23rd May 2007 07:00
ICAP PLC23 May 2007 Preliminary Statement for the year ended 31 March 2007 London - 23 May 2007 ICAP plc (IAP.L), the world's premier interdealer broker, today announced itsaudited results for the year ended 31 March 2007. Highlights: Year ended Year ended Increase 31 March 2007 31 March 2006 £m £m %Revenue 1,106.3 919.2 20Operating expenses(1) 874.5 736.4 19Profit(2) 251.6 204.3 23Profit before taxation - 213.8 193.0 11statutory EPS (basic) 19.3 p 19.6 pEPS (adjusted) 24.6 p 21.5 pTotal dividend per share 12.3 p 10.0 p • Record revenues, profit and adjusted EPS following strong growth across the Group • Overall revenue rose by 20% to £1,106.3m • Electronic revenue increased by 103% to £199.1m helped by the acquisition of EBS • On an underlying basis(3) revenue grew by 12% and operating profit(4) by 16% • The Group's operating profit(4) margin rose to a record 22% • The Group continues to invest in people and technology, particularly further upgrades to the Group's electronic broking platforms • Strong free cash flow of £190.1m. Despite investing £290.2m in acquisitions ICAP has net cash of £19.5m • The directors recommend a final dividend per ICAP share of 9.3p, which will be paid on 24 August 2007. The full year dividend will be 12.3 p, an increase of 23% Michael Spencer, Group Chief Executive Officer, said "These record results showa very strong performance from ICAP; especially when factoring in the very sharpdecline in the value of the US dollar in which we earn the majority of ourrevenues. Last year's acquisition of EBS has proved an outstanding success. Thecombination of its electronic spot foreign exchange and ICAP's fixed incomeelectronic broking businesses has created a global multi-product platform thatwe believe has enormous growth potential. The integration of the ICAP and EBSbusinesses is making very good progress and we are on track to deliver totaltechnology and other related savings of at least $58m per annum by the financialyear ending in March 2009. As the more liquid, standardised products continue to migrate to our electronicplatforms, our voice broking franchise in structured and complex products,energy, credit, equity derivatives and less liquid markets continues to enjoyhigh growth. We believe that our voice broking activities also have materialroom for expansion due to product innovation. This year's results amplydemonstrate the success of our strategy of retaining market leadership in bothvoice and electronic broking. Our markets continue to display strong, long-term structural growth. Wecurrently estimate that the underlying annual growth rate of industry revenues,in the medium term, will be between 7% and 9%, though there are periods whenvolatility and volumes in our markets can be very high. While we have notexperienced high levels of volatility at the beginning of this year, underlyingrevenues are ahead of last year." (1) Excludes amortisation and impairment of intangibles arising on consolidationand exceptional items. (2) Profit is defined as pre-taxation profit before amortisation and impairment of intangibles arising on consolidation and exceptional items. (3) Adjusted to exclude the impact of foreign exchange and acquisitions. (4) Operating profit excluding amortisation and impairment of intangiblesarising on consolidation and exceptional items. There will be a briefing for analysts and shareholders at 9:30 am BST onWednesday 23 May 2007 at 2 Broadgate, London EC2M 7UR. An audiocast of thepresentation made to analysts at 9:30am am BST on Wednesday 23 May 2007 will beavailable on the web site, www.icap.com at 2:00 pm BST on Wednesday 23 May 2007.It will remain on the web site for six months. Contacts: Michael Spencer Group Chief Executive Officer (+44) 20 7050 7400Mike Sheard Director of Corporate Affairs (+44) 20 7050 7103Neil Bennett Maitland (+44) 20 7379 5151 ICAP plc Preliminary Statement for the year ended 31 March 2007 Review of Operations After a very active and successful year, the Group reports a record profit of£251.6m before taxation, amortisation and impairment of intangibles arising onconsolidation and exceptional items; this represents a 23% increase over theprior year. On a statutory basis profit before taxation was £213.8m for the yearended 31 March 2007 (2006 - £193.0m). We continue to believe that profit beforetaxation, amortisation and impairment of intangibles arising on consolidationand exceptional items better reflects the Group's underlying year-on-yearperformance. This measure is reconciled to profit before taxation on the face ofthe consolidated income statement. The majority of ICAP's revenue is US dollar denominated and therefore theweakening of the dollar against sterling had a significant impact on ICAP'sreported results. Year-on-year profit before tax would have been approximately£9m higher without the dollar depreciation. In addition, the EBS contribution toprofit before taxation would have been approximately £2m higher if prior yearaverage exchange rates had prevailed. Strategy We have made significant progress towards our vision: to create the globalexchange for OTC financial products and to build a global brand in wholesalefinancial services. We believe that we can provide the service our customersneed by combining the strengths of our people together with technology - andthat by doing so we aim to continue setting the standard for our industry. Our strategic goals are clear and consistent; to be the leading globalintermediary in the wholesale OTC markets by a clear margin. Our aim is to haveat least a 35% share of overall market revenue and generate 50% of our profitfrom electronic broking. This year we have made good progress towards thesegoals with the acquisition of EBS in June 2006. We have increased our share ofglobal interdealer market revenues to an estimated 30% - 31%. We have grown rapidly and also acquired some great companies to create astronger business that sets the standard for both voice and electronic broking.As we have grown we have evolved and now have a very significanttechnology-based business, an extensive global network as well as the leadingvoice broking business. We believe that this combination is very valuable. Thereis no other business that shares our combination of voice and electronic marketleadership in OTC products coupled with such a wide geographic reach. The combination of EBS's strengths in electronic spot foreign exchange andICAP's fixed income electronic broking businesses has created a globalmulti-product platform that we believe has further, major growth potential. Theintegration of the ICAP and EBS businesses is making very good progress and weare on track to deliver total technology and other related savings of at least$58m per annum by the financial year ending in March 2009. This is now thelargest electronic broking business in our industry with an estimated 44% marketshare and has significant economies of scale through combining and leveragingtechnology networks and platforms. The combined global network covers more than1,600 customer installations in 45 countries plus a further 550 users that havesecure internet access. As the more liquid, standardised products continue to migrate to our electronicplatforms, our voice broking franchise in structured and complex products,energy, credit, equity derivatives and less liquid markets continues to enjoyhigh growth. We believe that our voice broking activities also have materialroom for expansion due to product innovation. This year's results amplydemonstrate the success of our strategy of retaining market leadership in bothvoice and electronic broking. Regional Summary Europe £m Headline Growth Underlying* GrowthRevenue 502.4 27% 20%Operating profit* 124.4 46% 38% Europe was the most profitable division with the highest profit margin. Theregion delivered a very good performance during the year with both voice andelectronic revenue growing rapidly. The fastest growth was in foreign exchange,as a result of the EBS acquisition. Demand for corporate bonds in the first halfremained subdued but activity returned in 2007 and credit derivatives continuedto grow with a significant portion traded electronically. The energy businessesproduced another very strong performance with our freight derivatives jointventure developing rapidly. The emerging markets' businesses had a successfulyear and we have expanded our operations into Russia and Turkey together withseveral East European centres. Structured equities and equity derivatives alsoperformed particularly well. Our interest rate derivative business faced tougherconditions with spreads remaining tight for much of the year. The "flight toquality" in late February/early March 2007 benefited some businesses includingeuro interest rate swaps and spot foreign exchange volumes. The Americas £m Headline Growth Underlying* GrowthRevenue 458.3 7% 3%Operating profit* 104.2 0% -2% While revenue increased on a headline basis in the Americas, growth inunderlying revenue was more subdued and there was a small reduction in theoverall profit margin of the region. Emerging markets, mainly driven by ourexpansion in Latin American products, our structured credit and equity productshave performed very well. Growth in activity in the repo market slowed andbrokerage commission came under pressure in the electronic US treasuries market.During the second half of the year the rate of commission compression in UStreasuries, as a result of competitor activity, slowed. In part this was due tothe renegotiation of pricing arrangements with our customers. The acquisition ofEBS substantially boosted foreign exchange revenue and profit. Asia Pacific £m Headline Growth Underlying* GrowthRevenue 145.6 52% 12%Operating profit* 19.1 169% 24% Both revenue and profit margin increased significantly in Asia Pacific as aresult of EBS in the foreign exchange market and Reset in the interest ratemarket with their attractive margins. Following last year's staff upheavals,this year the voice broking business has seen a rebuilding phase. The market hasbecome highly competitive and while staff turnover has slowed, it has notstopped completely. Our competitors are still seeking to build their presence.There has been strong revenue growth in Korean products, Japanese equityderivatives, interest rates swaps and energy. ICAP acquired the remaining 45% ofour Korean subsidiary in November 2006. We received approval from the Chineseauthorities for the China Foreign Exchange Trade System and ICAP to prepare toform a joint venture in Shanghai and expect to begin operations in mid 2007. Business Performance To give our investors a greater understanding of the growth drivers to theGroup's business, ICAP has revised the segmentation of its business. Thedifferent voice broking segments have been combined into a single voice brokingdivision. The electronic and information divisions remain unchanged. Voice division £m Headline Growth Underlying* GrowthRevenue 867.4 9% 12%Operating profit* 169.9 11% 20% Essentially the voice division has two groups of markets, the faster growinggroup where innovation in the financial markets is creating new products and themore mature, slower growing group where volumes are much higher and products aremoving towards more commoditisation, tighter bid-offer spreads and there is morecommission compression. These higher flow businesses are the ones that we expectto move to electronic broking in the future. Many of the newer businesses in the voice division have had a very good yearwith significant overall revenue growth and increased profit margin. We havecontinued to see the trend of robust growth in the more structured and complexproducts as our clients leverage both their financial and intellectual capitalto enhance yield. Emerging market products have grown in all centres as thesemarkets develop and derivatives in both interest rates and currency evolve. Formuch of the year the energy markets have been very active, with volatility inthe oil markets continuing. In addition, other products such as freightderivatives have been an important contributor to growth. However, growth inactivity levels in interest rate products such as government and corporate bondswas not as strong. There was a significant slowdown in voice broked volumes inthe US$ repo market, which is primarily the longer-dated trades, due tohistorically low levels of volatility. Electronic division £m Headline Growth Underlying* GrowthRevenue 199.1 103% 7%Operating profit* 55.4 87% 1% The most important event in the electronic division was the acquisition in June2006 of EBS for $534m in cash and 36.1m shares. This significantly increased ourforeign exchange revenues. The integration is going well having delivered itspre-acquisition targets. Now that we have had the opportunity to examine moredeeply the potential technology savings we have identified further synergies andthe anticipated annual cost savings by 2008/09 are now expected to be $58m. Thetotal exceptional costs of achieving these synergies are anticipated to be $48m. Our electronic broking margins will continue to improve as we complete theintegration of EBS and ICAP's electronic broking business. The electronicbroking margin in the second half of the year increased from 26% in the firsthalf to 29%. The temporary effect of the double running costs associated withthe upgrading of our fixed income platform is reflected in these margins. Thesecosts are expected to end in 2009. The percentage of ICAP's total profit arisingfrom electronic broking was 23%, a rise from 15% in the previous year. ICAP hasa long-term target to increase the share of profit coming from electronicbroking to 50%. In late February 2007, ICAP's daily electronic broking volumes exceeded $1trillion ($1,000 billion) for the first time on two successive days. The veryactive conditions in global financial markets, including the foreign exchangeand fixed income markets, led to a significant increase in volumes on ICAP'selectronic broking platforms (EBS and BrokerTec). This $1 trillion of tradingactivity comprised more than 175,000 transactions on each day by variouscounterparties in more than 40 countries. Average daily volumes on our expandedelectronic platform exceeded $670 billion during the second half of the year The EBS business has continued to perform well. Revenue and profit margin growthhas continued in electronic broking in several of the interest rate marketsincluding European repo, credit derivative products, forward foreign exchange,US agencies, mortgage-backed securities and interest rate products in Asia. Wehave maintained our markets share in US treasury products, and although therehas been significant brokerage compression, the rate of brokerage compressionsince November has levelled off. Algorithmic trading in both the fixed incomeand foreign exchange markets has continued to grow quickly and now makes asignificant contribution to liquidity on the two trading platforms. Information division £m Headline Growth Underlying* GrowthRevenue 39.8 54% 4%Operating profit* 22.4 58% 4% ICAP is also the source of global market information and commentary forprofessionals in the international financial markets. Our market data offersreal-time, end-of-day and historical market data sourced from our globalinterdealer trading platforms, providing authoritative and comprehensiveinformation on global markets across a broad range of asset classes. Asignificant part of the revenue of ICAP's information division is drawn from theelectronic broking businesses and grew strongly this year on the back of theacquisition of EBS. Markets To give our investors a greater understanding of the growth drivers to theGroup's business ICAP is providing an additional analysis of its business. Infuture ICAP will disclose revenue by product group. These are interest rates,credit, energy, foreign exchange, equities, emerging markets and information.These groups are aligned with the way our customers manage their businesses andas a result ICAP is able to explain the drivers of performance more clearly. Therevenue and proportion of ICAP's revenue for these product groups are set outbelow: Revenue Proportion of ICAP revenues £mInterest Rates 468.4 42%Credit 124.9 11%Energy 101.1 9%Foreign Exchange 159.2 15%Equities 98.3 9%Emerging Markets 114.6 10%Information 39.8 4% ========== ========== 1,106.3 100% ========== ========== Interest rates For much of the year yield curves in the major markets have been flat orinverted and volatility has been low. Notional amounts of interest ratederivatives outstanding, which include interest rate swaps and options andcross-currency interest rate swaps, grew almost 14% to $285.7 trillion in thesecond half of 2006. For the year as a whole, interest rate derivatives'notionals rose 34% over 2005, which is above the annual growth rate of recentyears. Credit This is a story of contrasting fortunes. Volumes in the credit derivativesmarkets have continued to grow very rapidly, secondary trading in the corporatebond markets however has been slowing. Credit derivatives are being used muchmore for hedging purposes. ISDA's survey indicates that the notional principaloutstanding volume of credit default swaps (CDS) grew 33 percent in the secondhalf of 2006, rising from $26.0 trillion at 30 June 2006 to $34.5 trillion at 31December 2006. This compares with a 52% growth during the first half of 2006.CDS notional growth for the whole of 2006 was 102%, compared with 103% during2005. Our electronic broking platform in Europe has been particularly successfulcombining both the bond and derivatives on a single platform. Over half of thevolume traded is completed electronically. Energy For much of the year the oil markets were particularly volatile and we benefitedfrom these active markets. Coal, gas and electricity were also busy and webecame the largest OTC broker of European emissions credits. Freight derivativeswere the latest market to see significant growth and the joint venture weestablished with Hyde Holdings two years ago has been very successful. ICAPacquired the shipbroking business of J.E.Hyde on 1 May 2007. In addition to ourjoint venture, J.E.Hyde's activities cover a range of shipbroking and relatedservices to the shipping industry. The acquired business has gross assets of £1mand employs 54 staff. Its core business of dry cargo ship broking and the saleand purchase of ships is complemented by shipping market research, yacht brokingand shipping website design. The new company will be known as ICAP Hyde &Company Ltd. FX The foreign exchange markets have seen significant volume growth aided byseveral periods of high volatility during the year. On the EBS platform we haveseen increasing business completed through the prime broking arms of ourcustomers, including algorithmic trading. Several new products have beenlaunched during the year on the EBS platform including US dollar/rouble, USdollar/New Zealand dollar and Australian dollar/New Zealand dollar. In forwardforeign exchange we are extending our electronic broking platform from a soundEuropean base across our electronic network to cover Asia Pacific and theAmericas. Equities The vast majority of ICAP's business in the equity markets is in derivatives andmore complex structures in the UK, US and Japan. There has been significantgrowth helped by equity market volatility. In the second half of 2006, accordingto ISDA, the notional amounts of equity derivatives outstanding consisting ofequity swaps, options, and forwards, grew 12% from $6.4 trillion to $7.2trillion, and annual growth was 29%, compared with 34% during 2005. Emerging markets Given the very broad range of products and markets covered by ICAP's emergingmarket teams, it is not possible to provide market volumes to illustrate thevery significant growth. The range includes foreign exchange, interest rateproducts, government and corporate bonds. We have a very strong position inLatin America where the markets have been very active. We have found and expectto find many more opportunities in the eastern European markets, Russia, Turkeyand into Africa. In Asia Pacific we have a well developed network of 12 officeswith more than 650 staff covering the markets. Balance sheet and cash flow The Group again demonstrated its strong cash generative characteristics. ICAP'sfree cash flow grew to £190.1m (2005/06 -£74.2m). Before tax and interestpayments, cash from operations benefited from a year on year impact of £88.6mfrom initially unsettled trades and exceptional items. Excluding these impacts,cash from operations increased to £260.9m an increase of £64.6m. Offsettingthis, cash tax and interest payments increased by £28.9m and capital expenditureby rose by £11.5m to £31.1m. The very strong cash flow has meant that despite investing £290.2m onacquisitions in 2006/07, ICAP ended the year with a net cash position of £19.5m(2005/06 - £211.1m). Regulatory capital changes In January 2007 the Group became subject to the new Capital RequirementsDirective (CRD). Under the CRD the circumstances in which a group may avoiddeducting goodwill from regulatory capital are more restrictively defined.However, those businesses which do not take on principal risk are entitled toapply for a waiver from the consolidated capital adequacy tests and in so doingsignificantly reduce their regulatory capital requirement. To enable ICAP toqualify for this waiver, the Group was required to reduce its investment in anumber of its smaller businesses, such as Exotix, which had position takingactivities. These disposals were completed during March 2007 following which thewaiver was granted. Currently the Group has regulatory capital that exceeds therequirement by approximately £300m. Going forward the most important impact of this waiver is that ICAP is able tomake acquisitions using debt without upsetting this headroom. Dividend Subject to shareholder approval, a final dividend of 9.3p is proposed. Thiscompares with 7.5p in the prior year and would result in a full-year dividend of12.3p, which represents a 23% increase over the prior year, in line with thegrowth in profit before tax*. This is the seventh consecutive year that we havebeen able to increase the dividend. The dividend is exactly twice covered byadjusted EPS. This cover is slightly lower than the prior year and we considerthis appropriate given the very strong cash flow performance. ICAP is keeping its dividend payout policy under review. Interim dividends arecalculated as 30% of the previous year's full-year dividend. This approach willcontinue in the 2007/08 financial year. Outlook Looking ahead we are taking steps to complete the integration of EBS, to extendour electronic broking business into an increasing number of markets with highlyliquid, commoditised products and to continue the expansion of our voice brokingbusiness into more structured products. Activity in our markets is driven by the volatility generated from a broad rangeof influences, over which we have no control. We aim to achieve secular growthfrom increasing market share and expanding product coverage. Our strategy is to grow in our industry, both organically and by selectiveacquisition. There are an increasing number of expansion opportunities for theGroup, both large and small, as the world's financial markets grow and thecurrent levels of financial innovation continue. ICAP is well placed to makefurther acquisitions and fund the development of the Group using its existingfinancial resources and if necessary by raising additional debt financing. ICAP enjoyed an active end to the financial year benefiting from the significantrise in market volatility and volumes. These volatile conditions were especiallyprevalent in emerging markets, mortgage backed securities, corporate bonds,credit and equity derivatives. The flight to quality away from many of theseasset classes also boosted volumes and benefited our business in governmentbonds, repo and interest rate swaps. Our markets continue to display strong, long-term structural growth. Wecurrently estimate that the underlying rate of growth of industry revenues, inthe medium term, will be between 7% and 9%, though there are periods whenvolatility and volumes in our markets can be very high. While we have notexperienced high levels of volatility at the beginning of this year, underlyingrevenues are ahead of last year. We have built this business to a very strong competitive position in our marketswith a strong balance sheet and a very capable management team. We have theresources and flexibility to create new business initiatives and drive thegrowth of our business. *Operating profit excludes amortisation and impairment of intangibles arising onconsolidation and exceptional items. Underlying additionally excludes the impactof foreign exchange and acquisitions. About ICAP ICAP is the world's premier voice and electronic interdealer broker and thesource of global market information and commentary for professionals in theinternational financial markets. The Group is active in the wholesale markets ininterest rates, credit, energy, foreign exchange and equity derivatives. ICAPhas an average daily transaction volume in excess of $1.5 trillion, more than50% of which is electronic. ICAP plc was added to the FTSE 100 Index on 30 June2006. For more information go to www.icap.com Audited Consolidated Income Statement Year ended 31 March 2007 Year ended 31 March 2006 Before Amortisation Exceptional Total Before Amortisation Exceptional Total amortisation & impairment items (note amortisation & impairment items (note & impairment of 3) & impairment of 3) of intangibles of intangibles intangibles arising on intangibles arising on arising on consolidation arising on consolidation consolidation consolidation & exceptional & exceptional items items Note £m £m £m £m £m £m £m £m Revenue 2 1,106.3 - - 1,106.3 919.2 - - 919.2 Operating (874.5) (40.9) 4.8 (910.6) (736.4) (10.7) - (747.1) expenses Other income 15.9 - - 15.9 13.5 - - 13.5 Operating 2 247.7 (40.9) 4.8 211.6 196.3 (10.7) - 185.6 profit Finance 23.0 - - 23.0 14.6 - - 14.6 income Finance (25.1) - - (25.1) (9.8) - - (9.8) costs Share of 2 6.0 (1.7) - 4.3 3.2 (0.6) - 2.6 profit/ (loss) of associates after tax Profit 2 251.6 (42.6) 4.8 213.8 204.3 (11.3) - 193.0 before taxation Taxation 4 (92.1) 3.3 0.7 (88.1) (72.2) - - (72.2) Profit for 159.5 (39.3) 5.5 125.7 132.1 (11.3) - 120.8 the year Attributable to: Equity 155.1 (39.3) 5.5 121.3 128.5 (11.3) - 117.2 holders of the parent Minority 4.4 - - 4.4 3.6 - - 3.6 interests 159.5 (39.3) 5.5 125.7 132.1 (11.3) - 120.8 Earnings per ordinary share - basic 6 19.3 p 19.6 p - diluted 6 18.8 p 19.1 p Dividends per ordinary share (including proposed final dividend) 5 12.3 p 10.0 p Audited Consolidated Statement of Recognised Income and Expense Year ended Year ended 31 March 31 March 2007 2006 £m £m Revaluation of available for sale investments 3.5 13.5 Net movement on cash flow hedges 1.8 (4.2) Actuarial (losses)/gains on retirement benefit obligations (0.2) 0.2 Exchange adjustments on net investments in overseas subsidiaries (52.7) 17.2 Revaluation gains recognised in the year (5.9) - Net current tax on items recognised in equity (0.1) 4.4 Net deferred tax on items recognised in equity 4.3 (2.8) Income and expense recognised directly in equity (49.3) 28.3 Profit for the year 125.7 120.8 Total recognised income and expense for the year 76.4 149.1 Total recognised income and expense for the year attributable to: Equity holders of the parent 72.0 145.5 Minority interests 4.4 3.6 76.4 149.1 Audited Consolidated Balance Sheet As at As at 31 March 31 March 2007 2006 Note £m £m Assets Non-current assets Intangible assets arising on consolidation 681.8 276.7 Intangible assets arising from development expenditure 21.5 16.5 Property, plant and equipment 55.9 50.2 Investment in associates 29.8 33.1 Deferred tax assets 33.3 33.7 Trade and other receivables 7.9 4.0 Available-for-sale investments 26.6 35.1 856.8 449.3 Current assets Trade and other receivables 83,804.3 44,145.7* Available-for-sale investments 20.0 11.8 Cash and cash equivalents 323.3 339.9 84,147.6 44,497.4 Total assets 85,004.4 44,946.7 Liabilities Current liabilities Trade and other payables (83,794.9) (44,116.9)* Short-term borrowings and overdrafts (22.9) (0.1) Tax payable (71.1) (51.8) Short-term provisions (10.0) (3.9) Obligations under finance leases (0.1) (0.1) (83,899.0) (44,172.8) Non-current liabilities Trade and other payables (27.8) (10.4) Long-term borrowings (280.9) (128.7) Retirement benefit obligations (1.4) (2.1) Deferred tax liabilities (0.2) (9.2) Long-term provisions (1.4) (3.6) Obligations under finance leases - (0.1) (311.7) (154.1) Total liabilities (84,210.7) (44,326.9) Net assets 793.7 619.8 Equity Capital and reserves Called up share capital 64.9 60.8 Share premium account 397.2 217.4 Other reserves 43.7 39.9 Retained earnings 275.4 285.7 Equity attributable to equity holders of the parent 781.2 603.8 Minority interests 12.5 16.0 Total equity 8 793.7 619.8 * The comparatives for 2006 are restated for changes to the presentation of matched principal transactions (note 1 (b)). Audited Consolidated Cash Flow Statement Year ended Year ended 31 March 31 March 2007 2006 Note £m £m Cash flows from operating activities 11 217.3 93.0 Cash flows from investing activities Dividends received from associates 3.9 0.8 Other equity dividends received - 0.3 Payments to acquire property, plant, and equipment (18.3) (13.0) Intangible development expenditure (12.8) (6.6) Receipts from sale of property, plant, and equipment - 0.8 Net payments to acquire available-for-sale investments (3.4) (5.7) Acquisition of interests in businesses net of cash acquired (282.3) (32.8) Acquisition of associates (7.9) (8.5) Net cash flows from investing activities (320.8) (64.7) Cash flows from financing activities Dividends paid to minority interests (2.8) (1.3) Equity dividend paid (66.7) (53.1) Payments to acquire treasury shares (9.0) - Payments to acquire own shares (5.1) (4.0) Proceeds from issue of ordinary shares 8.7 2.4 Capital element of finance lease payments (0.1) (0.8) Funds received from borrowing, net of fees 167.1 124.8 Net cash flows from financing activities 92.1 68.0 Exchange adjustments (28.0) 12.8 Net (decrease)/increase in cash and cash equivalents (39.4) 109.1 Net cash and cash equivalents at beginning of year 339.8 230.7 Net cash and cash equivalents at end of year 300.4 339.8 Notes to the Financial Statements 1 Basis of preparation (a) Basis of preparation The Financial Statements have been prepared in accordance with the accounting policies published in the Annual Report for the year ended 31 March 2006 except for the prior year adjustment and the change to the segmental analysis decribed below. The Financial Statements have also been prepared under the historical cost convention, as modified to include the fair value of certain financial instruments in accordance with IFRS. The Financial Statements are prepared in sterling, which is the functional currency of the parent company, ICAP plc. The Group maintains a columnar format for the presentation of its consolidatedincome statement. This enables the Group to continue its practice of improvingthe understanding of its results by presenting profit for the year beforeamortisation and impairment of intangibles arising on consolidation andexceptional items. This is the profit measure used to calculate adjusted EPS andis considered to be the most appropriate as it better reflects the Group'sunderlying cash earnings. Profit before amortisation and impairment ofintangibles arising on consolidation and exceptional items is reconciled toprofit before taxation on the face of the income statement. Items which are of a non-recurring nature and material when considering bothsize and nature, have been disclosed separately to give a clearer presentationof the Group's results. These items are shown as 'exceptional items' on the faceof the income statement. Intangible assets arising on consolidation represent goodwill and otherseparately identifiable intangible assets on business combinations since 1April 2004. The amortisation of separately identifiable intangible assets andany impairment of goodwill is included in the income statement within thecolumn 'amortisation and impairment of intangibles arising on consolidation'. (b) Prior year adjustment As a consequence of a review of its clearing and settlement arrangements, theGroup has determined that certain balances resulting from transactions settledthrough clearing corporations in the US should not be recognised on the balancesheet. Comparative amounts in the prior year have been restated. The impact onthe consolidated Financial Statements to 31 March 2006 is a reduction in matched principal trade debtors and matched principal trade creditors of £100,297.0m.The change has no impact on the income statement, net assets or the cash flowstatement of the Group. (c) Segmental analysis Primary segment - geographic The Group regards its primary reporting segment as geographic as this issubstantially the basis on which it manages its operations. The threegeographic business segments are Americas, Europe and Asia Pacific. Forreporting purposes, Europe includes South Africa and Bahrain. Secondary segment - business Following the acquisition of EBS, the Group's secondary segmentation has beenredefined to show voice, electronic and information divisions. The voicedivision consists of the previous segments of derivatives and money broking andsecurities broking and energy broking. The comparatives for the year ended 31March 2006 have been restated in accordance with the new segmentation. The new segments have been adopted as management believe they better reflect thediffering margins and risk profiles of the Group's businesses. The voice division represents trades concluded directly by the Group's stafffor interest rates, credit, FX, energy, equities and emerging market products.The electronic division represents trades concluded via electronic tradingplatforms and post-trade services. The information division represents the saleof market data and research services. 2 Segmental information (a) Analysis by geographic segment Year ended 31 March 2007 Americas Europe Asia Pacific Total £m £m £m £m Revenue 458.3 502.4 145.6 1,106.3 Operating profit before amortisation and impairment of intangibles arising on consolidation and exceptional 104.2 124.4 19.1 247.7 items Amortisation and impairment of intangibles (14.9) (12.8) (13.2) (40.9) arising on consolidation Exceptional items 9.4 (4.4) (0.2) 4.8 Operating profit 98.7 107.2 5.7 211.6 Net finance expense (5.5) 2.7 0.7 (2.1) Share of post-tax profit of associates - 2.7 1.6 4.3 Profit before taxation 93.2 112.6 8.0 213.8 Included in revenue is £24.2m in respect of joint ventures (Americas £9.2m,Europe £11.4m, Asia Pacific £3.6m).Included in operating profit is £6.7m inrespect of joint ventures (Americas £2.7m, Europe £3.3m, Asia Pacific £0.7m). Year ended 31 March 2006 Americas Europe Asia Pacific Total £m £m £m £m Revenue 428.2 394.9 96.1 919.2 Operating profit before amortisation and impairment of intangibles arising on consolidation and exceptional 103.9 85.3 7.1 196.3 items Amortisation and impairment of intangibles (3.0) (6.7) (1.0) (10.7) arising on consolidation Operating profit 100.9 78.6 6.1 185.6 Net finance income 3.8 0.6 0.4 4.8 Share of post-tax profit of associates - 1.7 0.9 2.6 Profit before taxation 104.7 80.9 7.4 193.0 Included in revenue is £24.7m in respect of joint ventures (Americas £11.0m,Europe £7.8m, Asia Pacific £5.9m).Included in operating profit is £6.3m inrespect of joint ventures (Americas £3.2m, Europe £1.8m, Asia Pacific £1.3m). (b) Analysis by business segment As explained in note 1 (c) the Group's secondary segmentation has beenredefined to show voice, electronic and information divisions. The comparativesfor the year ended 31 March 2006 have been restated in accordance with the newsegmentation. Year ended 31 March 2007 Voice Electronic Information division division division Total £m £m £m £m Revenue 867.4 199.1 39.8 1,106.3 Operating profit before amortisation and impairment of intangibles arising on consolidation and exceptional 169.9 55.4 22.4 247.7 items Amortisation and impairment of intangibles (15.1) (25.6) (0.2) (40.9) arising on consolidation Exceptional items 16.1 (11.3) - 4.8 Operating profit 170.9 18.5 22.2 211.6 Included in revenue is £24.2m in respect of joint ventures (voicedivision).Included in operating profit is £6.7m in respect of joint ventures(voice division). Year ended 31 March 2006 - restated (note 1 (c)) Voice Electronic Information division division division Total £m £m £m £m Revenue 795.0 98.3 25.9 919.2 Operating profit before amortisation and impairment of intangibles arising on consolidation and exceptional 152.5 29.6 14.2 196.3 items Amortisation and impairment of intangibles (3.5) (5.0) (2.2) (10.7) arising on consolidation Operating profit 149.0 24.6 12.0 185.6 Included in revenue is £24.7m in respect of joint ventures (voicedivision).Included in operating profit is £6.3m in respect of joint ventures(voice division). 3 Exceptional items Year ended Year ended 31 March 31 March 2007 2006 £m £m EBS related exceptional costs (11.3) - Disposal and closure of operations 16.1 - Net exceptional items before taxation 4.8 Taxation 0.7 - 5.5 - The EBS related exceptional item relates to reorganisation andrationalisation costs following the acquisition of EBS in June 2006 (note 7). During the year the Group disposed of its controlling interest in ExotixLimited, Exotix Investments Limited and Guy Butler Limited and closed anumber of it's futures operations. The gain from the disposal and closure ofoperations includes a gain of £12.5m arising from the disposal of shares,seats and memberships included within available-for-sale investments thatwere previously required to support part of the futures operations, a gain of£6.5m on the sale of the Exotix businesses, offset by reorganisation andrationalisation costs of £2.9m. The businesses that were disposed of or closed in the year ended 31 March2007 contributed revenue of £12.5m and a loss before taxation of £0.6m forthe year. As the results are not significant in the context of the Group's totalresults, they have not been treated as discontinued operations. 4 Taxation Tax charged to the income statement in the year Year ended Year ended 31 March 31 March 2007 2006 £m £m Current taxation UK Corporation Tax at 30.0% (2006 - 30.0%) -Current year 36.3 27.6 -Double tax relief (0.4) (0.1) -Adjustment to prior years (5.1) (5.5) Overseas taxation -Current year 55.1 47.4 -Adjustment to prior years 0.5 (0.2) 86.4 69.2 Deferred taxation 1.7 3.0 88.1 72.2 The Group's share of profit of associates in the income statement is shownnet of tax of £3.8m (2006 - £2.3m).The Group's tax charge is stated after takinginto account the tax effect of exceptional items which reduced the Group's taxcharge by £0.7m (2006 - £nil). 5 Dividends Year ended Year ended 31 March 31 March 2007 2006 Amounts recognised as distributions to equity holders in the year: £m £m Final dividend for the year ended 31 March 2006 of 7.5p per 47.6 38.2 ordinary share (2005 - 6.4p) Interim dividend for the year ended 31 March 2007 of 3.0p per 19.1 14.9 ordinary share (2006 - 2.5p) 66.7 53.1 On 23 May 2007 the board proposed a final dividend of 9.3p per share for theyear ended 31 March 2007. This has not been recognised as a liability of theGroup at the year end as it has not yet been approved by shareholders. Based onthe number of shares in issue at the year end, the total amount payable would be£59.2m. 6 Earnings per ordinary share The Group is required to disclose only basic and diluted EPS on the faceof the income statement. The Group continues to calculate an adjusted EPSmeasurement ratio, disclosed below, as it believes that it is the mostappropriate measurement since it better reflects the business's underlying cashearnings. Basic earnings per share is calculated by dividing the profit for theyear attributable to the equity holders of the parent of £121.3m (2006 - £117.2m) by the weighted average number of ordinary shares in issue during the year of 629.9m shares (2006 - 597.5m). The weighted average number of ordinary shares in issue excludes theweighted average number of shares held by trusts relating to employee shareschemes to which the participating employees are not unconditionally entitled,being 9.9m shares (2006 - 9.2m). Diluted earnings per share takes into account the dilutive effect ofshare options outstanding under the Company's employee share schemes and thedilutive effect of contingent share capital. Year ended 31 March 2007 Year ended 31 March 2006 Earnings Earnings Earnings Shares per share Earnings Shares per share £m millions pence £m millions pence Basic 121.3 629.9 19.3 117.2 597.5 19.6 Dilutive effect of share options - 16.4 (0.5) - 16.4 (0.5) Dilutive effect of contingent share - 0.3 - - 1.3 - capital Diluted 121.3 646.6 18.8 117.2 615.2 19.1 Adjusted earnings per share is based on earnings before amortisation andimpairment of intangibles arising on consolidation and exceptional items (andtheir tax effects). Since post-acquisition profits are included in earnings, theadjusted weighted average number of shares takes into account the effect ofcontingent share capital. Year ended 31 March 2007 Year ended 31 March 2006 Earnings Earnings Earnings Shares per share Earnings Shares per share £m millions pence £m millions pence Basic 121.3 629.9 19.3 117.2 597.5 19.6 Amortisation and impairment of intangibles arising on consolidation 42.6 - 6.8 11.3 - 1.9 Exceptional items (note 3) (4.8) - (0.8) - - - Taxation on exceptional items and (4.0) - (0.7) - - - intangibles arising on consolidation Dilutive effect of contingent share - 0.3 - - 1.3 - capital Adjusted 155.1 630.2 24.6 128.5 598.8 21.5 7 Acquisitions (a) Subsidiaries EBS Group Limited and subsidiary companies (EBS) On 5 June 2006 the Group completed the acquisition of EBS, a provider offoreign exchange trading and market data solutions to the professional spotforeign exchange community. The total consideration of £458.9m ($856.6m),including costs, was financed by the issue of 36,100,234 ICAP plc ordinaryshares of 10p each with a total market value of £172.3m ($322.2m) on the date ofacquisition and cash consideration of £286.6m ($534.4m). The fair value adjustments include the recognition of an intangible assetarising on consolidation of £224.0m ($419.0m) in respect of customerrelationships. The fair value has been independently valued by a qualifiedvaluation firm using the discounted cash flow method and is being amortisedover ten years. The goodwill of £207.2m ($386.3m) arising on consolidationrepresents the future synergies and growth potential of EBS and the Groupconsiders this to be a fair value. In the period from acquisition to 31 March 2007, EBS contributed £99.8mto revenue and £30.8m to pre-tax profit (before amortisation of intangiblesarising on consolidation and exceptional items). If the acquisition had beencompleted on the first day of the financial year, the estimated revenue wouldhave been £121.3m with profit of £35.8m. Other acquisitions On 5 April 2006, the Group acquired Electronic Traveller Limited (ETL), acompany incorporated in the British Virgin Islands, together with control ofReset Pte Limited (Reset), a company incorporated in Singapore, for cashconsideration of £8.1m. Additional deferred contingent consideration is due inJanuary 2008 and 2009 and is estimated to have a net present value of £36.5m($73.8m) as at 31 March 2007, of which £13.5m ($26.4m) is included as a non-current liability within non-current trade and other payables. The provisionalfair value adjustment of £19.6m principally relates to customer relationshipsand is being amortised over five years. Goodwill of £24.3m ($43.1m) arose onthis transaction and this represents the future growth potential of thisbusiness area. ETL and Reset are involved in the electronic matching of interestrate swaps. In the period from acquisition to 31 March 2007, ETL and Resetcontributed £12.5m to revenue and £8.5m to pre-tax profit (before amortisationof intangibles arising on consolidation and exceptional items). There would beno material difference had the businesses been acquired on 1 April 2006. On 5 April 2006 the Group invested £1.1m for a 50.1% stake in Altex-ATSLimited (Altex-ATS), a UK company involved in the development and operation ofan electronic system for financial order matching. Further amounts of £1.6m havebeen invested in Altex-ATS Limited throughout the year. The goodwill arising of£1.5m represents the future potential of this company. The Group also acquired88.94% of SIF Garban Colombia, SA and 100% of Gesmosa GBI Colombia, SA for£1.2m. Both companies operate as voice broking companies in Colombia. Goodwillof £1.1m representing the future potential of this company arose on thisacquisition. In November 2006, the Group acquired the remaining 45% of ICAP ForeignExchange Brokerage Limited, previously known as KIDB-ICAP Co., Ltd. which itdid not previously own for £4.6m. The goodwill of £3.1m arising on thistransaction represents the future growth potential of this business. Additionalpayments of net £0.9m were made for other intangible assets during the year. EBS Other Total Provisional Provisional Provisional Book fair Book fair Book fair value value value value value value £m £m £m £m £m £m Net assets acquired Intangible assets arising on consolidation - 224.0 0.9 20.5 0.9 244.5 Intangible assets arising from development 3.9 3.9 - - 3.9 3.9 expenditure Property, plant and equipment 15.1 15.1 0.2 0.2 15.3 15.3 Cash and cash equivalents 30.1 30.1 2.7 2.7 32.8 32.8 Trade and other receivables 31.6 31.6 1.3 1.3 32.9 32.9 Trade and other payables (33.3) (33.3) (0.7) (0.7) (34.0) (34.0) Tax payable (19.7) (19.7) - - (19.7) (19.7) 27.7 251.7 4.4 24.0 32.1 275.7 Goodwill 207.2 30.0 237.2 Consideration 458.9 54.0 512.9 Satisfied by: Cash 286.6 17.5 304.1 Shares 172.3 - 172.3 Deferred consideration - 36.5 36.5 458.9 54.0 512.9 (b) Associates and joint ventures During the year the Group increased its stake in its associate, TriOptimaAB, from 28.8% to 39.99% for consideration of £3.5m. The Group also invested£1.3m in Shanghai CFETS-ICAP International Money Broking Co. Ltd., a new jointventure based in Shanghai. 8 Capital and reserves Statement of changes in shareholders' equity - Group Year ended Year ended 31 March 31 March 2007 2006 £m £m As at beginning of year 603.8 508.6 Total recognised income and expenses for the 72.0 145.5 year Ordinary shares issued 181.0 2.4 Increase in investment in own shares (5.1) (4.0) Dividends paid in the year (66.7) (53.1) Share-based payments in the year 4.9 4.4 Options exercised in the year (1.2) - Treasury Shares acquired in the year (9.0) - Shares issued from Treasury in the year 0.3 - Shares issued by trust in the year 1.2 - As at end of year 781.2 603.8 Minority interests - equity 12.5 16.0 Total equity 793.7 619.8 9 Contingent liabilities Group (a) In July 2003, it was announced that two of the Group's subsidiariesand the Company were among those being sued in connection with an allegedinfringement of patent number 6,560,580 (580 Patent) in the US. The Grouprejected the claim. The jury trial commenced on 7 February 2005. Prior to the commencement ofthe trial, the claimants stated their damage claims against the defendants,including the Group, to be an amount of up to $104m as at 30 September 2004. Onthe first day of trial, the Court dismissed all of the monetary claims againstthe Group. The Court also dismissed all of the claims challenging use of the OMClick Exchange System for ICAP Electronic Broking LLC (IEB). The case then proceeded to trial on the limited issue of the claimants'request for injunctive relief as to the use of a second computer system, theICAP Securities USA LLC (ICAP Securities) GTN and on the Group's counterclaimfor judgement declaring that the ICAP Securities GTN did not infringe the 580Patent. On 22 February 2005, the jury found that the application for the 580Patent failed to provide an adequate written description in certain of the 580Patent claims. In addition, the jury found that the ICAP Securities GTNinfringed certain claims of the 580 Patent, but that the claimed infringementhad not been wilful. On 4 April 2005, the claimants and the Group filed post-trialapplications. On 12 December 2005, the Court ruled on the claimants' and theGroup's applications pertaining to the jury's verdict and denied allapplications, thus leaving the jury's verdict undisturbed. On 22 February 2006, the Court ruled on the Group's applicationpertaining to claimants' asserted inequitable conduct in the prosecution of the580 Patent. The Court ruled in favour of the Group and declared that the 580Patent was procured by inequitable conduct and as a result was unenforceable. A final order as to all matters decided by the jury and the Court wasentered on 3 April 2006. On 27 April 2006 a claimant filed a Notice of Appealseeking to appeal the jury's decision and the Court's ruling. On 20 March 2007 the US Court of Appeals for the Federal Circuit deniedthe claimant's appeal. The claimants have filed an application asking that theUS Court of Appeals reconsider its decision. The application is pending. At this stage it is not possible to predict the outcome with certainty orto determine the extent of liability, if any, of the Group following any appealbut, based on current available information and after consultation with theGroup's lawyers, the directors continue to expect a successful outcome for theGroup. No provision has been made in the Financial Statements for the year ended31 March 2007. (b) ICAP plc has received correspondence from National Australia Bank(NAB) alleging that revaluation data, supplied by an individual within ICAPCurrency Options Pte Limited (formerly ICAP-Nittan Pte Limited), one of ICAP'sSingapore subsidiaries and a member of the TFS-ICAP joint venture, helped masktrading losses in NAB's FX options business. On 27 January 2004 NAB announced that it incurred FX option tradinglosses of A$360 million (£158 million). Detailed reports following fullinvestigations into these losses were published by PricewaterhouseCoopers (PwC)and the Australian Prudential Regulation Authority in March 2004 and indicatedthat NAB incurred these FX trading losses between April 2003 and January 2004.The PwC report includes descriptions of how certain NAB dealers concealedlosses by processing false spot FX and false FX option transactions, bookingone-sided internal FX option transactions and using incorrect dealing rates forgenuine transactions. The reports analyse the cause of these trading losses,including the methods of concealment allegedly employed by the NAB dealers,repeated failures of NAB risk management, absence of NAB financial controls,gaps in NAB back office procedures, inadequate NAB corporate governance and NABcorporate cultural weaknesses. NAB accepted the findings of the PwC report on 28April 2004. Neither ICAP Currency Options Pte Limited nor any other member of theICAP Group or TFS-ICAP accept any responsibility for these NAB FX tradinglosses and intend to vigorously contest any claim which may be made against themin this matter. ICAP Currency Options Pte Limited has been informed that a similarallegation has been asserted by NAB against another interdealer broker, whichis not a party to the TFS-ICAP joint venture, in respect of these FX optionstrading losses. It is not possible at this stage to predict the outcome with certaintynor to determine the extent of liability, if any, of ICAP plc or ICAP CurrencyOptions Pte Limited. No provision has been made in the Financial Statements forthe year ended 31 March 2007. (c) From time to time the Group is engaged in litigation on employeerelated and other matters. The highly regulated nature of the Group'sactivities means that the group is occasionally subject to regulatory enquiriesand investigations. There are currently no issues that are expected to have amaterial, adverse effect on the Group's results or net assets. (d) In the normal course of business, certain Group companies enter intoguarantees to cover trading arrangements. 10 Exchange rates The principal exchange rates which affect the Group, expressed incurrency per £1, are shown below: Closing rate Closing rate Average Average rate rate as at as at year ended year ended 31 March 31 March 31 March 31 March 2007 2006 2007 2006 US dollar 1.96 1.73 1.89 1.79 Euro 1.47 1.43 1.47 1.46 Yen 231.59 204.66 221.19 202.05 The Group is exposed to foreign exchange translational risk onconsolidation of its overseas operations not denominated in sterling. Duringthe year ended 31 March 2007, the US dollar depreciated by 13% with respect tosterling and the euro depreciated by 3%. In accordance with IAS21 "The Effectsof Changes in Foreign Exchange Rates", the resulting translational exchangedifference is included within the exchange adjustment taken directly to reserves, as disclosed in the consolidated statement of recognised income and expense. 11 Cash flow Reconciliation of profit before taxation to net cash flow fromoperating activities Year ended Year ended 31 March 31 March 2007 2006 £m £m Profit before taxation 213.8 193.0 Operating exceptional items (4.8) - Share of operating profits of associates after tax (6.0) (3.2) Amortisation and impairment of intangible assets arising on 42.6 11.3 consolidation Amortisation of intangible assets arising from 10.2 6.3 development expenditure Depreciation of property, plant and equipment 21.5 16.0 Other amortisation and impairments 0.3 0.2 Share-based payments 4.9 4.4 Loss on sale of property, plant and equipment 2.6 - Profit on disposal of available-for-sale (1.9) - investments Net finance expense/(income) 2.1 (4.8) Operating cash flows before movements in working 285.3 223.2 capital Increase in trade and other receivables (25.9) (84.7) Increase in trade and other payables 14.2 25.1 Net receipts/(payments) in respect of financial 7.9 (7.0) assets held at fair value Cash generated by operations before exceptional 281.5 156.6 items Operating exceptional items received/(paid) 22.0 (6.3) Cash generated by operations 303.5 150.3 Interest received 14.7 11.6 Interest paid (20.9) (7.2) Taxation (80.0) (61.7) Net cash flow from operating activities 217.3 93.0 The movement in trade and other receivables and trade and other payables excludes the impact of the gross up of matched principal trades as permitted by IAS7 "Cash Flow Statements". Excluding the impact of the gross up, the net debtor for matched principal transactions and deposits for securities borrowed/loaned was £30.0m (March 2006 - £50.6m). 12 Post balance sheet events In May 2007, the Group announced that it had acquired all of the sharecapital of Hyde Holdings Limited, a company which provides shipbroking andrelated services to the shipping industry. The assets acquired include theremaining 50% of the existing joint venture between the Group and Hyde HoldingsLimited. The total consideration payable is capped at £17.7m Included within matched principal debtors is an amount of £9.5m relatingto a disputed post settlement clearing adjustment made by a sub custodian. Anadditional £13.1m of disputed post settlement clearing adjustments were made inrespect of trades which arose after 31 march 2007. The Group believes thatthese adjustments are erroneous and, after consultation with the Group'slawyers, is confident in its case and therefore the amounts owing will berecovered in full. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
IAP.L