Final Results

6th Mar 2006 07:00

John Wood Group PLCFinal results for the year to 31 December 2005Strong revenue and EBITA growth across the GroupJohn Wood Group PLC ("Wood Group", the "Group") is a market leader inengineering design, production support and industrial gas turbine services forcustomers in the oil & gas and power generation industries around the world.Operating in 40 countries, Wood Group's businesses employ over 16,000 people.Financial HighlightsRevenues of $2,761.9m (2004: $2,288.1m) up 21%EBITA(1) of $149.1m (2004: $117.4m) up 27%Operating profit of $148.0m (2004: $85.6m) up 73%Profit before tax of $124.7m (2004: $66.2m) up 88%ROCE(2) at 17% (2004: 15%)Adjusted diluted earnings per ordinary share(3) of 16.6 cents (2004: 12.9 cents)up 29%. Basic earnings per share of 17.0 cents (2004: 8.0 cents) up 113%Proposed full year dividend of 4.0 cents (2004: 3.6 cents) up 11%Operating HighlightsHealthy oil and gas market and active business development driving strongfinancial performance, with significant increases in divisional EBITA:Engineering & Production Facilities up 19%Well Support up 42%(4)Gas Turbine Services up 39%Engineering & Production Facilities - growth in exploration & productionspending contributed to a strong financial performanceEngineering - strong upstream activity for a broad spread of clients;downstream active on refinery upgrade workProduction Facilities - continuing activity from tiebacks, integrityenhancement and upgrade projects in North Sea; strengthening presence inAmericas, West Africa and AsiaWell Support - demand continued to be strong, with all businesses performingwell. Significant US presence strengthened; progressed internationaldevelopmentElectric Submersible Pumps (ESP) - important contract win in Argentina;successful start-up in Chad; Russia activity growingPressure Control - strong number two US position; continuing investment inChinaLogging Services - strong growth in US; leading position in wireline servicesin ArgentinaGas Turbine Services - US power market more stable; restructuring deliveringenhanced financial performance. Differentiation through higher technology,re-engineering parts and entering into more long-term contractsOil & gas activities benefit from a strong marketFocus on higher tech turbines and long term service agreements deliveringbenefitsSir Ian Wood, Chairman and Chief Executive, Wood Group, said:"We see a continuing strong oil & gas services market and a somewhat improvedpower market for our services. This, along with the ongoing extension of ourrange of services and geographical reach, will stand us in good stead and,overall, we believe we are positioned for strong growth into 2006."ENQUIRIES:Wood GroupAlan Semple Group Finance Director 01224 851000Nick Gilman / Carolyn SmithBrunswickPatrick Handley/ Nina Coad 020 7404 5959John Wood Group PLCFinal results for the year to 31 December 2005Chairman's StatementIntroductionI am pleased to report a year of strong growth across our three divisions.Key headline financials are: 2005 (US$m) 2004 (US$m) Change Revenues 2,761.9 2,288.1 +21% EBITA(1) 149.1 117.4 +27% EBITA margin(5) 5.4% 5.1% Profit before tax 124.7 66.2 +88% ROCE(2) 16.6% 14.6% Adjusted diluted 16.6c 12.9c +29%EPS(4) Total dividend 4.0 cents per 3.6 cents per +11% ordinary share ordinary share Reflecting continued confidence in our long-term strategy, the Board isrecommending a final dividend of 2.7 cents per ordinary share (2004: 2.4cents), which takes the total for the year to 4.0 cents (2004: 3.6 cents).MarketsEnergy demand is growing round the world. Oil & gas prices are strong and ourclients have stepped up their expenditure to bring new developments onstreamand enhance recovery from mature assets.We expect a further healthy increase in client expenditures in 2006 with thefollowing continuing trends:the major international operators looking at larger new developments, many ofwhich are offshore, and often in harsh environments;the National Oil Companies developing their significant domestic reserves andlooking at international expansion; andthe larger independents, many North America based, accelerating theirinternational development, particularly in the Eastern Hemisphere.All of these should give rise to strong demand for our oil & gas infrastructuredesign, and production support and enhancement services in the coming year.In the power industry, supply and demand in the US is moving towards balance insome states, leading to somewhat higher gas turbine utilisation. This, alongwith the increasing demand for power elsewhere in the world, will lead to anincrease in demand for aftermarket services for industrial gas turbines overthe next several years.There will continue to be a significant debate on energy policy andconservation across the world. Nuclear and coal will undoubtedly get moreattention, but we expect that gas, which is by far the most environmentallyfriendly fossil fuel, enhanced by the increased volumes of LNG(6), will continueto be a growing energy source. This will provide opportunities for both our oil& gas servicing activities and our position as the leading independent in theindustrial gas turbine aftermarket.Strategic DevelopmentDuring 2005, we have continued to pursue our strategy of broadening andenhancing our capabilities, while extending our international reach.Following the acquisition of Deepwater Specialists Inc (DSI), Engineering &Production Facilities acquired Offshore Design Limited (ODL) to enhance ourrange of commissioning services, pre-operations and start up support for newdevelopments coming onstream. In Well Support, Pressure Control continued todevelop their manufacturing and assembly capabilities in China to deliverincreased capacity and product cost improvements and, in Russia, we areexpanding our ESP revenues. In Gas Turbine Services, we have successfully addedto our number of long term contracts and enhanced our range of re-engineeredparts.We are extending our international reach with operations now in over 40countries. In Engineering & Production Facilities, we enhanced our capabilityto serve clients around the world from new Mustang(7) offices in London and Perth,Australia. Additionally our investment in John Brown E&C Limited (JBEC) inRussia is helping us gain an important foothold in that market and we haveextended our presence in Equatorial Guinea. In Well Support we successfullystarted up our ESP contract with ExxonMobil in Chad.In the second half of 2005, we raised approximately $90m of new equity tostrengthen our balance sheet and increase our flexibility to pursue our growthstrategy. The steps to broaden our service offering and extend ourinternational reach will include acquisitions, capital expenditure on newfacilities and investment in projects with our customers.Divisional highlightsEngineering & Production Facilities 2005 (US$m) 2004 (US$m) Change Revenues 1,472.3 1,199.6 +23% EBITA 88.2 73.9 +19% EBITA margin 6.0% 6.2% In 2005, the healthy oil & gas market and growth in exploration and productionspending contributed to a strong financial performance. The ongoing businessdevelopment programme, and increased level of zero margin pass-through sales inthe North Sea led to a slight fall in margins for the year.Engineering was engaged in supporting a broad spread of clients and activities.In upstream, we worked on a large number of new developments and upgradeprojects around the world. These include Tahiti, Blind Faith and Shenzi in theGulf of Mexico, East Area Gas, Tombua Landana and Elon in offshore Nigeria,Angola and Equatorial Guinea respectively, Mangala in India, Gorgon & Jansz inAustralia and Valhall in Norway. In our downstream activities, we completed theengineering on a number of refinery capacity upgrades and clean fuelmodification projects for a broad range of clients in North and South America.Production Facilities has been active on a number of tiebacks, integrityenhancement, upgrade and long-term support projects in the North Sea marketwhere there continues to be significant focus on extending field life andenhancing production. In the Americas, we have won new contracts in the Gulf ofMexico, Venezuela and Colombia, as well as a contract to operate and maintain afloating production storage and offloading vessel (FPSO) system offshoreBrazil. In West Africa, we are now supporting a number of independents as theystart up new production and LNG operations. Elsewhere, we have won several newcontracts including rotating equipment operations & maintenance activities inMexico, Vietnam and Indonesia.Well Support 2005 (US$m) 2004 (US$m) Change Revenues(8) 645.7 513.9 +26% EBITA(8) 58.5 41.2 +42% EBITA margin(8) 9.1% 8.0% All three businesses in Well Support performed strongly. We maintained oursignificant US market positions while furthering our international businessdevelopment. The increased turnover, together with cost reduction andefficiency improvement initiatives, contributed to the positive margin trend.ESP performed well in both the US and Canada and we have recently won amulti-year extension on a major contract in Argentina. In Chad, our ExxonMobilcontract started up successfully and in Russia we are continuing to grow ourmarket share. Pressure Control has maintained its strong number two position inthe US market and is growing its international presence. The investment inmanufacturing, test and assembly capabilities in China is delivering productcost improvements and additional manufacturing capacity to supply new markets.Logging Services enjoyed a good year in the US and, in Argentina weconsolidated our position as the leader in cased hole electric wirelineservices. In the fourth quarter we sold our permanent monitoring activities forapproximately US$31.4m including working capital adjustment. This business hadperformed well but was non-core and will better achieve its potential as partof a well completion products specialist.Gas Turbine Services 2005 (US$m) 2004 (US$m) Change Revenues 607.8 537.9 +13% EBITA 32.7 23.5 +39% EBITA margin 5.4% 4.4% Our cost reduction and efficiency improvement programmes and a more stable USpower market have contributed to the improved financial performance in theyear, and the positive margin trend.Our oil & gas aftermarket activities, which represent about 35% of revenues,are continuing to make good progress and we are increasing our expenditure onthe technology and spare parts related to new turbine types.The power sector market is now more stable and the anticipated benefits fromour programme of cost reductions and efficiency improvements are beingdelivered. We are also developing and enhancing our differentiation in highertech Heavy Industrial Turbines, in the reverse engineering of spare parts andin lower cost component repair. As a result, we are increasing the portion ofour business under long term contract.PeopleDuring the year, we significantly increased our investment in our most valuedresource - our people. We have stepped up our development and trainingprogrammes, with new in-house schemes designed to enhance the strength anddepth of our next generation of business leaders, we have increased our intakeof graduates, and our very active programme of hiring, training and developingour people around the world has led to a significant increase in our overallnumber of employees.We warmly welcome Mark Papworth to our Board. Mark is our new Chief Executivefor Gas Turbine Services and he is already making a positive contribution.Allister Langlands has returned to his role as Deputy Chief Executive and isleading several important Group initiatives. Ewan Brown, who has been a trustedand wise counsel to the Board over many years, has decided not to stand forre-election at the next Annual General Meeting and I thank him most warmly onbehalf of all my Board colleagues for his outstanding contribution to theGroup's success. We intend to appoint two additional non executive directors inthe course of this year.And finally, the Board's warmest thanks again go to all our employees for theircommitment to safe working, quality and customer care, their skills, and theirinterest and involvement in the ongoing successful development of the Group.Continuing growthWe see a continuing strong oil & gas services market and a somewhat improvedpower market for our services. This, along with the ongoing extension of ourrange of services and geographical reach, will stand us in good stead and,overall, we believe we are positioned for strong growth into 2006.Engineering & Production FacilitiesEngineering & Production Facilities provides a broad range of services fromconcept selection through engineering design, project management, constructionmanagement, facilities modifications and operations & maintenance support tooil & gas companies worldwide. 2005 (US$m) 2004 (US$m) Change Revenues 1,472.3 1,199.6 23% EBITA 88.2 73.9 19% EBITA margin 6.0% 6.2% In 2005, the healthy oil & gas market and growth in exploration and productionspending contributed to a strong financial performance. The ongoinginternational business development programme, and increased level of zeromargin pass-through sales in the North Sea led to a slight fall in margins forthe year.In order to continue to develop and grow the division we have been broadeningand enhancing our capabilities and extending our international reach.Engineering & Broadening Services Extending International Production Facilities reach Engineering Project management, Moscow, London and Perth, construction management Australia offices - to services, midstream develop our client base in technology Europe, FSU(9), Africa, the Middle East and Asia Pacific Production Facilities Pre-operations support and Building & extending start-up presence in Equatorial Guinea, Brazil, Russia, Training services Indonesia, Mexico, and (established the Energy Kazakhstan Training Centre Joint Venture in Puerta La Cruz, Venezuela) EngineeringWe offer a broad range of engineering and project management services in oil &gas production, transportation and processing facilities. We have particularexpertise in: Services Areas of Expertise Upstream Engineering, project Deepwater and lightweight management, construction topsides, onshore processing management facilities and subsea engineering Midstream Offshore and onshore pipelines engineering, compression and LNG/gas to liquids (GTL) technologies Downstream Clean fuel modifications, refinery upgrades and pharmaceuticals Automation Automation services, including proprietary software Engineering was engaged in supporting a broad spread of clients and activities.2005 was a strong year for our upstream activities. We were busy for a diverserange of clients on upgrade projects and new developments around the world. Inthe Gulf of Mexico we provided engineering services on a range of fast-trackupgrade projects, as well as a number of new developments, including ChevronTexaco's Tahiti and Blind Faith, along with BHP Billiton's Shenzi. Our SouthAmerican operations have provided support to our US activities, were active ona range of upgrade projects and continued to provide engineering expertise on anumber of important projects, for example Conoco Phillip's Coro Coro inVenezuela. In Africa, we are providing detailed engineering on ExxonMobil'sEast Area Gas development offshore Nigeria and on Amerada Hess's Okume Complexdevelopments offshore Equatorial Guinea. We have recently begun a contract onCairn's Mangala project in India and JP Kenny, our pipeline engineeringspecialist, continues to grow and is providing subsea engineering expertise forthe Gorgon & Jansz developments. In Norway we have begun work on the FEED(10) forthe Valhall Redevelopment Project. MSi - the Group's specialist flow assuranceand software provider - has won a number of important contracts includingnotable successes in Kazakhstan and Trinidad.In the midstream area our technology is gaining increasing acceptance andgenerating a number of enquiries that we hope will lead to growing revenues in2006.In downstream we have been active in North America, Venezuela and Mexico onclean fuel modification work, including a number of low sulphur dieselmodifications, and refinery upgrades to take advantage of the more favourablemarket conditions being enjoyed by our clients.Production FacilitiesWe offer a broad range of life of field production facilities support servicesto our clients around the world. Exploration Development Production Enhanced Recovery Abandonment Pre-operation support Commissioning Start-up support Operations and maintenance Brownfield Engineering Facility Modifications Production enhancement Life extension Decommissioning Production Facilities continued to be very busy in its established regions,while also increasing its range of services and extending its presence in newterritories for the Group.To broaden our service offering across the life of field we acquired ODL duringthe year, a provider of technical and consulting services, along withpre-operations and start-up support. Since acquisition, ODL has performed welland extended its activity into new territories, including Norway, with a newcontract for the Marathon operated Alvheim development.In the North Sea, we have been active on a number of tiebacks, integrityenhancement, upgrade and long-term support projects. We are working as one ofthe engineering, modifications and maintenance providers to BP's North Seaassets and, during the year, we supported a number of turnarounds on facilitiesand upgrade projects on the Schiehallion and Magnus assets. We are continuingto support Shell's assets in the Northern North Sea as a one third partner inthe Sigma 3 joint venture, where there was significant focus on engineeringwork associated with Shell's integrity upgrade project. Separately, we areShell's main support contractor for their onshore gas plants at St Fergus andMossmorran and completed significant upgrade projects during the year.Several other significant projects were completed for key North Sea clients,including a major upgrade of the gas handling and power generation facilitieson the Forties Field for Apache, topsides modifications on the Alwyn and Dunbarplatforms for the Forvie high pressure, high temperature gas condensate fielddevelopment for Total and modifications to the Hess operated Triton FPSO (11) toaccommodate the PetroCanada Pict field development. We have further expandedour North Sea activities with an important new contract to support ExxonMobilat their Fife Ethylene Plant and an addition to the Talisman contract foroperations & maintenance support to the Bleoholm FPSO.In the Americas, we provide production operations and maintenance supportservices for a large number of manned and unmanned platforms in the shallowwater Gulf of Mexico for a wide range of operators, including Apache, Pogo,ERT, El Paso and Dominion, and are expanding into deep water with the award ofa contract from BHP Billiton for pre-operations support for the Neptuneproject. In addition, DSI, our commissioning services provider, has been activethroughout the year on a range of projects, including the BP Atlantis andThunder Horse developments. In Brazil, we secured a notable new contract tooperate and maintain Sevan Marine's SSP 300 FPSO for the Petrobras Piranemafield. This is anticipated to commence operation in late 2006 and we arecurrently providing pre-operations support services during the constructionphase of the project. We increased our presence in the region with our firstoffshore operations and maintenance contract in Mexico, managing the Akal GCgas compression complex on behalf of a joint venture between Duke Energy andMarubeni.In West Africa, we have expanded our presence in Equatorial Guinea. We arecontinuing to provide operations support to Marathon's Alba offshore productionand onshore gas processing and export facilities, along with training anddevelopment support to ExxonMobil and Amerada Hess. We added a new contractwith ExxonMobil to provide operations and maintenance support to their offshoreZafiro field. We were also awarded a contract by Amerada Hess to provideoperations and maintenance support to their existing Ceibe FPSO and theirdevelopment of the Okume complex, comprising two tension leg platforms and fourfixed platforms. Elsewhere in the region, DSI provided commissioning servicesto Shell's Bonga facility.In Asia Pacific, our contract with Brunei Shell Petroleum, through the SKS Woodjoint venture, is progressing well with significant construction and shutdownactivity in the second year of this long term contract In Indonesia, we wereawarded a project services support contract for the BP Tangguh LNG developmentand continue to provide offshore operations and maintenance support to theirWest Java assets. We have also been awarded maintenance contracts with PremierOil and Star Energy for their offshore assets in Indonesia.We have continued to invest in developing our presence in new markets that webelieve will be important to the division going forward. This includes theinvestment in JBEC in Russia, together with additional contract awards inKazakhstan and Vietnam.Well SupportWell Support provides solutions, products and services to enhance productionrates and efficiency from oil & gas reservoirs. It is among the market leadersinternationally in artificial lift using electric submersible pumps (ESPs) andin surface wellheads and valves to control reservoir pressure. It also has astrong market share in the provision of electric wireline and slicklineservices in the Gulf of Mexico and parts of South America. 2005 (US$m) 2004 (US$m) Change Revenues (8) 645.7 513.9 26% EBITA (8) 58.5 41.2 42% EBITA margin (8) 9.1% 8.0% All three businesses in Well Support performed strongly, maintaining oursignificant US market positions as well as furthering our internationalbusiness development. The increased turnover, together with cost reduction andefficiency improvement initiatives contributed to the positive margin trend.We continued to focus on technology enhancement of our products and servicesand international expansion to provide continuing growth over the next severalyears.Well Support Technology Development Extending International reach Expanded manufacturing, ESP - Expansion of our service assembly and test capacity and repair capabilities in in China and Canada; Russia; start up of long-term introduction of high volume ESP contract with ExxonMobil in /high temperature ESP Chad; established new products; introduction of operations in Ecuador and several new logging tools Colombia; growth in Yemen and Egypt PC - Mexico and Middle East breakthroughs Electric Submersible Pumps (ESPs)During the year we have strengthened our significant position in the US marketand also seen further progress from our Canadian operations, where we arebuilding a new facility to support our growth. In South America, we recentlywon a multi-year extension to an important 6 year contract in Argentina,expanded our operations in Ecuador and opened operations in Colombia. InBrazil, we secured a major contract for Devon Energy, which we hope willprovide a platform for further expansion. Russia is an important market forESPs and our Nizhnevartovsk facility in Western Siberia is helping us to addfurther repair work and grow our market share. In the Middle East and Africaregion, our 10 year performance contract with ExxonMobil in Chad started upsuccessfully and we have won contracts in Egypt.Our engineering and product development efforts remain focused on increasingthe run life of our equipment and reducing the lifetime operating cost for ourcustomers. To that end, we have introduced a number of product enhancements andnew products that expand our product offering into more difficult downholeconditions. We have also introduced new, patented technology aimed at thegrowing SAGD (12) market in heavy oil regions, such as Northern Alberta in Canada.Pressure ControlWe maintained our strong number two position in the US market and madesignificant progress in expanding our international business.The Americas market was particularly active in the year and we won a number ofnew contracts and successfully extended a number of our existing contracts withseveral large independent operators. In the US mid-continent and Rocky Mountainregions we expanded our infrastructure to serve the significantly increasedactivity in the area. In Canada our operations enjoyed another year of goodgrowth and, in Mexico, we won several contracts with Pemex and westernoperators.Pressure Control now has a presence in 20 countries, including those in theAmericas and a number of locations in the Middle East, notably Saudi Arabia andEgypt.The investment we have made in our manufacturing, assembly and testcapabilities in China is leading to product cost improvements. We arecontinuing to extend our capacity and will source an increasing portion of ourequipment from China in the future. We are continually looking at ways toenhance the safety of our products and generate cost savings for our customers,and, during 2005, we introduced a new generation of our low profile wellheadsystems targeted for the land drilling markets. This product line reduces theamount of rig time required and enhances safety during pipe size changes.Logging ServicesWood Group Logging Services provides cased hole electric wireline and slicklinemechanical and specialised services focused on well data acquisition anddownhole operations. In 2005, there was a strong market for our services and weenjoyed good growth in revenues and EBITA and continued to extend our serviceoffering.We expanded our slickline market share in the Gulf of Mexico and furtherdeveloped our land-based operations in Texas. The focus on extending ourcapability and improving the reliability of our equipment continued and weintroduced an expanded product range of smart slickline tools and a new"PowerHammer" for freeing downhole obstructions.Our electric wireline operations in the US and South America continued to growand we believe we are the cased hole logging market leader in Argentina. Weintroduced new technology during the year to expand the range of services andmarkets that we can serve, for example:we introduced a new offshore skid unit for deep water applications. The 30/30unit is capable of working at well depths below 30,000 feet and includesdownhole tools that will operate at 30,000 psi bottom hole pressures;we introduced a new, high-resolution, casing inspection tool (ECI - ElectronicCasing Inspection) for improved data acquisition.After a strategic review, we sold our Permanent Downhole Monitoring business inthe fourth quarter for US$31.4m including a working capital adjustment. Thisbusiness had performed well but was non-core and will better achieve itspotential as part of a well completion products specialist.Gas Turbine ServicesGas Turbine Services is the world-leading independent provider of integratedmaintenance solutions, and repair and overhaul services for industrial gasturbines, used for power generation, compression and transmission in the oil &gas and power generation industries. 2005 (US$m) 2004 (US$m) Change Revenues 607.8 537.9 13% EBITA 32.7 23.5 39% EBITA margin 5.4% 4.4% Our cost reduction and efficiency improvement programmes and a more stable USpower market have contributed to the improved financial performance in theyear, and the positive margin trend.In order to continue to develop and grow the division we have retained ourfocus on broadening and enhancing our capabilities and extending ourinternational reach.Gas Turbine Broadening Services Extending International reach Services Broader range of Expanded operations in re-engineered parts; growth Thailand; won new contracts in in long term service Russia, Poland, China, Mexico agreements; increasing and Colombia operations and maintenance business Sales to customers in over 75 countries Aero-derivativeWe have three aero-derivative gas turbine businessesRolls Wood Group - our joint venture with Rolls-Royce, primarily servingcustomers in the oil & gas marketWood Group Pratt & Whitney - our joint venture with Pratt & Whitney, primarilyserving customers in the oil & gas and power marketsTransCanada Turbines - our joint venture with TransCanada Pipelines, which isboth GE LM and Rolls-Royce approved, serving customers in the oil & gas andpower markets.Rolls Wood Group had another strong year, and we have continued to increase theshare of business that is under long term contracts. TransCanada Turbinesdelivered an improved financial performance, driven by increased volumes,including good growth in its oil & gas activities. Wood Group Pratt & Whitneysuccessfully expanded its scope to include the provision of spare parts whichcontributed to its increased volumes in the year.Light Industrial Turbines (LIT)Our LIT activities include the repair and overhaul of the Siemens and Solarlight industrial turbine ranges, which are focused primarily on oil & gasapplications. In 2005, we strengthened the management team and increased oursales efforts in a number of locations. This helped deliver improvedperformance in the North Sea and the Americas. We have also entered a number ofnew countries in the year, including the provision of inspection, maintenanceservices and supply of spare parts for Surgutneftegaz in Russia. Future growthwill be driven by increasing our range of re-engineered parts and extending therange of turbines for which we offer aftermarket services.Heavy Industrial Turbines (HIT)The Group's HIT activities focus primarily on industrial gas turbines used inpower generation applications.Our financial performance improved with the anticipated benefits from ourprogramme of cost reductions and efficiency improvements. The US power marketis more stable and, in the Rest of the World, there are good opportunities forgrowth. In the Eastern Hemisphere, we have seen increased price competitionfrom some component repair providers. As part of our focus on lower costcomponent repair, we have increased our presence in Thailand and significantlyreduced our HIT component repair activity in Dundee, Scotland. This action,together with some further cost reduction actions, has resulted in a $6mimpairment and restructuring charge.During the year, we increased the portion of our business under long termcontract. We successfully completed the first outages on our GLOW contract inThailand and were awarded a range of contracts, including a long-termmaintenance contract with Alliant Energy Corp. to provide maintenance servicesto two Frame 7FA turbines.The focus on re-engineered parts is also an important part of our development.Our long-term contracts to supply parts to six GE Frame 7EA turbines owned bythe Dhofar Power Company in the Sultanate of Oman and three GE turbinespartially owned by El Paso Energy in Brazil continue to perform well. We werealso awarded a number of new contracts in the year, including a six-yearpackaged maintenance services contract, including the supply of re-engineeredparts, for British Nuclear Fuel's Fellside Combined Heat and Power (CHP) plant.Support ServicesThe broad range of ancillary turbine services support our Aero-derivative, LITand HIT offerings and help us to offer our clients an integrated service.Our power plant operations & maintenance activities made excellent progressincluding securing four new contracts in the year.Wood Group Power solutions business, which provides complete mid-sized gasturbine packages, often on an EPC (13) basis, had another good year with over 170MWof power installed for projects in Colombia, Utah in the US, Sardinia and theRepublic of Georgia.Our Generator Services business, which provides electrical generator and motormaintenance services to power plant operators, showed reduced losses, followingthe very disappointing results in 2004. The recovery plan is now progressingand we anticipate a further improvement in performance in 2006.Our Accessories and Components activities performed satisfactorily in arelatively flat market, with lower revenues from our military aviationcustomers offset by some good progress in industrial markets.Financial ReviewTrading Performance 2005 2004 Change (US$m) (US$m) Revenues 2,761.9 2,288.1 21% EBITA 149.1 117.4 27% Operating profit 148.0 85.6 73% Profit before tax 124.7 66.2 88% Profit for the year 83.6 39.4 112% Diluted EPS (cents) 16.4 7.8 110% Adjusted diluted EPS (cents) 16.6 12.9 29%Revenues & EBITA increased by 21% and 27% respectively in 2005, reflectingstrong growth in all three divisions. The overall EBITA margin (`margin')increased from 5.1% in 2004 to 5.4% in 2005. The increased margin reflectsimprovement in Gas Turbine Services, including the benefits from cost reductionand efficiency improvement programmes and a more stable US power market, andWell Support, including the benefits from cost reduction and efficiencyimprovements. Margins in Engineering and Production Facilities reduced slightlydue to higher business development costs and an increased level of zero marginpass-through revenues in the North Sea.Impairment and restructuring charges of US$6.0m (2004: US$26.2m) were booked inthe year. These represent the costs of rationalisation and severance costs inour Gas Turbine Services division as we continue to review the structure of thebusiness and increase its competitiveness. Specifically, the charge includedthe impact of increasing our Thailand component repair presence and reducingour activity in Dundee, Scotland. There was also a one-off gain on sale of ourProtech business of US$9.7m, which was sold in December 2005 for $31.4mincluding a working capital adjustment.Net interest payable by the Group was US$23.3m (2004: US$19.4m). The increaseof 20% was due to a higher level of average borrowings, particularly during thefirst half of the year as a result of the strong sales and working capitalgrowth, as well as the increase in floating US dollar interest rates againstwhich we were partially hedged. Interest cover of 6.4 times for 2005 comparedto 6.1 times in 2004.The tax charge for the period of US$41.1m (2004: US$26.8m) represents a taxrate for the year of 33.0% (2004: 40.5%) on profit before tax. Measured againstprofit before tax, impairment and restructuring charges and profit on disposalof subsidiaries, the rate was 33.9% (2004: 37.3%), which compares to thetheoretical expected tax rate of 34.2% (2004: 33.6%).Adjusted diluted earnings per ordinary share for the period increased by 29% to16.6 cents (2004: 12.9 cents) and basic earnings per ordinary share increasedto 17.0 cents (2004: 8.0 cents). The final recommended dividend of 2.7 cents(2004: 2.4 cents) represents an increase of 13%, and an increase of 11% in thetotal dividend for the year of 4.0 cents (2004: 3.6 cents).Cash Flow 2005 2004 (US$m) (US$m) Opening net debt (354.3) (208.6) Cash generated from operations before 195.0 145.2 working capital movements Working capital movements (33.7) (66.8) Cash generated from operations 161.3 78.4 Capex and acquisitions (94.8) (124.5) Disposal of subsidiaries 22.8 - Sale/(purchase) of own shares 1.7 (22.3) Issue of new shares 90.8 0.2 Interest, tax, dividends and other (73.3) (77.5) Decrease/(increase) in net debt 108.5 (145.7) Closing net debt (245.8) (354.3)Cash flow generation was significantly improved over 2004, with cash generatedfrom operations before working capital increasing US$49.8m or 34%. The workingcapital outflows during the year reflect the strong sales growth discussedabove. The outflow includes an increase in inventories and receivables ofUS$44.1m and US$35.5m respectively less an increase in payables and provisionsof US$45.9m.The Group continued to invest in acquisitions and capital expenditure in 2005.Total investment in acquisitions in 2005, including acquisitions of minoritiesand deferred consideration payments, was US$33.4m (2004: US$61.8m) and includedthe acquisition of ODL and an investment in JBEC in Russia. Capital expenditure(net of disposals) amounted to US$61.4m (2004: US$62.7m). Disposal ofsubsidiaries relates to the Protech business as described above, for which anelement of the proceeds was received in 2006.In September 2005, the Group carried out a cash placing of 5% of its ordinaryshares, to increase our flexibility to pursue our growth strategy, raisingUS$90.8m, net of expenses.Net debt at 31 December 2005 was US$245.8m, a reduction of US$108.5m during theyear (December 2004: US$354.3m). The Group's gearing ratio fell from 67% atDecember 2004 to 36% at December 2005.Treasury and RiskThe Group's debt is primarily US dollar denominated in line with the currencyof the bulk of the Group's net assets. Long-term borrowings amounted toUS$347.8m (2004: US$355.0m), of which US$180.0m (2004: US$130.0m), or 52%(2004: 37%), was at a weighted average fixed rate of interest, including marginof 4.8% (2004: 5.0%). US$50.0m of new interest rate swaps were entered intoduring the year.The Group renewed its bilateral banking facilities during 2005, two years aheadof schedule, to take advantage of favourable market conditions. The newfacilities are increased from $560m to $750m at lower margins and providesecured funding until 2010.PensionsThe Group's net pension liability at December 2005 was US$33.3m compared toUS$33.9m at December 2004. These figures are before taking into account therelated deferred tax asset of US$10.0m (2004 : US$10.2m). The underlyingliability, which is sterling denominated, was significantly impacted by thereduction in the assumed discount rate of 50 basis points, which more thanoffset strong growth in the value of the scheme assets.International Financial Reporting Standards (`IFRS')The Group has prepared its financial statements in accordance with IFRS and the2004 figures have been restated accordingly. The main measurement differencesfor the Group were as follows:Under IFRS 2, share based payments have been booked in relation to all shareoptions granted after 7 November 2002 and all potential share awards under theGroup's new long term incentive scheme.Goodwill is no longer amortised under IFRS but is subject to an annualimpairment review. Goodwill amortisation previously booked in our 2004financial statements, and now reversed for reporting under IFRS, amounted toUS$16.9m.The Group has a number of joint ventures. Under IFRS, these have beenproportionally consolidated and our share of each line item is thereforeincluded in the financial statements.Proposed dividends are no longer accrued as dividends and are only recognisedin the period that they are approved by shareholders. The dividends of US$11.1mprovided at December 2004 and US$10.4m provided at December 2003 under UK GAAPhave been reversed under IFRS.The treatment of financial instruments under IAS 39 differs considerably to UKGAAP although there has been no material impact on the Group's incomestatement.Alan G SempleGroup Finance Director3 March 2006End notes:(1)EBITA represents operating profit of $148.0m (2004: $85.6m), before adjustingfor impairment and restructuring charges of $6.0m (2004: $26.2m), profit ondisposal of subsidiaries of $9.7m (2004: Nil) and amortisation of $4.8m (2004:$5.6m). This financial term is provided as it is a key unit of measurement usedby the Group in the management of its business(2)ROCE is Return on Capital Employed and is calculated as Group EBITA, before discontinuing activities, divided by average equity plus average net debt(3)Shares held by the Group's employee share ownership trusts are excluded fromthe number of shares in calculating earnings per ordinary share. Adjusteddiluted earnings per ordinary share is based on the diluted number of shares,taking account of employee share schemes where the effect of these is dilutive.(4)EBITA growth for Well Support includes the results for Protech a business soldin December 2005. EBITA growth excluding Protech would have been 33%.(5)EBITA margin is EBITA divided by revenues(6)Liquefied Natural Gas(7)Mustang is a Wood Group subsidiary and a global leader in the Engineeringmarket(8)Revenue includes $37.5m (2004: $22.0m) and EBITA includes $5.0m (2004: $1.0m)for Protech. EBITA margin excluding Protech would have been 8.8% (2004: 8.2%)(9)Former Soviet Union(10)Front End Engineering Design(11)Floating Production Storage and Offloading vessel(12)Steam Assisted Gravity Drain(13)Engineering, Procurement and ConstructionJOHN WOOD GROUP PLCGROUP FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2005Group income statement for the year to 31 December 2005 Note 2005 2004 US$m US$m Revenues 1 2,761.9 2,288.1 Cost of sales (2,209.7) (1,818.5) Gross profit 552.2 469.6 Administrative expenses: Profit on disposal of subsidiaries 4 9.7 - Impairment and restructuring charges 5 (6.0) (26.2) Other administrative expenses (407.9) (357.8) Administrative expenses (404.2) (384.0) Operating profit 1 148.0 85.6 Finance income 2 2.5 1.8 Finance expense 2 (25.8) (21.2) Profit before taxation 3 124.7 66.2 Taxation 6 (41.1) (26.8) Profit for the year 83.6 39.4 Attributable to: Equity shareholders 80.5 37.3 Minority interest 26 3.1 2.1 83.6 39.4 Earnings per share (expressed in cents per share) Basic 8 17.0 8.0 Diluted 8 16.4 7.8 All items dealt with in arriving at the profits stated above relate tocontinuing operations.Group statement of recognised income and expense for the year to 31 December 2005 Note 2005 2004 US$m US$m Profit for the year 83.6 39.4 Actuarial losses on retirement benefit liabilities 30 (2.5) (4.8) Movement in deferred tax relating to retirement 0.7 1.4 benefit liabilities Cash flow hedges - fair value gains 2.4 - - reported in profit for the year 1.4 - Exchange differences on retranslation of foreign (15.5) 1.7 currency net assets Total recognised income for the year 70.1 37.7 Adoption of IAS 32 and IAS 39 - Retained earnings (0.9) - - Hedging reserve (2.4) - Total recognised income since last annual report 66.8 37.7 Total recognised income for the year is attributable to: Equity shareholders 67.0 35.6 Minority interest 3.1 2.1 70.1 37.7 Group balance sheet as at 31 December 2005 Note 2005 2004 US$m US$m Assets Non-current assets Goodwill and other intangible assets 9 328.6 308.9 Property plant and equipment 10 219.5 216.2 Long term receivables 13.5 22.6 Financial assets - derivative financial instruments 18 1.3 - Deferred tax assets 20 19.3 20.9 582.2 568.6 Current assets Inventories 12 362.9 329.9 Trade and other receivables 13 610.7 579.3 Income tax receivable 5.4 6.8 Financial assets - derivative financial instruments 18 1.7 - Cash and cash equivalents 14 149.9 71.4 1,130.6 987.4 Liabilities Current liabilities Financial liabilities - Borrowings 16 47.9 70.7 - Derivative financial instruments 18 0.6 - Trade and other payables 15 526.7 496.7 Income tax liabilities 14.8 11.8 590.0 579.2 Net current assets 540.6 408.2 Non-current liabilities Financial liabilities - borrowings 16 347.8 355.0 Deferred tax liabilities 20 7.0 8.6 Retirement benefit liabilities 30 33.3 33.9 Other non-current liabilities 17 18.7 21.7 Provisions 19 15.1 15.7 421.9 434.9 Net assets 700.9 541.9 Shareholders' equity Share capital 22 25.4 23.5 Share premium 23 292.1 200.9 Retained earnings 24 288.1 215.7 Other reserves 25 75.7 89.8 Total shareholders' equity 681.3 529.9 Minority interest 26 19.6 12.0 Total equity 700.9 541.9The financial statements on pages 2 to 50 were approved by the board of directors on 3 March 2006.Sir Ian Wood, Director Allister G Langlands, DirectorGroup cash flow statement for the year to 31 December 2005 Note 2005 2004 US$m US$m Cash generated from operations 27 161.3 78.4 Tax paid (37.2) (34.7) Net cash from operating activities 124.1 43.7 Cash flows from investing activities Acquisitions (net of cash acquired) 28 (24.2) (57.1) Deferred consideration payments 28 (9.2) (4.7) Disposal of subsidiaries (net of cash disposed) 28 22.8 - Purchase of property plant and equipment (56.4) (68.4) Proceeds from sale of property plant and equipment 4.2 12.7 Purchase of intangible assets (9.2) (7.0) Net cash used in investing activities (72.0) (124.5) Cash flows from financing activities Proceeds from issue of ordinary shares (net of 90.8 0.2 expenses) (Repayment of)/proceeds from bank loans (18.6) 118.0 Purchase of shares in employee share trusts - (22.5) Disposal of shares in employee share trusts 1.7 0.2 Interest received 2.5 1.8 Interest paid (25.3) (20.8) Dividends paid to shareholders 7 (17.5) (15.9) Dividends paid to minority interest 26 (1.3) - Net cash from financing activities 32.3 61.0 Effect of exchange rate changes on cash and cash (5.9) 0.4 equivalents Net increase/(decrease) in cash and cash equivalents 78.5 (19.4) Opening cash and cash equivalents 71.4 90.8 Closing cash and cash equivalents 14 149.9 71.4 Notes to the financial statements for the year to 31 December 2005Accounting PoliciesPreparation of accountsIntroductionFollowing the adoption of IAS Regulation EC 1606/2002 by the EuropeanParliament, John Wood Group PLC is required to prepare consolidated financialstatements in accordance with International Financial Reporting Standards(`IFRS') for periods beginning on or after 1 January 2005.The Group has applied IFRS for the year ended 31 December 2005, and hasprepared 2004 comparative figures on the same basis. The Group's date oftransition to IFRS is 1 January 2004. This report contains the consolidatedfinancial results for these periods under the basis of preparation set outbelow.To assist with the understanding of the impact of transition from UnitedKingdom Generally Accepted Accounting Principles (`UK GAAP') to IFRS, the Grouphas presented the reconciliations of UK GAAP to IFRS as required by IFRS 1`First time adoption of International Financial Reporting Standards' for 1January 2004 and 31 December 2004 in note 36.Basis of preparationThese financial statements have been prepared in accordance with IFRS and IFRICinterpretations endorsed by the European Union (`EU') and with those parts ofthe Companies Act, 1985 applicable to companies reporting under IFRS. Thefinancial statements have been prepared under the historical cost convention asmodified by the revaluation of financial assets and liabilities held fortrading. A summary of the more important Group accounting policies is set outbelow, together with an explanation of where changes have been made to previouspolicies on the adoption of new accounting standards in the year.The preparation of financial statements requires the use of estimates andassumptions that affect the reported amount of assets and liabilities at thedate of the financial statements and the reported amount of income and expensesduring the year. Although these estimates are based on management's bestknowledge of the amount, event or actions, actual results ultimately may differfrom those estimates.Significant accounting policiesThe Group's key accounting policies adopted in the preparation of thesefinancial statements are set out below. These policies have been consistentlyapplied to all the years presented, unless otherwise stated.In respect of financial instruments, the Group's policy has been to adopt IAS32 `Financial Instruments: Disclosure and Presentation' and IAS 39 `FinancialInstruments: Recognition and Measurement' from 1 January 2005. Comparatives for2004 have not been restated and, as permitted by IFRS 1, financial instrumentsare accounted for under UK GAAP in accordance with the accounting policies setout in the financial statements for the year ended 31 December 2004. If 2004comparatives had been restated adjustments would be required to record the fairvalues of the financial instruments and the respective movements in the fairvalues during the year.Transitional arrangementsOn transition to IFRS, an entity is generally required to apply IFRSretrospectively, except where an exemption is available under IFRS 1. Thefollowing is a summary of the key elections from IFRS 1 that were made by theGroup: * The Group has elected to apply IFRS 3 `Business Combinations' prospectively from 1 January 2004. The Group carried out an impairment test as at that date and no further impairment of goodwill was required. As a result, the balance of goodwill under UK GAAP as at 31 December 2003 was carried forward as the carrying value of goodwill at 1 January 2004. * The Group has elected to reset the currency translation reserve to zero on transition to IFRS. * The Group has elected to apply IFRS 2 `Share-based payment' to all share option grants made after 7 November 2002, but which had not vested at 1 January 2005. Basis of consolidationThe Group financial statements are the result of the consolidation of thefinancial statements of the Group's subsidiary undertakings from the date ofacquisition or up until the date of disposal as appropriate. Subsidiaries areentities over which the Group has the power to govern the financial andoperating policies and generally accompanies a shareholding of more than onehalf of the voting rights. The Group's interests in joint ventures areaccounted for using proportional consolidation. Under this method the groupincludes its share of each joint venture's income, expenses, assets,liabilities and cash flows on a line by line basis in the consolidatedfinancial statements. All Group companies apply the Groups' accounting policiesand prepare financial statements to 31 December.Functional currencyThe Group's earnings stream is primarily US dollars and the principalfunctional currency is the US dollar, being the most representative currency ofthe Group. The Group's financial statements are therefore prepared in USdollars.Foreign currenciesIncome statements of entities whose functional currency is not the US dollarare translated into US dollars at average rates of exchange for the period andassets and liabilities are translated into US dollars at the rates of exchangeruling at the balance sheet date. Exchange differences arising on translationof net assets in such entities held at the beginning of the year, together withthose differences resulting from the restatement of profits and losses fromaverage to year end rates, are taken to the currency translation reserve. Otherexchange differences are taken directly to the income statement.In each individual entity, transactions in overseas currencies are translatedinto the relevant functional currency at the exchange rates ruling at the dateof the transaction. Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the exchange rates ruling at the balance sheetdate. Any exchange differences are taken to the income statement.Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the exchange rate ruling at the balance sheet date.The directors consider it appropriate to record sterling denominated equityshare capital in the accounts of John Wood Group PLC at the exchange rateruling on the date it was raised.Revenue recognitionRevenue is measured at the fair value of the consideration received orreceivable. Revenue is recognised only when it is probable that the economicbenefits associated with a transaction will flow to the Group and the amount ofrevenue can be measured reliably. Revenue from services is recognised as theservices are rendered, including where they are based on contractual rates perman hour in respect of multi-year service contracts. Incentive performancerevenues are recognised upon completion of agreed objectives. Revenue fromproduct sales is recognised when the significant risks and rewards of ownershiphave been transferred to the buyer, which is normally upon delivery of productsand customer acceptance, if any. Where revenue relates to a multi-elementcontract, then each element of the contract is accounted for separately.Revenues are stated net of sales taxes and discounts.Revenue on lump-sum contracts for services, or construction contracts, isrecognised according to the stage of completion reached in the contract byreference to the value of work done. An estimate of the profit attributable towork completed is recognised once the outcome of the contract can be estimatedreliably. Expected losses are recognised in full as soon as losses areprobable. The net amount of costs incurred to date plus recognised profits lessthe sum of recognised losses and progress billings is disclosed as tradereceivables/trade payables.GoodwillThe Group uses the purchase method of accounting to account for acquisitions.Goodwill represents the excess of the cost of an acquisition over the fairvalue of the net assets acquired. Goodwill is carried at cost less accumulatedimpairment losses.Other intangible assetsIntangible assets are carried at cost less accumulated amortisation. Intangibleassets are recognised if it is probable that there will be future economicbenefits attributable to the asset, the cost of the asset can be measuredreliably, the asset is separately identifiable and there is control over theuse of the asset. Where the Group acquires a business, other intangible assetssuch as customer contracts are identified and evaluated to determine thecarrying value on the acquisition balance sheet. Other intangible assets areamortised on a straight line basis over their estimated useful lives, asfollows:Computer software 3-5 yearsOther intangible assets 1-10 yearsProperty plant and equipmentProperty plant and equipment (PP&E) is stated at cost less accumulateddepreciation and impairment. No depreciation is charged with respect tofreehold land and assets in the course of construction. Transfers from PP&E tocurrent assets are undertaken at the lower of cost and net realisable value.Depreciation is calculated using the straight line method over the followingestimated useful lives of the assets:Freehold and long leasehold buildings 25-50 yearsShort leasehold buildings period of leasePlant and equipment 3-10 yearsWhen estimating the useful life of an asset group, the principal factors theGroup takes into account are the durability of the assets, the intensity atwhich the assets are expected to be used and the expected rate of technologicaldevelopments.ImpairmentThe Group performs impairment reviews in respect of PP&E, goodwill and otherintangible assets whenever events or changes in circumstance indicate that thecarrying amount may not be recoverable. An impairment loss is recognised whenthe recoverable amount of an asset, which is the higher of the asset's fairvalue less costs to sell and its value in use, is less than its carryingamount. Where impairment is identified, it is initially applied to goodwill andthen spread over the remaining assets.For the purposes of impairment testing, goodwill is allocated to theappropriate `CGU' (cash generating unit). The CGUs are aligned to the businessunit and sub-business unit structure the Group uses to manage its business.Cash flows are discounted in determining the value in use.InventoriesInventories, which include materials, work in progress and finished goods andgoods for resale, are stated at the lower of cost and net realisable value.Product based companies determine cost by weighted average cost methods usingstandard costing to gather material, labour and overhead costs. These costs areadjusted, where appropriate, to correlate closely the standard costs to theactual costs incurred based on variance analysis. Service based companies'inventories consist of spare parts and other consumables. Serialised parts arecosted using the specific identification method and other materials aregenerally costed using the first in, first out method.Net realisable value is the estimated selling price in the ordinary course ofbusiness, less the estimated costs of completion and estimated sellingexpenses. Allowance is made for obsolete and slow-moving items, based uponannual usage.Cash and cash equivalentsCash and cash equivalents include cash in hand and other short-term bankdeposits with maturities of three months or less and bank overdrafts. Bankoverdrafts are included within borrowings in current liabilities.Trade receivablesTrade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost using the effective interest method, less provisionfor impairment. A provision for impairment of trade receivables is establishedwhen there is objective evidence that the Group will not be able to collect allamounts due according to the original terms of the receivables. The amount ofthe provision is the difference between the asset's carrying amount and thepresent value of estimated future cash flows, discounted at the effectiveinterest rate. The provision is determined by reference to previous experienceof recoverability for receivables in each market in which the Group operates.TaxationThe tax charge represents the sum of tax currently payable and deferred tax.Tax currently payable is based on the taxable profit for the year. Taxableprofit differs from the profit reported in the income statement due to itemsthat are not taxable or deductible in any period and also due to items that aretaxable or deductible in a different period. The Group's liability for currenttax is calculated using tax rates enacted or substantively enacted at thebalance sheet date.Deferred income tax is provided, using the full liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. The principaltemporary differences arise from depreciation on PP&E, tax losses carriedforward and, in relation to acquisitions, the difference between the fairvalues of the net assets acquired and their tax base. Tax rates enacted, orsubstantially enacted, by the balance sheet date are used to determine deferredincome tax.Deferred tax assets are recognised to the extent that it is probable thatfuture taxable profits will be available against which the temporarydifferences can be utilised.Accounting for derivative financial instruments and hedging activitiesPre 1 January 2005The Group uses derivative financial instruments to hedge its exposures tofluctuations in interest and foreign exchange rates. Instruments accounted foras a hedge are designated as a hedge at the inception of contracts. Receiptsand payments on interest rate instruments are recognised as adjustments tointerest expense over the life of the instrument. Gains and losses on foreigncurrency hedges are recognised on maturity of the underlying transaction.Post 1 January 2005Derivatives are initially recognised at fair value on the date the contract isentered into and are subsequently remeasured at their fair value. The method ofrecognising the resulting gain or loss depends on whether the derivative isdesignated as a hedging instrument, and if so, the nature of the item beinghedged. The Group designates certain derivatives as either: (1) hedges of thefair value of recognised assets or liabilities or a firm commitment (fair valuehedge); (2) hedges of highly probable forecast transactions (cash flow hedges);or (3) hedges of net investments in foreign operations (net investment hedge).Where hedging is to be undertaken, the Group documents at the inception of thetransactions the relationship between the hedging instrument and hedged item,as well as its risk management objective and strategy for undertaking the hedgetransaction. The Group also documents its assessment, both at hedge inceptionand on an ongoing basis, of whether the derivatives that are used in hedgingtransactions are highly effective in offsetting changes in fair values or cashflows of hedged items. The Group performs effectiveness testing on a quarterlybasis. a. Fair value hedgeChanges in the fair value of derivatives that are designated and qualify asfair value hedges are recorded in the income statement, together with anychanges in the fair value of the hedged asset or liability that areattributable to the hedged risk. b. Cash flow hedgeThe effective portion of changes in the fair value of derivatives that aredesignated and qualify as cash flow hedges is recognised in equity. The gain orloss relating to the ineffective portion is recognised immediately in theincome statement.Amounts accumulated in equity are recycled through the income statement inperiods when the hedged item affects profit or loss. However, when the forecasttransaction that is hedged results in the recognition of a non-financial assetor liability, the cost of the asset or liability is adjusted by the gains orlosses previously held in equity.When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing inequity at that time remains in equity and is recognised when the forecasttransaction is ultimately recognised in the income statement. When a forecasttransaction is no longer expected to occur, the cumulative gain or loss thatwas reported in equity is immediately transferred to the income statement. c. Net investment hedgeHedges of net investments in foreign operations are accounted for similarly tocash flow hedges. Any gain or loss on the hedging instrument relating to theeffective portion of the hedge is recognised in equity; the gain or lossrelating to the ineffective portion is recognised immediately in the incomestatement.Gains and losses accumulated in equity are included in the income statementwhen the foreign operation is disposed of. d. Derivatives that do not qualify for hedge accountingCertain derivatives, whilst providing effective economic hedges under theGroup's treasury policy are not designated as hedges. Changes in the fair valueof any derivative instruments that are not designated for hedge accounting arerecognised immediately in the income statement.Fair value estimationThe fair value of financial instruments traded in active markets is based onquoted market prices at the balance sheet date. The fair value of interest rateswaps is calculated as the present value of their estimated future cash flows.The fair value of forward foreign exchange contracts is determined usingforward foreign exchange market rates at the balance sheet date. The carryingvalues of trade receivables and payables approximate to their fair values. Thefair value of financial liabilities is estimated by discounting the futurecontractual cash flows at the current market interest rate that is available tothe Group for similar financial instruments.Operating leasesAs lesseePayments made under operating leases are charged to the income statement on astraight line basis over the period of the lease. Benefits received andreceivable as an incentive to enter into an operating lease are also spread ona straight line basis over the period of lease.As lessorOperating lease rental income arising from leased assets is recognised in theincome statement on a straight line basis over the period of the lease.Finance leasesAs lesseeAssets held under finance leases are capitalised as PP&E and depreciated overthe shorter of the lease term and the asset's useful life. The capital elementof the future lease obligation is recorded as a liability, with the interestelement charged to the income statement over the period of the lease so as toproduce a constant rate of charge on the capital outstanding.As lessorFinance lease rental income arising from leased assets is recognised in theincome statement so as to produce a constant rate of return on the net cashinvestment. Amounts receivable under finance leases represent the outstandingamounts due under these agreements less amounts allocated to future periods.Retirement benefit liabilitiesThe Group operates a defined benefit scheme and a number of definedcontribution schemes and these are accounted for under IAS 19 `EmployeeBenefits'. The liability recognised in respect of the defined benefit schemerepresents the present value of the defined benefit obligations less the fairvalue of the scheme assets. The assets of this scheme are held in separatetrustee administered funds. The defined benefit scheme's assets are measuredusing market values. Pension scheme liabilities are measured annually by anindependent actuary using the projected unit method and discounted at thecurrent rate of return on a high quality corporate bond of equivalent term andcurrency to the liability. The increase in the present value of the liabilitiesof the Group's defined benefit pension scheme expected to arise from employeeservice in the period is charged to operating profit. The expected return onthe scheme assets and the increase during the period in the present value ofthe scheme's liabilities arising from the passage of time are included infinance income/expense. Actuarial gains and losses are recognised in the Groupstatement of recognised income and expense in full in the period in which theyoccur.The defined benefit scheme's surpluses, to the extent that they are consideredrecoverable, or deficits are recognised in full and presented on the face ofthe balance sheet.The Group's contributions to defined contribution schemes are charged to theincome statement in the period to which the contributions relate.ProvisionsProvision is made for the estimated liability on all products and servicesstill under warranty, including claims already received, based on pastexperience. Other provisions are recognised where the Group is deemed to have aconstructive liability. Provisions are not discounted.Share based charges relating to employee share schemesThe Group has a number of employee share schemes:- i. Share options granted under Executive Share Option Schemes (`ESOS') are granted at market value. A charge is booked to the income statement as an employee benefit expense for the fair value of share options expected to be exercised, accrued over the vesting period. The corresponding credit is taken to retained earnings. The fair value is calculated using an option pricing model. ii. Share options granted under the Long Term Retention Plan (`LTRP') are granted at par value. The charge to the income statement for LTRP shares is also calculated using an option pricing model and as with ESOS grants, the fair value of the share options expected to be exercised is accrued over the vesting period. The corresponding credit is also taken to retained earnings. iii. The Group also has a Long Term Incentive Scheme (`LTIS') for directors and key senior executives. Participants are awarded shares dependent on the achievement of certain performance targets. The charge to the income statement for shares expected to be awarded under the LTIS is based on the fair value of those shares at the grant date, spread over the vesting period. The corresponding credit is taken to retained earnings. For those shares that have a market related performance measure, the fair value of the market related element is calculated using a Monte Carlo simulation model. Proceeds received on the exercise of share options are credited to sharecapital and share premium.Share capitalJohn Wood Group PLC has one class of ordinary shares and these are classifiedas equity. Dividends on ordinary shares are not recognised as a liability orcharged to equity until they have been declared.The Group is deemed to have control of the assets, liabilities, income andcosts of its employee share ownership trusts (`ESOP trusts'). They havetherefore been consolidated in the financial statements of the Group. Sharesacquired by and disposed of by the ESOP trusts are recorded at cost. The costof shares held by the ESOP trusts is deducted from shareholders' equity.Segmental reportingThe Group's primary reporting segments are its three operating divisions,namely Engineering & Production Facilities, Well Support and Gas TurbineServices.Engineering & Production Facilities provides a broad range of life-of-fieldengineering, modifications, maintenance and operations services to oil and gascustomers worldwide. Well Support supplies solutions, products and services toincrease production rates and recovery from oil and gas reservoirs. It is amongthe market leaders worldwide in artificial lift using electric submersiblepumps, in the provision of surface wellheads and valves and, in the Gulf ofMexico and in South America, in the provision of electric wireline andslickline services. Gas Turbine Services is a world leading independentprovider of maintenance, repair and overhaul services for industrial gasturbines and related high speed rotating equipment used for compression,transmission and power generation in the oil and gas and power generationindustries.Disclosure of impact of future accounting standardsAmendment to IAS 19 `Employee Benefits'The Group adopted this amendment early, which allows the recognition of definedactuarial gains and losses through the statement of recognised income andexpense. This treatment is similar to that previously adopted by the Groupunder FRS 17.The Group has not yet adopted the following standards which are only effectivefor periods commencing on or after 1 January 2006 or 2007.FRS 7 `Financial Instruments: Disclosures'This standard consolidates IAS 30 and the disclosure requirements of IAS 32relating to financial instruments. We do not anticipate that this standard willhave any material impact on the Group's financial statements.IFRIC 4 `Determining whether an arrangement contains a lease'IFRIC 4 contains guidance on determining whether arrangements that do not takethe legal form of a lease should nonetheless be accounted for in accordancewith IAS 17 `Leases'. We do not anticipate that this will have any materialimpact on the Group's financial statements.1 Segmental reportingPrimary reporting format - business segments Revenues EBITDA(1) EBITA(1) Operating profit Year Year Year Year Year Year Year Year ended ended ended ended ended ended ended ended 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 2005 2004 2005 2004 2005 2004 2005 2004 US$m US$m US$m US$m US$m US$m US$m US$m Engineering & 1,472.3 1,199.6 98.7 83.1 88.2 73.9 86.0 69.7 Production Facilities Well Support (2) 645.7 513.9 76.3 58.4 58.5 41.2 68.0 38.3 Gas Turbine Services 607.8 537.9 47.8 38.4 32.7 23.5 24.9 (0.6) Central costs (5) - - (28.8) (20.1) (29.5) (19.8) (29.8) (20.1) Total excluding 2,725.8 2.251.4 194.0 159.8 149.9 118.8 149.1 87.3 discontinuing operations Gas Turbine Services - 36.1 36.7 (0.1) (0.7) (0.8) (1.4) (1.1) (1.7)discontinuing operations (3) 2,761.9 2,288.1 193.9 159.1 149.1 117.4 148.0 85.6 Finance income 2.5 1.8 Finance expense (25.8) (21.2) Profit before taxation 124.7 66.2 Taxation (41.1) (26.8) Profit for the year 83.6 39.4 Notes 1 EBITDA represents operating profit of US$148.0m (2004 : US$85.6m) before profit on disposal of subsidiaries of US$9.7m (2004 : US$nil), impairment and restructuring charges of US$6.0m (2004 : US$26.2m), depreciation of US$44.8m (2004 : US$41.7m) and amortisation of US$4.8m (2004 : US$5.6m). EBITA represents EBITDA less depreciation. EBITA and EBITDA are provided as they are units of measurement used by the Group in the management of its business. 2 Well Support's results include revenues of US$37.5m (2004 : US$22.0m) and operating profit of US$5.0m (2004 : US$1.0m) earned by the Production Technology business prior to its disposal in December 2005. 3 The discontinuing operations relate to an Aero engine overhaul company which the Group has decided to divest. 4 Revenues arising from sales between segments are not material. 5 Central costs includes the costs of certain management personnel in both the UK and the US, along with an element of Group infrastructure costs.Segment assets and liabilities Engineering Well Gas Discontinuing Unallocated Total & Support Turbine Operations Production Services At 31 December 2005 Facilities US$m US$m US$m US$m US$m US$m Segment assets 568.2 432.2 518.7 34.7 159.0 1,712.8 Segment liabilities 264.5 132.8 145.2 7.8 461.6 1,011.9 At 31 December 2004 Segment assets 568.7 371.9 501.1 35.1 79.2 1,556.0 Segment liabilities 244.0 118.4 148.1 9.8 493.8 1,014.1Segment assets and liabilities are presented before the elimination ofinter-segment trading balances. Unallocated assets and liabilities includesincome tax, deferred tax and cash and borrowings where this relates to thefinancing of the Group's operations.Other segment itemsAs at 31 December Engineering Well Gas Discontinuing Unallocated Total2005 & Support Turbine Operations Production Services Facilities US$m US$m US$m US$m US$m US$m Capital expenditure - Property plant & 10.2 28.1 15.2 2.5 0.5 56.5equipment - Intangible assets 3.9 0.1 5.2 - - 9.2 Depreciation 10.5 17.8 15.1 0.7 0.7 44.8 Amortisation of 2.2 0.2 1.8 0.3 0.3 4.8other intangible assets Impairment - - - 1.7 - - 1.7property plant and equipment Impairment of trade 1.5 0.7 1.4 - - 3.6receivables As at 31 December 2004 US$m US$m US$m US$m US$m US$m Capital expenditure - Property plant and 7.5 29.4 18.9 2.4 - 58.2equipment - Intangible assets 8.1 - 2.0 - 0.7 10.8 Depreciation 9.2 17.2 14.9 0.7 (0.3) 41.7 Amortisation of other 4.2 0.1 0.7 0.3 0.3 5.6intangible assets Impairment - property - 0.3 6.4 - - 6.7plant and equipment - - 0.4 - - 0.4- goodwill Impairment of trade (0.8) 1.4 - - - 0.6receivables Secondary format - geographical segments Revenues Segment assets Capital expenditure 2005 2004 2005 2004 2005 2004 US$m US$m US$m US$m US$m US$m Europe 885.4 726.6 391.7 359.5 16.1 11.8 North America 1,103.9 976.9 878.1 822.0 29.2 30.8 Rest of the World 772.6 584.6 443.0 374.5 20.4 26.4 2,761.9 2,288.1 1,712.8 1,556.0 65.7 69.0 2005 2004 US$m US$m Revenues by category are as follows: Sale of goods 485.0 372.7 Rendering of services 2,276.9 1,915.4 2,761.9 2,288.12 Finance income/expense 2005 2004 US$m US$m Interest payable on bank borrowings 25.7 20.9 Other interest payable (note 30) 0.1 0.3 Finance expense 25.8 21.2 Finance income - interest receivable on short term deposits 2.5 1.8 Finance expense - net 23.3 19.43 Profit before taxation 2005 2004 US$m US$m The following items have been included in arriving at operating profit: Employee benefits expense (note 29) 966.3 829.1 Cost of inventory recognised as an expense (included in cost 208.4 206.6 of sales) Impairment of inventory 7.6 9.7 Depreciation of property plant and equipment 44.8 41.7 Amortisation of other intangible assets 4.8 5.6 Loss on disposal of property plant and equipment 0.5 0.9 Other operating lease rentals payable: - Plant and machinery 11.0 10.1 - Property 29.6 27.7 Net exchange gain/(loss) on foreign currency borrowings less 5.5 (7.9)deposits The gain on the fair value of unhedged derivative financial instrumentscredited to the income statement during the year was US$0.9m.Services provided by the Group's auditor and network firmsDuring the year the Group obtained the following services from its auditor atcosts as detailed below: 2005 2004 US$m US$m Audit services - UK audit 1.4 1.1 - Overseas audit 0.5 0.4 Tax services 0.2 0.2 Other services 0.1 0.1 2.2 1.84 Profit on disposal of subsidiaries 2005 2004 US$m US$m Profit on disposal of subsidiaries 9.7 - In December 2005, the Group disposed of its Production Technology businesswhich was part of the Well Support division. Further details are provided innote 28.5 Impairment and restructuring charges 2005 2004 US$m US$m Impairment and restructuring charges 6.0 26.2 The 2005 impairment and restructuring charge of US$6.0m was in respect ofrationalisation of businesses and facilities, severance costs and impairment ofproperty plant and equipment in the Gas Turbine Services division. In 2004, animpairment and restructuring charge of US$23.4m was booked in relation to theGas Turbine Services division and a charge of US$2.8m was booked in the WellSupport division in respect of severance costs and impairment of property plantand equipment.6 Taxation 2005 2004 US$m US$m Current tax - Current year 46.5 29.8 - Adjustment in respect of prior years (5.1) (0.7) 41.4 29.1 Deferred tax - Current year 0.1 0.9 - Adjustment in respect of prior years (0.4) (3.2) (0.3) (2.3) Total tax charge 41.1 26.8 Tax on items charged to equity 2005 2004 US$m US$m Deferred tax on retirement benefit liabilities 0.7 1.4 Tax is calculated at the rates prevailing in the respective jurisdictions inwhich the Group operates. The tax for the year is lower (2004 : higher) thanthe rate of corporate tax expected due to the following factors: 2005 2004 US$m US$m Profit before taxation 124.7 66.2 Profit before tax at expected rate of 34.2% (2004: 33.6%) 42.6 22.2 Effects of: Adjustments in respect of prior years (5.5) (3.9) Non-recognition of losses and other attributes 5.4 3.5 Other permanent differences (1.4) 5.0 Total tax charge 41.1 26.8 7 Dividends 2005 2004 US$m US$m Dividends on equity shares Final dividend paid - year ended 31 December 2004 : 2.4 cents 11.1 10.4(2004: 2.2 cents) per share Interim dividend paid - year ended 31 December 2005 : 1.3 6.4 5.5cents (2004: 1.2 cents) per share 17.5 15.9In addition, the directors are proposing a final dividend in respect of thefinancial year ended 31 December 2005 of 2.7 cents per share which will absorban estimated US$13.3m of shareholders' funds. The final dividend will be paidon 25 May 2006 to shareholders who are on the register of members on 5 May2006.8 Earnings per share 2005 2004 Earnings Number of Earnings Earnings Number of Earnings attributable shares per attributable shares per to equity (millions) share to equity share shareholders (cents)shareholders (millions) (cents) US$m US$m Basic 80.5 473.4 17.0 37.3 466.2 8.0 Effect of dilutive 17.8 10.4 ordinary shares Diluted 80.5 491.2 16.4 37.3 476.6 7.8 Amortisation 4.8 5.6 Profit on disposal of (7.9) - subsidiaries, net of tax Impairment and 4.2 18.5 restructuring charges, net of tax Adjusted diluted 81.6 491.2 16.6 61.4 476.6 12.9 Adjusted basic 81.6 473.4 17.2 61.4 466.2 13.2The calculation of basic earnings per share for the year ended 31 December 2005is based on the earnings attributable to equity shareholders divided by theweighted average number of ordinary shares in issue during the year excludingshares held by the Group's employee share ownership trusts. Adjusted EPS isdisclosed to show the results excluding the impact of amortisation, impairmentand restructuring charges, net of tax and profit on disposal of subsidiaries,net of tax. For the calculation of diluted EPS, the weighted average number ofordinary shares in issue is adjusted to assume conversion of all potentiallydilutive ordinary shares. The Group has two types of dilutive ordinary shares -share options granted to employees under Executive Share Option Schemes and theLong Term Retention Plan; and shares issuable under the Group's Long TermIncentive Scheme.9 Goodwill and other intangible assets Computer Other Total Goodwill software US$m US$m S$m US$m Cost At 1 January 2005 297.5 16.9 13.8 328.2 Exchange differences (3.7) (1.5) (0.5) (5.7) Additions - 6.7 2.5 9.2 Acquisitions 18.7 - 0.9 19.6 At 31 December 2005 312.5 22.1 16.7 351.3 Aggregate amortisation and impairment At 1 January 2005 0.4 10.6 8.3 19.3 Exchange differences - (1.0) (0.4) (1.4) Charge for the year - 3.5 1.3 4.8 At 31 December 2005 0.4 13.1 9.2 22.7 Net book value at 31 December 2005 312.1 9.0 7.5 328.6 Cost At 1 January 2004 236.0 10.5 9.1 255.6 Exchange differences 1.8 0.3 0.5 2.6 Additions - 6.6 4.2 10.8 Acquisitions 59.7 - - 59.7 Disposals - (0.5) - (0.5) At 31 December 2004 297.5 16.9 13.8 328.2 Aggregate amortisation and impairment At 1 January 2004 - 8.4 4.3 12.7 Exchange differences - 0.5 0.4 0.9 Charge for the year - 2.0 3.6 5.6 Impairment 0.4 - - 0.4 Disposals - (0.3) - (0.3) At 31 December 2004 0.4 10.6 8.3 19.3 Net book value at 31 December 2004 297.1 6.3 5.5 308.9 In accordance with IAS 36 `Impairment of assets', goodwill was tested forimpairment during the year. The impairment tests were carried out on a CashGenerating Unit (`CGU') basis using the budgeted cash flows for 2006/7. Cashflows for 2008-10 are assumed to grow at a rate of 5% per annum. Subsequentcash flows have been assumed to grow in line with the historic growth in globalGDP. The cash flows have been discounted using a pre-tax discount rate of 10%.No impairment of goodwill is required in 2005. An impairment charge of US$0.4mwas booked in 2004 in relation to the restructuring carried out in the GasTurbine Services division. Impairment is included in the `impairment andrestructuring charges' line in the income statement.The carrying amounts of goodwill by division are: Engineering & ProductionFacilities US$191.9m (2004 : US$181.5m), Gas Turbine Services US$86.7m (2004 :US$88.3m) and Well Support US$33.5m (2004 : US$27.3m).Other includes development costs, licences and customer contracts. Developmentcosts with a net book value of US$3.1m (2004 : US$1.2m) are internallygenerated intangible assets.10 Property plant and equipment Land and Land and Plant and Total buildings - buildings equipment Long - Short leasehold leasehold and freehold US$m US$m US$m US$m Cost At 1 January 2005 49.8 15.9 350.7 416.4 Exchange differences (0.7) (0.6) (9.1) (10.4) Additions 4.6 1.0 50.9 56.5 Acquisitions 1.7 - 1.8 3.5 Disposals (3.3) (0.4) (13.2) (16.9) Company sold - - (2.1) (2.1) Reclassification as current - - (6.8) (6.8)assets At 31 December 2005 52.1 15.9 372.2 440.2 Accumulated depreciation and impairment At 1 January 2005 16.8 7.9 175.5 200.2 Exchange differences (0.8) (0.2) (5.5) (6.5) Charge for the year 3.1 1.1 40.6 44.8 Acquisitions 0.2 - 0.4 0.6 Impairment - 0.3 1.4 1.7 Disposals (0.7) (0.4) (10.1) (11.2) Company sold - - (1.1) (1.1) Reclassification as current assets - - (7.8) (7.8) At 31 December 2005 18.6 8.7 193.4 220.7 Net book value at 31 December 2005 33.5 7.2 178.8 219.5 Cost At 1 January 2004 47.8 29.8 308.0 385.6 Exchange differences 0.6 0.8 6.4 7.8 Additions 2.0 0.2 56.0 58.2 Acquisitions - - 1.0 1.0 Disposals (0.6) (14.9) (8.7) (24.2) Reclassification as current assets - - (12.0) (12.0) At 31 December 2004 49.8 15.9 350.7 416.4 Accumulated depreciation and impairment At 1 January 2004 14.9 8.6 136.6 160.1 Exchange differences 0.7 0.2 2.9 3.8 Charge for the year 1.2 1.4 39.1 41.7 Impairment 0.3 0.5 5.9 6.7 Disposals (0.3) (2.8) (7.5) (10.6) Reclassification as current assets - - (1.5) (1.5) At 31 December 2004 16.8 7.9 175.5 200.2 Net book value at 31 December 2004 33.0 8.0 175.2 216.2 Plant and equipment includes assets held for lease to customers under operatingleases of US$33.0m (2004: US$26.1m). Additions during the year amounted toUS$12.0m (2004 : US$15.9m) and depreciation totalled US$7.0m (2004 : US$7.3m).The gross cost of these assets at 31 December 2005 is US$41.9m (2004 :US$34.0m) and aggregate depreciation is US$9.0m (2004 : US$7.9m).In accordance with IFRS 1, `First time adoption of International FinancialReporting Standards', and IAS 17, `Leases', the Group has reviewed theclassification of all leases on transition to IFRS. The Group did not have anyoperating leases that required to be reclassified as finance leases at thetransition date.Impairment is included in the `impairment and restructuring' line in the incomestatement (see note 5).Property plant and equipment includes assets in the course of construction ofUS$10.8m (2004 : US$10.9m).11 Joint venturesIn relation to the Group's interests in joint ventures, its share of assets,liabilities, income and expenses is shown below. 2005 2004 US$m US$m Non-current assets 56.2 73.3 Current assets 200.2 223.0 Non-current liabilities (15.6) (15.0) Current liabilities (150.4) (176.8) Net assets 90.4 104.5 Income 315.8 285.6 Expenses (286.9) (261.2) Profit before tax 28.9 24.4 Tax (7.6) (7.6) Share of post tax results from joint ventures 21.3 16.8 The joint ventures have no significant contingent liabilities to which theGroup is exposed, nor has the Group any significant contingent liabilities inrelation to its interest in the joint ventures other than the bank guaranteesdescribed in note 32.12 Inventories 2005 2004 US$m US$m Materials 76.3 72.7 Work in progress 58.9 71.1 Finished goods and goods for resale 227.7 186.1 362.9 329.913 Trade and other receivables 2005 2004 US$m US$m Trade receivables 514.7 511.9 Less: provision for impairment (11.4) (8.6) Trade receivables - net 503.3 503.3 Amounts recoverable on contracts 11.2 2.6 Amounts receivable under finance leases 9.9 9.3 Prepayments and accrued income 36.7 35.9 Other receivables 49.6 28.2 610.7 579.3 Total amounts receivable under finance leases, including amounts allocated tofuture periods of US$3.9m (2004 : US$8.2m) is US$21.3m (2004 : US$38.8m).Rentals receivable during the year under finance leases amounted to US$13.6m(2004 : US$14.7m). Amounts receivable under finance leases of US$11.4m (2004 :US$21.3m) are included in long term receivables.14 Cash and cash equivalents 2005 2004 US$m US$m Cash at bank and in hand 75.7 42.9 Short-term bank deposits 74.2 28.5 149.9 71.4The effective interest rate on short-term deposits was 4.3% (2004 : 3.2%) andthese deposits have an average maturity of 32 days (2004 : 91 days).15 Trade and other payables 2005 2004 US$m US$m Trade payables 192.8 195.2 Other tax and social security payable 27.9 20.1 Accruals and deferred income 277.1 255.0 Deferred consideration 3.9 6.6 Other payables 25.0 19.8 526.7 496.716 Financial liabilities - borrowings 2005 2004 US$m US$m Bank loans and overdrafts due within one year or on demand Unsecured 47.9 70.7 Non-current bank loans Unsecured 347.8 355.0 Bank loans are denominated in a number of currencies and bear interest based onLIBOR or foreign equivalents appropriate to the country in which the borrowingis incurred.The effective interest rates on the Group's borrowings at the balance sheetdate were as follows: 2005 2004 % % US Dollar 4.76 2.87 Sterling 5.17 5.55 Euro 2.75 2.80 Australian Dollar 6.03 5.98 Canadian Dollar 4.02 3.37The carrying amounts of the Group's borrowings are denominated in the followingcurrencies: 2005 2004 US$m US$m US Dollar 246.2 289.3 Sterling 61.3 39.5 Euro 17.1 19.1 Australian Dollar 7.3 10.1 Canadian Dollar 48.8 54.1 Other 15.0 13.6 395.7 425.717 Other non-current liabilities 2005 2004 US$m US$m Deferred consideration 13.2 16.4 Other payables 5.5 5.3 18.7 21.7Deferred consideration represents amounts payable on acquisitions made by theGroup and is expected to be paid over the next four years.18 Financial instrumentsThe main risks arising from the Group's financial instruments are interest raterisk, liquidity risk, foreign currency risk and credit risk. The Board reviewsand agrees policies for managing each of these risks and these are summarisedbelow.Interest rate riskThe Group finances its operations through a mixture of retained profits andbank borrowings. The Group borrows in the desired currencies at floating ratesof interest and then uses interest rate swaps as cash flow hedges to generatethe desired interest profile and to manage the Group's exposure to interestrate fluctuations. The Group's long-term policy is to maintain approximately50% of its borrowings at fixed rates of interest. At 31 December 2005,approximately 45% (2004 : 31%) of the Group's borrowings were at fixed ratesafter taking account of interest rate swaps.Liquidity riskAs regards liquidity, the Group's policy has throughout the year been that, toensure continuity of funding, at least 90% of the Group borrowing facilities(excluding joint ventures) should mature in more than one year. At 31 December2005, 96% (2004 : 95%) of the Group borrowing facilities were due to mature inmore than one year.Foreign currency riskThe Group is exposed to foreign exchange risk arising from various currencies.The Group also has significant overseas subsidiaries whose revenues andexpenses are denominated in other currencies. In order to protect the Group'sbalance sheet from movements in exchange rates, the Group finances its netinvestment in non US dollar subsidiaries primarily by means of borrowingsdenominated in the appropriate currency.Some of the sales of the Group's businesses are to customers in overseaslocations. Where possible, the Group's policy is to eliminate all significantcurrency exposures on sales at the time of the transaction through forwardcurrency contracts. The Group does not tend to hedge account for these forwardcontracts and thus changes in the forward contract fair values are bookedthrough the income statement.The Group carefully monitors the economic and political situation in thecountries in which it operates to ensure appropriate action is taken tominimise any foreign currency exposure.Credit riskThe Group's credit risk primarily relates to its trade receivables. The Group'smajor customers are typically large companies which have strong credit ratingsassigned by international credit rating agencies. The Group has a broadcustomer base and management believe that no further credit risk provision isrequired in excess of the provision for impairment of receivables.Price riskThe Group is not exposed to any significant price risk in relation to itsfinancial instruments.Numerical financial instrument disclosures are set outbelow.The book value and net fair value of the Group's derivative financialinstruments at the balance sheet date were as follows: 2005 2004 US$m US$m Contracts with positive fair values: Interest rate swaps 1.5 - Forward foreign currency contracts 1.5 0.2 3.0 0.2 Contracts with negative fair values: Interest rate swaps (0.1) (2.9) Forward foreign currency contracts (0.5) (0.1) Currency options - (0.9) (0.6) (3.9)The comparative figures at 31 December 2004 are fair values only as the Groupdid not adopt IAS 39 until 1 January 2005, as permitted by IFRS 1. US$1.3m ofthe interest rate swap asset is disclosed in non-current assets.Interest rate swapsThe notional principal amount of the Group's outstanding interest rate swapcontracts at 31 December 2005 was US$180.0m (2004 : US$130.0m).At 31 December 2005 the fixed interest rates varied from 2.7% to 5.0% (2004 :2.7% to 5.0%) and the floating rate was 5.0% including margin (2004 : 3.3%).The Group interest rate swaps are for periods of 5 years and they expirebetween 2006 and 2010 with the exception of one US$25m swap which is a 10 yearswap expiring in 2012. The bank has a break option on this swap after fiveyears.The fair value gains relating to the interest rate swaps and which are deferredin equity at 31 December will reverse in the income statement over the term ofthe swaps.Net investment in foreign entitiesThe Group has foreign currency borrowings which it has designated as a hedge ofsubsidiary company net assets. The fair value of the borrowings at 31 December2005 was US$78.3m. The foreign exchange gain of US$2.1m on translation of theborrowings into US dollars has been recognised in the currency translationreserve (note 25). The Group has also entered into forward contracts to hedgesubsidiary company net assets. The nominal value of these contracts at 31December 2005 was US$42.9m. The fair value movement of US$1.2m isalso recognised in the currency translation reserve.Fair value of non-derivative financial assets and financial liabilitiesWhere market values are not available, fair values of non-derivative financialassets and financial liabilities have been calculated by discounting expectedfuture cash flows at prevailing interest rates and by applying year endexchange rates.The fair value of short-term borrowings, trade and other payables, trade andother receivables, short-term deposits and cash at bank and in handapproximates to the carrying amount because of the short maturity of interestrates in respect of these instruments. Long-term borrowings are generallyrolled over for periods of three months or less.Fair value of long-term borrowings 2005 2004 Book value Fair value Book value Fair value US$m US$m US$m US$m Long-term borrowings (note 16) (347.8) (347.8) (355.0) (355.0) Fair value of other financial assets and financial liabilities Primary financial instruments held or issued to finance the Group's operations: Trade and other receivables (note 610.7 610.7 579.3 579.3 13) Cash at bank and in hand (note 14) 75.7 75.7 42.9 42.9 Short-term deposits (note 14) 74.2 74.2 28.5 28.5 Trade and other payables (note 15) (526.7) (526.7) (496.7) (496.7) Short-term borrowings (note 16) (47.9) (47.9) (70.7) (70.7) Other non-current liabilities (note (18.7) (18.7) (21.7) (21.7)17) Maturity of financial liabilitiesThe maturity profile of the carrying amount of the Group's non-currentliabilities at 31 December was as follows: Borrowings Other 2005 Borrowings Other 2004 Total Total US$m US$m US$m US$m US$m US$m In more than one year but not more than two 1.6 13.9 15.5 10.7 11.7 22.4years In more than two years but not more 346.2 4.8 351.0 344.3 10.0 354.3than five years 347.8 18.7 366.5 355.0 21.7 376.7Borrowing facilitiesThe Group has the following undrawn committed borrowing facilities available at31 December in respect of which all conditions precedent had been met at thatdate: 2005 2004 US$m US$m Expiring within one year 8.3 20.9 Expiring in more than two years but not more than five 421.1 215.7years 429.4 236.6All undrawn borrowing facilities are floating rate facilities. The facilitiesexpiring within one year are annual facilities subject to review at variousdates during 2006. The other facilities have been arranged to help finance theGroup's activities. All these facilities incur commitment fees at market rates.19 Provisions Warranty Other Total provisions US$m US$m US$m At 1 January 2005 11.0 4.7 15.7 Exchange differences (0.3) (0.1) (0.4) Charge to income statement 6.9 0.4 7.3 Payments during the year (5.9) (1.6) (7.5) Acquisitions - 0.2 0.2 Company sold (0.2) - (0.2) At 31 December 2005 11.5 3.6 15.1 Warranty provisionsThese provisions are recognised in respect of guarantees provided in the normalcourse of business relating to contract performance. They are based on previousclaims history and it is expected that most of these costs will be incurredover the next two years.Other provisionsAt 31 December 2005, other provisions of US$3.6m (2004 : US$4.7m) have been recognised.The provisions consist of various claims made against the Group, the largest of which relates to overseas indirect taxes. It is expected that costs in relation to these provisions will be incurred over the next two years.20 Deferred taxDeferred tax is calculated in full on temporary differences under the liabilitymethod using the tax rate applicable to the territory in which the asset orliability has arisen.The movement on the deferred tax account is shown below: 2005 2004 US$m US$m At 1 January (12.3) (7.6) Exchange differences 1.0 (1.2) Acquisitions - 0.2 Credit to income statement (0.3) (2.3) Deferred tax relating to retirement benefit liabilities (0.7) (1.4) At 31 December (12.3) (12.3) The deferred tax account is presented in the financial statements as follows: Deferred tax assets (19.3) (20.9) Deferred tax liabilities 7.0 8.6 (12.3) (12.3)No deferred tax is recognised on the unremitted earnings of overseassubsidiaries and joint ventures. As these earnings are continually reinvestedby the Group, no tax is expected to be payable on them in the foreseeablefuture. If the earnings were remitted, tax of US$17.3m (2004 : US$12.2m) wouldbe payable.The Group has unrecognised tax losses of US$39.3m (2004 : US$29.1m) to carryforward against future taxable income.The movement in deferred tax during the year is shown below. Deferred taxassets and liabilities are only offset where there is a legally enforceableright of offset and there is an intention to settle the balances net.Deferred tax (asset)/liability Accelerated Other Total tax depreciation US$m US$m US$m At 1 January 2005 10.4 (22.7) (12.3) Exchange differences - 1.0 1.0 Charge/(credit) to income statement 4.4 (4.7) (0.3) Deferred tax relating to retirement benefit - (0.7) (0.7)liabilities At 31 December 2005 14.8 (27.1) (12.3)21 Share based chargesThe Group currently has three types of share based payment schemes, namelyExecutive Share Option Schemes (`ESOS'), Long Term Retention Plans (`LTRP') andthe Long Term Incentive Scheme (`LTIS'). Details of each of the schemes aregiven in the Directors' Remuneration Report and in note 22.The charge in the Group income statement for these schemes is US$7.9M (2004 :US$2.9M)The assumptions made in arriving at the charge for each scheme are given below:ESOS and LTRPThere are currently 432 employees participating in these schemes. For thepurposes of calculating the fair value of the options a Black-Scholes optionpricing model has been used. Based on past experience, it has been assumed thatoptions will be exercised, on average, six months after the earliest exercisedate, which is four years after grant date, and there will be a lapse rate of20%-25%. The share price volatility used of 35%-40% is based on the actualvolatility of the Group's shares since IPO as well as that of comparablecompanies. The risk free rate of return of 4%-5% is based on the implied yieldavailable on zero coupon gilts with a term remaining equal to the expectedlifetime of the options at the date of grant. A dividend yield of 1.4% is usedin the calculation.The fair value of options granted under the ESOS during the year was ‚£0.45(2004 : ‚£0.46). The fair value of options granted under the LTRP during theyear ranged from ‚£1.37 to ‚£1.72 (2004 : ‚£1.33). The weighted average remainingcontractual life of share options at 31 December 2005 is 6.7 years.LTISThe actual performance for 2005 on the two non-market related performancetargets has been assumed to continue for the remainder of the three year cycleand the share based charge is calculated using a fair value of ‚£1.40. Thecharge for the market related performance target has been calculated using aMonte Carlo simulation model using similar assumptions to the ESOS and LTRPcalculations.22 Share capital 2005 2004Authorised US$m US$m 720,000,000 (2004: 720,000,000) ordinary shares 34.9 34.9of 3¢â€¦â€œ pence 2005 2004 shares US$m shares US$m Issued and fully paid Ordinary shares of 3¢â€¦â€œ pence each At 1 January 483,531,380 23.5 482,648,960 23.4 Issue of new shares 24,356,550 1.5 882,420 0.1 Allocation of shares to employee 7,350,000 0.4 - -share trusts At 31 December 515,237,930 25.4 483,531,380 23.5On 13 September 2005, the Group issued 24,176,550 new shares, representing 5%of the issued share capital, at a share price of ‚£2.10. The proceeds afterdeduction of expenses amounted to US$90.8m. The share placing was carried outin order to increase the Group's flexibility to pursue its growth strategy.During the year 180,000 ordinary shares of 3¢â€¦â€œ pence were issued at pricesvarying from 17¢â€¦â€œ pence per share to 18¢â€¦â€œ pence per share, on the exercise ofoptions granted under the John Wood Group PLC 1994 Approved Executive ShareOption Scheme and the John Wood Group 1996 Unapproved Executive Share OptionScheme.Executive Share Option SchemesThe following options to subscribe for new or existing shares were outstandingat 31 December:Year of Grant Number of ordinary Exercise shares under option price 2005 2004 (per Exercise share) period 1998 121,290 121,290 15¢â€¦â€p 2003-2008 2000 1,965,864 7,050,000 17¢â€¦â€œp 2005-2010 2000 90,000 210,000 18¢â€¦â€œp 2005-2010 2001 1,335,000 1,305,000 93¢â€¦â€œp 2006-2011 2001 5,164,500 5,440,500 83¢â€¦â€œp 2006-2011 2002 1,726,500 1,801,500 83¢â€¦â€œp 2007-2012 2003 500,000 500,000 161‚¼p 2007-2013 2003 3,635,001 3,802,069 158p 2007-2013 2004 6,901,328 7,341,981 128‚½p 2008-2014 2004 60,000 60,000 143‚½p 2008-2014 2005 1,985,000 - 145p 2009-2015 23,484,483 27,632,340 Details of the Group's Executive Share Option Schemes are set out in theDirectors' Remuneration Report. Share options are granted at an exercise priceequal to the average mid-market price of the shares on the three days prior tothe date of grant.2,177,154 options (2004 : 121,290) were exercisable at 31 December 2005.2,015,000 options were granted during the year, 5,328,616 options wereexercised during the year and 834,241 options lapsed during the year. Theweighted average share price during the period for options exercised over theyear was ‚£1.82 (2004 : ‚£1.33).There are no performance criteria attached to the exercise of the optionsgranted prior to 2003. Options granted to directors under the share optionscheme adopted during 2002, and implemented in 2003, are subject to performancecriteria as set out in the Directors' Remuneration Report. There are noperformance criteria under this scheme for options granted to employees.Long Term Retention PlanThe following options granted under the Group's LTRP were outstanding at 31December:Year of Grant Number of ordinary Exercise shares under option price 2005 2004 (per Exercise share) period 2003 1,793,489 1,855,802 3¢â€¦â€œp 2007-2008 2004 120,000 120,000 3¢â€¦â€œp 2008-2009 2005 138,003 - 3¢â€¦â€œp 2009-2010 2,051,492 1,975,802 Options are granted under the Group's LTRP at par value (3¢â€¦â€œ pence per share).There are no performance criteria attached to the exercise of options under theLTRP. However, no LTRP options are granted unless the Group achieves a minimumlevel of EPS growth of RPI plus 3%. The level of grant varies between RPI plus3% and the maximum grant of RPI plus 10%. 138,003 LTRP options were grantedduring the year, 2,885 LTRP options were exercised during the year and 59,428LTRP options lapsed during the year.Long Term Incentive SchemeThe Group introduced a Long Term Incentive Scheme (`LTIS') during the year.Under this Scheme, the executive directors (but not the Chairman) and other keysenior executives are awarded shares dependent upon the achievement ofperformance targets established by the Remuneration Committee. The performancemeasures for the first cycle are operating profit, return on capital employedand growth in the company's share price. The awards are in the form ofrestricted shares and are deferred for two years from the award date. On theassumption that 2005 actual performance levels are repeated in each of the nexttwo years, 6,378,346 shares are potentially issuable under the scheme. Furtherdetails of the LTIS are provided in the Directors' Remuneration Report.John Wood Group PLC is a public limited company, incorporated and domiciled inScotland.23 Share premium 2005 2004 US$m US$m At 1 January 200.9 200.8 Arising on issue of new shares, net of expenses 89.3 0.1 Allocation of shares to employee share trusts 1.9 - At 31 December 292.1 200.9Expenses of share issue amounted to US$1.4m (2004 : nil).24 Retained earnings 2005 2004 US$m US$m At 1 January - before adoption of IAS 32 and IAS 39 215.7 219.6 Adoption of IAS 32 and IAS 39 (0.9) - At 1 January 214.8 219.6 Profit for the year attributable to equity shareholders 80.5 37.3 Dividends paid (17.5) (15.9) Credit relating to share based charges 7.9 2.9 Actuarial losses on retirement benefit liabilities (2.5) (4.8) Movement in deferred tax relating to retirement benefit 0.7 1.4 liabilities Shares acquired by ESOP trusts - (22.5) Shares allocated to ESOP trusts (2.3) - Shares disposed of by ESOP trusts 1.7 0.2 Exchange differences in respect of shares held by ESOP trusts 4.8 (2.5) At 31 December 288.1 215.7 Retained earnings are stated after deducting the investment in own shares heldby employee share trusts. Investment in own shares represents the cost of22,031,380 (2004 : 19,892,881) of the company's ordinary shares totallingUS$40.4m (2004 : US$44.6m). Options have been granted over 121,290 shares heldby the ESOP trusts.Shares acquired by the trusts are purchased in the open market using fundsprovided by John Wood Group PLC to meet obligations under the Employee ShareOption Schemes and the LTRP. During 2005, 7,350,000 shares at a value ofUS$2.3m were allocated to the trust in order to satisfy the exercise of shareoptions. 5,211,501 shares were issued during the year to satisfy the exerciseof share options at a value of US$1.7m. Exchange adjustments of US$4.8m aroseduring the year relating to the retranslation of the investment in own sharesfrom sterling to US dollars. The costs of funding and administering the schemesare charged to the income statement in the period to which they relate. Themarket value of the shares at 31 December 2005 was US$77.2m (2004 : US$51.2m)based on the closing share price of ‚£2.04 (2004 : ‚£1.34). The ESOP trusts havewaived their rights to receipt of dividends.25 Other reserves Capital Currency Hedging Total reduction translation reserve reserve reserve US$m US$m US$m US$m At 1 January 2004 88.1 - - 88.1 Exchange differences on retranslation - 1.7 - 1.7 of foreign currency net assets At 31 December 2004 88.1 1.7 - 89.8 Adoption of IAS 32 and IAS 39 - - (2.4) (2.4) At 1 January 2005 88.1 1.7 (2.4) 87.4 Exchange differences on retranslation - (15.5) - (15.5)of foreign currency net assets Fair value gains - - 3.8 3.8 At 31 December 2005 88.1 (13.8) 1.4 75.7 The capital reduction reserve was created on the conversion of convertibleredeemable preference shares immediately prior to the IPO in June 2002. Thecapital redemption reserve was converted to a capital reduction reserve inDecember 2002 and is part of distributable reserves.The currency translation reserve relates to the retranslation of foreigncurrency net assets on consolidation. This was reset to zero on transition toIFRS at 1 January 2004.The hedging reserve relates to the accounting for derivative financialinstruments under IAS 39. Fair value gains and losses in respective ofeffective cash flow hedges are recognised in the hedging reserve.The adoption of IAS 32 and IAS 39 at 1 January 2005 resulted in the recognitionof financial assets of US$0.2m, financial liabilities of US$3.9m and areduction in accruals and deferred income of US$0.4m at that date. A reductionin retained earnings of US$0.9m and a reduction in the hedging reserve ofUS$2.4m was also recorded. The movement in the fair value of financial assetsand financial liabilities during the year resulted in a credit of US$0.9m tothe income statement and a credit of US$3.8m to the hedging reserve.26 Minority interest 2005 2004 US$m US$m At 1 January 12.0 18.7 Acquisition of minority interest - (9.3) Share of profit for the year 3.1 2.1 Dividends paid (1.3) - Minority interest recognised on conversion of joint venture to 5.8 0.5 subsidiary At 31 December 19.6 12.0 27 Cash generated from operations 2005 2004 US$m US$m Reconciliation of operating profit to cash generated from operations: Operating profit 148.0 85.6 Adjustments for: Depreciation 44.8 41.7 Loss on disposal of property plant and equipment 0.5 0.9 Amortisation of other intangible assets 4.8 5.6 Share based charges 7.9 2.9 Impairment and restructuring charges - non-cash 5.3 12.5 impact Profit on disposal of subsidiaries (9.7) - Changes in working capital (excluding effect of acquisition and disposal of subsidiaries) Increase in inventories (44.1) (74.5) Increase in receivables (35.5) (90.4) Increase in payables 46.1 99.6 Decrease in provisions (0.2) (1.5) Exchange differences (6.6) (4.0) Cash generated from operations 161.3 78.4 28 Acquisitions and disposalsThe assets and liabilities acquired in respect of acquisitions during the yearwere as follows: Book value and fair value US$m Property plant and equipment 2.9 Other intangible assets 0.9 Inventories 6.9 Trade and other receivables 9.8 Cash and cash equivalents 4.8 Trade and other payables (5.8) Provisions (0.2) Minority interest (5.8) Net assets acquired 13.5 Goodwill 15.5 Consideration 29.0 Consideration satisfied by: Cash 29.0 The Group has used acquisition accounting for all purchases and, in accordancewith the Group's accounting policies the goodwill arising on consolidation ofUS$15.5m has been capitalised. Acquisitions during the year include thepurchase of John Brown E&C Limited in January and Offshore Design Limited inApril. In July, the Group increased its shareholding in one of its Engineeringand Production Facilities joint venture companies. In September, one of theGroup's joint venture companies in the Gas Turbine Services division acquired arepair and overhaul business.The acquisitions carried out during the year provide the Group with access tonew markets and strengthen the Group's capabilities in certain areas. Theacquired companies will be in a position to access the Group's wider clientbase and use the Group's existing relationships to further grow and developtheir businesses. These factors contribute to the goodwill recognised by theGroup on the acquisitions during the year.Deferred consideration payments of US$9.2m were made during the year in respectof acquisitions made in prior periods and resulted in additional goodwill ofUS$3.2m.The outflow of cash and cash equivalents on the acquisitions made during theyear is analysed as follows: US$m Cash consideration 29.0 Cash acquired (4.8) 24.2 The results of the Group, as if the above acquisitions had been made at thebeginning of period, would have been as follows: US$m Revenues 2,771.3 Profit for the year 84.3The acquired businesses earned cumulative revenues of US$9.4m from thebeginning of the year to their respective acquisition dates. From the dates ofacquisition to 31 December 2005, the acquisitions contributed US$18.9m torevenues and US$0.3m to profit for the year.DisposalsDetails of the assets and liabilities disposed of during the year were asfollows: US$m Property plant and equipment 1.0 Inventories 11.2 Trade and other receivables 9.8 Cash and cash equivalents 1.0 Trade and other payables (2.7) Income tax liabilities (0.4) Provisions (0.2) Net assets disposed of 19.7 Net proceeds received and receivable 31.4 Other disposal costs (2.0) Profit on disposal of subsidiaries 9.7 Reconciliation of net proceeds to cash inflow from disposal of subsidiaries US$m Net proceeds received and receivable 31.4 Cash disposed of (1.0) Deferred consideration (7.6) Cash inflow from disposal of subsidiaries 22.8 29 Employees and directorsEmployee benefits expense 2005 2004 US$m US$m Wages and salaries 869.0 747.5 Social security costs 73.2 61.1 Pension costs - defined benefit schemes (note 30) 7.0 5.5 Pension costs - defined contribution schemes (note 30) 17.1 15.0 966.3 829.1Average monthly number of employees (including executive 2005 2004directors) No. No. By geographical area: Europe 3,952 3,484 North America 7,576 6,878 Rest of the World 5,059 4,276 16,587 14,638Key management compensation 2005 2004 US$m US$m Salaries and short-term employee benefits 13.7 10.1 Amounts receivable under long-term incentive schemes 4.5 0.8 Post employment benefits 0.9 0.7 Share based charges 5.4 0.8 24.5 12.4The key management figures given above include executive directors. 2005 2004Directors US$m US$m Aggregate emoluments 4.4 3.1 Aggregate gains made on the exercise of share options 2.1 0.5 Aggregate amounts receivable under long-term incentive 1.1 -schemes Company contributions to defined contribution pension 0.1 -schemes 7.7 3.6 One director (2004: one) has retirement benefits accruing under a deferredcontribution pension scheme. Retirement benefits are accruing to five (2004:five) directors under the company's defined benefit pension scheme. Furtherdetails of directors emoluments are provided in the Directors' RemunerationReport.30 Retirement benefit liabilitiesOne of the Group's pension schemes in the UK, the John Wood Group PLCRetirement Benefits Scheme, is a defined benefit scheme, which is contractedout of the State Scheme and provides benefits based on final pensionablesalary. The assets of the scheme are held separately from those of the Group,being invested with independent investment companies in trustee administeredfunds.The most recent actuarial valuation of the scheme was carried out at 5 April2004 by a professionally qualified actuary.The principal assumptions made by the actuaries at the balance sheet date were: 2005 2004 % % Rate of increase in pensionable salaries 4.75 4.75 Rate of increase in pensions in payment and deferred 2.75 2.75pensions Discount rate 4.80 5.30 Inflation assumption 2.75 2.75 Expected return on scheme assets 7.09 7.16The expected return on scheme assets is based on market expectation at thebeginning of the period for returns over the entire life of the benefitobligation.The exchange rates used to retranslate the pension disclosures into US$ are asfollows: 2005 2004 Average rate ‚£1 = US$ 1.8170 1.8310 Closing rate ‚£1 = US$ 1.7168 1.9199PensionThe amounts recognised in the balance sheet are determined as follows: 2005 2004 US$m US$m Present value of funded obligations (137.0) (122.2) Fair value of scheme assets 103.7 88.3 Net liabilities (33.3) (33.9)The major categories of scheme assets as a percentage of total scheme assetsare as follows: 2005 2004 % % Equity securities 84.7 85.1 Corporate bonds 7.5 7.3 Gilts 7.7 7.3 Cash 0.1 0.3The amounts recognised in the income statement are as follows: 2005 2004 US$m US$m Current service cost included within employee benefits expense 7.0 5.5 Interest cost 6.3 5.3 Expected return on scheme assets (6.2) (5.0) Total included within net finance expense 0.1 0.3 The employee benefits expense is included within administrative expenses.Changes in the present value of the defined benefit liability are as follows: 2005 2004 US$m US$m Present value of obligation at 1 January 122.2 93.0 Current cost 7.0 5.5 Interest cost 6.3 5.3 Actuarial losses 14.8 9.7 Scheme participants contributions 3.2 3.5 Benefits paid (2.1) (2.6) Exchange differences (14.4) 7.8 Present value of obligation at 31 December 137.0 122.2 Changes in the fair value of scheme assets are as follows: 2005 2004 US$m US$m Fair value of scheme assets at 1 January 88.3 65.5 Expected return on scheme assets 6.2 5.0 Contributions 9.7 9.9 Benefits paid (2.1) (2.6) Actuarial gains 12.3 4.9 Exchange differences (10.7) 5.6 Fair value of scheme assets at 31 December 103.7 88.3 Analysis of the movement in the balance sheet liability: 2005 2004 US$m US$m At 1 January 33.9 27.5 Current service cost 7.0 5.5 Finance costs 0.1 0.3 Contributions (6.5) (6.4) Net actuarial losses recognised in the year 2.5 4.8 Exchange differences (3.7) 2.2 At 31 December 33.3 33.9 Cumulative actuarial gains and losses recognised in equity: 2005 2004 US$m US$m At 1 January 33.0 28.2 Net actuarial losses recognised in the year 2.5 4.8 At 31 December 35.5 33.0The actual return on scheme assets was US$18.5m (2004 : US$9.9m).History of experience gains and losses: 2005 2004 2003 2002 2001 Difference between the expected and actual return on scheme assets : Amount (US$m) 12.3 4.9 6.3 (11.6) (8.0) Percentage of scheme assets 12% 6% 10% 26% 19% Experience losses on scheme liabilities: Amount (US$m) (14.8) (9.7) (7.5) (2.4) (2.1) Percentage of the present value of the 11% 8% 8% 4% 4%scheme liabilities Present value of scheme liabilities 137.0 122.2 93.0 67.1 50.8 Fair value of scheme assets 103.7 88.3 65.5 43.8 43.2 Deficit 33.3 33.9 27.5 23.3 7.6 The contribution expected to be paid during the financial year ending 31December 2006 amounts to US$5.5m.Pension costs for defined contribution schemes are as follows: 2005 2004 US$m US$m Defined contribution schemes 17.1 15.0 31 Operating lease commitments - minimum lease payments 2005 2004 Vehicles, Vehicles, plant and plant and equipment equipment Property Property US$m US$m US$m US$m Commitments under non-cancellable operating leases expiring: Within one year 5.5 1.4 5.6 1.4 Later than one year and less than five 23.5 8.9 18.0 5.4years After five years 11.0 0.4 14.5 0.1 40.0 10.7 38.1 6.9The Group leases various offices and warehouses under non-cancellable operatinglease agreements. The leases have various terms, escalation clauses and renewalrights. The Group also leases plant and machinery under non-cancellableoperating lease agreements.32 Contingent liabilitiesAt the balance sheet date the Group had cross guarantees without limit extendedto its principal bankers in respect of sums advanced to subsidiaries. At 31December 2005, the Group has outstanding guarantees of US$14.0m (2004 :US$18.4m) in respect of joint venture banking arrangements.33 Capital and other financial commitments 2005 2004 US$m US$m Contracts placed for future capital expenditure not provided in the financial statements 4.4 4.5The capital expenditure above relates to property plant and equipment. Thereare no significant joint venture capital commitments included in the figuresabove.There are financial commitments relating to the purchase of shares from certainsubsidiary minority shareholders based on the profits of these subsidiaries andthe payments extend over a number of years. The remaining 6.6% of MustangEngineering Holdings Inc. is due to be acquired in the first half of 2006.34 Related party transactionsThe following transactions were carried out with the Group's joint ventures.These transactions comprise sales and purchases of goods and services in theordinary course of business. 2005 2004 US$m US$m Sale of goods and services to joint ventures 95.2 75.0 Purchase of goods and services from joint ventures 6.7 19.9 Receivables from joint ventures 12.7 22.4 Payables to joint ventures 5.8 17.7In addition to the above, the Group charged JW Holdings Limited, a company inwhich Sir Ian Wood holds a controlling interest, an amount of US$0.1m (2004 :US$0.2m) for management services provided under normal commercial terms.Key management compensation is disclosed in note 29.35 Principal subsidiaries and joint venturesThe Group's principal subsidiaries and joint ventures are listed below.Name of subsidiary or joint Country of Ownership Principal activity venture incorporation interest or % registration Engineering & Production Facilities: Wood Group Engineering (North UK 100 Engineering design, Sea) Limited operations maintenance and management SIGMA 3 (North Sea) Limited UK 33.3* Engineering design, operations maintenance and management Mustang Engineering Holdings USA 93.4 Engineering design Inc. Alliance Wood Group USA 100 Engineering design Engineering L.P. J P Kenny Engineering Limited UK 100 Engineering design SIMCO Consortium Venezuela 49.5* Operations maintenance and management Wood Group Production USA 100 Operations maintenance andServices, Inc. management Wood Group Colombia S.A. Colombia 100 Operations maintenance and management Deepwater Specialists Inc USA 100 Commissioning services Wood Group Equatorial Guinea Cyprus 100 Operations maintenance andLimited management Well Support: Wood Group ESP, Inc. USA 100 Electric submersible pumps Corporacion ESP de Venezuela Venezuela 100 Electric submersible pumpsCA Wood Group Products & Argentina 100 Electric submersible pumpsServices SA Wood Group Pressure Control, USA 100 Valves and wellhead L.P. equipment Wood Group Pressure Control UK 100 Valves and wellhead Limited equipment Wood Group Logging Services USA 100 Logging services Inc. Gas Turbine Services: Wood Group Light Industrial UK 100 Gas turbine repair and Turbines Limited overhaul Wood Group Engineering Jersey 100 Gas turbine repair and Services (Middle East) overhaul Limited Rolls Wood Group (Repair & UK 50* Gas turbine repair and Overhauls)Limited overhaul TransCanada Turbines Limited Canada 50* Gas turbine repair and overhaul Wood Group HIT AG Switzerland 100 Provision of gas turbine parts Wood Group Gas Turbine UK 100 Gas turbine repair and Services Limited overhaul Wood Group Field Services, USA 100 Gas turbine repair and Inc. overhaul Wood Group Power Solutions, USA 100 Provision of gas turbine Inc. packages The proportion of voting power held equates to the ownership interest, otherthan for joint ventures (marked *) which are jointly controlled.36 Reconciliation of net assets and profit under UK GAAP to IFRS(i) Reconciliation of income statement - year ended 31 December 2004 As Proportional As reported Consolidation IFRS reported of Joint Adjustments under under Ventures IFRS UK GAAP Note (a) Note US$m US$m US$m US$m Revenues 2,288.1 - - 2,288.1 Share of joint venture (285.6) 285.6 - - revenues Group revenues 2,002.5 285.6 - 2,288.1 Cost of Sales (1,592.2) (226.3) - (1,818.5) Gross profit 410.3 59.3 - 469.6 Administrative expenses (b) (338.3) (32.0) 12.5 (357.8) (c) (d) Impairment and restructuring (26.2) - - (26.2)charges Share of joint venture 27.3 (27.3) - - operating profit Operating profit 73.1 - 12.5 85.6 Finance income 1.8 - - 1.8 Finance expense (21.2) - - (21.2) Profit before taxation 53.7 - 12.5 66.2 Taxation (e) (24.9) - (1.9) (26.8) Profit for the year 28.8 - 10.6 39.4 Attributable to: Equity shareholders 26.7 - 10.6 37.3 Minority interest 2.1 - - 2.1 28.8 - 10.6 39.4 An explanation of the IFRS adjustments is given on page 49.36 Reconciliation of net assets and profit under UK GAAP to IFRS (continued)(ii) Reconciliation of equity at 1 January 2004 (date of transition to IFRS) As As Proportional reported reported Consolidation IFRS under of Joint Adjustments IFRS under Ventures UK GAAP Note (a) Note US$m US$m US$m US$m Assets Non-current assets Goodwill 217.2 18.8 - 236.0 Intangible assets (c) 3.2 1.6 2.1 6.9 Property plant and equipment (c) 174.2 53.4 (2.1) 225.5 Investment in joint ventures 103.6 (103.6) - - Long term receivables 28.4 - - 28.4 Deferred tax assets (f) 9.7 1.0 8.2 18.9 536.3 (28.8) 8.2 515.7 Current assets Inventories 180.5 62.1 - 242.6 Trade and other receivables 386.9 66.8 - 453.7 Income tax receivable 8.1 1.3 - 9.4 Cash and cash equivalents 69.8 21.0 - 90.8 645.3 151.2 - 796.5 Liabilities Current liabilities Borrowings 13.9 24.3 - 38.2 Trade and other payables (g) 326.6 61.0 (10.4) 377.2 Income tax liabilities 18.2 2.0 - 20.2 358.7 87.3 (10.4) 435.6 Net current assets 286.6 63.9 10.4 360.9 Non-current liabilities Borrowings 230.9 30.3 - 261.2 Deferred tax liabilities 10.2 1.1 - 11.3 Retirement benefit liabilities (f) 19.3 - 8.2 27.5 Other non-current liabilities 7.5 1.4 - 8.9 Provisions 14.8 2.3 - 17.1 282.7 35.1 8.2 326.0 Net assets 540.2 - 10.4 550.6 Shareholders' equity Ordinary shares 23.4 - - 23.4 Share premium 200.8 - - 200.8 Retained earnings (g) 209.2 - 10.4 219.6 Other reserves 88.1 - - 88.1 Total shareholders' equity 521.5 - 10.4 531.9 Minority interest 18.7 - - 18.7 Total equity 540.2 - 10.4 550.6(iii) Reconciliation of equity at 31 December 2004 As Proportional As reported Consolidation IFRS reported of Joint Adjustments under under Ventures IFRS UK GAAP Note (a) Note US$m US$m US$m US$m Assets Non-current assets Goodwill (c) (d) 264.7 18.2 14.2 297.1 Intangible assets (c) 4.1 1.4 6.3 11.8 Property plant and (c) 168.8 53.7 (6.3) 216.2equipment Investment in joint 104.5 (104.5) - -ventures Long term receivables 21.9 0.7 - 22.6 Deferred tax assets (e) (f) 11.5 1.1 8.3 20.9 575.5 (29.4) 22.5 568.6 Current assets Inventories 264.4 65.5 - 329.9 Trade and other receivables 507.0 72.3 - 579.3 Income tax receivable 9.7 (2.9) - 6.8 Cash and cash equivalents 54.4 17.0 - 71.4 835.5 151.9 - 987.4 Liabilities Current liabilities Borrowings 18.2 52.5 - 70.7 Trade and other payables (g) 453.6 54.2 (11.1) 496.7 Income tax liabilities 12.1 (0.3) - 11.8 483.9 106.4 (11.1) 579.2 Net current assets 351.6 45.5 11.1 408.2 Non-current liabilities Borrowings 345.0 10.0 - 355.0 Deferred tax liabilities 7.3 1.3 - 8.6 Retirement benefit (f) 23.7 - 10.2 33.9liabilities Other non-current 18.7 3.0 - 21.7liabilities Provisions 13.9 1.8 - 15.7 408.6 16.1 10.2 434.9 Net assets 518.5 - 23.4 541.9 Shareholders' equity Ordinary shares 23.5 - - 23.5 Share premium 200.9 - - 200.9 Retained earnings (c)(d) 192.3 - 23.4 215.7 (e)(g) Other reserves 89.8 - - 89.8 Total shareholders' equity 506.5 - 23.4 529.9 Minority interest 12.0 - - 12.0 Total equity 518.5 - 23.4 541.9Explanatory notes to the UK GAAP to IFRS reconciliations(a) Joint venturesUnder UK GAAP, joint ventures are accounted for using equity accounting withthe Group's share of profits being shown in the consolidated income statementand the Group's share of net assets included in the consolidated balance sheet.As permitted under IFRS, the Group has used proportional consolidation toconsolidate its joint ventures. Under this method, the Group includes its shareof each joint venture's income, expenses, assets, liabilities and cash flows ona line by line basis in the consolidated financial statements. The Group haspresented the proportional consolidation of the joint ventures as a separatecolumn in the UK GAAP to IFRS reconciliations. Shareholders' equity is notimpacted by the adoption of proportional consolidation.(b) Share based chargesUnder UK GAAP, charges for share based payments are based on the intrinsicvalue of share options awarded at the grant date. Under IFRS, the charge isbased on the fair value of the share options awarded at the grant date. Thefair value is calculated using option pricing models and applies to all optionsgranted after 7 November 2002 and not vested at 1 January 2005. The adjustmentfor the year ended 31 December 2004 is US$1.7m.(c) Other intangible assetsPurchased intangible assets other than goodwill are recognised on acquisitionand amortised over their useful life. On the acquisition of a business, anyintangible asset that may exist separately from goodwill and that meets therecognition criteria under IFRS should be recognised and amortised over itsuseful economic life. Under IFRS, the recognition criteria for intangibleassets may result in the recognition of more intangible assets than under UKGAAP. On transition to IFRS, US$2.7m of intangible assets have been recognisedon acquisitions made in 2004. These intangible assets had a useful economiclife of less than one year and as a result were fully amortised during 2004. Acharge of US$2.7m was booked for the year ended 31 December 2004.Additionally, computer software, which was previously included in propertyplant and equipment under UK GAAP, has been reclassified under other intangibleassets as required by IFRS. US$2.1m was reclassified in the opening balancesheet (note that this adjustment was not made in the opening balance sheetprovided with the interim accounts). US$6.3m was reclassified in the balancesheet at 31 December 2004. Amortisation on this software is added back tooperating profit for the calculation of EBITA. There is no impact on EBITDA asthe amortisation was previously treated as depreciation. Software amortisationfor the year to December 2004 was US$2.0m.(d) GoodwillUnder UK GAAP, goodwill is amortised on a straight line basis over itsestimated useful life. Under IFRS 3, goodwill is not amortised but subject toan annual impairment review. Goodwill amortisation of US$16.9m booked in 2004under UK GAAP has been reversed and goodwill is carried at 1 January 2004levels.(e) TaxUnder UK GAAP, the provision for deferred tax is based on a timing differenceapproach, whereas under IFRS a temporary difference approach is used.Consequently, accounting under IFRS may result in the provision of additionaldeferred tax. Due to the reversal of the goodwill amortisation charge for 2004mentioned at (d) above, the book value of goodwill has increased. There hasbeen no change in the underyling tax basis of the goodwill in those countrieswhere amortisation is tax deductible and therefore additional deferred taxarises on the increase in the temporary difference. Additional deferred tax ofUS$1.9m has been provided for the year ended December 2004.(f) Deferred tax relating to retirement benefit liabilities Under UK GAAP, the deferred tax assets in respect of retirement benefitliabilities are netted against the liabilities. Under IFRS the deferred taxrelating to retirement benefit liabilities is split out and shown separately onthe face of the balance sheet. The deferred tax asset at 1 January 2004amounted to US$8.2m and at 31 December 2004 US$10.2m.(g) DividendsUnder UK GAAP, proposed dividends are recognised at the balance sheet date.IFRS requires that dividends should not be recognised as a liability or chargedto equity until they have been declared. As a result, the dividends accrued at31 December 2003 (US$10.4m) and 31 December 2004 (US$11.1m) under UK GAAP havebeen reversed and only dividends paid in the year recognised in the financialstatements.(h) Cash flow statementThe Group cash flow statement has been prepared in accordance with IFRS. Thechanges to the Group's cash flows that were previously presented under UK GAAPare mainly presentational although the proportional consolidation of jointventures results in the Group's share of its joint venture cash flows beingincluded on a line by line basis. Under IFRS, the cash flow statement presents"cash and cash equivalents" which includes short-term deposits. In the UK GAAPcash flow statement the movement in short-term deposits was shown separatelyfrom the movement in cash.Shareholder informationPayment of dividendsThe Company declares its dividends in US dollars. As a result of theshareholders being mainly UK based, dividends will be paid in sterling, but ifyou would like to receive your dividend in US dollars please contact theRegistrars at the address below. All shareholders will receive dividends insterling unless requested. If you are a UK based shareholder, the Companyencourages you to have your dividends paid through the BACS (Banker's AutomatedClearing Services) system. The benefit of the BACS payment method is that theRegistrars post the tax vouchers directly to the shareholders, whilst thedividend is credited on the payment date to the shareholder's Bank or BuildingSociety account. UK shareholders who have not yet arranged for their dividendsto be paid direct to their Bank or Building Society account and wish to benefitfrom this service should contact the Registrars at the address below. Sterlingdividends will be translated at the closing mid-point spot rate on 5 May 2006as published in the Financial Times on 6 May 2006.Officers and advisersSecretary and Registered Office RegistrarsI Johnson Lloyds TSB Registrars ScotlandJohn Wood Group PLC PO Box 28448John Wood House Finance HouseGreenwell Road Orchard BraeABERDEEN EDINBURGHAB12 3AX EH4 1WQTel: 01224 851000 Tel: 0870 601 5366Stockbrokers AuditorsJPMorgan Cazenove Limited PricewaterhouseCoopers LLPCredit Suisse Chartered AccountantsFinancial calendarResults announced 6 March 2006 Ex-dividend date 3 May 2006 Dividend record date 5 May 2006 Annual General Meeting 18 May 2006 Dividend payment date 25 May 2006 The Group's Investor Relations website can be accessed at www.woodgroup.com.ENDWOOD GROUP (JOHN) PLC

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