Final Results - Part 1

Expro International Group PLC 31 May 2006 EXPRO INTERNATIONAL GROUP PLC ("Expro" or "the group") Preliminary results for the year ended 31 March 2006 Expro International Group PLC, the oilfield services company, today announces preliminary results for the year ended 31 March 2006. Year ended Year ended Increase 31 March 31 March (%) 2006 2005 Revenue Â£300.7m Â£211.3m 42% Operating profit Â£34.1m Â£12.5m Headline operating profit (a) Â£34.1m Â£19.0m 79% Headline operating margin (a) 11.3% 9.0% Profit after tax Â£18.4m Â£3.1m Continuing EPS* 25.5p 4.7p Headline EPS* (b) 25.5p 13.5p 89% Underlying EPS* (c) 27.1p 14.6p 86% Net cash from operating activities Â£58.4m Â£32.8m Free cash flow (d) Â£10.4m Â£4.0m Dividends per share 10.9p 10.9p Net bank borrowings (e) Â£17.1m Â£53.7m * All references to earnings per share (EPS) are calculated by reference to the basic number of shares (a) Based on continuing operations before special items, as extracted from the consolidated income statement (b) Based on continuing operations before special items, as calculated under note 12 (c) Based on continuing and discontinued operations, before special items and the amortisation of intangible assets which arise from acquisitions, as calculated under note 12 (d) As calculated in the financial review (e) Bank loans of Â£62.7m (2005: Â£58.7m) less cash of Â£45.6m (2005: Â£5.0m), as extracted from the consolidated balance sheet â€¢ Results above current market expectations â€¢ Our strategy, boosted by strong market conditions, continued to deliver financial performance â€¢ Strong operational leverage â€¢ Record levels of investment in capex and product development â€¢ Strong cash flow â€¢ Dividend maintained Commenting on the results, Graeme Coutts, Chief Executive, said, "I am delighted to announce excellent results that are ahead of current market expectations. Our performance this year reflects the benefits of our focused strategy, boosted by the continued strengthening of the market. Strong organic revenue growth and high operational leverage continue to fund investments for the future, offset adverse currency movements and provide sustained earnings growth. Despite record levels of investment, the group's cash flow remains strong." - Ends - For further information please contact: Expro International Group PLC On 31 May 2006: 020 7067 0700 Graeme Coutts, Chief Executive Thereafter: 0118 959 1341 Michael Speakman, Finance Director Weber Shandwick Square Mile 020 7067 0730 James Chandler / Rachel Taylor / Stephanie Badjonat An analyst meeting will be held at 09.30 this morning at the offices of Weber Shandwick Square Mile, Fox Court, 14 Gray's Inn Road, London, WC1X 8WS EXPRO INTERNATIONAL GROUP PLC ("Expro" or "the group") Final results for the year ended 31 March 2006 Chairman's and Chief Executive's Statement Throughout the first half of 2005, the results from the implementation of Expro's growth strategy began to deliver strong financial performance. The momentum witnessed in the first half of the financial year has continued, assisted by ever improving market conditions. The well publicised increase in global demand for energy has placed heavy pressure on supply, supporting high oil and gas prices. Strong industry momentum has been established, dominated by these conditions. The combination of elevated commodity prices and a positive outlook for global energy demand has resulted in a stable investment environment for oil and gas operators. These market conditions have led to strong demand for the products and services provided to the global oil and gas industry by companies such as Expro. As a late cycle upstream services provider, Expro is well positioned to benefit from the increased customer spend, which is forecast to remain at elevated levels for several years to come. Our customers are heavily focused on maximising cash flows from their producing assets, aggressively developing new producing fields and adding replacement reserves through increased exploration. All of these activities play to Expro's technology strengths. Trading in the second half of the year continued to gain momentum in strong market conditions. The strategy published 30 months ago has positioned the group to take advantage of current market conditions, resulting in a record order backlog, an outstanding technology position and profitable progress in all our operating areas. In addition, the second half saw our exit from the permanent monitoring business through the sale of our 50% holding in the QuantX joint venture to Baker Hughes Inc. Given the increase in activity around the group over the prior year, our safety performance has been excellent. We have seen further improvement in our key performance indicators ("KPI's"), which we believe make Expro "best in class" for safety performance. The group's worldwide performance over the last five years has been recognised by Expro being named as winner of RoSPA's Oil and Gas and Water Industry Sector Award for 2006, beating off strong competition from major players in the oil, gas and utilities sectors. Expro has a significant amount of US dollar revenues which create a material exposure to the effects of currency movements when translating into the group's functional currency, sterling. The year on year effect of currency movements has been smaller than previous years as the value of the US dollar has been consistent for a sustained 24 month period. In trading terms, turnover increased to Â£300.7m, compared to Â£211.3m in the prior year representing growth of 42%. Headline operating profit increased to Â£34.1m, a 79% increase over the prior year result of Â£19.0m. Headline operating margin at 11.3% is well ahead of prior year's 9.0% and, despite record levels of re-investment, free cash flow was positive at Â£10.4m. Net cash was further enhanced by the proceeds of a very well supported cash placing of shares and payment received from Baker Hughes Inc. in consideration for the group's share of QuantX. Dividend statement The Board is recommending maintaining the final dividend of 7.1p per ordinary share, bringing the total dividend for the year to 10.9p, unchanged from last year. This recommendation reflects the Board's continued confidence in the group's future performance. The dividend will be paid on 31 July 2006 to shareholders on the register on 30 June 2006. Board changes After 24 years of service, Colin Ainger, Executive Corporate Development Director, will retire from the group at the Annual General Meeting on 6 July 2006. His position on the Board will be taken by John McAlister who joins Expro as Executive Group General Counsel in June 2006. The Board wishes to welcome John to Expro, where his blend of skills will bring additional value to the Executive team, and wish Colin well in his retirement, following his years of outstanding service. Group strategy Implementation of the group's strategy published by management late in 2003 has led to greatly improved performance and outlook for Expro. The initial strategic objective was aimed at setting new growth targets for the business. The results to date are very encouraging. There were three key areas identified for strategic focus. Firstly, management were required to re-engineer a loss-making Americas business. Secondly, a far greater degree of client interaction was required which led to additional investment in people, professional training and a fully integrated sales network to improve the overall efficiency of Expro's customer care capability. Finally, the importance of technology development was emphasised and appropriately resourced. Technology enhancement took shape in two ways, firstly through organic projects such as the Joint Industry Partnership ("JIP") for rigless intervention, and secondly through the identification and acquisition of synergistic growth technologies. To support the strategy in rapidly improving market conditions, several key structural and organisational changes were made. Additional management with the appropriate specialisation were introduced to manage distinct aspects of Expro's business. Emphasis was placed on separating the geographically dependent Cased Hole Services ("CHS") and Surface and Environmental Systems ("SES") from the project driven Subsurface Systems ("SSS") and Production Solutions business. Expro is now structured and managed under two distinct segments - Regional businesses and Global businesses. Regional businesses comprise the technologies and services which are predominantly local, infrastructure dependent and driven by client operating expenditure. This encompasses our previously reported CHS business stream and our well testing offerings. Global businesses comprise those products and services which are driven by global customer capital expenditure and where Expro is a leading technology provider. They are, in the main, highly technically differentiated and require strong project management skills. This encompasses our previously reported SSS business stream, including Subsea Safety Tools ("SST") and our market leading global subsurface brand of Tronic-Matre, as well as our Production Solutions business, the latter previously reported under SES. These key structural and management changes allowed specialisation and differentiation to support the sales, contractual and technology strategies. Overall the results to date are encouraging with record order backlogs established in the period. Business segment overview As previously described, Expro now operates in two distinct segments. Regional businesses Through our Regional businesses, we offer our clients a wide range of well performance technologies for the maintenance of existing wells and the installation of new producing wells. Steady progress has been made in the Former Soviet Union ("FSU"), existing contracts have been extended and the client base increased during the year. The market for the Regional businesses is driven by a combination of client capital expenditure for new well construction, and operating expenditure for existing wells. Virtually all wells require cased hole products and services throughout their economic life. Our technology offering varies according to geography. In the majority of our locations, we provide services closely aligned to our client's operating expenditure. Our Regional businesses deliver a high degree of stable and relatively predictable earnings, this is particularly true of mature provinces such as the North Sea, a market which continues to offer us opportunity. In this area we have increased our market share and increased the contractual opportunity base to introduce new high value technologies such as our Cableless Telemetry System ("CaTS TM") wireless well products. We continue to invest in additional high value technologies to enhance our earnings capability through our fixed global infrastructure and extensive client contract base. Further development of the Down Hole Video product line, both technically and geographically, is an excellent example of this. Global businesses Our Global businesses primarily consist of our Production Solutions business, which provides Early Production Facilities ("EPF's"), along with SST's and the leading global subsurface brand of Tronic-Matre. Our Production Solutions business provides and operates small plant, topside processing equipment for temporary, semi-permanent and occasionally permanent field development. This business is seeing the benefit of a sustained high oil price, late cycle deepwater field developments and a need to increase appraisal testing. All of this has been assisted by our improved organisational structure and sales efforts. Increasingly, customers see our small, fast-track production solutions as a viable way to gain early cash flow from major projects, as well as increasing their reservoir knowledge and reserves position. Our reputation in this segment is very strong. Early in the year we assisted Exxon Neftegaz Ltd ("ENL") to achieve first production from their Sakhalin Island development on schedule. The Chayvo project has given Expro the opportunity to display exceptional value in the harshest of environments. This flagship contract will continue throughout most of the 2006 calendar year. Tronic-Matre and our SST business have been the largest beneficiaries of the increased late cycle activity. Momentum in this segment has continued at a pace. Our market leading products are all closely aligned to our client's deep water capital expenditure. These late cycle businesses are dependent on sanctioned projects which are operationally underway. Although cyclical in nature, market conditions for our subsurface business remain favourable. These conditions, combined with our organisational focus, have continued to drive positive momentum, producing strong performance and outlook. Geographic segment overview Expro provides products and services to global markets through an extensive network of operational areas. These geographic operating areas are managed and report within four distinct regional groupings. Europe/Former Soviet Union ("Europe/FSU") Europe/FSU performance in the year, particularly in the UK North Sea, has been outstanding. The characteristics of this ageing oil and gas province continue to provide the type of market opportunity ideally suited to Expro, where we provide our most comprehensive offering of technologies. Demand for our cased hole products has been especially high. These technologies form the basis of production enhancement for all wells, particularly those in heavy decline. We enjoyed the benefit of the market share gains made in the prior year, mainly from the pan-European contract for Shell. An equally compelling market driver in a late cycle offshore province is subsea tie-back activity. This is an industry recognised technique to access numerous stranded pockets of hydrocarbons in a cost effective manner. These subsea wells, when connected back to the North Sea's ageing fixed infrastructure, provide additional cash for operators for relatively small investment. In this area, Expro provides market leading products and services. Our subsea safety tools are required to provide safe operational connectivity between the drilling rig and subsea wellhead. Our surface well test spreads are also in high demand, handling, processing and disposing of hydrocarbons from new subsea wells. Overall the North Sea, including Norway, continues to offer good prospects for Expro. Africa/Middle East ("Africa/ME") Africa/ME was separated out as a managed region for the first time during the year. A key focus for management has been to establish operational areas of critical mass. This has been achieved in Africa. Performance in the year has been very good, particularly given the challenges of setting up extensive operating capability to serve the deep water subsea field developments off the West African continental shelf. The region also covers operations in North Africa, particularly in Libya and Algeria, down the West African coast, where we provide Production Solutions facilities and deep water technologies offshore Nigeria, and on to the deep water developments off Mauritania, Angola and South Africa. This region has the largest portion of Expro's order backlog. Significant contracts have been performed for numerous customers including bp, Total and Woodside. Asia Asia was also separated out as part of the restructuring exercise performed by management during the period. Formerly managed as a single region together with Africa, the separation was necessary to cater for the growth characteristics of both regions. In this region we have multiple operating countries but the main focus of our strategy is to capture high value projects, such as Chayvo on Sakhalin Island, and create key operational hubs where critical mass can be established, such as Australia. Performance in the period has been good. The absolute highlight has to be the aforementioned Chayvo production facility, installed and operational on schedule for ENL in the difficult environment of Sakhalin Island. This achievement was recognised by our customer in their 2005 highlights. Asia remains an interesting and challenging region for Expro. Enquiry levels for subsea activity have risen, indicative of the changing nature of this market. Americas The Americas region has been subject to an ongoing strategic re-engineering exercise which commenced in the year to March 2004. The challenge has been to establish stronger market positions for Expro, reducing our historic dependence on lower tier land and Gulf of Mexico shelf markets, in favour of higher margin, technology based positions such as the deep water Gulf of Mexico. During the year, the continuing implementation of this strategy delivered positive results. Significant market share has been established in the rapidly developing deep water Gulf of Mexico, and several high value orders have been taken for specialist subsea tools from customers with extensive deep water programmes, such as Chevron and BHP. The Americas also benefited from stable market conditions and good demand for our cased hole services products throughout the region. Of note has to be the renewed interest in some of our unique cased hole perforating technologies, which are particularly well suited to operations in areas such as the Barnett Shale in Texas. Our employees Expro has established a reputation within the upstream services industry as an employer of choice. The ability to attract and retain quality staff will have a high degree of influence over the success of our strategy in these strong market conditions. Our ability to deliver our strategy, and to continue to develop the business, is greatly assisted by the professional attitude and performance of our employees. Over the period, Expro has added approximately 300 staff, many of them graduates and trainees. The Board wishes to place on record its recognition of the achievements and contribution made by all employees to the safe and successful implementation of our strategy. Outlook The general outlook for the oil and gas services sector remains very positive, driven by client confidence and stable commodity prices, resulting in a strong uplift in client capital and operational spend. As a late cycle player, Expro is enjoying the benefit of these market conditions. This positive environment is providing good impetus to Expro's strategy, resulting in a positive trading outlook. Key markets such as the United Kingdom Continental Shelf ("UKCS") have performed well for the group and offer continued good prospects. West Africa and a revitalised Americas business are poised to provide further growth. Recruitment and retention of personnel, together with resource and cost management are particularly challenging issues given the buoyant nature of the global industry. We remain focused on our strategy, including the further development of our customer care capability and, very importantly, the development of our future technology portfolio. Encouraged by our customers and early results, investment levels in the latter will increase as we strive for technical breakthroughs. Globally, our levels of tendering and enquiry remain high, in part driven by enhanced client interaction. Our order book and market outlook are sufficiently robust to give us confidence that we remain well set to continue to deliver our strategic goals. Dr Chris Fay, CBE Graeme Coutts 30 May 2006 Chairman Chief Executive Officer OPERATIONS REVIEW Expro's operations are centred in four geographic regions. The Europe/FSU region, headquartered in Aberdeen, covers the UKCS, Norway, Continental Europe and FSU, including Western Russia. The Africa/Middle East region, managed from its hub in Dubai, covers North Africa, West Africa and the Middle East. The Asia region, also based in Dubai, covers South East Asia, China and Australia. The Americas region spans North and South America, with headquarters in Houston. The group operates in fifty countries worldwide. In addition to the Regional businesses the group operates a number of Business Units that rely on the regional infrastructure for operations support. The Subsea Business Unit, based in Aberdeen, provides subsea intervention equipment used to access subsea wells for completion, testing and maintenance. The Production Solutions Business Unit, with offices in Reading and Houston, supplies and operates fast track production facilities to establish early production from proven fields. The Tronic-Matre Business Unit provides a specialist range of subsea electrical connectors and sensors. Performance The year has seen a significant improvement in activity, partly due to increased investment by operators both in field development and well operations, partly due to the impact of Expro's development strategy and partly from the benefits of the established infrastructure. The number of recorded manhours has increased by 17% on the prior year. Against this background, Expro has bettered its HSE targets for the year and delivered a "best in class" HSE performance. Regional businesses Europe/FSU regional revenue was Â£77.1m, up 29% on the prior year. Higher oil prices saw a build up in well maintenance activity during the year, as operators strived to optimise production. At the same time, the market experienced an upturn in development and exploration activity in the North Sea. Limited availability of personnel and equipment saw improved pricing and margins despite underlying cost pressures. This was the first full year of the Shell pan-European wireline and well testing contracts, under which Expro performs well operations across all of Shell's European activities. In the FSU, the contract to provide multiple services on the Karachaganak field was extended for a further two years with two one year options, at enhanced rates. The group was also successful in expanding its client base in the FSU with campaigns for Caspian Oil & Gas, Uralsk Oil & Gas and Maersk Oil & Gas. Increased activity using under balanced drilling technology in the Netherlands boosted income. In the North Sea, the use of Slickline Perforating ("SLP") technology together with innovative StimGun(R) products provided cost effective solutions to operators keen to optimise production. Africa regional revenue was Â£32.9m, up 44% on the prior year. A slow start to the year in North Africa was offset by some notable contract awards in the second half of the year and a pick up in activity. Recent awards included contracts for bp, Repsol, Total and Woodside. The application of multiphase metering technology and Expro's proprietary GOLD system, delivering laboratory standard Pressure Volume Temperature ("PVT") analysis in the field, is providing clients in North Africa, and elsewhere, with valuable fluid data on site. The provision of well testing and cased hole services on a number of major West Coast deepwater projects accounted for the majority of the increase in activity. A successful campaign for Woodside on their Chinguetti field offshore Mauritania was completed during the year, with the prospect of further work in the area in the future. The start up of testing and cased hole operations for Amerada Hess offshore Equatorial Guinea expanded Expro's presence in this all important West Africa region. Major contracts were awarded in Angola during the year, for the supply of clean up and testing services on deepwater Blocks 18 and 31 for bp, and on Blocks 17 and 32 for Total. Expro's capability offshore Angola has increased significantly during the year. This was achieved against a background of increasing supply chain pressures within the industry. These contracts are further evidence of Expro's strong position in the all important deep water West Africa market. Offshore Cote d'Ivoire, Expro combined its Drill Stem Testing ("DST") and Tubing Conveyed Perforating ("TCP") expertise to provide CNR with a seamless testing capability on its Espoir field. This was the first time that this expertise had been applied to a major contract outside the United States. Asia regional revenue was Â£24.9m, up 16% on the prior year. Cased hole services activity was up by over a third in Australia as operators increased well maintenance activity both onshore and offshore. A similar picture emerged in Thailand, where the continuing well services contract with Chevron saw activity increase by almost 40%. Work continued through the year on a major integrated services contract with PetroVietnam in the Cuu Long basin. This contract utilised Expro's proprietary Tubing Conveyed Sampling system that enables operators to retrieve fluid samples whilst testing rather than with a separate wireline deployed sampler, saving time. Americas regional revenue was Â£34.6m, up 26% on the prior year. Income was boosted by the acquisition early in the year of Downhole Video Inc. ("DHVI"). This provided a valuable addition to Expro's portfolio of wireline deployed tools. Despite the worst hurricane season on record in the Gulf of Mexico, TCP activity was up 18% on the prior year and activity increased noticeably in the final quarter. This was in part due to increased market activity and in part due to increased market share. The EXCAPE(R) perforating technology was successfully deployed in high rate horizontal wells in the Barnett Shale in Central Texas, opening up a new area for this technology. As a result, EXCAPE(R) activity was up 23% on the prior year. Despite a slow take up of the technology, downhole tractor operations in Canada recorded combined runs of 200,000 metres in extreme well conditions with no lost time. Other notable technical achievements were the development of a combined video and production logging tool to identify fluid entry into wells and the use of PowerPerf TM propellant to provide enhanced perforating services. Global businesses Subsea Business Unit revenue was Â£39.1m, up 49% on the prior year. In the North Sea, a significant increase in the number of subsea well interventions and well clean-ups saw equipment utilisation at record levels. This was reflected in improved pricing. It was a similar picture in the Gulf of Mexico with a 37% increase in the number of interventions, to record levels. In addition to conventional intervention equipment, the year saw the successful deployment of the latest generation of high pressure electro hydraulically operated tools on Eni's K2 development. Work continued during the year on the development of the next generation of high pressure tools for Chevron's deepwater Tahiti development in the Gulf of Mexico. This is the largest single subsea contract ever placed with Expro and represents state of the art subsea intervention technology, confirming Expro's position as market leader in this field. During the year, equipment was delivered for use on bp's Block 18 development offshore Angola, on Chevron's Lobito Tomboco development also offshore Angola and on Norsk Hydro's Ormen Lange project offshore Norway. Production Solutions Business Unit revenue was Â£39.9m, up 115% on the prior year. This was despite the early shut down of the Ardmore Field in the North Sea where Expro was providing and operating production facilities on the jack up based production facility. The equipment was decommissioned and is currently being redeployed to other projects. The most significant achievement during the year was the successful start up of the interim production facility for ENL on the Chayvo Field, Sakhalin Island, Eastern Russia. This enabled ENL to commence oil and gas production from the giant Sakhalin-1 development, on time and on budget. Income in South East Asia was boosted by the start up of the Nang Nuan development, with Expro providing and operating the production facilities onboard the FPSO. A number of smaller onshore early production facilities were also commissioned during the year in Indonesia. In China, sales of production and testing equipment reached record levels. Work started during the year on the construction of a barge mounted production facility for Chevron Nigeria Ltd. The facility is due to be completed in the next financial year and will be used to increase Chevron's production from the Delta Region. Tronic-Matre Business Unit revenue was Â£39.4m, up 48% on the prior year. With the acquisition of Matre at the end of the previous financial year, the business added pressure and temperature sensors to its product range, enabling Tronic-Matre to offer integrated sensor and connector packages for installation on subsea wells. Income was also boosted by an increasing number of orders for high voltage subsea power connectors, a technology where Tronic has established itself as a market leader. After a record year in 2005, orders for subsea equipment continued to increase as more and more subsea development projects were approved. This is directly reflected in Tronic's order book. Continued investment in both facilities and personnel during the year has ensured that Tronic-Matre can meet the demand, delivering high quality products on time, for projects across the globe. Development of enhanced subsea connectors for ultra high voltage power supply and for fibre-optic cables has continued, ensuring that Tronic-Matre remains at the forefront of subsea connector technology. Finally the Fluid Analysis Centre and Ecodrill manpower business, which fall within the Global businesses segment, also showed significant growth on the prior year. Mike Martindale Chief Operating Officer FINANCIAL REVIEW Trading performance The market conditions for Expro's products and services have continued to strengthen throughout the year, magnifying the financial impact of the strategic initiatives that have been put in place. All businesses have performed well, with a good balance between the Regional and Global businesses. A very strong performance in the UK Continental Shelf was typical of most of the operating expenditure driven Regional businesses, which all performed well year on year. The commencement of the operational phase of ENL's Chayvo EPF at Sakhalin, together with strong growth from Tronic-Matre and Subsea Safety Tools, provided an equally strong performance from the capital expenditure driven Global businesses. Overall revenue at Â£300.7m was 42% higher than the prior year, with a bias towards the second half of the year as a result of new projects coming on stream later in the year. The resultant headline operating profit at Â£34.1m was 79% higher than the prior year and produced a headline operating margin of 11.3%, up from 9.0%. While Expro has a significant amount of US dollar revenues, the year on year effect of currency movements has been smaller than previous years, as the value of the US dollar relative to sterling, has been consistent for a sustained 24 month period. Acquisitions and disposals On 11 April 2005, Expro acquired Downhole Video International Inc. (DHVI), a US based supplier of downhole video services. DHVI provide high quality visual images from within the well and are the market leaders in this technology. It has become an integral service within our Regional businesses and globalisation of the DHVI service offering is well underway. In August 2005 our partner in the QuantX joint venture, Baker Hughes Inc., elected to exercise its right to acquire the business outright. The consideration of Â£15.8m is based on a predetermined formula and the transaction was completed on 31 October 2005. This has led to a significant pre-tax gain of Â£11.5m and a corresponding tax charge of Â£1.8m. Interest The net finance costs in the year of Â£4.6m were higher than the prior year (Â£3.6m), primarily as a result of higher rates of interest on bank loans. Net interest includes imputed charges of Â£1.4m (Â£1.1m) in respect of pension schemes and finance leases. The group has a five year interest rate swap with a notional capital value of Â£12m and rate of 5.62%, and a five year interest rate cap at 6.25% on a notional capital value of $40m, both maturing on 15 May 2007. Taxation The group tax charge of Â£11.2m represents an effective tax rate of 37.9%. The effective rate reflects the group's broad geographic spread of profits, unrecoverable losses in certain territories, a variety of imputed and higher rate overseas tax regimes and non-deductible items. Tax continues to be a key priority for the group, particularly the careful management of the long-term underlying tax rate. Closure of tax positions throughout the group's operating territories also remains a priority. Earnings per share Headline earnings per share, which is based on continuing operations before special items, was 25.5p for the full year, an increase of 89% on the prior year. Underlying earnings per share, which is based on continuing and discontinued operations before special items, but excludes the amortisation arising from acquisitions, are 27.1p which represents an 86% increase on the prior year. These increases reflect the impact of higher sales volume leveraging the relatively high operational gearing of the group. Dividends The Board is recommending that the final dividend of 7.1p per ordinary share is maintained, bringing the total dividend for the year to 10.9p, which is unchanged from last year. This recommendation reflects the Board's continued confidence in the group's future performance. Equity Total equity increased by Â£56.4m to Â£109.6m. The increase comprises trade profits in the year of Â£18.8m, the net gain on the sale of QuantX of Â£9.7m, Â£5.3m of favourable exchange movements, a Â£4.5m gain arising from reductions in the pension deficit, share capital issued of Â£26.5m less dividends paid of Â£8m, together with other minor movements. Cash flow Net cash flow from operations for the year was Â£58.4m, funding both the group's investment requirements and commitments in terms of tax, financing and dividends. Despite the record levels of capital investment, outlined below, free cash flow was Â£10.4m, representing an improvement of Â£6.4m on the prior year and in excess of the Â£8.0m required to fund the dividend. 2006 2005 Â£m Â£m Net cash from operating activities 58.4 32.8 Interest received 0.6 0.4 Proceeds on disposal of property, plant and equipment 0.8 0.2 Purchases of property, plant and equipment (49.3) (29.1) Purchases of intangible assets (0.1) (0.3) -------------------------------------------------------------------------------- Free cash flow 10.4 4.0 Dividends paid (8.0) (7.2) Dividend cover 130% 56% -------------------------------------------------------------------------------- Capital investment Capital investment at Â£51.5m (in cash terms, Â£49.4m) was a record spend for the group and includes investments in several material projects namely the Chayvo EPF project, the Tahiti SST and the Dibi EPF project, together with our expansion in Angola, following two major contract awards. Research and development Expenditure on research and development also increased to record levels, continuing the focus on deep water subsea developments, and increasingly on the development of the Rigless AX-S TM intervention system. Net bank borrowings On 2 June 2005 the company raised Â£25.9m from the proceeds of a very well supported cash box placing that was initiated to refinance the earlier acquisitions of RMI (Matre) and DHVI. In October 2005, the company received Â£15.3m from Baker Hughes for the group's remaining share of QuantX. These two events were largely responsible for the reduction in net bank borrowings to Â£17.1m at the end of the year. At 31 March 2006, 74% of the group's gross borrowings were denominated in US Dollars. Total bank borrowings are well within the group's facility, thereby providing headroom for both organic and some acquisitive growth. Financial risks The group's principal financial instruments, other than derivatives, comprise bank loans, finance leases, and cash. The main purpose of these financial instruments is to manage the group's funding and liquidity requirements. Exposure to liquidity, credit and market price risk arises as a result of the day-to-day business activities of the group and the financing of those activities. Derivative financial instruments are used to hedge exposures to fluctuations in interest rates and foreign exchange rates. Treasury activities are governed by policies and procedures approved by the Board and established controls are in place covering all financial instruments. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities and not for speculative purposes. Further information on the principal financial risks facing the group and the approaches taken to mitigate them, are set out in the financial statements, specifically notes 19, 21 and 23. Mitigating the group's exposure to currency risk continues to be a key priority. The group's currency exposure arises in two principal forms, transactional and translational. Transactional exposure is minimised because, as far as possible, operating entities transact in the same currency as their functional currency. Where this is not possible, the group enters into forward currency contracts. During the year ended 31 March 2006, forward contracts with a nominal value of US$93m matured with an average US Dollar/Sterling settlement exchange rate of 1.82. This compared to the average US Dollar/Sterling rate used in translating the income statement of US$ 1.77. At the year end the group has outstanding contracts of US$ 38m at an average US Dollar/Sterling settlement rate of 1.77. This compares to the exchange rate at 31 March 2006 of US$1.74/Â£1 and a budgeted exchange rate for the year ending 31 March 2007 of US$1.80/Â£1. Translational exposure impacts the group's revenues, profits and its net assets, to the extent that these are in overseas businesses with functional currencies other than sterling. 47% of the group's revenues are denominated in US Dollars, with 38% in Sterling and 15% in other currencies. The group's policy of natural hedging partially mitigates the impact of currency movements in terms of profits, cash and net assets. In addition, the group also has foreign currency loans, principally US Dollars, which mitigate its exposure to foreign currency denominated net assets. Pensions The group's pension scheme deficit reduced to Â£19.3m from the prior year deficit of Â£23.9m, a reduction of Â£4.6m, arising from improved returns on the underlying scheme assets, offset by an increase in the scheme liabilities. The actuarial valuation carried out for funding purposes on 5 April 2005 projected that the scheme was in deficit at Â£6.9m against an IAS 19 deficit of Â£23.9m at 31 March 2005, a difference of Â£17.0m. Michael J Speakman Group Finance Director CONSOLIDATED INCOME STATEMENT Year ended 31 March 2006 Note 2006 2006 2006 2005 2005 2005 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Headline Special Total Headline Special Total items (c) items (c) Continuing operations Revenue 3,4 300,727 - 300,727 211,273 - 211,273 Cost of sales (255,251) - (255,251) (184,553) - (184,553) --------- ------ --------- -------- ------ --------- Gross profit 45,476 - 45,476 26,720 - 26,720 Administrative expenses (11,360) - (11,360) (7,702) (6,517) (14,219) --------- ------ --------- --------- ------- --------- Operating profit/(loss) 4,5 34,116 - 34,116 19,018 (6,517) 12,501 Comprising: ------------------------------------------------------------ Headline operating profit (a) 34,116 - 34,116 19,018 - 19,018 Goodwill impairment - - - - (4,971) (4,971) Inventory impairment - - - - (1,546) (1,546) -------- ------ -------- -------- ------- ------- 34,116 - 34,116 19,018 (6,517) 12,501 ------------------------------------------------------------ Post tax profit from joint ventures 6 - - - 1,300 738 2,038 Comprising: ------------------------------------------------------------ Headline post tax profit (b) - - - 1,300 - 1,300 Goodwill impairment - - - - (726) (726) Release of contract provision - - - - 1,464 1,464 -------- ------ -------- -------- ------- -------- - - - 1,300 738 2,038 ------------------------------------------------------------ Operating profit/(loss) including joint ventures 34,116 - 34,116 20,318 (5,779) 14,539 Investment income 8 3,855 - 3,855 3,055 - 3,055 Finance costs 9 (8,409) - (8,409) (6,643) - (6,643) -------- ------- -------- -------- ------- -------- Net finance costs (4,554) - (4,554) (3,588) - (3,588) Profit/(loss) before tax 29,562 - 29,562 16,730 (5,779) 10,951 Tax 10 (11,204) - (11,204) (7,829) - (7,829) -------- ------- -------- -------- ------- -------- Profit/(loss) after tax 18,358 - 18,358 8,901 (5,779) 3,122 Discontinued operations Post tax profit from joint ventures 6 441 - 441 658 - 658 Post tax gain from disposal of joint ventures 6 - 9,661 9,661 - - - -------- ------- -------- -------- ------- -------- Profit/(loss) for the year 18,799 9,661 28,460 9,559 (5,779) 3,780 ======== ======= ======== ======== ======= ======== Attributable to: Equity holders of the parent 18,750 9,661 28,411 9,558 (5,779) 3,779 Minority interest 49 - 49 1 - 1 -------- ------- -------- -------- ------- -------- 18,799 9,661 28,460 9,559 (5,779) 3,780 ======== ======= ======== ======== ======= ======== Earnings per share From continuing operations Basic 12 25.5p 25.5p 13.5p 4.7p ======== ======== ======== ======== Diluted 12 25.1p 25.1p 13.3p 4.7p ======== ======== ======== ======== (a) Headline operating profit is before special items. (b) Headline post tax profit in respect of joint ventures is before special items. (c) Special items comprise significant impairments, gains on disposal of discontinued operations and, in the case of joint ventures, the release of a contract provision. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year ended 31 March 2006 Note 2006 2005 Â£'000 Â£'000 Loss on cash flow hedges (2,951) - Exchange differences on translation of foreign operations 5,672 (1,963) Actuarial gains/(losses) on defined benefit pension schemes 31 4,451 (7,847) Tax on items taken directly to equity 567 2,789 ------- ------- Net income recognised directly in equity 7,739 (7,021) Transfers Transferred to profit and loss on disposal of joint venture foreign operations 6 (365) - Transferred to profit and loss on maturity of cash flow hedges 1,815 - Profit for the year 28,460 3,780 ------- ------- Total recognised income and expense for the year 37,649 (3,241) ======= ======= Attributable to: Equity holders of the parent 37,600 (3,242) Minority interest 49 1 ------- ------- 37,649 (3,241) ======= ======= Effects of changes in accounting policy Attributable to: Equity holders of the parent 547 - Minority interest - - ------- ------- 547 - ======= ======= The effects of changes in accounting policy arise from the adoption of IAS 32 and IAS 39 with effect from 1 April 2005. As explained in note 2, the prior year comparatives have not been restated for this change in accounting policy. CONSOLIDATED BALANCE SHEET At 31 March 2006 Note 2006 2005 Â£'000 Â£'000 Non-current assets Goodwill 14 20,511 18,166 Intangible assets 15 9,221 7,119 Property, plant and equipment 16 95,423 72,426 Investment in joint ventures 6 - 3,242 Deferred tax assets 22 6,365 3,470 -------- ------- 131,520 104,423 Current assets Inventories 17 19,237 15,213 Trade and other receivables 19 95,577 74,789 Cash 45,642 5,009 -------- ------- 160,456 95,011 -------- ------- Total assets 291,976 199,434 -------- ------- Current liabilities Trade and other payables 20 (73,159) (45,290) Current tax liabilities (12,549) (6,625) Finance leases 24 (768) (478) Derivative financial instruments 23 (295) - Provisions 25 (188) (349) -------- ------- (86,959) (52,742) Non-current liabilities Bank loans 21 (62,699) (58,715) Retirement benefit obligation 31 (19,348) (23,882) Deferred tax liabilities 22 (2,428) (1,629) Finance leases 24 (7,972) (6,496) Derivative financial instruments 23 (138) - Provisions 25 (2,882) (2,780) -------- ------- (95,467) (93,502) -------- ------- Total liabilities (182,426) (146,244) -------- ------- Net assets 109,550 53,190 ======== ======= Equity Share capital 26 7,328 6,646 Share premium account 27 570 929 Hedging and translation reserve 27 3,099 (1,963) Own shares 27 (352) (407) Equity reserve 27 1,032 417 Retained earnings 27 97,841 47,535 -------- ------- Equity attributable to equity holders of the parent 109,518 53,157 Minority interest 27 32 33 -------- ------- Total equity 109,550 53,190 ======== ======= The financial statements were approved by the board of directors and authorised for issue on 30 May 2006. They were signed on its behalf by: G Coutts Director 30 May 2006 CONSOLIDATED CASHFLOW STATEMENT Year ended 31 March 2006 Note 2006 2005 Â£'000 Â£'000 Operating profit 34,116 12,501 Adjustments for: Depreciation of property, plant and equipment 16 30,445 18,991 Loss on disposal of property, plant and equipment 1,771 1,123 Amortisation of intangible assets 15 1,469 1,300 Goodwill impairment 14 - 4,971 Intangible asset impairment 15 718 - Inventory impairment - 1,546 Share-based payments 30 615 417 Retirement benefit charge 251 229 -------- -------- Operating cash flows before movements in working capital 69,385 41,078 (Increase)/decrease in inventories (2,611) 1,124 (Increase) in receivables (21,263) (180) Increase/(decrease) in payables 25,589 (506) -------- -------- Cash generated by operations 71,100 41,516 Income taxes paid (9,209) (5,752) Interest paid (3,534) (2,978) -------- -------- Net cash from operating activities 58,357 32,786 -------- -------- Investing activities Interest received 614 407 Purchases of property, plant and equipment (49,288) (29,080) Proceeds on disposal of property, plant and equipment 846 181 Purchases of intangible assets (100) (317) Net cash outflow on acquisition of subsidiary 28 (6,075) (5,868) Proceeds on disposal of joint ventures 6 15,319 - Proceeds on disposal of joint ventures in prior year 6 4,797 - Net repayment of loans from joint ventures - 33 Payment of deferred consideration 25 (334) (59) -------- -------- Net cash used in investing activities (34,221) (34,703) -------- -------- Financing activities Issue of share capital 27 25,555 959 Purchase of own shares 27 - (400) Dividends paid 11 (7,956) (7,204) Repayments of finance leases (1,305) (992) -------- -------- Net cash from/(used in) financing activities 16,294 (7,637) -------- -------- Net increase/(decrease) in cash 40,430 (9,554) Cash at beginning of year 5,009 14,563 Effect of foreign exchange rate changes 203 - -------- -------- Cash at end of year 45,642 5,009 ======== ======== This information is provided by RNS The company news service from the London Stock Exchange

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