Interim Report 2005 Energy Supporting Energy
www.woodgroup.com John Wood Group PLC is a market leader in engineering design, production support and industrial gas turbine services for customers in the oil & gas and power generation industries around the world. Operating in 36 countries, Wood Group s businesses employ over 14,000 people.
Contents Page Highlights 2 Interim statement 3 Interim financial review 6 Group income statement 8 Group balance sheet 9 Statement of recognised income and expense 10 Consolidated statement of changes in shareholders equity 11 Group cash flow statement 12 Notes to the interim accounts 13 Independent review report 26 Shareholder information 27 1
Highlights Financial Highlights 1 Revenues of $1,327.0m (2004: $1,040.8m) up 27% EBITA 2 of $69.2m (2004: $53.7m) up 29% Operating profit of $67.2m (2004: $26.9m, after impairment and restructuring charges of $24.9m) up 150% Profit before tax of $56.2m (2004: $18.0m, after impairment and restructuring charges of $24.9m) up 212% Adjusted diluted earnings per ordinary share 3 of 7.8 cents (2004: 5.9 cents) up 32%. Basic earnings per share of 7.6 cents (2004: 1.9 cents) up 300% Declared interim dividend of 1.3 cents (2004: 1.2 cents) up 8% 4 The overall oil & gas markets are healthy, with good demand for Wood Group s services. We are confident 2005 will show strong growth in line with our July trading update and believe that our business development programme will deliver continuing growth in 2006 and beyond. Notes 1 All figures are prepared on the basis detailed in note 1 to the interim accounts. 2 EBITA represents operating profit of $67.2m (2004: $26.9m), before deduction of impairment and restructuring charges of $nil (2004: $24.9m) and amortisation of $2.0m (2004: $1.9m). This financial term is provided as it is a key unit of measurement used by the Group in the management of its business. 3 Shares held by the Group s employee share ownership trusts are excluded from the number of shares in calculating earnings per ordinary share. Adjusted diluted earnings per ordinary share is calculated on earnings before amortisation, and impairment and restructuring charges, net of tax. Adjusted diluted earnings per ordinary share is based on the diluted number of shares, taking account of employee share schemes where the effect of these is dilutive. 4 In accordance with International Financial Reporting Standards ( IFRS ), the interim dividend declared is not reflected in these accounts. The dividend will be reflected in the accounts when paid. 2
Interim Statement Sir Ian Wood The Group has made good progress in the first half, with strong revenue and EBITA growth in all divisions. In the six months to June 2005, revenues increased to $1,327.0m (2004: $1,040.8m) and EBITA increased to $69.2m (2004: $53.7m). During the period we invested $61.8m (2004: $86.7m) and as at 30 June 2005 gearing 5 was 70%, compared to 62% as at 30 June 2004 and interest cover 6 was 6.3 times (2004: 6.0 times). Background to and reasons for the cash placing Wood Group has grown substantially over the last three and a half years, increasing revenues by over 70%, and investing $200m in acquisitions and $140m in capital expenditure in excess of depreciation. The Board believes that the current strong conditions in the oil & gas market will continue and wishes to maintain the growth strategy of targeted geographic expansion and broadening of the service provision to take advantage of the opportunities. This will involve further investment and resources to develop our client base, including the majors, independents and the national oil corporations, in key oil and gas regions in Europe, Africa, the Middle East and Asia Pacific. We also intend to broaden our service provision: In Engineering & Production Facilities through extending our project management and EPCM (Engineering, Procurement and Construction Management) services, and increasing our involvement in midstream engineering and downstream refinery upgrades and debottlenecking, further developing our preoperations, commissioning and start-up support services as well as pursuing long term performance based modifications, maintenance & operations contracts In Well Support, expanding our services in key markets such as Russia, the Middle East and North and West Africa, and building up our manufacturing capability in low-cost areas such as China In Gas Turbine Services, continuing to enhance our differentiation through the re-engineering of parts and broadening the range of turbines that we support. These developments are likely to include acquisitions of local businesses, capital expenditure on new facilities and investment in projects with our customers. In addition, we will continue to assess larger acquisitions and investments in our oil & gas and power activities round the world. The Board is therefore proposing a cash placing of approximately 24 million shares, representing 5% of the Group s issued share capital, expected to raise approximately $90m (the placing ). The placing will strengthen the Group s balance sheet and increase the flexibility to pursue our growth strategy. In the short term, the proceeds of the placing will be used to reduce net borrowing, reducing gearing from 70% to approximately 46% on a pro forma basis as at 30 June 2005. 7 Notes 5 Gearing represents net debt over shareholders funds. 6 Interest cover is EBITA divided by net finance costs of $11.0m (2004: $8.9m). 7 Pro forma gearing is based on the gearing as at June 2005 adjusted to take into account the impact of the proceeds from the cash placing of approximately $90m. 3
Interim Statement Dividend Reflecting continuing confidence in our long-term strategy, we have declared an increase in the interim dividend to 1.3 cents per share (2004: 1.2 cents per share) which will be payable to shareholders on the register on 23 September 2005 and will be paid on 13 October 2005. Engineering & Production Facilities Revenues increased 29.6% to $703.0m (2004: $542.3m), and EBITA rose 20.6% to $40.9m (2004: $33.9m). Although revenue growth was good, the EBITA margin ( margin ) decreased to 5.8% (2004: 6.3%). This is principally as a result of higher zero margin pass-through revenues in the active North Sea market and our extended international business development programme. Engineering is active for a broad spread of clients. In upstream, we are working on a range of fast-track upgrade projects and have won a healthy mix of contracts for new developments in deep and shallow water. These include Valhall in Norway, East Area Gas in Nigeria, Gorgon & Jansz in Australia and Shenzi in the Gulf of Mexico. In downstream, we are also busy with a number of our refinery clients on low sulphur gas and diesel modifications and implementing upgrades to their facilities to take advantage of the current market conditions. In addition, we are focusing resources in Mustang s new London offices and in Perth, Australia to develop our client base in Europe, Africa, the Middle East and Asia Pacific. In Production Facilities, our clients focus on improving the structure and integrity of their assets and enhancing production is leading to increased activity. In the North Sea we are working on a diverse range of long term support contracts and upgrade projects for a number of clients. Production Facilities in the Americas is making steady progress and our activities in West Africa, where we have recently won further work, and Brunei are progressing well. We are also investing in developing new international markets, where recent wins include the contract to operate and maintain Sevan Marine s SSP 300 floating, production, storage and offloading (FPSO) vessel offshore Brazil and multi-year, turbomachinery operations & maintenance contracts in Mexico, Vietnam and Indonesia. In April, we acquired Offshore Design Limited ( ODL ), a provider of technical and consulting services and pre-operations support. ODL has performed well since its acquisition and made progress in further expanding its business internationally. Well Support Revenues increased 26.7% to $302.1m (2004: $238.5m), EBITA increased 37.1% to $27.0m (2004: $19.7m) and margin increased to 8.9% (2004: 8.3%). The US and international markets for all three of our Well Support businesses Electric Submersible Pumps (ESP), Pressure Control and Logging Services are strong and we are maintaining our significant US positions, while seeing further success in our international business development efforts. ESP is performing well in the US and, in the significant Russian market, the Nizhnevartovsk pump facility is making good progress. In Chad our major new contract started up successfully. We also continue to maintain good levels of activity in South America and the Middle East. 4
Interim Statement In addition to its significant position in the US market, Pressure Control is making progress in growing the business internationally, with contract wins in the UK, Russia, Mexico and the Middle East. The investment in manufacturing, assembly and test capabilities in China is contributing to further product cost improvements. Logging Services operations are strong in the US, notably in the second quarter, despite the early and active hurricane season and in Argentina, where we are now the leader in cased hole electric wireline logging. Gas Turbine Services Revenues increased 24.3% to $304.4m (2004: $244.9m), EBITA increased 51.5% to $15.0m (2004: $9.9m) and the margin increased to 4.9% (2004: 4.0%). Our oil & gas related activities, representing about 35% of Gas Turbine Services revenues, continue to make progress. The US power market is more stable and the anticipated benefits from our restructuring programme, have contributed to the improved performance. Our Power Solutions business is very active and this is contributing to the strong revenue growth. The focus on increasing the long term content in our activities is continuing. We have recently won a number of operations & maintenance contracts, including a 10-year contract with Sacramento Municipality Utility District Financing Authority announced today. We have also won a long term maintenance contract with a wholly-owned subsidiary of Alliant Energy Corp. to provide maintenance services to two Frame 7FA turbines. We are continuing to build on the differentiation we enjoy through the supply of re-engineered parts and have recently won a six-year packaged maintenance services contract, including the supply of re-engineered parts under the Group s APM (Advanced Parts Manufacture) programme, supporting British Nuclear Fuel s Fellside CHP plant. Outlook In Engineering & Production Facilities, we anticipate that Engineering will continue to be involved in a wide range of upstream, midstream and downstream projects and that Production Facilities will enjoy strong levels of activity, led by the North Sea. In Well Support, we expect all three businesses to perform well. Gas Turbine Services should see a similar level of performance in the second half, with the continuing drive to differentiation leading to further improvement in 2006. The overall oil & gas markets are very healthy, with good demand for the Group s services. We are confident 2005 will show strong growth in line with our July trading update and believe our business development programme will deliver continuing growth in 2006 and beyond. Sir Ian Wood Chairman and Chief Executive 12 September 2005 5
Interim Financial Review Alan G Semple The income statement for the six months to 30 June 2005 is summarised below: Unaudited Unaudited Interim Interim June 2005 June 2004 US$m US$m Increase Revenues 1,327.0 1,040.8 27% EBITA 69.2 53.7 29% Profit before tax 56.2 18.0 212% Profit for the period 36.4 10.0 264% Adjusted diluted EPS (cents) 7.8 5.9 32% Revenues increased by $286.2m, or 27%, for the six months to June 2005 reflecting growth in all three divisions. EBITA increased by $15.5m or 29% for the period, again increasing in all three divisions. Profit before tax has increased by $38.2m or 212%, with profits in the prior period having been impacted by an impairment and restructuring charge of $24.9m. Excluding this charge, profit before tax increased by 31%. The tax charge for the period of $19.8m (2004: $8.0m) is based on an anticipated effective tax rate for the year of 34% on profit before tax, impairment and restructuring charges, and amortisation. The actual effective tax rate for the year ended 31 December 2004 was 35%. The cash flow statement for the six months to 30th June 2005 is summarised below: Unaudited Unaudited Unaudited Full Year Interim Interim December June 2005 June 2004 2004 US$m US$m US$m Cash generated from operations 92.7 62.1 145.2 before movements in working capital Working capital movements (35.5) (49.0) (66.8) Capex and acquisitions (59.0) (74.8) (124.5) Transactions in own shares (1.0) (14.7) (22.3) Interest, tax, dividends and other (26.4) (32.3) (77.3) Increase in net debt (29.2) (108.7) (145.7) Opening net debt (354.3) (208.6) (208.6) Closing net debt (383.5) (317.3) (354.3) 6
Interim Financial Review Cash generated from operations before movements in working capital increased by $30.6m or 49% for the six months to June 2005. Working capital outflows in the period of $35.5m compare to $49.0m in the first half of 2004. Capital expenditure amounted to $32.5m (2004: $39.9m) and proceeds from the disposal of tangible fixed assets amounted to $2.8m (2004: $11.9m). The cost of acquisition of subsidiaries, net of cash acquired, totalled $11.1m (2004: $17.3m). The Group also acquired minority interests and made deferred consideration payments totalling $15.2m (2004: $28.9m). Net debt increased by $29.2m from $354.3m at December 2004 to $383.5m at June 2005. The Group s gearing ratio increased from 67% at December 2004 to 70% at June 2005. Net debt of $383.5m is primarily US dollar denominated in line with the currency of the bulk of the Group s net assets. Long-term borrowings amounted to $483.0m (December 2004: $355.0m), of which $125.0m (December 2004: $125.0m), or 26% (December 2004: 35%), was at a weighted average fixed rate of interest of 5.0% (December 2004: 5.0%). Net finance costs were $11.0m, which is an increase of $2.1m compared to the same period in 2004. This increase was principally due to the higher level of borrowings and higher US dollar interest rates. Interest cover was 6.3 times (June 2004: 6.0 times). Adjusted diluted earnings per ordinary share for the period increased by 32% to 7.8 cents (June 2004: 5.9 cents) and basic earnings per ordinary share increased to 7.6 cents (June 2004: 1.9 cents). Alan G Semple Group Finance Director 12 September 2005 7
Group income statement Unaudited Unaudited Unaudited Interim Interim Full Year June 2005 June 2004 December 2004 Note US$M US$M US$M Revenues 3 1,327.0 1,040.8 2,288.1 Cost of sales (1,062.3) (823.0) (1,818.5) Gross profit 264.7 217.8 469.6 Administrative expenses before impairment and restructuring charges (197.5) (166.0) (357.8) Impairment and restructuring charges 6 - (24.9) (26.2) Administrative expenses (197.5) (190.9) (384.0) Operating profit 3 67.2 26.9 85.6 Finance income 1.0 0.8 1.8 Finance expense (12.0) (9.7) (21.2) Profit before tax 56.2 18.0 66.2 Taxation 7 (19.8) (8.0) (26.8) Profit for the period 36.4 10.0 39.4 Attributable to: Equity shareholders 35.3 9.0 37.3 Minority interest 1.1 1.0 2.1 36.4 10.0 39.4 Earnings per share for profit attributable to equity shareholders (expressed in cents per share) Basic 5 7.6 1.9 8.0 Diluted 5 7.4 1.9 7.8 All items dealt with in arriving at the profits stated above relate to continuing operations. 8
Group balance sheet as at 30 June 2005 Unaudited Unaudited Unaudited Interim Interim Full Year June 2005 June 2004 December 2004 Note US$M US$M US$M Assets Non-current assets Goodwill 314.7 261.5 297.1 Intangible assets 13.8 9.1 11.8 Property plant and equipment 219.5 206.9 216.2 Long term receivables 17.6 29.2 22.6 Deferred tax assets 20.2 17.8 20.9 585.8 524.5 568.6 Current assets Inventories 355.2 278.4 329.9 Trade and other receivables 617.4 502.2 579.3 Income tax receivable 4.2 8.2 6.8 Cash and cash equivalents 135.3 74.8 71.4 1,112.1 863.6 987.4 Liabilities Current liabilities Financial liabilities - Borrowings 35.8 56.6 70.7 - Derivative financial instruments 0.2 - - Trade and other payables 520.2 394.3 496.7 Income tax liabilities 16.5 8.7 11.8 572.7 459.6 579.2 Net current assets 539.4 404.0 408.2 Non-current liabilities Financial liabilities - Borrowings 483.0 335.5 355.0 - Derivative financial instruments 1.2 - - Deferred tax liabilities 8.5 11.3 8.6 Retirement benefit liability 10 31.7 27.5 33.9 Other non-current liabilities 23.0 13.1 21.7 Provisions 15.2 15.6 15.7 562.6 403.0 434.9 Net assets 562.6 525.5 541.9 Shareholders equity Ordinary shares 23.9 23.5 23.5 Share premium 202.4 200.9 200.9 Other reserves 78.2 85.4 89.8 Retained earnings 244.9 204.9 215.7 Total shareholders equity 549.4 514.7 529.9 Minority interest in equity 13.2 10.8 12.0 Total equity 562.6 525.5 541.9 9
Statement of recognised income and expense Unaudited Unaudited Unaudited Interim Interim Full Year June 2005 June 2004 December 2004 US$M US$M US$M Profit for the period/year 36.4 10.0 39.4 Actuarial loss in pension scheme - - (4.8) Movement in deferred tax relating to pension liability - - 1.4 Cash flow hedges - fair value gains 0.4 - - - reported in profit for the period 1.0 - - Exchange adjustments (10.6) (2.7) 1.7 Total recognised income 27.2 7.3 37.7 Attributable to: Equity shareholders 26.1 6.3 35.6 Minority interest 1.1 1.0 2.1 27.2 7.3 37.7 10
Consolidated statement of changes in shareholders equity Period to June 2005 Period to June 2004 Year ended 31 Dec 2004 Note Share- Share- Shareholders Minority Total holders Minority Total holders Minority Total equity interest equity equity interest equity equity interest equity US$M US$M US$M US$M US$M US$M US$M US$M US$M Opening Balance 529.9 12.0 541.9 531.9 18.7 550.6 531.9 18.7 550.6 Adoption of IAS 32 and IAS 39 8 (3.3) - (3.3) - - - - - - At 1 January 526.6 12.0 538.6 531.9 18.7 550.6 531.9 18.7 550.6 Profit for the year 35.3 1.1 36.4 9.0 1.0 10.0 37.3 2.1 39.4 Dividends 4 (11.1) - (11.1) (10.3) - (10.3) (15.9) - (15.9) Exchange adjustments (10.6) 0.1 (10.5) (2.7) (0.1) (2.8) 1.7-1.7 Value of services provided under 3.9-3.9 1.3-1.3 2.9-2.9 share based schemes Cash Flow Hedges 1.4-1.4 - - - - - - Actuarial loss in pension scheme, - - - - - - (3.4) - (3.4) net of deferred tax Issue of new shares 1.9-1.9 0.2-0.2 0.2-0.2 Shares acquired by ESOP trusts (2.0) - (2.0) (14.9) - (14.9) (22.5) - (22.5) Shares disposed of by ESOP trusts 1.0-1.0 0.2-0.2 0.2-0.2 Exchange adjustments in respect 3.0-3.0 - - - (2.5) - (2.5) of shares held by ESOP trusts Acquisition of minority interests - - - - (9.3) (9.3) - (9.3) (9.3) Minority shareholding recognised - - - - 0.5 0.5-0.5 0.5 on conversion from joint venture to subsidiary Closing Balance 549.4 13.2 562.6 514.7 10.8 525.5 529.9 12.0 541.9 11
Group cash flow statement Unaudited Unaudited Unaudited Interim Interim Full Year June 2005 June 2004 Dec 2004 Note US$m US$m US$m Cash generated from operations 11 57.2 13.1 78.4 Tax paid (11.4) (16.1) (34.7) Net cash inflow/(outflow) from operating activities 45.8 (3.0) 43.7 Cash flows from investing activities Acquisition of subsidiaries (net of cash acquired) (11.1) (17.3) (32.9) Acquisition of minority interests (6.2) (24.2) (24.2) Deferred consideration payments (9.0) (4.7) (4.7) Purchase of property, plant and equipment (32.5) (39.9) (68.4) Proceeds from sale of property, plant and equipment 2.8 11.9 12.7 Purchase of intangible assets (3.0) (0.6) (7.0) Net cash used in investing activities (59.0) (74.8) (124.5) Cash flows from financing activities Proceeds from issue of ordinary share capital 1.9 0.2 0.2 Proceeds from new bank loans 102.8 96.6 118.0 Purchase of shares in employee share trusts (2.0) (14.9) (22.5) Sale of shares in employee share trusts 1.0 0.2 0.2 Interest received 1.0 0.8 1.8 Interest paid (11.8) (9.7) (20.8) Dividends paid to shareholders (11.1) (10.3) (15.9) Net cash from financing activities 81.8 62.9 61.0 Effect of exchange rate changes on cash and cash equivalents (4.7) (1.1) 0.4 Net increase/(decrease) in cash and cash equivalents 63.9 (16.0) (19.4) Opening cash and cash equivalents 71.4 90.8 90.8 Closing cash and cash equivalents 135.3 74.8 71.4 12
Notes to the interim accounts 1. Preparation of interim accounts Introduction Following the adoption of IAS Regulation EC 1606/2002 by the European Parliament, John Wood Group PLC is required to prepare consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) for periods beginning on or after 1 January 2005. The Group will apply IFRS for the year ended 31 December 2005, and is required to prepare 2004 comparative figures under IFRS. The Group s date of transition to IFRS is 1 January 2004 and its first reporting period is for the six months ended 30 June 2005. This report contains the consolidated financial results for the 6 months ended 30 June 2005, comparatives for the 6 months ended 30 June 2004 and for the year ended 31 December 2004 under the basis of preparation set out below. To assist with the understanding of the impact of transition from United Kingdom Generally Accepted Accounting Principles ( UK GAAP ) to IFRS, the Group has presented the reconciliations of UK GAAP to IFRS information as required by IFRS 1 for 1 January 2004, 31 December 2004 and 30 June 2004 in Appendix 1. Basis of preparation The financial information has been prepared in accordance with UK Listing Rules, under the historical cost and fair value conventions and on the basis of the accounting policies set out below, which the Group expects to apply to its financial statements for 31 December 2005 and which are to be prepared in accordance with IFRS. Further standards and interpretations may be issued that will be applicable for financial years beginning on or after 1 January 2005 or that are applicable to later accounting periods but may be adopted early. The Group s first IFRS financial statements may therefore be prepared in accordance with some different accounting policies from the financial information presented here. The comparative figures for the financial year ended 31 December 2004 do not constitute the statutory financial statements for that year. Those financial statements which were prepared under UK GAAP in accordance with the Companies Act 1985, have been delivered to the Registrar of Companies and include the auditors report which was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. 2. Significant accounting policies The Group s key accounting policies are detailed below. These policies have been prepared on the basis of the recognition and measurement requirements of IFRS standards that have been published at 31 December 2004 and that apply to accounting periods beginning on or after 1 January 2005. The standards used are either endorsed by the European Union or are expected to be endorsed at 31 December 2005, the Group s first annual reporting date at which it is required to adopt IFRS. In particular, the directors have assumed that the amendment to IAS 19 Employee Benefits will be fully endorsed by the European Union and therefore available for use in the annual IFRS Financial Statements for the year ended 31 December 2005. In respect of financial instruments, the Group s policy has been to adopt IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement from 1 January 2005. Comparatives for 2004 have not been restated to reflect the requirements of IAS 32 and IAS 39 and, as permitted by IFRS 1, these are accounted for under UK GAAP in accordance with the accounting policies set out in the annual financial statements for the year ended 31 December 2004. Transitional arrangements On transition to IFRS, an entity is generally required to apply IFRS retrospectively, except where an exemption is available under IFRS 1 First-time Adoption of International Financial Reporting Standards. The following is a summary of the key elections from IFRS 1 that were made by the Group: The Group has elected to adopt the IFRS 1 exemption in relation to business combinations and will only apply IFRS 3 Business Combinations prospectively from 1 January 2004. As a result, the balance of goodwill under UK GAAP as at 31 December 2003 remains as the carrying value of goodwill at 1 January 2004. The Group has elected to adopt the IFRS 1 option to reset foreign currency cumulative translation reserves to zero on transition to IFRS. The Group has elected to apply IFRS 2 to all share option grants made after 7 November 2002, but not vested at 1 January 2005. Basis of consolidation The Group financial statements are the result of the consolidation of the financial statements of the Group s subsidiary undertakings from the date of acquisition or up until the date of disposal as appropriate. Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The Group s interests in joint ventures are accounted for using proportional consolidation. Under this method the group includes its share of each joint venture s income, expenses, assets, liabilities and cash flows on a line by line basis in the consolidated financial statements. All Group companies prepare accounts to 31 December. 13
Notes to the interim accounts Reporting currency The Group s earnings stream is primarily US dollars and the principal functional currency is the US dollar, being the most representative currency of the Group. The Group financial information is therefore prepared in US dollars. Foreign currencies Income statements of entities whose functional currency is not the US dollar are translated into US dollars at average rates of exchange for the period and assets and liabilities are translated into US dollars at the rates of exchange ruling at the balance sheet date. Exchange differences arising on translation of net assets in such entities held at the beginning of the year, together with those differences resulting from the restatement of profits and losses from average to year end rates, are taken to equity. Other exchange differences are taken directly to the income statement. In each individual entity, transactions in overseas currencies are translated into the relevant functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date. Any exchange differences are taken to the income statement. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The directors consider it appropriate to record sterling denominated equity share capital in the accounts of John Wood Group PLC at the exchange rate ruling on the date it was raised. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised only when it is probable that the economic benefits associated with a transaction will flow to the Group and the amount of revenue can be measured reliably. Revenue from services is recognised as the services are rendered, including where based on contractual rates per man hour in respect of multi-year service contracts. Incentive performance revenues are recognised upon completion of agreed objectives. Revenue from product sales is recognised when the significant risks and rewards of ownership have been transferred to the buyer, which is normally upon delivery of products and customer acceptance, if any. Where revenue relates to a multi-element contract, then each element of the contract is accounted for separately. Revenues are stated net of sales taxes and discounts. Revenue on lump-sum contracts for services, or construction contracts is recognised according to the stage of completion reached in the contract by reference to the value of work done. An estimate of the profit attributable to work completed is recognised once the outcome of the contract can be estimated reliably. Expected losses are recognised in full as soon as losses are probable. The net amount of costs incurred to date plus recognised profits less the sum of recognised losses and progress billings is disclosed as trade receivables/trade payables. Goodwill Goodwill arising on consolidation represents the excess of the cost of an acquisition over the fair value of the Group s share of the net assets of the acquired subsidiary or joint venture at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to the appropriate cash generating unit for the purpose of impairment testing. Intangible assets Intangible assets are recognised if it is probable that there will be future economic benefits attributable to the asset, the cost of the asset can be measured reliably, the asset is separately identifiable and there is control over the use of the asset. The assets are amortised on a straight line basis over their estimated useful lives. Property, Plant and Equipment Property, Plant and Equipment (P,P&E) is stated at cost less accumulated depreciation. No depreciation is charged with respect to freehold land and assets in the course of construction. Transfers from P,P&E to current assets are undertaken at the lower of cost and net realisable value. Depreciation is calculated on the straight line method over the estimated useful life of the asset, as follows: Freehold buildings 25-50 years Long leasehold buildings 25-50 years Short leasehold buildings period of lease Plant and equipment 3-10 years When estimating the useful life of an asset group, the principal factors the Group takes into account are the durability of the assets, the intensity at which the assets are expected to be used and the expected rate of technological developments. Impairment The Group carries out annual impairment reviews in respect of goodwill. The Group performs impairment reviews in respect of P,P&E and intangible assets whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognised when the recoverable amount of an asset, which is the higher of the asset s net realisable value and its value in use, is less than its carrying amount. 14
Notes to the interim accounts Inventories Inventories, which include raw materials, work in progress and finished goods, are stated at the lower of cost and net realisable value. Product based companies determine cost by weighted average methods using standard costing to gather raw material, labour and overhead costs. These costs are adjusted, where appropriate, to correlate closely the standard costs to the actual costs incurred based on variance analysis. Service based companies inventories consist of spare parts and other consumables. Serialised parts are costed using the specific identification method and other materials are generally costed using the first in, first out method. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. Allowance is made for obsolete and slow-moving items, based upon annual usage. Deferred income taxes Deferred income tax is provided, using the full liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation on property, plant and equipment, and tax losses carried forward; and, in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. Tax rates enacted, or substantially enacted, by the balance sheet date are used to determine deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Accounting for derivative financial instruments and hedging activities Pre 1 January 2005 The Group uses derivative financial instruments to hedge its exposures to fluctuations in interest and foreign exchange rates. Instruments accounted for as a hedge are designated as a hedge at the inception of contracts. Receipts and payments on interest rate instruments are recognised as adjustments to interest expense over the life of the instrument. Gains and losses on foreign currency hedges are recognised on maturity of the underlying transaction. Post 1 January 2005 Derivatives are initially recognised at fair value on the date the contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of highly probable forecast transactions (cash flow hedges); or (3) hedges of net investments in foreign operations (net investment hedge). Where hedging is to be undertaken, the Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. (a) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (b) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled through the income statement in periods when the hedged item affects profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or liability, the cost of the asset or liability is adjusted by the gains or losses previously held in equity. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (c) Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. 15
Notes to the interim accounts (d) Derivatives that do not qualify for hedge accounting Certain derivatives, whilst providing effective economic hedges under the Group s policy are not designated as hedges. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. Fair Value Estimation The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the balance sheet date. The carrying value of trade receivables and payables approximate to their fair values. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. Operating leases As lessee Payments made under operating leases are charged to the income statement on a straight line basis over the period of the lease. As lessor Operating lease rental income arising from leased assets is recognised in the income statement on a straight line basis over the period of the lease. Finance leases As lessor Finance lease rental income arising from leased assets is recognised in the income statement so as to produce a constant rate of return on the net cash investment. Amounts receivable under finance leases represent the outstanding amounts due under these agreements less amounts allocated to future periods. Retirement benefit liability The Group operates a defined benefit scheme and a number of defined contribution schemes and these are accounted for under IAS 19 Employee Benefits. The liability recognised in respect of the defined benefit scheme is the fair value of the defined benefit obligations less the fair value of the scheme assets. The assets of these schemes are held in separate trustee administered funds. The defined benefit scheme s assets are measured using market values. Pension scheme liabilities are measured annually by an independent actuary using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The increase in the present value of the liabilities of the Group s defined benefit pension scheme expected to arise from employee service in the period is charged to operating profit. The expected return on the scheme assets and the increase during the period in the present value of the scheme s liabilities arising from the passage of time are included in finance income/expense. Actuarial gains and losses are recognised in the consolidated statement of recognised income and expense in the period in which they occur. The pension scheme s surpluses, to the extent that they are considered recoverable, or deficits are recognised in full and presented on the face of the balance sheet. The Group s contributions to defined contribution schemes are charged to the income statement in the period to which the contributions relate. Use of estimates and assumptions The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue during the reporting period. Actual results could differ from those estimates. Warranties Provision is made for the estimated liability on all products and services still under warranty, including claims already received, based on past experience. 16
Notes to the interim accounts Share based payments relating to Employee Share Schemes The Group has a number of employee share schemes:- (i) (ii) (iii) Share options granted under Employee Share Option Schemes ( ESOS ) are granted at market value. A charge is booked to the income statement as an employee benefit expense for the fair value of share options accrued over the vesting period. The corresponding credit is taken to retained earnings. The fair value is calculated using an option pricing model. Share options granted under the Long Term Retention Plan ( LTRP ) are granted at par value. The charge to the income statement for LTRP shares is also calculated using an option pricing model and as with ESOS shares the fair value of the share options is accrued over the vesting period. The corresponding credit is also taken to retained earnings. The Group also has a Long Term Incentive Scheme ( LTIS ) for directors and senior managers. Under the LTIS, participants are awarded shares dependent on the achievement of certain performance targets. The charge to the income statement for shares expected to be awarded under the LTIS is based on the fair value of those shares at the grant date, spread over the vesting period. The corresponding credit is taken to retained earnings. For those shares that have a market related performance criteria, the fair value is calculated using a Monte Carlo simulation model. Proceeds received on the exercise of share options are credited to share capital and share premium. The Group is deemed to have control of the assets, liabilities, income and costs of its employee share ownership trusts ( ESOP trusts ). They have therefore been included in the financial statements of the Group. The cost of shares held by the ESOP trusts is deducted from shareholders equity. Segmental reporting The Group s primary reporting segments are its three operating divisions, namely Engineering & Production Facilities, Well Support and Gas Turbine Services. Engineering & Production Facilities provides a broad range of life-of-field engineering, modifications, maintenance and operations services to oil and gas customers worldwide. Well Support supplies solutions, products and services to increase production rates and recovery from oil and gas reservoirs. It is among the market leaders worldwide in artificial lift using electric submersible pumps, in the provision of surface wellheads and valves and, in the Gulf of Mexico and in South America, in the provision of electric wireline and slickline services. Gas Turbine Services is a world leading independent provider of maintenance, repair and overhaul services for industrial gas turbines and related high speed rotating equipment used for compression, transmission and power generation in the oil and gas and power generation industries. 17
Notes to the interim accounts 3. Segmental reporting Business segments Revenues EBITDA (1) EBITA (1) Operating profit Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Interim Interim Full Interim Interim Full Interim Interim Full Interim Interim Full 30 June 30 June Year 30 June 30 June Year 30 June 30 June Year 30 June 30 June Year 2005 2004 2004 2005 2004 2004 2005 2004 2004 2005 2004 2004 US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M US$M Engineering & Production 703.0 542.3 1,199.6 45.6 38.4 83.1 40.9 33.9 73.9 39.9 32.5 69.7 Facilities Well Support 302.1 238.5 513.9 35.1 26.6 58.4 27.0 19.7 41.2 26.9 16.7 38.3 Gas Turbine Services 304.4 244.9 537.9 23.1 17.3 38.4 15.0 9.9 23.5 14.4 (12.4) (0.6) Unallocated - - - (13.1) (8.3) (20.1) (13.3) (8.7) (19.8) (13.5) (8.8) (20.1) Total excluding 1,309.5 1,025.7 2,251.4 90.7 74.0 159.8 69.6 54.8 118.8 67.7 28.0 87.3 discontinuing operations Gas Turbine Services - 17.5 15.1 36.7 - (0.7) (0.7) (0.4) (1.1) (1.4) (0.5) (1.1) (1.7) discontinuing operations (2) Total 1,327.0 1,040.8 2,288.1 90.7 73.3 159.1 69.2 53.7 117.4 67.2 26.9 85.6 Net finance expense (11.0) (8.9) (19.4) Profit before tax 56.2 18.0 66.2 Notes 1 EBITDA represents operating profit before deduction of impairment and restructuring charges, depreciation and amortisation. EBITA represents EBITDA less depreciation. EBITA and EBITDA are provided as they are units of measurement used by the Group in the management of its business. 2 The discontinuing operations relate to an Aero engine overhaul company which the Group has decided to divest. 3 Revenues arising from sales between segments are not material. 4. Dividends Unaudited Unaudited Unaudited Interim Interim Full Year June June Dec 2005 2004 2004 US$m US$m US$m Dividends on equity shares Interim paid (1.2 cents per share) - - 5.5 Final paid (2.4 cents per share) 11.1 10.3 10.4 Total dividends 11.1 10.3 15.9 After the balance sheet date, the directors declared an interim dividend of 1.3 cents per share which will be paid on 13 October 2005. 18
Notes to the interim accounts 5. Earnings per share Unaudited interim Unaudited interim Unaudited full year June 05 June 04 Dec 04 Earnings Earnings Earnings attributable attributable attributable to equity Number of Earnings to equity Number of Earnings to equity Number of Earnings shareholders shares per share shareholders shares per share shareholders shares per share (US $m) (millions) (cents) (US $m) (millions) (cents) (US $m) (millions) (cents) Basic 35.3 463.8 7.6 9.0 469.2 1.9 37.3 466.2 8.0 Effect of dilutive ordinary shares Options and share based 14.5 11.0 10.4 payments Diluted 35.3 478.3 7.4 9.0 480.2 1.9 37.3 476.6 7.8 Amortisation 2.0 1.9 5.6 Impairment and restructuring - 24.9 26.2 charges Tax on impairment and - (7.5) (7.7) restructuring charges Adjusted diluted 37.3 478.3 7.8 28.3 480.2 5.9 61.4 476.6 12.9 Adjusted basic 37.3 463.8 8.0 28.3 469.2 6.0 61.4 466.2 13.2 The calculation of basic earnings per share for the six months ended 30 June 2005 is based on the earnings attributable to equity shareholders divided by the weighted average number of ordinary shares in issue during the period excluding shares held by the Group s employee share ownership trusts. Adjusted EPS is disclosed to show the results excluding the impact of amortisation and impairment and restructuring charges, net of tax. For the calculation of diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. The group has two classes of dilutive ordinary shares share options granted to employees under Employee Share Option Schemes and the Long Term Retention Plan; and shares issuable under the Group s Long Term Incentive Scheme. In calculating the diluted number of shares at 30 June 2005 it has been assumed that the performance criteria for the vesting of the awards under the LTIS have been met, and the shares are therefore included in the calculation. 6. Impairment and restructuring charges An impairment and restructuring charge of US$nil (June 2004: US $24.9m, Dec 2004 : US $26.2m) was booked in the period. US$nil (June 2004: US $21.9m, Dec 2004: US $23.4m) of this charge was booked in the Gas Turbine Services division in respect of rationalisation of businesses and facilities, severance costs and fixed asset impairment. US$nil (June 2004: US$3.0m, Dec 2004: US$2.8m) was booked in the Well Support division in respect of severance costs and fixed asset impairment. 7. Taxation The taxation charge for the six months ended 30 June 2005 reflects an anticipated effective taxation rate of 34% on profit before taxation, amortisation and impairment and restructuring charges for the year ending 31 December 2005 (June 2004 : 35%). 8. IAS 32 and 39 The adoption of IAS 32 and 39 at 1 January 2005 has resulted in the recognition of financial assets of US$0.1m and financial liabilities of US$3.4m at that date. A corresponding reduction in equity was also recorded. The adoption of IAS 32 and 39 does not impact prior periods. 9. Acquisitions In April 2005, the Group acquired 100% of the share capital of Offshore Design Ltd, a company based in Aberdeen, Scotland that provides technical support and consulting services to the oil and gas industry. 10. Retirement benefit liability The pension liability at 30 June 2005 is as calculated at 31 December 2004 as adjusted for current service cost, interest cost and expected return on assets. No interim revaluation has been carried out and accordingly there is no actuarial gain/loss in the statement of recognised income and expense. The figures for gains and losses for the full year together with the surplus/deficit at the year end will be presented in the 2005 Annual Report. 19
Notes to the interim accounts 11. Cash flows from operating activities Unaudited Unaudited Unaudited Interim Interim Full Year June 2005 June 2004 Dec 2004 US$m US$m US$m Cash flows from operating activities Operating profit 67.2 26.9 85.6 Adjustments for: Depreciation 21.5 19.6 41.7 Loss on sale of property plant and equipment 0.3 0.3 0.9 Amortisation of intangibles 2.0 1.9 5.6 Adjustment in respect of employee share awards 3.9 1.3 2.9 Impairment and restructuring charges non-cash impact - 14.1 12.5 Changes in working capital (excluding effect of acquisition of subsidiaries) Increase in inventories (29.1) (34.0) (74.5) Increase in receivables (46.2) (40.7) (90.4) Increase in payables 40.0 27.3 99.6 Decrease in provisions (0.2) (1.6) (1.5) Exchange adjustments (2.2) (2.0) (4.0) Cash generated from operations 57.2 13.1 78.4 20
Notes to the interim accounts Appendix I Reconciliation of UK GAAP to IFRS (i) Reconciliation of income statement six months ended 30 June 2004 Proportional Consolidation As reported of Joint As reported under Ventures IFRS under UK GAAP Note (a) Adjustments IFRS Note US$M US$M US$M US$M Revenues 1,040.8 - - 1,040.8 Share of joint venture revenues (121.3) 121.3 - - Group revenues 919.5 121.3-1,040.8 Cost of Sales (732.0) (91.0) - (823.0) Gross Profit 187.5 30.3-217.8 Administrative expenses (b)(c)(d) (155.9) (16.4) 6.3 (166.0) Impairment and restructuring charges (24.9) - - (24.9) Share of joint venture operating profit 13.9 (13.9) - - Operating profit 20.6-6.3 26.9 Finance income 0.8 - - 0.8 Finance expense (9.7) - - (9.7) Profit before tax 11.7-6.3 18.0 Taxation (e) (7.1) - (0.9) (8.0) Profit for the period 4.6-5.4 10.0 Attributable to: Equity shareholders 3.6-5.4 9.0 Minority interest 1.0 - - 1.0 4.6-5.4 10.0 (ii) Reconciliation of income statement year ended 31 December 2004 Proportional Consolidation As reported of Joint As reported under Ventures IFRS under UK GAAP Note (a) Adjustments IFRS Note US$M US$M US$M US$M Revenues 2,288.1 - - 2,288.1 Share of joint venture revenues (285.6) 285.6 - - Group revenues 2,002.5 285.6-2,288.1 Cost of Sales (1,592.2) (226.3) - (1,818.5) Gross Profit 410.3 59.3-469.6 Administrative expenses (b)(c)(d) (338.3) (32.0) 12.5 (357.8) Impairment and restructuring charges (26.2) - - (26.2) Share of joint venture operating profit 27.3 (27.3) - - Operating profit 73.1-12.5 85.6 Finance income 1.8 - - 1.8 Finance expense (21.2) - - (21.2) Profit before tax 53.7-12.5 66.2 Taxation (e) (24.9) - (1.9) (26.8) Profit for the year 28.8-10.6 39.4 Attributable to: Equity shareholders 26.7-10.6 37.3 Minority interest 2.1 - - 2.1 Explanation of the IFRS adjustments is given on page 25. 28.8-10.6 39.4 21