16th Mar 2007 07:01
Cape PLC16 March 2007 Cape PLC ("Cape" or the "Company") Preliminary results for the year ended 31 December 2006 Cape PLC is a leading international provider of essential support services forthe energy sector, providing a broad range of services across the life cycle ofmajor industrial assets. Our services are used during initial project build,routine maintenance and during outages, extension of life projects and finallyfor decommissioning. We work globally with many of the world's leading nationaland international oil and LNG companies. Cape's footprint extends from the UKthrough the Gulf and Caspian into the Far East and Pacific Rim. We offerservices both on and offshore, with offices in 23 countries and around 8,000employees worldwide. Cape PLC is pleased to announce an excellent set of results for the year ended31 December 2006. Financial Highlights Group turnoverup 13.0% to £295.5m (2005: £261.5m) Total operating profitup to £14.6m (2005: loss of £1.4m) Group operating profit from continuing operations before exceptional items andacquisitionsup 65.4% to £12.9m (2005: £7.8m) Net cash from operating activities before Scheme funding£13.7m (2005: £7.3m) Shareholders' fundsIncreased by 26.2% to £81.0m (2005: £64.2m) Basic EPSUp to 13.5 pence (2005: Nil pence) Adjusted basic EPSUp 45.8% to 14 pence (2005: 9.6 pence) Business Highlights - Continued progress in key power generation, oil and LNG markets - Further significant contract wins in each of our key markets: UK, Gulf & Caspian, and Far East & Pacific Rim - Order book continues to grow across all regions - Asbestos Scheme of Arrangement effective from 14 June 2006 • Acquisition of DBI Group Limited • Sale of the Cleton business Outlook Highlights - Trading ahead of expectations • PCH discussions continue Martin May, Chief Executive commented: "I am very pleased to announce another outstanding set of results, building onthe firm progress made over the last five years, further demonstrating Cape'sability to deliver both financially and operationally. The business has been substantially de-risked through the asbestos Scheme ofArrangement and, following the disposal of the Cleton business and with theacquisition of DBI Group now completed and a clear strategy, Cape is extremelywell positioned for further growth, both organically and by selectiveacquisition. In the last year we have continued to secure a significant number of newcontracts and renewals both in the UK and internationally and see strong demandfor our services with Cape's forward order book continuing to grow. We believethe Group is ideally positioned for continued progress during the current yearand beyond." Further information: Cape PLCMartin May, Chief Executive +44 (0) 1924 876 276 Bell Pottinger Corporate and FinancialNick Lambert/ Victoria Geoghegan +44 (0) 20 7861 3232 Chairman's Statement 2006 has seen a step change in Cape's fortunes and aspirations. On theoperational and financial front, the Group has delivered an excellent set ofresults. Following the approval of its ground-breaking asbestos Scheme ofArrangement in June 2006, Cape also completed the disposal of its Cletonbusiness in July and the acquisition of DBI Group in October. With a clearstrategy and a strong order book, Cape is extremely well placed for futuregrowth. Cape specializes in the provision of scaffolding, insulation, fire protection,cleaning and other essential services to the energy sector. Cape aims to buildon its success to date by strengthening the range of services it offers and byundertaking work only where it can be done to the highest quality of health,safety and environmental standards, where Cape is confident that the work can bedelivered on time within acceptable risk parameters and without compromising itsethical policies. Results for 2006 Group turnover rose during the year to £295.5 million (2005: £261.5 million), anincrease of 13.0%. Total operating profit for the year was £14.6 million (2005:loss of £1.4 million). Operating profit from continuing operations beforeexceptional items and acquisitions increased by 65.4% to £12.9 million (2005:£7.8 million). Basic earnings per share increased to 13.5 pence from nil pencein 2005. This marks the third consecutive year in which Cape has deliveredgrowth in turnover and underlying profitability. Board Developments The appointment in July 2006 of Martin May as Chief Executive with the task ofimplementing our ambitious and acquisitive growth strategy has given furthermomentum to the Group. I took over from Martin as non-executive Chairman and on 1 September 2006 DavidRobins, a partner at city law firm Berwin Leighton Paisner LLP and a formerdirector of Hornby Plc joined the Board. His corporate finance expertise addsstrength and depth to the Board. The board now comprises: David McManus - Non-executive Chairman Martin May - Chief Executive Mike Reynolds - Group Finance Director David Robins - Non-executive Director I am delighted to be able to announce today that Sean O'Connor has agreed torejoin the Board as a non-executive Director with effect from 1 April 2007. Seanwas previously a non-executive Director of the Company from 1996 to 2004. He iscurrently chairman of Applied Energy Holdings Limited, Babel Media Limited andSpringboard Urban Limited and a director of a number of private and publiccompanies including Sportingbet PLC, Graphite Enterprise Trust PLC, Crow TVLimited and Escape Studios Limited. Our people We recognize that the continuing dedication, quality and enthusiasm of all ofCape's employees is the cornerstone of our success. Whilst rapid organic growthand the assimilation of new businesses bring new skills and faces into the mix,they also bring challenges. There is a real drive to bring all our peopletogether as one team taking the best of what each of us has to offer andharnessing it to deliver a consistent top quality service to all our clients. Onbehalf of the Board, I would like to thank the Group's management, staff andemployees at all levels worldwide for their hard work and commitment throughout2006. David McManusChairman16 March 2007 Chief Executive's Report Cape has enjoyed another year of strong organic growth and financialperformance. Not only has Cape produced another strong set of results, it hasdelivered on its commitment to shareholders of substantially de-risking thebusiness by implementing the asbestos Scheme of Arrangement, it has alsoundertaken its first acquisition since 1999. These results confirm Cape'sposition as one of the leading international providers of essential supportservices to the energy sector. Financial summary Turnover for the year from continuing operations (including the Group's share ofjoint ventures but excluding acquisitions) was £270.7 million (2005: £229.8million), an increase of 17.8%. Turnover from the Cleton business sold in July2006, amounted to £21.5 million. DBI Group, which was acquired in October 2006,generated £3.5 million of turnover by the year end. Turnover from alloperations, including the Group's share of joint ventures, was up 13.0% to£295.7 million (2005: £261.8 million). Turnover in the UK increased organically by 18.1%, from £165.9 million to £196.0million. Similar levels of growth were achieved in the rest of the world, withturnover up 19.4% from £58.8 million to £70.2 million. Total operating profit for the year was £14.6 million (2005: loss of £1.4million). Operating profits from continuing operations (including the Group'sshare of joint ventures but excluding acquisitions and exceptional items)increased by £5.0 million or 62.5% to £13.0 million (2005: £8.0 million). Whilstthe discontinued Cleton business contributed £0.2 million, the newly acquiredDBI Group generated £0.6 million of profit before the amortization of goodwillof £0.2 million in the 10 week period following completion of the acquisition. In the UK, profits from continuing operations, before the deduction of headoffice costs of £2.7 million (2005: £1.8 million) and industrial disease costsof £3.4 million (2005: £4.8 million), were up 10.4% to £8.5 million (2005: £7.7million). In the rest of the world, profits from continuing operations,including the Group's share of joint ventures, rose to £11.0 million (2005: £7.0million) an increase of 57.1%. There have been no further exceptional costs incurred in relation to the Schemefollowing its coming into effect on 14 June 2006 and a provision of £1 millionwhich had been held against further Scheme costs has been released. One of the key performance indicators by which the Directors measure the Group'sperformance is its return on managed assets. Before exceptional items, theGroup's continuing operating businesses delivered a return on managed assetscomfortably in excess of the 25% target set by the Directors. For thesepurposes, the Directors define managed assets as tangible fixed assets plus netcurrent assets excluding cash, borrowings and corporate tax balances. The net charge to the profit and loss account for industrial disease claims was£3.4 million (2005: £4.8 million). One of the benefits of the Scheme, however,is that asbestos related Scheme claims are now paid directly from the fund.Although Cape has an obligation to top up the fund to the extent that thetriennial assessments show there is a shortfall, cash has been freed up toinvest in the business and drive growth. Net cash generated from operating activities before Scheme funding was £13.7million (2005: £7.3 million), an increase of £6.4 million. Although the Groupcontinues to generate cash, the increase in activity across the business, thefunding of the acquisition of DBI Group and the transfer of cash to the Schemefund have resulted in an increased level of cash outflow. After financing,including the negotiation of a new bank facility and the repayment ofborrowings, the Group saw a net cash outflow of £16.6 million (2005: inflow£22.4 million). The Group ended the year with net debt of £21.1 million (2005:funds £23.7 million). Another key performance indicator by which the Directors measure the Group'sperformance is growth in earnings per share. Basic earnings per share ('EPS')were 13.5 pence (2005: nil pence). The adjusted basic EPS was 14.0 pence (2005:9.6 pence), an increase of 45.8% against a 2006 target of 12.5%. The tax charge for the year was £3.1 million (2005: credit of £1.0 million). Theeffective rate of tax for the Group was 21.5%. If the tax on profits arisingfrom the sale of the Cleton business were to be excluded, the effective rate oftax would have been 16.9%. Shareholders' funds increased from £64.2 million in 2005 to £81.0 million. Theincrease was due principally to the significant growth in retained earnings andalso to an improvement in the actuarial valuation of the pension schemes'surplus. A dividend is not being proposed (2005: Nil). Forward order book Cape continued to win significant new contract awards and renewals throughout2006. As at 31 December 2006, the Group's order book showed that approximately70% of budgeted Group turnover for 2007 was already underpinned with firmcontracts. There is also clear visibility of a substantial proportion ofanticipated 2008 turnover. Notable contract successes in 2006 included: •a £78 million multi-disciplinary contract over ten years with Scottish Power Generation Limited on the Longannet and Cockenzie Power Stations; •a £10 million maintenance contract renewal over five years with Drax Power Limited; •a £4 million access scaffolding contract on the first phase of the South Hook LNG Terminal to complement other work already won on the site by Cape; •a $30 million multi-disciplinary contract for SABIC on the Yanbu complex; •further contracts in Saudi Arabia with a combined value of c. $19.1 million on the Rabigh, Khursaniyah, Juaymah and Sharq III plants; and •contracts in the UAE and Qatar with a combined value of c. $23 million on the Archirodon NGL III Project, the Dolphin Project at Ras Laffan, Ruwais, and Umm Said. We are also pleased to announce the following significant contract awards inearly 2007: •a £10 million maintenance contract renewal over five years with RWE Npower PLC at the Didcot A and B power stations; •a £7.5 million maintenance contract renewal over three years with RWE Npower PLC at the Aberthaw power station which has been won from the former incumbent provider, Interserve Industrial Services Limited; •seven other access, insulation and cleaning contracts in the UK with a combined value of in excess of £27 million; •in the UK, a large project for two major players in the nuclear decommissioning field; and •a $8.0 million insulation contract in Qatar for Descon Engineering. Disposal of the Cleton business On 20 July 2006, Cape completed the disposal of the business and assets ofCleton, its operating business based in the Netherlands, Germany and Belgium, toSGB Group Limited. The terms of the disposal provided for a cash payment of £5.4million, representing a premium to net assets. After recycling to the profit andloss account the goodwill previously taken to reserves, there was an overallloss on the sale of £1.6 million. Since the sale, however, Cape has alsodisposed of the three freehold premises used by the Cleton business for £2.9million after expenses giving a profit of £1.8 million. The overall effect ofthe transaction was a profit of £0.2 million arising on the sale of thebusiness, the assets and the properties. More importantly, the disposal had abeneficial effect from a cash flow perspective. The sale of the Cleton business, which in the period to 20 July 2006 generatedturnover of £21.5 million and contributed profits before tax of £0.2 million, isin line with the Group's strategy of focussing on core markets where the returnon managed assets, rate of growth in operating profit and cash generationjustify Cape's presence. Acquisition of DBI Group On 18 October 2006, Cape completed the acquisition of DBI Group Limited and itssubsidiaries DBI Industrial Services Limited and DBI Offshore Services Limited("DBI Group"). DBI Group operates across the UK and provides onshore andoffshore specialist cleaning services to a number of large blue chip clients inthe pharmaceutical, oil, petrochemical and manufacturing industries. Clientsinclude BASF, Bluewater Services, BP, Cadbury Schweppes, Corus, Dow Corning,Ineos Chlor, Maersk, Mitsui Babcock and Total. DBI Group is an excellent fit for Cape as we have a number of significantclients in common, a similarly exacting approach to matters of health and safetyand a well matched geographic footprint. DBI Group brings an additional level oftechnical specialization to Cape's existing industrial cleaning services. Weexpect the combination to bring immediate benefits to both businesses. The initial consideration for the acquisition (including expenses) was £11.0million and, subject to DBI Group meeting earnings growth targets over the nexttwo years, up to a further £7.25 million will be payable. The initialconsideration has been paid in cash and the additional consideration will besatisfied by a mixture of cash, loan notes, Cape shares and options over Capeshares. Since 18 October 2006, DBI Group has generated turnover of £3.5 million andcontributed profits before tax of £0.6 million before goodwill amortisation of£0.2 million and £0.5 million to the Group's operating cash flow. The Board hasrecently approved new investment in plant and machinery for the business of £1.0million for 2007. It is anticipated that this, along with a furtherstrengthening of the management team, will result in significantly increasedgrowth in 2007. Finance At the time of the DBI Group acquisition Cape also secured a new £60 millionfive year committed facility from Barclays Bank Plc and Bank of Scotland,Corporate. The facility comprises a term loan of up to £13 million to fund theacquisition of DBI Group and revolving credit and other facilities totalling £47million for working capital and other purposes. The new facility, which is onimproved terms, replaces the previous Barclays facility other than in respect ofthe £15 million term loan used to part fund the Scheme, which remains in placeand is unamended. Pensions The Group operates two principal pension schemes in the UK: one is a definedbenefit scheme and the other a defined contribution ("Stakeholder") scheme. Theassets of both schemes are held in trustee administered funds. Independent actuaries have updated the April 2004 valuation of the definedbenefit schemes to 31 December 2006. The present value of the defined benefitpension schemes' liabilities is £102.7 million (2005: £108.2 million). Themarket value of the assets is £118.2 million (2005: £115.7 million). The relateddeferred tax liability of £4.6 million (2005: £2.2 million) leaves a net pensionasset of £10.9 million (2005: £5.3 million). One of the Group's smaller schemes, the Works Staff pension scheme for ex-Calsilemployees, commenced wind up on 12 June 2006. The assets of the scheme were £1.7million and liabilities £1.1 million on an FRS 17 basis. However, on a wind upbasis, the liabilities exceeded the FRS 17 liabilities resulting in a charge tothe profit and loss account of £0.6 million. Strategy Cape's strategy can be summarized as follows. • Overall objectives The Group's overall objectives are: * to be the market leader in the provision of essential support services for the energy sector; and * to achieve above average returns for our shareholders when compared to our peers. • Specific objectives for Cape PLC In order to achieve these objectives the specific objectives of the Company are: * to achieve target earnings per share growth year on year; * to achieve a minimum return on managed assets of 25%; * to provide adequate funding to allow for the growth of the business; * to provide for management succession and development across the Group; * following the first Scheme of Arrangement review (due in 2008), to pay dividends to shareholders; * to meet the Group's obligations fully with respect to the Scheme of Arrangement; and * to manage the defined benefit pensions schemes to minimise the risk to the Group. • Market profile In establishing its market profile, the Group will seek to: * unify the business under the trading name 'Cape' and to invest in and establish a strong brand and common house style; and * sustain a behavioural profile built on performance and integrity; on quality services, provided to the highest industry safety and environmental standards. • Activities * Cape will continue to provide a broad range of essential support services for the Energy, Power Generation, Process Engineering and similar sectors characterised by relatively high entry costs, technical expertise, specific workforce competencies, and a high quality and safety profile. * Cape will seek to engage as far as possible with end users looking for long term business relationships having similar quality and safety cultures who operate globally within our footprint. * Cape will aim to service client needs throughout asset life cycles, by providing innovative and cost effective solutions during initial project build, maintenance, extension of asset life and decommissioning. • Acquisitions There are two circumstances where the Group will look to make acquisitions. These are: * to establish another discipline quickly that cannot readily be achieved through normal organic growth; or * to add businesses which can be "bolted on" to existing operations to consolidate an existing market or extend our footprint within an existing region. Scheme of Arrangement Following its approval by the overwhelming majority of creditors who voted onthe Scheme, and its subsequent sanction by the High Court, the Scheme becameeffective on 14 June 2006. The Scheme provides for the long-term funding of themajority of asbestos-related claims arising out of the historical activities ofthe Group in the UK. The Directors believe that the Scheme is a major step in de-risking Cape. Itleaves the Group better able to generate the resources needed to secure thecontinued payment of compensation to claimants and removes a significantobstacle to Cape's growth. Given the outlook for the Group and assuming that future settlements broadlyfollow recent history, we remain confident that any required top-ups to theScheme fund and (insofar as there are any) future claims outside the Scheme, tothe extent not matched by insurance recoveries, can be met from operating cashflows. Health and Safety, and Training Cape is absolutely committed to ensuring that all of our people can work safelyat all times. So despite another very demanding year operationally, we werepleased that the Group maintained its excellent health and safety record.Training and safety go hand in glove so none of this could have been achievedwithout significant investment in training schemes and resources right acrossthe Group. Training in this context extends not only to existing employees butalso to new employees. We have established and continue to invest in trainingcentres in each of our major operations. Over the last year the Board approved adoubling of our investment in training in the Philippines and the establishmentof a new facility on Sakhalin Island. Many of our clients demand high levels oflocal labour content. Cape has a proven track record of training localworkforces to exacting standards across the breadth of our operations. With the ultimate intention over time of incurring zero lost time incidents, thetarget in 2006 was to achieve an accident frequency rate ("AFR") of 0.12 per100,000 man hours or less across the Group. In fact, we achieved an AFR of 0.08(2005: 0.07). The number of RIDDOR accidents (Reporting of Injuries Diseases andDangerous Occurrences Regulations 1995) for the Group increased from 15 in 2005to 18 in 2006. The overall trend, however, remains downwards with the AFR morethan halved since 2002 and the number of RIDDOR accidents down by 40% in spiteof a 55% increase in the number of man hours worked. Notably, on SakhalinIsland, Cape has just completed 2 million man hours without incurring a losttime incident. For the second year in succession, Cape has been awarded the British SafetyCouncil's 5 Star Award and the British Safety Council's prestigious Sword ofHonour. The Sword of Honour is one of only 40 awarded worldwide by the BritishSafety Council and recognizes organizations that have implemented safety systemsthat are among the best in the world. This is the third time in five years thata Sword of Honour has been awarded to Cape. Outlook Cape now has a demonstrable track record of growing a profitable business. TheGroup's strategy is designed to ensure that this continues. Cape's strong growthin recent years has been generated organically. In 2007, we are keen to exploitdemand for our services in North Africa and to further strengthen our positionin Kazakhstan. From this stable platform and with the support of its keystakeholders, Cape is now also well positioned to make acquisitions that fitwithin its strategic criteria. Against a background of sustained high energy prices and with the market forindustrial support services as strong as at any time in recent years, Cape isideally positioned to prosper. During 2007, Cape's Directors will also decidewhether, and if so when, to consider a return to the Official List of the LondonStock Exchange. As has been reported in recent weeks, Cape is in discussions with PCH GroupLimited, a public company which is listed on the Australian Stock Exchange.These discussions continue but are at an early stage and may or may not lead toan offer. Should an offer be made, Cape's Directors are confident that they willbe able to fund a cash offer to PCH's shareholders. Cape ended 2006 with activity levels at a record high and is currently tradingsignificantly ahead of management's expectations. The Directors have everyreason to look forward to continuing growth in 2007 and beyond. Martin K May Chief Executive16 March 2007 Unaudited Consolidated profit and loss account at 31 December 2006 2006 2005 (restated) Total Total Notes £m £mTurnoverContinuing operations 270.7 229.8Acquisitions 3.5 - --------------------Total continuing operations 274.2 229.8 --------------------Discontinued operations 21.5 32.0 -------------------- 2 295.7 261.8 Less share of turnover of joint ventures - continuing operations (0.2) (0.3) --------------------Group turnover 295.5 261.5 -------------------- Group operating profitContinuing operations 12.9 7.8Acquisitions (after £0.2 million (2005: £nil) of goodwill amortisation) 0.4 -Operating exceptional items - continuing operations 3 1.0 (9.7)Total continuing operations 14.3 (1.9) Discontinued operations 2 0.2 0.3 ------------------- Group operating profit /(loss) 14.5 (1.6)Share of operating profit in joint ventures - continuing operations 0.1 0.2 --------------------Total operating profit / (loss) : group and share of joint ventures 14.6 (1.4) ------------------- Loss on disposal of business - discontinued 4 (2.5) -Profit on sale of fixed assets - discontinued 4 1.8 -Profit on sale of fixed assets - continuing 4 - 0.3 -------------------Profit / (loss) on ordinary activities before interest 2 13.9 (1.1)Net interest payable (0.4) (0.7)Other finance income 0.9 0.8 -------------------Profit / (loss) on ordinary activities before taxation 14.4 (1.0)Tax (charge) / credit on profit / (loss) on ordinary activities (3.1) 1.0 -------------------Profit for the year 11.3 - Earnings per ordinary share: 6- Basic 13.5p NIL- Diluted 13.3p NIL Unaudited Consolidated balance sheet at 31 December 2006 Group 2006 2005 Notes £m £mFixed assetsIntangible assets 15.0 0.6Tangible assets 32.0 29.4Interest in joint ventures:Share of gross assets 0.1 0.2Share of gross liabilities - - ---------------- 0.1 0.2 ---------------- 47.1 30.2 ---------------- Current assetsStocks 8.3 9.9Debtors 83.6 77.5Cash - Scheme funds (restricted) 8b 40.1 -Cash at bank and in hand 15.3 27.2 --------------- 147.3 114.6 --------------- Creditors: amounts falling due within one yearShort-term borrowings (13.3) (1.8)Other creditors (73.0) (63.2) ---------------- (86.3) (65.0) ----------------Net current assets 61.0 49.6 -----------------Total assets less current liabilities 108.1 79.8Creditors: amounts falling due after more than one year (23.1) (1.7)Provisions for liabilities and charges (14.9) (19.2) ----------------Net assets excluding pension asset 70.1 58.9Pension asset 10.9 5.3 ----------------Net assets including pension asset 81.0 64.2 ---------------- Capital and reservesCalled up share capital 25.5 25.5Share premium account 5 25.0 25.0Revaluation reserve 5 2.0 2.2Profit and loss account 5 28.5 11.5 ----------------Shareholders' funds 81.0 64.2 ---------------- Unaudited Consolidated cash flow statement for the year ended 31 December 2006 2006 2006 2005 2005 £m £m £m £mNet cash inflow from operating activities before Scheme funding 13.7 7.3Scheme funding - transfer to restricted cash (40.0) -Net cash (outflow)/inflow from operating activities (26.3) 7.3Dividends received from Joint ventures 0.2 0.4 --------------------------------Returns on investments and servicing of financeInterest received 1.3 0.3Interest received on restricted cash (1.0) -Net interest received 0.3 0.3Interest paid (1.7) (1.0)Issue costs of new bank loans (0.5) --------------------------------Net cash outflow from returns on investments and servicing of finance (1.9) (0.7) --------------------------------Taxation (1.4) (0.9)Capital expenditure and financial investmentPurchases of tangible fixed assets (8.9) (8.8)Receipts from sale of tangible fixed assets 3.5 1.0 --------------------------------Net cash outflow from capital expenditure and financial investment (5.4) (7.8) -------------------------------- Acquisitions and disposalsPurchase of subsidiary undertakings (11.0) (0.5)Sale of trade and business assets 5.4 -Net debt acquired with subsidiary undertaking (1.2) - ---------------------------------Net cash outflow from acquisitions and disposals (6.8) (0.5) ---------------------------------Net cash outflow before financing (41.6) (2.2) ---------------------------------FinancingIssue of ordinary shares - 32.0Expenses of share issue - (1.4)Capital element of finance lease rental payments (1.5) (0.8)Repayment of short-term borrowing - (5.2)Increase in borrowings 26.5 -Net cash inflow from financing 25.0 24.6 ---------------------------------(Decrease)/increase in cash in the year (16.6) 22.4 --------------------------------- Unaudited reconciliation of net cash flow to 2006 2005movement in net debt £m £m(Decrease)/increase in cash in the year (16.6) 22.4(Outflow)/Inflow from debt and lease financing (24.5) 6.0 ------------------------Change in debt resulting from cash flows (41.1) 28.4New finance leases (3.1) (2.8)Exchange movement in year (0.6) 0.5 -----------------------Movement in net debt in year (44.8) 26.1Net funds/ (debt) at 1 January 23.7 (2.4) -----------------------Net (debt)/funds at 31 December (21.1) 23.7 ----------------------- Unaudited Consolidated statement of total recognised gains and losses for the year ended 31 December 2006 2006 2005 (restated) Notes £m £mProfit on ordinary activities after taxation 11.3 -Currency translation differences net of taxation on foreign currency net investments 5 (2.2) 1.4Actuarial gain recognized in the pension scheme 5 7.7 1.6Movement on deferred tax relating to pension asset 5 (2.3) (0.5) -----------------Total recognized gains relating to the year 14.5 2.5 ----------------- (0.1) Prior year adjustmentTotal gains and losses recognized since last annual report 14.4 ------------------ Unaudited Reconciliation of movements in shareholders' funds for the year ended 31 December 2006 2006 2005 (restated) Note £m £mProfit on ordinary activities after taxation 11.3 -Currency translation differences net of taxation on foreign currency net investments 5 (2.2) 1.4Issue of new share capital (net of issue costs) - 30.6Adjustment in respect of employee share scheme 0.4 0.2Recycling of goodwill previously written off to reserves 1.9 -Actuarial gain in pension scheme net of deferred tax 5.4 1.1 -----------------Net increase to shareholders' funds 16.8 33.3Shareholders' funds at 1 January 64.2 30.9 -----------------Shareholders' funds at 31 December 81.0 64.2 ----------------- NOTES TO THE UNAUDITED ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2006 1. Accounting policies The preliminary results have been prepared using the same accounting policies aswere used in the Group's statutory accounts to 31 December 2005 except for theadoption of a new accounting standard as detailed below. FRS 20 'Accounting for share based payments', which is applicable for accountingperiods beginning on or after 1 January 2006, was adopted in the period. FRS 20requires the fair value of employee share options granted to be charged in theprofit and loss account over the vesting period of the option. Accordingly theprior year results have been restated. The effect is to reduce profit after taxby £0.1m for the year ended 31 December 2005. The effect on the current year isto reduce the profit after tax by £0.2 million. 2. Segmental Analysis (a) Business Analysis Profit before tax Turnover Pre- Operating Non- Total Net exceptional exceptional operating operating items items exceptional assets items £m £m £m £m £m £m (Note 4) (Note 5) 2006Continuing operations- Operating business 270.5 19.0 - - 19.0 62.0- Acquisitions 3.5 0.4 - - 0.4 3.8- Joint ventures 0.2 0.1 - - 0.1 (0.1) ----------------------------------------------------------------- Total operating business 274.2 19.5 - - 19.5 65.7- Head Office - (2.7) 1.0 - (1.7) 10.8- Compensation for industrial disease - (3.4) - - (3.4) (12.5) ------------------------------------------------------------------Total continuing operations 274.2 13.4 1.0 - 14.4 64.0 ----------------------------------------------------------------- Discontinued operations- Cleton 21.5 0.2 - 0.2 0.4 (2.7)- Cape Calsil - - - (0.9) (0.9) 0.7 -----------------------------------------------------------------Total discontinued operations 21.5 0.2 - (0.7) (0.5) (2.0) ----------------------------------------------------------------- Total operations 295.7 13.6 1.0 (0.7) 13.9 62.0 -----------------------------------------------------------------Other finance income 0.9 -Net interest/net debt (0.4) (21.1)Scheme funds - 40.1 ---------------- 14.4 81.0 ---------------- There are no significant inter-segment sales between business units. Profit before tax (restated) Turnover Pre- Operating Non- Total Net exceptional exceptional operating operating items items exceptional assets items £m £m £m £m £m £m (Note 4) (Note 5)2005Continuing operations- Operating businesses 229.5 14.4 - 0.3 14.7 46.5- Joint ventures 0.3 0.2 - - 0.2 - ------------------------------------------------------------------ Total operating businesses 229.8 14.6 - 0.3 14.9 46.5- Head Office - (1.8) (9.7) - (11.5) 3.2- Compensation for industrial disease - (4.8) - - (4.8) (14.5) ------------------------------------------------------------------Total continuing operations 229.8 8.0 (9.7) 0.3 (1.4) 35.2 ------------------------------------------------------------------ Discontinued operations- Cleton 32.0 0.3 - - 0.3 4.5- Cape Calsil - - - - - 0.8 -----------------------------------------------------------------Total discontinued operations 32.0 0.3 - - 0.3 5.3 ----------------------------------------------------------------- Total operations 261.8 8.3 (9.7) 0.3 (1.1) 40.5 -------------------------------------------------------------------Other finance income 0.8Net interest/net cash (0.7) 23.7 ------------------ (1.0) 64.2 ------------------ Net operating assets represents the net assets of each business unit afteradjusting for Group funding loans. (b) Geographical analysis by origin Profit before tax Turnover Pre- Operating Non- Total Net exceptional exceptional operating operating items items exceptional assets items £m £m £m £m £m £m (Note 4) (Note 5)2006Continuing operations- United Kingdom 199.5 2.4 1.0 - 3.4 52.7- Continental Europe 4.3 - - - - (2.5)- Rest of the World 70.2 10.9 - - 10.9 13.9- Rest of the World joint ventures 0.2 0.1 - - 0.1 (0.1) ----------------------------------------------------------------Total continuing operations 274.2 13.4 1.0 - 14.4 64.0 ---------------------------------------------------------------- Discontinued operations- United Kingdom - - - (0.9) (0.9) 0.8- Continental Europe 21.5 0.2 - 0.2 0.4 (2.8) -----------------------------------------------------------------Total discontinued operations 21.5 0.2 - (0.7) (0.5) (2.0) ----------------------------------------------------------------- Total operations 295.7 13.6 1.0 (0.7) 13.9 62.0 -----------------------------------------------------------------Other finance income 0.9 -Net interest/net debt (0.4) (21.1)Scheme funds - 40.1 ----------------- 14.4 81.0 ----------------- Profit before tax (restated) Turnover Pre- Operating Non- Total Net exceptional exceptional operating operating items items exceptional assets) items £m £m £m £m £m £m (Note 4) (Note 5)2005Continuing operations- United Kingdom 165.9 1.1 (9.7) 0.3 (8.3) 24.5- Continental Europe 4.8 (0.1) - - (0.1) (1.9)- Rest of the World 58.8 6.8 - - 6.8 12.4- Rest of the World joint ventures 0.3 0.2 - - 0.2 - ----------------------------------------------------------------Total continuing operations 229.8 8.0 (9.7) 0.3 (1.4) 35.0 ---------------------------------------------------------------- Discontinued operations- United Kingdom - - - - - 0.9- Continental Europe 32.0 0.3 - - 0.3 4.6 -----------------------------------------------------------------Total discontinued operations 32.0 0.3 - - 0.3 5.5 ----------------------------------------------------------------- Total operations 261.8 8.3 (9.7) 0.3 (1.1) 40.5 -----------------------------------------------------------------Other finance income 0.8 -Net interest/net cash (0.7) 23.7 ------------------ (1.0) 64.2 ------------------ Net operating assets represents the net assets of each geographical segmentafter adjusting for Group funding loans. 3. Operating exceptional items 2006 2005The operating exceptional items comprise: £m £mContinuing:Credit/(costs) relating to Scheme of arrangement 1.0 (9.7) --------------- The cash outflow relating to the above exceptional items was £4.5 million (2005:£4.4 million). The tax effect of the operating exceptional item is a tax charge of £0.3 million(2005: credit of £2.9 million). 4 Non-operating exceptional items 2006 2005The non-operating exceptional items comprise: £m £mContinuing:Profit on sale of Sutton Coldfield depot - 0.3 ----------------Discontinued:- Cape Calsil - additional costs relating to the disposal of Calsil (0.9) -business- Loss on disposal of Cleton business (after recycling of goodwill) (1.6) - -----------------Loss on disposal of business (2.5) - Profit on sale of Cleton properties 1.8 - ----------------- Total discontinued (0.7) - ----------------- The tax effect of the non-operating exceptional items is a tax charge of £0.5million (2005: £nil). 5. Reserves Share Profit premium Revaluation and loss Total account reserve accountGroup £m £m £m £mAt 1 January 2006 38.7 25.0 2.2 11.5Currency translation differences net of tax - -on foreign currency net investments (2.2) (2.2) Profit for the year 11.3 - - 11.3Adjustment in respect of employee share scheme 0.4 - - 0.4Transfer on sale of properties - - (0.2) 0.2Recycling of historic goodwill previously written off to reserves 1.9 - - 1.9Actuarial gain on pension schemes 7.7 - - 7.7Movement on deferred tax relating to pension assets (2.3) - - (2.3) -----------------------------------------At 31 December 2006 55.5 25.0 2.0 28.5 ----------------------------------------- 6. Earnings per share The basic earning per share calculation for the year ended 31 December 2006 isbased on the earnings (after tax and dividends on the 3.5% cumulative preferenceshares) of £11.3 million (2005: £NIL million) divided by the weighted averagenumber of ordinary 25p shares of 83,523,010 (2005: 67,183,916). The diluted earning per share calculation for the year ended 31 December 2006 isbased on the earnings (after tax and dividends on the 3.5% cumulative preferenceshares) of £11.3 million (2005: £NIL million) divided by the weighted averagenumber of ordinary 25p shares of 84,808,505 (2005: 67,939,577). Share options are considered potentially dilutive as the average share priceduring the year was above the average exercise prices. 2006 2005 Shares SharesBasic weighted average number of shares 83,523,010 67,183,916Adjustments:Weighted average number of outstanding share options 1,285,495 755,661 -----------------------Diluted weighted average number of shares 84,808,505 67,939,577 ------------------------ An adjusted basic earnings per share has been calculated which excludes theeffects of operating and non-operating exceptional items. It is calculated bydividing the adjusted earnings (after tax and dividends on the 3.5% cumulativepreference shares) of £11.8 million (2005: £6.5 million) by the weighted averagenumber of ordinary 25p shares of 83,523,010 (2005: 67,183,916). The adjustednumbers have been provided in order that the effects of exceptional items onreported earnings can be fully appreciated, and has been calculated as follows: 2006 2005 Earnings EPS Earnings EPS £m pence £m penceBasic earnings per share 11.3 13.5 - -Adjustments:Operating exceptional items (1.0) (1.2) 9.7 14.4Non operating exceptional items 0.7 0.8 (0.3) (0.5)Tax effect of exceptional items 0.8 0.9 (2.9) (4.3) ------------------------------------Adjusted basic earnings per share 11.8 14.0 6.5 9.6 ------------------------------------- 2006 2005 Earnings EPS Earnings EPS £m pence £m PenceDiluted earnings per share 11.3 13.3 - -Adjustments:Operating exceptional items (1.0) (1.2) 9.7 14.3Non operating exceptional items 0.7 0.8 (0.3) (0.5)Tax effect of operating exceptional items 0.8 0.9 (2.9) (4.3) ------------------------------------Adjusted diluted earnings per share 11.8 13.8 6.5 9.5 ------------------------------------ 7. Contingent liabilities i. There is a history of industrial disease claims being lodged against the Group for a number of years. Where the Group has determined that it is appropriate to do so, settlement has been made. Based on this experience, it is likely that similar claims will continue to be received for the foreseeable future. However, there is significant uncertainty over the number, nature, timing and validity of such future claims. This is as a result of, inter alia, uncertainties concerning the population that may have been exposed to asbestos and that may develop asbestos-related diseases, the nature and timing of the diseases that may develop, the impact of other factors which might have contributed to the claimant's condition, changes in the legal environment and to the typical cost of settlement. These factors affect considerations of liability and the quantum of settlements. Experience to date is that some of these claims will be at least partially covered by insurance policies but the amount of cover will not be known until the details of the claims are available. In order to provide for the long term financing of a great majority of allfuture asbestos-related claims likely to be made successfully against the Group,Cape has put in place a Scheme of Arrangement ("Scheme") details of which areset out in Note 8. The Scheme became effective in relation to Cape PLC and 12 ofits wholly owned subsidiaries on 14 June 2006. The Scheme companies are listedin Note 8. For the purposes of the Scheme, the Directors commissioned independent actuariesto review and provide an estimate of certain of the Group's unpaid and uninsuredUK asbestos-related claims as at 31 December 2004. Estimates of unpaidasbestos-related claims are inherently uncertain. Although the review did nottake account of all potential claims against the Group, it covers, in theopinion of the Directors, the overwhelming majority of all UK asbestos-relatedclaims likely to be made against the Group. The actuaries' best estimate of theaggregate projected discounted value, net of insurance recoveries, of the unpaidUK asbestos-related claims they reviewed is £119.4 million. This estimate iscontained within a range of low and high estimates of £70.2 million and £240.3million respectively, although there can be no certainty that the total cost ofsuch claims will fall within the range of such estimates. The discount rateapplied is 5 per cent. Claims not covered by the review include, inter alia,overseas claims and certain potential claims for reimbursement from insurers andothers. Given the wide range of the estimates and the significant degree of uncertaintysurrounding them, the Directors take the view that the amount of the Group'soverall obligation cannot be measured with sufficient reliability. Accordingly,the Group provides in the profit and loss account each period for the estimatedliability in respect of industrial disease claims lodged and outstanding at theperiod end. The accounting treatment of claims lodged and outstanding has notbeen changed as a result of the implementation of the Scheme. Upon consolidationthe potential liability shown in the Group Balance Sheet remains unchanged as aresult of the implementation of the Scheme. However, the effect of the Scheme isto protect the Group to a significant extent from the risks of insolvency of theScheme companies if there is a significant increase in either the number ofclaims or the quantum of damages or costs the Group has to settle or a materialdeterioration in the Group's trading performance which would otherwise havecaused the Group to be unable to settle Scheme claims payable by it in full.Nevertheless, if it were possible to assess reliably the present value ofamounts that might be paid in future settlements such that this was to beprovided in the Balance Sheet, there would be a materially adverse effect on theGroup's financial position. There is great uncertainty over the net presentvalue of the future claim settlements. These could occur over a period of morethan 40 years. However, in aggregate they are likely to exceed the amount of thenet assets included in the current Group Balance Sheet. Based on the recenthistory of settlements, the Directors anticipate that, assuming there is nomaterial deterioration in the Group's trading performance nor a significantincrease in either the number of asbestos-related claims or the quantum ofdamages or costs the Group has to settle, nor any significant shortfall in therecoveries that the Directors expect the Group to make from its insurers andunder third party indemnities and the Scheme fund achieves investment returns inline with current expectations, the Group will be able to ensure that (i) itsnewly formed subsidiary Cape Claims Services Limited ("CCS") will besufficiently funded to satisfy all Scheme claims and (ii) the Group will besufficiently funded to satisfy any UK asbestos-related claims falling outsidethe Scheme. Should the future pattern as regards timing and quantum of claimsprove to be materially and adversely different from the historic trend, therecould be a material adverse effect on the Group's financial position. ii. The Company was the defendant in proceedings brought by some 7,500 South African residents who claimed that they suffered injury as the result of mining activities in South Africa undertaken by former subsidiaries of Cape PLC. The Company entered into an agreement on 13 March 2003 with the claimants in the group action and new claimants who had come forward in 2002. It is possible that claims could arise in the future from claimants who were notincluded in the group action, or who claim they have developed an asbestosrelated disease since the date of the settlement and as a result of the Group'sformer mining activities in South Africa. There is a significant uncertainty asto whether such future claims will be made and as to the number, nature, timingand validity of such claims. However, no such claims have been received to date. iii. Certain companies in the Group continue to be named, along with several asbestos fibre and asbestos product suppliers, as defendants in a number of legal actions in North America. The plaintiffs in such actions are claiming substantial damages as a result of the use of these products. The Company has received legal advice in the UK that default judgments obtained in North America against Companies within the Group which are not present in North America, would not be enforceable in the UK. Consequently the Directors believe that the above-mentioned matters are unlikely to have a material effect on the Group's financial position. iv. The Company's subsidiary, Cape Industrial Services Limited, together with other companies involved in offshore contracting work, is a defendant in proceedings before the Employment Tribunal under the Working Time Regulations 1998 brought by a small number of employees claiming that their paid annual leave should be taken from scheduled working time. If successful, the claimants (and other affected employees who are not party to the proceedings) could be entitled to compensation. Under the terms of certain of its contracts, Cape Industrial Services Limited would be entitled to additional payment from its clients. There is significant uncertainty as to whether the claimants will succeed and, if they do, as to the number of affected employees, the amount of any compensation that would be awarded and the extent to which it could be recovered under relevant contracts. v. There are a number of leasehold properties in respect of which the Group is liable for dilapidations, and rent in the event of default by its sub-tenants. Given the nature of these arrangements it is difficult to assess the potential liability with certainty and as a consequence contingent liabilities may exist. The Directors believe that any such contingent amounts would not have a material effect on the Group's financial position. vi. The Group has contingent liabilities in respect of guarantees and bonds entered into in the normal course of business, in respect of which no loss is expected. 8. The Scheme of arrangement On 14 June 2006, the Scheme became effective and binding upon Cape PLC and thefollowing 12 of its wholly owned subsidiaries: Cape Building Products Limited Cape Calsil Systems Limited Cape Contracts International Limited Cape Durasteel Limited Cape East Limited Cape Industrial Services Limited Cape Industries Limited Cape Insulation Limited Cape Specialist Coatings Limited Predart Limited Somewatch Limited Somewin Limited The detailed terms of the Scheme are set out in the Scheme itself, a copy ofwhich has been filed with the Registrar of Companies, the Articles ofAssociation of Cape and CCS and a number of other ancillary agreements. Theeffect of the Scheme as a whole can be summarised as follows: (a) While Scheme creditors retain their rights against Schemecompanies, and may bring proceedings against Scheme companies for declaratoryrelief to determine whether they have a claim and, if so, of what amount, theirrights, subject as provided in sub paragraphs (k) and (m) below are onlyenforceable against CCS under the terms of the Scheme guarantee; (b)CCS has been funded in the first instance with a sum of £40million which represents what is considered to be a sufficient sum to dischargeCCS's liabilities to Scheme creditors which become payable over at least 8 yearsfrom 1 January 2006. The use of these funds is restricted to the payment ofestablished Scheme claims and Scheme creditor costs; (c)The sum of £40 million has not been calculated by reference to anestimate of the likely amount of Scheme claims. It simply represents theaggregate of the amount that the Company was able to raise from its shareholdersand the level of debt which the Company can reasonably maintain for the purposesof the Scheme. Of fundamental importance to the Scheme are the provisions as totopping up of that sum described below; (d)Commencing in 2008, every three years there will be an assessmentof the projected Scheme claims against Scheme companies payable by CCS over thefollowing nine years, by reference to which there will be established theFunding Requirement; (e) In the event that an assessment reveals a shortfall between theScheme assets and the Funding Requirement, the Company will top up CCS's fundingover the following three years provided that sufficient cash is available,Cape's obligation being limited to 70 per cent of the Group's consolidatedadjusted operational cash flow (including, for example, adjustments to takeaccount of acquisitions, an element of capital expenditure and repayment ofborrowing facilities) ; (f) Should the Company not be able to meet its top up obligation inany one year, it will be required to make good the shortfall in the next year,again subject to sufficient cash being available; (g) Alongside the Funding Requirement there is the Scheme FundingRequirement which will be assessed every year by reference to projected Schemeclaims against Scheme companies payable by CCS over the next six years; (h)If at any time the ratio of the Scheme assets to the SchemeFunding Requirement (the Scheme Funding Percentage) falls below 60 per cent, CCSwill have the ability to reduce the percentage (the Payment Percentage) of eachestablished claim which it pays to Scheme creditors until such time as theScheme Funding Percentage is restored to 60 per cent; (i) Commencing in 2008, Cape will be permitted to pay dividendsprovided that at the time of payment (i) the Scheme Funding Percentage inrelation to the last preceding financial year was certified to be not less than110 per cent, (ii) the Directors of Cape certify that they anticipate that theScheme Funding Percentage for the current and following financial year will benot less than 110 per cent and (iii) the Payment Percentage has not at any timewithin the previous 40 business days been below 100 per cent. Any distributionwhich Cape proposes to make to its shareholders may not, without the consent ofthe Scheme Shareholder, exceed the greater of (i) 50 per cent of theconsolidated operating profits of the Group for the last preceding FinancialYear and (ii) the aggregate of any permitted dividends made in the precedingfinancial year. This restriction therefore places a cap on the amount ofdividends that the Company may pay in any one year; (j) There have been established special voting shares (the SchemeShares) in CCS and Cape which are held by an independent third party (the SchemeShareholder) on trust for Scheme creditors. The Scheme Shares have specialrights which are designed to enable the Scheme Shareholder to protect theinterests of Scheme creditors; (k)In the case of certain Scheme creditors (Recourse SchemeCreditors), who are those Scheme creditors whose claims are in whole or in partthe subject of a contract of insurance (Recourse Scheme Claims) their rights toenforce their Recourse Scheme Claims against a relevant Scheme company willrevive in certain circumstances. These circumstances are where the relevantScheme company is insolvent or where there has been a specified reduction in thePayment Percentage and if the Scheme creditor was able to bring about theinsolvency of the relevant Scheme company he would be able to recover greatercompensation from the FSCS ("Financial Services Compensation Scheme") or, incertain circumstances, from a solvent insurer than is available from CCS at thattime under the Scheme. There will be a specified reduction if either (i) thePayment Percentage has been reduced below 100 per cent but above 50 per cent andthe Scheme creditor has not been paid in full after 12 months or (ii) thePayment Percentage is reduced to 50 per cent or below; (l) Each Scheme company will agree to hold on trust for any Schemecreditor concerned the proceeds of any policy of insurance (or any compensationreceived from the FSCS) referable to that Scheme claim; (m)The restriction described in sub paragraph (a) above will not applyto proceedings to enforce the right to conferred under sub-paragraph (l) above;and (n) There are provisions contained in two reimbursement agreementswhich preserve certain rights of proof by CCS and Cape respectively in anyinsolvency of Cape or any of the other Scheme companies. 9. The preliminary results for the year ended 31 December 2006 areunaudited. The financial information set out in the announcement does notconstitute the company's statutory accounts for the years ended 31 December 2006or 31 December 2005 as defined by Section 240 of the Companies Act 1985. The financial information for the year ended 31 December 2005 is derived fromthe statutory accounts for that year (as restated) which have been delivered tothe Registrar of Companies. The auditors reported on those accounts; theirreport whilst unqualified, contained an explanatory paragraph making referenceto the fundamental uncertainty concerning the amount required to settle futureclaims for industrial disease compensation as described in note 8 above. Theauditors' report did not contain a statement under either Section 237 (2) or (3)of the Companies Act 1985. The statutory accounts for the year ended 31 December 2006 will be finalised onthe basis of the financial information presented by the directors in thispreliminary announcement and will be delivered to the Registrar of Companiesfollowing the company's Annual General Meeting. The auditors' report on thestatutory accounts for the year ended 31 December 2006 is expected to contain anexplanatory paragraph making reference to the fundamental uncertainty concerningthe amount required to settle future claims for industrial disease compensationas described in note 7 above. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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