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WS Atkins plc Annual Report 2003 Contents 01 Financial summary 02 Segmental overview 04 Chairman’s statement 06 Operating review 12 Financial review 16 Board of Directors 18 Report of the Directors 20 Corporate governance report 23 Corporate social responsibility report 25 Remuneration report 33 Auditors’ report 34 35 36 37 37 38 39 72 76 Consolidated profit and loss account Consolidated balance sheet Consolidated cash flow statement Consolidated statement of total recognised gains and losses Reconciliation of movements in shareholders’ funds Parent company balance sheet Notes to the financial statements Five year summary Investors’ information Atkins is a leading provider of consultancy and support services. Our 15,000 highly-skilled staff support complex, technology-based projects across a wide range of professional disciplines, from design and engineering to project and asset management. Our major clients are household names. Our reputation for consistently high standards of delivery and our market-leading expertise provide a sound foundation from which to deliver value. Financial summary 2003 £m 2002 £m 935.3 806.3 18.7 38.1 (13.1) (8.9) Exceptional items before tax (64.5) (6.1) (Loss)/profit before tax (61.6) 20.9 Net debt (71.9) (57.2) 3.0p 11.3p Turnover Adjusted profit from operations (1) PFI/PPP bid costs (2) (3) (4) Dividend per share (1) (2) (3) (4) Before Metronet bid costs, amortisation of pension surplus and goodwill, exceptional items and Employee Benefit Trusts. 2002 figures have been adjusted to be comparable. Includes £8.4m (2002: £3.8m) Metronet bid costs. Includes cost reduction programme and other reorganisation and restructuring charges, impairment of assets and write down in carrying value of own shares held in Employee Benefit Trusts. Net debt excludes cash held by the Employee Benefit Trusts and cash held on behalf of sub-contractors. 2003 Results This has been a challenging year for Atkins. Last year’s introduction of our new finance and HR systems caused significant disruption to the business, with an adverse impact on the level of both overheads and net debt during the first half of the year. However underlying operational performance remained robust and we continued to retain and win work from our key customers throughout the period. More information on all the case studies in this report may be accessed at: www.atkinsglobal.com/ annualreport/casestudies During the second half of the year the problems with our systems were addressed and a cost reduction programme was implemented to manage overheads. The Group was re-financed and rigorous debt management processes implemented. The basis for improved financial performance is now in place. Prospects The prospects for the coming year are good. Our forward order book is strong and the conclusion in April 2003 of the Metronet consortium’s contracts to manage the major proportion of the London Underground has initiated a significant volume of new work. WS Atkins plc Annual Report 2003 Financial summary 01 Transport Design and Government Services Turnover £312.0m Contribution £48.3m Turnover £195.9m Contribution £32.5m Highways & Transportation Rail Design, Environment and Engineering (DE2) Business Services Asset Management Investments Percentage of Group turnover Percentage of Group turnover 33.4% 20.9% Atkins is one of the foremost providers of consultancy and support services to the UK transport sector. Our Highways & Transportation (H&T) and Rail businesses offer an unrivalled breadth of services covering all aspects of surface transport, from initial planning and design to network management and maintenance. Design and Government Services provides multi-discipline design and engineering, business technology, education and asset management services. Segmental overview Atkins is the UK market leader in highway services to the Highways Agency and also supports many local authorities. Our services include highway management and design, transport planning, integrated highway services and transport systems consultancy. Atkins is also the leading supplier of engineering design services to the UK rail market. As part of the Metronet consortium, Atkins is embarking on a 30-year contract to modernise and maintain over two thirds of the London Underground. Business stream Managing Directors Although predominantly public-sector based, the division applies its expertise to providing integrated solutions to a wide range of private-sector organisations. In addition, our Investments arm provides financial and technical support to the Group’s participation in PPP and PFI projects. Joint Ventures Our Investments business manages investments in PPP/PFI Joint Ventures. In the UK our share of turnover from these was £24.5m in 2002/3. This figure is not included in the segmental analysis above. Richard Deacon Highways & Transportation Norman Schunter Design, Environment & Engineering Tony Fletcher Rail Michael Foote Business Services David Clements Investments & Government Services 02 WS Atkins plc Annual Report 2003 Segmental overview Industry Commercial Services International Turnover £116.4m Contribution £15.8m Turnover £118.4m Contribution £19.3m Turnover £192.6m Contribution £7.9m Aviation & Defence Systems Nuclear Power Process Telecoms Water Cost management (Faithful & Gould) Property management and agency (Lambert Smith Hampton) North America Rest of the World Percentage of Group turnover Percentage of Group turnover Percentage of Group turnover 12.4% 12.7% 20.6% Industry provides consultancy and design services to the aviation and defence, nuclear, power, process, telecoms and water industries. Commercial Services provides cost and property management and agency services to the owners of commercial and industrial property. The services we provide include technical, engineering and planning consultancy, design and construction management, programme and project management and regulatory advice. Faithful & Gould (F&G) is one of the UK’s leading quantity surveyors, and has a strong reputation in project management. Public and private sector clients include Network Rail, Royal Bank of Scotland and BP. Our North American operations comprise programme and cost management companies Faithful & Gould and Hanscomb, and Atkins Americas, a full service architecture and engineering company which also provides design build, environmental and systems integration services. Our clients include blue chip private sector organisations, UK nuclear licence holders, oil & gas and pharmaceutical companies, telecommunication operators, eight of the ten UK water companies, the Ministry of Defence and the Environment Agency. Ivor Catto Industry Lambert Smith Hampton (LSH) provides a broad range of property management and agency services and has the widest geographical spread of any UK based commercial property consultancy. Richard Hall Faithful & Gould Outside the US, the primary overseas operations are in the Middle East, Europe and China/Hong Kong, where we provide design and engineering services. Joint Ventures Our share of revenue from TFMC (Proprietary) Ltd which provides asset management to South Africa Telkom was £44.6m. Our share of revenue from DG21 LLC which supplies support services to the US Navy in Diego Garcia, was £7.8m. These figures are not included in the segmental turnover above. Paul Wood North America Chris Boulton Lambert Smith Hampton WS Atkins plc Annual Report 2003 Segmental overview 03 1 2 1 Michael Jeffries Chairman. 2 Somerset County Council renewed its highways engineering services partnership with Atkins Highways & Transportation with the award of two new five year contracts. Chairman’s statement Although the past year has been a difficult one for Atkins, I am pleased with the considerable progress we have made in the second half of the year. Our core operating businesses are sound and with our focus on cost reduction, improving margins and cash collection we are well on the way towards re-establishing the Group’s performance. During the second half of the year we have lowered our net debt level, exceeded our adjusted profit target and concluded in April 2003 the Metronet consortium’s 30-year contracts with London Underground. As indicated in previous statements, our difficulties this year arose principally from the implementation of our new finance and HR systems, which disrupted our business. I am able to report that the key issues have been addressed and our systems are now providing us with the management information we need to run our operations properly. We have caught up with our billing and credit control and in this respect we are now in a better position than we achieved in previous years. Action to reduce overheads is continuing, and to date has produced annualised cost savings in excess of £15m to offset the significant increase in our cost base resulting from our new systems. Our programme of corrective action also delivered significant improvement in net debt during the second half of the year, reducing it to £71.9m at the year end from £105.4m at 30 September 2002. 04 WS Atkins plc Annual Report 2003 Chairman’s statement Atkins’ strength is in the skill and professionalism of its staff. Their dedication has ensured that the enduring impact of the last year’s problems on our clients has been minimal. Our order book remains strong and we continue to win new and repeat business from a diverse range of clients. We have made substantial progress during the second half of the financial year and our focus for the immediate future will remain cash collection and margin improvement through cost reduction. We have set new margin targets for the Group’s businesses and are undertaking regular reviews to monitor delivery. As a result, I believe the Group is firmly back on track to deliver improved performance in the new financial year and on a sustained basis thereafter. It is the Group’s objective to work towards a return to historic operating margins in the medium-term. 3 4 3 Atkins has participated in the development of a new technology which uses microwaves and UV light to disinfect water without the need for chemicals. 4 Atkins led a study for the Strategic Rail Authority into the potential for a new High Speed Rail line between the North and South of the UK. Results Trading in our principal operations remained robust during the period, although our overall results are disappointing, having been impacted by the introduction of our new systems and exceptional restructuring and impairment charges. Turnover and contribution increased in our core Rail, Highways & Transportation and Design businesses, however difficult conditions in the US market continued. Following a long period of consistent growth, adjusted profit before tax for the year of £18.7m is down from £38.1m in 2002. Taking account of Metronet bid costs and one-off, non-operational charges, losses before tax of £61.6m represent a fall of £82.5m compared to 2002. Dividend The Board is confident in the future of the business and a final dividend of 3.0p per share is recommended to be paid on 1 October 2003 to shareholders on the register on 8 August 2003. Our people On behalf of the Board, I would like to thank all our staff for their exceptional efforts over the last year. Whether working to maintain client services in the face of significant internal disruption or coping with the issues of restructuring against a background of uncertainty and unfavourable media reports, this has been a difficult year. I am aware of the long hours which have been worked and the huge effort put in to maintain quality of service to our clients. Board of Directors I am pleased to report that Keith Clarke has accepted the role of Chief Executive and will join the Board in October from Skanska AB where he is currently Executive Vice President. Stephen Billingham joined the Board as Group Finance Director on 1 October 2002. Stephen has made a significant contribution to the Group’s recovery programme during his first six months on the Board, and as Finance Director of Metronet, helped to steer the consortium to financial close. He resigned as Finance Director of Metronet on 4 April 2003. Christopher Kemball became a NonExecutive Director on 14 May 2002. Roger Umney retired as a Non-Executive Director on 1 October 2002. Paul Marsh resigned as a Non-Executive Director on 10 April 2003 due to other business commitments. Frances Heaton will be retiring as a Non-Executive Director following the forthcoming Annual General Meeting. I would like to thank her for her long service to the Board. Our prospects Our order book remains strong and we continue to win new business from our key customers. At the start of the new financial year the Metronet consortium, in which the Group is a 20% shareholder, signed its 30 year Public Private Partnership (PPP) contracts with London Underground. Metronet will undertake a programme of repair and refurbishment that will deliver substantial improvements to the underground infrastructure and significant returns for the Group. Results in the early part of the new financial year are in line with our expectations. The Board is confident that a stronger focus on operations will form the basis for a sustained recovery in our performance. Michael Jeffries Chairman 26 June 2003 Robin Southwell, the former Chief Executive, left the Board on 30 September 2002 and Ric Piper, the former Group Finance Director, left the Board on 1 October 2002. WS Atkins plc Annual Report 2003 Chairman’s statement 05 1 2 1 Atkins is designing and developing the journey planning software for Transport Direct, the UK government’s comprehensive journey planning service. 2 Network Rail draws upon Faithful & Gould’s quantity surveying and commercial management skills such as here at Newark Dyke through a five year framework contract. Operating review Atkins is well established in the top priority upgrade schemes identified by the Strategic Rail Authority. Transport Turnover in our Transport division rose by 31.2% to £312.0m (2002: £237.8m), excluding Joint Ventures. Highways & Transportation (H&T) H&T experienced strong growth in large integrated service contracts, including a £172m contract renewal with Somerset County Council over five years. The intelligent transport systems business secured a two year extension to its travel information and traffic control contract in South Wales, won a key role in the Transport Direct national journey planning project, and is participating in a major road user charging trial in Leeds. The two new management projects for the Highways Agency (Areas 10 and 11) operated well during the year, and the Connect Joint Venture was awarded the concession to design, build, finance and operate the £130m M77 Glasgow Southern Orbital in May 2003. Transport Planning undertook major studies for the Department for Transport, the Strategic Rail Authority, the Commission for Integrated Transport, Transport for London, the Highways Agency and the European Commission. Prospects Looking ahead, market trends include increasing use of technology to improve transport efficiencies and an increasing emphasis on integrated solutions – both areas in which the Group excels. We also expect to gain additional work from regional planning bodies in the UK. H&T is also well-placed to respond effectively to greater use of private finance in highways 06 WS Atkins plc Annual Report 2003 Operating review contracts with the Highways Agency and local authorities. We already support many such opportunities in-house but will develop strategic relations with other service providers and suppliers where appropriate. Rail Atkins Rail benefited from strong demand for safety-related upgrades, the extension of existing fleet lifecycles and independent certification of new vehicle classes. The Rail Civils business successfully re-bid its structural examination contracts in Scotland and Southern England. Atkins is the only company to hold more than one of these new 10-year contracts. Atkins continues to play a significant role in supporting major investment programmes such as the West Coast Route Modernisation. Prospects Atkins Rail is well established in the top priority upgrade schemes identified by the Strategic Rail Authority and we expect to see increasing work from our multifunctional framework contract with Network Rail. Our biggest single project will be the work on the London Underground, which commenced in April 2003 when Metronet was awarded a 30 year modernisation and maintenance contract (see case study opposite). In December 2002, the UK government unveiled a £5.5bn package of national and local transport measures to accelerate the delivery of the 10-year transport plan. Atkins is well-placed to take advantage of opportunities which may arise as these measures are introduced. Working for a better Tube Responsibility for managing the infrastructure of the London Underground system has now passed to two private sector consortia, one of which is Metronet in which the Group is a 20% shareholder. Metronet’s 30 year partnership with London Underground covers the SSL (Metropolitan, District, Circle, Hammersmith & City and East London) and BCV (Bakerloo, Central, Victoria and Waterloo & City) lines. Together these lines make up over two thirds of the underground network. WS Atkins plc Annual Report 2003 Operating review Atkins brings a diverse range of skills to the project. We will design premises as well as new passenger information, CCTV and public address systems, help points and destination indicators. Atkins will also manage the structural inspections, assessments and design work on some 3,800 bridges and structures, 80 miles of tunnels and nearly 100 miles of earth structures. 07 1 2 1 Atkins is working with the Environment Agency to mitigate the increasing problem of flooding by producing models to predict where floods will occur. 2 Tony Fletcher, Managing Director of Atkins Rail (left) and Mike Willmore, Director of Trans4m, discussing the modernisation of the London Underground. Our consultants responded to strong public-sector demand for technology consulting and project management. Design & Government Services Market conditions were good in the year, with our design and engineering teams benefiting from growth in the UK construction market and our consultants responding to strong public sector demand for technology consulting and project management. Turnover, at £195.9m, was up 10.1% (2002: £177.9m), excluding Joint Ventures. It was a particularly good year for Design, Environment and Engineering (DE2), which benefited from growth in the UK construction market, winning a design commission for the Colchester Garrison PFI project and securing design partnerships with the Department for the Environment, Food and Rural Affairs, the Department for Work and Pensions and Derbyshire County Council. We also won a new commission to design the Wiltshire and Swindon Archive Centre, one of the largest heritage centres in the country. Recent legislation has placed the environment high on the agenda for both public and private organisations, and we capitalised on these opportunities during the year. We are market leaders in geotechnical and environmental consultancy for the infrastructure engineering market, and our planning and landscape business is one of the largest in the UK. In the education sector we provided an extensive range of services to schools in Merton, Cornwall, Oxford, Essex and Somerset. We foresee continued demand for design and facilities management services in this sector, however there has been a discernible shift away from large-scale intervention outsourcing and we are withdrawing from the provision of these services to the London Borough of Southwark. 08 WS Atkins plc Annual Report 2003 Operating review In Asset Management, the focus was on restructuring for the future, with some unattractive projects being terminated or renegotiated. The business is now streamed into its four principal market sectors of Government & Education, Defence, Health, and Corporate & Retail, with shared support services. Our national helpdesk handles in excess of five million calls each year and was categorised as best in class in a recent BT survey. We are also developing a series of supply chain partnerships in order to respond to the growing demand for total asset management solutions. Financial performance in Business Services improved due to a number of long-term contracts with local and central government departments. These included programme and project management services at GCHQ, the Foreign and Commonwealth Office, the Highways Agency, the Office of National Statistics and the Environment Agency. We also continued to operate long-term contracts to provide business technology management and support to the Food Standards Agency, Department for Education and Skills and Swindon Borough Council. Atkins Investments (our PPP/PFI unit) had a busy year, reaching financial close on the London Borough of Merton Schools PFI project. We were also made provisional preferred bidder for the Royal School of Military Engineering, as well as providing support to Metronet for the London Underground PPP and the M77 road project in Scotland. The Colchester Garrison PFI project made good progress, with planning permission finally being achieved in July 2003. 3 4 3 Atkins has embarked on detailed designs for Colchester Garrison. 4 Airbus has chosen Atkins to support the development of its new A380 airliner and, right, A400M military transport aircraft. Prospects Looking ahead, our appointment as preferred bidder for the Colchester Garrison PFI project demonstrates the scope of our capabilities. Atkins’ involvement in the project includes multi-discipline planning design, asset management, cost consultancy, and other specialist services. Against this background, medium term plans for public sector investment are expected to provide significant opportunities for Design and Government Services in the coming year. UK Joint Ventures Operating profit was £10.5m (2002: £10.6m). Profit before tax was £2.9m (2002: £3.5m). The majority of the Group’s UK Joint Ventures performed as expected during the year. Half of the Group’s Joint Venture operating profit was from Connect Roads Limited in which Atkins has a 32.1% stake. A limited refinancing of the Connect projects was completed in November 2002, enabling the Joint Venture company to distribute a dividend to its shareholders. Joint Ventures in the UK health and education sectors continued to perform in line with expectations. Following a review of prospects in the prison sector, we sold our 5.3% stake in Bridgend Custodial Services. We will continue to review our PFI portfolio to ensure we make best use of the Group’s capital. Industry Turnover in Industry rose by 24.2% to £116.4m (2002: £93.7m). Aviation and Defence Systems (A&DS) A&DS delivered profitable growth in 2003. Aerospace prime contractors are faced with a significant level of design activity for major new programmes such as A380, A400M and Joint Strike Fighter (JSF). We are well positioned as Airbus’ selected engineering solutions partner for both A400M and A380 projects and are well-placed to build on our involvement in these and the JSF project. Nuclear The year was challenging for Nuclear. There was some uncertainty in the market as BNFL and UKAEA developed their strategies and this led to delays in contract awards. However, our forward order book is healthy, and performance in 2004 is expected to benefit from measures taken to improve the efficiency of the business. Power It was a profitable year for Power. Regulatory requirements and government targets are driving growth in our key markets of energy solutions and renewable energy. We have forged close working relationships with key clients, particularly on our framework and alliance contracts which should provide the platform for success in 2004. Process Much of our work for the oil and gas sector involves ensuring the safety and integrity of existing assets. As a result we were able to maintain our workload during 2003 despite reduced investment in the UK market. Looking ahead, we will seek to capitalise on our expertise in niche oil and gas markets. WS Atkins plc Annual Report 2003 Operating review Telecoms The telecoms market remained weak, with little sign of immediate improvement. Despite this backdrop, performance on our key contracts improved during the year and we believe that our cost base will enable us to continue to deliver acceptable returns in this sector. Water Water is one of the UK’s leading water consultancies, having major framework contracts with the Environment Agency (EA) and many of the privatised water companies. Our business performed well during the year, winning significant work from the EA in the area of flood prevention and prediction. Commercial Services Turnover in Commercial Services fell 0.9% to £118.4m (2002: £119.5m). Cost management – Faithful & Gould (F&G) During 2003 the public sector market remained particularly buoyant. Investment in the renewal, repair and improvement of the national rail network was maintained, and several regions continued to invest in light rail or similar systems. Regulatory obligations imposed upon utility providers, particularly the water and power sectors, continued to drive investment. The private property sector showed signs of decline, especially in the South East. F&G consolidated its lead in the cost management market by focusing on service improvements, offering a broader range of skills and applying the latest asset planning and maintenance management tools. During the year F&G won a Network Rail contract for cost management support, a new four year commission to provide cost management services for Scottish Water and a contract to provide outsourced technical services to Derby City Council. 09 Managing Britain’s highways These latest commissions reflect the trend towards large, long-term, multi-discipline contracts. During the year our Highways & Transportation business led by Managing Director Richard Deacon (above right, seen here with Technical Director David Jenkins) began work on two new management and operational contracts for the Highways Agency (Area 10 and 11). The £190m Highways Agency Managing Agent Contract for Area 11 in the Midlands was secured through Optima Infrastructure Management (Atkins working in partnership with Accord-Jarvis). 10 WS Atkins plc Annual Report 2003 Operating review We are also creating strategic alliances to bid for multi-activity contracts for Local Authorities and private finance highway maintenance schemes. Connect, our Joint Venture with Balfour Beatty, was awarded the contract to design, build, finance and operate the £130m M77 and Glasgow Southern Orbital motorway in Scotland. 1 2 1 Atkins is helping to build a new systems development centre for the Royal Navy. The facility will develop combat systems for the T45 destroyer. 2 Atkins Power is managing energy trading for Growers CHP, which provides combined heat and power to the horticulture industry. Prospects We expect that the government’s commitment to public sector investment will continue to provide significant opportunities. We will be looking to build upon very strong positions in the transport and utilities sectors, where framework arrangements provide future workload. Property management and agency services – Lambert Smith Hampton (LSH) The year was characterised by contrasting conditions in different market sectors. The retail sector benefited from an upturn as a result of a strong consumer sector and growth in the service sector was sustained by demand for distribution and warehousing space. The investment market continued to be dominated by private investors, reflecting low interest rates and high returns compared to the underperforming equity market. Conversely the office and manufacturing sectors suffered from rationalisation, reduced investment and slower rental growth. Against this background, LSH had a successful year. Of particular note was the performance of our West End investment business, which successfully negotiated three multi-million pound property transactions on behalf of Praedia/Cardinal Lysander, Sydney & London and Dawnay Day. Our Industry team was named Best Industrial Agency in Property Week’s 2002 Property awards. Significant new contracts won in the year included provision of estates and valuation services to Hertfordshire County Council (a contract worth £6m over five years), and management of Henderson Global Investment’s UK property portfolio. Across all sectors, we transacted over 33million sq ft of space during the year. Prospects Looking ahead, the UK’s economic performance will depend on the global economic recovery and in particular recovery in the US. Domestic consumer spending and the housing market have been the main driving forces behind the UK’s economic performance during 2003: a significant downturn in either of these areas could pose a threat, particularly to the domestic and retail sectors. Over supply of office space is likely to mean that rental growth will not return to this sector until 2004. Prospects Looking ahead, our North American operations continue to pursue privatisation projects. Over half of all federal construction contracts are being executed using a design-build delivery approach, and that percentage is expected to grow the next few years, providing significant opportunities in this sector for the foreseeable future. International Turnover in International grew by 8.6% to £192.6m (2002: £177.4m). Rest of the world Elsewhere in the world the skills of our designers continued to be in demand. Our design team prepared schemes for prestigious new hotels in Tunisia and Saudi Arabia. In Hong Kong, we were awarded two major rail contracts to provide design and construction services for extensions to commuter rail lines. Our USA operations experienced mixed fortunes during the year, reflecting challenging market conditions due to uncertainty over the situation in Iraq. Hanscomb International Corp. (Hanscomb), acquired in June 2002, performed well, winning a major construction management contract with Honda. While Faithful & Gould also made progress, Atkins Americas Inc., formerly the Benham Group Inc., had to contend with weak demand in its core markets and a generally weak private sector economy. International Joint Ventures Operating profit was £3.7m (2002: £3.9m). Profit before tax was £3.8m (2002: £4.1m). International Joint Ventures continue to perform in line with expectations. TFMC (Proprietary) Ltd which manages South Africa Telekom’s entire property portfolio, is one of the world’s largest outsourcing agreements. Workload remained unpredictable during the period, with fewer projects commencing and more intense competition to win work. A number of projects for which we had been commissioned were delayed or cancelled. In response to these difficult conditions, we undertook a thorough review of the business to align both operational and corporate overhead costs with business activity and productivity. WS Atkins plc Annual Report 2003 Operating review 11 1 2 1 Stephen Billingham Group Finance Director. 2 Atkins Rail has won a major consultancy contract with the Danish National Railway Agency. Financial review Since my appointment as Group Finance Director on 1 October 2002, my focus has been on refinancing the Group and improving cash generation and net margin performance. We are focused on cash generation and net margin performance. Results summary Year to 31 March 2003 £m Year to 31 March 2002 £m 935.3 806.3 123.8 (105.0) 14.2 (9.6) (4.7) 116.7 (80.3) 14.5 (7.7) (5.1) 18.7 38.1 (8.4) 3.7 (11.1) – (3.8) 3.4 (9.4) (1.3) 2.9 27.0 Exceptional items (64.5) (6.1) (Loss)/profit before tax (61.6) 20.9 Basic (loss)/earnings per share Adjusted earnings per share(2) (58.7)p 16.5p 13.1p 31.4p Turnover Contribution from operating segments(1) Overheads Joint Ventures profit Net interest payable Bid costs (excluding Metronet) Adjusted profit before tax(2) Metronet bid costs Amortisation of pension surplus Amortisation of goodwill Employee Benefit Trusts Profit on ordinary activities before tax (1) (2) 12 Contribution from operating segments is operating profit before allocation of overhead costs, amortisation of pension surplus and goodwill, bid costs, Employee Benefit Trusts (EBTs), Joint Ventures and exceptional items. Adjusted profit is before Metronet bid costs, amortisation of pension surplus and goodwill, EBTs and exceptional items. WS Atkins plc Annual Report 2003 Financial review 3 4 3 Ivor Catto (middle), Managing Director of Industry with Project Manager Dave Miller on site at Avecia where we are managing the building of their new manufacturing plant. 4 The Highways Agency asked Atkins to design and manage installation of a new M25 CCTV system. Turnover Turnover increased by 16.0%, of which 12.2% was organic and 3.8% related to Hanscomb International Corp (Hanscomb, acquired in July 2002) and Scanrail (acquired in July 2001). Contribution Contribution from operating segments increased by 6.1%, reflecting the underlying profitability of the Group’s core operations. Further analysis of the performance of our business segments is contained in the Operating review. Overheads Overheads increased by 30.8% during 2003. The Group replaced its UK information technology infrastructure and finance and HR systems in 2002, and this intensive programme of capital investment gave rise to significantly increased depreciation and maintenance costs. To offset this, the Group announced a cost reduction programme in October 2002. As a result, overhead costs had been reduced by more than £15m per annum on an ongoing basis by the year end. External cost pressures, such as premiums for professional indemnity insurance, continue to provide a challenge and we are constantly working to manage our cost base. Joint Ventures In accordance with FRS 9, Associates and Joint Ventures, the Group has reported £6.7m (2002: £7.6m) as its share of the profit before tax of its Joint Ventures, being the Group’s share of operating profit of £14.2m (2002: £14.5m) less net interest payable £7.5m (2002: £6.9m). Joint venture performance will be enhanced significantly by Metronet in 2004. Net interest payable Excluding Joint Ventures, the rise in net interest payable from £0.6m to £2.0m reflected the deterioration in the Group’s net debt position during the year. Net interest payable is expected to rise in 2004 reflecting the cost of financing the Group’s investment in Metronet (see below), partially offset by ongoing reductions in the level of net debt. Bid costs The results were after charging £8.4m (2002: £3.8m) on the Metronet bid for the London Underground. Additional bid costs of £4.7m (2002: £5.1m) were incurred during the year on other PFI/PPP projects, including Colchester Garrison. In compliance with UITF 34 Pre-contract costs the Group capitalises PFI/PPP bid costs from the point at which it becomes virtually certain that such costs will be recovered. No costs were capitalised with respect to PFI/PPP bids during the period under review. It is expected that the level of bid costs will be substantially lower in 2004, following Financial Close on Metronet and as the Colchester Garrison bid nears completion. Cumulative bid costs and development fees of £20m were reimbursed on 4 April 2003 in respect of Metronet and will be amortised over the life of the concessions in accordance with the Group’s accounting policies. Pensions Amortisation of pension surplus of £3.7m (2002: £3.4m) relates to the Atkins Staff Scheme and the Railways Scheme and is based on the latest SSAP 24 actuarial valuation of each scheme WS Atkins plc Annual Report 2003 Financial review (1 April 2001 and 31 December 2001 respectively). It is the Board’s intention to request an updated actuarial valuation of the Group’s defined benefit pension schemes during the first half of the new financial year and the Group’s accounting estimates with respect to pensions will be reviewed following this exercise. Preliminary discussions with the actuaries indicate that, in order to maintain existing benefits, additional contributions in the order of £6m per annum may be required. Acquisitions The acquisition of Hanscomb in June 2002 accounted for £5.0m net cash outflow. Goodwill arising from the acquisition amounted to £20.3m. Operating profits were after charging £11.1m (2002: £9.4m) of goodwill amortisation relating to Hanscomb and to acquisitions made in prior years. The cost of goodwill amortisation is expected to fall in 2004 as a result of the write down in the carrying value of goodwill discussed below. Exceptional items Loss before tax is after exceptional items totalling £64.5m. Of this, £33.3m related to impairment of assets, primarily in North America where the slowdown of the market significantly impacted the results of Atkins Americas Inc. (formerly the Benham Group Inc.). In addition, £16.4m was written off the carrying value of own shares held in EBTs and £14.8m related to the cost reduction programme and other reorganisation and financial restructuring charges. 13 1 2 1 Norman Schunter Managing Director of Design, Environment and Engineering reviews our work at London City Airport. 2 Network Rail has awarded our Rail business two 10-year contracts to examine structures in the Southern Region and in Scotland. Metronet presents a significant opportunity to the Group. Taxation The Group’s effective tax rate in 2003 was 18.5% (2002: 25.5%) of Adjusted profit. The variation between this rate and the UK corporation tax rate of 30.0% is explained in Note 8 to the accounts. The reduction in effective tax rate was primarily due to the release of provision for deferred tax in respect of tax benefits on amortisation of shares in the EBTs. We expect the Group’s effective tax rate to revert to normal levels in 2004 as the Group returns to profitability. Dividends The Directors propose a final dividend of 3.0p per share. EPS and adjusted EPS figures Basic EPS was a loss of 58.7p (2002: profit of 13.1p), reflecting the impact of exceptional items on the year’s result. Adjusted EPS was a profit of 16.5p (2002: 31.4p) based on Adjusted profit before tax of £18.7m (2002: 38.1m) and that part of the Group’s tax charge attributable to this profit. Cash flow In spite of reduced operating profit, net cash inflow from operating activities increased by £6.3m in the year due to improved working capital management. Dividends increased by £5.7m primarily due to a dividend received from the Connect Joint Venture on completion of its refinancing. Capital expenditure was lower by £34.5m reflecting completion of investment in information technology. 14 WS Atkins plc Annual Report 2003 Financial review Going forward net cash flow from operating activities is expected to continue to rise as the benefits of new margin targets are realised. Tax payments will increase as the Group returns to profitability, however capital expenditure is expected to be lower than in 2003. The Group will also benefit in 2004 from reimbursement of bid costs and development fees relating to Metronet (see below). Activities which are expected to enhance future performance Atkins is a 20% shareholder in the Metronet consortium (Metronet) which, after nearly 4 years of negotiation, consultation and planning, achieved Financial Close on its 30-year Public Private Partnership (PPP) with London Underground on 4 April 2003. The Group expects that operating profits from supply chain work and fees relating to Metronet will be around £7m in the first year, rising to £13m per annum over the rest of the initial seven year period. In addition the Group will account for its share of the profit before tax of Metronet which is expected to be around £10m in the first year and £12m per annum thereafter. The Group will invest £70m in Metronet by way of equity and shareholder subordinated debt over the first six years of the concession, £2m of which was invested at Financial Close. The equity contributions and the post tax supply chain profits taken together will be broadly cash neutral over the first seven years, after which Metronet is expected to return significant dividends to Atkins. 3 4 3 Hanscomb is managing construction of a major extension to Honda’s car plant in Lincoln, Alabama. 4 David Clements, Managing Director of Investments and Government Services (left) and Graham Brammer, Barclay’s Group Director Property Services, interrogate the Performance Dashboard, a tool that provides an at a glance indication of service levels on asset management contracts. Treasury The role of Group Treasury is to manage and monitor the Group’s external funding requirements and financial risks in support of the Group’s corporate objectives. The Board reviews and agrees policies and authority levels for all areas of treasury activities. Group Treasury is not a profit centre and therefore does not undertake speculative trading. The Group funds its ongoing activities through cash generated from its operations and bank borrowings. The Group’s cash flow is analysed in detail in Note 31 to the accounts. As a result of the problems arising from the implementation of our new finance and HR systems, the Group’s net debt position deteriorated to £105.4m at 30 September 2002 (31 March 2002: £57.2m). The Group made substantial progress on improving its debt management in the second half of the year and at 31 March 2003, net debt had been reduced to £71.9m. On 27 February 2003, the Group announced that it had signed new banking facilities with its principal lending banks. These facilities include cash facilities and bonding lines, as well as a £68m Letter of Credit facility in relation to the Group’s ongoing equity obligations under the Metronet transaction. The fees for the Letters of Credit included an agreement to issue warrants in respect of 4,715,200 Atkins shares (representing approximately 4.73% of Atkins’ current issued share capital) on financial close of Metronet. 50% of these warrants are exercisable at any time from 4 July 2003. A further 25% of them are exercisable at any time from 4 October 2003, and the remaining warrants are exercisable at any time from 4 January 2004. An amount of 0.5p (the nominal value of Atkins’ shares) is payable in respect of each Atkins’ share issued on the exercise of the warrants. The Group also has the Sterling equivalent of £3.5m banking facilities available to non-UK parts of the Group. Private Finance Initiative (PFI) and Public Private Partnership (PPP) The Group’s PFI and PPP projects involve the Group in arranging finance as part of the overall project service. Individual projects are undertaken in Special Purpose Companies (SPCs) in Joint Ventures with other parties. These SPCs contract with end users for the provision of serviced facilities and also arrange funding, construction, facilities management services and, where required, operational support for the project. Except for equity commitments, the funding of these SPCs is arranged without recourse to the rest of the Group. The Group’s share of the gross assets and liabilities of these SPCs is reflected separately in the Group accounts in accordance with the provisions of FRS 9. Foreign currency risk Through its acquisition of the Benham Group Inc. (now Atkins Americas Inc.) in 2000 and Hanscomb in 2002, the Group has significant US Dollar denominated assets. To mitigate the effect of currency exposures arising from its net investment in the US the Group has financed part of its investment by borrowing in US Dollars. The borrowing is currently at a floating rate of interest. The Group also has transactional currency exposures. These exposures arise from sales or purchases in currencies other than Sterling. It is the Group’s policy to hedge the risk arising from contracts denominated in currencies other than Sterling. At 31 March 2003 the Group had outstanding forward foreign exchange contracts amounting to the equivalent of £1.2m. Stephen Billingham Group Finance Director Interest rate and liquidity risk The Group funds itself using floating rate borrowings. The Board considers that the new banking facilities entered into on 27 February 2003 include sufficient funding to allow for seasonal variations in working capital. At 31 March 2003, the amount undrawn under the Group’s credit lines was £51.3m. WS Atkins plc Annual Report 2003 Financial review 15 Board of Directors Michael Jeffries Chairman, age 58 Michael Jeffries, Chartered Architect, was appointed a Director in 1992, Chief Executive in 1995, and Chairman in April 2001. He joined the Group in 1975 and in 1979 was appointed a Director of WS Atkins Group Consultants, a former Group Company. He was appointed a Non-Executive Director of De La Rue plc in April 2000 and Chairman of Wembley National Stadium Ltd in April 2002. Michael is a member of the Nomination Committee. Frances Heaton Deputy Chairman and Senior Non-Executive Director, age 58 Frances Heaton was appointed a NonExecutive Director in 1990 and Deputy Chairman in 1996. She is currently a NonExecutive Director of Legal & General Group plc and awg plc and a member of the Committee on Standards in Public Life. She was formerly an Executive Director of Lazard Brothers & Co. Limited, a NonExecutive Director of the Bank of England and Commercial Union plc and DirectorGeneral of the Panel on Take-Overs and Mergers. Frances is Chairman of the Audit Committee, and a member of the Remuneration Committee and the Nomination Committee. James Morley Non-Executive Director, age 54 James Morley was appointed a NonExecutive Director in January 2001. He is a Chartered Accountant. He is currently Group Finance Director of Cox Insurance Holdings plc and a Non-Executive Director of Bankers Investment Trust. He has previously been Finance Director at Arjo Wiggins Appleton plc, Guardian Royal Exchange plc and Avis Europe plc. James is a member of the Audit Committee, the Remuneration Committee and the Nomination Committee. 16 WS Atkins plc Annual Report 2003 Board of Directors Stephen Billingham Group Finance Director, age 45 Stephen Billingham was appointed to the Board in October 2002. He joined Atkins in the Autumn of 2000 as Group Financial Controller. For the year prior to joining the Board he was on full time secondment to the Metronet LUL PPP consortium as Finance Director. Stephen spent 11 years with the engineering group BICC plc (now Balfour Beatty plc), where he was Group Treasurer from 1993 to 2000. He has previously held finance positions in Severn Trent plc, the Burmah Oil plc and British Telecommunications plc. Christopher Kemball Non-Executive Director, age 56 Christopher Kemball was appointed a Non-Executive Director in May 2002. Most of his career has been in investment banking in Europe, Emerging Markets and the USA. He is currently a Vice Chairman of Hawkpoint Partners Limited, the independent corporate advisory firm. He is also a Non-Executive Director of The Davis Service Group plc and Control Risks Group Limited. Christopher is a member of the Nomination Committee. Struan Robertson Non-Executive Director, age 53 Struan Robertson was appointed a NonExecutive Director in August 2000. Struan is a mechanical engineer with an MBA. He retired from BP in July 2000 after a distinguished international career where he held posts as Chairman of BP Asia Pacific, Chief Executive Oil Trading International and Senior Vice President Technology and Marketing. Following retirement, Struan was appointed as Group Chief Executive of the Wates Group. He is a past Deputy Chairman of the International Petroleum Exchange. Struan is Chairman of the Remuneration Committee, and a member of the Audit Committee and the Nomination Committee. 1 2 3 4 5 6 1 2 3 4 5 6 Michael Jeffries Stephen Billingham Frances Heaton Christopher Kemball James Morley Struan Robertson WS Atkins plc Annual Report 2003 Board of Directors 17 Report of the Directors The Directors present their report together with the audited financial statements of the Group and the Company for the year ended 31 March 2003. These will be laid before the shareholders at the Annual General Meeting to be held on 16 September 2003. Principal activities and business review WS Atkins plc is a leading provider of technology-based consultancy and support services with offices in the United Kingdom, Europe, the Middle East, Asia Pacific and the USA. As at 31 March 2003 it employed 15,392 (2002: 15,159) permanent staff worldwide. It reports through five segments: Transport, Design and Government Services, Industry, Commercial Services and International (including North America). The Chairman’s statement (pages 4 and 5), and Operating review (pages 6 to 11), Financial review (pages 12 to 15) and the Corporate and social responsibility report (pages 23 and 24) report on Atkins’ performance during the past year and prospects for the future. The reviews are included in this report by reference, together with the list of the principal subsidiary undertakings and the countries in which they operate (Note 33). The loss for the year after tax of £54.3m is shown in the consolidated profit and loss account on page 34. A final dividend of 3 pence (2002: 7.56 pence) per ordinary share is proposed making a total dividend for the year of 3 pence (2002: 11.34 pence) if approved. The final dividend will be payable on 1 October 2003 to shareholders on the register at the close of business on 8 August 2003. Acquisitions On 24 June 2002 the Company acquired Hanscomb International Corp, a project management consultancy business with 370 staff. The consideration of £21.7m was met from existing borrowing facilities and the issue of 3,039,617 new shares. 18 Share capital Details of the Company’s authorised and issued share capital can be found in Note 23 of the financial statements. Directors The Directors of the Company at the date of this report are shown on page 16. On 14 May 2002 Christopher Kemball and Paul Marsh were appointed as NonExecutive Directors. Paul Marsh subsequently resigned on 10 April 2003 due to a significant increase in his other business commitments which meant he was unable to devote sufficient time to the affairs of the Company. On 30 September 2002 Robin Southwell resigned as a Director. On 1 October 2002 Ric Piper resigned as a Director and Roger Umney retired and resigned as a Non-Executive Director. At every Annual General Meeting (AGM) one third of the Directors must retire by rotation and may be reappointed. At the forthcoming AGM James Morley will retire in accordance with the Articles of Association and being eligible offer himself for re-election. Stephen Billingham, having been appointed to the Board since the last AGM, will retire and being eligible, offer himself for re-election. Frances Heaton, the Deputy Chairman and Senior NonExecutive Director, will also retire and will not be seeking re-election. Details of Directors of the Company, their remuneration, shareholdings, options and long term incentive entitlements are given in the Remuneration report on pages 25 to 32. Subsequent events On 4 April 2003, the Metronet consortium in which the Group is a 20% shareholder, signed 30 year contracts with London Underground. Further information on these contracts is given on pages 7 and 14. WS Atkins plc Annual Report 2003 Report of the Directors Substantial shareholdings As at 26 June 2003 the Company had been notified in accordance with Sections 198 to 208 of the Companies Act 1985 of the following interests in ordinary shares: Name No. of ordinary share shares % of issued capital The Atkins (No. 4) Employees’ Benefit Trust(1) 4,922,371 4.93% Aviva plc(1) 3,602,791 3.61% BH Caporn and AC Vause(1) 3,797,588 3.80% FMR Corp and Fidelity International 10,470,658 Limited(2) 10.49% Legal and General Group plc(3) 3,079,802 3.08% (1) (2) (3) Not a beneficial interest. Interest arises in the context of passive investment activities only by the various investment accounts managed on a discretionary basis. Beneficial interest. Save as referred to above, the Directors are not aware of any person as at 26 June 2003 who was interested in 3.0% or more of the issued share capital of the Company or could directly or indirectly, jointly or severally, exercise control over the Company. Corporate governance A report on corporate governance is on pages 20 to 22. Corporate social responsibility A report on corporate social responsibility is on pages 23 to 24. Business conduct policy The Board is responsible for the Group’s Business Conduct Policy. The Group believes that integrity is a fundamental prerequisite for successful business relationships, both internally and externally. Reputation, trust and confidence are essential elements which we seek to protect and enhance to the benefit of all with whom we have a relationship. The Group seeks to understand and meet its customers’ needs, whilst seeking continuous improvement. Across the Group there are procedures in place which seek to underpin this approach. By so doing the Group aims to meet the needs of customers, shareholders and staff. Payments to suppliers The Group agrees terms and conditions for its business transactions with suppliers and endeavours to make payments to these terms, subject to the terms and conditions being met by the suppliers. Although systems issues during the early part of the financial year significantly disrupted the normal payment cycle, as at 31 March 2003, the number of days of annual purchases in the Group represented by year end creditors had returned to a normal level of 29 days (2002: 49). Charitable and political contributions Amounts given by the Group for charitable purposes were £115,000 (2002: £84,900). It is the Group’s policy not to make political donations either in the UK or overseas. The Group has no intention of making any political donations or incurring such expenditure in the future. However, the Political Parties, Elections and Referendum Act (the PPER Act) came into effect during 2001 and defines “EU Political Organisation” widely. There is some uncertainty over which bodies are covered by the definition and what will be classified as a “Donation”. The Board will therefore seek authority at the forthcoming AGM to make political expenditure up to £100,000 in order to prevent inadvertent breach of the PPER Act. European Monetary Union The impact of the introduction of the Euro on the Group has been minimal reflecting the fact that approximately £21.0m (2.2%) of Atkins’ turnover in 2003 was generated in the 12 countries and that the Group’s local systems have been appropriately amended. It is not possible to predict whether the UK will adopt the Euro in the future, at what exchange rate it might be adopted or whether any impact on Atkins would be significant. The Group neither anticipates changing its reporting currency nor denominating its share capital in Euros, unless the UK decides to join the European Monetary Union. Tax status The close company provisions of the Income and Corporation Taxes Act 1988 do not apply to the Company. Annual General Meeting The Annual General Meeting will be held on 16 September 2003 at 4.30pm. Directors’ responsibilities The Directors are required by UK company law to prepare for each accounting period financial statements which give a true and fair view of the state of affairs of the Group and the Company as at the end of the accounting period and of the profit and loss of the Group for that period. In preparing the financial statements the Directors are required to select and apply consistently suitable accounting policies framed by reference to reasonable and prudent judgements and estimates. Applicable accounting standards also have to be followed and a statement made to that effect in the financial statements, subject to any material departure being disclosed and explained in the notes to the financial statements. The Directors are required to prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for ensuring proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. WS Atkins plc Annual Report 2003 Report of the Directors They are also responsible for taking reasonable steps to safeguard the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Group’s website. Financial information published on the website is based on legislation in the United Kingdom governing the preparation and dissemination of financial statements that may differ from legislation in other jurisdictions. Going concern The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis in preparing the accounts. Auditors Following the conversion of PricewaterhouseCoopers to a Limited Liability Partnership (LLP) from 1 January 2003, PricewaterhouseCoopers resigned on 25 March 2003 and the Directors appointed its successor, PricewaterhouseCoopers LLP, as auditors. A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Group will be proposed at the forthcoming Annual General Meeting. Approved by the Board of Directors and signed on its behalf Amanda Massie Company Secretary 26 June 2003 19 Corporate governance report The Group provides a wide range of technology-based consultancy and support services. An effective system of corporate governance is fundamental to fulfiling the Group’s corporate responsibilities and the achievement of its financial objectives. The policy of the Board of WS Atkins plc is to manage its affairs in accordance with the Principles of Good Governance and the Code Provisions set out in Section 1 of the Combined Code on Corporate Governance in the UKLA Listing Rules. Following the publication of the Higgs Report in January 2003 and the proposed integration of these recommendations into the Listing Rules in July 2003 the Board will review its corporate governance framework during the latter half of 2003. The provisions of the Code applicable to the Group are divided into four parts: Board and committee structure Board The Board of WS Atkins plc is the body responsible for corporate governance, for establishing policies and objectives and for the stewardship of the Group’s resources. It is the Group’s policy that the roles of Chairman and Chief Executive are separate. However, as an interim measure following the resignation of the former Chief Executive, since 1 October 2002, these roles have been temporarily combined until the new Chief Executive is appointed on 1 October 2003. Currently there are two Executive Directors and four Non-Executive Directors. Their profiles are given on page 16. It is the opinion of the Board that the Non-Executive Directors are independent of management and have no business or other relationship which could interfere materially with the exercise of their judgment. The Board meets regularly throughout the year and met more than 12 times during 2003. In addition, Directors meet as members of relevant Committees. There is a formal schedule of matters reserved specifically to the Board for decision and delegating specific responsibilities to Committees. Each of the Committees 20 has formal written Terms of Reference which are reviewed by the Board at regular intervals. All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. There is an agreed procedure for Directors to obtain independent professional advice. Board members receive appropriate guidance to strengthen their understanding of the business and their legal obligations. In accordance with the Group’s Articles of Association, one third of the Board is required to retire by rotation each year. In addition, all those appointed during the year will stand for re-election at the next General Meeting, ensuring that each Board Member faces re-election at regular intervals. Group Executive The Group Executive meets regularly throughout the year, at least ten times. It is responsible for the management of the business and is chaired by the Chief Executive. Its members currently comprise the Group Finance Director, the Managing Directors of the Business Units, the Human Resources Director and the Company Secretary. The respective roles of the Board and Group Executive are discussed further under Internal control on page 21. Audit Committee The Audit Committee comprises Frances Heaton, James Morley and Struan Robertson, all Non-Executive Directors. Frances Heaton is Chairman. Paul Marsh was a member until his resignation. The Committee meets at least three times a year. Its prime tasks are to review the scope of the external audit, to receive reports from the external and internal auditors and to review the half yearly and annual financial statements before they are presented to the Board, focusing in particular on accounting policies and compliance, areas of management judgment and estimates, and the effectiveness of internal control procedures. WS Atkins plc Annual Report 2003 Corporate governance report The key elements of processes used by the Audit Committee to review the effectiveness of the system of internal control include: • discussion with Management on risk areas identified by Management and/or the audit process; • review of internal and external audit plans; • review of significant issues arising from internal and external audits; and • review of significant Group risks reported by the Group Risk Committee. Auditors The Audit Committee’s Terms of Reference address the provisions in the Combined Code in relation to audit committees and auditors. The Board and the Audit Committee monitor the cost effectiveness of audit and non-audit work performed by the auditors and also consider the potential impact, if any, on the corporate relationship with the auditors before awarding any non-audit work. The auditors continue to operate procedures to safeguard against the possibility that the auditors’ objectivity and independence could be compromised. This includes the use of independent concurring partners, use of a technical review board (where appropriate) and annual independence confirmations by all staff. The auditors report to the Audit Committee on matters including independence and non-audit fees on an annual basis. In addition, the role of the audit partner is rotated on a periodic basis. Nomination committee The Nomination Committee comprises the Chairman and up to four other Directors the majority of whom are Non-Executive Directors. It is responsible for the nomination for Board approval of candidates for Board appointment. Remuneration committee The Remuneration Committee comprises Struan Robertson, Frances Heaton and James Morley, all Non-Executive Directors. Struan Robertson is Chairman. Roger Umney was Chairman until his resignation. Paul Marsh was a member until his resignation. The Committee is also attended by the Chairman, Chief Executive and Human Resources Director, except when their own remuneration is under consideration. The Committee meets at least twice a year. The Committee reviews the Group’s policy on the Executive Directors’ remuneration and terms of employment and makes recommendations upon this to the Board. It also assists in the formulation of remuneration for other senior Managers. The Remuneration report is shown on pages 25 to 32 and includes information on the Directors’ service contracts. Directors’ remuneration The Remuneration report on pages 25 to 32 includes details of the remuneration policy and of the remuneration of the Directors. Internal control The Directors are responsible for the Group’s system of internal financial and operating controls which are designed to meet the Group’s particular needs and aim to safeguard the Group’s assets and ensure proper accounting records are maintained and that the financial information used within the business and for publication is reliable. Any system of internal control can only provide reasonable, but not absolute, assurance against material misstatement and loss. In 2000, the Group commenced a major initiative to replace the core Finance and Human Resources systems for its UK operations and to establish a new Shared Services Facility (SSF) at Worcester. These new core systems and the SSF became operational in January 2002. The Board recognised the risks associated with the changes and prior to implementation put in place further review processes. Additional short-term debt facilities were obtained from the Group’s lending banks to allow for the expected increase in working capital. The introduction of these new systems, in particular the SSF, proved substantially more problematic and disruptive than expected. These problems impacted, in particular, the Group’s cash flow. The Board and management recognised the severity of the problems and a team was set-up to address and monitor the various issues arising. The results of this team’s work were regularly reported to the Board, and when the underlying nature of some of the issues became clear the Board took immediate action and advised shareholders. The problems with the new systems that had a material affect upon the financial results have now been identified and addressed. Remedial action is being pursued on the outstanding issues. Key features of the system of internal control are as follows: Group organisation and culture By its statements and actions the Board emphasises a culture of integrity, competence, fairness and responsibility. The Board focuses mainly on strategic issues, senior management and financial performance. The Group Executive concentrates on operational performance, operational decision making and the formulation of strategic proposals to the Board. The Managing Directors of the Business Units manage their businesses with the support of senior managers whose appointment requires endorsement by the Group Executive. The Board determines how the Group Executive and the individual businesses operate within a framework of delegated authorities and reserved powers which seeks to ensure that certain transactions, significant in terms of their size or type, are undertaken only after high level review. Financial reporting Annual budgets for individual businesses and the Group are prepared and approved by the Board. The financial performance of individual businesses is reported regularly and compared to annual budgets. The Group reports to shareholders on a half-yearly basis. Forecasts for the Group are prepared and reviewed by the Board regularly. However, the difficulties encountered with the new systems meant that for the first part of the year reliable forecasts for the Group were not available. Individual business controls Individual businesses complete an annual self-certification statement. Responsible managers personally confirm the adequacy of their systems of internal control and their compliance with Group policies. The statement also requires the reporting of any significant control issues that have emerged so that areas of Group concern may be identified, addressed and experience shared. Apart from the issues raised by the implementation of the new systems referred to above, no significant control issues were identified as at 31 March 2003. Project and contract control Procedures seek to ensure that risks are identified through the lifecycle from bidding to completion. Regular review procedures are in place to ensure that issues are appropriately reported to the Board. Commercial procedures have been strengthened during the year by the adoption of a Commercial Risk & Audit Framework which requires peer review to be carried out for all significant bids and opportunities, or where significant investment decisions have to be taken. Functional speciality reporting The Board assesses the risks facing the business on an ongoing basis and has identified a number of key areas which are subject to regular reporting to the Board such as Environment, Health & Safety, Human Resources, Insurance, PFI/PPP investments and Treasury. WS Atkins plc Annual Report 2003 Corporate governance report 21 Corporate governance report continued Risk management review The Board assesses risk management throughout the Group, aided by the Group Risk Committee and detailed reviews of internal controls and risk management. A new Group Risk Management Framework has been implemented that requires businesses formally to record all significant risks facing each business unit. A summary of the key risks facing the Group is reviewed regularly by the Board. Internal Audit The Internal Audit function within the Group is required to undertake a programme to address internal control and risk management processes with particular reference to the Turnbull report. Its conclusions are advised to the relevant level of management and the function has a direct reporting responsibility to the Audit Committee acting on behalf of the Board. During the first part of the year, the Internal Audit function was used substantially to support the Group’s new financial reporting processes. The Board confirms that there is a continuing process for identifying, evaluating and managing the risks faced by the Group and that the process has been in place for the year under review and remains current. A full review of the internal control and risk management framework was undertaken during the year and a number of steps taken to re-inforce it, as detailed above. The Audit Committee has reviewed the operation and effectiveness of the framework, which operated during the period covered by the Directors’ report and Financial statements, up to and including the date of approval by the Board. Relations with shareholders Communication with all shareholders is given a high priority. The Annual Report and Interim Reports are sent to all shareholders and all shareholders are invited to the Company’s Annual General Meeting, which is attended by the full Board. The Group also has a website (www.atkinsglobal.com) that contains information on its activities, including recordings of the Annual and Interim results presentations to City analysts and institutional investors. The Board welcomes the views of all shareholders. The Group has an on-going programme of dialogue and meetings between the Directors and its major institutional shareholders, where a wide range of relevant issues including strategy, performance, management and Corporate Governance are discussed. The Annual Report is designed to present a balanced and understandable view of the Group’s activities and prospects. The Chairman’s statement, Operating review and Financial review on pages 4 to 15 provide an assessment of the Group’s affairs and position and will be supported by a presentation to be made at the Annual General Meeting. Compliance with the Combined Code The Company has complied throughout the year with the provisions stated in Section 1 of the Combined Code except from 1 October 2002 when the roles of Chairman and Chief Executive were temporarily combined as an interim measure pending the appointment of the new Chief Executive on 1 October 2003. Approved by the Board of Directors and signed on its behalf Amanda Massie Company Secretary 26 June 2003 22 WS Atkins plc Annual Report 2003 Corporate governance report Corporate social responsibility report Introduction The Group aims to demonstrate a high standard of corporate social responsibility (CSR) based on the implementation of sound policies and good practice. The Group’s Safety, Health and Environment Advisory Committee (SHEAC) was formed last year to address CSR issues and to make recommendations to the Board regarding the Group, its staff, customers and stakeholders. The Committee, which reports to the Board on a quarterly basis, is chaired by the Managing Director of Rail and includes senior managers from each of the Group’s business units. Two external advisors have also been appointed to provide the Committee with independent strategic advice. The Quality, Safety & Environment (QSE) Managers’ Forum, formed in December 2002, reviews operational health & safety and environmental performance across the Group and makes recommendations to the SHEAC as part of the continuous improvement process. During the year, the Highways and Transportation business achieved certification for Occupational Health and Safety Assessment Series (OHSAS) 18001. WS Atkins Rail Limited is the first rail company to have its Railway Safety Case approved by the HSE for possession only work. Environment The Group continues to consider the impact of its business activities on the environment and has taken steps to improve its performance during the year, including: • conducting a review of the environmental impact of the Group’s business support activities, including assessing business travel in the Group’s UK businesses, and monitoring gas, electricity and water consumption, waste generation and recycling; • reviewing the Group’s Environmental Policy Statement, which sets the standard for those undertaking duties on behalf of the Group; During 2004 the Group aims to further integrate overall QSE strategy further and to produce an integrated Group QSE policy manual. • implementing a Group-wide environmental management framework to provide all businesses with clear guidance and protocols; and Health & Safety The Group is committed to creating and maintaining a culture which provides a safe working environment for employees. The Group’s Health and Safety Policy is published on the intranet. • producing a corporate Environmental Report, which is published on our website (www.atkinsglobal.com). It is intended to update this report annually. The Chief Executive is responsible for health and safety matters at Board level and reports on these monthly. The Board also receives an annual update on health and safety legislation and best practice. Each business unit has a nominated QSE co-ordinator. The Group’s safety record has been significantly better than the national average and this achievement was recognised by the award of the Royal Society for the Prevention of Accidents’ Order of Distinction to our Asset Management business. The Group’s Accident Incidence Rate (AIR) for 2003 was 280 (2002: 276), well below the Health Safety Executive’s (HSE) AIR target for industry generally (631) and the service industry specifically (478). In the coming year, the Group will benchmark the energy efficiency of key areas of its facilities and set realistic targets for improvement. The Chief Executive is responsible for environmental matters at Board level and reports on these monthly. The Ethical Investment Research and Information Services (EIRIS) and Business in the Environment (BiE) have included the Group in their surveys. The Group’s index score in BiE Index of Corporate Environmental Engagement rose during the year to 56% (2002: 39%). WS Atkins plc Annual Report 2003 Corporate social responsibility report Environmental Management Systems (EMS) This year the Group implemented environmental management systems and procedures which provide the business with clear guidance and protocols. During the year, both Rail and Environment and Sustainable Solutions (part of Design, Environment and Engineering) were awarded the internationally recognised BS EN ISO 14001 and the Highways and Transportation business successfully achieved this certification for all products, activities and services. Further business units are currently pursuing certification and the aim is to have approximately 50% of UK operations covered by EMS and certified to ISO 14001 by December 2004. Environmental awareness, communications and training The Group has developed training courses (externally certified by the Institute of Environmental Management & Assessment) covering environmental auditing and EMS implementation, together with an in-house environmental handbook available to all staff working or visiting our project sites. Incidents and prosecutions The Group had no prosecutions relating to environmental incidents in the last year although there were a number of incidents where the Environment Agency was involved and summarily investigated the occurrence. None of these investigations led to a formal indication of the Group being at fault. Quality assurance Effective quality management continues to be crucial in sustaining a competitive advantage through the high standard of our work. The Group continues to maintain its existing registrations of quality system approval satisfactorily. Approval to ISO 9001: 2000 has been the focus of attention, recognising that all approvals to the 1994 version of the Quality System Standard will no longer be valid after December 2003. A number of units have already achieved approval to the new Standard. The remaining businesses are actively implementing management programmes to ensure that approval is achieved before the deadline. 23 Corporate social responsibility report continued People Atkins is a people-based business which prospers to the extent that it is able to harness, develop and deploy the energies and skills of its employees. Human resources (HR) objectives are therefore linked closely to wider business objectives and are to: • recruit and retain staff with the best skills available across the markets in which the Group operates; • provide a working environment within which the skills of our employees can be used effectively, promoting resource sharing and skills transfer across the Group; • invest in the development of our employees to meet the growing needs of the Group and its customers for a wide range of management, professional and technical skills; • reward staff on the basis of performance and provide an opportunity for them to become and remain shareholders in the Group; • strive to remain an “employer of choice”, particularly for graduate recruits; and • deal with all staff equitably as well as managing the employment liabilities of the Group. The Human Resources Director has responsibility for HR issues within the Group and reports to the Chief Executive, who is responsible for HR issues at Board level. Resourcing The Group continues to be a major recruiter of talent across the sectors in which it operates. During 2003, over 2,000 staff joined the Group. The Group continues to invest in its recruitment processes to ensure selection of staff with the right competence and experience to meet the changing needs of the Group and its customers. Employee development The Group has made a significant investment in management development and training in recent years in order to ensure that we are able to meet the majority of our management needs from within the Group. Structured management and senior management development programmes operate across the Group. These have proved extremely effective both in identifying and developing a substantial population of capable managers and in significantly improving retention rates. Development of skills for line managers is a key target for 2004. Reward Whilst remuneration practices vary across the Group, in line with good practice for each of the markets within which the Group operates, overall objectives are to: A structured development programme is in place for graduates, accredited by a wide range of professional institutions including all the major engineering institutions. All staff have access to a portfolio of in-house professional and technical training courses covering areas such as health and safety, project management, commercial skills, communication and interpersonal skills and specific job related training. The use of personal development plans (appraisals) is promoted across the Group in order to improve objective setting and performance management and to support continuous professional development. Remuneration policy and practice are kept under regular review. Working environment The Group regularly seeks the views of employees on a range of issues affecting their employment. A confidential survey is conducted regularly covering all UK based staff. This is used to identify areas where more needs to be done to engage and motivate our employees. Overseas businesses typically conduct similar surveys locally. The survey covers a range of issues including communication, training and development, effective use of skills and resources across the Group. The results are collected and presented to allow comparison of performance internally between business units and externally against other leading employers. The findings are then used to help to set corporate and individual objectives for the year ahead. Each year the Group recruits in excess of 250 graduates from UK universities. An increasing number of candidates investigate career opportunities and make their initial applications on-line via www.whyatkins.com. 24 WS Atkins plc Annual Report 2003 Corporate social responsibility report • pay competitive salaries to recruit and retain staff with the right skills and experience; • reward individuals on the basis of performance; and • provide a range of employee benefits appropriate to each market. Equal opportunities The Group is committed to the fair and equitable treatment of all its employees irrespective of gender, race, disability or sexual orientation. Policies have been implemented across the Group to ensure that this commitment is fulfilled. The Group’s policy and practice is to encourage the recruitment and subsequent training, career development and promotion of disabled people on the basis of their aptitude and abilities, and the retention and re-training of employees who become disabled. In South Africa, the Group is a 38.25% shareholder in TFMC (Proprietary) Ltd, a company established to provide asset management services to South Africa Telkom. The company has made significant commitments to employment equity in general and to black economic empowerment. These include specific targets in relation to achieving 50% representation of previously disadvantaged individuals in management positions within two years and similarly to exceeding 50% of its bulk supply chain spend with qualifying enterprises in the same time frame. Employment liabilities The employment liabilities of the Group are kept under careful review and action is taken to contain these liabilities where appropriate. These include pension fund liabilities and liabilities arising as a result of staff joining the Group on contracts where TUPE has applied. Remuneration report Introduction The Remuneration report has been prepared in accordance with the Directors Remuneration Regulations 2002 (the Regulations) and Schedule B of the Combined Code. As required by the Regulations, a resolution to approve the report will be proposed at the Annual General Meeting (AGM) at which the financial statements of the Group will be presented for approval. Remuneration policy The objectives of the Group’s remuneration policy are to attract, retain and incentivise management with appropriate professional, managerial and technological expertise to realise the Group’s business objectives, and to align their interests with those of shareholders. This is achieved through maintaining an appropriate balance between basic salaries, bonuses and shares. Remuneration committee The Remuneration Committee comprises Struan Robertson, Frances Heaton and James Morley, all Non-Executive Directors. Struan Robertson is Chairman. Roger Umney was Chairman until his resignation. Paul Marsh was a member until his resignation. During the year the Committee reviewed overall levels of remuneration and the balance between these elements to ensure that packages remained competitive and in the best interests of the Group. This exercise was supported by New Bridge Street Consultants who undertook a review of remuneration levels and structures across a comparator group of businesses. These were selected having regard to the size of the Group, the business sectors in which it operates, its diversity and geographical spread. The Remuneration Committee’s purpose is to review, on behalf of the Board, the remuneration policy for Executive Directors and to determine the level of remuneration, incentives and other benefits, compensation payments and terms of employment of each Executive Director. It also seeks to provide a remuneration package that aligns the interests of Executive Directors with those of the shareholders. The Remuneration Committee also reviews the salaries and benefits for senior staff reporting to the Chief Executive. The remuneration packages agreed by the Committee for the Executive Directors contain the following elements: • basic salary; • performance bonus payable for the achievement of in-year targets; • longer term share incentives; and The Committee has appointed New Bridge Street Consultants to provide external independent advice to the Committee on remuneration policy and practice for Directors and Senior Executives, and to assist the Committee in the development of short and long term incentive schemes. Clifford Chance LLP has provided legal advice on the incentive schemes. The Committee meets at least twice a year. For the year ended 31 March 2003 the Committee met eight times. The Chief Executive and Human Resources Director attend the meetings by invitation and are consulted about the Committee’s proposals, except when their own remuneration is under consideration. The Company Secretary also attends the meetings and provides advice where required. • pension and other benefits. Basic salary The Committee establishes salaries by reference to those prevailing in the employment market generally for Executive Directors of comparable status, taking into account the size and range of responsibilities held by different executives. Basic salaries are set at a level which corresponds broadly with the median salaries for executives in comparable businesses. Salaries are normally reviewed annually. WS Atkins plc Annual Report 2003 Remuneration report Other benefits for Executive Directors include a car and payment of its operating expenses and fuel, life assurance and entitlement to a non-contributory private health care scheme. Bonus and long term incentive plans provide executives with the opportunity to increase overall remuneration levels to the upper quartile for comparable businesses but only following the achievement of demanding performance targets. Performance bonus Executive Directors are eligible to receive up to 60% of their salary as a bonus for the achievement of financial year Group performance and personal targets. In exceptional circumstances, the Remuneration Committee may resolve to award bonuses up to 80% of salary. The targets against which bonuses are paid are reviewed annually. Key senior managers are also eligible to receive a bonus for the achievement of Group, divisional and individual performance targets. They are offered the opportunity to invest in the Group by taking part or all of their bonus in the form of a right to acquire ordinary shares under the Deferred Bonus Plan. This is designed to promote the retention of senior staff. Bonus awards are non-pensionable and non-contractual. Long term share incentives Various long term incentive plans are in place with the objective of aligning the interests of participants and shareholders in generating satisfactory business performance and investment return. The Committee commissioned a review of these plans by New Bridge Street Consultants, with the objective of simplifying the current arrangements and updating performance conditions. The review recommended retention of the existing bonus arrangements summarised above and modifications to the WS Atkins 1997 Senior Executive Long Term Incentive Plan (Senior Executive Plan II) in line with current best practice. It is proposed that these changes will apply for all awards made subsequent to the Company’s AGM on 16 September 2003. Awards prior to that date will be subject to the existing rules. 25 Remuneration report continued At the forthcoming AGM it will be recommended to shareholders that the rules of the Senior Executive Plan II be amended. The proposed amendments include the following: The Executive Directors and other key senior managers will continue to participate in this plan. It is also intended to broaden the plan to key staff below senior manager level. • The performance conditions will be based on total shareholder return (TSR), with an earnings per share (EPS) underpin. Subject to approval of these changes by shareholders, the main plans which the Company will operate will be the Senior Executive Plan II and the Deferred Bonus Plan, both of which will be used to reward and incentivise Executive Directors and key senior managers. The EPPs will be discontinued. • Full vesting of any award will take place for a top 20% ranking against a group of comparator companies, 30% for a median ranking, with no award if TSR falls below the median. Summary of existing share plans • The EPS underpin is proposed as Retail Price Index (RPI) plus 2% per annum. This combination is designed to reward management performance in delivering both absolute growth and relative performance against similar companies. The Remuneration Committee will choose appropriate comparator companies for each year’s grant. The proposed comparator companies for the grant after the AGM will include AEA Technology plc, Amec plc, WS Atkins plc, Balfour Beatty plc, Capita plc, Carillion plc, Interserve plc, Jarvis plc, Kier plc, McAlpine plc, Mowlem plc and Serco plc (with a discretion for the Remuneration Committee to add or remove companies to take account of change in circumstances). The Remuneration Committee considers that the comparator group should comprise up to 16 companies and will seek to add further companies in due course as appropriate. • Change of control will only result in vesting pro-rata to the extent to which the above TSR performance condition has been met at that date of change of control. • In addition to the use of existing shares, awards will also be capable of being satisfied using new issue shares. Full details of the proposed changes are set out in the Notice of the AGM. WS Atkins 1997 Senior Executive Long Term Incentive Plan (Senior Executive Plan II) The Senior Executive Plan II was established to provide a continuing incentive for Executive Directors and senior managers. As explained above, there will be a recommendation at the forthcoming AGM to amend the rules of the Plan for future awards. Participants may receive the right to acquire shares held in the Employee Benefit Trusts (EBTs), such right to become exercisable three years from the date of grant of the award and subject to the attainment of challenging performance conditions. For awards granted after the AGM, if the resolution to amend the rules is passed, the performance conditions will be based on TSR with an EPS underpin. For awards granted prior to the AGM, if the increase in earnings per ordinary share is more than 12% points per annum above the UK RPI in the relevant three year performance period then all of the ordinary shares can be acquired, but if the earnings per ordinary share growth is less than 5% points per annum above the UK RPI then none of the ordinary shares can be acquired. A sliding scale in relation to the number of ordinary shares that may be acquired operates for growth in earnings per ordinary share between 5% and 12% points above the UK RPI. It is proposed that the performance period will commence from 1 April 2004 in respect of awards made following the 2003 AGM. 26 WS Atkins plc Annual Report 2003 Remuneration report No awards were made during the financial year ended 31 March 2003. It is intended to make awards to Executive Directors shortly after the announcement of the preliminary results for the year ended 31 March 2003 under the existing rules with the three year performance period commencing 1 April 2003. It is proposed to make awards following the AGM to Executive Directors and key senior managers under the new rules with the three year performance period starting 1 April 2004. Deferred Bonus Plan The Deferred Bonus Plan was established to provide an opportunity for key senior managers to invest in the Company by taking part or all of their bonus in the form of a right to acquire ordinary shares which vest three years from the date of grant. Executive Directors are not currently eligible to participate in the plan, however it is proposed to recommend to shareholders at the forthcoming AGM that the rules of the Plan be amended so as to allow the Executive Directors to participate. Equity Participation Plans (EPPs) There are two plans by which bonuses may be converted to shares in both current and future financial years. Each plan has a different tax treatment and it is for the individual to choose which EPP is preferred. Both were designed to encourage participants to invest in the Group by taking all or part of their bonus in the form of ordinary shares or a right to acquire ordinary shares, which if retained for a three year period, will give managers a right to obtain a matching number of ordinary shares, currently held by the EBTs. The right to the matching ordinary shares is subject to performance conditions similar to those in the Senior Executive Plan II. A sliding scale operates for growth in earnings per ordinary share between 2% and 6% points above the UK RPI. One award was made under the terms of this Plan during the financial year ended 31 March 2003 to Robin Southwell, the matching element of which lapsed on his resignation. Details can be found on page 32. It is intended to make awards to Stephen Billingham and to key senior managers shortly after the announcement of the preliminary results for the year ended 31 March 2003 under the existing rules with the three year performance period commencing 1 April 2003. These awards will be made in recognition of exceptional performance by a group of key executives and for the achievement of demanding recovery targets during 2003. However, beyond 2003, it is not intended to make any further awards under these Plans, subject to shareholder approval of the proposed amendments to the Deferred Bonus Plan. Geared Option Scheme (GOS) The Geared Option Scheme (formerly called the WS Atkins 2000 Key Employee Incentive Plan), which was approved by shareholders in August 2000 was amended by the Remuneration Committee in September 2001, July 2002 and January 2003. The approved plan, utilising an investment company, was replaced by an option arrangement following negotiations with the Inland Revenue and the arrangement preserves the commercial aspects of the GOS. WS Atkins 1997 Executive Long Term Incentive Plan (Executive Plan III) The Executive Plan III was established to provide a continuing incentive to selected key staff below senior manager level not participating in the Senior Executive Plan II. It is intended that, conditional upon the resolution to amend the rules of the Senior Executive Plan II being passed at the forthcoming AGM, any future long term incentive awards to key staff below senior manager level will be made under Senior Executive Plan II, and accordingly no further awards will be made under the Executive Plan III. The maximum amount which a participant may invest in the plan was 100% of basic salary (excluding benefits in kind) expressed as an annual rate payable on the date he was invited to participate in the plan. The funds were used to buy shares which were deposited with the Trustee of an EBT (deposited shares). A participant is granted an award (a Matching Award) which is an option to acquire shares worth a multiple of the amount invested in the plan. The multiple is decided by the Trustee prior to the grant and being not more than ten and not less than four. The exercise price is determined by the price paid by the Trustee to purchase the shares on the London Stock Exchange. The Matching Award becomes exercisable in tranches of 20%, 30% and 50% after 3, 4 and 5 years respectively. The shares which a participant has deposited with the Trustee are at risk, since if the Matching Award lapses unexercised (on the earliest of the participant leaving employment, 10 years after grant or the participant seeking to withdraw his deposited shares), the participant has agreed to give some or all of these shares to the Trustee to the extent that the Trustee makes a loss from holding the shares subject to the Matching Award (taking into account interest costs and dividends). Accordingly, if the share price declines, or fails to increase by more than the cost of borrowing less dividends, the participant may lose some or all of the shares he has deposited. No awards were made during the financial year ended 31 March 2003 and it is not intended to make any further awards under this plan. All-employee share plans All employees and the Executive Directors are eligible to participate in the Inland Revenue approved UK Sharesave Scheme. It is not intended to grant options under this scheme during the financial year ended 31 March 2004. An International Sharesave Scheme for non-UK resident employees is operated in some territories. An Employees’ Stock Purchase Plan is operated in the US. It is not intended to grant options under these schemes during the financial year ended 31 March 2004. Approval for a Share Incentive Plan was given by shareholders on 8 August 2000 and by the Inland Revenue on 6 April 2002. No grants were made during the financial year ended 31 March 2003. It is not intended to grant any awards under this plan during the financial year ended 31 March 2004. Participants in the Executive Plan III may receive the right to acquire shares currently held in the EBTs to be exercisable in three years from the date of grant. If the increase in earnings per ordinary share is more than 6% points per annum above the UK RPI in the three year performance period, then all of the ordinary shares can be acquired, but if the earnings per ordinary share growth is less than 2% points per annum above the UK RPI then none of the ordinary shares can be acquired. WS Atkins plc Annual Report 2003 Remuneration report 27 Remuneration report continued Performance graph In accordance with the Directors Remuneration Report Regulations 2002 the following performance graph compares the Group’s total shareholder return (TSR) compared with the performance of the FTSE 250 Index excluding investment trusts over the past five years. This is considered the most appropriate index against which to measure performance as the Company was a member of the FTSE 250 for the majority of the five year period. Value of £100 holding (£s) 200 150 100 50 0 1998 1999 2000 2001 2002 2003 Retirement benefits Pension and life assurance benefits provided to the Executive Directors are comparable to those provided by other companies. The pension arrangement provided by Atkins is called the WS Atkins Staff Retirement Benefits Plan (the Plan) which is approved by the Inland Revenue. The Plan is administered by a board of Trustees. The Executive Directors hold benefits in the defined benefit section of the Plan, which provides a 40ths accrual rate and a normal retirement age of 60. In addition to his normal benefits under the Plan, Ric Piper who resigned from the Board on 1 October 2002 had an additional unfunded pension promise with benefits being paid under the Plan. Robin Southwell, who left on 30 September 2002, had funded personal pension arrangements. Year ended 31 March WS Atkins plc FTSE 250 excluding investment trusts TSR is defined as the return shareholders would receive if they held a notional number of shares and received dividends on those shares over a period of time. Assuming that the dividends are re-invested into the Group’s shares, it measures the percentage growth in the Group’s share price together with the value of any dividends paid. As from 1 April 2003, the pension benefits in respect of Michael Jeffries will be provided under an Executive Pension Plan on a defined contribution basis. Executives Directors’ contracts Executive Directors’ Service Agreements will terminate when the Director reaches the age of 60 and are otherwise terminable on giving 12 months notice. Copies of each Director’s Service Agreement will be available for inspection prior to and during the AGM. The current service contracts do not provide for predetermined amounts of compensation in the event of early termination of the service contracts. However, the Group is reviewing service contracts for Executive Directors and other key managers to identify changes which may be appropriate in the light of current best practice. 28 WS Atkins plc Annual Report 2003 Remuneration report Non-Executive Directors The Non-Executive Directors of the Group have letters of appointment stating their annual fee, and that their appointment may be terminated with six months written notice. The remuneration of the Non-Executive Directors is determined by the Board within the limits set out in the Articles of Association and on the basis of independent advice and the level of fees paid to Non-Executive Directors of comparator companies. The annual fees are specific to each Director reflecting their individual commitments to the Board and various Board committees. Non-Executive Directors are not eligible for pensions, share incentives, annual bonus or any similar payments other than out-of-pocket expenses in connection with the performance of their duties. Each NonExecutive Director withdraws from the Remuneration Committee in respect of matters relating to their own position. Emoluments The aggregate emoluments in respect of their roles as Directors, excluding pensions, of the Directors of the Company who served during the year were as follows: Salary/ fees £000 2003 2002 Bonus and profit share(9) £000 2003 2002 Executive Directors Stephen Billingham(1) Michael Jeffries Ric Piper(2) Robin Southwell(3) 113 238 126 175 – 121 217 333 2 251 25(7) – – 6(7) 32(7) – 6 18 12 31 – 14 15 28 – – – 400(8) – – – – 140(12) – – – Total Executive Directors 652 671 278 38 67 57 400 – 140 Non-Executive Directors Frances Heaton Christopher Kemball(4) Paul Marsh(5) James Morley Struan Robertson Roger Umney(6) 36 25 20 28 31 19 35 – – 26 26 30 – – – – – – – – – – – – 2(13) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 38 25 20 28 31 19 35 – – 26 26 30 Total Non-Executive Directors 159 117 – – 2 – – – – – 161 117 Aggregate emoluments (excluding pensions)(11) 811 788 278 38 69 57 400 – 140 15 1,698 898 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Other benefits(10) £000 2003 2002 Other payments £000 2003 2002 Non-cash emoluments £000 2003 2002 Total(11) 2003 2002 261 507 163 606 – 141 264 376 15 1,537 781 – – – 15(14) Stephen Billingham was appointed a Director on 1 October 2002. Ric Piper resigned as a Director on 1 October 2002. Robin Southwell resigned as a Director on 30 September 2002. Christopher Kemball was appointed a Director on 14 May 2002. Paul Marsh was appointed a Director on 14 May 2002 and resigned as a Director on 10 April 2003. Roger Umney resigned as a Director on 1 October 2002. Includes a benefit due to the Director following the exercise of options under the Equity Participation Plan or Long Term Incentive Plan equivalent to the amount of dividends paid per share in the financial years up to the exercise date. Robin Southwell’s employment terminated on 30 September 2002 and he was paid compensation for loss of office of £399,810. In addition a contribution of £76,000 was made to the defined contributions pension arrangement in which Robin Southwell participated (although this contribution included approximately £23,000 reflecting a shortfall of pension contributions during his employment). The compensation payments reflected Robin Southwell’s contractual entitlement to a payment equal to the value of 12 months’ salary, pension contributions and other contractual benefits. In addition, he was paid £18,750 in respect of legal fees and outplacement support. Bonus and profit share refers to amounts payable in cash. Benefits include such items as company cars, fuel and medical insurance. Total excludes pension contributions, which are detailed below. Stephen Billingham has elected to take his bonus in the form of a right to acquire shares under the Pre-Tax Equity Participation Plan. An award of shares to an aggregate value of £140,000 will be granted on 30 June 2003 based on the closing mid-market price on 27 June 2003. This translates into a bonus option of 49,382 shares with a Matching Award of 49,382 shares subject to the terms of the EPP. Other benefits relate to re-imbursement of business expenses. Robin Southwell elected to take his bonus in the form of a right to acquire shares under the Pre-Tax Equity Participation Plan. WS Atkins plc Annual Report 2003 Remuneration report 29 Remuneration report continued Retirement benefits In the event of death whilst in employment, a capital sum equal to four times pensionable salary is payable together with a spouse’s pension of 50% of the member’s accrued plus future prospective service to age 60 limited to a maximum of 10 years if joined the pension plan after 31 March 1997, and children’s allowances. For death in retirement, a spouse’s pension of 50% of the member’s pre-commutation pension is payable. In the event of death after leaving service but prior to commencement of pension, a spouse’s pension of 50% of the accrued pension is payable. In the event of early retirement through ill health, protection is at the discretion of the Trustees. Early retirement at the member’s choice is possible from the age of 50, subject to actuarial reduction of the pension payable. Post-retirement pensions are subject to increases of 5% per annum on all service to 31 March 2001 for members who joined the pension plan before 31 March 1996. From 1 April 2001 pension increases will be the same as for members who joined after 31 March 1996, that is, increases in the RPI subject to a maximum of 5% per annum. The amounts below show the pension entitlement that would be paid annually on retirement based on service to the end of the year. Age at 31.03.03 Stephen Billingham Michael Jeffries(1) Ric Piper(2) Robin Southwell(6) (1) (2) (3) (4) (5) (6) (7) (8) 44 58 50 43 Accrued Accrued Benefit entitlement entitlement during Years of at year end at year end the year (7) (7) 31.3.02 31.3.03(5) service at 31.3.03 31.3.03 £000 p.a. £000 p.a. £000 2 27 9 1 6 196 22 – 3 183 20 – 3 8 1 – Accrued transfer value at year end 31.3.03(8) £000 22 3,851 219 – Increase in accrued transfer Accrued value transfer Member net of value at contributions member year end during year(3)contributions(8)31.03.02(8) £000 £000 £000 5 4 3 – (3) 20 493 3,354 (29) 245 – – The pension for Michael Jeffries is based on two-thirds of final gross pensionable salary at age 60. Ric Piper has an unfunded pension promise (not included in the above table) to provide comparable benefits to other Executive Directors who joined before 31 May 1989. Actuarial calculations are re-stated on a market value basis to show an accumulated value of £244,220 (2002: £411,000). Contributions were paid in the year by the Directors participating in the Scheme at 3% of net pensionable salary in accordance with the terms of the Scheme. Members of the Scheme have the option to pay additional voluntary contributions. Neither the additional voluntary contributions nor the resulting benefits are included in the above table. The increase in accrued benefits excludes inflation in year. As described on page 29, as part of the arrangements agreed in connection with the termination of his employment, the sum of £76,000 was paid into the defined contribution scheme in respect of Robin Southwell (2002: £66,000). The £76,000 includes a payment of £23,000 reflecting a shortfall of pension contributions during his employment. The accrued entitlement is the pension the Director had earned up to the end of the year. All transfer values have been calculated on the basis of actuarial advice in accordance with the Actuarial Guidance Note GN11. The accrued transfer values represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the Scheme’s liability in respect of the Director’s pension benefits earned in respect of qualifying services. They do not represent sums payable to individual Directors and therefore cannot be added meaningfully to annual remuneration. The increase in transfer values less member contributions is the increase in transfer value of the accrued benefits in respect of qualifying services during the year after deducting the Director’s personal contributions to the Scheme. 30 WS Atkins plc Annual Report 2003 Remuneration report Directors’ interests The beneficial interest of the Directors and their families in the ordinary shares of 0.5p each in the Company at 31 March 2003 were as follows: At 31.03.03 or date of termination Executive Directors Stephen Billingham Michael Jeffries Ric Piper Robin Southwell Non-Executive Directors Frances Heaton Christopher Kemball Paul Marsh James Morley Struan Robertson Roger Umney Total (1) (2) At 31.03.02 or date of appointment – 623,604 294,600 48,321(2) – 622,944 326,264(1) 48,321(2) 966,525 997,529 45,300 – 1,557 1,250 984 32,500 45,300 – – 1,250 984 29,000 81,591 76,534 1,048,116 1,074,063 31,664 shares were held on behalf of Ric Piper as deposited shares under the Geared Option Scheme (formerly the WS Atkins 2000 Key Employee Incentive Plan). These shares were forfeited on 1 October 2002 when Ric Piper resigned. His award in respect of Matching Shares under the Scheme lapsed on the date of termination of his employment. Prior to the termination of his employment on 30 September 2002, Robin Southwell had made a personal investment of 48,321 ordinary shares in the acquisition of deposited shares under the Geared Option Scheme. The rules of the Scheme have been adjusted to provide that those deposited shares were not automatically forfeited on termination of his employment, but continue to be held on his behalf by the Scheme Trustee as if he had remained in employment. The deposited shares are still subject to risk of forfeiture but can be released in full to the extent that no loss is suffered in respect of shares purchased as Matching Shares. If the value of the deposited shares after compensating for any loss in Matching Shares recovers to the sum originally invested, the deposited shares will be released automatically so that he receives back no more in value than the amount originally invested by him. His award in respect of Matching Shares under the Plan lapsed on the date of termination of his employment. As at 31 March 2003, each of the Directors was deemed to be interested as a potential beneficiary under the Employee Benefit Trusts in 6,597,037 ordinary shares of 0.5pence each (2002: 6,716,682). Details of the Directors’ personal interests in the EBTs are given on page 32. WS Atkins plc Annual Report 2003 Remuneration report 31 Remuneration report continued Share options and long term incentives Name Scheme Name (4) No of shares under option at 01.04.02 Award or date of date appointment Granted Stephen Billingham(5) EPP – Bonus 18/7/01 EPP – Matching* 18/7/01 Senior Executive Plan II* 18/7/01 SAYE 06/7/01 SAYE 22/8/02 Total Michael Jeffries(5) EPP – Bonus 18/7/01 EPP – Matching* 18/7/01 Senior Executive Plan II* 21/9/01 Total Ric Piper EPP – Bonus 11/1/00 EPP – Matching* 11/1/00 EPP – Bonus 20/7/00 EPP – Matching* 20/7/00 EPP – Bonus 18/7/01 EPP – Matching* 18/7/01 Senior Executive Plan II* 12/6/00 Senior Executive Plan II* 18/7/01 SAYE 16/7/99 SAYE 07/7/00 SAYE 06/7/01 GOS)(3) 28/9/01 Total Robin Southwell EPP – Bonus 09/8/02 EPP – Matching 09/8/02 Senior Executive Plan II* 18/7/01 SAYE 22/8/02 GOS(3) 28/9/01 Total Aggregate gains on share options 2003 Aggregate gains on share options 2002 788 788 12,012 186 – 13,774 – – – – 161 161 8,258 8,258 53,932 70,448 12,400 12,400 5,159 5,159 6,006 6,006 47,808 25,825 456 239 186 316,642 438,286 – – – – – – Option Price Market price on exercise Mid Market price at date of grant 788 788 12,012 186 161 13,935 0.0p 0.0p 0.0p 666.0p 259.2p – – – – – 782.5p 782.5p 782.5p 807.5p 287.5p – – – – – – 18/7/04 18/7/04 18/7/04 01/9/04 1/11/05 18/7/08 18/7/08 18/7/08 01/3/05 01/5/06 – – – – – 12,400)(1) – 5,159)(1) – 6,006)(1) 47,808)(1) 25,825)(1) 456 239 186 316,642 414,721 8,258 8,258 53,932 70,448 – – – – – – – – – – – – – 0.0p 0.0p 0.0p – – – 782.5p 782.5p 667.5p 18/7/04 18/7/04 21/9/04 18/7/08 18/7/08 21/9/08 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 424.0p 502.0p 666.0p 724.9p 127.0p – 127.0p – 127.0p – – – – – – – 700.0p 700.0p 742.5p 742.5p 782.5p 782.5p 627.5p 782.5p 503.5p 658.5p 807.5p 689.0p – – – – 15,748 – 6,551 – 7,627 – – – – – – – 29,926 11/1/03 11/1/03 20/7/03 20/7/03 18/7/04 18/7/04 20/7/03 18/7/04 01/9/02 01/9/03 1/11/04 28/9/04 11/1/07 11/1/07 20/7/07 20/7/07 18/7/08 18/7/08 20/7/07 18/7/08 28/2/03 29/2/04 01/3/05 28/9/11 4,838)(2) – – 4,838)(2) – 39,639)(2) – 161 – 486,008 4,838 530,646 – – – – – – 0.0p 0.0p 0.0p 259.2p 724.9p 122.0p – – – – 312.5p 312.5p 782.5p 287.5p 689.0p 09/8/05 09/8/05 18/7/04 1/11/05 28/9/04 09/8/12 19/8/12 18/7/08 01/5/06 28/9/11 Exercised – – – – – – – – – – – – – – – – 12,400)(1) – 5,159)(1) – 6,006)(1) – – – – – – – 23,565 – – 4,838 – 4,838 39,639 – – 161 486,008 – 525,647 9,837 No of shares under option at 31.03.03 or at date of Lapsed termination – – – – – – Gain on First exercise date £ exercisable 5,902 – – – – 5,902 35,828 1,753 Date of lapse of option *Subject to performance criteria as described on page 26. (1) (2) (3) (4) (5) Ric Piper ceased to be a Director and an employee of the Company on 1 October 2002. In accordance with the scheme rules of the EPP, Mr Piper was permitted to exercise the bonus element of the award. However the matching element of the award lapsed on the termination of his employment. His awards under the Senior Executive Plan II also lapsed on the cessation of his employment. Robin Southwell ceased to be an employee on 30 September 2002. In accordance with the rules of the EPP Mr Southwell was permitted to exercise the bonus element of the award. However the matching element of the award lapsed on the termination of his employment. His awards under the Senior Executive Plan II also lapsed on the termination of his employment. The Group made available a multiplier of each share purchased by the Executive Director. The option price increases on a monthly basis. Scheme Names: EPP – Equity Participation Plan GOS – Geared Option Scheme SAYE – Savings related share option scheme (Sharesave) Senior Executive Plan II – The WS Atkins 1997 Senior Executive Long Term Incentive Plan Awards will be granted on 30 June under the provisions of the Senior Executive Plan II based on the closing mid-market price on 27 June 2003 of 81,236 shares to Stephen Billingham and 191,816 shares to Michael Jeffries. For each share under option that had not expired at the end of the financial year, the market price at the 31 March 2003 was £1.28 and the highest and lowest market prices during the financial year were £6.22 and £0.52 respectively. Audited information The emoluments and share option information disclosed on the pages 29 to 32 as required by Part 3 of Schedule 7a to the Companies Act has been audited. On behalf of the Board Struan Robertson Chairman of the Remuneration Committee 32 WS Atkins plc Annual Report 2003 Remuneration report Auditors’ report Independent auditors’ report to the members of WS Atkins plc We have audited the consolidated financial statements which comprise the consolidated profit and loss account, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of total recognised gains and losses and the related notes which have been prepared under the historic cost convention and the accounting policies set out in the statement of accounting policies. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the Remuneration report (the auditable part). Respective responsibilities of directors and auditors The Directors’ responsibilities for preparing the annual report, and the consolidated financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of Directors’ responsibilities. The Directors are also responsible for preparing the Remuneration report. Our responsibility is to audit the consolidated financial statements and the auditable part of the Directors’ remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the consolidated financial statements give a true and fair view and whether the consolidated financial statements and the auditable part of the Remuneration report have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the consolidated financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions is not disclosed. We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated financial statements. The other information comprises only the Chairman’s statement, the Operating review, the Financial review, the Report of the Directors, the Corporate governance statement and the unaudited part of the Remuneration report. We review whether the Corporate governance statement reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Group’s Corporate Governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the auditable WS Atkins plc Annual Report 2003 Auditors’ report part of the Remuneration report. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the consolidated financial statements and the auditable part of the Remuneration report are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: • the consolidated financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 March 2003 and of the loss and cash flows of the Group for the year then ended; • the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985; and • those parts of the Remuneration report required by Part 3 of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 26 June 2003 33 Consolidated profit and loss account for the year ended 31 March 2003 Notes Turnover: Group and Share of Joint Ventures Less: Share of Joint Ventures’ turnover 1 4 Turnover Continuing operations Acquisitions Cost of sales Before Exceptional Items 2003 £m Exceptional Items (note 3) 2003 £m Total 2003 £m Before Exceptional Items 2002 £m Exceptional Items (note 3) 2002 £m Total 2002 £m 1,012.2 (76.9) – – 1,012.2 (76.9) 880.9 (74.6) – – 880.9 (74.6) 935.3 908.1 27.2 (576.1) – – – – 935.3 908.1 27.2 (576.1) 806.3 806.3 – (546.1) – – – – 806.3 806.3 – (546.1) Gross profit Administrative expenses 2 2 359.2 (361.0) – (48.1) 359.2 (409.1) 260.2 (240.2) – (6.1) 260.2 (246.3) Operating (loss)/profit: Group excluding share of Joint Ventures Continuing operations Acquisitions 2 (1.8) (4.1) 2.3 (48.1) (48.1) – (49.9) (52.2) 2.3 20.0 20.0 – (6.1) (6.1) – 13.9 13.9 – Operating profit: Share of Joint Ventures 4 14.2 14.2 14.5 – 14.5 (35.7) 34.5 (6.1) 28.4 6.3 3.8 2.5 3.6 3.0 0.6 – – – 3.6 3.0 0.6 (16.4) – – – (15.8) (5.8) (10.0) (11.1) (3.6) (7.5) – – – (11.1) (3.6) (7.5) Operating profit/(loss): Group and Share of Joint Ventures Interest receivable and similar income Operations Joint Ventures 12.4 5 4 Amounts written off investments Interest payable and similar charges Operations Joint Ventures (48.1) 6.3 3.8 2.5 – – – – (16.4) 4 (15.8) (5.8) (10.0) 4 2.9 (3.8) 6.7 (64.5) (64.5) – (61.6) (68.3) 6.7 27.0 19.4 7.6 (6.1) (6.1) – 20.9 13.3 7.6 4 (2.1) (0.3) (1.8) 9.4 9.4 – 7.3 9.1 (1.8) (11.0) (8.9) (2.1) 1.9 1.9 – (9.1) (7.0) (2.1) Profit/(loss) on ordinary activities after taxation Operations Joint Ventures Dividends 4 9 0.8 (4.1) 4.9 (2.8) (55.1) (55.1) – – (54.3) (59.2) 4.9 (2.8) 16.0 10.5 5.5 (10.2) (4.2) (4.2) – – 11.8 6.3 5.5 (10.2) Retained (loss)/profit for the year transferred to reserves 10 (2.0) (55.1) (57.1) 5.8 (4.2) 1.6 Profit/(loss) on ordinary activities before taxation Operations Joint Ventures Taxation on profit/(loss) on ordinary activities Operations Joint Ventures (Loss)/earnings per share Basic Fully Diluted Adjusted(1) Dividends per share Interim – paid Final – proposed 6 – 8 – – – 11 (58.7)p (58.7)p 16.5p 13.1p 12.8p 31.4p nil 3.00p 3.78p 7.56p 3.00p 11.34p 9 Total for the year The notes on pages 39 to 71 form part of these financial statements. (1) Before amortisation of goodwill and pension surplus, exceptional items, Metronet bid costs and Employee Benefit Trusts. 34 WS Atkins plc Annual Report 2003 Consolidated profit and loss account Consolidated balance sheet as at 31 March 2003 Fixed assets Intangible assets Tangible assets Investments in Joint Ventures Share of gross assets Share of gross liabilities Investments – own shares Investments – other Notes 2003 £m 2002 £m 12 13 49.5 65.4 72.7 74.5 4 19.5 176.1 (156.6) 14.7 – 17.4 146.3 (128.9) 29.0 0.7 34.2 47.1 149.1 194.3 0.4 244.2 7.5 44.8 0.8 228.8 9.3 25.8 296.9 264.7 (302.5) (276.3) (5.6) (11.6) 14 15 Investments – total Current assets Stocks Debtors Investments Cash at bank and in hand 16 17 18 31(c) Current liabilities Creditors: amounts falling due within one year 19 Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges 20 21 Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Merger reserve Profit and loss account 23 24 24 24 24 Shareholders’ funds – equity interests Michael Jeffries Stephen Billingham } 143.5 182.7 (51.1) (22.7) (43.4) (23.9) 69.7 115.4 0.5 55.4 0.2 8.7 4.9 0.5 42.1 0.2 8.7 63.9 69.7 115.4 Directors Approved by the Board on 26 June 2003. The notes on pages 39 to 71 form part of these financial statements. WS Atkins plc Annual Report 2003 Consolidated balance sheet 35 Consolidated cash flow statement for the year ended 31 March 2003 Notes 2003 £m 2002 £m 31(b) 26.6 20.3 Dividends received from Joint Ventures and Associates 6.5 0.8 Returns on investments and servicing of finance Interest received – current asset liquid investments and other – finance leases 3.3 2.6 0.7 3.0 2.4 0.6 (5.5) (5.0) (0.5) (3.4) (3.0) (0.4) (2.2) (0.4) (1.8) (11.0) (17.7) (2.6) 1.2 0.1 0.2 (52.2) (18.4) – 3.3 0.7 (18.8) (66.6) (3.3) (2.5) (6.6) 1.6 (1.1) – – (7.1) (9.4) (9.6) Equity dividends paid (6.6) (8.9) Cash outflow before use of liquid resources and financing (5.7) (75.4) 1.7 7.8 33.0 (0.8) 4.6 (2.7) 0.2 12.3 (0.4) 3.4 (2.9) 0.1 34.3 12.5 30.3 (55.1) Net cash inflow from operating activities Interest paid – bank loans, overdrafts and other – finance leases Taxation 31(d) Capital expenditure and financial investment Purchases less disposals of fixed assets Purchases of own shares by Employee Benefit Trusts Disposal of other fixed asset investment Sales of own shares by Employee Benefit Trusts Sale of non-liquid current asset investment Acquisitions and disposals Purchases of fixed asset investments – Joint Ventures Subsidiary undertakings acquired: Hanscomb – cash consideration including expenses – cash acquired Prior year acquisitions Management of liquid resources Decrease in current asset investments Financing Cash inflow from short-term loans Redemption of loan stock Cash inflow from long-term loans Capital element of finance lease rental payments Shares issued Increase/(decrease) in cash The notes on pages 39 to 71 form part of these financial statements. 36 WS Atkins plc Annual Report 2003 Consolidated cash flow statement 32 Consolidated statement of total recognised gains and losses for the year ended 31 March 2003 Notes (Loss)/profit for the financial year Operations Joint Ventures Differences on exchange 24 Total gains and losses recognised in the year 2003 £m 2002 £m (59.2) 4.9 6.3 5.5 (54.3) 11.8 (1.9) (0.5) (56.2) 11.3 Historical cost profits and losses do not differ materially from those disclosed in the Group profit and loss account. Reconciliation of movements in shareholders’ funds for the year ended 31 March 2003 2003 £m 2002 £m (59.2) 4.9 6.3 5.5 (54.3) 11.8 (2.8) (10.2) (57.1) 1.6 (1.9) 13.3 (0.5) 1.1 Net (reduction in)/additions to shareholders’ funds (45.7) 2.2 Opening shareholders’ funds 115.4 113.2 Closing shareholders’ funds 69.7 115.4 Notes (Loss)/profit for the financial year Operations Joint Ventures Dividends 9 Differences on exchange Issue of new shares 24 WS Atkins plc Annual Report 2003 Statement of total recognised gains and losses Reconciliation of movements in shareholders’ funds 37 Parent company balance sheet as at 31 March 2003 Notes 2003 £m 2002 £m Fixed assets Investments 15 58.5 61.3 Current assets Debtors 17 24.8 14.8 Current liabilities Creditors: amounts falling due within one year 19 (13.2) (16.3) Net current assets/(liabilities) 11.6 (1.5) Total assets less current liabilities 70.1 59.8 0.5 55.4 0.2 8.7 5.3 0.5 42.1 0.2 8.7 8.3 70.1 59.8 Capital and reserves Called up share capital Share premium account Capital redemption reserve Merger reserve Profit and loss account 23 24 24 24 24 Shareholders’ funds – equity interests Michael Jeffries Stephen Billingham } Directors Approved by the Board on 26 June 2003. The notes on pages 39 to 71 form part of these financial statements. 38 WS Atkins plc Annual Report 2003 Parent company balance sheet Notes to the financial statements Accounting policies The Group financial statements are prepared in accordance with applicable United Kingdom Accounting Standards. A summary of the more important Group accounting policies which have been applied consistently, is given below. Basis of accounting The Financial Statements have been prepared under the historical cost convention, as modified by the valuation of current asset investments set out in Note 18. The preparation of the Group’s financial statements in conformity with UK Generally Accepted Accounting Principles requires the Board to make certain estimates and assumptions. These affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Significant elements of those estimates in these financial statements include allowances for estimated contract revenue and related costs. These are explained in the policy note Contract accounting and stocks. The Board considers that the Group is prudent in its valuation of contracts, particularly for large contracts lasting several years, which may have a wide range of potential outcomes. Other significant elements of those estimates include asset recognition of pre-contract bid costs on Private Finance Initiative bids, self-insured liabilities, pension costs on defined benefit schemes, taxation provisions and Transfer of Undertaking Protection of Employment (‘TUPE’) potential liabilities. The Board has continued to review judicial clarifications of the interpretation of the Transfer of Undertakings (Protection of Employment) Regulations 1981. It continues to monitor developments in this area and is actively managing the risks involved. The Board considers the current level of the Group’s provisioning to be adequate. Basis of consolidation The consolidated profit and loss account and balance sheet include the accounts of the Company and its subsidiary undertakings. The results of the subsidiary undertakings acquired during the year are included in the profit and loss account from the date of acquisition. UITF Abstract 13 seeks to clarify certain issues relating to ESOP trusts in the light of the principles established by FRS 5, which requires a reporting entity’s financial statements to reflect the substance of the transactions into which it has entered. Accordingly, in compliance with UITF 13, the Employee Benefit Trusts have been incorporated in these financial statements as detailed in Note 25. The Directors have not disclosed details of the International Sharesave 25 Scheme, as permitted by UITF 17. As permitted by Section 230 of the Companies Act 1985, no profit and loss account is presented for the parent company. Goodwill Goodwill is stated at cost less a provision for amortisation. Amortisation is calculated to write off the cost in equal annual instalments over its expected useful life. The useful life is not normally expected to exceed 10 years. Provision is made for permanent impairment. Joint Ventures In accordance with FRS9 Associates and Joint Ventures, the Group accounts for Joint Ventures under the gross equity method of accounting. The results of holdings in Joint Ventures are included from the date on which the Group acquires joint control. Where there is sufficient evidence that an event has irrevocably changed the relationship between the Group and the Joint Venture such that the Group’s ability to exercise significant influence is removed, the carrying amount at the date of the event is reported as an investment and no account is taken of subsequent changes in the venture’s assets and liabilities. The results, assets and liabilities of Joint Ventures are stated in accordance with Group accounting policies. Where Joint Ventures do not adopt Group accounting policies, their reported results are restated to comply with Group accounting policies. Where Joint Ventures do not adopt accounting periods that are co-terminus with the Group’s results, results and net assets are based upon accounts drawn up to the Group’s accounting reference date. Turnover Group turnover from long term contracts comprises the value of work performed during the year by reference to total sales value and stage of completion of these contracts. Turnover from other contract activities represents fee income receivable in respect of services provided during the year. Under certain services contracts, the Group manages customer expenditure and is obliged to purchase goods and services from third party sub-contractors and recharge them on to the customer at cost. The amounts charged by sub-contractors and recharged to customers are excluded from turnover and cost of sales. Debtors, creditors and cash relating to these transactions are included in the Group balance sheet. WS Atkins plc Annual Report 2003 Notes to the financial statements 39 Notes to the financial statements continued Contract accounting and stocks The value of contract work in progress comprises the costs incurred on contracts plus an appropriate proportion of overheads and attributable profit. Profit is recognised on a percentage of completion basis when the outcome can be reasonably foreseen but not until the contract is at least 50% complete. Otherwise, profits are taken on completion. Provision is made in full for estimated losses to completion. Fees invoiced on account are deducted from the value of work in progress and the balance is separately disclosed in debtors as amounts recoverable on contracts, unless such fees exceed the value of the work in progress on any contract when the excess is separately disclosed in current liabilities as fees invoiced in advance. Income recognition on outsourcing contracts is determined based on the proportion of the annual service delivered to date. Where the costs of obligations in relation to the non-renewal or termination of a contract are higher in the final year of the contract a proportion of revenue is deferred each year to meet these anticipated costs. Full provision is made for losses on outsourcing contracts if the forecast costs of fulfilling the contract throughout the contract period exceed the forecast income receivable. In assessing the amount of the loss to provide on an outsourcing contract, account is taken of the Group’s share of the forecast results from Joint Ventures which the contract is servicing. Stocks are stated at the lower of cost and net realisable value. Pre-contract costs relating to PFI/PPP investments which involve Special Purpose Companies The Group accounts for all pre-contract costs in accordance with UITF 34. Costs incurred before it is virtually certain that a contract will be obtained are charged to expenses. Directly attributable costs incurred after that point (offset by any bid recovery fees received on award of the contract) are recognised in the balance sheet and charged to profit and loss over the same period as the Group’s interest in any Special Purpose Company charges the equivalent capitalised cost to profit and loss. Any other bid recovery fees are credited to profit and loss over the same period as the Group’s interest in any Special Purpose Company charges the equivalent capitalised cost to profit and loss. Depreciation and amortisation Tangible and intangible fixed assets are depreciated on a straight line basis calculated at annual rates to write off each asset over the term of its useful life as follows: Goodwill Patents (over equipment) Freehold buildings Short leasehold Plant and machinery Special purpose industrial motor vehicles Other motor vehicles Information Technology Corporate Information Systems 10 years 3 years 10 to 50 years over the life of the lease 3 to 10 years 3 to 12 years 3 to 4 years 3 to 5 years 7 years No depreciation is provided in respect of freehold land and assets in the course of construction. The Directors annually review the estimated useful lives of the fixed assets. Costs included in Corporate Information Systems are those directly attributable to design, construction and testing of new systems (including major enhancements) from the point of inception to the point of satisfactory completion. Costs include costs of own labour. Maintenance and minor modifications are expensed to profit and loss as incurred. Fixed asset investments Fixed asset investments include ordinary shares of the Company, some of which are held for options and other incentives. Where the option or incentive price is below book value, the difference is charged as an operating cost over the period of the option. Provision is made for permanent impairment. Current asset investments Current asset investments include UK government securities and short-term deposits and are shown at market value. 40 WS Atkins plc Annual Report 2003 Notes to the financial statements Lease obligations On the inception of finance leases the asset is capitalised and a liability recognised for the present value of the minimum lease payments. Assets are depreciated over the remaining contract term. Rentals are apportioned between capital and interest expense to achieve a constant rate of charge on the outstanding obligation. The costs of operating leases are charged to profit and loss account as incurred. Where the Group acts as a lessor in an arrangement which transfers substantially all the risks and rewards of ownership to a third party, that lease is treated as a finance lease. All other lease arrangements are treated as operating leases. Debtors under finance leases represent outstanding amounts due under these agreements less finance charges allocated to future periods. Finance lease interest is recognised over the primary period of the lease so as to produce a constant rate of return on the net cash investments. Rental income from operating leases is accounted for on a straight line basis over the period of the lease. Pension schemes Contributions to funded defined benefit pension schemes are calculated as a percentage, agreed on independent actuarial advice, of the pensionable salaries of employees. The cost of providing pensions and any variations from the regular cost, arising from actuarial valuations, is charged or credited to the profit and loss account on a systematic basis over the expected average remaining service lives of the members of each scheme. The pension cost is assessed in accordance with the advice of qualified actuaries. The difference between the charge for pensions and the total contributions actually paid is included within provisions for liabilities and charges. The pension costs relating to the defined contribution schemes represent contributions payable by the Group. Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where the transactions or events that give rise to an obligation to pay more or less tax in the future have occurred by the balance sheet date. A net deferred tax asset is recognised only when it can be regarded as more likely than not that it will be recovered. Deferred tax is measured on a non-discounted basis using tax rates that have been enacted by the balance sheet date. Foreign currency transactions and financial instruments Forward foreign exchange contracts entered into as hedges of future purchases and sales denominated in foreign currency are recorded at cost and are then revalued to market rates at each balance sheet date. Gains and losses are deferred and taken to profit and loss to match the maturity of the underlying transactions. Gains and losses on those contracts which are no longer designated as hedges are taken to the profit and loss account as they arise. Foreign currency debtors covered by forward currency contracts are translated at the contract rates of exchange; other foreign currency denominated assets and liabilities are translated at closing rates of exchange. Gains and losses are taken to the profit and loss account, except that exchange differences on foreign currency borrowings to finance foreign currency net investments are taken to the statement of total recognised gains and losses. Trading results of overseas subsidiaries are translated at average rates of exchange. Differences resulting from the retranslation of opening net assets and results for the year at closing rates are taken to the statement of total recognised gains and losses. US borrowings are used to hedge against the Group investment in the US. The net exchange differences are taken to reserves. Forward foreign exchange contracts are carried on the balance sheet at fair value (‘marked to market’) with changes in the value recognised in earnings for the period. Employee Benefit Trusts The cost of shares is amortised on a straight line basis down to the exercise price of each incentive scheme over the period to initial exercise date. Cumulative amortisation relating to options which have lapsed in year is written back to profit and loss. Provision is made for impairment where the Group considers there has been a permanent diminution in value. The shares held for the Geared Option Scheme are carried at cost except where the Group considers there has been a permanent diminution in value. WS Atkins plc Annual Report 2003 Notes to the financial statements 41 Notes to the financial statements continued 1 Segmental analysis Continuing Operations £m Acquisitions £m Total 2003 £m Total 2002 £m A. Turnover Geographic area by location of operations United Kingdom Overseas Other European countries Middle East Asia/Pacific North America 742.7 165.4 40.5 16.4 30.8 77.7 – 27.2 6.0 – – 21.2 742.7 192.6 46.5 16.4 30.8 98.9 628.9 177.4 34.3 13.6 35.1 94.4 Total before Joint Ventures Joint Ventures United Kingdom Overseas 908.1 76.9 24.6 52.3 27.2 – – – 935.3 76.9 24.6 52.3 806.3 74.6 22.3 52.3 985.0 27.2 1,012.2 880.9 By class of business Transport Design and Government Services Industry Commercial Services International 312.0 195.9 116.4 118.4 165.4 – – – – 27.2 312.0 195.9 116.4 118.4 192.6 237.8 177.9 93.7 119.5 177.4 Total before Joint Ventures 908.1 27.2 935.3 806.3 There was no material difference between geographic turnover by location of operation and by location of customer. Turnover excludes recharges of £186.2m (2002: £129.5m) where under certain services contracts the Group manages customer expenditure and is obliged to purchase goods and services from third party sub-contractors and recharge them to the customer at cost. 42 WS Atkins plc Annual Report 2003 Notes to the financial statements 1 Segmental analysis (continued) Operating (loss)/profit 2003 2002 £m £m B. Operating (loss)/profit and net assets Geographic area by location of operations United Kingdom Continuing operations Amortisation of goodwill/unamortised goodwill Amortisation of pension surplus Contribution to Employee Benefit Trusts Employee Benefit Trusts after contribution Net assets/(liabilities) 2003 2002(1) £m £m (3.1) (1.2) (5.5) 3.7 (2.5) 2.4 14.5 18.1 (5.5) 3.4 (1.9) 0.4 (16.2) (42.2) 25.0 – – 1.0 27.3 (28.4) 40.0 – – 15.7 1.3 5.5 66.4 70.7 Overseas Other European Countries – continuing operations – amortisation of goodwill/unamortised goodwill – acquisitions – amortisation of goodwill on acquisitions/ unamortised goodwill on acquisitions Middle East Asia/Pacific North America – continuing operations – amortisation of goodwill/unamortised goodwill – acquisitions – amortisation of goodwill on acquisitions/ unamortised goodwill on acquisitions 1.5 (0.7) 0.1 1.7 (0.6) – 13.1 5.9 (0.4) 12.2 6.0 – (0.1) 1.4 0.2 – 1.4 1.5 – 6.3 7.7 – 5.2 7.9 1.4 (3.4) 2.3 4.8 (3.3) – 11.5 – 3.7 12.7 26.7 – (1.4) – 18.6 – Total before Joint Ventures and exceptional items Joint Ventures United Kingdom Overseas (1.8) 14.2 10.6 3.6 20.0 14.5 10.5 4.0 50.2 19.5 15.1 4.4 98.0 17.4 14.2 3.2 12.4 (48.1) 34.5 (6.1) 69.7 – 115.4 – (35.7) 28.4 69.7 115.4 Total before exceptional items Exceptional items (1) Comparatives have been restated to ensure comparability with the current year and primarily relate to the allocation of goodwill. WS Atkins plc Annual Report 2003 Notes to the financial statements 43 Notes to the financial statements continued 1 Segmental analysis (continued) Operating (loss)/profit 2003 2002 £m £m B. Operating (loss)/profit and net assets (continued) By class of business Profit before items below/ Net assets before unamortised goodwill Transport Design & Government Services Industry Commercial Services International Net assets/(liabilities) 2003 2002(1) £m £m 18.8 9.2 (1.5) (0.3) 4.5 6.9 36.4 14.8 0.5 3.8 7.9 9.4 48.7 (17.6) 22.9 5.2 (2.3) 40.5 74.3 (12.5) 41.4 (5.5) 11.6 39.3 Bid costs Amortisation of goodwill/unamortised goodwill Amortisation of pension surplus Contribution to Employee Benefit Trusts Employee Benefit Trusts Corporate net liabilities (13.1) (11.1) 3.7 (2.5) 2.4 – (8.9) (9.4) 3.4 (1.9) 0.4 – – 49.4 – – 1.0 (48.9) – 72.7 – – 15.7 (64.7) Total before Joint Ventures and exceptional items Joint Ventures Exceptional items (1.8) 14.2 (48.1) 20.0 14.5 (6.1) 50.2 19.5 – 98.0 17.4 – (35.7) 28.4 69.7 115.4 59.7 – (71.9) (24.5) 17.3 (2.0) (2.8) (22.7) (2.0) 58.4 0.7 (57.3) (39.2) 9.2 (4.4) (7.0) (23.9) (1.2) (48.9) (64.7) Corporate net liabilities comprise : Fixed assets Fixed asset investments Net cash balances Trade creditors Deferred tax Corporation tax Proposed dividends Provisions for liabilities and charges Other (2) (1) (2) Comparatives have been restated to ensure comparability with the current year. Following the reorganisation in 2002, responsibility for the majority of the UK fixed assets and trade creditors has been centralised. As a result of this change in practise these assets and liabilities are no longer accounted for in business segments. C. Operating margins Operating margins 2003 2002 By class of business Transport Design and Government Services Industry Commercial Services International Total 2.9% (0.8)% (0.3)% 3.8% 3.6% 6.2% 0.3% 4.1% 6.6% 5.3% 2.0% 4.5% Operating margins exclude amortisation of goodwill and pension surplus, bid costs, exceptional items, Employee Benefit Trusts and share of Joint Ventures. 44 WS Atkins plc Annual Report 2003 Notes to the financial statements 2 Operating profit 2003 £m 2002 £m Turnover Cost of sales Project expenses(1) Other direct costs (mainly labour) 935.3 (576.1) (250.2) (325.9) 806.3 (546.1) (206.5) (339.6) Gross profit Administrative costs Selling costs Administrative expenses excluding selling costs Exceptional administrative expenses 359.2 (409.1) (34.1) (326.9) (48.1) 260.2 (246.3) (34.2) (206.0) (6.1) (49.9) 13.9 Operating profit Amounts relating to acquisitions in the above are £14.8m for cost of sales and £10.1m for administrative expenses. Operating profit is arrived at after charging/(crediting): Depreciation of tangible fixed assets: owned – exceptional write downs owned leased Loss/(profit) on sale of tangible fixed assets Profit on disposal of current asset liquid investments Profit on disposal of current asset non-liquid investments Loss on sale of fixed asset investments – own shares Amortisation of goodwill Impairment of goodwill Amortisation of shares held by Employee Benefit Trusts Payments under operating leases: land and buildings plant, machinery and vehicles Amounts payable to auditors: PricewaterhouseCoopers LLP audit services(2) – for current year non-audit services – taxation services – financial and other advisory services Audit services from other auditors (1) (2) 1.8 20.6 1.6 0.4 – (0.1) 0.3 11.1 30.7 0.1 2.9 11.5 2.7 (0.3) (0.1) (0.7) – 9.4 – 1.7 18.7 7.4 18.5 7.3 1.03 0.71 1.30 – 0.79 0.55 0.10 0.01 Project expenses represent project related costs including sub-contractor costs but excluding direct labour costs. Includes £50,000 audit fee for the holding company (2002: £50,000). WS Atkins plc Annual Report 2003 Notes to the financial statements 45 Notes to the financial statements continued 3 Exceptional items 2003 £m 2002 £m Operating Redundancy and other restructuring costs Accelerated depreciation 14.8 – 3.2 2.9 Impairment of tangible fixed assets (Note 12) Impairment of current assets (Note 12) 14.8 1.8 0.8 6.1 – – Total before impairment of goodwill Impairment of goodwill (Note 12) 17.4 30.7 6.1 – Total after impairment of goodwill 48.1 6.1 Non-operating Amounts written off investments 16.4 – At the time of the Interim Statement the Group announced a major restructuring programme in order to significantly reduce costs and protect future profitability. A charge of £14.8m (cash outflow £11.7m) has been made in the year ended 31 March 2003 which includes a provision for vacant property resulting from the restructuring programme. The provision for impairment of goodwill and other assets is a result of an impairment review as detailed in Note 12. Restructuring costs in 2002 of £6.1m (cash outflow £3.2m) consisted mainly of staff redundancy, accelerated depreciation of redundant fixed assets and the establishment of the Shared Service Facility. The carrying value of the shares held in Employee Benefit Trusts was reviewed in the light of the issues affecting the Company and the consequent impact on the Company’s share price. At 30 September 2002 a provision of £16.4m was made, which remained in place as at 31 March 2003. 4 Joint Ventures 2003 £m 2002 £m Income from interests in Joint Ventures Turnover 76.9 74.6 Operating profit before impairment Impairment of investment 14.6 (0.4) 14.5 – 14.2 2.5 (10.0) 14.5 0.6 (7.5) 6.7 (1.8) 7.6 (2.1) 4.9 5.5 0.5 126.5 49.1 176.1 0.6 104.0 41.7 146.3 (22.0) (134.6) (156.6) (21.9) (107.0) (128.9) 19.5 17.4 Share of operating profit in Joint Ventures Interest receivable by Joint Ventures Interest payable by Joint Ventures Share of profit on ordinary activities before taxation Taxation on profit on ordinary activities Share of profit on ordinary activities after taxation Share of net assets of Joint Ventures Intangible assets – Goodwill Tangible fixed assets Current assets Liabilities due within one year Liabilities due after one year 46 WS Atkins plc Annual Report 2003 Notes to the financial statements 4 Joint Ventures (continued) 2003 £m 2002 £m Group turnover with Joint Ventures 7.5 10.4 Included in liabilities due within one year are: – Trading balances with WS Atkins 0.2 – 10.1 3.1 Joint Venture Loan drawn as at 31 March Facility 2003 £m £m Repayment period years Connect Roads Limited South Manchester Healthcare (Holdings) Ltd Mercia Healthcare (Holdings) Limited New Schools (Penweddig) Holdings Limited New Schools (Leyton) Holdings Limited New Schools (Cornwall) Holdings Limited New Schools (Swanscombe) Holdings Limited New Schools (Merton) Holdings Limited Total Solutions for Industry Limited Total Solutions for Industry Limited 155.6 83.4 67.8 11.0 14.0 38.2 13.2 52.6 4.8 6.2 155.6 78.3 64.3 10.1 13.3 30.7 12.4 17.9 4.7 5.2 Total 446.8 392.5 Included in liabilities due after more than one year are: – Subordinated debt with WS Atkins Loan balances 11 21 25 28 24 23 23 23 15 4 The Group has not guaranteed any of the above loans. 2003 £m 2002 £m 3.8 18.8 2003 £m 2002 £m Interest receivable – short-term Income from fixed asset investment Income from current asset liquid investments Income from finance leases Profit on sale of fixed asset investment 1.7 0.1 0.6 0.7 0.6 1.8 0.1 0.9 – – Employee Benefit Trusts 3.7 0.1 2.8 0.2 Joint Ventures 3.8 2.5 3.0 0.6 6.3 3.6 Group share of capital commitments Capital commitments 5 Interest receivable and similar income WS Atkins plc Annual Report 2003 Notes to the financial statements 47 Notes to the financial statements continued 6 Interest payable and similar charges Interest payable on loans and other borrowings wholly repayable within five years: Bank loans and overdrafts (secured) Hire purchase and finance leases Other Joint Ventures 7 Staff numbers and costs Number of persons (including Executive Directors) employed by the Group as at 31 March 2003: By class of business: Transport Design and Government Services Commercial Services Industry International Corporate Those persons were based as follows: UK Non – UK Other European countries Middle East Asia Pacific North America Average number of persons (including Executive Directors) employed by the Group during the year: By class of business: Transport Design and Government Services Commercial Services Industry International Corporate Those persons were based as follows: UK Non – UK 2003 £m 2002 £m 4.9 0.5 0.4 5.8 10.0 15.8 3.0 0.4 0.2 3.6 7.5 11.1 2003 No. 2002 No. 4,155 4,416 2,267 1,123 3,310 121 15,392 4,408 4,578 2,286 1,042 2,629 216 15,159 12,082 3,310 1,060 516 616 1,118 12,530 2,629 691 498 556 884 15,392 15,159 4,308 4,521 2,300 1,102 3,032 187 15,450 3,880 4,367 2,312 851 2,567 228 14,205 12,418 3,032 15,450 11,638 2,567 14,205 £m £m 413.4 12.1 32.9 18.0 476.4 342.0 12.8 29.7 16.6 401.1 Aggregate payroll costs of those persons amounted to: Salaries Profit share and performance-related bonus Social security costs Other pension costs Details of Directors’ remuneration (including pensions) and interests are detailed in the Remuneration report. 48 WS Atkins plc Annual Report 2003 Notes to the financial statements 8 Taxation on profit/(loss) on ordinary activities 2003 £m 2002 £m UK corporation tax at 30% Relief for overseas taxation Adjustment in respect of prior years (1.1) (0.4) (1.5) 4.4 (0.4) (0.5) Overseas tax (3.0) 1.9 3.5 1.3 Joint Ventures (1.1) 1.8 4.8 2.1 Total current tax Deferred tax – current year losses – other 0.7 (7.3) (0.7) 6.9 – 2.2 Total tax (credit)/charge (7.3) 9.1 The tax charge as adjusted profit on ordinary activities is £3.5m (2002: £9.7m), an effective tax rate of £18.5% (2002: 25.5%). Adjusted profit is profit before exceptional items, amortisation of pension surplus and goodwill, Metronet bid costs and Employee Benefit Trusts. The variation between this rate and the UK corporation tax rate is explained as follows: % % UK corporation tax rate Effect of: Pension credit Accelerated capital allowances Overseas timing differences Other timing differences Permanent differences Other differences Non – UK activities 30.0 30.0 (3.6) 4.9 (1.0) (3.7) 3.0 (0.3) 2.5 (1.5) (4.2) (2.3) 2.8 2.4 (1.5) – Sub total Adjustment in respect of prior years 31.8 (3.2) 25.7 (3.4) 28.6 (10.1) 22.3 3.2 18.5 25.5 30.0 (20.7) – (0.9) (11.5) 2.4 0.8 30.0 13.5 (0.7) 8.9 (14.3) (2.5) (2.0) 0.1 32.9 Total current tax based on adjusted profit Movement in deferred tax Total tax based on adjusted profit Explanation of current tax based on profit on ordinary activities: UK corporation tax rate Effect on current tax of goodwill amortisation and impairment Effect on current tax of EBTs Permanent differences Timing differences Adjustment in respect of prior years Other differences Total current tax based on profit on ordinary activities Excess 2003 tax losses are carried forwards as a deferred tax asset. To the extent that dividends remitted from overseas subsidiaries and associated undertakings are expected to result in additional taxes, appropriate amounts have been provided. No taxes have been provided for unremitted earnings of Group companies overseas, as these are, in the main, considered permanently employed in the business of these companies. Unremitted earnings may be liable to overseas taxes and/or UK taxation (after allowing for double taxation relief) if they were to be distributed as dividends. WS Atkins plc Annual Report 2003 Notes to the financial statements 49 Notes to the financial statements continued 9 Dividends 2003 £m 2002 £m Interim paid – Nil per share (2002: 3.78p) Final proposed – 3p per share payable 1 October 2003 (2002: 7.56p) – 2.8 3.3 6.9 Dividends 2.8 10.2 Dividends amounting to £0.2m (2002:£0.6m) in respect of the Company’s shares held by the EBTs have been deducted in arriving at the aggregate of dividends paid and proposed. 10 Retained profit 2003 £m 2002 £m Retained (loss)/profit for the year has been dealt with in the Financial Statements as follows: Parent Company Subsidiary undertakings Joint Ventures (Note 4) Employee Benefit Trusts (Note 25) (3.0) (45.1) 4.9 (13.9) 4.1 (8.6) 5.5 0.6 Retained (loss)/profit for the year (57.1) 1.6 11 (Loss)/earnings per share Basic earnings per share are calculated in accordance with FRS 14 Earnings per share, by dividing loss after tax of £54.3m (2002: profit of £11.8m) by the weighted average number of shares in issue during the period of 92,486,187 (2002: 90,537,512), excluding 6,433,843 shares held by the Employee Benefit Trusts (EBTs) which have not unconditionally vested in the employees. Fully diluted earnings per share is the basic earnings per share after allowing for the dilutive effect of the conversion into ordinary shares of the number of options outstanding during the period. The number of shares used for the Fully Diluted calculation is 93,048,051 (2002: 92,398,113). The options relate to the SAYE schemes which mature between April 2003 and March 2006, to the Equity Participation Plans and Long Term Incentive Plans, and to “incentive-to-sell” option schemes for employees of Atkins Americas Inc. In accordance with FRS14, there is deemed to be no diluting effect of potential ordinary shares where there is a basic loss per ordinary share. The Adjusted earnings per share information has been calculated based on an adjusted profit after tax of £15.2m (2002: £28.4m). Adjusted profit is before Metronet bid costs, amortisation of pension surplus and goodwill, exceptional items and Employee Benefit Trusts. The Board believes that this additional measure provides a better indicator of the underlying trends in the business. 2003 (Loss)/profit after taxation Average shares (‘000) 2002 £(54.3)m 92,486 £11.8m 90,537 (58.7)p (58.7)p 12.8p 13.1p Adjustments after accounting for tax – Amortisation of goodwill EBT – contributions EBT – amounts written off investments EBT – amortisation/other Amortisation of pension surplus Metronet bid costs Exceptional items 12.0p 2.7p 12.4p (2.7)p (2.8)p 6.4p 47.2p 10.4p 1.3p nilp (0.7)p (4.9)p 5.5p 6.7p Adjusted earnings per share Fully diluted adjusted earnings per share 16.5p 16.3p 31.4p 30.7p Fully diluted earnings per share Basic earnings per share 50 WS Atkins plc Annual Report 2003 Notes to the financial statements 12 Intangible fixed assets Goodwill Cost at 1 April Acquisition of Hanscomb Acquisition of ScanRail Acquisition of Boward Difference on exchange Cost at 31 March 2003 £m 2002 £m 96.4 20.3 – – (2.2) 89.6 – 5.3 1.4 0.1 114.5 96.4 Amortisation at 1 April Difference on exchange Amortisation charge for the year Impairment provision 23.7 (0.5) 11.1 30.7 14.3 – 9.4 – Amortisation at 31 March 65.0 23.7 Net Book Value at 31 March 49.5 72.7 In accordance with FRS11 Impairment of fixed assets and goodwill, the carrying value of the Group’s acquired subsidiaries has been compared to their recoverable amounts, represented by their value in use to the Group. The value in use has been derived from discounted cashflow projections using discount rates of 3% to 6%. The review has resulted in an impairment charge of £30.7m (2002: nil) to goodwill, largely relating to the North American business. In addition a further £1.8m charge was made to tangible fixed assets and £0.8m to net current assets. 13 Tangible fixed assets Freehold property £m Short-term leasehold property £m Plant, machinery & vehicles £m Total £m Cost at 1 April 2002 New subsidiary undertakings Additions Disposals Differences on exchange 9.6 – – – – 2.5 0.4 6.7 (0.4) (0.2) 113.0 0.2 13.3 (9.6) (1.6) 125.1 0.6 20.0 (10.0) (1.8) Cost at 31 March 2003 9.6 9.0 115.3 133.9 Depreciation at 1 April 2002 Disposals Depreciation charge for the year Impairment charge for the year (note 12) Differences on exchange 5.3 – 0.7 – – 1.7 (0.4) 0.5 0.3 (0.1) 43.6 (4.4) 21.0 1.5 (1.2) 50.6 (4.8) 22.2 1.8 (1.3) Depreciation at 31 March 2003 6.0 2.0 60.5 68.5 Net Book Value at 31 March 2003 3.6 7.0 54.8 65.4 Net Book Value at 31 March 2002 4.3 0.8 69.4 74.5 No depreciation has been provided on freehold land. WS Atkins plc Annual Report 2003 Notes to the financial statements 51 Notes to the financial statements continued 13 Tangible fixed assets (continued) Included in the above are equipment and vehicles held under finance leases and hire purchase contracts as follows: 2003 £m 2002 £m 9.9 (3.2) 12.5 (6.4) 6.7 6.1 2003 £m 2002 £m 5.4 (1.5) 8.6 (0.9) 3.9 7.7 2003 £m 2002 £m Cost At 1 April Additions Disposals 35.8 2.6 (2.2) 24.7 18.4 (7.3) At 31 March 36.2 35.8 Amortisation At 1 April Charge for year Impairment provision Disposals 6.8 0.1 16.4 (1.8) 8.6 2.3 – (4.1) At 31 March 21.5 6.8 Net Book Value at 31 March 14.7 29.0 Cost Depreciation Net Book Value Additions to fixed assets funded by finance leases were £3.5m. Included in the above are equipment and vehicles leased to customers under operating leases as follows: Cost Depreciation Net Book Value Rents receivable from operating leases of £0.5m (2002: £0.4m) are included in turnover. 14 Fixed assets – Investment in own shares At 31 March 2003, the Employee Benefit Trusts (EBTs) owned 6,628,437 (2002: 6,765,542) ordinary shares of the Company being 6.6% (2002: 7.0%) of the Company’s entire issued share capital. These ordinary shares have been acquired by the EBTs for the subsequent transfer to employees and are substantially reserved to meet commitments under the employee incentive schemes. The EBTs have waived their rights to dividends on these shares. The carrying value of the shares was reviewed in the light of the issues affecting the Company and the consequent impact on the Company’s share price. At 30 September 2002 a provision for permanent diminution in value of £16.4m was made. 52 WS Atkins plc Annual Report 2003 Notes to the financial statements 15 Fixed assets – Unlisted investments Associates £m Other participating interests £m Total £m Group Cost at 1 April 2002 Disposals 0.3 – 0.6 (0.6) 0.9 (0.6) Cost at 31 March 2003 0.3 – 0.3 Provisions at 1 April 2002 Charge in year (0.2) (0.1) – – (0.2) (0.1) Provisions at 31 March 2003 (0.3) – (0.3) – – – 0.1 0.6 0.7 Joint Ventures and Subsidiaries associates £m £m Total £m Net Book Value at 31 March 2003 Net Book Value at 31 March 2002 The disposal during the year relates to the Group’s interest in Bridgend Custodial Services Ltd. Company Cost of shares at 1 April 2002 Additions 53.1 19.1 8.4 – 61.5 19.1 Cost of shares at 31 March 2003 72.2 8.4 80.6 Provisions at 1 April 2002 Charge in year – 21.9 0.2 – 0.2 21.9 Provisions at 31 March 2003 21.9 0.2 22.1 Net Book Value at 31 March 2003 50.3 8.2 58.5 Net Book Value at 1 April 2002 53.1 8.2 61.3 Details of principal subsidiary undertakings are set out in Note 33. 16 Stocks Group Stocks of raw materials and consumables WS Atkins plc Annual Report 2003 Notes to the financial statements 2003 £m 2002 £m 0.4 0.8 53 Notes to the financial statements continued 17 Debtors Group Amounts due within one year: Trade debtors Amounts recoverable on contracts Deferred tax (Note 22) Finance lease debtor Other debtors Other prepayments and accrued income Dividends receivable Amounts due after more than one year: Deferred tax (Note 22) Finance lease debtor Total debtors Company 2003 £m 2002 £m 2003 £m 2002 £m 185.5 13.4 12.1 0.3 10.5 14.1 – 235.9 131.6 63.1 9.2 – 8.9 15.9 0.1 228.8 – – – – – – 24.8 24.8 – – – – – – 14.8 14.8 5.2 3.1 244.2 – – 228.8 – – 24.8 – – 14.8 18 Current asset investments Group Short term deposits and marketable securities Certificates of tax deposit Liquid investments Land 2003 £m 2002 £m 6.5 0.4 6.9 0.6 7.5 8.1 0.4 8.5 0.8 9.3 Current asset liquid investments are shown at market value, which is £52,000 above historic cost (2002: £21,000 below historic cost). Certificates of tax deposit consisted of £0.4m in respect of Employee Benefit Trusts (2002: £0.4m). 19 Creditors: amounts falling due within one year Loan notes Bank loan (secured) Bank overdrafts (secured) Fees invoiced in advance Trade creditors Amounts due to sub-contractors (Note 31 c) Amounts due to subsidiary undertakings UK corporation tax Social security and other taxation Dividend payable Hire purchase and finance leases Deferred consideration on acquisitions (see below) Deferred PFI bid cost recovery Accruals and deferred income Other creditors Group Company 2003 £m 2002 £m 2003 £m 2002 £m 0.9 47.9 2.2 70.7 35.0 23.0 – 2.0 36.0 2.8 2.1 0.9 0.2 66.7 12.1 302.5 1.7 14.9 14.6 70.7 46.4 16.5 – 4.4 20.9 6.9 2.2 1.3 0.1 63.1 12.6 276.3 0.9 – – – – – 9.5 – – 2.8 – – – – – 13.2 1.7 – – – – – 7.7 – – 6.9 – – – – – 16.3 Total deferred consideration amounted to £2.0m of which £0.9m falls due within one year and £1.1m falls due after more than one year (Note 20). Of the total deferred consideration, £0.2m relates to the final instalment for the acquisition of Atkins Americas Inc., formerly Benham, which was settled in April 2003. The remaining £1.8m relates to the acquisition of Hanscomb (£2.3m at acquisition (Note 32) less utilisation of £0.5m (Note 25)). Of the trade creditors and accruals above, £0.2m relates to the purchase of fixed assets (2002: £2.9m). 54 WS Atkins plc Annual Report 2003 Notes to the financial statements 20 Creditors: amounts falling due after more than one year Group 2003 £m 2002 £m 39.6 34.4 1.6 2.5 0.7 1.1 5.6 1.4 2.2 0.2 0.2 5.0 51.1 43.4 Ex Director’s unfunded pension promise £m Total £m Bank loan repayable between two and five years (secured) Hire purchase and finance leases: Repayable between one and two years Repayable between two and five years Repayable after more than five years Deferred consideration (Note 19) Deferred bid cost recovery fees The Company had no creditors falling due after more than one year. 21 Provisions for liabilities and charges Vacant property £m Pensions £m Balance at 1 April 2002 Charged/(credited) to profit and loss account Pensions contributions/provisions utilised – 4.8 – 23.5 10.5 (16.3) 0.4 (0.2) – 23.9 15.1 (16.3) Balance at 31 March 2003 4.8 17.7 0.2 22.7 The pension provision represents the excess of accumulated costs over the amount funded. The ex Director’s unfunded pension promise provision was reduced in the year as it was no longer salary related (Note 30). No provision has been released or applied for any purpose other than that for which it was established. 22 Deferred taxation Amounts due within one year: Accelerated depreciation Employee Benefit Trusts Overseas Pension accrual UITF 34 adjustment Tax losses Other timing differences Amounts due after more than one year: Accelerated depreciation Pension accrual Total deferred taxation WS Atkins plc Annual Report 2003 Notes to the financial statements 2003 £m 2002 £m – 0.8 1.8 1.8 – 7.3 0.4 0.7 (2.7) 1.9 7.2 1.0 – 1.1 12.1 9.2 1.6 3.6 – – 5.2 – 17.3 9.2 55 Notes to the financial statements continued 23 Share capital Group and Company No. of shares £m Authorised Authorised at 1 April 2002 and 31 March 2003 ordinary shares of 0.5p Issued and fully paid Issued and fully paid at 1 April 2002 Issue of new shares in respect of: acquisition of Hanscomb QUEST scrip dividend 150,000,000 0.8 96,510,192 0.5 3,039,617 79,238 94,975 Issued and fully paid at 31 March 2003 99,724,022 0.5 As at the 31 March 2003 there were 6,628,437 (2002: 6,765,542) ordinary shares held by the Employee Benefit Trusts of which 3,423,876 (2002: 3,990,174) were being held for transfer to Directors and employees, some of which are contingent on future earnings per share performance conditions, under the following share incentive schemes: Date award granted Exercise price per share Normal exercisable/ transferable period of the award Number of awards outstanding WS Atkins 1997 Senior Executive Long Term Incentive Plan 15/06/98 18/07/01 21/09/01 30/11/01 0.0p 0.0p 0.0p 0.0p 15/06/01-15/06/06 18/07/04-18/07/08 21/09/01-21/09/08 30/11/04-30/11/11 20,056 83,001 53,932 75,144 WS Atkins 1997 Executive Long Term Incentive Plan 15/06/98 30/11/01 29/07/02 0.0p 0.0p 0.0p 15/06/01-15/06/06 30/11/04-30/11/11 29/07/05-29/07/12 73,911 18,722 50,924 Lambert Smith Hampton Executive Option Scheme 03/06/99 16/06/99 16/06/99 399.0p 399.0p 399.0p 03/06/04-03/06/06 01/02/04-16/06/06 16/06/04-16/06/06 3,736 13,326 3,736 WS Atkins Geared Option Scheme 28/09/01 31/12/01 31/01/02 724.9p 724.9p 724.9p 28/09/04-28/09/11 31/12/04-31/12/11 31/01/05-31/01/12 44,182 42,903 34,783 WS Atkins Pre Tax Equity Participation Plan 01/08/97 16/03/98 22/07/98 22/07/99 11/01/00 20/07/00 18/07/01 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 01/08/00-01/08/04 16/03/01-16/03/05 22/07/01-22/07/05 22/07/02-22/07/06 11/01/03-11/08/07 20/07/03-20/07/07 18/07/04-18/07/08 47,301 30,800 34,417 46,335 4,528 55,339 117,325 WS Atkins Post Tax Equity Participation Plan 01/08/97 22/07/98 18/07/01 0.0p 0.0p 0.0p 01/08/00-01/08/04 22/07/01-22/07/05 18/07/04-18/07/08 5,059 1,546 1,436 Name of Scheme 56 WS Atkins plc Annual Report 2003 Notes to the financial statements 23 Share capital (continued) Date award granted Exercise price per share Normal exercisable/ transferable period of the award Number of awards outstanding WS Atkins Deferred Bonus Share Option Plan 23/12/99 18/02/00 12/06/00 04/12/00 08/06/01 30/11/01 26/07/02 29/07/02 26/08/02 02/09/02 13/12/02 13/12/02 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 23/12/04-23/12/09 18/02/03-18/02/10 12/06/03-12/06/10 04/12/03-04/12/10 08/06/04-08/06/11 25/07/04-30/11/11 26/07/06-26/07/12 29/07/05-29/07/12 26/08/05-26/08/12 31/05/05-02/09/12 13/12/05-13/12/12 13/12/06-13/12/12 17,600 20,259 24,458 4,664 58,287 5,106 18,019 74,064 217,251 177,816 31,914 202,569 The Atkins Executive Share Option Scheme 01/02/95 137.5p 01/02/98-01/02/05 2,680 Executive Share Bonuses 01/04/00 0.0p 01/04/04-01/04/07 87,364 WS Atkins Employees’ Stock Option Plan 01/06/00 08/06/01 29/07/02 622.5p 832.5p 324p 01/06/03-01/06/10 08/06/04-08/06/11 29/07/05-29/07/12 81,464 102,722 128,900 WS Atkins Restricted Stock Unit Plan for Key Employees 02/07/02 13/12/02 0.0p 0.0p 02/07/05 13/12/05 288,769 30,000 WS Atkins Restricted Stock Unit Plan for Executives 02/07/02 02/07/02 02/07/02 02/07/02 02/07/02 0.0p 0.0p 0.0p 0.0p 0.0p 02/07/05 02/01/03 02/07/03 02/01/04 02/07/04 39,897 2,869 9,814 9,814 9,820 WS Atkins Sharesave Scheme 16/07/99 07/07/00 06/07/01 22/08/02 424.0p 502.0p 666.0p 259.2p 01/09/02-28/02/03 01/09/03-29/02/04 01/09/04-01/03/05 01/11/05-01/05/06 2,991 494,883 582,928 711,983 WS Atkins International Sharesave Scheme 20/10/00 22/10/01 672.0p 528.0p 20/01/04-01/07/04 01/01/05-01/07/05 59,881 66,843 WS Atkins International Sharesave Scheme Irish Section 20/10/00 22/10/01 672.0p 528.0p 01/01/04-01/07/04 01/01/05-01/07/05 5,169 6,872 WS Atkins Employees’ Stock Purchase Plan 472.0p 01/02/04-01/02/04 36,520 Name of Scheme 22/10/01 Sharesave options to be satisfied by new issue of shares 4,476,632 1,052,756 Shares held by the Employee Benefit Trusts to satisfy outstanding options 3,423,876 On 4 April 2003 the Company issued 2,357,600 ‘A’ warrants, 1,178,800 ‘B’ warrants and 1,178,800 ‘C’ warrants which are convertible into ordinary shares of 0.5p each in three tranches. The ‘A’ warrants are convertible on or after 4 July 2003. The ‘B’ warrants are convertible on or after the 4 October 2003 and the ‘C’ warrants are convertible on or after the 4 January 2004. WS Atkins plc Annual Report 2003 Notes to the financial statements 57 Notes to the financial statements continued 24 Reserves Share premium account £m Capital redemption reserve £m Merger reserve £m Group Balance at 31 March 2002 Retained loss for the year Net differences on exchange Issue of new shares EBT contribution Transfer to EBT reserve Balance at 31 March 2003 42.1 – – 13.3 – – 55.4 0.2 – – – – – 0.2 8.7 – – – – – 8.7 Company Balance at 31 March 2002 Retained loss for the year Issue of new shares Balance at 31 March 2003 42.1 – 13.3 55.4 0.2 – – 0.2 8.7 – – 8.7 Goodwill written off £m (15.9) – – – – – (15.9) – – – – EBT reserves £m Other profit and loss account £m Total profit and loss account £m Total reserves £m 15.5 – – – 2.5 (16.9) 1.1 64.3 (57.1) (1.9) – (2.5) 16.9 19.7 63.9 (57.1) (1.9) – – – 4.9 114.9 (57.1) (1.9) 13.3 – – 69.2 – – – – 8.3 (3.0) – 5.3 8.3 (3.0) – 5.3 59.3 (3.0) 13.3 69.6 In accordance with FRS 10 Goodwill and intangible assets, purchased goodwill arising on acquisitions since 1 April 1997 has been capitalised. Goodwill which arose prior to 1 April 1997 amounting to £15.9m, of which positive and negative goodwill totalled £26.3m and £10.4m respectively, has been written off to profit and loss. 25 Employee Benefit Trusts At 31 March 2003 there were four Employee Benefit Trusts (EBTs). The EBTs have acquired ordinary shares to facilitate employee shareholdings through the WS Atkins incentive arrangements detailed in Note 23. In compliance with UITF 13 the accounts of the EBTs have been incorporated into the results of the Group as, although they are controlled by independent Trustees and their assets are held separately from those of the Group, in practice the Group’s advice as to how the assets are used for the benefit of employees is normally accepted. The Group bears the major risks and rewards of the assets held by the EBTs until the shares vest unconditionally in the employees. The contribution of the EBTs to the profit or loss reported by the Group and the net assets held by the EBTs included in the Group figures are shown below. The information is based on the audited financial statements of the EBTs. The financial accounts of the EBTs have been prepared under the historical cost convention. Income has been recognised as it becomes receivable and costs written off against profit on an accruals basis. The cost of shares is amortised on a straight line basis down to the exercise price of each incentive scheme over the period to initial exercise date. Cumulative amortisation relating to options which have lapsed during the year is written back to profit and loss. Provision is made for impairment where there is considered to be a permanent distribution in value. The shares held for the Geared Option Scheme are carried at cost, except where the Group considers there has been a permanent diminution in value. This review is undertaken annually for the Group’s accounts. 58 WS Atkins plc Annual Report 2003 Notes to the financial statements 25 Employee Benefit Trusts (continued) The results included in the profit and loss account and balance sheet are as follows: Profit and loss account 2003 £m 2002 £m Operating profit/(loss)(1) Loss on sale of fixed asset investments(2) Interest receivable and similar income 0.2 (0.3) 0.1 (1.5) – 0.2 Amounts written off investments – (16.4) (1.3) – Loss on ordinary activities before taxation Taxation on loss on ordinary activities (16.4) – (1.3) – Loss on ordinary activities after taxation Capital Grant (16.4) 2.5 (1.3) 1.9 Retained (loss)/profit for the period (13.9) 0.6 (1) Operating profit/(loss) includes amortisation credit of £0.4m (2002 charge: £1.8m). The amortisation arises on shares held for options where the option price is below book value and the difference is amortised over the period of service to which the option relates. Where options have lapsed the prior years’ amortisation is reversed. The results are stated after the utilisation of £0.5.m (2002: £0.8m) of deferred consideration creditor (Note 19) in respect of amortisation and loss on sale of shares purchased for the future satisfaction of the Atkins Americas Inc., (formerly Benham) and Hanscomb deferred consideration arrangements. (2) This represents the loss on the sales of investments by the EBTs which were purchased in the open market. Any gain on sales of ordinary shares issued by the Company to the EBTs has been taken directly to reserves. Contributions by the Company and its subsidiaries to the EBTs were £2.5m (2002: £1.9m). As explained in Note 3, a provision of £16.4m was made against the carrying value of the shares held by the EBTs. Balance sheet Fixed assets – Investment in own shares at Net Book Value (Note 14) Cash Other debtors Current asset investments Taxation payable Other creditors falling due within one year Amounts due to WS Atkins (net) – falling due after one year Net assets 2003 £m 2002 £m 14.7 2.7 0.5 0.4 (0.4) (0.4) (16.4) 29.0 3.0 0.9 0.4 (0.4) (1.0) (16.4) 1.1 15.5 Based on a mid-market price of 128.5 pence the market value of the shares on 31 March 2003 was £8.5m (2002: £40.4m). 26 Related party transactions Details of Directors’ shareholdings and share options are given in the Remuneration report. The Company has taken advantage of the exemption provided by FRS 8 and not disclosed transactions with subsidiary companies where over 90% of the shares in the subsidiary are owned by the Company. Any such transactions have been eliminated on consolidation. Transactions with Joint Ventures are disclosed in Note 4. WS Atkins plc Annual Report 2003 Notes to the financial statements 59 Notes to the financial statements continued 27 Financial and capital commitments 2003 £m 2002 £m 0.6 2.9 Capital expenditure contracted for but not provided In addition to the above, the Group is committed to make payments for equity and debt into Special Purpose Companies under Private Finance Initiative contracts of £4.3m (2002: £5.2m). Plant, machinery and vehicles 2003 2002 £m £m Land and buildings 2003 2002 £m £m Operating leases Amounts payable in the next year in respect of commitments expiring: Within one year Between two and five years After five years 1.0 5.1 – 1.0 5.5 0.1 5.0 6.3 9.7 4.1 8.2 14.4 Total 6.1 6.6 21.0 26.7 28 Financial instruments A description of the policies relating to financial instruments is set out in the accounting policies on page 41. (a) Maturity of financial liabilities Group Less than one year Between one and two years Between two and five years More than five years Company 2003 £m 2002 £m 2003 £m 2002 £m 53.1 1.6 42.1 0.7 33.4 1.4 36.6 0.2 0.9 – – – 1.7 – – – 97.5 71.6 0.9 1.7 Unutilised committed borrowing facilities expiring beyond 12 months fell wholly between two and five years and amounted to £51.3m (2002: £16.2m). Unutilised committed borrowing facilities expiring within 12 months amounted to £nil (2002: £95.0m). The Group’s principal committed borrowing facilities of £140.0m are secured by a fixed and floating charge over the UK assets of the Group. Other financial liabilities included in the above table are overdrafts, loan notes and finance lease balances as shown in Notes 19 and 20. The Group’s liability with respect to deferred consideration, which is free of interest, is excluded from the above table and described in Note 19. (b) Currency exposures To mitigate the effect of currency exposures arising from its net investment in the US, the Group has financed part of its investment by borrowing in US dollars. The table below shows the extent to which Group companies have monetary assets and liabilities in currencies other than their local currency. Foreign exchange differences on retranslation of these assets and liabilities are taken to the profit and loss account of the Group companies and the Group. Net foreign currency monetary assets/(liabilities) Other Sterling US Dollar Euro currencies £m £m £m £m As at 31 March 2003 Functional currency of Group operation Sterling US Dollar Euro Danish Krone Other currencies – – – – 1.2 Total 1.2 60 WS Atkins plc Annual Report 2003 Notes to the financial statements (0.2) – – – 0.2 – Total 2003 £m – – – – 0.1 – – – – (0.4) (0.2) – – – 1.1 0.1 (0.4) 0.9 28 Financial Instruments (continued) Under the Group’s accounting policy, foreign currency assets which are hedged using forward foreign exchange contracts or borrowings are translated at the contracted rates. The unrecognised gain or loss at the balance sheet date on forward currency contracts to be recognised in the profit and loss account of the following year is not material. i Assets The following analysis excludes short term debtors, cash held on behalf of sub-contractors and funds held by the Employee Benefit Trusts. Fixed rate cash and short-term deposits Floating rate cash and short-term deposits Total Sterling £m Euro £m 8.1 6.7 – 1.9 – 6.6 14.8 1.9 6.6 Total 2003 £m Total 2002 £m – 2.3 8.1 17.5 9.3 5.1 2.3 25.6 14.4 US Dollar Danish Krone £m £m ii Liabilities The interest rate profile of the Group’s financial liabilities, excluding short-term creditors, at 31 March 2003 was as follows: Floating rate liabilities 2003 £m Fixed rate finance leases 2003 £m Total 2003 £m Floating rate liabilities 2002 £m Fixed rate finance leases 2002 £m Total 2002 £m Sterling US Dollar Euro Danish Krone 55.3 31.3 1.4 6.9 2.6 – – – 57.9 31.3 1.4 6.9 31.3 26.9 1.3 6.1 6.0 – – – 37.3 26.9 1.3 6.1 Total 94.9 2.6 97.5 65.6 6.0 71.6 The benchmark rate for determining the principal floating rate liabilities is calculated with reference to LIBOR. The weighted average interest rate on the fixed rate finance leases is 10.5%, over a weighted average period of 43 months. The Group’s liability with respect to the deferred consideration, which is free of interest, is excluded from the above table and described in Note 19. Fair values The fair value of the assets and liabilities of the Group, with the exception of the forward currency contracts, is considered to be materially equivalent to their book value. The fair value of these assets and liabilities has been determined by discounting future cashflows of the relevant financial instrument at the Group’s incremental borrowing rate. The forward currency contracts are used to manage the Group’s forward currency risk. The fair value of forward currency contracts at the year-end, based on their market value, is detailed below: Forward currency hedges 2003 Book value £m 2003 Fair value £m 2002 Book value £m 2002 Fair value £m 1.2 1.2 8.5 8.5 The Group did not use any derivative instrument other than the forward currency contracts during the year or at the year-end. 29 Contingent liabilities The Group has given indemnities in respect of overseas office overdraft, performance, advance payments, letters of credit and import duty guarantees issued on its behalf. The amount outstanding at 31 March 2003 was £62.6m (2002: £64.7m). The indemnities, which arose in the ordinary course of business, are not expected to result in any material financial loss. WS Atkins plc Annual Report 2003 Notes to the financial statements 61 Notes to the financial statements continued 30 Pension Schemes The Group operates both defined benefit and defined contribution schemes. Membership of the Group’s principal pension schemes is as follows: Defined Benefit Schemes Atkins Staff Scheme Railways Scheme 2003 2002 2003 2002 No. No. No. No. Members Deferred pensioners Pensioners Defined Contribution Scheme Atkins Staff Scheme 2003 2002 No. No. Total Membership Total 2003 No. Total 2002 No. 4,450 5,251 1,620 5,451 4,629 1,445 605 353 89 620 243 74 3,041 535 – 2,045 160 – 8,096 6,139 1,709 8,116 5,032 1,519 11,321 11,525 1,047 937 3,576 2,205 15,944 14,667 The assets of the defined benefit schemes are held in separate Trustee administered funds, and the pension cost and provision are assessed in accordance with the advice of professionally qualified actuaries. The defined benefit section of the Atkins Staff Scheme is closed to new entrants, who are now offered membership of a defined contribution section. The latest actuarial valuation of the defined benefit section of the Atkins Staff Scheme (for both SSAP24 and funding purposes) was at 1 April 2001, using the projected unit method. The main assumptions used for the SSAP 24 valuation of the Atkins Staff Scheme together with the assumptions used by the Trustees for funding purposes as at the last actuarial valuation are listed in the table below. SSAP 24 Trustees Rate of inflation Real pension increases Fixed Limited price indexation 3.00% 3.00% 2.00% 0% 2.00% 0% Real salary increases Real dividend growth Real investment return (pre-retirement) 1.50% 1.25% 4.25% 1.50% 1.00% 4.00% Under SSAP 24 assumptions the total market value of the assets at the date of the valuation was £374.5m and the actuarial value of the assets was sufficient to cover approximately 105% of the benefits that had accrued to members allowing for assumed future increases in earnings. The excess of assets over liabilities (surplus) of £18.5m is being amortised as a level percentage of salary over the estimated service lives of current employees in the Scheme through to 2016. As the Scheme is now closed to new members the current service costs, under the projected unit valuation basis, will increase as a percentage of salary as members of the Scheme approach retirement, although the overall cost will decrease as the number of members decreases. The most recent triennial valuation of the Railways Pension Scheme (for both SSAP24 and funding purposes) took place at 31 December 2001 using the projected unit method. The assumptions which had the most significant effect on the results of the valuation for SSAP 24 reporting are those relating to the rate of return on future investments and the rates of increases in salaries, pensions and dividend income. It was assumed that the investment return would be 2.75% higher than the rate of annual salary increases, 2.25% higher than the rate of future pension increases and 3.0% higher than the rate of dividend income. The total market value of the assets at the date of valuation was £106.8m and the actuarial value of the assets was sufficient to cover approximately 128% of the benefits that had accrued to members allowing assumed future increases in earnings. The excess of assets over accrued liabilities (surplus) of £23.0m is being amortised as a level percentage of salary over the estimated service lives of current employees in the Scheme through to 2014. In addition to this surplus there is a pension prepayment, representing the excess of the amount funded over the accumulated pension cost, of £2.6m as at 31 March 2003 (2002: £1.6m). This has been netted with the pension provisions of the other defined benefit schemes and included in provisions for liabilities and charges. Other pension schemes include the USA defined benefits scheme and the Eire Pension scheme (both closed to new entrants) and the Local Government Pension Scheme. The latter is a defined benefit scheme but as the Group’s contributions are largely set in relation to the current service period only, costs are accounted for on a contribution basis. 62 WS Atkins plc Annual Report 2003 Notes to the financial statements 30 Pension Schemes (continued) The costs of the pension schemes under current accounting standard SSAP 24 are shown below: 2003 £m 2002 £m Regular pension cost Less employees’ contribution 20.9 (6.7) 21.5 (6.9) Employer’s regular pension cost Atkins Staff Scheme Railways Scheme Other 14.2 11.2 2.6 0.4 14.6 12.0 2.2 0.4 Amortisation of surplus Atkins Staff Scheme Railways Scheme (3.7) (1.4) (2.3) (3.4) (1.4) (2.0) Net pension cost of defined benefit schemes 10.5 11.2 Cost of defined contribution schemes Unfunded ex-Director’s promise (Note 21) 7.7 (0.2) 5.4 0.025 Total pension cost 18.0 16.6 The net cost of the defined benefit schemes was £10.5m, a decrease of £0.7m over the previous year analysed as follows: £m 2002 triennial valuation – Railways Scheme regular pension cost Membership changes and salary increases (net) 0.2 (0.9) Net reduction in cost (0.7) The pension cost of the defined contribution schemes was £7.7m, an increase of £2.3m. The majority of new staff are offered membership of the defined contribution schemes following the closure of the defined benefits scheme to new entrants. A provision of £17.9m (which incorporates the unfunded ex-Director’s promise) is included in provisions for liabilities and charges representing the excess of accumulated pension cost over the amount funded (2002: £23.9m). Financial Reporting Standard 17 – Retirement benefits (FRS 17) As noted in the 2002 accounts, the Board has decided to defer full implementation of FRS17 following the UK Accounting Standards Board proposal to extend the transitional regime for the new Standard. The disclosures required under FRS 17 are shown below. These relate to the main UK schemes (Atkins Staff Scheme and the Railways Scheme) but they would not be materially different if they included the defined benefit schemes which operate overseas. The latest full actuarial valuation was conducted as at 1 April 2001 for the Atkins Staff Scheme and as at 31 December 2001 for the Railways Scheme. These have been updated to 31 March 2003 by a qualified independent actuary. The principal assumptions used by the actuary were as follows: Rate of increase in salaries(1) Rate of increase of pensions in payment – Limited price indexation – Fixed 5% Rate of increase of deferred pensions Discount rate Inflation assumption (1) At 31 March 2003 At 31 March 2002 3.90% 2.40% 5.00% 2.40% 5.40% 2.40% 4.00% 2.50% 5.00% 2.50% 6.00% 2.50% plus 0.75% p.a. promotional salary scale for the Railways Scheme. WS Atkins plc Annual Report 2003 Notes to the financial statements 63 Notes to the financial statements continued 30 Pension Schemes (continued) The assets in the schemes and the expected rate of return as at 31 March were: 2003 Assets at market value Equities Corporate bonds Property Other/cash 2002 Long term rate of return Atkins Staff Scheme £m Railways Scheme £m 8.00% 4.80% 6.70% 3.75% 199.5 123.0 – 4.6 327.1 Total market value of assets Present value of scheme liabilities Total £m Long term rate of return Atkins Staff Scheme £m Railways Scheme £m Total £m 70.3 5.9 6.3 0.6 269.8 128.9 6.3 5.2 7.90% 5.30% 7.10% 4.00% 253.7 111.9 0.7 12.1 93.5 7.2 5.7 0.9 347.2 119.1 6.4 13.0 83.1 410.2 378.4 107.3 485.7 (530.7) (99.7) (630.4) (396.1) (96.5) (492.6) (Deficit)/surplus in scheme Related deferred tax asset/(liability) (203.6) (16.6) (220.2) (17.7) 10.8 (6.9) 61.1 5.0 66.1 5.3 (3.2) 2.1 Net pension (liability)/asset (142.5) (11.6) (154.1) (12.4) 7.6 (4.8) The following amounts would have been recognised in the performance statements in the year to 31 March 2003 under the requirements of FRS 17: Atkins Staff Scheme £m Operating profit Current service cost Other finance income Expected return on pension scheme assets Interest on pension scheme liabilities Net return Total profit and loss impact Statement of total recognised gains and losses Actual return less expected return on pension scheme assets % of assets at end of period Experience losses/(gains) arising on the scheme liabilities % of liabilities at end of period Changes in assumptions underlying the present value of the scheme liabilities Actuarial loss/(gain) recognised % of liabilities at end of period Railways Scheme £m Total 2003 £m (15.9) (2.6) (18.5) 28.1 (23.6) 4.5 (11.4) 5.0 (3.6) 1.4 (1.2) 33.1 (27.2) 5.9 (12.6) 90.9 28% 28.9 5% 69.4 189.2 36% 20.2 24% 1.0 1% 6.3 27.5 27% 111.1 27% 29.9 5% 75.7 216.7 33% If the above amounts had been recognised in the financial statements the Group’s net assets and profit and loss account reserve at 31 March would be as follows: 2003 £m Net assets Net assets Adjust for SSAP 24 provision (net of deferred tax) FRS 17 pension liability (net of deferred tax) Net (liabilities)/assets including FRS 17 pension liability Reserves Profit and loss reserve Adjust for SSAP 24 provision (net of deferred tax) FRS 17 pension liability (net of deferred tax) Profit and loss reserve including FRS 17 pension liability 64 WS Atkins plc Annual Report 2003 Notes to the financial statements 2002 £m 69.7 12.4 (154.1) (72.0) 115.4 16.7 (4.8) 127.3 4.9 12.4 (154.1) (136.8) 63.9 16.7 (4.8) 75.8 30 Pension Schemes (continued) Movement in the pension scheme surplus/(deficit) during the year: Atkins Staff Scheme £m Railways Scheme £m Total £m At 1 April 2002 Current service cost Contributions Net finance income Actuarial loss (17.7) (15.9) 14.7 4.5 (189.2) 10.8 (2.6) 1.3 1.4 (27.5) (6.9) (18.5) 16.0 5.9 (216.7) At 31 March 2003 (203.6) (16.6) (220.2) Since the date of the last formal valuations stock markets have declined and accrued liabilities of the schemes have increased as a result of changes in financial conditions. This has resulted in a deficit in the fund at 31 March 2003, calculated in accordance with the requirements of FRS 17 (see above). It is the Board’s intention to request an updated actuarial valuation of the Group’s defined benefit pension schemes during the first half of the new financial year and the Group’s accounting estimates with respect to pensions will be reviewed following this exercise. Preliminary discussions with the actuaries indicate that in order to maintain existing benefits, additional contributions in the order of £6m per annum may be required for the Atkins Staff Scheme. 31 a) Reconciliation of net cash flow to movement in funds 2003 £m 2002 £m 30.3 2.7 (1.7) (33.0) 0.8 (4.6) (55.1) 2.9 (7.8) (12.3) 0.4 (3.4) Increase in net debt resulting from cash flows (5.5) (75.3) Increase in net debt from new finance leases Increase/(decrease) in current asset investment market value (Note 18) Profit on sale of current asset investments Translation differences (3.6) 0.1 – 0.5 (2.9) (0.2) 0.1 0.1 Increase in net debt in year (Net debt)/net funds at 1 April (8.5) (37.3) (78.2) 40.9 Net debt at 31 March (45.8) (37.3) Cash increase/(decrease) Cash outflow due to lease repayments Cash inflow from decrease in liquid resources Cash inflow from increase in short-term loans (non-EBT) Cash outflow from redemption of loan stock Cash inflow from increase in long-term loans WS Atkins plc Annual Report 2003 Notes to the financial statements 65 Notes to the financial statements continued 31 b) Reconciliation of operating profit/(loss) to net cash inflow from operating activities 2003 £m 2002 £m (49.9) (49.8) (0.1) 22.2 1.8 11.1 30.7 (0.4) 0.4 0.3 – (0.1) 0.4 9.0 (4.2) 0.6 4.6 (0.6) 13.9 15.4 (1.5) 17.1 – 9.4 – 1.8 (0.3) – (0.1) (0.7) (0.6) (42.2) 35.0 1.2 – – (Decrease) in pension fund provision 25.9 (5.8) 34.5 (5.2) Operations Employee Benefit Trusts 20.1 19.5 0.6 29.3 29.6 (0.3) 6.5 (9.0) 26.6 20.3 Operating (loss)/profit Operations including amortisation of goodwill Employee Benefit Trusts Depreciation charges Impairment of fixed assets Amortisation of goodwill Impairment of goodwill Amortisation of own shares Loss/(profit) on disposal of tangible fixed assets Loss on disposal of fixed asset investments – own shares (Profit) on disposal of current asset investments (Profit) on disposal of current asset non-liquid investments Decrease/(increase) in stocks Decrease/(increase) in debtors (Decrease)/Increase in other creditors due within one year Increase in other creditors due after one year Increase in other provisions for liabilities and charges Exchange rate effect on current assets Increase/(decrease) in amounts due to sub-contractors Net cash inflow from operating activities 66 WS Atkins plc Annual Report 2003 Notes to the financial statements 31 c) Analysis of net funds At 31.3.02 £m Cash at bank and in hand Bank overdrafts Current asset liquid investments Debt due within one year Loan notes Bank loans Finance leases Debt due after one year Bank loans Finance leases Total Cash held on behalf of sub-contractors EBT – cash EBT – certificate of tax deposit Cash Flow £m Other non-cash changes £m Exchange movement £m At 31.3.03 £m 6.3 (14.6) 8.1 11.7 12.4 (1.7) – – 0.1 1.1 – – 19.1 (2.2) 6.5 (1.7) (14.9) (2.2) 0.8 (33.0) 2.7 – – (2.6) – – – (0.9) (47.9) (2.1) (34.4) (3.8) (4.6) – – (1.0) (0.6) – (39.6) (4.8) (57.2) 16.5 3.0 0.4 (11.7) 6.5 (0.3) – (3.5) – – – 0.5 – – – (71.9) 23.0 2.7 0.4 (37.3) (5.5) (3.5) 0.5 (45.8) Bank balances and cashflows as shown on the balance sheet and cashflow: Cash at bank and in hand Cash held on behalf of sub-contractors Employee Benefit Trusts 6.3 16.5 3.0 11.7 6.5 (0.3) – – – 1.1 – – 19.1 23.0 2.7 Cash as shown on balance sheet Overdrafts 25.8 (14.6) 17.9 12.4 – – 1.1 – 44.8 (2.2) Net cash and cashflow 11.2 30.3 – 1.1 42.6 The net debt at 31 March 2003 includes amounts relating to the Group’s insurance subsidiary of £8.7m (2002: £10.2m). As referred to in the accounting policy for turnover, under certain service contracts the Group manages customer expenditure and is obliged to purchase goods and services from third party sub-contractors and recharge them on to the customer at cost. As at 31 March 2003 £23.0m (2002: £16.5m) has been included within both cash and creditors (Note 19) as amounts due to sub-contractors. 31 d) Analysis of tax paid during the year UK corporation tax paid Overseas tax paid WS Atkins plc Annual Report 2003 Notes to the financial statements 2003 £m 2002 £m 0.8 1.0 10.1 0.9 1.8 11.0 67 Notes to the financial statements continued 32 Acquisitions On 24 June 2002 the Group acquired 100% of the share capital of Hanscomb International Corp., an Atlanta based project and programme management consultancy for a consideration of £21.7m including deferred consideration of £2.3m payable in shares. Shares to the value of £2.3m have been acquired by the Employee Benefit Trusts, satisfied by a capital grant from the Company. As part of the acquisition agreement 70% will be utilised within three years of acquisition. The net assets have been included in the accounts at fair value at the date of acquisition (£1.4m). Included in net assets acquired was cash of £1.6m. The method used to account for the transaction is acquisition accounting. Book value £m Accounting adjustments £m Fair value adjustments £m Fair value £m Tangible fixed assets Current assets Current liabilities 1.0 12.8 (9.4) (0.2) (1.3) – (0.2) (0.4) (0.9) 0.6 11.1 (10.3) Net assets acquired 4.4 (1.5) (1.5) 1.4 Consideration Cash paid Issue of shares Deferred consideration Legal expenses 21.7 6.0 12.8 2.3 0.6 Goodwill capitalised 20.3 The Accounting adjustments relate to the harmonisation of work in progress valuation policies and alignment of depreciation policies. The Fair value adjustments arise from a review of the recoverability of work in progress and additional cut-off adjustments. Goodwill arising on the acquisition is being amortised over ten years which is the period over which the Directors estimate that the value of the underlying business acquired is expected to exceed the value of the underlying assets. A charge of £1.5m has been made to the profit and loss account for amortisation for the 9 months to 31 March 2003. The consideration paid in respect of prior years’ acquisitions relates largely to deferred consideration in respect of the acquisition of Atkins Americas Inc., formerly the Benham Group Inc., in January 2000. 68 WS Atkins plc Annual Report 2003 Notes to the financial statements 33 Subsidiary undertakings The following companies were the principal subsidiary undertakings as at 31 March 2003: Country of registration/ incorporation Class and percentage of shares held ATMOS Limited Faithful & Gould Limited(1) England & Wales England & Wales 100% ordinary 100% ordinary Lambert Smith Hampton Group Limited(1) WS Atkins (Services) Limited WS Atkins (UK Holdings) Limited England & Wales England & Wales England & Wales 100% ordinary 100% ordinary 100% ordinary WS Atkins Consultants Limited(1) WS Atkins Facilities Management Limited WS Atkins International Limited WS Atkins Investments Limited(1) WS Atkins Planning and Management Consultants Limited WS Atkins Rail Limited England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales 100% ordinary 100% ordinary 100% ordinary 100% ordinary 100% ordinary 100% ordinary Atkins Americas Inc.(1) (formerly Atkins Benham Inc.) Hanscomb International Corp USA USA 100% ordinary 100% ordinary Atkins China Limited WS Atkins & Partners Overseas(1) WS Atkins Insurance (Guernsey) Limited Atkins Danmark A/S(1) China Gibraltar Guernsey Denmark 100% ordinary 100% ordinary 100% ordinary 100% ordinary (1) Nature of business Construction services Quantity surveyors and cost estimators Property consultants Group service company Management activities holding company Consulting engineers Property services Consulting engineers Investment company Consulting engineers Design engineers for the railways industry Architects and engineers Project and programme management consultants Consulting engineers Consulting engineers Insurance Transport and engineering consultants The equity of these subsidiary undertakings is held by another subsidiary undertaking. The percentage of the issued share capital held by the Group is equivalent to the percentage of voting rights held. The Group holds the whole of all classes of issued share capital. All the above operate in the country of registration, except for WS Atkins & Partners Overseas which operates in the United Arab Emirates. All of the above are included in the consolidated result of the Group. A full list of subsidiary companies will be filed at Companies House. WS Atkins plc Annual Report 2003 Notes to the financial statements 69 Notes to the financial statements continued 34 Joint Ventures The following represents the principal Joint Ventures in which the Group participated during the year: Date of last Proportion of audited financial shares held(1) statements Name Nature of business Connect Roads Limited Holding company for companies involved in the design and build, financing, operation and maintenance of roads in the UK. 32.14% 31 March 2002 DG 21 LLC Delaware limited liability company involved in provision of all non-core services for the US Navy Facility at Diego Garcia. The principal place of business is 4801 Spring Valley Road, Suite 125B, Dallas, Texas 75244. 24.5% Mercia Healthcare (Holdings) Limited Holding company for companies involved in the 25% design and construction of hospital accommodation and the provision of full services to the accommodation within which the NHS may provide core clinical services. 31 December 2002 PricewaterhouseCoopers LLP NewSchools Limited Management Services Company for companies involved in the design and construction of school accommodation and the provision of full services to the accommodation within which the LEA may provide teaching. 50% 31 December 2002 Deloitte & Touche LLP NewSchools (Cornwall) Holding company for company involved in the 40% Holdings Limited design and construction of school accommodation and the provision of full services to the accommodation within which the LEA may provide teaching. 31 December 2002 Deloitte & Touche LLP NewSchools (Leyton) Holdings Limited Provision of design and build, financing and operating services to a new secondary school in London Borough of Waltham Forest. 42.5% 31 December 2002 Deloitte & Touche LLP NewSchools (Merton) Holdings Limited Provision of design and build, financing and operating services to six secondary schools in the London Borough of Merton. 42.5% Not yet published NewSchools (Penweddig) Holdings Limited Provision of design and build, financing and operating services to a new secondary school in Aberystwyth, Wales. 42.5% 31 December 2002 Deloitte & Touche LLP NewSchools (Swanscombe) Holdings Limited Holding company for company involved in the 65% design and construction of school accommodation and the provision of full services to the accommodation within which the LEA may provide teaching. 31 December 2002 Deloitte & Touche LLP South Manchester Healthcare (Holdings) Limited Holding company for companies involved in the design and construction of hospital accommodation and the provision of full services to the accommodation within which the NHS may provide core clinical services. 25% 31 December 2002 PricewaterhouseCoopers LLP TFMC (Proprietary) Limited Company incorporated in South Africa involved in providing asset management services in South Africa. 38.25% 30 June 2002 effective holding Total Solutions for Industry Limited Joint Venture to provide Industrial PFI-type solutions. 50% (1) Proportion of shares held are in respect of ordinary share capital. All of the above are incorporated in England and Wales unless otherwise stated. 70 WS Atkins plc Annual Report 2003 Notes to the financial statements External auditors Deloitte & Touche LLP 31 December 2002 Deloitte & Touche LLP Deloitte & Touche LLP Fisher Hoffman PKF 31 December 2001 Deloitte & Touche LLP 35 Post balance sheet event On 4 April 2003 Financial Close was reached on the £17 billion Metronet London Underground Public Private Partnership in which the Group is a 20% equal partner. The 30-year partnership, which covers over two thirds of the London Underground network, covers inter alia the repairs, refurbishment and modernisation of the stations. Metronet has contracted with Trans4m Ltd, a Joint Venture company in which Atkins has a 25% shareholding, to undertake the civil engineering work and the refurbishment programme. Trans4m Ltd has signed a 71/2 year contract with Atkins for premises and civil design, inspection and assessment work and the design and build of new communication systems. Atkins will invest £70m in Metronet by way of equity and shareholder subordinated debt over the first six years of the concession, £2m of which was invested at Financial Close. Atkins has obtained standby Letters of Credit from its banks to support the deferred element of its equity commitment. The fees for the standby Letters of Credit included an agreement to issue warrants in respect of 4,715,200 Atkins shares (representing approximately 4.73% of Atkins’ current issued share capital) on Financial Close of Metronet. 50% of these warrants are exercisable at any time from 4 July 2003. A further 25% of them are exercisable at any time from 4 October 2003, and the remaining warrants are exercisable at any time from 4 January 2004. An amount of 0.5p (the nominal value of Atkins’ shares) is payable in respect of each Atkins’ share issued on the exercise of the warrants. WS Atkins plc Annual Report 2003 Notes to the financial statements 71 Five year summary Consolidated profit and loss account for years ended 31 March 2003 £m Turnover: Group and Share of Joint Ventures Less: Share of Joint Ventures’ turnover 2002 £m 2001 £m Restated(1) 2000 £m Restated(1) 1999 £m Restated(1) 1,012.2 (76.9) 880.9 (74.6) 711.7 (38.3) 525.3 (9.0) 428.6 (4.7) Turnover Cost of sales 935.3 (576.1) 806.3 (546.1) 673.4 (420.7) 516.3 (331.9) 423.9 (284.8) Gross profit Administrative expenses 359.2 (409.1) 260.2 (246.3) 252.7 (225.8) 184.4 (156.6) 139.1 (114.2) (49.9) (8.0) (41.8) (0.1) 13.9 24.8 (9.4) (1.5) 26.9 39.1 (8.9) (3.3) 27.8 34.7 (4.6) (2.3) 24.9 27.0 (0.5) (1.6) 14.2 14.5 8.7 3.2 0.9 6.3 3.8 2.5 3.6 3.0 0.6 3.7 3.5 0.2 3.6 3.5 0.1 6.4 6.3 0.1 Operating (loss)/profit: Group excluding Share of Joint Venture Operations Amortisation and impairment of goodwill Employee Benefit Trusts Operating profit: Share of Joint Ventures Interest receivable and similar income Operations Joint Ventures Amounts written off investments (16.4) – – – – Interest payable and similar charges Operations Joint Ventures (15.8) (5.8) (10.0) (11.1) (3.6) (7.5) (8.1) (3.5) (4.6) (3.6) (1.2) (2.4) (1.4) (0.4) (1.0) (Loss)/profit on ordinary activities before taxation Operations Joint Ventures Amortisation and impairment of goodwill Employee Benefit Trusts (61.6) (10.1) 6.7 (41.8) (16.4) 20.9 24.0 7.6 (9.4) (1.3) 31.2 39.0 4.3 (8.9) (3.2) 31.0 37.1 0.9 (4.6) (2.4) 30.8 32.9 – (0.5) (1.6) 7.3 9.1 (1.8) (9.1) (7.0) (2.1) (11.5) (10.3) (1.2) (11.1) (10.9) (0.2) (10.1) (10.0) (0.1) (54.3) (17.4) 4.9 (41.8) – 11.8 15.7 5.5 (9.4) – 19.7 26.9 3.1 (8.9) (1.4) 19.9 24.5 0.7 (4.6) (0.7) 20.7 22.6 (0.1) (0.5) (1.3) (2.8) (10.2) (9.9) (8.8) (7.7) (57.1) 1.6 9.8 11.1 13.0 (58.7)p (58.7)p 16.5p 3.00p 13.1p 12.8p 31.4p 11.34p 21.9p 21.2p 30.2p 10.80p 23.0p 22.1p 26.5p 10.00p 24.6p 23.2p 21.3p 9.25p Taxation on loss/profit on ordinary activities Operations Joint Ventures (Loss)/profit on ordinary activities after taxation Operations Joint Ventures Amortisation and impairment of goodwill Employee Benefit Trusts Dividends Retained (loss)/profit for the year transferred to reserves Basic (loss)/earnings per share Fully Diluted earnings per share Adjusted earnings per share(2) Dividends per share (1) (2) All comparatives restated following adoption of FRS 19 and UITF Abstract 34. Adjusted earnings per share is before Metronet bid costs, amortisation of goodwill and pension surplus, exceptional items and Employee Benefit Trusts. 72 WS Atkins plc Annual Report 2003 Five year summary Five year summary continued Consolidated balance sheet as at 31 March 2003 £m 2002 £m 2001 £m Restated(1) 2000 £m Restated(1) 1999 £m Restated(1) 49.5 65.4 19.5 14.7 – 72.7 74.5 17.4 29.0 0.7 75.3 34.9 11.2 16.1 0.1 81.0 29.3 5.9 13.5 0.1 5.5 19.1 4.2 14.8 – 149.1 194.3 137.6 129.8 43.6 0.4 244.2 7.5 44.8 0.8 228.8 9.3 25.8 0.2 188.0 17.3 71.0 0.3 161.9 15.6 52.6 0.2 96.2 64.6 48.5 296.9 264.7 276.5 230.4 209.5 (302.5) (276.3) (231.3) (197.0) (158.5) (5.6) (11.6) 45.2 33.4 51.0 Fixed assets Intangible assets Tangible assets Investments in Joint Ventures Investments – own shares Investments – other Current assets Stocks Debtors Investments Cash at bank and in hand Current liabilities Creditors: amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities 143.5 182.7 182.8 163.2 94.6 Creditors: amounts falling due after more than one year Provisions for liabilities and charges (51.1) (22.7) (43.4) (23.9) (40.5) (29.1) (40.4) (24.0) (2.4) (18.6) Net assets 69.7 115.4 113.2 98.8 73.6 Capital and reserves Called up share capital Share premium account Capital redemption reserve Merger reserve Profit and loss account 0.5 55.4 0.2 8.7 4.9 0.5 42.1 0.2 8.7 63.9 0.5 41.0 0.2 8.7 62.8 0.5 37.3 0.2 8.7 52.1 0.5 31.8 0.2 – 41.1 Shareholders’ funds – equity interests 69.7 115.4 113.2 98.8 73.6 (1) All comparatives restated following adoption of FRS 19 and UITF Abstract 34. WS Atkins plc Annual Report 2003 Five year summary 73 Five year summary continued Consolidated cash flow for years ended 31 March 2003 £m 2002 £m (49.9) (8.0) (41.8) (0.1) Depreciation charges Impairment of fixed assets Amortisation of goodwill Impairment of goodwill Amortisation of own shares Loss/(profit) on disposal of tangible fixed assets (Profit)/loss on disposal of current asset investments Loss/(profit) on disposal of fixed asset investments – own shares (Profit) on disposal of current asset non-liquid investments Decrease/(increase) in stocks Decrease/(increase) in debtors (Decrease)/Increase in other creditors due within one year Increase in other creditors due after one year Increase/(decrease) in other provisions for liabilities and charges (Decrease)/(increase) in pension fund provision Exchange rate effect on current assets Operations Employee Benefit Trusts Operating loss/(profit) Operations Amortisation and impairment of goodwill Employee Benefit Trusts Increase/(decrease) in amounts due to sub-contractors Net cash inflow from operating activities Dividends received from Joint Ventures and Associates Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Acquisitions and disposals Equity dividends paid Management of liquid resources Financing Increase/(decrease) in cash (1) 2001 £m Restated(1) 2000 £m Restated(1) 1999 £m Restated(1) 13.9 24.8 (9.4) (1.5) 26.9 39.1 (8.9) (3.3) 27.8 34.7 (4.6) (2.3) 24.9 27.0 (0.5) (1.6) 22.2 1.8 11.1 30.7 (0.4) 0.4 – 0.3 (0.1) 0.4 9.0 (4.2) 0.6 4.6 (5.8) (0.6) 17.1 – 9.4 – 1.8 (0.3) (0.1) – (0.7) (0.6) (42.2) 35.0 1.2 – (5.2) – 11.5 – 8.9 – 3.6 (0.7) (0.3) (0.1) – 0.1 (22.1) 15.6 0.5 – 5.1 0.1 9.3 – 4.7 – 3.1 (0.4) 0.5 – – (0.1) (45.4) 13.6 0.8 0.2 5.2 – 7.1 – 0.5 – 2.4 (0.6) – – – – (13.1) (2.5) 2.4 (0.1) 5.8 – 20.1 19.5 0.6 29.3 29.6 (0.3) 49.1 47.2 1.9 19.3 19.0 0.3 26.8 25.7 1.1 6.5 (9.0) 12.1 1.5 0.5 26.6 6.5 (2.2) (1.8) (18.8) (9.4) (6.6) 1.7 34.3 20.3 0.8 (0.4) (11.0) (66.6) (9.6) (8.9) 7.8 12.5 61.2 0.6 0.5 (12.2) (19.1) (1.3) (8.1) (1.4) (1.8) 20.8 – 3.0 (14.4) (5.8) (61.6) (8.0) 49.1 17.8 27.3 – 5.8 (9.0) (15.2) (1.4) (7.1) (12.7) – 30.3 (55.1) 18.4 0.9 (12.3) All comparatives restated following adoption of FRS 19 and UITF Abstract 34. 74 WS Atkins plc Annual Report 2003 Five year summary Five year summary continued Reconciliation of net cash flow to movement in net debt 2003 £m 2002 £m 2001 £m Restated(1) 2000 £m Restated(1) 1999 £m Restated(1) 30.3 2.7 (1.7) (33.0) 0.8 – (4.6) (55.1) 2.9 (7.8) (12.3) 0.4 – (3.4) 18.4 3.1 1.4 (1.9) 0.7 – (0.1) 0.9 1.5 (49.1) (0.6) – 3.0 (28.3) (12.3) – 12.7 – – – – (Increase)/decrease in net debt resulting from cash flows (5.5) (75.3) 21.6 (72.6) 0.4 Increase in net debt from new finance leases Increase in net debt from loan note issue Increase/(decrease) in current asset investment market value Profit/(loss) on sale of current asset investments Translation differences (3.6) – 0.1 – 0.5 (2.9) – (0.2) 0.1 0.1 (2.6) – 0.4 (0.1) (2.1) (8.1) (2.8) (0.3) (0.5) (0.8) – – 0.1 – (0.1) Movement in year Net (debt)/funds at 1 April (8.5) (37.3) (78.2) 40.9 17.2 23.7 (85.1) 108.8 0.4 108.4 Net (debt)/funds at 31 March (45.8) (37.3) 40.9 23.7 108.8 Increase/(decrease) in cash Cash outflow due to lease repayment Cash inflow/(outflow) due to change in liquid resources Cash inflow from short-term loans (non-EBT) Cash outflow from redemption of loan stock Cash outflow from short-term EBT loans Cash inflow from long-term loans (1) All comparatives restated following adoption of FRS 19 and UITF Abstract 34. WS Atkins plc Annual Report 2003 Five year summary 75 Investors’ information Annual General Meeting The Annual General Meeting will be at 4.30pm on 16 September 2003 at the Chalk Lane Hotel, Chalk Lane, Epsom, Surrey. The full Notice of the Meeting and proxy card is enclosed with this report. Company Secretary and registered office Amanda Massie, WS Atkins plc, Woodcote Grove, Ashley Road, Epsom, Surrey, KT18 5BW. Shareholder services Registrar Administrative enquiries about the holding of WS Atkins plc shares should be directed in the first instance to the Registrar whose address is The Registrar, Registration Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4BR. Website: www.capita-irg.com Share dealing service Details of a postal dealing service can be obtained from: WS Atkins plc Share Dealing Service, Cazenove & Co. Ltd, 20 Moorgate, London, EC2R 6DA. Telephone: 020 7155 5155 Website: www.cazenove.com Dividend reinvestment plan A dividend reinvestment plan is available by which ordinary shareholders may invest the whole of their cash dividends in WS Atkins plc ordinary shares. Current shareholders will receive further details with the notice of the Annual General Meeting. Ordinary shareholders on the register on 8 August 2003 may participate in the plan provided their application forms are received by 9 September 2003. Copies of the explanatory brochure and application form are available from the Registrar. Amalgamation of accounts Shareholders who receive duplicate sets of Company mailings owing to multiple accounts in their name should write to the Registrar to have their accounts amalgamated. Unsolicited mail The Company is obliged by law to make its share register available to other organisations who may then use it for a mailing list. If you wish to limit the receipt of unsolicited mail you may do so by writing to: The Mailing Preference Service (MPS), Freepost 22, London W1E 7EZ. MPS will then notify the bodies which support its service that you do not wish to receive unsolicited mail. Registered office and advisors Registered office: WS Atkins plc Woodcote Grove Ashley Road Epsom Surrey KT18 5BW Registered number: 1885586 Auditors PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6NN Bankers The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR Solicitors Freshfields Bruckhaus Deringer 65 Fleet Street London EC4Y 1HS Barclays Bank plc PO Box 544 54 Lombard Street London EC3V 9EX Stockbrokers Cazenove & Co. Ltd 20 Moorgate London EC2R 6DA HSBC Bank plc 70 Pall Mall London SW1Y 5EZ Investment bankers N M Rothschild & Sons Limited New Court St Swithin’s Lane London EC4P 4DU 76 WS Atkins plc Annual Report 2003 Investors’ information The paper used in this report is sourced from sustainable forests, is totally chlorine free (TCF), and contains 50% recycled fibre. Designed and produced by College Design, London +44 (0)20 7457 2020 WS Atkins plc Woodcote Grove Ashley Road Epsom Surrey KT18 5BW England Telephone +44 (0)1372 726140 Fax +44 (0)1372 740055 [email protected] www.atkinsglobal.com WS Atkins plc Annual Report 2003