Final Results

Intertek Group PLC 05 March 2007 PRELIMINARY 2006 RESULTS ANNOUNCEMENT 5 MARCH 2007 Intertek Group plc ('Intertek'), a leading international provider of quality and safety services, announces its preliminary results for the year ended 31 December 2006. A STRONG SET OF NUMBERS Year ended 31 December 2006 2005 % change Revenue Â£664.5m Â£580.1m + 14.5% Operating profit(1) Â£102.2m Â£87.1m + 17.3% Profit before tax Â£91.4m Â£79.4m + 15.1% Adjusted profit before tax(1) Â£95.5m Â£83.5m + 14.4% Basic earnings per share 40.9p 36.8p + 11.1% Earnings per share(2) 43.2p 39.1p + 10.5% Dividend per share 14.8p 12.0p + 23.3% All numbers are at actual exchange rates HIGHLIGHTS Organic revenue and operating profit(1) growth of 7.9% and 10.7% respectively For the three main divisions, revenue growth of 20.9%, organic revenue growth of 13.3% and organic operating profit(1) growth of 27.3% Operating profit(1) margin increase of 40 bps to 15.4% Operating cash flow of Â£124.6m, up by 28.9% Seven businesses acquired in 2006, for net consideration of Â£36.9m (1) Excluding amortisation of business combination intangibles Â£3.8m (2005: Â£2.1m) and goodwill impairment Â£0.3m (2005: Â£2.0m) (2) Diluted adjusted earnings per share based on profit before amortisation of business combination intangibles and goodwill impairment Wolfhart Hauser, Chief Executive Officer, commented: 'I am pleased to report a strong set of numbers for the full year, continuing the good performance we saw in the first half. Our three main divisions had an excellent performance driven by the continuing high demand for safety and quality services across our industries and the increasing tendency for companies to outsource these services. 'We see good opportunities to develop the business further, both organically and through selective acquisitions, and whilst the weaker dollar will impact on our results, we remain confident about the prospects for 2007.' CONTACTS For further information, please contact Aston Swift, Investor Relations Telephone: +44 (0) 20 7396 3400 aston.swift@intertek.com Richard Mountain, Financial Dynamics Telephone: +44 (0) 20 7269 7121 richard.mountain@fd.com ANALYSTS' MEETING There will be a meeting for analysts at 9.30am today at JPMorgan Cazenove, 20 Moorgate, London EC2R 6DA. A copy of the presentation will be available on the website later today. 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 provider of quality and safety services to a wide range of global and local industries. Partnership with Intertek brings increased value to customers' products and processes, ultimately supporting their success in the global market place. Intertek has the experience, expertise, resources and global reach to support its customers through their network of 930 laboratories and offices, over 18,000 people in 109 countries around the world. CHAIRMAN'S STATEMENT 'Strong customer focus produces good results' Results The Group has enjoyed a successful year and has continued to grow its operations both organically and through acquiring complementary businesses. Revenue for the Group grew by 14.5% to Â£664.5m in 2006 compared to 2005. Our three largest divisions, representing 92.0% of the Group's revenue, grew by 20.9% in total and Government Services, our smallest division, declined as expected, due to the discontinuation of pre-shipment inspection programmes in Nigeria and Venezuela. Group operating profit was Â£98.1m, up 18.2% over 2005. Operating profit, stated before the amortisation of business combination intangibles and the impairment of goodwill ('adjusted operating profit') was Â£102.2m, up 17.3% over 2005. Excluding Government Services, adjusted operating profit increased by 35.0%. These results include the contribution of acquisitions made in 2005 and 2006. Excluding these acquisitions the organic growth in revenue was 13.3% for the three largest divisions and 7.9% for the Group. Organic growth in adjusted operating profit was 27.3% for the three largest divisions and 10.7% for the Group. Acquisitions In line with the Group's strategy of extending its range of services and territories through complementary acquisitions, seven new businesses were acquired in 2006, for net consideration of Â£36.9m. The largest of these was Alta Analytical Laboratory Inc., which was acquired on 30 November 2006 for Â£14.0m. Alta which is based in California, USA provides analytical services to North American pharmaceutical and clinical research organisations. This acquisition broadens the range of laboratory services offered to the pharmaceutical sector. Other acquisitions enhanced our ability to offer analytical chemical testing in Europe and strengthened our market position in strategically important countries such as Japan and Spain. On 9 January 2007 the Group acquired for Â£12.9m, UK based Umitek Ltd and its subsidiaries, CAPCIS and SREL which provide specialist testing and consultancy services to the oil and gas industries in the North Sea and globally. Dividends An interim dividend of 4.6p per share (2005: 3.9p) was paid to shareholders on 14 November 2006. The Directors will propose a final dividend of 10.2p per share at the Annual General Meeting on 11 May 2007, to be paid to shareholders on 15 June 2007. If approved, this will make a full year dividend of 14.8p per share (2005: 12.0p), an increase of 23.3%. The Group continues to follow a progressive dividend policy. In determining the future level of dividends we previously set dividend cover to be at least three times earnings. As a result of our strengthening balance sheet, in future we will set the dividend to be covered by at least two and a half times earnings. Earnings per share Basic earnings per share were 40.9p, up 11.1% over last year. Diluted adjusted earnings per share, before amortisation of business combination intangibles and impairment of goodwill, were 43.2p, up 10.5% from 39.1p. Excluding the profit on sale of an associate made in 2005, the earnings per share growth increased from 10.5% to 13.4%. Details of the calculation of earnings per share is given in note 2. Board changes The Intertek Board of Directors was further strengthened during the year by the appointment of Christopher Knight and Debra Rade as Non-Executive Directors. Christopher Knight is a Chartered Accountant and former investment banker with a wide range of experience in corporate finance both in the UK and internationally. Debra Rade is currently a partner in a major US law firm. Her practice focuses on corporate governance and compliance as well as product safety and certification. Until 2002, Debra was a senior officer of Underwriters Laboratories Inc., a provider of product safety and certification. Their expertise and experience will contribute to the continued success of the Intertek Group. After leading the Consumer Goods division for most of his 33 years with Intertek, Raymond Kong retired as Chief Executive of that division on 1 July 2006 and became a Non-Executive Director of Intertek Group plc. Raymond continues as President of Asia and China, using his knowledge and experience to advance the Group's interests in that region. On behalf of everyone at Intertek, I would like to express our deep gratitude to Raymond for his outstanding contribution towards building the Consumer Goods division into the successful business that it is today. Paul Yao, formerly the Chief Operating Officer of the Consumer Goods division, was appointed Chief Executive of the division to replace Raymond. I wish both colleagues success in their new roles. Employees The growth reflected in this strong set of results has been delivered by the dedication and expertise of the Group's employees in providing value to our customers. At the end of 2006, the Group employed over 18,000 people in 109 countries, an increase of 2,600 people over last year. One of our key challenges in the Group, is recruiting, training and developing our people to ensure that they deliver excellent services which add value to our customers. In order to meet this challenge, we have strengthened the human resources function and have developed new metrics to identify and develop talent within the Group. On behalf of the Board, I would like to thank everyone in the Group for their effort in making 2006 another good year and for their continued dedication towards giving our customers the best possible service. Outlook The Group operates in a dynamic global marketplace where change is continual. Through its extensive global network and experienced people, the Group will continue to adapt and expand its services to anticipate and meet the changing needs of customers. The Group's strong financial position and ability to generate cash will enable it to invest in new facilities and acquire new businesses. Looking forward, we see good opportunities to develop the business further, both organically and through selective acquisitions, and whilst the weaker dollar will impact on our results, we remain confident about the prospects for 2007. Vanni Treves Chairman PERFORMANCE REVIEW Introduction This review provides information on the performance of the Group for the year ended 31 December 2006. It highlights areas which have performed well and explains why some areas have underperformed. Growth in revenue Â£m Change Revenue 2005 580.1 Currency translation (1.4) (0.3)% Acquisitions 39.5 6.7% Organic growth 46.3 8.1% Revenue 2006 664.5 14.5% Intertek provides a wide range of quality and safety related services to customers operating in the global marketplace. Top line revenue growth is a key performance measure. Revenue increased by Â£84.4m to Â£664.5m in 2006, up 14.5% over the prior year. This increase comprised Â£39.5m from acquisitions made in 2005 and 2006 and Â£46.3m from organic growth, reduced by Â£1.4m due to currency translation. The organic growth of 8.1% was generated primarily by increased global trade, growth in the market for quality and safety services, an increase in environmental regulations and an increase in outsourcing. Part of the Group's growth strategy is to make bolt on acquisitions which complement and extend the Group's service offering into new areas of expertise and new geographies. The Group made 12 such acquisitions in 2005 and seven in 2006, which were located in 12 different countries. These businesses have extended the range of analytical services offered by the Group in a variety of sectors including the pharmaceutical and chemical industries and have increased the Group's footprint in strategically important countries such as India, Japan and Spain. The Group is able to leverage the return from these acquisitions by offering new services on a global basis to existing customers. Geographically, all regions reported growth in revenue with the largest contributors being the United States and China. Growth in the US was driven partly by acquisitions but also by the strong petroleum market. Growth in China was driven mainly by the migration of manufacturing from western countries. The Group has been established in China for many years and continues to expand its facilities into new locations with 13 new laboratories opened in 2006 offering services to a wide range of industries including textiles, toys, minerals, electrical and automotive. There was substantial growth in revenue in the Netherlands as a result of the acquisition from DSM, the Dutch chemical manufacturer, of Polychemlab which offers specialist analytical services to the chemical industry. On the downside, revenue was reduced by the cessation of the pre-shipment inspection programmes in Nigeria and Venezuela. Growth in adjusted operating profit and margin 2006 2005 Â£m Â£m Change ------------ --------- --------- Operating profit 98.1 83.0 18.2% Amortisation of business combination 3.8 2.1 81.0% intangibles Impairment of goodwill 0.3 2.0 (85.0)% ---------------------------- ------------ --------- --------- Adjusted operating profit 102.2 87.1 17.3% ---------------------------- ------------ --------- --------- Adjusted operating margin 15.4% 15.0% Up 40bp ---------------------------- ------------ --------- --------- For management purposes, the Group adjusts operating profit and operating margin to exclude the amortisation of business combination intangibles and the impairment of goodwill. In 2006, adjusted operating profit was Â£102.2m, up 17.3% over the previous year. The adjusted operating margin was 15.4%, up 40 basis points from 15.0%. The adjusted operating profit in the three main divisions increased by 35.0%, however the smallest division, Government Services, declined by 59.5% due to the cessation of pre-shipment inspection contracts in Nigeria and Venezuela in 2005. On an organic basis, adjusted operating profit increased by 27.3% for the three main divisions and 10.7% for the Group. The adjusted organic margin for the Group was 15.3%. Impairment of goodwill The carrying value of capitalised goodwill was reviewed for impairment and a charge of Â£0.3m (2005: Â£2.0m) was made to operating profit in 2006 to reduce the goodwill to its fair value. The impairment related to a small business in Estonia acquired by the Oil, Chemical & Agri division in 2005, which has not performed in line with management expectations. The capitalised goodwill of Â£71.1m (2005: Â£55.7m) relates to acquisitions made since 1998. Net financing costs The Group reported finance income in 2006 of Â£4.5m (2005: Â£3.5m). This comprised the expected return on pension assets, interest on bank balances and foreign exchange differences on interest accruals. The increase was mainly due to higher interest rates. The Group's finance expense for 2006 was Â£11.5m compared to Â£9.4m in 2005. The charge comprised interest on borrowings, pension interest cost and other financing fees. The increase was primarily due to higher interest rates. Profit before taxation Profit before tax was Â£91.4m compared to Â£79.4m in 2005, mainly due to the good trading performance in the year. Taxation Income tax expense for 2006 was Â£22.5m (2005: Â£18.7m), comprising a current tax charge of Â£22.0m (2005: Â£24.1m) plus a deferred tax charge of Â£0.5m (2005: credit Â£5.4m). The tax rate was 24.6%, up from 23.6% in 2005. The main reason for the increase in the tax rate was increased earnings in higher taxed jurisdictions. The tax rate is expected to be sustainable at close to current year levels for the short to medium-term. Profit for the year Profit for the year was Â£68.9m (2005: Â£60.7m) of which Â£63.8m (2005: Â£57.1m) was attributable to equity holders of the Company. Minority interests Profit attributable to minority shareholders was Â£5.1m in 2006 (2005: Â£3.6m). The increase was mainly due to the strong growth in the Group's non-wholly owned subsidiaries in Asia. Earnings per share Earnings per share (EPS) is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year. As set out in note 2, basic EPS at the end of the year was 40.9p (2005: 36.8p), an increase of 11.1%. A diluted adjusted EPS calculation is also shown which removes the impact of amortisation of business combination intangibles and impairment of goodwill to give diluted adjusted EPS of 43.2p (2005: 39.1p), an increase of 10.5%. Excluding the profit on sale of associates of Â£1.6m in 2005, the growth in diluted adjusted EPS was 13.4% Year-on-year growth in diluted adjusted EPS is one of the key performance targets that the Group uses to incentives its managers. Dividends During the year, the Group paid total dividends of Â£19.8m (2005: Â£16.9m), which comprised Â£12.6m in respect of the final dividend for the year ended 31 December 2005 paid on 16 June 2006, at the rate of 8.1p per share and Â£7.2m being the interim dividend in respect of the year ended 31 December 2006, paid on 14 November 2006 at a rate of 4.6p per share. These amounts were charged to retained earnings. Since the balance sheet date, the Directors proposed a final dividend in respect of the year ended 31 December 2006, of 10.2p per share (2005: 8.1p) making a full year dividend of 14.8p per share (2005: 12.0p), an increase of 23.3% over last year. If approved, the final dividend will be paid to shareholders on 15 June 2007. Cash and liquidity In order to maintain its growth strategy the Group continually invests in laboratory equipment, computer systems, new facilities and acquisitions. A strong operating cash flow is therefore very important. One of the key performance indicators used by the Group to measure the efficiency of its cash generation is the percentage of adjusted operating profit that is converted into cash. As shown in the table below, in 2006, 79.6% of adjusted operating profit was converted into cash compared to 75.1% in 2005. Cash and liquidity 2006 2005 Change Â£m Â£m ------------ --------- --------- Cash generated from operations 124.6 96.7 28.9% Less acquisition of property, plant, equipment and software (43.2) (31.3) 38.0% --------------------------- ------------ --------- --------- Operating cash flow after capital expenditure 81.4 65.4 24.5% --------------------------- ------------ --------- --------- Adjusted operating profit 102.2 87.1 17.3% --------------------------- ------------ --------- --------- Operating cash flow/adjusted operating profit 79.6% 75.1% Up 450bp --------------------------- ------------ --------- --------- Cash generated from operations was Â£124.6m for 2006, compared to Â£96.7m for 2005. The increase of 28.9% was due to improved profitability and effective working capital management. Provisions decreased by Â£4.2m due to the settlement of claims and of restructuring costs incurred in the Government Services division. Cash outflows from investing activities in 2006 were Â£78.1m (2005: Â£71.4m), up 9.4%. The main outflows were Â£36.9m (2005: Â£44.5m) for the acquisition of subsidiaries and Â£43.2m (2005: Â£31.3m) for the acquisition of property, plant and equipment and computer software. The increase in capital expenditure was due to increased investment in laboratories, particularly in China, an increase in analytical services which require specialised equipment and investment in container scanning equipment. Cash flows from financing activities comprised cash inflows from the issue of share capital following the exercise of employee share options of Â£4.2m (2005: Â£3.8m) and the net drawdown of debt of Â£8.2m (2005: Â£9.7m), and cash outflows of dividends paid to minorities of Â£3.8m (2005: Â£2.9m) and dividends paid to Group shareholders of Â£19.8m (2005: Â£16.9m), which resulted in a net cash outflow of Â£11.2m (2005: Â£5.9m). Interest bearing loans and borrowings were Â£178.4m at 31 December 2006, a decrease of 6.4% over 2005. The Group's borrowings are in currencies which match its asset base. The decrease in borrowings comprised exchange adjustments of Â£20.5m principally due to the translation into sterling of borrowings denominated in US dollars and HK dollars, partially offset by the net drawdown of debt of Â£8.2m. The debt drawdown was mainly used to finance acquisitions. Cash and cash equivalents at 31 December 2006, were Â£49.5m, a decrease of 2.6% over 2005. Net debt at 31 December 2006 was Â£128.9m (2005: Â£139.9m). Acquisitions and disposals As described earlier, during 2006 the Group made seven acquisitions for a net cash outflow of Â£36.9m (2005: Â£44.5m). Further information on acquisitions is given in the business review by division. Return on business assets For management purposes, the Group calculates return on business assets as the adjusted operating profit for the year divided by the carrying value of business assets which comprise operating working capital plus tangible fixed assets and software at the end of the year. For 2006 the return on business assets was 57.0%, up 340 basis points from 53.6% in 2005. BUSINESS REVIEW BY DIVISION Consumer Goods The Consumer Goods (Labtest) division provides services to the textiles, toys, footwear, hardlines, food and retail industries. Services include testing, inspection, auditing, advisory services, quality assurance and hazardous substance testing. Customers are often retailers but can include manufacturers and suppliers within a global supply chain. The market for the services of the Consumer Goods division is diverse. Demand is driven by retailers who require the goods they sell to be produced to a quality set by either their own internal standards or by legislation in a particular country. Increasingly, goods are manufactured in locations that are remote from the eventual consumer, causing supply chains to be longer and more complicated. The market is increasingly being driven by regulations issued to address safety and environmental concerns over such issues as carcinogenic dyes in textiles and chemicals in toys and cosmetics. Performance in 2006 2006 2005 Change Â£m Â£m ------------------- ---------- ---------- Revenue 155.2 136.7 13.5% Operating profit(1) 49.5 44.2 12.0% Operating margin(1) % 31.9 32.3 (40)bp ------------------- ------------------- ---------- ---------- (1) Stated before the amortisation of business combination intangibles Â£0.5m (2005: Â£0.2m) and the impairment of goodwill Â£nil (2005: Â£2.0m) The Consumer Goods division performed well in 2006, with revenue growth of 13.5% and operating profit growth of 12.0%. The high operating margin in Consumer Goods was maintained at over 30% but decreased 40 basis points over last year. Most of this decline was attributable to the lower margin equipment and building inspection business that was acquired last year. On an organic basis, revenue growth was 11.9% and operating profit growth was 11.8%. Toys, food and hardlines grew particularly well, driven in part by an increase in the testing of hazardous substances caused by a European Union directive, which became mandatory on 1 July 2006. The global textile market continued to be unsettled by the impact of changes in import quotas but despite these challenging market conditions, revenue from textile testing grew well in key countries such as China and India. The volume of textile testing in Europe remained stagnant as the market shifted increasingly to Asia and Latin America. Over 60% of the revenue in Consumer Goods is generated in China, Hong Kong and Taiwan. Revenue from these countries grew well and prospects continue to look good. The textile laboratory network was expanded with new facilities in India, Guatemala and Vietnam and three new laboratories in China. The key growth drivers in Consumer Goods remain strong, principally the sourcing of products from China, the increasingly wide range of products being sold by retailers, shorter product lifecycles and the growth in demand from consumers and regulatory bodies for assurance of quality and safety. Companies are coming under increasing pressure to be socially responsible and the Consumer Goods division provides auditing and consultancy services in this sector. The division will continue to expand its network of facilities in 2007. Commercial & Electrical The Commercial & Electrical (ETL SEMKO) division provides services to a wide range of industries including those in the home appliances, medical, building, industrial and HVAC/R (heating, ventilation and air conditioning and refrigeration), IT and telecom and automotive sectors. Customers are mostly manufacturers but also retailers, industry organisations and government departments. Services include testing and certification, electromagnetic compatibility testing (EMC), systems auditing, outsourcing, benchmark and performance testing and environmental testing. The Group has the widest range of owned marks and accreditations, including the ETL listed mark and Warnock Hersey mark for North America and the S mark, as well as being a leader in the issuance of the CB certification mark and the CE mark and GS mark for Europe. The market for the services of the Commercial & Electrical division is driven by increasing regulations over the safety of products. This includes current concerns over climate change and the impact on the environment of electrical products. The division has a global strategy for each of its key industry sectors, for example expertise in the United States in automotive component testing and building products testing has been extended into China by the opening of a new automotive facility in Shanghai and a building products facility in Guangzhou. Performance in 2006 2006 2005 Change Â£m Â£m ------------------- ---------- ---------- Revenue 174.4 150.9 15.6% Operating profit(1) 26.7 22.7 17.6% Operating margin(1) % 15.3 15.0 30bp ------------------- ------------------- ---------- ---------- (1)Stated before the amortisation of business combination intangibles Â£2.0m (2005: Â£1.2m). The Commercial & Electrical division performed well in 2006, with revenue growth of 15.6% and operating profit growth of 17.6%. The operating margin increased by 30 basis points to 15.3%. All service sectors performed well apart from automotive component testing, which suffered from the decline in the domestic motor industry in the United States. On an organic basis, revenue increased by 8.7% and operating profit increased by 6.7%. The electrical, building products and HVAC/R businesses grew strongly, with double digit organic revenue growth. Revenue from the operations in mainland China continued to grow strongly and the network was extended by the opening of six offices and four laboratories in China. Two offices were also opened in India. In February 2006, the Japanese EMC business of Akzo Nobel was acquired. Japan is an important market for Commercial & Electrical and this acquisition will allow quicker penetration of that market for both EMC testing and other services offered by the Group. This business performed well in 2006. The division also acquired a small electrical testing business in Italy during the year. Customer demand for safe, energy efficient products continues to increase and the market for Commercial & Electrical continues to evolve which presents opportunities for growth. Concerns over global warming and climate change are driving new directives regarding the energy usage of products. This is evident in the HVAC/R industry and is expected to extend over other industry sectors. There are many small niche players in the market and this provides opportunities for bolt on acquisitions. Oil, Chemical & Agri The Oil, Chemical & Agri (Caleb Brett) division offers independent cargo inspection, testing and analytical services to the oil and chemical, agricultural, mineral and pharmaceutical sectors. Global customers include the major oil companies and leading chemical companies and the division also provides outsourcing services to many other major manufacturers. The cargo inspection and testing market is a well established global market in which Intertek is one of the leading service providers. High barriers to entry are principally due to the fixed costs required in establishing a global network of operations and laboratories. The analytical services market continues to expand driven by the increasing demand from industries which seek to outsource non-core services including testing. The more stringent environmental and regulatory requirements for fossil fuels and the drive for seeking alternative energy sources are expanding the market for testing services. Intertek developed outsourcing initially in the oil sector, but now is extending its reach to the chemical, pharmaceutical, bio tech, automotive and minerals industries. Intertek's successful track record is creating more opportunities and has reinforced Intertek as the market leader in laboratory outsourcing in the oil and chemical sector. Performance in 2006 2006 2005 Change Â£m Â£m ----------------- --------- --------- Revenue 281.5 218.0 29.1% Operating profit(1) 30.0 17.9 67.6% Operating margin(1) % 10.7 8.2 250bp ----------------- ----------------- --------- --------- (1) Stated before the amortisation of business combination intangibles Â£1.2m (2005: Â£0.7m) and the impairment of goodwill Â£0.3m (2005: Â£nil). Oil, Chemical & Agri had an excellent performance in 2006 with revenue growth of 29.1%, operating profit growth of 67.6% and an increase in margin from 8.2% to 10.7%. On an organic basis, revenue growth was 17.5% and operating profit growth was 52.1%. Excluding the impact of the hurricane which affected the 2005 results, organic revenue increased by 16.5% and organic operating profit increased by 27.0%. All service sectors contributed to this growth. With high volumes of trade and increased demand for petroleum products, market conditions were favourable and increased trading activity was evident across all regions. Demand for analytical services increased, in part due to the expansion of the global bio fuels market and from new environmental regulations coming into force for road and marine fuels. Revenue from analytical services as a percentage of total revenues grew to 43% in 2006 up from 36% in 2005. In the Americas, revenue grew strongly, led by the US cargo inspection and testing business with market expansion throughout the US as well as in Latin America. An early investment in multiple facilities for testing ultra low sulphur diesel paid off, as demand was strong, driven by the requirement to comply with new US regulations. Demand was also strong for ethanol testing due to a change in regulations regarding the use of ethanol as an additive to petrol. In Europe, revenue growth was assisted by the full implementation of outsourced analytical contracts which were awarded in 2005. Downstream, two new contracts for a bio-fuels plant and a refinery in the UK were won. A new contract was also awarded by BP to provide upstream analytical and technical support services to all offshore and onshore oil and gas production facilities in the North Sea. In Asia, new minerals testing and agri services were established to take advantage of the growth in these sectors. Upstream oil and gas services capabilities were expanded utilising the support and technology from the Westport laboratory in the US, which was acquired from Halliburton at the end of 2005. The division continued its strategy of extending its service offering by acquiring companies with specialist skills that complement the existing business and can be leveraged to existing and new clients through the Group's global network. Details of the larger acquisitions are given below. From 1 September 2006, under an outsourcing agreement, Intertek began providing all of the analytical service support to the manufacturing operations of Sabic and DSM in the Netherlands. This is one of the largest outsourcing contracts for analytical services within the chemical industry to date, with over 170 chemists and technicians joining Intertek. In November 2006, the Group acquired the bioanalytical divisions of Alta Analytical Laboratory Inc., which is based in California, USA. Alta provides analytical services to North American pharmaceutical and clinical research organisations and provides Intertek with a platform to build a global presence in this area. In December 2006, the Group acquired Caleb Brett Iberica, a leading testing and inspection business in Spain and Portugal, providing technical inspections and fuel analysis services to petroleum, chemical and fuel retailer clients. This acquisition provides the Group with the opportunity to extend its full range of services into this strategically important region. In January 2007, the Group acquired Umitek Ltd and its subsidiaries, CAPCIS and Smith Rea Energy Ltd (SREL) in the UK, which provide specialist testing and consultancy services to the oil and gas industries in the North Sea and globally. These businesses will allow the Group to extend the range of services provided by Intertek's current upstream operations to Europe and the Middle East. The outlook for Oil, Chemical & Agri is positive with oil price volatility expected to continue generating trading opportunities requiring third party inspection and testing and continued expansion of the analytical services business driven by new regulations. The pipeline of potential outsourcing projects remains strong and the strategy of supplementing organic growth with acquisitions will continue. GOVERNMENT SERVICES The Government Services (FTS) division offers a range of services to governments, national standards organisations, customs departments and industrial companies. Services offered include ensuring imports comply with relevant safety, quality and other standards. Goods and commodities are tested and/or inspected prior to shipment which prevents dumping of unsafe goods and improves the quality of imported and sold goods. Ministries of Finance retain services to increase import duty and help improve efficiency. Imports are inspected and valued in the country before shipment to enable import duties to be accurately assessed and certified. Container scanning services are offered to help protect against security risks associated with international trade. Intertek's worldwide laboratory coverage allows for rapid inspection, certification and valuation of shipments, anywhere in the world. Most of the customers of the Government Services division are governments or departments linked to governments in countries which do not have the necessary infrastructure to enforce import controls effectively. Performance in 2006 2006 2005 Change Â£m Â£m ----------------- --------- --------- Revenue 53.4 74.5 (28.3)% Operating profit(1) 6.6 16.3 (59.5)% Operating margin(1) % 12.4 21.9 (950)bp ----------------- ----------------- --------- --------- (1) Stated before the amortisation of business combination intangibles Â£0.1m (2005: Â£nil). As expected, the cessation of pre-shipment inspection contracts in Nigeria and Venezuela had an adverse effect on the division's performance in 2006. Revenue in 2006 was 28.3% lower than the previous year and operating profit declined 59.5% due to the loss of profit from those contracts and the lost contribution towards overheads. The operating margin reduced from 21.9% to 12.4%. The division was restructured to minimise its cost base, incurring costs of Â£0.3m (2005: Â£2.0m). Standards contracts in Nigeria and Kenya which started at the end of 2005 were fully operational in 2006 and performed well. A new container scanning contract with the Guinean Ministries of Transport and Finance commenced operation in the second half of 2006 and will run for ten years. The Government Services division will continue to work with governments to develop innovative programmes that are tailored to their specific requirements. There are a number of potential opportunities for new contracts, particularly in the areas of container scanning and standards programmes. Consolidated income statement For the year ended 31 December 2006 2006 2005 Â£m Â£m --------- --------- Revenue (Note 1) 664.5 580.1 Cost of sales (523.6) (447.6) -------------------------------- --------- --------- Gross profit 140.9 132.5 -------------------------------- --------- --------- Amortisation of business combination intangible assets (3.8) (2.1) Impairment of goodwill (0.3) (2.0) Administrative expenses (38.7) (45.4) -------------------------------- --------- --------- Total administrative expenses (42.8) (49.5) -------------------------------- --------- --------- Group operating profit (Note 1) 98.1 83.0 -------------------------------- --------- --------- Finance income 4.5 3.5 Finance expense (11.5) (9.4) -------------------------------- --------- --------- Net financing costs (7.0) (5.9) -------------------------------- --------- --------- Share of profit of associates 0.3 0.7 Profit on sale of interest in associate - 1.6 -------------------------------- --------- --------- Profit before taxation 91.4 79.4 Income tax expense (22.5) (18.7) -------------------------------- --------- --------- Profit for the year 68.9 60.7 -------------------------------- --------- --------- Attributable to: Equity holders of the Company 63.8 57.1 Minority interest 5.1 3.6 -------------------------------- --------- --------- Profit for the year 68.9 60.7 -------------------------------- --------- --------- Earnings per share (Note 2) -------------------------------- --------- --------- Basic 40.9p 36.8p -------------------------------- --------- --------- Diluted 40.6p 36.5p -------------------------------- --------- --------- Consolidated balance sheet As at 31 December 2006 2006 2005 Â£m Â£m ---------- ---------- ASSETS Property, plant and equipment 123.7 115.9 Goodwill 71.1 55.7 Other intangible assets 19.6 12.8 Investments in associates 0.7 0.7 Deferred tax assets 13.3 14.4 ------------------------------ ---------- ---------- Total non-current assets 228.4 199.5 ------------------------------ ---------- ---------- Inventories 3.2 3.1 Trade and other receivables 151.9 146.3 Derivative financial instruments 0.4 1.7 Cash and cash equivalents 49.5 50.8 ------------------------------ ---------- ---------- Total current assets 205.0 201.9 ------------------------------ ---------- ---------- Total assets 433.4 401.4 ------------------------------ ---------- ---------- LIABILITIES Interest bearing loans and borrowings (13.6) (15.3) Current taxes payable (24.1) (25.8) Trade and other payables (101.3) (93.9) Provisions (4.5) (8.9) ------------------------------ ---------- ---------- Total current liabilities (143.5) (143.9) ------------------------------ ---------- ---------- Interest bearing loans and borrowings (164.8) (175.4) Deferred tax liabilities (3.8) (3.4) Net pension liabilities (15.2) (17.8) Other payables (0.9) (1.2) ------------------------------ ---------- ---------- Total non-current liabilities (184.7) (197.8) ------------------------------ ---------- ---------- Total liabilities (328.2) (341.7) ------------------------------ ---------- ---------- Net assets 105.2 59.7 ------------------------------ ---------- ---------- EQUITY Share capital 1.6 1.6 Share premium account 242.4 238.2 Other reserves 6.0 13.4 Retained earnings (153.6) (201.3) ------------------------------ ---------- ---------- Total equity attributable to equity holders of the Company 96.4 51.9 Minority interest 8.8 7.8 ------------------------------ ---------- ---------- Total equity 105.2 59.7 ------------------------------ ---------- ---------- Consolidated statement of cash flows For the year ended 31 December 2006 2006 2005 Â£m Â£m -------- ------- Cash flows from operating activities Profit for the year 68.9 60.7 Adjustments for: Depreciation charge 24.1 22.0 Amortisation of software 2.2 - Amortisation of business combination intangibles 3.8 2.1 Impairment of goodwill 0.3 2.0 Share option expense 2.4 1.9 Share of profit of associates (0.3) (0.7) Profit on sale of interest in associate - (1.6) Net financing costs 7.0 5.9 Income tax expense 22.5 18.7 (Profit)/ loss on disposal of property, plant and equipment (0.3) 0.1 -------------------------------- -------- ------- Operating profit before changes in working capital and provisions 130.6 111.1 (Increase)/decrease in inventories (0.4) 0.1 Increase in trade and other receivables (13.7) (23.7) Increase in trade and other payables 12.3 5.9 (Decrease)/increase in provisions (4.2) 3.3 -------------------------------- -------- ------- Cash generated from operations 124.6 96.7 Interest paid (7.7) (6.5) Income taxes paid (24.6) (17.8) -------------------------------- -------- ------- Net cash flows from operating activities 92.3 72.4 -------------------------------- -------- ------- Investing activities Proceeds from sale of property, plant and equipment 0.9 0.3 Proceeds from disposal of interest in associate - 2.7 Interest received 1.1 0.6 Dividends received from associated undertakings - 0.8 Acquisition of subsidiaries, net of cash acquired (36.9) (44.5) Additions to property, plant and equipment (42.0) (31.3) Additions to software (1.2) - -------------------------------- -------- ------- Net cash flows from investing activities (78.1) (71.4) -------------------------------- -------- ------- Financing activities Proceeds from the issue of share capital 4.2 3.8 Proceeds from disposal of own shares by ESOT - 0.4 Drawdown of debt 104.8 62.8 Repayment of debt (96.6) (53.1) Dividends paid to minorities (3.8) (2.9) Dividends paid (19.8) (16.9) -------------------------------- -------- ------- Net cash flows from financing activities (11.2) (5.9) -------------------------------- -------- ------- Net increase/(decrease) in cash and cash equivalents 3.0 (4.9) Cash and cash equivalents at 1 January 50.8 52.5 Effect of exchange rate fluctuations on cash held (4.3) 3.2 -------------------------------- -------- ------- Cash and cash equivalents at 31 December 49.5 50.8 -------------------------------- -------- ------- Consolidated statement of recognised income and expense For the year ended 31 December 2006 2006 2005 Â£m Â£m --------- --------- Foreign exchange translation differences (6.1) (1.7) Actuarial gains and losses on defined benefit pension 3.2 (3.7) schemes Tax on income and expenses recognised directly in equity (1.9) 1.4 Effective portion of changes in fair value of cash flow hedges, net of recycling (1.3) 2.6 ----------------------------------- --------- --------- Net expense recognised directly in equity (6.1) (1.4) Profit for the year 68.9 60.7 ----------------------------------- --------- --------- Total recognised income and expense for the year 62.8 59.3 ----------------------------------- --------- --------- Total recognised income and expense for the year attributable to: Equity holders of the Company 58.2 54.8 Minority interest 4.6 4.5 ----------------------------------- --------- --------- Total recognised income and expense for the year 62.8 59.3 ----------------------------------- --------- --------- 1 SEGMENT REPORTING Segment information is presented in respect of the Group's business and geographical segments. The primary format, business segments, is based on the Group's management and internal reporting structure. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly borrowings, pension fund liabilities, and corporate expenses and assets. Business segments The Group comprises the following main business segments: Consumer Goods (Labtest), which provides services to the textiles, footwear, toys, food and hardlines industries. Commercial & Electrical (ETL SEMKO), which provides testing, inspection and certification services to industries including those in the home appliances, medical, building, industrial and HVAC/R, IT and telecom and automotive sectors. Oil, Chemical & Agri (Caleb Brett), which provides cargo inspection, testing and analytical services to the oil and gas, chemical, agricultural, mineral and pharmaceutical sectors. Government Services (FTS), which provides trade services to standards bodies and governments. Central overheads comprise the costs of the corporate head office and non-operating holding companies and other costs which are not controlled by the operating divisions. On 1 January 2006, the systems certification business was transferred from Consumer Goods to Commercial & Electrical and prior year figures haves been restated to show a like-for-like comparison. Geographical segments All the business segments are managed on a worldwide basis but can be divided into the following geographic regions: Americas Europe, Middle East and Africa Asia In presenting information on the basis of geographic segments, segment revenue is based on the geographical location of the entity that generated that revenue. Segment assets are based on the geographical location of the assets. Segment reporting Business analysis (primary segment) Consumer Commercial Oil, Chemical Government Goods & Electrical & Agri Services 2006 2005 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------ ------ ------ ----- ----- ----- ----- ----- Revenue from external customers 155.2 136.7 174.4 150.9 281.5 218.0 53.4 74.5 Inter-segment revenue 0.3 0.1 1.4 1.1 2.4 2.3 1.3 1.4 ------------ ------ ------ ------ ----- ----- ----- ----- ----- Revenue 155.5 136.8 175.8 152.0 283.9 220.3 54.7 75.9 ------------ ------ ------ ------ ----- ----- ----- ----- ----- Operating profit before amortisation 49.5 44.2 26.7 22.7 30.0 17.9 6.6 16.3 and impairment Amortisation of business combination (0.5) (0.2) (2.0) (1.2) (1.2) (0.7) (0.1) - intangibles Impairment of goodwill - (2.0) - - (0.3) - - - ------------ ------ ------ ------ ----- ----- ----- ----- ----- Group operating profit 49.0 42.0 24.7 21.5 28.5 17.2 6.5 16.3 ------------ ------ ------ ------ ----- ----- ----- ----- ----- Net financing costs Share of profit of associates Profit on sale of interest in associate Income tax expense Profit for the year ------------ ------ ------ ------ ----- ----- ----- ----- ----- Segment assets 64.9 57.9 95.0 85.7 188.0 158.1 18.1 26.6 Investment in associates Unallocated assets ------------ ------ ------ ------ ----- ----- ----- ----- ----- Total assets ------------ ------ ------ ------ ----- ----- ----- ----- ----- Segment 21.5 20.3 31.3 27.2 40.3 37.3 9.1 12.0 liabilities Unallocated liabilities ------------ ------ ------ ------ ----- ----- ----- ----- ----- Total liabilities ------------ ------ ------ ------ ----- ----- ----- ----- ----- Depreciation and software amortisation 6.2 5.3 7.6 6.9 11.0 8.7 1.4 1.0 ------------ ------ ------ ------ ----- ----- ----- ----- ----- Capital expenditure 14.3 7.4 9.9 9.3 16.7 13.0 2.2 1.5 including software ------ ------ ------ ----- ----- ----- ----- ----- ------------ Business analysis (primary segment) continued Central overheads Eliminations Consolidated 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m ----- ----- ----- ---- ----- ----- Revenue from external customers - - - - 664.5 580.1 Inter-segment revenue - - (5.4) (4.9) - - -------- ----- ----- ----- ---- ----- ----- Revenue - - (5.4) (4.9) 664.5 580.1 -------- ----- ----- ----- ---- ----- ----- Operating profit before amortisation and impairment (10.6) (14.0) - - 102.2 87.1 Amortisation of business combination - - - - (3.8) (2.1) intangibles Impairment of goodwill - - - - (0.3) (2.0) -------- ----- ----- ----- ---- ----- ----- Group operating profit (10.6) (14.0) - - 98.1 83.0 -------- ----- ----- ----- ---- ----- ----- Net financing costs (7.0) (5.9) Share of profit of associates 0.3 0.7 Profit on sale of interest in associate - 1.6 Income tax expense (22.5) (18.7) -------- ----- ----- ----- ---- ----- ----- Profit for the year 68.9 60.7 -------- ----- ----- ----- ---- ----- ----- Segment assets 2.4 4.3 368.4 332.6 Investment in associates 0.7 0.7 Unallocated assets 64.3 68.1 -------- ----- ----- ----- ---- ----- ----- Total assets 433.4 401.4 -------- ----- ----- ----- ---- ----- ----- Segment liabilities 3.1 6.5 105.3 103.3 Unallocated liabilities 222.9 238.4 -------- ----- ----- ----- ---- ----- ----- Total liabilities 328.2 341.7 Depreciation and software amortisation 0.1 0.1 - - 26.3 22.0 -------- ----- ----- ----- ---- ----- ----- Capital expenditure including software 0.1 0.1 - - 43.2 31.3 -------- ----- ----- ----- ---- ----- ----- Segment reporting (continued) On 1 January 2006, the systems certification business was transferred from Consumer Goods to Commercial & Electrical and the 2005 figures have been restated to show a like-for-like comparison. Geographic analysis (secondary segment) Europe, Middle Americas East and Africa Asia Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------ ------ ------ ------ ------ ------ ------ ------ Revenue from external customers 245.1 203.6 190.3 186.8 229.1 189.7 664.5 580.1 Operating profit 29.6 21.0 (2.0) 2.5 70.5 59.5 98.1 83.0 ----------- ------ ------ ------ ------ ------ ------ ------ ------ Amortisation of business combination intangibles 1.7 1.3 1.1 0.6 1.0 0.2 3.8 2.1 ----------- ------ ------ ------ ------ ------ ------ ------ ------ Impairment of goodwill - - 0.3 2.0 - - 0.3 2.0 ----------- ------ ------ ------ ------ ------ ------ ------ ------ Segment assets 142.8 141.2 128.2 113.3 97.4 78.1 368.4 332.6 ----------- ------ ------ ------ ------ ------ ------ ------ ------ Capital expenditure including software 11.5 10.4 10.1 9.3 21.6 11.6 43.2 31.3 ----------- ------ ------ ------ ------ ------ ------ ------ ------ 2 EARNINGS PER ORDINARY SHARE The calculation of earnings per ordinary share is based on profit attributable to equity holders of the Company and the weighted average number of ordinary shares in issue during the year. In addition to the earnings per share required by IAS 33: Earnings Per Share, an adjusted earnings per share has also been calculated and is based on earnings excluding the effect of amortisation of business combination intangibles and goodwill impairment. It has been calculated to allow shareholders a better understanding of the trading performance of the Group. Details of the adjusted earnings per share are set out below: 2006 2005 Based on the profit for the year: Â£m Â£m ----------------------------------------- -------- -------- Profit attributable to equity shareholders 63.8 57.1 Amortisation of business combination intangibles 3.8 2.1 Impairment of goodwill 0.3 2.0 ----------------------------------------- -------- -------- Adjusted earnings 67.9 61.2 ----------------------------------------- -------- -------- Number of shares (millions): ----------------------------------------- -------- -------- Basic weighted average number of shares 156.0 155.1 Potentially dilutive share options 1.2 1.3 ----------------------------------------- -------- -------- Diluted weighted average number of shares 157.2 156.4 ----------------------------------------- -------- -------- Basic earnings per share 40.9p 36.8p Options (0.3)p (0.3)p ----------------------------------------- -------- -------- Diluted earnings per share 40.6p 36.5p ----------------------------------------- -------- -------- Basic adjusted earnings per share 43.5p 39.5p Options (0.3)p (0.4)p ----------------------------------------- -------- -------- Diluted adjusted earnings per share 43.2p 39.1p ----------------------------------------- -------- -------- The weighted average number of shares used in the calculation of the diluted earnings per share for the year to 31 December 2006, excludes nil potential shares (2005: 1,456,156) as these were not dilutive in accordance with IAS 33: Earnings Per Share and 128,194 (2005: nil) contingently issuable shares as the performance conditions were not met, 3 ANNUAL REPORT The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2006 or 2005 but is derived from the 2006 accounts. Statutory accounts for 2005 have been delivered to the registrar of companies and those for 2006 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock Exchange

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