Final Results

ITV PLC 08 March 2006 ITV plc results for year ended 31 December 2005 Exploiting content on every platform and delivering ITV's digital future today Financial highlights â€¢ Revenue up 6% at Â£2,177m 1 - Revenue outside ITV1 NAR grown by 25% to Â£715m, 33% of ITV's revenues â€¢ Operating profit up 42% at Â£460m 1 - Profits doubled in two years - Increased profitability in all areas â€¢ Cash generated from operations of Â£456m - Cash conversion ratio of 98% â€¢ Adjusted EPS up 25% to 8.0p 2 â€¢ Final dividend up 38% to 1.8p â€¢ Pension fund deficit halved from Â£672m in 2004 to Â£325m now â€¢ Â£300m cash back to shareholders Operating highlights â€¢ Delivering ITV's digital future today - Digital channels continue to grow strongly - Revenue up 91% - 2007 target of Â£150m from multi-channel expected to be achieved one year early - New target set of Â£250m of multichannel advertising/interactive revenue by end 2008 - New channel launches - CITV, ITV Play and ITV Broadband - ITV is the biggest commercial family of channels in Freeview homes 3 - Targeting 50% of revenue outside ITV1 NAR by end 2010 â€¢ Exploiting content - driving value through the business - Creating and owning content is key strength and a unique commercial advantage - Good content performs well on all platforms - Commencing digitisation of library - International and UK production (ex ITV) up strongly - 40,000 hours of programmes sold internationally in 2005 â€¢ Strengthening channel brands - ITV Family SOCI has increased by 1.4 percentage points in Multichannel homes - 8 out of top 10 UK programmes broadcast in 2005 were on ITV1 - Strengthening commissioning structure to drive creativity â€¢ New revenue streams - ITV Play to become a Â£20 million profit business in its first full year - itv.com - creating a content rich broadband multimedia proposition - Friends Reunited acquisition, unique business opportunity - significantly strengthening our online proposition - January revenue up 75% yoy â€¢ Distribution - SDN provides certainty of DTT transmission capacity and adds significant value to ITV - ITV operates 38% of commercial DTT bandwidth - Three out of four new digital homes choose Freeview - A Freeview viewer is an ITV viewer Commenting, Charles Allen, Chief Executive of ITV said: 'ITV has had another very successful year with strong profit growth helping us to double our profits in the last two years. We have strong cashflow which has allowed us to invest in our businesses, improve the pension position and still be able to return cash to shareholders. 'These results demonstrate that we are delivering ITV's digital future today. We have transformed ITV from an analogue, single channel federation to a multi-channel, multi-platform, content driven business firmly focused on the needs of viewers and advertisers.' 1 Up 3% on a pro forma basis including GMTV for a full year 2 Before amortisation and exceptioal items 3 ITV Family of channels in Freeview homes 26.2% viewing share For further enquiries please contact: ITV plc Tel: 020 7620 1620 Press enquiries Brigitte Trafford - Communications Director Jim Godfrey - Head of Corporate Affairs Analysts' enquiries James Tibbitts - Company Secretary Georgina Blackburn - Head of Investor Relations Caroline Bailey - Investor Relations Analyst Citigate Dewe Rogerson Tel: 020 7638 9571 Jonathan Clare Simon Rigby Anthony Kennaway Website: www.itv.com, investor information: www.itvplc.com An analysts presentation will be held at 09.30hrs on 8th March 2006 at the City Presentation Centre, 4 Chiswell Street, London EC1Y 4UP Chairman's statement In ITV's second year as a single Company we have continued to build on last year's progress, further improving our structure and our profitability. 2005 results After a good first half our operating profit before amortisation and exceptional items continued to grow in the second half of the year, and for the full year is up by 42% on last year to Â£460 million before exceptionals and amortisation. Earnings per share (before amortisation and exceptional items) increased by 25% to 8.0 pence (up 54% to 5.4 pence after amortisation and exceptional items). Your Board is proposing a final dividend of 1.8 pence per share payable on 3 July 2006 to shareholders on the register on 21 April 2006. The ex-dividend date will be 19 April 2006. This will increase the full year dividend by 30% to 3.12 pence compared to 2004, and will help achieve our stated aim of rebalancing the levels of interim and final dividend over the medium term such that the interim will ultimately represent approximately one-third of the total dividend. Cash return to shareholders In 2005 we reviewed the possibility of returning cash to our shareholders and concluded that before doing so we should: â€¢ complete the process of renewing the financial terms of our ITV1 licences; and â€¢ address the deficit funding of our defined benefit pension schemes. We have now completed those processes and have the capacity to return Â£300 million to shareholders. We propose to do this over the coming few months by way of market purchase of ordinary shares. Building new businesses and revenue streams We have made real progress in: â€¢ expanding the audience for our growing television channels; â€¢ building our production business and exploiting our content across all platforms and media; and â€¢ developing new businesses and revenue streams in pay and consumer areas. Every part of the Group has contributed to this success. In broadcasting we have seen tremendous success for our new channels and growing sponsorship and interactive revenues. In production we have continued to grow our UK sales to other broadcasters and we are expanding our profitable US and Australian production businesses with commissions for network broadcasters. Our new consumer team has launched a number of successful ventures in 2005, which will enable us to grow our non-advertising revenues. In 2005 we acquired SDN and Friends Reunited. These acquisitions support our strategy; with SDN providing long term digital terrestrial transmission capacity and already growing in value, and Friends Reunited increasing customers for its content based services and building communities through cross promotion from television. Organic growth is increasing from our interactive revenues, with ITV Play making a very promising start. Regulation We have made some significant progress in bringing regulation up to date; but we still have a long way to go before we are as free of regulation as our main competitors. Our licence payments to the government were reviewed in 2005 by our regulator, Ofcom, and as a result were reduced from a pro forma figure of Â£207 million in 2004 to Â£75 million in 2005. Over the period to digital switchover they will continue to reduce towards Â£4 million in constant prices. Our Public Service Broadcasting ('PSB') obligations still cost nearly Â£250 million a year including programme costs and revenue foregone during lower rating PSB programmes. Whilst we have recently received some dispensation to reduce our commitments to, for instance, the hours of religious and regional programming, we still have to bear costs which are both disproportionate to the ratings achieved from such material and almost unique to ITV as a commercial broadcaster. It is essential that we are able to reduce these PSB costs further over the medium term. Contracts Right Renewal ('CRR') is a further burden that has had the unintended consequence of changing the way that our advertising market works. Our ITV1 advertisers now contract to deliver to us the share of broadcast expenditure calculated under CRR and we therefore have fewer opportunities to take advantage of strengths in our schedule such as the Football World Cup during 2006. We will continue to lobby for CRR, which has become a disproportionate remedy, to be relaxed as the share of the market that ITV1 attracts is reduced by the growing multichannel universe. Corporate governance and CR We are publishing a corporate responsibility report for 2005 which sets out the detail of our activities across the Group. ITV was the highest contributor to charitable causes in both the 2005 Guardian Giving List and Business in the Community Percent Club, ranking contributions to charitable causes as a percentage of profits of FTSE 100 Companies. A large part of ITV's giving is supplied as airtime across our family of channels. Pension schemes We are in a period of unprecedented pressures on companies' defined benefit ('DB') pension schemes. Over recent years the factors to which scheme deficits have been exposed have included increasing life expectancy of members and falling world equity markets. The most material factor now is the level of UK long term real interest rates where a small reduction can have a large impact by increasing the net present value of a scheme's liabilities. Our work on the DB pension schemes has continued during 2005: a) Scheme mergers We have merged six DB schemes in the Group into a single scheme with savings in cost and improved focus. b) Deficit funding and IAS 19 valuations We have completed the Â£325 million of deficit funding that we announced in September 2005, with the last tranche of Â£207 million paid early in 2006. Our IAS 19 aggregate deficit has reduced during 2005 from Â£672 million to Â£532 million and the last Â£207 million reduces that to Â£325 million. c) Tax simplification We have considered how we should deal with aspects of the tax simplification regime coming into effect on 6 April 2006. We will not separately compensate any executives for this change, but will establish alternate arrangements designed to leave both individuals and the Group in a broadly similar position. Further details relating to the Group's pension schemes are given later in this document. People Henry Staunton will be stepping down from the Board on 31 March after 13 years as Finance Director, first of Granada and then of ITV. The Board would like to thank Henry for his contribution to the Company and for his expertise in the mergers and acquisitions that have formed it. John Cresswell, our Chief Operating Officer since 2005, joined the Board in January and is now our Finance Director. John has 18 years of experience in operational and financial roles in television companies which will be of great assistance to us as we deal with the many changes facing our industry. I am pleased to welcome Mike Clasper, who joined the Board in January, as a non-executive director. Mike has experience in running service businesses, as well as in advertising and marketing, that will be valuable to us. David Chance stepped down from the Board in February 2006. As his involvement in other television ventures has developed over recent months, he decided that it was appropriate for him to resign from the Board. We wish David well with his future ventures. Once again I would like to extend the Board's thanks to our management and employees whose continued commitment and drive make ITV the nation's favourite commercial broadcaster. Sir Peter Burt Chairman Chief Executive's review During 2005 we have continued with our programme of developing our business and changing our operations to enable us to take advantage of the rapidly evolving digital television world. In early 2006 we re-branded our operations, from a fresh new look onscreen for our channels through to new signage and logo for our ITV production business. The feedback from our viewers has been very positive. Improving and simplifying our structure During 2005 we made some changes to simplify our management and structure, and increase the focus on our core business. Simon Shaps as Director of Television now heads up our channels operations and he has brought in a number of key new commissioning executives. He is also increasing the emphasis on US programme acquisitions across all our channels. Ian McCulloch heads up the commercial operations, contracting with our advertisers and marketing our channels and programmes. His role is to build relationships directly with our advertising customers, and to address the challenge of reducing the burden that CRR places upon us. Owning content and intellectual property rights is key to ITV's future success and John Whiston, amongst our most talented of programme makers, now heads up the ITV production operation. Jeff Henry has been developing our consumer operations with a number of successful organic developments and acquisitions which are explained later. We are also recruiting for a new head of our international production and distribution operations. Freeview growth Freeview was the fastest growing broadcasting platform across 2005 with three-quarters of all households that went digital choosing Freeview. We are actively promoting our channels, both on air and in other display media, and expect Freeview rapidly to become the UK's number one digital television platform in 2006. We acquired SDN in April 2005 for Â£136 million. This acquisition boosts our digital strategy (ITV now operates 38% of commercial DTT bandwidth). SDN contributed Â£16 million of revenue in eight months of 2005. The market rate for a videostream in DTT has been increasing and videostream contract renewals for SDN begin in 2008. SDN has been an extremely profitable acquisition for our shareholders. Channel schedule performance Our new digital channels continued to grow their audience share and in November 2005 we launched our latest channel, ITV4. This channel is aimed at a male demographic and its schedule includes a higher proportion of US acquired material than our other channels. ITV4 has attracted a 0.5% share of multichannel viewing in its early months on screen. ITV2 and ITV3 have increased their viewing share in 2005 and our share of commercial viewing across all our channels in multichannel homes increased by 7% to 32%. As viewers move to the greater channel choice available on digital television, the viewing share of ITV1 inevitably decreases. Under the CRR undertakings, agreed with the Office of Fair Trading as part of the ITV merger, the consequence of that is a proportionate decrease in the ITV1 share of television advertising revenue. During 2005 our ITV1 advertising revenue was Â£50 million lower than in 2004. The success of our new business operations helped to increase our pro forma revenues outside ITV1 advertising by Â£144 million in 2005, more than offsetting the ITV1 reduction and increasing our revenues from these sources from 27% of the total last year to 33% of the total in 2005. As digital television approaches universal takeup in the near future, the downward pressure on ITV1 viewing share and revenues will slow, enabling ITV1 to return to growth alongside our rapidly growing digital channels. In December, we took the difficult decision to close the ITV News Channel, as the increasing opportunity cost of digital transmission capacity made running a commercial 24 hour news channel economically unviable. Developing non-ITV production assets in the UK and overseas ITV productions had a very successful year, we created Sex Traffic for C4, Casanova for the BBC, another series of Brainiac for Sky and Countdown for C4. International production (part of ITV Worldwide) had another excellent year. In America we made Hell's Kitchen and Nanny 911 for Fox, both US primetime shows that will return, Hit Me Baby for NBC, Airline and 1st 48 for A&E and Roomraiders for MTV. In Australia and Germany we made a number of primetime shows for the top broadcasters. We are able to create and produce hits for international broadcasters, increase our market share and add the new material to our media catalogue and distribution business. We have increased the profitability of Granada International and extended our third party distribution sales worldwide. This includes such clients as HBO, Aardman, CNN and Chorion. We have begun the digitisation of our media catalogue and have been trialling video-on-demand which should develop into a new means of content exploitation. Growing consumer revenues A major focus for ITV is the development of our consumer operations; those parts of our business that deliver products and services directly to viewers who pay for them through subscription, transactional or interactive revenues. ITV Play is the brand name for a portfolio of 'participation' TV formats designed to engage our mass-market audiences in high-quality original interactive programming. ITV Play has been trialling across our Channels in night time. We will be launching a dedicated channel in April. This has proved to be very popular and we are currently developing more Play programming and formats which will be shown across our family of channels including online and mobile. We have acquired Friends Reunited, the UK's leading reunion website. There are five separate business strands: the Schools reunion site; Genes Reunited; dating and jobs sites; and Connections, a general chat room and message board site. The dating and jobs sites can already be found within our existing itv.com environment and we are seeing increased traffic as a result. itv.com is ITV's broadband site. Our aim is to create a content-rich multimedia proposition. itv.com will be restructured and relaunched as a broadband content on demand portal later in 2006; improving functionality and consumer experience. This will increase dwell times and stickiness to drive subscription and advertising revenues. Internet advertising is increasing rapidly, and is likely to have overtaken radio and outdoor in 2006. ITV is a producer-broadcaster. We believe that there will be an increasing competition in Local Loop unbundling and that prices for bandwidth will be driven towards marginal cost. Consumers will pay for content, and we will strive to ensure that in this world of convergence, where viewers may be able to receive content via cable, satellite, DTT, broadband or mobile, that ITV's brand and content are available for them to enjoy. Outlook In 2005 our first quarter advertising revenue was particularly strong with Easter falling in March. In 2006 both Easter and the Football World Cup fall in the second quarter and will move money into that period. As a result advertising revenue has been lower in the first few months of 2006 and total ITV advertising revenue will be down by approximately 10% in the first quarter. In April we expect that ITV1 will be up 2% year on year and our total advertising revenue will be up 6% year on year. People I would like to join with Sir Peter Burt and the rest of the Board in thanking all of our employees for their continuing work and dedication to the Company and to our programmes and services. The broadcasting world is seeing more change than many other industries and we continue to lead and embrace that change as we move towards a fully digital environment in which viewers are able to increase the level of personalisation of their viewing from more channels and prospectively from delivery systems such as broadband. We look forward to these changes and to remaining the producer and broadcaster of many of the nation's favourite shows. Charles Allen CBE Chief Executive Financial review Statutory results for the year ended 31 December 2005 Revenue for the year ended 31 December 2005 was up 6% at Â£2,177 million (2004: Â£2,053 million). Operating profit increased to Â£329 million (2004: Â£143 million) with underlying operating profit before amortisation and exceptional items up 42% at Â£460 million (2004: Â£324 million). Profit before tax, amortisation and exceptional items increased by 36% to Â£452 million (2004: Â£332 million). Pro forma results for the year ended 31 December 2004 For the year ended 31 December 2004 pro forma results were prepared to show the results of ITV as if the merger between Granada plc and Carlton Communications Plc had taken place before 1 January 2004. In summary, and adjusted for IFRS, these are: --------------------------------------------- --------- ---------- --------- Published Pro forma Published 2005 2004 2004 Â£m Â£m Â£m Revenue 2,177 2,083 2,053 Operating EBITA* 460 325 324 Profit before tax* 452 331 332 Adjusted* earnings per share - basic 8.0p 6.3p 6.4p --------------------------------------------- --------- ---------- --------- *Pre amortisation and exceptional items On this basis, revenue for the year ended 31 December 2005 was up 5% at Â£2,177 million (2004: Â£2,083 million). Operating profit before amortisation and exceptional items was up 42% at Â£460 million (2004: Â£325 million). Profit before tax, amortisation and exceptional items increased by 37% to Â£452 million (2004: Â£331 million). The following comparisons to 2004 for net advertising revenue, other sales, ITV schedule and licence fees are on a pro forma basis. --------------------------------------------- ---------- --------- Published Pro forma 2005 2004 Revenue Â£m Â£m Net advertising revenue 1,631 1,588 Other broadcasting revenue 140 133 Interactive, online and other segment revenue 67 30 Production revenue 247 233 Producer/broadcaster segment revenue 2,085 1,984 Other operations revenue 92 99 Total revenue 2,177 2,083 --------------------------------------------- ---------- --------- Net advertising revenue ('NAR') Total ITV plc NAR increased by 2.7% during the year to Â£1,631 million (2004: Â£1,588 million). This result includes a full year contribution of Â£58 million from GMTV (2004: Â£18 million), which became a subsidiary in October 2004. --------------------------------------------- --------- ---------- --------- Published Pro forma 2005 2004 Change Â£m Â£m % ITV1 1,462 1,512 (3.3%) ITV2, ITV3, ITV4, ITV News Channel, Men & Motors 111 58 91% GMTV 58 18 222% Total ITV plc NAR 1,631 1,588 2.7% --------------------------------------------- --------- ---------- --------- ITV plc ITV1 NAR in the year was Â£1,462 million (2004: Â£1,512 million), Â£50 million lower than 2004, however, this reduction was outweighed by the strong performance of ITV2 and ITV3 which, together with ITV News Channel, Men and Motors and the newly launched ITV4 contributed 91% year on year growth of Â£53 million resulting in total NAR of Â£111 million (2004: Â£58 million) across these channels. ITV's NAR is a function of audience share which is measured in terms of commercial impacts, prevailing advertising market conditions and television's share of that market. In 2005, ITV's total share of commercial impacts on UK television was 42.0% (2004: 42.7%). The reduction in 2005 was principally due to the rapid take-up of digital multichannel television and the increasing number of channels available to viewers. ITV continues to develop its effective multichannel strategy, which has seen ITV2 establish itself during the year as the most popular digital channel in multichannel homes and strong performances from ITV3 and the recently launched ITV4. 2005 was a difficult year for the television advertising market, with growth of 2.6% compared to 6.0% in 2004. The market was adversely affected by a slowdown in economic growth combined with a fall in consumer confidence, resulting in reductions in advertising spend, particularly in the household stores and motoring sectors. The 2006 advertising trading season is now substantially complete, with the majority of agency deals concluded. Our ITV1 negotiations are within the framework of the Contracts Rights Renewal ('CRR') remedy agreed with the Office of Fair Trading as a condition to the merger creating ITV plc. Other sales Other broadcasting sales of Â£140 million (2004: Â£133 million) principally comprise sponsorship income, fees for airtime sales on behalf of third parties, and sales of ITV programming by the Network Centre to Channel 3 licencees not owned by ITV plc. Other revenue within our producer/broadcaster segment of Â£67 million (2004: Â£30 million) includes interactive transactions and online advertising sales of Â£45 million (2004: Â£21 million) of which Â£19 million (2004: Â£5 million) relates to GMTV, and revenue from the SDN business which we acquired during the year of Â£16 million (2004: Â£nil). Production revenue includes original productions for the UK and international markets, the distribution and exploitation of internally generated and acquired rights, and studios and facilities revenue. Programming made by ITV for ITV channels is not included in Group revenue as it represents an internal programming cost of sale. In 2005, total external sales of Â£247 million (2004: Â£233 million) included original productions for other broadcasters of Â£121 million (2004: Â£108 million), distribution and exploitation sales of Â£99 million (2004: Â£103 million) and revenue from the hire of studio and technical facilities of Â£27 million (2004: Â£22 million). Other operations revenue comprises cinema advertising sales of Â£61 million (2004: Â£65 million), revenue from education sales of Â£30 million (2004: Â£34 million) and revenue from Friends Reunited which was acquired during the year, Â£1 million (2004: Â£nil). ITV schedule The cost of the ITV1 network schedule (ITV plc share) in 2005 was Â£776 million (2004: Â£796 million). Regional programme costs for ITV1 were Â£125 million (2004: Â£142 million). Ofcom's reduction in our non-news regional programming commitment has resulted in a cost saving of Â£7 million to ITV plc. In addition to this, we have achieved savings of Â£10 million on last year from increased efficiencies across our regional production centres. Schedule costs for ITV2 were Â£38 million (2004: Â£26 million) and the first full year schedule costs of ITV3 were Â£9 million (2004: Â£2 million). ITV4 schedule costs were Â£6 million (2004: Â£nil) in its launch year. The increased investment in these digital channel schedules has been a key factor in attracting new advertisers and viewers to our multichannel offering. The first full year schedule cost of GMTV, which became a subsidiary in October 2004, was Â£29 million (2004: Â£7 million). Licence fees Licence fees comprise both a fixed annual sum (the cash bid) and a variable element representing a percentage of our NAR and sponsorship income (PQR Levy). The PQR Levy is reduced by the percentage of homes which receive ITV1 in digital format. The digital licence rebate for 2005 is based on a digital penetration of 61%. In 2004 the licence fee payment including a full 12 months of GMTV was Â£215 million. ------------------ --------- --------- ------- Published Pro forma 2005 2004 Saving Â£m Â£m Â£m Cash bid payment 4 67 63 PQR Levy 192 277 85 Digital rebate (121) (137) (16) ------------------ --------- --------- ------- Total 75 207 132 ------------------ --------- --------- ------- 2005 has seen the setting of new financial terms for our Channel 3 licences which has resulted in a reduction in the net licence fees paid of 64% to Â£75 million. The payment will continue to fall as digital penetration increases and will reduce to around Â£4 million in constant prices by the time analogue transmissions cease. Together with the tax charge of Â£85 million, the licence fee of Â£75 million produces a combined tax and licence fee rate of 41% on our profit before tax and licence fees of Â£386 million. Exceptional items The operating exceptional items in the year total Â£29 million and primarily represent reorganisation and integraton costs, partially offset by liquidation dividends received. Reorganisation and integration costs include costs associated with the consolidation of regional news production centres as part of the ongoing efficiency gains following the merger between Granada and Carlton. Further such projects are planned for 2006. Non-operating exceptional items show a Â£10 million charge recognised in respect of education business after its classification as a disposal group held for sale. Net financing costs The net financing charge is Â£35 million. Financing income of Â£144 million includes the expected return on pension scheme assets (Â£112 million), interest income (Â£21 million) and net gains on remeasurement of interest rate swaps to fair value (Â£11 million). Financing costs of Â£179 million includes the interest on pension scheme liabilities (Â£125 million) and interest expense of Â£54 million arising on our principal debt instruments and interest payments under finance lease obligations. Investment income Investment income of Â£5 million comprises dividend income principally from holdings in SMG and Channel 7 in Australia. Gain on sale of property The Â£11 million profit from the sale of properties in the year principally arose from a gain on the sale of the Nottingham Studios. Tax The effective rate of tax on PBT is 27%. The underlying effective rate on operating profits is 28% as shown below: -------------------------------------------------------------------------------- ------- Underlying effective rate of tax Â£m Operating profit before exceptional items and share of profits of associates and joint ventures â€¢ Profit before tax as reported 311 â€¢ Exceptional items 39 â€¢ Share of profits of associates and joint ventures (11) -------------------------------------------------------------------------------- ------- 339 -------------------------------------------------------------------------------- ------- Underlying tax charge â€¢ Tax charge as reported 85 â€¢ Credit for exceptional costs 4 â€¢ Credit in respect of prior year items 7 -------------------------------------------------------------------------------- ------- 96 -------------------------------------------------------------------------------- ------- Underlying effective rate of tax 28% -------------------------------------------------------------------------------- ------- Earnings per share Basic earnings per share are 5.4 pence (2004: 3.5 pence). Adjusted earnings per share before amortisation and exceptional items are 8.0 pence (2004: 6.4 pence). Dividend The Board is proposing a final dividend of 1.8 pence per share which represents an increase of 38% over the 2004 final dividend. The total dividend proposed for the period is therefore 3.12 pence which is covered 2.56 times by the adjusted earnings per share (before amortisation and exceptional items) of 8.0 pence. Acquisition of businesses ITV made two material acquisitions during 2005: SDN and Friends Reunited. Friends Reunited has been acquired for an initial consideration of Â£120 million with additional consideration of up to Â£55 million based on future performance. SDN was acquired at a total cost of Â£136 million. As required under IFRS 3 (Business combinations) the net assets of the businesses have been adjusted to reflect their fair value at the date of acquisition and goodwill has been calculated based on the fair value of the consideration. For SDN, intangible assets of Â£82 million (in respect of the multiplex licence and customer contracts) have been recognised with an associated deferred tax liability of Â£25 million. Goodwill is Â£77 million. The principal adjustments for Friends Reunited are to recognise additional intangible assets of Â£34 million (in respect of brands and customer relationships), with an associated deferred tax liability of Â£10 million, and to recognise a tax asset of Â£21 million in respect of the exercise of share options. Goodwill of Â£100 million has been recognised based on the expected total consideration taken at a fair value of Â£145 million. Intangible assets Total intangible assets at 31 December 2005 are Â£3,947 million being principally goodwill and acquired intangible assets. Additions during the year arise principally from the acquisitions of SDN and Friends Reunited and total Â£294 million. Goodwill balances are not amortised but are instead subject to annual impairment testing. No impairment has been recognised in 2005. Other intangible assets are amortised over their useful lives. The total amortisation charge for the year is Â£102 million (2004: Â£111 million). Cash flow and net debt The cash generated from operations was Â£456 million reflecting strong trading. Exceptional cash payments of Â£28 million reflect restructuring and integration costs offset by a receipt from the liquidators of ONdigital. Property, plant and equipment expenditure was Â£46 million and Â£29 million was raised from sales. A net debt movement of Â£230 million in respect of the acquisitions of SDN and Friends Reunited is recognised. In January 2005, â‚¬125 million of the Exchangeable bond was repaid while in April the remaining Â£8 million of the Carlton Communications Limited Preference shares were called. In October, ITV issued Â£325 million Eurobonds with a maturity of October 2015 and carrying a coupon of 5.375% in order to secure long term financing for the Group at a very attractive fixed rate. As described in more detail under pensions, a Â£118 million deficit funding payment into the defined benefit schemes is reflected in cash flows. The principal movements in net debt in the year are shown in the table below: ------------------------------------------------------------------ ------- ------ Â£m Â£m Net debt at 31 December 2004 (280) Adjustment on adoption of IAS 32 and IAS 39 (47) ------------------------------------------------------------------ ------- ------ Net debt at 1 January 2005 (restated) (327) Cash generated from operations 456 Defined benefit pension deficit funding (118) Acquisition of SDN and Friends Reunited (230) Taxation paid (120) Property, plant and equipment (acquisitions less disposals) (17) Net interest paid (26) Equity dividends paid (98) Other movements (1) ------------------------------------------------------------------ ------- ------ Movement in net debt (154) ------------------------------------------------------------------ ------- ------ Net debt at 31 December 2005 (481) ------------------------------------------------------------------ ------- ------ Treasury operations and policies A central department in London following policies and procedures laid down by the Board, manages the Group's treasury operations. The most significant treasury exposures faced by ITV are raising finance, managing interest rate and currency positions and investing surplus cash in high quality assets. Treasury policies have been approved by the Board for managing each of these exposures including levels of authority on the type and use of financial instruments. Transactions are only undertaken if they relate to underlying exposures. The treasury department reports regularly to the Audit Committee and treasury operations are subject to periodic independent reviews and internal audit. ITV has established and retains strong relationships with a number of banks to ensure a balanced spread of risk and to facilitate future funding requirements. Set out below are ITV's principal treasury policies: - Financing: ITV's financing policy is to fund itself long term using debt instruments with a range of maturities. It is substantially funded from the UK and European capital markets and has bank facilities from the UK syndicated market. - Interest rate management: the Group's interest rate policy is to have fixed interest rate debt of between 30% and 70% of its total net indebtedness over the medium term in order to provide a balance between certainty of cost and benefit from low floating rates. ITV uses interest rate swaps and options in order to achieve the desired mix between fixed and floating. - Currency management: the Group's foreign exchange policy is to hedge foreign currency denominated costs at the time of commitment and to hedge a proportion of foreign currency denominated revenues on a rolling 12 month basis. The policies significantly reduce the Group's earnings and balance sheet exposures to changes in exchange rates. - Investment in cash: ITV operates strict investment guidelines with respect to surplus cash and the emphasis is on preservation of capital. Counterparty limits for cash deposits are largely based upon long term ratings published by the major credit rating agencies. Deposits longer than three months require the approval of the Management Committee of the Board. Pensions The Group's pension schemes are run independently by the schemes' trustees. All pension scheme assets are administered separately by the trustees using a number of external fund managers and custodians. The defined benefit schemes are funded on a long term basis with advice from the scheme actuaries. Actuarial valuations of the assets and liabilities of the schemes are carried out every three years with the most recent valuation of the main scheme having been conducted by the actuaries at 31 December 2004. As at 31 December 2005, the make up of the membership of the Group's defined benefit schemes was: ----------------------------------- -------- 000's Active employees 3 Deferreds 14 Pensioners 12 ----------------------------------- -------- 29 ----------------------------------- -------- This is a mature profile and the active employees therefore have a relatively small impact on changes in scheme liabilities compared to deferreds and pensioners. i) Scheme merger At the beginning of 2005 there were six separate defined benefit pension schemes in the Group, a legacy of the company mergers that created ITV. Terms were agreed with the trustees to merge those into a single scheme and that process completed at the end of January 2006. This will save significantly on the costs of administration and professional advice, and also enable a clearer focus on the issues for a single scheme than was possible with separate schemes. ii) Deficit funding It was announced in September 2005 that ITV plc would make a Â£325 million contribution into the defined benefit pension schemes as part of a plan to address the deficit. The amount had been calculated so that, together with estimated future investment returns on the schemes' assets, it would enable the schemes to move towards being fully funded (on an ongoing basis) over an appropriate period of time. The funding was made in cash with Â£118 million paid in December 2005 and Â£207 million in January and February 2006. iii) IAS 19 IAS 19 accounting for the Group's defined benefit schemes does not affect the ongoing funding of those schemes. In 2005 the IAS 19 operating charge for defined benefit schemes was Â£24 million (2004: Â£24 million). The charge within net financing costs for the net of the expected return on scheme assets and the interest cost on liabilities was an additional Â£13 million (2004: Â£6 million). The Group's defined contribution schemes gave rise to an operating charge of Â£2 million (2004: Â£2 million). The IAS 19 deficit on the defined benefit schemes was Â£672 million at 31 December 2004. The valuation at that date reflected the recognition of improving mortality rates which had been assessed on a scheme specific basis and there has been no need to make any further adjustment to those mortality rates in 2005. The principal movements in assets and liabilities of the defined benefit pension schemes during the year have resulted from the significant reduction in the long term real interest rates which have increased liabilities, and the very strong investment returns (especially on the equity portfolio) which have provided a compensating increase in scheme assets. The IAS 19 deficit at 31 December 2005 was Â£532 million reflecting the Â£118 million lump sum payment in December 2005 and an improvement of Â£22 million in the underlying funding position during the year before that lump sum payment. A net actuarial gain of Â£35 million has been recognised as a credit to reserves. Following the Â£207 million lump sum payment in early 2006 that Â£532 million deficit would reduce to Â£325 million pre tax on a pro forma basis (or Â£228 million after a deferred tax asset of Â£97 million). The pension schemes are funded on a long term basis and therefore the IAS 19 disclosures are not relevant to the ongoing funding of the schemes. The last ongoing actuarial valuations of the defined benefit schemes (at 31 December 2004 for the main ITV Scheme and other dates for some of the remaining schemes) showed a deficit of Â£586 million compared to the IAS 19 deficit of Â£672 million at 31 December 2004. Over 2005 the difference in real long term interest rates applied to our IAS 19 valuations was 0.5%. If this reduction had not occurred then our year end liabilities would have been over Â£200 million less than reported. As a result of the improved funding position it is expected that the net return on scheme assets and liabilities in 2006 will give rise to a credit to the net financing costs of the Group. iv) Pension tax simplification The new tax regime for pension funds comes into effect on 6 April 2006. This change, referred to as 'A' Day, will have significant consequences for senior executives for whom tax relief on pension accruals will change from that time. ITV has taken professional advice and has concluded that it should not separately compensate any executives for this change, but should establish alternate pension arrangements for those immediately impacted which leave both the individual and the Group in positions broadly similar to the present. Individuals whose pension arrangements are wholly within an approved scheme will remain in that scheme up to the maximum permitted without adverse tax consequences, and will have any accrual above that level provided from a secured unfunded unapproved retirement benefit scheme. Individuals currently subject to the earnings cap within an approved scheme, and having additional benefits provided through an unfunded unapproved retirement benefit scheme, will accrue benefits under the approved scheme up to the maximum permitted without adverse tax consequences, and will have any accrual above that level provided from the unfunded unapproved retirement benefit scheme. International Financial Reporting Standards ITV plc adopted IFRS for group reporting on 1 January 2005 and has presented its group financial statements under IFRS for the first time in this report. The basis of preparation, is set out in note 11. The 2004 comparative financial information has been restated and represented under IFRS. Details of this conversion is given in ITV plc's Preliminary International Financial Reporting Standards Financial Statements for 2004 which is available on the corporate website www.itvplc.com. Risks and uncertainties ITV has an established programme of risk assessment. Key risks, mitigating controls and actions required to enhance controls are identified and monitored by the management, executive directors and Audit Committee. ITV currently considers its key risks and uncertainties to be as follows: â€¢ The total level of advertising expenditure is driven by conditions within the UK and global economies over which ITV has no control; â€¢ The high level of competition between media owners for share of the total display advertising market; â€¢ The increasingly competitive market for television viewers in the UK and the impact of new technologies that may change viewing behaviour; â€¢ Adherence to UK broadcasting regulations; â€¢ Exposure to the risk that pension scheme assets are insufficient to meet the present and future scheme liabilities; â€¢ Exposure to increasing cost of programmes, talent and rights acquired from third parties; â€¢ Exposure to counterparty credit risk; and â€¢ Reliance on third party technology for the operation of key activities. John Cresswell Finance Director Consolidated income statement -------------------------------- --------- --------- -------- 2005 2004 For the year ended 31 December: Note Â£m Â£m Group and share of joint ventures' revenue 2,243 2,132 Less share of joint ventures' revenue (66) (79) -------------------------------- --------- --------- -------- Revenue 2,177 2,053 -------------------------------- --------- --------- -------- Operating costs before amortisation of intangible assets and exceptional items (1,717) (1,729) Operating costs - exceptional items 1 (29) (70) Earnings before interest, tax and amortisation (EBITA) 431 254 Amortisation of intangible assets 6 (102) (111) -------------------------------- --------- --------- -------- Total operating costs (1,848) (1,910) -------------------------------- --------- --------- -------- Operating profit 329 143 -------------------------------- --------- --------- -------- Financing income 144 128 Financing costs (179) (147) -------------------------------- --------- --------- -------- Net financing costs (35) (19) Share of profits of associates and joint ventures 7 11 13 Investment income 5 7 Gain on sale of property 11 7 (Loss)/gain on sale of subsidiaries and investments (exceptional items) 1 (10) 17 -------------------------------- --------- --------- -------- Profit before tax 311 168 Taxation 4 (85) (25) -------------------------------- --------- --------- -------- Profit for the year 226 143 -------------------------------- --------- --------- -------- Attributable to: Equity shareholders of the parent company 222 137 Minority interests 4 6 -------------------------------- --------- --------- -------- Profit for the year 226 143 -------------------------------- --------- --------- -------- Basic earnings per share 2 5.4p 3.5p Diluted earnings per share 2 5.3p 3.4p All results are from continuing operations. Operating exceptional items during the year comprise reorganisation and integration costs net of a liquidation dividend received (see note 1 for details). Consolidated balance sheet --------------------------------- -------- -------- -------- 2005 2004 At 31 December: Note Â£m Â£m Non-current assets Property, plant and equipment 235 258 Intangible assets 6 3,947 3,797 Investments in joint ventures and associates 7 93 83 Equity investments 8 181 140 Distribution rights 13 12 --------------------------------- -------- -------- -------- Deferred tax asset in respect of pension scheme deficits 160 202 Other deferred tax balances (86) (136) --------------------------------- -------- -------- -------- Net deferred tax asset 4 74 66 --------------------------------- -------- -------- -------- 4,543 4,356 --------------------------------- -------- -------- -------- Current assets Assets held for sale 63 - Programme rights and other inventory 388 368 --------------------------------- -------- -------- -------- Trade and other receivables due within one year 362 349 Trade and other receivables due after more than one year 7 8 --------------------------------- -------- -------- -------- Trade and other receivables 369 357 Cash and cash equivalents 9 663 582 --------------------------------- -------- -------- -------- 1,483 1,307 --------------------------------- -------- -------- -------- Current liabilities Liabilities held for sale (9) - Borrowings 9 (43) (10) --------------------------------- -------- -------- -------- Trade and other payables due within one year (734) (713) Trade and other payables due after more than one (4) - year -------- -------- -------- --------------------------------- Trade and other payables (738) (713) Current tax liabilities (217) (225) Provisions (23) (32) --------------------------------- -------- -------- -------- (1,030) (980) --------------------------------- -------- -------- -------- --------------------------------- -------- -------- -------- Net current assets 453 327 --------------------------------- -------- -------- -------- Non-current liabilities Borrowings 9 (1,101) (852) Defined benefit pension deficit 5 (532) (672) Other payables (29) (7) Provisions (29) (43) --------------------------------- -------- -------- -------- (1,691) (1,574) --------------------------------- -------- -------- -------- --------------------------------- -------- -------- -------- Net assets 3,305 3,109 --------------------------------- -------- -------- -------- Attributable to equity shareholders of the parent company Share capital 10 423 422 Share premium 10 98 91 Merger and other reserves 10 2,666 2,666 Translation reserve 10 (1) (2) Available for sale reserve 10 33 - Retained earnings 10 74 (84) --------------------------------- -------- -------- -------- Total attributable to equity shareholders of the parent company 10 3,293 3,093 Minority interest 10 12 16 --------------------------------- -------- -------- -------- Total equity 10 3,305 3,109 --------------------------------- -------- -------- -------- Consolidated cash flow statement ---------------------------- -------- ------ ------ ------- 2005 2004 For the year ended 31 December: Â£m Â£m Â£m Â£m Cash flows from operating activities Operating profit before exceptional items 358 213 Depreciation of property, plant and equipment 34 35 Amortisation of intangible assets 102 111 ---------------------------- -------- ------ ------ ------- Increase in programme rights and other inventory, and distribution rights (30) (22) Decrease in receivables 23 34 (Decrease)/increase in payables (3) 10 ---------------------------- -------- ------ ------ ------- Movement in working capital (10) 22 ---------------------------- -------- ------ ------ ------- Cash generated from operations before exceptional items 484 381 Cash flow relating to exceptional items: Operating loss (29) (70) Asset write-offs - 4 Provision for impairment - 5 Increase in payables and provisions* 1 1 ---------------------------- -------- ------ ------ ------- Cash outflow from exceptional items (28) (60) ---------------------------- -------- ------ ------ ------- Cash generated from operations 456 321 Defined benefit pension deficit funding (118) - Interest received 20 19 Interest paid on bank and other loans (42) (43) Interest paid on finance leases (4) (4) Investment income 5 7 Dividends received from investments in joint ventures and associates - 4 Taxation paid (120) (12) ---------------------------- -------- ------ ------ ------- (259) (29) ---------------------------- -------- ------ ------ ------- Net cash from operating activities 197 292 Cash flows from investing activities Acquisition of subsidiary undertakings, net of cash and cash equivalents acquired and debt repaid on acquisition (208) 434 Proceeds from sale of assets held for resale 3 59 Proceeds from sale of property, plant and equipment 29 35 Acquisition of minority interest - (154) Acquisition of property, plant and equipment (46) (36) Acquisition of investments (30) (2) Proceeds from sale of subsidiaries 2 - Proceeds from sale of investments - 208 ---------------------------- -------- ------ ------ ------- Net cash (used in)/from investing activities (250) 544 Cash flows from financing activities Proceeds from issue of ordinary share capital 50 8 Purchase of US held shares (42) - Bank and other loans - amounts repaid (88) (192) Bank and other loans - amounts raised 322 - Capital element of finance lease payments (3) (4) Preference dividends paid to shareholders - (5) Redemption of preference shares (8) - Redemption of redeemable shares on merger - (200) Equity dividends paid (98) (48) ---------------------------- -------- ------ ------ ------- Net cash from/(used in) financing activities 133 (441) ---------------------------- -------- ------ ------ ------- Net increase in cash and cash equivalents 80 395 Cash and cash equivalents at 1 January 582 185 Effects of exchange rate changes and fair value movements on cash and cash equivalents 1 2 ---------------------------- -------- ------ ------ ------- Cash and cash equivalents at 31 December 663 582 ---------------------------- -------- ------ ------ ------- * Includes Â£4 million (2004: Â£8 million) relating to expenditure against provisions held in respect of activities which have been previously discontinued. Consolidated statement of recognised income and expense ------------------------------- ---------- ------- -------- Note 2005 2004 For the year ended 31 December: Â£m Â£m Exchange differences on translation of foreign 1 (2) operations Revaluation of available for sale investments 20 - Movements in respect of cash flow hedges (1) - Actuarial gains and losses on defined benefit pension schemes 5 35 (123) Taxation on items taken directly to equity 4 (8) 37 ------------------------------- ---------- ------- -------- Net income/(expense) recognised directly in equity 47 (88) Profit for the year 226 143 ------------------------------- ---------- ------- -------- Total recognised income and expense for the year 273 55 ------------------------------- ---------- ------- -------- Attributable to: Equity shareholders of the parent company 10 269 49 Minority interests 10 4 6 ------------------------------- ---------- ------- -------- Total recognised income and expense for the year 273 55 ------------------------------- ---------- ------- -------- Effect of change in accountancy policy: Impact of adoption of IAS 32 and IAS 39 on equity at 1 January 2005 10 4 - ------------------------------- ---------- ------- -------- 277 55 ------------------------------- ---------- ------- -------- 1. Exceptional items ---------------------- ----- ----------------- -------- -------- 2005 2004 Â£m Â£m Operating exceptional items: Reorganisation and integration costs (40) (65) Receipt from the liquidators of ONdigital 11 - Provision for goodwill impairment - (5) ---------------------- ----- ----------------- -------- -------- (29) (70) ---------------------- ----- ----------------- -------- -------- Non-operating exceptional items: (Loss)/gain on sale of subsidiaries and investments (10) 17 ---------------------- ----- ----------------- -------- -------- (10) 17 ---------------------- ----- ----------------- -------- -------- Total exceptional items before tax (39) (53) ---------------------- ----- ----------------- -------- -------- In 2005 a charge of Â£40 million was incurred in respect of reorganisation and integration costs including the consolidation of regional news production centres and technical facilities. The largest element of this (Â£25 million) was staff related. Also included in 2005 is an Â£11 million receipt from the liquidators of ONdigital. A Â£10 million loss has been recognised in relation to the education business after its classification as a disposal group held for sale. Reorganisation and integration costs in 2004 of Â£65 million were principally costs associated with the integration of the Carlton, Granada and new subsidiary businesses into ITV plc. The largest element of these costs (Â£41 million) were staff related with further costs incurred arising as a result of integrating our IT systems and infrastructure, property portfolio and fixed asset base. 2. Earnings per share ---------------------- ------------ --------- --------- --------- 2005 2004 Basic Diluted Basic Diluted Â£m Â£m Â£m Â£m Profit for the year attributable to equity 222 222 137 137 shareholders of the parent company Exceptional items (including related tax effect of Â£4 million, 2004: Â£14 million) 35 35 39 39 ---------------------- ------------ --------- --------- --------- Profit for the year before exceptional items 257 257 176 176 Amortisation of intangible assets (including related tax effect of Â£31 million, 2004: Â£33 million) 71 71 78 78 ---------------------- ------------ --------- --------- --------- Profit for the year before exceptional items and amortisation of intangible assets 328 328 254 254 ---------------------- ------------ --------- --------- --------- Weighted average number of ordinary shares 4,082 4,082 3,947 3,947 in issue - million Dilution impact of share options - million - 46 - 60 ---------------------- ------------ --------- --------- --------- 4,082 4,128 3,947 4,007 ---------------------- ------------ --------- --------- --------- Earnings per ordinary share 5.4p 5.3p 3.5p 3.4p ---------------------- ------------ --------- --------- --------- Adjusted earnings per ordinary share Basic earnings per ordinary share 5.4p 5.3p 3.5p 3.4p Add: Loss per ordinary share on exceptional items 0.9p 0.9p 1.0p 1.0p ---------------------- ------------ --------- --------- --------- Earnings per ordinary share before exceptional items 6.3p 6.2p 4.5p 4.4p Add: Loss per ordinary share on amortisation of intangible assets 1.7p 1.7p 1.9p 1.9p ---------------------- ------------ --------- --------- --------- Earnings per ordinary share for the year before exceptional items and amortisation of intangible assets 8.0p 7.9p 6.4p 6.3p ---------------------- --------- -------- -------- -------- An adjusted earnings per share has been disclosed because in the view of the directors this gives a fairer reflection of the results of the underlying business. 3. Dividends Dividends declared and recognised through equity in the year were: ----------------------------------- ----------- -------- 2005 2004 Â£m Â£m Equity shares: Interim 2003 dividend of 0.5 pence per share - 20 Interim 2004 dividend of 1.1 pence per share - 45 Final 2004 dividend of 1.3 pence per share 53 - Interim 2005 dividend of 1.32 pence per share 54 - ----------------------------------- ----------- -------- 107 65 ----------------------------------- ----------- -------- A final dividend of 1.8 pence per share, totalling Â£74 million, has been proposed after the balance sheet date in respect of the year ended 31 December 2005 (2004: 1.3 pence per share, totalling Â£53 million). As is required by IAS 10 (Events after the balance sheet date) this amount has not been provided for at the balance sheet date. 4. Taxation Recognised in the income statement: ------------------------------ ---------- --------- 2005 2004 Â£m Â£m Current tax expense: Current tax before exceptional items (129) (73) Current tax credit on exceptional items 4 14 ------------------------------ ---------- --------- (125) (59) Adjustment for prior periods 9 17 ------------------------------ ---------- --------- (116) (42) ------------------------------ ---------- --------- Deferred tax: Origination and reversal of temporary differences 33 17 Adjustments for prior periods (2) - ------------------------------ ---------- --------- 31 17 ------------------------------ ---------- --------- Total taxation expense in the income statement (85) (25) ------------------------------ ---------- --------- Reconciliation of taxation expense: ---------------------------------- ---------- --------- 2005 2004 Â£m Â£m Profit before tax 311 168 ---------------------------------- ---------- --------- Taxation expense at UK corporation tax rate of 30% (2004: 30%) (93) (50) Non-taxable/non-deductible exceptional items (8) (2) Non-taxable income/non-deductible expenses (5) (7) Effect of tax losses utilised 18 17 Over provision in prior years 7 17 Other (4) - ---------------------------------- ---------- --------- (85) (25) ---------------------------------- ---------- --------- In the year ended 31 December 2005 the effective tax rate on profits is lower (2004: lower) than the standard rate of UK corporation tax primarily as a result of the utilisation of tax losses on which deferred tax assets were not previously recognised, offset by exceptional items which are not deductible for corporation tax purposes. The underlying tax rate on operating profits, after adjusting for exceptional items, overprovisions in prior years and excluding associates and joint ventures is 28% (2004: 27%). A tax expense totalling Â£8 million (2004: credit of Â£37 million) has been recognised directly in equity representing a current tax credit of Â£2 million (2004: Â£nil) and a deferred tax expense of Â£10 million (2004: credit of Â£37 million). Deferred tax assets and liabilities recognised and their movements are: -------- -------- -------- ------- --------- -------- -------- ------- -------- At 31 Adjustment At 1 Business Recognised Recognised Transfer At 31 December for January combinations in the in equity to held December 2004 IAS 32 and 2005 income for sale 2005 IAS 39 (restated) statement Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Property, plant and equipment (3) - (3) - (2) - 2 (3) Intangible assets (151) - (151) (35) 31 - - (155) Programme rights 7 - 7 - (2) - - 5 Pension scheme deficits 202 - 202 - (31) (11) - 160 Pensions funding payments 2 - 2 - 27 - - 29 Interest-bearing loans and borrowings, and derivatives (8) 2 (6) - 10 (1) - 3 Share-based payments 8 - 8 18 4 2 - 32 Tax losses 5 - 5 - (5) - - - Other 4 - 4 - (1) - - 3 -------- -------- -------- ------- --------- -------- -------- ------- -------- 66 2 68 (17) 31 (10) 2 74 -------- -------- -------- ------- --------- -------- -------- ------- -------- ------------------- -------- ---------- --------- --------- -------- At 1 Business Recognised Recognised At 31 January combinations in the in equity December 2004 income 2004 statement Â£m Â£m Â£m Â£m Â£m Property, plant and equipment (6) 4 (1) - (3) Intangible assets - (184) 33 - (151) Programme rights - 9 (2) - 7 Pension scheme deficits 127 41 (3) 37 202 Pensions funding payments - - 2 - 2 Interest-bearing loans and borrowings, and derivatives - 9 (17) - (8) Share-based payments 1 5 2 - 8 Tax losses - 5 - - 5 Other 2 (1) 3 - 4 ------------------- -------- ---------- --------- --------- -------- 124 (112) 17 37 66 ------------------- -------- ---------- --------- --------- -------- At 31 December 2005 total deferred tax assets are Â£232 million (2004: Â£228 million) and total deferred tax liabilities are Â£158 million (2004: Â£162 million). Potential deferred tax assets estimated at Â£0.7 billion, primarily in respect of capital losses and loan relationship deficits, have not been recognised due to uncertainties as to amount and whether gain or income will arise in the appropriate form and relevant territory against which such losses could be utilised. Deferred tax liabilities relating to investments in subsidiaries, associates and joint ventures are also not recognised because the Group controls whether the liability will be incurred and is satisfied that it will not be incurred in the foreseeable future. 5. Pension schemes The Group operates a number of defined benefit and defined contribution pension schemes. Defined contribution schemes Total contributions recognised as an expense in relation to defined contribution schemes during 2005 were Â£2 million (2004: Â£2 million). Defined benefit schemes The Group operates a number of final salary defined benefit schemes. The majority of these schemes are funded and associated scheme assets are held in separate trustee administered funds. The movement in the present value of the defined benefit obligation for these schemes is analysed below: ---------------------------------- --------- -------- 2005 2004 Â£m Â£m Defined benefit obligation at 1 January 2,357 1,552 Business combinations - 570 Current service cost 26 28 Curtailment gain (2) (4) Interest cost 125 113 Net actuarial loss 184 179 Contributions by scheme participants 5 6 Benefits paid (91) (87) ---------------------------------- --------- -------- Defined benefit obligation at 31 December 2,604 2,357 ---------------------------------- --------- -------- The present value of the defined benefit obligation is analysed between wholly unfunded and funded defined benefit schemes in the table below: ---------------------------------- ----------- -------- 2005 2004 Â£m Â£m Defined benefit obligation in respect of funded schemes 2,573 2,330 Defined benefit obligation in respect of wholly unfunded schemes 31 27 ---------------------------------- ----------- -------- Total defined benefit obligation 2,604 2,357 ---------------------------------- ----------- -------- The movement in the fair value of the defined benefit scheme assets is analysed below: ---------------------------------- ----------- -------- 2005 2004 Â£m Â£m Fair value of assets at 1 January 1,685 1,130 Business combinations - 432 Expected return on assets 112 107 Net actuarial gain 219 56 Employer contributions 142 41 Contributions by scheme participants 5 6 Benefits paid (91) (87) ---------------------------------- ----------- -------- Fair value of assets at 31 December 2,072 1,685 ---------------------------------- ----------- -------- The assets and liabilities of the scheme are recognised in the balance sheet and shown within non-current liabilities. The total recognised is: ---------------------------------- ----------- -------- 2005 2004 Â£m Â£m Total defined benefit scheme assets 2,072 1,685 Total defined benefit scheme obligations (2,604) (2,357) ---------------------------------- ----------- -------- Net amount recognised within the balance sheet (532) (672) ---------------------------------- ----------- -------- Amounts recognised through the income statement are as follows: ---------------------------------- ----------- -------- 2005 2004 Â£m Â£m Amount (charged)/credited to operating costs: Current service cost (26) (28) Curtailment gain 2 4 ---------------------------------- ----------- -------- (24) (24) Amount credited/(charged) to net financing costs: Expected return on pension scheme assets 112 107 Interest cost (125) (113) ---------------------------------- ----------- -------- (13) (6) ---------------------------------- ----------- -------- Total charge in the income statement (37) (30) ---------------------------------- ----------- -------- The amounts recognised through the statement of recognised income and expense are: ---------------------------------- ----------- -------- 2005 2004 Â£m Â£m Actuarial gains and (losses): Arising on plan assets 219 56 Arising on scheme liabilities (184) (179) ---------------------------------- ----------- -------- 35 (123) ---------------------------------- ----------- -------- The cumulative amount of actuarial gains and losses recognised through the statement of recognised income and expense since 1 January 2004 is an actuarial loss of Â£88 million (2004: Â£123 million). Included within actuarial gains and losses are experience adjustments as follows: ---------------------------------- ----------- -------- 2005 2004 Â£m Â£m Experience adjustments on scheme assets 219 56 Experience adjustments on scheme liabilities 9 (70) ---------------------------------- ----------- -------- The scheme assets are shown below by major category along with the associated expected rates of return. ----------------------- ---------- ---------- -------- -------- Expected long Market Expected Market term rate of value long term value return 2005 rate of 2004 return 2005 Â£m 2004 Â£m % % Market value of assets - equities and property 7.5 1,421 7.5 1,198 Market value of assets - bonds 4.1 - 5.6 618 4.5 - 6.1 453 Market value of assets - other 4.5 - 4.9 33 4.75 - 5.4 34 ----------------------- ---------- ---------- -------- -------- Total scheme assets 2,072 1,685 ----------------------- ---------- ---------- -------- -------- The expected long term rate of return on assets assumption is assessed by considering the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the asset allocation to develop the expected long term rate of return on assets assumption for the portfolio. The actual return on plan assets in the year ended 31 December 2005 was Â£331 million (2004: Â£163 million). The principal assumptions used in the scheme valuations at the balance sheet date were: ------------------ --------- -------- 2005 2004 Rate of general increase in salaries 4.00% 4.25% Rate of increase in pension payment 2.75% 2.75% Rate of increase to deferred pensions 2.75% 2.75% Discount rate for scheme liabilities 4.90% 5.40% Inflation assumption 2.75% 2.75% ------------------ --------- -------- For mortality rates the Group has used PA92 tables with mortality projected to 2015 for pensioner members and to 2030 for non-pensioner members. Using these tables a male member currently aged 40 is expected to live for a further 45 years, while a male pensioner aged 60 is expected to live a further 24 years. The Group reflected this recognition that mortality rates have reduced in its 2004 valuation. The tables above have been used for both 2005 and 2004 and reflect published mortality investigation data in conjunction with the results of investigations into the mortality experience of scheme members. Normal contributions into the schemes in 2006 are expected to be in the region of Â£20 million based on contribution rates agreed with scheme trustees. Payments totalling Â£207 million have been made in early 2006 as part of the announced Â£325 million lump sum payment to address the schemes' deficit being the balance following the Â£118 million payment in December 2005. 6. Intangible assets ---------------- -------- ------ --------- ------- ---------- ------- Goodwill Brands Customer Licences Film Total contracts and libraries relationships and other Â£m Â£m Â£m Â£m Â£m Â£m Cost At 1 January 2004 1,256 - - - 8 1,264 Additions 2,004 173 319 48 74 2,618 Reclassifications (see note 7) 40 - - - - 40 Disposals (4) - - - - (4) ---------------- -------- ------ --------- ------- ---------- ------- At 31 December 2004 3,296 173 319 48 82 3,918 Additions 174 26 17 73 4 294 Reclassification as assets held for sale (45) - - - (7) (52) Disposals - - - - (1) (1) ---------------- -------- ------ --------- ------- ---------- ------- At 31 December 2005 3,425 199 336 121 78 4,159 ---------------- -------- ------ --------- ------- ---------- ------- Amortisation and impairment At 1 January 2004 - - - - 5 5 Charge for the year - 15 86 4 6 111 Impairment charge 5 - - - - 5 ---------------- -------- ------ --------- ------- ---------- ------- At 31 December 2004 5 15 86 4 11 121 Charge for the year - 17 72 7 6 102 Reclassification as assets held for sale (5) - - - (5) (10) Disposals - - - - (1) (1) ---------------- -------- ------ --------- ------- ---------- ------- At 31 December 2005 - 32 158 11 11 212 ---------------- -------- ------ --------- ------- ---------- ------- Net book value At 31 December 2005 3,425 167 178 110 67 3,947 ---------------- -------- ------ --------- ------- ---------- ------- At 31 December 2004 3,291 158 233 44 71 3,797 ---------------- -------- ------ --------- ------- ---------- ------- At 1 January 2004 1,256 - - - 3 1,259 ---------------- -------- ------ --------- ------- --------- ------- Amortisation of intangible assets is shown within operating costs in the income statement. In 2004 an impairment of Â£5 million was recognised within exceptional items as a result of an impairment review on elements of goodwill attached to the education business. Impairment tests for cash-generating units containing goodwill The following units have significant carrying amounts of goodwill: ----------------------------------- ------------- ------- 2005 2004 Â£m Â£m Broadcasting 2,963 2,889 Multiple units without significant goodwill 462 402 ----------------------------------- ------------- ------- 3,425 3,291 ----------------------------------- ------------- ------- The recoverable amount of the Broadcasting cash-generating units is based on value in use calculations. Those calculations use cash flow projections based on actual operating results and the five year business plan. Cash flows in perpetuity are extrapolated using a 2.5% growth rate and are appropriate because broadcasting is a long term business. The growth rate used is consistent with the long term average growth rate for the industry. A pre-tax discount rate of 11.4% has been used in discounting the projected cash flows. The key assumptions and the approach to determining their value are: Assumption How determined Total advertising market Long term trends, industry forecasts and macro-economic outlook Television share of advertising Long term trends, industry forecasts and in-house market estimates Digital penetration Industry forecasts and government stated objectives ITV1 share of commercial impacts Impact of digital penetration and historic ---------------------- viewing shares by platform -------------------------------- 7. Investments in joint ventures and associated undertakings ---------------------------- ------------- --------- ------- Joint ventures Associated Total undertakings Â£m Â£m Â£m At 1 January 2004 2 31 33 Additions - 2 2 Business combinations 80 4 84 Reclassification (GMTV) 6 (6) - Reclassification as subsidiaries (ITV2, LNN, ITFC, ITV News Channel, GMTV, GSkyB)* (39) (6) (45) Share of attributable profits 9 4 13 Dividends received (3) (1) (4) ---------------------------- ------------- --------- ------- At 31 December 2004 55 28 83 Share of attributable profits 5 6 11 Other - (1) (1) ---------------------------- ------------- --------- ------- At 31 December 2005 60 33 93 ---------------------------- ------------- --------- ------- * Included within the 2004 Â£45 million reclassification as subsidiaries was Â£40 million of goodwill (see note 6). The aggregated summary financial information in respect of associates in which the Group has an interest is as follows: ----------------------------------- ------------- ------- 2005 2004 Â£m Â£m Assets 143 125 Liabilities (108) (87) Revenue 142 135 Profit 13 8 ----------------------------------- ------------- ------- The aggregated summary financial information in respect of the Group's share of interests in joint ventures is as follows: ----------------------------------- ------------- ------- 2005 2004 Â£m Â£m Non-current assets 66 65 Current assets 49 45 Current liabilities (27) (19) Non-current liabilities (29) (30) Revenue 66 79 Expense (61) (70) ----------------------------------- ------------- ------- 8. Equity Investments ----------------------------- ------------ Â£m At 1 January 2004 157 Business combinations 2 Disposals (16) Other (3) ----------------------------- ------------ At 31 December 2004 140 Adjustment on adoption of IAS 32 and IAS 39 13 ----------------------------- ------------ At 1 January 2005 (restated) 153 Additions at fair value 13 Disposals (3) Revaluation to fair value 18 ----------------------------- ------------ At 31 December 2005 181 ----------------------------- ------------ 9. Analysis of net debt -------------- -------- --------- --------- --------- --------- -------- 31 Adjustment 1 January Net Currency 31 December for IAS 32 2005 cash and December 2004 and IAS 39 (restated) flow and non-cash 2005 acquisitions movements Â£m Â£m Â£m Â£m Â£m Â£m Cash 441 - 441 81 - 522 Cash equivalents 141 - 141 (1) 1 141 ------------- -------- --------- --------- --------- --------- -------- Cash and cash equivalents 582 - 582 80 1 663 ------------- -------- --------- --------- --------- --------- -------- Loans and loan notes due within one year (7) - (7) (22) (11) (40) Finance leases due within one year (3) - (3) 3 (3) (3) Loans and loan notes due after one year (774) (39) (813) (234) 21 (1,026) Finance leases due after one year (78) - (78) - 3 (75) Preference shares - (8) (8) 8 - - ------------- -------- --------- --------- --------- --------- -------- (862) (47) (909) (245) 10 (1,144) ------------- -------- --------- --------- --------- --------- -------- Net debt (280) (47) (327) (165) 11 (481) ------------- -------- --------- -------- --------- --------- -------- -------------------- -------- --------- -------- --------- -------- 1 January Acquisitions Net cash Currency 31 2004 excluding flow and December cash non-cash 2004 movements Â£m Â£m Â£m Â£m Â£m Cash at bank and in hand 91 - 349 1 441 Cash equivalents 94 27 19 1 141 -------------------- -------- --------- -------- --------- -------- Cash and cash equivalents 185 27 368 2 582 -------------------- -------- --------- -------- --------- -------- Loans due within one year (3) (1) - (3) (7) Finance leases due within one year (1) - 4 (6) (3) Loan and loan notes due after one year - (965) 192 (1) (774) Finance leases due after one year (54) (30) - 6 (78) -------------------- -------- --------- -------- --------- -------- (58) (996) 196 (4) (862) -------------------- -------- --------- -------- --------- -------- Net funds/(debt) 127 (969) 564 (2) (280) -------------------- -------- --------- -------- --------- -------- Included within cash equivalents is Â£78 million (2004: Â£81 million) the use of which is restricted to meeting finance lease commitments and Gilts of Â£29 million (2004: Â£24 million) over which the unfunded pension promises have a charge. 10. Consolidated statement of changes in equity ------------ ------- -------- ---------- --------- -------- ------- ------- ------- ------- Attributable to equity shareholders of the parent company Share Share Merger and Translation Available Retained Total Minority Total capital premium other reserve for sale earnings interest equity reserves reserve Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 January 2004 277 - 1,191 - - (81) 1,387 1 1,388 Business combinations 143 85 1,675 - - - 1,903 174 2,077 Redemption of Granada redeemable shares - - (200) - - - (200) - (200) Purchase of minority interest - - - - - - - (159) (159) Shares issued in the year 2 6 - - - - 8 - 8 Total recognised income and expense - - - (2) - 51 49 6 55 Movements due to share-based compensation - - - - - 11 11 - 11 Dividends paid to non-equity shareholders - - - - - - - (6) (6) Equity dividends - - - - - (65) (65) - (65) ------------ ------- -------- ---------- --------- -------- ------- ------- ------- ------- At 31 December 2004 422 91 2,666 (2) - (84) 3,093 16 3,109 Adjustment on adoption of IAS 32 and IAS 39 - - - - 13 (1) 12 (8) 4 ------------ ------- -------- ---------- --------- -------- ------- ------- ------- ------- At 1 January 2005 (restated) 422 91 2,666 (2) 13 (85) 3,105 8 3,113 Cancellation of shares (3) (39) - - - - (42) - (42) Shares issued in the year 4 46 - - - - 50 - 50 Total recognised income and expense - - - 1 20 248 269 4 273 Movements due to share-based compensation - - - - - 18 18 - 18 Equity dividends - - - - - (107) (107) - (107) ------------- ------- -------- ---------- --------- -------- ------- ------ ------- ------- At 31 December 2005 423 98 2,666 (1) 33 74 3,293 12 3,305 ------------- ------ ------- -------- --------- -------- ------- ------ ------- ------- 11. Basis of preparation The group financial statements consolidate those of ITV plc and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates and jointly controlled entities. As required by EU law (IAS Regulation EC 1606/2002) the Group's accounts have been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board (IASB), and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB, as adopted by the EU ('IFRS'). These are the Group's first consolidated financial statements to be prepared under IFRS and IFRS 1 'First-time Adoption of International Financial Reporting Standards' has been applied. The accounts are principally prepared on the historical cost basis except where other bases are applied under the Group's accounting policies. The comparative information presented in these accounts has been restated and represented under IFRS. In respect of financial instruments, the Group's policy, as permitted under IFRS 1, has been to adopt IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) from 1 January 2005. Comparatives have therefore not been restated to reflect the requirements of IAS 32 and IAS 39 and continue to be prepared in accordance with UK GAAP. The financial information set out herein does not constitute the Company's statutory report and accounts for the year ended 31 December 2005. Statutory accounts for 2005 will be delivered to the Registrar of Companies following the Company's annual general meeting. The auditor has reported on those accounts; their report was unqualified and did not contain statements under 237(2) or (3) of the Companies Act 1985. Copies of the 2005 annual report and accounts will be sent to all shareholders and will be available from the registered office of the Company, London Television Centre, Upper Ground, London, SE1 9LT. This information is provided by RNS The company news service from the London Stock Exchange

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