| The Group’s operating profit before the amortisation of goodwill at £34.3m was 35% higher than in 2001. Some 5% or £1.4m of this increase arose as a result of profit earned on the acquisitions made during the year. In addition, the Suncoast business acquired in October 2001 contributed a full year’s profit against a three-month contribution last year. |
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| Results Group operating margins before goodwill amortisation increased to 6.7% from the 6.0% margin reported in 2001, reflecting the full year impact of the Suncoast business together with improved margins across all our major Foundation Services business units. The average foreign currency exchange rates of the Euro and Australian dollar against Sterling each strengthened by around 1% year on year but the US dollar weakened by some 4% against Sterling. Cumulatively this had an adverse effect on operating profit before goodwill amortisation of £0.8m. Stripping out the effects of acquisitions and currency, the like for like growth in operating profit before the amortisation of goodwill was 14% indicating that the Group has continued to deliver strong organic growth. Acquisitions Several acquisitions were made in the year for a total investment (including costs) of £34.4m of which £19.3m was in cash. In December, McKinney Drilling was acquired for an initial consideration of £17.1m funded by a placing of new shares and an extension to the Group’s banking facilities. There is a deferred consideration payable in 2005 dependent on McKinney’s results in the two years to December 2004. The directors’ current estimate of such deferred consideration is £1.7m. Also in December, the Group created a new venture, Keller-Terra, with Terratest, one of Spain’s leading ground engineers, with an investment of £8.6m, representing 51% of the new venture. This was satisfied by the issue of 3m new Keller shares to Terratest. In August, Keller Australia purchased Vibropile for a cash consideration of £1.0m and Makers UK purchased Accrete for an initial consideration of £3.2m with a deferred consideration which the directors currently estimate at £0.9m. A number of smaller investments were made during the year including the buy out of the remaining 15% minority interest in Keller Australia and an investment of 84% in Wannenwetsch, a German concrete repair business. Total net debt assumed on all of these acquisitions was £0.8m with net goodwill arising of £8.7m. Capital and reserves The net assets of the Group increased during the year by £26.8m to stand at £100.1m at 31 December 2002. The net goodwill carried on the balance sheet increased by £5.7m to £66.3m and taking into account other intangibles of £0.4m the tangible net assets were £33.4m at the year end, an increase of two and a half times the figure at the end of the prior year. Of the increase in net assets, £13.6m net of expenses arose as a result of the two share issues during the year: 3,029,000 shares at 277p for the investment in Keller-Terra and 2,215,000 shares at 240p for the partial funding of McKinney. Retained earnings increased by £10.0m in the year and minority interests increased by £3.2m reflecting the new 49% minority in Keller-Terra and the new 16% minority in Wannenwetsch, offset by the buy out of the 15% minority in Keller Australia. |
| Group insurances In line with most other businesses in our industry the Group has faced significant rises in its insurance costs during the year. As a result of this, and after taking advice from our insurance brokers and reviewing several available options, the Group set up a captive insurance company with effect from May 2002 to self insure a portion of the general third party insurance exposure. The provisions for reserves made by the captive together with net cash balances retained by the captive are consolidated with these financial statements. Accounting standards Although the full implementation of FRS 17 on retirement benefits has been deferred indefinitely the transitional disclosures have been made in note 29 of these financial statements. These disclosures show that the net deficit after deferred tax relief in the UK-based Keller Group Pension Scheme has increased to £4.6m. This increase has arisen not only as a result of the recent deterioration in the equity markets but also as a result of a reduction in the discount rate used to value the liabilities. The scheme has been closed to new employees since 1999 and all new contributions into the scheme are going into fixed interest securities, with the split between equities and bonds being 60% to 40% at the year end. Contributions into the scheme have been increased as explained in note 29. In addition to this defined benefit scheme the Group retains funds within the business to provide for retirement obligations for the German and Austrian employees. Although these retirement obligations are not fully funded the respective assets and liabilities are included within debtors and creditors on the Group balance sheet. All other pension provisions in the Group are of a defined contribution nature. UITF Abstract 34 on pre contract costs which was issued in May 2002 has had no adverse impact on the Group. In general the Group’s contracts are of a relatively short term nature and the Group has always had a policy of expensing all bid related costs as they are incurred. Taxation The Group’s effective tax rate for the year at 39% is the same as that of the prior year. While this is significantly higher than the standard UK corporation tax rate of 30% it is a direct result of more than 60% of the Group’s taxable profit arising in the US where the effective federal and state tax rate is nearly 40% and less than 5% of taxable profit arising in the UK . Cash flow and net debt The operating cash flow of the Group at £43.2m represents 126% of the operating profit before goodwill amortisation in the year compared to £32.2m and 127% respectively for the prior year. Cash conversion is one of the great strengths of this Group and is something that all of our key employees work hard to achieve. Working capital controls have remained good with an inflow from working capital of £0.5m in the year despite sales increases of 21%. However, net capital expenditure has increased over the prior year and at £12.7m, of which £1.8m was spent on land and buildings, it was one and a half times the depreciation charge. Although net debt levels at the year end increased to £68.0m from £63.2m the previous year, the gearing level reduced from 86% to 68%. The majority of the Group’s debt is denominated in US dollars reflecting its profit and asset profile. The net interest charge in the year of £3.9m more than doubled compared to the previous year reflecting the higher debt levels taken on since the acquisition of Suncoast in October 2001. The Group increased its banking facilities in December 2002 to help fund the McKinney acquisition, when the revolving credit facility was increased from £40m to £53m and a new four year term loan of $18m was negotiated. Around 60% of the Group’s debt is subject to floating interest rates with 40% subject to fixed rates until September 2004. The Group has sufficient headroom in its banking facilities and its banking covenants to give it flexibility in funding its existing operations and future strategy. The Group’s EBITDA interest cover for 2002 was 11.1 times (2001: full year pro forma of 7.8 times), well within its banking covenant. Earnings and dividends After a minority interest charge of £0.2m, slightly below the prior year, and an increase in the weighted average number of shares in issue during the year of 3,109,000 reflecting the placing of shares which was made in December 2001, earnings per share for the year were 27.5p, an increase of 17% on 2001 reflecting an increase in the goodwill charge from £1.3m to £3.1m in 2002. Earnings per share before goodwill amortisation of 32.7p were 27% ahead of the prior year. Following the recommendation of a final dividend of 6.6p, the total dividend for the year of 9.9p, an increase of 8% on 2001, is covered 2.6 times by earnings and 3.1 times by earnings before goodwill amortisation. J R Atkinson Finance director 6 March 2003 |