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Interserve PLC (IRV)

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Thursday 26 February, 2015

Interserve PLC

Final Results

RNS Number : 8986F
Interserve PLC
26 February 2015
 



News Release


 

 

 

26 February 2015                      

 

                            

Strong growth and strategic progress

Annual Results 2014

 

Interserve, the international support services and construction group, reports on a year of strong growth and strategic progress, with its annual results for the year ended 31 December 2014.

  

 

 

 

2014

2013

 

 


Revenue

 

£2,913.0m

£2,192.6m

+33%

 


Headline Total operating profit*

 

£117.2m

£86.7m

+35%

 

 

Headline pre-tax profit*

 

£106.2m

£81.1m

+31%

 


Profit before tax

 

£61.9m

£68.1m

-9%

 


Headline earnings per share*

 

58.8p

47.7p

+23%

 


Full-year dividend                               23.0p                 21.5p                 +7%

 

Highlights

 

·     Revenue growth of 33 per cent (organic growth of 10 per cent)

 

·     Total operating profit growth of 35 per cent (organic growth of 9 per cent)

 

·     Headline earnings per share growth of 23 per cent (organic growth of 14 per cent)

 

·     Full-year dividend: Recommended increase of 7 per cent to 23.0p

 

·     £4.1 billion of new business won in 2014

 

·     Record future workload of £8.1 billion, up 26 per cent


 

Chief Executive Adrian Ringrose commented:

 

"2014 was a landmark year for the business in which we advanced our strategy and delivered 35 per cent operating profit growth including strong organic growth despite continuing challenging conditions in a number of our markets. We made two strategic acquisitions (Initial Facilities and the Employment & Skills Group), each of which deepened our presence in core outsourcing markets.

 

Our focus on providing high quality services to both new and existing clients resulted in strong work winning during the year, with our future workload rising 26 per cent to a record £8.1 billion.

 

Looking to the future, we are encouraged by the growth potential of the business. Our attractive positioning in our core markets and our ability to identify, invest in and deliver on attractive project and corporate opportunities is a powerful differentiator." 

 

 

 

- Ends -

 

 

 

For further information please contact:

 

Rhys Jones, Group PR Manager                                    +44 (0) 118 9602285

 

Robin O'Kelly, Group Director of Communications           +44 (0) 7786 702526

 

Richard Campbell/Michael Kinirons, CNC                       +44 (0) 203 219 8816

 

 

About Interserve

 

Interserve is one of the world's foremost support services and construction companies. Our vision is to redefine the future for people and places. Everything we do is shaped by our core values. We are a successful, growing, international business: a leader in innovative and sustainable outcomes for our clients and a great place to work for our people. We offer advice, design, construction, equipment, facilities management and frontline public services. We are headquartered in the UK and listed in the FTSE 250 index. We have gross revenues of £3.3 billion and a workforce of circa 80,000 people worldwide.

 

www.interserve.com

 

For news follow @interservenews

 

 

*This news release and the Annual Report include a number of non-statutory measures to reflect the impact of non-trading and non-recurring items. See note 15 to the condensed consolidated financial statements for a reconciliation of these measures to their statutory equivalents and note 9 for calculation of earnings per share.

 



 

STRATEGIC REPORT - Chairman's Statement

 

Interserve made further significant progress during 2014, growing revenues by 33 per cent and adding over 23,000 new colleagues during the year.  It is a central tenet of our corporate strategy to build strong core businesses. The acquisition of Initial Facilities in March added breadth and depth to our customer offering, positioning us as a top three player in the UK facilities management market. In addition our performance was underpinned by strong organic growth (a 10 per cent increase in consolidated revenues), demonstrating our potential in recovering markets and our resilience where market conditions have been more difficult.

 

Our strategy also envisages extending out from our core businesses to enter and grow in adjacent markets where our skills can be applied to gain competitive advantage. Since 2011, Interserve has been building its capabilities to deliver 'front line' services to the citizen, initially through the Work Programme and subsequently through our domiciliary care business.  Recently we have extended our reach considerably; in December, we were selected to provide probation services as part of the Ministry of Justice's Transforming Rehabilitation programme. Also in December, we acquired The Employment & Skills Group (esg), further extending our Work Programme presence and adding capability to provide skills, training and employability services in the UK and further education in the Kingdom of Saudi Arabia (KSA). The broad range of capabilities we now possess, together with our track record as a trusted partner to UK Government, provides a significant opportunity to deliver better, and better-coordinated services to the citizen, whilst improving the outcomes sought by our clients.

 

During the period we expanded our support services business into a number of territories where we had existing construction and RMD activities, including in the KSA where our new joint venture with local partner Rezayat, gives us access to a significant Facilities Management (FM) market. In addition, the acquisition of esg Group adds the establishment and management of three education colleges in KSA to Interserve's portfolio. We believe that both the FM and education markets have significant potential for us; not just in KSA, but in the Middle Eastern region as a whole. Our oil and gas services businesses in the Middle East have also performed well and we took further steps to position ourselves to grow our FM activities across the region. 

 

In Europe, we are growing our capability to serve major clients who look for a single organisation to meet their support service needs across the continent. Some 3,000 colleagues joined us in Spain through the Initial acquisition whilst organically we expanded our work for the Foreign & Commonwealth Office and won our first cross-border commercial contract, with Sony Europe, wherein we will provide services in 27 countries.

 

In our construction business we delivered good revenue growth in the UK. Whilst margins have been affected by supply pressures, they remain within our expected range. This is a tribute to strong customer relationships and prudent management of the business through the economic cycle.  In the Middle East, the business has delivered a solid performance in challenging, albeit improving construction markets.

 

Equipment Services performed strongly in 2014, benefitting from our investment over recent years in expanding the fleet in improving overall market conditions. The margins in that business have now recovered after the worldwide recession, enabling us to achieve an attractive return on investment. We opened new facilities on the US west coast, in Panama and in Cape Town, South Africa.

 

Health and Safety remains a critical priority for the business, especially as our continued growth results in many more colleagues to induct into the Interserve values and culture. Despite our continuing focus on safety, we did not achieve an in-year improvement in our overall rate of reportable incidents, which included one fatal incident early in the year.  Our thoughts remain with those affected by this tragic event.  We remain absolutely committed to our medium term target to halve our accident/incident rate over the period 2010-2019.

 

Our strategy is proving effective and I am very conscious that the ongoing performance of the business is achieved through the ingenuity and hard work of our people in serving our customers. I thank them all on behalf of the Board.  We have always sought to recognise those individuals who epitomise our values. In 2014 we developed this further, holding our first Group-wide award scheme, celebrating our colleagues who bring our values to life, who exhibit leadership in Health & Safety and who, both individually and in teams, are role models to inspire us all.

 

We continue to embrace keenly our obligation to act as a responsible business, recognising that delivering real social value and sustainable shareholder value go hand in hand.  During the year we made further progress in our SustainAbilities strategy and are becoming increasingly confident in the differentiation this provides for us with clients, suppliers and our own people. We are also increasingly aware of our responsibilities as a major employer to help inform, guide and influence relevant areas of public policy. In April we published a report, in association with the Social Market Foundation, on how best to boost the skills and wage prospects for the low paid in the UK. We sponsored a social value summit (recently repeated) at which a number of key political leaders and policy thinkers spoke.  However, whilst publications and events are useful focal points, it is our everyday actions as a responsible employer that really matter and which are reflected in our integrated reporting of our performance in social, natural and knowledge as well as financial capitals.

 

BOARD CHANGES

During the year, we were delighted to welcome Nick Salmon and Russell King to the Board as non-executive directors, and members of the Audit, Nomination and Remuneration Committees. They both bring a wealth of commercial and board governance experience.  Keith Ludeman assumed chairmanship of the Remuneration Committee on 9 July and David Thorpe retired from the Board in August. David left with our gratitude for the major contribution he made to the Company over five and a half years.  Looking ahead, after serving over nine years on the Board, our Senior Independent Director (SID), Les Cullen, will be retiring at the forthcoming Annual General Meeting. Les will be sorely missed, but I am delighted that Russell King has agreed to assume the role of SID at that time. Finally, having been Chairman since January 2006 I have informed the Board of my intention to stand down no later than the 2016 AGM.  Accordingly, the Board, under Russell King's leadership, will undertake an external search for my successor and will make further announcements in due course.

 

PROSPECTS

2014 has been another year of strong progress and growth for the business and looking to the future we are encouraged by its growth potential. In the majority of our markets we are seeing signs of recovery, with the business well positioned to achieve further growth so long as the more extreme global political and economic risks do not crystallise. While optimistic, we continue to manage the business prudently to ensure it remains resilient against future economic cycles.

 

DIVIDEND

We continue to believe our strategy is able to deliver attractive, sustainable returns for shareholders and support a progressive dividend policy. Given our confidence in the medium term outlook for the business we are recommending an increased final dividend of 15.5p (2013: 14.7p), bringing the total dividend for the year to 23.0p (2013: 21.5p), an increase of 7.0 per cent. The final dividend will be paid on 20 May 2015 to shareholders on the register at the close of business on 7 April 2015.

 

 

Lord Blackwell

Chairman

26 February 2015

 

STRATEGIC REPORT - Operational Review

 

Overview

 

Interserve serves the needs of its broad client-base by providing a range of integrated services in the outsourcing and construction markets.  Our success is founded on the skills and ingenuity of our people, and so we invest extensively in the development and training of our 80,000 strong team to ensure we continue to retain and attract the right people. In this way we can apply our collective knowledge and experience to meet our customers' needs and develop lasting, long-term relationships.

 

2014 was a good year for Interserve. We strengthened our business both organically and through the acquisitions of Initial Facilities (March) and esg (December). Overall we grew our headcount by more than 40 per cent and expanded our reach in a number of UK and international markets.

 

We delivered organic headline earnings per share growth of 14 per cent in the face of mixed market conditions, supported by targeted investment and a continued focus on the factors that differentiate us as a business. This growth was complemented by the performance of recently acquired businesses which, in aggregate, boosted our total earnings per share growth to 23 per cent and delivered healthy returns on invested capital. This strong performance, together with our record future workload (up 26 per cent) and confidence in our medium term prospects underpins the recommended increase in dividend, which we have grown by a compound annual growth rate of over 5 per cent over the last 10 years.

 

Sustainability remains fundamental to the business. Our commitment to making positive contributions in natural, social and knowledge capital as well as through 'conventional' financial performance is an increasingly strong differentiator with clients, investors, our people and our supply chain. During the year we made substantial progress against our ambitious sustainability targets and continued to invest in skills, research and events; positioning Interserve as both a thought leader and leading practitioner in this sphere.

 

 



 

Operational review

 

We segment our results into four main areas - Support Services, Construction, Equipment Services and Investments - all of which are supported by central Group Services.

 

SUPPORT SERVICES

 

Support Services focuses on the management and delivery of operational services to both public and private sector clients in the UK and internationally.

 

Results summary

2014

2013

Change

Revenue




-     UK

£1,679.9m

£1,196.6m

+40%

-     International

(incl share of associates)

£157.2m

£100.5m

+56%





Contribution to Total

Operating Profit

£88.8m

£60.1m

+48%

UK

£81.4m

£56.0m

+45%

International

(incl share of associates)

£7.4m

£4.1m

+80%





Operating margin (UK)

4.8%

4.7%


Operating margin

(International)*

4.8%

4.4%






Future Workload




-     UK

£6.2bn

£5.1bn

+21%

-     International

(incl share of associates)

£0.3bn

£0.2bn

+74%

 

*Operating margin is calculated based on the underlying operating margin of associates and the reported operating margin of subsidiaries.

 

We delivered strong organic growth in the UK and continued the development of the business by acquiring Initial Facilities ("Initial"), while our support services businesses in the Middle East continued to perform well. During the year we further expanded our reach in the delivery of front-line public services in the UK and broadened our offering in the Middle East facilities management market through the formation of Interserve Rezayat, a joint venture in Saudi Arabia.

 

UK

 

We delivered strong operating profit growth, up 45 per cent to £81.4 million. Our strong organic performance (up 9 per cent) was bolstered by the acquisition of Initial as we made further strategic progress on a number of fronts and built on a key aspect of our growth strategy: to broaden our offering in front line services.

 

In recent years we have built capability in healthcare, welfare-to-work and justice. Our welfare-to-work business, which operates in multiple UK regions providing personalised support and training, supported over 7,000 customers into employment during the year. Our healthcare business, which provides care in the home for high acuity patients, grew well, benefitting from increased investment and is well-placed to expand further during 2015. Towards the end of the year we added to our welfare offering through the acquisition of The Employment & Skills Group (esg). We also started to mobilise new contracts in the justice sector after we secured seven year contracts worth £622 million in aggregate to provide probation and rehabilitation services for low and medium risk offenders in five areas of England from February 2015 as part of the Ministry of Justice's (MoJ) Transforming Rehabilitation (TR) programme.

 

We remain one of the Ministry of Defence's (MoD) key delivery partners, having won a new five-year, £322 million contract to manage its National Training Estate (NTE) with the option to extend for a further five years. Our defence FM portfolio includes Welbeck Defence Sixth Form College, the Defence Communication Services Agency and the Permanent Joint Overseas Bases (Falklands, Ascension, Cyprus, Gibraltar). We were, though, unsuccessful in our bids for the Next Generation Estates Contracts which, together with the more limited scope of the new NTE contract will result in a net reduction in the scale of our Defence business in the near term.

 

Our work-winning was strong during the year (£2.0 billion) and we achieved a number of notable successes that reflect the diversity of our capabilities including: The Docklands Light Railway (DLR), Exterion Media, Southampton NHS Trust and the Royal National Lifeboat Institution.

 

Initial's performance in 2014 was in line with the Board's expectations. The first wave of integration and re-branding of the business is complete, with the final phase due to complete in 2015. As anticipated, following the acquisition we have been able to further develop our portfolio of private sector clients, for instance in the transport sector where we have developed and strengthened our presence through contract wins and extensions. In the UK we now provide cleaning at 16 major Network Rail stations and recently agreed a two year extension of our contract for services for London Underground. We also won a new contract to deliver cleaning and security services for the Docklands Light Railway. We added to our significant transport operations in Spain, covering the rail and aviation markets for clients including Iberia, Alstom and Renfe, by winning a contract to provide cleaning, maintenance and assistance to passengers with restricted mobility for Spanish airport operator Aena.

 

Our enlarged UK Support Services business now has a broader customer proposition and the ability to cross-sell more services to existing clients, growing single service contracts into multi-service FM packages. Examples of this include winning a £35 million contract extension with B&Q to provide services across its entire 361 store estate, up from 182 stores. We also grew the scope and size of FM contracts with Alliance Boots and Southwark Council and added to contracts with Co-op Midlands, CBRE and Deutsche Bank.

 

As a consequence of the developments outlined above, our revenue is now split evenly between the public and private sectors.

 

We successfully mobilised our five-year facilities management contract with the BBC. This involves the management and delivery of services at over 150 locations across the UK including New Broadcasting House in London and MediaCityUK in Salford, where we are responsible for services ranging from critical broadcast engineering to business continuity planning.

 

We have also expanded our capability to serve several of our pan-European clients. Our contract with the Foreign & Commonwealth Office (FCO) was expanded - and extended by two years - to deliver support services in France, in addition to the FM services we already provide to the FCO's UK estate and to 14 diplomatic missions across Europe. Our reach was further developed through our appointment by Sony Europe to support their business in 27 countries, providing services at 40 locations.

 

International

 

Internationally we provide a broad range of facilities management services in sectors such as hospitality, leisure, education, defence and retail and, through esg, the operation of further education colleges in Saudi Arabia. We also offer maintenance, turnaround services and training to the oil and gas sector in the United Arab Emirates (UAE), Qatar and Oman.

 

A mix of contract wins with new and existing customers, particularly those in the oil and gas, defence and education sectors, delivered very strong organic operating profit growth of 37 per cent, which together with the full-year impact of businesses acquired during 2013, resulted in overall growth in operating profit of 80 per cent to £7.4 million.

 

Highlights during the year included winning a new three year contract to provide Qatar Shell GTL with a range of mechanical services and a five year facilities management contract with ExxonMobil in Qatar. We also secured a three year extension to our longstanding logistics and oilfield services contract with Occidental Petroleum in Oman. Other contract wins included two mechanical services contracts with the UAE military, consultancy work for Dubai's Roads and Transport authority and FM contracts for several schools and colleges in Qatar.

 

In Saudi Arabia we won contracts to manage services at the Information Technology and Communications Complex (ITCC) and King Abdullah Financial District in Riyadh. We are also encouraged by the prospects for our recently launched joint venture with the Rezayat Group (Interserve Rezayat) which will deliver facilities management services in Saudi Arabia. The addition of esg to the Group also creates a platform to extend front line services into Saudi Arabia, where we operate three further education colleges under the Colleges of Excellence programme, which complements our existing safety and management skills training activities in Qatar and Oman.

 

With our new businesses, TOCO and Adyard (each acquired during 2013 in Oman and the UAE, respectively) joining our longstanding Madina operations (based in Qatar) we have developed greater reach and capability across the oil and gas services sector in the Gulf region, opening up access to a wider pool of customers and pan-regional, as well as national, opportunities. TOCO and Adyard delivered strong work winning and started 2015 with record order books.  Key new wins included  contracts with ZADCO, NABORS, GASCO, Hyundai Engineering & Construction Co.,Asia Gulf Power Service, TAPCO, Gulf Petrochemical Services and Enerflex.

 

CONSTRUCTION

We offer design, development, consultancy and construction services to create whole-life, sustainable solutions for building and infrastructure projects. Our focus is on forming long-term relationships and delivering repeat business through commercial structures such as framework agreements and project-financed schemes.

 

Our presence in the Middle East is structured through longstanding joint venture partnerships, enabling us to form enduring relationships with clients and to combine our international experience with our partners' local knowledge to deliver outstanding service.

 

 

 

Results summary

2014

2013

Change

Revenue




-     UK

£970.7m

£802.2m

+21%

-     International

(share of associates)

£207.9m

£215.9m

-4%





Contribution to Total Operating Profit

£26.2m

£27.8m

-6%

UK

£15.4m

£14.7m

+5%

International

(share of associates)

£10.8m

£13.1m

-18%





Operating margin (UK)

1.6%

1.8%


Operating margin

(International)*

4.7%

5.1%






Future Workload




-     UK

£1.4bn

£1.0bn

+39%

-     International

(share of associates)

£0.3bn

£0.2bn

+37%

 

* Operating margin is calculated based on the underlying operating margin of associates.

 

UK

 

Against a backdrop of improving demand but also of increasing supply chain pressures, we performed well, growing revenue 21 per cent to £970.7 million. This growth was boosted by a strong performance from Paragon, the London-based specialist fit-out and refurbishment business we acquired in 2013, and by our growing Energy from Waste (EfW) activities. It also reflects a robust performance from our traditional regional building activities. Operating profit rose to £15.4 million at a margin of 1.6 per cent.

 

Future workload grew 39 per cent to £1.4 billion (FY2013: £1.0 billion), benefitting from our successful targeting of a mixture of new and existing frameworks, and from selective opportunities in the private sector.

 

We made further progress in the EfW market, entering (in joint venture with Shanks Group plc) into an agreement with Derby City and Derbyshire County Councils to build and operate a new waste treatment facility in the city under a 27 year, £950 million Public Private Partnership (PPP) contract. This contract adds to a pipeline of EfW projects that we already have underway in Glasgow, Peterborough, Rotherham and East Lothian (signed in early 2015) together with a number of other opportunities in this growing sector.

                                             

Much of our work for the public sector is channelled through framework agreements in the health and education sectors, which provide a strong foundation and good visibility for our business.

 

In education, we were confirmed as preferred bidder in the Priority School Building Programme to develop seven secondary schools across Hertfordshire, Luton and Reading. We also won contracts to build facilities for the universities in Birmingham, Southampton and Wolverhampton. These projects extend our track record in this sector where we have now completed the construction of over 50 educational facilities.

 

We won significant work in the health sector during the year, including contracts to design and build a high energy proton beam cancer therapy facility for the Christie NHS Foundation Trust in Manchester and a centre of excellence for the Scottish National Blood Transfusion Service in Edinburgh.

 

During the year we were awarded a place on the Highways Agency's four year, £5 billion collaborative delivery framework schemes valued between £25 million and £50 million, which will provide us with opportunities on a large programme of infrastructure investment over the coming years.

 

Our credentials in building advanced production testing facilities were reinforced through a number of new awards, such as for a research and assembly plant - Factory 2050 - at the University of Sheffield's Advanced Manufacturing Research Centre. This was further reinforced by the award of a contract to build an advanced experimental station and electron microscopy facility at Diamond Light Source on the Harwell Oxford Campus in Oxfordshire.

 

Combining our project finance and construction skills, we secured two further major city development schemes featuring a range of retail and leisure clients: a project to develop and build a 150-room Premier Inn hotel in Torphichen Street in central Edinburgh and the development of a mixed-use project on the site of the former Co-op building in Newcastle city centre.

 

Paragon continues to thrive, benefiting from both a buoyant London office fit-out market, and from the additional client base and balance sheet strength provided by the Group since acquisition. Since becoming part of Interserve, Paragon has won more than £160 million of new work, including contracts to fit-out three floors of Markel Insurance's Fenchurch Street offices and BMW's UK headquarters in Farnborough.

 

In July we were delighted to be named Contractor of the Year by industry journal Construction News, highlighting our leading position within the UK construction market and the excellent teamwork demonstrated by our people.

 

International

 

International Construction performed as expected in challenging, albeit slowly improving markets, in which competition remains high. Volumes increased slightly on a constant currency basis (up 1 per cent) and strong work winning led to growth in the order book of 37 per cent at the year end compared to the end of 2013.

 

Key contract wins in the UAE included work with Halliburton, DP World, the UAE Roads and Transport Authority, Meraas and the RIVA Group. We completed work on  'The Beach' retail and entertainment village and started work on the £110 million redevelopment, expansion and upgrade of the Mall of the Emirates, on behalf of long-standing client, Majid Al Futtaim. 

 

In Qatar we were awarded a £323 million contract, in joint venture, to build Doha Festival City, which will be Qatar's largest retail and entertainment development.  We also won work on the Msheireb Heart of Doha redevelopment and a project to build a central energy plant at Education City for the Qatar Foundation.

 

In Oman, contract wins included the civil engineering works for the expansion of the Sohar refinery for Petrofac/Daelim and an extension to the Muscat City Centre mall for Majid Al Futtaim. We further developed our power and water portfolio by winning the civil engineering works to a seawater reverse osmosis plant in Barka for Osmoflo.

 

EQUIPMENT SERVICES

 

Equipment Services operates globally, designing, hiring and selling formwork and falsework solutions for use in infrastructure and building projects. Our activities have a broad geographic spread, the mix of which can change quickly, hence we manage our equipment fleet globally, thereby combining our scale and expertise with agility and responsiveness to meet customers' needs.

 

Results summary

2014

2013

Change

Revenue

£195.5m

£169.6m

+15%

Contribution to

Total Operating Profit

£26.6m

£20.1m

+32%

Margin

13.6%

11.9%


 

Performance in the period was strong, increasing profit by 32 per cent to £26.6 million (FY 2013: £20.1 million) with operating margins gaining 170 basis points as this operationally-geared business benefitted from increased activity in global infrastructure markets and from the significant  investment we have made over the last two years to facilitate growth.

 

We further extended our reach during the year, opening new branches in South Africa (Cape Town and Nelspruit), the United States (San Leandro, California) and Panama (Panama City) but also downsized in weaker markets, such as Australia, relocating our fleet to exploit opportunities and keeping our cost base responsive to demand fluctuations.

 

Middle East and Africa

 

We continue to see strong growth in the Middle East, benefiting from increased demand in the UAE, with business confidence growing in Dubai and ongoing work on large projects including the Midfield Terminal project at Abu Dhabi airport. We are well positioned to take advantage of opportunities in Qatar as new large-scale infrastructure projects gear up, while Oman has also seen a significant increase in demand, boosted by projects such as the Nizwa Mosque, which was completed during the period. After very strong levels of demand in 2013 our activity in Saudi Arabia continued to grow, boosted by significant new contract wins, including work to supply a new transportation complex being built in Mecca and early wins on major projects such as the King Abdullah Financial District and Riyadh metro.

 

Asia-Pacific

 

Demand continued to weaken gradually in Australia, reflecting more subdued economic conditions emerging in the last 12-18 months and the completion of a number of major energy and mining projects in Western Australia.

 

Elsewhere in the Asia-Pacific region demand grew, with Hong Kong particularly buoyant due to a series of significant transport infrastructure projects including the Macau Bridge and West Kowloon Rail Terminus. We traded strongly in New Zealand through a broad base of projects across both the North and South islands. We also performed well in the Philippines, in both the commercial and power sectors, helped by new contracts including the Davao power plant: a project that should stand us in good stead to benefit from further investment in the sector.

 

Europe

 

We performed very well in the UK, benefitting from our role in the development of a leisure and entertainment complex being built near Birmingham and from work on sizeable rail improvement projects in Reading and on the Stockley Viaduct project near Heathrow airport. Other notable contract wins include work on Scotland's new Forth Bridge and the bridge deck to support the Friargate development in Coventry, while our Ascent-s Safety Screen was used on a number of new high-rise developments.

 

The market remained slow across much of mainland Europe. We took further action on our cost base in Ireland and Spain reflecting persistent weakness in domestic demand, but also made further progress in developing export opportunities, in particular to other Spanish-speaking markets, such as Panama and Colombia.

 

Americas

 

We operate in the USA, Colombia, Panama, Chile and export into Peru. The recovery in the US construction market has been somewhat slower than anticipated and government investment remains sluggish. However, our expansion in California is now bearing fruit, with ongoing work on a number of sizeable commercial developments in the Bay Area and downtown San Francisco. We continued our expansion in Latin America, by developing and investing in our businesses in Colombia and Panama. Performance in Chile was subdued due in large part to low copper prices suppressing general economic activity.

 

INVESTMENTS

 

Investments leads the Group's project-investment activities and manages our equity investments both in Public Private Partnership (PPP) and private sector projects.

 

 


2014

2013

Contribution to

Total Operating Profit

£0.8m

£0.8m

Interest received on subordinated debt investments

£0.8m

£0.6m

Total

£1.6m

£1.4m

Exceptional profit from PFI disposals

£nil

£3.6m

 

Our strategy includes combining our investment, development and project management skills to finance and deliver projects over many years. In recent years we have extended this from our core PFI activities into selective private sector commercial developments and now have an aggregate portfolio (invested and committed) of £47 million.

 

Having achieved a number of financing and planning milestones, we started work in February 2014 on the Haymarket development in central Edinburgh, which will become one of the city's largest mixed-use commercial developments. During the year we also invested in projects to redevelop the Alder Hey Children's Hospital and a centre of excellence for the Scottish National Blood Transfusion Service in Edinburgh.

 

We were appointed preferred bidder to finance, design, build and provide FM services for seven secondary schools across Hertfordshire, Luton and Reading, the first batch to be procured under the Priority School Building Programme, part of the government's PF2 initiative.

 

Our presence in Yorkshire has grown significantly in recent years and during the year we completed work on the last of three major developments for West Yorkshire Police to provide a modern working environment for over 1,000 police officers and civilian staff, built to the highest energy and sustainability standards.

 

Group Services

 

All central costs, including those related to our financing and central bidding activities, are disclosed within the Group Services segment.

 

Group Services' costs in 2014 were £25.2 million (FY 2013: £22.1 million), accommodating an increased investment in back office capabilities, IT infrastructure, people development and communications.

 

We anticipate this increased level of investment will continue in the medium term, as we ensure that we continue to scale our support and assurance functions appropriately with the growth of our operational businesses.

 

Outlook

 

Against a backdrop of uncertainty in many of our markets, we remain confident in our strategy of managing and diversifying risk and focussing our resources on markets with strong long-term growth drivers. Our attractive positioning in our core markets and our ability to identify, invest in and deliver on attractive project and corporate opportunities is a powerful differentiator.

 

We expect our Support Services business to make further progress as we continue to win new work and extend relationships with existing clients. Our increased private sector exposure should act as a counterweight to any temporary hiatus in further government outsourcing, which we expect to resume and accelerate after the UK General Election, with particular emphasis on frontline public services. We believe that the spread of our activities in the Middle East support services market will mitigate against the potential impact of continued weakness in the oil price during 2015.

 

In Construction we expect to see further volume growth in the UK in 2015, much of which is visible in our future workload, although margins will likely remain close to current levels. In the Middle East we expect to make volume progress as we deliver contracted orders and continue to pursue opportunities across various sectors.

 

We expect Equipment Services to continue to grow in expanding global construction markets and to benefit from further operational gearing.

 

While optimistic, we continue to manage the business prudently to ensure it remains resilient against future economic cycles.

 



 

STRATEGIC REPORT

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

We operate in a business environment in which a number of risks and uncertainties exist. While it is not possible to eliminate these completely, the established risk-management and internal control procedures, which are regularly reviewed by the Group Risk Committee on behalf of the Board, are designed to manage their effects and thus contribute to the creation of value for the Group's shareholders as we pursue our business objectives.

 

The Group continues to be dependent on effective maintenance of its systems and controls. Over and above that, the principal risks and uncertainties which the Group addresses through

its risk-management measures are detailed below.

 

Risk

Potential impact

Mitigation and monitoring

Business, economic and political environ-

ment

Among the changes which could affect our business are:

 

·     shifts in the economic climate both in the UK and internationally, including changes in the oil and gas industry;

 

·     alterations in the UK government's policy with regard to expenditure on improving public infrastructure, buildings, services and modes of service delivery and delays in or cancellation of the procurement of government-related projects;

 

·     the imposition of unusually onerous contract conditions by major clients;

 

·     changes in our competitors' behaviour;

 

·     a deterioration in the profile of our counterparty risk; and

 

·     civil unrest and/or shifts in the political climate in some of the regions in which we operate

 

 

 

any one or more of which might result in a failure to win new or sufficiently profitable contracts in our chosen markets or to complete contracts with sufficient profitability.

 

We seek to mitigate these risks by fostering long-term relationships with our clients and partners, our governmental/quasi-governmental medium-to-long-term revenue streams, the development of additional capabilities to meet anticipated demand in new growth areas, careful supply chain management and by operating in various regions of the world, including the Middle East, where we are able to transfer resources to maximum effect between the differing economies of that region.

 

We also have in place committed financing with long maturity dates.

 

We constantly monitor market conditions and assess our capabilities in comparison to those of our competitors. Whether we win, lose or retain a contract we analyse the reasons for our success or shortcomings and feed the information back at both tactical and strategic levels. We also constantly monitor our cost base and take action to ensure it is suitable given the prevailing market environment.

 

We have also set ourselves the goals of delivering sustainability solutions to our clients, ensuring that we and our suppliers uphold the highest standards in equality, diversity, human rights and ethics, playing an active role in the communities in which we operate and placing sustainability at the heart of our business.

 

Risk

Potential impact

Mitigation and monitoring

Major contracts

As we focus on large-volume relationships with certain major clients for a significant part of our revenue, termination of one or more of the associated contracts would be likely to reduce our revenue and profit. In addition, the management of such contracts entails potential risks including mis-pricing, inaccurate specification, failure to appreciate risks being taken on, poor control of costs or of service delivery, sub-contractor insolvency and failure to recover, in part or in full, payments due for work undertaken.

 

In PFI/PPP contracts, which can last for periods of around 30 years, there may be increases in costs, including wage inflation, beyond those anticipated.

Among our mitigation strategies are targeting work within, or complementary to, our existing competencies, the fostering of long-term relationships with clients, operating an authority matrix for the approval of large bids, monthly management reporting with key performance indicators at contract and business level, the use of monthly cost-value reconciliation, supply chain management and ensuring that periodic benchmarking and/or market testing are included in long-term contracts PFI/PPP contracts.

 

 

Risk

Potential impact

Mitigation and monitoring

Operating system

We enjoy demonstrable success in working with third parties both through joint ventures and associated companies in the UK and abroad.  This success results in a material proportion of our profits and cash flow being generated from businesses in which we do not have overall control. Any weakening of our strong relationships with these business partners could have an effect on our profits and cash flow.

 

We have a proven track record of developing and re-enforcing such relationships in a mutually beneficial way over a long period of time and our experience of this places us well to preserve existing relationships and create new ones as part of our business model. The measures taken to limit risk in this area include: board representation, shareholders' agreements, management secondments, local borrowings and rights of audit in addition to investing time in personal relationships.

 



 

 

Risk

Potential impact

Mitigation and monitoring

Key people

The success of our business is dependent on recruiting, retaining, developing, motivating and communicating with sufficient numbers of appropriately skilled, competent people of integrity at all levels of the organisation. This is particularly relevant during periods of rapid growth and expansion into new markets.

We have a Group-wide leadership programme designed to support the strategic aims of the Company. We have various incentive schemes and run a broad range of training courses for people at all stages in their careers. With active human resources management and Investors in People accreditation in many parts of the Group, we manage our people professionally and encourage them to develop and fulfil their maximum potential with the Group.

 

We have also set ourselves the goals of inspiring the next generation of professionals, measuring and recognising the value of people, society and the environment.

 

Risk

Potential impact

Mitigation and monitoring

Health and safety regime

The nature of the businesses conducted by the Group involves exposure to health and safety risks for both employees and third parties. Management of these risks is critical to the success of the business and is implemented through the adoption and maintenance of rigorous operational and occupational health and safety procedures.

A commitment to safety forms part of our mission statement and the subject leads every Board meeting both at Group and divisional level. Each member of the Executive Board undertakes dedicated visits to look at health and safety measures in place at our operational sites and we have ongoing campaigns across the Group emphasising its importance.

 

Risk

Potential impact

Mitigation and monitoring

Financial risks

We are subject to certain financial risks which are discussed in the Financial Review on pages 17 to 23.

 

In particular, we carry out major projects which from time to time require substantial amounts of cash to finance working capital, capital expenditure and investment in PFI projects. Failure to manage working capital appropriately could result in us being unable to meet our trading requirements and ultimately to defaulting on our banking covenants.

We have policies in place to monitor the effective management of working capital, including the production of daily balances, weekly cash reports and forecasts together with monthly management reporting.

 

We have in place committed financing with long maturity dates.

 

 

 

Risk

Potential impact

Mitigation and monitoring

Damage to reputation

Issues arising within contracts, from the management of our businesses or from the behaviour of our employees at all levels can have broader repercussions on the Group's reputation than simply their direct impact and may have an adverse impact upon the Group's "licence to operate".  This risk increases as we expand the range of front-line services being delivered.  

 

Control procedures and checks governing the operation of our contracts and of our businesses, supported by business continuity plans are in place. With the expansion of our front-line services there is even more emphasis placed upon having proper procedures in place to monitor performance, escalate issues and monitor our response.

 

We have a clear set of core values which we strive to embed within our organisation and set ourselves the goals of creating a culture of innovation in sustainability and offering transparency to clients on public-sector projects.

 

 

 

Risk

Potential impact

Mitigation and monitoring

Environmental Change

Adverse weather events, travel disruption, long-term climate shifts, water stress and sea-level rises which could have uncertain implications for our business and for many of our clients, who increasingly require us to help them address the impact of these issues on their activities.

We have in place business continuity plans for our own businesses and work closely with our clients in respect of their business continuity arrangements.

 

We have set ourselves the goals of being responsible for zero net loss in biodiversity, procuring products and services beyond best practice in environmental and social standards, becoming a water positive business, halving our absolute carbon emissions and those from our supply chain, helping our clients to increase their energy security, caring for the natural resources we use (including treating waste as a resource) and building resilience to environmental change in everything we do.

 

The Group continues to have no material exposure to currency risks. Whilst it does not trade in commodities, the Group does operate in countries where their economies depend upon commodity extraction and are therefore subject to volatility in commodity prices. The Group's principal businesses operate in countries which we regard as politically stable.

 



 

FINANCIAL REVIEW

 

Summary

 

Financial highlights of 2014 included:

 

·      A strong trading performance with Revenue up 33 per cent (10 per cent organic) and Total Operating Profit up 35 per cent (9 per cent organic)

·      Increase in Headline Earnings Per Share of 23 per cent

·      Investment of £271.4 million in acquisitions to broaden our UK FM footprint (Initial Facilities) and enhance our skills and Welfare to Work expertise (esg).

·      Further strengthening the balance sheet for the long term by:

·      Enhancing our debt facilities with a 10 year $350 million US private placement and extension of our existing bank facilities to 2019.

·      Completing a pension buy-in transaction for c35 per cent of the liabilities of the Interserve Pension Scheme.

·      Further investment for growth in capex and working capital.

 

Financial performance

 

Revenue and operating profit

 

Consolidated revenues increased by 33 per cent compared with 2013, and total gross revenues (including our share of joint ventures and associates) by 28 per cent.

 

UK Support Services, boosted by the March acquisition of Initial Facilities, delivered a strong performance with a 40 per cent increase in revenues (3 per cent organic). The International Support Services division revenues also increased sharply to £157.2 million as we continued the integration of our regional services offering and benefitted from a full year contribution of Adyard. The upturn in UK Construction market activity levels and a strong performance by our Paragon fit-out business helped drive an increase in revenues of 21 per cent (18 per cent organic). Middle East construction markets remained resilient with 1% revenue growth on a constant currency basis. Equipment Services benefitted from further investment and generally improving markets to show revenue growth of 15 per cent.

 

Full-year operating margin of 4.0 per cent (2013: 4.0 per cent) reflects a number of differing trends within divisions. Support Services UK delivered an operating margin of 4.8 per cent, a slight improvement on the 2013 outturn of 4.7 per cent. International Support Services made further progress with margins rising to 4.8 per cent (2013: 4.4 per cent). UK Construction margins fell to 1.6 per cent (2013: 1.8 per cent), remaining within our guided range but reflecting the supply chain pressures currently present within the market. Margins in our International Construction operations held up well in difficult markets, declining slightly to 4.7 per cent (2013: 5.1 per cent). Market conditions and tender opportunities are generally improved from 2013 but markets remain tight. Equipment Services continued to show the benefits of a high operational gearing as margins rose further to 13.6 per cent (2013: 11.9 per cent).

 

Average and closing exchange rates used in the preparation of these results were:

 


Average rates

Closing rates


2014

2013

2014

2013

US dollar

1.65

1.57

1.55

1.65

Australian dollar

1.83

1.63

1.90

1.86

Qatar Rial

5.99

5.72

5.65

6.00

Omani Rial

0.63

0.60

0.60

0.63

UAE Dirham

6.04

5.76

5.70

6.06

 

At 2013 average rates the Group would have generated an additional £2.3m of Total Operating Profit.

 



 

Investment revenue and finance costs

 

The net interest charge for the year of £11.0 million can be analysed as follows:

 

£million

2014

2013




Net interest on Group debt

(12.1)

(4.8)




Interest receivable from PFI sub-debt

0.8

0.6




Pension finance credit / (charge)

0.3

(1.4)




Group net interest charge

(11.0)

(5.6)




Driven predominantly by the acquisition of Initial, the average net debt for the year was £240.8 million (2013: £14.9 million) and this increase can be seen in the higher net interest charge on Group debt. Allowing for the timing of the payment of the consideration for Initial, there was no material difference between average and year end net debt levels.

 

Interest receivable on sub-debt increased slightly to £0.8 million (2013: £0.6 million) reflecting the return on our continuing PFI investments.

 

The improved pension deficit position resulted in a pension finance credit of £0.3 million (2013: £1.4 million charge).

 

Taxation

 

The tax charge for the year of £12.0 million represents an effective rate of 19.4 per cent on total Group profit before taxation, broadly unchanged from 2013. The factors underlying this effective rate are shown in the table below.

 

£million

2014

2013


Profit

Tax

Rate

Profit

Tax

Rate








Group companies

89.7

(18.7)

20.8%

63.9

(15.0)

23.5%

Joint ventures and associates *

16.5

-

0.0%

17.2

-

0.0%








Headline profit before tax

106.2

(18.7)

17.6%

81.1

(15.0)

18.5%








Amortisation of intangible assets

(24.4)

4.5

18.4%

(8.9)

1.5

16.9%

Other exceptional items

(19.9)

2.2

11.1%

(4.1)

0.4

9.8%








Effective tax charge and rate

61.9

(12.0)

19.4%

68.1

(13.1)

19.2%

 

* The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.

 

The reduction in the Group companies' rate is predominantly driven by the 2 per cent fall in the UK corporation tax rate during 2014, together with an increased proportion of overseas profits arising in lower tax jurisdictions.

 

Profit before tax of £61.9 million (2013: £68.1 million) is lower than the previous year due to increased exceptional costs and amortisation, both principally driven by the acquisition of Initial Facilities.

 

Dividend

 

The directors recommend a final dividend for the year of 15.5 pence, to bring the total for the year to 23.0 pence, an increase of 7.0 per cent over last year. This dividend is covered 2.6x times by Headline earnings per share.

 

 



Net debt and cash flow

 

Net debt has increased to £268.9 million (2013: £38.6 million), reflecting our continuing investments in acquisitions (2014: £168.5 million net of share issue), net capital expenditure (2014: £54.3 million) and working capital (2014: £53.3 million).

 

£million


2014

2013

Operating profit before exceptional items and amortisation of intangible assets


100.6

69.4

Other exceptional items


-

(2.1)

Depreciation and amortisation


39.3

33.8

Net capital expenditure


(54.3)

(33.7)

Gain on disposal of property, plant and equipment


(12.2)

(13.4)

Other


3.4

7.6

Working capital movement


(53.3)

(19.7)

Operating cash flow


23.5

41.9

Pension contributions in excess of the income statement charge


(18.2)

(18.5)

Dividends received from associates and joint ventures


17.8

13.7

Tax paid


(10.2)

(5.7)

Other


(10.5)

(5.3)

Free cash flow


2.4

26.1

Dividends paid


(34.4)

(29.1)

Investments (net)


(10.1)

(10.6)

Disposals


-

(0.2)

Acquisitions  (net)


(243.7)

(49.1)

Share issues


75.2

3.3

Other non-recurring


(19.7)

(4.8)

Increase in net debt


(230.3)

(64.4)

 

The operating cash flow of £23.5 million (2013: £41.9 million) reflects the increased level of capital expenditure and an increase in working capital levels, both of which were anticipated at the start of the year and seen in our half year results. Our rolling 3 year gross operating cash conversion is 61.7 per cent (2013 : 92.1 per cent). This compares to our target of 100% and is impacted by a period of investment in growth.

 

The net working capital outflow of £53.3 million (2013: £19.7m outflow) reflects both the growth of the business, particularly in Equipment Services, and continued pressures on payment terms, particularly in UK Construction.

 

Capital expenditure increased significantly to £54.3 million (2013: £33.7 million). This reflects investment in the Equipment Services fleet to enable us benefit from improving markets, and further investment in our back office and client facing assets in UK Support Services.

 

Despite tight trading conditions in the Middle East our remitted dividends of £17.8 million were in excess of the profits earned (£15.1 million).

 

Tax paid of £10.1 million (2013: £5.7 million) remains lower than the Consolidated Income Statement charge incurred by the Group, principally driven by tax deductions for pension deficit payments and timing differences.

 

Investments outflow in the year of £10.1 million (2013: £10.6 million) reflects our increasing investments in property development schemes, principally Haymarket.

 

Acquisitions net outflow of £243.7 million in 2014 represents the net consideration for the acquisitions of Initial Facilities and esg.

 

Other non recurring costs of £19.7 million mostly relate to the exceptional charges for the acquisition and integration of Initial (£18.4 million).

 

Acquisitions

 

On 18 March 2014 we acquired 100% of the facilities services business ("Initial Facilities") of Rentokil Initial Plc, for a cash consideration of £245.7 million. The acquisition strengthens our Support Services offering, allowing the provision of a significantly enhanced service offering. The enlarged business offers a full range of services across all contract sizes, evenly split between  public- and private-sector customers. The post-acquisition review of fair values identified acquired net assets of £105.4 million including £87.8 million of intangible assets, predominantly representing customer relationships. These acquired assets will be amortised over periods up to 5 years. £140.3 million has been recognised as goodwill.

 

On 5 December 2014 we acquired esg, a training and skills business. The acquisition boosts our skills offering in the UK and Middle East. Total cash consideration was £25.7 million. The review of fair values identified acquired net assets of £13.8 million including £19.1 million of acquired intangible assets, representing customer relationships. These acquired assets will be amortised over periods up to 5 years. The balance of £11.9 million has been recognised as goodwill.

 

We maintain a selective approach to reviewing potential acquisition opportunities, seeking out strategically attractive assets in growth markets. With our expanded debt capacity and facilities, we remain able to take advantage of further appropriate acquisition opportunities as they are identified.

 

Pensions

 

At 31 December 2014 the Group pension deficit under IAS 19, net of deferred tax, has decreased slightly to £3.8 million (2013: £5.9 million): 

 

£million

2014

2013




Defined benefit obligation

924.9

826.9

Aviva buy in asset

(360.7)

-

Other scheme assets

(559.4)

(819.2)

Total deficit

4.8

7.7

Deferred tax thereon

(1.0)

(1.8)

Net deficit

3.8

5.9

 

On 1 August 2014 we made further substantive progress with our ongoing plan to reduce risk in our pension scheme by entering into a buy-in transaction with Aviva Plc. This buy-in contract protects the Group from risks associated with approximately 35 per cent of the Scheme's defined benefit liabilities.



 

This de-risking has proved its worth in period by allowing us to reduce the risk of asset underperformance. If the transaction had not been entered into and the assets instead invested in the FTSE100 the net deficit would have been approx. £35 million higher at year end.

 

 

 

Defined benefit liabilities and funding

 

The Group's principal pension scheme is the Interserve Pension Scheme, comprising approximately 92 per cent of the total defined benefit obligations of the Group.

 

The most recent completed triennial actuarial valuation of the Scheme was as at 31 December 2011 which set the annual recovery payments at £12 million per annum, indexed each year, until 2019. A new triennial valuation process, based on the position as at 31 December 2014, has now commenced.

 

Investment risks

 

Scheme assets are invested in a mixed portfolio that consists of a balance of performance-seeking assets (such as equities) and lower-risk assets (such as gilts and corporate bonds).  As at 31 December 2014, 48 per cent of the Scheme assets were invested in performance-seeking assets (2013: 49 per cent).

 

The agreed investment objectives of the Scheme are:

 

§ to secure, with a high degree of certainty, liabilities in respect of all defined benefit members; and

§ to adopt a long-term strategy which aims to capture outperformance from equities and move gradually into bonds to reflect the increasing maturity of the defined benefit membership with a view to reducing the volatility of investment returns.

 

The majority of equities held by the Scheme are in international blue chip entities.  The aim is to hold a globally diversified portfolio of equities, with an ultimate target of 50 per cent of equities being held in UK and 50 per cent in US, European and Asia Pacific equities.

 



 

IAS 19 assumptions and sensitivities

 

Assumptions adopted in assessment of the income statement charge and funding position under IAS 19 are reviewed by our actuarial advisers, Lane Clark & Peacock LLP.

 

The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:

 


Assumption adopted


Sensitivity

Indicative change in liabilities


2014

2013





Key financial assumptions







            Discount rate

3.6%

4.5%


+/-  0.5%

-/+ 6%

-/+ £55m

            RPI / CPI

3.1% / 2.1%

3.4% / 2.4%


+/-  0.5%

+/- 8%

+/- £73m








Life expectancy (years)







            Current pensioners 1







                        Men

87.5

87.4

ü

+ 1 year

+3%

+£30m

                        Women

89.5

89.4

ï

            Future pensioners 2



ý

                        Men

89.3

89.2

ï

                        Women

91.0

90.9

þ

 

1     Life expectancy of a current pensioner aged 65.

2     Life expectancy at age 65 for an employee currently aged 45.

 

Treasury risk management

 

We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks.  The Treasury function is not a profit centre and it does not enter into speculative transactions.  It aims to reduce financial risk by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board. 

 

Liquidity risk

 

We seek to maintain sufficient facilities to ensure access to funding for our current and anticipated future requirements, determined from budgets and medium term plans.

 

Following the acquisition of Initial Facilities, and the resulting step change in group debt, we have put in place a $350 million US Private placement. These loan instruments have a weighted average maturity of mid 2024 and are fully hedged into a fixed interest rate sterling amount. Additionally we have access to committed revolving bank facilities totalling £250 million, which were extended during the year until February 2019.

 

Our aggregate finance facilities therefore stand at c£450 million with £250 million of this available until February 2019 and the remainder available on average until mid 2024.

 

Market price risk

 

The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that adequate interest cover is maintained, in line with Board approved targets and banking covenants.

 

Our borrowings under the US private placement are denominated in US dollars and subject to fixed interest rates. These are fully hedged back into a sterling fixed rate with FX swaps lasting for the duration of the loan period.

 

Our other borrowings are principally denominated in sterling and mostly subject to floating rates of interest linked to LIBOR.  We have in place interest rate caps and swaps which limit interest rate risk. The weighted average duration to maturity of these instruments is approximately 7 months.

 

Foreign currency risk

 

Transactional currency translation

The revenues and costs of our trading entities are typically denominated in their functional currency.  Where a material trade is transacted in a non-functional currency, the entity is required to take out instruments through the centralised Treasury function to offset the currency exposure. The instruments used will normally be forward currency contracts.  The impact of retranslating any entity's non-functional currency balances into its functional currency was not material.

 

Consolidation currency translation

We do not hedge the impact of translating overseas entities trading results or net assets into the consolidation currency.

 

In preparing the consolidated financial statements, profits and losses from overseas activities are translated at the average exchange rates applying during the year. The average rates used in this process are disclosed on page 17.

 

The balance sheets of our overseas entities are translated at the year-end exchange rates.  The impact of changes in the year-end exchange rates, compared to the rates used in preparing the 2013 consolidated financial statements, has led to an increase in consolidated net assets of £12.8 million (2013: £13.0 million decrease).

 

Going concern

 

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report and Governance sections. Our financial position, cash flows, liquidity position and borrowing facilities and details of financial risk management are described in the Financial review.

 

The majority of our revenue is derived from long-term contracts, which provides a strong future workload and good forward revenue visibility. We have access to committed debt facilities totalling c£450 million until a range of dates that extend beyond at least February 2019. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

 

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 



 

Consolidated income statement

For the year ended 31 December 2014

 

 



Year  ended 31 December 2014

Year  ended 31 December 2013



Before exceptional items and amortisation of acquired intangible assets

Exceptional items and amortisation of acquired intangible assets

Total

Before exceptional items and amortisation of acquired intangible assets

Exceptional items and amortisation of acquired intangible assets

Total


Notes

£million

£million

£million

£million

£million

£million

Continuing operations
















Revenue including share of associates and joint ventures


3,305.3

-

3,305.3

2,581.9

-

2,581.9

Less: Share of associates and joint ventures


(392.3)

-

(392.3)

(389.3)

-

(389.3)

3

2,913.0

-

2,913.0

2,192.6

-

2,192.6

Cost of sales


(2,583.7)

-

(2,583.7)

(1,927.0)

-

(1,927.0)


329.3

-

329.3

265.6

-

265.6









Administration expenses


(228.7)

-

(228.7)

(196.2)

-

(196.2)

Amortisation of acquired intangible assets


-

(24.4)

(24.4)

-

(8.8)

(8.8)

Other exceptional items

4

-

(19.8)

(19.8)

-

(2.6)

(2.6)

Total administration expenses


(228.7)

(44.2)

(272.9)

(196.2)

(11.4)

(207.6)









Loss on disposal of property and investments

4

-

-

-

-

(1.5)

(1.5)


100.6

(44.2)

56.4

69.4

(12.9)

56.5









Share of result


16.6

-

16.6

17.3

-

17.3

Amortisation of acquired intangible assets


-

(0.1)

(0.1)

-

(0.1)

(0.1)

Share of result of associates and joint ventures


16.6

(0.1)

16.5

17.3

(0.1)

17.2


117.2

(44.3)

72.9

86.7

(13.0)

73.7









Investment revenue

5

5.0

-

5.0

3.6

-

3.6

Finance costs

6

(16.0)

-

(16.0)

(9.2)

-

(9.2)


106.2

(44.3)

61.9

81.1

(13.0)

68.1









Tax (charge)/credit

7

(18.7)

6.7

(12.0)

(15.0)

1.9

(13.1)

Profit for the year


87.5

(37.6)

49.9

66.1

(11.1)

55.0








Attributable to:








Equity holders of the parent


83.0

(37.6)

45.4

61.3

(11.1)

50.2

Non - controlling interests


4.5

-

4.5

4.8

-

4.8



87.5

(37.6)

49.9

66.1

(11.1)

55.0








Earnings per share

9















Basic




32.2p



39.1p

Diluted




31.7p



38.2p

 



Consolidated statement of comprehensive income

For the year ended 31 December 2014

 



Notes

Year ended 31

December 2014

Year ended 31

December 2013




£million

£million

Profit for the year



49.9

55.0






Items that will not be reclassified subsequently to profit or loss:




Actuarial gains/(losses) on defined benefit pension schemes


(15.7)

21.3

Deferred tax on above items taken directly to equity

9

3.1

(7.3)



(12.6)

14.0





Items that may be reclassified subsequently to profit or loss:




Exchange differences on translation of foreign operations


12.8

(13.0)

Gains on cash flow hedging instruments (excluding joint ventures)


5.6

0.8

Deferred tax on above items taken directly to equity

9

(2.0)

1.3

Net impact of items relating to joint-venture entities


11.6

2.3



28.0

(8.6)

Other comprehensive income net of tax


15.4

5.4






Total comprehensive income



65.3

60.4






Attributable to:





Equity holders of the parent



60.7

55.7

Non-controlling interests



4.6

4.7




65.3

60.4

 



Consolidated balance sheet

At 31 December 2014

 



31 December 2014

31 December 2013

31 December 2012


Notes

£million

£million

£million

Non-current assets





Goodwill


401.4

248.0

226.3

Other intangible assets


123.1

38.6

39.5

Property, plant and equipment


195.3

155.9

137.8

Interests in joint-venture entities


42.7

20.6

7.6

Interests in associated undertakings


77.2

73.9

76.6

Deferred tax asset


-

21.0

33.5



839.7

558.0

521.3






Current assets





Assets classified as held for sale


-

-

51.2

Inventories


48.6

30.7

24.6

Trade and other receivables


679.4

486.1

432.0

Cash and deposits


82.1

79.7

76.8



810.1

596.5

584.6






Total assets


1,649.8

1,154.5

1,105.9






Current liabilities





Borrowings


(5.5)

(27.4)

(19.8)

Trade and other payables


(748.7)

(592.3)

(555.5)

Current tax liabilities


(1.0)

(5.3)

(4.2)

Short-term provisions


(29.2)

(18.1)

(24.2)



(784.4)

(643.1)

(603.7)






Net current assets/(liabilities)


25.7

(46.6)

(19.1)






Non-current liabilities





Bank loans


(344.7)

(90.0)

(30.0)

Trade and other payables


(14.8)

(13.5)

(13.2)

Long-term provisions


(19.5)

(29.9)

(27.1)

Retirement benefit obligation

11

(4.8)

(7.7)

(101.1)

Deferred tax liabilities


(2.0)

-

-



(385.8)

(141.1)

(171.4)






Total liabilities


(1,170.2)

(784.2)

(775.1)






Net assets


479.6

370.3

330.8






Equity





Share capital

12

14.4

12.9

12.7

Share premium account


115.3

115.0

113.1

Capital redemption reserve


0.1

0.1

0.1

Merger reserve


121.4

49.0

49.0

Hedging and revaluation reserve


19.5

2.4

(0.7)

Translation reserve


35.0

22.3

35.2

Investment in own shares


(3.0)

(2.9)

(1.4)

Retained earnings


165.3

161.6

116.5

Equity attributable to equity holders of the parent


468.0

360.4

324.5

Non-controlling interests


11.6

9.9

6.3

Total equity


479.6

370.3

330.8

 


Consolidated statement of changes in equity


Share capital

Share premium

Capital redemption reserve

Merger reserve (1)

Hedging and revaluation reserve (2)

Translation reserve

Investment in own shares (3)

Retained earnings

Attributable to equity holders of the parent

Non-

controlling interests

Total


£million

£million

£million

£million

£million

£million

£million

£million

£million

£million

£million

Balance at 1 January 2013

12.7

113.1

0.1

49.0

(0.7)

35.2

(1.4)

116.5

324.5

6.3

330.8

Profit for the year

-

-

-

-

-

-

-

50.2

50.2

4.8

55.0

Other comprehensive income

-

-

-

-

3.1

(12.9)

-

15.3

5.5

(0.1)

5.4

Total comprehensive income

-

-

-

-

3.1

(12.9)

-

65.5

55.7

4.7

60.4

Dividends paid

-

-

-

-

-

-

-

(26.2)

(26.2)

(2.9)

(29.1)

Shares issued

0.2

1.9

-

-

-

-

-

-

2.1

-

2.1

Acquisition

-

-

-

-

-

-

-

-

-

1.8

1.8

Purchase of Company shares

-

-

-

-

-

-

(2.7)

-

(2.7)

-

(2.7)

Company shares used to settle share-based payment obligations

-

-

-

-

-

-

1.2

(0.5)

0.7

-

0.7

Share-based payments

-

-

-

-

-

-

-

6.3

6.3

-

6.3

Transactions with owners

0.2

1.9

-

-

-

-

(1.5)

(20.4)

(19.8)

(1.1)

(20.9)

Balance at 31 December 2013

12.9

115.0

0.1

49.0

2.4

22.3

(2.9)

161.6

360.4

9.9

370.3

Profit for the year

-

-

-

-

-

-

-

45.4

45.4

4.5

49.9

Other comprehensive income

-

-

-

-

17.1

12.7

-

(14.5)

15.3

0.1

15.4

Total comprehensive income

-

-

-

-

17.1

12.7

-

30.9

60.7

4.6

65.3

Dividends paid

-

-

-

-

-

-

-

(31.5)

(31.5)

(2.9)

(34.4)

Shares issued

1.5

0.3

-

72.4

-

-

-

-

74.2

-

74.2

Acquisition

-

-

-

-

-

-

-

-

-

-

-

Purchase of Company shares

-

-

-

-

-

-

(1.3)

-

(1.3)

-

(1.3)

Company shares used to settle share-based payment obligations

-

-

-

-

-

-

1.2

(0.1)

1.1

-

1.1

Share-based payments

-

-

-

-

-

-

-

4.4

4.4

-

4.4

Transactions with owners

1.5

0.3

-

72.4

-

-

(0.1)

(27.2)

46.9

(2.9)

44.0

Balance at 31 December 2014

14.4

115.3

0.1

121.4

19.5

35.0

(3.0)

165.3

468.0

11.6

479.6













On 5 March 2014, 12,897,771 ordinary shares were issued and placed at a price of 580p per share. The net proceeds after costs were £73.7 million. The placing utilised a structure, whereby a special purpose entity issued redeemable preference shares in consideration for the receipt of the cash proceeds (net of issue costs) arising from the placing. The Company's ordinary shares were issued as consideration for the transfer to it of the shares, which it did not already own, in the special purpose entity. As a result, in the opinion of the Directors, the placing qualified for merger relief under section 612 of Companies Act 2006 so that the £72.4 million excess of the value of the acquired shares in the special purpose entity over the nominal value of the ordinary shares issued by the Company was credited to the Company's Merger reserve.

 

(1) The £121.4 million merger reserve represents £16.4 million premium on the shares issued on the acquisition of Robert M. Douglas Holdings Plc in 1991, £32.6 million premium on the shares issued on the acquisition of MacLellan Group Plc in 2006 and £72.4 million premium on the shares placed to partially fund the acquisition of Initial Facilities during the period.

 

(2) The hedging and revaluation reserve includes £27.6 million relating to the revaluation of available for sale financial assets within the joint ventures (2013: £6.5 million).

 

(3) The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the How Group, Bandt and Interserve Employee Benefit Trusts. The market value of these shares at 31 December 2014 was £4.8 million (2013: £5.3 million).


Consolidated cash flow statement

For the year ended 31 December 2014



Year ended 31 December 2014

Year ended 31 December 2013


Notes

£million

£million

Operating activities




Total operating profit


72.9

73.7

Adjustments for:




Amortisation of acquired intangible assets


24.4

8.8

Amortisation of capitalised software development


3.7

1.9

Depreciation of property, plant and equipment


35.6

31.9

(Profit)/loss on disposal of property and investments


-

1.5

Other non-cash exceptional items


1.4

0.5

Pension payments in excess of the income statement charge


(18.2)

(18.5)

Share of results of associates and joint ventures


(16.5)

(17.2)

Charge relating to share-based payments


3.4

5.5

Gain on disposal of plant and equipment - hire fleet


(12.1)

(13.4)

Gain on disposal of plant and equipment - other


(0.1)

-

Operating cash flows before movements in working capital


94.5

74.7

Increase in inventories


(13.4)

(4.5)

Increase in receivables


(73.6)

(14.6)

Increase/(decrease) in payables


33.7

(0.6)

Cash generated by operations before changes in hire fleet


41.2

55.0

Capital expenditure - hire fleet


(47.0)

(29.8)

Proceeds on disposal of plant and equipment - hire fleet


16.7

18.0

Cash generated by operations


10.9

43.2

Taxes paid


(10.2)

(5.7)

Net cash from operating activities


0.7

37.5





Investing activities




Interest received


4.7

3.5

Dividends received from associates and joint ventures


17.8

13.7

Proceeds on disposal of plant and equipment - non-hire fleet


0.9

0.2

Capital expenditure - non-hire fleet


(24.9)

(22.1)

Purchase of business


(243.7)

(49.1)

Investment in joint-venture entities


(10.4)

(10.6)

Costs of disposal of investments


-

(0.2)

Receipt of loan repayment - Investments


0.3

-

Net cash used in investing activities


(255.3)

(64.6)





Financing activities




Interest paid


(16.0)

(7.8)

Dividends paid to equity shareholders

8

(31.5)

(26.2)

Dividends paid to minority shareholders


(2.9)

(2.9)

Proceeds from issue of shares and exercise of share options


75.2

3.3

Purchase of own shares 


(1.3)

(2.7)

Proceeds from US private placement


207.2

-

Increase in bank loans


47.5

60.0

Movement in obligations under finance leases


(0.1)

(0.3)

Net cash from financing activities


278.1

23.4





Net increase/(decrease) in cash and cash equivalents


23.5

(3.7)

Cash and cash equivalents at beginning of period


52.3

57.0

Effect of foreign exchange rate changes


0.8

(1.0)

Cash and cash equivalents at end of period


76.6

52.3





Cash and cash equivalents comprise




Cash and deposits


82.1

79.7

Bank overdrafts


(5.5)

(27.4)



76.6

52.3





Reconciliation of net cash flow to movement in net debt




Net increase/(decrease) in cash and cash equivalents


23.5

(3.7)

Proceeds from US private placement


(207.2)

-

Increase in bank loans


(47.5)

(60.0)

Movement in obligations under finance leases


0.1

0.3





Change in net debt resulting from cash flows


(231.1)

(63.4)

Effect of foreign exchange rate changes


0.8

(1.0)

Movement in net debt during the period


(230.3)

(64.4)

Net cash/(debt) - opening


(38.6)

25.8

Net cash/(debt) - closing


(268.9)

(38.6)

 

Notes to the Consolidated Financial Statements

For the year ended 31 December 2014

 

1.         General information

 

Interserve Plc (the Company) is a company incorporated in the United Kingdom. The financial information in this announcement, which was approved by the Board of Directors on 26 February 2015, does not constitute the Company's statutory financial statements for the years ended 31 December 2014 or 2013 but is derived from these accounts.

 

Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the Company's annual general meeting. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under section 498(2), (3) or (4) of the Companies Act 2006. The Company expects to publish its statutory accounts that comply by the end of March 2015.

 

2.         Accounting policies

 

These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.

 

The annual financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. 

 

The accounting policies and methods of computation followed in these financial statements are consistent with those as published in the Group's Annual Report and Financial Statements for the year ended 31 December 2013 which are available on the Company's website at www.interserve.com. In addition, the accounting policies used are consistent with those that the directors have used in the Annual Report and Financial Statements for the year ending 31 December 2014.

 

3.         Business and geographical segments

 

The Group is organised into four operating divisions, as set out below. Information reported to the Executive Board for the purposes of resource allocation and assessment of segment performance is based on the products and services provided.

·    Support Services: provision of outsourced support services to public- and private-sector clients, both in the UK and internationally.

·    Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and internationally.

·    Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.

·    Investments: transaction structuring, and management of, the Group's project finance activities. The Investments' segmental figures represent the Group's share of the associated special purpose companies.


Costs of central services, including those relating to managing our PFI investments and central bidding activities, are shown in "Group Services".

 

 

 

 

 

 

Notes to the Consolidated Financial Statements

For the year ended 31 December 2014

 

Business segments

 


Revenue including share of associates and joint ventures

Consolidated revenue

Result


2014

2013

2014

2013

2014

2013


£million

£million

£million

£million

£million

£million








Support Services - UK

1,786.0

1,292.5

1,679.9

1,196.6

81.4

56.0

Support Services - International

157.2

100.5

117.5

57.5

7.4

4.1

Support Services - sub-total

1,943.2

1,393.0

1,797.4

1,254.1

88.8

60.1








Construction - UK

970.7

802.2

970.7

802.2

15.4

14.7

Construction - International

207.9

215.9

-

-

10.8

13.1

Construction - sub-total

1,178.6

1,018.1

970.7

802.2

26.2

27.8








Equipment Services

195.5

169.6

195.5

169.6

26.6

20.1

Investments

38.6

34.5

-

-

0.8

0.8

Group Services

8.1

7.1

8.1

7.1

(25.2)

(22.1)

Inter-segment elimination

(58.7)

(40.4)

(58.7)

(40.4)

-

-


3,305.3

2,581.9

2,913.0

2,192.6

117.2

86.7

Amortisation of acquired intangible assets





(24.5)

(8.9)

Exceptional items (note 4)





(19.8)

(4.1)

Total operating profit





72.9

73.7

Investment revenue





5.0

3.6

Finance costs





(16.0)

(9.2)

Profit before tax





61.9

68.1

Tax





(12.0)

(13.1)

Profit for the year





49.9

55.0

 

 

 


Segment assets

Segment liabilities

Net assets/ (liabilities)


2014

2013

2014

2013

2014

2013


£million

£million

£million

£million

£million

£million








Support Services - UK

392.6

252.7

(339.9)

(242.2)

52.7

10.5

Support Services - International

89.2

71.6

(26.6)

(20.7)

62.6

50.9

Support Services - sub-total

481.8

324.3

(366.5)

(262.9)

115.3

61.4








Construction - UK

214.7

172.0

(321.9)

(302.5)

(107.2)

(130.5)

Construction - International

50.8

48.7

-

-

50.8

48.7

Construction - sub-total

265.5

220.7

(321.9)

(302.5)

(56.4)

(81.8)








Equipment Services

237.4

188.9

(47.3)

(37.2)

190.1

151.7

Investments

42.7

20.6

-

-

42.7

20.6


1,027.4

754.5

(735.7)

(602.6)

291.7

151.9

Group Services, goodwill and acquired intangible assets

537.2

316.6

(92.0)

(69.5)

445.2

247.1


1,564.6

1,071.1

(827.7)

(672.1)

736.9

399.0








Net cash/(debt)





(268.9)

(38.6)








Net assets (excluding non-controlling interests)





468.0

360.4

 



Notes to the Consolidated Financial Statements - continued

For year ended 31 December 2014

 


Depreciation and amortisation

Additions to property, plant and equipment and intangible assets

 


2014

2013

2014

2013


£million

£million

£million

£million






Support Services - UK

13.4

10.6

21.9

14.0

Support Services - International

3.0

1.1

3.8

6.7

Support Services

16.4

11.7

25.7

20.7






Construction - UK

2.3

2.2

2.1

1.6

Construction - International

-

0.1

-

-

Construction

2.3

2.3

2.1

1.6






Equipment Services

20.0

19.4

42.5

28.4

Investments

-

-

-

-


38.7

33.4

70.3

50.7

Group Services

25.1

9.3

1.6

1.6


63.8

42.7

71.9

52.3

 



Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

Geographical segments

 

The Support Services and Construction divisions are located in the United Kingdom and the Middle East. Equipment Services has operations in all of the geographic segments listed below. Investments is predominantly based in the United Kingdom.

 

The table below provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services.

 


Revenue including




share of associates

Consolidated

Total operating


and joint ventures

Revenue

profit









2014

2013

2014

2013

2014

2013


£million

£million

£million

£million

£million

£million








United Kingdom

2,779.6

2,145.4

2,634.9

2,015.0

99.6

73.5

Rest of Europe

42.5

8.1

42.5

8.1

(0.3)

(2.7)

Middle East and Africa

454.1

381.4

206.5

122.5

32.1

25.5

Australasia

31.4

40.0

31.4

40.0

5.7

10.8

Far East

21.3

15.8

21.3

15.8

5.8

2.8

Americas

27.0

24.5

27.0

24.5

(0.5)

(1.1)

Group Services

8.1

7.1

8.1

7.1

(25.2)

(22.1)

Inter-segment elimination

(58.7)

(40.4)

(58.7)

(40.4)

-

-


3,305.3

2,581.9

2,913.0

2,192.6

117.2

86.7

Amortisation of acquired intangible assets





(24.5)

(8.9)

Exceptional items (note 4)





(19.8)

(4.1)






72.9

73.7

 

 


Non-current assets


2014

2013


£million

£million




United Kingdom

103.2

62.7

Rest of Europe

4.0

4.7

Middle East and Africa

153.2

134.9

Australasia

15.7

13.6

Far East

12.1

9.5

Americas

24.5

20.7

Group Services, goodwill and acquired intangible assets

527.0

290.9


839.7

Deferred tax asset

-

21.0


839.7

558.0

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

4.      Exceptional items

 


2014

2013


£million

£million




Agreed valuation of transfer to pension scheme

-

55.0

Transaction costs

-

(0.2)

Disposals

-

(51.2)

Profit on disposal of PFI assets

-

3.6

Write-down of investment in Indian associate company SSPDL Interserve Private Limited

-

(5.1)

Loss on disposal of property and investments

-

(1.5)

 


2014

2013


£million

£million

Transaction costs on the acquisition of Initial Facilities and esg

(8.2)

-

Integration costs on the acquisition of Initial Facilities

(10.2)

-

Earnout arrangements on the acquisition of Paragon Management UK Ltd

(1.4)

(0.5)

Bonus and share-based payments triggered by the exceptional profits on the disposals of PFI investments above

-

(2.1)

Other exceptional items

(19.8)

(2.6)




Exceptional items

(19.8)

(4.1)

 

5.      Investment revenue

 


2014

2013


£million

£million




Bank interest

3.3

2.8

Interest income from joint-venture investments

0.8

0.6

Net return on defined benefit pension assets (note 11)

0.3

-

Other interest

0.6

0.2


5.0

3.6

 

6.      Finance costs

 


2014

2013


£million

£million




Bank loans and overdrafts and other loans repayable

(16.0)

(7.8)

Interest cost on pension obligations (note 11)

-

(1.4)


(16.0)

(9.2)

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

7.      Tax

 


2014

2013


£million

£million




Current tax - UK

2.8

2.2

Current tax - overseas

4.3

5.0

Deferred tax

4.9

5.9

Tax charge for the year                                         A

12.0

13.1

 




Tax charge before prior period adjustments         

11.9

14.0

Prior period adjustments -charges/(credits)

0.1

(0.9)

                                                                            A

12.0

13.1

 

Profit before tax



Subsidiary undertakings' profit before tax              B

53.6

52.4

Loss on disposal of property and investments

-

(1.5)

Non tax-deductible transaction costs

(8.2)

-

Group share of profit after tax of associates and joint ventures

16.5

17.2


61.9

68.1

Effective tax, excluding one-offs, on subsidiary profits before tax (A/B)

22.4%

25.0%

 

UK corporation tax is calculated at 21.5 per cent (2013: 23.2 per cent) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

 

The total charge for the year can be reconciled to the profit per the income statement as follows:

 


2014

2013

 


£million

%

£million

%






Profit before tax

61.9


68.1







Tax at the UK income tax rate of 21.5% (2013: 23.2%)

13.3

21.5%

15.8

23.2%






Tax effect of expenses not deductible in determining taxable profit

1.5

2.4%

0.7

1.0%

Non taxable exceptional items

2.8

4.5%

0.5

0.7%

Tax effect of share of results of associates

(3.0)

(4.8%)

(4.0)

(5.9%)

Effect of overseas tax rates and unrelieved losses

(2.7)

(4.4%)

1.0

1.5%

Prior period adjustments

0.1

0.2%

(0.9)

(1.3%)

Tax charge and effective tax rate for the year

12.0

19.4%

13.1

19.2%

 

In addition to the income tax charged to the income statement, the following deferred tax charges/(credits) have been recorded directly to equity in the year:

 


2014

2013


£million

£million




Tax on actuarial losses/gains on pension liability

(3.1)

4.3

Impact of change in corporation tax on pension liability

-

3.0

Tax on fair value adjustment on cash flow hedging instruments

-

0.2

Tax on the intrinsic value of share-based payments

2.0

(1.5)

Total

(1.1)

6.0

 

 

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

8.      Dividends

 


Dividend per share

2014

2013


Pence

£million

£million





Final dividend for the year ended 31 December 2012

14.1

-

17.6

Interim dividend for the year ended 31 December 2013

6.8

-

8.6

Final dividend for the year ended 31 December 2013

14.7

20.8

-

Interim dividend for the year ended 31 December 2014

7.5

10.7

-

Amount recognised as distribution to equity holders in the period


31.5

26.2





Proposed final dividend for the year ended 31 December 2014

15.5

22.3


 

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 

9.      Earnings per share

 

Calculation of earnings per share is based on the following data:

 


2014

2013


£million

£million

Earnings



Net profit attributable to equity holders of the parent (for basic and basic diluted earnings per share)

45.4

50.2

Adjustments:



Exceptional items

19.8

4.1

Amortisation of acquired intangible assets

24.5

8.9

Tax effect of above adjustments

(6.7)

(1.9)

Headline earnings (for headline and headline diluted earnings per share)

83.0

61.3




Number of shares


2014

2013


Number

Number




Weighted average number of ordinary shares for the purposes of basic, headline and underlying headline earnings per share

141,136,892

128,386,396




Effect of dilutive potential ordinary shares:



Share options and awards

2,109,620

3,154,762




Weighted average number of ordinary shares for the purposes of diluted basic, diluted headline and diluted underlying headline earnings per share

143,246,512

131,541,158




Earnings per share

2014

2013


Pence

Pence




Basic earnings per share

32.2

39.1

Diluted basic earnings per share

31.7

38.2




Headline earnings per share

58.8

47.7

Diluted headline earnings per share

57.9

46.6

 

 

 





 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

10.       Acquisitions

 

The Group made the following acquisitions in the year:

 

On 18 March 2014, the Group acquired 100% of the facilities services business ("Initial Facilities") of Rentokil Initial Plc, for a cash consideration of £245.7 million. The acquisition strengthens the Support Services offering of Interserve, allowing the provision of a significantly enhanced service offering. The enlarged business offers a full range of services across all contract sizes and to both public and private sector customers.

 

On 5 December 2014, the Group acquired 100% of the share capital of ESG Holdings Limited ("esg") for a cash consideration of £25.7 million. The acquisition strengthens Interserve's position within the UK and Saudi Arabian skills and training markets, it also provides an increased presence in the Welfare to Work market where we are already active via Interserve Working Futures & Jobfit.

 

Preliminary fair value exercises have been performed, as set out below:

 


Initial Facilities

ESG

Total

Assets acquired

£million

£million

£million





Property, plant and equipment

6.6

3.2

9.8

Intangible assets

87.8

19.1

106.9

Cash balances

25.3

4.5

29.8

Inventories

3.3

-

3.3

Trade and other receivables

107.7

5.2

112.9

Trade and other payables

(96.8)

(13.4)

(110.2)

Other liabilities

(28.5)

(4.8)

(33.3)





Net assets

105.4

13.8

119.2

Goodwill

140.3

11.9

152.2

Consideration

245.7

25.7

271.4





Net cash outflow on acquisition

220.4

21.2

241.6

 

The fair value adjustments relate to certain intangible assets and their associated deferred tax charge. These have been separately identified and recognised using appropriate valuation techniques based on the fair value of forecast future cash flows. The resultant goodwill from the acquisition represents the future economic benefits arising from assets that are not capable of being individually identified and separately recognised (for example the knowledge and expertise of the assembled workforce and the operating synergies that arise from the Group's strengthened market position). None of the goodwill is expected to be deductible for income tax purposes.

 

Acquisition-related costs, included in exceptional costs, amounted to £8.2 million.

 

Since acquisition on 18 March 2014, Initial Facilities has contributed £440.4 million to revenue and a £7.9 million loss after exceptional items. If the business had been acquired on 1 January 2014, it would have contributed revenues of £555.3 million and a loss after exceptional items of £5.6 million.

 

Since acquisition on 5 December 2014, esg has contributed £3.4 million in revenue and a £0.3 million loss after exceptional items. If the business had been acquired on 1 January 2014, it would have contributed revenues of £41.2 million and a loss after exceptional items of £3.3 million.

 

A further £2.1 million of cash was paid in the period relating to the 2013 acquisition of Adyard. 

 

 

 

 



 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

11.    Retirement benefit schemes

 

The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.

 


2014

2013

2012

Significant actuarial assumptions




Retail price inflation

3.10% pa

3.40% pa

3.00% pa

Discount rate

3.60% pa

4.50% pa

4.40% pa

Post-retirement mortality (life expectancy in years)




   Male currently aged 65

87.5

87.4

87.3

   Female currently aged 65

89.5

89.4

89.3

   Male aged 65 in 20 years' time

89.3

89.2

89.1

   Female aged 65 in 20 years' time

90.1

90.9

90.9





Other related actuarial assumptions




Consumer price index

2.10% pa

2.40% pa

2.30% pa

Pension increases in payment:




  LPI/RPI

3.00%/3.10%

3.30%/3.40%

2.90%/3.00%

  Fixed 5%

5.00% pa

5.00% pa

5.00% pa

  3% or RPI if higher (capped at 5%)

3.60% pa

3.70% pa

3.50% pa

General salary increases

2.10 - 2.60% pa

2.40 - 2.90% pa

2.30 - 2.80% pa

The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:

 


2014

2013

2012

2011

2010


£million

£million

£million

£million

£million

Present value of defined benefit obligation

924.9

826.9

799.3

695.0

642.3

Fair value of schemes' assets

(920.1)

(819.2)

(698.2)

(638.8)

(590.8)

Liability recognised in the balance sheet

4.8

7.7

101.1

56.2

51.5

 

The amounts recognised in the income statement are as follows:

 


2014

2013


£million

 

£million

 




Employer's part of current service cost

8.0

7.4

Administration costs

1.6

1.9

Bulk transfer

(0.1)

-

Net interest expense

(0.3)

1.4

Total expense recognised in the income statement

9.2

10.7

 

The current service cost and administration costs are included within operating profit. The interest cost is included within financing costs.

 

Insurance buy-in transaction

 

On 1 August 2014 further action was taken to reduce risk in our pension scheme by entering into a buy-in transaction. This transaction has put in place an insurance contract with Aviva plc, covering approximately 35% of our scheme liabilities.

 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

12.       Share capital


Shares

Share capital


thousands

£million




As at 1 January 2013

126,846.9

12.7




Share awards issued in 2013

2,206.8

0.2




At 31 December 2013

129,053.7

12.9




Equity placing

12,897.8

1.3

Exercised share-based payments

1,966.1

0.2




At 31 December 2014

143,917.6

14.4

 

13.       Related parties

 

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period, Group companies entered into the following transactions with related parties who are not members of the Group:

 


Sales of goods

Purchases of goods

Amounts due from

Amounts owed 


and services

and services

related parties

to related parties











2014

2013

2014

2013

2014

2013

2014

2013


£million

£million

£million

£million

£million

£million

£million

£million










Joint-venture entities

2.5

1.2

-

-

0.4

0.1

-

-










Associates

137.6

127.6

0.8

1.0

21.2

32.2

0.5

16.2

 

Sales and purchases of goods and services to related parties were made on normal trading terms.

 

The amounts outstanding shown in the above table are unsecured and will be settled in cash. No guarantees have been given or received on these amounts. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

 

14.    Contingent liabilities

 

The Company and its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. Appropriate provision has been made in these accounts for all material uninsured liabilities resulting from proceedings that are, in the opinion of the directors, likely to materialise.

 

The Company and certain subsidiary undertakings have, in the normal course of business, given performance guarantees and provided indemnities to third parties in relation to performance bonds and other contract related guarantees. These relate to the Group's own contracts and to the Group's share of the contractual obligations of certain joint ventures and associated undertakings. The Group acts as guarantor for the following:

 


Maximum guarantee

Amounts utilised


2014

2013

2014

2013


£million

£million

£million

£million






Associated undertakings' borrowings

16.2

13.6

0.6

0.3

Joint venture and associated undertakings' bonds and guarantees

205.1

177.0

115.9

102.0

Total

221.3

190.6

116.5

102.3

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

15.    Reconciliation of non-statutory measures

 

The Group uses a number of non-statutory measures to monitor the performance of its business. This note reconciles these measures to individual lines in the financial statements.

 

(a) Headline pre-tax profit

2014

2013

2012


£million

£million

£million

Profit before tax

61.9

68.1

179.8

Adjusted for




Amortisation of acquired intangible assets

24.4

8.8

6.0

Share of associates amortisation of acquired intangible assets

0.1

0.1

0.4

Exceptional items

19.8

4.1

(110.9)

Headline pre-tax profit

106.2

81.1

75.3

 

(b) Operating cash flow

2014

2013

2012


£million

£million

£million

Cash generated by operations

10.9

43.2

33.7

Adjusted for




Pension contributions in excess of income statement charge

18.2

18.5

28.8

Other exceptional items cash impact

18.4

2.1

4.0

Proceeds on disposal of plant and equipment - non-hire fleet

0.9

0.2

1.8

Capital expenditure - non-hire fleet

(24.9)

(22.1)

(10.7)

Operating cash flow

23.5

41.9

57.6

 

(c) Free cash flow

2014

2013

2012


£million

£million

£million

Operating cash flow

23.5

41.9

57.6

Adjusted for




Pension contributions in excess of income statement charge

(18.2)

(18.5)

(28.8)

Taxes paid

(10.2)

(5.7)

(10.7)

Dividends received from associates and joint ventures

17.8

13.7

19.8

Interest received

4.7

3.5

8.4

Interest paid

(16.0)

(7.8)

(9.6)

Effect of foreign exchange rate change

0.8

(1.0)

(0.2)

Free cash flow

2.4

26.1

36.5

 

(d) Operating cash conversion

2014

2013

2012


£million

£million

£million

Operating cash flow

23.5

41.9

57.6

Operating profit, before exceptional items and amortisation of acquired intangible items

100.6

69.4

53.0

Full-year operating cash conversion

23.4%

60.4%

108.7%





Three-year rolling operating cash flow

123.0

163.6

165.8

Three-year rolling operating profit, before exceptional items and amortisation of acquired intangible items

223.0

165.8

137.6

Operating cash conversion, three-year rolling average

55.2%

98.7%

120.5%

 

 

 

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2014

 

(e) Gross operating cash conversion

2014

2013

2012


£million

£million

£million

Operating cash flow

23.5

41.9

57.6

Dividends received from associates and joint ventures

17.8

13.7

19.8

Gross operating cash flow

41.3

55.6

77.4





Operating profit before exceptional items and amortisation of acquired intangible assets

100.6

69.4

53.0

Share of results of associates and joint ventures, before exceptional items and amortisation of acquired intangible assets

16.6

17.3

25.4

Total operating profit before exceptional items and amortisation of acquired intangible assets

117.2

86.7

78.4

Full-year gross operating cash conversion

35.2%

64.1%

98.7%





Three-year gross operating cash flow

174.3

217.7

238.3

Three-year rolling total operating profit before exceptional items and amortisation of acquired intangible assets

282.3

236.4

221.9

Gross operating cash conversion, three-year rolling average

61.7%

92.1%

107.4%

 

 

(f) Gross revenue

2014

2013

2012


£million

£million

£million

Consolidated revenue

2,913.0

2,192.6

1,958.4

Share of revenues of associates and joint ventures

392.3

389.3

411.2

Gross revenue

3,305.3

2,581.9

2,369.6

 

(g) Operating margins

2014

2013

2012


£million

£million

£million

Total operating profit before exceptional items and amortisation of acquired intangible assets

117.2

86.7

78.4

Gross revenue

3,305.3

2,581.9

2,369.6

Total operating margin

3.5%

3.4%

3.3%

 

 

 

 

 

 



 

Non-statutory accounts

 

The information in this annual results announcement does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006 (the "Act"). The statutory accounts for the year ended 31 December 2014 will be delivered to the Registrar of Companies in England and Wales in accordance with section 441 of the Act. The auditor has reported on those accounts. Its report was unqualified and did not contain a statement under section 498(2), (3) or (4) of the Act.

 

The Strategic Report and Directors' report are the "management report" for the purposes of DTR 4.1.8R.

 

Annual report

 

The Company's annual report and accounts for the year ended 31 December 2014 is expected to be posted to shareholders by the end of March 2015. Copies of both this announcement and the annual report and accounts will be available to the public at the Company's registered office at Interserve House, Ruscombe Park, Twyford, Reading, Berkshire RG10 9JU and through the Company's website at www.interserve.com.

 

Cautionary statement

 

Statements made in these Annual Financial Results ("Results") reflect the knowledge and information available at the time of their preparation. The Results contain forward-looking statements in respect of the Group's operations, performance, prospects and financial condition. By their nature, these statements involve uncertainty. In particular, outcomes often differ from plans or expectations expressed through forward-looking statements and such differences may be significant. Assurance cannot be given that any particular expectation will be met. No responsibility is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Liability arising from anything in the Results shall be governed by English Law. Nothing in the Results should be construed as a profit forecast.

 

Responsibility statement of the directors in respect of the annual results announcement

 

The annual report contains the following statements regarding responsibility for the financial statements and Directors' report included in the annual report:

 

"The directors confirm that, to the best of their knowledge:

 

a)      the Company and Group financial statements in this Annual report, which have been prepared in accordance with UK GAAP and IFRS, respectively, give a true and fair view of the assets, liabilities, financial position and profit of the Company and of the Group taken as a whole;and

(b)     the Strategic Report contained in this Annual Report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face; and

c)       the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy."

 



 

 

By order of the Board

 

 

 

A M Ringrose                                                                             T P Haywood

Chief Executive                                                                         Group Finance Director

 

26 February 2015

                                         

- END -

 

 


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