Intertek Group Regulatory News (ITRK)

5 Mar 2007 07:02

Intertek Group PLC05 March 2007 PRELIMINARY 2006 RESULTS ANNOUNCEMENT 5 MARCH 2007 Intertek Group plc ("Intertek"), a leading international provider of quality andsafety services, announces its preliminary results for the year ended 31December 2006. A STRONG SET OF NUMBERS Year ended 31 December 2006 2005 % changeRevenue £664.5m £580.1m + 14.5%Operating profit(1) £102.2m £87.1m + 17.3%Profit before tax £91.4m £79.4m + 15.1%Adjusted profit before tax(1) £95.5m £83.5m + 14.4%Basic earnings per share 40.9p 36.8p + 11.1%Earnings per share(2) 43.2p 39.1p + 10.5%Dividend per share 14.8p 12.0p + 23.3%All numbers are at actual exchange rates HIGHLIGHTSOrganic revenue and operating profit(1) growth of 7.9% and 10.7% respectivelyFor the three main divisions, revenue growth of 20.9%, organic revenue growth of13.3% and organic operating profit(1) growth of 27.3%Operating profit(1) margin increase of 40 bps to 15.4%Operating cash flow of £124.6m, up by 28.9%Seven businesses acquired in 2006, for net consideration of £36.9m (1) Excluding amortisation of business combination intangibles £3.8m (2005:£2.1m) and goodwill impairment £0.3m (2005: £2.0m)(2) Diluted adjusted earnings per share based on profit before amortisation ofbusiness combination intangibles and goodwill impairment Wolfhart Hauser, Chief Executive Officer, commented: "I am pleased to report a strong set of numbers for the full year, continuingthe good performance we saw in the first half. Our three main divisions had anexcellent performance driven by the continuing high demand for safety andquality services across our industries and the increasing tendency for companiesto outsource these services. "We see good opportunities to develop the business further, both organically andthrough selective acquisitions, and whilst the weaker dollar will impact on ourresults, we remain confident about the prospects for 2007." CONTACTS For further information, please contactAston Swift, Investor RelationsTelephone: +44 (0) 20 7396 3400 aston.swift@intertek.com Richard Mountain, Financial DynamicsTelephone: +44 (0) 20 7269 7121 richard.mountain@fd.com ANALYSTS' MEETINGThere will be a meeting for analysts at 9.30am today at JPMorgan Cazenove, 20Moorgate, London EC2R 6DA. A copy of the presentation will be available on thewebsite later today. Corporate website: www.intertek.com High resolution images of Intertek Group plc businesses are available todownload, free of charge from www.vismedia.co.uk ABOUT INTERTEK Intertek is a leading international provider of quality and safety services to awide range of global and local industries. Partnership with Intertek bringsincreased value to customers' products and processes, ultimately supportingtheir success in the global market place. Intertek has the experience,expertise, resources and global reach to support its customers through theirnetwork of 930 laboratories and offices, over 18,000 people in 109 countriesaround the world. CHAIRMAN'S STATEMENT"Strong customer focus produces good results" ResultsThe Group has enjoyed a successful year and has continued to grow its operationsboth organically and through acquiring complementary businesses. Revenue for theGroup grew by 14.5% to £664.5m in 2006 compared to 2005. Our three largestdivisions, representing 92.0% of the Group's revenue, grew by 20.9% in total andGovernment Services, our smallest division, declined as expected, due to thediscontinuation of pre-shipment inspection programmes in Nigeria and Venezuela. Group operating profit was £98.1m, up 18.2% over 2005. Operating profit, statedbefore the amortisation of business combination intangibles and the impairmentof goodwill ('adjusted operating profit') was £102.2m, up 17.3% over 2005.Excluding Government Services, adjusted operating profit increased by 35.0%. These results include the contribution of acquisitions made in 2005 and 2006.Excluding these acquisitions the organic growth in revenue was 13.3% for thethree largest divisions and 7.9% for the Group. Organic growth in adjustedoperating profit was 27.3% for the three largest divisions and 10.7% for theGroup. AcquisitionsIn line with the Group's strategy of extending its range of services andterritories through complementary acquisitions, seven new businesses wereacquired in 2006, for net consideration of £36.9m. The largest of these was AltaAnalytical Laboratory Inc., which was acquired on 30 November 2006 for £14.0m.Alta which is based in California, USA provides analytical services to NorthAmerican pharmaceutical and clinical research organisations. This acquisitionbroadens the range of laboratory services offered to the pharmaceutical sector.Other acquisitions enhanced our ability to offer analytical chemical testing inEurope and strengthened our market position in strategically important countriessuch as Japan and Spain. On 9 January 2007 the Group acquired for £12.9m, UK based Umitek Ltd and itssubsidiaries, CAPCIS and SREL which provide specialist testing and consultancyservices to the oil and gas industries in the North Sea and globally. DividendsAn interim dividend of 4.6p per share (2005: 3.9p) was paid to shareholders on14 November 2006. The Directors will propose a final dividend of 10.2p per shareat the Annual General Meeting on 11 May 2007, to be paid to shareholders on 15June 2007. If approved, this will make a full year dividend of 14.8p per share(2005: 12.0p), an increase of 23.3%. The Group continues to follow a progressivedividend policy. In determining the future level of dividends we previously setdividend cover to be at least three times earnings. As a result of ourstrengthening balance sheet, in future we will set the dividend to be covered byat least two and a half times earnings. Earnings per shareBasic earnings per share were 40.9p, up 11.1% over last year. Diluted adjustedearnings per share, before amortisation of business combination intangibles andimpairment of goodwill, were 43.2p, up 10.5% from 39.1p. Excluding the profit onsale of an associate made in 2005, the earnings per share growth increased from10.5% to 13.4%. Details of the calculation of earnings per share is given innote 2. Board changesThe Intertek Board of Directors was further strengthened during the year by theappointment of Christopher Knight and Debra Rade as Non-Executive Directors.Christopher Knight is a Chartered Accountant and former investment banker with awide range of experience in corporate finance both in the UK andinternationally. Debra Rade is currently a partner in a major US law firm. Herpractice focuses on corporate governance and compliance as well as productsafety and certification. Until 2002, Debra was a senior officer of UnderwritersLaboratories Inc., a provider of product safety and certification. Theirexpertise and experience will contribute to the continued success of theIntertek Group. After leading the Consumer Goods division for most of his 33 years withIntertek, Raymond Kong retired as Chief Executive of that division on 1 July2006 and became a Non-Executive Director of Intertek Group plc. Raymondcontinues as President of Asia and China, using his knowledge and experience toadvance the Group's interests in that region. On behalf of everyone at Intertek,I would like to express our deep gratitude to Raymond for his outstandingcontribution towards building the Consumer Goods division into the successfulbusiness that it is today. Paul Yao, formerly the Chief Operating Officer of theConsumer Goods division, was appointed Chief Executive of the division toreplace Raymond. I wish both colleagues success in their new roles. EmployeesThe growth reflected in this strong set of results has been delivered by thededication and expertise of the Group's employees in providing value to ourcustomers. At the end of 2006, the Group employed over 18,000 people in 109countries, an increase of 2,600 people over last year. One of our key challengesin the Group, is recruiting, training and developing our people to ensure thatthey deliver excellent services which add value to our customers. In order tomeet this challenge, we have strengthened the human resources function and havedeveloped new metrics to identify and develop talent within the Group. On behalf of the Board, I would like to thank everyone in the Group for theireffort in making 2006 another good year and for their continued dedicationtowards giving our customers the best possible service. OutlookThe Group operates in a dynamic global marketplace where change is continual.Through its extensive global network and experienced people, the Group willcontinue to adapt and expand its services to anticipate and meet the changingneeds of customers. The Group's strong financial position and ability togenerate cash will enable it to invest in new facilities and acquire newbusinesses. Looking forward, we see good opportunities to develop the businessfurther, both organically and through selective acquisitions, and whilst theweaker dollar will impact on our results, we remain confident about theprospects for 2007. Vanni TrevesChairman PERFORMANCE REVIEW IntroductionThis review provides information on the performance of the Group for the yearended 31 December 2006. It highlights areas which have performed well andexplains why some areas have underperformed. Growth in revenue £m ChangeRevenue 2005 580.1Currency translation (1.4) (0.3)%Acquisitions 39.5 6.7%Organic growth 46.3 8.1%Revenue 2006 664.5 14.5% Intertek provides a wide range of quality and safety related services tocustomers operating in the global marketplace. Top line revenue growth is a keyperformance measure. Revenue increased by £84.4m to £664.5m in 2006, up 14.5%over the prior year. This increase comprised £39.5m from acquisitions made in2005 and 2006 and £46.3m from organic growth, reduced by £1.4m due to currencytranslation. The organic growth of 8.1% was generated primarily by increasedglobal trade, growth in the market for quality and safety services, an increasein environmental regulations and an increase in outsourcing. Part of the Group's growth strategy is to make bolt on acquisitions whichcomplement and extend the Group's service offering into new areas of expertiseand new geographies. The Group made 12 such acquisitions in 2005 and seven in2006, which were located in 12 different countries. These businesses haveextended the range of analytical services offered by the Group in a variety ofsectors including the pharmaceutical and chemical industries and have increasedthe Group's footprint in strategically important countries such as India, Japanand Spain. The Group is able to leverage the return from these acquisitions byoffering new services on a global basis to existing customers. Geographically, all regions reported growth in revenue with the largestcontributors being the United States and China. Growth in the US was drivenpartly by acquisitions but also by the strong petroleum market. Growth in Chinawas driven mainly by the migration of manufacturing from western countries. TheGroup has been established in China for many years and continues to expand itsfacilities into new locations with 13 new laboratories opened in 2006 offeringservices to a wide range of industries including textiles, toys, minerals,electrical and automotive. There was substantial growth in revenue in theNetherlands as a result of the acquisition from DSM, the Dutch chemicalmanufacturer, of Polychemlab which offers specialist analytical services to thechemical industry. On the downside, revenue was reduced by the cessation of thepre-shipment inspection programmes in Nigeria and Venezuela. Growth in adjusted operating profit and margin 2006 2005 £m £m Change ------------ --------- ---------Operating profit 98.1 83.0 18.2%Amortisation of business combination 3.8 2.1 81.0%intangiblesImpairment of goodwill 0.3 2.0 (85.0)%---------------------------- ------------ --------- ---------Adjusted operating profit 102.2 87.1 17.3%---------------------------- ------------ --------- ---------Adjusted operating margin 15.4% 15.0% Up 40bp---------------------------- ------------ --------- --------- For management purposes, the Group adjusts operating profit and operating marginto exclude the amortisation of business combination intangibles and theimpairment of goodwill. In 2006, adjusted operating profit was £102.2m, up 17.3% over the previous year.The adjusted operating margin was 15.4%, up 40 basis points from 15.0%. Theadjusted operating profit in the three main divisions increased by 35.0%,however the smallest division, Government Services, declined by 59.5% due to thecessation of pre-shipment inspection contracts in Nigeria and Venezuela in 2005.On an organic basis, adjusted operating profit increased by 27.3% for the threemain divisions and 10.7% for the Group. The adjusted organic margin for theGroup was 15.3%. Impairment of goodwillThe carrying value of capitalised goodwill was reviewed for impairment and acharge of £0.3m (2005: £2.0m) was made to operating profit in 2006 to reduce thegoodwill to its fair value. The impairment related to a small business inEstonia acquired by the Oil, Chemical & Agri division in 2005, which has notperformed in line with management expectations. The capitalised goodwill of£71.1m (2005: £55.7m) relates to acquisitions made since 1998. Net financing costsThe Group reported finance income in 2006 of £4.5m (2005: £3.5m). This comprisedthe expected return on pension assets, interest on bank balances and foreignexchange differences on interest accruals. The increase was mainly due to higherinterest rates. The Group's finance expense for 2006 was £11.5m compared to £9.4m in 2005. Thecharge comprised interest on borrowings, pension interest cost and otherfinancing fees. The increase was primarily due to higher interest rates. Profit before taxationProfit before tax was £91.4m compared to £79.4m in 2005, mainly due to the goodtrading performance in the year. TaxationIncome tax expense for 2006 was £22.5m (2005: £18.7m), comprising a current taxcharge of £22.0m (2005: £24.1m) plus a deferred tax charge of £0.5m (2005:credit £5.4m). The tax rate was 24.6%, up from 23.6% in 2005. The main reasonfor the increase in the tax rate was increased earnings in higher taxedjurisdictions. The tax rate is expected to be sustainable at close to currentyear levels for the short to medium-term. Profit for the yearProfit for the year was £68.9m (2005: £60.7m) of which £63.8m (2005: £57.1m) wasattributable to equity holders of the Company. Minority interestsProfit attributable to minority shareholders was £5.1m in 2006 (2005: £3.6m).The increase was mainly due to the strong growth in the Group's non-wholly ownedsubsidiaries in Asia. Earnings per shareEarnings per share (EPS) is calculated by dividing the profit attributable toequity holders of the Company by the weighted average number of shares in issueduring the year. As set out in note 2, basic EPS at the end of the year was40.9p (2005: 36.8p), an increase of 11.1%. A diluted adjusted EPS calculation isalso shown which removes the impact of amortisation of business combinationintangibles and impairment of goodwill to give diluted adjusted EPS of 43.2p(2005: 39.1p), an increase of 10.5%. Excluding the profit on sale of associatesof £1.6m in 2005, the growth in diluted adjusted EPS was 13.4% Year-on-yeargrowth in diluted adjusted EPS is one of the key performance targets that theGroup uses to incentives its managers. DividendsDuring the year, the Group paid total dividends of £19.8m (2005: £16.9m), whichcomprised £12.6m in respect of the final dividend for the year ended 31 December2005 paid on 16 June 2006, at the rate of 8.1p per share and £7.2m being theinterim dividend in respect of the year ended 31 December 2006, paid on 14November 2006 at a rate of 4.6p per share. These amounts were charged toretained earnings. Since the balance sheet date, the Directors proposed a finaldividend in respect of the year ended 31 December 2006, of 10.2p per share(2005: 8.1p) making a full year dividend of 14.8p per share (2005: 12.0p), anincrease of 23.3% over last year. If approved, the final dividend will be paidto shareholders on 15 June 2007. Cash and liquidityIn order to maintain its growth strategy the Group continually invests inlaboratory equipment, computer systems, new facilities and acquisitions. Astrong operating cash flow is therefore very important. One of the keyperformance indicators used by the Group to measure the efficiency of its cashgeneration is the percentage of adjusted operating profit that is converted intocash. As shown in the table below, in 2006, 79.6% of adjusted operating profitwas converted into cash compared to 75.1% in 2005. Cash and liquidity 2006 2005 Change £m £m ------------ --------- ---------Cash generated from operations 124.6 96.7 28.9%Less acquisition of property, plant,equipment and software (43.2) (31.3) 38.0%--------------------------- ------------ --------- ---------Operating cash flow after capital expenditure 81.4 65.4 24.5%--------------------------- ------------ --------- ---------Adjusted operating profit 102.2 87.1 17.3%--------------------------- ------------ --------- ---------Operating cash flow/adjusted operating profit 79.6% 75.1% Up 450bp--------------------------- ------------ --------- --------- Cash generated from operations was £124.6m for 2006, compared to £96.7m for2005. The increase of 28.9% was due to improved profitability and effectiveworking capital management. Provisions decreased by £4.2m due to the settlementof claims and of restructuring costs incurred in the Government Servicesdivision. Cash outflows from investing activities in 2006 were £78.1m (2005: £71.4m), up9.4%. The main outflows were £36.9m (2005: £44.5m) for the acquisition ofsubsidiaries and £43.2m (2005: £31.3m) for the acquisition of property, plantand equipment and computer software. The increase in capital expenditure was dueto increased investment in laboratories, particularly in China, an increase inanalytical services which require specialised equipment and investment incontainer scanning equipment. Cash flows from financing activities comprised cash inflows from the issue ofshare capital following the exercise of employee share options of £4.2m (2005:£3.8m) and the net drawdown of debt of £8.2m (2005: £9.7m), and cash outflows ofdividends paid to minorities of £3.8m (2005: £2.9m) and dividends paid to Groupshareholders of £19.8m (2005: £16.9m), which resulted in a net cash outflow of£11.2m (2005: £5.9m). Interest bearing loans and borrowings were £178.4m at 31 December 2006, adecrease of 6.4% over 2005. The Group's borrowings are in currencies which matchits asset base. The decrease in borrowings comprised exchange adjustments of£20.5m principally due to the translation into sterling of borrowingsdenominated in US dollars and HK dollars, partially offset by the net drawdownof debt of £8.2m. The debt drawdown was mainly used to finance acquisitions.Cash and cash equivalents at 31 December 2006, were £49.5m, a decrease of 2.6%over 2005. Net debt at 31 December 2006 was £128.9m (2005: £139.9m). Acquisitions and disposalsAs described earlier, during 2006 the Group made seven acquisitions for a netcash outflow of £36.9m (2005: £44.5m). Further information on acquisitions isgiven in the business review by division. Return on business assetsFor management purposes, the Group calculates return on business assets as theadjusted operating profit for the year divided by the carrying value of businessassets which comprise operating working capital plus tangible fixed assets andsoftware at the end of the year. For 2006 the return on business assets was57.0%, up 340 basis points from 53.6% in 2005. BUSINESS REVIEW BY DIVISION Consumer Goods The Consumer Goods (Labtest) division provides services to the textiles, toys,footwear, hardlines, food and retail industries. Services include testing,inspection, auditing, advisory services, quality assurance and hazardoussubstance testing. Customers are often retailers but can include manufacturersand suppliers within a global supply chain. The market for the services of the Consumer Goods division is diverse. Demand isdriven by retailers who require the goods they sell to be produced to a qualityset by either their own internal standards or by legislation in a particularcountry. Increasingly, goods are manufactured in locations that are remote fromthe eventual consumer, causing supply chains to be longer and more complicated.The market is increasingly being driven by regulations issued to address safetyand environmental concerns over such issues as carcinogenic dyes in textiles andchemicals in toys and cosmetics. Performance in 2006 2006 2005 Change £m £m ------------------- ---------- ----------Revenue 155.2 136.7 13.5%Operating profit(1) 49.5 44.2 12.0%Operating margin(1) % 31.9 32.3 (40)bp------------------- ------------------- ---------- ---------- (1) Stated before the amortisation of business combination intangibles £0.5m(2005: £0.2m) and the impairment of goodwill £nil (2005: £2.0m) The Consumer Goods division performed well in 2006, with revenue growth of 13.5%and operating profit growth of 12.0%. The high operating margin in ConsumerGoods was maintained at over 30% but decreased 40 basis points over last year.Most of this decline was attributable to the lower margin equipment and buildinginspection business that was acquired last year. On an organic basis, revenuegrowth was 11.9% and operating profit growth was 11.8%. Toys, food and hardlines grew particularly well, driven in part by an increasein the testing of hazardous substances caused by a European Union directive,which became mandatory on 1 July 2006. The global textile market continued to beunsettled by the impact of changes in import quotas but despite thesechallenging market conditions, revenue from textile testing grew well in keycountries such as China and India. The volume of textile testing in Europeremained stagnant as the market shifted increasingly to Asia and Latin America. Over 60% of the revenue in Consumer Goods is generated in China, Hong Kong andTaiwan. Revenue from these countries grew well and prospects continue to lookgood. The textile laboratory network was expanded with new facilities in India,Guatemala and Vietnam and three new laboratories in China. The key growth drivers in Consumer Goods remain strong, principally the sourcingof products from China, the increasingly wide range of products being sold byretailers, shorter product lifecycles and the growth in demand from consumersand regulatory bodies for assurance of quality and safety. Companies are coming under increasing pressure to be socially responsible andthe Consumer Goods division provides auditing and consultancy services in thissector. The division will continue to expand its network of facilities in 2007. Commercial & Electrical The Commercial & Electrical (ETL SEMKO) division provides services to a widerange of industries including those in the home appliances, medical, building,industrial and HVAC/R (heating, ventilation and air conditioning andrefrigeration), IT and telecom and automotive sectors. Customers are mostlymanufacturers but also retailers, industry organisations and governmentdepartments. Services include testing and certification, electromagneticcompatibility testing (EMC), systems auditing, outsourcing, benchmark andperformance testing and environmental testing. The Group has the widest range ofowned marks and accreditations, including the ETL listed mark and Warnock Herseymark for North America and the S mark, as well as being a leader in the issuanceof the CB certification mark and the CE mark and GS mark for Europe. The market for the services of the Commercial & Electrical division is driven byincreasing regulations over the safety of products. This includes currentconcerns over climate change and the impact on the environment of electricalproducts. The division has a global strategy for each of its key industrysectors, for example expertise in the United States in automotive componenttesting and building products testing has been extended into China by theopening of a new automotive facility in Shanghai and a building productsfacility in Guangzhou. Performance in 2006 2006 2005 Change £m £m ------------------- ---------- ----------Revenue 174.4 150.9 15.6%Operating profit(1) 26.7 22.7 17.6%Operating margin(1) % 15.3 15.0 30bp------------------- ------------------- ---------- ---------- (1)Stated before the amortisation of business combination intangibles £2.0m(2005: £1.2m). The Commercial & Electrical division performed well in 2006, with revenue growthof 15.6% and operating profit growth of 17.6%. The operating margin increased by30 basis points to 15.3%. All service sectors performed well apart fromautomotive component testing, which suffered from the decline in the domesticmotor industry in the United States. On an organic basis, revenue increased by8.7% and operating profit increased by 6.7%. The electrical, building products and HVAC/R businesses grew strongly, withdouble digit organic revenue growth. Revenue from the operations in mainlandChina continued to grow strongly and the network was extended by the opening ofsix offices and four laboratories in China. Two offices were also opened inIndia. In February 2006, the Japanese EMC business of Akzo Nobel was acquired. Japan isan important market for Commercial & Electrical and this acquisition will allowquicker penetration of that market for both EMC testing and other servicesoffered by the Group. This business performed well in 2006. The division alsoacquired a small electrical testing business in Italy during the year. Customer demand for safe, energy efficient products continues to increase andthe market for Commercial & Electrical continues to evolve which presentsopportunities for growth. Concerns over global warming and climate change aredriving new directives regarding the energy usage of products. This is evidentin the HVAC/R industry and is expected to extend over other industry sectors.There are many small niche players in the market and this provides opportunitiesfor bolt on acquisitions. Oil, Chemical & Agri The Oil, Chemical & Agri (Caleb Brett) division offers independent cargoinspection, testing and analytical services to the oil and chemical,agricultural, mineral and pharmaceutical sectors. Global customers include themajor oil companies and leading chemical companies and the division alsoprovides outsourcing services to many other major manufacturers. The cargo inspection and testing market is a well established global market inwhich Intertek is one of the leading service providers. High barriers to entryare principally due to the fixed costs required in establishing a global networkof operations and laboratories. The analytical services market continues toexpand driven by the increasing demand from industries which seek to outsourcenon-core services including testing. The more stringent environmental andregulatory requirements for fossil fuels and the drive for seeking alternativeenergy sources are expanding the market for testing services. Intertek developedoutsourcing initially in the oil sector, but now is extending its reach to thechemical, pharmaceutical, bio tech, automotive and minerals industries.Intertek's successful track record is creating more opportunities and hasreinforced Intertek as the market leader in laboratory outsourcing in the oiland chemical sector. Performance in 2006 2006 2005 Change £m £m ----------------- --------- ---------Revenue 281.5 218.0 29.1%Operating profit(1) 30.0 17.9 67.6%Operating margin(1) % 10.7 8.2 250bp----------------- ----------------- --------- --------- (1) Stated before the amortisation of business combination intangibles £1.2m(2005: £0.7m) and the impairment of goodwill £0.3m (2005: £nil). Oil, Chemical & Agri had an excellent performance in 2006 with revenue growth of29.1%, operating profit growth of 67.6% and an increase in margin from 8.2% to10.7%. On an organic basis, revenue growth was 17.5% and operating profit growthwas 52.1%. Excluding the impact of the hurricane which affected the 2005results, organic revenue increased by 16.5% and organic operating profitincreased by 27.0%. All service sectors contributed to this growth. With highvolumes of trade and increased demand for petroleum products, market conditionswere favourable and increased trading activity was evident across all regions.Demand for analytical services increased, in part due to the expansion of theglobal bio fuels market and from new environmental regulations coming into forcefor road and marine fuels. Revenue from analytical services as a percentage oftotal revenues grew to 43% in 2006 up from 36% in 2005. In the Americas, revenue grew strongly, led by the US cargo inspection andtesting business with market expansion throughout the US as well as in LatinAmerica. An early investment in multiple facilities for testing ultra lowsulphur diesel paid off, as demand was strong, driven by the requirement tocomply with new US regulations. Demand was also strong for ethanol testing dueto a change in regulations regarding the use of ethanol as an additive topetrol. In Europe, revenue growth was assisted by the full implementation of outsourcedanalytical contracts which were awarded in 2005. Downstream, two new contractsfor a bio-fuels plant and a refinery in the UK were won. A new contract was alsoawarded by BP to provide upstream analytical and technical support services toall offshore and onshore oil and gas production facilities in the North Sea. In Asia, new minerals testing and agri services were established to takeadvantage of the growth in these sectors. Upstream oil and gas servicescapabilities were expanded utilising the support and technology from theWestport laboratory in the US, which was acquired from Halliburton at the end of2005.The division continued its strategy of extending its service offering byacquiring companies with specialist skills that complement the existing businessand can be leveraged to existing and new clients through the Group's globalnetwork. Details of the larger acquisitions are given below. From 1 September 2006, under an outsourcing agreement, Intertek began providingall of the analytical service support to the manufacturing operations of Sabicand DSM in the Netherlands. This is one of the largest outsourcing contracts foranalytical services within the chemical industry to date, with over 170 chemistsand technicians joining Intertek.In November 2006, the Group acquired the bioanalytical divisions of AltaAnalytical Laboratory Inc., which is based in California, USA. Alta providesanalytical services to North American pharmaceutical and clinical researchorganisations and provides Intertek with a platform to build a global presencein this area. In December 2006, the Group acquired Caleb Brett Iberica, a leading testing andinspection business in Spain and Portugal, providing technical inspections andfuel analysis services to petroleum, chemical and fuel retailer clients. Thisacquisition provides the Group with the opportunity to extend its full range ofservices into this strategically important region.In January 2007, the Group acquired Umitek Ltd and its subsidiaries, CAPCIS andSmith Rea Energy Ltd (SREL) in the UK, which provide specialist testing andconsultancy services to the oil and gas industries in the North Sea andglobally. These businesses will allow the Group to extend the range of servicesprovided by Intertek's current upstream operations to Europe and the MiddleEast. The outlook for Oil, Chemical & Agri is positive with oil price volatilityexpected to continue generating trading opportunities requiring third partyinspection and testing and continued expansion of the analytical servicesbusiness driven by new regulations. The pipeline of potential outsourcingprojects remains strong and the strategy of supplementing organic growth withacquisitions will continue. GOVERNMENT SERVICES The Government Services (FTS) division offers a range of services togovernments, national standards organisations, customs departments andindustrial companies. Services offered include ensuring imports comply withrelevant safety, quality and other standards. Goods and commodities are testedand/or inspected prior to shipment which prevents dumping of unsafe goods andimproves the quality of imported and sold goods. Ministries of Finance retainservices to increase import duty and help improve efficiency. Imports areinspected and valued in the country before shipment to enable import duties tobe accurately assessed and certified. Container scanning services are offered tohelp protect against security risks associated with international trade.Intertek's worldwide laboratory coverage allows for rapid inspection,certification and valuation of shipments, anywhere in the world.Most of the customers of the Government Services division are governments ordepartments linked to governments in countries which do not have the necessaryinfrastructure to enforce import controls effectively. Performance in 2006 2006 2005 Change £m £m ----------------- --------- ---------Revenue 53.4 74.5 (28.3)%Operating profit(1) 6.6 16.3 (59.5)%Operating margin(1) % 12.4 21.9 (950)bp----------------- ----------------- --------- ---------(1) Stated before the amortisation of business combination intangibles £0.1m(2005: £nil). As expected, the cessation of pre-shipment inspection contracts in Nigeria andVenezuela had an adverse effect on the division's performance in 2006. Revenuein 2006 was 28.3% lower than the previous year and operating profit declined59.5% due to the loss of profit from those contracts and the lost contributiontowards overheads. The operating margin reduced from 21.9% to 12.4%. Thedivision was restructured to minimise its cost base, incurring costs of £0.3m(2005: £2.0m).Standards contracts in Nigeria and Kenya which started at the end of 2005 werefully operational in 2006 and performed well. A new container scanning contractwith the Guinean Ministries of Transport and Finance commenced operation in thesecond half of 2006 and will run for ten years.The Government Services division will continue to work with governments todevelop innovative programmes that are tailored to their specific requirements.There are a number of potential opportunities for new contracts, particularly inthe areas of container scanning and standards programmes. Consolidated income statementFor the year ended 31 December 2006 2006 2005 £m £m --------- ---------Revenue (Note 1) 664.5 580.1Cost of sales (523.6) (447.6)-------------------------------- --------- ---------Gross profit 140.9 132.5-------------------------------- --------- ---------Amortisation of business combination intangible assets (3.8) (2.1)Impairment of goodwill (0.3) (2.0)Administrative expenses (38.7) (45.4)-------------------------------- --------- ---------Total administrative expenses (42.8) (49.5)-------------------------------- --------- ---------Group operating profit (Note 1) 98.1 83.0-------------------------------- --------- ---------Finance income 4.5 3.5Finance expense (11.5) (9.4)-------------------------------- --------- ---------Net financing costs (7.0) (5.9)-------------------------------- --------- ---------Share of profit of associates 0.3 0.7Profit on sale of interest in associate - 1.6-------------------------------- --------- ---------Profit before taxation 91.4 79.4Income tax expense (22.5) (18.7)-------------------------------- --------- ---------Profit for the year 68.9 60.7-------------------------------- --------- ---------Attributable to:Equity holders of the Company 63.8 57.1Minority interest 5.1 3.6-------------------------------- --------- ---------Profit for the year 68.9 60.7-------------------------------- --------- --------- Earnings per share (Note 2)-------------------------------- --------- ---------Basic 40.9p 36.8p-------------------------------- --------- ---------Diluted 40.6p 36.5p-------------------------------- --------- --------- Consolidated balance sheetAs at 31 December 2006 2006 2005 £m £m ---------- ----------ASSETSProperty, plant and equipment 123.7 115.9Goodwill 71.1 55.7Other intangible assets 19.6 12.8Investments in associates 0.7 0.7Deferred tax assets 13.3 14.4------------------------------ ---------- ----------Total non-current assets 228.4 199.5------------------------------ ---------- ---------- Inventories 3.2 3.1Trade and other receivables 151.9 146.3Derivative financial instruments 0.4 1.7Cash and cash equivalents 49.5 50.8------------------------------ ---------- ----------Total current assets 205.0 201.9------------------------------ ---------- ---------- Total assets 433.4 401.4------------------------------ ---------- ---------- LIABILITIESInterest bearing loans and borrowings (13.6) (15.3)Current taxes payable (24.1) (25.8)Trade and other payables (101.3) (93.9)Provisions (4.5) (8.9)------------------------------ ---------- ----------Total current liabilities (143.5) (143.9)------------------------------ ---------- ---------- Interest bearing loans and borrowings (164.8) (175.4)Deferred tax liabilities (3.8) (3.4)Net pension liabilities (15.2) (17.8)Other payables (0.9) (1.2)------------------------------ ---------- ----------Total non-current liabilities (184.7) (197.8)------------------------------ ---------- ---------- Total liabilities (328.2) (341.7)------------------------------ ---------- ---------- Net assets 105.2 59.7------------------------------ ---------- ---------- EQUITYShare capital 1.6 1.6Share premium account 242.4 238.2Other reserves 6.0 13.4Retained earnings (153.6) (201.3)------------------------------ ---------- ----------Total equity attributable to equity holders of the Company 96.4 51.9Minority interest 8.8 7.8------------------------------ ---------- ---------- Total equity 105.2 59.7------------------------------ ---------- ---------- Consolidated statement of cash flowsFor the year ended 31 December 2006 2006 2005 £m £m -------- -------Cash flows from operating activitiesProfit for the year 68.9 60.7Adjustments for:Depreciation charge 24.1 22.0Amortisation of software 2.2 -Amortisation of business combination intangibles 3.8 2.1Impairment of goodwill 0.3 2.0Share option expense 2.4 1.9Share of profit of associates (0.3) (0.7)Profit on sale of interest in associate - (1.6)Net financing costs 7.0 5.9Income tax expense 22.5 18.7(Profit)/ loss on disposal of property, plant and equipment (0.3) 0.1-------------------------------- -------- -------Operating profit before changes in working capital andprovisions 130.6 111.1(Increase)/decrease in inventories (0.4) 0.1Increase in trade and other receivables (13.7) (23.7)Increase in trade and other payables 12.3 5.9(Decrease)/increase in provisions (4.2) 3.3-------------------------------- -------- -------Cash generated from operations 124.6 96.7Interest paid (7.7) (6.5)Income taxes paid (24.6) (17.8)-------------------------------- -------- -------Net cash flows from operating activities 92.3 72.4-------------------------------- -------- ------- Investing activitiesProceeds from sale of property, plant and equipment 0.9 0.3Proceeds from disposal of interest in associate - 2.7Interest received 1.1 0.6Dividends received from associated undertakings - 0.8Acquisition of subsidiaries, net of cash acquired (36.9) (44.5)Additions to property, plant and equipment (42.0) (31.3)Additions to software (1.2) --------------------------------- -------- -------Net cash flows from investing activities (78.1) (71.4)-------------------------------- -------- ------- Financing activitiesProceeds from the issue of share capital 4.2 3.8Proceeds from disposal of own shares by ESOT - 0.4Drawdown of debt 104.8 62.8Repayment of debt (96.6) (53.1)Dividends paid to minorities (3.8) (2.9)Dividends paid (19.8) (16.9)-------------------------------- -------- -------Net cash flows from financing activities (11.2) (5.9)-------------------------------- -------- ------- Net increase/(decrease) in cash and cash equivalents 3.0 (4.9)Cash and cash equivalents at 1 January 50.8 52.5Effect of exchange rate fluctuations on cash held (4.3) 3.2-------------------------------- -------- -------Cash and cash equivalents at 31 December 49.5 50.8-------------------------------- -------- ------- Consolidated statement of recognised income and expenseFor the year ended 31 December 2006 2006 2005 £m £m --------- ---------Foreign exchange translation differences (6.1) (1.7)Actuarial gains and losses on defined benefit pension 3.2 (3.7)schemesTax on income and expenses recognised directly in equity (1.9) 1.4Effective portion of changes in fair value ofcash flow hedges, net of recycling (1.3) 2.6----------------------------------- --------- ---------Net expense recognised directly in equity (6.1) (1.4)Profit for the year 68.9 60.7----------------------------------- --------- ---------Total recognised income and expense for the year 62.8 59.3----------------------------------- --------- ---------Total recognised income and expense for the yearattributable to:Equity holders of the Company 58.2 54.8Minority interest 4.6 4.5----------------------------------- --------- ---------Total recognised income and expense for the year 62.8 59.3----------------------------------- --------- --------- 1 SEGMENT REPORTING Segment information is presented in respect of the Group's business andgeographical segments. The primary format, business segments, is based on theGroup's management and internal reporting structure. Segment results, assets and liabilities include items directly attributable to asegment as well as those that can be allocated on a reasonable basis.Unallocated items comprise mainly borrowings, pension fund liabilities, andcorporate expenses and assets. Business segmentsThe Group comprises the following main business segments: Consumer Goods (Labtest), which provides services to the textiles, footwear,toys, food and hardlines industries. Commercial & Electrical (ETL SEMKO), which provides testing, inspection andcertification services to industries including those in the home appliances,medical, building, industrial and HVAC/R, IT and telecom and automotive sectors. Oil, Chemical & Agri (Caleb Brett), which provides cargo inspection, testing andanalytical services to the oil and gas, chemical, agricultural, mineral andpharmaceutical sectors. Government Services (FTS), which provides trade services to standards bodies andgovernments. Central overheads comprise the costs of the corporate head office andnon-operating holding companies and other costs which are not controlled by theoperating divisions. On 1 January 2006, the systems certification business was transferred fromConsumer Goods to Commercial & Electrical and prior year figures haves beenrestated to show a like-for-like comparison. Geographical segmentsAll the business segments are managed on a worldwide basis but can be dividedinto the following geographic regions: AmericasEurope, Middle East and AfricaAsia In presenting information on the basis of geographic segments, segment revenueis based on the geographical location of the entity that generated that revenue.Segment assets are based on the geographical location of the assets. Segment reporting Business analysis (primary segment) Consumer Commercial Oil, Chemical Government Goods & Electrical & Agri Services 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m ------ ------ ------ ----- ----- ----- ----- -----Revenue fromexternal customers 155.2 136.7 174.4 150.9 281.5 218.0 53.4 74.5Inter-segmentrevenue 0.3 0.1 1.4 1.1 2.4 2.3 1.3 1.4------------ ------ ------ ------ ----- ----- ----- ----- -----Revenue 155.5 136.8 175.8 152.0 283.9 220.3 54.7 75.9------------ ------ ------ ------ ----- ----- ----- ----- -----Operating profitbeforeamortisation 49.5 44.2 26.7 22.7 30.0 17.9 6.6 16.3and impairmentAmortisation ofbusinesscombination (0.5) (0.2) (2.0) (1.2) (1.2) (0.7) (0.1) -intangiblesImpairment ofgoodwill - (2.0) - - (0.3) - - ------------- ------ ------ ------ ----- ----- ----- ----- -----Group operatingprofit 49.0 42.0 24.7 21.5 28.5 17.2 6.5 16.3------------ ------ ------ ------ ----- ----- ----- ----- -----Net financingcostsShare of profit ofassociatesProfit on sale ofinterestin associateIncome taxexpenseProfit forthe year------------ ------ ------ ------ ----- ----- ----- ----- -----Segment assets 64.9 57.9 95.0 85.7 188.0 158.1 18.1 26.6Investment inassociatesUnallocatedassets------------ ------ ------ ------ ----- ----- ----- ----- -----Total assets------------ ------ ------ ------ ----- ----- ----- ----- ----- Segment 21.5 20.3 31.3 27.2 40.3 37.3 9.1 12.0liabilitiesUnallocatedliabilities------------ ------ ------ ------ ----- ----- ----- ----- ----- Totalliabilities------------ ------ ------ ------ ----- ----- ----- ----- -----Depreciation andsoftwareamortisation 6.2 5.3 7.6 6.9 11.0 8.7 1.4 1.0------------ ------ ------ ------ ----- ----- ----- ----- -----Capitalexpenditure 14.3 7.4 9.9 9.3 16.7 13.0 2.2 1.5including software ------ ------ ------ ----- ----- ----- ----- ----------------- Business analysis (primary segment) continued Central overheads Eliminations Consolidated 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m ----- ----- ----- ---- ----- -----Revenue fromexternal customers - - - - 664.5 580.1Inter-segment revenue - - (5.4) (4.9) - --------- ----- ----- ----- ---- ----- -----Revenue - - (5.4) (4.9) 664.5 580.1-------- ----- ----- ----- ---- ----- -----Operating profit beforeamortisation and impairment (10.6) (14.0) - - 102.2 87.1Amortisation of businesscombination - - - - (3.8) (2.1)intangiblesImpairment of goodwill - - - - (0.3) (2.0)-------- ----- ----- ----- ---- ----- -----Group operating profit (10.6) (14.0) - - 98.1 83.0-------- ----- ----- ----- ---- ----- -----Net financing costs (7.0) (5.9)Share of profitof associates 0.3 0.7Profit on sale ofinterest in associate - 1.6Income tax expense (22.5) (18.7)-------- ----- ----- ----- ---- ----- -----Profit for the year 68.9 60.7-------- ----- ----- ----- ---- ----- -----Segment assets 2.4 4.3 368.4 332.6Investment in associates 0.7 0.7Unallocated assets 64.3 68.1-------- ----- ----- ----- ---- ----- -----Total assets 433.4 401.4-------- ----- ----- ----- ---- ----- ----- Segment liabilities 3.1 6.5 105.3 103.3Unallocated liabilities 222.9 238.4-------- ----- ----- ----- ---- ----- -----Total liabilities 328.2 341.7Depreciation andsoftware amortisation 0.1 0.1 - - 26.3 22.0-------- ----- ----- ----- ---- ----- -----Capital expenditureincluding software 0.1 0.1 - - 43.2 31.3-------- ----- ----- ----- ---- ----- ----- Segment reporting (continued) On 1 January 2006, the systems certification business was transferred fromConsumer Goods to Commercial & Electrical and the 2005 figures have beenrestated to show a like-for-like comparison. Geographic analysis (secondary segment) Europe, Middle Americas East and Africa Asia Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £m ------ ------ ------ ------ ------ ------ ------ ------Revenue fromexternalcustomers 245.1 203.6 190.3 186.8 229.1 189.7 664.5 580.1Operatingprofit 29.6 21.0 (2.0) 2.5 70.5 59.5 98.1 83.0----------- ------ ------ ------ ------ ------ ------ ------ ------Amortisationofbusinesscombinationintangibles 1.7 1.3 1.1 0.6 1.0 0.2 3.8 2.1----------- ------ ------ ------ ------ ------ ------ ------ ------Impairment ofgoodwill - - 0.3 2.0 - - 0.3 2.0----------- ------ ------ ------ ------ ------ ------ ------ ------Segment assets 142.8 141.2 128.2 113.3 97.4 78.1 368.4 332.6----------- ------ ------ ------ ------ ------ ------ ------ ------Capitalexpenditureincludingsoftware 11.5 10.4 10.1 9.3 21.6 11.6 43.2 31.3----------- ------ ------ ------ ------ ------ ------ ------ ------ 2 EARNINGS PER ORDINARY SHARE The calculation of earnings per ordinary share is based on profit attributableto equity holders of the Company and the weighted average number of ordinaryshares in issue during the year. In addition to the earnings per share requiredby IAS 33: Earnings Per Share, an adjusted earnings per share has also beencalculated and is based on earnings excluding the effect of amortisation ofbusiness combination intangibles and goodwill impairment. It has been calculatedto allow shareholders a better understanding of the trading performance of theGroup.Details of the adjusted earnings per share are set out below: 2006 2005Based on the profit for the year: £m £m----------------------------------------- -------- --------Profit attributable to equity shareholders 63.8 57.1Amortisation of business combination intangibles 3.8 2.1 Impairment of goodwill 0.3 2.0----------------------------------------- -------- -------- Adjusted earnings 67.9 61.2----------------------------------------- -------- -------- Number of shares (millions):----------------------------------------- -------- --------Basic weighted average number of shares 156.0 155.1Potentially dilutive share options 1.2 1.3----------------------------------------- -------- --------Diluted weighted average number of shares 157.2 156.4----------------------------------------- -------- -------- Basic earnings per share 40.9p 36.8pOptions (0.3)p (0.3)p----------------------------------------- -------- --------Diluted earnings per share 40.6p 36.5p----------------------------------------- -------- -------- Basic adjusted earnings per share 43.5p 39.5pOptions (0.3)p (0.4)p----------------------------------------- -------- --------Diluted adjusted earnings per share 43.2p 39.1p----------------------------------------- -------- -------- The weighted average number of shares used in the calculation of the dilutedearnings per share for the year to 31 December 2006, excludes nil potentialshares (2005: 1,456,156) as these were not dilutive in accordance with IAS 33:Earnings Per Share and 128,194 (2005: nil) contingently issuable shares as theperformance conditions were not met, 3 ANNUAL REPORT The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2006 or 2005 but is derivedfrom the 2006 accounts. Statutory accounts for 2005 have been delivered to theregistrar of companies and those for 2006 will be delivered in due course. Theauditors have reported on those accounts; their reports were (i) unqualified,(ii) did not include references to any matters to which the auditors drewattention by way of emphasis without qualifying their reports and (iii) did notcontain statements under section 237(2) or (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange