Preliminary Results

Costain Group PLC 15 March 2006 Costain Group PLC ('Costain' or the 'Group') Preliminary results for the year ended 31 December 2005 Costain, the international engineering and construction group, announces increased turnover and profit for the year ended 31 December 2005 and the conclusion of a strategic review Financial highlights 2005 2004 % change Turnover Â£773.2m Â£695.2m 11 Operating Profit Â£25.6m Â£9.3m 175 Profit before tax Â£25.0m Â£10.5m 138 Underlying Profit* Â£20.7m Â£19.5m 6 Earnings per share 6.7p 2.5p 168 * Profit before tax and before IFRS restatements in relation to Spanish property, share based payments and hedging costs Operational highlights â€¢ New strategy in place : 'Being Number One' â€¢ New Chief Executive and senior management appointments â€¢ Record forward order book up 73% to Â£1.9bn (2004: Â£1.1bn) â€¢ Building on excellent market positions â€¢ Balance sheet restructured : dividend payment and pension deficit being addressed Commenting, the Chairman, David Jefferies, said: 'The Group made good progress in 2005. We are particularly pleased with the forward order book which not only stands at record levels but, more importantly, substantially includes secure work over a five-year term of which a significant proportion is repeat business. The current year has started well. In-line with our 'Being Number One' strategy, 2006 will see a greater emphasis on establishing market leading positions in selected sectors and this, combined with other actions, will help ensure that Costain achieves its new objective for the next three years of double-digit growth in both turnover and underlying profitability.' 15 March 2006 ENQUIRIES: Costain Group PLC Tel: 01628 842 444 Andrew Wyllie, Chief Executive Charles McCole, Finance Director Graham Read, Public Relations College Hill Tel: 020 7457 2020 Mark Garraway Matthew Gregorowski CHAIRMAN'S STATEMENT I am pleased to report that the Company continued to make good progress in 2005. The year saw a number of major developments including the appointment of a new Chief Executive, the successful restructuring of the balance sheet and a record forward order book including long-term contracts that give the Group an outstanding quality and visibility of sustainable earnings. In September 2005, Andrew Wyllie formally succeeded Stuart Doughty as Chief Executive. Andrew joined from Taylor Woodrow Construction Limited where he was Managing Director. We were delighted to have found someone of Andrew's immense experience of, and track record in, the industry. Since joining Costain, Andrew has completed a strategic review and this was recently approved by the Board. He sets out in detail the key components of the 'Being Number One' strategy in his Chief Executive's Report. Following the significant water contract wins of the first half, the latter part of the year also recorded some notable successes including a major contract on the M1 motorway, Costain's largest road project to date, further work on the M25 motorway and a nuclear decommissioning contract. These awards further reinforced Costain's strategy of targeting sectors where it can establish leading market positions through partnering relationships with major clients and develop long-term framework agreements. Results This is the first set of annual results that the Group is reporting under International Financial Reporting Standards ('IFRS') which, as previously reported, have no impact upon the underlying cash flows or trading activities of the Group but do impact on the timing of accounting for both revenue and profit recognition from the Group's property development activities in Southern Spain. Such revenue can now only be recognised when risk associated with ownership of the land is transferred to the purchaser and all significant acts (such as infrastructure works) are complete. The impact of this change is to defer sales recognised by the joint venture. As was previously explained in the announcement published on 17 August 2005 on the 'Transfer to IFRS', this reduced the Group's earnings for the year ended 31 December 2004 by Â£6.4m. As expected, the majority of these infrastructure works were completed in 2005 and the corresponding profit recognised. The results for the year ended 31 December 2005 show a turnover of Â£773.2m (2004: Â£695.2m). As expected, the balance of earnings for the year was more weighted towards the second half with a full-year profit before tax of Â£25.0m (2004: Â£10.5m). Profit after tax of Â£23.6m (2004: Â£8.8m) includes a contribution of Â£14.0m from the Alcaidesa joint venture and Â£3.5m profit on the sale of half of the Company's shareholding in Kings College Hospital PFI. Earnings per share were 6.7p (2004: 2.5p). At the year-end, the forward order book was Â£1.9bn (2004: Â£1.1bn) up 73%, of which Â£760m relates to 2006 and of which 70% is repeat order business. The Group has no significant borrowings and net cash balances at the full-year totalled Â£74.0m (2004: Â£62.6m), including the Group's share of cash held by joint arrangements (construction joint ventures) of Â£22.0m (2004: Â£18.9m). The continuing changing profile of the business into framework/partnered client relationships will result in a more evenly balanced cash flow profile going forward. Pensions Following discussions with the Trustee of the Costain Pension Scheme the Board agreed that the final salary scheme would be closed to new employees who would have the opportunity to join a defined contribution scheme. This change was effective as of 1 June 2005. In addition, the final salary scheme is being changed to a Career Average Revalued Earnings (CARE) scheme with effect from 1 April 2006. The Company is increasing its contributions to the Costain Pension Scheme from 15.6% of pensionable salaries to 21.6% of pensionable salaries also with effect from 1 April 2006. The active members of the Pension Scheme are also increasing their contributions from 8% to 10% from the same date. These steps have been taken to help address the deficit on the Group's pension scheme. Dividend In April last year, shareholders approved a restructuring of the Group's balance sheet, by way of a reduction of share capital and cancellation of the share premium account. Following the restructuring, the Company's distributable reserves were re-set at nil. As reported last year, this will allow the Board to consider, subject to prevailing trading conditions, a resumption of a final dividend payment in respect of 2006. As well as prevailing trading conditions, a resumption of dividend payments must also take into account our obligation to address the deficit on the Group's pension scheme which, as at the year-end, stood at Â£69.5m net of deferred tax. Following extensive discussions with the Trustee of the Costain Pension Scheme, the Board has agreed that a resumption of dividend payments will be matched pound for pound by a payment into the scheme. The Pensions Regulator, having been approached by the Board, has agreed the proposal in principle and formal clearance will be sought at the appropriate time. Board Charles McCole, Finance Director, had previously notified the Board that he wished to pursue new opportunities in the future and did not feel able to give a long term commitment to the Company. The Board was therefore pleased to announce on 6 March 2006 that Anthony Bickerstaff FCCA, Finance Director of Taylor Woodrow Construction Limited, would succeed Charles McCole as Finance Director at a date to be finalised but expected to be not later than June 2006. Charles McCole will remain with the Company to ensure a smooth handover. Anthony Bickerstaff has considerable experience both in the industry and the finance arena. He will be an able successor to Charles McCole, who has made a significant contribution to our successful recovery and whom we wish well for the future. Outlook The Group made good progress in 2005. We are particularly pleased with the forward order book, which not only stands at record levels but, more importantly, includes secure work over a five-year term of which a significant proportion is repeat business. The current year has started well, with continuing high levels of customer spend in our targeted markets. Our 'Being Number One' strategy will see a greater emphasis on establishing market leading positions in selected sectors and this, combined with other actions, will help ensure that Costain achieves its new objective of double-digit growth in both turnover and underlying profitability over the next three years. David G Jefferies Chairman CHIEF EXECUTIVE'S REPORT I am delighted to have been given the opportunity to lead one of the UK's best known construction and engineering companies. My impression of Costain before my arrival in August 2005 was of a company with a strong brand, quality contracts and talented people - all of the raw materials needed to take a business forward. Since joining, I have met many of the Group's skilled and dedicated people and spoken to a wide range of customers. There is much to inspire confidence. My predecessor, Stuart Doughty, and his team had achieved a great deal. The business has grown, there is a good order book with an emphasis on long-term relationships and there is a belief, both internally and externally, in the Group's ability to build on its recovery. When I arrived, I said that my intention was to embark on a course of 'evolution not revolution'. That remains the case. I have spent a considerable amount of time analysing the strengths of Costain and the areas which could and will be improved. A clear conclusion was that, as the Group expanded during its recovery phase, resources in certain parts of the business, especially in Building, were stretched. Management teams in those areas have been significantly strengthened and working practices brought into line with those in the rest of the Group. With my fellow Executive Board Directors, I have completed a strategy document - 'Being Number One'. This has been approved by the Board and will provide the foundation for future Costain success. 'Being Number One' 'Being Number One' is about striving for leadership through focus and excellence. Capitalising on our core strengths, it is a strategy to ensure that we are the best in everything we do. Our approach is underpinned by a strongly held belief that developing strong market positions is a pre-requisite for sustainable profitability and cashflow. To grow and to create strong market positions, we need to adopt a greater focus in fewer areas of operation. This will enable us to commit more resources to those areas where we believe we have competitive advantage and where we can generate the greatest return. Greater focus will also allow us to play to our core strengths, including a reputation for technical capability coupled with exceptional customer service. Costain's recent successes have highlighted, in many areas, a quality and delivery of a far higher calibre than that of the competition. Now we must ensure that this is a consistent theme across all of our operations and that everyone in the business strives for continual excellence. This is not new territory for Costain and our people are very ambitious. We are already the market leader in Asset Management in the Water sector where, in 2005, we were successful in renewing all of our five year framework contracts and, in most cases, with enhanced opportunity of increased turnover. Our people regularly receive awards and praise for their work. We have a skills base second to none, which is enhanced through our training and general development programmes. The components of success are to be found in many parts of the business. Our priority is to ensure that they are replicated across the whole Group. 2006 Objectives To ensure that we deliver our strategy, we have set some clear objectives for 2006 which are:- â€¢To maintain our priority on the management of Health and Safety, with zero tolerance for accidents â€¢To focus our efforts and develop even stronger positions in our key targeted markets â€¢To achieve progress towards our three year objective of double-digit growth in turnover and underlying profit â€¢To provide a challenging and stimulating working environment where our people enjoy their jobs, can fulfil their potential and are recognised for their efforts â€¢To ensure we achieve improved customer satisfaction scores by providing excellent and innovative project and framework solutions â€¢To continue to develop our supply chain through closer working relationships with a reduced number of key suppliers â€¢To implement Best Practice and rigorous risk management across Costain to ensure that our operations are as efficient and effective as possible Safety, Health and Environment I have made it clear, both internally and externally that safety will continue to be Costain's first priority. Everybody in the business has a corporate and individual responsibility to ensure that our operations are properly and effectively managed in a safe, healthy and environmentally controlled manner. We will adopt a zero tolerance to accidents. We cannot afford to fail in this area, not least because we know that excellent health, safety and environmental performance also has a direct correlation with bottom line business results. It makes good business sense for both the Company and our customers. We are working closely with the Health and Safety Executive (HSE) and the Major Contractors Group on the introduction of further initiatives relating to specific issues including noise, lifting, vibration white finger, stress and asbestos working. The Costain Safety, Health and Environment (SHE) culture will be developed through continuous improvement across our operations. Although our current performance places us in the upper quartile of our industry peer group of Major Contractors, we are still not satisfied, and are aiming for Costain to be recognised as being at the very vanguard of SHE leadership. Achieving leading market positions Our strategy is focused on building long-term partnership and framework relationships with large sophisticated 'blue chip' customers, who have the ability to place repeat orders with Costain. These major customers are looking for Costain to deliver much more than just consistently high quality projects. Within long-term framework relationships, they are also looking for us to be proactive in delivering tangible benefits to their businesses. To do this on a consistent basis requires us to have a detailed knowledge of their operations and the challenges that they face, whether they be a water utility, a retailer or Government department. To provide such a service naturally requires a high degree of sector expertise, a specialist supply chain and teams led by knowledgeable people. All of the major customers in the industry are moving - in one form or another - towards longer-term relationships with contractors, and are increasingly demanding higher levels of sector expertise and service. Our future success will depend on our ability to focus and properly align our organisation to be at the forefront of meeting these sector specific needs. In the water sector, we are already the number one contractor, and we have every intention of retaining that position. Costain's success in water is the result of a focused strategy in pursuit of the market leading position and the deployment of specialist teams to deliver results. Drawing on the water model, we intend to repeat that success elsewhere, specifically in the roads, health, education, nuclear, rail, marine, retail, airport and oil & gas sectors. We will also seek to grow our Spanish land development activity. In all of these markets, we already have a significant presence on which we intend to build, and our skills are recognised in UK and international markets. In roads, for example, we are currently number two and hold the leading position in the Highways Agency Capability Assessment Toolkit (CAT 2) that measures a contractor's capabilities. Recently, in joint venture, we pre-qualified for the M25 PFI scheme, which is valued at Â£1.5 billion. This is the largest single PFI road scheme to be issued to the UK roads market. Pursuing awards such as this will help to achieve our goal of attaining the market leader position. We have made good progress in other sectors too such as education and health. Key individuals, with specialist sector knowledge, have been appointed and high-quality teams are actively pursuing new opportunities. The construction market is generally buoyant, and there is a high demand for the services provided by Costain. This positive environment is good news and allows us to be more selective in ensuring that we achieve profitable growth. Financial Growth It is important that we continue to grow our business so that we can achieve even stronger market positions, provide numerous career opportunities for our people and deliver increasing returns for our shareholders. We will deliver our 2006 profit and turnover targets through a range of initiatives such as customer targeting, product innovation, effective key account management and building stronger relationships with clients. This objective is underpinned by having already secured Â£760m of turnover for 2006. People Our success will depend largely on the quality of our people. Simply put, to be the best and to be Number One, we will need to continue to recruit, retain and develop the very best people. We have a vibrant, challenging and growing business - and an environment that provides tremendous opportunities for everybody. Our policy is to provide proper recognition and reward for the efforts of both individuals and teams, where appropriate. We are committed to linking reward to performance. We are prioritising training and development, detailed performance reviews and succession planning. We have already put in place an Executive Development Programme for senior management advancement. The majority of participants have already been promoted. As we continue to grow we must further develop project management, design management and commercial skills through forums and the general sharing of best practice. Customer Satisfaction Improving customer satisfaction by understanding their needs and exceeding their expectations through excellent delivery is essential to achieving repeat orders. We must also work to enhance our reputation with our customers so that they recommend us to others. Key Account Managers have been appointed for each of our customers. It is their job to manage and co-ordinate the overall Costain relationship with that customer. It is also their responsibility to maximise the number of projects and services that we provide to that customer from across the Costain organisation. We ask our customers to provide regular detailed feedback on our performance increasingly using the Costain Heartbeat approach, which is the Company's in-house scorecard to measure performance. We monitor the feedback by project, division and across the whole of Costain and, we take appropriate action where necessary. It is encouraging that our customer performance results generally indicate a steady improvement. However, detailed analysis indicates that there is still room for specific improvement. Enhanced targets have been set for 2006 to ensure that we continue to enhance our reputation with our customers. Supply Chain Costain recognises the potential for enhanced performance through developing long-term partnership relationships with suppliers. These mutually beneficial relationships, based on trust and a common set of objectives, deliver real business benefits to both parties. By providing greater certainty of future workload to our suppliers, we generate commitment, encourage innovation, strip out duplicated and abortive costs, improve efficiency and increase reliability. To achieve this, we are concentrating on supplier development within key trades and have set a specific supply chain action plan. This includes a reduction in the number of suppliers. Risk Management When a customer purchases a project from Costain, that customer rightly expects the very best service that we can offer. Likewise, it goes to the heart of our values that Costain people are committed to doing a good job. Consequently, we have set out clear procedures to help ensure that we deliver our objective of consistently high levels of service. These processes are called the Implementation of Best Practice (IBP) and are mandatory on every Costain project. I am committed to ensuring we have a strong focus on processes, and that these are constantly reviewed and updated to ensure that they are still as relevant, efficient and effective as they should be. An important area that will receive much attention in 2006 is design management. We must also appreciate that there are risks associated with some of the things that we do, and so live risk registers are maintained on every project. Risk assessments are carried out on all of our activities and, where appropriate, detailed method statements are put in place. Risks and opportunities are also reviewed at a corporate level, and a new Executive Investment Panel has been formed to review all major new project opportunities. Conclusion 'Being Number One' is as much about corporate culture as it is about strategy. It highlights and focuses on Costain's strengths which will be the building blocks for the future. Everybody at Costain must aim to be and supply the best. There must be a commitment at all times to premier performance and mediocrity will not be accepted. This is already part of the Costain culture and that is why I am optimistic about the future. All our stakeholders - who include shareholders, clients, suppliers, local communities and employees - are looking to Costain to maintain the momentum into the future as we seek to occupy the Number One position in everything we do. Andrew Wyllie Chief Executive OPERATING REVIEW Civil Engineering In Civil Engineering, profit was Â£16.0 million on a turnover of Â£329.8 million. Of our record Â£1.9bn orderbook at the end of 2005, 77% is in the core civil engineering activity. Water 2005 brought continued success for Costain in securing further long-term programme delivery framework contracts from Water companies for the next five years, which positions Costain as the leading delivery contractor in the UK Water market. As the delivery of AMP3 comes to a close, Costain will have delivered over Â£600 million of capital work to the UK Water Companies in 700 projects to quality, time and best whole life value. We have resecured contracts with increased scope and value for our existing customers, United Utilities and Yorkshire Water, to add to those contracts re-secured with Thames Water and Dwr Cymru Welsh Water late last year. In June, we were awarded a Â£60 million five year framework for clean water process and distribution by a new customer, Bristol Water Company, which built on specific contracts undertaken for this client in its AMP3 programme. These frameworks have been fully integrated into our Asset Management organisation and we now have significant projected capital spend committed in the second and third years of AMP4. April 2005 saw the award from Southern Water to Costain of the largest individual programme framework secured to date. Costain is working alongside United Utilities and Montgomery Watson Harza in a joint venture company, 4 Delivery Limited, to deliver Southern Water's complete capital process programme in AMP4, worth Â£750 million over the next five years. Over 40% of the total programme is currently under design and work commenced on site within 12 weeks of the transfer of 120 existing Southern Water delivery staff to our new venture. This delivery model is at the forefront of the market place and successful performance will give Costain the ability to develop further long-term security in the Water market well beyond 2010. By March 2006, we will have commenced construction on 80 of the 270 contracts to be undertaken. Major capital projects in Water continue to sit alongside these long-term frameworks as part of our strategy in AMP4 to continue to grow asset management. We are now in the final stages of commissioning our Â£100 million Design & Build Perry Oaks/Iver South scheme for Thames and BAA, to provide new sewerage processing and transfer operations from the Terminal 5 site at Heathrow. This will be fully operational in July 2006, well before the Terminal opens. On the K3 Costain Black & Veatch Joint Venture for Southern Water, we successfully delivered the Â£15 million Lewes Old Town Flooding Scheme to support the EA and DEFRA in eliminating the town centre inundation suffered in 2003. The Â£110 million AMP3 programme was completed in February 2006 when the last of the 54 schemes at Romsey Waste Water Treatment Works was handed over three months early. From the reputation gained both here and during the Southern Water K3 programme, Costain was successful with Black & Veatch in winning the Â£66 million major coastal sewerage upgrade at Margate and Broadstairs, Kent. This three year contract commenced in April 2005 and gives Costain the opportunity to continue to deploy its tunneling and marine skills as part of capital process delivery pedigree, for water companies. The project is forging ahead of programme and the team has delivered some innovative value solutions for Southern Water. The award of these contracts in 2005 has lifted the forward order book in Water to Â£820 million at 2005 prices and gives the Division a platform for strategically developing the business alongside our water company partners. The forward order book does not include the potential to extend the framework contracts for a further period of five years. Costain with its joint venture partner Severn Trent commenced in Spring 2005 delivery of work and waste water services to approximately 1500 Ministry of Defence sites under Aquatrine 'C' PFI project which continues to go well. Roads In the Roads sector, Costain scored another notable achievement when the Â£34 million Sirhowy Way PFI contract in South Wales was successfully delivered nearly four months ahead of schedule and is now being maintained as part of the 30-years concession period. At Â£85 million the Porth Relief Road is the largest local authority highway scheme in the UK. Costain is on target to substantially complete this logistically complicated ECI contract by the end of the year. Substantial road contract additions to the forward order book have been secured during 2005 with the award of three Highways Agency ECI Contracts: A2/M25 (Â£138 million), M25 Holmesdale (Â£57 million) and M1 J10-13 Joint Venture (Â£429 million). Costain won the new Walton Bridge over the Thames for Surrey County Council (value Â£14 million) and an upgrade of the J9 Interchange on the M62 at Rochdale, together with an adjoining major remediation and infrastructure contract for a business park (value Â£24 million) for Wilson Bowden PLC and the Highways Agency. Costain is well advanced with this major project for a developer who specialises in brownfield sites nationally and who will be releasing major plots in September 2006 with overall completion in April 2007. Rail In Rail, we are ahead of programme to deliver the major rail infrastructure for Chelsfield Plc to allow that company's development at White City Retail City to proceed. Costain constructed new viaducts and, at the end of February 2006 built retaining walls on the LUL Hammersmith and City Line together with demolishing redundant infrastructure. At the end of July 2005 the major viaduct was slid into position during a 72-hour possession. As a result of the success with this client, we have been awarded further new station works for LUL on the project to a value of between Â£8 million and Â£12 million. These performances have provided significant opportunities to develop market share in the South East Rail Sector. Work on the Channel Tunnel Rail Link Contract at St Pancras continues and the construction of the new Thames Link Station infrastructure was completed. The focus now is on finishing the new Midland Mainline Station, which is due to be opened in 2006. Despite the complexity of the scheme, 2.7 million man-hours were completed with zero lost-time accidents, a testament to the quality of the management and supervision. King's Cross Underground redevelopment nears completion with only minor architectural finishings and commissioning remaining. The station will open in summer 2006. A contract for the refurbishment of Battersea Park Railway Station, part of the redevelopment of Battersea Power Station, was awarded in the last quarter of 2005 with a value of Â£20 million. Nuclear Decommissioning Moving the Costain capital delivery model and skills developed in the Water market into the developing Nuclear Decommissioning market has been a key expansion priority over the last 12 months. In 2005, we have delivered a series of small decommissioning projects at AWE Aldermaston, Burghfield and Harwell facilities. Out-performance has now been recognised with a preferred bidder position on a long-term framework under the control of the Nuclear Decommissioning Authority (NDA) at Aldermaston and a Â£6 million contract at Winfrith for the Dragon facility for the United Kingdom Atomic Energy Authority. In addition, at Trawsfyndd in North Wales, we have recently secured a five-year major civils works framework for decommissioning work at the Transfer Station estimated at Â£35 million over the five-year contract period and work commenced in November 2005 on the foundations of the low level waste (LLW) store. Costain is building from these framework contracts and has significant opportunity to bid for decommissioning contracts at Hinkley Point, Winfrith, Chapelcross and Sellafield in Q1/Q2 of 2006. Marine With regard to Coastal Defence Works, in March 2005, HRH Duke of York opened the new harbour and arm at West Bay, Dorset. This high quality three year Â£18 million contract was delivered on some of the most exposed coastline in the South West. In the North, another arduous coastal defence scheme for DEFRA at Withernsea on Spurn Head, Humberside. In the second half of 2005, Costain won a Â£4.2 million coastal protection scheme at Whitstable. As a leading contractor in container port development, our teams are currently locked in the final tender stages of bidding for the Â£250 million plus port development at Felixstowe Landguard for Hutchison Whampoa. The client has received full unconditional planning consent and we anticipate this contract will commence construction in June, 2006. As reported in our Interim Statement 2005 the final settlement of the Felixstowe Stage Two development is in part the subject of an insurance claim as a result of ground movement in the early part of the contract. We were also selected to bid to P&O on a shortlist of five contractors for its flagship port development within Thames Gateway Development at 'London Gateway Port'. Two bids submitted for this Â£300 million new container port have been extended until the end of July 2006, while the takeover of P&O by Dubai World Ports is completed. In addition, 2006 will bring further significant port expansion marine opportunities at Hull, Brixham and Stranraer. Costain is hopeful of securing a major port infrastructure contract to construct over the next three years and, in addition has a team engaged in winning a position on the next Environment Agency national framework due to be awarded in early 2007. Airports At the New Robin Hood Airport at Doncaster, Costain handed over aircraft stands and taxi-ways worth Â£10 million, built in less than six months to allow Peel Holdings to open the Airport on programme in March 2005. This was Costain's fifth consecutive successful delivery to Peel Holdings. Fresh from success at Doncaster, we were awarded a three year aircraft pavement framework by Manchester Airport for all its airports valued in excess of Â£50 million and we have just completed the first major project being new charter stands at Manchester Airport (value Â£22 million) and a taxi-way widening at East Midlands Airport. Building In Building, turnover was Â£321.6 million which delivered a profit of Â£4.3 million. The Building Division grew by 36% in 2005 completing the year with a turnover in excess of Â£300 million, thus establishing Costain as a major national player in the sector. As referred to in the Chief Executive's review, this rapid growth stretched resources and has resulted in some lower margin business. These issues are being addressed, key management appointments have been made and robust actions taken to strengthen procurement and operational controls across the business. The volume of new work taken on has given the division the critical mass to enable it to be more selective in tendering future projects which in the medium term will lead to enhanced profit. Winning the 2005 Major Contractor of the Year Award by Building Magazine, reflecting the views of our clients, was evidence of the progress made during the year. Health In the Health sector, financial close was reached on Shropshire PFI and the Company entered into a contract with Nations Healthcare on its Â£34 million Day Treatment Centre facility at Queens Medical Centre. ProCure21 has continued through the year and contracts were completed on Â£30 million of new schemes. Also during the year, construction was completed on the Kent Care Homes PFI and the operational phase is underway. The Broadmoor project was also successfully completed for West London Mental Health NHS Trust in September 2005. The Company sold half of its shareholding in King's College Hospital PFI in 2005, realising a profit of Â£3.5 million. This is the first investment that has been sold into the secondary market. It is intended to sell the balance in 2006. Preferred Bidder status was achieved on the 3 Shires PFI project, the first batched PFI project for the NHS with a total capex value of approximately Â£60 million. Construction is underway at Kingston Hospital PFI. Education Good progress has been made in the education sector. The Ealing and Kent Schools PFI projects both reached financial close. The John Madejski Academy and the Glen Eyre Campus for the University of Southampton also reached contract close. Stockley Academy and the University of Kent at Canterbury Phase 6 were finished successfully. The focus that has been put into developing a market position and capability in Education has led to the significant success in achieving preferred bidder status on the pathfinder Bradford Building Schools For The Future project which will deliver new schools through an education partnership, using PFI and traditional contracts. As with the 3 Shires project in the Health sector, success in these major programmes significantly improves the profile of the contracted workload. This in turn enables the building of ever-stronger supply chain relationships and the development of innovative solutions to differentiate Costain's capabilities Retail In Retail, the relationship with Tesco remains strong and Costain worked on a wide variety of schemes under its construction framework contract. The Enfield Town Centre redevelopment for ING Real Estate Development UK progressed well during the course of the year. Costain has also been appointed to review and assess the current situation regarding completion of the Tesco store and tunnel at Gerrards Cross. The project was stopped in 2005 after the collapse of the rail tunnel. Costain was not involved in the tunnel construction work. International In International, turnover was Â£24.7 million which delivered a loss of Â£2.9 million. Work is under way at the Costa Azul project in Mexico, despite procedural delays in obtaining permits. Costain in joint venture with China Harbour Engineering has been granted a time extension and additional costs. In Africa, the Tambuwara wastewater treatment project in Nigeria was awarded mid-year. There have been problems in closing out historical projects in other areas of Africa which have impacted on the result for 2005. Appropriate provisions have been made. Oil, Gas & Process In Oil, Gas & Process, turnover was Â£52.1 million which delivered a loss of Â£1.0 million. Costain was awarded a Â£30 million contract by Conoco Phillips for the engineering, procurement and construction of a VOC recovery facility to be installed at the North Sea Petroleum Terminal, Seal Sands, Middlesbrough. The project is proceeding according to schedule and budget. Also, during 2005, WINGAS (a JV of Wintershall and Gazprom) awarded Costain the Front End Engineering Design of an underground gas storage facility that will be located in the east of England. There are several other such facilities being planned around the UK. Costain's expertise in the design of 'package plant' has been utilised in the execution of the Modulerised Active Effluent treatment Plant project for the British Nuclear Group at Hunterston, Scotland. The project is scheduled to be completed in 2007. In the Middle East, we executed the shutdown and overhaul of the ADGAS LNG Train II located on Das Island, Abu Dhabi. Once again, the project was completed safely, within budget and ahead of schedule. In Iran, political uncertainties resulted in delays to the progress of several projects, a situation that we monitor closely. In international gas processing, Costain is executing, together with Techint, a project for the engineering, procurement and construction of the world's largest nitrogen rejection plant for Pemex, Mexico. In addition, we undertook early design work for facilities that will be located in Pakistan and Egypt. Costain offers its proprietary cryogenic technology to customers involved in the enhanced production of hydrocarbons in gas processing and in LNG. Property Development In Property Development, turnover was Â£45.0 million which delivered a profit after tax of Â£14.0 million. The Group's Spanish property development business, Alcaidesa Holding SA, in which Costain holds a 50% interest, had another successful year. The business has consolidated its original development schemes on the Costa del Sol near Gibraltar, and expanded its activities into Granada province in the municipal districts of Salobrena and Motril ensuring a long term business stream for the company. During 2005 infrastructure in Alcaidesa's La Linea 2 land holding was completed including the servicing of all developable land with some 4.2 kms of roads and the provision of water, electricity and telecommunication services to all plots. This enabled the company to complete a number of substantial land sales to Spanish residential developers and to meet its financial objectives. In addition, a new environmentally sensitive water treatment plant was completed which will process waste water from the entire Alcaidesa development with cleansed water being stored in new dams and used to irrigate the Alcaidesa golf courses. A second golf course is under construction and should be ready for play before the end of 2006. This new course will be run in conjunction with the adjacent existing 18 hole links course and both will be serviced by a new club house currently being built which will include restaurant, bar and event facilities. During the year, Alcaidesa was able to acquire a further 98 hectares of developable land immediately adjacent to its San Roque 3 land holding to add to the 209 hectares already owned. This enlarged land holding, once detailed planning consent has been achieved, should permit about 3,000 residential units to be built plus hotels, retail and two further golf courses. At Salobrena, the company acquired a further 3.5 hectares of developable land next to land purchased in 2004 and also made excellent progress in negotiating an improved planning consent with the Local Authority which it is hoped will lead to a new consent during the course of 2006. The activities in Salobrena, and the options over land held in the nearby town of Motril, have led to Alcaidesa opening a new office in Motril from which the expansion of the Granada region will be centred. Further expansion of Alcaidesa's developments on the Costa del Sol are in detailed negotiation with the expectation of securing in mid 2006 land and water rights to build a substantial yacht marina and commercial development close to Gibraltar. Safety, Health and Environment (SHE) For the sixth consecutive year, Costain achieved a reduction in its Accident Frequency Rate ('AFR') which now stands at 0.25 and places the Company in the top quartile of the Major Contractors Group. However, we are not satisfied with that performance and are constantly looking to improve. Costain's Health & Safety performance was recognised at the 2005 RoSPA Awards ceremony when Costain received 38 awards in recognition of the efforts made to keep Health & Safety at the forefront of the Company ethos and to generate a strong culture. Costain has also set out to raise the profile of the Environment within the business. This has been achieved by the delivery of a one-day site-specific environmental awareness course across all operating divisions of the business. In addition, our environmental management system has been developed, updated and improved by our own enhanced team of highly qualified environmental specialists. This has now been formally acknowledged by the BSI, who recommended Costain Ltd for an upgrade to ISO14001: 2004, the updated international environmental standard, following its audit of our systems in September 2005. All sites with a duration of over six weeks are now registered on the Considerate Constructors Scheme. A key priority is to minimise the impact of our works on the local neighbourhoods in which Costain operates. Costain has received a number of excellent audit scores, giving the opportunity to gain further recognition as a caring, professional contractor and to enhance still further Costain's brand and reputation. To assist and continue the drive towards a more sustainable Costain, promotion and development of the Save It campaign, aimed at reducing waste through improved material and resources management, recycling and reuse of material, have continued. Roadshows, which outline the aims of the campaign and how to achieve them, have been completed across the Company and further benchmarking and monitoring are planned for the year ahead. FINANCIAL REVIEW IFRS restatement This is the first set of annual results that the Group is reporting under International Financial Reporting Standards ('IFRS'), which have no impact upon the underlying cash flows or trading activities of the Group but do impact on the timing of accounting for both revenue and profit recognition from the Group's property development activities in Southern Spain. The impact of this change on the previously reported results for the year ended 31 December 2004 is to reduce profit after tax by Â£6.4 million. In respect of the year ended 31 December 2005, the impact of the change is to increase profit after tax by Â£7.2 million. Further details are set out below. Results Profit before tax for the year ended 31 December 2005 under IFRS increased by 138% over the previous year to Â£25.0 million on turnover including joint arrangements (construction joint ventures) up 11.2% to Â£773.2 million. Underlying profit (being the profit before tax and before IFRS restatements in respect of Spanish property, share based payments and hedging costs) for the year ended 31 December 2005 was Â£20.7 million, up 6.2% on the previous year. Net interest payable amounted to Â£0.6 million (2004: Â£1.2 million receivable) including a pension finance cost of Â£2.8 million (2004: Â£1.1 million cost). Basic earnings per share increased 168% to 6.7p (2004: 2.5p). Cash flow and borrowings The Group generated a cash inflow of Â£11.4 million (2004: Â£8.0 million outflow), reflecting an improvement in working capital. The net cash position of Â£74.0 million (2004: Â£62.6 million) includes Â£1.2 million of borrowings. Order book Order book improved during the year with a work in hand position of Â£1.9 billion (2004: Â£1.1 billion) at the end of the year and of which 70% is repeat order business. Shareholder funds The Group has positive net operating assets of Â£47.0 million (2004: Â£25.1 million) sustaining the continued improvement of the last few years. However, the impact of the deficit in the pension scheme produced negative shareholder equity of Â£22.5 million (2004: Â£44.6 million negative). Treasury controls Policy The Group's treasury and funding activities are undertaken by a centralised treasury function, its primary activities are to manage the Group's liquidity, funding and financial risk, principally arising from movements in interest rates and foreign currency exchange rates. The Group's policy is to ensure that adequate liquidity and financial resource are available to support the Group's growth development, while managing these risks. The Group's policy is not to engage in speculative transactions. Group Treasury operates as a service centre within clearly defined objectives and controls and is subject to periodic review by Internal Audit. Foreign currency exposure Translation exposure: the results of the Group's overseas activities are translated into sterling using the cumulative average exchange rates for the period concerned. The balance sheets of overseas subsidiaries are translated at closing exchange rates. Transaction exposure: the Group has transactional currency exposure arising from subsidiaries' commercial activities overseas in currencies other than the subsidiaries' operating currencies. In such circumstances, the Group requires its subsidiaries to use forward currency contracts to minimise the currency exposure unless a natural hedge exists elsewhere within the Group. Interest rates risks and exposure The Group holds financial instruments for two main purposes: to finance its operations and to manage the interest rate and currency risks arising from its operations and its sources of finance. Various financial instruments (for example, trade debtors, trade creditors, accruals and prepayments) arise directly from the Group's operations. The Group finances its operations through a mixture of working capital and bank borrowings. With the Group's low level of borrowings, the main exposure to interest rate fluctuations arises from surplus cash, which is generally deposited with one of the Group's relationship banks. Liquidity risk Group policy is to ensure that projected financing needs are supported by adequate committed facilities. The Group negotiated borrowing facilities with its relationship banks to a maturity date of 30 June 2007. In addition to its borrowing facilities, the Group has extended its contract bonding facilities with its relationship banks and surety companies, all of which facilities subsist until 30 June 2007. Going concern The Directors believe, after due and careful enquiry, that the Group has sufficient resources for its present requirements and, therefore, consider it appropriate to adopt the going concern basis in preparing the 2005 financial statements. International Financial Reporting Standards The Group has prepared its consolidated financial statements for the year ended 31 December 2005 in accordance with International Financial Reporting Standards (IFRS) as required by EU Law (IAS Regulation EC 1606/2002). Basis of preparation The financial information has been prepared on the basis of the recognition and measurement requirements of IFRS in issue that are either endorsed by the EU and effective/or available for early adoption at 31 December 2005. As permitted by IFRS1 First time adoption of IFRS, the Group has adopted IAS 32 and IAS 39 Financial instruments with effect from 1 January 2005: comparative figures have not been restated. The Group has also decided to adopt early the December 2004 amendment to IAS 19 Employee Benefits. The Group issued a document setting out the impact of the transition to International Financial Reporting Standards on 17 August 2005 which is available on its website (www.costain.com) or from the Company Secretary. The main changes relate to revenue recognition accounting for derivative financial instruments and share based payments. Revenue Recognition Alcaidesa, the Group's Spanish property development interest, has sold parcels of land that were subject to the completion of certain infrastructure. Sales and profits in respect of such developments were recognised on exchange of contract with costs to complete on the infrastructure element recognised accordingly. Under IFRS, these developments fall within the scope of IAS 18, where reference is specifically made to situations where the seller is obliged to perform substantial acts to complete under the contract. Revenue and thus profit in respect of such acts should be recognised only when the act is performed. Given the specific circumstances existing within these developments we consider that the appropriate treatment under IFRS is to view these arrangements, where separable, as two transactions, firstly the sale of the land and secondly the provision of the infrastructure. In such circumstances, revenue and profit are recognised on the land sale element of each transaction on exchange of legal title and when all conditions for revenue recognition under IAS 18 are met. In respect of the infrastructure, the proportion of revenue and profit related to the provision of these facilities is deferred until such works are complete. The impact of IAS 18 has been to defer the amount of profit shown within the Group's share of profits from joint ventures and associates in previous years. Profit after tax for the 12 months to 31 December 2004 has reduced by Â£6.4million and 2005 increases by Â£7.2million. Financial Instruments IAS 39 is relevant to the Group for the first time this year. Retrospective adjustment is not required however the Group must fair value derivative financial instruments. Management have identified derivative financial instruments on the balance sheet date within the Group to be forward contracts to buy and sell foreign currency and interest rate RPI SWAP arrangements within the PFI activity. The Group has assessed the effectiveness of the hedging arrangements and the ineffective portion of the hedge is posted to the income statement and the effective hedges are posted directly to reserves. Share Based Payments IFRS2 requires the Group to fair value share incentives using an appropriate model and spread fair value over the vesting period of the options. The Group has used a Black Scholes model to value share options and has resulted in a Â£0.2 million charge to the income statement. Unaudited Preliminary Results Announcement Consolidated income statement Year ended 31 December Notes 2005 2004 Â£m Â£m ---------- --------- Revenue (Group and share of joint ventures 2 773.2 695.2 and associates) Share of joint ventures and associates 6 (95.1) (22.0) ---------- --------- Group revenue 678.1 673.2 Cost of sales (650.7) (645.0) ---------- --------- Gross profit 27.4 28.2 Administrative expenses (18.7) (18.0) ---------- --------- Group operating profit 8.7 10.2 Sale of interest in joint venture 3.5 - Share of results of joint ventures and 6 13.4 (0.9) associates ---------- --------- Profit from operations 25.6 9.3 Finance income 3 23.5 22.9 Finance costs 3 (24.1) (21.7) ---------- --------- Net financing (costs)/income (0.6) 1.2 ---------- --------- Profit before tax 25.0 10.5 Income tax expense 5 (1.4) (1.7) ---------- --------- Profit for the period 2 23.6 8.8 ---------- --------- Attributable to: Equity holders of the parent 23.6 8.8 Minority interest - - ---------- --------- 23.6 8.8 ---------- --------- Earnings per share - basic 4 6.7p 2.5p Earnings per share - diluted 4 6.5p 2.5p During the year and the previous year, no businesses were acquired or disposed and therefore all results arise from continuing operations. Consolidated statement of recognised income and expense Year ended 31 December Notes 2005 2004 Â£m Â£m Exchange differences on translation of foreign (0.9) (0.4) operations Cash flow hedges: Effective portion of changes in fair value (net of tax) during period - Group (0.6) - Effective portion of changes in fair value (net of tax) (2.7) - during period - joint ventures and associates Fair value adjustment of asset held for sale 3.4 - Actuarial gains/(losses) on defined benefit pension schemes (net of tax) 0.2 (16.0) ---------- --------- Net expense recognised directly in equity (0.6) (16.4) ---------- --------- Profit for the period 23.6 8.8 ---------- --------- Total recognised income and expense for the period 8 23.0 (7.6) Effect of change in accounting policy: Effect of adoption of IAS 32 and 39, net of tax, on 1 January 2005 (with 2004 not restated) on 0.2 - hedging reserve - Group Effect of adoption of IAS 32 and 39, net of tax, on 1 January 2005 (with 2004 not restated) on (1.9) - hedging reserve - joint ventures and associates ---------- --------- 21.3 (7.6) ---------- --------- Attributable to: Equity holders of the parent 21.4 (7.6) Minority interest (0.1) - ---------- --------- 21.3 (7.6) ---------- --------- Consolidated balance sheet As at 31 December Notes 2005 2004 Â£m Â£m ASSETS Non-current assets Property, plant & equipment 5.9 4.9 Intangible assets 3.5 0.5 Investments in joint ventures 27.6 11.6 Investments in associates 0.2 - Loans to joint ventures 0.2 2.6 Loans to associates 3.0 2.7 Other investments 4.4 1.0 Other debtors 10.2 5.7 Deferred tax assets 31.1 31.6 --------- -------- Total non-current assets 86.1 60.6 --------- -------- Current assets Inventories 2.0 1.0 Trade and other receivables 166.5 152.3 Cash and cash equivalents 7 75.2 64.1 --------- -------- Total current assets 243.7 217.4 --------- -------- Total assets 329.8 278.0 ========= ======== EQUITY Share capital 17.8 35.3 Share premium 0.4 119.5 Special reserve 13.1 - Fair value reserve 3.4 - Foreign currency translation reserve (1.2) (0.4) Hedging reserve (5.0) - Retained earnings (51.0) (199.0) --------- -------- Total equity attributable to equity holders of the parent (22.5) (44.6) Minority interest - 0.1 --------- -------- Total equity 8 (22.5) (44.5) --------- -------- LIABILITIES Non-current liabilities Interest bearing loans and borrowings 0.2 0.5 Retirement benefit obligations 99.3 99.5 Other payables 7.2 3.0 Long-term provisions 6.8 3.1 --------- -------- Total non-current liabilities 113.5 106.1 --------- -------- Current liabilities Trade and other payables 233.3 212.1 Current tax liabilities 3.2 2.2 Overdrafts 7 0.2 0.6 Interest bearing loans and borrowings 0.8 0.4 Provisions 1.3 1.1 --------- -------- Total current liabilities 238.8 216.4 --------- -------- Total liabilities 352.3 322.5 --------- -------- Total equity and liabilities 329.8 278.0 ========= ======== Consolidated cash flow statement Year ended 31 December Notes 2005 2004 Â£m Â£m Cash flows from operating activities Profit for the period 23.6 8.8 Adjustments for: Depreciation and amortisation 1.5 1.1 Investment income 3 (23.5) (22.9) Interest expense 3 24.1 21.7 Share based payments expense 8 0.2 - Income tax expense 5 1.4 1.7 Sale of interest in joint venture (3.5) - Share of profit of joint ventures and 6 (13.4) 0.9 associates Release of provisions against investment (0.3) - --------- -------- Operating profit before changes in working capital and 10.1 11.3 provisions (Increase)/decrease in inventories (1.1) 0.6 Increase in receivables (15.1) (38.3) Increase in payables 24.2 18.8 Movement in provisions and employee benefits (3.0) (2.9) --------- -------- Net cash from/(used by) operations 15.1 (10.5) Interest paid (0.1) (0.3) Income taxes paid - - --------- -------- Net cash from/(used by) operating activities 15.0 (10.8) --------- -------- Cash flows from investing activities Interest received 2.4 2.6 Additions to property, plant and equipment (2.4) (1.7) Additions to intangible assets (3.1) - Additions to investments (0.2) (0.4) Capital repayments by investments 1.3 0.2 Dividend received from joint venture - 4.4 Loans to joint ventures and associates (net) (2.6) (2.8) --------- -------- Net cash (used by)/from investing activities (4.6) 2.3 --------- -------- Cash flows from financing activities Issue of ordinary share capital 0.5 0.9 New loans 0.4 - Payment of finance lease liabilities (0.3) (0.2) --------- -------- Net cash from financing activities 0.6 0.7 --------- -------- Net increase/(decrease) in cash and cash 11.0 (7.8) equivalents Cash and cash equivalents at beginning of 63.5 71.7 period Effect of foreign exchange rate changes 0.5 (0.4) --------- -------- Cash and cash equivalents at end of period 75.0 63.5 --------- -------- NOTES TO THE PRELIMINARY ANNOUNCEMENT 1 General information The financial information set out in this announcement does not constitute the company's financial statements for the years ending 31 December 2005 or 2004. Statutory financial statements for 2004, which were prepared under UK GAAP, have been delivered to the Registrar of Companies. The auditors have reported on the 2004 financial statements; their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory financial statements for 2005, which are being prepared under International Financial Reporting Standards as adopted by the European Union (EU), will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies in due course. Statement of compliance The financial information set out in this announcement has been presented for the first time in accordance with International Financial Reporting Standards (IFRS) adopted for use in the EU and its interpretations adopted by the International Accounting Standards Board. An explanation of the transition from UK GAAP to Adopted IFRS has been presented in note 9 and a reconciliation of the reported financial performance, financial position and cash flows of the Group is also provided in note 9. The Group has decided to adopt early the December 2004 amendment to IAS19 Employee benefits. As permitted by IFRS1 First time adoption of IFRS, the Group has adopted IAS 32 and IAS 39 Financial instruments with effect from 1 January 2005: comparative figures have not been restated. IFRS 1 also grants certain exemptions from the full requirements of IFRS in the transition period. The following exemptions have been taken in these financial statements: â€¢ Business combinations - Business combinations that took place prior to 1 January 2004 have not been restated. â€¢ Employee benefits - All cumulative actuarial gains and losses on defined benefit plans have been recognised in equity at 1 January 2004. â€¢ Cumulative translation differences - Cumulative translation differences for all foreign operations have been set to zero at 1 January 2004. However, whilst the financial information has been prepared on this basis, this announcement does not itself contain sufficient information to comply with IFRS. Significant accounting policies Costain Group PLC (the 'Company') is a company incorporated in the United Kingdom. The financial information presented in this announcement has been prepared in accordance with the same accounting policies as the statutory financial statements for the year ended 31 December 2004 save for those changes arising from IFRS applicable as at 31 December 2005. These changes are presented in note 9 and the detailed accounting policies were included in the IFRS Transition Statement of 17 August 2005. The accounting policies will be presented in full in the Group's annual report and accounts. NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 2 Business and geographical segment information by origin In the opinion of the directors, the business segments are Civil Engineering, Building, Oil Gas & Process, International, which undertake engineering and construction projects, the Group's property development operations in Spain and central costs (which comprise mainly corporate expenses.) These represent the Group's primary segments. Secondary segments are presented geographically. Year ended Civil Building Oil, Gas& International Property Central Total 31 December Engineering Process Development costs 2005 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revenue Group Revenue 309.1 315.5 44.5 9.0 - - 678.1 Share of revenue of JVs and associates 20.7 6.1 7.6 15.7 45.0 - 95.1 --------- ------- ---------- --------- ---------- ------- ------ Total revenue 329.8 321.6 52.1 24.7 45.0 - 773.2 --------- ------- ---------- --------- ---------- ------- ------ Group operating profit 16.0 1.2 (1.2) (2.5) - (4.8) 8.7 Share of results of JVs and associates - (0.4) 0.2 (0.4) 14.0 - 13.4 Sale of interest in JV - 3.5 - - - - 3.5 --------- ------- ---------- --------- ---------- ------- ------ Segment result 16.0 4.3 (1.0) (2.9) 14.0 (4.8) 25.6 --------- ------- ---------- --------- ---------- ------- Net financing costs (0.6) Income tax expense (1.4) ------ Profit for the period 23.6 ------ Year ended Civil Building Oil, Gas& International Property Central Total 31 December Engineering Process Development costs 2004 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revenue Group Revenue 392.1 225.9 41.9 13.3 - - 673.2 Share of revenue of JVs and associates - 10.1 4.1 2.7 5.1 - 22.0 --------- ------- ---------- --------- ---------- ------- ------ Total revenue 392.1 236.0 46.0 16.0 5.1 - 695.2 --------- ------- ---------- --------- ---------- ------- ------ Group operating profit 18.4 0.2 (3.9) (0.4) - (4.1) 10.2 Share of results of JVs and associates - (0.3) 0.1 (0.2) (0.5) - (0.9) --------- ------- ---------- --------- ---------- ------- ------ Segment result 18.4 (0.1) (3.8) (0.6) (0.5) (4.1) 9.3 --------- ------- ---------- --------- ---------- ------- Net financing costs 1.2 Income tax expense (1.7) ------ Profit for the 8.8 period ------ NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued Revenue Segment Results 2005 2004 2005 2004 Â£m Â£m Â£m Â£m United Kingdom 673.4 661.4 16.3 9.8 Spain 45.0 5.1 14.0 (0.5) Rest of the 54.8 28.7 (4.7) - world -------- -------- -------- -------- 773.2 695.2 25.6 9.3 -------- -------- -------- -------- 3 Net financing (costs)/income 2005 2004 Â£m Â£m Interest income 2.4 2.6 Expected return on the assets of the pension scheme 21.1 20.3 ------- -------- Financial income 23.5 22.9 ------- -------- Interest expense (0.1) (0.3) Losses on foreign currency forward contracts (0.1) - Expected increase in the present value of the scheme liabilities (23.9) (21.4) ------- -------- Financial expenses (24.1) (21.7) ------- -------- ------- -------- Net financing (costs)/income (0.6) 1.2 ------- -------- 4 Earnings per share The calculation of earnings per share is based on profit attributable to ordinary shareholders of Â£23.6m (2004: Â£8.8m) and the number of shares set out below: 2005 2004 Weighted average number of shares for basic earnings per share calculation 353,355,346 351,190,999 Dilutive potential ordinary shares: SAYE Scheme 7,945,390 6,417,591 ---------- ---------- Weighted average number of shares for fully diluted earnings per share calculation 361,300,736 357,608,590 ---------- ---------- 5 Income tax expense 2005 2004 Â£m Â£m On profit for the year: United Kingdom corporation tax at 30% (1.0) (0.2) Overseas taxation - (0.1) -------- ------- Current tax charge for the year (1.0) (0.3) Deferred taxation (0.4) (1.4) -------- ------- Total income tax expense in income statement (1.4) (1.7) -------- ------- NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 2005 2004 Â£m Â£m Tax reconciliation: Profit before tax 25.0 10.5 -------- ------- Income tax at 30% (7.5) (3.1) Rate adjustments relating to overseas profits 0.1 0.1 Share of results of joint ventures and associates at 30% 4.0 (0.2) Sundry disallowed expenses and profits relieved by capital losses (0.6) (0.4) Reversal of temporary differences 2.6 1.9 -------- ------- Total income tax expense in income statement (1.4) (1.7) -------- ------- Deferred tax recognised directly in equity: Relating to defined benefit pension schemes (0.1) 7.0 Relating to cash flow hedges 0.1 - -------- ------- - 7.0 -------- ------- The income tax expense above does not include any amounts for joint ventures and associates, whose results are disclosed in the income statement net of tax. 6 Investments The analysis of the Group's share of joint ventures and associates is set out below: 2005 2004 Alcaidesa Other Associates Total Alcaidesa Other Associates Total joint joint joint joint venture ventures venture ventures Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revenue 45.0 37.5 12.6 95.1 5.1 16.3 0.6 22.0 -------- ------- -------- ------ -------- -------- -------- ------- Profit before tax 22.5 0.8 (1.1) 22.2 (0.8) (0.1) (0.2) (1.1) Income tax expense (8.5) (0.3) - (8.8) 0.3 (0.1) - 0.2 -------- ------- -------- ------ -------- -------- -------- ------- Profit for the period 14.0 0.5 (1.1) 13.4 (0.5) (0.2) (0.2) (0.9) -------- ------- -------- ------ -------- -------- -------- ------- Non-current assets 7.4 0.7 2.0 10.1 11.3 0.2 1.5 13.0 Current assets 40.2 68.0 20.5 128.7 27.2 60.4 1.9 89.5 Current liabilities (15.6) (23.9) (7.5) (47.0) (21.7) (7.3) (2.0) (31.0) Non-current liabilities (5.5) (43.7) (14.8) (64.0) (3.9) (54.6) (1.4) (59.9) -------- ------- -------- ------ -------- -------- -------- ------- Investments in joint ventures and associates 26.5 1.1 0.2 27.8 12.9 (1.3) - 11.6 -------- ------- -------- ------ -------- -------- -------- ------- Financial commitments 9.5 4.3 ------ Capital commitments 36.3 20.7 ------ Net interest payable by joint ventures and associates in 2005 was Â£1.6m (2004: Â£0.6m). The financial commitments relate to joint ventures involved in Private Finance Initiative (PFI) schemes and the capital commitments to construction work being undertaken by the Costain Group. All figures are the Group's share. NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 7 Cash and cash equivalents Cash at bank and in hand is analysed below and includes the Group's share of cash held by joint arrangements of Â£22.0m (2004: Â£18.9m). 2005 2004 Â£m Â£m Cash and cash equivalents 75.2 64.1 Bank overdrafts (0.2) (0.6) -------- --------- Cash and cash equivalents in the 75.0 63.5 statement of cash flows -------- --------- 8 Capital and reserves Share Share Special Fair Translation Hedging Retained Total Minority Total capital premium reserve value reserve reserve earnings interests equity account reserve Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 January 2004 34.5 119.4 - - - - (191.8) (37.9) 0.1 (37.8) Total recognised income & expense - - - - (0.4) - (7.2) (7.6) - (7.6) Shares issued 0.8 0.1 - - - - - 0.9 - 0.9 ------ ------- ------- ------- --------- ------- ------- ------ ------- ------ At 31 December 2004 35.3 119.5 - - (0.4) - (199.0) (44.6) 0.1 (44.5) ------ ------- ------- ------- --------- ------- ------- ------- ------ ------ Implementation of IAS 39 - - - - - (1.7) - (1.7) - (1.7) ------ ------- ------- ------- --------- ------- ------- ------ ------- ------ At 1 January 2005 35.3 119.5 - - (0.4) (1.7) (199.0) (46.3) 0.1 (46.2) Total recognised income & expense - - - 3.4 (0.8) (3.3) 23.8 23.1 (0.1) 23.0 Share based payments - - - - - - 0.2 0.2 - 0.2 Capital reduction (17.6) (119.5) 13.6 - - - 123.5 - - - Shares issued 0.1 0.4 (0.5) - - - 0.5 0.5 - 0.5 ------ ------- ------- ------- --------- ------- ------- ------ ------- ------ At 31 December 2005 17.8 0.4 13.1 3.4 (1.2) (5.0) (51.0) (22.5) - (22.5) ------ ------- ------- ------- --------- ------- ------- ------ ------- ------ Special reserve On 18 May 2005, Court approval of a capital restructuring was granted under which the deficit on the Company's profit and loss account was eliminated using a special reserve created from restructuring the share capital and the share premium. NOTES TO THE PRELIMINARY ANNOUNCEMENT - continued 9 Explanation of transition to IFRS As stated in note 1, the financial statements for the year ended 31 December 2005 will be the Group's first consolidated financial statements prepared in accordance with IFRS. The accounting policies, which were set out in the IFRS Transition Statement of 17 August 2005, have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented here for the year ended 31 December 2004 and in 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, the Group has adjusted amounts reported previously in financial statements prepared in accordance with UK GAAP. An explanation of how the transition from previous GAAP to IFRS has affected the Group's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables. Reconciliations - UK GAAP to IFRS CONSOLIDATED INCOME STATEMENT Year ended 31 December 2004 Impact of transition to IFRS ---------------------------- Under UK Alcaidesa Joint Financing Under GAAP Ventures/ IFRS Associates Â£m Â£m Â£m Â£m Â£m Revenue 673.2 - - - 673.2 Cost of sales (645.0) - - - (645.0) -------- -------- -------- -------- ------- Gross profit 28.2 - - - 28.2 Administrative expenses (18.0) - - - (18.0) -------- -------- -------- -------- ------- Group operating profit 10.2 - - - 10.2 Group share of joint ventures operating results 8.9 (9.2) 0.3 - - Group share of associates operating results (0.2) - 0.2 - - Share of profit of joint ventures and associates - - (0.9) - (0.9) -------- -------- -------- -------- ------- Profit from operations 18.9 (9.2) (0.4) - 9.3 Other finance charges (1.1) - - 1.1 - Net interest 1.7 - 0.6 (2.3) - Finance income - - - 22.9 22.9 Finance costs - - - (21.7) (21.7) -------- -------- -------- -------- ------- Profit before tax 19.5 (9.2) 0.2 - 10.5 Income tax expense (4.3) 2.8 (0.2) - (1.7) -------- -------- -------- -------- ------- Profit for the period 15.2 (6.4) - - 8.8 -------- -------- -------- -------- ------- Attributable to: Equity holders of the parent 15.2 (6.4) - - 8.8 Minority interests - - - - - -------- -------- -------- -------- ------- Earnings per share - basic 4.3p (1.8p) - - 2.5p Earnings per share - diluted 4.3p (1.8p) - - 2.5p Reconciliations - UK GAAP to IFRS - continued Changes in accounting policies - income statement Explanatory notes on the impact of IFRS adjustments to the consolidated income statement IAS 18 Revenue recognition Alcaidesa, the Group's Spanish property development interest, has sold parcels of land that were subject to the completion of certain infrastructure. Sales and profits in respect of such developments were recognised on exchange of contract with costs to complete on the infrastructure element recognised accordingly. Under IFRS, these developments fall within the scope of IAS 18, where reference is specifically made to situations where the seller is obliged to perform substantial acts to complete under the contract. Revenue and thus profit in respect of such acts should be recognised only when the act is performed. Given the specific circumstances existing within these developments we consider that the appropriate treatment under IFRS is to view these arrangements, where separable, as two transactions, firstly the sale of the land and secondly the provision of the infrastructure. In such circumstances, revenue and profit are recognised on the land sale element of each transaction on exchange of legal title and when all conditions for revenue recognition under IAS 18 are met. In respect of the infrastructure, the proportion of revenue and profit related to the provision of these facilities is deferred until such works are complete. The impact of IAS 18 has been to defer the amount of profit shown within the Group's share of profits from joint ventures and associates. Profit after tax for 12 months to 31 December 2004 has reduced by Â£6.4m. IAS 28 Investments in associates and IAS 31 Interests in joint ventures Under UK GAAP, the group share of operating profits of associates and joint ventures was presented on the face of the income statement after group operating profit. The group share of interest and tax of associates was included within the relevant Group totals. Under IFRS, the Group share of profit after tax of associates and joint ventures is presented on the face of the income statement after Group operating profit. IAS 1 Income statement reclassifications and IAS 19 Retirement benefit obligations There are a number of reclassifications between income statement and balance sheet captions that arise from the application of various IFRS. Under IFRS the expected return on assets of the pension scheme and interest income are shown as finance income and the interest on pension scheme liabilities and interest and finance charges payable are shown as finance costs. Reconciliations - UK GAAP to IFRS - continued CONSOLIDATED BALANCE SHEET As at 1 January 2004 (Transition) Impact of transition to IFRS ------------------------------- Under UK Reclassified Pension Translation Intangible P&L Under GAAP Reserve Assets Reserves IFRS Â£m Â£m Â£m Â£m Â£m Â£m Â£m ASSETS Non-current assets Property, plant & equipment 4.9 - - - (0.2) - 4.7 Intangible assets - - - - 0.2 - 0.2 Other debtors - 3.2 - - - - 3.2 Deferred tax assets - 2.6 23.5 - - - 26.1 Investments in associates - - - - - - - Investments in joint ventures 17.6 - - - - (0.8) 16.8 Loans to joint ventures 2.5 - - - - - 2.5 Loans to associates - - - - - - - Other investments 1.0 - - - - - 1.0 ------- --------- ------- --------- -------- ------- ------- Total non-current assets 26.0 5.8 23.5 - - (0.8) 54.5 ------- --------- ------- --------- -------- ------- ------- Current assets Inventories 1.6 - - - - - 1.6 Trade and other receivables 122.4 (5.8) - - - - 116.6 Cash & short term deposits 72.0 - - - - - 72.0 ------- --------- ------- --------- -------- ------- ------- Total current assets 196.0 (5.8) - - - - 190.2 ------- --------- ------- --------- -------- ------- ------- Total assets 222.0 - 23.5 - - (0.8) 244.7 ======= ========= ======= ========= ======== ======= ======= EQUITY Share capital 34.5 - - - - - 34.5 Share premium 119.4 - - - - - 119.4 Cum. translation reserve - - - - - - - Retained earnings (190.6) - (0.4) - - (0.8) (191.8) -------- --------- -------- --------- -------- -------- -------- (36.7) - (0.4) - - (0.8) (37.9) Minority interest 0.1 - - - - - 0.1 -------- --------- -------- --------- -------- -------- -------- Total equity (36.6) - (0.4) - - (0.8) (37.8) -------- --------- -------- --------- -------- -------- -------- LIABILITIES Non-current liabilities Interest bearing loans and borrowings 0.9 - - - - - 0.9 Retirement benefit obligations 54.5 - 23.9 - - - 78.4 Other payables 1.7 - - - - - 1.7 Long-term provisions - 3.8 - - - - 3.8 -------- --------- -------- --------- -------- -------- -------- Total non-current liabilities 57.1 3.8 23.9 - - - 84.8 -------- --------- -------- --------- -------- -------- -------- Current liabilities Trade and other payables 191.8 - - - - - 191.8 Current tax liabilities 2.1 - - - - - 2.1 Overdrafts 0.3 - - - - - 0.3 Interest bearing loans and borrowings 0.2 - - - - - 0.2 Provisions and other liabilities 7.1 (3.8) - - - - 3.3 -------- --------- -------- --------- -------- -------- -------- Total current liabilities 201.5 (3.8) - - - - 197.7 -------- --------- -------- --------- -------- -------- -------- Total liabilities 258.6 - 23.9 - - - 282.5 -------- --------- -------- --------- -------- -------- -------- Total equity and liabilities 222.0 - 23.5 - - (0.8) 244.7 ======== ========= ======== ========= ======== ======== ======== Reconciliations - UK GAAP to IFRS - continued CONSOLIDATED BALANCE SHEET As at 31 December 2004 Impact of transition to IFRS ----------------------------------------------------- Under UK Reclassified Pension Translation Intangible P&L Under GAAP Reserve Assets Reserves IFRS Â£m Â£m Â£m Â£m Â£m Â£m Â£m ASSETS Non-current assets Property, plant & equipment 5.4 - - - (0.5) - 4.9 Intangible assets - - - - 0.5 - 0.5 Other debtors - 5.7 - - - - 5.7 Deferred tax assets - 1.7 29.9 - - - 31.6 Investments in associates - - - - - - - Investments in joint ventures 19.0 - - - - (7.4) 11.6 Loans to joint ventures 2.6 - - - - - 2.6 Loans to associates 2.7 - - - - - 2.7 Other investments 1.0 - - - - - 1.0 ------- --------- ------- --------- -------- ------- ------ Total non-current assets 30.7 7.4 29.9 - - (7.4) 60.6 ------- --------- ------- --------- -------- ------- ------ Current assets Inventories 1.0 - - - - - 1.0 Trade and other receivables 159.7 (7.4) - - - - 152.3 Cash and short term deposits 64.1 - - - - - 64.1 ------- --------- ------- --------- -------- ------- ------ Total current assets 224.8 (7.4) - - - - 217.4 ------- --------- ------- --------- -------- ------- ------ Total assets 255.5 - 29.9 - - (7.4) 278.0 ======= ========= ======= ========= ======== ======= ====== EQUITY Share capital 35.3 - - - - - 35.3 Share premium 119.5 - - - - - 119.5 Cum. translation reserve - - - (0.2) - (0.2) (0.4) Retained earnings (191.6) - (0.4) 0.2 - (7.2) (199.0) -------- --------- -------- --------- -------- -------- ------- (36.8) - (0.4) - - (7.4) (44.6) Minority interest 0.1 - - - - - 0.1 -------- --------- -------- --------- -------- -------- ------- Total equity (36.7) - (0.4) - - (7.4) (44.5) -------- --------- -------- --------- -------- -------- ------- LIABILITIES Non-current liabilities Interest bearing loans and borrowings 0.5 - - - - - 0.5 Retirement benefit obligations 69.2 - 30.3 - - - 99.5 Other payables 3.0 - - - - - 3.0 Long-term provisions - 3.1 - - - - 3.1 -------- --------- -------- --------- -------- -------- ------- Total non-current liabilities 72.7 3.1 30.3 - - - 106.1 -------- --------- -------- --------- -------- -------- ------- Current liabilities Trade and other payables 212.1 - - - - - 212.1 Current tax liabilities 2.2 - - - - - 2.2 Overdrafts 0.6 - - - - - 0.6 Interest bearing loans and borrowings 0.4 - - - - - 0.4 Provisions and other liabilities 4.2 (3.1) - - - - 1.1 -------- --------- -------- --------- -------- -------- ------- Total current liabilities 219.5 (3.1) - - - - 216.4 -------- --------- -------- --------- -------- -------- ------- Total liabilities 292.2 - 30.3 - - - 322.5 -------- --------- -------- --------- -------- -------- ------- Total equity and liabilities 255.5 - 29.9 - - (7.4) 278.0 ======== ========= ======== ========= ======== ======== ======= Reconciliations - UK GAAP to IFRS - continued Explanatory notes on the impact of IFRS adjustments to the consolidated balance sheet at 31 December 2004 IAS 1 Current/non current assets and liabilities Non-current receivables have been reclassified on the face of the balance sheet as non-current assets and provisions have been reallocated to non-current liabilities. Assets and liabilities relating to defined benefit plans have been classified as non-current (IAS 19). Assets and liabilities relating to defined contribution plans normally are current and have been classified as such. IAS 19 Employee benefits Costain Group PLC adopted early the amendments to FRS 17 for UK GAAP reporting and has recognised the defined benefit pension plan liability (based on the projected unit credit method) in full as at 31 December 2003. The Group has nominated to recognise any actuarial gains or losses in the statement of recognised income and expense. There are no significant accounting differences between FRS 17 and IAS 19 in relation to accounting for defined benefit pension obligations where the company has nominated to recognise actuarial losses directly in equity. The finance cost of the pension plan liabilities will be shown separately as a finance cost and the expected return on plan assets will be shown as finance income. The Group intends to have actuarial updates at each half-year for the defined benefit pension plan and a full actuarial review at least every 2 years as required by the trust deed. However, IAS 19 requires employee benefit schemes' financial assets to be valued at fair value. For relevant financial assets this means the bid price whereas FRS 17 specifies using mid market price. This has the effect of reducing asset values and thereby increasing the deficit by Â£0.6m. IAS 12 Income taxes Costain Group has a significant defined benefit pension scheme liability. Under UK GAAP this has given rise to a deferred tax asset based on the company's UK corporation tax rate, which has been netted against the defined benefit pension scheme liability. IAS 12 requires that the deferred tax asset be grouped with other deferred tax assets. Deferred tax assets relating to retirement benefit obligations have been reclassified from non-current liabilities to non-current assets. IAS 21 The effects of changes in foreign exchange rates UK GAAP requires exchange differences on a monetary item forming part of a reporting entity's net investment in a foreign operation to be taken to the STRGL. Under IFRS, IAS 21 requires such exchange differences to be recognised in a separate component of equity in the reporting entity's consolidated financial statements. Cumulative translation differences on foreign operations are deemed to be zero at 1 January 2004. A Â£0.2m exchange difference relating to 2004 has been moved from retained reserves to a cumulative translation reserve. IAS 38 Intangible assets Under UK GAAP, computer software costs attributable to major business systems implementations and material software licenses were capitalised as plant and equipment. Under IFRS, software development, purchased software and software licences should be classified as an intangible asset. At 31 December 2004, under IFRS, computer software of Â£0.5m has been reclassified from plant and equipment to intangible assets. IAS 18 Revenue recognition The income statement IFRS adjustment required for Alcaidesa revenue recognition causes a reduction in the carrying value of joint venture net assets of Â£0.8m at 1 January 2004 and Â£7.4m at 31 December 2004. IFRS 2 Share based payments Equity settled share options granted after 7 November 2002 and not vested at the date of transition have been valued at the date of grant and an expense recognised over the period that the service benefit is to be provided by the employees under the terms of the schemes. At 31 December 2004, under IFRS, the charge for equity settled options was immaterial and charges will commence in 2005. Reconciliations - UK GAAP to IFRS - continued CONSOLIDATED CASH FLOW STATEMENT For the year to 31 December 2004 Impact of transition to IFRS ----------------- Under UK GAAP Alcaidesa Under IFRS Â£m Â£m Â£m Cash flows from operating activities Profit for the period 15.2 (6.4) 8.8 ---------- -------------- -------- Adjustments for: Depreciation 1.1 - 1.1 Investment income (22.9) - (22.9) Interest expense 22.3 (0.6) 21.7 Share of profit of associates (8.7) 9.6 0.9 Tax expense 4.3 (2.6) 1.7 ---------- -------------- -------- Operating profit before changes in working capital and provisions 11.3 - 11.3 (Increase)/decrease in inventories 0.6 - 0.6 Decrease/(increase) in receivables (38.3) - (38.3) (Decrease)/increase in payables 18.8 - 18.8 Decrease in provisions (2.9) - (2.9) ---------- -------------- -------- Cash generated from the operations (10.5) - (10.5) Interest paid (0.3) - (0.3) ---------- -------------- -------- Net cash from operating activities (10.8) - (10.8) ---------- -------------- -------- Cash flows from investing activities Interest received 2.6 - 2.6 Acquisition of plant (1.7) - (1.7) Additions to investments (0.4) - (0.4) Capital repayments by investments 0.2 - 0.2 Dividends received 4.4 - 4.4 Amounts invested in joint ventures (2.8) - (2.8) ---------- -------------- -------- Net cash from investing 2.3 - 2.3 activities ---------- -------------- -------- Cash flows from financing activities Issue of ordinary share capital by Costain Group PLC 0.9 - 0.9 Payment of finance lease liabilities (0.2) - (0.2) ---------- -------------- -------- Net cash from financing activities 0.7 - 0.7 ---------- -------------- -------- Net decrease in cash and cash equivalents (7.8) - (7.8) Cash and cash equivalents at beginning of year 71.7 - 71.7 Effect of foreign exchange rate changes (0.4) - (0.4) ---------- -------------- -------- Cash and cash equivalents at end of year 63.5 - 63.5 ========== ============== ======== This information is provided by RNS The company news service from the London Stock Exchange

Companies

Costain Group (COST)

Monday, 20th May 2024

COMPANIES COVERED:

KWS BLND KNOS

Keywords Studios surges as another London-listed tech firm looks set to be bought out by private equity, Kainos posts 14th consecutive year of growth and British Land sells down its remaining stake in Sheffield’s Meadowhall mall.

Full Archive

UK 100

Latest directors dealings

33 minutes ago Prudential
44 minutes ago Howden Joinery Group
1 hour ago TBC Bank Group
2 hours ago Primary Health Properties
2 hours ago DP Poland

All directors dealings today