Final Results

News Release

27 February 2013

STRONG PERFORMANCE AND GOOD STRATEGIC PROGRESS

Annual Results 2012

Interserve, the international support services and construction group, reports a strong performance with its annual results for the year ended 31 December 2012.

Financial highlights

·; Strong future workload up 12.5 per cent to £6.3 billion, as at 31 December 2012 (FY 2011: £5.6 billion) and £2.7 billion of new business won in the year

·; Strong operational performance: underlying headline EPS up 8.0 per cent and dividend up 7.9 per cent

·; Three year rolling average operating cash conversion of 116.8 per cent (2011: 155.3 per cent)

·; Strong net cash position of £25.8 million

·; Extended and secured long-term banking facilities

·; Capacity of more than £250 million available to fund strategic growth opportunities

Strategic highlights

·; Realised £174 million of value from our PFI portfolio of which we have:

a) Invested £67 million, acquiring businesses in growth markets (frontline services, oil and gas)

b) Transferred £55 million into the pension scheme

·; Organic expansion into new sectors (e.g. energy from waste, justice)

·; Geographical expansion (e.g. Saudi Arabia, Chile, Panama)

·; Developed plans for the imminent launch of SustainAbilities to transform our approach to social, environmental, and knowledge sustainability.

Chief Executive Adrian Ringrose commented:

"2012 was a very good year for Interserve, in mixed market conditions. We grew earnings, generated strong cash flow and made good strategic progress.

"We won over £2.7 billion of work during the year, expanding our future workload to £6.3 billion. We have confidence in our ability to make further progress in 2013, with further improvements in Support Services' margins, and continued recovery in Equipment Services offsetting soft Construction markets. Looking further ahead, with good potential in our existing sectors, expansion into new markets and our strong balance sheet, our medium-term growth prospects remain strong."

- Ends -

For further information please contact:

Matt Hickman, Investor Relations Manager 0118 960 2280

Robin O'Kelly, Director of Communications 0118 960 2313

Richard Campbell / Ian Brown, Capital MSL 0207 307 5334

About Interserve

Interserve's vision is to redefine the future for people and places. We are one of the world's foremost support services and construction companies, operating in the public and private sectors in the UK and internationally. We offer advice, design, construction, equipment, facilities management and frontline public services. Interserve is based in the UK and is listed in the FTSE 250 index. We have gross revenue of £2.3 billion and a workforce of over 50,000 people worldwide. Website: www.interserve.com.

* This news release, the Chairman's Statement, the Strategic Overview, the Operational and Financial reviews include a number of non-statutory measures to reflect the impact of non-trading and non-recurring items. See note 16 to the consolidated financial statements for a reconciliation of these measures to their statutory equivalents and note 9 for calculation of earnings per share.

Chairman's Statement

In 2011 we outlined our strategy designed to transform the business, delivering growth and shareholder value with a bold aspiration to double headline earnings per share by 2015. 2012 has been a watershed year in this evolution. While economic headwinds have been tougher and more enduring than most of us expected I am encouraged by the progress we have made in delivering our strategy. In addition to achieving strong organic growth in mixed economic conditions, we realised significant latent value from our PFI portfolio and started to invest this cash in growth markets, new sectors and strengthening the funding position of the pension scheme.

In line with our growth strategy, we continued to expand our frontline services capability though the acquisition of a welfare-to-work business in May, a home healthcare business in December and in January 2013, a Middle East oil and gas services provider. Organically we have invested in new territories through our Equipment Services division and new markets for the Construction division, such as energy from waste, as well as creating a new Justice business unit. Justice remains an important market for us and while the appointment of a new Secretary of State for Justice in 2012 signalled a short-term delay in the outsourcing programme, there are clear indications this will lead to accelerated outsourcing activity in the medium term from which we expect to see opportunities emerging in 2013.

The breadth and scope of our operations is of significant benefit to the business. Our Support Services business has grown strongly, as the trend towards increased outsourcing in the UK accelerates and opportunities emerge in the oil and gas sector internationally. Our Construction division has been resilient, despite low demand in the UK and high levels of competition internationally, because of our continued focus on recurring business under framework contracts and our ability to innovate and differentiate ourselves from peers. Equipment Services, our most geographically diverse business, has experienced a wide range of local market conditions during the year. Active management of our global fleet has ensured that we have been well-placed to take advantage of the strongest markets, while making best use of our invested capital. We are now looking to increase levels of investment in this business as future demand progresses.

During the year, we completed a major review of the Interserve brand, giving a better understanding of and a new emphasis on the unique strengths of the Company, which will help drive performance and improve the focus of our marketing. This is summarised by the phrase, "Ingenuity at Work", which describes the intelligent approach our people take when designing solutions and dealing with the day-to-day challenges of meeting and hopefully exceeding, our customers' expectations. Having redefined our vision and core values, we are engaged in a majorcommunications programme across the business.

We have developed plans for the imminent launch of a far reaching and, in our view, bold sustainability strategy, SustainAbilities. This plan builds on our longstanding credentials in this increasingly important area: we have long recognised the need to develop not only financial capital, but also to look to areas such as environmental, social and knowledge 'capitals', to build a truly resilient, sustainable business. During the course of the year we have shaped this into a sustainability plan which underpins our corporate strategy.

In addition, clear communication of both our brand and of SustainAbilities, will help ensure that potential customers and stakeholders have a better understanding of Interserve and the full extent of our capabilities.

On behalf of the Board, I would like to thank all of our people for their continued hard work in bringing their ingenuity and commitment to providing great service to our customers and to furthering their individual as well as our corporate development. During the last 12 months the Company has won numerous awards, including Learning and Career Development from the British Institute of Facilities Management, gold and silver awards for health and safety from RoSPA, the UK Excellence Award, the British Quality Foundation's Achievement Award for Leadership, Project of the Year Award from the Chartered Institute of Building and the National Engineering Award, presented by the Association for Project Safety. 

A number of Board changes were announced in January which were brought about by the retirements of David Paterson and David Trapnell. I would like to thank them both for their long years of excellent service to the Company, and to welcome their successors, Anne Fahy as non-executive director to the Group Board and George Franks and Ian Renhard as members of the Executive Board.

We remain confident in the delivery of our strategy and our medium-term outlook and we are therefore recommending an increased final dividend of 14.1p (2011: 13.0p), bringing the total dividend for the year to 20.5p (2011: 19.0p), an increase of 7.9 per cent. The final dividend will be paid on 20 May 2013 to shareholders on the register at the close of business on 5 April 2013.

Lord Blackwell

Chairman

27 February 2013

Strategic Overview

In 2012 we made significant progress against our corporate strategy: building strong core businesses, expanding their scope and continuing our international growth. Our businesses have performed well in 2012 and are poised for further sustained organic progress. We have created a strong balance sheet giving us the capacity to seize on growth opportunities whilst substantially addressing our pension funding position.

In building our core businesses we benefit from long-term client relationships, through framework agreements, repeat business and account growth.  We continue to reinvest in new operating models, business development and new asset purchases. We also continue to innovate through new products and technologies. This is reflected in our strong work-winning, notably in our UK operations and has also played a major part in providing a strong platform for growth.

We have been expanding the scope of our operations by taking our core skills into new areas, notably in extending our offering in outsourced public services, in areas such as health and welfare-to-work and energy from waste infrastructure.

We have also expanded our service offering to the oil and gas sector through the acquisition of TOCO in Oman, enabling us to service our clients over a wider geographic footprint.

We continue to target growth in Equipment Services, increasing our investment in countries such as Saudi Arabia, Chile and Colombia and further expanding our reach through export opportunities to countries such as Kazakhstan and Iraq.

We are a strong, sustainable and ambitious business and as we continue to develop we will invest in the training and development of our people and the management of complex supply chains. The development and imminent launch of our far-reaching SustainAbilities plan will further differentiate the Company through our approach to sustainable communities and the environments in which we operate. Our corporate strategy and the continued evolution of our capabilities place us well to meet both the risks and the opportunities that the future brings.

Group outlook

We have confidence in our ability to make further progress in 2013. We expect Support Services to continue its strong progress with margins trending towards our medium-term targets. We also expect Construction's performance to remain resilient in continuing difficult market conditions and that Equipment Services' revenues will continue to show improvement. We remain on track to deliver strong medium-term growth.

Operational review

KPI table

(1) See note 16 for a definition of cash conversion

(2) Staff turnover measures the proportion of managerial, technical and office-based staff leaving voluntarily over the course of the period.

* This includes a non-recurring Middle East tax benefit of 5.6 pps

We segment our operational results into: Support Services, Construction and Equipment Services. Support Services and Construction are each subdivided into UK and International businesses. We also have Group Services, which consists of the Board and a range of central services and our Investment activities. We allocate all central costs to Group Services, including those related to our financing and central bidding activities, and show the performance of our PFI investments separately as the Investments segment. Group Services' costs in 2012 were £19.1 million (2011: £20.4 million).

Future workload

Our future workload comprises forward orders and pipeline. Forward orders are those for which we have secured contracts in place, and pipeline covers contracts for which we are in bilateral negotiations and on which final terms are being agreed. We include our share of work won by our international associates.

As a result of reorganisation we have reclassified £0.3 billion of future workload in 2011 from Construction UK to Support Services UK.

Support Services

Support Services provides a broad range of outsourced services to public and private sector clients, predominantly in the UK but also increasingly in the Middle East, the majority of which we integrate and deliver ourselves.

Results summary:

*(share of associates)

UNITED KINGDOM

In the period revenues increased 11.0 per cent with margins improving from 3.6 per cent in 2011 to 4.0 per cent in 2012. Revenue growth was primarily due to our success in developing our relationships with existing customers, but also reflected the benefits of continued strong work winning in current and prior years.

This strong performance reflects our core capabilities to provide innovative and cost effective solutions, to help customers invest more efficiently and to develop existing relationships, thereby leading to an increased scope of activity.

This is exemplified by our long-standing relationship which, in partnership with Alliance Boots, we have grown from a contract to provide cleaning services to 320 stores into a total facilities management (TFM) service for eight office locations and cleaning services across more than 1,000 stores in the UK and Ireland.

We have continued to improve our margins in this division through a combination of investment in new systems and processes, a rationalisation of our organisational structures and a further drive to increase procurement efficiency. These activities, together with the benefits of increasing scale are also contributing to our continued progress towards our target of exiting 2013 with a margin of 5 per cent.

The business has performed well in winning work during the year, with a number of significant contract wins with customers such as Scottish Power, Carphone Warehouse, East Thames Group, West Yorkshire Police Authority, London Borough of Southwark, London Universities Purchasing Consortium, The Environment Agency and the Defence Infrastructure Organisation.

As a result future workload for the division increased to £5.2bn in 2012 (2011: £4.5bn), a strong platform for future years. 

We believe that demand for public services will continue to accelerate from a growing and ageing population, and that we are only now beginning to see the long-anticipated shift in thinking that will lead to the more widespread use of outsourcing as the most efficientway to maintain such services while reducing unit costs.

Anticipating the acceleration of this trend, we have sought to position ourselves to take advantage of outsourcing in frontline services. To date we have made strategic investments in justice, welfare-to-work and healthcare.

During the year we increased our investment in the provision of frontline welfare services through the acquisition of Yorkshire-basedBEST (now renamed Interserve Working Futures). Combined with our existing joint venture, Rehab Jobfit, which operates in Wales and the South West, we are now one of the largest providers of training and work-placement services for the long-term unemployed, principally through the Government's flagship Work Programme.

In December we acquired Advantage Healthcare which provides community healthcare services including case management, social care, clinical and nursing services, for Primary Care Trusts (PCTs), private clients and through GP referrals. Our entry into the community healthcare market, which complements our existing offering to healthcare clients, anticipates the increasing demand for more flexible and cost effective service provision in this sector.  

The increasing range of our capabilities and the growing complexity of customers' requirements were exemplified in the Leicestershire NHS Trust estate management contract win, announced in September. This is notable because ofboth its scale and the scope of services involved and also through its innovative relationship across three separate NHS Trusts. The contract comprises a full suite of support services ranging from facilities and estate management to strategic consultancy and advice, marking a new and radical approach leveraging the collective scale and rationalising the combined assets of the three Trusts. It will support three acute hospitals and a range of health facilities including mental health units, primary care facilities, and community and district hospitals in the area.

In addition we have developed organically a new capability in the justice market to meet the demand from Government for greater private sector involvement in the prison and probation services market.

Strategically these developments extend our offering in 'frontline services', building on the Company's extensive experience and capability in outsourced government services, where we see significant and ongoing potential for growth.

Outlook

We expect the business to continue its strong progress as we expand into new markets, deliver more for our current customers, win new client contracts and execute our services more efficiently through our margin improvement programme.

INTERNATIONAL

This business provides fabrication, maintenance, turnaround services and training to the oil and gas industry and hard and soft facilities management services across a broad range of markets across the Middle East.

In the period we continued to build on our offering, winning more turnaround and long-term services contracts with both current and new clients including: Oryx (extension to onsite mechanical maintenance on their gas-to-liquid plant), Shell Pearl, (five year services contract and turnaround services), Dolphin Energy (five five-year contract for plant modification works and maintenance services both on and offshore) and Punj Lloyd Limited (fabrication, installation and pre-commissioning of pipework for a polysilicon plant).

We aim toexpandour engineering services and facilities management activities in the Middle East, where economic progress is increasingly generating requirements for outsourced services. This has generated opportunities for us to harness the expertise gained from our outsourcing experience across many sectors in the UK with our knowledge of Gulf Cooperation Council markets.

In January 2013 we expanded the footprint of our activities with the acquisition of TOCO, an Oman-based business specialising in fabrication, maintenance and repair services for oil and gas refineries and offshore facilities. The acquisition extends Interserve's service offering in Oman, a key growth market offering c.US$2.5 billion of oil, gas and power contracts per annum as well as growing our offering across the region.

Outlook

We expect revenues and profits to progress well, driven by the petrochemical sector with margins trending towards our medium-term targets. We are intent on building a sizeable support services presence in this important region.

Construction

In the UK and internationally we offer design and construction services in the creation of a broad range of buildings and infrastructure. The majority of our UK revenue comes throughlong-term framework agreements and from repeat business with blue-chip clients, with over three-quarters of this activity in the public and utilities sectors. We operate from a network of regional offices, specialising in mid-sized contracts. In the Middle East, where we have been active for over 30 years, our client base is more oriented towards the private sector. However, drawing on the market positioningof our local partners, our businesses arealso characterised by a focus on recurring work from long-term relationships.

Results summary:

*(share of associates)

United Kingdom

Despite challenging conditions, 2012 was a year of continued successful performance, innovation and new market development. The division'scontribution to Total Operating Profit fell by £3.4 million to £14.6 million at a margin of 2.0 per cent, reflecting increased competitive pressures in line with our expectations. We continue to expect margins to trend between 1.5 to 2.0 per cent over the medium term.

During the year we have worked hard with local authority customers to address their twin problems of affordable build costs and sustainable running costs. Richmond Hill Primary School, which achieved the groundbreaking PassivHaus certification, exemplifies this well: the school will use up to 80 per cent less energy than a conventionally built equivalent facility.

We have also extended our reach into targeted growth markets, such as energy-from-waste, completing the design and build of a plant in Westbury, Wiltshire and winning a £150 million contract with Viridor for the construction of Glasgow City Council's new Residual Waste Treatment facility. The contract involves the design and build of a facility to treat up to 200,000 tonnes p.a. of waste via recycling, anaerobic digestion and energy recovery by gasification.

Our sustainability credentials arebecoming an increasingly important element of our offering alongside our more established operational and project finance capabilities, as evidenced by our success with West Yorkshire Police (in a £150 million PFI project to design, build, finance and operate three police facilities). Our proposal for this contract involved a significant amount of investment in community projects, generating local jobs and training and exemplified our ability to make places and deliver services that enhance peoples' lives.

These skills, together with our traditional ability to tackle complex construction challenges, have also been brought to bear in our successful proposals for the refurbishment and renovation of 200-year old buildings at Advocate's Close, Edinburgh. The new mixed-use development will comprise serviced apartments, restaurants, a bistro/bar and offices/retail units revitalising an area formerly occupied by the City of Edinburgh Council. 

In addition to the contracts mentioned above, we have enjoyed other successes, including: a multi-million pound project with Jaguar Land Rover to build a circa 65,000 square metre facility in Wolverhampton to produce a family of all-new advanced technology, low emission 4-cylinder Jaguar Land Rover petrol and diesel engines; further work under existing framework agreements with the NHS in England, Scotland and Wales, and with National Grid; together with numerous other contracts for English Heritage, St Luke's Hospice, and the Highways Agency. As a result, our future workload as at 31 December 2012 has remained at £0.9 billion.

Outlook

We expect the UK construction market to continue to remain challenging during 2013, before a resumption of gradual growth from 2014, stimulated by increased government spending on infrastructure and some recovery in private sector investment. However, we have a strong order book and continue to diversify the business to position ourselves for growth across an expanding set of market segments.

International

Both volumes and profits continued to be affected by short-term client caution. Nevertheless we were able to continue to maintain our shape and readiness for an increase in demand, which we expect to materialise in the coming years given the underlying economic strength of the Middle East region.

Against this overall backdrop of restraint, we are beginning to see cause for medium-term optimism. For example, in the UAE, we are starting to see an improvement in trading conditions, and during the year we won a number of sizable contracts with both new and existing clients. These included: infrastructure projects such as the £11 million Fujairah internal roads system and the £6 million regional headquarters for the Habib Bank AG Zurich; shopping centres, such as the £49 million Jumeirah Beach Village and the £38 million Fujairah City Centre; and a £28 million contract for General Electric for the construction of Emirates' Engine Overhaul Facility. Our fit-out business continues to see demand with the winning of numerous contracts including the Saint Regis Hotel in Abu Dhabi and the Bab Al Bahr Hotel in Ajman.

In Qatar, which was more subdued, we are well prepared for the anticipated increase in infrastructure investment in the run-up to the 2022 World Cup. We won an important contract to fit-out the main halls and 17 lounges at the new Doha International airport which will compete as a new major international hub. Fit-out continues to be an important market for us, with prestigious contracts secured for the Private Engineers Office and the Al Deeble Tower in Doha. The planned newcity of Lusail, to the north of Doha, is starting to generate demand for construction services. Over the year we have started to deliver infrastructure projects including the construction, installation and commissioning of two substations for Hyosung worth approximately £30 million and chilled water piping diversions for Ashghal who are building the Expressway in Lusail.

Our ability to deliver complex projects is well exemplified by the Doha West Sewage Treatment works project for Ashghal, where we built a new plant, refurbished the existing plant and constructed two storage lagoons. The project was completed three months early and on budget. In Dubai we refurbished the existing "Gold Souk", in the Dubai Mall, for Chalhoub Group into a bespoke 9000 square metre shoe district, comprising 40 designer outlets.

Market conditions in Oman have beenbroadly stable with good levels of activity in industrial development and defence. Notable contracts included building a 132KV grid substation for Arabian Industries and a substantial package of works for the new Military Training College in Seeb. Our fit-out and joinery businesses have also performed well, with the completion of the flagship Sohar Court complex, which we also built, a particular highlight. 

Outlook

We expect that in the short term demand will remain subdued; however, growth rates in the region are still attractive in the medium term as countries need to improve their infrastructure, we move closer to the 2022 World Cup and economic growth in the region shows signs of improvement. 

Equipment Services

Equipment Services designs bespoke engineering solutions and provides temporary structural equipment (formwork and falsework) for complex infrastructure and building projects. We have a strong position as one of the leading global suppliers in these specialist markets, operating across a wide range of geographies and sectors, with a fleet of equipment which we redeploy to meet the changing demands in our various markets.

Results summary:

We have continued to see a gradual recovery in activity levels in a number of our key markets in 2012.

Regionally:

Middle East and Africa

Saudi Arabia remains our largest market in this region, and we have continued to expand our footprint in the area between Jeddah and Riyadh. Our largest project in the region is the provision of equipment to the Roots Group Arabia contract at the Mecca Grand Mosque, to which we have delivered approximately 15,000 tonnes of equipment, over the last three years. In Jeddah our equipment is being used to build the 6-lane raisedapproach roads to the new airport andseveral major infrastructure projects in Riyadh are continuing to support a good performance.

In Oman, the business is performing well and we are strongly positioned with a high market share, currently undertaking a number of important projects, including: the redevelopments of Muscat and Salahlah airports, where in each case the innovative climbing formwork system, Tru-lift, is being used in the construction of new control towers.

In the UAE there are early signs that more substantial infrastructure projects are coming to market after a lengthy period of stagnation. In November we won a prestigious contract for the Presidential Palacein Abu Dhabi, building momentum from earlier wins with customers such as Larson & Toubro and Seobon Construction.

In Qatar the market remains subdued although increased bidding activity on planned major infrastructure projects (such as the underground light rail system at Lusail) points to early indications of improvement.

Following a restructuring, our South African business saw much improved year-on-year performance andis well-placed to profit from growing signs of a pick-up in demand driven by civil infrastructure growth in areas such as roads and power stations. We are continuing to provide significant amounts of equipment to the Gruluk Bunker, in connection with a new power station near Lephalale in Limpopo province. We also won a number of important new contracts including Flicksburg reservoir with Ruwacon and the supply of shoring equipment to the Mhlatshane waste water treatment works for Cyclone Construction in Kwazulu Natal.

Australasia and Far East

Performance across the region was underpinned by infrastructure, major liquified natural gas and mining projects. In Australia this included Gorgon in Western Australia and three other liquified natural gas plants on Curtis Island, Queensland. Although the pace of investment in the natural resources sector may have slowed somewhat in recent months, and activity in commercial hubs remains low, Australia nevertheless represents an important and relatively resilient market in which we have a strong market-leading position. Following the substantial earthquake damage in Christchurch, we have experiencedsignificant demand for both shoring and formwork, which has driven a very strong result from our operation in New Zealand.

Growth in Hong Kong has been driven by a strong programme of infrastructure investment, including the $1.5 billion cruise ship terminal development and the Kowloon 810a/b public transport project, which includes the development of an integrated interchange for underground and overground trains, a bus station and a taxi hub.

We also had a strong year in the Philippines, with demand being driven by projects such as the new Philippines Arena and Stadium complex. During the year we developed our international centre of excellence for design in Manila, drawing on the extensive labour pool of relevant skills in the Philippines and servicing our business across the Far East and in Europe.

Europe

Demand was generally subdued, reflecting the continued pressures on the construction sector, both in the UK and mainland Europe. We implemented a number of cost-reduction and restructuring measures to ensure that our operations were appropriately sized for lower volumes. We undertook a number of important projects such as the support of the stadium roof in the Stade Vélodrome in Marseille and also in Spain, where we are working with Horta Cosalda as plans to increase stadia capacity ahead of UEFA's Euro 2016 tournament begin to emerge.

Americas

In the US, the construction market has begun to show signs of recovery with both volumes and prices improvingtowards the end of the year. Prior to that, conditions were difficult, to which we responded with a number of organisational changes.

Elsewhere, market conditions were much more favourable, and we have increased our investment in Chileand Panama and are planning market entry into Colombia. Chile in particular is growing strongly, driven by mining demand, and we have opened our third branch in the country, in Copiapo, to service the natural resources extraction industries in that region.

Outlook

We expect Equipment Services' revenues to continue to improve with margins trending towards the medium-term target.

Investments

Investments is responsible for two broad areas: directing the Group's PFI activities (leading the bid process and managing equity investments); and taking the primary role in driving the Group's strategic development, pursuing acquisitions, exploring new opportunities and leading major, complex bids in market sectors which require cross-divisional involvement. The costs of these central functions are allocated to the Group Centre segment. The results summarised below reflect the performance of our equity investments in PFI projects.

Results summary:

Our strategy for our PFI portfolio is to optimise the cash flows of projects by intelligent operational and financial management. When we can add no further value, we seek to realise the latent value that we have created and to reinvest in new strategic opportunities.

During 2012 we undertook a series of three transactions to unlock the significant value in our increasingly mature portfolio:

In June and July we announced the sale ofhalf of our holding in the UCLH project to the CFIG Fund, the exercise of our pre-emption rights in relation to a co-investors holding, andthe onward sale of this holding, to the CFIG Fund. In October we sold a minority stake in a portfolio of 19 PFI investments to Dalmore Investment Fund and in December we announced the transfer of £55 million of the remaining PFI assets into the Company's pension scheme (a transaction which completed in January 2013).

The combined effect of these transactions was to realise a total value of £174.3 million, £119.3 million of which was in cash. We intend to utilise these cash proceeds (and some of the capacity in our current debt facilities) on further strategic investments in growth markets or sectors, both in our existing businesses and by acquisitions. 

Notwithstanding these disposals, the PFI/Private Finance 2(PF2) market remains an important area for Interserve, both as a source of construction and facilities management contracts, and for the available returns on our equity and debt investments. In 2012 our PFI equity investments made a total contribution to pre-tax profit of £12.0 million. We continue to seek out, and to win new contracts, such as the West Yorkshire Police PFI, won during 2012.This will involve the construction of two new divisional headquarters, custody suites and a specialist operational training facility (with firearm ranges and public-order and driver training facilities), and the provision of FM services for 25 years thereafter. We anticipate that the total value of our construction and FM services will be approximately £150 million.

At 31 December 2012 we had a remaining portfolio of two PFI assets (31 December 2011: 21), comprising Addiewell Prison, which is operational and West Yorkshire Police, which is under construction. Additionally, preferred bidder negotiations are on-going at a third project, Alder Hey children's hospital in Merseyside.

Outlook

The recently announced private finance initiative, PF2, and the announcement of a resumption in the schools' capital programme, together with a further £5 billion of other infrastructure investment are positive developments. Given our strong track record in delivering, operating and financing PPP initiatives, we expect to enlarge our project portfolio over the next few years.

Business review

Principal risks and uncertainties

We operate in a business environment in which a number of risks and uncertainties exist. While it is not possible to eliminate these completely, the established risk-management and internal control procedures, which are regularly reviewed by the Group Risk Committee on behalf of the Board, are designed to manage their effects and thus contribute to the creation of value for the Group's shareholders as we pursue our business objectives. The Group continues to be dependent on effective maintenance of its systems and controls. Over and above that, the principal risks and uncertainties which the Group addresses through its risk-management measures are detailed below.

The Group continues to have no material exposure to currency risks or volatility in commodity prices. The Group's principal businesses operate in countries which we regard as politically stable.

Financial review

Summary

Financial highlights of 2012 included:

·; Increase in Underlying Headline Earnings Per Share of 8 per cent

·; A robust trading performance in line with expectations, based on:

·; Continued improvement in margins at Support Services

·; Stable activity levels in UK Construction with margins in line with expectations

·; Return to growth at Equipment Services with enhanced operating margins

·; Continued strong cash generation with a three-year rolling profit conversion of 117 per cent.

·; Realisation of value from a maturing PFI investment portfolio to provide £119 million of cash for strategic growth and development opportunities plus a contribution of £55 million worth of assets to our Pension Scheme

·; Investment of £67 million in acquisitions increasing our presence in the provision of frontline public services in welfare (Interserve Working Futures) and healthcare (Advantage Healthcare) and in expanding our geographic footprint for oil and gas maintenance service provision in the Middle East (TOCO) (completed in January 2013)

·; Actuarial Pension Scheme deficit agreed at £150 million as at 31 December 2011 (before contribution of PFI assets, completed in January 2013), and future annual deficit contributions reduced from £23 million to £12 million

·; Successful re-financing of bank facilities completed, providing committed financing of circa £245 million

Financial performance

Revenue and operating profit

Consolidated revenues increased by 6 per cent compared with 2011, and total gross revenues (including our share of joint ventures and associates) by 2 per cent.

Strong work winning and account development delivered an 11 per cent increase in revenues at UK Support Services. International Support Services grew its volumes by 21 per cent as these services become an increasingly important part of our activities. Despite challenging market conditions, UK Construction maintained revenues at £737.2 million but our International Construction activities, in line with our expectations, reported a small decline in revenues. Equipment Services delivered a 9 per cent increase in revenues, following a 10 per cent increase last year, as it continues on its path to recovery.

A full-year operating margin on gross revenues of 3.4 per cent (2011: 3.2 per cent) again reflects a stronger second half than first half with an operating margin of 3.7 per cent (H1 2012: 3.1 per cent). Within this, the operating margin at Support Services - UK strengthened from 3.4 per cent in the first half to 4.5 per cent in the second half, reflecting the benefits of ongoing operational efficiency improvements and the emerging scale benefits of increased revenue. The full year operating margin at 4.0 per cent (2011: 3.6 per cent) provides further evidence of the significant progress made in our Support Services operations in the UK as we track towards the medium term target of 5 per cent operating margins. Our International Support Services business delivered a healthy, but reduced, margin of 12.8 per cent (2011: 15.1 per cent) on significantly increased volumes. In line with expectations, UK Construction margins at 2.0 per cent (2011: 2.5 per cent) have reverted to near long-term norms whilst margins in our International Construction operations have declined from 8.4 per cent to 6.5 per cent on volumes down 10 per cent in increasingly competitive global markets. Equipment Services delivered increased full year margins, on increased activity levels, of 9.6 per cent (2011: 8.8 per cent) resulting in the anticipated return to full year growth. Second half margins in this division returned to double-digits at 10.7 per cent (H2 2011: 9.6 per cent) with a further recovery towards medium term margin expectations of 15 per cent expected over the coming years.

Average and closing exchange rates used in the preparation of these results were:

Movements in exchange rates during the year had no material impact on the results of the Group.

Investment revenue and finance costs

The net interest charge for the year of £2.0 million can be analysed as follows:

The interest cost on Group debt appears high, relative to the amounts of drawn debt. This is due to thehigh proportion of fixed costs relating to: the amortisation of upfront arrangement fees; and the accelerated amortisation of arrangement fees relating to the previous debt facility; together with a commitment fee payable as a percentage of undrawn committed facilities.

Interest receivable on sub-debt increased to £5.4 million (2011: £4.0 million) reflecting the increasing operational maturity of the PFI investment portfolio and increasing associated returns. Transactions disposing of the majority of the assets that generated these returns were completed before the year-end or shortly thereafter and as a consequence returns of this nature are expected to be materially reduced in the coming year. It is anticipated that this reduction in income will be more than offset by the benefits of reinvesting the cash proceeds.

A lower assumed rate of return on Scheme assets of 4.9 per cent (2011: 6.0 per cent), reflecting generally depressed equity and bond markets, resulted in a reduced interest credit to the income statement of £32.0 million (2011: £35.3 million) despite actual returns on assets exceeding this expectation by £17.7 million in the year. This was partially offset by the reduced interest cost on liabilities resulting from a lower assumed discount rate of 4.4 per cent (2011: 4.8 per cent). The net impact of these two pension-related items was a (non-cash) net interest cost of £0.8 million in 2012 (2011: £1.3 million credit).

Taxation

The tax charge for the year of £11.2 million represents an effective rate of 6.1 per cent on total Group profit before taxation. The factors underlying this effective rate are shown in the table below:

* The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.

As anticipated last year, the underlying tax charge and rate is slightly lower than in the previous year due to management action to stem losses in overseas tax jurisdictions that are not available for relief against other Group profits.

Last year's tax charge benefited from actions taken that improved the tax efficiency of earnings remitted from a subsidiary in the Middle East.

The profit on disposal of PFI assets of £114.9 million recognised in the year is not subject to corporation tax.

Dividend

The directors recommend a final dividend for the year of 14.1 pence, to bring the total for the year to 20.5 pence, an increase of 8 per cent over last year. This dividend is covered 2.3 times by headline earnings per share and is comfortably covered by free cash flow.

Net debt and cash flow

Average net debt for the year was £27 million (2011: £3 million). At the year end, we had net cash of £25.8 million (net debt 2011: £44.2 million), due to our strong operating cash flow, and disposal proceeds from PFI investments of £119.3 million, with cash reinvested in acquisitions of £44.7 million.

The operating cash flow of £55.6 million (2011: £66.6 million) was driven by continued close control of capital expenditure and efficient management of working capital. The resulting 101 per cent conversion of Operating profit before amortisation of intangible assets and exceptional items (2011: 145 per cent), brings our rolling 3 year conversion rate to 116.8 per cent, compared with our KPI target of 100 per cent.

Despite a £5.3 million net outflow of advances received from customers (2011: £5.8 million) working capital movements represented a small net inflow of £0.2 million.

Net capital expenditure increased from £5.5 million to £14.9 million as we continue to invest in the growing activity levels in Support Services and Equipment Services. Even at this increased level, this remains significantly below the annual depreciation charge as we continue to generate cash returns on hire fleet investments made in earlier years within Equipment Services.

The strong cash generation of our operations in the Middle East and of our Investment special purpose vehicles has enabled us broadly to maintain the levels of dividends remitted at £19.8 million (2011: £20.6 million) despite a decline in the overall contribution from joint ventures and associates.

Tax paid of £10.7 million (2011: £3.2 million) remains lower than the Consolidated Income Statement charge incurred by the Group, due principally to timing differences and the tax deductions for pension deficit payments.

Investments outflow of £11.6 million (2011: £19.3 million) reflects additional equity and sub-debt invested in PFI joint venture companies.

Disposals of PFI and other investments generated a net inflow of £119.3 million.

Acquisitions outflow of £44.7 million in 2012 represents the cash purchase consideration for the acquisitions of Business Employment Services Training Ltd (£18.0 million) and Advantage Healthcare (£26.5 million) along with aggregate acquired net debt of £0.2 million.

Refinancing

As noted in last year's annual report, in February 2012 we were successful in securing a long-term refinancing for the Group. This saw our previous £250 million syndicated revolving credit facility, which was due to expire in October 2013, replaced with a series of committed facilities totalling circa £245 million (at current exchange rates). These new facilities run in parallel with each other and provide a diverse maturity profile extending, in total, to February 2017.

The new funding is subject to the same covenants as the previous facility and is on broadly similar commercial terms. It has been secured at slightly lower rates for borrowing and non-utilisation.

These new funding arrangements provide us with increased certainty, greater flexibility, improved resilience, a diversity of maturity dates and sufficient balance sheet capacity to deliver our medium-term strategy.

Disposals / PFI

In accordance with our long-term strategy of recycling capital from our investments portfolio, we completed two separate disposals of PFI investments during the year. Subsequently, in January 2013, we contributed the majority of the remaining PFI investment portfolio into the Interserve Pension Scheme. Following these transactions our PFI portfolio now consists solely of our investments in the Addiewell Prison and West Yorkshire Police projects, and our interest in the Alder Hey Children's Hospital project on which we are preferred bidder, but which has not yet reached financial close.

On 21 June 2012, we announced a sequence of transactions(including the exercise of pre-emption rights over the holding of a fellow investor) that gave rise to the disposal of half of our 33 1/3 per cent holding in the UCLH project in exchange for a net £33 million of cash.

On 12 October 2012, we sold for cash consideration of £85.5 million interests representing 49.9 per cent of the equity and 62 per cent of the debt instruments in two subsidiaries that between them owned 19 of our PFI investments.

In aggregate these transactions contributed an exceptional profit on disposal of £110.9 million after associated costs.

On 28 November 2012, we announced that we had entered into a conditional agreement with the trustee of the Pension Scheme, to transfer our remaining interest in a portfolio of 19 PFI assets, to the Trustee at a valuation of £55 million. Subsequent to the year end, the transfer was approved by shareholders at a General Meeting and completed on 7 January 2013.

Acquisitions

We began the process of reinvesting the proceeds raised from these asset disposals in new growth areas, by completing two acquisitions, for aggregate consideration of £44.7 million, during the year with another completed shortly after the year end:

On 3 May 2012, consistent with our strategy to increase our capability to provide front line public services, we acquired Business Employment Services Training Limited (BEST) one of the UK's leading providers of training and development for job seekers and employers, now renamed Interserve Working Futures Limited. Total consideration was £18.0 million. The preliminary review of fair values identified acquired net assets of £3.8 million including £7.7 million of acquired intangible assets representing customer relationships. These intangible assets will be amortised over 6 years. The balance of £14.2 million has been recognised as goodwill.

On 17 December 2012, we acquired Advantage Healthcare, a leading UK provider of community healthcare, for a total consideration of £26.5 million. The acquisition widens our access to a £10bn market through offering a range of healthcare services at home. The preliminary review of fair values identified acquired net assets of £13.4 million including £16.5 million of acquired intangible assets representing customer relationships. These intangible assets will be amortised over 10 years, representing the estimated useful economic life of these relationships. The balance of £13.1 million has been recognised as goodwill.

Shortly after the year end, on 7 January 2013, jointly with our partner in Oman, we acquired the oil and gas maintenance business of Willbros Middle East (known as TOCO). The acquisition expands our operational footprint in the oil and gas services business into Oman, a key growth market. Total cash consideration was $41.3 million (circa £26 million), of which we contributed 85 per cent.

We maintain a disciplined approach to reviewing potential acquisition opportunities, rejecting those which do not meet our strict valuation and other selection criteria but with a strong balance sheet, and significant available debt capacity and facilities, we remain well placed to take advantage of further appropriate acquisition opportunities as they are identified.

Pensions

At 31 December 2012 the Group pension deficit under IAS 19, net of deferred tax, has increased to £77.8 million (2011: £42.2 million):

With the benefit of additional employer cash contributions significantly in excess of the Income Statement charge and an investment portfolio that out-performed expectations in the period, the value of Scheme assets increased by £59.4 million during the year after allowing for benefits paid. However corporate bond yields, which are used to discount Scheme liabilities, have again fallen significantly during the year. As a result, the value of benefit obligations has increased by more than the increase in the value of Scheme assets.

Defined benefit liabilities and funding

The Group's principal pension scheme is the Interserve Pension Scheme, comprising approximately 95 per cent of the total defined benefit obligations of the Group.

The triennial actuarial valuation of the Scheme as at 31 December 2011 was completed during the year with an assessed actuarial deficit of £150 million. A new programme of deficit recovery payments was also agreed with the Trustee, comprising: a £55 million contribution of PFI assets (which completed in January 2013); and annual recovery payments of £12 million per annum, indexed each year, until 2019. These new cash contribution levels, reduced from the current £23 million per annum, make available an additional £11 million of cash flow per annum to reinvest in operational activities.

Investment risks

Scheme assets are invested in a mixed portfolio that consists of a balance of performance-seeking assets (such as equities) and lower-risk assets (such as gilts and corporate bonds). As at 31 December 2012, 45 per cent of the Scheme assets were invested in performance-seeking assets (2011: 44 per cent).

The agreed investment objectives of the Scheme are:

§ to secure, with a high degree of certainty, liabilities in respect of all defined benefit members; and

§ to adopt a long-term strategy which aims to capture outperformance from equities and move gradually into bonds to reflect the increasing maturity of the defined benefit membership with a view to reducing the volatility of investment returns.

The majority of equities held by the Scheme are in international blue chip entities. The aim is to hold a globally diversified portfolio of equities, with an ultimate target of 50 per cent of equities being held in UK and 50 per cent in US, European and Asia Pacific equities.

IAS 19 assumptions and sensitivities

Assumptions adopted in assessment of the income statement charge and funding position under IAS 19 are reviewed by our actuarial advisers, Lane Clark & Peacock LLP.

The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:

1 Life expectancy of a current pensioner aged 65.

2 Life expectancy at age 65 for an employee currently aged 45.

The Group will apply the new accounting standard, IAS19R ("Employee Benefits") from 1 January 2013. As a result when we publish results for 2013, comparative numbers for 2012 and earlier years will be restated to be on a consistent basis. Going forward, scheme administration expenses will be expensed within operating profit (they are currently included in the return on scheme assets disclosed within interest) and the expected return on scheme assets will be accounted for at the lower liability discount rate (equivalent to a AA corporate bond yield). The combined impact of this restatement on 2012 is currently expected to be a reduction in the published Headline EPS of 1.9 pence. There will be no impact on the disclosed obligation, asset, balance sheet or cash flow.

Investments

The credit in the Income Statement relating to the performance of the Group's share of the equity portfolio is analysed as follows:

With the majority of the investment portfolio having been disposed of by, or shortly after, the balance sheet date, we anticipate significantly lower levels of investment return in 2013 onwards. However, this reduction in investment return should be at least partially offset by bank interest on the £119 million of cash raised from the disposals, a return on the additional £55 million of pension scheme assets and/or returns from businesses acquired using these proceeds.

Treasury risk management

We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks. The Treasury function is not a profit centre and it does not enter into speculative transactions. It aims to reduce financial risk by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board.

Liquidity risk

We seek to maintain sufficient facilities to ensure access to funding for our current and anticipated future requirements, determined from budgets and medium term plans.

Under our new bank facilities signed in February 2012, we have access to committed syndicated revolving credit facilities totalling £150 million until February 2017 and circa £95 million of various bi-lateral agreements which expire between February 2015 and February 2016.

Market price risk

The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that adequate interest cover is maintained, in line with Board approved targets and banking covenants.

Our borrowings are principally denominated in sterling and mostly subject to floating rates of interest linked to LIBOR. We have in place interest rate caps and swaps which limit interest rate risk. The weighted average duration to maturity of these instruments is a little over two years.

Foreign currency risk

Transactional currency translation

The revenues and costs of our trading entities are typically denominated in their functional currency. Where a material trade is transacted in a non-functional currency, the entity is required to take out instruments through the centralised Treasury function to hedge the currency exposure. The instruments used will normally be forward currency contracts. The impact of retranslating any entity's non-functional currency balances into its functional currency was not material.

Consolidation currency translation

We do not hedge the impact of translating overseas entities trading results or net assets into the consolidation currency.

In preparing the consolidated financial statements, profits and losses from overseas activities are translated at the average exchange rates applying during the year.

The balance sheets of our overseas entities are translated at the year-end exchange rates. The impact of changes in the year-end exchange rates, compared to the rates used in preparing the 2011 consolidated financial statements, has led to a decrease in consolidated net assets of £8.4 million (2011: £8.0 million increase).

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Business review. Our financial position, cash flows, liquidity position and borrowing facilities and details of financial risk management are described in the Financial review.

The majority of our revenue is derived from long-term contracts, which provides a strong future workload and good forward revenue visibility. We have access to committed debt facilities totalling circa £245 million until a range of dates that extend beyond at least February 2015. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Consolidated income statement

For the year ended 31 December 2012

Consolidated statement of comprehensive income

For the year ended 31 December 2012

Consolidated balance sheet

At 31 December 2012

Consolidated statement of changes in equity

The £49.0 million merger reserve represents £16.4 million premium on the shares issued on the acquisition of Robert M. Douglas Holdings Plc in 1991 and £32.6 million premium on shares issued in the acquisition of MacLellan Group Plc in 2006.

The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the How Group, Bandt and Interserve Employee Benefit Trust. The market value of these shares at 31 December 2012 was £2.5 million (2011: £4.2 million).

The accumulated balance of translation differences, incorporated within the Hedging and translation reserve, amounts to £35.2 million (2011: £43.6 million). 

Consolidated cash flow statement

For the year ended 31 December 2012

Notes to the Consolidated Financial Statements

For the year ended 31 December 2012

1. General information

Interserve Plc (the Company) is a company incorporated in the United Kingdom. The financial information in this announcement, which was approved by the Board of Directors on 27 February 2013, does not constitute the Company's statutory financial statements for the years ended 31 December 2012 or 2011 but is derived from these accounts.

Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's annual general meeting. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under section 498(2), (3) or (4) of the Companies Act 2006. The Company expects to publish its statutory accounts that comply by the end of March 2013.

2. Accounting policies

These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.

The annual financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. 

The accounting policies and methods of computation followed in these financial statements are consistent with those as published in the Group's Annual Report and Financial Statements for the year ended 31 December 2011 which are available on the Company's website at www.interserve.com. In addition, the accounting policies used are consistent with those that the directors have used in the Annual Report and Financial Statements for the year ending 31 December 2012.

3. Business and geographical segments

The Group is organised into four operating divisions, as set out below. These divisions are the basis on which the Group reports its primary segment information.

·; Support Services: provision of outsourced support services to public and private-sector clients, both in the UK and through Middle East associates.

·; Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and through Middle East associates.

·; Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.

·; Investments: transaction structuring, and management of, the Group's project finance activities. The Investments' segmental figures represent the Group's share of the associated special purpose companies.