29th Feb 2012 07:00
Interserve STRONG PERFORMANCE AND GOOD STRATEGIC PROGRESS Annual Results 2011 Interserve, the international support services and construction group, reportsa strong performance with its annual results for the year ended 31 December2011. 2011 2010 Gross revenue* £2,320m £2,315m +0.2% Headline pre-tax profit* £72.8m £69.6m +4.6% Profit before tax £67.1m £64.1m +4.7% Headline earnings per share* 49.3p 42.8p +15.2% Net debt £44.2m £53.8m -17.8% Full-year dividend 19.0p 18.0p +5.6%Strong performance * Headline EPS up 15 per cent * Full-year dividend up 6 per cent to 19.0 pence per share
* Full-year gross operating cash conversion of 118 per cent (2010: 105 per
cent) Strong financial position
* Net debt reduced by 18 per cent to £44.2 million
* Refinancing completed - committed financing of £246 million with maturity
dates between 2015 and 2017
Operational and strategic highlights
* £5.6 billion future workload at 31 December 2011, up from £5.3 billion a
year ago; more than £2 billion of new orders
* Support Services: gains in margin; UK expansion into new areas of activity
(Department for Work and Pensions and Justice)
* Construction: resilient despite competitive pressures; strong performances
in health and education
* Equipment Services: early-cycle recovery; strong performances in Australia,
Pacific Rim and Saudi Arabia
Chief Executive Adrian Ringrose commented:
"This was a good year for Interserve. We grew earnings, generated strong cash flow and made good strategic progress in entering new markets.
"We made further excellent advances in increasing the margins in SupportServices and are on track to reach our target for the division of 5 per cent bythe end of 2013. Construction has done well both in the UK and internationallyin a tough market where margin pressure and increased competition have had aneffect. Equipment Services is emerging from the bottom of the cycle in goodshape, improving margins and making a good return on capital."We won over £2 billion of work during the year, expanding our future workloadto £5.6 billion. We anticipate stable trading in 2012, with pressure onConstruction being balanced by further improvements in Support Services'margins and recovery in Equipment Services. Looking further ahead, with goodpotential in our existing markets, expansion into new markets and our strongbalance sheet, our medium-term growth prospects are strong." - Ends -
For further information please contact:
Adrian Ringrose, Chief Executive 0118 932 0123 Tim Haywood, Group Finance Director 0118 932 0123 Robin O'Kelly, Director of Communications 0118 960 2313 Matt Hickman, Investor Relations Manager 0118 960 2280 Liz Morley / Tom Eckersley, Maitland 020 7379 5151
About Interserve
Interserve's vision is to be the Trusted Partner of all our stakeholders. Weare one of the world's foremost support services and construction companies,operating in the public and private sectors in the UK and internationally. Weoffer advice, design, construction, equipment and facilities managementservices for society's infrastructure. Interserve is based in the UK and islisted in the FTSE 250 index. We have gross revenue of £2.3 billion and aworkforce of over 50,000 people worldwide. Website: www.interserve.com.* This news release, the Chairman's Statement and the Operational and Financialreviews include a number of non-statutory measures to reflect the impact ofnon-trading and non-recurring items. See note 14 to the consolidated financialstatements for a reconciliation of these measures to their statutoryequivalents.
Chairman's Statement
I am pleased to report a year of significant achievement and progress for Interserve. In continued difficult markets we have delivered growing earnings, strong cash flows and an improved order book. At the same time we have undertaken significant new developments towards our strategic objectives to grow shareholder value.
In recent years the Group has begun a significant transformation in the scopeof our business, applying our core skills in new markets where we believe wecan both grow and deliver high value.In the UK our Support Services business, as well as taking steps to improvecustomer value, efficiency and margins in our existing markets, has invested inextending our management skills into new areas of outsourcing activity. Duringthis last year, for example, we started our innovative partnership serving theDepartment for Work and Pensions in its Work Programme, and are now shortlistedin bidding to support the Ministry of Justice in its framework programme formanagement of offenders. Overseas we have invested in developing the scope ofbusiness activities in our existing high growth markets as well as extendinginto major new territories - such as Saudi Arabia, India and the USA.We believe the ongoing opportunities for continuing this transformation of ourbusiness - both in the UK and overseas - provide significant upside potentialin the medium and long term, notwithstanding the ongoing economicuncertainties. This is the primary engine for achieving our growth ambitions.Managing long-term client relationships is a major strength and one of the keyingredients in the excellent forward visibility of our future workload. Theactions we have been taking in Support Services should continue to improvemargins. There are also indications that the recovery in Equipment Services'international markets, begun in the second half of 2011, will now bemaintained. Together we anticipate these developments can more than offset theshort-term impact on Construction's performance resulting from the currentmargin and volume pressures.This year I am reporting separately on the role and effectiveness of the Boardin our Corporate Governance review. However, on behalf of the Board I wouldlike to thank all of our people for their continued commitment and for theirwillingness to go the extra mile in delivering outstanding service to ourcustomers. The success of our business is founded on having the right peopleand supporting them in their development. One of our key programmes identifiesand develops the people who will form the core of our senior leadership in theyears to come. We offer all our people a wealth of training and developmentopportunities including apprenticeships and a `Skills for Life' numeracy andliteracy programme. We also run return-to-work schemes for the long-termunemployed.Reflecting our confidence in the medium-term prospects and in our strategy fordeveloping the Group, we are recommending an increased final dividend of 13.0p(2010: 12.4p), bringing the total dividend for the year to 19.0p (2010: 18.0p),an increase of 5.6 per cent. The final dividend will be paid on 24 May 2012 toshareholders on the register at the close of business on 10 April 2012.Lord BlackwellChairman29 February 2012Operational review Target 2011 2010 2009 2008 2007
Workload for next Visibility over 78% 73% 79% 79% 70% year
70% of next 12 months revenue (consensus)
Headline earnings Double headline 49.3p 42.8p 49.7p 46.7p 39.9p per share ("EPS") EPS over the five
years to 2015
Operating cash 100% over medium 155.3% 122.1% 116.9% 88.6% 108.7% conversion (1), term
3-year rolling average Annualised staff Below 10 per cent 7.0% 8.6% 5.6% 8.6% 9.9% turnover(2) Annualised Halve the rate by 310 377 344 429 444 all-employee 2020 from a 2010 accident base
incidence rate
(1) See note 14 for a definition of operating cash conversion
(2) Staff turnover measures the proportion of managerial, technical and office-based staff leaving voluntarily over the course of the period.
We deliver our operational services through three divisions: Support Services,Construction and Equipment Services. We also have a Group Services function,which consists of the Board and a range of central services, and ourDevelopments division, which is responsible for managing our investmentactivities and for leading our strategic developments. We allocate all centralcosts to Group Services, including those related to our financing and centralbidding activities, and show the performance of our investments separately asthe Investments segment. Group Services' costs in 2011 were £20.4 million(2010: £20.0 million).
Future workload
Our future workload comprises forward orders and pipeline. Forward orders arethose for which we have secured contracts in place, and pipeline coverscontracts for which we are in bilateral negotiations and on which final termsare being agreed. We include our share of work won by our internationalassociates. 31 December 2011 31 December 2010 Forward orders £4.5 billion £4.3 billion Pipeline £1.1 billion £1.0 billion Future workload £5.6 billion £5.3 billion Coverage of next year's 78% 73% revenue (analyst consensus) Support Services
Support Services provides a broad range of outsourced services to the public and private sectors, predominantly in the UK but also increasingly in the Middle East, the majority of which we integrate and deliver ourselves.
Our support service activities in the Middle East have previously been reportedwithin our Construction segment. In view of the increasing scale of theseoperations we have moved them into our Support Services results (the 2010figures have been adjusted to the same basis - see note 3 to the financialstatements).Results summary: 2011 2010 Change Revenue - UK £1,007.3m £1,024.8m -1.7% - International1 £25.9m £23.7m +9.3%
Contribution to Total Operating £40.0m £28.5m +40.4%
Profit - UK £36.4m £25.1m +45.0% - International1 £3.6m £3.4m +5.9% Operating margin (UK) 3.6% 2.4% +1.2%pts
Operating margin (International)2 15.1% 14.8% +0.3%pts
1(share of associates)
2 Operating margin for our associates is calculated on operating profit, comprising post-tax profit of £3.6m (2010: £3.4m) plus interest and tax of £ 0.3m (2010: £0.1m)
Operational efficiencies in Support Services delivered a further significantimprovement in contribution to Total Operating Profit, despite flat revenue. Asusual in this business the profit was somewhat second-half weighted, althoughwe anticipate that there will be less difference between the first and secondhalf margins - which were 3.1 per cent and 4.1 per cent respectively - once thegains from our margin-improvement programme are fully achieved.There were three main contributors to our margin improvement programme: first,the integration of our Security operation into our Commercial business, whichhas had an important impact on the indirect cost base; second, we havecontinued to make significant improvements to procurement; and third, we havefurther developed systems and procedures to increase productivity across ourmajor contracts.The UK market for outsourced services is not yet exhibiting the full growthpotential that was expected to result from the government's austerity programmeand from continued private sector efficiency drives. While there is still areasonable flow of opportunities, we have not yet seen the anticipated shift inthinking, particularly among local authorities, that will lead to a morestructural approach to outsourcing as a way to maintain services whileaddressing costs. Meanwhile clients seek to restrain discretionary spend,resulting in some volume pressure.However, we believe that the rise in demand for services from a growing andageing population will accelerate the long-term trend towards public servicesoutsourcing, and we continue to see good potential in this market given thelimited number of service providers with our ability to deliver full-scope,integrated services contracts. Opportunities such as the MoJ's custodialservices framework show that there is an appetite for innovation in the publicsector and we are actively pursuing such new business streams. Equally, in theprivate sector we continue to see growing evidence of clients seeing thebenefit of outsourcing, albeit the operating models through which opportunitiesarise are more varied.The Work Programme is another example of government seeking to gain thebenefits of competition and payment by results, and one in which we weresuccessful in 2011. The DWP took the decision to replace all existingwelfare-to-work programmes with a regionally-based series of contracts in whichthe successful bidders would be responsible for delivering vocational training,skills development and employment-focused support to the long-term unemployed.We were successful, in our joint venture with Rehab Group, an Irish charity, inwinning both the Wales and south-west England contracts, which last for fiveyears and are worth approximately £130 million in aggregate.Other significant UK contract wins include: contracts with the DefenceInfrastructure Organisation (DIO) supporting the military bases in Cyprus, theFalkland Islands, Ascension Island and Gibraltar, worth £300 million over fiveyears with possible two-year extensions; a £108 million, two-year extension toour South East Regional Prime contract, also with the DIO; a three-yearextension to our TFM contract with the London Borough of Croydon, worth £30million; and a three-year contract to clean William Hill's retail estate.Internationally, our success was led by industrial services work in Qatar.Dolphin Energy awarded us a five-year contract for maintenance services at itsRas Laffan plant and for supplying management, manpower and equipment boththere and at its offshore platforms and pipelines. We added infrastructuremaintenance services to our existing five-year contract with Qatar Shell GTLand, since the year end, have won a place on its three-year Plant ChangeConstruction Services framework agreement (with a two-year extension option).
The award of these and other contracts means that the division's future workload grew from £4.0 billion to £4.2 billion during the course of the year, and our confidence is further underpinned by additional identified opportunities of around £7 billion.
We are further developing our activities in the Middle East, where the economicprogress of the various economies is increasingly generating requirements foroutsourced services. Qatar's compound GDP growth rate is forecast to be 5.2 percent per annum to 2015, with the UAE at 3.8 per cent. We are also consideringexpanding into other regions where we can combine the expertise gained from ouroutsourcing experience with our knowledge of the local markets gained throughour other operational divisions.
Construction
We work closely with our clients in the UK and internationally, leading thedesign and construction process in the creation of a broad range of buildingsand infrastructure. The majority of the division's UK work comes from low-riskprojects with long-standing clients, and over three-quarters of this activityis in the public and utilities sectors. In the Middle East, where we have beenactive for over 30 years, our client base is more oriented towards the privatesector. However, with the support of our local joint venture partners, ourassociate businesses are characterised by the same focus on developinglong-term working relationships.Results summary: 2011 2010 Change Revenue - UK £731.1m £754.3m -3.1% - International1 £223.7m £239.2m -6.5%
Contribution to Total Operating £34.6m £47.3m -26.8%
Profit - UK £18.0m £24.5m -26.5% - International1 £16.6m £22.8m -27.2% Operating margin (UK) 2.5% 3.2% -0.7% pts
Operating margin (International)2 8.4% 10.3% -1.9% pts
1(share of associates)
2 Operating margin for our associates is calculated on operating profit, comprising post-tax profit of £16.6m (2010: £22.8m) plus interest and tax of £ 2.2m (2010: £1.8m)
United Kingdom
The UK business performed creditably in a very competitive environment, particularly given that the comparative year of 2010 was, by some way, a record. The drop in contribution to UK Total Operating Profit reflects the reduced profitability of projects contracted since the downturn, when competitive pressure had increased. With stable volumes, the margin, at 2.5 per cent, is returning towards the levels we would expect over the longer term.
2011 was a year of success and innovation by our education team. We handed overboth the £77 million flagship Sandwell College (see inset) in West Bromwich forup to 10,000 students, and the £32 million Leeds West Academy, whichincorporates many sustainability features and has achieved a provisional BREEAM`Excellent' rating. Leeds is also the location for two groundbreaking projectswon during the year: at Leeds East Academy we shall use our innovative modular"PodSolve" construction technique, which saves a quarter of the constructioncost and can be applied to both new and retrofit buildings; and we shall bebuilding Richmond Hill Primary School to PassivHaus standards - one of thefirst such schools in the UK. During 2011 we completed the first certified,carbon-neutral, Passivhaus, commercial office to be built in the UK: our ownregional office in Leicester.We have a long and successful association with the health sector. By the end of2011 we had been awarded 13 contracts, worth an aggregate £180 million, underthe new ProCure21+ framework. Projects awarded during the year included a £19 million Research, Innovation, Learning and Development Centre in Exeter andappointment by Nottingham University Hospitals NHS Trust as preferred PrincipalSupply Chain Partner until 2016. We have been similarly successful in the Welshhealth framework, and, in January 2012, were named as a partner in all threeregions in its successor, Designed for Life: Building for Wales 2, which lastsfor four years with a possible two-year extension.Among our infrastructure projects we completed the challenging refurbishment ofthe historic Albert Bridge in London and reopened it to vehicles in Decemberfollowing nearly two years of intensive work. Both our technical expertise andour project management skills were vital in restoring the Grade-II-listedbridge to its former glory while maintaining passage for the busy rivertraffic.Looking forward, we expect that the UK construction market will continue torecede during 2012 and into 2013, before beginning to grow again from 2014. Itis likely that the emphasis of government spending will shift towardsinfrastructure in the shorter term and that the private sector, particularly insouth-east England, will begin to recover before the public sector. We arewell-positioned in key sectors and are managing our resources flexibly so thatwe shall be able to respond swiftly as and when the market returns to growth.Significantly, our UK Construction future workload stands at £1.2 billion,slightly higher than the £1.1 billion at the end of 2010.
International
The majority of our international earnings are generated from our associatebusinesses in the Middle East. Both volumes and profits were affected byincreased caution on the part of our clients as the global economy adjusts tonew patterns of demand. Nevertheless we made good progress with our developmentplans. We acquired a joinery business, Noorco, in Qatar to augment ourcapabilities in interior fit-out and continue to explore other potential growthavenues across the region.We won a number of sizeable contracts in Qatar, our largest market, with amixture of new and long-standing clients. These included two major constructioncontracts at Ras Laffan Industrial City, worth £70 million together, forinfrastructure in the processing and gas supply markets, a project with Nakilatfor the construction of support facilities at a shipyard also at Ras Laffan,and a contract for the design, construction and maintenance of a new fitnesscentre at the world-leading sports tourism destination, Aspire Zone, Doha.The UAE is a regional hub for transport and a range of business services.Despite the current surplus of residential property, demand for hotelaccommodation remains high with hotels operating at greater than 80 per centoccupancy (source: Ernst & Young). The hospitality and leisure sector was animportant contributor in 2011, with works carried out on the Ritz Carlton andfit-out projects on Saadiyat Island's St Regis Hotel and the Sofitel ResortPalm Jumeirah Hotel. We saw a modest upturn in infrastructure work, withcontracts such as the Dubai Roads and Transport Authority's maintenance works,surfacing works on the Dubai-Fujairah Freeway and roads in Umm al Quwain, oneof the smaller emirates, and in the retail sector we secured a £40 millioncontract to build the Fujairah Mall and car park for Majid Al Futtaim.Oman experienced a degree of civil unrest as part of the Arab Spring, which ishaving an impact on the return of tourism and leisure projects. We aretherefore increasing our focus on roads and infrastructure projects, which wesee as more attractive in the short-to-medium term. After the year end we won asignificant contract with Daewoo to build the infrastructure for a new 2,000MWpower station in Sur for the Oman Power and Water Procurement Company.The IMF is forecasting GDP growth of 4.0 per cent for 2012 for the GulfCo-operation Council (GCC) countries, slightly reduced on previous forecastsdue to the resumption of more normal levels of oil production in Qatar andSaudi Arabia which had ramped up in 2011 to compensate for lower output fromLibya. Nevertheless, growth rates in the region are still attractive even ifthe immediate outlook is somewhat subdued, and Qatar in particular, withconstruction output forecast to grow at a compound rate of 7.9 per cent perannum up to 2016 (source: Business Monitor international), remains a marketwith very substantial future prospects from which we are well placed tobenefit.
Equipment Services
Equipment Services (which trades as RMD Kwikform) designs bespoke engineeringsolutions and provides temporary structural equipment for complexinfrastructure and building projects. We have a strong position as one of theleading global suppliers in these specialist markets. We operate across a widerange of geographies and sectors, with a fleet of equipment which we can movearound the world to meet the changing demands in our global markets.Results summary: 2011 2010 Change Revenue £154.3m £139.9m +10.3%
Contribution to Total Operating £13.6m £14.4m -5.6%
Profit Margin 8.8% 10.3% -1.5% pts
With the exception of strong performances from Australia and the Far East, weexperienced weakness in infrastructure spending in 2011, with pricing pressurecontinuing to impact margins. This was exacerbated by the impact of the ArabSpring, particularly on exports to North Africa and to an extent in Bahrain andOman. To address these pressures, we maintained a strong focus on the cost baseand cash generation of our operations, with a number of business units beingrestructured during the year. Although there is still some uncertainty inglobal construction markets we believe that the first half of the year was thelow point in our cycle and trading is showing early signs of recovery: not onlydid profits in the second half exceed those in the first half, they were also15 per cent stronger than those in the second half of 2010.
Regionally:
Middle East and Africa
Trading in the Middle East was affected both by the position of theconstruction market generally and by the impact of the civil disturbances inBahrain, Oman and North Africa, in particular Libya. With the reduction inthese contributions, Saudi Arabia, which we entered for the first time in 2009,became our most successful and largest Middle Eastern market in 2011. Thekingdom has extensive construction and infrastructure plans from which we arebenefitting. An example is the Jubail Highway upgrade connecting Dammam toJubail, the busiest road in the Eastern Province, where we have been involvedin the construction of some major highway intersections involving a number ofbridges for our customer Sinopec.Among the projects we undertook was the Ritz Carlton Hotel in Dubai Marina, forwhich Khansaheb, our UAE Construction associate, was the client. A particularlychallenging project was the design and supply of the supporting equipment forthe construction of a 6.5km tunnel forming part of the Lusail Light RailTransit system in Qatar. Our engineers designed, fabricated and supplied sixcomplete sets of travelling formwork and shoring, each 14m long, which enabledthe contractor to achieve four-day cycles, reducing the construction programmesignificantly. We were subsequently commissioned to design and supply all thesupport and formwork equipment for the tunnel pumping stations and ventilationshafts and are negotiating over further associated work.One aspect of our growth strategy is to develop exports to other parts of theregion. In 2011 this included the Basra Sports City Stadium project in Iraq, a65,000-seater football stadium due to be complete in time for the Gulf Cup
in2013.Australasia and Far East
We had a record year in Australasia and the Far East. This is now EquipmentServices' largest region and is benefitting from healthy demand in theAustralian mining and infrastructure sectors. The Sino Iron project gives anidea of the scale and complexity of the work in which we have been involved.Another example is the Victoria Desalination Plant, currently in the finalstages of construction and the largest of its type built to date in Australia.We have designed and supplied formwork and shoring systems to all areas of thismajor development over the past two years. Prospects in mining and naturalresources remain good, driven in part by the country's access to thefast-growing Chinese and Indian markets. There is little sign yet of aresumption of growth in the Australian commercial sector.Elsewhere in the region Hong Kong performed well as further infrastructurecontracts were let, and we anticipate that this will continue in 2012. A keyproject was our work on the new Cruise Terminal building, which has aconstruction programme of three years and will berth the world's largest cruiseliners. The project drew on not only our engineering skills but also ourlogistics expertise, as we designed and supplied some 3,000 tonnes of formworkand shoring sourced from around the world within a very short lead time.
Europe
Demand in the UK reflected the pressures on the construction sector.Nevertheless performance was resilient and we undertook a number ofhigh-profile projects and developed further innovative products that willmaintain our position at the leading edge of the industry. Our specialistParaslim composite bridge system was used to support the construction of thenew M6 Catthorpe Viaduct Replacement at the intersection of the M6/M1motorways. We also introduced `Megastair', a stair and access system that willbe used on the country's two new aircraft carriers, and `Ascent Screens', aunique set of products which works in tandem with our climbing formwork systemto shield concrete works and protect the surrounding environment from buildingdebris. For the coming year, we see a number of attractive prospects, includingCrossrail, commercial building work in London, waste-to-energy plants and thenuclear sector.Our markets in Spain and Ireland were severely depressed in 2011. We have takenrestructuring actions in both countries and have moved excess fleet out tomarkets with greater potential demand. A general election in Spain in November2011 saw a change in government, and a return to an infrastructure plan is alsoanticipated but with the benefit not likely to be felt until 2013. In Irelandthe outlook is somewhat improved but the country's economic position leavessignificant uncertainty over the infrastructure sector.
Americas
While we have made good progress in integrating and reconfiguring the US operations that we acquired at the end of 2010, the recovery of the construction market remains slower than expected. Our Chilean operation performed well, responding to increased demand in reconstruction work and from the burgeoning mining sector. We expect this to continue in 2012.
Developments - Investments
Developments is responsible for two broad areas: directing the Group's PPPinvestment activities, leading the bid process and managing equity investments;and taking the primary role in driving the Group's strategic development,pursuing acquisitions, exploring new opportunities and leading major, complexbids in market sectors which require cross-divisional involvement. As it is acentral function its costs are allocated to Group Centre and its resultsreflect the performance of our investments. 2011 2010 Change Contribution to Total Operating Profit £6.0m £4.2m +42.9% Interest received on subordinated debt £4.0m £2.8m +42.9%
investments £10.0m £7.0m +42.9%
Our PPP equity investments continue to make a healthy contribution to Groupearnings, with a total contribution to pre-tax profit of £10.0 million. At 31December 2011 we had 22 signed contracts (31 December 2010: 21), of which 19are now operational and three under construction. During the year we were namedpreferred bidder for one more, the Holt Park wellbeing centre in Leeds, andreached financial close just before the end of the year. Also in January 2012we were chosen as the successful bidder for the West Yorkshire Police PFI. Thiswill involve the construction of two new divisional headquarters, custodysuites and a specialist operational training facility (with firearms ranges andpublic-order and driver training facilities), and the provision of FM servicesfor 25 years thereafter. We anticipate that the total value of our constructionand FM services will be approximately £150 million.We have made a significant investment commitment on the signed contracts, ofwhich £45.1 million (31 December 2010: £25.8 million) has already been paid and£13.0 million (31 December 2010: £30.1 million) remained.We expect our portfolio to be cash neutral over the medium term, with newinvestments being funded by disposals of mature projects. With our considerableexpertise and track record in delivering, operating and financing using PPPstructures, we believe we are well placed to benefit from the development ofsimilar funding arrangements for public sector investments. Our bidding in 2012will concentrate on education, health and strategic partnerships.
Principal risks and uncertainties
We operate in a business environment in which a number of risks anduncertainties exist. While it is not possible to eliminate these completely,the established risk-management and internal control procedures, which areregularly reviewed by the Group Risk Committee on behalf of the Board, aredesigned to manage their effects and so to contribute to the creation of valuefor the Group's shareholders as we pursue our business objectives. The Groupcontinues to be dependent on effective maintenance of its systems and controls.Over and above that, the principal risks and uncertainties which the Groupaddresses through its risk-management measures are detailed below. Business, economic and political environment Potential impact Mitigation and monitoring
Among the changes which could affect our We seek to mitigate these risks by
business are: fostering long-term relationships with our clients and partners, our
changes in our competitors' behaviour; predominantly governmental/ quasi-governmental
the imposition of unusually onerous medium-to-long-term revenue streams, contract conditions by major clients; the development of additional
capabilities to meet anticipated shifts in the economic climate both in demand in new growth areas of publicthe UK and internationally; service delivery, careful supply chain management and by operating in
a deterioration in the profile of our various regions of the world,
counterparty risk; including the Middle East, where we are able to transfer resources to
alterations in the UK government's maximum effect between the differing policy with regard to expenditure on economies of that region. We also
improving public infrastructure, have in place committed financing ofbuildings, services and modes of service £246m with a diversity of maturing delivery; dates between 2015 and 2017. We constantly monitor market conditions
delays in the procurement of and assess our capabilities in government-related projects; and comparison to those of our competitors. Whether we win, lose
or
civil unrest and/or shifts in the retain a contract we analyse the
political climate in some of the regions reasons for our success or
in which we operate shortcomings and feed the information back at both tactical
any one or more of which might result in and strategic levels. We also a failure to win new or sufficiently constantly monitor our cost base andprofitable contracts in our chosen take action to ensure it is suitablemarkets or to complete those contracts given the prevailing market with sufficient profitability. environment.
Major contracts Potential impact Mitigation and monitoring As we focus on large-volume Among our mitigation strategies are
relationships with certain major clients targeting work within, or for a significant part of our revenue, complementary to, our existing termination of one or more of the competencies, the fostering of associated contracts would be likely to long-term relationships with reduce our revenue and profit. In clients, operating an authority addition, the management of such matrix for the approval of large contracts entails potential risks bids, monthly management reporting including mis-pricing, inaccurate with key performance indicators at
specification, failure to appreciate contract and business level, the use risks being taken on, poor control of of monthly cost-value
costs or of service delivery, reconciliation, supply chain sub-contractor insolvency and failure to management, taking responsibility recover, in part or in full, payments for the administration of our PFI/ due for work undertaken. In PFI/PPP PPP SPCs, securing board
contracts, which can last for periods of representation in them and ensuring around 30 years and typically require that periodic benchmarking and/or
the Special Purpose Companies (SPCs) market testing are included in established by us and one or more third long-term contracts. parties to provide for the future capital replacement of assets, there is a risk that such a company may fail to anticipate adequately the cost or timing of the necessary works or that there may be increases in costs, including wage inflation, beyond those anticipated.
Operating system Potential impact Mitigation and monitoring
We enjoy demonstrable success in working We have a proven track record of with third parties both through joint developing and re-enforcing such ventures and associated companies in the relationships in a mutually
UK and abroad. This success results in a beneficial way over a long period of material proportion of our profits and time and our experience of this
cash flow being generated from places us well to preserve existing businesses in which we do not have relationships and create new ones asoverall control. Any weakening of our part of our business model. The strong relationships with these business measures taken to limit risk in thispartners could have an effect on our area include: board representation, profits and cash flow. shareholders' agreements, management secondments, local borrowings and rights of audit in addition to investing time in personal relationships. Key people Potential impact Mitigation and monitoring
The success of our business is dependent We have a Group-wide leadership on recruiting, retaining, developing, programme designed to support the motivating and communicating with strategic aims of the Company. We appropriately skilled, competent people have various incentive schemes and of integrity at all levels of the run a broad range of training
organisation. courses for people at all stages in their careers. With active human resources management and Investors in People accreditation in many parts of the Group, we manage our people professionally and encourage them to develop and fulfil their maximum potential with the Group. Health and safety regime Potential impact Mitigation and monitoring
The nature of the businesses conducted A commitment to safety forms part of by the Group involves exposure to health our mission statement and the
and safety risks for both employees and subject leads every Board meeting
third parties. Management of these risks both at Group and divisional level. is critical to the success of the Each member of the Executive Board
business and is implemented through the undertakes dedicated visits to look adoption and maintenance of rigorous at health and safety measures in
operational and occupational health and place at our operational sites and
safety procedures. we have ongoing campaigns across the Group emphasising its importance. Financial risks Potential impact Mitigation and monitoring We are subject to certain financial We have policies in place to monitorrisks which are discussed in the the effective management of working Financial Review. capital, including the production of daily balances, weekly cash reports In particular, we carry out major and forecasts together with monthly projects which from time to time require management reporting. substantial amounts of cash to finance
working capital, capital expenditure and A number of actions have been taken investment in PFI projects. Failure to including closure of the Defined
manage working capital appropriately Benefit Scheme to further accrual could result in us being unable to meet for all non-passport members from our trading requirements and ultimately the end of December 2009, the to defaulting on our banking covenants. contribution of PFI investments to the pension scheme and additional
We recognise a pension deficit on our employer contributions in excess of balance sheet. The deficit's value is the income statement charge.
sensitive to several key assumptions which are discussed in the Financial Review, and any significant changes in these may result in the Group having to increase its pension scheme contribution with a resultant impact on liquidity.
Damage to reputation Potential impact Mitigation and monitoring
Issues arising within contracts, from Control procedures and checks the management of our businesses or from governing the operation of our
the behaviour of our employees at all contracts and of our businesses are levels can have broader repercussions on supported by business continuity
the Group's reputation than simply their plans and arrangements for managing direct impact. the communication of issues to our stakeholders. Financial Review
The Chairman's statement and the Business Review provide an overview of the Group's results for 2011. This report provides further information on key aspects of the performance and financial position of the Group.
Summary
Financial highlights of 2011 included:
* A robust trading performance in line with expectations * Increase in headline earnings per share of 15.2 per cent
* Continued improvement in margins at Support Services driven by significant
operational efficiency improvements and procurement benefits * Continued strong cash generation. Average net debt for the year was £3 million (2010: £20 million)
* Very low taxation charge, representing an effective rate of 9.7 per cent
(2010: 16.5 per cent) on Profit before taxation, following management action taken to maximise tax efficiency on earnings remitted from the Middle East * Net pension deficit under IAS 19 materially contained despite worsening market asset prices and falling liability discount rates
* Successful re-financing completed providing committed financing of £246
million with a diversity of maturity dates between 2015 and 2017. Core
funding of £150 million in place for 5 years with bi-lateral arrangements
running in parallel totalling £96 million providing additional flexibility
and capacity. This is a clear demonstration of commitment from our banking
group and provides significant headroom to fund our future growth.
Financial performance
Revenue and operating profit
Across the Group, total gross revenues have been stable year on year. However our three principal trading divisions experienced different market conditions.
Strong revenue growth of 10 per cent in Equipment Services principally reflectsincreased activity from our newly acquired operations in North America. InSupport Services revenues were broadly stable at £1,007.3 million (2010: £1,024.8 million), with measured work winning accompanying a continued focus onmargin enhancement. Our UK and International Construction divisions reporteddeclining revenues in continued challenging global construction markets.A full-year operating margin on gross revenues of 3.2 per cent (2010: 3.2 percent) again reflects a stronger second half than first half with an operatingmargin of 4.3 per cent (H1 2011: 3.7 per cent). Within this, the operatingmargin at Support Services - UK strengthened from 3.1 per cent in the firsthalf to 4.1 per cent in the second half, reflecting the benefits of ongoingoperational efficiency improvements and procurement benefits. The improvementin margin over the year clearly demonstrates the significant progress made inthe division as it tracks towards the medium term target of 5 per centoperating margins. As anticipated, UK Construction margins of 2.5 per cent arereverting towards more long-term norms and are expected to drift down slightlyover the next few years, impacted by lower activity levels and increasedcompetition. Full year margins at Equipment Services were down slightly year onyear at 8.8 per cent (2010: 10.3 per cent), having been adversely impacted bythe effects of the Arab Spring and Eurozone conditions. Most encouragingly,however, the second half of 2011 saw resumption in growth and, led by furtherincreases in activity levels, the division is expected to return to a full yearof growth in 2012 with further recovery towards medium term margin expectationsof 15 per cent.Average and closing exchange rates used in the preparation of these resultswere: Average rates Closing rates 2011 2010 2011 2010 US dollar 1.60 1.55 1.55 1.55 Qatar Rial 5.84 5.64 5.63 5.64 UAE Dirham 5.88 5.68 5.68 5.68 Australian 1.54 1.69 1.52 1.52 dollar Euro 1.15 1.17 1.19 1.17
Movements in exchange rates during the year had no material impact on the results of the Group.
New segmentation
Reflecting the growing significance of our International Support Serviceoperations, and some minor changes in the way a few elements of our businessare reported and managed, the segmentation of our results has been amended withcomparatives restated accordingly. Note 3 to the financial statements providesfurther details.
Investment revenue and finance costs
The net interest charge for the year of £1.0 million can be analysed asfollows:£million 2011 2010 Net interest on Group debt (6.3) (5.4) Interest due on sub-debt 4.0 2.8 IAS 19: Expected return on Scheme assets 35.3 32.3 Interest cost on pension obligations (34.0) (34.5) Group net interest charge (1.0) (4.8)A continued strong focus on cash management during the year delivered a furthersignificant reduction in average net debt to £3 million (2010: £20 million).The increase in net interest on Group debt reflects the full year impact of there-financing in April 2010.The interest cost on Group debt is high relative to the amounts drawn down dueto the fixed costs relating to the amortisation of upfront arrangement fees anda commitment fee payable as a percentage of undrawn committed facilities.Interest receivable on sub-debt increased to £4.0 million (2010: £2.8 million)reflecting the increasing operational maturity of the investment portfolio andincreasing associated returns.The successful reassessment of the Interserve Pension Scheme's ("the Scheme")investment strategy, carried out over the past two years, together withrelatively strong equity markets, has resulted in significant increases inpension fund asset values. These increases and the additional cash and assetcontributions from the company during the period, gave rise to increasedexpected returns on the Scheme assets of £35.3 million (2010: £32.3million).This resulted in a (non-cash) net interest credit in the 2011 resultsrelating to pensions.TaxationThe tax charge for the year of £6.5 million represents an effective rate of 9.7per cent on total Group profit before taxation. The factors underlying this loweffective rate are shown in the table below:£million 2011 2010 Profit Tax Rate Profit Tax Rate Group companies 39.7 13.9 35.0% 33.6 11.5 34.2% Joint ventures and 27.4 - 0.0% 30.5 - 0.0%associates * Underlying tax charge and 67.1 13.9 20.7% 64.1 11.5 17.9%rate Prior period adjustments (0.4) (0.9) Middle East remittances (7.0) - Total per Income Statement 67.1 6.5 9.7% 64.1 10.6 16.5%
* The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.
The underlying tax charge and rate, before the benefits noted below, wasslightly higher than in the previous year due to a higher incidence of lossesin overseas tax jurisdictions that are not available for relief against otherGroup profits. The impact of this is expected to normalise downwards in futureyears as management action to stem these losses reduces their impact.As previously disclosed, the Group has benefited from actions taken that haveimproved the tax efficiency of earnings remitted from a subsidiary in theMiddle East. This has been achieved through a restructuring of investmentholdings in the region, which will also have prospective benefits, and theconclusion of negotiations on the nature, and subsequent tax treatment, of anhistorical remittance. This has benefited the current year tax charge by £7.0million (2010: £nil).DividendThe directors recommend a final dividend for the year of 13.0 pence, to bringthe total for the year to 19.0 pence, an increase of 5.6 per cent over lastyear. This dividend is covered 2.6 times by headline earnings per share and
2.3times by free cash flow.Net debt and cash flowAverage net debt for the year was £3 million (2010: £20 million) and year-endnet debt was £44.2 million (2010: £53.8 million), having benefited from freecash flow generation of £54.4 million (2010: £43.1 million).£million 2011
2010
Operating profit before exceptional items and 45.9 43.4amortisation of intangible assets Depreciation and amortisation 29.9 26.3 Net (capital expenditure) / disposal proceeds (5.5) 9.5 Gain on disposal of property, plant and (15.5) (13.0)
equipment Share-based payments 2.3 1.6 Working capital movement 9.5 (21.5) Operating cash flow 66.6 46.3
Pension contributions in excess of the income (27.0) (26.7) statement charge
Dividends received from associates and joint 20.6 32.1
ventures Tax paid (3.2) (6.3) Other (2.6) (2.3) Free cash flow 54.4 43.1 Dividends paid (25.5) (24.8)
Investments, acquisitions and disposals (19.3) (32.6) Other non-recurring - (2.2) Decrease / (increase) in net debt 9.6 (16.5)
The strong operating cash flow of £66.6 million, representing 145 per cent conversion of operating profit before amortisation of intangible assets (2010: £46.3 million and 107 per cent respectively), was driven by continued management action to control capital expenditure and manage working capital efficiently.
Despite a £5.8 million net outflow of advances received from customers (2010: £14.3 million outflow) working capital produced a net inflow of £9.5 million. Ona three year rolling basis this represents an aggregate net inflow of workingcapital of £40.6 million against a backdrop of continuing tough economicconditions.Following a year in which proceeds from disposal exceeded new capital investedby £9.5 million, 2011 saw a return to a modest level of net capital expenditureof £5.5 million. This remains significantly below the annual depreciationcharge.
The strong cash generation of our operations in the Middle East and of our Investment special purpose vehicles has enabled us to make an investment of £ 3.3 million during the year in the acquisition of the trade and assets of a joinery business in Qatar and to remit dividends from associates and joint ventures of £20.6 million (2010: £32.1 million).
Tax paid of £3.2 million (2010: £6.3 million) remains considerably lower thanthe Consolidated Income Statement charge incurred by the Group, due principallyto timing differences, the tax deductions for pension deficit payments and theactions taken to maximise the tax efficiency of the remittance of earnings fromthe Middle East noted earlier.
Investments and acquisitions outflow of £19.3 million in 2011 reflects additional equity and sub-debt invested in PFI joint venture companies, as a number of projects achieved operational status.
Refinancing
Subsequent to the balance sheet date, we have been successful in securing along-term refinancing for the Group. This has seen our previous £250 millionsyndicated revolving credit facility, which was due to expire in October 2013,replaced with a series of committed facilities totalling £246 million (atcurrent exchange rates). These new facilities run in parallel with each otherand provide a diverse maturity profile extending, in total, five years toFebruary 2017. The achievement of five-year funding in the current debt marketis a clear demonstration of the commitment and backing we receive from ourbanking group.The core of this financing is provided by a £150 million committed syndicatedfacility extending five years until February 2017. This is augmented by twocommitted bi-lateral facilities totalling £46 million that run in parallel tothe main facility and extend for four years until February 2016. The finalelement of financing is provided by a three-year, £50 million bilateralfacility that matures in February 2015 with the option of two one-yearextensions.The new funding is subject to the same covenants as the previous facility andis on broadly similar commercial terms. It has been secured at slightly lowerrates for borrowing and non-utilisation.
These new funding arrangements provide us with increased certainty, greater flexibility, improved resilience, a diversity of maturity dates and sufficient balance sheet capacity to deliver our medium-term strategy.
Acquisitions
We maintain a disciplined approach to reviewing potential acquisition opportunities, rejecting those which do not meet our strict valuation and other selection criteria.
We announced on 29 March 2011 that, following several weeks of due diligence and expenditure of some £0.7 million on professional advisers, we were not continuing with the proposed acquisition of Mouchel Group Plc.
Nevertheless, with a strong balance sheet, and significant available debt capacity and facilities, we remain well placed to take advantage of appropriate acquisition opportunities as they are identified.
Pensions
At 31 December 2011 the Group pension deficit under IAS 19, net of deferred tax, was broadly stable at £42.2 million (2010: £37.6 million):
£million 2011 2010 Defined benefit obligation 695.0 642.3 Scheme assets (638.8) (590.8) Deferred tax thereon (14.0) (13.9) Net deficit 42.2 37.6
With the benefit of additional employer cash contributions significantly inexcess of the Income Statement charge and an investment portfolio thatout-performed the market in the period, the value of Scheme assets increased by£48.0 million during the year. However corporate bond yields, which are used todiscount Scheme liabilities, have fallen significantly during the year. As aresult, the value of benefit obligations has increased by marginally more thanthe increase in the value of Scheme assets.
Defined benefit liabilities and funding
The Group's principal pension scheme is the Interserve Pension Scheme, comprising approximately 95 per cent of the total defined benefit obligations of the Group.
The triennial actuarial valuation of the Scheme as at 31 December 2011 iscurrently under way. This will determine an updated funding shortfall and anassociated programme of deficit recovery payments. The Group is currentlycommitted to a programme of cash deficit recovery payments of £22 million perannum, increasing by 2.8 per cent each year, until 2017. This deficit recoveryplan was designed to eliminate a deficit of £224 million assessed as at 31December 2008. This plan also included a bullet contribution of £61.5 millionof PFI assets in November 2009.
Investment risks
Scheme assets are invested in a mixed portfolio that consists of a balance ofperformance-seeking assets (such as equities) and lower-risk assets (such asgilts and corporate bonds).As at 31 December 2011, 44 per cent of the Schemeassets were invested in performance-seeking assets (2010: 48 per cent).
The agreed investment objectives of the Scheme are:
* to secure, with a high degree of certainty, liabilities in respect of all
defined benefit members; and
* to adopt a long-term strategy which aims to capture outperformance from
equities and move gradually into bonds to reflect the increasing maturity
of the defined benefit membership with a view to reducing the volatility of
investment returns.
The majority of equities held by the Scheme are in international blue chipentities. The aim is to hold a globally diversified portfolio of equities, withan ultimate target of 50 per cent of equities being held in UK and 50 per centin US, European and Asia Pacific equities.
IAS 19 assumptions and sensitivities
Assumptions adopted in assessment of the income statement charge and funding position under IAS 19 are reviewed by our actuarial advisers, Lane Clark & Peacock LLP.
The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:
Assumption adopted Sensitivity Indicative change in liabilities 2011 2010 Key financial assumptions Discount rate 4.8% 5.4% +/- 0.5% -/+ 8% -/+ £54m RPI / CPI 3.1% / 3.4% / +/- 0.5% +/- 6% +/- £41m 2.8% 2.1% Real salary increases 0.75% - 0.75% - +/- 0.5% +/- 0.2% +/- £1m 1.5% 1.5% Life expectancy (years) Current pensioners 1 Men 86.0 85.9 } + 1 year +3% +£21m Women 87.9 87.9 } Future pensioners 2 } Men 87.8 87.7 } Women 89.1 89.0 }
1 Life expectancy of a current pensioner aged 65.
2 Life expectancy at age 65 for an employee currently aged 45.
Investments
The credit in the Income Statement relating to the performance of the Group's share of the equity portfolio is analysed as follows:
£million 2011 2010 Share of operating profit 1.9 3.8 Net finance credit 7.5 2.8 Taxation (3.4) (2.4)
Share of profit included in Group Total Operating 6.0 4.2Profit
This increased contribution reflects the increasing operational maturity of the remaining portfolio, with six projects having achieved operational status during the year.
Assets created under investment contracts have been assessed in relation to thebalance of risks and rewards assumed by the Group and are accounted for asfinancial assets, classified as available-for-sale. As such these assets areheld at their assessed fair value at the balance sheet date, with movementsover the period being taken directly to equity.Having achieved financial close on the Holt Park project in December 2011, atthe balance sheet date the Group had £58.1 million of committed investment in22 projects which had reached financial close. Of this, £45.1 million had beeninvested at that date, with the balance due to be invested over the next twoyears.Subsequent to the year end, we were appointed selected bidder on the WestYorkshire Police project for the construction of two new divisionalheadquarters, custody suites and a specialist operational training facility. Onfinancial close this will increase our committed investment and is expected toprovide £150 million of construction and facilities management work over 25years.£million Investment Remaining Total to date commitment 1 January 2011 25.8 30.1 55.9
New projects achieving financial close / - 2.4
2.4increased participation Loans and capital advanced 19.5 (19.5) - Repayment of sub-debt (0.2) - (0.2) 31 December 2011 45.1 13.0 58.1The Group's share of gross liabilities of £805.5 million (2010: £701.8 million)principally represents non-recourse debt within these ventures to fund capitalbuilding programmes and working capital requirements.Our PFI portfolio represents a significant source of value. For illustrativepurposes, the present value of the expected future cash flows of the currentportfolio excluding projects at preferred bidder stage at a range of discountrates would be:Discount rate 4% 5% 6% 7% 8% Portfolio valuation (£m) 223.8 193.4 169.5 149.9 133.7Treasury risk management
We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks. The Treasury function is not a profit centre and it does not enter into speculative transactions. It aims to reduce financial risk by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board.
Liquidity risk
We seek to maintain sufficient facilities to ensure access to funding for ourcurrent and anticipated future requirements, determined from budgets and mediumterm plans.Having successfully re-financed subsequent to the balance sheet date, we haveaccess to committed syndicated revolving credit facilities totalling £150million until February 2017 and £96 million of various bi-lateral agreementswhich expire between February 2015 and February 2016.
Market price risk
The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that adequate interest cover is maintained, in line with Board approved targets and banking covenants.
Our borrowings are principally denominated in sterling and mostly subject tofloating rates of interest linked to LIBOR. We have in place interest rate capsand swaps which limit interest rate risk. The weighted average duration tomaturity of these instruments is a little over two years.
Foreign currency risk
Transactional currency translation
The revenues and costs of our trading entities are typically denominated intheir functional currency. Where a material trade is transacted in anon-functional currency, the entity is required to take out instruments throughthe centralised Treasury function to hedge the currency exposure. Theinstruments used will normally be forward currency contracts. The impact ofretranslating any entity's non-functional currency balances into its functionalcurrency was not material.
Consolidation currency translation
We do not hedge the impact of translating overseas entities trading results or net assets into the consolidation currency.
In preparing the consolidated financial statements, profits and losses from overseas activities are translated at the average exchange rates applying during the year.
The balance sheets of our overseas entities are translated at the year-endexchange rates. The impact of changes in the year-end exchange rates, comparedto the rates used in preparing the 2010 consolidated financial statements, hasled to an increase in consolidated net assets of £8.0 million (2010: £7.7million reduction).
Going concern
The Group's business activities, together with the factors likely to affect itsfuture development, performance and position are set out in the OperationalReview. Our financial position, cash flows, liquidity position and borrowingfacilities and details of financial risk management are described in theFinancial Review.The majority of our revenue is derived from long-term contracts, which providesa strong future workload and good forward revenue visibility. We have access tocommitted debt facilities totalling £246 million until a range of dates thatextend beyond February 2015. As a consequence, the directors believe that theGroup is well placed to manage its business risks successfully despite thecurrent uncertain economic outlook.After making enquiries, the directors have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. For this reason, they continue to adopt the going concernbasis in preparing the financial statements.Consolidated income statementFor the yearended 31 December 2011 Year ended 31 December 2011 Year ended 31 December 2010 Before Exceptional Total Before Exceptional Total exceptional items and exceptional items and items and amortisation items and amortisation amortisation of acquired amortisation of acquired of acquired intangible of acquired intangible intangible assets intangible assets assets assets Notes £million £million £million £million £million £million Continuing operations Revenue including 2,319.6 - 2,319.6 2,315.4 - 2,315.4share of associates and joint ventures Less: Share of 9 (472.1) - (472.1) (443.4) - (443.4)associates and joint ventures Consolidated revenue 3 1,847.5 - 1,847.5 1,872.0 - 1,872.0 Cost of sales * (1,643.7) - (1,643.7) (1,688.7) - (1,688.7) Gross profit 203.8 - 203.8 183.3 - 183.3 Administration (157.9) - (157.9) (139.9) - (139.9)expenses * Amortisation of - (5.2) (5.2) - (5.0) (5.0)acquired intangible assets Total administration (157.9) (5.2) (163.1) (139.9) (5.0) (144.9)expenses Operating profit 45.9 (5.2) 40.7 43.4 (5.0) 38.4 Share of result 27.9 - 27.9 31.0 - 31.0 Amortisation of - (0.5) (0.5) - (0.5) (0.5)acquired intangible assets Share of result of 9 27.9 (0.5) 27.4 31.0 (0.5) 30.5associates and joint ventures Total operating 73.8 (5.7) 68.1 74.4 (5.5) 68.9profit Investment revenue 4 39.7 - 39.7 36.1 - 36.1 Finance costs 5 (40.7) - (40.7) (40.9) - (40.9) Profit before tax 72.8 (5.7) 67.1 69.6 (5.5) 64.1 Tax (charge)/credit 6 (7.9) 1.4 (6.5) (12.0) 1.4 (10.6) Profit for the year 64.9 (4.3) 60.6 57.6 (4.1) 53.5 Attributable to: Equity holders of 62.0 (4.3) 57.7 53.8 (4.1) 49.7the parent Minority interest 2.9 - 2.9 3.8 - 3.8 64.9 (4.3) 60.6 57.6 (4.1) 53.5 Earnings per share 8 Basic 45.9p 39.5p Diluted 44.7p 38.5p* £4.7m of business unit overheads have been reallocated in the prior periodcomparatives between cost of sales and administration expenses in line with themovement of business units between divisions (see note 3). Thisreclassification does not impact operating profit.Consolidated statement of comprehensive incomeFor the year ended 31 December 2011 Notes Year ended 31 Year ended 31 December 2011 December 2010 £million £million Profit for the 60.6 53.5period Other comprehensive income
Exchange differences on translation 8.0
7.7of foreign operations Gains/(losses) on 1.1 (0.6)
available-for-sale financial assets
(excl joint ventures)
Actuarial (losses)/gains on defined (32.9)
19.3benefit pension schemes Deferred tax on items taken 6 7.5 (6.0)directly to equity Net impact of items relating to 23.1 (12.4)joint venture entities **
Other comprehensive incomenet of 6.8
8.0tax Total comprehensive 67.4 61.5income Attributable to: Equity holders of 64.5 57.7the parent Minority interest 2.9 3.8 67.4 61.5
** Movements in other comprehensive income within joint venture entities, previously disclosed separately, have been shown within a single line, net of deferred tax. Prior period comparatives have been reclassified accordingly. This reclassification does not impact total comprehensive income.
Consolidated balance sheetAt 31 December 2011 31 December 31 December 31 December 2011 2010 2009 Notes £million £million £million Non-current assets Goodwill 199.0 199.6 198.9 Other intangible assets 22.2 28.7 31.9 Property, plant and equipment 139.7 149.0 148.8 Interests in joint venture 103.3 60.1 67.4entities Interests in associated 77.2 61.7 57.0undertakings Deferred tax asset 23.4 16.5 31.4 564.8 515.6 535.4 Current assets Inventories 22.2 19.6 20.1 Trade and other receivables 380.1 386.1 355.3 Cash and deposits 46.1 67.6 60.9 448.4 473.3 436.3 Total assets 1,013.2 988.9 971.7 Current liabilities Bank overdrafts (19.3) (35.2) (11.6) Trade and other payables (492.7) (492.8) (482.7) Current tax liabilities (5.9) (3.9) (8.5) Short-term provisions (28.7) (20.2) (23.1) (546.6) (552.1) (525.9) Net current liabilities (98.2) (78.8) (89.6) Non-current liabilities Bank loans (70.0) (85.0) (85.0) Trade and other payables (4.1) (6.7) (9.0) Non-current tax liabilities (9.2) (9.1) (9.1) Long-term provisions (26.3) (26.9) (25.7) Retirement benefit obligation 10 (56.2) (51.5) (95.3) (165.8) (179.2) (224.1) Total liabilities (712.4) (731.3) (750.0) Net assets 300.8 257.6 221.7 Equity Share capital 11 12.6 12.6 12.5 Share premium account 112.7 112.7 112.7 Capital redemption reserve 0.1 0.1 0.1 Merger reserve 49.0 49.0 49.0
Hedging and translation reserves 96.3 64.2
69.3 Investment in own shares (2.8) (2.8) (0.5) Retained earnings 28.7 18.0 (24.1) Equity attributable to equity 296.6 253.8 219.0holders of the parent Minority interest 4.2 3.8 2.7 Total equity 300.8 257.6 221.7
Consolidated statement of changes in equity
Capital Hedging and Share Share redemption Merger translation capital premium reserve reserve reserves £million £million £million £million £million Balance at 1 January 2010 12.5 112.7 0.1 49.0 69.3 Total comprehensive income - - - - (5.1) Dividends paid - - - - - Shares issued 0.1 - - - - Purchase of Company shares - - - - - Company shares used to - - - - -settle share-based payment obligations Share-based payments - - - - - Balance at 31 December 2010 12.6 112.7 0.1 49.0 64.2 Total comprehensive income - - - - 32.1 Dividends paid - - - - - Company shares used to - - - - -settle share-based payment obligations Share-based payments - - - - - Balance at 31 December 2011 12.6 112.7 0.1 49.0 96.3 Investment Retained Attributable in own earnings to equity shares holders of Minority Total the parent interest £million £million £million £million £million Balance at 1 January 2010 (0.5) (24.1) 219.0 2.7 221.7 Total comprehensive income - 62.8 57.7 3.8 61.5 Dividends paid - (22.1) (22.1) (2.7) (24.8) Shares issued - - 0.1 - 0.1 Purchase of Company shares (2.3) - (2.3) - (2.3) Company shares used to - - - - -settle share-based payment obligations Share-based payments - 1.4 1.4 - 1.4 Balance at 31 December 2010 (2.8) 18.0 253.8 3.8 257.6 Total comprehensive income - 32.4 64.5 2.9 67.4 Dividends paid - (23.0) (23.0) (2.5) (25.5) Company shares used to - - - - -settle share-based payment obligations Share-based payments - 1.3 1.3 - 1.3 Balance at 31 December 2011 (2.8) 28.7 296.6 4.2 300.8
The £49.0 million merger reserve represents £16.4 million premium on the sharesissued on the acquisition of Robert M. Douglas Holdings Plc in 1991 and £32.6million premium on shares issued in the acquisition of MacLellan Group Plc in2006.
The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the How Group, Bandt and Interserve Employee Benefit Trust. The market value of these shares at 31 December 2011 was £4.2 million (2010: £3.1 million).
The accumulated balance of translation differences, incorporated within the Hedging and translation reserve, amounts to £43.6 million (2010: £35.6 million).
Consolidated cash flow statementFor the year ended 31 December 2011 Year ended 31 Year ended 31 December 2011 December 2010 Notes £million £million Operating activities Total operating profit 68.1 68.9 Adjustments for:
Amortisation of acquired intangible assets 5.2
5.0
Amortisation of capitalised software 1.6
1.1development
Depreciation of property, plant and 28.3
25.2equipment Pension payments in excess of the income (27.0) (26.7)statement charge Share of results of associates and joint 9 (27.4) (30.5)ventures
Charge relating to share-based payments 2.3
1.6
Gain on disposal of plant and equipment - (15.4) (12.7)hire fleet Gain on disposal of plant and equipment - (0.1) (0.3)other
Operating cash flows before movements in 35.6
31.6working capital
(Increase)/decrease in inventories (2.7)
2.6
Decrease/(increase) in receivables 5.6 (29.1) Increase in payables 6.6 5.0
Cash generated by operations before changes 45.1
10.1in hire fleet Capital expenditure - hire fleet (21.6)
(12.8)
Proceeds on disposal of plant and equipment 24.6
27.9- hire fleet
Cash generated by operations 48.1
25.2 Taxes paid (3.2) (6.3)
Net cash from operating activities 44.9
18.9 Investing activities Interest received 4.4 3.8
Dividends received from associates and joint 9 20.6
32.1ventures
Proceeds on disposal of plant and equipment 0.5
1.9- non-hire fleet Capital expenditure - non-hire fleet (9.0) (7.5) Purchase of business - (21.6) Investment in joint venture Investments (19.5)
(6.1)
Investment in associated undertaking -
(5.0)
Receipt of loan repayment - Investments 0.2
0.1
Net cash used in investing activities (2.8) (2.3) Financing activities Interest paid (6.7) (6.4) Dividends paid to equity shareholders 7 (23.0)
(22.1)
Dividends paid to minority shareholders (2.5) (2.7) Issue of shares - 0.1 Purchase of own shares - (2.3) Repayment of bank loans (15.0) - Movement in obligations under finance leases (0.2)
(0.4)
Net cash used in financing activities (47.4)
(33.8)
Net decrease in cash and cash equivalents (5.3)
(17.2)
Cash and cash equivalents at beginning of 32.4
49.3period
Effect of foreign exchange rate changes (0.3)
0.3
Cash and cash equivalents at end of period 26.8
32.4
Cash and cash equivalents comprise
Cash and deposits 46.1 67.6 Bank overdrafts (19.3) (35.2) 26.8 32.4
Reconciliation of net cash flow to movement
in net debt Net decrease in cash and cash equivalents (5.3) (17.2) Repayment of bank loans 15.0 -
Movement in obligations under finance leases 0.2
0.4
Change in net debt resulting from cash flows 9.9
(16.8)
Effect of foreign exchange rate changes (0.3)
0.3
Movement in net debt during the period 9.6 (16.5) Net debt - opening (53.8) (37.3) Net debt - closing (44.2) (53.8)Notes to the Consolidated Financial StatementsFor the year ended 31 December 2011
1. General information
Interserve Plc (the Company) is a company incorporated in the United Kingdom.The financial information in this announcement, which was approved by the Boardof Directors on 29 February 2012, does not constitute the Company's statutoryfinancial statements for the years ended 31 December 2011 or 2010 but isderived from these accounts.Statutory accounts for 2010 have been delivered to the Registrar of Companiesand those for 2011 will be delivered following the Company's annual generalmeeting. The auditors have reported on these accounts; their reports wereunqualified and did not contain statements under section 498(2), (3) or (4) ofthe Companies Act 2006. The Company expects to publish its statutory accountsthat comply by the end of March 2012.
2. Accounting policies
These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.
The annual financial statements have been prepared on a going concern basis inaccordance with International Financial Reporting Standards (IFRS) adopted foruse in the European Union and therefore comply with Article 4 of the EU IASRegulation and with those parts of the Companies Act 2006 that are applicableto companies reporting under IFRS.The accounting policies and methods of computation followed in these financialstatements are consistent with those as published in the Group's Annual Reportand Financial Statements for the year ended 31 December 2010 which areavailable on the Company's website at www.interserve.com. In addition, theaccounting policies used are consistent with those that the directors have usedin the Annual Report and Financial Statements for the year ending 31 December2011.
3. Business and geographical segments
The Group is organised into four operating divisions, as set out below. These divisions are the basis on which the Group reports its primary segment information.
* Support Services: provision of outsourced support services to public- and
private-sector clients, both in the UK and through Middle East associates.
* Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and through Middle East associates. * Equipment Services: design, hire and sale of formwork, falsework and associated access equipment. * Investments: transaction structuring, and management of, the Group's
project finance activities. The Investments' segmental figures represent
the Group's share of the associated special purpose companies.
Costs of central services, including those in Developments relating to managing our PFI investments and central bidding activities, are shown in "Group Services".
Reflecting the growing significance of our International Support Services operations, and some minor changes in operational reporting structures, the business segmentation has been revised. The principal charges are:
* the Support Services activities carried out by our Middle East associates,
principally the Madina sub-group, have been moved from Construction to Support Services; * the Engineering business unit has been moved from Support Services to Construction; * the Educational facilities management business unit has been moved from Construction to Support Services.
Segmental information is prepared on the new segmentation, with prior periods being restated. Additionally the analysis under the old classification is presented for information.
New segmentation
The segment information below reflects how the business segments will be disclosed henceforth.
Revenue including share of associates and Consolidated joint ventures revenue Result 2011 2010 2011 2010 2011 2010 £million £million £million £million £million £million restated restated restated Support Services - UK 1,069.6 1,098.7 1,007.3 1,024.8 36.4 25.1 Support Services - 25.9 23.7 - - 3.6 3.4International Support Services - 1,095.5 1,122.4 1,007.3 1,024.8 40.0 28.5sub-total Construction - UK 731.1 754.3 731.1 754.3 18.0 24.5 Construction - 223.7 239.2 - - 16.6 22.8International Construction - 954.8 993.5 731.1 754.3 34.6 47.3sub-total Equipment Services 154.3 139.9 154.3 139.9 13.6 14.4 Investments 160.2 106.6 - - 6.0 4.2 Group Services - - - - (20.4) (20.0) Inter-segment (45.2) (47.0) (45.2) (47.0) - -elimination 2,319.6 2,315.4 1,847.5 1,872.0 73.8 74.4 Amortisation of (5.7) (5.5)acquired intangible assets
Total operating profit 68.1 68.9 Investment revenue 39.7 36.1 Finance costs (40.7) (40.9) Profit before tax 67.1 64.1 Tax (6.5) (10.6) Profit for the year 60.6 53.5 Segment Net assets/ Segment assets liabilities (liabilities) 2011 2010 2011 2010 2011 2010 £million £million £million £million £million £million restated restated restated Support Services - UK 217.1 215.0 (228.5) (224.5) (11.4) (9.5) Support Services - 21.5 8.7 - - 21.5 8.7International Support Services - 238.6 223.7 (228.5) (224.5) 10.1 (0.8)sub-total Construction - UK 162.0 160.9 (291.7) (294.8) (129.7) (133.9) Construction - 45.6 42.4 - - 45.6 42.4International Construction - 207.6 203.3 (291.7) (294.8) (84.1) (91.5)sub-total Equipment Services 184.9 188.8 (32.5) (30.8) 152.4 158.0 Investments 103.3 60.1 - - 103.3 60.1 734.4 675.9 (552.7) (550.1) 181.7 125.8 Group Services, 232.7 245.4 (73.6) (63.6) 159.1 181.8goodwill and acquired intangible assets 967.1 921.3 (626.3) (613.7) 340.8 307.6 Net debt (44.2) (53.8) Net assets (excluding 296.6 253.8minority interests) Notes to the Financial Statements - continuedFor year ended 31 December 2011 Depreciation and Additions to property, amortisation plant and equipment and intangible assets 2011 2010 2011 2010 £million £million £million £million restated restated Support Services - UK 7.9 6.5 6.3 5.6 Support Services - 0.4 0.4 - -International Support Services - sub-total 8.3 6.9 6.3 5.6 Construction - UK 2.4 2.5 2.9 1.1 Construction - International 0.1 0.1 - - Construction - sub-total 2.5 2.6 2.9 1.1 Equipment Services 19.1 16.7 20.8 33.2 Investments - - - - 29.9 26.2 30.0 39.9 Group Services 5.7 5.6 0.6 0.3 35.6 31.8 30.6 40.2
The additions in Equipment Services in 2010 included £18.3 million of property, plant and equipment and £1.6 million intangible assets arising from the acquisition of assets from CMC Construction Services.
Notes to the Financial Statements - continuedFor the year ended 31 December 2011
Old segmentation
The business segmentation information below is prepared on the same basis as presented in the 2010 annual report.
Revenue including share of associates and Consolidated joint ventures revenue Result 2011 2010 2011 2010 2011 2010 £million £million £million £million £million £million Support Services 1,123.8 1,167.5 1,061.5 1,093.6 37.5 27.2 Construction 983.4 1,002.9 733.8 740.0 37.1 48.6 Equipment Services 154.3 139.9 154.3 139.9 13.6 14.4 Investments 160.2 106.6 - - 6.0 4.2 Group Services - - - - (20.4) (20.0) Inter-segment (102.1) (101.5) (102.1) (101.5) - -elimination 2,319.6 2,315.4 1,847.5 1,872.0 73.8 74.4 Amortisation of (5.7) (5.5)acquired intangible assets
Total operating profit 68.1
68.9 Investment revenue 39.7 36.1 Finance costs (40.7) (40.9) Profit before tax 67.1 64.1 Tax (6.5) (10.6) Profit for the year 60.6 53.5 Segment assets Segment Net assets/ liabilities (liabilities) 2011 2010 2011 2010 2011 2010 £million £million £million £million £million £million Support Services 224.7 225.1 (246.0) (242.2) (21.3) (17.1) Construction 221.5 201.9 (274.2) (277.1) (52.7) (75.2) Equipment Services 184.9 188.8 (32.5) (30.8) 152.4 158.0 Investments 103.3 60.1 - - 103.3 60.1 734.4 675.9 (552.7) (550.1) 181.7 125.8 Group Services, 232.7 245.4 (73.6) (63.6) 159.1 181.8 goodwill and acquired intangible assets 967.1 921.3 (626.3) (613.7) 340.8 307.6 Net debt (44.2) (53.8) Net assets (excluding 296.6 253.8 minority interests) Notes to the Financial Statements - continuedFor year ended 31 December 2011 Depreciation and Additions to property, amortisation plant and equipment and intangible assets 2011 2010 2011 2010 £million £million £million £million Support Services 7.9 6.6 6.3 5.6 Construction 2.9 3.0 2.9 1.1 Equipment Services 19.1 16.7 20.8 14.9 Investments - - - - 29.9 26.3 30.0 21.6 Group Services 5.7 5.5 0.6 0.3 35.6 31.8 30.6 21.9Geographical segments
The Support Services and Construction divisions are located in the United Kingdom and the Middle East. Equipment Services has operations in all of the geographic segments listed below. Investments is predominantly based in the United Kingdom.
The table below provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services.
Revenue including share of associates Consolidated Total operating and joint ventures revenue profit 2011 2010 2011 2010 2011 2010 £million £million £million £million £million £million United Kingdom 1,976.1 1,972.7 1,753.6 1,792.2 60.8 55.9 Rest of Europe 10.8 17.5 10.8 17.5 (4.0) (2.8) Middle East and Africa 301.0 323.8 51.4 60.9 22.8 30.5 Australasia 48.5 37.4 48.5 37.4 14.0 10.5 Far East 9.5 6.1 9.5 6.1 1.2 0.7 Americas 18.9 4.9 18.9 4.9 (0.6) (0.4) Group Services - - - - (20.4) (20.0) Inter-segment (45.2) (47.0) (45.2) (47.0) - - elimination 2,319.6 2,315.4 1,847.5 1,872.0 73.8 74.4 Amortisation of acquired (5.7) (5.5) intangible assets 68.1 68.9 Notes to the Financial Statements - continuedFor the year ended 31 December 2011 Non-current assets 2011 2010 £million £million United Kingdom 140.5 101.4 Rest of Europe 9.5 14.7 Middle East and Africa 118.9 105.4 Australasia 19.7 19.3 Far East 10.6 6.3 Americas 21.8 26.1 Group Services, goodwill and acquired intangible 220.4 225.9assets 541.4 499.1 Deferred tax asset 23.4 16.5 564.8 515.64. Investment revenue 2011 2010 £million £million Bank interest 0.2 0.3
Interest income from joint venture investments 4.0
2.8
Return on defined benefit pension assets 35.3 32.3 Other interest 0.2 0.7 39.7 36.15. Finance costs 2011 2010 £million £million
Bank loans and overdrafts and other loans repayable (6.7) (6.4)
Interest cost on pension obligations (34.0) (34.5) (40.7) (40.9)Notes to the Financial Statements - continuedFor the year ended 31 December 20116. Income tax expense 2011 2010 £million £million Current tax - UK 0.3 (1.6) Current tax - overseas 5.4 3.1 Deferred tax 0.8 9.1 Tax charge for the year 6.5 10.6Tax charge before prior period adjustments A 13.9
11.5
Prior period adjustments - (credits)/charges (7.4) (0.9) 6.5 10.6Profit before tax Subsidiary undertakings' profit before tax B 39.7
33.6
Group share of profit after tax of associates and 27.4 30.5joint ventures 67.1 64.1 Effective tax, excluding one-offs, on subsidiary 35.0%
34.2%
profits before tax (A/B)
As explained in the Financial Review, prior period adjustments include £7.0m relating to UK Corporation Tax reductions following the restructuring of investment holdings in the Middle East.
UK corporation tax is calculated at 26.5% (2010: 28.0%) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
The total charge for the year can be reconciled to the profit per the incomestatement as follows: 2011 2010 £million % £million % Profit before tax 67.1 64.1 Tax at the UK income tax rate of 26.5% 17.8 26.5% 17.9 27.9%(2010: 28.0%) Tax effect of expenses not deductible in 1.9 2.8% 1.2 1.9%determining taxable profit Tax effect of share of results of (7.8) (11.6%) (8.7) (13.6%)associates
Effect of overseas losses unrelieved 2.0 3.0% 1.1
1.7% Prior period adjustments (7.4) (11.0%) (0.9) (1.4%)
Tax charge and effective tax rate for the 6.5 9.7% 10.6 16.5% year
Notes to the Financial Statements - continuedFor the year ended 31 December 2011In addition to the income tax charged to the income statement, the followingdeferred tax charges/(credits) have been recorded directly to equity in theyear: 2011 2010 £million £million restated
Tax on actuarial (losses)/gains on pension liability (8.2) 5.2
Impact of change in corporation tax on pension 1.0
1.0liability Tax on fair value adjustment on available-for-sale 0.2 (0.2)financial assets
Tax on the intrinsic value of share-based payments (0.5)
- Total (7.5) 6.0The impact of deferred tax within project finance joint venture entities,disclosed in prior periods, has been removed from the table above and is nowincluded within "Net impact of items relating to joint venture entities" withinother comprehensive income.7. Dividends Dividend per share 2011 2010 pence £million £million Final dividend for the year ended 31 December 12.0 - 15.12009
Interim dividend for the year ended 31 5.6 -
7.0December 2010
Final dividend for the year ended 31 December 12.4 15.5
-2010
Interim dividend for the year ended 31 6.0 7.5
-December 2011
Amount recognised as distribution to equity 23.0
22.1holders in the period
Proposed final dividend for the year ended 31 13.0 16.4 December 2011
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
8. Earnings per share
The calculation of the basic, diluted and headline earnings per share is basedon the following data: 2011 2010 £million £million Earnings
Net profit attributable to equity holders of the 57.7
49.7
parent (for basic and basic diluted earnings per
share) Adjustments:
Amortisation of acquired intangible assets 5.7
5.5
Tax effect of above adjustments (1.4)
(1.4)
Headline earnings (for headline and headline diluted 62.0 53.8earnings per share) Notes to the Financial Statements - continuedFor the year ended 31 December 2011Number of shares 2011 2010 Number Number
Weighted average number of ordinary shares 125,804,346 125,715,700 for the purposes of basic and headline
earnings per share
Effect of dilutive potential ordinary shares:
Share options and awards 3,399,166 3,283,818
Weighted average number of ordinary shares 129,203,512 128,999,518 for the purposes of basic and diluted
earnings per share Earnings per share 2011 2010 Pence Pence Headline earnings per share 49.3 42.8
Diluted headline earnings per share 48.0
41.7 Basic earnings per share 45.9 39.5
Diluted basic earnings per share 44.7
38.5
9. Results from joint venture and associated undertakings
2011 2010 Construction Support Investments Total Construction Support Investments Total Services * Services * £million £million £million £million
£million £million £million £million
Revenues 223.7 88.2 160.2 472.1 239.2 97.6 106.6 443.4 Operating 18.8 4.7 1.9 25.4 24.6 4.3 3.8 32.7profit Net interest 0.5 0.1 7.5 8.1 1.0 0.1 2.8 3.9receivable Taxation (1.6) (0.6) (3.4) (5.6) (2.6) (0.6) (2.4) (5.6) Group share of 17.7 4.2 6.0 27.9 23.0 3.8 4.2 31.0profit Amortisation of (0.1) (0.4) - (0.5) (0.1) (0.4) - (0.5)acquired intangibles Total operating 17.6 3.8 6.0 27.4 22.9 3.4 4.2 30.5profit Dividends (12.8) (2.6) (5.2) (20.6) (24.3) (2.6) (5.2) (32.1) Retained 4.8 1.2 0.8 6.8 (1.4) 0.8 (1.0) (1.6)profits
* In line with the revised reporting of segmental results (see note 3), certain activities carried out by our Middle East associates have been moved from Construction to Support Services, and the prior period's results have been restated.
10. Retirement benefit schemes
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.
Assumptions 2011 2010 2009 Retail price inflation 3.10% pa 3.40% pa 3.50% pa Consumer price index 2.10% pa 2.80% pa n/a Discount rate 4.80% pa 5.40% pa 5.60% pa
Pension increases in payment:
LPI/RPI 3.00%/3.10% 3.30%/3.40% 3.40%/3.50% Fixed 5% 5.00% 5.00% 5.00%
3% or RPI if higher (capped at 5%) 3.60% 3.70% 3.70%
General salary increases 3.85 - 4.60% pa 4.15 - 4.90% pa 4.25 - 5.00% pa Notes to the Financial Statements - continuedFor the year ended 31 December 2011
The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:
2011 2010 2009 2008 2007 £million £million £million £million £million Present value of defined 695.0 642.3 627.4 534.2 563.4benefit obligation Fair value of schemes' (638.8) (590.8) (532.1) (381.1) (480.3)assets Liability recognised in 56.2 51.5 95.3 153.1 83.1the balance sheet
The amounts recognised in the income statement are as follows:
2011 2010 £million £million Employer's part of current service cost 5.6 6.3 Interest cost 34.0 34.5 Expected return on plan assets (35.3)
(32.3)
Gains on curtailments and settlements (0.4) - Total expense recognised in the income statement 3.9
8.5
The current service cost and curtailment gain are included within operatingprofit. The interest cost and expected return on assets are included withinfinancing costs.11. Share capital Shares Share capital thousands £million As at 1 January 2010 125,367.8 12.5 Share awards issued in 2010 436.6 0.1
At 31 December 2010 and 31 December 2011 125,804.4
12.6
Notes to the Financial Statements - continuedFor the year ended 31 December 2011
12. Related parties
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period, Group companies entered into the following transactions with related parties who are not members of the Group:
Purchases of Sales of goods goods Amounts owed Amounts owed and services and services by related to related parties parties 2011 2010 2011 2010 2011 2010 2011 2010 £m £m £m £m £m £m £m £m Joint 180.2 225.2 - 0.1 1.6 1.1 - - venture entities - PFI Investments Associates 98.6 103.1 1.1 1.0 3.3 2.3 0.4 -
Sales and purchases of goods and services to related parties were made on normal trading terms.
The amounts outstanding shown in the above table are unsecured and will besettled in cash. No guarantees have been given or received on these amounts. Noprovisions have been made for doubtful debts in respect of the amounts owed
byrelated parties.13. Contingent liabilities
In the normal course of business, the Group is involved in disputes and litigation with third parties. Appropriate provision has been made in these financial statements for all material uninsured liabilities resulting from proceedings that are, in the opinion of the directors, likely to materialise.
The Company and certain subsidiary undertakings have, in the normal course ofbusiness, given performance guarantees and provided indemnities to thirdparties in relation to performance bonds and other contract related guarantees.These relate to the Group's own contracts and to the Group's share of thecontractual obligations of certain joint ventures and associated undertakings.The Group acts as guarantor for the following: Maximum guarantee Amounts utilised 2011 2010 2011 2010 £million £million £million £million Associated undertakings' 7.3 17.1 0.2 0.2borrowings Joint venture and associated 206.4 200.6 127.4 119.3undertakings' bonds and guarantees Total 213.7 217.7 127.6 119.5
Notes to the Financial Statements - continued
For the year ended 31 December 2011
14. Reconciliation of non-statutory measures
The Group uses a number of non-statutory measures to monitor the performance ofits business. This note reconciles these measures to individual lines in thefinancial statements.1) Headlinepre-taxprofit 2011 2010 2009 £million £million £million Profit before tax 67.1 64.1 89.2 Adjusted for
Amortisation of acquired intangible assets 5.2 5.0
5.0
Share of associates amortisation of acquired 0.5 0.5
0.4intangible assets Exceptional items - - (16.3) Headline pre-tax profit 72.8 69.6 78.32) Operating cash flow 2011 2010 2009 £million £million £million Cash generated by operations 48.1 25.2 37.6 Adjusted for
Pension contributions in excess of income 27.0 26.7
15.5statement charge
Special pension contribution - -
61.5
Proceeds on disposal of plant and equipment - 0.5 1.9
0.6non-hire fleet Capital expenditure - non-hire fleet (9.0) (7.5)
(13.1)
Cash impact of exceptional items - -
11.6 Operating cash flow 66.6 46.3 113.73) Free cash flow 2011 2010 2009 £million £million £million Operating cash flow 66.6 46.3 113.7 Adjusted for Pension contributions in excess of income (27.0) (26.7) (15.5)statement charge Taxes paid (3.2) (6.3) (15.7)
Dividends received from associates and joint 20.6 32.1
17.6ventures Interest received 4.4 3.8 7.2 Interest paid (6.7) (6.4) (5.8) Effect of foreign exchange rate change (0.3) 0.3 (0.6) Free cash flow 54.4 43.1 100.94) Operating cash conversion, three-year rolling 2011 2010 2009average £million £million £million Three-year rolling operating cash flow 226.6 194.7
199.6
Three-year rolling operating profit, before 145.9 159.4
170.8
exceptional items and amortisation of acquired
intangible items
Operating cash conversion, three-year rolling 155.3% 122.1% 116.9% average
5) Full-year gross operating cash conversion 2011 2010
2009 £million £million £million Operating cash flow 66.6 46.3 113.7
Dividends received from associates and joint 20.6 32.1
17.6ventures Gross operating cash flow 87.2 78.4 131.3
Total operating profit before exceptional items 73.8 74.4 85.7 and amortisation of acquired intangible assets
Full-year gross operating cash conversion 118.2% 105.4%
153.2%
Notes to the Financial Statements - continuedFor the year ended 31 December 20116) Gross revenue 2011 2010 2009 £million £million £million Consolidated revenue 1,847.5 1,872.0 1,906.8 Share of revenues of associates and joint 472.1 443.4 563.9ventures Gross revenue 2,319.6 2,315.4 2,470.77) Operating margins 2011 2010 2009 £million £million £million
Total operating profit before exceptional items 73.8 74.4 85.7 and amortisation of acquired intangible assets
Gross revenue 2,319.6 2,315.4 2,470.7 Total operating margin 3.2% 3.2% 3.5%
15. Events after the balance sheet date
Subsequent to the balance sheet date, we have been successful in securinglong-term refinancing for the Group. This has seen our previous £250 millionsyndicated revolving credit facility, which was due to expire in October 2013,replaced with a series of committed facilities of £225 million and €25 million(combined total of £246 million, at exchange rates on 29 February 2012). Thesenew facilities run in parallel with each other and provide a diverse maturityprofile extending, at most, five years to February 2017.
Non-statutory accounts
The information in this annual results announcement does not constitutestatutory accounts within the meaning of section 435 of the Companies Act 2006(the "Act"). The statutory accounts for the year ended 31 December 2011 will bedelivered to the Registrar of Companies in England and Wales in accordance withsection 441 of the Act. The auditor has reported on those accounts. Its reportwas unqualified and did not contain a statement under section 498(2), (3) or(4) of the Act.
The Directors' report is the "management report" for the purposes of DTR 4.1.8R.
Annual report
The Company's annual report and accounts for the year ended 31 December 2011 isexpected to be posted to shareholders by the end of March 2012. Copies of boththis announcement and the annual report and accounts will be available to thepublic at the Company's registered office at Interserve House, Ruscombe Park,Twyford, Reading, Berkshire RG10 9JU and through the Company's website atwww.interserve.com.
Cautionary statement
Statements made in these Annual Financial Results ("Results") reflect theknowledge and information available at the time of their preparation. TheResults contain forward-looking statements in respect of the Group'soperations, performance, prospects and financial condition. By their nature,these statements involve uncertainty. In particular, outcomes often differ fromplans or expectations expressed through forward-looking statements and suchdifferences may be significant. Assurance cannot be given that any particularexpectation will be met. No responsibility is accepted to update or revise anyforward-looking statement resulting from new information, future events orotherwise. Liability arising from anything in the Results shall be governed byEnglish Law. Nothing in the Results should be construed as a profit forecast.Notes to the Financial Statements - continuedFor the year ended 31 December 2011
Responsibility statement of the directors in respect of the annual results announcement
The annual report contains the following statements regarding responsibility for the financial statements and Directors' report included in the annual report:
"The directors confirm that, to the best of their knowledge:
a) the Company and Group financial statements in this Annual report, which havebeen prepared in accordance with UK GAAP and IFRS, respectively, give a trueand fair view of the assets, liabilities, financial position and profit of theCompany and of the Group taken as a whole; and(b) the Directors' report contained in this Annual report includes a fairreview of the development and performance of the business and the position ofthe Company and the Group taken as a whole, together with a description of theprincipal risks and uncertainties that they face."By order of the BoardA M Ringrose T P Haywood Chief Executive Group Finance Director 29 February 2012
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