Interim Results
Intertek Group PLC
05 September 2005
INTERIM 2005 RESULTS ANNOUNCEMENT
5 SEPTEMBER 2005
Intertek Group plc ('Intertek'), the global testing, inspection and
certification company, today announces its interim results for the half year to
30 June 2005.
FINANCIAL HIGHLIGHTS
Revenue £272.3m Up 14.5% at actual exchange rates
Up 15.7% at constant exchange rates
Up 13.2% organically (Note 1)
Operating profit (Note 2) £43.5m Up 11.5% at actual exchange rates
Up 13.3% at constant exchange rates
Up 7.9% organically (Note 1)
Up 9.1% organically, excluding IFRS share
option charge (Note 1)
Operating margin (Note 1) 16.0% Down from 16.3%
Operating cash flow £20.0m Down 34.2% from £30.4m
Profit before tax £38.5m Up 4.3% from £36.9m
Earnings per share (Note 3) 18.7p Up 14.0% from 16.4p
Basic earnings per share 17.0p Up 4.3% from 16.3p
Interim dividend per share 3.9p Up 14.7% from 3.4p
1. At constant exchange rates
2. Excluding amortisation of intangibles £0.8m (H1 04: £0.3m) and goodwill
impairment £2.0m (H1 04: £nil)
3. Diluted adjusted earnings per share based on profit before amortisation of
intangibles and goodwill impairment
CHIEF EXECUTIVE OFFICER, WOLFHART HAUSER commented:
The Group once again performed well in the first half of 2005. Revenue grew at
14.5% at actual exchange rates and 15.7% at constant exchange rates. Organic
revenue growth was 13.2% and all four divisions achieved organic revenue growth
in excess of 10%. Profit before tax at £38.5m was up 4.3% and adjusted EPS was
up 14.0%.
We are confident that we are well placed to be able to continue to capitalise on
the strong drivers in our business.
In consideration of our confidence in the future prospects for the group, we
have declared an interim dividend of 3.9p, an increase of 14.7% over last year.
ANALYSTS' MEETING
There will be a meeting for analysts at 9.30am today at Goldman Sachs
International, Peterborough Court, 133 Fleet Street, London EC4A 2BB. A copy of
the presentation will be available on the website later today.
For further information, please contact
Aston Swift, Treasurer and Investor Relations
Telephone: +44 (0) 20 7396 3400 aston.swift@intertek.com
Tim Lynch, Tulchan Communications
Telephone: +44 (0) 20 7353 4200 intertekteam@tulchangroup.com
Corporate website: www.intertek.com
High resolution images of Intertek Group plc businesses are available to
download, free of charge from www.vismedia.co.uk.
ABOUT INTERTEK
Intertek is a leading international testing, inspection and certification
organisation which assesses customers' products and commodities against a wide
range of safety, regulatory, quality and performance standards and certifies the
management systems of customers. Intertek has 307 laboratories and over 14,500
people around the world and is increasingly undertaking outsourced testing work
for its customers.
Chairman's statement
Results overview
On behalf of the Board, I am pleased to announce a very good result for the
first half of 2005, with each division reporting organic revenue growth of over
10%. At constant exchange rates, revenue for the Group increased 15.7% and
operating profit before amortisation of intangibles and goodwill impairment
increased 13.3%. On an organic basis, revenue grew 13.2% and operating profit
grew 9.1%, before the share option charges required under IFRS. Approximately
80% of the Group's earnings are in US dollars or related currencies. At actual
exchange rates, revenue increased 14.5% and operating profit increased 11.5%
over the same period last year, reflecting a 3% weakening in the value of the US
dollar against sterling.
New business
The Group continued its policy of making acquisitions to complement existing
businesses. On 29 April 2005, we acquired Omega Point Laboratories Inc (OPL), a
fire testing laboratory in Texas, USA, for £2.5m. As announced on 3 August 2005,
we also acquired PARC Technical Services Inc (PARC), a US petroleum and chemical
process testing company for £3.9m.
Further acquisitions are being pursued.
Dividends
The Board has decided to pay, on 15 November 2005, an interim dividend of 3.9p
(2004: 3.4p), an increase of 14.7% over last year. The interim dividend will
paid to members on the register at 4 November 2005. In accordance with
International Accounting Standard 10, dividends payable are no longer accrued
but are recognised when they are paid.
Accounting standards
To date, the Group has prepared its accounts in compliance with UK Generally
Accepted Accounting Principles (UK GAAP). European Union (EU) regulations
require the Group to adopt International Financial Reporting Standards (IFRS)
and International Accounting Standards (IAS) in its financial statements from
2005. IFRS and IAS have been applied to the Group's consolidated interim
financial statements from 1 January 2005 and the 2004 comparatives have been
restated where applicable. The adoption of international standards has some
impact on the presentation of our financial statements but does not
fundamentally change our strategy, business and economic risks, financial
position or our cash flows. A reconciliation of the impact on the income
statement is given in note 14 to the interim report and full disclosure of the
balance sheet impact is given in Appendix A. The policies adopted by the Group
are detailed in Appendix B.
Looking ahead
Once again we expect another good outcome for the year. We feel confident in the
continuing organic growth of the business, in the Group's ability to acquire and
integrate acquisitions and to continue its progressive dividend policy.
Vanni Treves
Chairman
Chief Executive Officer's review
Overview
Revenue for the Group for the first half of 2005 (H1 05) was £272.3m, an
increase of 15.7% over the first half of 2004 (H1 04) at constant exchange
rates. At actual exchange rates, revenue grew by 14.5%, reflecting a 3% decline
in the value of the US dollar against sterling. Excluding acquisitions and
disposals organic growth was 13.2%. Strong revenue growth was achieved in ETL
SEMKO, Caleb Brett and FTS which all delivered more than 17% growth over H1 04
at constant rates. Revenue growth in Labtest was lower, partly due to disposals
made in 2004.
At constant exchange rates, total operating profit before amortisation of
intangibles and impairment of goodwill, increased by 13.3% to £43.5m. Excluding
acquisitions, disposals and share option charges, organic growth was 9.1%. At
actual exchange rates, operating profit grew by 11.5% over H1 04. Operating
margins improved in all the divisions apart from Labtest which declined
slightly, mainly due to investment in China, a market which has grown rapidly
and contraction in some countries. At constant exchange rates, the Group's
profit margin after deducting central overheads, decreased from 16.3% to 16.0%.
The performance of each of the divisions is shown below at constant exchange
rates:
Revenue Operating profit (Notes 1 & 2)
H1 05 Change Organic change H1 05 Change Organic change Organic change
excl. share
option charge
(Note 2) (Note 2) (Note 3)
£m % % £m % % %
------------------ -------- -------- -------- -------- -------- -------- --------
At constant
exchange rates (4)
------------------ -------- -------- -------- -------- -------- -------- --------
By division:
Labtest 65.9 4.9 10.1 20.6 1.0 (0.5) 1.0
------------------ -------- -------- -------- -------- -------- -------- --------
ETL SEMKO 69.3 20.1 11.1 11.1 24.7 12.8 13.8
------------------ -------- -------- -------- -------- -------- -------- --------
Caleb Brett 100.0 17.9 13.2 8.9 20.3 11.1 10.8
------------------ -------- -------- -------- -------- -------- -------- --------
Foreign Trade
Standards 37.1 23.3 23.3 7.4 48.0 48.0 47.1
------------------ -------- -------- -------- -------- -------- -------- --------
Central
overheads (4.5) (36.4) (36.4) (33.3)
------------------ -------- -------- -------- -------- -------- -------- --------
Total at
constant
exchange rates 272.3 15.7 13.2 43.5 13.3 7.9 9.1
------------------ -------- -------- -------- -------- -------- -------- --------
1. Operating profit excludes the results of associates and is stated
before amortisation of intangibles £0.8m (H1 04: £0.3m) and goodwill
impairment H1 05: £2.0m (H1 04: nil).
2. Operating profit for H1 04 has been restated under IFRS to include a
share option charge of £0.5m and to exclude income from associates of
£0.6m.
3. Excluding IFRS share option charge of £1.0m for H1 05 (H1 04: £0.5m)
4. Cumulative average exchange rates for the six months to 30 June 2005.
Impact of international financial reporting standards (IFRS)
Operating profit for H1 04, previously reported under UK GAAP, has been restated
under IFRS. The table below shows the impact of the restatement together with
the equivalent H1 05 figures for comparative purposes.
H1 05 H1 04 Change
£m £m %
Total operating profit before amortisation and
impairment under UK GAAP 45.1 40.1 12.5
-------------------------------- --------- -------- --------
Less share of operating profits of associates (0.6) (0.6)
-------------------------------- --------- -------- --------
IFRS share option charge (1.0) (0.5)
-------------------------------- --------- -------- --------
Group operating profit under IFRS before
amortisation, impairment and profit from associates
(note 2) 43.5 39.0 11.5
-------------------------------- --------- -------- --------
Amortisation of intangible assets (0.8) (0.3)
-------------------------------- --------- -------- --------
Impairment of goodwill (2.0) -
-------------------------------- --------- -------- --------
Group operating profit under IFRS 40.7 38.7 5.2
-------------------------------- --------- -------- --------
A detailed reconciliation of the impact on the income statement is given in note
14 to the interim report and full disclosure of the balance sheet impact is
given in Appendix A.
The key areas of impact are described below:
IFRS 2: Share-based payments
A charge is made to the income statement for share options issued since November
2002. The charge is based on the fair value of options at the grant date, with
the fair value being determined by an option pricing model. The charge was £1.0m
for H1 05 for options issued in 2003, 2004 and 2005 and £0.5m for H1 04 for
options issued in 2003 and 2004.
IFRS 3: Business combinations
Goodwill is no longer amortised and instead it is subject to annual impairment
reviews. Capitalised goodwill was 'frozen' at its UK GAAP carrying value at 1
January 2004, and goodwill amortisation of £1.5m charged to the income statement
in 2004 was reversed. This increased profit by £0.7m in H1 04, under IFRS.
IFRS 3: Business combinations/ IAS 38: Intangible assets
As required by IFRS, goodwill on acquisitions made after 31 March 2004, has been
re-examined and analysed into separately identifiable intangible assets which
are amortised over their estimated useful lives and capitalised goodwill which
is unamortised. Our review of acquisitions made in the period 1 April 2004 to 31
December 2004, identified intangible assets such as covenants not to compete,
patented technology and customer relationships with a value of £4.9m, therefore
capitalised goodwill has been reduced by this amount. In H1 05 we acquired £0.2m
of intangible assets in the OPL business mentioned in the Chairman's statement.
The income statements for H1 05 and H1 04 were charged with £0.8m and £0.3m
respectively for the amortisation of intangible assets.
IAS 32/39: Financial instruments
The transitional arrangements for hedge accounting were adopted in full from 1
January 2005, with no restatement of comparative information. A charge of £1.0m
was made to retained earnings in shareholders' funds to reflect the fair value
of the derivative financial instruments at 1 January 2005 (see note 7 to the
Interim Report). Derivative financial instruments are brought onto the balance
sheet at their fair value. At 30 June 2005, the fair value of the derivative
financial instruments was £1.0m. This was included within net current assets on
the balance sheet.
Hedge accounting has been adopted for four financial derivatives which qualify
as cash flow hedges under IAS 39. These financial derivatives hedge the variable
interest rate on the Group's external borrowings. The effective portions of the
movement in the fair value of the financial derivatives that are hedge accounted
were recognised directly in equity. This movement in H1 05 was £1.9m (see page
11). The ineffective portion of the movement in the fair value of the financial
derivatives was taken to the income statement which in H1 05, resulted in a
credit of £0.1m to finance income.
Hedge accounting has also been adopted for the foreign currency external
borrowings which hedge the Group's net investment in its foreign subsidiaries.
The effective portion of the gain or loss on the hedging instruments that are
hedge accounted is recognised directly in retained earnings in shareholders'
funds.
The foreign exchange contracts undertaken by the Group to hedge foreign currency
transaction exposures were not hedge accounted under IAS 39. This is because the
fair value movements are expected to be immaterial. The fair value movements on
these foreign exchange contracts is therefore charged or credited to the income
statement. At 30 June 2005, there was no change in the fair value of these
contracts.
IAS 12: Tax
Adjustments arising from the adoption of IFRS have been tax effected as
appropriate. Under UK GAAP the pension fund deficit was disclosed net of
deferred tax. Under IFRS the pension deficit is disclosed gross of tax and the
tax is shown as a deferred tax asset.
IAS 10: Dividends
Dividends are presented as a deduction in shareholders' equity when they have
been declared or ratified by shareholders rather than as a deduction in the
income statement when they have been proposed. The income statement for H1 04
has been adjusted to remove the proposed interim dividend of £5.2m.
IAS 14: Segment analysis
The Group's primary basis of segmentation is by business and its secondary basis
is by geography.
Impairment of goodwill
The carrying value of capitalised goodwill was reviewed for impairment and a
charge of £2.0m was made to operating profit in H1 05 (H1 04: £nil) to reduce
the goodwill to its fair value. The impairment related to an acquisition made in
2003 in Labtest in the UK.
Profitability
Group operating profit, after charging amortisation of intangibles of £0.8m (H1
04: £0.3m) and goodwill impairment of £2.0m (H1 04: £nil) was £40.7m, up 5.2%
over H1 04. The net financing costs were £2.6m in H1 05, compared to £2.2m in H1
04, principally due to increased interest rates on the Group's borrowings. The
tax rate of 27.0% for H1 05 was based on the estimated tax rate the Group
expects for the full year. Excluding amortisation of intangibles and goodwill
impairment, the effective rate was 25.2% Profit for the period was £28.1m, up
2.2%.
Cash flow
Cash from operating activities for H1 05 was £20.0m down 34% on H1 04. The
decrease was mainly due to a 21.3% increase in trade and other receivables,
partly reflecting growth in the business. In H1 05, the Group spent £13.4m (H1
04: £27.1m) on net investments, including capital expenditure of £11.7m (H1 04:
£8.3m) and acquisitions of £2.2m (H1 04: £19.9m), £16.8m (H1 04: £19.3m) on
financing activities, including repayment of borrowings of £7.6m (H1 04: £8.8m)
and £10.8m (H1 04: £9.1m) on payment of dividends.
Divisional review
In the divisional review that follows, the figures are stated at the cumulative
average exchange rates for the six months to 30 June 2005. Operating profit is
stated before amortisation of intangibles and goodwill impairment.
Labtest
H1 05 Change Organic Organic change
excl share
option charge
change
£m % % %
------------- ------- ------- ------- -------
Revenue 65.9 4.9 10.1 10.1
------------- ------- ------- ------- -------
Operating
profit 20.6 1.0 (0.5) 1.0
------------- ------- ------- ------- -------
Operating
margin 31.3% (1.2) (3.3) (2.9)
------------- ------- ------- ------- -------
The key growth drivers in Labtest remained strong, principally the sourcing of
products from China, the wide range of products being sold by retailers, shorter
product lifecycles and the demand for quality and safety. Growth in the division
varied widely depending on location. Revenue from mainland China increased by
47% in H1 05 over H1 04; sometimes at the expense of other locations which
suffered a contraction in revenue due to the relocation of business to China.
The operating margin declined from 32.5% to 31.3% due to expansion in China, the
cost of downsizing in other locations and an increase in the IFRS share option
charge from £0.1m in H1 04 to £0.4m in H1 05. Organic growth was calculated
after removing the results of a loss-making business which was sold in 2004 and
a small acquisition also made in 2004.
ETL SEMKO
H1 05 Change Organic Organic change
excl share
option charge
change
£m % % %
------------- ------- ------- ------- -------
Revenue 69.3 20.1 11.1 11.1
------------- ------- ------- ------- -------
Operating
profit 11.1 24.7 12.8 13.8
------------- ------- ------- ------- -------
Operating
margin 16.0% 0.6 0.2 0.4
------------- ------- ------- ------- -------
ETL SEMKO had an excellent start to the year with strong growth in revenues and
operating profit in H1 05 over H1 04. There was substantial organic growth in
revenue in mainland China, particularly in the safety testing of household
appliances manufactured for export. The Americas also performed well, with
organic growth in electrical and building products supplemented by growth in the
automotive component testing business which was acquired in May 2004.
Further expansion of automotive component testing is planned in China for H2 05.
The operating margin improved from 15.4% to 16.0%, mainly through tight cost
control in the Americas.
Caleb Brett
H1 05 Change Organic Organic change
excl share
option charge
change
£m % % %
------------- ------- ------- ------- -------
Revenue 100.0 17.9 13.2 13.2
------------- ------- ------- ------- -------
Operating
profit 8.9 20.3 11.1 10.8
------------- ------- ------- ------- -------
Operating
margin 8.9% 0.2 (0.2) (0.2)
------------- ------- ------- ------- -------
Caleb Brett performed strongly, particularly in the traditional cargo inspection
market in the United States and in analytical services. The growth in the cargo
inspection market in the United States was driven by increased demand for
petroleum products and chemicals. The Americas also benefited from the
acquisition of Kelley Completion Services in December 2004. Revenue from
analytical services, which accounted for 33% of revenue in H1 05 (28% in H1 04),
increased by 39.2% in H1 05 over H1 04, mainly due to contracts which started
during 2004 and to a new Rolls-Royce contract which started in January 2005.
Operating margin increased from 8.7% to 8.9%.
FTS
H1 05 Change Organic change Organic change
excl share
option charge
£m % % %
------------- ------- ------- ------- -------
Revenue 37.1 23.3 23.3 23.3
------------- ------- ------- ------- -------
Operating
profit 7.4 48.0 48.0 47.1
------------- ------- ------- ------- -------
Operating
margin 19.9% 3.3 3.3 3.3
------------- ------- ------- ------- -------
The three key contracts in Nigeria, Saudi Arabia and Venezuela, which accounted
for 63% of the division's revenue, performed well in H1 05. The pre-shipment
inspection (PSI) contract in Venezuela terminated on 31 August 2005 which will
reduce PSI revenue and profit in the short term. Provision for restructuring the
office in Venezuela was made in the results for H1 05. A new cargo scanning
contract in Sierra Leone commenced in H1 05 and the PSI contract in Malawi has
been renewed for a further two years.
Central overheads
Central overheads were £4.5m for H1 05, an increase of £1.2m or 36.4% over H1
04, reflecting the growth in the business. The increase was primarily due to
increased staff, legal and IT costs and a donation of £0.1m to the Tsunami
disaster relief appeal.
Outlook
The first half of 2005, has been another period of good growth for the Group and
the main drivers of our business offer a wide range of opportunities for further
growth.
The increasing variety of new products and the reduction in average product
lifespan is leading our customers to develop a greater number of prototypes
which are also being sold in a wider range of countries. This increases their
need for services covering all aspects of quality and safety, from the design
stage through the supply chain to the final product.
Consumers are increasingly demanding safer, more reliable, higher quality
products. Environmental and social pressure from consumers and authorities is
leading to more complex regulations. We help our customers meet consumer
expectations and comply with these regulations thus safeguarding their brand
reputation
in an increasingly competitive environment.
Oil and chemical companies, manufacturers, retailers and traders, currently
outsource only a small part of their quality and safety needs. Our range of
technical expertise on a world-wide basis in all divisions, means we can offer
customers a wider scope of quality services, to fulfil their individual needs.
We believe our fast turn-around times and our tailored services will increase
the amount of work outsourced to us in all markets.
We have the resources to take advantage of these and other opportunities and we
are confident that we will continue to develop and grow our business.
Wolfhart Hauser
Chief Executive Officer
Consolidated interim income statement
Six months to Six months to Year to
30 June 2005 30 June 2004 31 December
2004
(Unaudited) (Unaudited) (Unaudited)
Notes £m £m £m
--------------------- ----- -------- -------- ---------
Revenue 2 272.3 237.8 499.6
Cost of sales (210.3) (183.2) (385.0)
--------------------- ----- -------- -------- ---------
Gross profit 62.0 54.6 114.6
--------------------- ----- -------- -------- ---------
Administrative
expenses (18.5) (15.6) (31.6)
Amortisation of
intangible assets (0.8) (0.3) (1.4)
Impairment of
goodwill 2 (2.0)
--------------------- ----- -------- -------- ---------
Total administrative
expenses (21.3) (15.9) (33.0)
--------------------- ----- -------- -------- ---------
Group operating
profit 2 40.7 38.7 81.6
--------------------- ----- -------- -------- ---------
Finance income 1.9 2.1 4.2
Finance expense (4.5) (4.3) (12.1)
--------------------- ----- -------- -------- ---------
Net financing costs (2.6) (2.2) (7.9)
------------------------ -------- -------- ---------
Share of profit of
associates 0.4 0.4 0.7
------------------------ -------- -------- ---------
Profit before
taxation 38.5 36.9 74.4
Income tax expense 3 (10.4) (9.4) (19.6)
--------------------- ----- -------- -------- ---------
Profit for the
period 28.1 27.5 54.8
------------------------ -------- -------- ---------
---------
Attributable to:
Equity holders of
the Company 26.4 25.2 52.0
Minority interest 1.7 2.3 2.8
--------------------- ----- -------- -------- ---------
Profit for the
period 28.1 27.5 54.8
--------------------- ----- -------- -------- ---------
Earnings per share 4
--------------------- ----- -------- -------- ---------
Basic 17.0p 16.3p 33.7p
--------------------- ----- -------- -------- ---------
Diluted 16.9p 16.2p 33.4 p
--------------------- ----- -------- -------- ---------
Consolidated interim balance sheet
At 30 June At 30 June At 31 December
2005 2004 2004
(Unaudited) (Unaudited) (Unaudited)
Notes £m £m £m
------------------------------ ------ --------- ---------- ----------
ASSETS
Property, plant and equipment 93.1 78.7 88.5
Goodwill 33.9 28.8 33.5
Other intangible assets 9 2.9 4.6 3.5
Investments in associates 1.9 1.5 1.8
Deferred tax assets 5.5 2.8 5.5
------------------------------ ------ --------- ---------- ----------
Total non-current assets 137.3 116.4 132.8
------------------------------ ------ --------- ---------- ----------
Inventories 1.7 1.6 1.5
Trade and other receivables 135.3 111.5 109.8
Cash and cash equivalents 8 43.3 64.0 52.5
------------------------------ ------ --------- ---------- ----------
Total current assets 180.3 177.1 163.8
------------------------------ ------ --------- ---------- ----------
------------------------------ ------ --------- ---------- ----------
Total assets 317.6 293.5 296.6
------------------------------ ------ --------- ---------- ----------
LIABILITIES
Interest- bearing loans and
borrowings 8 (14.4) (21.5) (14.0)
Current taxes payable (21.4) (19.9) (19.5)
Trade and other payables (79.6) (69.3) (75.9)
Provisions (3.6) (5.1) (5.4)
------------------------------ ------ --------- ---------- ----------
Total current liabilities (119.0) (115.8) (114.8)
------------------------------ ------ --------- ---------- ----------
Interest-bearing loans and
borrowings 8 (150.1) (175.6) (150.9)
Deferred tax liabilities (0.6) (0.3) (0.6)
Net pension liabilities (14.1) (7.5) (16.1)
Other payables (0.4) (0.5)
------------------------------ ------ --------- ---------- ----------
Total non-current liabilities (164.8) (183.8) (168.1)
------------------------------ ------ --------- ---------- ----------
------------------------------ ------ --------- ---------- ----------
Total liabilities (283.8) (299.6) (282.9)
------------------------------ ------ --------- ---------- ----------
------------------------------ ------ --------- ---------- ----------
Net assets /(liabilities) 33.8 (6.1) 13.7
------------------------------ ------ --------- ---------- ----------
EQUITY
Share capital 7 1.6 1.5 1.5
Share premium account 7 236.8 234.2 234.5
Reserves 7 13.6 8.8 13.5
Retained earnings 7 (224.9) (257.3) (241.5)
------------------------------ ------ --------- ---------- ----------
Total equity attributable to
equity holders of the Company 7 27.1 (12.8) 8.0
Minority interest 6.7 6.7 5.7
------------------------------ ------ --------- ---------- ----------
Total equity 33.8 (6.1) 13.7
------------------------------ ------ --------- ---------- ----------
Consolidated interim statement of cash flows
Notes Six months to Six months to Year to
30 June 30 June 31 December
2005 2004 2004
(Unaudited) (Unaudited) (Unaudited)
£m £m £m
---------------------------------- ------ -------- -------- --------
Operating activities
Profit for the period 28.1 27.5 54.8
Adjustments for:
Depreciation charge 9.9 8.9 18.4
Amortisation of intangibles 0.8 0.3 1.4
Impairment of goodwill 2.0
Share option expense 1.0 0.5 1.0
Share of profit of associates (0.4) (0.4) (0.7)
Net financing costs 2.6 2.2 7.9
Income tax expense 10.4 9.4 19.6
Loss on disposal of fixed assets 0.1 0.2
---------------------------------- ------ -------- -------- --------
Operating profit before changes in
working capital and provisions 54.4 48.5 102.6
Increase in inventories (0.2) (0.2) (0.8)
Increase in trade and other
receivables (22.3) (8.5) (8.9)
Increase in trade and other payables 1.9 2.8 11.9
Decrease in provisions (3.8) (3.2) (2.9)
---------------------------------- ------ -------- -------- --------
Cash generated from operations 30.0 39.4 101.9
Interest paid (2.9) (2.9) (6.9)
Income taxes paid (7.1) (6.1) (16.0)
---------------------------------- ------ -------- -------- --------
Cash flows from operating activities 20.0 30.4 79.0
---------------------------------- ------ -------- -------- --------
Investing activities
Proceeds from sale of property,
plant and equipment 0.1 0.2 0.2
Interest received 0.2 0.9 1.6
Dividends received from associated
undertakings 0.2 0.8
Acquisition of subsidiaries, net
of cash acquired 10 (2.2) (19.9) (26.6)
Acquisition of property, plant and
equipment (11.7) (8.3) (28.2)
---------------------------------- ------ -------- -------- --------
Cash flows from investing
activities (13.4) (27.1) (52.2)
---------------------------------- ------ -------- -------- --------
Financing activities
Proceeds from the issue of
share capital 2.6 0.8 1.1
Issue of new debt 165.7
Repayment of borrowings 8 (7.6) (8.8) (202.0)
Dividends paid to minorities (1.0) (2.2) (4.1)
Dividends paid 7 (10.8) (9.1) (14.4)
---------------------------------- ------ -------- -------- --------
Cash flows from financing
activities (16.8) (19.3) (53.7)
---------------------------------- ------ -------- -------- --------
Net decrease in cash and cash
equivalents 8 (10.2) (16.0) (26.9)
Cash and cash equivalents at
1 January 8 52.5 81.5 81.5
Effect of exchange rate
fluctuations on cash held 8 1.0 (1.5) (2.1)
---------------------------------- ------ -------- -------- --------
Cash and cash
equivalents at end of period 8 43.3 64.0 52.5
---------------------------------- ------ -------- -------- --------
Consolidated interim statement of recognised income and expense
Six months to Six months to Year to
30 June 30 June 31 December
2005 2004 2004
(Unaudited) (Unaudited) (Unaudited)
£m £m £m
------------------------------ ---------- --------- ---------
Foreign exchange translation
differences, net of tax (0.8) 2.4 7.1
Actuarial pension loss (9.0)
Deferred tax on actuarial loss 2.4
First time adoption IAS 39, cash
flow hedges:
Fair values on adoption at 1
January 2005 (1.0)
Effective portion of changes in
fair value 1.9
------------------------------ ---------- --------- ---------
Net expense recognised directly in
equity 0.1 2.4 0.5
Profit for the period 28.1 27.5 54.8
------------------------------ ---------- --------- ---------
Total recognised income and
expense for the period 28.2 29.9 55.3
------------------------------ ---------- --------- ---------
Attributable to:
------------------------------ ---------- --------- ---------
Equity holders of the Company 26.5 27.6 52.5
------------------------------ ---------- --------- ---------
Minority interest 1.7 2.3 2.8
------------------------------ ---------- --------- ---------
Total recognised income and
expense 28.2 29.9 55.3
------------------------------ ---------- --------- ---------
Reconciliation of shareholders' equity
Six months to Six months to Year to
30 June 30 June 31 December
2005 2004 2004
(Unaudited) (Unaudited) (Unaudited)
£m £m £m
------------------------------ ---------- --------- ---------
Opening equity under UK GAAP (3.6) (43.1) (43.1)
Restatement for International
Accounting Standards (note 7) 11.6 9.2 9.2
------------------------------ ---------- --------- ---------
Restated opening equity prior to
adoption of IAS 39 8.0 (33.9) (33.9)
Adoption of IAS 39 (note 7) (1.0)
------------------------------ ---------- --------- ---------
Restated opening equity under IFRS 7.0 (33.9) (33.9)
Issue of shares 2.4 2.1 2.4
Equity settled transactions 1.0 0.5 1.0
Tax on equity settled transactions 0.4
Profit for the period attributable
to equity holders 26.4 25.2 52.0
Dividends (10.8) (9.1) (14.4)
Foreign exchange translation
differences, net of tax (0.8) 2.4 7.1
Movement on cash flow hedges 1.9
Actuarial pension loss (9.0)
Deferred tax on actuarial pension
loss 2.4
------------------------------ ---------- --------- ---------
Closing equity under IFRS 27.1 (12.8) 8.0
------------------------------ ---------- --------- ---------
Notes to the interim report
1. Basis of preparation
EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidated
financial statements of the company, for the year ending 31 December 2005, be
prepared in accordance with International Financial Reporting Standards (IFRS)
adopted for use in the EU (adopted IFRS).
This interim financial information has been prepared on the basis of the
recognition and measurement requirements of IFRS in issue that either are
endorsed by the EU and effective (or available for early adoption) at 31
December 2005, or are expected to be endorsed and effective (or available for
early adoption) at 31 December 2005, the Group's first annual reporting date at
which it is required to use the adopted IFRS. Based on these adopted and
unadopted IFRS, the directors have made assumptions about the accounting
policies expected to be applied, which are set out in Appendix B, when the first
annual IFRS financial statements are prepared for the year ending 31 December
2005.
In particular, the directors have assumed that 'Amendments to IAS 19' issued by
the International Accounting Standards Board will be adopted by the EU in
sufficient time to be available for use in the annual IFRS financial statements
for the year ending 31 December 2005.
In addition, the adopted IFRS that will be effective (or available for early
adoption) in the annual financial statements for the year ending 31 December
2005, are still subject to change and to additional interpretations and
therefore cannot be determined with certainty. Accordingly, the accounting
policies for that annual period will be determined finally only when the annual
financial statements are prepared for the year ending 31 December 2005.
The comparative figures for the financial year ended 31 December 2004, are not
the Company's statutory accounts for that financial year. Those accounts, which
were prepared under UK Generally Accepted Accounting Principles (UK GAAP), have
been reported on by the company's auditors and delivered to the Registrar of
Companies. The report of the auditors was unqualified and did not contain
statements under section 237(2) or (3) of the Companies Act 1985.
An explanation of how the transition to IFRS has affected the reported financial
performance of the Group is provided in note 14. The impact of IFRS on the
Group's reported financial position is shown in Appendix A.
A reconciliation of equity previously reported under UK GAAP to that reported
under IFRS for the respective periods is shown on page 11.
2. SEGMENT ANALYSIS
Business analysis (Primary segment)
Labtest ETL SEMKO Caleb Brett FTS Central Total
overheads
£m £m £m £m £m £m
------------------ ------- --------- --------- --------- -------- ---------
Revenue
Six months to
30 June 2005 65.9 69.3 100.0 37.1 - 272.3
Six months to
30 June 2004 64.0 58.4 85.1 30.3 - 237.8
Year to 31
December 2004 132.3 122.4 177.3 67.6 - 499.6
------------------ ------- --------- --------- --------- -------- ---------
Group operating Labtest ETL SEMKO Caleb Brett FTS Central Total
profit overheads
£m £m £m £m £m £m
------------------ ------- --------- --------- --------- -------- ---------
Six months to 30
June 2005
Group
operating
profit 18.6 10.5 8.7 7.4 (4.5) 40.7
Add:
impairment of
goodwill* 2.0 - - - - 2.0
Add:
amortisation
of intangibles - 0.6 0.2 - - 0.8
------------------ ------- --------- --------- --------- -------- ---------
Operating
profit before
impairment and
amortisation 20.6 11.1 8.9 7.4 (4.5) 43.5
------------------ ------- --------- --------- --------- -------- ---------
Six months to 30
June 2004
Group
operating
profit 20.8 8.8 7.4 5.0 (3.3) 38.7
Add:
amortisation
of intangibles - 0.2 0.1 - - 0.3
------------------ ------- --------- --------- --------- -------- ---------
Operating
profit before
impairment and
amortisation 20.8 9.0 7.5 5.0 (3.3) 39.0
------------------ ------- --------- --------- --------- -------- ---------
Year to 31
December 2004
Group
operating
profit 43.5 16.5 14.7 13.8 (6.9) 81.6
Add:
amortisation
of intangibles - 0.8 0.6 - - 1.4
------------------ ------- --------- --------- --------- -------- ---------
Operating
profit before
impairment and
amortisation 43.5 17.3 15.3 13.8 (6.9) 83.0
------------------ ------- --------- --------- --------- -------- ---------
* Relates to Fastech, a UK business, acquired in 2003.
Geographic analysis (Secondary segment)
Six months to Six months to Year to
30 June 30 June 31 December
2005 2004 2004
Revenue £m £m £m
------------------------- ----------- ---------- ----------
Americas 94.4 80.2 169.0
Europe, Middle East and Africa 90.7 77.7 166.3
Asia 87.2 79.9 164.3
------------------------- ----------- ---------- ----------
Total 272.3 237.8 499.6
------------------------- ----------- ---------- ----------
Group operating profit
Americas 10.8 8.6 16.6
Europe, Middle East and Africa 2.9 4.5 12.0
Asia 27.0 25.6 53.0
-------------------------- ---------- ---------- ----------
Total 40.7 38.7 81.6
-------------------------- ---------- ---------- ----------
3. Income tax expense
The tax charge on profits before tax for the six months to 30 June 2005 of
£10.4m (30 June 2004: £9.4m) is based on the estimated effective rate for the
full year. The effective tax rate at 30 June 2005 is 27.0% (30 June 2004: 25.5%,
31 December 2004: 26.3%). Excluding amortisation of intangibles and goodwill
impairment, the effective rate at 30 June 2005 is 25.2% (30 June 2004: 25.3%, 31
December 2004: 25.6%).
Differences between the estimated effective rate of 27% and the notional
statutory UK rate of 30% include, but are not limited to, the effect of tax
rates in foreign jurisdictions, non deductible expenses, the effect of tax
losses utilised and under/(over) provisions in previous years.
4. Earnings per ordinary share
Six months to Six months to Year to
30 June 30 June 31 December
2005 2004 2004
Based on the profit for the year: £m £m £m
---------- ---------- ---------
---------------------------------
Basic earnings
Profit attributable to ordinary
shareholders 26.4 25.2 52.0
Amortisation of intangibles 0.8 0.3 1.4
Impairment of goodwill 2.0
Amortisation of debt issuance
costs 2.2
on refinancing, less tax ---------- ---------- ---------
---------------------------------
Adjusted earnings 29.2 25.5 55.6
--------------------------------- ---------- ---------- ---------
Number of shares (millions):
Basic weighted average number of
shares 154.9 154.3 154.4
Potentially dilutive share options 1.5 0.7 1.1
--------------------------------- ---------- ---------- ---------
Diluted weighted average number of
shares 156.4 155.0 155.5
--------------------------------- ---------- ---------- ---------
Basic earnings per share 17.0p 16.3p 33.7p
Options (0.1)p (0.1)p (0.3)p
--------------------------------- ---------- ---------- ---------
Diluted earnings per share 16.9p 16.2p 33.4p
--------------------------------- ---------- ---------- ---------
Basic adjusted earnings per share 18.9p 16.5p 36.0p
Options (0.2)p (0.1)p (0.2)p
--------------------------------- ---------- ---------- ---------
Diluted adjusted earnings per 18.7p 16.4p 35.8p
share ---------- ---------- ---------
---------------------------------
The weighted average number of shares used in the calculation of the diluted
earnings per share for the six months to 30 June 2005, excludes 1,497,513
potential shares (31 December 2004: 56,280, 30 June 2004: 1,414,765) as these
were not dilutive in accordance with IAS 33: Earnings per share.
5. Pension schemes
There has been no significant change in the net liabilities of the Group's
defined benefit pension schemes since 31 December 2004. As permitted by IAS 19,
actuarial valuations of the assets and liabilities of the defined benefit
pension schemes were not performed at 30 June 2005.
The expense recognised in the consolidated interim income statement consists of
the current service cost, interest on the obligation for employee benefits and
the expected return on plan assets. For the six months ended 30 June 2005, the
Group recognised a net expense of £1.2m (30 June 2004: £1.1m).
6. Share-based payments
The Company has share option schemes, details of which were contained in the
Annual report and accounts for the year ended 31 December 2004.
During the period, the company granted 1,499,197 options to employees at an
exercise price of 778p which are exercisable between 7 April 2008 and 7 April
2015.
In accordance with IFRS 2, the fair values of services received in return for
share options granted to employees, is measured by reference to the fair value
of share options granted. The estimate of the fair value of the services
received is measured based on the Black-Scholes formula, a financial model used
to calculate the fair value of options. During the six months ended 30 June
2005, the Group recognised an expense of £1.0m in respect of outstanding share
awards issued in 2003, 2004 and 2005. For the six months ended 30 June 2004, the
charge was £0.5m for outstanding share awards issued in 2003 and 2004. Under UK
GAAP, there was no expense since the exercise price represented the market value
of the shares at date of issue.
7. Reconciliation of shareholders' equity
-----------------
Reserves
-------- ------ -------
Share capital Share premium Translation Hedging Other reserves Retained Total
account reserve reserve earnings
£m £m £m £m £m £m £m
------------------- ------- ------- -------- ------ ------- ------- -------
At 31
December 2004
under UK GAAP 1.5 234.5 6.4 (246.0) (3.6)
Restatement for
IAS:
Goodwill
Goodwill
amortisation 1.5 1.5
Amortisation
of intangibles (1.4) (1.4)
Tax relief on
share option
charge 0.7 0.7
Dividend
accruals 10.8 10.8
Foreign
exchange
translation
differences,
net of tax 7.1 (7.1)
------------------- ------- ------- -------- ------ ------- ------- -------
Restated 31
December 2004 1.5 234.5 7.1 6.4 (241.5) 8.0
Adoption of
IAS 39* (1.0) (1.0)
------------------- ------- ------- -------- ------ ------- ------- -------
At 1 January
2005 under
IFRS 1.5 234.5 7.1 (1.0) 6.4 (241.5) 7.0
Movement on
cash flow
hedges 1.9 1.9
Profit for the
period
attributable
to equity
holders 26.4 26.4
Dividends paid (10.8) (10.8)
Issue of
shares 0.1 2.3 2.4
Equity settled
transactions 1.0 1.0
Foreign
exchange
translation
differences,
net of tax (0.8) (0.8)
At 30 June
2005 1.6 236.8 6.3 0.9 6.4 *(224.9) 27.1
------------------- ------- ------- -------- ------ ------- ------- -------
* After charging £244.1m for goodwill written off to reserves in relation to
subsidiaries acquired prior to 31 December 1997.
IAS 39 'Financial instruments: Recognition and measurement' was adopted on 1
January 2005. This resulted in fair values (negative) of hedged derivatives of
£1.0m to be included in the Balance Sheet.
The dividend of £10.8m represents the dividend declared on 6 May 2005, at the
rate of 7.0p per ordinary share.
There was an issue of 503,426 ordinary shares during the period on exercise of
share options.
8. Analysis of net debt
At 1 January Cash flow Exchange At 30 June
2005 adjustments 2005
£m £m £m £m
----------------------- --------- --------- --------- ---------
Cash 52.5 (10.2) 1.0 43.3
Borrowings (164.9) 7.6 (7.2) (164.5)
----------------------- --------- --------- --------- ---------
Total net debt (112.4) (2.6) (6.2) (121.2)
----------------------- --------- --------- --------- ---------
9. Other intangible assets
As required by IFRS, goodwill on acquisitions made after 31 March 2004, has been
re-examined and analysed into separately identifiable intangible assets which
are amortised over their estimated useful lives and capitalised goodwill which
is unamortised. In 2004, intangible assets with a value of £4.9m were
capitalised and goodwill was reduced by this amount. In the six months to 30
June 2005, £0.2m of intangible assets were acquired. Intangible assets comprised
covenants not to compete, patented technology and customer relationships which
are being amortised over their contractual live. The amortisation charged in the
six months to 30 June 2005 was £0.8m (30 June 2004: £0.3m, 31 December 2004:
£1.4m).
10. Acquisition of subsidiaries
On 29 April 2005, the Group acquired, on a cash free/debt free basis, all the
shares in Omega Point Laboratories Inc (OPL), a company incorporated in the USA,
for cash consideration of £2.2m. In addition, a further amount, which is
estimated to be £0.3m, will be payable as deferred consideration. The company is
engaged in the business of fire testing.
The acquisition had the following effect on the Group's assets and liabilities.
OPL's net assets at the acquisition date:
Recognised
values
£m
Intangibles 0.2
Property, plant and equipment 0.8
Trade and other receivables 0.3
Trade and other payables (0.1)
-------------------------------- ---------
Net identifiable assets and liabilities 1.2
Goodwill on acquisition (provisional) 1.3
-------------------------------- ---------
Cash paid 2.2
Estimated additional consideration payable 0.3
-------------------------------- ---------
There were no fair value adjustments.
11. Post balance sheet event
On 3 August 2005, the Group acquired the share capital of PARC Technical
Services Inc (PARC), a US petroleum and chemical process testing company for
£3.9m.
12. Contingent liabilities: claims and litigation
There have been no material developments concerning claims and litigation, which
in the opinion of the directors, would give rise to a material adverse effect on
the financial position of the Group in the foreseeable future.
13. Approval
The consolidated interim financial statements were approved by the Board on 2
September 2005.
14. Explanation of transition to IFRS
As stated in note 1, these are the Group's first consolidated interim financial
statements prepared in accordance with IFRS. The comparative information for the
six months to 30 June 2004, and for the year ended 31 December 2004, previously
prepared under UK GAAP, have been restated under IFRS. An explanation of how the
transition from previous GAAP to IFRS has affected the Group's financial
performance is shown in the table below.
Impact on the income statement:
Six months to Six months to Year to
30 June 30 June 31 December
Notes 2005 2004 2004
(Unaudited) (Unaudited) (Unaudited)
---------------------------- ------ --------- --------- ---------
£m £m £m
---------------------------- ------ --------- --------- ---------
Retained profit for the
period 20.8 19.8 36.6
under UK GAAP
IFRS adjustments:
Goodwill amortisation a 1.1 0.7 1.5
Amortisation of intangibles b (0.8) (0.3) (1.4)
Share option expense c (1.0) (0.5) (1.0)
Tax relief on share option c 0.1 0.3 0.2
charge
Ineffective hedges d 0.1
Minority interest e 1.7 2.3 2.8
Dividends f 6.1 5.2 16.1
---------------------------- ------ --------- --------- ---------
Net profit for the period
under 28.1 27.5 54.8
IFRS ------ --------- --------- ---------
----------------------------
a) Under UK GAAP, there was a charge to profit in respect of amortisation of
goodwill. Under IFRS, there is no such charge. However, under IFRS there is an
annual review required of goodwill which could result in an impairment charge.
b) IFRS requires qualifying intangibles, previously included within goodwill
under UK GAAP, to be separately identified and amortised over their useful
economic lives.
c) IFRS requires a charge to be made for the fair value of options granted to
employees.
d) Under IFRS, the movement in fair values of financial derivatives in respect
of an ineffective hedge is cycled through the income statement.
e) Under UK GAAP, minority interest was deducted in arriving at profit for the
period. Under IFRS, the minority interest is not deducted but is disclosed by
way of a note.
f) Under UK GAAP, dividends proposed were deducted in arriving at retained
profit. Under IFRS, dividends are taken to reserves when they are paid.
Impact on the balance sheet
Appendix A sets out the reconciliation between UK GAAP and IFRS balance sheets
together with an explanation of the IFRS adjustments.
Impact on the cash flow statement
The move from UK GAAP to IFRS does not change any of the cash flows of the
Group. The IFRS cash flow format is similar to UK GAAP but presents various cash
flows in different categories and in a different order from UK GAAP.
Accounting policies
Appendix B sets out the IFRS accounting policies
Appendix A: Effect of transition to International Financial Reporting Standards
Balance sheets
At 1 January 2004 At 30 June 2004 At 31 December 2004
(Unaudited) (Unaudited) (Unaudited)
UK GAAP Effect of IFRS UK GAAP Effect of IFRS UK GAAP Effect of IFRS
transition transition transition
Notes £m £m £m £m £m £m £m £m £m
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
ASSETS
Property,
plant and
equipment 77.8 77.8 78.7 78.7 88.5 88.5
Goodwill 1 17.8 17.8 33.0 (4.2) 28.8 36.9 (3.4) 33.5
Other
intangible
assets 1 4.6 4.6 3.5 3.5
Investments in
associates 1.2 1.2 1.5 1.5 1.8 1.8
Deferred tax
assets 2 2.5 2.5 2.8 2.8 5.5 5.5
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
non-current
assets 96.8 2.5 99.3 113.2 3.2 116.4 127.2 5.6 132.8
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Inventories 1.4 1.4 1.6 1.6 1.5 1.5
Trade and
other
receivables 105.3 105.3 111.5 111.5 109.8 109.8
Cash and cash
equivalents 81.5 81.5 64.0 64.0 52.5 52.5
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total current
assets 188.2 188.2 177.1 177.1 163.8 163.8
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total assets 285.0 2.5 287.5 290.3 3.2 293.5 291.0 5.6 296.6
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
LIABILITIES
Interest
bearing loans
and borrowings (17.5) (17.5) (21.5) (21.5) (14.0) (14.0)
Current taxes
payable (16.6) (16.6) (19.9) (19.9) (19.5) (19.5)
Trade and
other payables 3 (75.5) 9.1 (66.4) (74.5) 5.2 (69.3) (86.7) 10.8 (75.9)
Provisions (8.3) (8.3) (5.1) (5.1) (5.4) (5.4)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total current
liabilities (117.9) 9.1 (108.8) (121.0) 5.2 (115.8) (125.6) 10.8 (114.8)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Interest
bearing loans
and borrowings (196.2) (196.2) (175.6) (175.6) (150.9) (150.9)
Deferred tax
liabilities (0.3) (0.3) (0.3) (0.3) (0.6) (0.6)
Net pension
liabilities 2 (5.1) (2.4) (7.5) (5.1) (2.4) (7.5) (11.3) (4.8) (16.1)
Other
creditors (1.4) (1.4) (0.4) (0.4) (0.5) (0.5)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
non-current
liabilities (203.0) (2.4) (205.4) (181.4) (2.4) (183.8) (163.3) (4.8) (168.1)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
liabilities (320.9) 6.7 (314.2) (302.4) 2.8 (299.6) (288.9) 6.0 (282.9)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net
(liabilities)/
assets (35.9) 9.2 (26.7) (12.1) 6.0 (6.1) 2.1 11.6 13.7
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
EQUITY
Share capital 1.5 1.5 1.5 1.5 1.5 1.5
Share premium
account 232.1 232.1 234.2 234.2 234.5 234.5
Reserves 4 6.4 6.4 6.4 2.4 8.8 6.4 7.1 13.5
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Retained
earnings (283.1) 9.2 (273.9) (260.9) 3.6 (257.3) (246.0) 4.5 (241.5)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Retained
earnings (283.1) 9.2 (273.9) (260.9) 6.0 (54.9) (246.0) 11.0 (235.3)
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
attributable
to the equity
holders of the
company 5 (43.1) 9.2 (33.9) (18.8) 6.0 (12.8) (3.6) 11.6 8.0
Minority
interest 7.2 7.2 6.7 6.7 5.7 5.7
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total equity (35.9) 9.2 (26.7) (12.1) 6.0 (6.1) 2.1 11.6 13.7
---------------- --- ------ ------ ------ ------ ------ ------ ------ ------ ------
Notes to the IFRS adjustments
1. Goodwill amortisation charged under UK GAAP since 1 January 2004,
(the IFRS transitional date) is reversed, since under IFRS goodwill is not
amortised. IFRS requires a review for impairment of goodwill. This review did
not result in any impairment loss in the periods covered by the tables above.
In addition, specific intangible assets, previously included within goodwill
under UK GAAP, have been separately identified and shown as 'Other intangibles'
2. The deferred tax asset netted off against the pension liabilities
under UK GAAP, is now shown separately under IFRS. In addition the deferred tax
asset includes tax on the share option charge.
3. Under IFRS, a dividend accrual is only made when the dividend is
declared payable. Under UK GAAP dividends had been accrued although they had not
been declared.
4. Under IFRS, cumulative translation differences, previously included
in retained earnings under UK GAAP, are shown in a separate translation reserve.
5. The adjustment to retained earnings represents the sum of the
adjustments explained in the notes 1 to 4 above.
Appendix B: IFRS accounting policies
(a) Statement of compliance
The consolidated interim financial statements are prepared in accordance with
International Financial Reporting Standards (IFRS) adopted by the International
Accounting Standards Board (IASB). These are the Group's first consolidated
interim financial statements for part of the period covered by the first IFRS
annual consolidated financial statements prepared in accordance with IFRS. IFRS
1 has been applied before its effective date in the preparation of the Group's
consolidated interim financial statements.
(b) Basis of preparation
The consolidated interim financial statements have been prepared on a historical
cost basis except for derivative financial instruments which are stated at their
fair value from 1 January 2005. The accounting policies set out below have been
applied consistently to all periods presented in these consolidated interim
financial statements and in preparing an opening IFRS balance sheet at 1 January
2004, for the purposes of the transition to IFRS with the exception of IAS 39
which, as required, has been applied from 1 January 2005. The accounting
policies have been applied consistently by Group entities.
(c) Basis of consolidation
(i) Subsidiaries
Subsidiaries are those entities controlled by the Company. Control exists when
the Company has the power, directly or indirectly, to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. In
assessing control, potential voting rights that presently are exercisable or
convertible are taken into account. The financial statements of subsidiaries are
included in the consolidated interim financial statements from the date that
control commences until the date that control ceases.
(ii) Associates
Associates are those entities in which the Group has significant influence, but
not control, over the financial and operating policies. The consolidated interim
financial statements include the Group's share of the total recognised gains and
losses of associates on an equity accounted basis, from the date that
significant influence commences until the date that significant influence
ceases. When the Group's share of losses exceeds the carrying amount of the
associate, the carrying amount is reduced to nil and recognition of further
losses is discontinued except to the extent that the Group has incurred
obligations in respect of the associate.
(iii) Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised gains arising from
intra-group transactions, are eliminated in preparing the consolidated interim
financial statements. Unrealised gains arising from transactions with associates
are eliminated to the extent of the Group's interest in the entity.
(d) Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate
ruling at the date of the transaction or, if hedged forward, at the rate of
exchange under the related forward currency contract. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date, are
translated into sterling at the contracted rate or the rate of exchange ruling
at the balance sheet date. Foreign exchange differences arising on translation
are recognised in the income statement. Non-monetary assets and liabilities
denominated in foreign currencies that are stated at fair value are translated
to sterling at foreign exchange rates ruling at the dates the values were
determined.
(ii) Financial statements of foreign operations
The assets and liabilities of foreign operations, including goodwill and fair
value adjustments arising on consolidation, are translated to sterling at
foreign exchange rates ruling at the balance sheet date. The revenues and
expenses of foreign operations are translated into sterling at average rates of
exchange during the year. Foreign exchange differences arising on translation
are recognized directly in equity, net of exchange differences arising on
related foreign currency borrowings, where net investment hedging is in place.
Any differences that have arisen since 1 January 2004, the date of transition to
IFRS, are presented as a separate component of equity. They are recycled and
recognized in profit or loss upon disposal of the operation. Translation
differences that arose before the date of transition to IFRS in respect of all
foreign entities are not presented as a separate component.
(e) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign
exchange and interest rate risks arising from operational, financing and
investment activities. In accordance with its treasury policy, the Group does
not hold or issue derivative financial instruments for trading purposes.
However, derivatives that do not qualify for hedge accounting are accounted for
as trading instruments.
Derivative financial instruments are recognised initially at cost. Subsequent to
initial recognition, derivative financial instruments are stated at fair value.
Recognition of any resultant gain or loss depends on the nature of the item
being hedged (see accounting policy (f)).
The fair value of interest rate swaps is the estimated amount that the Group
would receive or pay to terminate the swap at the balance sheet date, taking
into account current interest rates and the current creditworthiness of the swap
counterparties. The fair value of forward exchange contracts is their quoted
market price at the balance sheet date, being the present value of the quoted
forward price.
(f) Hedging
(i) Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability, a firm commitment
or a highly probable forecasted transaction, the effective part of any gain or
loss on the derivative financial instrument is recognised directly in equity.
When the firm commitment or forecasted transaction results in the recognition of
an asset or liability, the cumulative gain or loss is removed from equity and
recognised in the income statement immediately.
When a hedging instrument or hedge relationship is terminated but the hedged
transaction is still expected to occur, the cumulative gain or loss at that
point remains in equity and is recognised in accordance with the above policy
when the transaction occurs. If the hedged transaction is no longer expected to
take place, the cumulative unrealised gain or loss recognised in equity is
recognised in the income statement immediately.
(ii) Hedge of monetary assets and liabilities
Where a derivative financial instrument is used economically to hedge the
foreign exchange exposure of a recognised monetary asset or liability, no hedge
accounting is applied and any gain or loss on the hedging instrument is
recognised in the income statement.
(iii) Hedge of net investment in foreign operation
The portion of the gain or loss on an instrument used to hedge a net investment
in a foreign operation that is determined to be an effective hedge is recognised
directly in equity. The ineffective portion is recognised immediately in the
income statement.
(g) Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated
depreciation (see below) and impairment losses (see accounting policy (l)).
(ii) Leased assets
Leases in terms of which the Group assumes substantially all the risks and
rewards of ownership are classified as finance leases. Assets held under finance
leases are treated as if they had been purchased at the present value of the
minimum lease payments. This cost is included in property, plant and equipment
and depreciation is provided over the shorter of the lease term or the estimated
useful life. The corresponding obligations under these leases are included
within borrowings. The finance charge element of rentals payable is charged to
the income statement to produce a constant rate of interest. Operating lease
rentals are charged to the income statement on a straight-line basis over the
period of the lease.
(iii) Depreciation
Depreciation is charged to the income statement on a straight-line basis over
the estimated useful lives of items of property, plant and equipment. Land is
not depreciated. The estimated useful lives are as follows:
Freehold buildings and long leasehold land and buildings 50 years
Short leasehold land and buildings Term of lease
Plant and machinery 3 - 10 years
(h) Intangible assets
(i) Goodwill
All business combinations are accounted for by applying the purchase method. In
respect of business acquisitions that have occurred since 1 January 2004,
goodwill represents amounts arising on acquisitions, being the difference
between the fair value of consideration payable and the fair value of separable
net assets acquired. Goodwill is stated at cost less any accumulated impairment
losses (see accounting policy (l)).
In respect of acquisitions prior to 1 January 2004, goodwill is included on the
basis of its deemed cost, which represents the amount recorded under previous
GAAP.
Purchased goodwill in respect of acquisitions before 1 January 1998, was written
off to reserves in the year of acquisition, in accordance with the accounting
standard then in force.
Fair value accounting adjustments are made in respect of acquisitions and these
may be made on provisional estimates. Amendments may be made to these
adjustments in the subsequent 12 months with a corresponding adjustment to
goodwill in the light of post acquisition experience.
(ii) Other intangible assets
Intangible assets other than goodwill that are acquired by the Group are stated
at cost less accumulated amortisation and impairment losses.
Amortisation is charged to the income statement on a straight-line basis over
the estimated useful lives of other intangible assets from the date they are
available for use. The estimated useful lives are as follows:
Covenants not to compete Contractual life
Patented technology Contractual life
Customer relationships Up to 10 years
(i) Trade and other receivables
Trade and other receivables are stated at their cost less impairment loses (see
accounting policy (l)).
(j) Inventories
Inventories and work in progress are stated at the lower of cost and net
realisable value. Cost comprises expenditure incurred in the normal course of
business in bringing inventories and work in progress to their present condition
and location and net realisable value is the estimated selling price in the
ordinary course of business, less the estimated selling costs.
(k) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an
original maturity of three months or less. Bank overdrafts that are repayable on
demand and form an integral part of the Group's cash management are included as
a component of cash and cash equivalents for the purpose of the statement of
cash flows.
(l) Impairment
The carrying amount of the Group's assets are reviewed at each balance sheet
date to determine whether there has been any indication of impairment. If any
such indication exists, the asset's recoverable amount is estimated. An
impairment loss is recognised in the income statement whenever the carrying
amount of an asset exceeds its recoverable amount.
Impairment losses recognised in respect of cash-generating units are allocated
first to reduce the carrying amount of any goodwill allocated to the
cash-generating unit/group of units and then to reduce the carrying amount of
the other assets in the unit.
Goodwill was tested for impairment at 1 January 2004, the date of transition to
IFRS, even though no indication of impairment existed.
(m) Dividends
Dividends are recognised as a liability in the period in which they are
declared.
(n) Interest-bearing borrowings
Interest-bearing borrowings are initially recognised at fair value, less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any difference
between cost and redemption value being recognised in the income statement over
the period of the borrowings on an effective interest basis.
(o) Employee benefits
(i) Defined contribution plan
Obligations for contributions to defined contribution pension plans are
recognised as an expense in the income statement as incurred.
(ii) Defined benefit plans
The Group's net obligation in respect of defined benefit pension plans is
calculated separately for each plan by estimating the amount of future benefit
that employees have earned in return for their service in the current and prior
periods. That benefit is discounted to determine the present value, and the fair
value of any plan assets is deducted. The discount rate is the yield at balance
sheet date on high quality corporate bonds that have maturity dates
approximating the terms of the Group's obligations. The calculation is performed
by a qualified actuary using the attained age method for closed schemes and
projected unit method for open schemes.
The defined benefit schemes' assets are valued at bid prices and the schemes'
liabilities are discounted to present values using high quality corporate bond
rates. The resultant pension scheme surpluses, to the extent that they are
considered recoverable, or deficits, are recognised in full on the face of the
balance sheet.
The increase in the present value of the liabilities expected to arise from the
employees' services in the accounting period is charged to the income statement.
The expected return on the schemes' assets less the interest on the present
value of the schemes' liabilities during the accounting period is shown as
'Other finance income'. Actuarial gains and losses, net of deferred tax, are
recognised in the consolidated statement of total recognised income and
expenses.
(iii) Share-based payment transactions
The share option programme allows Group employees to acquire shares in the
Company. The fair value of options granted, is recognised as an expense with a
corresponding increase in equity. The fair value is measured at grant date and
spread over the period during which the employee becomes unconditionally
entitled to the options. The fair value of the options granted, is measured
using the Black- Scholes method. The amount recognised as an expense is adjusted
to reflect the actual number of share options that vest, except where forfeiture
is only due to share prices not achieving the threshold for vesting.
(p) Provisions
A provision is recognised in the balance sheet when the Group has a legal or
constructive obligation as a result of a past event, and it is probable that an
outflow of economic benefits will be required to settle the obligation.
(i) Restructuring
A provision for restructuring is recognised when the Group has approved a
detailed and formal restructuring plan, and the restructuring has either
commenced or has been announced publicly. Future operating costs are not
provided for.
(ii) Claims
A provision for a claim is recognised when a judgement has been passed or a
settlement agreed. Provision is made for estimated legal fees as soon as a claim
becomes active.
(q) Trade and other payables
Trade and other payables are stated at their cost.
(r) Revenue
Revenue represents the total amount receivable for services provided or goods
sold, excluding sales related taxes and intra group transactions. Revenue is
recognised in the income statement when the relevant service is completed or
goods delivered.
(s) Expenses
(i) Operating lease payments
Payments made under operating leases are recognised in the income statement on a
straight-line basis over the term of the lease. Lease incentives received are
recognised in the income statement as an integral part of the total lease
expense.
(ii) Net financing costs
Net financing costs comprise interest payable on borrowings calculated using the
effective interest rate method, amortisation of debt issuance costs, facility
fees, interest receivable on funds invested, finance income, pension expenses
and gains and losses on hedging instruments that are recognised in the income
statement (see accounting policy (f)). Interest income is recognised in the
income statement as it accrues. The interest expense component of finance lease
payments is recognised in the income statement using the effective interest rate
method.
(t) Income tax
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent that
it relates to items recognised directly to equity, in which case it is
recognised in equity. Current tax is the expected tax payable on the taxable
income for the year, using tax rates enacted or substantially enacted at the
balance sheet date, and any adjustment to tax payable in respect of previous
years.
Deferred tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes. The
following temporary differences are not provided for: goodwill not deductible
for tax purposes, the initial recognition of assets or liabilities that affect
neither accounting nor taxable profit, overseas retained earnings the
distribution of which is under the control of the Group and which are not likely
to be distributed in the foreseeable future, and differences relating to
investments in subsidiaries to the extent that they will probably not reverse in
the foreseeable future. The amount of deferred tax provided is based on the
expected manner of realisation or settlement of the carrying amount of assets
and liabilities, using tax rates enacted or substantially enacted at the balance
sheet date.
A deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
(u) Segment reporting
A segment is a distinguishable component of the Group that is engaged either in
providing services (business segment) or in providing services within a
particular economic environment (geographic segment), which is subject to risks
and rewards that are different from those of other segments.
Independent review report by KPMG Audit Plc to Intertek Group plc
Introduction
We have been engaged by the company to review the financial information set out
on pages 8 to 26 and we have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to the
interim figures should be consistent with those applied in preparing the
preceding annual financial statements except where any changes, and the reasons
for them, are disclosed.
As disclosed in note 1 to the financial information, the next annual financial
statements of the group will be prepared in accordance with IFRS adopted for use
in the European Union.
The accounting policies that have been adopted in preparing the financial
information are consistent with those that the directors currently intend to use
in the next annual financial statements. There is, however, a possibility that
the directors may determine that some changes to these policies are necessary
when preparing the full annual financial statements for the first time in
accordance with those IFRSs adopted for use by the European Union. This is
because, as disclosed in note 1, the directors have anticipated that certain
standards, which have yet to be formally adopted for use in the EU, will be so
adopted in time to be applicable to the next annual financial statements.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 'Review of interim financial information' issued by the Auditing
Practices Board for use in the United Kingdom. A review consists principally of
making enquiries of group management and applying analytical procedures to the
financial information and underlying financial data and, based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review is substantially less
in scope than an audit performed in accordance with Auditing Standards and
therefore provides a lower level of assurance than an audit. Accordingly, we do
not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2005.
KPMG Audit Plc
Chartered Accountants
London
2 September 2005
This information is provided by RNS
The company news service from the London Stock Exchange
Latest directors dealings
- 10 hours ago Regional REIT Limited
- 10 hours ago Regional REIT Limited
- 10 hours ago Polar Capital Holdings
- 11 hours ago Norcros
- 11 hours ago London Stock Exchange Group