Interserve Plc Annual report and financial statements 2006 Whole-life services Extended reach, expanded markets, enhanced capabilities Contents 1 Highlights of 2006 2 Our profile and principal activities 4 Directors and advisers 6 Chairman’s statement 7 Directors’ report 7 Business review 7 Strategy 8 Operational review 18 Case studies 22 Financial review 26 Principal risks and uncertainties 28 Corporate social responsibility 38 Corporate governance 43 General information and disclosures 45 Directors’ remuneration report 54 Directors’ responsibility statement 55 Independent auditors’ report (consolidated financial statements) 56 Consolidated financial statements 56 Income statement 57 Statement of recognised income and expense 58 Balance sheet 59 Cash flow statement 60 Notes 95 Independent auditors’ report (Company financial statements) 96 Company financial statements 96 Balance sheet 97 Notes 103 Principal undertakings and trading activities 108 Shareholder information Highlights of 2006 Interserve is a services, maintenance and building group. • Revenue up 16 per cent to £1,408.5 million (2005: £1,214.5 million) • Profit before tax, exceptional items and amortisation: up 61 per cent to £58.1 million (2005: £36.0 million)a • Net cashflow from operating activities up 15 per cent to £40.1 million (2005: £34.8 million) • Earnings per share before exceptional items and amortisation: up 68 per cent to 31.7p (2005: 18.9p)b • Full-year dividend: increased by 4.8 per cent to 15.4p (2005: 14.7p) “Our trading performance emphatically demonstrated the strength of each of Interserve’s three main operating divisions, with headline earnings per share rising by 68 per cent to 31.7 pence (2005: 18.9 pence). We also made the exciting acquisition of MacLellan Group plc, which opens up new markets, augments the range of services we can offer to existing clients and enables us to bid for work using the combined skills and scale of the two organisations. The integration of MacLellan and of the Industrial Services division into our Facilities Services operation is well advanced. “In addition to trading strongly we won a notable amount of new business during 2006 which will generate revenue going forward. Our future workload at 31 December had grown to £5.6 billion, up 17 per cent on 2005 (£4.8 billion). With the underlying strength of the business demonstrated in our 2006 performance, our record future workload and the opportunities created by our acquisition of MacLellan, Interserve’s future prospects are encouraging.” Adrian Ringrose Chief Executive a after exceptional items and amortisation: £15.1 million (2005: £36.2 million) b after exceptional items and amortisation: (1.4)p (2005: 19.0p) Our profile Principal activities Overall revenue split by Divisional revenue split by market sector market sector – see left for key Interserve is a services, Increasingly our customers wish 2% 7% 9% 6% 10% maintenance and building to buy more services from 11% 14% group. We provide services fewer suppliers. With our 19% 7% across the whole life of many breadth of skills and services, 38% types of buildings and we are able to respond to that 8% infrastructure such as hospitals, customer need and to deliver a 15% 27% schools, offices, industrial “one-stop-shop”, integrated 8% plant, bridges, waterworks or service. Private Finance 6% roads. We offer our services at Initiative (PFI) projects are an 13% Facilities Management each stage of the asset excellent example of where the lifecycle: we build, we help customer wants to work with Activities Health others build by hiring them an organisation that can design, Provision of outsourced support equipment, we maintain, we build, operate, maintain, Defence services to public- and private- support operations and we replace and finance their asset. Industry sector clients. replace. Around 80 per cent of Our ability to tailor our services Central and local government our services are delivered into to meet individual client needs Infrastructure The Facilities Management (FM) the built environment and 20 by harnessing expertise from division concentrates on per cent to plant and across the Group differentiates Commerce opportunities where it can infrastructure. us and means that we can Education deliver benefits through achieve growth with existing Custodial/police integrating the management A common theme throughout clients by delivering additional and delivery of several services our services is that we manage services. For example, in a for one customer. complex environments to number of cases we are enable our clients’ businesses developing facilities Typical services to run more effectively. The management (FM) services from • mechanical and electrical core competencies that enable our existing construction maintenance us to deliver the services our framework agreements and are • communications customers need are: winning construction contracts • building fabric maintenance with FM clients. • Service integration • energy monitoring • Direct delivery and supply Interserve’s value chain shows • estates management chain management how our services support the • reception creation and management of • helpdesk • Productivity improvement assets throughout their lives • security • Development of long-term and how we add value at each • cleaning stage. Our strategy is to build working relationships • catering long-term relationships, and • porterage • Driving and managing change these can relate to any of the links in the value chain, • waste management although our longest contracts • industrial access are for operational and • industrial cleaning maintenance services. • application of protective coatings and insulation • power transmission Value chain • pipework fabrication Lifecycle Design New Build Refurbish Operate stage Key sectors Specify Project manage Manage Complex HR issues • health Key Architecture Procure Interface Hard FM • education Interserve Engineer Deliver Deliver • fabric/services roles Soft FM • commerce • occupancy support Lifecycle management • defence • industry • central and local government • custodial/police • retail Geographical scope United Kingdom, Ireland, Cyprus, South Atlantic 2 Interserve Plc Annual report 2006 Split of investment commitment 3% 2% 2% 5% 8% 9% 11% 5% 11% 7% 13% 2% 6% 3% 21% 5% 36% 38% 2% 18% 52% 34% 57% 31% 17% 2% Specialist Services Project Services Equipment Services PFI Investments Activities Activities Trading name Activities Provision of a set of specialised Design, construction and RMD Kwikform Limited Transaction structuring and services. These can be maintenance of buildings and management of Interserve’s PFI delivered either individually or infrastructure. Activities activities. as part of bundled service Design, hire and sale of packages through the FM Focusing on framework formwork, falsework and The division co-ordinates division. agreements, PFI projects and associated access equipment in Interserve’s identification of long-term maintenance infrastructure and building suitable target projects, Typical services contracts, Project Services has projects. selection of bid partners and • manned guarding a progressive approach, bid management process. It • security stewards working in true partnership and The division’s design and manages the Group’s PFI equity forming long-term relationships logistics expertise help its investments and provides • mechanical and electrical with its customers and its customers maximise the value management services to various installation and supply chain. of their projects by reducing special purpose companies. At maintenance time and cost, and position 31 December 2006 Interserve • heating, ventilation and air Typical services Interserve as an integral part of was involved in 24 PFI/PPP conditioning servicing • building design, their supply chain. (public/private partnership) • asbestos surveying and construction and contracts with five more at remediation maintenance Typical services preferred bidder stage. The • specialist window and • road design and • hire and sale of formwork, total investment commitment façade cleaning construction falsework and associated for these projects was • safety systems for working approximately £71.4 million. • bridge maintenance and access equipment at height repair • consultancy in its Key sectors • design, construction and application Key sectors • health commissioning of water and • project planning • commerce sewage treatment plants • technical support • education • finance • custom design • defence • retail Key sectors • central and local • sport • health Key sectors government • central and local • education • infrastructure • custodial/police government • commerce • transport Geographical scope • infrastructure • defence • buildings United Kingdom • industry • industry • utilities • central and local • waterways Geographical scope government • commerce United Kingdom • infrastructure • industry • custodial/police • central and local government Geographical scope United Kingdom, Middle East Geographical scope Europe, Middle East, Australasia, Far East, North & South America Interserve Plc Annual report 2006 3 Directors and advisers A B C D A Norman Blackwell Chairman Executive directors B Adrian Ringrose C Tim Jones Norman Blackwell (Lord Blackwell) 1 Adrian Ringrose 1 D John Vyse Norman was appointed Chairman of Chief Executive E Patrick Balfour Interserve on 1 January 2006 having joined Adrian was appointed Chief Executive in F Les Cullen the Group as a non-executive director the