8th Mar 2006 07:04
Carillion PLC08 March 2006 8 March 2006 Carillion plc 2005 Preliminary Results UK support services and construction company Carillion plc announces itspreliminary results for the year ended 31 December 2005. These full-yearfinancial results are presented for the first time under International FinancialReporting Standards (IFRS). Highlights • Revenue (including joint ventures) up 15% to £2,284m • Underlying profit before tax* up 15% to £55.5m • Underlying earnings per share up 10% to 20.4p • Strong operating cash flow - net cash at 31 December £90.8m • Final dividend 5.2p per share - total 2005 dividend up 7% to 8p per share • Order book and framework contracts up 40% to £7 billion Financial summary 2005 2004Revenue- including joint ventures £2,284m £1,985m- excluding joint ventures £2,025m £1,859mUnderlying profit before tax* £55.5m £48.1mUnderlying earnings per share 20.4 p 18.6 pProfit before tax £51.9m £66.8mBasic earnings per share 18.7p 27.1 p * Underlying profit is net of tax on profit from joint ventures (2005: £5.0m;2004: £2.0m) and excludes- non-operating items, amortisation of intangible assets and goodwill impairment (2005: £3.6m charge; 2004: £11.5m profit)- a one-off increase in 2004 profit of £7.2m relating to the transfer of rail maintenance to Network Rail Commenting, Chairman Philip Rogerson said, "I am pleased to report that in 2005Carillion achieved all its key financial targets and made substantial strategicprogress to deliver further profitable growth, both organically and through theacquisition of mechanical and electrical engineering maintenance company, PME. "In December 2005, we announced the terms of a recommended cash and shares offerfor the acquisition of Mowlem plc. This acquisition, which received theoverwhelming support of Carillion and Mowlem shareholders, was completed inFebruary 2006 and, in line with our strategy, represents a step change inCarillion's transformation. "In view of the financial performance in 2005 and enhanced prospects for futuregrowth, the Board is recommending a final ordinary dividend for 2005 of 5.2pence per share, making the total full year dividend 8 pence per share, anincrease of some 7 per cent on the total dividend paid in respect of 2004 (7.5pence per share)." For further information contactChris Girling Finance Director 01902 422431John Denning Director Corporate Affairs 01902 316426High resolution photographs are available free of charge to the media atwww.newscast.co.uk telephone 0207 608 1000 Chairman's statement I am pleased to report that in 2005 Carillion achieved all its key financialtargets and made substantial strategic progress to deliver further profitablegrowth, both organically and through the acquisition of mechanical andelectrical engineering maintenance company, PME. In December 2005, we announced the terms of recommended cash and shares offerfor the acquisition of Mowlem plc. This acquisition, which received theoverwhelming support of Carillion and Mowlem shareholders, was completed inFebruary 2006 and, in line with our strategy, represents a step change inCarillion's transformation. In this report, Carillion has presented for the first time its full-yearfinancial results under International Financial Reporting Standards. In 2005,revenue increased by 15 per cent to £2,284 million, including joint ventures,(2004: £1,985 million), despite the impact of transferring to Network Railmaintenance contracts that generated £150 million of revenue in 2004. Underlying* profit before tax also increased by 15 per cent to £55.5 million (2004: £48.1million). Operating cash flow remained strong and at 31 December 2005 net cashamounted to £90.8 million (2004: £128.8 million). The intake of new orders in 2005 was particularly strong and by the year end thevalue of the Group's order book and framework contracts had increased by 40 percent to £7 billion (2004: £5 billion). The integration of PME, which we acquired in March 2005, has been completedsuccessfully. This has significantly strengthened our building management andsupport services capability and enhanced our earnings in 2005. Three non-executive directors, Sir Neville Simms, our previous chairman, AndrewParrish and Roger Dickens, retired from the Board in 2005. I should like torecord the Board's thanks and recognition for their contributions to thedevelopment and success of Carillion and in particular to record the Board'sdeep sadness at the death of Roger Dickens early in 2006. During 2005, we werepleased to welcome to the Board two new non-executive directors. The appointmentof Vanda Murray OBE in June, which I reported to shareholders in my InterimReport, was followed by the appointment in November of David Maloney, who bringsto the Board considerable experience in a number of service industry sectors. With a record order book and strong presence in our key growth markets, theoutlook was already positive for Carillion to deliver sustainable growth.However, the acquisition of Mowlem will accelerate growth substantially and create significant value for shareholders. It brings together two companies of a similar size with an excellent strategic fit, complementary skills and market strengths, to create one of the largest support services and construction companies in the UK and with substantial international businesses. Combining the two companies will generate opportunities for cost savings and strengthen Carillion's ability to compete successfully in its chosen markets. As a result, we expect the acquisition of Mowlem to enhance earnings materially in 2007, the first full year of operation following the acquisition. The strong platform that has enabled us to acquire Mowlem and move forward into2006 with considerable confidence is due to the leadership of Carillion's seniormanagement team and the commitment and professionalism of all its people. Onbehalf of the Board I should like to offer our thanks to everyone in Carillionfor the contributions they have made to our success. In view of the financial performance in 2005 and enhanced prospects for futuregrowth, the Board is recommending a final ordinary dividend for 2005 of 5.2pence per share, making the total full year dividend 8 pence per share, anincrease of some 7 per cent on the total dividend paid in respect of 2004 (7.5pence per share). The final ordinary dividend for 2005 will be paid on 23 June2006 to shareholders on the register at close of business on 28 April 2006. Philip RogersonChairman * Underlying profit is net of tax on profit from joint ventures and excludes- non-operating items, amortisation of intangible assets relating to business combinations and goodwill impairment (for details see Note 4 on page 26)- a one-off increase in 2004 profit of £7.2 m relating to the transfer of rail maintenance to Network Rail Operating and Financial Review Chief Executive's statement In our 2004 annual report, I said that 2005 marked the beginning of a new phaseof growth for Carillion. Having completed our programme of major disposals andbuilt a well-balanced, customer-focused business, delivering good qualityearnings backed by strong operating cash flows, we were ready to accelerate thedevelopment and growth of our business. That growth will continue to be drivenby implementing our consistent and effective strategy through customer-focusedbusinesses, supported by a culture based on "living" our core values ineverything we do. Strategic development Over the past few years we have been seeking acquisitions to fill capabilitygaps in order to improve the scope and quality of our integrated servicessolutions and also to deliver a step change in the development of our business.We apply the same criteria to all potential acquisitions, namely that they mustbe consistent with our strategy for delivering sustainable, profitable growthand deliver financial returns equivalent to those we expect from otherinvestments. Acquisition of PME The acquisition of PME, one of the largest privately owned mechanical andelectrical (M&E) engineering maintenance businesses in the UK, for approximately£47 million (including a £10 million payment to the PME pension fund) in March2005 filled an important capability gap. M&E maintenance accounts for up to 40per cent of a typical building management and support services contract. Havingan in-house M&E maintenance capability has therefore considerably strengthenedour integrated service offering for both new and existing customers. PME isperforming well as an integral part of our business, with cost synergies nowexpected to reach approximately £3 million by the end of 2006, exceeding the £2million originally identified. Acquisition of Mowlem plc Carillion announced its cash and shares offer for the acquisition of Mowlem inDecember 2005. It was recommended by the Mowlem Board and received theoverwhelming support of Carillion and Mowlem shareholders. The acquisitionvalued Mowlem's share capital at £313 million and was completed successfully on23 February 2006. 65.8 million new Carillion shares were issued on 23 February2006 as a result of the acquisition. Mowlem is an outstanding strategic fit, particularly in support services andprivate finance, and we are confident that it will deliver a step change in thedevelopment of our business and materially enhance our earnings in 2007, thefirst full year after acquisition. The addition of Mowlem's complementary skills and market strengths in supportservices makes Carillion one of the largest support services businesses in theUK and significantly enhances our ability to provide customers with highquality, integrated solutions in our key market sectors. The addition of Mowlem's portfolio of Public Private Partnership (PPP) projectsto Carillion's own substantial portfolio will create a very large and valuableportfolio of equity investments. Mowlem also has a large pipeline of new PPPprojects for which it is the preferred bidder or shortlisted, with the potentialto add considerable further value to our investment portfolio. Furthermore, theacquisition of Mowlem will increase the number of specialist people we have withprivate finance skills, which has been the main constraint to our growth in thismarket. Mowlem's considerable strengths in construction services will add to the breadthand scale of our own construction capabilities. Going forward, Mowlem's approachto construction will be subject to the same selectivity criteria that we haveconsistently applied to our own construction activities. Furthermore, ourrigorous and proven risk management policies and processes will underpin everyaspect of the enlarged group's operations. On 18 January 2006, Carillion announced that it had agreed to sell two Mowlembusinesses, Charter, the US construction management company and Edgar Allen, theUK rail track products manufacturer to Balfour Beatty plc for a totalconsideration of approximately £20.5 million, subject to due diligence byBalfour Beatty. Completion of these sales is expected in the second quarter of2006. Within the last few days, the Office of Fair Trading (OFT) visited two Mowlemoffices. We have fully co-operated with the OFT and will continue to do so asappropriate. The integration of Carillion and Mowlem is being led by a dedicated teamcomprising senior people from both companies to ensure we achieve the synergybenefits we have identified and create a business that will deliver acceleratedgrowth, materially enhanced earnings and strong cash generation. We expect todeliver cost savings at a running rate of £10 million per annum by the end of2006, rising to £15 million per annum by the end of 2007. The one-off cost ofdelivering these savings is expected to be £10 million in 2006. Our business model for the enlarged group will continue to be based ondelivering our existing strategy through market focused business units, eachequipped with the skills and resources necessary to provide customers withsolutions tailored to meet their specific needs. Business performance Total revenue in 2005 increased by 15 per cent to £2,284 million (2004: £1,985million), including revenue from joint ventures of £259 million (2004: £126million). Underlying* profit before tax also increased by 15 per cent to £55.5 million(2004: £48.1 million), with underlying earnings per share of 20.4 pence (2004:18.6 pence). Underlying earnings per share grew by 10 per cent, after theGroup's effective tax rate returned to a more normal level of 27 per cent,having reduced temporarily in 2004 to 21 per cent, due to a number of one-offtax settlements. Our relentless focus on cash management has again resulted in a strong cash flowfrom operations of £84 million. Average weekly net cash was £37 million, net offinance lease liabilities of £31 million. At 31 December 2005 Carillion had netcash of £90.8 million, net of finance leases of £37.7 million (2004: £128.8million net of finance leases of £24.2 million), having invested approximately£47 million in the acquisition of PME. Delivering improved results in 2005 was a particularly significant achievement,given the impact of transferring to Network Rail during 2004 profitablemaintenance contracts that contributed around £150 million of revenue in 2004. We continue to report our financial results in three segments - SupportServices, Construction Services and Investments - in which we group togetheractivities of a similar type and risk profile to make it easier for the Marketto value our earnings on a consistent basis. Our performance in each of thesesegments is summarised below and a more detailed explanation follows later inthis review. In Support Services, revenue (including joint ventures) increased by over sevenper cent to £989 million, with the effect of losing £150 million of railmaintenance revenue more than offset by the acquisition of PME and organicgrowth. An increase in operating profit of two per cent, to £40.6 million,lagged growth in revenue, reflecting the loss of rail maintenance contracts,which had higher than average margins in this segment. In Construction Services, revenue (including joint ventures) increased by 22 percent to £1,230 million, driven mainly by growth in our International Regions,particularly the Middle East and Canada, UK Building and our Developmentsbusiness. Operating profit in this segment increased by 35 per cent to £16.9million. Investments, contributed revenue of £65.4 million. Operating profit increased by36 per cent to £8.3 million, due to an improved performance across our portfolioof equity investments in PPP projects and reductions in bid costs and overheads.As explained later in this review, we are also creating long-term value byinvesting in these projects and the Directors' current valuation of ourportfolio is £89 million, based on discounting at 10 per cent the cash flowsthat will be generated by these investments over the next thirty years or more. Total operating profit from our three financial reporting segments was £65.8million, including joint ventures. After Corporate Centre costs of £10.4million, net financing income of £5.1 million and tax on joint venture profitsof £5.0 million, underlying profit before tax was £55.5 million. Non-operatingitems, amortisation of intangible assets and goodwill impairment amounted to£3.6 million, leaving profit before tax of £51.9 million. Profit after tax was£40.8 million and basic earnings per share were 18.7 pence. 2005 was an outstanding year for new orders, which increased the value of theGroup's order book and framework contracts at the year-end by some 40 per centto around £7 billion (2004: £5 billion). Despite converting a high proportion ofpotential new orders into contracts in 2005, we also maintained a healthypipeline of probable orders, worth up to £1.6 billion at the year-end (2004:£2.2 billion). Our strategy for growth continues to be reflected in our order book, withSupport Services and PPP concession contracts accounting for some 84 per cent oforder book value (2004: 78 per cent). The longer-term nature of these contractsalso significantly improves the visibility of future revenues, with around 74per cent of our order book expected to generate revenues in 2007 and beyond. Atthe same time, through our selective approach, we have continued to improve thequality of our construction order book and focused on long-term relationshipswith key customers. For example, in 2005 our UK building business generatedaround 84 per cent (2004: 80 per cent) of its revenue from 20 key customers. * Underlying profit is net of tax on profit from joint ventures and excludes- non-operating items, amortisation of intangible assets relating to business combinations and goodwill impairment (for details see Note 4 on page 26)- a one-off increase in 2004 profit of £7.2 m relating to the transfer of rail maintenance to Network Rail Risk Management The rigorous policies and processes we have established to identify, mitigateand manage risk are a cornerstone of our business. Our Group Head of Risk isresponsible for advising on all risk issues, including our policies andprocesses and their application to all our business activities. We address strategic risks and risks specific to individual businesses andcontracts, including social, environmental and ethical risks. Our riskmanagement processes apply to every aspect of our business, from choosing themarkets in which we operate to the contracts we bid for and the selection of oursuppliers and sub-contractors. They apply to every stage of a contract frominception to completion, in order to deliver the cash-backed profit we expectand a service that meets or exceeds the expectations of our customers. The more significant areas of risk, where our failure to perform well or changesto macro economic or market specific environments would adversely affect ourbusiness, are summarised below. • Integration of Mowlem. The efficient and professional integration of Carillion and Mowlem is essential to the success of this acquisition and to the delivery of cost synergies, sustainable, profitable growth and materially enhanced earnings• Attracting, developing and retaining excellent people. The success of our business depends primarily on the quality of our people• Management of major contracts. Completing contracts on time and to the required standards, avoids financial penalties and damage to our brand and reputation• Closing out existing contracts. Settling completed contracts and collecting the cash we are owed is essential to reducing debt and delivering the earnings growth we expect• Pension scheme management. The cost to Carillion of funding its pension schemes depends on the macro-economic environment, equity market stability and regulatory requirements• Government investment and outsourcing. With a substantial proportion of our business and future growth dependent on planned investment and outsourcing of services, it is important to maintain an effective presence in a number of growth sectors to support the resilience of our business Our people Our people are the key source of competitive advantage and it is through theirefforts each day that we meet or exceed our customers' expectations. The success of our business and the value of the Carillion brand dependprimarily upon the performance of our people. We therefore remain totallycommitted to attracting, developing and retaining excellent people by becomingan employer of choice and have a wide range of measures in place to make this areality across all our businesses. Above all we strive to communicate well with all our people and to listen to andact upon what they tell us. We do this through a structured approach tocommunication, including individual performance and development reviews, monthlyTeam Talks and regular surveys through which everyone can share their viewsopenly and frankly, in line with our core value of 'Openness'. These surveysculminate annually in "The Great Debate" in which around 1,400 people fromacross the Group took part in 2005. This enables us to monitor and measure ourprogress on a wide range of issues, including how well we engage with our peopleto recognise and value the contributions they make to our business, to help themdevelop and fulfil their potential. Specifically in response to feedback from the Great Debate, in 2005 we redoubledour efforts to improve the way we communicate, beginning with around 250 of oursenior managers attending workshops designed to demonstrate the "Power ofEngagement". By the end of 2005 around 2,000 managers and supervisors hadattended these workshops. Good two-way communication must be the hallmark of ourbusiness leaders and the benefits of this are increasingly evident in thesatisfaction and performance of our people. Health and Safety Carillion has an absolute commitment to ensuring that all our people can worksafely at all times, wherever they are. This commitment extends to those whowork with us and those who could be affected by our activities, includingmembers of the public. This requires the continual vigilance and commitment ofeveryone involved in our activities to ensure that safe working practices arealways used. This is supported by rigorous reviews, inspections, training andeducation, all of which are actively promoted and led by the Board. At the end of 2004, we launched a radical new initiative, Target Zero, aimed ateliminating reportable accidents by 2010. This is an ambitious target, but weare determined to create a culture of zero tolerance to accidents, not onlywithin Carillion, but also within all our stakeholders, including customers,suppliers and partners. Tragically, five people were killed while working onprojects under Carillion's management control during 2005. These accidentsreinforce our commitment to make Target Zero a reality and its benefits arealready evident. Our Accident Frequency Rate (AFR), reduced by 35 per cent in2005 to 0.24 (2004: 0.37). The number of RIDDOR2 accidents (Reporting ofInjuries Diseases and Dangerous Occurrences Regulations 1995) for the Groupreduced by 27 per cent in 2005 to 255 (2004:348). Sustainability We believe that our commitment to responsible business practices that createpositive impacts on the environment and on the communities in which we operate,is not only good for our own people and for society in general, but also makesgood business sense. It is fundamental to delivering sustainable, profitablegrowth. Our commitment to becoming a more sustainable company began over ten years ago.Today, we are one of the recognised leaders in developing and adopting sociallyresponsible business practices and for demonstrating that these practices canhave measurable business benefits. We benchmark our performance in a number ofways, including participating in Business in the Community's CorporateResponsibility Index, an independent annual survey of sustainabilityperformance. Since its inception in 2003, Carillion has each year been rankedfirst in its sector and in the top quartile of all companies participating inthe Index. Our strategy model, which helps us to map and quantify the links between ourbusiness objectives and our impacts on the environment and society, continues toform the basis for our sustainability programme by identifying the areas wherewe need to improve our performance. Strategic objectives In order to build on our success in 2005, we have set the following strategicobjectives for 2006.• Attract, develop and retain excellent people, by becoming an employer of choice• Successfully integrate Carillion and Mowlem• Achieve cost synergies at a minimum running rate of £10 million per annum by the end of 2006, and be on course to achieve a minimum running rate of £15 million per annum by the end of 2007• Reduce net debt to circa £200 million by the end of 2006 and be on course to reduce it to below £100 million by the end of 2007• Be on track to deliver materially enhanced earnings for the enlarged Group in 2007• Be the recognised leader in the delivery of safety and sustainability Markets and Outlook Business Services Carillion Business Services comprises our UK building, facilities management(FM) and other Support Services activities. These activities generated approximately £1.2 billion of revenue (includingjoint ventures) in 2005 (2004: £769 million), a 56 per cent increase on 2004,driven mainly by a strong performance in UK building and the acquisition of PME. Business Services had a very successful year, more than doubling the value ofits order book at the year-end to £1.8 billion (2004: £821 million), as a resultof winning a number of significant new orders and the acquisition of PME, whichcontributed some £180 million to our year-end order book. In the Defence sector,we made a major breakthrough by winning, with our joint venture partners, twosupport services contracts for Defence Estates, together worth around £1.2billion over a period of up to 10 years. In addition, Carillion's joint venture,Monteray, won a three-year extension to its contract with BT to provideintegrated facilities management services, worth some £350 million. In UK building, we won substantial new orders in our chosen sectors, worth some£1.1 billion. We were particularly successful in the education sector: wereached financial close on a PPP project to build nine new schools inRenfrewshire, with a construction value of £100 million and in which we expectto invest £4 million of equity; we secured a £100 million contract to providedesign and construction services for six new schools in Leeds; and a Carillionjoint venture was appointed preferred bidder for a PPP project to build six newschools in South Ayrshire. We expect to invest around £4.5 million of equity inthe latter project, which will also add over £73 million to our constructionorder book when it reaches financial close in 2006. In addition, our UK building business was awarded a £230 million contract toprovide three new printing plants for News International and a £118 millioncontract for the British Nuclear Group to construct a store for materialsarising from decommissioning at Sellafield. In 2005, our building business generated some 84 per cent of its revenue from 20customers, reflecting our focus on long-term key customers. With around 80 percent of our UK building order book for 2006 already secure, we expect asimilarly high percentage of revenue to come from our top 20 customers in 2006. Business Services entered 2006 in a strong position to deliver further growth,particularly from integrated solutions for public sector customers in theDefence, Education and Health markets, as well as from the retail, offices andmixed use developments sectors of the commercial building market. Notable newopportunities in 2006 include reaching financial close on two major PPP projectsfor which Mowlem is the preferred bidder - the £7 billion Allenby Connaughtproject to provide Army accommodation in the South of England and a £1.1 billionproject to provide a new Permanent Joint Headquarters for the Ministry ofDefence - for which the concession periods are 35 years and 25 years,respectively. We also expect new opportunities in the growing nuclear market,following the creation of the Nuclear Decommissioning Authority. Carillion hasconsiderable experience as a supplier of construction and support services inthis market and Mowlem also has useful skills and experience, which complementthose of Carillion. With the acquisition of Mowlem enhancing the strong positions we already hold inour existing UK building and support services markets, and creating a strongpresence in other markets, such as Defence and UK regional building, the outlookfor Business Services is positive. Health In the health market, we provide a range of construction and facilitiesmanagement services, including integrated solutions focused primarily on PPPhospitals and Independent Sector Treatment Centres (ISTC). These activities generated £146 million of revenue (including joint ventures) in2005 (2004: £119 million), with the increased contributions from bothconstruction and support services. Carillion Health made good progress in 2005, winning new orders that nearlydoubled the value of its order book to £1.1 billion at the year end (2004: £592million), including two particularly notable successes. In November 2005, wereached financial close on the Queen Alexandra Hospital PPP project inPortsmouth, worth approximately £1.1 billion to Carillion over the 33-yearconcession period, of which some £470 million is included in our Health orderbook. In addition, Carillion will invest some £12 million of equity in thisproject, on which we expect to make financial returns in-line with our normalPPP investment criteria. A Carillion joint venture was also appointed thepreferred bidder by the Bedfordshire and Hertfordshire Primary Care Trust fornew ISTC facilities, involving some £48 million of construction and operationalservices worth around £119 million over a five-year period. The outlook for our Health business continues to be positive, particularly inour two key market sectors of PPP acute hospitals and Independent SectorTreatment Centres (ISTCs). The UK Government has reaffirmed its commitment to asubstantial programme of PPP hospitals, worth between £7 billion and £9 billion.Carillion Health is currently shortlisted for one new PPP hospital and will bebidding for further hospitals in this programme as they come to market. TheGovernment is also committed to a second wave of ISTCs, including 24 surgicalcentres, plus eight regional contracts and one national contract for diagnosticservices, with a combined value of some £3 billion over the next 5 years. Weexpect to bid for a number of these new centres and contracts in 2006. Carillion's strong presence and successful track record will be further enhancedby the acquisition of Mowlem, which has six Local Improvement Finance Trust(LIFT) contracts. The acquisition of Mowlem will also increase the number ofpeople we have with specialist private finance skills and therefore our capacityto bid for PPP hospitals and ISTCs. Consequently, the outlook for our Healthbusiness also remains positive. Transport Carillion Transport is focused on the provision and maintenance of rail and roadinfrastructure. These activities contributed some £580 million of revenue(including joint ventures) to the Group in 2005 (2004: £713 million), with thereduction on 2004 due to the effect of transferring to Network Rail maintenancecontracts that generated around £150 million of revenue in 2004. At 31 December 2005, the value of our Transport order book and frameworkcontracts was £817 million (December 2004: £888 million). The reduction in orderbook reflects the expected trend in the UK rail infrastructure market,particularly for major projects, as we indicated in our 2005 interim resultsannouncement. Nevertheless, during 2005 a joint venture, in which Carillion hasa 50 per cent interest, was awarded a £110 million contract for railelectrification on the West Coast Mainline and orders for smaller regional railprojects and track renewals have remained at a satisfactory level. While the outlook in the UK rail market is expected to remain challenging,planned investment by Network Rail is still substantial at approximately £11billion over the period 2006 to 2008. The acquisition of Mowlem will increaseCarillion's already strong presence in this market, where we remain focused onincreasing our market share and on reducing costs to protect margins. After aslower than expected start to the outsourcing of rail infrastructure work inScandinavia, we are now making progress in this market. We expect this tocontinue in 2006, as the market is forecast to double in size over the next twoyears to around £600 million per annum. In highways maintenance, we expect to maintain our 10 per cent share of the £1.0billion per annum Highways Agency market and to target opportunities for furthergrowth in the Local Authority market, worth around £750 million per annum. In road construction, the £122 million Early Contractor Involvement (ECI)project to upgrade the A74 between Carlisle and Guardsmill to motorway standardis expected to move into the construction phase during the second quarter of2006. The acquisition of Mowlem, which has been particularly successful inwinning six ECI road contracts to date with a total value of over £350 million,will significantly strengthen our presence in this market. Overall, the outlook in Transport remains stable. International Regions Our international regional businesses in the Middle East, Canada and theCaribbean are focused on selected construction markets and on their growingsupport services activities. These businesses contributed £299 million ofrevenue to the Group in 2005 (2004: £349 million). The reduction in revenue wasdue to the sale in November 2004 of our contracting business in France, whichcontributed some £160 million of revenue in that year. However, this reductionwas offset by substantial growth in our remaining international regions, notablyin the Middle East and Canada. 2005 was another successful year for new orders. The value of our internationalorder book increased by over 11 per cent to £1.23 billion at 31 December 2005(2004: £1.1 billion) and more than treble its value at December 2003. Notablesuccesses in 2005 included construction orders for Dubai Festival City wortharound £150 million and new highways maintenance contracts in Ontario, Canadaworth £130 million. This was followed early in 2006 by our appointment aspreferred bidder for a further highway maintenance contract in Canada worth £137million, which will extend our operations to Alberta. With a strong order book, our international regional businesses are already ontrack to deliver further growth in 2006. They also remain well positioned ingood growth markets, especially in Canada and the Middle East. In Canada, whereconstruction of our two PPP hospitals - the William Osler in Toronto and theRoyal Ottawa - is progressing well, we expect to bid for further PPP hospitalsas the next wave of projects comes to market in 2006. Our highways maintenancebusiness in Canada will also be targeting further contracts in Alberta and inBritish Columbia as these Provinces progressively outsource highways maintenancework to the private sector. In the Middle East, growth in construction activity is forecast to continue,with much of this being generated by the Dubai Festival City development forwhich our joint venture business is well positioned. In addition, we shall betargeting opportunities in other countries in the region, such as Abu Dhabi,where construction activity is also forecast to grow. The acquisition of Mowlem brings new international businesses to the Group inAustralia and South East Asia. The sale of Charter, Mowlem's US constructionbusiness, to Balfour Beatty was announced on 18 January 2006 and we expect thisto be completed in the second quarter of 2006, subject to due diligence byBalfour Beatty. FINANCIAL REVIEW Accounting policies These are the Group's first annual consolidated financial statements prepared inaccordance with IFRS. The Group's IFRS accounting policies have been applied in preparing theconsolidated financial statements for the year to 31 December 2005, thecomparative information for the year to 31 December 2004 and the preparation ofan opening IFRS balance sheet at 1 January 2004 (the date of transition from UKGAAP to IFRS). Profit allocation On construction contracts profit is recognised broadly in proportion to turnoverafter taking into account the remaining risks and uncertainties. In addition, onmajor construction contracts we take no profit on the first 20 per cent ofturnover and this profit is deferred until contracts are completed. This method,which better reflects the risk profile of our construction activities, reducedreported profit in Construction Services by £5.4 million in 2005 (2004: £3.3million). The total provision of £8.7 million is carried forward at 31 December2005. Interest and cash The Group net interest credit of £4.0 million (2004: £4.1 million) reflects anaverage net cash position of £37 million, net of average finance leases of £31million. Net cash at 31 December 2005 was £90.8 million after finance lease liabilitiesof £37.7 million (31 December 2004: net cash £128.8 million, after financeleases of £24.2 million). Strong cash generation from operations of £84 million and dividends receivedfrom jointly controlled businesses of £8 million continue to demonstrate ourfocus on cash management and the resilience of our business. Capital expenditureof £38 million included £13 million of investment in our previously announcedproject to outsource business processes in Human Resources and Finance, which isprogressing well and on schedule for completion in 2006. Dividend payments in 2005 were £16 million and corporate tax paid was £19million. Jointly controlled businesses An important part of our strategy for Public Private Partnership (PPP) and largeconstruction projects is the development of jointly controlled businesses thatenable us to structure the resource and risk profiles of these activities togenerate reliable returns. Our share of these businesses generated £259 millionof turnover and £20.3 million of operating profit during 2005. The interestcredit relating to joint ventures of £1.1 million is £4.5 million ahead of 2004and reflects the effects of selling our equity interest in the M40 project inJune 2004 and of reclassifying our joint venture interest in the NottinghamExpress Transit project as a trade investment. Growth in our construction joint ventures, notably that responsible for ourDubai Festival City projects, and in profit from PPP projects, resulted inprofit before tax of £21.4 million (2004: £9.6 million) and profit after tax of£16.4 million (2004: £7.4 million). Taxation The Group's effective rate of tax on underlying profit returned to a more normallevel of 27 per cent in 2005, having reduced to 21 per cent in 2004 due to anumber of one-off tax settlements in 2004 relating to prior years. We have £65million of corporate tax losses in the UK, none of which are recognised as adeferred tax asset, that are potentially available to reduce future taxliabilities. Amortisation of intangible assets Amortisation of intangible assets relating to business acquisitions was £2.5million, which relates to the £6.2 million of intangible assets arising from theacquisition of PME. Non-operating items The Group's share of results of jointly controlled entities includes anexceptional loss of £0.8 million relating to the disposal of the remainder ofour joint venture plant hire business (2004: profit of £1.7 million, whichincluded a related tax credit of £0.2million). Pensions The Group's ongoing pensions charge in 2005, calculated on the basis of IAS19,was £21.3 million (2004: £27.0 million). The reduction on 2004 mainly reflects areduction in number of active scheme members. The Group's pension schemes had anet deficit of £47.5 million at 31 December 2005 (2004: £59.7 million) and wepropose to discuss with the trustees proposals to reduce this deficit. Acquisitions On 8 March 2005 we acquired the entire share capital of PME for approximately£47 million, which included a one-off contribution to the PME pension scheme of£10.0 million. Since acquisition, the performance of PME has met ourexpectations, contributing £3.5 million towards Group Operating Profit onturnover of £148.7 million. Following the acquisition of Mowlem plc on 23 February 2006 for a totalconsideration of approximately £341 million, comprising £117 million in cash and65.8 million new ordinary Carillion shares, we are in the process of evaluatingthe fair value of net assets acquired. This process is progressingsatisfactorily. Segmental results The table below shows revenue by business activity and the segments in which itis reported. Business activities Financial Reporting Segments Support Investments Construction Services ServicesTransportRail 408.7 - -Roads 147.7 - 24.3Health 56.8 - 89.2 Business ServicesUK building - - 813.1FM & Services 369.5 - 39.2International Regions 34.6 - 264.3Private Finance - 65.4 - Total* 1,017.3 65.4 1,230.1 * Includes internal trading of £28.9 million Investments £ million 2005 2004Revenue Group 0.8 0.8JVs 64.6 61.7 ------- ------ 65.4 62.5 ------- ------Operating profit* 8.3 6.1JV Interest & tax (0.6) (4.9) ------- ------Profit from operations* 7.7 1.2 ------- ------ * Before goodwill impairment of £0.3 million in both years and after tax onjoint ventures of £3.1m (2004: £2.7m) In this segment we report the equity returns on our investments in PublicPrivate Partnership (PPP) projects. At 31 December 2005, we had 19 financially closed projects in our portfolio,having added two new projects during the year - Renfrewshire schools and QueenAlexandra Hospital, Portsmouth - in which we will invest a total approximately£16 million of equity. Our portfolio of equity investments continues to generate significant value forthe Group. The increase in operating profit reflects an improved performanceacross our portfolio, together with a reduction in overheads and bid costs. Thisimprovement more than offset the effect on operating profit of selling ourinvestment in the M40 motorway project in 2004. Due to this sale, the interestcharge relating to joint ventures also reduced, resulting in a substantialincrease in profit from operations. Equity investments in PPP projects are typically valued by discounting the cashflows they will generate over the lives of concession contracts. Based ondiscounting cash flows at 10 per cent and 8 per cent, our portfolio ofinvestments in financially closed projects had valuations at December 2005 of£89 million and £115 million, respectively. These valuations have increased(2004: £83 million and £103 million) as a result of reaching financial close onthe Renfrewshire schools and Queen Alexandra Hospital projects. The value we arecreating through our PPP equity portfolio will continue to increase, because weare committed to invest a further £31 million of equity in our financiallyclosed projects, in addition to the £29 million already invested. Beyond this,we have a good pipeline of new projects, including two for which we are thepreferred bidder, in which we expect to invest around £7 million of equity, andfive for which we are shortlisted, with a potential equity requirement of up to£33 million. The acquisition of Mowlem also adds substantial value to our PPP portfolio.Mowlem has 10 financially closed PPP projects in which it has either alreadyinvested, or commitments to invest, some £51 million. It also has three projectsfor which it is the preferred bidder, in which it expects to invest around £77million of equity and is shortlisted for two projects with a potential equityrequirement of up to £29 million. Construction Services £ million 2005 2004Revenue Group 1,050.1 949.3JVs 180.0 56.1 ------- ------ 1,230.1 1,005.4 ------- ------Operating profit* 16.9 12.5JV Interest & tax (3.1) (0.3) ------- ------Profit from operations* 13.8 12.2 ------- ------ * Before a JV non operating loss of £0.8m (2004 non-operating profit £1.7m) andafter tax on joint ventures of £1.8m (2004: £0.7m credit) In this segment we report the results of our UK building and constructionactivities and International Regional businesses. Revenue in Construction Services increased by 22 per cent, despite the disposalsin 2004 of Crown House and our contracting business in France, which togethercontributed over £200 million of revenue in 2004. Progress in this segment isdue to healthy growth in the Middle East and Canada, continuing success in ourchosen sectors of the UK commercial building market and a strong performance byour Developments business. Operating profit increased by 35 per cent and the operating margin rose from 1.2per cent to 1.4 per cent. This was achieved despite the effect of introducing,in the second half of 2004, a new method by which we recognise profit on majorconstruction contracts. Previously, profit was recognised broadly in proportionto turnover after taking account of risks and uncertainties. In addition, we nowtake no profit on the first 20 per cent of turnover and this profit is deferreduntil contracts are completed. The effect of this in 2005 has been to reducereported operating profit by £5.4 million (2004: £3.3 million). Total deferredprofit relating to this change at 31 December was £8.7 million, which we expectto begin releasing to profit in 2007 as contracts reach completion. Support Services £ million 2005 2004Revenue Group 974.6 908.9JVs 14.1 8.3 ------- ------ 988.7 917.2 ------- ------Operating profit* 40.6 39.7+JV Interest & tax (0.2) (0.2) ------- ------Profit from operations* 40.4 39.5 ------- ------ * Before amortisation of intangible assets of £2.5 m (2004: nil) and after taxon joint ventures of £0.1m (2004: nil)+ Excluding a one-off increase of £7.2m relating to the transfer of railmaintenance to Network Rail In this segment we report the results of our activities in rail infrastructure,roads maintenance, facilities management and other support services. Revenue in Support Services increased by nearly 8 per cent, as the acquisitionof PME and organic growth more than offset a reduction in revenue from our railinfrastructure activities. The latter was largely due to transferring to NetworkRail maintenance contracts that generated around £150 million in 2004. Organicgrowth was driven primarily by road maintenance in Canada and the UK. Growth inCanada has been particularly strong following our success in winning contractsin Ontario, where we have established a market leading position. Since theyear-end, we have built on that success by winning a further contract that willextend our operations to Alberta. Operating profit increased by £0.9 million (excluding the £7.2 million one-offincrease in profit in 2004, relating to the transfer of rail maintenance toNetwork Rail) and the operating margin reduced from 4.3 per cent to 4.1 percent, reflecting the loss of rail maintenance contracts, which had higher thanaverage margins in this segment. PME performed in line with our expectations, contributing £149 million ofrevenue and £3.5 million of operating profit in the year, following itsacquisition in March 2005. New Bank Facility In connection with the acquisition of Mowlem plc, a new committed bank facilitytotalling £490 million has been arranged. Of this amount, £190 million isrepayable at the end of five years, £250 million is repayable over five yearsand £50 million is available for 364 days with a six month term-out option. Consolidated income statementFor the year ended 31 December 2005 2005 2004 £m £m ----------------------------------------------------------------------------------------- |Total revenue 2,284.2 1,985.1 | |Less: Share of jointly controlled entities revenue (258.7) (126.1)| ----------------------------------------------------------------------------------------- Revenue 2,025.5 1,859.0 Cost of sales (1,888.6) (1,698.9) --------------------------------------- ------- ------- Gross profit 136.9 160.1 Administrative expenses (104.6) (116.6) --------------------------------------- ------- ------- Group operating profit 32.3 43.5 ------------------------------------------------------------------------------------------ |Jointly controlled entities | |Operating profit 20.3 13.0 | |Net financing income/(expense) 1.1 (3.4) | |Non-operating items (0.8) 1.5 | |Income tax (5.0) (2.0) | ------------------------------------------------------------------------------------------ Share of results of jointly controlled entities 15.6 9.1 --------------------------------------- ------- ------- Profit from operations 47.9 52.6 Non-operating items - 10.1 ------------------------------------------------------------------------------------------ |Financial income 54.4 52.3 | |Financial expenses (50.4) (48.2) | ------------------------------------------------------------------------------------------ Net financing income 4.0 4.1 --------------------------------------- ------- ------- Profit before tax* 51.9 66.8 Income tax (11.1) (8.6) --------------------------------------- ------- ------- Profit for the year 40.8 58.2 ------- ------- Attributable to: Equity holders of the parent 39.3 56.4 Minority interests 1.5 1.8 ------- ------- Profit for the year 40.8 58.2 ------- ------- Earnings per share* Basic 18.7p 27.1p Diluted 18.4p 26.7p Total dividend declared for the year 8.0p 7.5p ------- ------- The above results for both years derive from continuing operations. * A reconciliation of the reported result to the underlying result is given inNote 4. Consolidated statement of recognised income and expenseFor the year ended 31 December 2005 2005 2004 £m £m Foreign exchange translation adjustments 1.6 (1.1)Actuarial gains and losses on defined benefit pension schemes 6.7 26.3Group share of change in fair value of cash flow hedges withinjointly controlled entities (1.3) -(net of tax) ------- -------- 7.0 25.2Tax in respect of the above (1.5) (8.3) ------- --------Income and expense recognised directly in equity 5.5 16.9Profit for the year 40.8 58.2 ------- --------Total recognised income and expense for the year 46.3 75.1 -------- Effect of adoption of IAS 32 and IAS 39 (net of tax) on 1January 2005Hedging reserve (9.7)Fair value reserve 0.9 ------- 37.5 ------- Attributable to:Equity holders of the parent 44.8 73.3Minority interests 1.5 1.8 ------- --------Total recognised income and expense for the year 46.3 75.1 ------- -------- Reconciliation of movements in consolidated equity shareholders' funds For the year ended 31 December 2005 2005 2004 £m £mRecognised income and expense 44.8 73.3Equity settled transactions (net of deferred tax) 0.9 0.4New share capital subscribed 1.7 0.4Share options exercised by employees 0.7 0.8Dividends paid to equity holders of the parent (16.1) (16.4) ------- -------Net addition to equity shareholders' funds 32.0 58.5Opening equity shareholders' funds (as restated) 116.7 67.0 ------- -------Closing equity shareholders' funds 148.7 125.5 ------- -------Opening equity shareholders' funds (as previously reported) 125.5Effect of adoption of IAS 32 and IAS 39 on 1 January 2005 (8.8) ------- -------Opening equity shareholders' funds (as restated) 116.7 ------- ------- Consolidated balance sheet As at 31 December 2005 2005 2004 £m £mAssetsNon-current assetsProperty, plant and equipment 100.9 69.9Intangible assets 62.3 20.3Retirement benefit assets 6.4 4.6Investments in jointly controlled entities 62.7 65.1Other investments 4.7 6.8Deferred tax assets 35.2 35.3 ------- -------Total non-current assets 272.2 202.0 ------- ------- Current assetsInventories 21.2 18.0Income tax receivable 0.2 0.4Trade and other receivables 459.7 389.1Cash and cash equivalents 180.9 202.7 ------- -------Total current assets 662.0 610.2 ------- -------Total assets 934.2 812.2 ------- ------- LiabilitiesCurrent liabilitiesBorrowings (17.0) (17.4)Derivative financial instruments (0.3) -Trade and other payables (600.4) (486.2)Provisions - (1.8)Income tax payable (13.3) (24.4) ------- -------Total current liabilities (631.0) (529.8) ------- ------- Non-current liabilitiesBorrowings (73.1) (56.5)Retirement benefit liabilities (74.3) (89.8)Deferred tax liabilities (6.0) (8.1)Provisions - (0.4) ------- -------Total non-current liabilities (153.4) (154.8) ------- -------Total liabilities (784.4) (684.6) ------- -------Net assets 149.8 127.6 ------- ------- EquityIssued share capital 107.4 107.1Share premium 8.2 6.8Reserves (1.0) 6.8Retained earnings 34.1 4.8 ------- -------Equity attributable to equity holders of the parent 148.7 125.5 Minority interests 1.1 2.1 ------- -------Total equity 149.8 127.6 ------- ------- Consolidated statement of cash flowsFor the year ended 31 December 2005 2005 2004 £m £mCash flows from operating activitiesProfit for the year 40.8 58.2 Depreciation, amortisation and impairment 20.5 16.8Profit on disposal of property, plant & equipment (0.9) -Share based payment expense 1.2 0.6Other non-cash movements (3.2) 3.0Share of results of associates and joint ventures (15.6) (9.1)Non-operating profit on disposal of property, plant &equipment - (2.9)Profit on disposal of investments in associates and jointventures - (7.7)Loss on disposal of businesses - 0.5Net financing income (4.0) (4.1)Income tax expense 11.1 8.6 ------- -------Operating profit before changes in working capital andprovisions 49.9 63.9Increase in inventories (2.6) (1.9)(Increase)/decrease in trade and other receivables (26.4) 16.5Increase in trade and other payables 65.1 13.7Decrease in provisions (2.2) (0.3) ------- -------Cash generated from operations before pensions schemecontribution 83.8 91.9 Contribution to PME pension scheme (10.0) - ------- -------Cash generated from operations 73.8 91.9Interest paid (4.6) (3.5)Income taxes paid (19.5) (12.7) ------- ------Net cash flows from operating activities 49.7 75.7 ------- ------ Cash flows from investing activitiesDisposal of property, plant and equipment 7.3 6.9Disposal of investments in jointly controlled entities 0.6 20.2Disposal of other non-current investments 3.4 0.9Interest received 7.4 7.2Dividends received from jointly controlled entities 8.4 7.3Disposal of businesses, net of cash disposed of - (4.3)Acquisition of subsidiary, net of cash acquired (37.1) -Acquisition of property, plant and equipment (34.2) (14.8)Acquisition of intangible assets (4.3) (0.2)Acquisition of investments in and loan advances tojointly (2.3) (1.0)controlled entities ------- ------Net cash flows from investing activities (50.8) 22.2 ------- ------ Cash flows from financing activitiesProceeds from the issue of share capital 1.7 0.4Draw down of other loans 3.4 2.2Repayment of bank loans (2.8) (5.6)Payment of finance lease liabilities (3.7) (2.9)Dividends paid to equity holders of the parent (16.1) (16.4)Dividends paid to minority interests (2.5) (2.0) ------- ------Net cash flows from financing activities (20.0) (24.3) ------- ------ Net (decrease)/increase in cash and cash equivalents (21.1) 73.6Cash and cash equivalents at beginning of period 189.6 116.2Effect of exchange rate fluctuations on cash held 1.2 (0.2) ------- ------Cash and cash equivalents at end of year 169.7 189.6 ------- ------ Cash and cash equivalents comprise:Cash and cash equivalents 180.9 202.7Bank overdrafts (11.2) (13.1) ------- ------ 169.7 189.6 ------- ------ Notes 1. Basis of preparation Carillion plc has previously prepared its financial statements in accordancewith UK generally accepted accounting principles. From 2005, the Group isrequired to prepare its consolidated financial statements in accordance withInternational Financial Reporting Standards (IFRS) as adopted by the EuropeanUnion. These results represent the first annual financial statements prepared inaccordance with IFRS. An explanation of how the transition to IFRS has affectedthe reported financial position, financial performance and cash flows of theGroup was published on 30 June 2005 and is available on the Group's website atwww.carillionplc.com. The financial information set out herein (which was approved by the Board on 8March 2006) does not constitute the Company's statutory accounts for the yearsended 31 December 2005 and 2004 but is derived from the 2005 statutory accounts.The statutory accounts for the year ended 31 December 2004, which were preparedunder UK GAAP, have been delivered to the Registrar of Companies. The statutoryaccounts for the year ended 31 December 2005, prepared under InternationalFinancial Reporting Standards adopted for use in the EU, will be deliveredfollowing the Company's Annual General Meeting. The auditors have reported onthose accounts; their reports were unqualified, did not include references toany matters to which the auditors drew attention by way of emphasis withoutqualifying their reports and did not contain statements under section 237(2) or(3) of the Companies Act 1985. 2. Segmental reporting Segment information is presented in respect of the Group's business segments,which are the primary basis of segment reporting. The business segment reportingformat reflects the Group's management and internal reporting structure. Inter-segment pricing is determined on an arm's length basis. Segment trading resultsinclude items directly attributable to a segment as well as those that can beallocated on a reasonable basis. Business segmentsThe Group is comprised of the following main business segments: • Construction Services: UK building, development and civil engineering activities and international regional construction services. • Support Services: Rail infrastructure, roads maintenance, facilities management and other support services. • Investments: Equity returns on investments in Public Private Partnership (PPP) projects Construction Support Investments Eliminations Consolidated Services Services and unallocated head office 2005 £m £m £m £m £m Revenue fromexternalcustomers 1,050.1 974.6 0.8 - 2,025.5Inter-segmentrevenue 0.3 28.6 - (28.9) - --------- --------- --------- --------- ---------Segmentrevenue 1,050.4 1,003.2 0.8 (28.9) 2,025.5 --------- --------- --------- --------- --------- Segmenttrading 4.8 39.9 0.8 - 45.5resultAmortisation/i - (2.5) (0.3) - (2.8)mpairmentof intangibleassetsUnallocatedexpenses - - - (10.4) (10.4) --------- --------- --------- --------- ---------Groupoperatingprofit 4.8 37.4 0.5 (10.4) 32.3 --------- --------- --------- --------- ---------Share ofprofit of 8.2 0.5 6.9 - 15.6jointlycontrolled --------- --------- --------- --------- ---------entitiesProfit fromoperations 13.0 37.9 7.4 (10.4) 47.9 --------- --------- --------- ---------Non - -operatingitemsNet financingincome 4.0Income taxexpense (11.1) ---------Profit forthe 40.8year --------- Construction Support Investments Eliminations Consolidated Services Services and unallocated head office 2004 £m £m £m £m £m Revenue fromexternalcustomers 949.3 908.9 0.8 - 1,859.0Inter-segmentrevenue 0.5 25.9 - (26.4) - --------- --------- --------- --------- ---------Segmentrevenue 949.8 934.8 0.8 (26.4) 1,859.0 --------- --------- --------- --------- --------- Segmenttrading 10.5 46.3 (4.3) - 52.5resultAmortisation/i - - (0.3) - (0.3)mpairmentof intangibleassetsUnallocatedexpenses - - - (8.7) (8.7) --------- --------- --------- --------- ---------Groupoperatingprofit 10.5 46.3 (4.6) (8.7) 43.5 --------- --------- --------- --------- ---------Share ofprofit of 3.2 0.4 5.5 - 9.1jointlycontrolled --------- --------- --------- --------- ---------entitiesProfit fromoperations 13.7 46.7 0.9 (8.7) 52.6 --------- --------- --------- ---------Non -operatingitems 10.1Net financingincome 4.1Income taxexpense (8.6) ---------Profit forthe 58.2year --------- 3. Dividends The following dividends were paid by the Company: 2005 2004 £m Pence per £m Pence per share shareCurrent year interim 6.0 2.8 5.6 2.675Previous year final 10.1 4.825 10.8 5.175 ------- ------- ------- ------- 16.1 7.625 16.4 7.85 ------- ------- ------- -------The following dividends were proposed by the Company in respect of eachfinancial year: 2005 2004 £m Pence per £m Pence per share shareInterim 6.0 2.8 5.6 2.675Final 14.6 5.2 10.1 4.825 ------- ------- ------- ------- 20.6 8.0 15.7 7.5 ------- ------- ------- ------- The interim dividend for 2004 includes 1.0 pence per share that represents areturn to shareholders of a proportion of the profit generated on the disposalof PPP equity shareholdings. The final dividend for 2005 of 5.2 pence per share was approved by the Board on8 March 2006 and has not been included as a liability as at 31 December 2005.The amount expected to be paid in respect of the 2005 final dividend of £14.6mincludes the dividend payable on 65.8 million new Carillion shares issuedfollowing the acquisition of Mowlem plc on 23 February 2006. 4. Earnings per share (a) Basic earnings per shareThe calculation of basic earnings per share at 31 December 2005 is based on theprofit attributable to equity holders of the parent of £39.3m (2004: £56.4m) anda weighted average number of ordinary shares outstanding during the year ended31 December 2005 of 210.5m (2004: 208.4m), calculated as follows:Weighted average number of ordinary sharesIn millions of shares 2005 2004Issued ordinary shares at 1 January 214.3 214.0Effect of own shares held by ESOP and QUEST (4.1) (5.7)Effect of shares issued in the year 0.3 0.1 ------- -------Weighted average number of ordinary shares at 31 December 210.5 208.4 ------- ------- (b) UnderlyingA reconciliation of profit before tax and basic earnings per share as reportedin the income statement to underlying profit before tax and basic earnings pershare is set out below. The adjustments made in arriving at the underlyingperformance measures are made to illustrate the impact of non-trading andnon-recurring items. 2005 2004 £m £mProfit before taxProfit before tax as reported in the income statement 51.9 66.8Amortisation of intangible assets arising from businesscombinations 2.5 -Impairment of goodwill 0.3 0.3Loss/(profit) on disposal of investments and businesses 0.8 (11.8)One-off impact of Network Rail transfer - (7.2) ------- -------Underlying profit before tax 55.5 48.1 ------- ------- 2005 2004 Pence per share Pence per share Basic earnings per shareBasic earnings per share as reported inthe income statement 18.7 27.1Amortisation of intangible assets arisingfrom business combinations 1.2 -Impairment of goodwill 0.1 0.1Loss/(profit) on disposal of investmentsand businesses 0.4 (6.2)One-off impact of Network Rail transfer - (2.4) ------- -------Underlying basic earnings per share 20.4 18.6 ------- -------c) Diluted earnings per shareThe calculation of diluted earnings per share at 31 December 2005 is based onprofit as shown in note 4(b) and a weighted average number of ordinary sharesoutstanding calculated as follows: Weighted average number of ordinary shares (diluted)In millions of shares 2005 2004 Weighted average number of ordinary shares at 31 December 210.5 208.4Effect of share options in issue 3.1 2.8 ------ -------Weighted average number of ordinary shares (diluted) at 31December 213.6 211.2 ------ ------- 5. Acquisitions On 8 March 2005, the Group acquired the entire share capital of PlannedMaintenance Group Limited (PMG) on an adjusted price basis for £33m in cashpursuant to the completion accounts process. The company and its subsidiariesoperate in the building services and maintenance industry and its results arereported in the Support Services segment. In the period from acquisition to31 December 2005 PMG contributed profit before tax of £3.5m to the consolidatedprofit for the period. If the acquisition had occurred on 1 January 2005, Grouprevenue would have been £2,054.1m and profit before tax would have been £52.4mfor the year ended 31 December 2005. Effect of acquisitions The acquisition had the following effect on the Group's assets and liabilities.Acquiree's net assets at the acquisition date Carrying Fair value Recognised amounts adjustments values £m £m £mProperty, plant and equipment 1.7 - 1.7Intangible assets 1.0 6.2 7.2Deferred tax asset 7.0 - 7.0Inventories 0.2 - 0.2Trade and other receivables 38.9 - 38.9Cash and cash equivalents 0.1 - 0.1Borrowings (3.0) - (3.0)Trade and other payables (38.9) - (38.9)Retirement benefit liabilities (13.5) - (13.5) ----------- ----------- -----------Net identifiable assets and liabilities (6.5) 6.2 (0.3) ----------- -----------Goodwill recognised on acquisition 34.5 -----------Consideration paid, satisfied in cash* 34.2Net debt acquired 2.9 -----------Net cash outflow 37.1 ----------- * Includes costs associated with the acquisition of £1.2m 6. Explanation of transition to IFRS These are the Group's first consolidated financial statements prepared inaccordance with IFRS. The Group's IFRS accounting policies have been applied in preparing theconsolidated financial statements, including comparative information for theyear to 31 December 2004 and the preparation of an opening IFRS balance sheet at1 January 2004 (the Group's date of transition). In preparing its opening IFRS balance sheet and comparative information for theyear to 31 December 2004, the Group has adjusted amounts reported previously infinancial statements prepared in accordance with previous GAAP. In addition,following the adoption of IAS 32 and IAS 39, the Group has adjusted previouslyrestated total equity at 1 January 2005. The reconciliation of total equity at 1 January 2004 and 31 December 2004 isgiven below: 31 December 2004 1 January 2004 £m £mTotal equity as previously reported underUK GAAP 186.9 151.6 --------- --------Adjustments on adoption of IFRS: Employee benefits (69.3) (90.0)Business combinations 3.2 -Share-based payments 0.3 0.2Deferred tax (2.9) (3.4)Proposed dividends 10.1 10.8Other (0.7) 0.1 --------- --------Total IFRS adjustments (59.3) (82.3) --------- --------Total equity under IFRS 127.6 69.3 --------- -------- The reconciliation of total equity at 1 January 2005 following the adoption ofIAS 32 and IAS 39 is given below: 1 January 2005 £m Total equity as reported under IFRS at 31 December 2004 127.6 --------Adjustments on adoption of IAS 32 and IAS 39:Group share of fair value of cash flow hedges in associatesand jointly controlled entities (9.7)(net of deferred tax assets of £4.2m)Fair value of available for sale investments 1.3Deferred tax on the above (0.4) --------Total IAS 32 and IAS 39 adjustments (8.8) --------Total equity under IFRS at 1 January 2005 118.8 -------- The reconciliation of profit for the year to 31 December 2004 is given below: Year to 31 December 2004 £m Loss for the period under UK GAAP (16.0) --------Adjustments on adoption of IFRS:Employee benefits 2.2Business combinations 71.8Share based payments (0.2)Deferred tax 0.5Other (0.1) --------Total IFRS adjustments 74.2 --------Profit for the period under IFRS 58.2 -------- Employee benefitsIAS 19 replaces SSAP 24 'Accounting for pension costs' and is broadly similar tothe requirements of FRS 17 'Retirement benefits'. Disclosure of the potentialimpact of FRS 17 has been included in the Group's annual report and accountssince 2001. As permitted by IAS 19, the Group has opted to recognise immediatelyand in full the actuarial gains and losses arising in each accounting period inthe Statement of Recognised Income and Expense. This treatment is similar to therequirements of FRS 17. Under IAS 19 the surplus or deficit relating to defined benefit schemes arerecognised on the balance sheet of the Group. Although the methodology fordetermining the profit and loss account charge is similar to SSAP 24, theactuarial assumptions are different. In particular, IAS 19 requires the discountrate used in the evaluation of scheme liabilities to be based on market yieldson high quality corporate bonds at the balance sheet date. In contrast, SSAP 24required the use of long-term investment return rate to discount liabilities.The difference in approach to the discount rate used can lead to a more volatileprofit and loss account charge under IAS 19 compared to SSAP 24. Business combinationsIFRS 3 'Business combinations' covers the accounting for acquisitions, which isdealt with under UK GAAP by FRS 6 'Acquisitions and mergers', FRS 7 'Fair valuesin acquisition accounting', and FRS 10 'Goodwill and intangible assets'. IFRS 3 strictly prohibits the use of merger accounting that in certaincircumstances can be applied under UK GAAP. Although goodwill arising onbusiness combinations is recognised as an asset in the balance sheet under bothIFRS and UK GAAP, IFRS 3 prohibits the amortisation of goodwill. Instead, IFRS 3requires goodwill to be subject to annual impairment reviews. In addition,goodwill previously written off to reserves under UK GAAP remains in reservesunder IFRS and is not re-cycled through the income statement on disposal of thebusiness to which it relates. The adjustment in the table above relates primarily to goodwill previouslywritten off to reserves on the original acquisitions of Crown House Engineeringand Carillion BTP, which were both disposed of in 2004. The impairment ofgoodwill under IFRS relates to UK Highways Services Limited reflecting thereduction in future cash flows as we move nearer to the end of it's maintenancecontract in 2007. Share-based paymentsIFRS 2 'Share based payments' replaces UITF 17 'Employee share schemes' under UKGAAP. IFRS 2 requires the fair value cost of providing employee share option schemesto be charged to the income statement, and in respect of equity settled sharebased payments, recognised directly in equity. This differs to the UITF 17approach under which the charge to the income statement is based on theintrinsic value of the share options. The scope of IFRS 2 is wider than UITF 17as it relates to all share based payments. Consequently, Save as You Earn (SAYE)schemes are within the scope of IFRS 2, whereas under UITF 17 they arespecifically exempt. Deferred taxIAS 12 'Income taxes' is the IFRS equivalent of FRS 16 'Current tax' and FRS 19'Deferred taxation' under UK GAAP. There is no change to the basis of calculating current income tax as a result ofadopting IAS 12. However, the basis of calculating deferred tax changes from anincome statement approach under FRS 19 to a balance sheet approach under IAS 12.The balance sheet approach compares the tax value with the carrying value ofassets and liabilities at the balance sheet date. Of the additional requirementsof IAS 12, the most significant is the requirement to recognise a deferred taxliability in respect of the unremitted earnings of overseas entities, wheretheir distribution cannot be controlled or planned by the Group. Proposed dividendsIAS 10 (revised 2003) 'Events after the balance sheet date' is the FRSequivalent of SSAP 17 'Accounting for post balance sheet events in the UK. Bothstandards are similar except in respect of the accounting treatment ofdividends. Under IAS 10, dividends declared and approved by shareholders after the balancesheet date are not permitted to be recognised as a liability at the balancesheet date. This differs from the UK GAAP treatment of proposed dividends, whichare accrued for the in the financial period to which they relate. The adjustmentreflects the reversal of the proposed dividend accrued in the 2004 financialstatements. 7. Posting of statutory accounts to shareholders The Company's report and accounts will be posted to shareholders on 4 April 2006. From that date copies will be available from the registered office, Carillionplc, Birch Street, Wolverhampton, WV1 4HY. 8. Annual general meeting A resolution will be put to shareholders at the AGM on 10 May 2006 for theCompany to be authorised to purchase its own shares. The Board has no presentintention of making any such purchase and the resolution is in keeping with thepractice of other companies. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Carillion Plc