Final Results

14th Sep 2006 07:01

Kier Group PLC14 September 2006 14 September 2006 KIER GROUP PLC PRELIMINARY RESULTS FOR THE YEAR TO 30 JUNE 2006 • Pre-tax profits* up 23.6% to £59.1m (2005: £47.8m**) • EPS before last year's exceptional items up 25.1% to 120.8p (2005: 96.6p) • Full year dividend increased by 17.1% to 26.0p (2005: 22.2p) • £96.6m of cash generated from operating activities • Construction and Support Services order books at record levels • Homes order book at 31 August 45% ahead of last year *Pre-tax profits are stated after deducting joint venture tax of £1.4m (2005:£1.2m)**Before exceptional items Commenting on the results, John Dodds, Chief Executive said: "The year to 30 June 2006 has seen the Group firing on all cylinders and ourobjective for the new financial year is to maintain this momentum and tocontinue to provide clients with a high quality service. "Our Construction order books at 30 June 2006 were at the highest level everand, with a strong pipeline of virtually secure work, our Construction divisionis in an excellent position to grow further. In Support Services the market forlocal authority outsourcing contracts continues to expand. Our housing land bankcontains sites of good quality in saleable locations and we anticipate anincrease in unit sales for Kier Residential this year enhanced by theacquisition of Hugh Bourn Homes which provides us with a new operating area. OurProperty portfolio contains a range of development sites that will continue tobe enhanced in value, and in Infrastructure Investment we can see a number ofgood projects coming forward. "Against this backdrop, the prospects for the Group are excellent and I amconfident that we will continue to deliver further growth in 2007 andthereafter."------------------ For further information, please contact:John Dodds, Chief ExecutiveDeena Mattar, Finance DirectorKier Group plc Tel: 01767 640111 Caroline SturdyMadano Partnership Tel: 020 7593 4000 Chairman's Statement Overview I am pleased to report another record result for Kier Group plc for the year to30 June 2006. Profits before tax have grown by 23.6% to £59.1m (2005: £47.8mbefore exceptional items); and earnings per share, after deducting theamortisation of intangible assets, have increased by 25.1% to 120.8p (2005:96.6p before exceptional items), representing a compound annual growth rate of23% since flotation some 10 years ago. Activity across all of our divisions was high during the year and order intakewas strong, resulting in a record £1.8bn of revenue for the year (2005: £1.6bn)and record year-end order books for Construction and Support Services of £2.7bn(2005: £2.2bn). Our Homes division had an excellent year with the number of unitsales 25% ahead of last year and order books at 31 August 45% ahead of the sametime last year. The cash performance, one of our key measures, was exceptionally strong,particularly within our Construction businesses, with £96.6m generated fromoperating activities during the year, despite special pension contributions of£31.5m in the period. The net cash balance at 30 June 2006 was £111.2m (2005:£58.1m). This is the first set of full year results presented under InternationalFinancial Reporting Standards (IFRS) and comparative figures for the year to 30June 2005 have been restated on this basis. The most significant impact ofchanges in accounting standards is on the Group's net asset position, which hasreduced by £42.1m as a result of reflecting the net pension scheme deficit onthe balance sheet. The Board proposes a final dividend of 17.8p (2004: 15.2p) making 26.0p for theyear (2005: 22.2p), an increase of 17.1% which is covered 4.6 times by earningsper share. The dividend will be paid on 5 December to shareholders on theregister on 29 September 2006 and there will be a scrip dividend alternative. Board appointments I am very pleased to welcome Phil White to our Board as a non-executive directorfrom 1 July 2006. Phil was Chief Executive of National Express for nearly 10years transforming it into one of the UK's leading transportation groups. He isalready playing a very constructive role on the Kier Board and, with hisexperience, will contribute significantly to the future growth of the Group. I am delighted to announce that, with effect from 1 October 2006, MickO'Farrell, managing director of Kier Residential, will be joining the Board.Mick, aged 45, joined the Group in May 2003 as managing director of AllisonHomes and became managing director of Kier Residential in August 2005. Mick hasmany years of experience in housebuilding having held senior positions in othermajor housing businesses. Our housing activities contribute significantly to theresults and the strength of the Group and Mick's position on the Board is welldeserved - I wish him well. Prospects The record levels of revenue, cash generation and contracting order booksprovide a firm foundation for the future and we are therefore well placed forfurther profitable growth in 2007. Operating and Financial Review Chief Executive's Review Overview The year to 30 June 2006 has been another successful one for the Group. Activitylevels have been high, with revenue across most of the divisions at recordlevels; cash generation has been strong and all of the divisions have seenincreased operating margins. Our growth record in earnings per share hascontinued with a 25.1% increase on last year (excluding the impact of lastyear's exceptional items) and compound annual growth of 23% since flotation in1996. Good progress has been made this year on multi-skilled projects where two ormore of the divisions within the Group are working together. This is an area inwhich Kier has a competitive advantage and which, I believe, will continue tostrengthen our position in the marketplace. Financial performance Revenue for the year at £1,838.3m (2005: £1,623.2m) was 13.3% ahead of last yearwith strong growth from our Construction, Support Services and Homes divisions.Operating profit, after the amortisation of intangible assets and joint ventureinterest and tax, was 20.8% ahead of last year at £59.2m (2005: £49.0m) andprofit before tax increased by 23.6% to £59.1m (2005: £47.8m before exceptionalprofits of £6.7m). Adjusted earnings per share before the amortisation of intangible assets andlast year's exceptional profits and tax increased by 24.4% to 124.8p (2005:100.3p). The trading result for the year was supported by strong cash generation. Overallthere was an inflow of £53.1m resulting in a year end net cash balance of£111.2m (2005: £58.1m) after an outflow of £31.5m relating to special pensioncontributions to the Kier Group Pension Scheme in the last quarter of thefinancial year. The strong cash balance is a reflection of excellent cashmanagement in the Construction and Support Services divisions and the timing ofland expenditure within the Homes division including the purchase of a number ofsites on deferred terms. Group structure and strategic developments Kier Group comprises five divisions: Construction; Support Services; Homes;Property Development and Infrastructure Investment (investment under the PrivateFinance Initiative (PFI)). The Group's management structure and segmentalanalysis for reporting purposes are based on the five divisions. The Group has a well established business model that has underpinned its growthand development over a number of years providing both financial and operationalsynergies. Financially, the construction activities generate cash, albeit atrelatively low operating margins whilst activities such as housebuilding andproperty require cash investment for growth but generate higher operatingmargins. By combining the cash generative construction activities withhousebuilding and property, we have created an efficient financial model thatachieves excellent returns on capital. Operationally the combined skills of ourbusinesses are delivering a wide range of development schemes through a singlesource. Such schemes include regeneration projects, mixed-use schemes and PFIprojects, bringing together cross-divisional expertise in a total in-housesolution. The Group strategy is to build on our skills and expertise and grow each of thedivisions by maximising opportunities in the markets in which we operate. Muchof our growth has occurred organically, particularly in the Constructiondivision where our reputation for delivery and multi-skilled services hasattracted a large number of opportunities. In Support Services our growthcontinues to emanate, largely, from new contracts in the local authorityoutsourcing sector through our Building Maintenance division. Our Homes division is one in which we have generated growth both organically andthrough acquisition. We have continued this strategy with the acquisition, inJuly 2006, of Hugh Bourn Developments (Wragby) Limited (Hugh Bourn Homes) whichhas formed the basis for our fifth housing operation within the Group. Our Property development business has also grown both organically and throughacquisition including, in December 2005, the acquisition of a portfolio of nineproperties to add to our existing holdings. The strategy for InfrastructureInvestment continues to be to grow a portfolio of PFI projects yieldinglong-term income streams while providing a flow of negotiated constructioncontracts and operational facilities management contracts for the Group's otheroperating divisions. Business review, markets and outlook Construction The Construction division comprises Kier Regional and Kier Construction. KierRegional benefits from unrivalled UK regional construction coverage focusinglargely on mid-range building contracts, and encompasses our affordable homesand major building projects operations. Kier Construction includes the Group'sinfrastructure and overseas business with rail, mining and remediationcapability. Revenue in the Construction division reached a record £1,218.1m for the year,12.1% ahead of 2005's revenue of £1,086.3m. Growth within this division wasfuelled by a strong market supported by a high level of public sectorexpenditure. Operating profit increased by 30.4% to £18.0m (2005: £13.8m) andthe operating margin reached our short-term target of 1.5% compared with 1.3%last year. Cash generation, one of our key performance measures, has been exceptionallystrong, with cash balances at 30 June 2006 over £40m higher than the previousyear end and average cash balances for the year £38m ahead. Contract awards werevery strong during the year at £1,311m (2005: £1,372m), providing a record orderbook of £1,270m at 30 June 2006 (2005: £1,030m). Kier Regional business review Kier Regional, with its wide network of UK construction businesses, continues togo from strength to strength and, once again, has achieved a number of recordsin the key performance measures of revenue, cash and new orders. Revenue, at£1,092.8m, was 14.5% ahead of 2005; year-end cash balances of £243.0m were£38.2m ahead; and contract awards of £1,216m were 19.4% ahead of 2005's £1,018m. The high proportion of negotiated and repeat business from long-standingclients, as well as national framework agreements, has remained a constant themeacross all regional businesses. Representing around 65% of work secured (2005:59%), this provides us with a lower risk, more sustainable order book,particularly when combined with the fact that the average size of contractswithin this business remains relatively low at £3.2m, (2005: £2.9m). A number of the framework agreements and strategic alliances are with publicsector clients including those designed to deliver an increasing number ofsocial housing units. Of particular note are our framework agreements withNewlon Housing Trust and Dominion Housing Group, both Registered SocialLandlords, which are providing high-rise affordable housing in London and whichhave contributed to the £180m of residential awards for the year. The continuinghigh level of public expenditure has led to an increase in public sector awardsto 43% of the total compared with 41% in 2005. Education has remained a very strong sector for Kier Regional, with over £350mof work secured this year, representing 29% of total awards (2005:24%). £95m hasbeen awarded under the private finance initiative, including Norwich Schools andOldham Schools both with Kier as an equity partner in the special purposevehicle. Our involvement with private sector clients continues through partnering stylearrangements with food retailers including Tesco, Waitrose, Morrisons andSainsbury's and developers such as Land Securities Trillium, for whom we arecarrying out the multi-phased refurbishment of the DVLA headquarters in Swansea.From this contract, our relationship with Land Securities has strengthened. As previously reported, in November 2005 our client Castlepoint announced theclosure of a retail centre in Bournemouth due to concerns over health andsafety. We, as main contractor, worked around the clock to install temporaryprops allowing the centre to fully reopen in mid January. We are discussing withCastlepoint the dismantling and rebuilding of the car park and the minimisationof any disruption on trading. The costs of this exercise are expected to becovered predominately by insurance, with no material effect anticipated on theGroup's trading position. Kier Construction business review Revenue remained relatively stable in the year to 30 June 2006 at £125.3m (2005:£131.7m). In the UK, the civil engineering arm of Kier Construction saw thecommencement of a rail framework for the renewal of railway structures in EastAnglia under a five year agreement with Network Rail. The five year AssetManagement Programme 4 for United Utilities, in joint venture, has successfullycompleted its first year of operation, albeit with a longer lead-in time thanenvisaged. Our major infrastructure projects capability continues with thesuccessful completion of CTRL contract 103 and increasing activity at MilfordHaven for South Hook LNG. Our mining business had another productive year at our opencast coal site atGreenburn, East Ayrshire, with coal production having exceeded one milliontonnes. 1.3m tonnes of coal have now been extracted to date and over 66% of thatremaining in the ground has been forward-sold at favourable fixed prices. Our remediation capability, where brownfield sites are re-developed forcommercial, residential or mixed use, is being enhanced with a number ofprojects for other Group companies. In Peterborough, work has commenced on aformer Anglian Water site for our Homes business and in Uxbridge, KierConstruction is working with Kier Property to remediate a British Gas site aheadof development of a mixed-use scheme. Overseas, our activities in the Caribbean continue to perform well. Goodprogress has been made on a large transportation centre in downtown Kingston,Jamaica and the extension to Kingston's Norman Manley Airport has started wellwith certain areas expected to be ready for the cricket world cup next year. Ourlong-term alliance with Alcoa continues to provide extensive work on projects ataluminium refineries in Suriname and Jamaica. Construction markets and outlook In the UK demand for building remains high, both in the public and privatesectors and there is an increasing emphasis on remediation projects. This demandcan be satisfied by the combined skills of our Construction division anddevelopment expertise from elsewhere in the Group. Our mining activities have good potential to contribute to future growth. Thecurrent area in which we are mining in Ayrshire is expected to continueproduction until 2009, however, extensions are being pursued and a new planningapplication has been made to operate an opencast mine at an adjacent site. Ifsuccessful, this will extend the life of the mine into 2011. Overseas, our established contacts are providing us with good opportunities,particularly in the Caribbean, with Alcoa, and in Romania, where we haverecently secured a contract for a shopping mall and residential apartments withour joint venture partner. In Dubai, where construction activity is plentiful,we remain focused on our key area of expertise, infrastructure, and we haverecently been awarded a new contract to build roads and infrastructure works forthe new 'City of Arabia'. Our Construction order books, represented by confirmed contracts in hand, are atthe highest levels ever at £1,270m (2005: £1,030m), supported by a significantpipeline of contracts in the final stages of negotiation. With these strong,good quality order-books, we can expect further growth in our Constructionactivities in the new financial year. Support Services Support Services comprises four business streams: Kier Managed Services,providing facilities management services to public and private clients; KierBuilding Maintenance, providing reactive and planned maintenance mainly to localauthority clients, housing associations and Arms Length ManagementOrganisations; Kier Building Services Engineers, a specialist mechanical andelectrical design and installation and maintenance business; and Kier Plant,specialising in plant hire to Kier Group companies and external clients. Support Services business review Revenue in the Support Services division increased by 18.5% in the year to£281.3m (2005: £237.4m), driven largely by our Building Maintenance business.Operating profit, before deducting the amortisation of intangibles of £1.9m inboth years, increased by 26.1% to £8.7m (2005: £6.9m), providing an operatingmargin of 3.1% (2005: 2.9%), slightly ahead of our short-term target of 3.0%.The cash performance within the division has been strong with £14.6m generatedin the year to give a closing cash balance of £12.5m (2005: overdraft of £2.1m).Order books have also grown during the year to £1,396m at 30 June 2006 (2005:£1,204m). In Managed Services volumes have remained steady. An increasing contribution torevenue arises from services provided under PFI; however, other private sectorwork has reduced in volume as we continue our focus on margin improvement. Newservices have begun during the year for the National Offenders ManagementService in Newport and the Dogs Trust site in Hatfield; both achieved throughintroductions from our Construction division. Good results were achieved by the Building Maintenance division, which now looksafter around 185,000 homes for local authority clients including Sheffield CityCouncil, Islington Borough Council and Leeds City Council. Revenue increasedfrom £136.9m to £172.5m, mainly due to the inclusion of Decent Homes work and awhole year of revenue from the Leeds contract. During the year we secured a fiveyear contract for the City of Lincoln which, whilst currently in themobilisation phase, will provide £7m of revenue per annum under the Decent Homesinitiative. Kier Sheffield, our partnership with Sheffield City Council, hasachieved an increase in the volume of work carried out under the Decent Homesinitiative. It continues to benefit from Sharrow Industries, a shelteredworkshop run by Kier Sheffield which supplies and manufactures kitchens, windowsand doors under an exclusivity agreement with all five contractors under theDecent Homes initiative in the City, one of which is Kier Sheffield. We weredelighted that Sheffield City Council achieved Beacon status, the highestaccolade a council can receive. Kier Sheffield's work was also influential inSheffield's housing services being awarded a three star rating (the highest) bythe Audit Commission. Support Services markets and outlook Whilst opportunities continue to emerge within the facilities management marketfor Kier Managed Services, we will continue to be selective in the contracts forwhich we bid. In Building Maintenance both local authority expenditure, through housingrepairs and maintenance budgets, and central government expenditure, through theDecent Homes initiative, are providing good potential for new work. A stronglist of opportunities is emerging in the £10m to £40m per annum range and,although disappointingly, we were unsuccessful on a bid for Manchester, we haverecently been confirmed as preferred bidder, subject to negotiations on theheads of terms, on a contract for Harlow. With a revenue stream of £17m perannum this contract will provide repairs and maintenance to housing stock,street scene works and grounds maintenance. In addition, we have been confirmedas preferred bidder on a £6.5m per annum contract in Southwark and have beenshort listed as one of three on a £35m per annum repairs and maintenancecontract for Stoke. With our proven ability to fulfil these higher value contracts, we are wellplaced to secure further work in this area. Homes Kier Residential, our housebuilding division, was structured through fourcompanies during the year: Allison Homes, which operates throughout Lincolnshireand north Cambridgeshire; Bellwinch Homes, with sites in the south and southeast; Kier Homes, operating across the central belt of Scotland; and TwigdenHomes, with activities in East Anglia and the West Midlands. In July 2006 weacquired Hugh Bourn Homes operating in North Lincolnshire, which has formed thebasis of a fifth operating area. Homes business review Kier Residential experienced a changed pattern to the timing of unit sales inthe year to 30 June 2006 with a greater bias towards the second half of the yearthan in 2005. Overall we sold 1,522 homes in the year, a 25% increase over2005's 1,215 homes achieved from an 11% increase in outlets. Average sellingprices of £180,100 (2005: £181,700) provided revenue of £274.2m from housingsales (2005: £220.8m). A land disposal, of part of a large site, generated afurther £3.7m of revenue at a nominal profit of £0.1m. The slight reduction inaverage selling prices reflects a 2% reduction in unit size and an increase inthe proportion of affordable housing sales from 12% of total sales in 2005 to16% in 2006. Operating profit from housing sales increased by 26.1% to £41.5m(2005: £32.9m) at a margin of 15.1% on housing turnover (2005: 14.9%) in linewith our targets for this business. During the year £93.3m was spent on selective land purchases, including asignificant amount on deferred terms, and at 30 June 2006 the land bankcontained 5,863 units with planning consent (2005: 5,178 units) which, at 3.9years worth of sales, is in line with our target holding of four years' unitsales. In addition to land with planning consent, we also hold approximately12,000 units of strategic land, mostly under option. Strategic land is proving avaluable route for land acquisition as, historically, approximately 18% of ourannual unit sales have originated from this process. Continuing the theme of mixed-use and regeneration sites, Kier Residential ismaking good progress on remediating a former Anglian Water site near the centreof Peterborough. Kier Construction is carrying out the work, which, whencompleted, will provide a site for 550 residential units, comprising acombination of flats and houses. At Aylesbury, a former Kier Property site,sales targets are being achieved following remediation of the site adjacent tothe station. Planning consent has now been granted at Poole Harbour, subject tosigning the agreement for the Section 106 works, for redevelopment of amixed-use site previously owned by Network Rail. Kier Construction will relocatethe rail sidings and carry out other infrastructure works which, in time, willprovide a development site for a new hotel, some 250 apartments, offices, shopsand a new railway station. In Sunbury, a development of 96 homes and a hotel is progressing on remediatedland, in conjunction with Kier Property. Bellwinch is constructing threeapartment blocks and Kier Property is building the 120 bedroom hotel. Ouraffordable housing business, Kier Partnership Homes, worked with Bellwinch toobtain a housing association contract for 48 units within the scheme. On 31 July 2006 we acquired the shares in Hugh Bourn Homes for a totalconsideration of £53.3m, representing the market value of land, work in progressand other assets and liabilities. £20m was paid on completion, with the balancedue in instalments on 2 July 2007 and 1 July 2008. Hugh Bourn Homes forms thefoundation for a fifth trading division of Kier Residential, expanding its reachto the north of Allison Homes' operating area. The majority of the 1,197residential plots we acquired with the business benefit from a combination ofoutline and detailed planning consent and included a small number of built andpartially built units. In its first year of operation within Kier, Hugh BournHomes is expected to trade from 21 outlets. Housing markets and outlook The housing market saw its usual quietening during the holiday season in Julyand most of August, although there are clear signs that it has begun to pick upin recent weeks. Reservations during the new financial year, on a like for likebasis, excluding the effects of the acquisition of Hugh Bourn Homes, are 46%ahead of the same period last year and, taking Hugh Bourn Homes into account,they are some 68% ahead of last year. This has given rise to an order book at 31August 2006 some 45% ahead of the same time last year (38% excluding Hugh BournHomes). We will be selling from approximately 27% more outlets during the year comparedwith last year and therefore we anticipate growth in unit sales for the fullyear of which 42% are already secure. Similar to 2006 we expect the balance ofsales to be skewed towards the second half of the year. We anticipate further land expenditure this financial year, in addition to theexpenditure for Hugh Bourn Homes, in order to maintain our land bank atapproximately four years' worth of sales. Property Our Property development business comprises activity across commercial,industrial, retail and mixed-use sectors largely on a non-speculative basis. Itoperates through Kier Ventures, a wholly owned subsidiary; and Kier Developmentsa joint venture with the Bank of Scotland. Property business review Kier Property has had another active year, cementing its position as one of theUK's leading commercial property developers. Despite the commercial propertymarket in the UK experiencing high levels of investment demand, with investorschasing limited availability of stock, Kier Property acquired some 15 new sitesduring the year and crystallised considerable value on several existingproperties through lettings, sales and obtaining planning consents. Notwithstanding all this activity, the number of developments sold during theyear fell resulting in a reduction in revenue from £62.2m in 2005 to £47.5m in2006. Operating profit, similarly, reduced from £10.4m to £9.2m in the year,although operating margins moved ahead from 16.7% to 19.4%. Kier Property has developed a portfolio that now totals over 5m sq ft ofdevelopments, with a prospective completed value of around £734m. The portfoliooffers a diverse spread of office, retail and mixed-use schemes with aparticular commitment to regeneration. In December 2005, we acquired a £10mportfolio including nine sites from Warner Estates. One of the sites, inLincoln, has planning consent for residential use on which Allison Homes hascommenced the infrastructure works for a major residential development.Remaining sites include a mixture of short-term and long-term developmentsacross all sectors and we will work through the portfolio to maximise value. During the year, Kier Property continued to augment its industrial portfolio,with the successful 'Trade City' brand as a platform. A 2.9 acre site onLondon's North Circular Road was acquired for a 115,000sq ft scheme, of whichalmost an acre is expected to be sold to a self-storage company. An 11 acreformer British Gas site in Uxbridge was also purchased and is being remediatedby Kier Construction ahead of a 215,000sq ft employment-led mixed-use scheme. Atour Crown Road scheme in Enfield, the first phase was pre-let and completedduring the year, comprising a 20,000sq ft Renault car showroom and a 50,000sq ftSelco builders' merchant. The scheme was then sold to a financial institution ata very satisfactory yield. We have now secured planning permission for a second,80,000sq ft phase at the site and work will begin during the coming year. At our Loughton development the prime site was sold to Sytner for a BMW carshowroom and the remainder of the site was developed into a new office for KierRegional's operating business, Kier London. In the offices portfolio, Kier Property continued to establish itself as one ofthe foremost players in the pre-let development arena. During the year, KierProperty was selected as preferred developer to deliver a new head office forOrdnance Survey in Southampton. Kier Regional will build the new 145,000sq fthead office on a new site with Kier Building Services Engineers carrying out themechanical and electrical installation. Kier Managed Services will then providethe facilities management services when it is complete. This will enable KierProperty to work up Ordnance Survey's existing twenty-five acre site into amajor regeneration project comprising 10 acres of employment use and over 400homes, to be developed with Kier Residential. A further pre-let office scheme was signed during the year to develop a new140,000sq ft head office campus for global IT company Electronic Data Systems.Work has begun on phase one of the £35m scheme with Kier Regional as thecontractor. On other regeneration projects, Kier Regional has begun work on a mixed-useredevelopment of the former Shippams food factory in Chichester. The scheme willinclude 45,000sq ft of retail space, most of which has been let to high streetretailers, and a residential development of 165 flats the land for which hasbeen sold to a house builder during the year. In March 2006 we secured planning for a new 175,000sq ft produce and flower hallat the Western International Market near Heathrow. On completion of the newfacility, we will develop a 300,000sq ft distribution scheme on the old marketsite. Property markets and outlook Looking ahead, major schemes such as the three-phase, 600,000 sq ft ReadingCentral office development and a 800 home regeneration site close to AshfordTown centre will gather pace and we anticipate further growth in the businessthrough both acquisitions and enhancement of existing properties. We are particularly pleased to have been selected as preferred bidder for thenew UK Supreme Court in London's Parliament Square. Planning consent hasrecently been granted and work is expected to commence in spring 2007. Infrastructure Investment Kier Project Investment (KPI) manages the Group's interests procured under PFI.The core strength of KPI is the ability to bring together the diverse range ofskills and resources within the Group and combine these with a financial packagethat will deliver high quality buildings and services to meet the publicsector's needs. Infrastructure Investment business review This has been another successful year for KPI, bringing our committed equityinvestment in the government's PFI to £22.8m and securing a further £230m offuture turnover for the Group through associated construction and facilitiesmanagement contracts. Three projects reached financial close during the year: one health scheme, theGarrett Anderson Centre, a significant addition to the existing IpswichHospital; and two schools schemes providing six schools in Norwich for NorfolkCounty Council and two schools, for Oldham Metropolitan Borough Council.Construction work with a combined value of £120m is now under way by KierRegional. Facilities management services will be provided by Kier ManagedServices on completion of the buildings. A contract to provide a new headquarters building in Gravesend for Kent Policereached financial close in July 2006. This new £32m facility will be constructedby Kier Regional. Construction was successfully completed on a number of projects during the year.Eleven schools including two in Tendring, seven in Waltham Forest and two inSheffield; Hinchingbrooke Hospital and Oldham Library were all handed over ontime and Kier Managed Services commenced facilities management operations oneach of these new facilities. Construction continues on two further schools inSheffield. We were disappointed not to have been selected for either of the 'BuildingSchools for the Future' (BSF) projects for which we were bidding. BSF has been acostly exercise for us and we have written off costs of £2.2m in the two yearsto 30 June 2006. However, we are not ruling out BSF projects and ourConstruction companies remain keen to pursue the construction opportunities. Infrastructure Investment markets and outlook The PFI market continues to provide sensible opportunities for our businesses inthe key sectors in which we operate. Our strategy continues to be to invest inPFI opportunities that provide the Group either with the construction work orthe facilities management contracts, and preferably both. As a Group we cantackle a wide range of sectors from hospitals and schools to street services,which provides us with a broad market and plenty of scope for new projects. KPI is currently short-listed, supported by other Group companies, on bids forthe Three Counties Police Investigation Centres project in East Anglia and theLeicester Hospitals scheme. Pensions At 30 June 2006 the net pension deficit shown on the balance sheet, calculatedas required by IAS 19 'Employee Benefits', is £42.1m (June 2005: £85.3m). Themovement in the year includes special contributions, amounting to £31.5m, paidinto the pension scheme in the last quarter of the financial year. Thesecontributions form part of a schedule of payments designed to eliminate thepension scheme deficit over 10 years. A further £5.0m was contributed in July2006 and the Group is making further special contributions of £0.5m per month.These contributions are in addition to a special contribution of £12.0m made inMarch 2005, bringing the total payments to the scheme, over and above normalcontributions, to £43.5m in the two years to 30 June 2006. The special contributions have no effect on the income statement for the year,but are shown as a reduction in cash and a reduction in the pension deficit. Health & Safety Kier has continued to build on the positive approach to health and safety valuedin all of our employees and supply chain members. This approach, together withour "Don't Walk By" campaign and continuing focus on behavioural issues, hascreated a proactive approach identifying and correcting health and safetyissues. By addressing the risk and not the symptom, Kier has brought aboutsignificant reductions in its Accident Incidence Rate, which now stands at 522per 100,000 staff and subcontractors, comparing favourably with the Health &Safety Executive benchmark of 902. In recognition, the Group received nine gold, two silver, and one bronze awardfrom RoSPA and seven British Safety Council Awards. Through their positive, proactive attitude, our staff and supply chain worktirelessly to reduce the potential for accidents to happen, and to protect thelong-term health of those working on Kier sites. The roll-out of the ISO 18001/14001 registration programme has ensured that already high standards and levelsof awareness continue to be raised and the third party audit carried out by BSIensures that the Group continues to deliver best practice. This continuingimprovement approach culminated in Kier Group being awarded the highly covetedQuality in Construction Health and Safety Management Award 2006. People The success and reputation of a business is a reflection of the quality of thepeople who work together to form it. We have many excellent, committed andenthusiastic people in this Group. Whether we are building a tunnel, servicingan office, changing a boiler or grappling with a complex planning issue, thewealth of talent in this Group to bring any project to fruition is immense. I amvery proud of what this Group can achieve and I also sense a great pride in ouremployees: pride, not just for the work they are doing, but as employees ofKier. I should like to thank all of our employees for their continuingcontribution to making Kier Group the success it is today. Objectives and prospects The year to 30 June 2006 has seen the Group firing on all cylinders and ourobjective for the new financial year is to maintain this momentum and tocontinue to provide clients with a high quality service. Our Construction order books at 30 June 2006 were at the highest level ever and,with a strong pipeline of virtually secure work, our Construction division is inan excellent position to grow further. In Support Services the market for localauthority outsourcing contracts continues to expand. Our housing land bankcontains sites of good quality in saleable locations and we anticipate anincrease in unit sales for Kier Residential this year enhanced by theacquisition of Hugh Bourn Homes which provides us with a new operating area. OurProperty portfolio contains a range of development sites that will continue tobe enhanced in value, and in Infrastructure Investment we can see a number ofgood projects coming forward. Opportunities for our businesses to work together are becoming more prolific ascomplex planning issues continue to require resolution and clients' requirementsbecome more intricate. Against this backdrop, the prospects for the Group are excellent and I amconfident that we will continue to deliver further growth in 2007 andthereafter. Financial Review International Financial Reporting Standards (IFRS) 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 June 2006, the comparativeinformation for the year to 30 June 2005 and the preparation of an opening IFRSbalance sheet at 1 July 2004 (the date of transition from UK GAAP to IFRS). Profit before tax Profit before tax increased by 23.6% to £59.1m (2005: £47.8m). This is statedafter deducting joint venture tax of £1.4m (2005: £1.2m) and before theexceptional profits of £6.7m recorded in the year to 30 June 2005. Theexceptional profits in 2005 included: £0.8m on the sale of the Group's remaininginterest in Kier Hong Kong Limited; £3.8m on the sale of a property fixed asset;and £2.1m on the sale of the Group's interest in a PFI concession. Taxation The Group's effective tax rate, including joint venture tax on joint ventureprofits, is 29.0%. This compares with an effective rate of 34.3% in 2005.However, the effective tax rate for the year to 30 June 2005 included £2.5m ofexceptional tax relating to refinancing one of the Group's PFI concessions, forwhich no profit was recognised; and £1.8m relating to exceptional items.Disregarding the exceptional items, the 2005 effective rate, including jointventure tax on joint venture profit, was 30.2%. The reduction to 29.0% largely reflects the utilisation of some brought forwardcapital losses and tax benefits relating to contaminated land remediation. Interest and cash The interest charge for the year comprises the following:- Years to 30 June 2006 2005 £'m £'mGroup interest receivable 5.3 4.0Interest payable (2.8) (2.5)Unwinding of discount (2.6) (2.7)Share of joint venture interest (2.6) (3.1) -------------- -------------- (2.7) (4.3) -------------- -------------- The Group interest receivable arises from average treasury balances of £60m forthe year. The charge of £2.6m relating to unwinding of discounts includes £2.0mrelating to land creditor balances payable over a number of years (2005: £2.1m). Net cash at 30 June 2006 was £111.2m (2005: £58.1m) after deducting £30.1mrelating to loan notes. £96.6m was generated from operations during the yearafter deducting £31.5m in respect of the special pension contributions madeduring the year. Cash, net of debt, at 30 June 2006, includes £37.6m (2005: £22.8m) of cash whichis not generally available for Group purposes, including that held by jointarrangements, overseas and by the Group's captive insurance company. The liquidcash position is affected by seasonal, monthly and contract-specific cycles. Inorder to accommodate these flows the Group maintains a range of bank facilitieswhich were increased by £40.0m during the year. The facilities at 30 June 2006,of £120.0m, comprise £12.5m of overdraft facilities, and £107.5m of committed,revolving credit facilities all on an unsecured basis. £15.0m of this expires inJanuary 2007 and £92.5m expires in January 2011. Treasury policy and risk management The Group has a centralised treasury function which manages funding, liquidityand financial risks. The Group's policy is to use the cash generated by theConstruction business to invest in the asset based homes and propertybusinesses. This financial model is supplemented with bank facilities amountingto £120m and long term debt of £30m. The Group's financial instruments comprise cash and liquid investments. TheGroup, largely through its PFI and Property joint ventures, enters intoderivatives transactions (principally interest rate swaps) to manage interestrate risks arising from the Group's operations and its sources of finance. We donot enter into speculative transactions. There are minor foreign currency risks arising from operations. The Group has asmall number of branches and subsidiaries operating overseas in differentcurrencies. Currency exposure to overseas assets is hedged through inter-companybalances and borrowings, such that assets denominated in foreign currencies arematched, as far as possible, by liabilities. Where there may be further exposureto foreign currency fluctuations, forward exchange contracts are entered into tobuy and sell foreign currency. Balance sheet and shareholders' funds The balance sheet at 30 June 2006 includes intangible assets of £14.8m of which£9.6m relates to the outsourcing contract at Sheffield which is being amortisedover ten years, being the life of the contract, with £1.9m (2005: £1.9m) chargedto profits in the year. Shareholders' funds have more than doubled during the year to £108.5m (2005:£52.8m) arising from retained profits of £42.9, dividends of £(8.3)m, currencytranslation of £(0.3)m, movement in the share scheme reserve of £0.7m, movementin the net pension deficit of £21.0m, issue of shares of £2.1m and theintroduction of IAS 32 and 39 this financial year, which has a £(2.4)m impact. Pensions The Group participates in two principal schemes, the Kier Group Pension Scheme,which includes a defined benefit section, and a defined benefit scheme on behalfof its employees in Kier Sheffield LLP. The financial statements reflect thepension scheme deficits and surpluses calculated in accordance with IAS 19. At30 June 2006 the net deficit under the Kier Group Pension Scheme was £46.9m(2005: £86.6m). The market value of the schemes' assets was £467.0m (2005:£393.5m) and the net present value of the liabilities was £534.0m (2005:£517.2m). £31.5m of the movement in asset value related to the specialcontributions made to the pension scheme during the year. Under the scheme relating to Kier Sheffield LLP there was a net surplus of £4.8mat 30 June 2006 (2005: £1.3m). Pension charges of £16.9m (2005: £15.3m) have been made to the income statementin accordance with IAS 19. Consolidated income statementfor the year ended 30 June 2006 2006 2005 Notes £m £m------------------------------------- ---- ------- -------Revenue - continuing operationsGroup and share of joint ventures 2 1,838.3 1,623.2Less share of joint ventures (55.1) (50.2)------------------------------------- ---- ------- -------Group revenue 1,783.2 1,573.0Cost of sales (1,623.7) (1,433.8)------------------------------------- ---- ------- -------Gross profit 159.5 139.2Administrative expenses (103.5) (91.1)Share of post tax profits from joint ventures 3.2 0.9------------------------------------- ---- ------- -------Profit from operations 2 59.2 49.0Other non-operating income (exceptional items) 3 - 6.7Finance income 5.3 4.0Finance cost (5.4) (5.2)------------------------------------- ---- ------- -------Profit before tax 2 59.1 54.5Income tax 4 (16.2) (17.9)------------------------------------- ---- ------- -------Profit for the year 42.9 36.6------------------------------------- ---- ------- -------Earnings per ordinary share 6- basic 120.8p 103.4p- diluted 118.8p 102.5p------------------------------------- ---- ------- -------Underlying earnings per ordinary share (excludingother non-operating income - exceptional items)- basic 120.8p 96.6p- diluted 118.8p 95.8p------------------------------------- ---- ------- ------- Consolidated statement of recognised income and expensefor the year ended 30 June 2006 2006 2005 Notes £m £m------------------------------------- ---- ------ -------Foreign exchange translation differences (0.3) 0.1Fair value movements in cash flow hedging instruments 4.1 -Actuarial gains and losses on defined benefit pension schemes 30.0 (41.5)Deferred tax on items recognised directly in equity (10.2) 12.5------------------------------------- ---- ------ -------Income and expense recognised directly in equity 23.6 (28.9)Profit for the year 42.9 36.6------------------------------------- ---- ------ -------Total recognised income and expense for the year 66.5 7.7------------------------------------- ---- ------ -------Change in accounting policyEffect of adoption of IAS32 and IAS39 on 1July2005(withJune2005 not restated) on cash flow hedge reserve (7.5) -Deferred tax on above 2.2 -------------------------------------- ---- ------ ------- 61.2 7.7------------------------------------- ---- ------ ------- Consolidated balance sheetat 30 June 2006 2006 2005 Notes £m £m--------------------------------------- ---- ------- -------Non-current assetsIntangible asset 14.8 16.7Property, plant and equipment 78.5 75.8Investment in joint ventures 20.8 22.9Retirement benefit surplus 6.8 1.8Deferred tax assets 20.9 38.3Other financial assets 0.6 -Trade and other receivables 16.1 14.6--------------------------------------- ---- ------- -------Non-current assets 158.5 170.1--------------------------------------- ---- ------- -------Current assetsInventories 377.8 325.7Other financial assets 0.6 -Trade and other receivables 258.4 233.3Cash and cash equivalents 141.3 93.5--------------------------------------- ---- ------- -------Current assets 778.1 652.5--------------------------------------- ---- ------- -------Total assets 936.6 822.6--------------------------------------- ---- ------- -------Current liabilitiesBank overdrafts and loans - (5.3)Trade and other payables (670.5) (566.5)Tax liabilities (2.7) (9.5)Provisions (0.9) (1.2)--------------------------------------- ---- ------- -------Current liabilities (674.1) (582.5)--------------------------------------- ---- ------- -------Non-current liabilitiesLong-term borrowings (30.1) (30.1)Trade and other payables (36.8) (17.2)Retirement benefit obligations (67.0) (123.7)Provisions (18.1) (16.3)Deferred tax liabilities (2.0) ---------------------------------------- ---- ------- -------Non-current liabilities (154.0) (187.3)--------------------------------------- ---- ------- -------Total liabilities (828.1) (769.8)--------------------------------------- ---- ------- -------Net assets 2 108.5 52.8--------------------------------------- ---- ------- -------EquityShare capital 0.4 0.4Share premium 20.0 17.9Capital redemption reserve 2.7 2.7Retained earnings 88.0 31.7Cash flow hedge reserve (2.4) -Translation reserve (0.2) 0.1--------------------------------------- ---- ------- -------Total equity 7 108.5 52.8--------------------------------------- ---- ------- ------- Consolidated cash flow statementfor the year ended 30 June 2006 2006 2005 Notes £m £m------------------------------------- ---- ------ -------Cash flows from operating activitiesProfit before tax 59.1 54.5Adjustments Other non-operating income (exceptional items) - (6.7) Share of post tax profits from joint ventures (3.2) (0.9) Normal contributions to pension fund in excess of pension charge (0.2) (0.1) Share-based payments charge 1.1 0.6 Amortisation of intangible assets 1.9 1.9 Depreciation charges 13.5 12.3 Profit on disposal of property, plant & equipment (1.1) (0.5) Net finance cost 0.1 1.2------------------------------------- ---- ------ -------Operating cash flows before movements inworking capital 71.2 62.3Special contributions to pensionfund (31.5) (12.0)(Increase)/decrease in inventories (49.3) 19.7Increase in receivables (26.7) (16.7)Increase in payables 131.8 31.3Increase in provisions 1.1 1.8------------------------------------- ---- ------ -------Cash inflow from operating activities 96.6 86.4Interest received 5.3 3.7Income taxes paid (11.3) (12.8)------------------------------------- ---- ------ -------Net cash generated from operatingactivities 90.6 77.3------------------------------------- ---- ------ -------Cash flows from investing activitiesProceeds from sale of property, plant &equipment 4.6 6.0Proceeds from sale of investments 1.4 5.8Refinancing of PFI joint venture - 8.1Dividends received from joint ventures 1.3 0.4Purchases of property, plant &equipment (23.2) (19.9)Acquisition of subsidiaries (10.1) (16.5)Investment in joint ventures (0.6) (1.5)------------------------------------- ---- ------ -------Net cash used in investing activities (26.6) (17.6)------------------------------------- ---- ------ -------Cash flows from financing activitiesProceeds from the issue of share capital - 0.2Purchase of own shares (2.0) (0.4)Interest paid (2.7) (2.6)Dividends paid (6.2) (6.4)------------------------------------- ---- ------ -------Net cash used in financing activities (10.9) (9.2)------------------------------------- ---- ------ -------Net increase in cash and cashequivalents 53.1 50.5Opening net cash and cash equivalents 88.2 37.7------------------------------------- ---- ------ -------Closing net cash and cash equivalents 141.3 88.2------------------------------------- ---- ------ ------- Reconciliation of net cash flow to movement in net fundsNet increase in cash and cash equivalents 53.1 50.5Opening net funds 58.1 7.6------------------------------------- ---- ------ -------Closing net funds 111.2 58.1------------------------------------- ---- ------ -------Net funds consist of:Cash and cash equivalents 141.3 93.5Overdrafts - (5.3)------------------------------------- ---- ------ -------Net cash and cash equivalents 141.3 88.2Long-term borrowings (30.1) (30.1)------------------------------------- ---- ------ -------Net funds 111.2 58.1------------------------------------- ---- ------ ------- Cash and cash equivalents includes £12.6m (2005: £6.2m) being the Group's shareof cash held by joint arrangements and £25.0m (2005: £16.6m) of cash not readilyavailable to the Group. Notes to the Consolidated Financial Statements 1. Basis of preparation The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards as adopted for use in the EU (IFRS). As these are the first annual financial statements of the Group to be preparedunder IFRS, the significant accounting policies that have been applied in thepreparation of the financial statements are detailed in note 8. 2 Turnover, profit and segmental information For management purposes the Group is organised into five operating divisions,Construction, Support Services, Homes, Property and Infrastructure Investment.These divisions are the basis on which the Group reports its primary segmentalinformation. Support Infrastructure Construction Services Homes Property Investment Centre Group £m £m £m £m £m £m £m------------------ ------- ------- ------- ------- ------- ------- -------Year to30 June 2006RevenueGroup andshare of jointventures 1,218.1 281.3 277.9 47.5 13.5 - 1,838.3Less share ofjoint ventures (2.6) - - (40.0) (12.5) - (55.1)------------------ ------- ------- ------- ------- ------- ------- -------Group revenue 1,215.5 281.3 277.9 7.5 1.0 - 1,783.2------------------ ------- ------- ------- ------- ------- ------- -------ProfitGroup operatingprofit 17.2 6.8 41.6 4.2 (2.1) (11.7) 56.0Share of jointventures' operatingprofit 0.8 - - 5.0 1.4 - 7.2------------------ ------- ------- ------- ------- ------- ------- -------Group andshare of jointventures 18.0 6.8 41.6 9.2 (0.7) (11.7) 63.2Share of joint ventures - finance cost - - - (2.1) (0.5) - (2.6)- tax (0.1) - - (0.8) (0.5) - (1.4)------------------ ------- ------- ------- ------- ------- ------- -------Profit fromoperations 17.9 6.8 41.6 6.3 (1.7) (11.7) 59.2Financeincome/(cost) 13.7 (0.5) (13.1) (0.9) 1.2 (0.5) (0.1)------------------ ------- ------- ------- ------- ------- ------- -------Profit beforetax 31.6 6.3 28.5 5.4 (0.5) (12.2) 59.1------------------ ------- ------- ------- ------- ------- ------- -------Balance sheetInvestment injoint ventures - - - 21.7 (0.9) - 20.8Other assets 281.3 77.3 351.1 22.9 0.8 41.1 774.5Totalliabilities (496.6) (78.2) (112.3) (5.2) (3.2) (102.5) (798.0)------------------ ------- ------- ------- ------- ------- ------- -------Net operatingassets/(liabilities) (215.3) (0.9) 238.8 39.4 (3.3) (61.4) (2.7)Cash, net ofdebt 298.7 12.5 (165.8) (23.8) (3.8) (6.6) 111.2------------------ ------- ------- ------- ------- ------- ------- -------Net assets 83.4 11.6 73.0 15.6 (7.1) (68.0) 108.5------------------ ------- ------- ------- ------- ------- ------- ------- Year to30 June 2005RevenueGroup andshare of jointventures 1,086.3 237.4 225.5 62.2 11.8 - 1,623.2Less share ofjoint ventures (7.3) - - (32.0) (10.9) - (50.2)------------------- ------- ------- ------- ------- ------- ------- -------Group revenue 1,079.0 237.4 225.5 30.2 0.9 - 1,573.0------------------- ------- ------- ------- ------- ------- ------- -------ProfitGroupoperatingprofit 14.2 5.0 32.9 5.6 (1.7) (7.9) 48.1Share of jointventures'operatingprofit (0.4) - - 4.8 0.8 - 5.2------------------- ------- ------- ------- ------- ------- ------- -------Group andshare of jointventures 13.8 5.0 32.9 10.4 (0.9) (7.9) 53.3Share of jointventures - finance cost - - - (2.2) (0.9) - (3.1)- tax 0.1 - - (0.8) (0.5) - (1.2)------------------- ------- ------- ------- ------- ------- ------- -------Profit from operations 13.9 5.0 32.9 7.4 (2.3) (7.9) 49.0Othernon-operatingincome(exceptionalitems) 0.8 - - - 2.1 3.8 6.7Financeincome/(cost) 11.5 (1.1) (11.5) (0.6) 1.1 (0.6) (1.2)------------------- ------- ------- ------- ------- ------- ------- -------Profit beforetax 26.2 3.9 21.4 6.8 0.9 (4.7) 54.5------------------- ------- ------- ------- ------- ------- ------- -------Balance sheetInvestment injoint ventures 1.6 - - 20.1 1.2 - 22.9Other assets 243.5 77.3 320.2 11.5 0.6 53.1 706.2Totalliabilities (431.2) (66.2) (74.6) (7.2) (3.5) (151.7) (734.4)------------------- ------- ------- ------- ------- ------- ------- -------Net operatingassets/(liabilities) (186.1) 11.1 245.6 24.4 (1.7) (98.6) (5.3)Cash, net ofdebt 258.2 (2.1) (185.5) (12.6) (2.0) 2.1 58.1------------------- ------- ------- ------- ------- ------- ------- -------Net assets 72.1 9.0 60.1 11.8 (3.7) (96.5) 52.8------------------- ------- ------- ------- ------- ------- ------- ------- The 30 June 2005 segmental information for Construction and Support Services hasbeen restated to reflect the reclassification of Kier Plant from Construction toSupport Services to align segmental reporting with the Group's management andinternal reporting structure. This has increased revenue by £9.9m and operatingprofit by £1.8m in Support Services with a corresponding reduction inConstruction. Net operating assets represent assets excluding cash, bank overdrafts, long-termborrowings and interest-bearing inter-company loans. 3. Other non-operating income (exceptional items) For the purpose of these financial statements the term other non-operatingincome and exceptional items are interchangeable where they relate to the prioryear. Exceptional items for the year to 30 June 2005 arose from the following: Profit before Net tax Tax profit/(loss) £m £m £m -------------------------------------- ------- ------- -------Disposal of investment inKier Hong Kong Limited 0.8 - 0.8Disposal of investment in aPFI joint venture 2.1 (0.6) 1.5Refinancing of a PFI jointventure - (2.5) (2.5)Disposal of a property heldin property, plant andequipment 3.8 (1.2) 2.6-------------------------------------- ------- ------- ------- 6.7 (4.3) 2.4-------------------------------------- ------- ------- ------- 4. Income tax Recognised in the income statement 2006 2005 £m £m--------------------------------------------- ------- -------Current tax expenseUK corporation tax : current year on profit before exceptional items 7.6 11.7 : on exceptional items - 4.3Overseas tax 0.8 0.3Adjustments for prior years (3.9) 0.4--------------------------------------------- ------- -------Total current tax 4.5 16.7--------------------------------------------- ------- -------Deferred tax expenseOrigination and reversal of temporary differences 7.2 1.6Adjustments for prior years 4.5 (0.4)--------------------------------------------- ------- -------Total deferred tax 11.7 1.2--------------------------------------------- ------- -------Total income tax expense in the income statement 16.2 17.9--------------------------------------------- ------- -------Reconciliation of effective tax rateProfit before tax 59.1 54.5Add : tax on joint ventures 1.4 1.2--------------------------------------------- ------- -------Underlying profit before tax 60.5 55.7--------------------------------------------- ------- -------Income tax at UK corporation tax rate of 30% 18.2 16.7Tax on refinancing of a PFI joint venture - 2.5Non deductible expenses 0.5 0.5Tax reliefs not recognised in the income statement (1.4) -Capital items not taxable - (0.5)Effect of tax losses utilised - (0.2)Effect of tax rates in foreign jurisdictions - 0.1Under provision in respect of prior years 0.3 ---------------------------------------------- ------- -------Total tax (including joint ventures) 17.6 19.1Tax on joint ventures (1.4) (1.2)--------------------------------------------- ------- -------Group income tax expense 16.2 17.9--------------------------------------------- ------- ------- 5. Dividends Amounts recognised as distributions to equity holders in the year. 2006 2005 £m £mFinal dividend for the year ended 30 June 2005 of 15.2 pence(2004: 13.0 pence) 5.4 4.6Interim dividend for the year ended 30 June 2006 of 8.2 pence(2005: 7.0 pence) 2.9 2.5--------------------------------------------- ------- ------- 8.3 7.1--------------------------------------------- ------- ------- The proposed final dividend of 17.8 pence (2005: 15.2 pence) had not beenapproved at the balance sheet date and so has not been included as a liabilityin these financial statements. The dividend totalling £6.3m will be paid on5 December 2006 to shareholders on the register at the close of business on29 September 2006. A scrip dividend alternative will be offered. 6. Earnings per share A reconciliation of profit and earnings per share, as reported in the incomestatement, to underlying and adjusted profit and earnings per share is set outbelow. The adjustments are made to illustrate the impact of exceptional itemsand the amortisation of intangible assets. 2006 2005 Basic Diluted Basic Diluted £m £m £m £m------------------------------------ ------- ------- ------- -------Profit for the year 42.9 42.9 36.6 36.6Less : exceptional items - - (6.7) (6.7)Add : tax on exceptional items - - 4.3 4.3------------------------------------ ------- ------- ------- -------Underlying profit 42.9 42.9 34.2 34.2Add : amortisation of intangibleassets 1.9 1.9 1.9 1.9Less : tax on amortisation ofintangible assets (0.5) (0.5) (0.6) (0.6)------------------------------------ ------- ------- ------- -------Adjusted profit 44.3 44.3 35.5 35.5------------------------------------ ------- ------- ------- ------- million million million million ------------------------------------ ------- ------- ------- -------Weighted average number of shares 35.5 35.5 35.4 35.4Weighted average number of unexercisedoptions - dilutive effect - 0.3 - 0.1Weighted average impact of LTIP - 0.3 - 0.2------------------------------------ ------- ------- ------- -------Weighted average number of shares usedfor EPS 35.5 36.1 35.4 35.7------------------------------------ ------- ------- ------- ------- pence pence pence pence------------------------------------ ------- ------- ------- -------Earnings per share 120.8 118.8 103.4 102.5Underlying earnings per share(excluding exceptional items) 120.8 118.8 96.6 95.8Adjusted earnings per share (excludingexceptional items and amortisation ofintangible assets) 124.8 122.7 100.3 99.4------------------------------------ ------- ------- ------- ------- 7. Reconciliation of changes in shareholders equity 2006 2005 £m £m--------------------------------------------- ------- -------Opening shareholders' equity 52.8 51.2Adjustments on adoption of IAS 32 and IAS 39 on 1 July 2005(net of tax) (5.3) ---------------------------------------------- ------- -------Restated opening shareholders' equity 47.5 51.2Recognised income and expense for the year 66.5 7.7Dividends paid (8.3) (7.1)Issue of own shares 2.1 0.8Purchase of own shares (2.0) (0.4)Share-based payments 1.1 0.6Deferred tax on share-based payments 1.6 ---------------------------------------------- ------- -------Closing shareholders' equity 108.5 52.8--------------------------------------------- ------- ------- 8. Significant accounting policies Kier Group plc (the 'Company') is a company domiciled in the United Kingdom(UK). The consolidated financial statements of the Company for the year ended30 June 2006 comprise the Company and its subsidiaries (together referred to asthe 'Group') and the Group's interest in jointly controlled entities. Statement of compliance The Group's consolidated financial statements have been prepared in accordancewith IFRS. An explanation of how the transition to IFRS has affected the reported financialposition, financial performance, and cash flows of the Group, andreconciliations of total equity and profit for the comparative period reportedunder UK Generally Accepted Accounting Practice (GAAP) to those reported underIFRS was published in the 2005 Annual Report and is available on the Group'swebsite at www.kier.co.uk. The following accounting policies have been applied consistently in dealing withitems which are considered material in relation to the Group's financialstatements with the exception of certain policies subject to the transitionalarrangements of IFRS, as detailed below. The financial statements are presented in pounds sterling. They have beenprepared on the historical cost basis except for derivative financialinstruments which are stated at their fair value and certain payables onextended terms which are stated at discounted cost. Basis of preparation In March 2005, the International Financial Reporting Interpretations Committee(IFRIC) issued draft guidance on accounting for service concession arrangements(drafts D12 to D14). IFRIC are currently considering the comments received onthis draft guidance, with the final guidance expected to be issued in late 2006.Until the final guidance is issued and endorsed by the EU and in absence ofspecific guidance within IFRS, the Group has continued to account for PrivateFinance Initiative (PFI) assets in the same way as previously accounted forunder UK GAAP. This measures PFI contract assets (i.e. property, plant andequipment and finance debtors) on the basis of historical cost. Howeverfollowing the introduction of IAS 32 'Financial Instruments: Disclosure andPresentation' and IAS 39 'Financial Instruments: Recognition and Measurement',the interest rate swaps held by the PFI joint ventures for the purpose ofhedging floating rate liabilities are measured at fair value both initially andsubsequently. If the IFRIC draft interpretations are finalised in the currentform, to the extent that PFI contract assets are recognised as financial assets(finance debtors) they also may be measured initially and subsequently at fairvalue. In addition at the date of issue of these financial statements the followingstandards and interpretations, which have not been applied in these financialstatements, were in issue but not yet effective: IFRS 6 Explorations for and Evaluation of Mineral Resources. IFRS 7 Financial Instruments: Disclosures: and the related amendments to ISA 1'Presentation of Financial Statements' on capital disclosures. IFRS 39 Amendments to fair value option, forecast intra-group transactions andfinancial guarantee contracts. IFRIC 4 Determining whether an Arrangement contains a lease. IFRIC 5 Right to Interest Arising from Decommissioning, Restoration andEnvironmental Rehabilitation Funds. IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives The directors anticipate that the adoption of these standards andinterpretations in future periods will have no material impact on the financialstatements of the Group, except for additional disclosures on capital andfinancial instruments when the relevant standards come into effect for periodscommencing on or after 1 January 2007. Transition to IFRS IFRS 1 'First-time Adoption of International Financial Reporting Standards' setsout the procedures that the Group must follow when it adopts IFRS for the firsttime as the basis for preparing its consolidated financial statements. The Group is required to establish its IFRS accounting policies as at30 June 2006 and, in general, apply these retrospectively to determine the IFRSopening balance sheet at its date of transition, 1 July 2004. IFRS 1 provides a number of optional exemptions to this general principle. Themost significant of these are set out below together with a description, in eachcase, of the exemption adopted by the Group. Business combinations that occurred before the opening IFRS balance sheet date The Group has elected not to apply IFRS 3 'Business Combinations'retrospectively to business combinations that took place before the date oftransition. As a result, in the opening balance sheet, goodwill arising frompast business combinations of £5.2m remains as stated under UK GAAP at1 July 2004. Employee benefits - actuarial gains and losses The Group has elected to recognise all cumulative actuarial gains and losses inrelation to employee benefit schemes at the date of transition. The Group haschosen to early adopt the amendments to IAS 19 'Employee Benefits' and hasrecognised actuarial gains and losses in full directly to reserves via thestatement of recognised income and expense in the period in which they occur. Share-based payments The Group has elected to apply IFRS to relevant share-based payment transactionsonly where rights were granted after 7 November 2002 and not vested as at1 January 2005. Financial instruments The Group has taken advantage of the exemption in IFRS 1 that enables the Groupto apply IAS 32 and IAS 39 from 1 July 2005 only, with no restatement for priorperiods. A reconciliation of total equity at 1 July 2005 following the adoptionof IAS 32 and IAS 39 is given in note 7. Cumulative translation differences The Group has elected to set the previously accumulated translation differencesrelating to investments in overseas subsidiaries to zero at 1 July 2004. Basis of consolidation (a) Subsidiaries The consolidated financial statements comprise the financial statements of theCompany and subsidiaries controlled by the Company drawn up to 30 June 2006.Control exists when the Group has direct or indirect power to govern thefinancial and operating policies of an entity so as to obtain economic benefitsfrom its activities. Subsidiaries are included in the consolidated financialstatements from the date that control transfers to the Group until the date thatcontrol ceases. The purchase method is used to account for the acquisition ofsubsidiaries. (b) Joint ventures A joint venture is a contractual arrangement whereby the Group undertakes aneconomic activity that is subject to joint control with third parties. The Group's interests in jointly controlled entities are accounted for using theequity method. Under this method the Group's share of the profits less losses ofjointly controlled entities is included in the consolidated income statement andits interest in their net assets is included in investments in the consolidatedbalance sheet. Where the share of losses exceeds the Group's interest in theentity and there is no obligation to fund these losses the carrying amount isreduced to nil and recognition of further losses is discontinued, future profitsare not recognised until unrecognised losses are extinguished. Interest in theentity is the carrying amount of the investment together with any long-terminterests that, in substance, form part of the net investment in the entity. Where a Group company is party to a jointly controlled operation, that companyaccounts for the assets it controls, the liabilities and expenses it incurs andits share of the income. Such joint arrangements are reported in theconsolidated financial statements on the same basis. Goodwill and other intangible assets Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary or jointly controlled entity at the dateof acquisition. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised immediately in the income statement andis not subsequently reversed. Negative goodwill is recognised in the incomestatement immediately. On disposal of a subsidiary or jointly controlled entity,the attributable carrying amount of goodwill is included in the determination ofthe profit or loss on disposal. Goodwill arising on acquisitions before 1 July 2004, being the date oftransition to IFRS, has been retained at the previous UK GAAP amounts at1 July 2004 subject to being tested for impairment. Goodwill written off toreserves under UK GAAP prior to 1998 has not been reinstated and is not includedin determining any subsequent profit or loss on disposal. Other intangible assets which comprise contract rights are stated at cost lessaccumulated amortisation and impairment losses. Amortisation is charged to theincome statement on a straight line basis over the relevant contract period. Revenue and profit recognition Revenue comprises the fair value of the consideration received or receivable,net of value added tax, rebates and discounts and after eliminating sales withinthe Group. It also includes the Group's proportion of work carried out underjointly controlled operations. Revenue and profit are recognised as follows: a) Private housing and land sales Revenue from housing sales is recognised at the fair value of the considerationreceived or receivable on legal completion, net of incentives. Revenue from landsales and land exchanges is recognised on the unconditional exchange ofcontracts. Profit is recognised on a site by site basis by reference to theexpected out-turn result from each site. The principal estimation technique usedby the Group in attributing profit on sites to a particular period is thepreparation of forecasts on a site by site basis. These focus on revenues andcosts to complete and enable an assessment to be made of the final out turn oneach site. Consistent review procedures are in place in respect of siteforecasting. b) Property development Revenue in respect of property developments is taken on unconditional exchangeof contracts on disposal of finished developments. Profit taken is subject toany amounts necessary to cover residual commitments relating to developmentperformance. Provision is made for any losses foreseen in completing adevelopment as soon as they become apparent. Where developments are sold in advance of construction being completed, revenueand profit are recognised from the point of sale and as the significantoutstanding acts of construction and development are completed. (c) Construction contracts Revenue arises from increases in valuations on contracts and includes theGroup's share of revenue from joint arrangements, and goods and servicesprovided. Revenue is normally determined by external valuations and is the gross value ofwork carried out for the period to the balance sheet date (including retentions)but excludes claims until they are actually certified. Profit on contracts is calculated in accordance with accounting standards andindustry practice and may not relate directly to revenue. The principalestimation technique used by the Group in attributing profit on contracts to aparticular period is the preparation of forecasts on a contract by contractbasis. These focus on revenues and costs to complete and enable an assessment tobe made of the final out-turn on each contract. Consistent contract reviewprocedures are in place in respect of contract forecasting. The general principles for profit recognition are: • Profits on short duration contracts (generally less than 12 months) are taken when the contract is complete; • Profits on other contracts are recognised on a percentage of completion basis when the contract's outcome can be foreseen with reasonable certainty; • Provision is made for losses incurred or foreseen in bringing the contract to completion as soon as they become apparent; and • Claims receivable are recognised as income when received or certified for payment except that, in preparing contract forecasts to completion, a prudent and reasonable evaluation of claims receivable may be included to mitigate foreseeable losses but only to the extent that there is reasonable assurance of recovery. Percentage completion is normally calculated by taking certified value to dateas a percentage of estimated final value unless the adjusted value is materiallydifferent in which case the adjusted value is used. Pre-contract costs Costs associated with bidding for contracts are written off as incurred(pre-contract costs). When it is probable that a contract will be awarded,usually when the Group has secured preferred bidder status, external costsincurred from that date to the date of financial close are carried forward inthe balance sheet. When financial close is achieved on PFI or Public Private Partnership (PPP)contracts, external costs are recovered from the special purpose vehicle andpre-contract costs within this recovery that were not previously capitalised arecredited to the income statement, except to the extent that the Group retains ashare in the special purpose vehicle. The amount not credited is deferred andrecognised over the life of the construction contract to which the costs relate. Property, plant and equipment and depreciation Depreciation is based on historical or deemed cost, less the estimated residualvalue, and the estimated economic lives of the assets concerned. Freehold landis not depreciated. Other tangible assets are depreciated in equal annualinstalments over the period of their estimated economic lives, which areprincipally as follows: Freehold buildings 25-50 years Leasehold buildings and improvements Period of lease Plant, equipment and vehicles 3-10 years Assets held under finance leases are depreciated over the shorter of the term ofthe lease or the expected useful life of the asset. Leases Operating lease rental charges are charged to the income statement on astraight-line basis over the life of each lease. Employee benefits (a) Retirement benefit obligations For defined contribution pension schemes operated by the Group, amounts payableare charged to the income statement as they fall due. For defined benefit pension schemes, the cost of providing benefits iscalculated annually by independent actuaries using the projected unit creditmethod. The charge to the income statement reflects the current and past servicecosts of such obligations, and the interest cost on scheme liabilities less theexpected return on plan assets. The retirement benefit obligation represents the difference between the fairvalue of scheme assets and the present value of scheme liabilities. It isdetermined bi-annually by independent actuaries and recognised in full in thebalance sheet. Differences between the actual and expected returns on assets andexperience gains and losses arising on scheme liabilities during the year,together with differences arising from changes in assumptions, are recognised infull directly to reserves via the statement of recognised income and expense inthe year. In accordance with the transitional provisions of IFRS 1 cumulativeactuarial gains and losses at 1 July 2004 are presented within the openingretained earnings reserve at that date. The Group's contributions to the schemes are paid in accordance with the rulesof the schemes and the recommendation of the actuary. (b) Share-based payments In accordance with the transitional provisions, IFRS 2 'Share-based payments'has been applied for all payments granted after 7 November 2002. This requiresthat share-based payments granted after that date, but not vested, should bevalued at the fair value of the shares at the date of grant. This affects theSharesave and Long-Term Incentive Plan (LTIP) schemes. The fair value of theseschemes at date of award is calculated using the Black Scholes model. The cost to the Group of awards to employees under the LTIP scheme is spread ona straight line basis over the relevant performance criteria period. The schemeawards to senior employees a number of shares which will vest after three yearsif particular criteria are met. The award may be taken either as shares or as acombination of shares and cash based on the share price prevailing when theshares vest. The cost of the share-based payment element of the scheme is basedon the market value of the shares at the date the options are granted, and thecost of the cash based payment element is based on the market value of the shareoptions at the balance sheet date. Shares purchased and held in trust in connection with the Group's share schemesare deducted from retained earnings. No gain or loss is recognised within theincome statement on the market value of these shares compared to the originalcost. Finance income and costs Interest receivable and payable on bank deposits is credited or charged to theincome statement as incurred. Borrowing costs are capitalised where the Group constructs qualifying assets andhas separately identifiable funding. All other borrowing costs are written offto the income statement as incurred. Borrowing costs incurred within the Group's jointly controlled entities relatingto the construction of assets in PFI and PPP projects are capitalised until therelevant assets are brought into operational use. Notional interest payable, representing the unwinding of the discount onlong-term liabilities, is charged to finance costs. Infrequently a long-term land creditor arises for a parcel or parcels of landwhere the Group has exchanged unconditional contracts, and so recognised thecreditor and the land inventory, but in practice does not have title or accessto the land. In these few cases the notional interest payable already charged tofinance costs is then credited to finance costs and added to the cost ofinventory in accordance with IAS 23 'Borrowing Costs' and IAS 2 'Inventories'.In no circumstances will the cost of such land inventory exceed the contractedsum payable. Taxation Income tax comprises current and deferred tax. Income tax is recognised in theincome statement except to the extent that it relates to items recogniseddirectly in equity, in which case it is also recognised in equity. Current tax is the expected tax payable on taxable income for the year, usingtax rates enacted or substantively enacted at the balance sheet date, and anyadjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Theamount of deferred tax provided is based on the expected manner of realisationor settlement of the carrying amount of the assets and liabilities, using taxrates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. Foreign currencies Transactions denominated in foreign currencies are recorded at the exchangerates in effect when they take place. Resulting foreign currency denominatedassets and liabilities are translated at the exchange rates ruling at thebalance sheet date. Exchange differences arising from foreign currencytransactions are reflected in the income statement. The assets and liabilities of overseas subsidiary undertakings are translated atthe rate of exchange ruling at the balance sheet date. Trading profits or lossesare translated at average rates prevailing during the accounting period.Differences on exchange arising from the retranslation of net investments inoverseas subsidiary undertakings at the year-end rates are recognised in thetranslation reserve. All other translation differences are reflected in theincome statement. In accordance with the transitional provisions of IFRS 1 the Group has electedto set the previously accumulated translation differences relating toinvestments in overseas subsidiary undertakings to zero at 1 July 2004. Mining assets Opencast expenditure incurred prior to the commencement of operating opencastsites is capitalised and the cost less the residual value is depreciated overthe coaling life of the site on a coal extraction basis. The total cost ofrestoration is recognised as a provision as soon as the mine becomesoperational. The amount provided represents the present value of the anticipatedcosts. Costs are charged against the provision as incurred and the unwinding ofthe discount is included within interest costs. A tangible asset is created foran amount equivalent to the initial provision and depreciated on a coalextraction basis over the life of the asset. Inventories Inventories and work in progress, including land held for and in the course ofdevelopment, are valued at the lower of cost and net realisable value. Costcomprises direct materials and, where appropriate, labour and productionoverheads which have been incurred in bringing the inventories and work inprogress to their present location and condition. Cost in certain circumstancesalso includes notional interest as explained in the accounting policy forfinance income and costs. Net realisable value represents the estimated sellingprice less all estimated costs of completion and costs to be incurred inmarketing, selling and distribution. Construction work in progress is included within inventories in the balancesheet. It is measured at cost plus profit less losses recognised to date lessprogress billings. If payments received from customers exceed the incomerecognised, the difference is included withiin trade and other payables in thebalance sheet. Land inventory is recognised at the time a liability is recognised - generallyafter exchange of unconditional contracts. Property inventory, which represents all development land and work in progress,is included at cost less any losses foreseen in completing and disposing of thedevelopment less any amounts received or receivable as progress payments or partdisposals. Where a property is being developed, cost includes cost ofacquisition and development to date, including directly attributable fees,expenses and finance charges net of rental or other income attributable to thedevelopment. Where development property is not being actively developed, netrental income and finance costs are taken to the income statement. Share capital The ordinary share capital of the Company is recorded at the proceeds received,net of directly attributable incremental issue costs. Provisions Provisions are recognised when the Group has a present legal or constructiveobligation as a result of a past event, and where it is probable that an outflowwill be required to settle the obligation and the amount can be reliablyestimated. Financial instruments Financial assets and financial liabilities are recognised in the Group's balancesheet when the Group becomes a party to the contractual provisions of theinstrument. The principal financial assets and liabilities of the Group are asfollows: (a) Trade receivables and trade payables Given the varied activities of the Group it is not practicable to identify acommon operating cycle. The Group has therefore allocated receivables andpayables due within 12 months of the balance sheet date to current with theremainder included in non-current. Trade receivables do not carry interest and are stated at their initial valuereduced by appropriate allowances for estimated irrecoverable amounts. Trade payables on normal terms are not interest bearing and are stated at theirnominal value. Trade payables on extended terms, particularly in respect of landpurchases, are discounted and recorded at their fair value. (b) Cash and cash equivalents Cash and cash equivalents in the cash flow statements comprise cash at bank andin hand, including bank deposits with original maturities of three months orless, net of bank overdrafts. Bank overdrafts are included within financialliabilities in current liabilities in the balance sheet. (c) Bank and other borrowings Interest bearing bank and other loans are recorded at the proceeds received, netof direct issue costs. Finance charges, including premiums payable on settlementor redemption and direct issue costs, are accounted for on an accruals basis inthe income statement using the effective interest method and are added to thecarrying value of the instrument to the extent that they are not settled in theperiod in which they arise. (d) Derivative financial instruments Derivatives are initially recognised at fair value on the date that the contractis entered into and subsequently re-measured in future periods at their fairvalue. The method of recognising the resulting change in fair value is dependenton whether the derivative is designated as an effective hedging instrument. A number of the Group's PFI joint ventures have entered into interest ratederivatives as a means of hedging interest rate risk under cash flow hedges,which are initially recognised at fair value. The effective part of the changein fair value of these derivatives is recognised directly in equity. Anyineffective portion is recognised immediately in the income statement. Amountsaccumulated in equity are recycled to the income statement in the periods whenthe hedged items will affect profit or loss. The fair value of interest ratederivatives is the estimated amount that the Group would receive or pay toterminate the derivatives at the balance sheet date. The Group also enters into forward contracts in order to hedge againsttransactional foreign currency exposures. In cases where these derivativeinstruments are significant, hedge accounting is applied as described above.Where hedge accounting is not applied, changes in fair value of derivatives arerecognised in the income statement. Fair values are based on quoted marketprices at the balance sheet date. 9. Statutory Accounts The financial information set out above does not constitute statutory accountsfor the years ended 30 June 2006 or 2005 but is derived from those accounts. Statutory accounts for 2005 have been delivered to the Registrar of Companiesand those for 2006 will be delivered following the Company's Annual GeneralMeeting. The auditors have reported on those accounts, their reports wereunqualified and did not contain statements under section 237 (2) or (3) of theCompanies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

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