Intertek Group Regulatory News (ITRK)

6 Mar 2006 07:02

Intertek Group PLC06 March 2006 Intertek Group plc PRELIMINARY 2005 RESULTS ANNOUNCEMENT 6 MARCH 2006 Intertek Group plc ("Intertek"), the leading international provider of qualityand safety services to a wide range of global and local industries, todayannounces its preliminary results for the year to 31 December 2005. UNDERLYING PERFORMANCE Revenue (1) £581.9m Up 16.5% at actual exchange rates Up 15.1% at constant exchange rates Up 12.2% organic at constant rates Operating profit (2) £87.1m Up 4.9% at actual exchange rates Underlying operating profit (3) £92.9m Up 11.9% at actual exchange rates Up 10.5% at constant exchange rates Up 5.7% organic at constant rates Underlying operating margin (3) 16.0% Down from 16.6% Earnings per share (4) 39.1p Up 14.0% Dividend per share (5) 12.0p Up 15.4% 1. After adjusting for lost revenues of £1.8m from the US hurricanes andflooding.2. Before amortisation of intangible assets and goodwill impairment.3. Before amortisation of intangible assets and goodwill impairment and afteradjusting for non-recurring items - closure costs, lost profits from the UShurricanes and flooding, court judgment.4. Fully diluted underlying earnings per share before amortisation of intangibleassets and goodwill impairment.5. Dividend per share is based on the interim dividend paid of 3.9p (2004: 3.4p)plus the proposed final dividend of 8.1p (2004: 7.0p). STATUTORY RESULTS Revenue £580.1m Up 16.1% Operating profit £83.0m Up 1.7% Operating cash flow £96.7m Down 5.1% Profit before tax £79.4m Up 6.7% Basic earnings per share 36.8p Up 9.2% CHIEF EXECUTIVE OFFICER, WOLFHART HAUSER commented: "As today's results show, our underlying business performance in 2005 wasstrong. As planned, we made a number of acquisitions over the year and continueto look for targets with a good geographical and business fit. We remain focusedon offering services to support global trade. Looking ahead, we are confidentthat the business is well placed to capitalise on long term market trends whichcontinue to be very favourable." Overview In 2005, the group achieved good growth in revenue and operating profit at bothactual and constant exchange rates. At actual rates, revenue in 2005 was£580.1m, 16.1% above 2004 and operating profit before amortisation of intangibleassets and goodwill impairment was £87.1m, 4.9% above 2004. On an organic basis,underlying revenue grew 12.2% and underlying operating profit grew 5.7%. The Consumer Goods division (Labtest) had a challenging year in 2005 but stillachieved actual reported revenue growth of 8.2% and organic revenue growth of8.7% at constant exchange rates. The underlying operating margin of 31.4% wasstable in the second half of the year compared to the first half. The stronggrowth of all industry sectors in China and the strong global growth of toyswere offset by the slower growth in global textile testing as a result ofturbulence caused by changes in the textile sector. Correcting overcapacity oftextile testing in developed countries weighed on the margin. The Commercial & Electrical division (ETL SEMKO) had an excellent year in 2005with actual reported revenue growth of 18.0% and organic revenue growth of 12.4%at constant exchange rates. The underlying operating margin of 15.2% was higherthan last year due to a more focused business development strategy andoperational efficiencies. The Oil, Chemical & Agri division (Caleb Brett) had a very strong underlyingresult. The actual reported revenue growth was 23.0% and underlying organicrevenue growth was 15.4% at constant exchange rates. The underlying operatingmargin of 8.7% was at a similar level to last year. Revenue from analyticalservices grew 41% and this service line now accounts for 36% of the division'stotal revenues, up from 31% last year. The Government Services division (FTS) reported good growth in 2005 with actualreported revenue growth of 10.2% and an underlying operating margin of 24.6%.This growth came principally from the pre-shipment inspection (PSI) contracts.The PSI contracts with the Governments of Venezuela and Nigeria were terminatedin the year which will result in significantly reduced revenues in 2006 for thisdivision. Group Our mission is to support, add value and facilitate our customers' success inthe global market place. This is achieved by following a clear strategy ofcontinual strengthening of our service offering on an industrial and regionalfocus and through the pursuit of acquisitions that provide our customers withmore and improved services. We are encouraged with the outcome of the acquisitions we made in 2005 as theyenable us to improve our service offering in accordance with our strategy. Wemade twelve acquisitions at a cost of £46.9m, three quarters of which was spentin the Oil, Chemical & Agri division on seven acquisitions. The largestacquisition was of Automotive Research Laboratories (ARL) from PerkinElmer for£20.1m. ARL is a market leader in North America in the motor fuels andlubricants sector which perfectly complements the PARC business that wasacquired for £4.1m earlier in the year as well as the existing fuels business.Westport was purchased from Halliburton at a cost of £5.4m. This takes usfurther upstream into the oil exploration and production end of analyticalservices. Four acquisitions for consideration of £8.5m were made by the Commercial &Electrical division. Omega Point Laboratories was acquired for £2.9m and bycombining this with our existing business it projects Intertek into marketleadership position in the North American building sector. The systems servicescertification business of KPMG in India and the Middle East was bought for £4.6mand this now enables us to sell a package of systems and product certificationin the region, instead of just product certification. The deal with DEKRA wherewe bought their majority share in Sweden and sold our minority share in Germanyfrees us to pursue systems certification in Europe. The success of our acquisition strategy has continued into 2006 where we haveannounced the purchase for £9.0m of Akzo Nobel's electro magnetic compatibilitytesting business in Japan, strengthening our position in this key target countryand market. There were some non-recurring items in 2005. These include the loss of revenuesfrom the hurricanes and flooding in the Gulf of Mexico, closure costs related tothe terminated Venezuela and Nigeria contracts and an adverse court judgmentrelating to an historic legal claim. Excluding these items, the adjustedoperating profit, before amortisation of intangible assets and goodwillimpairment, was £92.9m, 10.5% above 2004 at constant exchange rates. Dividend The Board remains confident that the business will show healthy growth, andbased on this, the Board is recommending a final dividend of 8.1p per share(2004: 7.0p) making the full year dividend 12.0p per share (2004: 10.4p), anincrease of 15.4% on last year. Outlook Intertek is very well positioned in many of its industries and the continuedactive marketing of our services will ensure we have another year of favourableresults with strong revenue growth and good margins complemented by acquisitiongrowth. ANALYSTS' MEETING There 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. CONTACT For further information, please contactAston Swift, Investor Relations Telephone: +44 (0) 20 7396 3400 aston.swift@intertek.com Tim Lynch, Tulchan Communications Telephone: +44 (0) 20 7353 4200 tlynch@tulchangroup.com 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, processes and ultimately supports theirsuccess in the global market place. Intertek has the experience, expertise,resources and global reach to support their customers through their network ofover 850 laboratories and offices and 15,500 people in more than 100 countriesaround the world. Performance Review Cautionary statement This Announcement contains certain forward-looking statements with respect tothe financial condition, results, operations and business of Intertek Group plc.These statements and forecasts involve risk and uncertainty because they relateto events and depend upon circumstances that will occur in the future. There area number of factors that could cause actual results or developments to differmaterially from those expressed or implied by these forward-looking statementsand forecasts. Nothing in this Announcement should be construed as a profitforecast. Overview In order to present a more meaningful comparison of the Group's revenue andoperating profit in 2005 compared to 2004, the revenue and operating profit inthis performance review have been adjusted for certain material, non-recurringitems. In addition, throughout this discussion, operating profit is statedbefore the amortisation of intangible assets and the impairment of goodwill. The underlying growth in revenue, which is after adjusting the 2005 revenue toinclude £1.8m of revenue lost due to the impact of the hurricanes in the US, was16.5%. Our underlying growth in operating profit, which is stated before theamortisation of intangible assets of £2.1m (2004: £1.4m) and the impairment ofgoodwill of £2.0m (2004: £nil) and after adding back lost profit due to thehurricanes of £1.2m and other non-recurring costs of £4.6m, was 11.9%. Labtestmaintained a good level of growth, despite challenging conditions in some of itsmarkets, ETL SEMKO and Caleb Brett both performed very strongly and FTS had agood year but suffered contract losses which will affect its performance goingforward. A substantial portion of the Group's revenue is denominated in US dollars orcurrencies linked to the US dollar therefore, the Group's results whentranslated into sterling are exposed to changes in the value of the US dollar.In order to compare the Group's results for 2005 with 2004 at constant exchangerates, the reported results for 2004, have been retranslated into sterling usingthe 2005 average exchange rates. The table below shows growth in revenue andoperating profit at both actual and constant exchange rates. Revenue reported in the income statement for 2005 was £580.1m, 16.1% higher than2004 and Group operating profit was £83.0m, an increase of 1.7%. Areconciliation of the underlying figures to the statutory figures is set out inthe table below. Underlying Performance Revenue Operating Profit ------- -------- --------- ------- -------- --------- 2005 Growth at Growth at 2005 Growth at Growth at actual constant actual constant rates rates(2) rates(1) rates(1,2) £m % % £m % %---------------- ------- -------- --------- -------- --------- --------Underlyingtotal 581.9 16.5 15.1 92.9 11.9 10.5Lessnon-recurringitems:Hurricaneimpact (1.8) (1.2)Court judgment - (2.6)Closure costs - (2.0)---------------- ------- -------- --------- -------- --------- --------Adjusted total 580.1 16.1 14.7 87.1 4.9 3.6Amortisationof intangibleassets - (2.1)Impairment ofgoodwill - (2.0)---------------- ------- -------- --------- -------- --------- --------Statutorytotal 580.1 16.1 14.7 83.0 1.7 0.4---------------- ------- -------- --------- -------- --------- -------- 1. Operating profit for 2004 has been restated under Adopted IFRSs toinclude a share option charge of £1.0m and to exclude income from associates of£1.2m.2. Cumulative average exchange rates for the year ended 31 December 2005. Non-recurring items The results for 2005, were impacted by a number of events that werenon-recurring and outside the normal course of trading. Firstly, the Gulf Coastin the United States was devastated by hurricanes Rita and Katrina andsubsequent flooding in the New Orleans area in the second half of 2005, whichcaused Caleb Brett's operation in this region to lose revenue of approximately£1.8m and operating profit of £1.7m. The Group is seeking recovery of its lossesfrom its insurers and an initial payment of £0.5m was received in February 2006.This amount was accrued in the accounts for 2005, so the net reduction ofoperating profit in the year was £1.2m. The Group will include any furtherinsurance recoveries in 2006. Secondly, operating profit was reduced by costs of£2.6m following an unexpected adverse court judgment in connection with an oldclaim. The judgment has been appealed but the outcome is unknown at the currenttime. Thirdly, two major government contracts were terminated in the FTSdivision which resulted in closure costs of £2.0m. Acquisitions and disposals The Group made one acquisition in the first half of 2005, and 11 acquisitionsand one disposal in the second half of the year. The Group includes the resultsof acquisitions from the date of acquisition and excludes the results ofdisposals from the date of disposal. At actual exchange rates, underlyingorganic revenue increased by 13.6% and underlying organic operating profitincreased by 7.2%. At constant rates underlying organic revenue increased by12.2% and underlying organic operating profit increased by 5.7%. A more detaileddiscussion of the acquisitions is given in the divisional review that follows. Review of 2005 Performance by Division The table below summarises the underlying results of each division for 2005 andgrowth over 2004 at constant exchange rates. Revenue for Caleb Brett has beenadjusted to include £1.8m of revenue that was lost due to the hurricanes.Operating profit is stated before the amortisation of intangible assets of £2.1m(2004: £1.4m) and the impairment of goodwill of £2.0m (2004: £nil). Operatingprofit for Caleb Brett is stated after including £1.2m of profit lost due to thehurricanes and operating profit for FTS is stated before non-recurring closurecosts of £2.0m. Central overheads, exclude a court judgment of £2.6m. Operatingprofit for 2004, has been restated under Adopted International FinancialReporting Standards (IFRSs) to include a share option charge and to excludeincome from associates. Underlying Financial Performance by division at constant rates (1) Revenue Operating profit ------- ------- ------- ------- ------- ------- Organic Organic 2005 Growth growth 2005 Growth growth £m % % £m % %By division: Labtest 143.2 7.1 8.7 44.9 2.3 0.9ETL SEMKO 144.4 16.9 12.4 22.0 25.0 19.8Caleb Brett 219.8 21.5 15.4 19.1 22.4 8.1FTS 74.5 10.2 10.2 18.3 31.7 31.7------------- ------- ------- ------- ------- ------- -------Sub total 581.9 15.1 12.2 104.3 14.6 10.3 Centraloverheads (11.4) (65.2) (65.2)------------- ------- ------- ------- ------- ------- ------- Underlyingtotal 581.9 15.1 12.2 92.9 10.5 5.7 Non-recurringitems (1.8) (5.8)------------- ------- ------- ------- ------- ------- -------Adjusted total 580.1 14.7 11.8 87.1 3.6 (1.3)------------- ------- ------- ------- ------- ------- -------Amortisationof intangibleassets (2.1)Impairment ofgoodwill (2.0)------------- ------- ------- ------- ------- ------- -------Statutorytotal 580.1 14.7 11.8 83.0 0.4 (4.7)------------- ------- ------- ------- ------- ------- ------- 1. Cumulative average exchange rates for the year ended 31 December 2005. Labtest Consumer goods Labtest services consumer goods industries including those producing textiles,footwear, toys, food and hardlines in the areas of testing, inspection,auditing, training and certification for quality, safety, health, environmentaland corporate social accountability. Its clients include the world's largestretail organisations, manufacturers and international traders. Revenue Underlying Operating Profit ------- -------- --------- ------- -------- --------- 2005 Growth at Growth at 2005 Growth at Growth at actual constant actual constant rates rates rates rates £m % % £m % %---------------- ------- -------- --------- -------- --------- --------Organic 140.0 9.9 8.7 44.4 1.8 0.9Acquisitionsand disposals 3.2 0.5---------------- ------- -------- --------- -------- --------- --------Total 143.2 8.2 7.1 44.9 3.2 2.3---------------- ------- -------- --------- -------- --------- -------- Labtest had a challenging year in 2005 but still achieved organic growth of 8.7%in revenue and 0.9% in operating profit, at constant exchange rates. In total,revenue increased 7.1% in 2005 over 2004 and operating profit increased 2.3%.Labtest's organic operating margin was 31.7% in 2005, compared to 34.2% in 2004.This was primarily due to lower than expected revenue and higher costs incertain countries, particularly in Europe and the Americas. Performance in the division was mixed, with very strong growth in China(including Hong Kong), which accounts for more than half of Labtest revenue,tempered by challenging market conditions in many other countries. Changes tothe World Trade Organisation's Agreement on Textiles and Clothing (ATC) endedmore than 40 years of quota restrictions on textiles and clothing and resultedin turbulence in the global textile market in 2005, with increased revenue inChina and a decline in revenue in the rest of Asia, Europe and the Americas.Toys, food and hardline testing performed well in all regions, mainly due toincreased European Union (EU) regulations on safety and environmental factorswhich increased the requirements for testing for various hazardous substances.For example, companies manufacturing or shipping electronic products into the EUhave been preparing to comply with the new Restriction of Hazardous Substances(RoHS) directive which becomes mandatory on 1 July 2006. At the end of November, Labtest sold its 49% shareholding in the German company,DEKRA Intertek Certification GmbH to DEKRA AG for £2.7m and acquired theremaining 51% of the shares not already owned by Intertek in the Swedish companyDEKRA-SEMKO Certification AB for £0.9m. This deal ends the joint venture betweenIntertek and DEKRA AG and enables both parties to focus on growing theircertification businesses independently. From 1 January 2006, the systemscertification business in Labtest will be aligned with the product certificationbusiness in ETL SEMKO, under the management of ETL SEMKO. The key growth drivers in Labtest remain strong, principally the sourcing ofproducts from China, the increasingly wide range of products being sold byretailers, shorter product lifecycles and the growth in demand from consumersand regulatory bodies for quality and safety. The growth strategy will be toconcentrate on higher growth markets and to reposition in lower growth regionsand strengthening marketing centres in major western countries. On 1 January2006, Paul Yao was appointed Chief Operating Officer for Labtest, reporting toRaymond Kong, Executive President China and Asia and Chief Executive Labtest. ETL SEMKO Commercial & electrical ETL SEMKO provides services to a wide range of industries including those in theelectrical, electronic, medical, building, industrial and automotive componentsectors. Revenue Underlying Operating Profit ------- -------- --------- ------- -------- --------- 2005 Growth at Growth at 2005 Growth at Growth at actual constant actual constant rates rates rates rates £m % % £m % %---------------- ------- -------- --------- -------- --------- --------Organic 127.7 13.5 12.4 19.4 22.0 19.8Acquisitions 16.7 2.6---------------- ------- -------- --------- -------- --------- --------Total 144.4 18.0 16.9 22.0 27.2 25.0---------------- ------- -------- --------- -------- --------- -------- ETL SEMKO had an excellent year in 2005, with organic growth of 12.4% in revenueand 19.8% in operating profit, at constant exchange rates. In total, revenueincreased 16.9% in 2005 over 2004 and operating profit increased 25.0%. ETLSEMKO's organic operating margin was 15.2% in 2005, compared to 14.3% in 2004.The margin increase was due to operational efficiencies and the turnaround ofunderperforming areas. China continued to report excellent organic growth driven by the increase inexports of consumer and commercial goods. North America also performed well withthe implementation of a more focused business development strategy andimprovements in efficiency, leading to organic growth in all service sectors. Anew automotive component testing laboratory was opened in Shanghai at the end ofthe year and is already generating revenue. In line with the Group's strategy of expanding services to clients, ETL SEMKOmade two infill acquisitions in the US in 2005. Omega Point Laboratories (OPL)was acquired in April for £2.9m. OPL provides building products services inTexas, US and extends the territory covered by the Group's existing services.International Approvals Laboratory based in Colorado, which provideselectromagnetic compatibility (EMC) testing, was acquired in December for £0.6m. At the end of 2005, Intertek acquired KPMG's systems certification businesses inIndia and the Middle East for consideration of £4.6m. As explained earlier, from1 January 2006, all Intertek's systems certification business will beamalgamated within ETL SEMKO. This acquisition provides Intertek with entry intothe systems certification market in key territories from which other Intertekservices can be offered. The outlook for ETL SEMKO is good, with the growth trend in China expected tocontinue and further development of key industry sectors and country marketswhere Intertek is currently under represented. On 22 February 2006, Intertekacquired the EMC business of Akzo Nobel in Japan for £9.0m. The business enjoysa strong local market position and will give ETL SEMKO more coverage in a keytarget country and market. Caleb Brett Oil, chemical and agri Caleb Brett offers inspection and analytical services to the oil, gas, chemical,agricultural, minerals and pharmaceutical industries. Revenue Underlying Operating Profit ------- -------- --------- ------- -------- --------- 2005 Growth at Growth at 2005 Growth at Growth at actual constant actual constant rates rates rates rates £m % % £m % %---------------- ------- -------- --------- -------- --------- -------- Underlyingorganic total 204.5 17.7 15.4 16.1 10.3 8.1Acquisitions 15.3 3.0---------------- ------- -------- --------- -------- --------- --------Underlyingtotal 219.8 24.0 21.5 19.1 24.8 22.4Less:hurricaneimpact (1.8) (1.2)---------------- ------- -------- --------- -------- --------- --------Total 218.0 23.0 20.5 17.9 17.0 14.7---------------- ------- -------- --------- -------- --------- -------- Caleb Brett performed strongly, with underlying organic growth of 15.4% inrevenue and 8.1% in operating profit, at constant exchange rates. The underlyingorganic margin was 7.9%, compared to 8.4% in 2004. The main reason for thedecline in operating margin was increased investment in marketing for globalagri services and the Eastern European region. Revenue from analytical services(including outsourcing agreements), which accounted for about 36% (2004: 31%) ofCaleb Brett's revenue in 2005, increased by 41.2% in 2005 over 2004. Favourable market conditions helped to drive a very strong performance in theAmericas. Property damage was suffered as a result of the hurricanes and thesubsequent flooding of the New Orleans area, the closure of oil refineries andthe disruption to transport, communications and accessibility, meant that CalebBrett and its clients could not operate from the affected areas. It is estimatedthat revenue was reduced by £1.8m and operating profit was reduced by £1.7m.Recovery is being sought from the Group's insurers and an initial payment of£0.5m was received in February 2006. Apart from the £0.5m, no recovery of costshas been included in the above figures. Asia and Europe also performed well in many areas, particularly analyticalservices. In 2005, new outsourcing contracts were gained with Rolls-Royce in theUK and Kodak in the UK and France. Caleb Brett made seven acquisitions in 2005 costing £33.9m in total. The largestacquisition was Automotive Research Laboratories (ARL) in the US which wasacquired in November for £20.1m. ARL is one of only two international marketleaders providing independent testing services for automotive fuels andlubricants for regulatory and performance standards. ARL complements theexisting downstream oil and chemical business in Caleb Brett by extending itsrange of support testing services from the refinery into the automotiveindustry. PARC Technical Services business was acquired in August for £4.1m.PARC operates pilot plants that simulate oil refineries, chemical plants andautomotive test engines. Its world class expertise and equipment stronglysupplements the current downstream testing and inspection services provided byCaleb Brett, extending significantly the reach of Caleb Brett into this industryand further up the value chain of supply. Caleb Brett acquired the Westport Technology Center from Halliburton in Octoberfor £5.4m. Westport, based in Texas, provides high end exploration productionlaboratory services to Halliburton and the upstream oil industry, includingconsulting and project management. This acquisition follows Intertek'soutsourcing strategy of operating customers' analytical laboratories which arecritical but not core to the customers' business. As well as widening CalebBrett's upstream analytical services, Westport also brings new and uniqueanalytical technology into the Group, which can be developed internationally. In November, Caleb Brett acquired Lintec Testing Services Ltd in the UK forconsideration of £3.3m. Lintec performs marine fuel and lubricant testing forthe shipping industry and complements Caleb Brett's existing marine business. In addition to the above, Caleb Brett made three other infill acquisitions inthe US and Europe for consideration of £1.0m. The outlook for Caleb Brett is positive with organic growth expected fromunderlying growth in the market, new regulations such as the EU RoHS directiveand the Ultra Low Sulphur regulations in the US and increased operationalefficiencies. The results in 2006, will benefit from the inclusion of a fullyear's results from the acquisitions made in 2005 and the new outsourcingcontracts. The pipeline of potential outsourcing projects remains strong and thestrategy of supplementing organic growth with acquisitions will continue. FTS Government services FTS works with governments to check the safety and quality of imports, verifyduty collection and provide cargo security services. FTS also provides technicalinspection services. Revenue Underlying Operating Profit ------- -------- --------- ------- -------- --------- 2005 Growth at Growth at 2005 Growth at Growth at actual constant actual constant rates rates rates rates £m % % £m % %---------------- ------- -------- --------- -------- --------- --------Underlying 74.5 10.2 10.2 18.3 32.6 31.7Less: closurecosts - (2.0)---------------- ------- -------- --------- -------- --------- --------Total 74.5 10.2 10.2 16.3 18.1 17.3---------------- ------- -------- --------- -------- --------- -------- FTS reported excellent growth in 2005 over 2004, with 10.2% growth in revenuesand 31.7% growth in underlying operating profit, at constant rates. Theunderlying margin was 24.6%, up from 20.6% in 2004. The pre-shipment inspection (PSI) contracts in Venezuela and Nigeria, whichaccounted for 37% of FTS revenue in 2005, terminated in the year. The Venezuelancontract ended on 31 August 2005 and the Nigerian contract ended on 31 December2005, resulting in closure costs of approximately £2.0m. Excluding these costs,operating profit increased 31.7% at constant exchange rates. New contracts gained in the year were a cargo scanning contract in Guinea andstandards contracts in Nigeria and Kenya. These did not have a material impacton 2005 results. Pre-shipment inspection contracts with the governments ofBangladesh, Ecuador, Malawi and Mozambique were renewed. The loss of the Nigeria and Venezuela contracts will significantly impact theresults of FTS in 2006. PSI contracts provide a valuable service to clientgovernments and they are expected to continue in the future, albeit in a varietyof forms. The Group's strategy is to continue providing these services and todevelop new and existing PSI and standards contracts, implementing cargoscanning solutions for clients, developing new customs services and expandingtechnical inspection services. Central overheads Central overheads, comprise the costs of head office functions such as theBoard, Group finance, treasury and tax, investor relations, Company Secretariat,business development, Group IT, internal audit, claims management and centralcompliance. 2005 Growth* £m % -------- ---------Underlying central costs (11.4) (65.2)Less: court judgment (2.6) -------- ---------Total (14.0) (102.9) -------- ---------* growth at actual and constant exchange rates is the same. Underlying central costs increased by 65.2% to £11.4m in 2005. Central costsincreased by about 25% due to increased headcount in human resources and thebusiness development and website development teams, a donation to the Tsunamiappeal and costs associated with the installation of a new global consolidationsystem. The balance was due to a high level of legal costs in the defence ofongoing claims which are described as contingent liabilities. The Group's policyis to charge costs incurred in connection with claims which arise fromdiscontinued business and from events prior to the Group's flotation in 2002, tocentral overheads. Costs for claims arising in subsequent years and forcontinuing business are charged to the operating division concerned. The adjustment of £2.6m relates to an old claim dating back to 1996, which wascontested in court and unexpectedly resulted in an adverse judgment. Thejudgment has been appealed and is scheduled to be heard in May 2006. Net financing costs The Group reported finance income in 2005 of £3.5m (2004: £4.2m). This comprisedthe expected return on pension assets, interest on bank balances and a gain onthe re-measurement of interest rate swaps to fair value. The Group's finance expense for 2005 was £9.4m compared to £12.1m in 2004. Thecharge comprised interest on borrowings, pension interest costs and otherfinancing fees. The decrease was primarily due to the non-recurring amortisationof debt issuance costs in 2004 of £3.4m following the refinancing that tookplace in December 2004. Profit before taxation Profit before tax was £79.4m compared to £74.4m in 2004, mainly due to the goodtrading performance in the year and a profit of £1.6m on the disposal of theGroup's interest in an associate company. Taxation Income tax expense for 2005, was £18.7m (2004: £19.6m), comprising a current taxcharge of £24.1m (2004: £19.5m) less a deferred tax credit of £5.4m (2004:charge £0.1m). The effective tax rate was 23.6%, down 2.7% from 2004. The mainreason for the reduction in the effective tax rate was the recognition ofdeferred tax assets due to improved taxable income in certain jurisdictions. Theeffective tax rate is expected to be sustainable at close to current year levelsfor the short to medium-term. Profit for the year Profit for the year after tax was £60.7m (2004: £54.8m) of which £57.1m (2004:£52.0m) was attributable to equity holders of the Company. Minority interests Profit attributable to minority shareholders was £3.6m in 2005 (2004: £2.8m).The increase was mainly due to the strong growth in the Group's non-wholly ownedsubsidiaries in China. Earnings per share As set out in note 2, basic earnings per share in the year were 36.8p (2004:33.7p), an increase of 9.2%. An underlying earnings per share calculation isalso shown which removes the impact of amortisation of intangibles andimpairment of goodwill to give basic underlying earnings per share of 39.5p(2004: 34.6p), an increase of 14.2%. Dividend During the year, the Group paid total dividends of £16.9m (2004: £14.4m), whichcomprised £10.8m in respect of the final dividend paid on 17 June 2005, at therate of 7.0p per share and £6.1m being the interim dividend in respect of theyear ended 31 December 2005, paid on 15 November 2005 at a rate of 3.9p pershare. These amounts were charged to retained earnings. Since the balance sheetdate, the Directors proposed a final dividend in respect of the year ended 31December 2005, of 8.1p per share (2004: 7.0p) making a full year dividend of12.0p per share (2004: 10.4p), an increase of 15.4% over last year. Cash and liquidity Cash generated from operations was £96.7m for 2005, compared to £101.9m for2004. The decline of 5.1% was mainly due to an increase in trade and otherreceivables of £23.7m. In February 2006, the Group received £4.5m from theGovernment of Nigeria which reduced FTS debtors and £0.5m from the Group'sinsurers in connection with the hurricane claim. Cash outflows from investingactivities in 2005 were £71.0m (2004: £52.2m), up 36.0%. The main outflows were£44.5m (2004: £26.6m) for the acquisition of subsidiaries and £31.3m (2004:£28.2m) for the acquisition of property, plant and equipment. The Group received£2.7m (2004: £nil) for the disposal of its interest in an associate. Net cashoutflows from financing activities were £6.3m (2004: £53.7m), which comprisedproceeds from the issue of share capital following the exercise of employeeshare options of £3.8m (2004: £1.1m) and the draw down of debt £62.8m (2004:£165.7m), less the repayment of borrowings £53.1m (2004: £202.0m), dividendspaid to minorities £2.9m, (2004: £4.1m) and dividend paid to Group shareholders£16.9m (2004: £14.4m). Interest bearing loans and borrowings were £190.7m at 31 December 2005, anincrease of 15.6% over 2004. The increase comprised cash out flow of £9.7m whichwas mainly used to finance acquisitions and exchange adjustments of £16.1mprincipally due to the retranslation into sterling of borrowings denominated inUS dollars and HK dollars. Cash and cash equivalents at 31 December 2005, were£50.8m, a decrease of 3.2% over 2004. Acquisitions and disposals As described earlier, during 2005 the Group made 12 acquisitions and onedisposal. The net cash outflow was £44.5m (2004: £26.6m) for the acquisition ofsubsidiaries and the Group received £2.7m (2004: £nil) for the disposal of itsinterest in an associate. Additional deferred consideration of £1.1m has beenaccrued, which may be payable if performance targets are met by certain of theacquired companies. Litigation From time to time, the Group is involved in claims and lawsuits incidental tothe ordinary course of the business, including claims for damages, negligenceand commercial disputes regarding inspection and testing and disputes withformer employees. The Group is not currently party to any legal proceedings other than ordinary litigation incidental to the conduct of business. At 31 December 2005, the Group had provisions against future claims of £8.0m(2004: £4.8m). The amount provided for claims and litigation relies onmanagement's informed judgment of the circumstances surrounding the claim, thecosts likely to be incurred in defending the claim and advice from legalexperts. The majority of claims made against Intertek's subsidiary companies fall withinthe Caleb Brett division. While commercial disputes are often settled,occasionally Caleb Brett will enter into a trial process. In November 2005, oneclaim in Caleb Brett, dating back to 1996, was contested in court andunexpectedly resulted in an adverse judgment. This decision is being appealedbut in the meantime, costs of £2.6m were incurred in 2005, by way of judgmentand legal fees. In 1999, Caleb Brett Canada (now called Intertek Testing Services Canada)entered into Collateral Management Agreements (CMA) with two trading companies.The agreements provided for Caleb Brett India to manage the storage and releaseof vegetable oil from warehouses in India. As a result of the actions of aformer rogue employee of Caleb Brett India, various quantities of oil werereleased without authorisation, leading to the commencement of recovery actionsagainst Caleb Brett in Singapore and London. The Singapore proceedings wereresolved by an out of court settlement with the involvement of insurers.However, the London proceedings, which comprise subrogated claims by MarineCargo Underwriters against Intertek Testing Services (ITS) Canada Ltd and CalebBrett India Pvt Ltd, claiming reimbursement of US$6.9m, have not resulted in asettlement and a trial is scheduled to commence on 20 March 2006. Caleb Brettbelieves that it had adequate insurance in place to cover the CMA work and has astrong legal defence against these claims. Between 1992 and 2001, the Puerto Rico Electric Power Authority (PREPA)contracted Caleb Brett to perform independent testing services. In August 2002,PREPA filed a lawsuit against Caleb Brett in the federal district court ofPuerto Rico. PREPA is seeking unspecified damages, alleging that Caleb Brettfalsified test results and engaged in a conspiracy with fuel suppliers toprovide off-specification fuel for on-specification prices during the 1992-2000period. Caleb Brett has filed a motion to dismiss PREPA's complaint, on the grounds thatthe claims are time barred by the applicable statute of limitations. Caleb Brettbelieves that it has substantial defences to the plaintiff's claims andcontinues to defend itself vigorously. At this point in the litigation however,it is impossible to predict the outcome with any degree of certainty. A processof fact and expert discovery began in earnest in the second half of 2005. Thecourt has set a deadline of 30 June 2006, for the conclusion of this discovery.No trial date has been set. In May 2004, Caleb Brett filed a petition in Texas state court against CertainUnderwriters at Lloyd's of London and other underwriters seeking a declarationthat certain policies issued by the Underwriters are in full force and effect,and that the insurers subscribing thereto must indemnify and defend Caleb Brettin the case of PREPA v Caleb Brett USA Inc in federal court in Puerto Rico. Atthis time, only limited discovery has taken place and it is impossible topredict the outcome with any degree of certainty. The outcome of the litigation to which Intertek Group companies are party to,cannot be readily foreseen. Based on information currently available, thedirectors consider that the cost to the Group of an unfavourable outcome arisingfrom such litigation is unlikely to have a materially adverse effect on thefinancial position of the Group in the foreseeable future. Consolidated income statementFor the year ended 31 December 2005 2005 2004 Notes £m £m-------------------------------- -------- --------- ---------Revenue 1 580.1 499.6Cost of sales (447.6) (385.0)-------------------------------- -------- --------- ---------Gross profit 132.5 114.6-------------------------------- -------- --------- ---------Amortisation of intangible assets (2.1) (1.4)Impairment of goodwill (2.0) -Other administrative expenses (45.4) (31.6)-------------------------------- -------- --------- ---------Total administrative expenses (49.5) (33.0)-------------------------------- -------- --------- ---------Group operating profit 1 83.0 81.6-------------------------------- -------- --------- ---------Finance income 3.5 4.2Finance expense (9.4) (12.1)-------------------------------- -------- --------- ---------Net financing costs (5.9) (7.9)-------------------------------- -------- --------- ---------Share of profit of associates 0.7 0.7Profit on sale of interest in associate 1.6 -------------- --------------------- -------- --------- ---------Profit before 79.4 74.4taxationIncome tax expense (18.7) (19.6)-------------------------------- -------- --------- ---------Profit for the year 60.7 54.8-------------------------------- -------- --------- ---------Attributable to:Equity holders of the Company 57.1 52.0Minority interest 3.6 2.8-------------------------------- -------- --------- ---------Profit for the year 60.7 54.8-------------------------------- -------- --------- --------- Earnings per share 2-------------------------------- -------- --------- ---------Basic 36.8p 33.7p-------------------------------- -------- --------- ---------Diluted 36.5p 33.4p-------------------------------- -------- --------- --------- Consolidated balance sheetAs at 31 December 2005 2005 2004 £m £m------------------------------ ---------- ----------AssetsProperty, plant and equipment 115.9 88.5Goodwill 55.7 33.5Other intangible assets 12.8 3.5Investments in associates 0.7 1.8Deferred tax assets 14.4 5.5------------------------------ ---------- ----------Total non-current assets 199.5 132.8------------------------------ ---------- ---------- Inventories 3.1 1.5Trade and other receivables 146.3 109.8Derivative financial instruments 1.7 -Cash and cash equivalents 50.8 52.5------------------------------ ---------- ----------Total current assets 201.9 163.8------------------------------ ---------- ---------- Total assets 401.4 296.6------------------------------ ---------- ---------- LiabilitiesInterest bearing loans and borrowings (15.3) (14.0)Current taxes payable (25.8) (19.5)Trade and other payables (93.9) (75.9)Provisions (8.9) (5.4)------------------------------ ---------- ----------Total current liabilities (143.9) (114.8)------------------------------ ---------- ---------- Interest bearing loans and borrowings (175.4) (150.9)Deferred tax liabilities (3.4) (0.6)Net pension liabilities (17.8) (16.1)Other payables (1.2) (0.5)------------------------------ ---------- ----------Total non-current liabilities (197.8) (168.1)------------------------------ ---------- ---------- Total liabilities (341.7) (282.9)------------------------------ ---------- ---------- Net assets 59.7 13.7------------------------------ ---------- ---------- EquityShare capital 1.6 1.5Share premium account 238.2 234.5Other reserves 13.4 13.5Retained earnings (201.3) (241.5)------------------------------ ---------- ---------- Total equity attributable to equity holders of the 51.9 8.0CompanyMinority interest 7.8 5.7------------------------------ ---------- ---------- Total equity 59.7 13.7------------------------------ ---------- ---------- Consolidated statement of cash flowsFor the year ended 31 December 2005 2005 2004 £m £m------------------------------ ---------- ----------Operating activitiesProfit for the year 60.7 54.8Adjustments for:Depreciation charge 22.0 18.4Amortisation of intangibles 2.1 1.4Impairment of goodwill 2.0 -Share option expense 1.9 1.0Share of profit of associates (0.7) (0.7)Profit on sale of interest in associate (1.6) -Net financing costs 5.9 7.9Income tax expense 18.7 19.6Loss on disposal of fixed assets 0.1 0.2------------------------------ ---------- ----------Operating profit before changes in working capital andprovisions 111.1 102.6Decrease/(increase) in inventories 0.1 (0.8)Increase in trade and other receivables (23.7) (8.9)Increase in trade and other payables 5.9 11.7Increase/(decrease) in provisions 3.3 (2.7)------------------------------ ---------- ----------Cash generated from operations 96.7 101.9Interest paid (6.5) (6.9)Income taxes paid (17.8) (16.0)------------------------------ ---------- ----------Cash flows from operating activities 72.4 79.0------------------------------ ---------- ---------- Investing activitiesProceeds from sale of property, plant and equipment 0.3 0.2Proceeds from disposal of interest in associate 2.7 -Proceeds from disposal of own shares by ESOT 0.4 -Interest received 0.6 1.6Dividends received from associated undertakings 0.8 0.8Acquisition of subsidiaries, net of cash acquired (44.5) (26.6)Acquisition of property, plant and equipment (31.3) (28.2)------------------------------ ---------- ----------Cash flows from investing activities (71.0) (52.2)------------------------------ ---------- ---------- Financing activitiesProceeds from the issue of share capital 3.8 1.1Drawdown of debt 62.8 165.7Repayment of debt (53.1) (202.0)Dividends paid to minorities (2.9) (4.1)Dividends paid (16.9) (14.4)------------------------------ ---------- ----------Cash flows from financing activities (6.3) (53.7)------------------------------ ---------- ---------- Net decrease in cash and cash equivalents (4.9) (26.9)Cash and cash equivalents at 1 January 52.5 81.5Effect of exchange rate fluctuations on cash held 3.2 (2.1)------------------------------ ---------- ----------Cash and cash equivalents at 31 December 50.8 52.5------------------------------ ---------- ---------- Consolidated statement of recognised income and expense 2005 2004 £m £m --------- ---------Foreign exchange translation differences (1.7) 7.1Actuarial gains and losses on defined benefit pension (3.7) (9.0)schemesTax on income and expenses recognised directly in equity 1.4 2.8Effective portion of changes in fair value of cash flow 2.6 -hedges --------- --------------------------------------------Net (expense)/income recognised directly in equity (1.4) 0.9Profit for the year 60.7 54.8----------------------------------- --------- ---------Total recognised income and expense for the year 59.3 55.7----------------------------------- --------- ---------Effect of change in accounting policy:Effect of adoption of IAS 32 and 39, net of tax, on 1January 2005 (with 2004 not restated) on:Hedging reserve (1.0) ------------------------------------ --------- --------- 58.3 55.7----------------------------------- --------- --------- Total recognised income and expense for the yearattributable to:Equity holders of the Company 55.7 52.9Minority interest 3.6 2.8----------------------------------- --------- ---------Total recognised income and expense 59.3 55.7----------------------------------- --------- --------- 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 segments The Group comprises the following main business segments: Labtest, which tests and inspects consumer goods including textiles, toysfootwear and hardlines.ETL SEMKO, which tests and certifies commercial and electrical consumerproducts, telecommunication equipment, building products, automotive componentsand heating, ventilation and air conditioning equipment .Caleb Brett, which tests and inspects oil, chemicals and agricultural produce.FTS, which provides trade services to standards bodies and governments.Central overheads comprise the costs of the corporate head office andnon-operating holding companies and other costs which are not controlled by theoperating divisions. Geographical segments All the business segments are managed on a worldwide basis but can be dividedinto the following geographic regions: Americas; Europe, the Middle East and Africa; Asia 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 reportingBusiness analysis (primary segment) Labtest ETL SEMKO Caleb Brett FTS Central Eliminations Consolidated overheads--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------ 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m £m £m £m £m £m £m £m £m--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------ Revenue fromexternalcustomers 143.2 132.3 144.4 122.4 218.0 177.3 74.5 67.6 - - - - 580.1 499.6Inter-segmentrevenue 10.5 14.3 10.2 8.4 12.1 9.8 37.9 33.2 - - (70.7) (65.7) - ---------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------ Revenue 153.7 146.6 154.6 130.8 230.1 187.1 112.4 100.8 - - (70.7) (65.7) 580.1 499.6--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------ Operatingprofit beforeamortisationand impairment 44.9 43.5 22.0 17.3 17.9 15.3 16.3 13.8 (14.0) (6.9) - - 87.1 83.0Amortisationof intangibles (0.2) - (1.2) (0.8) (0.7) (0.6) - - - - - - (2.1) (1.4)Impairment ofgoodwill (2.0) - - - - - - - - - - - (2.0) ---------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------Groupoperatingprofit 42.7 43.5 20.8 16.5 17.2 14.7 16.3 13.8 (14.0) (6.9) - - 83.0 81.6 ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ Net financingcosts (5.9) (7.9)Share ofprofit ofassociates 0.7 0.7Profit on saleof interest inassociate 1.6 -Income taxexpense (18.7) (19.6)--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------Profit for theyear 60.7 54.8--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------Segment assets 57.9 45.4 85.7 67.0 158.1 100.2 26.6 20.5 4.3 2.5 - - 332.6 235.6Investment inassociates 0.7 1.8Unallocatedassets 68.1 59.2 ------ ------Total assets 401.4 296.6 ------ ------ Segmentliabilities 20.3 16.0 27.2 19.3 37.3 26.1 12.0 12.4 6.5 5.7 - - 103.3 79.5Unallocatedliabilities 238.4 203.4 ------ ------ Totalliabilities 341.7 282.9 ------ ------ Depreciation 5.3 4.5 6.9 6.1 8.7 6.7 1.0 1.0 0.1 0.1 - - 22.0 18.4--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------Capitalexpenditure 7.4 7.7 9.3 7.2 13.0 10.3 1.5 2.9 0.1 0.1 - - 31.3 28.2--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------ Segment reporting (continued) Geographic analysis (secondary segment) Americas Europe, Middle Asia Consolidated East and Africa----------- ------ ------ ---------- --------- ------ ------ ------ ------ 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m £m £m----------- ------ ------ ---------- --------- ------ ------ ------ ------Revenue fromexternalcustomers 203.6 169.0 186.8 166.3 189.7 164.3 580.1 499.6----------- ------ ------ ---------- --------- ------ ------ ------ ------Segmentresult 21.0 16.6 2.5 12.0 59.5 53.0 83.0 81.6----------- ------ ------ ---------- --------- ------ ------ ------ ------Amortisationof intangibles 1.3 0.8 0.6 0.6 0.2 - 2.1 1.4----------- ------ ------ ---------- --------- ------ ------ ------ ------Impairmentof goodwill - - 2.0 - - - 2.0 ------------ ------ ------ ---------- --------- ------ ------ ------ ------Segment assets 141.2 86.3 113.3 96.4 78.1 52.9 332.6 235.6----------- ------ ------ ---------- --------- ------ ------ ------ ------Capitalexpenditure 10.4 8.5 9.3 9.4 11.6 10.3 31.3 28.2----------- ------ ------ ---------- --------- ------ ------ ------ ------ 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 underlying earnings per share has also beencalculated and is based on earnings excluding the effect of amortisation ofintangibles and goodwill impairment. It has been calculated to allowshareholders to gain a better understanding of the trading performance of theGroup. Details of the underlying earnings per share are set out below: 2005 2004Based on the profit for the year: £m £m------------------------------------ ------- -------Profit attributable to equity shareholders 57.1 52.0Amortisation of intangibles 2.1 1.4Impairment of goodwill 2.0 ------------------------------------- ------- -------Underlying earnings 61.2 53.4------------------------------------ ------- -------Number of shares (millions):------------------------------------ ------- -------Basic weighted average number of shares 155.1 154.4Potentially dilutive share options* 1.3 1.1------------------------------------ ------- -------Diluted weighted average number of shares 156.4 155.5------------------------------------ ------- ------- Basic earnings per share 36.8p 33.7pOptions (0.3)p (0.3)p------------------------------------ ------- -------Diluted earnings per share 36.5p 33.4p------------------------------------ ------- ------- Basic underlying earnings per share 39.5p 34.6pOptions (0.4)p (0.3)p------------------------------------ ------- -------Diluted underlying earnings per share 39.1p 34.3p------------------------------------ ------- ------- \* The weighted average number of shares used in the calculation of the dilutedearnings per share for the year to 31 December 2005, excludes 1,456,156potential shares (2004: 56,280) as these were not dilutive in accordance withIAS 33: Earnings per share. 3 ANNUAL REPORT The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2005 or 2004 but is derivedfrom the 2005 accounts . Statutory accounts for 2004, which were prepared underUK GAAP, have been delivered to the registrar of companies, and those for 2005,prepared under accounting standards adopted by the EU, will be delivered in duecourse. The auditors have reported on those accounts; their reports were (i)unqualified, (ii) did not include references to any matters to which theauditors drew attention by way of emphasis without qualifying their reports and(iii) did not contain statements under section 237(2) or (3) of the CompaniesAct 1985. This information is provided by RNS The company news service from the London Stock Exchange