Half-yearly Report
| Intertek Group plc Interim Report |
|
4 August 2008
2008 HALF YEAR RESULTS
Intertek Group plc (“Intertek”), a leading international provider of quality and safety services, announces its half year results for the period ended 30 June 2008.
Financial Highlights
| H1 08 | H1 07 | Growth | Growth | |||||||||||||
| at actual rates (3) | at constant rates (4) | |||||||||||||||
| Revenue | £457.4m | £360.8m | 26.8% | 21.3% | ||||||||||||
| Operating profit | £64.3m | £52.6m | 22.2% | |||||||||||||
| Adjusted operating profit (1) | £68.7m | £54.5m | 26.1% | 20.1% | ||||||||||||
| Profit before income tax | £58.5m | £48.4m | 20.9% | |||||||||||||
| Adjusted profit before income tax (1) | £62.9m | £50.3m | 25.0% | |||||||||||||
| Basic earnings per share | 25.1p | 21.5p | 16.7% | |||||||||||||
| Diluted adjusted earnings per share (2) | 27.6p | 22.5p | 22.7% | |||||||||||||
| Interim dividend | 7.1p | 5.8p | 22.4% |
|
1. Before amortisation of acquisition intangibles of £4.4m (H1 07: £1.9m). 2. Diluted adjusted EPS based on adjusted profit (see note 7 to the interim financial statements). 3. Cumulative average exchange rates for the six months to 30 June 2008 and the six months to 30 June 2007. 4. Cumulative average exchange rates for the six months to 30 June 2008. |
Highlights
- Strong revenue and operating profit¹ growth of 26.8% and 26.1%
- Organic revenue and operating profit¹ growth of 17.6% and 15.0%
- Operating profit margin¹ of 15.0%
- Operating cash flow of £56.7m, up 31.9%
- Eight businesses acquired in first half for a total consideration of £40.3m
- Businesses reorganised to allow greater focus on growth opportunities
- Interim dividend up 22.4%
Wolfhart Hauser, Chief Executive Officer, commented:
“Through our strategy of focusing on the current and future needs of our customers, we have delivered strong growth in the first half of 2008 and by continuing to invest strategically we have extended our services into industry sectors which provide us with a platform for future growth and margin enhancement.
Our first half performance demonstrates that our business remains resilient and therefore, whilst we continue to be aware that uncertainty in global economic growth could have a negative impact on broader trading conditions in certain markets, we expect the Group to perform strongly in the remainder of the year”.
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 businesses are available to download, free of charge from the News & Media section of www.intertek.com
INTERIM REPORT 2008
Management Reports
This half yearly report forms one of the
interim management statements that Intertek is required to publish under
the EU Transparency Directive with effect from the financial year
beginning 1 January 2008. Intertek will issue the next interim
management statement in the fourth quarter of 2008. The year end results
will be announced on 9 March 2009.
Interim Report
Recent changes to the Listing Rules of the
Financial Services Authority have removed the requirement to issue a
hard copy interim report to shareholders. However, if you require a hard
copy of this statement please contact the Company Secretary. This
statement is available on www.intertek.com.
OVERVIEW
Intertek’s strength lies
in our strategy of focusing on the current and future needs of our
customers. We develop and extend our service offering to add value to
their businesses and products in a rapidly changing global environment.
Through this focus and our dedication to our customers’
success we have delivered strong growth in the first half of 2008 (H1
08) and through continuing strategic investments we have extended our
services into industry sectors which provide us with a platform for
future growth and margin enhancement.
We have reorganised our operating divisions to align more closely with the industries in which our customers are based. Details of the reorganisation are given in the Business Review further on in this Interim Report. All prior period figures have been restated to allow a like-for-like comparison. Central overheads are now allocated to the operating divisions resulting in margins for each division being lower than previously reported. We did not incur any exceptional costs to complete the reorganisation. To aid comparison with previously reported figures, our segmental analysis in the interim financial statements presents the results in both the old and the new structure. The discussion that follows is based on the new divisional structure.
All divisions apart from Government Services reported strong revenue growth in H1 08 compared to H1 07. Consumer Goods and Oil, Chemical & Agri reported particularly strong organic revenue growth, with revenue being further increased by acquisitions. The adjusted margins referred to below are the operating margins before the amortisation of acquisition intangibles.
Consumer Goods revenue increased 32.6% (29.7% organic) in H1 08 over H1 07, driven by strong demand for toy testing and good growth in textile testing. The heightened demand for heavy metals testing in toys which started in the second half of 2007, continued into the current year. Whilst we expect demand to remain high, the rate of growth in the second half of 2008 will not be as high as in the first half. The adjusted margin after allocating central overheads was 28.9%.
Oil, Chemical & Agri revenue increased 22.3% (20.1% organic) in H1 08 over H1 07. The market demand for petroleum inspection and testing and chemical testing continued to be strong in all regions. The adjusted margin, after allocating central overheads increased 120 basis points to 10.6%. We expect growth to remain strong in the second half of the year.
Commercial & Electrical revenue increased 23.3% (13.7% organic) in H1 08 over H1 07. The growth was driven by the Americas where the electrical sector, which is more than half of the division, performed particularly well. Asia also reported good revenue growth. The adjusted margin after allocating central overheads decreased 110 basis points to 12.8%, mainly due to investment in new key industry sectors such as photovoltaic. We expect the margin to improve in the second half of the year.
New Divisions comprise Analytical Services, Minerals and Industrial Services, all of which are in the development stage of their growth cycle. Revenue increased by 43.1% (organic 9.0%) mainly due to the impact of acquisitions. The adjusted margin after allocating central overheads was 9.0%. We have invested significantly in these sectors, both organically and through acquisitions; adding new product lines in industries which we believe are strategically important and have considerable growth potential. We expect the margins in these new divisions to improve considerably.
Government Services revenue declined 3.6% due to the discontinuance of a pre-shipment inspection contract in Ecuador at the end of 2007. The margin after allocating central overheads decreased 240 basis points to 9.2%.
Acquisitions
In the first half of 2008 we completed eight
acquisitions for a total consideration of £40.3m (H1 07: £58.0m). These
were spread across all divisions other than Government Services. In July
2008, we acquired Applica, a food testing business based in Germany, for
an initial cash consideration of £3.0m and a contingent consideration of
up to £0.6m payable in March 2009 dependent on financial performance. We
continue to see many further acquisition opportunities which will widen
the scope and range of the services we offer.
Finance
To date, we have added a total of £75.0m to our
existing bank facility and we have also raised US$100.0m by way of a
senior note issue. These additional facilities will enable us to
continue our investment programme.
Outlook
Our first half performance demonstrates that our
business remains resilient and therefore, whilst we continue to be aware
that uncertainty in global economic growth could have a negative impact
on broader trading conditions in certain markets, we expect the Group to
perform strongly in the remainder of the year.
BUSINESS REVIEW
For the six months ended 30 June 2008
Overview of results
Revenue for the Group increased to
£457.4m, up 26.8% (21.3% at constant exchange rates). Excluding the
results of acquisitions made since 1 January 2007, organic revenue
increased 17.6%.
Operating profit for the Group before the amortisation of acquisition intangibles (adjusted operating profit), was £68.7m, up 26.1% (20.1% at constant exchange rates). The Group’s adjusted operating profit margin was 15.0% which was down 10 basis points from the margin for the first half of 2007, primarily due to investment costs in Analytical Services, Minerals and Industrial Services, which we expect to be margin accretive in the future.
Performance Review by Division
In response to growth
opportunities in new sectors and to increase our focus on customers in
their specific industries, from 1 January 2008 we have reorganised our
internal management structure from four divisions to seven. The
Analytical Services and Minerals businesses have been separated from the
Oil, Chemical & Agri business and are now managed independently. A new
division called Industrial Services was formed comprising Systems
Certification, which was previously included in Commercial & Electrical,
and Industrial Inspection which was previously included in Government
Services. Consumer Goods remains unchanged. Because of their relatively
small size, the results of the Minerals and Industrial Services
divisions are combined with Analytical Services and are currently
discussed in total as New Divisions in the Business Review.
In order to present a more accurate operating margin for each division, central overhead costs are now allocated to each of the operating divisions and, figures for prior periods have been restated on the same basis. The revenue and adjusted operating profit for the six months to 30 June 2008 are shown below for both the new and old structures. The reorganisation did not result in any exceptional costs.
Revenue for the six months to 30 June 2008
| New Structure | Old Structure | |||||||||||
| Revenue | Adjusted operating profit | Margin | Revenue | Adjusted operating profit | Margin | |||||||
| £m | £m | £m | £m | |||||||||
| Oil, Chemical & Agri | 143.8 | 15.3 | 10.6% | 216.5 | 26.7 | 12.3% | ||||||
| Consumer Goods | 108.1 | 31.2 | 28.9% | 108.1 | 32.8 | 30.3% | ||||||
| Commercial & Electrical | 95.8 | 12.3 | 12.8% | 105.1 | 13.8 | 13.1% | ||||||
| Government Services | 21.7 | 2.0 | 9.2% | 27.7 | 3.5 | 12.6% | ||||||
| New Divisions | 88.0 | 7.9 | 9.0% | - | - | |||||||
| Central | - | - | - | (8.1) | ||||||||
| Total | 457.4 | 68.7 | 15.0% | 457.4 | 68.7 | 15.0% | ||||||
A review of the performance of each division in the six months to 30 June 2008 compared to the six months to 30 June 2007 is set out below. Revenue and adjusted operating profit are presented at actual exchange rates and the growth rates are shown at both actual and constant exchange rates. The figures for the six months to 30 June 2007 have been restated to reflect the new structure.
| Oil, Chemical & Agri | H1 08 | H1 07 | Change | Change | ||||
| £m | £m | at actual rates | at constant rates | |||||
| Revenue | 143.8 | 117.6 | 22.3% | 17.2% | ||||
| Adjusted operating profit | 15.3 | 11.0 | 39.1% | 34.2% | ||||
| Adjusted operating margin | 10.6% | 9.4% | 120bp | 130bp |
The Oil, Chemical & Agri division provides independent cargo inspection as well as non-inspection related laboratory testing, calibration and related technical services to the world’s energy, petroleum, chemical and agricultural industries.
Oil, Chemical & Agri delivered an excellent performance in the first half of the year with strong growth across all regions, particularly in non-inspection related testing. Total revenue increased to £143.8m, up 22.3% (17.2% at constant exchange rates) and organic revenue increased by 20.1%. The organic growth was driven by favourable market conditions, higher demand for alternative fuels and increased regulation, which together resulted in greater demand for testing and inspection services.
Total adjusted operating profit increased to £15.3m, up 39.1% (34.2% at constant exchange rates). The adjusted operating margin improved by 120 basis points to 10.6%. The improvement in margin was mainly driven by the strong growth in non-inspection related testing of petroleum which generates a higher margin than the inspection business.
In January 2008, Electrical Mechanical Instrument Services (UK) Ltd (EMIS) was acquired. EMIS provides calibration services to the oil and gas industries in the UK and the Middle East and complements the existing upstream services offered by the Group.
We expect market conditions to remain favourable and therefore the strong performance should continue in the second half of the year.
| Consumer Goods | H1 08 | H1 07 | Change | Change | ||||
| £m | £m | at actual rates | at constant rates | |||||
| Revenue | 108.1 | 81.5 | 32.6% | 25.8% | ||||
| Adjusted operating profit | 31.2 | 23.5 | 32.8% | 26.3% | ||||
| Adjusted operating margin | 28.9% | 28.8% | 10bp | 10bp |
The Consumer Goods 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.
The Consumer Goods division delivered strong results with total revenue of £108.1m up 32.6% (25.8% at constant exchange rates) and organic revenue up 29.7%. The toy sector, which accounted for just over a quarter of the revenue in the first half of 2008, performed exceptionally well with revenue growth of 60%. This was mainly due to increased demand for heavy metals testing driven by heightened consumer concern over the safety of toys. Revenue from textile testing increased, particularly in China.
Total adjusted operating profit was £31.2m, up 32.8% (26.3% at constant exchange rates). The total adjusted operating margin was 28.9% compared to 28.8% for the comparable prior year period.
In April 2008, the Group acquired 4-Front Research, a group of companies in the UK, France and India which provide analytical support for clinical research studies on cosmetic, personal care, functional food and over-the-counter pharmaceutical and medical products. With seven sites in England and sites in Hyderabad, India and Paris, France, 4-Front extends the services the Group is able to offer its consumer healthcare customers and also provides a strategic platform for development in India and other fast growing Asian markets for consumer healthcare products.
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 and shorter product lifecycles. Concern over the safety of consumer products has increased demand from consumers and regulatory bodies for independent assurance of quality and safety. Although two-thirds of revenue is derived from toys and textiles testing, the remainder is from developing services such as consultancy, inspection, supply chain services, food and corporate social responsibility where margins are not always as high as those earned by the established services.
| Commercial & Electrical | H1 08 | H1 07 | Change | Change | ||||
| £m | £m | at actual rates | at constant rates | |||||
| Revenue | 95.8 | 77.7 | 23.3% | 18.3% | ||||
| Adjusted operating profit | 12.3 | 10.8 | 13.9% | 7.9% | ||||
| Adjusted operating margin | 12.8% | 13.9% | (110)bp | (130)bp |
The Commercial & Electrical division provides services to a wide range of industries including those in the home appliances, lighting, medical, building, industrial and HVAC/R (heating, ventilation and air conditioning and refrigeration), IT and telecom and automotive sectors.
Total revenue increased to £95.8m, up 23.3% (18.3% at constant exchange rates) and organic revenue increased by 13.7%. The electrical sector which accounted for 60% of the division’s total revenue grew well, particularly in the US, where increased acceptance of the ETL mark contributed to growth in market share. All other industry sectors also reported revenue growth in the first half of 2008 compared to the first half of 2007.
Revenue in Asia increased in the first half of 2008 compared to the first half of 2007, mainly due to good growth in China. Total revenue in Europe increased, although organic revenue growth was slower in the first half of 2008 compared to the first half of 2007.
Total adjusted operating profit was £12.3m, up 13.9% (7.9% at constant exchange rates). The total adjusted operating margin decreased 110 basis points to 12.8%. The decline in margin is partly due to slower growth in Europe but also to investment in new technology to support new key industry sectors such as photovoltaic (solar) and geographic expansion of automotive testing services in China and Japan.
In February 2008, the Group acquired Epsilon Technical Services Ltd. Epsilon is based in the UK and offers safety and advisory services to companies with products for use in potentially explosive atmospheres. This acquisition complements and extends the Group’s existing explosive environment certification services.
The outlook for Commercial & Electrical for the rest of the year is good. Over 50% of the division’s revenue is generated in the Americas where, despite the weak economy in the US, the growth prospects are good. Investment in new industry sectors provides good opportunities for growth and we expect to see an improvement in margin in the second half of the year.
| Government Services | H1 08 | H1 07 | Change | Change | ||||
| £m | £m | at actual rates | at constant rates | |||||
| Revenue | 21.7 | 22.5 | (3.6)% | (6.9)% | ||||
| Operating profit | 2.0 | 2.6 | (23.1)% | (28.6)% | ||||
| Operating margin | 9.2% | 11.6% | (240)bp | (280)bp |
The Government Services division offers a range of services to governments, national standards organisations and customs departments. Services include cargo scanning, fiscal support services and standards programmes.
Revenue declined 3.6% due to the discontinuance of a pre-shipment inspection (PSI) contract in Ecuador which was cancelled in 2007. Operating profit declined 23.1% to £2.0m and the margin decreased 240 basis points to 9.2%.
The division’s reliance on traditional PSI contracts has reduced and 66% of revenue is now generated by other services such as standards contracts and supply chain security. The Government Services division continues to seek new opportunities and is committed to developing innovative solutions to the cargo security issues facing international trade.
| New Divisions | H1 08 | H1 07 | Change | Change | ||||
| £m | £m | at actual rates | at constant rates | |||||
| Revenue | 88.0 | 61.5 | 43.1% | 37.1% | ||||
| Adjusted operating profit | 7.9 | 6.6 | 19.7% | 14.5% | ||||
| Adjusted operating margin | 9.0% | 10.7% | (170)bp | (170)bp |
New Divisions comprises the Analytical Services, Minerals and Industrial Services divisions.
Total revenue increased to £88.0m, up 43.1% (37.1% at constant exchange rates) and organic revenue increased by 9.0%. We have invested both organically and through acquisitions in these businesses as they are in sectors which have high growth potential.
Total adjusted operating profit was £7.9m, up 19.7% (14.5% at constant exchange rates). The total adjusted operating margin declined 170 basis points. The margin decline was mainly due to development and integration costs. We are very confident that the investment in these divisions will lead to improved margins.
Analytical Services, which comprised 63% of the total revenue for New Divisions in the first half of 2008, provides laboratory services to the chemical, pharmaceutical, cosmetics/personal care, oil and gas and automotive/aerospace industries.
Upstream Services reported strong growth in revenues in the first half of 2008 over the first half 2007. Downstream, Chemicals and Materials also performed well, apart from lubricant testing in the US which suffered from lower volumes in 2008 ahead of new standards being issued in 2009. Pharmaceutical testing grew well in the US but underperformed in the UK due to delays in a number of client projects.
In February 2008, the Group acquired the UK based Commercial Microbiology Group which provides laboratory and consultancy services and sells testing kits related to the measurement and management of bacteria in the upstream oil and gas industries. This acquisition expands the suite of expert services that the Group can deliver as a partner to the oil and gas exploration industries globally.
In February 2008, the Group also acquired Bioclin Research Laboratories Ltd, an Irish company which provides product quality testing and bio-analytical services to pharmaceutical, medical device and bio-technology companies.
In March 2008, the Limburg Water Boards of the Netherlands outsourced all laboratory activities and transfered the employees of Waterschapsbedrijf Limburg to Intertek for a minimum period of five years. The Group will provide extended analytical testing and consultancy services in the areas of environmental science, regulation and complex analysis of silt, soil and water.
The outlook for Analytical Services is good and we expect to see margin improvement in the second half of the year although lubricant testing will not show significant improvement until next year when new standards are issued.
Minerals, which comprised 20% of the total revenue for New Divisions in the first half of 2008, provides inspection, testing and advisory services to the minerals industry.
The minerals market remains very buoyant and revenue grew strongly in the first half of 2008 over the first half of 2007.
In April 2008, the Group acquired a company which operates the largest commercial assay laboratory in the Philippines and offers geophysical surveys and inspection services to the minerals industries in Asia.
Activity in the mining and exploration industries is expected to remain high and we will continue to expand the Minerals Division geographically and invest significantly in new laboratories to optimise the growth opportunities in this sector. We expect the margin in Minerals to improve in the second half of the year.
Industrial Services, which comprised 17% of the New Divisions revenue for the first half of 2008, combines Systems Certification, which provides high value audit services to a wide range of industries in both the manufacturing and service sectors, and Industrial Services which provides quality and safety services to oil and gas, industrial and process industries. These services include quality and control inspections, personnel outsourcing, asset integrity management, dimensional control, laser scanning, specialist testing and REACH (registration, evaluation, authorisation and restriction of chemicals) services.
Revenue from Industrial Services grew well in the first half of 2008 over the first half of 2007.
In April 2008, the Group acquired Hi-Cad Technical Services Ltd which provides specialist 3D data capture and measurement services, primarily to customers in the upstream and downstream oil and petroleum industry in the UK and the US. This acquisition strengthens the development of asset integrity management services in the Group and enables the Group to offer a cohesive vendor assessment and quality inspection service to customers globally.
The Group’s strategy for Industrial Services is to grow the division organically and by acquiring complementary businesses.
FINANCIAL REVIEW
For the six months ended 30 June 2008
Revenue
Revenue for the six months ended 30 June 2008 was
£457.4m, up 26.8% from the comparable prior period.
The Group operates in 69 currencies other than sterling, although the majority of the Group’s overseas earnings are denominated in US dollars, Chinese renminbi, Euros and Hong Kong dollars. Therefore the Group’s results are exposed to changes in the value of these currencies when translated into sterling.
Exchange rates which could have a material impact on the Group’s earnings are shown below:
| Value of £1 | H1 08 | H1 07 | Change | |||
| US dollar | 1.99 | 1.97 | 1.0% | |||
| Euro | 1.30 | 1.48 | (12.2)% | |||
| Chinese renminbi | 14.04 | 15.25 | (7.9)% | |||
| Hong Kong dollar | 15.50 | 15.43 | 0.5% |
Whilst sterling remained relatively steady against the US dollar in the first half of 2008 compared to the first half of 2007, it weakened significantly against a range of other currencies, including the Euro and the Chinese renminbi. This had a beneficial effect on the Group’s earnings for the first six months of 2008. At constant exchange rates, revenue increased 21.3%, compared to 26.8% at actual rates.
Adjusted operating profit and margin
Operating profit before
amortisation of acquisition intangibles (adjusted operating profit) was
£68.7m for the six months ended 30 June 2008, up 26.1% from the
comparable prior period. At constant exchange rates, adjusted operating
profit increased 20.1%.
The Group’s adjusted operating profit margin was 15.0%, compared to 15.1% for the comparable prior year period.
Amortisation of acquisition intangibles
The charge for
amortisation of acquisition intangibles was £4.4m in the first half of
2008 compared to £1.9m in for the comparable prior year period. The
increase was due to the number of acquisitions made in recent years.
Additional intangible assets of £10.7m were acquired in the six months
to 30 June 2008 (H1 07: £9.6m).
Operating profit and margin
Operating profit after
amortisation of acquisition intangibles was £64.3m for the six months
ended 30 June 2008, up 22.2% from the comparable prior period. The
operating margin was 14.1%, down 50 basis points over the margin for the
comparable period due to the increased amortisation charge described
above.
Net financing costs
The Group reported finance income for
the six months to 30 June 2008 of £2.9m (H1 07: £2.2m). The increase was
mainly due to an increase in the expected return on pension assets and
higher foreign exchange gains.
The Group's finance expense for the six months to 30 June 2008 was £8.7m (H1 07: £6.4m). The charge comprised interest on borrowings, pension interest cost, other foreign exchange differences and other financing fees. The increase was primarily due to higher levels of debt.
Income tax expense
The tax charge is based upon the estimate
of the tax rate expected for the full financial year. For the six months
to 30 June 2008 the estimated effective tax rate was 26.5% compared with
25.4% for the six months ended 30 June 2007.
Differences between the estimated effective tax rate of 26.5% and the notional statutory UK rate of 28% include, but are not limited to, the effect of tax rates in foreign jurisdictions, non-deductible expenses, the effect of utilised tax losses and withholding taxes.
Profit for the period
Profit for the period after income tax
was £43.0m (H1 07: £36.1m) of which £39.5m (H1 07: £33.7m) was
attributable to equity holders of the Company.
Minority interests
Profit attributable to minority
shareholders was £3.5m for the first six months of 2008 (H1 07: £2.4m).
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 are calculated by
dividing the profit attributable to ordinary shareholders of the Company
by the weighted average number of ordinary shares in issue during the
year. As set out in note 7 to the interim financial statements, basic
earnings per share for the six months to 30 June 2008 were 25.1p (H1 07:
21.5p), an increase of 16.7%. A diluted adjusted earnings per share
calculation is also shown which removes the impact of amortisation of
acquisition intangibles from earnings, and includes potentially dilutive
share options in the number of shares, to give diluted adjusted earnings
per share of 27.6p (H1 07: 22.5p), an increase of 22.7%.
Dividend
An interim dividend of 7.1 pence per share will be
paid on 18 November 2008 to shareholders on the register at 7 November
2008. This represents an increase of 22.4% on last year’s
interim dividend.
Cash and liquidity
| H1 08 | H1 07 | Increase | ||||
| £m | £m | |||||
| Cash generated from operations | 56.7 | 43.0 | 31.9% | |||
| Less net acquisition of property, plant, equipment and software | (26.7) | (17.8) | 50.0% | |||
| Operating cash flow after capital expenditure | 30.0 | 25.2 | 19.0% | |||
| Adjusted operating profit | 68.7 | 54.5 | 26.1% | |||
| Operating cash flow/adjusted operating profit | 43.7% | 46.2% |
The primary source of the Group’s cash liquidity is cash generated from operations and the drawdown of debt. A portion of these funds has been used to fund acquisitions and capital expenditure and to pay interest, dividends and taxes.
Cash flow for the first six months of 2008 was good. Cash generated from operations was £56.7m for the first half of 2008, compared to £43.0m for the first half of 2007. The increase of 31.9% was due to improved profitability and effective working capital management. In the first half of 2008, 43.7% of adjusted operating profit was converted into cash compared to 46.2% in H1 07. The 250 basis points decline was due to increased investment in property, plant, equipment and software.
To support our growth strategy we need to invest continually in our operations. In the first six months of 2008, net cash flows used in investing activities were £77.3m (H1 07: £61.2m). We paid £34.6m net of cash acquired, (H1 07: £43.9m) for eight new businesses and £16.4m additional consideration deferred from acquisitions made in prior periods. In addition, we invested net £26.7m (H1 07: £17.8m) in property, plant and equipment and computer software.
Cash flows from financing activities primarily comprised cash inflows from the issue of share capital following the exercise of employee share options of £2.3m (H1 07: £4.4m) and the net drawdown of debt of £85.8m (H1 07: £52.7m), and cash outflows of dividends paid to minorities of £0.8m (H1 07: £1.0m) and dividends paid to Group shareholders of £19.2m (H1 07: £16.0m), which resulted in a net cash inflow of £68.6m (H1 07: £40.1m).
As shown in note 10, interest bearing loans and borrowings were £322.8m at 30 June 2008, an increase of 41.4% over the borrowings at 30 June 2007. Of these borrowings, £13.9m is repayable in less than a year and £308.9m is due in more than a year. The Group’s borrowings are in currencies which match its asset base. The increase in borrowings comprised exchange adjustments of £5.8m due to the translation into sterling of borrowings denominated in other currencies and the net drawdown of debt of £85.8m, (£92.7m drawdown less £6.9m repayment). The debt drawdown was mainly used to finance acquisitions. Cash and cash equivalents at 30 June 2008, were £83.2m, an increase of 48.0% over cash at 30 June 2007.
Borrowings
The Group has a multi-currency senior bank
facility that was placed in December 2004. This facility was originally
due to expire on 15 December 2009, however the Group exercised its
option to extend the facility by a year in 2005 and by a further year in
2006. The facility is now due to expire in December 2011. The margins
currently paid on borrowings are in the range of 0.3% to 0.6% over
LIBOR. In August 2007, the Group extended the senior debt facility by a
further £100m to £400m. This was achieved through adding an additional
Term D tranche of finance. Term D margins are in the range of 0.3% to
0.5% over LIBOR in the relevant currency.
In June 2008, a further £60m was added to this facility from two new banks on the same terms and conditions and margins as the existing facility. In July 2008, another £15m was added from another new bank, again on the same terms and conditions and margin. Also, in June 2008, the Group raised US$100m by way of a senior note issue. This debt is repayable on 26 June 2015 and the interest rate is fixed at 5.54%.
The Group’s policy is to ensure that a liquidity buffer is available, in the short term, to absorb the net effects of transactions made and expected changes in liquidity both under normal and stressed conditions without incurring unacceptable losses or risking damage to the Group’s reputation. Including the additional funds raised to date, the Group has liquid funds of approximately £217m, an increase of 27% over the available funds at 31 December 2007.
Where appropriate, cash is managed in currency based cash pools and is put on overnight deposit, bearing interest at rates fixed daily in advance.
Risks
The Board continuously assesses and monitors the key
risks of the business. Despite the current uncertainty in the global
economy, the key risks that could affect the Group’s
medium term performance, and the factors which mitigate these risks,
have not significantly changed from those set out on pages 22 to 24 of
the Group’s Annual Report for 2007, a copy of
which is available from our website www.intertek.com.
The Business Review includes consideration of uncertainties affecting
the Group in the remaining six months of the year.
There has been no material change in the risks that the Group is exposed to in the period since the Annual Report was published.
Related party transactions
There have been no material
changes in the related party transactions described in the Annual Report
for 2007. See note 14 for disclosure of related party transactions for
the six months to 30 June 2008.
Cautionary statement concerning forward-looking statements
This
interim report and announcement contain certain forward-looking
statements with respect to the financial condition, results, operations
and business of Intertek Group plc. These statements and forecasts
involve risk and uncertainty because they relate to events and depend
upon circumstances that will occur in the future. There are a number of
factors that could cause actual results or developments to differ
materially from those expressed or implied by these forward-looking
statements and forecasts. Nothing in this announcement should be
construed as a profit forecast. Past performance cannot be relied upon
as a guide to future performance.
|
Condensed Consolidated Interim Income Statement |
||||||||
|
Six months ended 30 June 2008 |
||||||||
| Six months to | Six months to | Year to | ||||||
| 30 June | 30 June | 31 December | ||||||
| 2008 | 2007 | 2007 | ||||||
| (Unaudited) | (Unaudited) | (Audited) | ||||||
| Notes | £m | £m | £m | |||||
| Revenue | 5 | 457.4 | 360.8 | 775.4 | ||||
| Cost of sales | (366.6) | (288.0) | (615.9) | |||||
| Gross profit | 90.8 | 72.8 | 159.5 | |||||
| Amortisation of acquisition intangibles | (4.4) | (1.9) | (5.1) | |||||
| Impairment of goodwill | - | - | (0.4) | |||||
| Other administrative expenses | (22.1) | (18.3) | (37.9) | |||||
| Total administrative expenses | (26.5) | (20.2) | (43.4) | |||||
| Group operating profit | 5 | 64.3 | 52.6 | 116.1 | ||||
| Finance income | 2.9 | 2.2 | 5.4 | |||||
| Finance expense | (8.7) | (6.4) | (15.6) | |||||
| Net financing costs | (5.8) | (4.2) | (10.2) | |||||
| Share of loss of associates | - | - | (0.1) | |||||
| Profit before income tax | 58.5 | 48.4 | 105.8 | |||||
| Income tax expense | 6 | (15.5) | (12.3) | (27.0) | ||||
| Profit for the period | 43.0 | 36.1 | 78.8 | |||||
| Attributable to: | ||||||||
| Equity holders of the Company | 39.5 | 33.7 | 73.2 | |||||
| Minority interest | 3.5 | 2.4 | 5.6 | |||||
| Profit for the period | 43.0 | 36.1 | 78.8 | |||||
| Earnings per share | ||||||||
| Basic | 7 | 25.1p | 21.5p | 46.7p | ||||
| Diluted | 7 | 24.8p | 21.3p | 46.2p | ||||
| Dividends in respect of the period | 7.1p | 5.8p | 18.0p | |||||
|
Condensed Consolidated Interim Balance Sheet |
||||||||
|
As at 30 June 2008 |
||||||||
| At 30 June | At 30 June | At 31 December | ||||||
| 2008 | 2007 | |||||||