11.2) (0.3) (8.3)
Cash and cash equivalents at beginning of 49.3 58.2 58.2period Effect of foreign exchange rate changes 0.1 (1.2)
(0.6)
Cash and cash equivalents at end of period 38.2 56.7 49.3
Cash and cash equivalents comprise
Cash and deposits 49.6 70.4 60.9 Bank overdrafts (11.4) (13.7) (11.6) 38.2 56.7 49.3
Reconciliation of net cash flow to movement
in net debt
Net decrease in cash and cash equivalents (11.2) (0.3) (8.3)
(Increase)/repayment in bank loans (5.0) 25.5
80.5
Movement in obligations under finance 0.3 0.1
0.3leases
Change in net debt resulting from cash (15.9) 25.3
72.5flows Effect of foreign exchange rate changes 0.1 (1.2)
(0.6)
Change in net debt during the period (15.8) 24.1
71.9 Net debt - opening (37.3) (109.2) (109.2) Net debt - closing (53.1) (85.1) (37.3)
Notes to the unaudited interim financial statements For six months ended 30 June 2010
1. General information
Interserve Plc (the Company) is a company incorporated in the United Kingdom.The half-year results and condensed consolidated financial statements for thesix months ended 30 June 2010 (the interim financial statements) comprise theresults of the Company and its subsidiaries (together referred to as the Group)and the Group's interest in joint ventures and associates.The directors have considered the Group's financial position with reference tolatest forecasts and the actual performance for the half-year period. Whilstthe current economic environment continues to be uncertain, the directorsbelieve that the Group has adequate resources to continue in operationalexistence for the foreseeable future, being a period of at least 12 months,noting in particular that: the majority of the Group's revenue is derived fromlong-term contracts; the Group had visibility of £1.1 billion of work scheduledfor 2011 at the balance sheet date; and the Group has access to committed debtfacilities totalling £250 million until at least October 2013. Accordingly, theGroup continues to adopt the going concern basis in preparing the half-yearlycondensed financial statements.A copy of the statutory accounts for the year ended 31 December 2009 has beendelivered to the Registrar of Companies. The auditors' report on those accountswas unqualified and did not contain statements made under sections 498(2) or(3) of the Companies Act 2006.
The interim financial statements for the six months ended 30 June 2010 have been reviewed but have not been audited.
2. Accounting policies
The interim financial statements have been prepared in accordance with IAS 34Interim financial reporting, the recognition and measurement criteria ofInternational Financial Reporting Standards (IFRSs) as adopted by the EuropeanUnion and the disclosure requirements of the Listing Rules. The financialinformation set out in this interim report does not constitute statutoryaccounts as defined in section 434 of the Companies Act 2006. The interimfinancial statements do not include all information required for full annualfinancial statements and should be read in conjunction with the Annual Reportand Financial Statements for the year ended 31 December 2009.The accounting policies and methods of computation followed in the interimfinancial statements are consistent with those published in the Group's AnnualReport and Financial Statements for the year ended 31 December 2009 and whichare available on the Group's website at www.interserve.com.In addition, these accounting policies used are consistent with those that thedirectors intend to use in the Annual Report and Financial Statements for theyear ending 31 December 2010. Taxes on income in the interim period are accruedusing the tax rate that would be applicable to expected total annual earnings.
Significant standards and interpretations introduced during the period:
Standard IFRIC 12 Service concession The standard requires that where income arrangements received on the asset is not on a "per use" basis then the asset should be classified as available-for-sale. In addition revenue generated from the concession should be treated in accordance with IAS 11 and 18 and that interest should not be capitalised. The introduction of this IFRIC did not have a material impact on the Group's results or disclosures. IFRIC 17 Distributions of Does not impact the Group. non-cash assets to owners
IFRS 3 (revised 2008) Business The standard introduces the requirement to
combinations fair value when there is a change of control and impacts what is included as consideration to a vendor. These changes impact prospective changes to acquired undertakings and have no material impact on the Group's results or disclosures. IAS 27 (revised 2008) The standard deals with changes in control or Consolidated separate financial significant influence in Group undertakings statements and has no impact on the Group's results. IAS 28 (revised 2008) Investment The standard deals with the treatment of an in associates associate and the equity method of accounting for associates. The Group already complies with the requirements.
At the date of authorisation of these interim financial statements the following standards and interpretations were in issue but not yet effective and therefore have not been applied in these interim financial statements:
Standard IFRS 1 (amended) First-time adoption of IFRS - limited exemptions from comparative IFRS 7 disclosures IFRIC 14 Prepayments of a minimum funding requirement IFRIC 19 Extinguishing financial liabilities with equity instruments
IFRS 9 Financial instruments
IAS 24 Related party disclosures (amended Nov 2009)
The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group.
The principal risks and uncertainties facing the Group are those described onpages 24 to 25 of the Group's Annual Report and Financial Statements for theyear ended 31 December 2009. The directors expect that the Group's profits willcontinue to be weighted to the second-half.
3. Business and geographical segments
(a) Business segments
During the previous 12 months, the Specialist Services division had becomeprogressively integrated into services offered by the Facilities Managementdivision to its third party customers. As a result on 14 January 2010 the Groupmerged the Facilities Management and substantially all of the SpecialistServices divisions into a single reporting segment, forming the SupportServices division. Prior period comparatives have been adjusted accordingly.The Group is now organised into four operating divisions, as set out below. TheGroup internally reviews and allocates resources to each of these operatingdivisions and each has a divisional managing director who reports into andforms part of the executive board.
* Support Services: provision of outsourced support services to public- and
private-sector clients.
* 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 Six Six Year Six Six Year months months months months ended ended ended ended ended ended 30 June 30 June 31 Dec 30 June 30 June 31 Dec 2010 2009 2009 2010 2009 2009 £million £million £million £million £million £million Support Services 538.2 503.8 1,010.2 8.9 10.7 22.1 Project Services 380.8 406.4 820.5 23.5 18.1 40.7 Equipment Services 68.4 80.4 157.1 7.7 20.4 35.9 Joint ventures - PFI - - - 1.8 1.8 4.7Investments Group Services - - - (10.1) (8.0) (17.7)
Inter-segment elimination (42.9) (39.4) (81.0) - -
- 944.5 951.2 1,906.8 31.8 43.0 85.7 Exceptional items - 3.4 16.3 Amortisation of acquired (2.7) (2.7) (5.4)intangible assets Total operating profit 29.1 43.7 96.6 Investment revenue 18.1 15.0 31.6 Finance costs (19.9) (18.7) (39.0) Profit before tax 27.3 40.0 89.2 Tax (5.3) (8.2) (16.8) Profit after tax 22.0 31.8 72.4 Net assets/(liabilities) 30 June 30 June 31 December 2010 2009 2009 £million £million £million Support Services (21.9) (62.7) (21.8) Project Services (97.3) (111.2) (105.1) Equipment Services 132.6 137.6 138.4 Joint ventures - PFI Investments 67.2 117.7 67.4 80.6 81.4 78.9 Group Services, goodwill and acquired 179.2 197.2 177.4intangible assets 259.8 278.6 256.3 Net debt (53.1) (85.1) (37.3)
Net assets (excluding minority interest) 206.7 193.5 219.0
(b) Geographical segments
Support Services is predominantly based in the United Kingdom. Project Servicesis located in the United Kingdom and operates through associates in the MiddleEast. Equipment Services has operations in all of the geographic segmentslisted 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 geographical Total operating profit market Six Six Year Six Six Year months months months months ended ended ended ended ended ended 30 June 30 June 31 Dec 30 June 30 June 31 Dec 2010 2009 2009 2010 2009 2009 £million £million £million £million £million £million United Kingdom 925.6 914.9 1,840.4 23.8 19.2 44.3 Rest of Europe 10.6 14.0 27.1 (0.7) 0.4 0.3 Middle East & Africa 29.6 40.4 79.8 14.8 27.2 52.0 Australasia 16.6 15.8 31.7 4.1 4.8 9.1 Far East 3.1 2.9 5.5 0.1 (0.4) (1.2) Americas 1.9 2.6 3.3 (0.2) (0.2) (1.1) Group services - - - (10.1) (8.0) (17.7) Inter-segment (42.9) (39.4) (81.0) - - elimination 944.5 951.2 1,906.8 31.8 43.0 85.7 Exceptional items - 3.4 16.3 Amortisation of (2.7) (2.7) (5.4)acquired intangible assets 29.1 43.7 96.6 Non-current assets 30 June 30 June 31 December 2010 2009 2009 £million £million £million United Kingdom 112.3 165.8 117.5 Rest of Europe 16.3 18.7 19.8 Middle East & Africa 127.0 115.2 108.7 Australasia 17.0 15.2 16.0 Far East 5.5 5.8 4.8 Americas 4.4 4.2 4.2 Group Services, goodwill and acquired 214.9 267.8 233.0intangible assets 497.4 592.7 504.0 Deferred tax asset 32.4 35.5 31.4 Total non-current assets 529.8 628.2 535.44. Income tax expense Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million UK taxation (1.4) 7.4 6.6 Overseas taxation 1.5 1.8 3.2 Deferred taxation 5.2 (1.0) 7.0 5.3 8.2 16.8 Effective tax rate 19.4% 20.5% 18.8%The effective corporation tax charged represents the best estimate of theweighted average annual corporation tax rate expected for the full financialyear. No account has been taken in these interim financial statements of the2010 Finance Bill that was substantially enacted in July 2010, after thebalance sheet date. It is estimated that the reduction in the corporation taxrate from 28% to 27% from April 2011 would have resulted in a £1.2 millionreduction in the deferred tax asset held on the balance sheet at 30 June 2010if the change had been applied in the interim statements.In addition to the income tax charged to the income statement, the followingdeferred tax charges/(credits) have been recorded directly in equity in theperiod: Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million Tax on actuarial loss on pension (6.2) (15.2) (8.7)liability Tax on (loss)/gain on (0.2) 0.1 (0.1)
available-for-sale financial assets Tax on fair value adjustment on cash (11.3) 13.1 8.1flow hedges Tax on the fair value adjustments on 8.9 (9.0)
(4.6)
available-for-sale financial assets within the PFI special purpose
companies (8.8) (11.0) (5.3)5. Share of results and net assets of joint venture and associated undertakings Six months ended 30 June 2010 Six months ended 30 June 2009 Joint Joint ventures ventures Project Support - PFI Project Support - PFI Services Services Investments Total Services Services Investments Total £m £m £m £m £m £m £m £m Revenue 131.6 45.4 43.8 220.8 164.3 47.7 73.1 285.1 Operating 13.5 0.5 0.3 14.3 14.2 1.0 1.7 16.9profit Net interest 0.5 - 3.6 4.1 0.4 - 1.1 1.5receivable Taxation (1.4) (0.1) (2.1) (3.6) (3.6) (0.3) (1.0) (4.9) Group share 12.6 0.4 1.8 14.8 11.0 0.7 1.8 13.5of profit after tax Amortisation (0.2) - - (0.2) (0.2) - - (0.2)of acquired intangible assets Total 12.4 0.4 1.8 14.6 10.8 0.7 1.8 13.3operating profit Dividends (10.2) (1.0) (2.2) (13.4) (3.8) (1.0) (0.4) (5.2) Retained 2.2 (0.6) (0.4) 1.2 7.0 (0.3) 1.4 8.1profits Year ended 31 December 2010 Joint ventures Project Support - PFI Services Services Investments Total £m £m £m £m Revenue 319.1 88.1 156.7 563.9 Operating profit 28.9 1.8 4.8 35.5 Net interest receivable 0.7 - 3.0 3.7 Taxation (6.5) (0.5) (3.1) (10.1) Group share of profit 23.1 1.3 4.7 29.1after tax Amortisation of (0.4) - - (0.4)acquired intangible assets Total operating profit 22.7 1.3 4.7 28.7 Dividends (13.9) (1.0) (2.7) (17.6) Retained profits 8.8 0.3 2.0 11.1
The joint venture and associate undertakings are located in the United Kingdom except for the Project Services associates which are located in the Middle East.
6. Earnings per share
The calculation of earnings per share is based on the following data:
Earnings Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million
Earnings for the purposes of basic 20.0 30.3
68.7
earnings per share, being net profit attributable to equity holders of the
parent Adjustments: Exceptional items - (3.4) (16.3)
Amortisation of acquired intangibles 2.7 2.7
5.4
Tax effect of above adjustments (0.7) (0.7)
4.4 Headline earnings 22.0 28.9 62.2
Earnings for the purposes of diluted 20.0 30.3
68.7
earnings per share Weighted average number of shares Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 Number Number Number thousand thousand thousand
Weighted average number of ordinary 125,626 125,057 125,214 shares for the purposes of basic and
headline earnings per share
Effect of dilutive potential ordinary shares:
Share-based payments 3,186 3,566 2,817
Weighted average number of ordinary 128,812 128,623 128,031 shares for the purposes of diluted
earnings per share Earnings per share Six months Six months Year ended ended 30 ended 30 31 December June 2010 June 2009 2009 pence pence pence Headline earnings per share 17.5 23.1 49.7 Basic earnings per share 15.9 24.2 54.9 Diluted earnings per share 15.5 23.6 53.77. Dividends Six months Six months Year ended ended ended Dividend 30 June 30 June 31 Dec per share 2010 2009 2009 pence £million £million £million Final dividend for the year 11.7 - 14.6 14.6ended 31 December 2008 Interim dividend for the year 5.5 - - 6.9ended 31 December 2009 Final dividend for the year 12.0 15.1 - -ended 31 December 2009 Amount recognised as 15.1 14.6 21.5distribution to equity holders in the period
The interim dividend of 5.6p per share, amounting to £7.0m, was approved by the directors on 10 August 2010 and has therefore not been included as a liability as at 30 June 2010.
8. Defined benefit retirement schemes
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation
Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 Retail price inflation 3.30% pa 3.50% pa 3.50% pa Discount rate 5.40% pa 6.20% pa 5.60% pa Pension increases in payment: LPI/RPI 3.20%/3.30% 3.40%/3.50% 3.40%/3.50% Fixed 5% 5.00% 5.00% 5.00% 3% or RPI if higher (capped 3.60% 3.70% 3.70%at 5%)
General salary increases 4.05 - 4.80% pa 4.25 - 5.00% pa 4.25 - 5.00% pa
The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:
30 June 2010 30 June 2009 31 Dec 2009 £million £million £million Present value of defined benefit 640.2 597.5 627.4obligation Fair value of schemes' assets (534.9) (392.4) (532.1)
Liability recognised in the balance 105.3 205.1
95.3
sheet
The amounts recognised in the income statement are as follows:
Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million
Employer's part of current service 3.3 6.0
11.0cost Interest cost 17.4 16.7 33.2 Expected return on schemes' assets (16.1) (12.2)
(24.4)
Gains on curtailments and settlements - -
(20.6)
Total expense/(income) recognised in 4.6 10.5
(0.8)
the income statement 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 ofother comprehensive income. In December 2009, the non passport section of theInterserve Pension Scheme was closed to future accrual of benefit. As a resulta £20.6 million curtailment gain was recognised in the year ending 31 December2009.9. Share capital Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 Shares thousand Shares thousand Shares thousand At 1 January 125,368 125,016 125,016 Exercised share-based 436 352 352payments At the end of the period 125,804 125,368 125,36810. 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.
Key management compensation is disclosed on pages 50 to 61 in the Annual Report and Financial Statements for the year ended 31 December 2009.
During the period, Group companies entered into the following transactions with related parties who are not members of the Group:
Six months Six months Year ended ended ended 30 June 30 June 31 December 2010 2009 2009 £million £million £million Sales of goods and Joint ventures - PFI 105.1 109.1 195.5services Investments Associates 64.3 76.4 135.4
Purchases of goods Joint ventures - PFI - -
-and services Investments Associates 1.6 1.3 3.0 Amounts owed by Joint ventures - PFI 0.9 - -related parties Investments Associates 2.6 3.1 1.6 Amounts owed to Joint ventures - PFI - - -related parties Investments Associates - 0.2 -
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.11. Contingent liabilities
Other contingent liabilities of the Group have not materially changed from those published in the Annual Report and Financial Statements for the year ended 31 December 2009.
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