Final Results

Balfour Beatty PLC 09 March 2005 BALFOUR BEATTY PLC PRELIMINARY RESULTS FOR THE YEAR TO 31 DECEMBER 2004 ANOTHER YEAR OF PROGRESS IN BUILDING SHAREHOLDER VALUE Highlights • Double-digit growth in underlying pre-tax profits and earnings per share • Profit progress in all reporting segments • Strong operating cash performance • Order book increased by 17% to £6.8 billion • Five new PPP concession preferred bidder awards • Disposal of Andover Controls for $403 million (£226 million) • Acquisition of 50% interest in Gammon in Hong Kong • Final dividend of 3.75p; full-year dividend up 10% at 6.6p Financial Summary 2004 2003 Change Turnover including joint ventures and associates £4,171m £3,678m 13% Pre-tax profit - before goodwill charges and exceptionals £150m £130m 15% - after goodwill charges and exceptionals £257m £118m 118% Earnings per share - adjusted* 23.4p 20.6p 14% - basic 43.8p 16.9p Financing - net cash before PPP subsidiaries £311m £127m +£184m - net borrowings of PPP subsidiaries (non-recourse) £(244)m £(3)m * before goodwill charges, exceptional items and the premium arising on buy-back of preference shares 'We made further sound progress in 2004. Once again, we were able to both improve our profits and earnings and take important actions in developing the platform for the Group's future growth. Operating cash flow was, again, strong. We have leading positions in a number of long-term growth markets which continue to offer us encouragement and opportunity. We expect to make further progress in 2005 and to maintain our momentum thereafter.' Sir David John, Chairman Ian Tyler, Chief Executive BALFOUR BEATTY PLC PRELIMINARY RESULTS FOR THE YEAR TO 31 DECEMBER 2004 OVERVIEW Balfour Beatty is a world-class engineering, construction and services group, well positioned in infrastructure markets which offer significant growth potential. Its partnerships with public and private customers generate secure, long-term income. Its financial strength, with a significant cash position and with strong operating cash flows, offers continuing flexibility to add additional capacity and expertise to the business mix and to make appropriate investments in PPP concessions and other sustainable growth opportunities. RESULTS Balfour Beatty, the international engineering, construction and services group, today announced pre-tax profits for the 12 months to 31 December 2004 up 15% at £150 million (2003: £130 million) before goodwill charges and exceptional profits. Turnover was up 13% at £4,171 million (2003: £3,678 million). Earnings per share before goodwill charges, exceptional items and the premium arising on the buy-back of preference shares rose by 14% to 23.4p (2003: 20.6p). £35 million was charged to the profit and loss account in respect of goodwill amortisation arising from acquisitions (2003: £17 million), including a £16 million impairment charge in respect of Balfour Beatty Rail Inc. There were a number of exceptional items, resulting in a net exceptional pre-tax profit of £142 million. The sale of Andover Controls of the US, completed in July, brought an exceptional profit of £137 million, with a number of other items netting to a further £5 million credit (2003: £5 million credit). Profit before tax amounted to £257 million (2003: £118 million). Operating cash flow was, once again, strong and year-end net cash stood at £311 million (2003: £127 million) before taking account of the consolidation of £244 million of non-recourse net debt held in the PPP subsidiaries. The year-end order book increased by 17% to £6.8 billion (2003: £5.8 billion). The Board recommends a final dividend of 3.75p per ordinary share making a total dividend for the year of 6.6p (2003: 6.0p), an increase of 10%. BUSINESS SECTOR PERFORMANCE Operating profits are stated before goodwill charges and exceptional items In Building, Building Management and Services, operating profits from the continuing businesses improved by 14% to £32 million (2003: £28 million). Mansell, which was acquired at the end of 2003, performed ahead of anticipated levels and continued to grow, particularly in social housing. Elsewhere in the building sector, performance was satisfactory and order intake continued at very good levels. A number of substantial contracts and preferred bidder positions were secured, including a number of major new PPP schools schemes and major acute healthcare projects. Andover Controls, which was sold in July, made profits of £8 million (2003: £17 million) and is accounted for as a discontinued business. In Civil and Specialist Engineering and Services, operating profits improved by 10% to £23 million (2003: £21 million). Performance in the UK was good. Particularly encouraging progress was made in utilities contracting, where major new projects have been secured in both the gas and water sectors. Performance also improved significantly in road management and maintenance. In the US, however, further substantial losses were incurred. Our US business has now been reorganised and the heavy marine engineering business is being closed. The associated costs of these actions have been fully accounted for in 2004. The acquisition of 50% of Gammon in Hong Kong and the accelerating development of the Dubai market, where we have a strong presence, provide further opportunities for long-term future growth. In Rail Engineering and Services, operating profits rose by 5% to £43 million (2003: £41 million). The maintenance contracts taken in-house by Network Rail were settled on satisfactory terms. Our UK projects, plant and track systems businesses also performed well. A significantly larger share of the main line renewals programme was secured early in the year and the renewals workload for the London Underground is now increasing sharply. There were losses in Balfour Beatty Rail Inc in the US. The business has been reorganised and downsized as a result and its carrying value has been reduced by £16 million. There was also some weakness in the German market, which led to reorganisation costs, but major projects in Italy, Portugal and the rest of the world progressed well. In Investments and Developments, operating profits improved by 24% to £67 million (2003: £54 million) and pre-tax profits by 58% to £41 million (2003: £26 million). Progress was very satisfactory, largely as a result of the acquisition of 100% ownership of the Connect Roads A30/A35, A50 and M77/GSO concessions, a first full year of Metronet profits and a strong recovery in profits in Barking Power. In this latter context, a first dividend in respect of the administration of TXU Europe is anticipated during 2005. Preferred bidder status was achieved for five new PPP schemes - hospitals at Birmingham and Pinderfields in Yorkshire through Consort Healthcare, and schools schemes at North Lanarkshire, Nottinghamshire and Birmingham through Transform Schools. CHIEF EXECUTIVE'S REVIEW Order Book 'Our main markets, in healthcare, education, road and rail, and utilities, were generally buoyant in 2004. We were very successful in winning new work and our order book grew to £6.8 billion - a new record - with a further £1.0 billion at preferred bidder stage at the year end. Reliable earnings growth is underpinned by long-term alliance contracts. We already have many such contracts and have won more in 2004, including a £400 million, five year project to manage and maintain motorways and trunk roads in south-west England and a five-year contract likely to be worth approximately £500 million for rail renewals on the main line network. Early in 2005, we secured a £380 million contract to work with National Grid Transco in replacing the gas mains in Greater Manchester over the next eight years. We are strong in services, but the majority of our activity remains in engineering and construction. During the year, for example, we were selected to build the world's largest shopping mall in Dubai and the new 1,230-bed Birmingham Hospital and to manage and execute more than £400 million of work at Heathrow Terminal 5. We are a market leader in public private partnerships. During the year, we were appointed preferred bidder on five new concessions, with a total capital value of over £1 billion. When these schemes reach financial close, very substantial construction and long-term service contracts will fall to Balfour Beatty companies. Disposals and Acquisitions The sale of Andover Controls realised a net cash inflow of £218 million. Andover is a US building management systems specialist - a business quite unlike anything else in the Group. To sustain Andover's position in its markets would have required heavy expenditure on research and new product development. A number of companies whose principal business makes such investments appropriate wanted to buy Andover. As the company was becoming increasingly vulnerable to its competition, we decided to sell. We were paid a good price and this has released funds to invest in our core businesses. We continued to generate cash in line with our profits and to manage working capital carefully. Our overall year-end net cash position (excluding PFI/PPP non-recourse net debt) was £311 million, after spending a net £56 million on acquisitions. The year's major acquisition was a 50% interest in Gammon, the leading construction company in Hong Kong, for a consideration of £33 million. In addition to giving us pole position in an important local market, this creates a strong base from which to grow more generally in Asia. We also acquired the minority in Connect to give us 100% ownership of this profitable portfolio of road concessions, added to our rail signalling expertise and strengthened our US project and programme management company. We will continue to acquire in areas where the acquisition adds value. We will also continue to take equity stakes in PPP concessions where we are confident we can make good returns. US We had a difficult year in the US, resulting in substantial losses, as indicated in the geographic analysis. We have, however, now made good progress in getting our interests there into the right shape to generate the consistent and growing earnings profile which is the hallmark of our businesses elsewhere. We now have a sound organisation structure and sensible business models in each of our US markets. We have three strong regional civil engineering businesses in California, Texas and Pennsylvania, a rail transit and services operation and, in Heery, a well-established specialist in architecture, engineering and programme management. Our primary objective is to deliver significant performance improvement in 2005 and 2006, on which basis we can build a larger presence in the longer term. Strategy Our success in growing our underlying profits and earnings in recent years has been based on organic growth, and on creating and investing in businesses which have superior growth characteristics. We have created a strong concession base in the private finance sector where good growth is built in to the concessions over their term. We have extended our life cycle presence in roads, rail, utilities and buildings so that we have earnings streams emanating from across the value chain from concept and design through to whole-life management and maintenance. In addition to the disposal of Andover, we have also sold businesses overseas where prospects of growth are poor in favour of a more substantial presence in a few growth markets. During this period, procurement methods, particularly in the UK, have moved towards a greater emphasis on design and build, private finance, bundling of construction work into larger packages and outsourcing - all trends which either play to Balfour Beatty's existing strengths or into which we have moved successfully, for example through the acquisition of our gas and water utilities business. To continue to meet our growth objectives, we will be looking to add further new elements to the business mix. Having the cash to invest and acquire gives us flexibility in maintaining our forward momentum. Safety The construction environment is, by its nature, hazardous and we regard it as a priority to keep our employees and the public safe. It is therefore important to maintain our momentum in improving our safety systems and performance. Following the 17% improvement in our accident rate in 2003, it is gratifying to be able to report a further 20% reduction in 2004. Our accident frequency rate is significantly better than Health and Safety Executive norms, but this breeds no complacency. New targets have been set for further improvement this year. We have introduced an IT system which provides a single worldwide safety, environmental and health reporting and tracking system. This enables us to benchmark performance, identify trends and develop appropriate action plans. Social Responsibilities The Group is committed to fulfilling its responsibilities to all of its stakeholders, including the wider communities in which it operates. In respect of the environment, we measure our key impacts, work with our stakeholders to minimise any potentially negative outcomes and actively promote sustainable projects and processes both within the Group and with our customers. We are making good progress in a number of areas in respect of our social responsibilities. For example, a new charities policy has both increased the quantum of our corporate donations and focussed them more clearly on causes where we can most make a difference. We have contributed equipment, staff time and expertise as well as money to the current tsunami relief effort in Indonesia, where we have a joint venture company. International Financial Reporting Standards Balfour Beatty will be required to prepare its 2005 interim and annual financial statements under International Financial Reporting Standards (IFRS). We continue to monitor the development of those standards yet to be finalised, particularly in the area of accounting for PFI/PPP concessions. The principal impacts of the adoption of IFRS on the Group's financial statements will arise from the reclassification of the Group's preference shares as debt, the treatment of our IAS 19 pension deficit as a balance sheet item and the replacement of goodwill amortisation by annual reviews for impairment. In June 2005, we plan to publish a restatement of the 2004 financial statements in accordance with IFRS. OUTLOOK We have leading positions in a number of long-term growth markets which continue to offer us encouragement and opportunity. We anticipate further improvement in the Building sector as the construction of our significant portfolio of major PPP projects proceeds and the market for social housing continues to develop. In Engineering, our expectations of a significantly better performance in the US should, amongst other factors, lead to good progress. In Rail, lower UK activity levels following the loss of the maintenance contracts and some continuing weakness in Germany will impact results. In Investments, there was a major step forward in 2004. This segment will see more modest growth in 2005 as substantial new PPP projects reach financial close and are mobilised. Overall, we expect to make further progress in 2005 and to maintain our momentum thereafter. Enquiries to:- Ian Tyler, Chief Executive Anthony Rabin, Finance Director Tim Sharp, Director of Corporate Communications Tel: 020 7216 6800 www.balfourbeatty.com ******** High resolution photographs are available to the media free of charge at www.newscast.co.uk (+44 (0) 20 7608 1000) GROUP PROFIT AND LOSS ACCOUNT For the year ended 31 December 2004 Notes Before Exceptional Total Before Exceptional Total exceptional items exceptional items 2003 items (Note 3) items (Note 3) as 2004 2004 2004 2003 2003 restated £m £m £m £m £m £m TURNOVER INCLUDING SHARE OF JOINT VENTURES AND ASSOCIATES 2 4,171 - 4,171 3,678 - 3,678 Share of turnover of joint ventures 9 (380) - (380) (297) - (297) Share of turnover of associates 9 (292) - (292) (220) - (220) ------- --------- ------- ------- -------- ------- GROUP TURNOVER 3,499 - 3,499 3,161 - 3,161 ======= ========= ======= ======= ======== ======= +---------------------------------------------------------------+ Continuing operations | 3,432 - 3,432 3,058 - 3,058 | Acquisitions 12 | 16 - 16 - - - | Discontinued operations | 51 - 51 103 - 103 | +---------------------------------------------------------------+ GROUP OPERATING PROFIT 67 7 74 68 3 71 Share of operating profit of joint ventures 9 27 - 27 47 - 47 Share of operating profit of associates 9 44 - 44 29 - 29 ------- --------- ------- ------- -------- ------- OPERATING PROFIT INCLUDING SHARE OF JOINT VENTURES AND ASSOCIATES 2 138 7 145 144 3 147 +---------------------------------------------------------------+ Operating profit before goodwill | | amortisation | 173 7 180 161 3 164 | Goodwill amortisation and | | impairment 8 | (35) - (35) (17) - (17)| +---------------------------------------------------------------+ +---------------------------------------------------------------+ Continuing operations | 121 7 128 128 3 131 | Acquisitions 12 | 9 - 9 - - - | Discontinued operations | 8 - 8 16 - 16 | +---------------------------------------------------------------+ Profit on sale of operations 135 135 - - Provision for loss on sale of operations 2 2 (10) (10) (Loss) / profit on sale of tangible fixed assets (2) (2) 12 12 ------- --------- ------- ------- -------- ------- PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST 138 142 280 144 5 149 Net interest payable and similar charges: Group 4 - - - (1) - (1) Share of joint ventures' interest 4 (9) - (9) (18) - (18) Share of associates' interest 4 (14) - (14) (12) - (12) ------- --------- ------- ------- -------- ------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 115 142 257 113 5 118 +---------------------------------------------------------------+ Profit on ordinary activities | | before goodwill amortisation | 150 142 292 130 5 135 | and taxation | | Goodwill amortisation and | | impairment | (35) - (35) (17) - (17)| +---------------------------------------------------------------+ Tax on profit on ordinary activities 5 (39) (15) (54) (30) 1 (29) ------- --------- ------- ------- -------- ------- PROFIT FOR THE FINANCIAL YEAR 76 127 203 83 6 89 Dividends: Preference 6 (13) (15) Ordinary 6 (28) (25) Premium paid on buy-back of preference shares (6) (5) ------- ------- TRANSFER TO RESERVES 156 44 ======= ======= ADJUSTED EARNINGS PER ORDINARY SHARE 7 23.4 p 20.6 p Goodwill amortisation and impairment (8.3)p (4.1)p Exceptional items after attributable taxation 30.2 p 1.4 p Premium paid on buy-back of (1.5)p (1.0)p preference shares -------- ------- BASIC EARNINGS PER ORDINARY SHARE 7 43.8 p 16.9 p ======== ======= DILUTED EARNINGS PER ORDINARY SHARE 7 43.4 p 16.7 p ======== ======= DIVIDENDS PER ORDINARY SHARE 6 6.6 p 6.0 p ======== ======= GROUP BALANCE SHEET Notes 2004 2003 At 31 December 2004 as restated £m £m FIXED ASSETS Intangible assets - goodwill 8 265 306 Tangible assets - PFI/PPP constructed assets 288 - - other 149 158 Investments 42 36 Investments in joint ventures: +------------------+ Share of gross assets | 815 866 | Share of gross liabilities | (715) (777)| +------------------+ 9 100 89 Investments in associates 9 81 47 ------- ------- 925 636 ------- ------- CURRENT ASSETS Stocks 102 109 Debtors - due within one year 738 759 - due after one year 79 60 Cash and deposits - PFI/PPP subsidiaries 30 - - other 388 202 ------- ------- 1,337 1,130 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Borrowings - PFI/PPP non-recourse term loans (13) - - other (15) (7) Other creditors (1,209) (1,195) ------- ------- NET CURRENT ASSETS / (LIABILITIES) 100 (72) ------- ------- TOTAL ASSETS LESS CURRENT LIABILITIES 1,025 564 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Borrowings - PFI/PPP non-recourse term loans (261) (3) - other (62) (68) Other creditors (110) (95) PROVISIONS FOR LIABILITIES AND CHARGES (179) (167) ------- ------- 413 231 ======= ======= CAPITAL AND RESERVES Called-up share capital 213 212 Share premium account 150 328 Revaluation reserves 70 48 Special reserve 181 - Other reserves 4 8 Profit and loss account (205) (365) ------- ------- SHAREHOLDERS' FUNDS 10 413 231 +------------------+ Equity interests | 277 81 | Non-equity interests | 136 150 | +------------------+ ------- ------- 413 231 ======= ======= GROUP CASH FLOW STATEMENT Notes 2004 2003 For the year ended 31 December 2004 as restated £m £m NET CASH INFLOW FROM OPERATING ACTIVITIES 11(a) 171 170 ------- ------- DIVIDENDS FROM JOINT VENTURES AND ASSOCIATES 8 11 ------- ------- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 18 9 Interest paid (24) (10) Preference dividends paid (15) (15) ------- ------- NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (21) (16) ------- ------- UK corporation tax paid (25) (19) Foreign tax paid (16) (6) ------- ------- TAXATION (41) (25) ------- ------- CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Capital expenditure (110) (51) Disposal of tangible fixed assets 13 24 Investment in joint ventures and associates (11) (6) Other investments 51 (6) ------- ------- NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (57) (39) ------- ------- ACQUISITIONS AND DISPOSALS Acquisitions of businesses 11(e) (56) (21) Disposals of businesses 11(f) 217 - ------- ------- NET CASH INFLOW/(OUTFLOW) FROM ACQUISITIONS AND DISPOSALS 161 (21) ------- ------- ORDINARY DIVIDENDS PAID (25) (22) ------- ------- CASH INFLOW BEFORE USE OF LIQUID RESOURCES AND FINANCING 196 58 MANAGEMENT OF LIQUID RESOURCES Increase in term deposits 11(b) (206) (32) ------- ------- NET CASH OUTFLOW FROM MANAGEMENT OF LIQUID RESOURCES (206) (32) ------- ------- FINANCING Ordinary shares issued 4 5 Purchase of ordinary shares (2) (1) Buy-back of preference shares (20) (16) New loans 6 3 Repayment of loans (12) (11) Capital element of finance lease payments (2) (3) ------- ------- NET CASH OUTFLOW FROM FINANCING (26) (23) ------- ------- (DECREASE) / INCREASE IN CASH IN THE PERIOD 11(c) (36) 3 ======= ======= GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 2004 2003 For the year ended 31 December 2004 as restated £m £m Profit for the financial year: Group Group operating profit 74 71 Profit on sale of operations 135 - Provision for loss on sale of operations 2 (10) (Loss) / profit on sale of tangible fixed assets (2) 12 Net interest payable and similar charges - (1) Tax on profit on ordinary activities (36) (14) ------- ------- 173 58 Share of joint ventures (see Note 9) 10 19 Share of associates (see Note 9) 20 12 Exchange adjustments (2) (1) ------- ------- TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR 201 88 ======= ======= NOTES 1. BASIS OF PRESENTATION The accounts have been prepared under the historical cost convention, modified for the revaluation of certain land and buildings, using accounting policies which have been applied consistently throughout the year and the preceding year and comply with all applicable accounting standards and the Companies Act 1985. The Group has adopted UITF Abstract 38 'Accounting for ESOP trusts' and the amendments to UITF Abstract 17 'Employee share schemes' and comparative figures have been restated accordingly. Previously, investments in Balfour Beatty plc ordinary shares of 50p each acquired by the Group's discretionary Trust, the Balfour Beatty Employee Share Ownership Trust, to satisfy awards under the Balfour Beatty Performance Share Plan, were recognised as a fixed asset investment, net of provisions. The cost of shares acquired was charged to the profit and loss account over the qualifying period. In accordance with UITF 38 and UITF 17, own shares held by the Group's discretionary trust are recorded as a deduction in arriving at shareholders' funds and the fair value of the shares at the date of award is charged to the profit and loss account over the qualifying period. In addition, purchases of shares which were previously shown in the cash flow statement within capital expenditure and financial investment, are now disclosed within the financing section. This restatement has had no impact on operating profit in 2003. Shareholders' funds as at 31 December 2003 were increased by £1.3m. The Group has also adopted UITF Abstract 37 'Purchases and sales of own shares' and comparative figures have been restated accordingly, reducing basic earnings per ordinary share in 2003 by 1.0p. The difference between the carrying amount of preference shares bought back and the consideration paid has been reported as an appropriation of profit. 2. SEGMENT ANALYSIS a) Total Group, including share of joint ventures and associates Turnover Operating profit Capital employed before exceptional items 2004 2003 2004 2003 2004 2003 as as restated restated £m £m £m £m £m £m PERFORMANCE BY ACTIVITY Building, building management and services 1,586 1,093 32 28 (154) (153) Civil and specialist engineering and services 1,443 1,393 23 21 (45) (44) Rail engineering and services 803 873 43 41 (57) (51) Investments and developments 288 216 67 54 353 56 ------- --------- ------- ------- -------- ------- 4,120 3,575 165 144 97 (192) Discontinued operations 51 103 8 17 - 21 ------- --------- ------- ------- -------- ------- 4,171 3,678 173 161 97 (171) ======= ========= Goodwill amortisation and impairment (35) (17) ------- ------- Operating profit 138 144 Net interest payable (23) (31) ------- ------- Profit before tax and exceptional items 115 113 ======= ======= Net cash 67 124 Goodwill (including share of joint ventures and associates) 295 318 Tax and dividends (46) (40) -------- ------- 413 231 ======== ======= PERFORMANCE BY GEOGRAPHIC ORIGIN Europe 3,591 3,127 204 170 70 (221) North America 415 483 (35) (12) 8 41 Other 165 68 4 3 19 9 ------- --------- ------- ------- -------- ------- 4,171 3,678 173 161 97 (171) ======= ========= ======= ======= ======== ======= Andover Controls sold in July 2004 has been classified as discontinued. Goodwill amortisation arises in Building, building management and services £4.3m (2003: £1.2m), Civil and specialist engineering and services £5.0m (2003: £5.5m), Rail engineering and services £24.6m (2003:£9.0m), Investments and developments £0.3m (2003: nil) and Discontinued operations £0.7m (2003: £1.6m). In 2004, goodwill amortisation includes £15.9m impairment charge in respect of Balfour Beatty Rail Inc. In 2003, goodwill amortisation included £0.5m impairment charge in respect of Garanti Balfour Beatty. Goodwill arises in Building, building management and services £64m (2003: £62m), Civil and specialist engineering and services £95m (2003: £80m), Rail engineering and services £131m (2003: £152m), Investments and developments £5m (2003:£1m) and Discontinued operations nil (2003: £23m). Goodwill amortisation arises in Europe £14.8m (2003: £12.3m), North America £19.4m (2003: £4.7m) and Other £0.7m (2003: £0.3m). Goodwill arises in Europe £240m (2003: £242m), North America £31m (2003: £72m) and Other £24m (2003: £4m). b) PFI/PPP subsidiaries The Group has a 100% interest in four PFI/PPP concessions through its shareholdings in Connnect Roads Ltd, Connect M77/GSO Holdings Ltd and Connect Roads Sunderland Holdings Ltd. The performance of these PFI/PPP concessions (since becoming subsidiaries as appropriate) and their balance sheets are summarised below: 2004 2003 £m £m PROFIT AND LOSS ACCOUNT Turnover 36 - ------- ------- Operating profit 21 - Net interest payable (12) - ------- ------- Profit on ordinary activities before taxation 9 - Tax on profit on ordinary activities (2) - ------- ------- Profit for the period 7 - ------- ------- CASH FLOW Operating profit 21 - Depreciation 9 - Working capital decrease / (increase) 1 (3) ------- ------- Net cash inflow from operating activities 31 (3) Returns on investments and servicing of finance (20) - Taxation (4) - Capital expenditure and financial investment (2) - Dividends paid (9) - ------- ------- Cash outflow before use of liquid resources and financing (4) (3) Opening net borrowings / net borrowings at date of acquisition (240) - ------- ------- Closing net borrowings (244) (3) ------- ------- BALANCE SHEET Tangible fixed assets 288 - Debtors 25 3 Creditors and provisions (36) - Tax and dividends (10) - Cash and deposits 30 - Project finance non-recourse term loans (274) (3) ------- ------- Net assets 23 - ------- ------- 3. EXCEPTIONAL ITEMS 2004 2003 £m £m a) CREDITED TO / (CHARGED AGAINST) OPERATING PROFIT Compensation for loss of use of operating facility - 10 Cancellation of Network Rail maintenance contracts 7 (7) ------- ------ 7 3 ------- ------ b) PROFIT / (LOSS) ON SALE OF OPERATIONS Profit on disposal of Andover Controls 137 - Loss on disposal of Garanti Balfour Beatty (2) - Loss on disposal of First Philippine Balfour Beatty Inc (1) - Profit on sale of Hong Kong business 1 - ------- ------ 135 - ------- ------ c) PROVISION FOR LOSS ON SALE OF OPERATIONS Losses arising from the disposal of the discontinued Cables businesses - (8) Provision for loss on disposal of Garanti Balfour Beatty 2 (2) ------- ------ 2 (10) ------- ------ d) (LOSS) / PROFIT ON SALE OF TANGIBLE FIXED ASSETS Loss on sale of fixed assets (2) - Profit on sale of operating facility - 12 ------- ------ (2) 12 ------- ------ 142 5 ======= ====== a) The exceptional item credited to group operating profit in 2004 arises in respect of the resolution of certain matters previously provided for in 2003 in relation to the cancellation of three Network Rail maintenance contracts. Exceptional items charged against Group operating profit in 2003 also included compensation received in respect of business disruption, following the compulsory purchase of an operating facility. These exceptional items related to the Rail engineering and services segment and arose in Europe. b) In 2004 a profit of £137m (after charging goodwill previously written off to reserves of £37m) arose on the disposal of Andover Controls for a consideration of US$403m. In 2004, a loss of £2m (previously provided in 2003) arose on the disposal of the Group's 49.2% interest in Garanti Balfour Beatty Sanayi ve Ticaret AS for a consideration of US$1; a loss of £1m (comprising goodwill previously written off to reserves) arose on the disposal of the Group's 40% interest in First Philippine Balfour Beatty Inc for a consideration of US$3.5m; a profit of £1m arose on the transfer of the Group's construction contracts in progress in Hong Kong to the Gammon Skanska Group following the acquisition of a 50% interest in that business (see Note 12). These exceptional items arose in the Civil and specialist engineering and services segment. c) The provision for loss on sale of operations in 2003 comprised provision for environmental and employee retirement costs relating to the discontinued Cables businesses in North America sold in 1999 and provision for losses on the disposal in 2004 of the Group's 49.2% interest in Garanti Balfour Beatty in Turkey in the Civil and specialist engineering and services segment. d) In 2004, a net loss of £2m arose on the sale of fixed assets which comprises £2m profit on the sale of properties and plant in the UK and £4m loss on the disposal of specialist plant in the US heavy marine civil engineering business. The net loss arose in the Building, building management and services segment £1m profit, Rail engineering and services £1m profit and Civil and specialist engineering and services £4m loss. The profit on sale of fixed assets in 2003 arose on the compulsory purchase of an operating facility. This profit related to the Rail engineering and services segment and arose in Europe. e) Exceptional items increased the Group's tax charge in 2004 by £15m (2003: £1m reduction). 4. NET INTEREST PAYABLE AND SIMILAR CHARGES 2004 2003 £m £m Group PFI/PPP non-recourse - other net interest payable 13 - - interest on long-term finance assets (1) - ------- ------ 12 - Other net interest payable - bank loans and overdrafts 2 2 - finance leases 1 1 - other loans 7 9 PFI/PPP subordinated debt interest receivable (9) (2) Other interest receivable and similar income (13) (9) ------- ------ - 1 Share of joint ventures PFI/PPP concessions - other net interest payable 27 36 - interest on long-term finance assets (18) (18) Share of associates PFI/PPP concessions - other net interest payable 9 7 Other associates - other net interest payable 5 5 ------- ------ 23 31 ======= ====== 5. TAX ON PROFIT ON ORDINARY ACTIVITIES a) Taxation charge 2004 2003 £m £m UK CURRENT TAX Corporation tax for the period at 30% (2003: 30%) 37 31 Double tax relief (2) (2) Adjustments in respect of previous periods (8) (4) ------- ------ 27 25 ------- ------ UK ADVANCE CORPORATION TAX Written back against current year UK tax (11) (8) Adjustments in respect of other periods (6) (5) ------- ------ (17) (13) ------- ------ FOREIGN CURRENT TAX Foreign tax on profits of the period 18 5 Adjustments in respect of previous periods (1) 2 ------- ------ 17 7 ------- ------ Total current tax 27 19 ------- ------ DEFERRED TAX UK 4 (5) Adjustments in respect of previous periods 5 - ------- ------ Total deferred tax 9 (5) ------- ------ JOINT VENTURES AND ASSOCIATES Share of UK joint ventures' tax 7 10 Share of UK associates' tax 10 5 Share of foreign joint ventures' tax 1 - ------- ------ Total joint ventures' and associates' tax 18 15 ------- ------ Taxation charge 54 29 ======= ====== b) Factors that may affect future tax charges The Group has benefited from overseas tax losses in 2004. These losses have resulted in reduced tax payments in recent years and the Group expects to continue to benefit in 2005. The unrecognised deferred tax asset in respect of losses that arose over a number of years in the USA and Germany is estimated to be £65m (2003: £100m). In 2004, the Group has recognised £17m of surplus advance corporation tax, of which £8m is recoverable against future periods. The tax rate in future periods is expected to be higher following the recognition of this amount. 6. DIVIDENDS Per Amount Per Amount share share 2004 2004 2003 2003 pence £m pence £m On preference shares: Paid 4.8375 7 4.8375 7 Payable 4.8375 6 4.8375 8 -------- ------- -------- ------- 9.6750 13 9.6750 15 On ordinary shares: Interim payable 2.85 12 2.60 11 Final proposed 3.75 16 3.40 14 -------- ------- -------- ------- 6.60 28 6.00 25 ======== ======= ======== ======= An interim dividend of 2.85p (2003: 2.60p) per ordinary share was paid on 4 January 2005. Subject to approval at the Annual General Meeting on 12 May 2005, the final dividend of 3.75p (2003: 3.40p) per ordinary share will be paid on 1 July 2005 to ordinary shareholders on the register on 29 April 2005 by direct credit or, where no mandate, by cheques posted on 29 June 2005 payable on 1 July 2005. These shares will be quoted ex-dividend on 27 April 2005. A preference dividend of 5.375p gross (4.8375p net) per preference share will be paid in respect of the six months ending 30 June 2005 on 1 July 2005 to preference shareholders on the register on 27 May 2005 by direct credit or, where no mandate, by cheques posted on 29 June 2005 payable on 1 July 2005. These shares will be quoted ex-dividend on 25 May 2005. 7. EARNINGS PER ORDINARY SHARE The calculation of earnings per ordinary share is based on the profit for the financial year, after charging preference dividends and appropriations arising on the buy-back of preference shares, divided by the weighted average number of ordinary shares in issue during the year of 419.4m (2003:416.3m). The calculation of diluted earnings per ordinary share is based on the profit for the financial year, after charging preference dividends and appropriations arising on the buy-back of preference shares, divided by the weighted average number of ordinary shares in issue adjusted for the potential conversion of share options by 4m (2003: 3m). As in 2003, no adjustment has been made in respect of the potential conversion of the cumulative convertible redeemable preference shares, the effect of which would have been antidilutive throughout the year. Adjusted earnings per ordinary share before goodwill amortisation and impairment, exceptional items and appropriations arising on the buy-back of preference shares have been disclosed to give a clearer understanding of the Group's underlying trading performance. 8. INTANGIBLE ASSETS - GOODWILL Gross Amortisation Net £m £m £m At 1 January 2004 350 (44) 306 Exchange adjustments (4) 1 (3) Businesses acquired (see Note 12) 14 - 14 Businesses sold (27) 5 (22) Other adjustments 3 - 3 Amortisation - (17) (17) Impairment - (16) (16) ------ -------- ------- At 31 December 2004 336 (71) 265 ====== ======== Goodwill arising on joint ventures and associates 30 ------- Total goodwill 295 ======= 9. INVESTMENTS Share of results and net assets of joint ventures and associates Comprising Connect Other Total Barking ---------------- M1-A1 Metronet PFI/PPP PFI/PPP Power Gammon Other Total Joint Assoc- Ltd++ * investments investments Ltd + Ventures iates 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 £m £m £m £m £m £m £m £m £m £m Turnover 23 137 46 206 46 90 330 672 380 292 ======= ======= ======= ======= ====== ======= ======= ======= ======= ======= Operating profit 17 18 7 42 15 2 12 71 27 44 Interest (13) (8) 3 (18) (5) - - (23) (9) (14) ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Profit before taxation 4 10 10 24 10 2 12 48 18 30 Taxation (1) (3) (5) (9) (3) (1) (5) (18) (8) (10) ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Profit after taxation 3 7 5 15 7 1 7 30 10 20 Dividends (2) - - (2) - - (6) (8) (4) (4) ------- ------- ------- ------- ------ ------- ------- ------- ------- ------- Retained profits 1 7 5 13 7 1 1 22 6 16 ======= ======= ======= ======= ====== ======= ======= ======= ======= ======= Net cash / (debt) (125) (69) (337) (531) (69) 27 13 (560) (398) (162) ======= ======= ======= ======= ====== ======= ======= ======= ======= ======= Net assets 14 27 46 87 18 33 43 181 100 81 ======= ======= ======= ======= ====== ======= ======= ======= ======= ======= Comprising Connect Connect Other Total Barking ---------------- M1-A1 Roads Metronet PFI/PPP PFI/PPP Power Other Total Joint Assoc- Ltd++ Ltd * investments investments Ltd Ventures iates 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 £m £m £m £m £m £m £m £m £m £m Turnover 23 24 75 52 174 42 301 517 297 220 ======= ======= ======= ======= ======= ====== ======= ======= ====== ====== Operating profit 16 17 12 9 54 6 16 76 47 29 Interest (13) (10) (6) 4 (25) (5) - (30) (18) (12) ------- ------- ------- ------- ------- ------ ------- ------- ------- ------ Profit before taxation 3 7 6 13 29 1 16 46 29 17 Taxation (1) (2) (2) (5) (10) (1) (4) (15) (10) (5) ------- ------- ------- ------- ------- ------ ------- ------- ------- ------ Profit after taxation 2 5 4 8 19 - 12 31 19 12 Dividends (2) (2) - (2) (6) - (5) (11) (6) (5) ------- ------- ------- ------- ------- ------ ------- ------- ------- ------ Retained profits - 3 4 6 13 - 7 20 13 7 ======= ======= ======= ======= ======= ====== ======= ======= ======= ====== Net debt (132) (75) (1) (387) (595) (78) (2) (675) (561) (114) ======= ======= ======= ======= ======= ====== ======= ======= ======= ====== Net assets 13 17 11 40 81 11 44 136 89 47 ======= ======= ======= ======= ======= ====== ======= ======= ======= ====== ++ Connect M1-A1 Ltd changed its name from Yorkshire Link Ltd on 2 June 2004. * Metronet comprises Metronet Rail BCV Holdings Ltd and Metronet Rail SSL Holdings Ltd. + Gammon comprises Gammon Asia Ltd, Gammon China Ltd and Gammon Construction Holdings Ltd. 10. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 2004 2003 as restated £m £m Profit for the financial year 203 89 Dividends (41) (40) Premium paid on buy-back of preference shares (6) (5) ------ ------ 156 44 Other recognised gains and losses (net) (2) (1) Goodwill - on businesses sold 38 - Issue of ordinary shares 4 5 Buy-back of preference shares - carrying value (14) (11) Movements relating to Balfour Beatty Employee Share Ownership Trust - 2 ------ ------ 182 39 Opening shareholders' funds - as previously reported 230 193 Prior year adjustment 1 (1) ------ ------ Closing shareholders' funds - as restated 413 231 ====== ====== By special resolution on 13 May 2004, confirmed by the Court on 16 June 2004, the share premium account was reduced by £181m and the £4m capital redemption reserve was cancelled, effective on 25 June 2004. A special reserve of £185m was created which becomes distributable to the extent of future increases in share capital and share premium account. 11. NOTES TO THE CASH FLOW STATEMENT a) Net cash inflow from operating activities 2004 2003 as restated £m £m Group operating profit before exceptional items 67 68 Depreciation 50 43 Goodwill amortisation 33 15 Profit on sale of tangible fixed assets (1) (3) Charge relating to Performance Share Plan 2 3 Exceptional items - cash (expenditure)/ receipts (6) 5 Working capital decrease: +-----------------+ Stocks | 3 (6)| Debtors | (15) 70 | Other creditors and provisions | 38 (25)| +-----------------+ 26 39 ------- ------- Net cash inflow from operating activities 171 170 ======= ======= b) Analysis of movement in net cash Cash and Term Borrowings Tota1 Total deposits and deposits (including 2004 2003 overdrafts finance leases) £m £m £m £m £m At 1 January 2004 143 55 (74) 124 67 Cash flow (36) 206 8 178 46 Acquisitions of businesses - net (borrowings)/term deposits at date of acquisition - 39 (278) (239) 5 Exchange adjustments - (1) 5 4 6 -------- ------- --------- ------- ------- At 31 December 2004 107 299 (339) 67 124 ======== ======= ========= ======= ======= c) Reconciliation of cash flow to movement in net cash 2004 2003 £m £m (Decrease)/increase in cash in the period (36) 3 Cash outflow from decrease in borrowings 8 11 Cash outflow from increase in term deposits 206 32 ------- ------- Change in net cash resulting from cash flows 178 46 Acquisitions of businesses - net (borrowings)/term deposits at date of acquisition (239) 5 Exchange adjustments 4 6 ------- ------- Movement in net cash (57) 57 ======= ======= d) Analysis of net (cash)/borrowings 2004 2003 £m £m Unsecured borrowings: US dollar fixed rate term loan 8.06% (2008) 62 66 Bank overdrafts 12 4 Other short-terms loans 1 1 ------- ------- 75 71 Finance leases 2 4 ------- ------- 77 75 Cash and deposits (119) (147) Term deposits (269) (55) ------- ------- (311) (127) ------- ------- UK PFI/PPP non-recourse project finance - sterling floating rate term loan (2008 - 2027) 8 3 - sterling floating rate term loan (2005 - 2011) 25 - - sterling floating rate term loan (2005 - 2012) 93 - - sterling fixed rate bond (2006 - 2034) 148 - ------- ------- 274 3 UK PFI/PPP project finance - term deposits (30) - ------- ------- 244 3 ------- ------- Net (cash) / borrowings (67) (124) ======= ======= Term deposits represent cash on deposit for periods in excess of 24 hours. The interest rate obligations under the US dollar fixed rate term loan have been swapped into floating rate sterling obligations. A significant part of the PFI/PPP non-recourse project finance floating rate term loans have been swapped into fixed rate debt by the use of interest rate swaps. e) Acquisitions of businesses 2004 2003 Net assets acquired: £m £m Intangible assets - goodwill 17 54 Tangible fixed assets 229 24 Investments in joint ventures 34 - Stocks - 4 Debtors (including deferred tax) 81 115 Creditors and provisions (including current tax) (54) (174) Term deposits 39 5 PFI/PPP non-recourse term loans (278) - ------- ------- 68 28 Due on acquisitions 5 (7) ------- ------- 73 21 ======= ======= Satisfied by: Cash consideration 58 36 Cash, deposits and overdrafts acquired (2) (15) ------- ------- Cash outflow 56 21 Interest in joint ventures transferred 17 - ------- ------- 73 21 ======= ======= Companies acquired during the year (see Note 12) generated a net cash inflow from operating activities of £37m in periods since acquisition to 31 December 2004. f) Disposals of businesses 2004 2003 Net assets disposed of: £m £m Intangible assets - goodwill (including £38m goodwill previously written off to reserves) 60 - Tangible fixed assets 4 - Investments 3 - Stocks 2 - Debtors 29 - Creditors and provisions (18) - ------- ------- 80 - Profit on sale 137 - ------- ------- 217 - ======= ======= Satisfied by: Cash consideration 221 - Cash, deposits and overdrafts sold (4) - ------- ------- Cash inflow 217 - ======= ======= Disposals in 2004 comprise Andover Controls, the Group's Hong Kong business and the Group's investments in Garanti Balfour Beatty Insaat Sanayi ve Ticaret AS and First Philippine Balfour Beatty Inc. 12. ACQUISITIONS a) On 16 January 2004 and 23 January 2004 the Group acquired from Atkins its 32.2% interests in Connect Roads Ltd and Connect M77/GSO Holdings Ltd respectively for a total consideration of £13.3m cash. As a result, the Group's interests in the companies increased to 100% and they have been accounted for as subsidiaries from these dates. The fair value of the net assets acquired, consideration paid and goodwill arising were: Fair value of assets acquired £m Tangible fixed assets 231 Debtors 14 Investments 59 Creditors and provisions (31) Tax (11) Cash and deposits 41 Project finance non-recourse term loans (278) ------ 25 Investment in joint ventures (17) ------ 8 ------ Consideration and costs 13 ------ Goodwill 5 ====== The incremental operating profit, before goodwill amortisation, attributable to the 32.2% interests acquired, of £6m in the period since acquisition, is included in the Investments and developments segment. b) On 6 August 2004 the Group acquired from the Skanska Group its 50% shareholdings in each of Gammon China Ltd, Gammon Asia Ltd and Gammon Construction Holdings Ltd (the 'Gammon Skanska Group') for a total consideration of HK$475m (£33m) in cash and costs of £1m. The Group's share of the book value of net assets acquired was £27m. Provisional fair value adjustments amounting to £14m have been made to harmonise accounting policies for income and profit recognition on long-term contracts and the cost of pension obligations. Provisional goodwill arising amounted to £21m. The Group has recorded its share of operating profit, before goodwill amortisation, of £2m for the period since acquisition, which is included in the Civil and specialist engineering and services segment. c) On 1 January 2004 the Group acquired the business and assets of the railway division of ABB Gebaudetechnik AG based in Germany for a consideration of Euro3.3m. On 8 October 2004 the Group acquired the business and assets of HLM Design, a US design and engineering business, for a consideration of US$5.5m. On 14 October 2004 the Group acquired Bombardier Transportation's UK Solid State Interlocking signalling resources for a consideration of £2.1m. The provisional fair value of the net assets acquired, consideration paid and provisional goodwill arising on these transactions were: Fair value of assets acquired £m Tangible fixed assets 1 Debtors 6 Creditors and provisions (8) ------ (1) ------ Consideration and costs - cash 8 ------ Goodwill 9 ====== The businesses recorded an operating profit of £1m, before goodwill amortisation, in the periods since acquisition. The results of the former ABB and Bombardier businesses are included in the Rail engineering and services segment and the results of HLM Design are included in the Building, building management and services segment. d) In 2004, £4m deferred consideration was paid in respect of acquisitions completed in prior years. Goodwill arising on businesses acquired in 2003 has been increased by £3m. This reflects amendments to the provisional fair value of the net assets of Mansell plc of £4m, offset by a reduction in the consideration payable in respect of Marta Metroplex of £1m. The Group has used acquisition accounting to account for these transactions. 13. PENSIONS The Group continues to account for pensions in accordance with the requirements of SSAP 24 'Accounting for pension costs'. The Group's actuaries have reviewed the funding valuations of the principal schemes at 31 December 2004, namely the Balfour Beatty Pension Fund, the Balfour Beatty Shared Cost section of the Railways Pension Scheme and the two Mansell pension schemes. Details of these valuation reviews and the actuaries' assumptions are set out in the Report and Accounts along with the transitional rules and disclosures for the implementation of FRS17 'Retirement benefits'. The cost of pensions charged to profit and loss in the year was £35m (2003: £28m) with contributions paid of £43m (2003: £22m). The principal assumptions used by the actuaries, the scheme details and FRS 17 disclosures are summarised below: 2004 2003 ----------------------------- ------------------------------ Balfour Balfour Beatty Railways Beatty Railways Pension Pension Mansell Pension Pension Mansell Fund Scheme schemes Fund Scheme schemes % % % % % % Inflation assumption 2.8 2.8 2.8 2.7 2.7 2.7 Rate of increase in salaries 4.3 4.3 4.3 4.2 4.2 4.2 Rate of increase in pensions in payment 2.8 2.8 2.8 2.7 2.7 2.7 Return on existing investments: - actives and deferred members n/a n/a n/a 7.1 7.1 7.1 - pre-retirement 7.8 7.8 7.8 n/a n/a n/a - post-retirement 5.5 5.5 5.5 n/a n/a n/a - pensioners,widows and dependants 5.0 5.0 5.0 5.0 5.0 5.0 FRS 17 discount rate 5.3 5.3 5.3 5.4 5.4 5.4 Number Number Number Number Number Number Total number of scheme members 36,168 3,327 3,434 35,976 4,103 3,481 £m £m £m £m £m £m SCHEME SURPLUS / (DEFICIT) Market value of assets 1,480 185 133 1,385 238 118 Present value of scheme liabilities (1,479) (174) (169) (1,331) (222) (156) ---------- --------- -------- ---------- --------- --------- Surplus / (deficit) in scheme 1 11 (36) 54 16 (38) ========== ========= ======== ========== ========= ========= £m £m £m £m £m £m FRS 17 DEFICIT Market value of assets 1,480 185 133 1,385 238 118 Present value of scheme liabilities (1,638) (199) (190) (1,523) (264) (178) ---------- --------- -------- ---------- --------- --------- Surplus / (deficit) in scheme (158) (14) (57) (138) (26) (60) Related deferred tax asset 47 4 17 41 8 18 ---------- --------- -------- ---------- --------- --------- Net pension liability (111) (10) (40) (97) (18) (42) ========== ========= ======== ========== ========= ========= 14. POST BALANCE SHEET EVENTS On 17 February 2005 the Group acquired JCM Group in the USA for a consideration of approximately US$10m. ************************************* The financial information set out above (which was approved by the Board on 8 March 2005) does not constitute the Company's statutory accounts for the years ended 31 December 2004 or 2003, but is extracted from those accounts. The statutory accounts for the year ended 31 December 2004 will be filed with the Registrar of Companies following the Annual General Meeting. The auditors' report on these accounts was unqualified and did not contain any statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31 December 2003 have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain any statement under section 237(2) or (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

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