Financial review

Statutory results /

Reconciliation of underlying operating profit to statutory operating profit /

£m 2010 2009 Change
%		 Constant
currency
%
Underlying operating profit 192.2 170.3 12.9 12.3
Less:    
Amortisation of purchased intangible assets (26.5) (24.2)  
Disposals of subsidiaries (13.9) (1.0)  
Acquisition costs (4.5) –  
Exceptional debtor impairment (37.0) –  
UK property move costs (8.8) –  
Restructuring costs – (30.5)  
Total adjustments (90.7) (55.7)  
Statutory operating profit 101.5 114.6 (11.4) (11.5)

Reconciling items between underlying and statutory operating profit include the amortisation of purchased intangible assets and the impact of disposals of subsidiaries. The amortisation charge increased slightly to £26.5m in the year, reflecting the part year impact relating to purchased intangibles recognised in respect of Mitchell. The Group recorded a £13.9m loss on disposal of stakes in operations in the US and EMEA, as well as the part disposal of Vizeum Beijing which is now operated as a joint venture with Charm in China.

As we announced at our interim results in August 2010, the planned UK office re-location will result in one-off accounting charges totalling between £10m to £15m. We continue to expect that the total one-off charges will be within this range. A charge of £8.8m has been taken in 2010, with the remainder to be recorded in 2011. The main element of the 2010 charge relates to an onerous lease provision on the existing premises, whilst a small element relates to double rent, a portion of which will be taken in 2011. These charges will be broadly cash neutral over the next three years, before the positive impact of long term efficiency savings relating to the re-location.

In February 2011, we announced that a former Spanish client and certain affiliated companies had filed for pre-insolvency protection under section 5.3 of Spanish Insolvency Law. As these companies had outstanding liabilities owing to an Aegis subsidiary in Spain, we said at the time that it was likely that a provision would be made against our net exposure. A provision is held against our exposure, of which £25.9m is taken as an exceptional charge in the year (£37.0m on a pre-tax basis). This exceptional charge reduces statutory diluted earnings per share by around 2.2p, but has no impact on underlying results.

Operating profit /

Statutory operating profit was down 11.4% to £101.5m (2009: £114.6m).

Reconciliation of underlying profit before tax to statutory profit before tax /

£m 2010 2009* Change
%		 Constant
currency
%
Underlying profit before tax 162.4 150.4 8.0 7.0
Less:    
Adjustments to operating profit (90.7) (55.7)  
IAS 39 adjustments (3.2) (4.0)  
Gain on disposal of JV and associate 1.5 0.5 
Amortisation of purchased intangible assets
within associates		 (2.0) –  
Total adjustments (94.4) (59.2)  
Statutory profit before tax 68.0 91.2 (25.4) (25.6)
* 2009 underlying results are restated to exclude imputed interest arising due to discounting of deferred consideration, as explained below.

The gain on disposal of JV and associate of £1.5m relates predominantly to the dilution of the Group’s shareholding in Charm to 15.8%, following Charm’s Initial Public Offering during the year. The amortisation of purchased intangible assets within associates of £2.0m relates to the acquisition of our shareholding in Charm.

Profit before tax /

Statutory profit before tax is stated after the adjustments made in arriving at statutory operating profit and certain other items recorded within net financial items. These other items include IAS 39 adjustments relating to non-hedge derivatives and movements in put option liabilities, an IAS 39 impairment charge relating to assets classified as available for sale and a gain on deemed disposal of an associate in China (Charm).

In 2010, the Group has adopted the revised accounting standard for acquisition accounting, IFRS 3 (revised 2008) Business Combinations. This standard will lead to greater income statement volatility, since the Group will be required to take all changes in deferred consideration estimates arising on acquisitions in or after 2010 through the income statement. These movements will not be considered to form part of the Group’s underlying performance. In order to align with the accounting for such movements as non-underlying, imputed interest arising due to discounting of deferred consideration liabilities is also removed from underlying results in the current year and in the restated comparatives for 2009. The impact of the restatement is a reduction of £1.1m in the 2009 full year underlying finance costs. This leads to an increase in underlying profit before tax and underlying profit after tax by £1.1m and an increase in underlying basic eps and underlying diluted eps by 0.1p in the 2009 full year comparatives. Further information can be found in note 2 of the accounts.

Statutory profit before tax was down 25.4% at £68.0m (2009: £91.2m). Our statutory tax charge was £25.0m (2009: £27.0m), equivalent to a tax rate of 36.8% (2009: 29.6%). Basic and diluted earnings per share were 3.6p (2009: 5.5p).

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