Final Results
Intertek Group PLC
06 March 2006
Intertek Group plc
PRELIMINARY 2005 RESULTS ANNOUNCEMENT
6 MARCH 2006
Intertek Group plc ('Intertek'), the leading international provider of quality
and safety services to a wide range of global and local industries, today
announces its preliminary results for the year to 31 December 2005.
UNDERLYING PERFORMANCE
Revenue (1) £581.9m Up 16.5% at actual exchange rates
Up 15.1% at constant exchange rates
Up 12.2% organic at constant rates
Operating profit (2) £87.1m Up 4.9% at actual exchange rates
Underlying operating profit (3) £92.9m Up 11.9% at actual exchange rates
Up 10.5% at constant exchange rates
Up 5.7% organic at constant rates
Underlying operating margin (3) 16.0% Down from 16.6%
Earnings per share (4) 39.1p Up 14.0%
Dividend per share (5) 12.0p Up 15.4%
1. After adjusting for lost revenues of £1.8m from the US hurricanes and
flooding.
2. Before amortisation of intangible assets and goodwill impairment.
3. Before amortisation of intangible assets and goodwill impairment and after
adjusting for non-recurring items - closure costs, lost profits from the US
hurricanes and flooding, court judgment.
4. Fully diluted underlying earnings per share before amortisation of intangible
assets and goodwill impairment.
5. Dividend per share is based on the interim dividend paid of 3.9p (2004: 3.4p)
plus the proposed final dividend of 8.1p (2004: 7.0p).
STATUTORY RESULTS
Revenue £580.1m Up 16.1%
Operating profit £83.0m Up 1.7%
Operating cash flow £96.7m Down 5.1%
Profit before tax £79.4m Up 6.7%
Basic earnings per share 36.8p Up 9.2%
CHIEF EXECUTIVE OFFICER, WOLFHART HAUSER commented:
'As today's results show, our underlying business performance in 2005 was
strong. As planned, we made a number of acquisitions over the year and continue
to look for targets with a good geographical and business fit. We remain focused
on offering services to support global trade. Looking ahead, we are confident
that the business is well placed to capitalise on long term market trends which
continue to be very favourable.'
Overview
In 2005, the group achieved good growth in revenue and operating profit at both
actual and constant exchange rates. At actual rates, revenue in 2005 was
£580.1m, 16.1% above 2004 and operating profit before amortisation of intangible
assets and goodwill impairment was £87.1m, 4.9% above 2004. On an organic basis,
underlying revenue grew 12.2% and underlying operating profit grew 5.7%.
The Consumer Goods division (Labtest) had a challenging year in 2005 but still
achieved actual reported revenue growth of 8.2% and organic revenue growth of
8.7% at constant exchange rates. The underlying operating margin of 31.4% was
stable in the second half of the year compared to the first half. The strong
growth of all industry sectors in China and the strong global growth of toys
were offset by the slower growth in global textile testing as a result of
turbulence caused by changes in the textile sector. Correcting overcapacity of
textile testing in developed countries weighed on the margin.
The Commercial & Electrical division (ETL SEMKO) had an excellent year in 2005
with actual reported revenue growth of 18.0% and organic revenue growth of 12.4%
at constant exchange rates. The underlying operating margin of 15.2% was higher
than last year due to a more focused business development strategy and
operational efficiencies.
The Oil, Chemical & Agri division (Caleb Brett) had a very strong underlying
result. The actual reported revenue growth was 23.0% and underlying organic
revenue growth was 15.4% at constant exchange rates. The underlying operating
margin of 8.7% was at a similar level to last year. Revenue from analytical
services grew 41% and this service line now accounts for 36% of the division's
total revenues, up from 31% last year.
The Government Services division (FTS) reported good growth in 2005 with actual
reported revenue growth of 10.2% and an underlying operating margin of 24.6%.
This growth came principally from the pre-shipment inspection (PSI) contracts.
The PSI contracts with the Governments of Venezuela and Nigeria were terminated
in the year which will result in significantly reduced revenues in 2006 for this
division.
Group
Our mission is to support, add value and facilitate our customers' success in
the global market place. This is achieved by following a clear strategy of
continual strengthening of our service offering on an industrial and regional
focus and through the pursuit of acquisitions that provide our customers with
more and improved services.
We are encouraged with the outcome of the acquisitions we made in 2005 as they
enable us to improve our service offering in accordance with our strategy. We
made twelve acquisitions at a cost of £46.9m, three quarters of which was spent
in the Oil, Chemical & Agri division on seven acquisitions. The largest
acquisition was of Automotive Research Laboratories (ARL) from PerkinElmer for
£20.1m. ARL is a market leader in North America in the motor fuels and
lubricants sector which perfectly complements the PARC business that was
acquired for £4.1m earlier in the year as well as the existing fuels business.
Westport was purchased from Halliburton at a cost of £5.4m. This takes us
further upstream into the oil exploration and production end of analytical
services.
Four acquisitions for consideration of £8.5m were made by the Commercial &
Electrical division. Omega Point Laboratories was acquired for £2.9m and by
combining this with our existing business it projects Intertek into market
leadership position in the North American building sector. The systems services
certification business of KPMG in India and the Middle East was bought for £4.6m
and this now enables us to sell a package of systems and product certification
in the region, instead of just product certification. The deal with DEKRA where
we bought their majority share in Sweden and sold our minority share in Germany
frees us to pursue systems certification in Europe.
The success of our acquisition strategy has continued into 2006 where we have
announced the purchase for £9.0m of Akzo Nobel's electro magnetic compatibility
testing business in Japan, strengthening our position in this key target country
and market.
There were some non-recurring items in 2005. These include the loss of revenues
from the hurricanes and flooding in the Gulf of Mexico, closure costs related to
the terminated Venezuela and Nigeria contracts and an adverse court judgment
relating to an historic legal claim. Excluding these items, the adjusted
operating profit, before amortisation of intangible assets and goodwill
impairment, was £92.9m, 10.5% above 2004 at constant exchange rates.
Dividend
The Board remains confident that the business will show healthy growth, and
based on this, the Board is recommending a final dividend of 8.1p per share
(2004: 7.0p) making the full year dividend 12.0p per share (2004: 10.4p), an
increase of 15.4% on last year.
Outlook
Intertek is very well positioned in many of its industries and the continued
active marketing of our services will ensure we have another year of favourable
results with strong revenue growth and good margins complemented by acquisition
growth.
ANALYSTS' MEETING
There will be a meeting for analysts at 9.30am today at JPMorgan Cazenove, 20
Moorgate, London EC2R 6DA. A copy of the presentation will be available on the
website later today.
CONTACT
For further information, please contact
Aston Swift, Investor Relations
Telephone: +44 (0) 20 7396 3400 aston.swift@intertek.com
Tim Lynch, Tulchan Communications
Telephone: +44 (0) 20 7353 4200 tlynch@tulchangroup.com
Corporate website: www.intertek.com
High resolution images of Intertek Group plc businesses are available to
download, free of charge from www.vismedia.co.uk.
ABOUT INTERTEK
Intertek is a leading international provider of quality and safety services to a
wide range of global and local industries. Partnership with Intertek brings
increased value to customers' products, processes and ultimately supports their
success in the global market place. Intertek has the experience, expertise,
resources and global reach to support their customers through their network of
over 850 laboratories and offices and 15,500 people in more than 100 countries
around the world.
Performance Review
Cautionary statement
This Announcement contains certain forward-looking statements with respect to
the financial condition, results, operations and business of Intertek Group plc.
These statements and forecasts involve risk and uncertainty because they relate
to events and depend upon circumstances that will occur in the future. There are
a number of factors that could cause actual results or developments to differ
materially from those expressed or implied by these forward-looking statements
and forecasts. Nothing in this Announcement should be construed as a profit
forecast.
Overview
In order to present a more meaningful comparison of the Group's revenue and
operating profit in 2005 compared to 2004, the revenue and operating profit in
this performance review have been adjusted for certain material, non-recurring
items. In addition, throughout this discussion, operating profit is stated
before the amortisation of intangible assets and the impairment of goodwill.
The underlying growth in revenue, which is after adjusting the 2005 revenue to
include £1.8m of revenue lost due to the impact of the hurricanes in the US, was
16.5%. Our underlying growth in operating profit, which is stated before the
amortisation of intangible assets of £2.1m (2004: £1.4m) and the impairment of
goodwill of £2.0m (2004: £nil) and after adding back lost profit due to the
hurricanes of £1.2m and other non-recurring costs of £4.6m, was 11.9%. Labtest
maintained a good level of growth, despite challenging conditions in some of its
markets, ETL SEMKO and Caleb Brett both performed very strongly and FTS had a
good year but suffered contract losses which will affect its performance going
forward.
A substantial portion of the Group's revenue is denominated in US dollars or
currencies linked to the US dollar therefore, the Group's results when
translated into sterling are exposed to changes in the value of the US dollar.
In order to compare the Group's results for 2005 with 2004 at constant exchange
rates, the reported results for 2004, have been retranslated into sterling using
the 2005 average exchange rates. The table below shows growth in revenue and
operating profit at both actual and constant exchange rates.
Revenue reported in the income statement for 2005 was £580.1m, 16.1% higher than
2004 and Group operating profit was £83.0m, an increase of 1.7%. A
reconciliation of the underlying figures to the statutory figures is set out in
the table below.
Underlying Performance
Revenue Operating Profit
------- -------- --------- ------- -------- ---------
2005 Growth at Growth at 2005 Growth at Growth at
actual constant actual constant
rates rates(2) rates(1) rates(1,2)
£m % % £m % %
---------------- ------- -------- --------- -------- --------- --------
Underlying
total 581.9 16.5 15.1 92.9 11.9 10.5
Less
non-recurring
items:
Hurricane
impact (1.8) (1.2)
Court judgment - (2.6)
Closure costs - (2.0)
---------------- ------- -------- --------- -------- --------- --------
Adjusted total 580.1 16.1 14.7 87.1 4.9 3.6
Amortisation
of intangible
assets - (2.1)
Impairment of
goodwill - (2.0)
---------------- ------- -------- --------- -------- --------- --------
Statutory
total 580.1 16.1 14.7 83.0 1.7 0.4
---------------- ------- -------- --------- -------- --------- --------
1. Operating profit for 2004 has been restated under Adopted IFRSs to
include a share option charge of £1.0m and to exclude income from associates of
£1.2m.
2. Cumulative average exchange rates for the year ended 31 December 2005.
Non-recurring items
The results for 2005, were impacted by a number of events that were
non-recurring and outside the normal course of trading. Firstly, the Gulf Coast
in the United States was devastated by hurricanes Rita and Katrina and
subsequent flooding in the New Orleans area in the second half of 2005, which
caused Caleb Brett's operation in this region to lose revenue of approximately
£1.8m and operating profit of £1.7m. The Group is seeking recovery of its losses
from its insurers and an initial payment of £0.5m was received in February 2006.
This amount was accrued in the accounts for 2005, so the net reduction of
operating profit in the year was £1.2m. The Group will include any further
insurance recoveries in 2006. Secondly, operating profit was reduced by costs of
£2.6m following an unexpected adverse court judgment in connection with an old
claim. The judgment has been appealed but the outcome is unknown at the current
time. Thirdly, two major government contracts were terminated in the FTS
division which resulted in closure costs of £2.0m.
Acquisitions and disposals
The Group made one acquisition in the first half of 2005, and 11 acquisitions
and one disposal in the second half of the year. The Group includes the results
of acquisitions from the date of acquisition and excludes the results of
disposals from the date of disposal. At actual exchange rates, underlying
organic revenue increased by 13.6% and underlying organic operating profit
increased by 7.2%. At constant rates underlying organic revenue increased by
12.2% and underlying organic operating profit increased by 5.7%. A more detailed
discussion of the acquisitions is given in the divisional review that follows.
Review of 2005 Performance by Division
The table below summarises the underlying results of each division for 2005 and
growth over 2004 at constant exchange rates. Revenue for Caleb Brett has been
adjusted to include £1.8m of revenue that was lost due to the hurricanes.
Operating profit is stated before the amortisation of intangible assets of £2.1m
(2004: £1.4m) and the impairment of goodwill of £2.0m (2004: £nil). Operating
profit for Caleb Brett is stated after including £1.2m of profit lost due to the
hurricanes and operating profit for FTS is stated before non-recurring closure
costs of £2.0m. Central overheads, exclude a court judgment of £2.6m. Operating
profit for 2004, has been restated under Adopted International Financial
Reporting Standards (IFRSs) to include a share option charge and to exclude
income from associates.
Underlying Financial Performance by division at constant rates (1)
Revenue Operating profit
------- ------- ------- ------- ------- -------
Organic Organic
2005 Growth growth 2005 Growth growth
£m % % £m % %
By division:
Labtest 143.2 7.1 8.7 44.9 2.3 0.9
ETL SEMKO 144.4 16.9 12.4 22.0 25.0 19.8
Caleb Brett 219.8 21.5 15.4 19.1 22.4 8.1
FTS 74.5 10.2 10.2 18.3 31.7 31.7
------------- ------- ------- ------- ------- ------- -------
Sub total 581.9 15.1 12.2 104.3 14.6 10.3
Central
overheads (11.4) (65.2) (65.2)
------------- ------- ------- ------- ------- ------- -------
Underlying
total 581.9 15.1 12.2 92.9 10.5 5.7
Non-recurring
items (1.8) (5.8)
------------- ------- ------- ------- ------- ------- -------
Adjusted total 580.1 14.7 11.8 87.1 3.6 (1.3)
------------- ------- ------- ------- ------- ------- -------
Amortisation
of intangible
assets (2.1)
Impairment of
goodwill (2.0)
------------- ------- ------- ------- ------- ------- -------
Statutory
total 580.1 14.7 11.8 83.0 0.4 (4.7)
------------- ------- ------- ------- ------- ------- -------
1. Cumulative average exchange rates for the year ended 31 December 2005.
Labtest
Consumer goods
Labtest services consumer goods industries including those producing textiles,
footwear, toys, food and hardlines in the areas of testing, inspection,
auditing, training and certification for quality, safety, health, environmental
and corporate social accountability. Its clients include the world's largest
retail organisations, manufacturers and international traders.
Revenue Underlying Operating Profit
------- -------- --------- ------- -------- ---------
2005 Growth at Growth at 2005 Growth at Growth at
actual constant actual constant
rates rates rates rates
£m % % £m % %
---------------- ------- -------- --------- -------- --------- --------
Organic 140.0 9.9 8.7 44.4 1.8 0.9
Acquisitions
and disposals 3.2 0.5
---------------- ------- -------- --------- -------- --------- --------
Total 143.2 8.2 7.1 44.9 3.2 2.3
---------------- ------- -------- --------- -------- --------- --------
Labtest had a challenging year in 2005 but still achieved organic growth of 8.7%
in revenue and 0.9% in operating profit, at constant exchange rates. In total,
revenue increased 7.1% in 2005 over 2004 and operating profit increased 2.3%.
Labtest's organic operating margin was 31.7% in 2005, compared to 34.2% in 2004.
This was primarily due to lower than expected revenue and higher costs in
certain countries, particularly in Europe and the Americas.
Performance in the division was mixed, with very strong growth in China
(including Hong Kong), which accounts for more than half of Labtest revenue,
tempered by challenging market conditions in many other countries. Changes to
the World Trade Organisation's Agreement on Textiles and Clothing (ATC) ended
more than 40 years of quota restrictions on textiles and clothing and resulted
in turbulence in the global textile market in 2005, with increased revenue in
China and a decline in revenue in the rest of Asia, Europe and the Americas.
Toys, food and hardline testing performed well in all regions, mainly due to
increased European Union (EU) regulations on safety and environmental factors
which increased the requirements for testing for various hazardous substances.
For example, companies manufacturing or shipping electronic products into the EU
have been preparing to comply with the new Restriction of Hazardous Substances
(RoHS) directive which becomes mandatory on 1 July 2006.
At the end of November, Labtest sold its 49% shareholding in the German company,
DEKRA Intertek Certification GmbH to DEKRA AG for £2.7m and acquired the
remaining 51% of the shares not already owned by Intertek in the Swedish company
DEKRA-SEMKO Certification AB for £0.9m. This deal ends the joint venture between
Intertek and DEKRA AG and enables both parties to focus on growing their
certification businesses independently. From 1 January 2006, the systems
certification business in Labtest will be aligned with the product certification
business in ETL SEMKO, under the management of ETL SEMKO.
The key growth drivers in Labtest remain strong, principally the sourcing of
products from China, the increasingly wide range of products being sold by
retailers, shorter product lifecycles and the growth in demand from consumers
and regulatory bodies for quality and safety. The growth strategy will be to
concentrate on higher growth markets and to reposition in lower growth regions
and strengthening marketing centres in major western countries. On 1 January
2006, Paul Yao was appointed Chief Operating Officer for Labtest, reporting to
Raymond Kong, Executive President China and Asia and Chief Executive Labtest.
ETL SEMKO
Commercial & electrical
ETL SEMKO provides services to a wide range of industries including those in the
electrical, electronic, medical, building, industrial and automotive component
sectors.
Revenue Underlying Operating Profit
------- -------- --------- ------- -------- ---------
2005 Growth at Growth at 2005 Growth at Growth at
actual constant actual constant
rates rates rates rates
£m % % £m % %
---------------- ------- -------- --------- -------- --------- --------
Organic 127.7 13.5 12.4 19.4 22.0 19.8
Acquisitions 16.7 2.6
---------------- ------- -------- --------- -------- --------- --------
Total 144.4 18.0 16.9 22.0 27.2 25.0
---------------- ------- -------- --------- -------- --------- --------
ETL SEMKO had an excellent year in 2005, with organic growth of 12.4% in revenue
and 19.8% in operating profit, at constant exchange rates. In total, revenue
increased 16.9% in 2005 over 2004 and operating profit increased 25.0%. ETL
SEMKO's organic operating margin was 15.2% in 2005, compared to 14.3% in 2004.
The margin increase was due to operational efficiencies and the turnaround of
underperforming areas.
China continued to report excellent organic growth driven by the increase in
exports of consumer and commercial goods. North America also performed well with
the implementation of a more focused business development strategy and
improvements in efficiency, leading to organic growth in all service sectors. A
new automotive component testing laboratory was opened in Shanghai at the end of
the year and is already generating revenue.
In line with the Group's strategy of expanding services to clients, ETL SEMKO
made two infill acquisitions in the US in 2005. Omega Point Laboratories (OPL)
was acquired in April for £2.9m. OPL provides building products services in
Texas, US and extends the territory covered by the Group's existing services.
International Approvals Laboratory based in Colorado, which provides
electromagnetic compatibility (EMC) testing, was acquired in December for £0.6m.
At the end of 2005, Intertek acquired KPMG's systems certification businesses in
India and the Middle East for consideration of £4.6m. As explained earlier, from
1 January 2006, all Intertek's systems certification business will be
amalgamated within ETL SEMKO. This acquisition provides Intertek with entry into
the systems certification market in key territories from which other Intertek
services can be offered.
The outlook for ETL SEMKO is good, with the growth trend in China expected to
continue and further development of key industry sectors and country markets
where Intertek is currently under represented. On 22 February 2006, Intertek
acquired the EMC business of Akzo Nobel in Japan for £9.0m. The business enjoys
a strong local market position and will give ETL SEMKO more coverage in a key
target country and market.
Caleb Brett
Oil, chemical and agri
Caleb Brett offers inspection and analytical services to the oil, gas, chemical,
agricultural, minerals and pharmaceutical industries.
Revenue Underlying Operating Profit
------- -------- --------- ------- -------- ---------
2005 Growth at Growth at 2005 Growth at Growth at
actual constant actual constant
rates rates rates rates
£m % % £m % %
---------------- ------- -------- --------- -------- --------- --------
Underlying
organic total 204.5 17.7 15.4 16.1 10.3 8.1
Acquisitions 15.3 3.0
---------------- ------- -------- --------- -------- --------- --------
Underlying
total 219.8 24.0 21.5 19.1 24.8 22.4
Less:
hurricane
impact (1.8) (1.2)
---------------- ------- -------- --------- -------- --------- --------
Total 218.0 23.0 20.5 17.9 17.0 14.7
---------------- ------- -------- --------- -------- --------- --------
Caleb Brett performed strongly, with underlying organic growth of 15.4% in
revenue and 8.1% in operating profit, at constant exchange rates. The underlying
organic margin was 7.9%, compared to 8.4% in 2004. The main reason for the
decline in operating margin was increased investment in marketing for global
agri services and the Eastern European region. Revenue from analytical services
(including outsourcing agreements), which accounted for about 36% (2004: 31%) of
Caleb Brett's revenue in 2005, increased by 41.2% in 2005 over 2004.
Favourable market conditions helped to drive a very strong performance in the
Americas. Property damage was suffered as a result of the hurricanes and the
subsequent flooding of the New Orleans area, the closure of oil refineries and
the disruption to transport, communications and accessibility, meant that Caleb
Brett and its clients could not operate from the affected areas. It is estimated
that revenue was reduced by £1.8m and operating profit was reduced by £1.7m.
Recovery is being sought from the Group's insurers and an initial payment of
£0.5m was received in February 2006. Apart from the £0.5m, no recovery of costs
has been included in the above figures.
Asia and Europe also performed well in many areas, particularly analytical
services. In 2005, new outsourcing contracts were gained with Rolls-Royce in the
UK and Kodak in the UK and France.
Caleb Brett made seven acquisitions in 2005 costing £33.9m in total. The largest
acquisition was Automotive Research Laboratories (ARL) in the US which was
acquired in November for £20.1m. ARL is one of only two international market
leaders providing independent testing services for automotive fuels and
lubricants for regulatory and performance standards. ARL complements the
existing downstream oil and chemical business in Caleb Brett by extending its
range of support testing services from the refinery into the automotive
industry. PARC Technical Services business was acquired in August for £4.1m.
PARC operates pilot plants that simulate oil refineries, chemical plants and
automotive test engines. Its world class expertise and equipment strongly
supplements the current downstream testing and inspection services provided by
Caleb Brett, extending significantly the reach of Caleb Brett into this industry
and further up the value chain of supply.
Caleb Brett acquired the Westport Technology Center from Halliburton in October
for £5.4m. Westport, based in Texas, provides high end exploration production
laboratory services to Halliburton and the upstream oil industry, including
consulting and project management. This acquisition follows Intertek's
outsourcing strategy of operating customers' analytical laboratories which are
critical but not core to the customers' business. As well as widening Caleb
Brett's upstream analytical services, Westport also brings new and unique
analytical technology into the Group, which can be developed internationally.
In November, Caleb Brett acquired Lintec Testing Services Ltd in the UK for
consideration of £3.3m. Lintec performs marine fuel and lubricant testing for
the shipping industry and complements Caleb Brett's existing marine business.
In addition to the above, Caleb Brett made three other infill acquisitions in
the US and Europe for consideration of £1.0m.
The outlook for Caleb Brett is positive with organic growth expected from
underlying growth in the market, new regulations such as the EU RoHS directive
and the Ultra Low Sulphur regulations in the US and increased operational
efficiencies. The results in 2006, will benefit from the inclusion of a full
year's results from the acquisitions made in 2005 and the new outsourcing
contracts. The pipeline of potential outsourcing projects remains strong and the
strategy of supplementing organic growth with acquisitions will continue.
FTS
Government services
FTS works with governments to check the safety and quality of imports, verify
duty collection and provide cargo security services. FTS also provides technical
inspection services.
Revenue Underlying Operating Profit
------- -------- --------- ------- -------- ---------
2005 Growth at Growth at 2005 Growth at Growth at
actual constant actual constant
rates rates rates rates
£m % % £m % %
---------------- ------- -------- --------- -------- --------- --------
Underlying 74.5 10.2 10.2 18.3 32.6 31.7
Less: closure
costs - (2.0)
---------------- ------- -------- --------- -------- --------- --------
Total 74.5 10.2 10.2 16.3 18.1 17.3
---------------- ------- -------- --------- -------- --------- --------
FTS reported excellent growth in 2005 over 2004, with 10.2% growth in revenues
and 31.7% growth in underlying operating profit, at constant rates. The
underlying margin was 24.6%, up from 20.6% in 2004.
The pre-shipment inspection (PSI) contracts in Venezuela and Nigeria, which
accounted for 37% of FTS revenue in 2005, terminated in the year. The Venezuelan
contract ended on 31 August 2005 and the Nigerian contract ended on 31 December
2005, resulting in closure costs of approximately £2.0m. Excluding these costs,
operating profit increased 31.7% at constant exchange rates.
New contracts gained in the year were a cargo scanning contract in Guinea and
standards contracts in Nigeria and Kenya. These did not have a material impact
on 2005 results. Pre-shipment inspection contracts with the governments of
Bangladesh, Ecuador, Malawi and Mozambique were renewed.
The loss of the Nigeria and Venezuela contracts will significantly impact the
results of FTS in 2006. PSI contracts provide a valuable service to client
governments and they are expected to continue in the future, albeit in a variety
of forms. The Group's strategy is to continue providing these services and to
develop new and existing PSI and standards contracts, implementing cargo
scanning solutions for clients, developing new customs services and expanding
technical inspection services.
Central overheads
Central overheads, comprise the costs of head office functions such as the
Board, Group finance, treasury and tax, investor relations, Company Secretariat,
business development, Group IT, internal audit, claims management and central
compliance.
2005 Growth*
£m %
-------- ---------
Underlying central costs (11.4) (65.2)
Less: court judgment (2.6)
-------- ---------
Total (14.0) (102.9)
-------- ---------
* growth at actual and constant exchange rates is the same.
Underlying central costs increased by 65.2% to £11.4m in 2005. Central costs
increased by about 25% due to increased headcount in human resources and the
business development and website development teams, a donation to the Tsunami
appeal and costs associated with the installation of a new global consolidation
system. The balance was due to a high level of legal costs in the defence of
ongoing claims which are described as contingent liabilities. The Group's policy
is to charge costs incurred in connection with claims which arise from
discontinued business and from events prior to the Group's flotation in 2002, to
central overheads. Costs for claims arising in subsequent years and for
continuing business are charged to the operating division concerned.
The adjustment of £2.6m relates to an old claim dating back to 1996, which was
contested in court and unexpectedly resulted in an adverse judgment. The
judgment has been appealed and is scheduled to be heard in May 2006.
Net financing costs
The Group reported finance income in 2005 of £3.5m (2004: £4.2m). This comprised
the expected return on pension assets, interest on bank balances and a gain on
the re-measurement of interest rate swaps to fair value.
The Group's finance expense for 2005 was £9.4m compared to £12.1m in 2004. The
charge comprised interest on borrowings, pension interest costs and other
financing fees. The decrease was primarily due to the non-recurring amortisation
of debt issuance costs in 2004 of £3.4m following the refinancing that took
place in December 2004.
Profit before taxation
Profit before tax was £79.4m compared to £74.4m in 2004, mainly due to the good
trading performance in the year and a profit of £1.6m on the disposal of the
Group's interest in an associate company.
Taxation
Income tax expense for 2005, was £18.7m (2004: £19.6m), comprising a current tax
charge of £24.1m (2004: £19.5m) less a deferred tax credit of £5.4m (2004:
charge £0.1m). The effective tax rate was 23.6%, down 2.7% from 2004. The main
reason for the reduction in the effective tax rate was the recognition of
deferred tax assets due to improved taxable income in certain jurisdictions. The
effective tax rate is expected to be sustainable at close to current year levels
for the short to medium-term.
Profit for the year
Profit for the year after tax was £60.7m (2004: £54.8m) of which £57.1m (2004:
£52.0m) was attributable to equity holders of the Company.
Minority interests
Profit attributable to minority shareholders was £3.6m in 2005 (2004: £2.8m).
The increase was mainly due to the strong growth in the Group's non-wholly owned
subsidiaries in China.
Earnings per share
As set out in note 2, basic earnings per share in the year were 36.8p (2004:
33.7p), an increase of 9.2%. An underlying earnings per share calculation is
also shown which removes the impact of amortisation of intangibles and
impairment of goodwill to give basic underlying earnings per share of 39.5p
(2004: 34.6p), an increase of 14.2%.
Dividend
During the year, the Group paid total dividends of £16.9m (2004: £14.4m), which
comprised £10.8m in respect of the final dividend paid on 17 June 2005, at the
rate of 7.0p per share and £6.1m being the interim dividend in respect of the
year ended 31 December 2005, paid on 15 November 2005 at a rate of 3.9p per
share. These amounts were charged to retained earnings. Since the balance sheet
date, the Directors proposed a final dividend in respect of the year ended 31
December 2005, of 8.1p per share (2004: 7.0p) making a full year dividend of
12.0p per share (2004: 10.4p), an increase of 15.4% over last year.
Cash and liquidity
Cash generated from operations was £96.7m for 2005, compared to £101.9m for
2004. The decline of 5.1% was mainly due to an increase in trade and other
receivables of £23.7m. In February 2006, the Group received £4.5m from the
Government of Nigeria which reduced FTS debtors and £0.5m from the Group's
insurers in connection with the hurricane claim. Cash outflows from investing
activities in 2005 were £71.0m (2004: £52.2m), up 36.0%. The main outflows were
£44.5m (2004: £26.6m) for the acquisition of subsidiaries and £31.3m (2004:
£28.2m) for the acquisition of property, plant and equipment. The Group received
£2.7m (2004: £nil) for the disposal of its interest in an associate. Net cash
outflows from financing activities were £6.3m (2004: £53.7m), which comprised
proceeds from the issue of share capital following the exercise of employee
share options of £3.8m (2004: £1.1m) and the draw down of debt £62.8m (2004:
£165.7m), less the repayment of borrowings £53.1m (2004: £202.0m), dividends
paid to minorities £2.9m, (2004: £4.1m) and dividend paid to Group shareholders
£16.9m (2004: £14.4m).
Interest bearing loans and borrowings were £190.7m at 31 December 2005, an
increase of 15.6% over 2004. The increase comprised cash out flow of £9.7m which
was mainly used to finance acquisitions and exchange adjustments of £16.1m
principally due to the retranslation into sterling of borrowings denominated in
US dollars and HK dollars. Cash and cash equivalents at 31 December 2005, were
£50.8m, a decrease of 3.2% over 2004.
Acquisitions and disposals
As described earlier, during 2005 the Group made 12 acquisitions and one
disposal. The net cash outflow was £44.5m (2004: £26.6m) for the acquisition of
subsidiaries and the Group received £2.7m (2004: £nil) for the disposal of its
interest in an associate. Additional deferred consideration of £1.1m has been
accrued, which may be payable if performance targets are met by certain of the
acquired companies.
Litigation
From time to time, the Group is involved in claims and lawsuits incidental to
the ordinary course of the business, including claims for damages, negligence
and commercial disputes regarding inspection and testing and disputes with
former employees. The Group is not currently party to any legal proceedings o
ther than ordinary litigation incidental to the conduct of business.
At 31 December 2005, the Group had provisions against future claims of £8.0m
(2004: £4.8m). The amount provided for claims and litigation relies on
management's informed judgment of the circumstances surrounding the claim, the
costs likely to be incurred in defending the claim and advice from legal
experts.
The majority of claims made against Intertek's subsidiary companies fall within
the Caleb Brett division. While commercial disputes are often settled,
occasionally Caleb Brett will enter into a trial process. In November 2005, one
claim in Caleb Brett, dating back to 1996, was contested in court and
unexpectedly resulted in an adverse judgment. This decision is being appealed
but in the meantime, costs of £2.6m were incurred in 2005, by way of judgment
and legal fees.
In 1999, Caleb Brett Canada (now called Intertek Testing Services Canada)
entered into Collateral Management Agreements (CMA) with two trading companies.
The agreements provided for Caleb Brett India to manage the storage and release
of vegetable oil from warehouses in India. As a result of the actions of a
former rogue employee of Caleb Brett India, various quantities of oil were
released without authorisation, leading to the commencement of recovery actions
against Caleb Brett in Singapore and London. The Singapore proceedings were
resolved by an out of court settlement with the involvement of insurers.
However, the London proceedings, which comprise subrogated claims by Marine
Cargo Underwriters against Intertek Testing Services (ITS) Canada Ltd and Caleb
Brett India Pvt Ltd, claiming reimbursement of US$6.9m, have not resulted in a
settlement and a trial is scheduled to commence on 20 March 2006. Caleb Brett
believes that it had adequate insurance in place to cover the CMA work and has a
strong legal defence against these claims.
Between 1992 and 2001, the Puerto Rico Electric Power Authority (PREPA)
contracted Caleb Brett to perform independent testing services. In August 2002,
PREPA filed a lawsuit against Caleb Brett in the federal district court of
Puerto Rico. PREPA is seeking unspecified damages, alleging that Caleb Brett
falsified test results and engaged in a conspiracy with fuel suppliers to
provide off-specification fuel for on-specification prices during the 1992-2000
period.
Caleb Brett has filed a motion to dismiss PREPA's complaint, on the grounds that
the claims are time barred by the applicable statute of limitations. Caleb Brett
believes that it has substantial defences to the plaintiff's claims and
continues to defend itself vigorously. At this point in the litigation however,
it is impossible to predict the outcome with any degree of certainty. A process
of fact and expert discovery began in earnest in the second half of 2005. The
court has set a deadline of 30 June 2006, for the conclusion of this discovery.
No trial date has been set.
In May 2004, Caleb Brett filed a petition in Texas state court against Certain
Underwriters at Lloyd's of London and other underwriters seeking a declaration
that certain policies issued by the Underwriters are in full force and effect,
and that the insurers subscribing thereto must indemnify and defend Caleb Brett
in the case of PREPA v Caleb Brett USA Inc in federal court in Puerto Rico. At
this time, only limited discovery has taken place and it is impossible to
predict the outcome with any degree of certainty.
The outcome of the litigation to which Intertek Group companies are party to,
cannot be readily foreseen. Based on information currently available, the
directors consider that the cost to the Group of an unfavourable outcome arising
from such litigation is unlikely to have a materially adverse effect on the
financial position of the Group in the foreseeable future.
Consolidated income statement
For the year ended 31 December 2005
2005 2004
Notes £m £m
-------------------------------- -------- --------- ---------
Revenue 1 580.1 499.6
Cost of sales (447.6) (385.0)
-------------------------------- -------- --------- ---------
Gross profit 132.5 114.6
-------------------------------- -------- --------- ---------
Amortisation of intangible assets (2.1) (1.4)
Impairment of goodwill (2.0) -
Other administrative expenses (45.4) (31.6)
-------------------------------- -------- --------- ---------
Total administrative expenses (49.5) (33.0)
-------------------------------- -------- --------- ---------
Group operating profit 1 83.0 81.6
-------------------------------- -------- --------- ---------
Finance income 3.5 4.2
Finance expense (9.4) (12.1)
-------------------------------- -------- --------- ---------
Net financing costs (5.9) (7.9)
-------------------------------- -------- --------- ---------
Share of profit of associates 0.7 0.7
Profit on sale of interest in
associate 1.6 -
------------- --------------------- -------- --------- ---------
Profit before 79.4 74.4
taxation
Income tax expense (18.7) (19.6)
-------------------------------- -------- --------- ---------
Profit for the year 60.7 54.8
-------------------------------- -------- --------- ---------
Attributable to:
Equity holders of the Company 57.1 52.0
Minority interest 3.6 2.8
-------------------------------- -------- --------- ---------
Profit for the year 60.7 54.8
-------------------------------- -------- --------- ---------
Earnings per share 2
-------------------------------- -------- --------- ---------
Basic 36.8p 33.7p
-------------------------------- -------- --------- ---------
Diluted 36.5p 33.4p
-------------------------------- -------- --------- ---------
Consolidated balance sheet
As at 31 December 2005
2005 2004
£m £m
------------------------------ ---------- ----------
Assets
Property, plant and equipment 115.9 88.5
Goodwill 55.7 33.5
Other intangible assets 12.8 3.5
Investments in associates 0.7 1.8
Deferred tax assets 14.4 5.5
------------------------------ ---------- ----------
Total non-current assets 199.5 132.8
------------------------------ ---------- ----------
Inventories 3.1 1.5
Trade and other receivables 146.3 109.8
Derivative financial instruments 1.7 -
Cash and cash equivalents 50.8 52.5
------------------------------ ---------- ----------
Total current assets 201.9 163.8
------------------------------ ---------- ----------
Total assets 401.4 296.6
------------------------------ ---------- ----------
Liabilities
Interest bearing loans and borrowings (15.3) (14.0)
Current taxes payable (25.8) (19.5)
Trade and other payables (93.9) (75.9)
Provisions (8.9) (5.4)
------------------------------ ---------- ----------
Total current liabilities (143.9) (114.8)
------------------------------ ---------- ----------
Interest bearing loans and borrowings (175.4) (150.9)
Deferred tax liabilities (3.4) (0.6)
Net pension liabilities (17.8) (16.1)
Other payables (1.2) (0.5)
------------------------------ ---------- ----------
Total non-current liabilities (197.8) (168.1)
------------------------------ ---------- ----------
Total liabilities (341.7) (282.9)
------------------------------ ---------- ----------
Net assets 59.7 13.7
------------------------------ ---------- ----------
Equity
Share capital 1.6 1.5
Share premium account 238.2 234.5
Other reserves 13.4 13.5
Retained earnings (201.3) (241.5)
------------------------------ ---------- ----------
Total equity attributable to equity holders of the 51.9 8.0
Company
Minority interest 7.8 5.7
------------------------------ ---------- ----------
Total equity 59.7 13.7
------------------------------ ---------- ----------
Consolidated statement of cash flows
For the year ended 31 December 2005
2005 2004
£m £m
------------------------------ ---------- ----------
Operating activities
Profit for the year 60.7 54.8
Adjustments for:
Depreciation charge 22.0 18.4
Amortisation of intangibles 2.1 1.4
Impairment of goodwill 2.0 -
Share option expense 1.9 1.0
Share of profit of associates (0.7) (0.7)
Profit on sale of interest in associate (1.6) -
Net financing costs 5.9 7.9
Income tax expense 18.7 19.6
Loss on disposal of fixed assets 0.1 0.2
------------------------------ ---------- ----------
Operating profit before changes in working capital and
provisions 111.1 102.6
Decrease/(increase) in inventories 0.1 (0.8)
Increase in trade and other receivables (23.7) (8.9)
Increase in trade and other payables 5.9 11.7
Increase/(decrease) in provisions 3.3 (2.7)
------------------------------ ---------- ----------
Cash generated from operations 96.7 101.9
Interest paid (6.5) (6.9)
Income taxes paid (17.8) (16.0)
------------------------------ ---------- ----------
Cash flows from operating activities 72.4 79.0
------------------------------ ---------- ----------
Investing activities
Proceeds from sale of property, plant and equipment 0.3 0.2
Proceeds from disposal of interest in associate 2.7 -
Proceeds from disposal of own shares by ESOT 0.4 -
Interest received 0.6 1.6
Dividends received from associated undertakings 0.8 0.8
Acquisition of subsidiaries, net of cash acquired (44.5) (26.6)
Acquisition of property, plant and equipment (31.3) (28.2)
------------------------------ ---------- ----------
Cash flows from investing activities (71.0) (52.2)
------------------------------ ---------- ----------
Financing activities
Proceeds from the issue of share capital 3.8 1.1
Drawdown of debt 62.8 165.7
Repayment of debt (53.1) (202.0)
Dividends paid to minorities (2.9) (4.1)
Dividends paid (16.9) (14.4)
------------------------------ ---------- ----------
Cash flows from financing activities (6.3) (53.7)
------------------------------ ---------- ----------
Net decrease in cash and cash equivalents (4.9) (26.9)
Cash and cash equivalents at 1 January 52.5 81.5
Effect of exchange rate fluctuations on cash held 3.2 (2.1)
------------------------------ ---------- ----------
Cash and cash equivalents at 31 December 50.8 52.5
------------------------------ ---------- ----------
Consolidated statement of recognised income and expense
2005 2004
£m £m
--------- ---------
Foreign exchange translation differences (1.7) 7.1
Actuarial gains and losses on defined benefit pension (3.7) (9.0)
schemes
Tax on income and expenses recognised directly in equity 1.4 2.8
Effective portion of changes in fair value of cash flow 2.6 -
hedges --------- ---------
-----------------------------------
Net (expense)/income recognised directly in equity (1.4) 0.9
Profit for the year 60.7 54.8
----------------------------------- --------- ---------
Total recognised income and expense for the year 59.3 55.7
----------------------------------- --------- ---------
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:
Hedging reserve (1.0) -
----------------------------------- --------- ---------
58.3 55.7
----------------------------------- --------- ---------
Total recognised income and expense for the year
attributable to:
Equity holders of the Company 55.7 52.9
Minority interest 3.6 2.8
----------------------------------- --------- ---------
Total recognised income and expense 59.3 55.7
----------------------------------- --------- ---------
1 SEGMENT REPORTING
Segment information is presented in respect of the Group's business and
geographical segments. The primary format, business segments, is based on the
Group's management and internal reporting structure.
Segment results, assets and liabilities include items directly attributable to a
segment as well as those that can be allocated on a reasonable basis.
Unallocated items comprise mainly borrowings, pension fund liabilities, and
corporate expenses and assets.
Business segments
The Group comprises the following main business segments:
Labtest, which tests and inspects consumer goods including textiles, toys
footwear and hardlines.
ETL SEMKO, which tests and certifies commercial and electrical consumer
products, telecommunication equipment, building products, automotive components
and heating, ventilation and air conditioning equipment .
Caleb Brett, which tests and inspects oil, chemicals and agricultural produce.
FTS, which provides trade services to standards bodies and governments.
Central overheads comprise the costs of the corporate head office and
non-operating holding companies and other costs which are not controlled by the
operating divisions.
Geographical segments
All the business segments are managed on a worldwide basis but can be divided
into the following geographic regions:
Americas; Europe, the Middle East and Africa; Asia
In presenting information on the basis of geographic segments, segment revenue
is based on the geographical location of the entity that generated that revenue.
Segment assets are based on the geographical location of the assets.
Segment reporting
Business analysis (primary segment)
Labtest ETL SEMKO Caleb Brett FTS Central Eliminations Consolidated
overheads
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004
£m £m £m £m £m £m £m £m £m £m £m £m £m £m
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Revenue
from
external
customers 143.2 132.3 144.4 122.4 218.0 177.3 74.5 67.6 - - - - 580.1 499.6
Inter-
segment
revenue 10.5 14.3 10.2 8.4 12.1 9.8 37.9 33.2 - - (70.7) (65.7) - -
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Revenue 153.7 146.6 154.6 130.8 230.1 187.1 112.4 100.8 - - (70.7) (65.7) 580.1 499.6
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Operating
profit
before
amortisation
and
impairment 44.9 43.5 22.0 17.3 17.9 15.3 16.3 13.8 (14.0) (6.9) - - 87.1 83.0
Amortisation
of
intangibles (0.2) - (1.2) (0.8) (0.7) (0.6) - - - - - - (2.1) (1.4)
Impairment
of
goodwill (2.0) - - - - - - - - - - - (2.0) -
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Group
operating
profit 42.7 43.5 20.8 16.5 17.2 14.7 16.3 13.8 (14.0) (6.9) - - 83.0 81.6
------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------
Net financing
costs (5.9) (7.9)
Share of
profit of
associates 0.7 0.7
Profit on sale
of interest in
associate 1.6 -
Income tax
expense (18.7) (19.6)
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Profit for the
year 60.7 54.8
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Segment
assets 57.9 45.4 85.7 67.0 158.1 100.2 26.6 20.5 4.3 2.5 - - 332.6 235.6
Investment
in
associates 0.7 1.8
Unallocated
assets 68.1 59.2
------ ------
Total assets 401.4 296.6
------ ------
Segment
liabilities 20.3 16.0 27.2 19.3 37.3 26.1 12.0 12.4 6.5 5.7 - - 103.3 79.5
Unallocated
liabilities 238.4 203.4
------ ------
Total
liabilities 341.7 282.9
------ ------
Depreciation 5.3 4.5 6.9 6.1 8.7 6.7 1.0 1.0 0.1 0.1 - - 22.0 18.4
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Capital
expenditure 7.4 7.7 9.3 7.2 13.0 10.3 1.5 2.9 0.1 0.1 - - 31.3 28.2
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Segment reporting (continued)
Geographic analysis (secondary segment)
Americas Europe, Middle Asia Consolidated
East and Africa
----------- ------ ------ ---------- --------- ------ ------ ------ ------
2005 2004 2005 2004 2005 2004 2005 2004
£m £m £m £m £m £m £m £m
----------- ------ ------ ---------- --------- ------ ------ ------ ------
Revenue from
external
customers 203.6 169.0 186.8 166.3 189.7 164.3 580.1 499.6
----------- ------ ------ ---------- --------- ------ ------ ------ ------
Segment
result 21.0 16.6 2.5 12.0 59.5 53.0 83.0 81.6
----------- ------ ------ ---------- --------- ------ ------ ------ ------
Amortisation
of
intangibles 1.3 0.8 0.6 0.6 0.2 - 2.1 1.4
----------- ------ ------ ---------- --------- ------ ------ ------ ------
Impairment
of
goodwill - - 2.0 - - - 2.0 -
----------- ------ ------ ---------- --------- ------ ------ ------ ------
Segment
assets 141.2 86.3 113.3 96.4 78.1 52.9 332.6 235.6
----------- ------ ------ ---------- --------- ------ ------ ------ ------
Capital
expenditure 10.4 8.5 9.3 9.4 11.6 10.3 31.3 28.2
----------- ------ ------ ---------- --------- ------ ------ ------ ------
2 EARNINGS PER ORDINARY SHARE
The calculation of earnings per ordinary share is based on profit attributable
to equity holders of the company and the weighted average number of ordinary
shares in issue during the year. In addition to the earnings per share required
by IAS 33: Earnings per share, an underlying earnings per share has also been
calculated and is based on earnings excluding the effect of amortisation of
intangibles and goodwill impairment. It has been calculated to allow
shareholders to gain a better understanding of the trading performance of the
Group. Details of the underlying earnings per share are set out below:
2005 2004
Based on the profit for the year: £m £m
------------------------------------ ------- -------
Profit attributable to equity shareholders 57.1 52.0
Amortisation of intangibles 2.1 1.4
Impairment of goodwill 2.0 -
------------------------------------ ------- -------
Underlying earnings 61.2 53.4
------------------------------------ ------- -------
Number of shares (millions):
------------------------------------ ------- -------
Basic weighted average number of shares 155.1 154.4
Potentially dilutive share options* 1.3 1.1
------------------------------------ ------- -------
Diluted weighted average number of shares 156.4 155.5
------------------------------------ ------- -------
Basic earnings per share 36.8p 33.7p
Options (0.3)p (0.3)p
------------------------------------ ------- -------
Diluted earnings per share 36.5p 33.4p
------------------------------------ ------- -------
Basic underlying earnings per share 39.5p 34.6p
Options (0.4)p (0.3)p
------------------------------------ ------- -------
Diluted underlying earnings per share 39.1p 34.3p
------------------------------------ ------- -------
*The weighted average number of shares used in the calculation of the diluted
earnings per share for the year to 31 December 2005, excludes 1,456,156
potential shares (2004: 56,280) as these were not dilutive in accordance with
IAS 33: Earnings per share.
3 ANNUAL REPORT
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 December 2005 or 2004 but is derived
from the 2005 accounts . Statutory accounts for 2004, which were prepared under
UK GAAP, have been delivered to the registrar of companies, and those for 2005,
prepared under accounting standards adopted by the EU, will be delivered in due
course. The auditors have reported on those accounts; their reports were (i)
unqualified, (ii) did not include references to any matters to which the
auditors drew attention by way of emphasis without qualifying their reports and
(iii) did not contain statements under section 237(2) or (3) of the Companies
Act 1985.
This information is provided by RNS
The company news service from the London Stock Exchange
Monday, 20th May 2024
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