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Financial review


Income Statement

Trading results

The Group’s total revenue in 2011 was £1,154.3m, an increase of 8% on 2010. Stripping out the effects of acquisitions and foreign exchange movements, 2011 revenue was 7% up on 2010, almost wholly due to a 13% increase in like-for-like revenue in North America.

EBITDA was £71.4m, compared to £85.0m in 2010 and operating profit was £28.9m, down from £43.3m in 2010. The Group operating margin fell from 4.1% to 2.5%, largely as a result of the depressed state of the Group’s more established markets.

In North America, which represented 41% of Group revenue, the US dollar-denominated operating profit was up over 80% year-on-year, albeit from a low base. This was largely due to a substantial improvement in the result at Suncoast, which broke even in 2011 after recording a significant loss in 2010, although there was also an increase in the profit earned by the Group’s North American foundation contracting businesses. EMEA’s result was similar to the previous year, while the Asian and Australian results were behind 2010. The Asian result was impacted by a keenly competitive piling market in Singapore and significant project delays in India. In Australia, an expected reduction in profitability as a result of there being fewer large projects in the year was exacerbated by a very disappointing result at Piling Contractors, which recorded a loss for the year. Actions taken in the second half of 2011 have now restored Piling Contractors to profitability.

The Group’s trading results are discussed more fully in the Chairman’s Statement and the Operating Review.

Net finance costs

Net finance costs increased to £7.0m in 2011 from £3.7m in 2010. This increase mainly reflects the increased cost of borrowing under the Group’s £170m revolving credit facility agreed in December 2010 and higher non-cash items required to be included in net finance costs under IFRS.

Tax

The Group’s underlying effective tax rate was 25%, down from 28% in 2010, as a higher proportion of the Group’s profit was derived from lower tax countries.

Earnings and dividends

Earnings per share (EPS) before goodwill impairment decreased to 24.8p (2010: 44.0p). The Board has recommended a final dividend of 15.2p per share, which brings the total dividend to be paid out of 2011 profits to 22.8p, the same as last year. The 2011 dividend is covered 1.1 times by earnings.

Cash flow

The Group has always placed a high priority on cash generation. The current economic environment is inevitably putting pressure on working capital in certain locations and we continue to focus on maximising cash generation and minimising the Group’s investment in working capital.

Net cash inflow from operations was £54.8m, representing 77% of EBITDA. Year-end working capital was £119.8m, £13.1m or 12% more than at the end of 2010. Stripping out the impact of currency movements, year-end working capital increased by 8%, consistent with the 8% increase in revenue. Capital expenditure, net of disposals, was £37.4m, which compares to depreciation of £41.0m.

Financing

As at 31 December 2011, net debt amounted to £102.5m (2010: £94.0m). Based on net assets of £326.8m, year-end gearing was 31%, up slightly from 28% at the beginning of the year.

The Group’s term debt and committed facilities mainly comprise a US$70.0m private placement, repayable in October 2014, and a £170.0m syndicated revolving credit facility expiring in April 2015. At the year end, the Group also had other committed and uncommitted borrowing facilities totalling £92.6m. The Group therefore has sufficient available financing to support its long-term strategy of growth, both through organic means and targeted, bolt-on acquisitions.

The most significant covenants in respect of our main borrowing facilities relate to the ratio of net debt to EBITDA, EBITDA interest cover and the Group’s net worth. The Group is operating well within its covenant limits, as is illustrated in the table below:

Test Covenant limit Current position*
Net debt: EBITDA
EBITDA interest cover
Net worth		 < 3x
> 4x
> £200m		 1.8x
15x
£326.8m

*Calculated in accordance with the covenant, with letters of credit included as net debt and certain adjustments to net interest

Capital structure

The Group’s capital structure is kept under constant review, taking account of the need for, availability and cost of various sources of finance.

Pensions

The Group has defined benefit pension arrangements in the UK, Germany and Austria. The Group closed its UK defined benefit scheme for future benefit accrual with effect from 31 March 2006 and existing active members transferred to a new defined contribution arrangement. The last actuarial valuation of the UK scheme was as at 5 April 2008, when the market value of the scheme’s assets was £26.9m and the scheme was 77% funded on an ongoing basis. The level of contributions, currently set at £1.5m a year, will be reviewed at the finalisation of the next actuarial valuation, which is as at April 2011. This valuation is largely complete and, based on work to date, there are not expected to be any material changes to either the absolute deficit or the level of contributions going forward.

The 2011 year-end IAS 19 valuation of the UK scheme showed assets of £32.2m, liabilities of £38.0m and a pre-tax deficit of £5.8m.

In Germany and Austria, the defined benefit arrangements only apply to certain employees who joined the Group prior to 1998. There are no segregated funds to cover these defined benefit obligations and the respective liabilities are included on the Group balance sheet. These totalled £11.9m at 31 December 2011. All other pension arrangements in the Group are of a defined contribution nature.

Management of financial risks

Currency risk

The Group faces currency risk principally on its net assets, most of which are in currencies other than sterling. The Group aims to reduce the impact that retranslation of these assets might have on the balance sheet by matching the currency of its borrowings, where possible, with the currency of its assets. The majority of the Group’s borrowings are held in US dollars, euros and Australian dollars, in order to provide a hedge against these currency net assets.

The Group manages its currency flows to minimise currency transaction exchange risk. Forward contracts and other derivative financial instruments are used to hedge significant individual transactions. The majority of such currency flows within the Group relate to repatriation of profits and intra-Group loan repayments. The Group’s foreign exchange cover is executed primarily in the UK.

The Group does not trade in financial instruments, nor does it engage in speculative derivative transactions.

Interest rate risk

Interest rate risk is managed by mixing fixed and floating rate borrowings depending upon the purpose and term of the financing. As at 31 December 2011, virtually all the Group’s third-party borrowings bore interest at floating rates.

Credit risk

The Group’s principal financial assets are trade and other receivables, bank and cash balances and a limited number of investments and derivatives held to hedge certain of the Group’s liabilities. These represent the Group’s maximum exposure to credit risk in relation to financial assets.

The Group has stringent procedures to manage counterparty risk and the assessment of customer credit risk is embedded in the contract tendering processes. Customer credit risk is mitigated by the Group’s relatively small average contract size, its diversity, both geographically and in terms of end markets, and by taking out credit insurance in many of the countries in which the Group operates. No individual customer represented more than 5% of revenue in 2011.

The counterparty risk on bank and cash balances is managed by limiting the aggregate amount of exposure to any one institution by reference to their credit rating and by regular reviews of these ratings.

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