Interim Results
Intertek Group PLC
04 September 2006
INTERIM 2006 RESULTS ANNOUNCEMENT
4 SEPTEMBER 2006
Intertek Group plc ('Intertek'), a leading international provider of quality and
safety services, announces its interim results for the half year to 30 June
2006.
FINANCIAL RESULTS
Half Year ended 30 June 2006
HY 2006 HY 2005 % change % change
(constant
currency)
Revenue £327.1m £272.3m +20.1% +15.1%
Operating profit (1) £50.7m £43.5m +16.6% +10.0%
Operating cash flow £47.3m £30.0m +57.7%
Profit before tax £45.2m £38.5m +17.4%
Earnings per share (2) 21.3p 18.7p +13.9%
Basic earnings per share 20.1p 17.0p +18.2%
Interim dividend per share 4.6p 3.9p +17.9%
1 Excluding amortisation of intangibles £2.0m (H1 05: £0.8m) and goodwill
impairment £nil (H1 05: £2.0m)
2 Diluted adjusted earnings per share based on profit before amortisation of
intangibles and goodwill impairment
Wolfhart Hauser, Chief Executive Officer, commented:
'I am pleased to report a strong set of numbers today. Our three main divisions
which account for over 90% of group revenues, reported organic revenue growth of
11.9%. Our Oil, Chemical & Agri division, the largest division by revenue,
achieved organic revenue growth of over 15% driven by favourable conditions in
the oil and chemical market.'
'This strong growth was partially offset by the previously announced termination
in 2005 of two contracts in our smallest division, Government Services. This
reduced overall organic revenue growth to 7.4% and the margin by 50 basis points
to 15.5%.'
'Our strategy of focusing on key industry segments and leveraging cross
divisional activities and execution is helping to drive the revenue growth and
will result in margin improvements over the medium term.'
'We remain confident that Intertek will maintain its market leading position in
the industries it serves, and we expect the good progress to continue in the
second half.'
CONTACTS
For further information, please contact
Aston Swift, Investor Relations
Telephone: +44 (0) 20 7396 3400 aston.swift@intertek.com
Richard Mountain, Financial Dynamics
Telephone: +44 (0) 20 7831 3113 richard.mountain@fd.com
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.
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 and processes, ultimately supporting
their success in the global market place. Intertek has the experience,
expertise, resources and global reach to support its customers through their
network of 910 laboratories and offices, 16,600 people in 110 countries around
the world.
Chairman's statement
Results at actual exchange rates
I am pleased to report that revenue for the Group grew to £327.1m, up 20.1%.
Strong growth was achieved in all divisions apart from Government Services, our
smallest division, which declined as expected, due to the discontinuation of
pre-shipment inspection contracts in Nigeria and Venezuela. Organic revenue
growth was 12.2%.
Operating profit was £48.7m, up 19.7% over the same period last year. Operating
profit before amortisation of intangible assets and goodwill impairment
('adjusted operating profit') increased to £50.7m, up 16.6%. Organic growth in
adjusted operating profit was 8.0%.
Acquisitions
In line with the Group's policy of making complementary acquisitions, in
February 2006, the Group acquired Akzo Nobel's electromagnetic compatibility
business and assets in Japan for £9.4m. This acquisition enables the Commercial
& Electrical division to extend its service offering into a territory where the
Group was under represented.
On 1 September 2006, the Group acquired for £6.2m the business and assets of an
analytical chemical testing
laboratory in the Netherlands, from Chemelot BV, a subsidiary of DSM N.V.
Dividends
The Board has decided to pay, on 14 November 2006, an interim dividend of 4.6p
(2005: 3.9p), an increase of 17.9% over last year's interim dividend. The
interim dividend will be paid to members on the register at 3 November 2006.
Earnings per share
Basic earnings per share were 20.1p, up 18.2% over the same period last year.
Diluted earnings per share were 21.3p, up 13.9%.
Board changes
I am pleased to welcome Christopher Knight who was appointed a Non-Executive
Director on 30 March 2006. A Chartered Accountant and former investment banker,
he will, I am confident, make a valuable contribution to the Board's
deliberations and to the continued growth of Intertek.
After leading the Consumer Goods division for most of his 33 years with
Intertek, Raymond Kong retired as Chief Executive of the division on 1 July 2006
and became a Non-Executive Director of Intertek Group plc. Raymond continues as
President of Asia and China, using his knowledge and experience to advance the
Group's interests in that region. On behalf of everyone at Intertek, I would
like to express our deep gratitude to Raymond for his outstanding contribution
towards building the Consumer Goods division into the successful business that
it is today. Paul Yao, formerly the Chief Operating Officer of the Consumer
Goods division, was appointed Chief Executive of the division to replace
Raymond. I wish both colleagues success in their new roles.
Outlook
We remain confident that Intertek will maintain its market leading position in
the industries it serves, and we expect the good progress to continue in the
second half.
Vanni Treves
Chairman
Chief Executive Officer's review
Overview of results at constant exchange rates
Overall, the revenue growth was strong. Total revenue for the Group for the
first half of 2006 (H1 06) was £327.1m, an increase of 15.1% over the first half
of 2005 (H1 05). The three larger divisions - Consumer Goods, Commercial &
Electrical, and Oil, Chemical & Agri, which accounted for 91% of the Group's
revenue, grew by 20.6%. Many factors contributed to this growth including the
new RoHS (Restriction of Hazardous Substances) legislation, the favourable
conditions in the oil and chemical market and the good performance of our
acquisitions.
We include the results of acquisitions from the date that we acquire them,
therefore they distort the period- on-period comparison. In order to compare the
Group's performance for H1 06 and H1 05 without this distortion, we calculate
organic growth by excluding the revenue and operating profit from acquisitions
made in 2005 and 2006. On this basis, organic revenue growth for H1 06 over H1
05 was 7.4%. Excluding Government Services, organic growth in revenue was 11.9%.
Adjusted operating profit for the Group for H1 06 was £50.7m, up 10.0% over H1
05 and the Group's operating profit margin was 15.5%. The decline in margin was
mainly attributable to the discontinued contracts in the Government Services
division.
Constant currency basis
For statutory reporting purposes the results for H1 06 are translated into
sterling using the average exchange rates for the six months to 30 June 2006 and
the results for H1 05 are translated into sterling using the average exchange
rates for the six months to 30 June 2005. In order to compare the performance of
each division on a like-for-like basis, for management purposes we measure the
performance of each of the divisions at constant exchange rates. In the table
below and in the discussion of performance by division, the revenue and
operating profit for H1 05 have been translated at the average exchange rates
for the six months to 30 June 2006.
Definition of operating profit
For statutory reporting, operating profit is stated after the deduction of
amortisation of intangible assets and goodwill impairment. For management
purposes, we calculate the operating profit of the divisions before deducting
these charges. In the commentary that follows, unless otherwise stated, the
management definition of operating profit is used.
Performance by division
Revenue Operating profit(1)
H1 06 Change Organic H1 06 Change Organic
change(2) change(2)
£m £m
Consumer Goods 74.9 12.5% 8.9% 24.1 11.1% 10.6%
Commercial &
Electrical 88.3 16.6% 9.3% 13.6 12.4% 0.8%
Oil, Chemical
& Agri 134.8 28.7% 15.7% 13.5 45.2% 21.5%
Government
Services 29.1 (22.0)% (22.0)% 4.2 (44.0)% (44.0)%
Central
overheads - - - (4.7) (4.4)% (4.4)%
Total at
constant
exchange
rates(3) 327.1 15.1% 7.4% 50.7 10.0% 2.0%
1 Operating profit is adjusted to remove amortisation of intangible assets
£2.0m (H1 05: £0.8m) and goodwill impairment of £nil (H1 05: £2.0m).
2 Organic growth figures exclude the results of acquisitions made in 2005 and
2006.
3 Cumulative average exchange rates for the six months to 30 June 2006.
Profitability
Group operating profit, after charging amortisation of intangibles of £2.0m (H1
05: £0.8m) and goodwill impairment of £nil (H1 05: £2.0m) was £48.7m, up 19.7%
over H1 05. The net financing costs were £3.5m in H1 06, compared to £2.6m in H1
05, principally due to higher borrowings and interest rates. The tax rate of
24.8% for H1 06 was based on the estimated tax rate the Group expects for the
full year. Profit for the period was £34.0m, up 21.0%.
Cash flow
Cash from operating activities for H1 06 was £47.3m, up 57.7% on H1 05. The
growth was due to the growth in operating profit in the Group and also to an
improved working capital position. The cash inflow was used to fund investing
activities of £29.4m (H1 05: £13.4m) including capital expenditure of £20.5m (H1
05: £11.7m) and acquisitions of £9.8m (H1 05: £2.2m). Financing activities
generated cash inflow of £2.1m (H1 05: £16.8m outflow) due to the net drawdown
of debt of £13.6m (H1 05: £7.6m repayment) offset by the payment of dividends of
£14.2m (H1 05: £11.8m).
Litigation
From time to time, the Group is involved in claims and lawsuits incidental to
the ordinary course of business. None of the cases has resulted in any material
financial impact on the Group's reported income statement for the six months to
30 June 2006. 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 material effect on the financial position of
the Group in the foreseeable future. More detail of key claims is given in note
11 to the interim financial information.
Review of performance by division
Consumer Goods (Labtest)
H1 06 Change Organic
change
£m
Revenue 74.9 12.5% 8.9%
Operating profit 24.1 11.1% 10.6%
Operating margin 32.2% (40)bp 50bp
The Consumer Goods division performed well in the first half of 2006, with
revenue growth of 12.5% and operating profit growth of 11.1%. The toy sector,
which includes toys, footwear and hardlines, grew particularly well, driven in
part by an increase in RoHS (Restriction of Hazardous Substances) testing caused
by a European Union directive, which became mandatory on 1 July 2006. The global
textile market continued to be unsettled by the impact of changes in import
quotas but despite these challenging market conditions, revenue from textile
testing grew well in key countries such as China and India. The volume of
textile testing in Europe remained stagnant as the market shifted increasingly
to Asia and Latin America.
On an organic basis, the operating margin increased by 50 basis points.
Including acquisitions, the overall 40 basis point decline in operating margin
from 32.6% to 32.2% was attributable to the small equipment and building
inspection business acquired by Consumer Goods last year. Whilst this business
is profitable, its operating margin is currently lower than other parts of the
Consumer Goods division.
Over 60% of the revenue in Consumer Goods is generated in China, Hong Kong and
Taiwan. Revenue from these countries grew well and prospects continue to look
good. The textile laboratory network was expanded with new facilities in India,
Guatemala and Vietnam and three new laboratories in China.
The key growth drivers in Consumer Goods 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 assurance of quality and safety
Commercial & Electrical (ETL SEMKO)
H1 06 Change Organic
change
£m
Revenue 88.3 16.6% 9.3%
Operating profit 13.6 12.4% 0.8%
Operating margin 15.4% (60)bp (130)bp
Overall, the Commercial & Electrical division performed well in the first half
of the year, with revenue growth of 16.6% and operating profit growth of 12.4%.
All service sectors apart from automotive component testing contributed to this
growth.
Revenue from the automotive component testing sector, suffered a small decline
in H1 06 compared to H1 05, mostly due to the slow down at the major domestic
automotive manufacturers in the United States. Our operations and facilities in
the US are being consolidated to achieve greater efficiency and lower costs in
the second half of the year. The decline in operating margin was also partly due
to investment in facilities in China. The automotive component testing facility
in Shanghai which was opened at the end of last year, is progressing and is
expected to be fully operational later in the year.
The electrical, building products and HVAC (heating, ventilation and air
conditioning) businesses grew strongly, with double digit organic revenue
growth. Revenue from the operations in mainland China continued to grow strongly
and the network was extended by the opening of five offices and two laboratories
in China. Two offices were also opened in India.
In February 2006, the Japanese electromagnetic compatibility (EMC) testing
business of Akzo Nobel was acquired. Japan is an important market for Commercial
& Electrical and this acquisition will allow quicker penetration of that market
for both EMC testing and other services offered by the Group.
There are good growth prospects for the rest of the year and we expect to widen
the scope and range of the services we offer, by continued investment in new
sectors and regions.
Oil, Chemical & Agri (Caleb Brett)
H1 06 Change Organic
change
£m
Revenue 134.8 28.7% 15.7%
Operating profit 13.5 45.2% 21.5%
Operating margin 10.0% 110bp 40bp
Oil, Chemical & Agri had an excellent performance in the first half of the year
with revenue growth of 28.7% and an increase in margin from 8.9% to 10.0%. All
service sectors contributed to this growth. With high volumes of trade and
increased demand for petroleum products, market conditions were favourable and
increased trading activity was evident across all regions. Demand for analytical
services also increased with new environmental regulations coming into force in
the United States for road and marine fuels. Revenue from analytical services as
a percentage of total revenues grew to 41% in the first half of 2006, up from
36% recorded for the full year 2005.
In the Americas, revenues grew strongly led by the US cargo inspection business
with market expansion in the West Coast, East Coast and Gulf of Mexico. Early
investments in multiple facilities for testing ultra low sulphur diesel paid off
as demand was strong, ahead of the new regulations coming into force in the US
later this year. Demand was also strong for ethanol testing due to a change in
regulations regarding the permitted additives in petrol.
In Europe, revenue growth was assisted by the full implementation of outsourcing
contracts for both inspection and analytical services awarded in 2005.
Downstream, two new contracts for a bio fuels plant and a refinery in the UK
were won and a contract to provide upstream analytical services to all BP's
offshore and onshore oil and gas production facilities started.
In Asia, new laboratories were opened in China, Thailand and Papua New Guinea
during the first half of 2006. New minerals testing and agri services were
established to take advantage of the growth in these sectors in the region.
Upstream capabilities were expanded utilizing the support and technology from
our Westport laboratory in the US, which was acquired from Halliburton at the
end of 2005.
In July, the Group completed the acquisition of Louisiana Meter Services which
is a small company providing liquid and gas measurement services to the
petroleum and petrochemical industries in the United States.
From 1 September, under an outsourcing agreement, Intertek will provide all the
analytical service support to the manufacturing operations of Sabic and DSM in
Geleen, Netherlands. This is one of the largest outsourcing contracts for
analytical services within the chemical industry to date, with over 170 chemists
and technicians joining Intertek.
The market is expected to remain favourable for the rest of the year and there
are good prospects for new outsourcing contracts and acquisitions.
Government Services (FTS)
H1 06 Change Organic change
£m
Revenue 29.1 (22.0)% (22.0)%
------------- ------- ------- -------
Operating profit 4.2 (44.0)%.0 (44.0)%.0
------------- ------- ------- -------
Operating margin 14.4% (570)bp (570)bp
As expected, revenue for Government Services declined 22.0% in H1 06 over H1 05
due to the discontinuation of pre-shipment inspection (PSI) contracts in
Venezuela and Nigeria. These contracts ceased in May 2005 and December 2005
respectively, although revenues from Nigeria ran on through March 2006 to clear
work in progress. Operating profit declined 44.0% due mainly to the lost profit
from the discontinued contracts and the lost contribution towards the divisional
overheads. The division was restructured following the decline in revenue.
Excluding the discontinued contracts, revenue increased by 9.9% in H1 06
compared to H1 05. This growth was due to the good performance of the standards
programmes, the container scanning contract in Sierra Leone and technical
inspections on construction materials. A new scanning contract in Guinea is
expected to commence operations in the second half of the year.
In April, the Government Services division acquired certain assets of Port
Maritime Security International Limited (PMSI), a wholly owned subsidiary of
Eurotunnel plc. PMSI provides training and consultancy services in cargo
scanning and port security. This acquisition strengthens the Group's commitment
to the cargo scanning market.
The Government Services division continues to seek new opportunities in the PSI
market and is committed to developing innovative solutions to the cargo security
issues facing international trade.
Central overheads
Central overheads were £4.7m for H1 06, an increase of 4.4% over H1 05. The
increase reflects the cost of strengthening the procedures and resources in head
office to manage the 15% growth in revenue of the Group.
Looking forward
Our commitment to supporting and adding value for our customers drives
everything we do. The issues facing our customers - product variety, shorter
product life spans, complexity of supply chains, consumer demand for quality and
safety, increasing legislation, environmental and social pressure, increasing
competition and price pressure - are the key growth drivers for our business.
These remain strong and we are well placed to benefit from them.
We believe that global trade will continue to grow and become more complex and
that with the expertise and commitment of our people and our network of
resources, we will continue to grow our business to support that trade. Our
strategy of focussing on global industries and combining our services, adds
value to our customers and has helped to drive the strong growth in our business
in the first half of the year. We will continue with this strategy and
anticipate further good growth in the second half.
Wolfhart Hauser
Chief Executive Officer
Consolidated interim income statement
Six months to Six months to Year to
30 June 2006 30 June 2005 31 December
2005
(Unaudited) (Unaudited) (Audited)
Notes £m £m £m
--------------------- ----- -------- -------- ---------
Revenue 2 327.1 272.3 580.1
Cost of sales (257.7) (210.3) (447.6)
--------------------- ----- -------- -------- ---------
Gross profit 69.4 62.0 132.5
--------------------- ----- -------- -------- ---------
Amortisation of
intangible assets (2.0) (0.8) (2.1)
Impairment of goodwill - (2.0) (2.0)
Other administrative
expenses (18.7) (18.5) (45.4)
--------------------- ----- -------- -------- ---------
Total administrative
expenses (20.7) (21.3) (49.5)
--------------------- ----- -------- -------- ---------
Group operating profit 2 48.7 40.7 83.0
--------------------- ----- -------- -------- ---------
Finance income 2.4 1.9 3.5
Finance expense (5.9) (4.5) (9.4)
--------------------- ----- -------- -------- ---------
Net financing costs (3.5) (2.6) (5.9)
------------------------ -------- -------- ---------
Share of profit of
associates - 0.4 0.7
Profit on sale of
interest in associate - - 1.6
------------------------ -------- -------- ---------
Profit before taxation 45.2 38.5 79.4
Income tax expense 3 (11.2) (10.4) (18.7)
--------------------- ----- -------- -------- ---------
Profit for the period 34.0 28.1 60.7
------------------------ -------- -------- ---------
---------
Attributable to:
Equity holders of
the Company 31.3 26.4 57.1
Minority interest 2.7 1.7 3.6
--------------------- ----- -------- -------- ---------
Profit for the period 34.0 28.1 60.7
--------------------- ----- -------- -------- ---------
Earnings per share 4
--------------------- ----- -------- -------- ---------
Basic 20.1p 17.0p 36.8p
--------------------- ----- -------- -------- ---------
Diluted 20.0p 16.9p 36.5p
--------------------- ----- -------- -------- ---------
Dividends in respect
of the period 4.6p 3.9p 12.0p
--------------------- ----- -------- -------- ---------
Consolidated interim balance sheet
At 30 June At 30 June At 31 December
2006 2005 2005
(Unaudited) (Unaudited) (Audited)
Notes £m £m £m
------------------------------ ------ -------- --------- --------
ASSETS
Property, plant and equipment 123.1 93.1 115.9
Goodwill 57.6 33.9 55.7
Other intangible assets 11.1 2.9 12.8
Investments in associates 0.5 1.9 0.7
Deferred tax assets 14.2 5.5 14.4
------------------------------ ------ -------- --------- --------
Total non-current assets 206.5 137.3 199.5
------------------------------ ------ -------- --------- --------
Inventories 3.4 1.7 3.1
Trade and other receivables 153.2 135.3 146.3
Derivative financial instruments 1.5 0.9 1.7
Cash and cash equivalents 7 52.6 43.3 50.8
------------------------------ ------ -------- --------- --------
Total current assets 210.7 181.2 201.9
------------------------------ ------ -------- --------- --------
Total assets 417.2 318.5 401.4
------------------------------ ------ -------- --------- --------
LIABILITIES
Interest bearing loans and
borrowings 7 (14.6) (14.4) (15.3)
Current taxes payable (25.9) (21.4) (25.8)
Trade and other payables (90.0) (80.5) (93.9)
Provisions (4.0) (3.6) (8.9)
------------------------------ ------ -------- --------- --------
Total current liabilities (134.5) (119.9) (143.9)
------------------------------ ------ -------- --------- --------
Interest bearing loans and
borrowings 7 (181.0) (150.1) (175.4)
Deferred tax liabilities (3.5) (0.6) (3.4)
Net pension liabilities (17.8) (14.1) (17.8)
Other payables (1.1) - (1.2)
------------------------------ ------ -------- --------- --------
Total non-current liabilities (203.4) (164.8) (197.8)
------------------------------ ------ -------- --------- --------
Total liabilities (337.9) (284.7) (341.7)
------------------------------ ------ -------- --------- --------
Net assets 79.3 33.8 59.7
------------------------------ ------ -------- --------- --------
EQUITY
Share capital 8 1.6 1.6 1.6
Share premium account 8 240.9 236.8 238.2
Other reserves 8 11.1 12.1 13.4
Retained earnings/(deficit) 8 (182.9) (223.4) (201.3)
------------------------------ ------ -------- --------- --------
Total equity attributable to
equity holders of the Company 8 70.7 27.1 51.9
Minority interest 8.6 6.7 7.8
------------------------------ ------ -------- --------- --------
Total equity 79.3 33.8 59.7
------------------------------ ------ -------- --------- --------
Consolidated interim statement of cash flows
Notes Six months to Six months Year to
30 June 2006 to 30 June 2005 31 December
2005
(Unaudited) (Unaudited) (Audited)
£m £m £m
----------------------------- ------ --------- --------- ---------
Operating activities
Profit for the period 34.0 28.1 60.7
Adjustments for:
Depreciation charge 13.1 9.9 22.0
Amortisation of
intangible assets 2.0 0.8 2.1
Impairment of goodwill - 2.0 2.0
Share based expense 6 1.2 1.0 1.9
Share of profit of
associates - (0.4) (0.7)
Profit on sale of
interest in associate - - (1.6)
Net financing costs 3.5 2.6 5.9
Income tax expense 3 11.2 10.4 18.7
Loss on disposal
of fixed assets - - 0.1
----------------------------- ------ --------- --------- ---------
65.0 54.4 111.1
(Increase)/decrease
in inventories (0.4) (0.2) 0.1
Increase in trade
and other receivables (11.3) (22.3) (23.7)
(Decrease)/increase
in trade and
other payables (1.1) 1.9 5.9
(Decrease)/increase
in provisions (4.9) (3.8) 3.3
----------------------------- ------ --------- --------- ---------
Cash generated
from operations 47.3 30.0 96.7
Interest paid (3.9) (2.9) (6.5)
Income taxes paid (12.2) (7.1) (17.8)
----------------------------- ------ --------- --------- ---------
Cash flows from
operating activities 31.2 20.0 72.4
----------------------------- ------ --------- --------- ---------
Investing activities
Proceeds from sale
of property, plant
and equipment 0.3 0.1 0.3
Proceeds from
disposal of
interest in
associate - - 2.7
Proceeds from
disposal of own
shares by ESOT - - 0.4
Interest received 0.6 0.2 0.6
Dividends received
from associated
undertakings - 0.2 0.8
Acquisition of
subsidiaries, net
of cash acquired 9 (9.8) (2.2) (44.5)
Acquisition of
property, plant
and equipment (20.5) (11.7) (31.3)
----------------------------- ------ --------- --------- ---------
Cash flows from
investing
activities (29.4) (13.4) (71.0)
----------------------------- ------ --------- --------- ---------
Financing activities
Proceeds from the
issue of share
capital 2.7 2.6 3.8
Drawdown of debt 48.5 - 62.8
Repayment of debt (34.9) (7.6) (53.1)
Dividends paid to
minorities (1.6) (1.0) (2.9)
Dividends paid 8 (12.6) (10.8) (16.9)
----------------------------- ------ --------- --------- ---------
Cash flows from
financing activities 2.1 (16.8) (6.3)
----------------------------- ------ --------- --------- ---------
Net
increase/(decrease)
in cash and cash equivalents 7 3.9 (10.2) (4.9)
Cash and cash
equivalents at 1 January 7 50.8 52.5 52.5
Effect of exchange
rate fluctuations
on cash held 7 (2.1) 1.0 3.2
----------------------------- ------ --------- --------- ---------
Cash and cash
equivalents at end
of period 7 52.6 43.3 50.8
----------------------------- ------ --------- --------- ---------
Consolidated interim statement of recognised income and expense
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
(Unaudited) (Unaudited) (Audited)
£m £m £m
--------------------------------- ---------- -------- --------
Foreign exchange translation
differences (2.1) (2.3) (1.7)
Actuarial gains and losses on
defined benefit pension schemes - - (3.7)
Tax on income and expense recognised
directly in equity (1.5) 1.5 1.4
Effective portion of changes in fair
value of cash flow hedges (0.2) 1.9 2.6
--------------------------------- ---------- -------- --------
Net (expense)/income recognised
directly in equity (3.8) 1.1 (1.4)
Profit for the period 34.0 28.1 60.7
--------------------------------- ---------- -------- --------
Total recognised income and expense
for the period 30.2 29.2 59.3
--------------------------------- ---------- -------- --------
Total recognised income and expense
for the period attributable to:
Equity holders of the Company 27.5 27.5 55.7
Minority interest 2.7 1.7 3.6
--------------------------------- ---------- -------- --------
Total recognised income and expense 30.2 29.2 59.3
--------------------------------- ---------- -------- --------
Notes to the consolidated interim financial information
1. Reporting entity
Intertek Group plc is a company domiciled in the United Kingdom. The
consolidated interim financial information of the Company as at and for the six
months ended 30 June 2006, comprise the Company and its subsidiaries (together
referred to as the 'Group') and the Group's interests in associates.
This interim financial information has been prepared applying the accounting
policies and presentation that were applied in the preparation of the Company's
published consolidated financial statements for the year ended 31 December 2005.
The comparative figures for the financial year ended 31 December 2005, are not
the Company's statutory accounts for that financial year. Those accounts have
been reported on by the Company's auditors and delivered to the registrar of
companies. The report of the auditors was (i) unqualified; (ii) did not include
a reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report; and (iii) did not contain a statement
under section 237(2) or (3) of the Companies Act 1985.
The consolidated financial statements of the Group as at and for the year ended
31 December 2005 are available upon request from the Company's registered office
at 25 Savile Row, London W1S 2ES or at www.intertek.com.
2. Segment information
Business analysis (Primary segment)
The Group is organised into four operating divisions: Consumer Goods (Labtest),
Commercial & Electrical (ETL SEMKO), Oil, Chemical & Agri (Caleb Brett) and
Government Services (FTS). On 1 January 2006, the systems certification business
was transferred from Consumer Goods to Commercial & Electrical and prior period
figures have been restated to show a like-for-like comparison.
External revenue
Consumer Goods Commercial & Oil, Chemical & Government Total
Electrical Agri Services
£m £m £m £m £m
----------------- -------- --------- ---------- --------- -------
Six months to
30 June 2006 74.9 88.3 134.8 29.1 327.1
Six months to
30 June 2005 63.2 72.0 100.0 37.1 272.3
Year to 31
December 2005 136.7 150.9 218.0 74.5 580.1
----------------- -------- --------- ---------- --------- -------
For management purposes, the Group measures the performance of the divisions on
operating profit excluding amortisation of intangible assets and impairment of
goodwill ('adjusted operating profit'). A reconciliation of operating profit to
adjusted operating profit is set out below.
Operating profit Consumer Goods Commercial & Oil, Chemical & Government Central Total
Electrical Agri Services overheads
£m £m £m £m £m £m
---------------- -------- -------- -------- -------- ------- -------
Six months to 30
June 2006
Group operating
profit 23.9 12.5 12.8 4.2 (4.7) 48.7
Amortisation
of intangible
assets 0.2 1.1 0.7 - - 2.0
---------------- -------- -------- -------- -------- ------- -------
Adjusted operating
profit 24.1 13.6 13.5 4.2 (4.7) 50.7
---------------- -------- -------- -------- -------- ------- -------
Six months to 30
June 2005
Group operating
profit 18.4 10.7 8.7 7.4 (4.5) 40.7
Amortisation
of intangible
assets - 0.6 0.2 - - 0.8
Impairment of
goodwill 2.0 - - - - 2.0
---------------- -------- -------- -------- -------- ------- -------
Adjusted operating
profit 20.4 11.3 8.9 7.4 (4.5) 43.5
---------------- -------- -------- -------- -------- ------- -------
Year to 31
December 2005
Group operating
profit 42.1 21.4 17.2 16.3 (14.0) 83.0
Amortisation
of intangible
assets 0.2 1.2 0.7 - - 2.1
Impairment of
goodwill 2.0 - - - - 2.0
---------------- -------- -------- -------- -------- ------- -------
Adjusted
operating
profit 44.3 22.6 17.9 16.3 (14.0) 87.1
---------------- -------- -------- -------- -------- ------- -------
Geographic analysis (Secondary segment)
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
£m £m £m
------------------------- ----------- ---------- ----------
External revenue
Americas 123.8 94.4 203.6
Europe, Middle East and Africa 92.8 90.7 186.8
Asia 110.5 87.2 189.7
------------------------- ----------- ---------- ----------
Total 327.1 272.3 580.1
------------------------- ----------- ---------- ----------
Group operating profit
-------------------------- ---------- ---------- ----------
Americas 14.6 10.8 21.0
Europe, Middle East and Africa (0.4) 2.9 2.5
Asia 34.5 27.0 59.5
-------------------------- ---------- ---------- ----------
Total 48.7 40.7 83.0
-------------------------- ---------- ---------- ----------
3. Income tax expense
The tax charge, which is wholly overseas, on profits before tax for the six
months to 30 June 2006 of £11.2m (30 June 2005: £10.4m) is based on the
estimated effective rate for the full year. The effective tax rate at 30 June
2006 is 24.8% (30 June 2005: 27.0%).
Differences between the estimated effective rate of 24.8% and the notional
statutory UK rate of 30% include, but are not limited to, the effect of tax
rates in foreign jurisdictions, non deductible expenses, the effect of tax
losses utilised and under/(over) provisions in previous years.
4. Earnings per ordinary share
Six months to Six months to Year to
30 June 30 June 31 December
2006 2005 2005
Based on the profit for the year: £m £m £m
---------------------------- --------- --------- ---------
Basic earnings -profit attributable
to equity shareholders 31.3 26.4 57.1
Amortisation of intangible assets 2.0 0.8 2.1
Impairment of goodwill - 2.0 2.0
---------------------------- --------- --------- ---------
Adjusted earnings 33.3 29.2 61.2
---------------------------- --------- --------- ---------
Number of shares (millions):
Basic weighted average number of
shares 155.7 154.9 155.1
Potentially dilutive share options 0.9 1.5 1.3
---------------------------- --------- --------- ---------
Diluted weighted average number of
shares 156.6 156.4 156.4
---------------------------- --------- --------- ---------
Basic earnings per share 20.1p 17.0p 36.8p
Options (0.1)p (0.1)p (0.3)p
---------------------------- --------- --------- ---------
Diluted earnings per share 20.0p 16.9p 36.5p
---------------------------- --------- --------- ---------
Basic adjusted earnings per share 21.4p 18.9p 39.5p
Options (0.1)p (0.2)p (0.4)p
---------------------------- --------- --------- ---------
Diluted adjusted earnings per share 21.3p 18.7p 39.1p
---------------------------- --------- --------- ---------
The weighted average number of shares used in the calculation of the diluted
earnings per share for the six months to 30 June 2006, excludes 1,434,326
potential shares (30 June 2005: 1,497,513; 31 December 2005: 1,456,156) as these
were not dilutive in accordance with IAS 33: Earnings per share.
5. Pension schemes
The Directors are not aware of any significant change in the net liabilities of
the Group's defined benefit pension schemes since 31 December 2005. Therefore
actuarial valuations of the assets and liabilities of the defined benefit
pension schemes were not performed at 30 June 2006.
The expense recognised in the consolidated interim income statement consists of
the current service cost, interest on the obligation for employee benefits and
the expected return on scheme assets. For the six months ended 30 June 2006, the
Group recognised a net expense of £0.9m (30 June 2005: £1.2m).
6. Share-based payments
The Company has share option schemes, details of which were contained in the
Annual Report for the year ended 31 December 2005. As discussed in the 2005
Annual Report, the Company introduced a long term incentive plan called The
Intertek Deferred Bonus Plan ('the Plan') and the first awards under this plan
were made in April 2006.
During the period, no share options were granted. Under the Plan, 244,222
deferred shares and 128,195 matching shares were awarded in April 2006.
In accordance with IFRS 2: Share based payments, the fair value of services
received in return for share options and share awards granted to employees, is
measured by reference to the fair value of share options and shares granted. The
estimate of the fair value of the services received is measured based on the
Black-Scholes formula, a financial model used to calculate the fair value of
share-based payments. During the six months ended 30 June 2006, the Group
recognised an expense of £1.2m in respect of outstanding share options issued in
2003, 2004 and 2005 and in respect of the share awards made in April 2006. For
the six months ended 30 June 2005, the charge was £1.0m for outstanding share
options issued in 2003, 2004 and 2005.
7. Analysis of net debt
At 1 January Cash flow Exchange At 30 June
2006 adjustments 2006
£m £m £m £m
----------------------- --------- --------- --------- ---------
Cash 50.8 3.9 (2.1) 52.6
Borrowings (190.7) (13.6) 8.7 (195.6)
----------------------- --------- --------- --------- ---------
Total net debt (139.9) (9.7) 6.6 (143.0)
----------------------- --------- --------- --------- ---------
8. Reconciliation of shareholders' equity
Other reserves
-------- ------- ------
Share Share premium Translation Hedging reserve Other Retained Total
capital account reserve earnings*
£m £m £m £m £m £m £m
------------------- ------ ------- -------- ------- ------ -------- ------
At 1 January 2006 1.6 238.2 5.4 1.6 6.4 (201.3) 51.9
Movement on
cash flow hedges - - - (0.2) - - (0.2)
Profit for the
period attributable
to equity holders - - - - - 31.3 31.3
Dividends paid - - - - - (12.6) (12.6)
Issue of shares - 2.7 - - - - 2.7
Equity settled
transactions - - - - - 1.2 1.2
Foreign exchange
translation
differences - - (2.1) - - - (2.1)
Tax on income
and expense
recognised
directly in
equity - - - - - (1.5) (1.5)
------------------- ------ ------- -------- ------- ------ -------- ------
At 30 June 2006 1.6 240.9 3.3 1.4 6.4 (182.9) 70.7
------------------- ------ ------- -------- ------- ------ -------- ------
At 1 January 2005 1.5 234.5 7.1 (1.0) 6.4 (241.5) 7.0
Movement on
cash flow hedges - - - 1.9 - - 1.9
Profit for the
period attributable
to equity holders - - - - - 26.4 26.4
Dividends paid - - - - - (10.8) (10.8)
Issue of shares 0.1 2.3 - - - - 2.4
Equity settled
transactions - - - - - 1.0 1.0
Foreign exchange
translation
differences - - (2.3) - - - (2.3)
Tax on income
and expense
recognised
directly in equity - - - - - 1.5 1.5
------------------- ------ ------- -------- ------- ------ -------- ------
At 30 June 2005 1.6 236.8 4.8 0.9 6.4 (223.4) 27.1
------------------- ------ ------- -------- ------- ------ -------- ------
*After £244.1m for goodwill written off to retained earnings as at 1 January
2004 in relation to subsidiaries acquired prior to 31 December 1997. As
permitted by IFRS 1, this figure has not been restated.
The dividend £12.6m which was paid on 16 June 2006, represents the final
dividend in respect of the year ended 31 December 2005, at the rate of 8.1p per
ordinary share.
The dividend £10.8m which was paid on 17 June 2005, represents the final
dividend in respect of the year ended 31 December 2004, at the rate of 7.0p per
ordinary share.
There was an issue of 722,394 ordinary shares during the period on exercise of
share options.
9. Acquisition of businesses
There were two acquisitions in the period.
a) On 22 February 2006, the Group acquired Akzo Nobel's electromagnetic
compatibility business and assets in Japan for £9.4m, including expenses. This
business contributed £0.5m to operating profits from the date of acquisition to
30 June 2006. If the acquisition had occurred on 1 January 2006, management
estimates that Group turnover would have been £328.0m and Group operating profit
would have been £48.9m for the six months ended 30 June 2006.
Details of net assets acquired and fair value adjustments are as follows:
Book value Fair value Fair value
prior to adjustments to Group
acquisition
£m £m £m
--------- --------- ---------
Intangible assets - 0.5 0.5
Property, plant
and equipment 4.9 (0.4) 4.5
Trade and other receivables 1.2 - 1.2
---------------------------- --------- --------- ---------
Net identifiable
assets and liabilities 6.1 0.1 6.2
Goodwill on acquisition
(provisional) 3.2
---------------------------- --------- --------- ---------
Cash paid (including
expenses) 9.4
---------------------------- --------- --------- ---------
b) On 20 April 2006, the Group acquired the business of Port Maritime Security
International Limited
for £0.4m, including expenses. The purchase price was entirely attributed to
intangible assets. There were no fair value adjustments.
10. Post balance sheet events
On 1 July 2006, the Group completed the acquisition of Louisiana Meter Services
for £1.4m. This is a company providing liquid and gas measurement services to
the petroleum and petrochemical industries in the United States.
On 1 September 2006, the Group acquired for £6.2m the business and assets of an
analytical chemical testing laboratory from Chemelot BV, a subsidiary of DSM
N.V.
11. Contingent liabilities: claims and litigation
From time to time the Group is involved in claims and lawsuits incidental to the
ordinary course of business. The majority of claims made against Intertek's
subsidiary companies fall within the Oil, Chemical & Agri division (Caleb
Brett). In the 2005 Annual Report reference was made to three ongoing cases in
Caleb Brett and the latest developments in each case are summarised below.
In November 2005, one claim dating back to 1996, was contested in court and
unexpectedly resulted in a judgment against Caleb Brett. An appeal hearing took
place in May 2006. The appeal judgement is expected to be given in the second
half of 2006.
A court trial took place in March 2006, in which claims were made by Marine
Cargo Underwriters against certain Caleb Brett subsidiary companies. The court
ruled in favour of Caleb Brett. The claimant subsequently sought to appeal the
court judgment.
In August 2002, a lawsuit was filed against Caleb Brett in the district of
Puerto Rico. A process of fact and expert discovery began in earnest in the
second half of 2005. This matter has now been resolved and the court dismissed
the lawsuit in May 2006.
None of the above cases has resulted in any material financial impact on the
Group's reported income statement for the six months to 30 June 2006. 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 material effect on the financial position of the Group in the foreseeable
future.
12. Approval
The consolidated interim financial information was approved by the Board on 1
September 2006.
Independent review report by KPMG Audit Plc to Intertek Group plc
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 June 2006 which comprises the consolidated balance
sheet, income statement, statement of cash flows, statement of recognised income
and expense and the related notes. We have read the other information contained
in the Interim Report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the Company in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the Company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the Company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The Interim Report, including the financial information contained therein, is
the responsibility of, and has been approved by, the Directors. The Directors
are responsible for preparing the Interim Report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the UK. A review consists
principally of making enquiries of management and applying analytical procedures
to the financial information and underlying financial data and, based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed in
accordance with International Statements on Auditing (UK and Ireland) and
therefore provides a lower level of assurance than an audit. Accordingly, we do
not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2006.
KPMG Audit Plc
Chartered Accountants
London
1 September 2006
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