Final Results

Carillion PLC 08 March 2006 8 March 2006 Carillion plc 2005 Preliminary Results UK support services and construction company Carillion plc announces its preliminary results for the year ended 31 December 2005. These full-year financial results are presented for the first time under International Financial Reporting Standards (IFRS). Highlights • Revenue (including joint ventures) up 15% to £2,284m • Underlying profit before tax* up 15% to £55.5m • Underlying earnings per share up 10% to 20.4p • Strong operating cash flow - net cash at 31 December £90.8m • Final dividend 5.2p per share - total 2005 dividend up 7% to 8p per share • Order book and framework contracts up 40% to £7 billion Financial summary 2005 2004 Revenue - including joint ventures £2,284m £1,985m - excluding joint ventures £2,025m £1,859m Underlying profit before tax* £55.5m £48.1m Underlying earnings per share 20.4 p 18.6 p Profit before tax £51.9m £66.8m Basic earnings per share 18.7p 27.1 p * Underlying profit is net of tax on profit from joint ventures (2005: £5.0m; 2004: £2.0m) and excludes - non-operating items, amortisation of intangible assets and goodwill impairment (2005: £3.6m charge; 2004: £11.5m profit) - a one-off increase in 2004 profit of £7.2m relating to the transfer of rail maintenance to Network Rail Commenting, Chairman Philip Rogerson said, 'I am pleased to report that in 2005 Carillion achieved all its key financial targets and made substantial strategic progress to deliver further profitable growth, both organically and through the acquisition of mechanical and electrical engineering maintenance company, PME. 'In December 2005, we announced the terms of a recommended cash and shares offer for the acquisition of Mowlem plc. This acquisition, which received the overwhelming support of Carillion and Mowlem shareholders, was completed in February 2006 and, in line with our strategy, represents a step change in Carillion's transformation. 'In view of the financial performance in 2005 and enhanced prospects for future growth, the Board is recommending a final ordinary dividend for 2005 of 5.2 pence per share, making the total full year dividend 8 pence per share, an increase of some 7 per cent on the total dividend paid in respect of 2004 (7.5 pence per share).' For further information contact Chris Girling Finance Director 01902 422431 John Denning Director Corporate Affairs 01902 316426 High resolution photographs are available free of charge to the media at www.newscast.co.uk telephone 0207 608 1000 Chairman's statement I am pleased to report that in 2005 Carillion achieved all its key financial targets and made substantial strategic progress to deliver further profitable growth, both organically and through the acquisition of mechanical and electrical engineering maintenance company, PME. In December 2005, we announced the terms of recommended cash and shares offer for the acquisition of Mowlem plc. This acquisition, which received the overwhelming support of Carillion and Mowlem shareholders, was completed in February 2006 and, in line with our strategy, represents a step change in Carillion's transformation. In this report, Carillion has presented for the first time its full-year financial results under International Financial Reporting Standards. In 2005, revenue increased by 15 per cent to £2,284 million, including joint ventures, (2004: £1,985 million), despite the impact of transferring to Network Rail maintenance contracts that generated £150 million of revenue in 2004. Underlying * profit before tax also increased by 15 per cent to £55.5 million (2004: £48.1 million). Operating cash flow remained strong and at 31 December 2005 net cash amounted to £90.8 million (2004: £128.8 million). The intake of new orders in 2005 was particularly strong and by the year end the value of the Group's order book and framework contracts had increased by 40 per cent to £7 billion (2004: £5 billion). The integration of PME, which we acquired in March 2005, has been completed successfully. This has significantly strengthened our building management and support services capability and enhanced our earnings in 2005. Three non-executive directors, Sir Neville Simms, our previous chairman, Andrew Parrish and Roger Dickens, retired from the Board in 2005. I should like to record the Board's thanks and recognition for their contributions to the development and success of Carillion and in particular to record the Board's deep sadness at the death of Roger Dickens early in 2006. During 2005, we were pleased to welcome to the Board two new non-executive directors. The appointment of Vanda Murray OBE in June, which I reported to shareholders in my Interim Report, was followed by the appointment in November of David Maloney, who brings to the Board considerable experience in a number of service industry sectors. With a record order book and strong presence in our key growth markets, the outlook was already positive for Carillion to deliver sustainable growth. However, the acquisition of Mowlem will accelerate growth substantially and create significant value for shareholders. It brings together two companies of a similar size with an excellent strategic fit, complementary skills and market strengths, to create one of the largest support services and construction companies in the UK and with substantial international businesses. Combining the two companies will generate opportunities for cost savings and strengthen Carillion's ability to compete successfully in its chosen markets. As a result, we expect the acquisition of Mowlem to enhance earnings materially in 2007, the first full year of operation following the acquisition. The strong platform that has enabled us to acquire Mowlem and move forward into 2006 with considerable confidence is due to the leadership of Carillion's senior management team and the commitment and professionalism of all its people. On behalf of the Board I should like to offer our thanks to everyone in Carillion for the contributions they have made to our success. In view of the financial performance in 2005 and enhanced prospects for future growth, the Board is recommending a final ordinary dividend for 2005 of 5.2 pence per share, making the total full year dividend 8 pence per share, an increase of some 7 per cent on the total dividend paid in respect of 2004 (7.5 pence per share). The final ordinary dividend for 2005 will be paid on 23 June 2006 to shareholders on the register at close of business on 28 April 2006. Philip Rogerson Chairman * Underlying profit is net of tax on profit from joint ventures and excludes - non-operating items, amortisation of intangible assets relating to business combinations and goodwill impairment (for details see Note 4 on page 26) - a one-off increase in 2004 profit of £7.2 m relating to the transfer of rail maintenance to Network Rail Operating and Financial Review Chief Executive's statement In our 2004 annual report, I said that 2005 marked the beginning of a new phase of growth for Carillion. Having completed our programme of major disposals and built a well-balanced, customer-focused business, delivering good quality earnings backed by strong operating cash flows, we were ready to accelerate the development and growth of our business. That growth will continue to be driven by implementing our consistent and effective strategy through customer-focused businesses, supported by a culture based on 'living' our core values in everything we do. Strategic development Over the past few years we have been seeking acquisitions to fill capability gaps in order to improve the scope and quality of our integrated services solutions and also to deliver a step change in the development of our business. We apply the same criteria to all potential acquisitions, namely that they must be consistent with our strategy for delivering sustainable, profitable growth and deliver financial returns equivalent to those we expect from other investments. Acquisition of PME The acquisition of PME, one of the largest privately owned mechanical and electrical (M&E) engineering maintenance businesses in the UK, for approximately £47 million (including a £10 million payment to the PME pension fund) in March 2005 filled an important capability gap. M&E maintenance accounts for up to 40 per cent of a typical building management and support services contract. Having an in-house M&E maintenance capability has therefore considerably strengthened our integrated service offering for both new and existing customers. PME is performing well as an integral part of our business, with cost synergies now expected to reach approximately £3 million by the end of 2006, exceeding the £2 million originally identified. Acquisition of Mowlem plc Carillion announced its cash and shares offer for the acquisition of Mowlem in December 2005. It was recommended by the Mowlem Board and received the overwhelming support of Carillion and Mowlem shareholders. The acquisition valued Mowlem's share capital at £313 million and was completed successfully on 23 February 2006. 65.8 million new Carillion shares were issued on 23 February 2006 as a result of the acquisition. Mowlem is an outstanding strategic fit, particularly in support services and private finance, and we are confident that it will deliver a step change in the development of our business and materially enhance our earnings in 2007, the first full year after acquisition. The addition of Mowlem's complementary skills and market strengths in support services makes Carillion one of the largest support services businesses in the UK and significantly enhances our ability to provide customers with high quality, integrated solutions in our key market sectors. The addition of Mowlem's portfolio of Public Private Partnership (PPP) projects to Carillion's own substantial portfolio will create a very large and valuable portfolio of equity investments. Mowlem also has a large pipeline of new PPP projects for which it is the preferred bidder or shortlisted, with the potential to add considerable further value to our investment portfolio. Furthermore, the acquisition of Mowlem will increase the number of specialist people we have with private finance skills, which has been the main constraint to our growth in this market. Mowlem's considerable strengths in construction services will add to the breadth and scale of our own construction capabilities. Going forward, Mowlem's approach to construction will be subject to the same selectivity criteria that we have consistently applied to our own construction activities. Furthermore, our rigorous and proven risk management policies and processes will underpin every aspect of the enlarged group's operations. On 18 January 2006, Carillion announced that it had agreed to sell two Mowlem businesses, Charter, the US construction management company and Edgar Allen, the UK rail track products manufacturer to Balfour Beatty plc for a total consideration of approximately £20.5 million, subject to due diligence by Balfour Beatty. Completion of these sales is expected in the second quarter of 2006. Within the last few days, the Office of Fair Trading (OFT) visited two Mowlem offices. We have fully co-operated with the OFT and will continue to do so as appropriate. The integration of Carillion and Mowlem is being led by a dedicated team comprising senior people from both companies to ensure we achieve the synergy benefits we have identified and create a business that will deliver accelerated growth, materially enhanced earnings and strong cash generation. We expect to deliver cost savings at a running rate of £10 million per annum by the end of 2006, rising to £15 million per annum by the end of 2007. The one-off cost of delivering these savings is expected to be £10 million in 2006. Our business model for the enlarged group will continue to be based on delivering our existing strategy through market focused business units, each equipped with the skills and resources necessary to provide customers with solutions tailored to meet their specific needs. Business performance Total revenue in 2005 increased by 15 per cent to £2,284 million (2004: £1,985 million), including revenue from joint ventures of £259 million (2004: £126 million). Underlying* profit before tax also increased by 15 per cent to £55.5 million (2004: £48.1 million), with underlying earnings per share of 20.4 pence (2004: 18.6 pence). Underlying earnings per share grew by 10 per cent, after the Group's effective tax rate returned to a more normal level of 27 per cent, having reduced temporarily in 2004 to 21 per cent, due to a number of one-off tax settlements. Our relentless focus on cash management has again resulted in a strong cash flow from operations of £84 million. Average weekly net cash was £37 million, net of finance lease liabilities of £31 million. At 31 December 2005 Carillion had net cash of £90.8 million, net of finance leases of £37.7 million (2004: £128.8 million net of finance leases of £24.2 million), having invested approximately £47 million in the acquisition of PME. Delivering improved results in 2005 was a particularly significant achievement, given the impact of transferring to Network Rail during 2004 profitable maintenance contracts that contributed around £150 million of revenue in 2004. We continue to report our financial results in three segments - Support Services, Construction Services and Investments - in which we group together activities of a similar type and risk profile to make it easier for the Market to value our earnings on a consistent basis. Our performance in each of these segments is summarised below and a more detailed explanation follows later in this review. In Support Services, revenue (including joint ventures) increased by over seven per cent to £989 million, with the effect of losing £150 million of rail maintenance revenue more than offset by the acquisition of PME and organic growth. An increase in operating profit of two per cent, to £40.6 million, lagged growth in revenue, reflecting the loss of rail maintenance contracts, which had higher than average margins in this segment. In Construction Services, revenue (including joint ventures) increased by 22 per cent to £1,230 million, driven mainly by growth in our International Regions, particularly the Middle East and Canada, UK Building and our Developments business. Operating profit in this segment increased by 35 per cent to £16.9 million. Investments, contributed revenue of £65.4 million. Operating profit increased by 36 per cent to £8.3 million, due to an improved performance across our portfolio of equity investments in PPP projects and reductions in bid costs and overheads. As explained later in this review, we are also creating long-term value by investing in these projects and the Directors' current valuation of our portfolio is £89 million, based on discounting at 10 per cent the cash flows that will be generated by these investments over the next thirty years or more. Total operating profit from our three financial reporting segments was £65.8 million, including joint ventures. After Corporate Centre costs of £10.4 million, net financing income of £5.1 million and tax on joint venture profits of £5.0 million, underlying profit before tax was £55.5 million. Non-operating items, amortisation of intangible assets and goodwill impairment amounted to £3.6 million, leaving profit before tax of £51.9 million. Profit after tax was £40.8 million and basic earnings per share were 18.7 pence. 2005 was an outstanding year for new orders, which increased the value of the Group's order book and framework contracts at the year-end by some 40 per cent to around £7 billion (2004: £5 billion). Despite converting a high proportion of potential new orders into contracts in 2005, we also maintained a healthy pipeline of probable orders, worth up to £1.6 billion at the year-end (2004: £2.2 billion). Our strategy for growth continues to be reflected in our order book, with Support Services and PPP concession contracts accounting for some 84 per cent of order book value (2004: 78 per cent). The longer-term nature of these contracts also significantly improves the visibility of future revenues, with around 74 per cent of our order book expected to generate revenues in 2007 and beyond. At the same time, through our selective approach, we have continued to improve the quality of our construction order book and focused on long-term relationships with key customers. For example, in 2005 our UK building business generated around 84 per cent (2004: 80 per cent) of its revenue from 20 key customers. * Underlying profit is net of tax on profit from joint ventures and excludes - non-operating items, amortisation of intangible assets relating to business combinations and goodwill impairment (for details see Note 4 on page 26) - a one-off increase in 2004 profit of £7.2 m relating to the transfer of rail maintenance to Network Rail Risk Management The rigorous policies and processes we have established to identify, mitigate and manage risk are a cornerstone of our business. Our Group Head of Risk is responsible for advising on all risk issues, including our policies and processes and their application to all our business activities. We address strategic risks and risks specific to individual businesses and contracts, including social, environmental and ethical risks. Our risk management processes apply to every aspect of our business, from choosing the markets in which we operate to the contracts we bid for and the selection of our suppliers and sub-contractors. They apply to every stage of a contract from inception to completion, in order to deliver the cash-backed profit we expect and a service that meets or exceeds the expectations of our customers. The more significant areas of risk, where our failure to perform well or changes to macro economic or market specific environments would adversely affect our business, are summarised below. • Integration of Mowlem. The efficient and professional integration of Carillion and Mowlem is essential to the success of this acquisition and to the delivery of cost synergies, sustainable, profitable growth and materially enhanced earnings • Attracting, developing and retaining excellent people. The success of our business depends primarily on the quality of our people • Management of major contracts. Completing contracts on time and to the required standards, avoids financial penalties and damage to our brand and reputation • Closing out existing contracts. Settling completed contracts and collecting the cash we are owed is essential to reducing debt and delivering the earnings growth we expect • Pension scheme management. The cost to Carillion of funding its pension schemes depends on the macro-economic environment, equity market stability and regulatory requirements • Government investment and outsourcing. With a substantial proportion of our business and future growth dependent on planned investment and outsourcing of services, it is important to maintain an effective presence in a number of growth sectors to support the resilience of our business Our people Our people are the key source of competitive advantage and it is through their efforts each day that we meet or exceed our customers' expectations. The success of our business and the value of the Carillion brand depend primarily upon the performance of our people. We therefore remain totally committed to attracting, developing and retaining excellent people by becoming an employer of choice and have a wide range of measures in place to make this a reality across all our businesses. Above all we strive to communicate well with all our people and to listen to and act upon what they tell us. We do this through a structured approach to communication, including individual performance and development reviews, monthly Team Talks and regular surveys through which everyone can share their views openly and frankly, in line with our core value of 'Openness'. These surveys culminate annually in 'The Great Debate' in which around 1,400 people from across the Group took part in 2005. This enables us to monitor and measure our progress on a wide range of issues, including how well we engage with our people to recognise and value the contributions they make to our business, to help them develop and fulfil their potential. Specifically in response to feedback from the Great Debate, in 2005 we redoubled our efforts to improve the way we communicate, beginning with around 250 of our senior managers attending workshops designed to demonstrate the 'Power of Engagement'. By the end of 2005 around 2,000 managers and supervisors had attended these workshops. Good two-way communication must be the hallmark of our business leaders and the benefits of this are increasingly evident in the satisfaction and performance of our people. Health and Safety Carillion has an absolute commitment to ensuring that all our people can work safely at all times, wherever they are. This commitment extends to those who work with us and those who could be affected by our activities, including members of the public. This requires the continual vigilance and commitment of everyone involved in our activities to ensure that safe working practices are always used. This is supported by rigorous reviews, inspections, training and education, all of which are actively promoted and led by the Board. At the end of 2004, we launched a radical new initiative, Target Zero, aimed at eliminating reportable accidents by 2010. This is an ambitious target, but we are determined to create a culture of zero tolerance to accidents, not only within Carillion, but also within all our stakeholders, including customers, suppliers and partners. Tragically, five people were killed while working on projects under Carillion's management control during 2005. These accidents reinforce our commitment to make Target Zero a reality and its benefits are already evident. Our Accident Frequency Rate (AFR), reduced by 35 per cent in 2005 to 0.24 (2004: 0.37). The number of RIDDOR2 accidents (Reporting of Injuries Diseases and Dangerous Occurrences Regulations 1995) for the Group reduced by 27 per cent in 2005 to 255 (2004:348). Sustainability We believe that our commitment to responsible business practices that create positive impacts on the environment and on the communities in which we operate, is not only good for our own people and for society in general, but also makes good business sense. It is fundamental to delivering sustainable, profitable growth. Our commitment to becoming a more sustainable company began over ten years ago. Today, we are one of the recognised leaders in developing and adopting socially responsible business practices and for demonstrating that these practices can have measurable business benefits. We benchmark our performance in a number of ways, including participating in Business in the Community's Corporate Responsibility Index, an independent annual survey of sustainability performance. Since its inception in 2003, Carillion has each year been ranked first in its sector and in the top quartile of all companies participating in the Index. Our strategy model, which helps us to map and quantify the links between our business objectives and our impacts on the environment and society, continues to form the basis for our sustainability programme by identifying the areas where we need to improve our performance. Strategic objectives In order to build on our success in 2005, we have set the following strategic objectives for 2006. • Attract, develop and retain excellent people, by becoming an employer of choice • Successfully integrate Carillion and Mowlem • Achieve cost synergies at a minimum running rate of £10 million per annum by the end of 2006, and be on course to achieve a minimum running rate of £15 million per annum by the end of 2007 • Reduce net debt to circa £200 million by the end of 2006 and be on course to reduce it to below £100 million by the end of 2007 • Be on track to deliver materially enhanced earnings for the enlarged Group in 2007 • Be the recognised leader in the delivery of safety and sustainability Markets and Outlook Business Services Carillion Business Services comprises our UK building, facilities management (FM) and other Support Services activities. These activities generated approximately £1.2 billion of revenue (including joint ventures) in 2005 (2004: £769 million), a 56 per cent increase on 2004, driven mainly by a strong performance in UK building and the acquisition of PME. Business Services had a very successful year, more than doubling the value of its order book at the year-end to £1.8 billion (2004: £821 million), as a result of winning a number of significant new orders and the acquisition of PME, which contributed some £180 million to our year-end order book. In the Defence sector, we made a major breakthrough by winning, with our joint venture partners, two support services contracts for Defence Estates, together worth around £1.2 billion over a period of up to 10 years. In addition, Carillion's joint venture, Monteray, won a three-year extension to its contract with BT to provide integrated facilities management services, worth some £350 million. In UK building, we won substantial new orders in our chosen sectors, worth some £1.1 billion. We were particularly successful in the education sector: we reached financial close on a PPP project to build nine new schools in Renfrewshire, with a construction value of £100 million and in which we expect to invest £4 million of equity; we secured a £100 million contract to provide design and construction services for six new schools in Leeds; and a Carillion joint venture was appointed preferred bidder for a PPP project to build six new schools in South Ayrshire. We expect to invest around £4.5 million of equity in the latter project, which will also add over £73 million to our construction order book when it reaches financial close in 2006. In addition, our UK building business was awarded a £230 million contract to provide three new printing plants for News International and a £118 million contract for the British Nuclear Group to construct a store for materials arising from decommissioning at Sellafield. In 2005, our building business generated some 84 per cent of its revenue from 20 customers, reflecting our focus on long-term key customers. With around 80 per cent of our UK building order book for 2006 already secure, we expect a similarly high percentage of revenue to come from our top 20 customers in 2006. Business Services entered 2006 in a strong position to deliver further growth, particularly from integrated solutions for public sector customers in the Defence, Education and Health markets, as well as from the retail, offices and mixed use developments sectors of the commercial building market. Notable new opportunities in 2006 include reaching financial close on two major PPP projects for which Mowlem is the preferred bidder - the £7 billion Allenby Connaught project to provide Army accommodation in the South of England and a £1.1 billion project to provide a new Permanent Joint Headquarters for the Ministry of Defence - for which the concession periods are 35 years and 25 years, respectively. We also expect new opportunities in the growing nuclear market, following the creation of the Nuclear Decommissioning Authority. Carillion has considerable experience as a supplier of construction and support services in this market and Mowlem also has useful skills and experience, which complement those of Carillion. With the acquisition of Mowlem enhancing the strong positions we already hold in our existing UK building and support services markets, and creating a strong presence in other markets, such as Defence and UK regional building, the outlook for Business Services is positive. Health In the health market, we provide a range of construction and facilities management services, including integrated solutions focused primarily on PPP hospitals and Independent Sector Treatment Centres (ISTC). These activities generated £146 million of revenue (including joint ventures) in 2005 (2004: £119 million), with the increased contributions from both construction and support services. Carillion Health made good progress in 2005, winning new orders that nearly doubled the value of its order book to £1.1 billion at the year end (2004: £592 million), including two particularly notable successes. In November 2005, we reached financial close on the Queen Alexandra Hospital PPP project in Portsmouth, worth approximately £1.1 billion to Carillion over the 33-year concession period, of which some £470 million is included in our Health order book. In addition, Carillion will invest some £12 million of equity in this project, on which we expect to make financial returns in-line with our normal PPP investment criteria. A Carillion joint venture was also appointed the preferred bidder by the Bedfordshire and Hertfordshire Primary Care Trust for new ISTC facilities, involving some £48 million of construction and operational services worth around £119 million over a five-year period. The outlook for our Health business continues to be positive, particularly in our two key market sectors of PPP acute hospitals and Independent Sector Treatment Centres (ISTCs). The UK Government has reaffirmed its commitment to a substantial programme of PPP hospitals, worth between £7 billion and £9 billion. Carillion Health is currently shortlisted for one new PPP hospital and will be bidding for further hospitals in this programme as they come to market. The Government is also committed to a second wave of ISTCs, including 24 surgical centres, plus eight regional contracts and one national contract for diagnostic services, with a combined value of some £3 billion over the next 5 years. We expect to bid for a number of these new centres and contracts in 2006. Carillion's strong presence and successful track record will be further enhanced by the acquisition of Mowlem, which has six Local Improvement Finance Trust (LIFT) contracts. The acquisition of Mowlem will also increase the number of people we have with specialist private finance skills and therefore our capacity to bid for PPP hospitals and ISTCs. Consequently, the outlook for our Health business also remains positive. Transport Carillion Transport is focused on the provision and maintenance of rail and road infrastructure. These activities contributed some £580 million of revenue (including joint ventures) to the Group in 2005 (2004: £713 million), with the reduction on 2004 due to the effect of transferring to Network Rail maintenance contracts that generated around £150 million of revenue in 2004. At 31 December 2005, the value of our Transport order book and framework contracts was £817 million (December 2004: £888 million). The reduction in order book reflects the expected trend in the UK rail infrastructure market, particularly for major projects, as we indicated in our 2005 interim results announcement. Nevertheless, during 2005 a joint venture, in which Carillion has a 50 per cent interest, was awarded a £110 million contract for rail electrification on the West Coast Mainline and orders for smaller regional rail projects and track renewals have remained at a satisfactory level. While the outlook in the UK rail market is expected to remain challenging, planned investment by Network Rail is still substantial at approximately £11 billion over the period 2006 to 2008. The acquisition of Mowlem will increase Carillion's already strong presence in this market, where we remain focused on increasing our market share and on reducing costs to protect margins. After a slower than expected start to the outsourcing of rail infrastructure work in Scandinavia, we are now making progress in this market. We expect this to continue in 2006, as the market is forecast to double in size over the next two years to around £600 million per annum. In highways maintenance, we expect to maintain our 10 per cent share of the £1.0 billion per annum Highways Agency market and to target opportunities for further growth in the Local Authority market, worth around £750 million per annum. In road construction, the £122 million Early Contractor Involvement (ECI) project to upgrade the A74 between Carlisle and Guardsmill to motorway standard is expected to move into the construction phase during the second quarter of 2006. The acquisition of Mowlem, which has been particularly successful in winning six ECI road contracts to date with a total value of over £350 million, will significantly strengthen our presence in this market. Overall, the outlook in Transport remains stable. International Regions Our international regional businesses in the Middle East, Canada and the Caribbean are focused on selected construction markets and on their growing support services activities. These businesses contributed £299 million of revenue to the Group in 2005 (2004: £349 million). The reduction in revenue was due to the sale in November 2004 of our contracting business in France, which contributed some £160 million of revenue in that year. However, this reduction was offset by substantial growth in our remaining international regions, notably in the Middle East and Canada. 2005 was another successful year for new orders. The value of our international order book increased by over 11 per cent to £1.23 billion at 31 December 2005 (2004: £1.1 billion) and more than treble its value at December 2003. Notable successes in 2005 included construction orders for Dubai Festival City worth around £150 million and new highways maintenance contracts in Ontario, Canada worth £130 million. This was followed early in 2006 by our appointment as preferred bidder for a further highway maintenance contract in Canada worth £137 million, which will extend our operations to Alberta. With a strong order book, our international regional businesses are already on track to deliver further growth in 2006. They also remain well positioned in good growth markets, especially in Canada and the Middle East. In Canada, where construction of our two PPP hospitals - the William Osler in Toronto and the Royal Ottawa - is progressing well, we expect to bid for further PPP hospitals as the next wave of projects comes to market in 2006. Our highways maintenance business in Canada will also be targeting further contracts in Alberta and in British Columbia as these Provinces progressively outsource highways maintenance work to the private sector. In the Middle East, growth in construction activity is forecast to continue, with much of this being generated by the Dubai Festival City development for which our joint venture business is well positioned. In addition, we shall be targeting opportunities in other countries in the region, such as Abu Dhabi, where construction activity is also forecast to grow. The acquisition of Mowlem brings new international businesses to the Group in Australia and South East Asia. The sale of Charter, Mowlem's US construction business, to Balfour Beatty was announced on 18 January 2006 and we expect this to be completed in the second quarter of 2006, subject to due diligence by Balfour Beatty. FINANCIAL REVIEW Accounting policies These are the Group's first annual consolidated financial statements prepared in accordance with IFRS. The Group's IFRS accounting policies have been applied in preparing the consolidated financial statements for the year to 31 December 2005, the comparative information for the year to 31 December 2004 and the preparation of an opening IFRS balance sheet at 1 January 2004 (the date of transition from UK GAAP to IFRS). Profit allocation On construction contracts profit is recognised broadly in proportion to turnover after taking into account the remaining risks and uncertainties. In addition, on major construction contracts we take no profit on the first 20 per cent of turnover and this profit is deferred until contracts are completed. This method, which better reflects the risk profile of our construction activities, reduced reported profit in Construction Services by £5.4 million in 2005 (2004: £3.3 million). The total provision of £8.7 million is carried forward at 31 December 2005. Interest and cash The Group net interest credit of £4.0 million (2004: £4.1 million) reflects an average net cash position of £37 million, net of average finance leases of £31 million. Net cash at 31 December 2005 was £90.8 million after finance lease liabilities of £37.7 million (31 December 2004: net cash £128.8 million, after finance leases of £24.2 million). Strong cash generation from operations of £84 million and dividends received from jointly controlled businesses of £8 million continue to demonstrate our focus on cash management and the resilience of our business. Capital expenditure of £38 million included £13 million of investment in our previously announced project to outsource business processes in Human Resources and Finance, which is progressing well and on schedule for completion in 2006. Dividend payments in 2005 were £16 million and corporate tax paid was £19 million. Jointly controlled businesses An important part of our strategy for Public Private Partnership (PPP) and large construction projects is the development of jointly controlled businesses that enable us to structure the resource and risk profiles of these activities to generate reliable returns. Our share of these businesses generated £259 million of turnover and £20.3 million of operating profit during 2005. The interest credit relating to joint ventures of £1.1 million is £4.5 million ahead of 2004 and reflects the effects of selling our equity interest in the M40 project in June 2004 and of reclassifying our joint venture interest in the Nottingham Express Transit project as a trade investment. Growth in our construction joint ventures, notably that responsible for our Dubai Festival City projects, and in profit from PPP projects, resulted in profit before tax of £21.4 million (2004: £9.6 million) and profit after tax of £16.4 million (2004: £7.4 million). Taxation The Group's effective rate of tax on underlying profit returned to a more normal level of 27 per cent in 2005, having reduced to 21 per cent in 2004 due to a number of one-off tax settlements in 2004 relating to prior years. We have £65 million of corporate tax losses in the UK, none of which are recognised as a deferred tax asset, that are potentially available to reduce future tax liabilities. Amortisation of intangible assets Amortisation of intangible assets relating to business acquisitions was £2.5 million, which relates to the £6.2 million of intangible assets arising from the acquisition of PME. Non-operating items The Group's share of results of jointly controlled entities includes an exceptional loss of £0.8 million relating to the disposal of the remainder of our joint venture plant hire business (2004: profit of £1.7 million, which included a related tax credit of £0.2million). Pensions The Group's ongoing pensions charge in 2005, calculated on the basis of IAS19, was £21.3 million (2004: £27.0 million). The reduction on 2004 mainly reflects a reduction in number of active scheme members. The Group's pension schemes had a net deficit of £47.5 million at 31 December 2005 (2004: £59.7 million) and we propose to discuss with the trustees proposals to reduce this deficit. Acquisitions On 8 March 2005 we acquired the entire share capital of PME for approximately £47 million, which included a one-off contribution to the PME pension scheme of £10.0 million. Since acquisition, the performance of PME has met our expectations, contributing £3.5 million towards Group Operating Profit on turnover of £148.7 million. Following the acquisition of Mowlem plc on 23 February 2006 for a total consideration of approximately £341 million, comprising £117 million in cash and 65.8 million new ordinary Carillion shares, we are in the process of evaluating the fair value of net assets acquired. This process is progressing satisfactorily. Segmental results The table below shows revenue by business activity and the segments in which it is reported. Business activities Financial Reporting Segments Support Investments Construction Services Services Transport Rail 408.7 - - Roads 147.7 - 24.3 Health 56.8 - 89.2 Business Services UK building - - 813.1 FM & Services 369.5 - 39.2 International Regions 34.6 - 264.3 Private Finance - 65.4 - Total* 1,017.3 65.4 1,230.1 * Includes internal trading of £28.9 million Investments £ million 2005 2004 Revenue Group 0.8 0.8 JVs 64.6 61.7 ------- ------ 65.4 62.5 ------- ------ Operating profit* 8.3 6.1 JV Interest & tax (0.6) (4.9) ------- ------ Profit from operations* 7.7 1.2 ------- ------ * Before goodwill impairment of £0.3 million in both years and after tax on joint ventures of £3.1m (2004: £2.7m) In this segment we report the equity returns on our investments in Public Private Partnership (PPP) projects. At 31 December 2005, we had 19 financially closed projects in our portfolio, having added two new projects during the year - Renfrewshire schools and Queen Alexandra Hospital, Portsmouth - in which we will invest a total approximately £16 million of equity. Our portfolio of equity investments continues to generate significant value for the Group. The increase in operating profit reflects an improved performance across our portfolio, together with a reduction in overheads and bid costs. This improvement more than offset the effect on operating profit of selling our investment in the M40 motorway project in 2004. Due to this sale, the interest charge relating to joint ventures also reduced, resulting in a substantial increase in profit from operations. Equity investments in PPP projects are typically valued by discounting the cash flows they will generate over the lives of concession contracts. Based on discounting cash flows at 10 per cent and 8 per cent, our portfolio of investments in financially closed projects had valuations at December 2005 of £89 million and £115 million, respectively. These valuations have increased (2004: £83 million and £103 million) as a result of reaching financial close on the Renfrewshire schools and Queen Alexandra Hospital projects. The value we are creating through our PPP equity portfolio will continue to increase, because we are committed to invest a further £31 million of equity in our financially closed projects, in addition to the £29 million already invested. Beyond this, we have a good pipeline of new projects, including two for which we are the preferred bidder, in which we expect to invest around £7 million of equity, and five for which we are shortlisted, with a potential equity requirement of up to £33 million. The acquisition of Mowlem also adds substantial value to our PPP portfolio. Mowlem has 10 financially closed PPP projects in which it has either already invested, or commitments to invest, some £51 million. It also has three projects for which it is the preferred bidder, in which it expects to invest around £77 million of equity and is shortlisted for two projects with a potential equity requirement of up to £29 million. Construction Services £ million 2005 2004 Revenue Group 1,050.1 949.3 JVs 180.0 56.1 ------- ------ 1,230.1 1,005.4 ------- ------ Operating profit* 16.9 12.5 JV Interest & tax (3.1) (0.3) ------- ------ Profit from operations* 13.8 12.2 ------- ------ * Before a JV non operating loss of £0.8m (2004 non-operating profit £1.7m) and after tax on joint ventures of £1.8m (2004: £0.7m credit) In this segment we report the results of our UK building and construction activities and International Regional businesses. Revenue in Construction Services increased by 22 per cent, despite the disposals in 2004 of Crown House and our contracting business in France, which together contributed over £200 million of revenue in 2004. Progress in this segment is due to healthy growth in the Middle East and Canada, continuing success in our chosen sectors of the UK commercial building market and a strong performance by our Developments business. Operating profit increased by 35 per cent and the operating margin rose from 1.2 per cent to 1.4 per cent. This was achieved despite the effect of introducing, in the second half of 2004, a new method by which we recognise profit on major construction contracts. Previously, profit was recognised broadly in proportion to turnover after taking account of risks and uncertainties. In addition, we now take no profit on the first 20 per cent of turnover and this profit is deferred until contracts are completed. The effect of this in 2005 has been to reduce reported operating profit by £5.4 million (2004: £3.3 million). Total deferred profit relating to this change at 31 December was £8.7 million, which we expect to begin releasing to profit in 2007 as contracts reach completion. Support Services £ million 2005 2004 Revenue Group 974.6 908.9 JVs 14.1 8.3 ------- ------ 988.7 917.2 ------- ------ Operating profit* 40.6 39.7+ JV Interest & tax (0.2) (0.2) ------- ------ Profit from operations* 40.4 39.5 ------- ------ * Before amortisation of intangible assets of £2.5 m (2004: nil) and after tax on joint ventures of £0.1m (2004: nil) + Excluding a one-off increase of £7.2m relating to the transfer of rail maintenance to Network Rail In this segment we report the results of our activities in rail infrastructure, roads maintenance, facilities management and other support services. Revenue in Support Services increased by nearly 8 per cent, as the acquisition of PME and organic growth more than offset a reduction in revenue from our rail infrastructure activities. The latter was largely due to transferring to Network Rail maintenance contracts that generated around £150 million in 2004. Organic growth was driven primarily by road maintenance in Canada and the UK. Growth in Canada has been particularly strong following our success in winning contracts in Ontario, where we have established a market leading position. Since the year-end, we have built on that success by winning a further contract that will extend our operations to Alberta. Operating profit increased by £0.9 million (excluding the £7.2 million one-off increase in profit in 2004, relating to the transfer of rail maintenance to Network Rail) and the operating margin reduced from 4.3 per cent to 4.1 per cent, reflecting the loss of rail maintenance contracts, which had higher than average margins in this segment. PME performed in line with our expectations, contributing £149 million of revenue and £3.5 million of operating profit in the year, following its acquisition in March 2005. New Bank Facility In connection with the acquisition of Mowlem plc, a new committed bank facility totalling £490 million has been arranged. Of this amount, £190 million is repayable at the end of five years, £250 million is repayable over five years and £50 million is available for 364 days with a six month term-out option. Consolidated income statement For the year ended 31 December 2005 2005 2004 £m £m ----------------------------------------------------------------------------------------- |Total revenue 2,284.2 1,985.1 | |Less: Share of jointly controlled entities revenue (258.7) (126.1)| ----------------------------------------------------------------------------------------- Revenue 2,025.5 1,859.0 Cost of sales (1,888.6) (1,698.9) --------------------------------------- ------- ------- Gross profit 136.9 160.1 Administrative expenses (104.6) (116.6) --------------------------------------- ------- ------- Group operating profit 32.3 43.5 ------------------------------------------------------------------------------------------ |Jointly controlled entities | |Operating profit 20.3 13.0 | |Net financing income/(expense) 1.1 (3.4) | |Non-operating items (0.8) 1.5 | |Income tax (5.0) (2.0) | ------------------------------------------------------------------------------------------ Share of results of jointly controlled entities 15.6 9.1 --------------------------------------- ------- ------- Profit from operations 47.9 52.6 Non-operating items - 10.1 ------------------------------------------------------------------------------------------ |Financial income 54.4 52.3 | |Financial expenses (50.4) (48.2) | ------------------------------------------------------------------------------------------ Net financing income 4.0 4.1 --------------------------------------- ------- ------- Profit before tax* 51.9 66.8 Income tax (11.1) (8.6) --------------------------------------- ------- ------- Profit for the year 40.8 58.2 ------- ------- Attributable to: Equity holders of the parent 39.3 56.4 Minority interests 1.5 1.8 ------- ------- Profit for the year 40.8 58.2 ------- ------- Earnings per share* Basic 18.7p 27.1p Diluted 18.4p 26.7p Total dividend declared for the year 8.0p 7.5p ------- ------- The above results for both years derive from continuing operations. * A reconciliation of the reported result to the underlying result is given in Note 4. Consolidated statement of recognised income and expense For the year ended 31 December 2005 2005 2004 £m £m Foreign exchange translation adjustments 1.6 (1.1) Actuarial gains and losses on defined benefit pension schemes 6.7 26.3 Group share of change in fair value of cash flow hedges within jointly controlled entities (1.3) - (net of tax) ------- -------- 7.0 25.2 Tax in respect of the above (1.5) (8.3) ------- -------- Income and expense recognised directly in equity 5.5 16.9 Profit for the year 40.8 58.2 ------- -------- Total recognised income and expense for the year 46.3 75.1 -------- Effect of adoption of IAS 32 and IAS 39 (net of tax) on 1 January 2005 Hedging reserve (9.7) Fair value reserve 0.9 ------- 37.5 ------- Attributable to: Equity holders of the parent 44.8 73.3 Minority interests 1.5 1.8 ------- -------- Total recognised income and expense for the year 46.3 75.1 ------- -------- Reconciliation of movements in consolidated equity shareholders' funds For the year ended 31 December 2005 2005 2004 £m £m Recognised income and expense 44.8 73.3 Equity settled transactions (net of deferred tax) 0.9 0.4 New share capital subscribed 1.7 0.4 Share options exercised by employees 0.7 0.8 Dividends paid to equity holders of the parent (16.1) (16.4) ------- ------- Net addition to equity shareholders' funds 32.0 58.5 Opening equity shareholders' funds (as restated) 116.7 67.0 ------- ------- Closing equity shareholders' funds 148.7 125.5 ------- ------- Opening equity shareholders' funds (as previously reported) 125.5 Effect of adoption of IAS 32 and IAS 39 on 1 January 2005 (8.8) ------- ------- Opening equity shareholders' funds (as restated) 116.7 ------- ------- Consolidated balance sheet As at 31 December 2005 2005 2004 £m £m Assets Non-current assets Property, plant and equipment 100.9 69.9 Intangible assets 62.3 20.3 Retirement benefit assets 6.4 4.6 Investments in jointly controlled entities 62.7 65.1 Other investments 4.7 6.8 Deferred tax assets 35.2 35.3 ------- ------- Total non-current assets 272.2 202.0 ------- ------- Current assets Inventories 21.2 18.0 Income tax receivable 0.2 0.4 Trade and other receivables 459.7 389.1 Cash and cash equivalents 180.9 202.7 ------- ------- Total current assets 662.0 610.2 ------- ------- Total assets 934.2 812.2 ------- ------- Liabilities Current liabilities Borrowings (17.0) (17.4) Derivative financial instruments (0.3) - Trade and other payables (600.4) (486.2) Provisions - (1.8) Income tax payable (13.3) (24.4) ------- ------- Total current liabilities (631.0) (529.8) ------- ------- Non-current liabilities Borrowings (73.1) (56.5) Retirement benefit liabilities (74.3) (89.8) Deferred tax liabilities (6.0) (8.1) Provisions - (0.4) ------- ------- Total non-current liabilities (153.4) (154.8) ------- ------- Total liabilities (784.4) (684.6) ------- ------- Net assets 149.8 127.6 ------- ------- Equity Issued share capital 107.4 107.1 Share premium 8.2 6.8 Reserves (1.0) 6.8 Retained earnings 34.1 4.8 ------- ------- Equity attributable to equity holders of the parent 148.7 125.5 Minority interests 1.1 2.1 ------- ------- Total equity 149.8 127.6 ------- ------- Consolidated statement of cash flows For the year ended 31 December 2005 2005 2004 £m £m Cash flows from operating activities Profit for the year 40.8 58.2 Depreciation, amortisation and impairment 20.5 16.8 Profit on disposal of property, plant & equipment (0.9) - Share based payment expense 1.2 0.6 Other non-cash movements (3.2) 3.0 Share of results of associates and joint ventures (15.6) (9.1) Non-operating profit on disposal of property, plant & equipment - (2.9) Profit on disposal of investments in associates and joint ventures - (7.7) Loss on disposal of businesses - 0.5 Net financing income (4.0) (4.1) Income tax expense 11.1 8.6 ------- ------- Operating profit before changes in working capital and provisions 49.9 63.9 Increase in inventories (2.6) (1.9) (Increase)/decrease in trade and other receivables (26.4) 16.5 Increase in trade and other payables 65.1 13.7 Decrease in provisions (2.2) (0.3) ------- ------- Cash generated from operations before pensions scheme contribution 83.8 91.9 Contribution to PME pension scheme (10.0) - ------- ------- Cash generated from operations 73.8 91.9 Interest paid (4.6) (3.5) Income taxes paid (19.5) (12.7) ------- ------ Net cash flows from operating activities 49.7 75.7 ------- ------ Cash flows from investing activities Disposal of property, plant and equipment 7.3 6.9 Disposal of investments in jointly controlled entities 0.6 20.2 Disposal of other non-current investments 3.4 0.9 Interest received 7.4 7.2 Dividends received from jointly controlled entities 8.4 7.3 Disposal of businesses, net of cash disposed of - (4.3) Acquisition of subsidiary, net of cash acquired (37.1) - Acquisition of property, plant and equipment (34.2) (14.8) Acquisition of intangible assets (4.3) (0.2) Acquisition of investments in and loan advances to jointly (2.3) (1.0) controlled entities ------- ------ Net cash flows from investing activities (50.8) 22.2 ------- ------ Cash flows from financing activities Proceeds from the issue of share capital 1.7 0.4 Draw down of other loans 3.4 2.2 Repayment of bank loans (2.8) (5.6) Payment of finance lease liabilities (3.7) (2.9) Dividends paid to equity holders of the parent (16.1) (16.4) Dividends paid to minority interests (2.5) (2.0) ------- ------ Net cash flows from financing activities (20.0) (24.3) ------- ------ Net (decrease)/increase in cash and cash equivalents (21.1) 73.6 Cash and cash equivalents at beginning of period 189.6 116.2 Effect of exchange rate fluctuations on cash held 1.2 (0.2) ------- ------ Cash and cash equivalents at end of year 169.7 189.6 ------- ------ Cash and cash equivalents comprise: Cash and cash equivalents 180.9 202.7 Bank overdrafts (11.2) (13.1) ------- ------ 169.7 189.6 ------- ------ Notes 1. Basis of preparation Carillion plc has previously prepared its financial statements in accordance with UK generally accepted accounting principles. From 2005, the Group is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. These results represent the first annual financial statements prepared in accordance with IFRS. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Group was published on 30 June 2005 and is available on the Group's website at www.carillionplc.com. The financial information set out herein (which was approved by the Board on 8 March 2006) does not constitute the Company's statutory accounts for the years ended 31 December 2005 and 2004 but is derived from the 2005 statutory accounts. The statutory accounts for the year ended 31 December 2004, which were prepared under UK GAAP, have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2005, prepared under International Financial Reporting Standards adopted for use in the EU, will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under section 237(2) or (3) of the Companies Act 1985. 2. Segmental reporting Segment information is presented in respect of the Group's business segments, which are the primary basis of segment reporting. The business segment reporting format reflects the Group's management and internal reporting structure. Inter- segment pricing is determined on an arm's length basis. Segment trading results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Business segments The Group is comprised of the following main business segments: • Construction Services: UK building, development and civil engineering activities and international regional construction services. • Support Services: Rail infrastructure, roads maintenance, facilities management and other support services. • Investments: Equity returns on investments in Public Private Partnership (PPP) projects Construction Support Investments Eliminations Consolidated Services Services and unallocated head office 2005 £m £m £m £m £m Revenue from external customers 1,050.1 974.6 0.8 - 2,025.5 Inter-segment revenue 0.3 28.6 - (28.9) - --------- --------- --------- --------- --------- Segment revenue 1,050.4 1,003.2 0.8 (28.9) 2,025.5 --------- --------- --------- --------- --------- Segment trading 4.8 39.9 0.8 - 45.5 result Amortisation/ i - (2.5) (0.3) - (2.8) mpairment of intangible assets Unallocated expenses - - - (10.4) (10.4) --------- --------- --------- --------- --------- Group operating profit 4.8 37.4 0.5 (10.4) 32.3 --------- --------- --------- --------- --------- Share of profit of 8.2 0.5 6.9 - 15.6 jointly controlled --------- --------- --------- --------- --------- entities Profit from operations 13.0 37.9 7.4 (10.4) 47.9 --------- --------- --------- --------- Non - - operating items Net financing income 4.0 Income tax expense (11.1) --------- Profit for the 40.8 year --------- Construction Support Investments Eliminations Consolidated Services Services and unallocated head office 2004 £m £m £m £m £m Revenue from external customers 949.3 908.9 0.8 - 1,859.0 Inter-segment revenue 0.5 25.9 - (26.4) - --------- --------- --------- --------- --------- Segment revenue 949.8 934.8 0.8 (26.4) 1,859.0 --------- --------- --------- --------- --------- Segment trading 10.5 46.3 (4.3) - 52.5 result Amortisation/ i - - (0.3) - (0.3) mpairment of intangible assets Unallocated expenses - - - (8.7) (8.7) --------- --------- --------- --------- --------- Group operating profit 10.5 46.3 (4.6) (8.7) 43.5 --------- --------- --------- --------- --------- Share of profit of 3.2 0.4 5.5 - 9.1 jointly controlled --------- --------- --------- --------- --------- entities Profit from operations 13.7 46.7 0.9 (8.7) 52.6 --------- --------- --------- --------- Non - operating items 10.1 Net financing income 4.1 Income tax expense (8.6) --------- Profit for the 58.2 year --------- 3. Dividends The following dividends were paid by the Company: 2005 2004 £m Pence per £m Pence per share share Current year interim 6.0 2.8 5.6 2.675 Previous year final 10.1 4.825 10.8 5.175 ------- ------- ------- ------- 16.1 7.625 16.4 7.85 ------- ------- ------- ------- The following dividends were proposed by the Company in respect of each financial year: 2005 2004 £m Pence per £m Pence per share share Interim 6.0 2.8 5.6 2.675 Final 14.6 5.2 10.1 4.825 ------- ------- ------- ------- 20.6 8.0 15.7 7.5 ------- ------- ------- ------- The interim dividend for 2004 includes 1.0 pence per share that represents a return to shareholders of a proportion of the profit generated on the disposal of PPP equity shareholdings. The final dividend for 2005 of 5.2 pence per share was approved by the Board on 8 March 2006 and has not been included as a liability as at 31 December 2005. The amount expected to be paid in respect of the 2005 final dividend of £14.6m includes the dividend payable on 65.8 million new Carillion shares issued following the acquisition of Mowlem plc on 23 February 2006. 4. Earnings per share (a) Basic earnings per share The calculation of basic earnings per share at 31 December 2005 is based on the profit attributable to equity holders of the parent of £39.3m (2004: £56.4m) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2005 of 210.5m (2004: 208.4m), calculated as follows: Weighted average number of ordinary shares In millions of shares 2005 2004 Issued ordinary shares at 1 January 214.3 214.0 Effect of own shares held by ESOP and QUEST (4.1) (5.7) Effect of shares issued in the year 0.3 0.1 ------- ------- Weighted average number of ordinary shares at 31 December 210.5 208.4 ------- ------- (b) Underlying A reconciliation of profit before tax and basic earnings per share as reported in the income statement to underlying profit before tax and basic earnings per share is set out below. The adjustments made in arriving at the underlying performance measures are made to illustrate the impact of non-trading and non-recurring items. 2005 2004 £m £m Profit before tax Profit before tax as reported in the income statement 51.9 66.8 Amortisation of intangible assets arising from business combinations 2.5 - Impairment of goodwill 0.3 0.3 Loss/(profit) on disposal of investments and businesses 0.8 (11.8) One-off impact of Network Rail transfer - (7.2) ------- ------- Underlying profit before tax 55.5 48.1 ------- ------- 2005 2004 Pence per share Pence per share Basic earnings per share Basic earnings per share as reported in the income statement 18.7 27.1 Amortisation of intangible assets arising from business combinations 1.2 - Impairment of goodwill 0.1 0.1 Loss/(profit) on disposal of investments and businesses 0.4 (6.2) One-off impact of Network Rail transfer - (2.4) ------- ------- Underlying basic earnings per share 20.4 18.6 ------- ------- c) Diluted earnings per share The calculation of diluted earnings per share at 31 December 2005 is based on profit as shown in note 4(b) and a weighted average number of ordinary shares outstanding calculated as follows: Weighted average number of ordinary shares (diluted) In millions of shares 2005 2004 Weighted average number of ordinary shares at 31 December 210.5 208.4 Effect of share options in issue 3.1 2.8 ------ ------- Weighted average number of ordinary shares (diluted) at 31 December 213.6 211.2 ------ ------- 5. Acquisitions On 8 March 2005, the Group acquired the entire share capital of Planned Maintenance Group Limited (PMG) on an adjusted price basis for £33m in cash pursuant to the completion accounts process. The company and its subsidiaries operate in the building services and maintenance industry and its results are reported in the Support Services segment. In the period from acquisition to 31 December 2005 PMG contributed profit before tax of £3.5m to the consolidated profit for the period. If the acquisition had occurred on 1 January 2005, Group revenue would have been £2,054.1m and profit before tax would have been £52.4m for the year ended 31 December 2005. Effect of acquisitions The acquisition had the following effect on the Group's assets and liabilities. Acquiree's net assets at the acquisition date Carrying Fair value Recognised amounts adjustments values £m £m £m Property, plant and equipment 1.7 - 1.7 Intangible assets 1.0 6.2 7.2 Deferred tax asset 7.0 - 7.0 Inventories 0.2 - 0.2 Trade and other receivables 38.9 - 38.9 Cash and cash equivalents 0.1 - 0.1 Borrowings (3.0) - (3.0) Trade and other payables (38.9) - (38.9) Retirement benefit liabilities (13.5) - (13.5) ----------- ----------- ----------- Net identifiable assets and liabilities (6.5) 6.2 (0.3) ----------- ----------- Goodwill recognised on acquisition 34.5 ----------- Consideration paid, satisfied in cash* 34.2 Net debt acquired 2.9 ----------- Net cash outflow 37.1 ----------- * Includes costs associated with the acquisition of £1.2m 6. Explanation of transition to IFRS These are the Group's first consolidated financial statements prepared in accordance with IFRS. The Group's IFRS accounting policies have been applied in preparing the consolidated financial statements, including comparative information for the year to 31 December 2004 and the preparation of an opening IFRS balance sheet at 1 January 2004 (the Group's date of transition). In preparing its opening IFRS balance sheet and comparative information for the year to 31 December 2004, the Group has adjusted amounts reported previously in financial statements prepared in accordance with previous GAAP. In addition, following the adoption of IAS 32 and IAS 39, the Group has adjusted previously restated total equity at 1 January 2005. The reconciliation of total equity at 1 January 2004 and 31 December 2004 is given below: 31 December 2004 1 January 2004 £m £m Total equity as previously reported under UK GAAP 186.9 151.6 --------- -------- Adjustments on adoption of IFRS: Employee benefits (69.3) (90.0) Business combinations 3.2 - Share-based payments 0.3 0.2 Deferred tax (2.9) (3.4) Proposed dividends 10.1 10.8 Other (0.7) 0.1 --------- -------- Total IFRS adjustments (59.3) (82.3) --------- -------- Total equity under IFRS 127.6 69.3 --------- -------- The reconciliation of total equity at 1 January 2005 following the adoption of IAS 32 and IAS 39 is given below: 1 January 2005 £m Total equity as reported under IFRS at 31 December 2004 127.6 -------- Adjustments on adoption of IAS 32 and IAS 39: Group share of fair value of cash flow hedges in associates and jointly controlled entities (9.7) (net of deferred tax assets of £4.2m) Fair value of available for sale investments 1.3 Deferred tax on the above (0.4) -------- Total IAS 32 and IAS 39 adjustments (8.8) -------- Total equity under IFRS at 1 January 2005 118.8 -------- The reconciliation of profit for the year to 31 December 2004 is given below: Year to 31 December 2004 £m Loss for the period under UK GAAP (16.0) -------- Adjustments on adoption of IFRS: Employee benefits 2.2 Business combinations 71.8 Share based payments (0.2) Deferred tax 0.5 Other (0.1) -------- Total IFRS adjustments 74.2 -------- Profit for the period under IFRS 58.2 -------- Employee benefits IAS 19 replaces SSAP 24 'Accounting for pension costs' and is broadly similar to the requirements of FRS 17 'Retirement benefits'. Disclosure of the potential impact of FRS 17 has been included in the Group's annual report and accounts since 2001. As permitted by IAS 19, the Group has opted to recognise immediately and in full the actuarial gains and losses arising in each accounting period in the Statement of Recognised Income and Expense. This treatment is similar to the requirements of FRS 17. Under IAS 19 the surplus or deficit relating to defined benefit schemes are recognised on the balance sheet of the Group. Although the methodology for determining the profit and loss account charge is similar to SSAP 24, the actuarial assumptions are different. In particular, IAS 19 requires the discount rate used in the evaluation of scheme liabilities to be based on market yields on high quality corporate bonds at the balance sheet date. In contrast, SSAP 24 required the use of long-term investment return rate to discount liabilities. The difference in approach to the discount rate used can lead to a more volatile profit and loss account charge under IAS 19 compared to SSAP 24. Business combinations IFRS 3 'Business combinations' covers the accounting for acquisitions, which is dealt with under UK GAAP by FRS 6 'Acquisitions and mergers', FRS 7 'Fair values in acquisition accounting', and FRS 10 'Goodwill and intangible assets'. IFRS 3 strictly prohibits the use of merger accounting that in certain circumstances can be applied under UK GAAP. Although goodwill arising on business combinations is recognised as an asset in the balance sheet under both IFRS and UK GAAP, IFRS 3 prohibits the amortisation of goodwill. Instead, IFRS 3 requires goodwill to be subject to annual impairment reviews. In addition, goodwill previously written off to reserves under UK GAAP remains in reserves under IFRS and is not re-cycled through the income statement on disposal of the business to which it relates. The adjustment in the table above relates primarily to goodwill previously written off to reserves on the original acquisitions of Crown House Engineering and Carillion BTP, which were both disposed of in 2004. The impairment of goodwill under IFRS relates to UK Highways Services Limited reflecting the reduction in future cash flows as we move nearer to the end of it's maintenance contract in 2007. Share-based payments IFRS 2 'Share based payments' replaces UITF 17 'Employee share schemes' under UK GAAP. IFRS 2 requires the fair value cost of providing employee share option schemes to be charged to the income statement, and in respect of equity settled share based payments, recognised directly in equity. This differs to the UITF 17 approach under which the charge to the income statement is based on the intrinsic value of the share options. The scope of IFRS 2 is wider than UITF 17 as it relates to all share based payments. Consequently, Save as You Earn (SAYE) schemes are within the scope of IFRS 2, whereas under UITF 17 they are specifically exempt. Deferred tax IAS 12 'Income taxes' is the IFRS equivalent of FRS 16 'Current tax' and FRS 19 'Deferred taxation' under UK GAAP. There is no change to the basis of calculating current income tax as a result of adopting IAS 12. However, the basis of calculating deferred tax changes from an income statement approach under FRS 19 to a balance sheet approach under IAS 12. The balance sheet approach compares the tax value with the carrying value of assets and liabilities at the balance sheet date. Of the additional requirements of IAS 12, the most significant is the requirement to recognise a deferred tax liability in respect of the unremitted earnings of overseas entities, where their distribution cannot be controlled or planned by the Group. Proposed dividends IAS 10 (revised 2003) 'Events after the balance sheet date' is the FRS equivalent of SSAP 17 'Accounting for post balance sheet events in the UK. Both standards are similar except in respect of the accounting treatment of dividends. Under IAS 10, dividends declared and approved by shareholders after the balance sheet date are not permitted to be recognised as a liability at the balance sheet date. This differs from the UK GAAP treatment of proposed dividends, which are accrued for the in the financial period to which they relate. The adjustment reflects the reversal of the proposed dividend accrued in the 2004 financial statements. 7. Posting of statutory accounts to shareholders The Company's report and accounts will be posted to shareholders on 4 April 2006 . From that date copies will be available from the registered office, Carillion plc, Birch Street, Wolverhampton, WV1 4HY. 8. Annual general meeting A resolution will be put to shareholders at the AGM on 10 May 2006 for the Company to be authorised to purchase its own shares. The Board has no present intention of making any such purchase and the resolution is in keeping with the practice of other companies. This information is provided by RNS The company news service from the London Stock Exchange

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