21st Jun 2005 07:01
Atkins (WS) PLC21 June 2005 Tuesday 21 June 2005 for Immediate Release Results for the year ended 31 March 2005 Professional services group WS Atkins plc (Atkins) today announced preliminaryunaudited results for the year ended 31 March 2005. FINANCIAL SUMMARY 2005 2004 Group turnover on continuing operations excludingshare of Joint Ventures £955.0m £950.4mTurnover from continuing Joint Ventures £201.3m £187.7mTotal turnover from continuing operations £1,156.3m £1,138.1mTrading operating margin on continuing operations 1 5.9% 4.9%Adjusted profit on ordinary activities beforetaxation 1, 3 £73.6m £56.2mProfit on ordinary activities before taxation £60.1m £62.0mBasic EPS 39.0p 38.8pFully diluted adjusted EPS 1 50.3p 39.4pDividend 12.0p 9.0pCash flow from operations £82.6m £94.4mNet funds 2 £106.7m £68.4m 1. Adjusted profit before tax has been a consistent measure that the Directorsconsider is a fair reflection of the ongoing performance of the Group. It isdefined as profit before amortisation of the pension fund deficit, amortisationof goodwill, exceptional items, Employee Benefit Trusts and the 2004 ColchesterGarrison dilution gain. Trading operating margin is defined in note 2 to thesepreliminary results. 2. Net funds excludes cash held by the Employee Benefit Trusts and cashheld on behalf of sub-contractors. 3. A reconciliation of Adjusted profit before tax to profit before taxis shown in the Financial review. HIGHLIGHTS • Good results with Adjusted profit before tax up by 31%, led by a strong performance from the Design and Engineering Solutions segment. • Trading operating margin on continuing operations rose from 4.9% to 5.9% with margin in the second half of the year of 6.1%. • Improvement in results despite a slow-down in the Rail market and provisions for future losses on certain facilities management contracts. • Profit before tax was £60.1m (2004: £62.0m). • Strong cash flow underlines the quality of these results, with net funds increasing from £68.4m to £106.7m. • The Group's order book is strong with circa 57% of budgeted turnover for 2006 in hand at the start of the new financial year. • Metronet continued to make progress with its day-to-day operating performance. Significant delays in the capital programme affected results for the year. • The Board is recommending a final dividend of 8.0p per share, taking the total dividend for the year to 12.0p, up 33% (2004 total for year: 9.0p). "Last year was a successful one for the Group, with significantly increasedAdjusted profit and strong cash flow. We have built on the foundations laid in2004, when balance sheet restoration and a return to profitability were thepriority. Our focus on margin growth in our core markets has proved successful,especially in the Design and Engineering Solutions segment which producedexcellent results. We have also increased margins in Management and ProjectServices. The good overall performance was achieved despite the effects of a recentdownturn in the Rail sector, which adversely impacted the profits of ourTransport segment. Profits were also reduced by the need to make additionalprovisions in respect of some of our long term facilities management contracts. During the year Metronet continued to make progress with its day-to-dayoperating performance. The capital programme has, however, suffered significantdelays which, if not recovered, will affect the first Period's (71/2 years)returns. A new Chief Executive has been appointed and Keith Clarke has taken onthe role as Non-Executive Chairman on behalf of the shareholders of Metronet. Prospects for the business remain good and the outlook for the Group's coremarkets is positive. This is demonstrated by the Group's contractually committedwork in hand for 2006, the most appropriate indicator for our business, which isapproximately 57% of budgeted turnover. We believe that the recent slowing ofexpenditure in the UK Rail sector is likely to be temporary and is more thanoffset by strong demand for our services in other sectors." Ed Wallis Keith ClarkeChairman Chief Executive Enquiries AtkinsKeith Clarke, Chief Executive + 44 (0) 1372 726140Robert MacLeod, Group Finance Director + 44 (0) 1372 726140BrunswickMike Smith, Deborah Done +44 (0) 20 7404 5959 Notes to Editors 1. AtkinsAtkins (www.atkinsglobal.com) plans, designs and enables the delivery of complexinfrastructure and buildings for clients in the public and private sectorsacross the world. Atkins is the largest multi-disciplinary consultancy inEurope; the largest engineering consultancy in the UK; and the seventh largestdesign firm in the world (sources: New Civil Engineer - Consultants File 2005;Swedish Federation of Consultant Engineers & Architects - 2004; Engineering News- Record - 2004). 2. AttachmentsAttached to this press release are the Overview of the year, Operating review,Financial review, the unaudited consolidated profit and loss account,consolidated balance sheet, consolidated cash flow statement and notes to theaccounts for the year. 3. Analyst PresentationA presentation for analysts will be held today at The Lincoln Centre, 18Lincoln's Inn Fields, WC2A 3ED, at 9.30am. A webcast of the presentation willsubsequently be available via the Company's website, www.atkinsglobal.com. OVERVIEW Results Last year was a successful one for the Group, with significantly increasedAdjusted profit and strong cash flow. We have built on the foundations laid in2004, when balance sheet restoration and a return to profitability were thepriority. Our focus on margin growth in our core markets has proved successful,especially in the Design and Engineering Solutions segment which producedexcellent results. We have also increased margins in Management and ProjectServices. The good overall performance was achieved despite the effects of a recentdownturn in the Rail sector, which adversely impacted the profits of ourTransport segment. We believe that the Rail business will improve as even aconservative view of forecast expenditure for the sector indicates that themarket will grow over the medium term. Profits were also reduced by the need tomake additional provisions in respect of some of our long term facilitiesmanagement contracts. During the year Metronet continued to make progress with its day-to-dayoperating performance. The capital programme has, however, suffered significantdelays which, if not recovered, will affect the first Period's (71/2 years)returns. A new Chief Executive has been appointed and Keith Clarke has taken onthe role as Non-Executive Chairman on behalf of the shareholders of Metronet. Strategy We are confident that our business model can deliver sustainable growth inshareholder value. Our core business is helping clients to plan, design andenable their capital programmes. We intend to remain in this area of businessand our emphasis is on continuously improving delivery to our clients. Ourstrategy to achieve growth is to focus upon the Group's Identity, achieveExcellence and deliver Core Growth. This may be expressed further as follows: Atkins' Identity comes from the strength of our brand and by positioning andselling the skills we already have. Our skills are in planning, designing andenabling the delivery of complex infrastructure and buildings for clients in thepublic and private sectors in the UK and selected international markets. Inproviding these services our people are our key resource and the recruitment offirst class staff is critical. We therefore seek to forge relationships andenhance our reputation with selected universities to ensure future staffingneeds are met. We aim to achieve Excellence through focused investment, applying technology toincrease the effectiveness of our high calibre staff and products and hencedeliver a higher quality and more cost-effective service to our clients.Provision of top quality training and development for our talented staff iscrucial to meet and exceed the demands of our clients. As a consequence, we believe we will achieve Core Growth in existing markets andby extending and improving our range of services, through organic growthgeographically and by selective acquisitions in targeted areas. Outlook Prospects for the business remain good and the outlook for the Group's coremarkets is positive. This is demonstrated by the Group's contractually committedwork in hand for 2006, the most appropriate indicator for our business, which isapproximately 57% of budgeted turnover. We believe that the recent slowing ofexpenditure in the UK Rail sector is likely to be temporary and is more thanoffset by strong demand for our services in other sectors. Board of Directors Mike Jeffries, retired from the Board on 1 January 2005 after a career at Atkinsspanning almost 30 years. His contribution to the success of Atkins cannot beoverestimated and the Group owes him a great debt for his vision and leadershipover a long period. Struan Robertson, our Senior Independent Director, has indicated that afternearly six years of valuable service he will step down from the Board witheffect from the conclusion of the AGM on 7 September 2005. Our thanks go to MrRobertson for his outstanding commitment over his many years on the AtkinsBoard. Dividend In view of the Board's confidence in the prospects of the Group, it isrecommending payment of a final dividend of 8.0p. This makes the total dividendfor the year 12.0p (2004: 9.0p), an increase of 33%. OPERATING REVIEWTRANSPORT SEGMENT Our Transport segment provides planning, design and programme managementservices to the Rail and Highways and Transportation sectors, principally in theUK. We are the largest UK consultant engineer in both markets, as shown in theNew Civil Engineer Consultants File, 2005. Transport is the Group's largestsegment and accounted for 41% of the Group's turnover for the year and 38% oftrading operating profit. 2005 2004Turnover £394.4m £410.3mTrading operating profit £21.3m £23.5mTrading operating margin 5.4% 5.7%Joint Venture turnover £11.0m £19.3mJoint Venture profit before tax £0.8m £0.8mStaff at 31 March 4,702 4,706 Trading operating profit in Transport reduced by £2.2m (9%) compared to lastyear, on turnover which reduced by £15.9m (4%). Both turnover and tradingoperating profit were adversely impacted by the downturn in the Rail market inthe second half of the year. Our order book is substantial with work in hand for2006 at 70% of budgeted turnover, excluding the two major signalling schemesannounced after the year-end. Highways and Transportation Review of operations Our principal services are transport planning, design of new roads andimprovements, development of intelligent transport systems, management of roadmaintenance programmes and integrated road network management. Our key clientsare the Department for Transport, the Highways Agency (HA) and local andregional government bodies. We are the largest provider of planning, design andoperational services to the highways and transportation sector. Turnover and trading operating margins increased in 2005, despite the impact ofsome delay in the HA's capital expenditure programme. In particular, ourhighways services business performed well with operational efficiencies drivingmargin improvement. Margins also strengthened in our higher value transportplanning business due to increasing demand for our services in transport policy,strategy and network management. Clients are increasingly turning to technological solutions to improve travelinformation, traffic control and network operations. The development ofoperational and traffic control centres was a major feature last year. Ourtransport systems business has a well established capability in this area andour innovative approach was recognised when we were named Consultant of the Yearat the first annual Highways Magazine Excellence Awards in October 2004. Thejudges highlighted in particular 'the new control rooms incorporatingstate-of-the-art technology which have been introduced for the Welsh AssemblyGovernment and Northamptonshire County Council.' We won a number of significant contracts last year, including the design rolefor the M1 junctions 6A to 10 widening scheme. We recently took to publicconsultation the A14 Ellington to Fen Ditton improvement. As part of thegovernment's local transport planning process, we have helped thirteen localauthorities classified as weak, based on their third annual progress reports, tomove out of this category and are now helping six more authorities to raisetheir performance. We also secured professional services partnership and termcontracts with a number of local authorities. Outlook Government expenditure in the highways sector is likely to continue increasing,according to published spending plans, though the mix between central andsupplementary funding is set to change. Our market position means we are wellplaced to benefit from this continued investment. Furthermore, the trend towardsintegrated management and operational services contracts is accelerating and wehave a proven competence in this area. Our partnership with NorthamptonshireCounty Council was described as 'groundbreaking' in the government's recentguidance on delivering efficiency in local services. We believe that the outlookfor the sector remains positive and given our size and capability to plan,design and enable client projects, we are in a good position to exploit theincreasingly sophisticated government procurement framework. Rail Review of operations We provide high value rail engineering services. Our clients look to us toprovide them with cost effective solutions to reduce the cost of rail investmentand improve their returns. Our principal market remains the UK and we alsooperate in Scandinavia and the Far East. This year we worked on many high profile projects, including the West Coast MainLine (WCML), one of Europe's busiest rail routes. We have produced creative,cost effective solutions for the implementation of new systems and technologyfor the WCML, winning an industry award for a major signalling project at Rugby,as well as resourcing expertise to refurbish old technology signal boxes andequipment in the north-west. We are also advising the Strategic Rail Authorityand Department for Transport on how best to handle the increasing demand forrail travel linked to the expansion of Stansted Airport. The UK and Danish railways are going through a significant period of change,driven primarily by the need to reduce the cost of transportation to the taxpayer whilst maintaining service levels and improved network performance. Thisaffected work levels in the second half of the year and as a result bothturnover and trading operating profit for the full year fell compared to 2004.As a consequence, we have cut overheads while ensuring that key skills aremaintained, to allow us to benefit from what we believe will be a strongermarket in 2006/07 and beyond. Our recent selection as lead bidder for two majorsignalling schemes demonstrates our ability to compete in the currently morechallenging market. Outlook The market slow-down in the UK is likely to continue in the short term. However,the medium term outlook is more encouraging, based on industry forecasts ofexpenditure on renewals and enhancements and we remain confident in theprospects of the business. DESIGN AND ENGINEERING SOLUTIONS SEGMENT Design and Engineering Solutions delivers design, environment and engineeringbased consultancy services to a wide range of public and private sector clients.This segment accounted for 30% of the Group's turnover for the year and 43% oftrading operating profit. 2005 2004Turnover £288.4m £264.3mTrading operating profit £24.5m £13.4mTrading operating margin 8.5% 5.1%Joint Venture turnover £0.9m £0.1mJoint Venture profit before tax £0.2m £(0.2m)Staff at 31 March 4,956 4,339 The segment had a very successful year, due to strong demand for our servicesand the impact of our strategy of concentrating on delivering higher margins inour core markets. Trading operating profit increased by £11.1m (83%) on turnovergrowth of 9% with a significantly higher trading operating margin of 8.5%. Ourwork in hand for the year ahead is robust at 45% of budgeted turnover. Design, Environment & Engineering Review of operations Design Environment and Engineering is central to Atkins' core capability toplan, design and enable. Our architects and engineers design buildings andprovide town planning, urban design services and consulting engineering forcivil infrastructure projects. Our multi-disciplinary services includeenvironmental consultancy and other key related specialist disciplines.Principal areas of operation are in the UK, Europe, the Middle East and Asia.Key markets in the UK are education, environment, health, public sector,leisure, commercial and urban design. The 2005 New Civil Engineer ConsultantsFile indicated that we are the largest UK consultant in many of the markets inwhich we operate, including the building, geotechnical and public sectors. Our performance in the year was excellent, both in terms of turnover andimproved margins. Margin growth has been driven by the buoyant market for ourrange of services and the results of our efforts to improve our management ofprojects. Our services are in demand and across the business order intake wasgood with a number of significant contract wins. In the UK these included a project for the Greater London Authority for there-design of Parliament Square, a framework contract for the government'sBuilding Schools for the Future initiative and a project for Airbus for there-development of its base in Bristol. Much of our work has beenmulti-disciplinary, including the innovative design of the new British Libraryarchive storage facility at Boston Spa, for which we have provided a range ofarchitectural, engineering and design services. Other examples include designwork for a major housing and leisure development at Lytham and the design of amulti-modal transport interchange at Wolverhampton. In the Middle East we have grown significantly in the last year, with staffnumbers increasing by over 30% to approximately 800. We added to our portfolioof landmark building with the design of the Bahrain World Trade Centre and wewere appointed by the government of Dubai for the design and medical planning ofthe Al Zahra Hospital. In China we are one of the largest internationalconsultants operating in the mainland and continue to expand with a further twooffices opened in 2004. At the end of the year we employed nearly 300 staff inmainland China, in addition to our 370 staff in Hong Kong. In Shanghai we arecurrently working as masterplanner, architect and landscape architect on a 100hectare English themed new town ('Thames Town'). In Hong Kong we are designingthe next phase of the mass transportation rail network and undertaking the finalphase of Hong Kong's land reclamation project, which includes the redesign ofthe famous Star Ferry terminal. Outlook The current market in the UK is positive, especially in the light of ongoinginvestment in public sector capital projects. We envisage that healthcare andeducation will be particular growth areas in the forthcoming year. In theprivate sector, capital investment programmes are being encouraged by the stableUK economy. This strong demand means growth prospects in the UK remain good. Ouroperations in the Middle East continue to benefit from the sustained ongoinginvestment in the region. China also presents significant growth prospects andwe are well placed to exploit the considerable opportunities in the country. Industry Review of operations Our Industry business provides engineering, planning, design and projectmanagement services primarily in the UK utility, aerospace, defence and oil andgas markets. We are the UK's largest independent defence consultant and thesecond largest UK utility consultant. Our clients are leading companies andorganisations within these sectors, with 70 per cent of Industry business comingfrom 30 key customers with whom good relationships have been developed over manyyears. We are also able to offer a wide range of complementary services fromother parts of the Group. This feature, along with the Group's size andfinancial strength, means we continue to be chosen to undertake largemulti-disciplinary and alliance contracts. Recent examples include services forUnited Utilities and decommissioning work at Sellafield. The year was a very successful one for Industry. Although turnover fellslightly, profits and margins increased significantly. This is the result of ourstrategy of exiting non-core and less profitable businesses in order to focus onour key growth sectors. We have continued to penetrate the defence and aerospace markets and wereawarded the Future Rapid Effects System (FRES) systems house role by the MoD.Other major projects included design services for Airbus on the A380 aircraftand for Rolls-Royce on the Trent 1000 engine and the Joint Strike Fighter. Ourwater division started the year slowly due to the regulatory cycle but ended theyear strongly, bolstered by a good performance by our water technology products.We have continued to work on a diverse range of nuclear, conventional andrenewable power projects and have recently been selected as a partner by BritishEnergy to support their engineering division under a Technical Support Alliancecontract. We are seeing increased demand for our integrity management servicesin the oil and gas industry as clients such as BP, Shell and Total seek toextend the life of their existing assets. Outlook The actions taken during the last two years to re-focus the business on coregrowth sectors have set a solid foundation from which we can grow and increaseprofits further. We continue to see growth prospects in all our sectors andentered the new financial year with a strong order book. In utilities we havebeen successful in a number of bids under the AMP4 capital programme for thewater industry, which provide us with framework contracts for work throughoutthe life of the five year investment cycle. Demand for our services in theaerospace sector is growing from clients such as Rolls-Royce and Airbus. Theaward of the FRES contract is a significant step forward for our defencebusiness and provides excellent opportunities for growth. The formation of theNuclear Decommissioning Agency in April 2005 is expected to provide significantopportunities for our business. MANAGEMENT AND PROJECT SERVICES SEGMENT Management and Project Services encompasses a range of activities deliveringmanagement and IT consultancy, cost and programme management and whole lifecycle services to clients in the public and private sectors. This segmentaccounted for 22% of the Group's turnover for the year and 12% of tradingoperating profit. 2005 2004Turnover £210.8m £209.0mTrading operating profit £6.6m £3.6mTrading operating margin 3.1% 1.7%Joint Venture turnover £1.9m £17.1mJoint Venture profit before tax £0.7m £1.1mStaff at 31 March 3,219 3,597 Turnover in Management and Project Services was virtually unchanged compared tolast year but trading operating profit increased by £3.0m. ManagementConsultants and the UK part of Faithful & Gould performed well and increasedprofits significantly. However, our Asset Management business had anotherdifficult year due to the need to make provisions of £3.9m in respect of certainlong term facilities management contracts. Work in hand for 2006 is healthy at50% of budgeted turnover. Management Consultants Review of operations Our Management Consultants business provides clients with the skills andresources to manage complex programmes of business change. A major part of ourbusiness is the provision of management consultancy services to centralgovernment and its agencies, especially in the niche areas of programme andproject management. We also provide services to commercial clients such as BAA. The year saw an increase in turnover through organic growth. Trading operatingmargins also increased, through improved utilisation of staff and otherefficiencies. Drivers for growth included the government efficiency agenda,national security issues and information exchange requirements in respect ofgovernment agencies. Outlook Public sector efficiency drives are likely to generate large scale programmes oforganisational change requiring specialist support. We are positioning ourselvesto address specific opportunities in this area. These include reorganisationarising from relocation, programme management services for organisational changeand management strategies for integrated information systems. In order to meetincreasing demand we are devoting much attention to the recruitment, retentionand development of staff. Faithful & Gould Review of operations Faithful & Gould operates in the transport, property and industrial sectors andis one of the world's largest project and cost consultants. We have a diverseexternal client portfolio and also supply services to the rest of the AtkinsGroup. Our principal operations are in the UK and US and we also have a presencein other selected overseas markets. The UK business performed well in 2005. Trading operating margins improvedsignificantly, mainly due to selective bidding and tight control of overheads.Turnover growth was modest, in line with our plan to gradually re-position fromthe increasingly commoditised quantity surveying market to higher margin projectmanagement and strategic consultancy. An example of this is our provision ofproject and cost management support to the banking sector relating to branchimprovements. We have also won work in the water and urban development sectors,including cost management consultancy for United Utilities and the Lea Valleyregeneration project. Our operation in the US was impacted by difficult market conditions which had aconsequential effect on staff utilisation and margins. We have reviewed thecarrying value of our investment in Hanscomb Inc. and this resulted in awrite-down of £5.5m of the previously capitalised goodwill. Trading conditionsin the US have shown some signs of improvement in recent months. Our Far Eastoperation performed well in the year, particularly in the pharmaceutical andpetrochemical sectors. Outlook The overall outlook is positive and our continued focus on developing highermargin business and market leading processes provides a good basis for furthergrowth. Projects for this year include commercial advice on the Amsterdam Metroand project and cost management for British Land's regeneration scheme inSheffield. In the US the potential for client representative work on risk andprogramme management is substantial and we will continue to focus on improvingbusiness performance. Asset Management Review of operations Asset Management provides independent facilities management (FM) services to thepublic and private sectors. Whilst not a growth area for Atkins, AssetManagement has been re-positioned this year from a volume-driven to a focused FMservice for the MoD and selected private sector clients. It is expected that there-focused business will significantly reduce its risk profile, whilstmaintaining relationships with key clients, such as the MoD. The majority of the business had a satisfactory year, though results weresignificantly depressed due to losses made by certain long term facilitiesmanagement projects. Additional provisions of £3.9m were required to coverprojected losses over the circa 25 year life of the contracts concerned. Actionhas been taken to improve the financial performance of these contracts,including changes in management responsibilities. Outlook The Asset Management business will remain a useful part of the Group, operatingin its niche markets. We recently announced that, as part of a Joint Venture, wehave won an MoD Housing Prime contract, which will provide a significantworkload over seven years and we are preferred bidder, as part of another JointVenture, in the 30 year Royal School of Military Engineering PFI contract. EQUITY INVESTMENTS SEGMENT The Equity Investments segment comprises Lambert Smith Hampton and the Group'sinterest in PPP/PFI Joint Ventures. This segment accounted for 6% of the Group'sturnover for the year, 7% of trading operating profit and over 90% of its shareof Joint Venture turnover. 2005 2004Turnover £61.4m £66.8mTrading operating profit £4.3m £5.9mTrading operating margin 7.0% 8.8%Joint Venture turnover £187.5m £151.2mJoint Venture profit before tax £14.2m £12.6mStaff at 31 March 911 946 Lambert Smith Hampton Review of operations Lambert Smith Hampton (LSH) is a wholly owned subsidiary run independently underits own brand. It provides a broad range of commercial property consultancy andtransactional services. Its activities include commercial agency and investmentadvice, valuation services, landlord and tenant advice, property management andbuilding surveying. LSH has 29 offices across the UK and the Republic of Irelandand continues to be ranked as the UK's most Active Office Agent by the EstatesGazette. During the year LSH benefited from improving conditions, especially in theagency, investment and corporate occupier markets. The investment division wasinvolved in a number of notable deals, while commercial agency transactionsincluded the surrender of T-Mobile's lease in Borehamwood and its subsequentpurchase by Property Merchant Group, the largest transaction in the M25 officemarket last year. We further developed our outsourced property advisorybusiness, winning new work with clients including HM Prison Services and NTL.Staff turnover issues early in the year have been successfully addressed butthis disruption impacted on profits for the full year. Outlook The property markets generally show a positive outlook for the coming year, withoccupier demand supporting a strengthening office market, particularly inLondon, and strong demand for investment property. Whilst the retail marketremains exposed to consumer demand, prospects for the industrial market remaingood. LSH is well placed to benefit from these positive market trends throughfurther growth in our regional network and expansion of our national clientbase. Metronet In common with the vast majority of PPP/PFI contracts, Atkins is part of thesupply chain performing work related to its core skills. This year was the second year of operations of the Metronet consortium, in whichthe Group has a 20 per cent interest. Metronet runs the London Undergroundinfrastructure companies Metronet Rail BCV Limited, incorporating the Bakerloo,Central, Victoria and Waterloo & City lines, and Metronet Rail SSL Limited,incorporating the Metropolitan, District, Circle, Hammersmith & City and EastLondon lines. Together these account for over two thirds of the LondonUnderground network. Metronet is now undertaking a programme of upgrading,replacing and maintaining the network that will in time deliver substantialimprovements and enable London Underground to operate a more frequent andreliable service. London Underground will remain responsible for the managementof the network, including drivers, signalling and station staff and the SafetyCase. It will also be responsible for ticketing and fares. Trans4m Ltd, a Joint Venture company in which Atkins has a 25 per centshareholding, has contracted with the Metronet PPP companies to undertake thecivil engineering work and the refurbishment and modernisation of the stations.Trans4m Ltd has signed a 71/2 year contract with Atkins for premises and civilsdesign, inspection and assessment work and the design and build of newcommunications systems. Atkins also provides services and staff directly intoMetronet and to help with the delivery of the capital programme the number ofAtkins staff seconded to Metronet may increase. Metronet has made progress with its day-to-day operating performance. SinceMetronet took over, the reliability of the lines for which it is responsible hasimproved, resulting in less passenger disruption. In addition extra trains areavailable for service on the Central, Victoria and Metropolitan lines. The capital programme has suffered significant delays which, while notmaterially affecting the past year's operating performance, will unlessrecovered affect the first Period's (71/2 years) returns. A new Chief Executivefor Metronet with proven rail experience has been appointed and took up hisposition on 20 June 2005. Keith Clarke, on behalf of Metronet's fiveshareholders, has taken on the role of Non-Executive Chairman. At this early stage of the capital programme, the financial results of Metronetlargely reflect operating performance rather than the delivery of the capitalprogramme. During the year ended 31 March 2005, the operating performance wasbroadly in line with expectations. The results of Metronet were, however,impacted by the delay in the capital programme. A provision of £14m was made forthe financial impact of the potential late delivery of station improvements, ofwhich Atkins' share is approximately £3m. Trans4m plays a key role in delivering the capital programme for Metronet.Atkins currently has over 500 people working on Metronet related activities,either within Trans4m or within the Group. In addition, a number of staff havebeen seconded into key positions in Metronet. The continuing delay in thedelivery of the capital programme has impacted the results of Trans4m and theprofit that Atkins has made from its work for Trans4m. Improvements are beingmade and progress is now occurring. Other PPP/ PFI contracts The Colchester Garrison PFI project has now completed its first full year ofoperations. Construction is progressing well and is expected to be delivered ontarget. In line with the Group's strategy to recycle cash invested in PFI at theappropriate time, we disposed of our 25 per cent shareholding in MerciaHealthcare (Holdings) Limited in January 2005 for £5.6m. FINANCIAL REVIEW The Group has delivered significantly improved trading operating profit withstrong cash flow. Turnover Turnover from continuing operations was broadly unchanged at £1,156.3m (2004:£1,138.1m) and excluding our share of turnover from continuing Joint Venturesamounted to £955.0m (2004: £950.4m). These figures reflect our strategy toconcentrate on higher margin, core activities. Going forward, the Group willpursue turnover growth in our target markets and continue to focus onmaintaining or improving margins. Adjusted profit before tax Adjusted profit is used by the Group to measure underlying performance. Thetable below shows the calculation of Adjusted profit before tax and itsrelationship to profit before tax, as shown in the financial statements: 2005 2004 £m £mSegmental trading operating profit- Continuing operations 56.7 46.4- Discontinued operations - (1.1) ----------------- 56.7 45.3 Share of Joint Ventures' profit before tax 15.9 20.6Net interest 1.5 (6.7)PFI bid costs (0.5) (3.0) ----------------- Adjusted profit before tax 73.6 56.2Amortisation of pension scheme net deficit (4.6) (3.4)Amortisation of goodwill (5.9) (7.8)Exceptional items (1.8) 13.5Colchester Garrison dilution gain - 4.8Employee Benefit Trusts (1.2) (1.3) ---------------- Profit before tax 60.1 62.0 Adjusted profit before tax for the year ended 31 March 2005 was £73.6m, anincrease of £17.4m (31%) compared to last year. The increase reflects oursuccess in driving up margins by our selective approach to contracts, acontinued focus on overhead control and the impact of our strengthening cashposition. Adjusted profit for the year ended 31 March 2005 is stated after anincrease in depreciation following a reduction in the estimated useful life ofcertain IT fixed assets due to a re-evaluation of replacement cycles - theimpact in 2005 was £3.8m. The Group's trading operating margin on continuingoperations before Joint Ventures was 5.9% (2004: 4.9%). Joint Ventures The Group's share of profit before tax from its continuing Joint Ventures,principally Metronet, rose from £14.2m to £15.7m. The contribution made by JointVentures to the Group's results will remain significant in the next few years. Net interest Excluding Joint Ventures, net interest improved from net interest payable of£6.7m in 2004 to net interest receivable of £1.5m in 2005. This primarilyreflects the significant improvement in the Group's cash position and thereducing cost of financing the Group's commitment to its investment in Metronet.Net interest includes costs in respect of the Metronet Standby Letters of Creditof £2.6m (2004: £4.2m). The costs of these Letters of Credit will continue toreduce as the Metronet equity payments are made. Bid costs The results are after charging bid costs of £0.5m (2004: £3.0m) relating to PPP/PFI projects. There was relatively little bid activity during the year whilst weawaited the award of preferred bidder status on a number of outstanding bids. Nocosts were capitalised with respect of PPP/ PFI bids during the year. The Grouprecently announced that, along with its Joint Venture partners, it has beennamed as the preferred bidder for the Royal School of Military Engineering PFIcontract and that it has been short-listed for the Birmingham Highways PFIcontract. These bids are likely to increase the costs incurred in 2006. Pensions Valuation The triennial actuarial valuation of the Atkins Staff Scheme as at 1 April 2004was completed during the year. This indicated that the scheme had a deficit of£69m, some £4m greater than the interim actuarial assessment carried out inSeptember 2003. At that time the Group agreed, along with its staff, an increasein cash contributions. The Group increased its annual cash contributions by£3.5m commencing on 1 April 2004 and the staff's additional contributions ofcirca £3.5m per annum, to be phased over two years, also commenced on that date.It was estimated that these contributions should eliminate the actuarial deficitover a period of 15 years. Subsequently, given the Group's stronger financialposition, the Board decided to accelerate the payment of the Group'scontributions to the pension scheme. In addition to the annual cashcontributions of £3.5m, an additional contribution of £8.6m was made by theGroup in January 2005 and it anticipates making further contributions of circa£10m per annum. Based on the assumptions used in the last actuarial valuation,annual funding at this rate should lead to the elimination of the scheme'sactuarial deficit in approximately five years. Charges The defined benefit regular pension cost for the year included in Adjustedprofit decreased by £2.7m to £13.8m. This is due to a reduction in membership ofthe closed scheme and the increase in employee contributions. The charge toamortise the pension deficit increased by £1.2m to £4.6m, based on the triennialactuarial valuation. FRS17 The Group has continued to account for pension costs under SSAP 24, Accountingfor Pensions. Had the Group adopted FRS 17, Retirement Benefits, the Group'sprofit before tax would have been reduced by £6.9m (2004: £6.3m). Under FRS 17the Group would have recognised a post tax pension liability of £175.7m (2004:£161.5m). Exceptional items and discontinued operations Exceptional items comprise £5.5m in respect of goodwill impairment net of £3.7mprofit on disposal. An impairment charge of £5.5m has been made against the carrying value ofgoodwill in respect of the Group's American subsidiary, Hanscomb Inc, which wasacquired in June 2002. In January 2005 the Group disposed of its 25% interest in Mercia Healthcare(Holdings) Limited for a cash consideration of £5.6m, resulting in a profit ondisposal of £3.7m. This disposal was in line with the Group's policy ofrecycling capital in mature PFI investments at the appropriate time. Taxation The Group's effective tax rate for the year ended 31 March 2005 was 31.3% ofAdjusted profit (2004: 31.5%). The effective tax rate on profit beforeamortisation of goodwill and exceptional items was 31.3% (2004: 41.7%), the ratein 2004 having been abnormally high due to the treatment of loans between Groupcompanies and the Employee Benefit Trusts. The tax charge on exceptional itemswas £0.3m (2004: £1.1m). The Group's effective tax rate should decrease next year as the Group takesadvantage of the research and development tax credits available for expenditureon innovative projects. Dividends The Board has recommended a final dividend of 8.0p per share to be paid on 30September 2005 to ordinary shareholders on the register on 2 September 2005,making a total dividend for the year of 12.0p (2004: 9.0p total for the year).The Group's dividend policy is to see a progression towards a dividend that isapproximately 2.5 times covered by cash-backed earnings before amortisation ofgoodwill. Earnings from Joint Ventures, including the Metronet PPP companies andother material PPP/ PFI investments, are only therefore included in ourcalculation of dividend cover where they are matched by cash. EPS and adjusted EPS figures Basic EPS was 39.0p (2004: 38.8p). Adjusted basic EPS was 51.1p (2004: 39.9p),an increase of 28%. A reconciliation between Basic EPS and Adjusted EPS is setout in note 6. Cash flow Net funds (excluding EBTs and cash held on behalf of contractors) increased from£68.4m at 31 March 2004 to £106.7m at 31 March 2005. Net cash inflow fromoperating activities was £82.6m (2004: £94.4m). A summary reconciliation betweenoperating profit and operating cash flow is shown below. 2005 2004 £m £mGroup operating profit (excluding share of Joint Ventures) 39.0 34.5Depreciation and amortisation 35.6 26.8Decrease in working capital 9.2 37.9(Decrease)/ increase in pension fund provisions (7.9) 5.4Other items 6.7 (10.2) ---------------- Net cash inflow from operations 82.6 94.4 Working capital reduced by a further £9.2m in the year, reflecting the Group'stight control in this area. Any further improvements in working capital arelikely to be modest. Operating cash flow was impacted by the significantincrease in cash contributions to the pension scheme referred to above. Themovement in other items principally relates to changes in cash held on behalf ofcontractors. Net capital expenditure in the year was £12.4m (2004: £6.2m), theincrease relating mainly to planned IT investment. The Group made scheduledequity injections amounting to £11.1m into the Metronet PPP companies during theyear. Tax payments in the year increased to £18.3m, compared to £3.1m in 2004when the Group was able to utilise brought forward losses. The cash positionbenefited from the disposal proceeds from the sale of the Group's Joint Ventureinterest in Mercia Healthcare (Holdings) Limited (£5.6m) and net interestreceipts. Looking forward, the Group will continue to require an element of the cash itgenerates in order to fund its obligations in respect of the Metronet PPPcompanies (approximately £50m over the next four years). Additional pensioncontributions will also absorb cash. The business is well placed to generatesufficient cash to satisfy these requirements and allow investment in people andIT to meet the Group's objective of sustainable growth. International financial reporting standards (IFRS) As required by European Union (EU) law, the Group will prepare its annualfinancial statements under International Financial Reporting Standards (IFRS)with effect from the year ending 31 March 2006. The Group's interim financialstatements for the six months ending 30 September 2005 will also applyaccounting policies in compliance with IFRS. Conversion to IFRS should not affect the Group's operational prospects or itsability to generate cash. However, conversion to the new reporting frameworkrepresents a significant change and has been a high priority for the Board. Summarised financial information under IFRS for the year ended 31 March 2005will be published on 21 July 2005. The conversion project The Group aims to achieve a smooth transition to IFRS, managing all aspects ofimplementation including changes to accounting policies, procedures, trainingand communication. The conversion project has progressed according to plan andthe Group is prepared for transition in accordance with the necessarytimescales. We will continue to monitor the development of standards yet to beissued, notably with regard to accounting for PPP/ PFI contracts. Principal impact The Group's assessment of the major differences between current accountingpractice and IFRS are in the areas listed below. This summary is not intended tobe a complete list of affected areas. Further significant differences may ariseas a result of the Group's continued detailed assessment and interpretation ofpronouncements issued by the International Accounting Standards Board IASB andits committees. Defined benefit pension schemes The Group currently accounts for defined benefit pension schemes under SSAP 24,Accounting for Pension Costs, and publishes the transitional disclosuresrequired under FRS 17, Retirement Benefits. On transition to IFRS, the Groupwill account for such schemes under IAS 19, Employee Benefits. The methodologyand assumptions used to calculate the funding position under IAS 19 aresubstantially consistent with those used under FRS 17. The Group intends torecognise actuarial gains and losses in full in the period in which they occurin the statement of recognised income and expense rather than spreading theamounts over a longer period through the profit and loss account. Recognition of the IAS 19 deficit will significantly affect the Group's netasset position on transition to IFRS. The Group has made arrangements to ensurethat sufficient distributable reserves are in place to enable payment ofdividends for the foreseeable future. Goodwill The Group's current policy is to capitalise goodwill arising on acquisition ofbusinesses and amortise it on a straight line basis over its estimated usefuleconomic life. On transition to IFRS, this straight line amortisationmethodology will not be applied. Instead, annual reviews of goodwill will beperformed to test for potential impairment in accordance with IFRS 3, BusinessCombinations. The Group will elect not to apply IFRS 3 retrospectively tobusiness combinations prior to IFRS adoption. PPP/ PFI concessions The International Financial Reporting Interpretations Committee (IFRIC) haspublished draft guidance on accounting for assets constructed or managed underPPP/ PFI concessions. The guidance requires such assets to be classified asfinancial assets rather than fixed or leased assets, but is potentially subjectto change following a consultation process which is currently ongoing. We willcontinue to monitor the progress of IFRIC's proposals, but will not be ablefully to quantify the effect on the Group's PPP/ PFI concessions until the newaccounting rules are finalised. Proposed dividends Under UK GAAP, proposed dividends are accrued in the accounting period to whichthey relate. Under IFRS, dividends are recognised in the accounting period inwhich they are declared and approved. Share-based payments Under UK GAAP, the cost recognised in respect of share options is based on theintrinsic value of the option at the date of grant. Under IFRS 2, Share-basedPayments, the method for measurement of the cost of options granted afterNovember 2002 will change to a fair value basis. It is the Group's expectationthat the change in the profit and loss account expense under IFRS 2 will not bematerial. Format of financial statements The adoption of IFRS will result in certain changes to the way in whichinformation is presented in the Group's financial statements. The Group willcontinue to apply the gross equity method of accounting to its Joint Venturesbut under IFRS their post tax results and net assets will be shown as singleline items on the face of the profit and loss account and balance sheet.Segmental reporting will also be impacted. The Group currently reports itsoperations in three principal segments (Transport; Design and EngineeringSolutions; and Management and Project Services), supported by EquityInvestments. IAS 14, Segment Reporting, places increased emphasis on thealignment of reporting segments with the organisational units used bymanagement. In addition, the segmental disclosure requirements under IAS 14differ from those required by UK GAAP. The presentation of segmental analysisunder IAS 14 will lead to additional disclosure. Keith Clarke Robert MacLeodChief Executive Group Finance Director 21 June 2005 Consolidated Profit and Loss Account for the year ended 31 March 2005(unaudited) 2005 2004 Notes £m ------------------------------- ------ ------- ------- Turnover: Group and share of Joint Ventures 2 1,157.3 1,241.8Less: Share of Joint Ventures' turnover 4 (202.3) (250.0)------------------------------- ------ ------- -------Group turnover 955.0 991.8------------------------------- ------ ------- -------Continuing operations 955.0 950.4Discontinued operations - 41.4------------------------------- ------ ------- -------Cost of sales (579.3) (619.2)------------------------------- ------ ------- -------Gross profit 375.7 372.6Administrative expenses (336.7) (338.1)------------------------------- ------ ------- -------Non-exceptional (331.2) (338.1)Exceptional 3 (5.5) -------------------------------- ------ ------- -------Operating profit: Group excluding share of Joint 39.0 34.5Ventures ------ ------- --------------------------------------Continuing operations 44.5 35.6Continuing operations - exceptional items (5.5) -Discontinued operations - (1.1)------------------------------- ------ ------- -------Operating profit: share of Joint Ventures 4 23.2 32.8------------------------------- ------ ------- -------Continuing operations 23.2 22.7Discontinued operations - 10.1------------------------------- ------ ------- -------Operating profit: Group and share of Joint 62.2 67.3VenturesProfit on sale of subsidiary undertaking and JointVentures 3 3.7 13.5Interest receivable and similar income 20.7 15.7------------------------------- ------ ------- -------Operations 6.8 3.4Joint Ventures 4 13.9 12.3------------------------------- ------ ------- -------Interest payable and similar charges (26.5) (34.5)------------------------------- ------ ------- -------Operations (5.3) (10.0)Joint Ventures 4 (21.2) (24.5)------------------------------- ------ ------- -------Profit on ordinary activities before taxation 60.1 62.0------------------------------- ------ ------- -------Operations before exceptional items 46.0 27.9Exceptional items (1.8) 13.5Joint Ventures 4 15.9 20.6------------------------------- ------ ------- -------Taxation on profit on ordinary activities 5 (21.5) (24.6)------------------------------- ------ ------- -------Operations before exceptional items (15.5) (17.4)Exceptional items (0.3) (1.1)Joint Ventures 4 (5.7) (6.1)------------------------------- ------ ------- -------Profit on ordinary activities after taxation 38.6 37.4------------------------------- ------ ------- -------Operations before exceptional items 30.5 10.5Exceptional items (2.1) 12.4Joint Ventures 4 10.2 14.5------------------------------- ------ ------- -------Dividends (11.8) (8.8)------------------------------- ------ ------- -------Retained profit for the year transferred to 26.8 28.6reserves ------ ------- --------------------------------------Earnings per share: 6- Basic 39.0p 38.8p- Fully Diluted 38.4p 38.3p- Basic Adjusted (Note) 51.1p 39.9p- Fully Diluted Adjusted (Note) 50.3p 39.4pDividends per share:- Interim - paid 4.0p 2.0p- Final - proposed 8.0p 7.0p------------------------------- ------ ------- -------Total for the period 12.0p 9.0p------------------------------- ------ ------- ------- The notes on pages 17 to 22 form part of these preliminary results.Note: Before amortisation of goodwill and pension fund deficit, exceptionalitems, Employee Benefit Trusts and the 2004 Colchester Garrison dilution gain. Consolidated balance sheet as at 31 March 2005 (unaudited) 2005 2004 Notes £m £m------------------------------- ----- ------- -------Fixed assetsIntangible assets 25.1 36.8Tangible assets 49.6 56.9Investments in Joint Ventures 4 41.6 25.9------------------------------- ------- ------- -------Share of gross assets 502.4 474.0Share of gross liabilities (462.5) (452.7)Loans to Joint Ventures 1.7 4.6------------------------------- ------- ------- ------- 116.3 119.6Current assetsStocks 0.2 0.5Debtors (including amounts falling due after more thanone year of£14.4m (2004: £15.9m) 284.4 275.3Related Shares:
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