Information furnished to the Securities and Exchange Commission on November 14, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
Report of Foreign Issuer
[X] QUARTERLY REPORT PURSUANT TO RULE 13(a)-16 OR 15(d)-16 OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 333-6200
INTERTEK TESTING SERVICES LIMITED
(Exact name of Registrant as specified in its charter)
ENGLAND
(Jurisdiction of incorporation or organization)
25 SAVILE ROW, LONDON, W1S 2ES, ENGLAND
(011) 44-20-7396-3400
(Address of principal executive office)
(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F)
Form 20-F 
Form 40-F
(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934)
Yes No
Schedule of Information contained in this report
Intertek Testing Services Limited financial statements for the nine months to September 30, 2001
Pages 1 - 41
Intertek Testing Services Limited
Business description
We are a leading international organisation engaged in the testing, inspection and certification of manufactured goods and commodities. We are organised into four operating divisions, each focusing on the testing, inspection and certification of different manufactured goods and commodities. Our customer base is diverse and different in each division and includes retailers, distributors, manufacturers, petroleum companies, traders and governments. The majority of our work is on a job by job basis except in our Foreign Trade Standards (“FTS”) division, where over 90% of revenues are from term contracts. We currently employ over 10,400 people and operate 507 inspection offices and 253 testing laboratories in 98 countries. A description of each operating division is given below:
Caleb Brett
Caleb Brett was founded in 1885 and is a joint global leader in the market for testing and inspecting chemicals, petroleum products and crude oil. We believe that Caleb Brett has strong name recognition coupled with an international reputation for reliability and confidentiality. Caleb Brett provides independent and internationally recognised certification of the quality and quantity of crude oil, petroleum products, chemicals and agricultural produce. Our customers include oil and chemical companies and traders with whom we have well-established long-term relationships. Most of our customers purchase services from Caleb Brett on a global, regional or local basis. We are a world leader providing added value to customers by taking over their internal laboratory testing operations on an outsourcing basis. We provide a testing service which meets the customers’ demands for high scientific quality and safety standards at a lower cost than the custo mer can provide in-house.
Caleb Brett’s activities in petroleum and chemical testing are divided into three sub-divisions: Inspection, Inspection Related Testing and Outsourcing
Inspectionof cargoes involves the physical checking, sampling and measuring of the quantity of a commodity at points of loading and unloading, such as seaports, storage tanker terminals and the ends of transportation pipelines.
Inspection Related Testingis laboratory testing of samples taken to assess their composition and whether they comply with specifications demanded by customers or by legislation.
Outsourcinginvolves the analysis of samples not necessarily related to cargo shipments where oil companies and chemical manufacturers outsource their laboratory testing work to Caleb Brett.
Caleb Brett also performs marine surveying and agricultural inspection. Marine surveying is the evaluation of cargo damage, primarily for insurance purposes. Agricultural inspection and testing is the physical sampling, quantification, inspection and testing of commodities such as cereals, vegetable oils and cotton for commercial organisations and certifying food aid on behalf of government bodies such as the European Commission and United States Department of Agriculture.
ETL SEMKO
ETL SEMKO tests, certifies and puts safety labels on electrical and electronic products, telecommunication equipment, building products and heating, ventilation and air conditioning equipment. ETL SEMKO also certifies the quality of management systems to standards such as ISO 9000 and ISO 14000 in North and Central America and Europe. ETL is a long established brand name which traces its origins back to Thomas Edison in the United States. SEMKO is the name of the former state owned certification body in Sweden that we acquired in 1994. ETL SEMKO’s customers include industrial companies such as Adtran,
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LG Electronics, Hewlett Packard, Ericsson, Matsushita and Electrolux. We also have a number of long-standing relationships with various industry organizations, such as the Air Conditioning and Refrigeration Institute, which has been our customer since 1956. ETL SEMKO’s activities are divided into the following three sub-divisions: Conformity Assessment, Performance and Quality Management Systems.
Conformity Assessmentprimarily involves the testing of electronic, electrical and building products and telecommunications equipment to allow manufacturers to mark their products with nationally or regionally recognized safety marks and to have their products certified as complying with a number of nationally or regionally recognized standards. These services facilitate the sale of products to markets around the world.
Safety marks owned and issued by the ETL SEMKO division include “ETL” (United States and Canada), “S” (Europe) and “WH” (United States and Canada). ETL SEMKO is also authorised to apply the “GS” mark (Germany). ETL SEMKO has Notified Body Status in the European Union and also has accreditations for products it tests and certifies including electro-magnetic compatibility and telecommunications amongst others. These safety marks and certifications are widely relied upon by manufacturers, retailers and consumers to ensure that products conform to the applicable standards. In some countries and for some products, the safety marks and certifications are a legal requirement. Even when not required by governmental regulation, many manufacturers continue to use our safety marks and testing and certification services to ensure product quality. For example, the “S” mark, which whilst not mandatory in Sweden si nce 1990, continues to be widely used throughout that country and in other European countries, as evidence that a product complies with harmonised European safety standards. ETL SEMKO’s accreditations are held by legal entities that are registered in the various countries in which ETL SEMKO offers its services.
Performancetesting is demanded by manufacturers and industry associations to provide consumer confidence with respect to certain products. For example, we have been nominated by the Air Conditioning and Refrigeration Institute and the Gas Appliance Manufacturers Association in the United States to verify the accuracy of information provided in the yellow “Energy Guide” labels found on many appliances. We also test individual manufacturers’ products to provide independent competitive performance data, which can then be used by retailers and for marketing.
Quality Management Systems’activities involve the certification of the business processes and services of an organization to ISO 9000, ISO 14000 and similar standards. Certification involves a company defining and documenting its business processes and standards of service. Companies receiving certifications are subject to regular audits over time as a condition of continuing certification. ETL SEMKO manages this activity within the Americas. In Europe, this activity is performed through an associate company, in which we have a 49% holding. In Asia, this activity is carried out within the Labtest division.
Labtest
Labtest is one of the largest international providers of testing and inspection services for textiles, toys, footwear, hardlines and other consumer products. Labtest’s customers are retailers, mainly in North America and Europe, and manufacturers, mainly in Asia. Customers include McDonalds and retailers such as Gap Inc, The Home Depot and Tommy Hilfiger.
Labtest performs testing to ensure that products meet safety standards and the specifications of distributors and retailers. The purchasers typically specify their own quality and performance standards in addition to nationally recognized standards. Manufacturers operating in developing countries routinely seek such testing and inspection of consumer goods to assist them in selling their products to retailers and distributors in markets such as North America and Europe. Labtest divides its activities into the following sub-divisions:
Textilestesting is principally an activity in which large textile and clothing retailers specify standards for the testing of products at the point of manufacture. Testing is carried out for colourfastness, abrasion
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resistance, size conformity, shrinkage resistance, flammability and other standards. We believe that Labtest is the world leader in textile testing.
Toystesting is mainly to ensure products conform to national and international safety standards. Services include design and packaging evaluation, safety testing, durability testing and performance testing.
Inspection of consumer productsprimarily involves visual inspection of products at the manufacturer’s factory during production and prior to shipment for verification of quantity, quality and declared specifications of the products to be shipped. Inspection may be carried out on behalf of the manufacturer or the buyer.
Code of Conductwork has resulted from consumers and pressure groups being increasingly concerned about the social conditions and safety of workers in factories. Code of Conduct audit work includes factory tours, document review and employee interviews. Retailers usually commission the audits and we work closely with both manufacturers and retailers to find solutions to any problems identified. The main focus of these audits is the review of the use of child labour, involuntary labour, coercion and harassment, health and safety, working hours, compensation and environmental protection.
Quality Management Systemsinvolves the certification of the business processes and services of an organization to ISO 9000, ISO 14000 and related standards. In China, Hong Kong and Taiwan, Quality Management Systems work is carried out through a partnership with the British Standards Institute. In addition, Quality Management Systems’ activities include audits to standards issued by national and legal health authorities such as the Food and Drug Administration in the United States.
Risk Analysis and Managementworks with world market leaders to minimize business risk associated with the safety of children. The division provides a one-stop service of Total Quality Assurance.
Foreign Trade Standards
FTS provides independent pre-shipment inspection services (“PSI”) to the governments of developing countries to assist them in maximising customs duty revenues and supporting foreign exchange controls. PSI involves inspecting, testing and certifying for import duty purposes imports into the country before they are shipped. FTS offers innovative solutions to meet the objectives of its client governments using latest technologies and web-based services. Through ITS ADVANTAS (“Advanced Trade Assessment System”), FTS provides integrated electronic solutions including valuation information for import duty purposes, statistical services and secure, encrypted electronic certification.
FTS is a world leader in providing inspection, testing and support services to government standards organizations to ensure that imports of specified products meet national or international safety standards.
FTS also provides customs training and modernisation services to national customs departments.
In addition to government programmes, FTS provides a wide range of inspection and expediting activities focused on engineering plants, industrial projects and commercial consignment inspection.
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Operating and Financial Review and Prospects
Introduction
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes, and the other financial information included elsewhere in this document. Our consolidated financial statements are prepared in accordance with U.K. GAAP and we discuss in note 8 to the financial statements the principal differences between U.K. and U.S. GAAP as they relate to us.
In the following discussion we comment on our operating results and financial condition for the three months to September 30, 2001 (“Q3 01”) compared to the three months to September 30, 2000 (“Q3 00”) and the nine months to September 30, 2001 (“9M 01”) compared to the nine months to September 30, 2000 (“9M 00”), followed by a detailed review of the performance of each division. Our results for the nine months to September 30, 2001 are not necessarily indicative of the expected results for the year to December 31, 2001.
Impact of exchange rates
Our financial statements are reported in pounds sterling (“sterling” or “£”). We have 140 subsidiary companies, of which 130 report in currencies other than sterling. Subsidiaries report in the currency of the country in which they are domiciled, apart from those based in countries where there is hyperinflation, which report in their functional currency, which is the U.S. dollar. We translate the results of overseas operations into sterling at the cumulative average exchange rates applicable for each period, therefore fluctuations in exchange rates will impact our results.
The tables below show growth rates of Q3 01 over Q3 00 and 9M 01 over 9M 00 at actual exchange rates and at comparable exchange rates. The actual growth rate is the percentage change of one period over the prior period where each period is translated into GBP using the exchange rates applicable in that period. The comparable growth rate is the percentage change of one period over the prior period where both periods are translated into GBP using the prior period’s exchange rates. This reflects the underlying growth in revenues and operating income without the fluctuations caused by changes in translation rates. We do not hedge translation rate exposure.
Over 50% of our revenues and the majority of our borrowings, interest payments and debt repayments are denominated in U.S. dollars or currencies linked to the U.S. dollar, such as the Hong Kong dollar. Where there is material transaction exposure from currency rate movements, we take out forward foreign exchange contracts to minimise this exposure.
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Summary of revenues for the three months to September 30, 2000 compared to the three months to September 30, 2001
The table below compares revenues by division for the three months to September 30, 2000 and the three months to September 30, 2001 at actual and comparable exchange rates.
| Revenues by division | Q3 00 | Q3 01 | Growth | Actual | Comparable | |||||
| £m | £m | £m | % | % | ||||||
| Caleb Brett | 40.7 | 43.9 | 3.2 | 7.9 | 7.6 | |||||
| ETL SEMKO | 25.4 | 26.4 | 1.0 | 3.9 | 3.5 | |||||
| Labtest | 24.1 | 27.9 | 3.8 | 15.8 | 13.7 | |||||
| Foreign Trade Standards | 12.2 | 15.8 | 3.6 | 29.5 | 30.3 | |||||
| Total continuing operations | 102.4 | 114.0 | 11.6 | 11.3 | 10.7 | |||||
At actual and comparable exchange rates, revenues increased in every division in Q3 01 over Q3 00.
The terrorist attack in New York on September 11, 2001 impacted our revenues in the United States because ports, customers’ offices and facilities were closed for a number of days and fee charging inspectors and engineers were unable to travel for most of the following week. Some customers delayed or slowed down their activities and there was reduced consumption of commodities such as jet fuel. Despite the disruption in September, revenues from petroleum testing in the United States grew in Q3 01 over Q3 00 due to higher demand for petroleum products. Other major growth areas were textile testing in Asia in Labtest, safety testing in China in ETL SEMKO, pre-shipment inspections in Kenya in FTS and petroleum inspection and testing in the Former Soviet Union in Caleb Brett. The FTS pre-shipment inspection programme in Argentina generated negligible revenues in Q3 01 as the Argentine government wound down the programme. This reduced FTS revenues b y £1.2 million in Q3 01 over Q3 00.
Revenues in Q3 00 and Q3 01 were generated by operations located in the following geographic areas:
| Revenues by geographic area | Q3 00 | Q3 01 | Growth | Actual | Comparable | |||||
| £m | £m | £m | % | % | ||||||
| Americas | 41.6 | 43.6 | 2.0 | 4.8 | 2.9 | |||||
| Europe, Africa and Middle East | 30.4 | 34.7 | 4.3 | 14.1 | 15.1 | |||||
| Asia and Far East | 30.4 | 35.7 | 5.3 | 17.4 | 17.4 | |||||
| Total continuing operations | 102.4 | 114.0 | 11.6 | 11.3 | 10.7 | |||||
Growth in revenues in the Americas was reduced in Q3 01 by the lower volume of work in the United States following the terrorist attack on September 11, 2001. The revenue growth at actual rates was higher than at comparable rates due the strength of the U.S. dollar against sterling.
The growth in revenues in Europe, Africa and the Middle East in Q3 01 over Q3 00 was mainly attributable to the FTS division which reported a full quarter’s revenues from a pre-shipment inspection programme in Kenya which started in February 2001 and an increase in the volume of inspections in Saudi Arabia and Nigeria. The decline in revenues generated by the FTS Argentine programme reduced revenues in the United Kingdom in Q3 01 over Q3 00. European revenues in Caleb Brett increased due to expansion into new territories in the Former Soviet Union and also to acquisitions in France and Norway made at the end of 2000 which added 2% to the comparable growth rate. The revenue growth at actual rates was lower than at comparable rates due to the strength of sterling against other European currencies.
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Revenues in most sectors grew well in Asia and the Far East. The volume of textile testing and Code of Conduct inspections increased in Labtest throughout the region and safety testing expanded in ETL SEMKO in China. Revenues from petroleum inspections increased in Caleb Brett in Singapore due to increased market share. The revenue growth at actual rates was the same as the growth rate at comparable rates due to the strength of the Hong Kong dollar against sterling offset by weakness in other currencies.
Summary of revenues for the nine months to September 30, 2000 compared to the nine months to September 30, 2001
The table below compares revenues by division for the nine months to September 30, 2000 and the nine months to September 30, 2001 at actual and comparable exchange rates.
| Revenues by division | 9M 00 | 9M 01 | Growth | Actual | Comparable | |||||
| £m | £m | £m | % | % | ||||||
| Caleb Brett | 115.1 | 131.4 | 16.3 | 14.2 | 11.0 | |||||
| ETL SEMKO | 74.1 | 81.9 | 7.8 | 10.5 | 6.3 | |||||
| Labtest | 68.4 | 79.9 | 11.5 | 16.8 | 11.8 | |||||
| Foreign Trade Standards | 33.6 | 42.6 | 9.0 | 26.8 | 26.2 | |||||
| Total continuing operations | 291.2 | 335.8 | 44.6 | 15.3 | 11.8 | |||||
Revenues increased in every division in 9M 01 over 9M 00. Major contributors to growth in Caleb Brett were petroleum testing on the Gulf Coast of Mexico in the United States and increased market share of petroleum inspections in Singapore. Revenues in ETL SEMKO benefited from expansion in the market for safety testing of household appliances and home electronics in China. Revenues from textile and toy testing in Asia and from Code of Conduct inspections contributed to the increase in revenues in Labtest. Growth in revenues in FTS was mainly attributable to new pre-shipment inspection programmes in Bangladesh and Kenya, and increased volumes of inspections in Saudi Arabia and Nigeria.
Revenues in 9M 00 and 9M 01 were generated by operations located in the following geographic areas:
| Revenues by geographic area | 9M 00 | 9M 01 | Growth | Actual | Comparable | |||||
| £m | £m | £m | % | % | ||||||
| Americas | 119.9 | 134.8 | 14.9 | 12.4 | 6.1 | |||||
| Europe, Africa and Middle East | 88.6 | 100.6 | 12.0 | 13.5 | 13.8 | |||||
| Asia and Far East | 82.7 | 100.4 | 17.7 | 21.4 | 17.9 | |||||
| Total continuing operations | 291.2 | 335.8 | 44.6 | 15.3 | 11.8 | |||||
Revenues from the Americas increased in 9M 01 over 9M 00, primarily due to growth in petroleum testing in Caleb Brett in the United States, where the demand for petroleum products was strong, particularly in the first half of 2001. Demand reduced from September 2001 due to an increase in natural gas consumption, mainly driven by low gas prices. Natural gas does not generate any inspection or testing work for Caleb Brett. Other markets in the United States such as telecommunications testing, building materials and global semi-conductors slowed down which has reduced the revenue growth in ETL SEMKO.
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The growth in revenues in Europe, Africa and the Middle East in 9M 01 over 9M 00 was mainly due to expansion in the Foreign Trade Standards division. The pre-shipment inspection programme in Kenya which started in February 2001, generated revenues of £4.1 million in 9M 01 and there was an increase in the volume of inspections in Saudi Arabia and Nigeria following the expansion of those programmes to include new products in Saudi Arabia and new territories in Nigeria. Revenue growth in Europe was mainly attributable to petroleum inspection and testing in the Former Soviet Union in the Caleb Brett division. Revenues from acquisitions made by Caleb Brett in France and Norway at the end of 2000 added 2% to comparable growth.
Revenues from Asia and the Far East increased in 9M 01 over 9M 00. In Labtest, textile testing, toy testing and Code of Conduct inspections all grew significantly due to increased demand. The market for safety testing of household appliances continued to expand in China which generated increased revenues for ETL SEMKO. Revenues from petroleum inspection and testing in Singapore increased in Caleb Brett due to increased market share. The pre-shipment inspection programme in Bangladesh in the Foreign Trade Standards division started in February 2000 but it took several months for the programme to develop. In 9M 01 the programme was fully operational and revenues grew by £2.1 million over the same period last year.
Operating costs before exceptional items
Our operating costs principally comprise labour costs, property and equipment rental, depreciation and laboratory consumables. Operating costs increased by £10.2 million or 11.8% at actual rates, to £97.0 million, in Q3 01 over Q3 00. In 9M 01 over 9M 00, operating costs increased by £39.1 million or 15.7% at comparable rates to £287.6 million. Overall, costs have increased broadly in line with the growth in revenues. Cost reduction plans have been implemented in areas which have under performed.
Summary of operating income before exceptional items for the three months to September 30, 2000 compared to the three months to September 30, 2001
The table below compares operating income before exceptional items by division for the three months to September 30, 2000 and the three months to September 30, 2001 at actual and comparable exchange rates.
| Operating income before | Q3 00 | Q3 01 | Growth/ | Actual | Comparable | |||||
| exceptional items by division | (decline) | |||||||||
| £m | £m | £m | % | % | ||||||
| Caleb Brett | 4.9 | 3.4 | (1.5 | ) | (30.6 | ) | (28.6 | ) | ||
| ETL SEMKO | 3.7 | 3.4 | (0.3 | ) | (8.1 | ) | (10.8 | ) | ||
| Labtest | 7.5 | 9.0 | 1.5 | 20.0 | 17.3 | |||||
| Foreign Trade Standards | 1.1 | 2.7 | 1.6 | 145.5 | 154.5 | |||||
| Central overheads | (1.5 | ) | (1.4 | ) | 0.1 | 6.7 | — | |||
| Total continuing operations | 15.7 | 17.1 | 1.4 | 8.9 | 7.6 | |||||
Growth in operating income in Q3 01 over Q3 00 was reduced by the impact of the terrorist attack in New York in September. This had a severe impact on Caleb Brett in the United States but also affected Caleb Brett business worldwide due to the disruption to travel and reduced consumption of jet fuel. Cost
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reduction plans have been implemented on the East Coast of the United States to reduce overheads. Operating income from the expansion of Caleb Brett in the Former Soviet Union grew by £0.4 million in Q3 01 over Q3 00. The terrorist attack and the slowdown in the telecommunications market reduced growth in ETL SEMKO in the United States and the telecommunications slowdown also impacted the United Kingdom. Headcount has been reduced in both countries to reduce overheads. Operating income from the expansion of safety testing in China grew by £0.4 million in Q3 01 over Q3 00. The growth in operating income in Labtest was primarily due to increased volume of textile testing in China and Code of Conduct inspections. Operating income increased in the Foreign Trade Standards division due to the increased volume of pre-shipment inspections and effective cost control.
Summary of operating income before exceptional items for the nine months to September 30, 2000 compared to the nine months to September 30, 2001
The table below compares operating income before exceptional items by division for the nine months to September 30, 2000 and the nine months to September 30, 2001 at actual and comparable exchange rates.
| Operating income before | 9M 00 | 9M 01 | Growth/ | Actual | Comparable | |||||
| exceptional items by division | (decline) | |||||||||
| £m | £m | £m | % | % | ||||||
| Caleb Brett | 12.7 | 11.7 | (1.0 | ) | (7.9 | ) | (10.2 | ) | ||
| ETL SEMKO | 11.3 | 11.3 | — | — | (3.5 | ) | ||||
| Labtest | 20.4 | 24.1 | 3.7 | 18.1 | 13.2 | |||||
| Foreign Trade Standards | 2.8 | 5.5 | 2.7 | 96.4 | 96.4 | |||||
| Central overheads | (3.9 | ) | (3.8 | ) | 0.1 | 2.6 | 2.6 | |||
| Total continuing operations | 43.3 | 48.8 | 5.5 | 12.7 | 8.8 | |||||
Growth in operating income in 9M 01 over 9M 00 varied across the operating divisions. Operating income in Caleb Brett declined in 9M 01 over 9M 00, mainly due to disruptions to business in the United States in Q3 01. Cost reduction plans have been implemented on the East Coast of the United States to reduce overheads. Growth in operating income in ETL SEMKO was mainly from the expansion of safety testing in China but this was offset by a decline in other markets. Reduced volumes of telecommunication product testing resulted in under-utilisation of our Electro Magnetic Compatibility (“EMC”) testing facilities which reduced operating margins. Textile testing and Code of Conduct inspections continued to perform well for Labtest. The volume of inspections increased in the Foreign Trade Standards division due to new pre-shipment programmes and the expansion of existing programmes.
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Exceptional income/(costs)
| Operating exceptional items | Q3 00 | Q3 01 | 9M 00 | 9M 01 | ||||
| £m | £m | £m | £m | |||||
| Foreign Trade Standards | ||||||||
| Provision against Nigerian invoices | (0.5 | ) | — | (3.0 | ) | — | ||
| Payments received from Nigeria | 10.1 | — | 11.4 | — | ||||
| Provision against Argentina invoices | — | (4.0 | ) | — | (4.0 | ) | ||
| 9.6 | (4.0 | ) | 8.4 | (4.0 | ) | |||
| Caleb Brett | ||||||||
| EPA fine and costs | (1.2 | ) | (0.7 | ) | (1.2 | ) | (0.7 | ) |
| Total continuing operations | 8.4 | (4.7 | ) | 7.2 | (4.7 | ) | ||
| Discontinued operation | ||||||||
| Environmental EPA fine and costs | (1.0 | ) | (9.4 | ) | (3.0 | ) | (9.4 | ) |
| Total operating exceptional items | 7.4 | (14.1 | ) | 4.2 | (14.1 | ) | ||
Continuing operations
Foreign Trade Standards
The exceptional charges of £0.5 million in Q3 00 and £3.0 million in 9M 00 related to a provision against unpaid invoices issued to the Nigerian government by our FTS division. The exceptional credits of £10.1 million in Q3 00 and £11.4 million in 9M 00 were for cash received from the Nigerian government. The Nigerian government made regular payments throughout 2000 so we stopped making full provision for unpaid invoices raised from July 2000.
The exceptional charge of £4.0 million in Q3 01 was a provision against unpaid invoices issued to the Argentine government for pre-shipment inspections. Whilst we have received some payments from the government these have been irregular and have been for small amounts. In September 2001, the government of Argentina withdrew all items needing inspection on import into Argentina therefore the pre-shipment inspection programme has effectively ended. The unpaid invoices at September 30, 2001 totalled £4.0 million and we consider it prudent to make full provision against this amount. We are vigorously pursuing the recovery of the outstanding debt.
Caleb Brett
The exceptional charges of £1.2 million in Q3 00 and 9M 00 and £0.7 million in Q3 01 and 9M 01 for Caleb Brett were for fine and legal costs in connection with an investigation by the Environmental Protection Agency in the United States. This investigation is discussed in detail on page 19 of this report.
Discontinued operation
Environmental
The exceptional charges of £1.0 million in Q3 00 and £3.0 million in 9M 00 related to legal costs incurred in connection with the ongoing investigation by the Environmental Protection Agency into a discontinued operation in Richardson, Texas. The charge of £9.4 million in Q3 01 and 9M 01 comprised a provision for legal fees of £3.2 million and a fine of £6.2 million to settle the criminal investigation. This investigation is discussed in detail on page 18 of this report.
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| Non–operating exceptional items | Q3 00 | Q3 01 | 9M 00 | 9M 01 | |||
| £m | £m | £m | £m | ||||
| Losses on disposal of operations | |||||||
| Caleb Brett | (0.1 | ) | — | (0.4 | ) | — | |
| Foreign Trade Standards | 0.1 | — | (2.6 | ) | — | ||
| Total continuing businesses | — | — | (3.0 | ) | — | ||
| Discontinued operation | |||||||
| Loss on disposal of Bondar Clegg division | 0.1 | — | (12.2 | ) | — | ||
| Total non-operating exceptional items | 0.1 | — | (15.2 | ) | — | ||
Continuing operations
Caleb Brett
In Q3 00, Caleb Brett wrote off its investment in a small operation in Thailand, and incurred a loss of £0.1 million.
In 9M 00, Caleb Brett sold a small loss adjusting business in Chile, which after goodwill of £0.5 million that was previously written off to reserves was transferred to the profit and loss account, resulted in an exceptional charge of £0.3 million.
Foreign Trade Standards
In 9M 00 the FTS division sold its Technical Services business in the United States for its net assets value of £1.0 million. Goodwill of £2.6 million which was previously written off to reserves was charged to the profit and loss account, resulting in an exceptional charge of £2.6 million.
Discontinued operation
Bondar Clegg
In 9M 00, we sold Bondar Clegg, our minerals testing division. The net assets of businesses in North and South America and Africa were sold for £1.6 million, which generated a net loss of £4.3 million. In addition, we incurred termination and closure costs of £1.0 million. After deducting goodwill of £6.9 million that was previously written off to reserves, the total exceptional loss was £12.2 million.
Interest expense
Interest of £10.2 million was charged in Q3 01, an increase of £0.9 million over the charge in Q3 00. This increase was attributable to the Parent Subordinated PIK debentures and to currency differences. New Parent Subordinated PIK debentures have been issued each quarter in lieu of interest payments, causing an increase in the interest charge. The majority of our borrowings are in currencies other than sterling, therefore the interest charge is affected by fluctuations in exchange rates.
Interest of £29.0 million was charged in 9M 01, an increase of £2.6 million over the charge in 9M 00. The increase was attributable to the Parent Subordinated PIK debentures and to currency differences.
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Income taxes
The income tax charge in Q3 01 was £2.8 million (Q3 00 £2.0 million). This represented 40.7% of income before tax and exceptional items in Q3 01 and 31.8% in Q3 00. The tax rate was higher than the underlying tax rate of the territories in which we operate, largely due to our inability to obtain full potential tax relief on interest expense in the United Kingdom and the United States and on operating losses in other territories. The location of taxable profits and deductible expenses has a significant impact on the tax charge year by year.
The income tax charge in 9M 01 was £9.1 million (46.2 % of income before tax and exceptional items) and £7.6 million in 9M 00 (47.2% of income before tax and exceptional items).
Operating and financial review by division
We set out below a discussion of the performance of each of our operating divisions for the three months to September 30, 2000 compared to the three months to September 30, 2001 and the nine months to September 30, 2000 compared to the nine months to September 30, 2001. The operating income by division given below is before exceptional items.
Caleb Brett
| Operating results | Q3 00 | Q3 01 | Growth/ | 9M 00 | 9M 01 | Growth/ | ||||||
(decline) | (decline) | |||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Revenues | 40.7 | 43.9 | 3.2 | 115.1 | 131.4 | 16.3 | ||||||
| Actual growth | 7.9 | % | 14.2 | % | ||||||||
| Comparable growth | 8.8 | % | 11.5 | % | ||||||||
| Operating income | 4.9 | 3.4 | (1.5 | ) | 12.7 | 11.7 | (1.0 | ) | ||||
| Actual decline | (30.6 | )% | (7.9 | )% | ||||||||
| Comparable decline | (16.3 | )% | (5.5 | )% | ||||||||
| Operating margin | 12.0 | % | 7.7 | % | 11.0 | % | 8.9 | % | ||||
The growth in Caleb Brett revenues in Q3 01 over Q3 00 was attributable primarily to increased revenues in the United States, the acquisition of a businesses in France and Norway in Q4 00 and increased revenues in Singapore and the Former Soviet Union. Revenues in the United States in September were reduced by the impact of the terrorist attack in New York. Ship movements in New York were stopped for over a week and most other ports closed for a few days. Travel restrictions and enhanced security measures reduced the level of activity throughout the United States and disrupted courier deliveries of samples to laboratories around the world. Recently, the petroleum market in the United States has suffered from an increase in natural gas consumption, mainly driven by low gas prices. Natural gas does not generate any inspection or testing work for Caleb Brett. Revenues in Singapore increased as a result of concentrated marketing which followed the reloc ation of the regional management team of Caleb Brett Asia from Australia to Singapore.
The decline in operating income before exceptional items in Q3 01 over Q3 00 was largely due to the disruption following the terrorist attack in the United States. Cost reduction plans have been implemented on the East coast of the United States to reduce overheads. We also incurred higher costs associated with
12
the relocation of the Asian regional office, increased health insurance premiums in the United States and a reduction in profit margin on the BP outsourcing contract in the United Kingdom. Income from the Former Soviet Union was higher in Q3 01 over Q3 00 due to expansion of operations.
The growth in Caleb Brett revenues in 9M 01 over 9M 00 was mainly due to increased revenues in the United States, where consumption of petroleum products grew strongly in the first half of 2001. European revenues in 9M 01 benefited from a full nine month’s income from new businesses in France and Norway which were acquired in the last quarter of 2000 and from the BP outsourcing contract in the United Kingdom which started in March 2000. Revenues in Singapore increased in 9M 01 over 9M 00 but the Asian region continued to suffer from the depressed economies in Indonesia and the Philippines.
The decline in operating income in 9M 01 over 9M 00 was primarily due to the decline in volume of work following the terrorist attack in the United States. Income in the Americas was also reduced by tropical storm Allison which hit Texas in June 2001, the cessation of a coal testing contract in Canada and higher health insurance premiums in the United States. Income in Asia was reduced by higher costs associated with the relocation of the Asian regional office. Income in Europe benefited from expansion in the Former Soviet Union in 9M 01 and acquisitions in France and Norway made at the end of 2000.
ETL SEMKO
| Operating results | Q3 00 | Q3 01 | Growth/ | 9M 00 | 9M 01 | Growth/ | ||||||
(decline) | (decline) | |||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Revenues | 25.4 | 26.4 | 1.0 | 74.1 | 81.9 | 7.8 | ||||||
| Actual growth | 3.9 | % | 10.5 | % | ||||||||
| Comparable growth | 3.5 | % | 6.3 | % | ||||||||
| Operating income | 3.7 | 3.4 | (0.3 | ) | 11.3 | 11.3 | — | |||||
| Actual decline | (8.1 | )% | — | |||||||||
| Comparable decline | (10.8 | )% | (3.5 | )% | ||||||||
| Operating margin | 14.6 | % | 12.9 | % | 15.2 | % | 13.8 | % | ||||
The revenue growth in ETL SEMKO in Q3 01 over Q3 00 was mainly driven by the continued growth in the market for safety testing of household products and home appliances in Hong Kong, China and Taiwan. Revenues in the ISO 9000 business in the United States were severely reduced by the travel disruptions following the terrorist attack in New York. Customers and our inspectors were unable to travel to carry out assessments and shipments of products to be tested were cancelled or delayed. The telecommunications market has suffered a severe slowdown and the resulting shortage of Electro Magnetic Compatibility testing has also meant that our EMC testing facilities were under utilised. The building material market and the global semi-conductor market have also started to slow down. Revenues from the testing of heating, ventilation and air conditioning equipment increased in Q3 01 over Q3 00.
The decline in operating income before exceptional items in Q3 01 over Q3 00 was primarily due to the under utilisation of our EMC facilities. The cost structure in ETL SEMKO has been reduced.
Revenue growth in 9M 01 over 9M 00 was due to the continued expansion of business in Asia, particularly in Hong Kong, China, Taiwan and Japan. Household and safety testing in Sweden also contributed to the increase. The growth has been reduced by the downturn in telecommunications testing.
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Operating income before exceptional items remained static in 9M 01 compared to 9M 00. Operating income increased in Asia, particularly in Hong Kong and China, but a new laboratory in Japan incurred costs associated with integrating it into ETL SEMKO and providing the Hong Kong laboratory with accreditation for exports to Japan. Operating income in the United States and Europe declined in 9M 01 over 9M 00, largely due to the decline in telecommunications testing.
Labtest
| Operating results | Q3 00 | Q3 01 | Growth | 9M 00 | 9M 01 | Growth | ||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Revenues | 24.1 | 27.9 | 3.8 | 68.4 | 79.9 | 11.5 | ||||||
| Actual growth | 15.8 | % | 16.8 | % | ||||||||
| Comparable growth | 23.7 | % | 15.4 | % | ||||||||
| Operating income | 7.5 | 9.0 | 1.5 | 20.4 | 24.1 | 3.7 | ||||||
| Actual growth | 20.0 | % | 18.1 | % | ||||||||
| Comparable growth | 29.3 | % | 17.6 | % | ||||||||
| Operating margin | 31.1 | % | 32.3 | % | 29.8 | % | 30.2 | % | ||||
The growth in revenues in Labtest in Q3 01 over Q3 00 was driven by textile testing in Asia and to a lesser extent in Europe. We attribute this growth to a number of factors, including the growth in consumer demand, the continued migration of manufacturing from the West to Asia and other developing countries, the faster introduction of new products by manufacturers and the increasing demand by consumers for good quality and safe products. The rate of revenue growth has slowed in Hong Kong because business is moving from there to China where we are expanding our laboratory network. Revenues from toy testing and Code of Conduct inspections increased in Q3 01 over Q3 00.
Whilst the economic downturn in the United States could lead to reduced imports of consumer goods, this has not yet started to have a significant impact on the Labtest business.
The growth in operating income before exceptional items in Q3 01 over Q3 00 was mainly from textile testing and Code of Conduct inspections where we audit social practices and safety in factories. The new toy testing laboratory in Germany incurred start up costs in Q3 01 but reported a profit in September 2001. The newly established toy testing laboratory in Guangzhou, China also incurred start up costs and additional support costs which reduced the overall operating margin for toy testing.
The growth in revenues in 9M 01 over 9M 00 was primarily due to increased volumes of textile testing, toy testing and Code of Conduct inspections.
The growth in operating income in 9M 01 over 9M 00 was primarily due to textile testing and Code of Conduct inspections. Operating income from toy testing declined slightly, due to the start up costs of new laboratories in Guangzhou and Germany.
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Foreign Trade Standards
| Operating results | Q3 00 | Q3 01 | Growth | 9M 00 | 9M 01 | Growth | ||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Revenues | 12.2 | 15.8 | 3.6 | 33.6 | 42.6 | 9.0 | ||||||
| Actual growth | 29.5 | % | 26.8 | % | ||||||||
| Comparable growth | 30.3 | % | 26.2 | % | ||||||||
| Operating income | 1.1 | 2.7 | 1.6 | 2.8 | 5.5 | 2.7 | ||||||
| Actual growth | 145.5 | % | 96.4 | % | ||||||||
| Comparable growth | 154.5 | % | 96.4 | % | ||||||||
| Operating margin | 9.0 | % | 17.1 | % | 8.3 | % | 12.9 | % | ||||
The increase in revenues in Q3 01 over Q3 00 was due to the new pre-shipment inspection programme in Kenya which started in February 2001 and expansion of the Nigerian programme. The volume of inspections in Saudi Arabia increased due to stricter enforcement of the pre-shipment standards testing and inspection programme by the Saudi Arabian government although there was some reduction in shipments following the terrorist attack in the United States. In September 2001, the Argentine government announced that the pre-shipment inspection programme will cease at the end of the year. The programme had already declined and revenues were £0.9 million lower in Q3 01 over Q3 00. No significant further revenue is expected.
The increase in FTS operating income in Q3 01 over Q3 00 was mainly attributable to higher revenues and a reduction in operating costs, partly due to the development of the information technology platform. In Q3 01, due to delays in receiving payments from the Argentine government we made an exceptional provision against unpaid invoices. This amounted to £4.0 million at September 30, 2001 and in view of the materiality of the amount, it was charged to our profit and loss account as an exceptional operating item.
The growth in revenues in 9M 01 over 9M 00 was due to the new pre-shipment inspection programmes in Kenya and Bangladesh, and increased volumes of inspections in Saudi Arabia. Revenues in 9M 00 included £1.0 million from the pre-shipment inspection programme in Ghana which was cancelled in 2000 and £0.7 million from the Technical Services business which was sold in February 2000. Revenues from the Argentine pre-shipment inspection programme were £1.2 million lower in 9M 01 over 9M 00.
The growth in operating income in 9M 01 over 9M 00 was mainly due to higher revenues and improved operating efficiencies.
Central overheads
Central overheads comprise the costs of our corporate head office in London, our tax and human resources team in the United States and costs associated with non-trading holding companies. Central overheads include salaries, property rental, travel and legal and professional fees. At actual exchange rates, central overheads were £1.4 million in Q3 01, £0.1 million less than central overheads in Q3 00. Central overheads were £3.8 million in 9M 01 and £3.9 million in 9M 00.
15
Effects of U.S. GAAP adjustments on operating income
Our financial statements have been prepared in accordance with U.K. GAAP which differs in certain significant respects from U.S. GAAP. The most significant differences between U.S. GAAP and U.K. GAAP are described in note 8 of the financial statements.
Financial condition and liquidity
At September 30, 2001 we had cash of £27.3 million compared to £21.3 million at December 31, 2000.
Net cash inflow from operating activities includes operating income after operating exceptionals, before depreciation and other non-cash items, as well as working capital movements. Our net cash inflow from operating activities decreased by £7.7 million to £43.4 million in 9M 01 compared to 9M 00, primarily due to costs associated with the EPA investigations.
We spent £3.6 million on legal costs in 9M 01 (9M 00: £1.8 million) in connection with an Environmental Protection Agency investigations in Richardson, Texas. We have agreed to settle the criminal investigation by paying a fine of £6.1 million in instalments of £3.1 million, 60 days after sentencing and £1.0 million per annum thereafter. Sentencing is scheduled for December 14, 2001. The civil investigation and certain third party litigation is ongoing and until these matters are concluded we will continue to incur legal costs. We also spent £1.4 million in 9M 01 (9M 00: £0.4 million) in connection with the two Environmental Protection Agency investigations in Linden, New Jersey and Puerto Rico. We agreed to settle the Linden investigation by paying a fine of £0.7 million in instalments of £0.3 million in April 2001, £0.2 million in October 2001 and £0.2 million in April 2002.
We spent £16.8 million on tangible fixed assets in 9M 01 compared to £14.3 million in 9M 00. This is mostly expenditure on laboratory and computer equipment. Expenditure in 9M 01 included £2.3 million for the ongoing Oracle computer project in ETL SEMKO in the United States.
In 9M 01 we acquired a small business in Australia for consideration of £0.1 million and paid deferred consideration of £0.6 million for acquisitions made in 1999 and 2000. In 9M 01 we received deferred sale proceeds of £0.1 million from the disposal of Bondar Clegg.
In 9M 01, we paid interest and finance charges of £15.0 million (9M 00: £13.0 million) on our borrowings. These figures exclude interest relating to the Parent Subordinated PIK Debentures, which was funded by further issues of debentures in February 2001, May 2001 and August 2001. We paid dividends of £2.6 million to minority shareholders in 9M 01 compared to £2.8 million in 9M 00.
At September 30, 2001, our total borrowings were £347.5 million less unamortised debt issuance costs of £7.4 million. A detailed summary of our borrowings is given in note 3 of our consolidated financial statements. Apart from the Revolving Credit Facility, our borrowings are denominated in currencies other than sterling, and are therefore affected by exchange rate fluctuations. We issued £8.6 million of new Parent Subordinated PIK Debentures, which are denominated in U.S. dollars, in lieu of interest payments. We repaid £6.5 million of the Senior Term A loans in June 2001. There were no scheduled repayments of the Senior Subordinated Notes or Senior B Loans in 9M 01. We utilised a further £13.0 million of our Revolving Credit Facility in 9M 01, increasing our total drawings to £23.0 million at September 30, 2001.
On August 9, 2001 we agreed new banking arrangements with our syndicate of senior banks. A new Senior Term C loan of up to £40.0 million has been made available for capital expenditure. The facility can be drawn in U.S. dollars, pounds sterling, Swedish kroner or Euros in tranches of at least £250,000 or the equivalent in non-sterling currencies. The terms of these new facilities also allow up to £10.0 million of the Senior Term C loan to be drawn down to repay the Senior Revolving Credit facility. The Senior Term C loan will be available until June 2004 and will become repayable in December 2005. It carries an interest rate cost of LIBOR plus 2.75% and a commitment fee of 0.75% per annum will be paid on the average
16
amount of Senior Term C which is unused. To date, we have used £1.0 million of this facility to fund expenditure on outsourcing projects.
We anticipate that available cash, cash flows from operations and borrowing availability under our Revolving Credit Facility and Term Loan C will be sufficient to satisfy our working capital and capital expenditure requirements for the foreseeable future. However, to the extent that we should desire to increase our financial flexibility and capital resources or choose or be required to fund future capital commitments from sources other than operating cash or from borrowings under our existing credit facility, we may consider raising additional capital by increasing the credit facility or through the raising of additional equity. There can be no assurance, however, that additional capital will be available to us on acceptable terms, if at all.
Our ability to meet our debt repayments in the longer term will depend upon the achievement of our business plan. There can be no assurance that we will generate sufficient cash flow from operations or that future working capital will be available in an amount sufficient to enable us to service our indebtedness, or make necessary capital expenditures.
In order to purchase the business from Inchcape plc, we raised finance in the form of Senior Subordinated Notes, Senior Term Loans and Parent Subordinated PIK Debentures. Subject to the provisions under which these Loans were made, and subject to certain exceptions and applicable law, there are no restrictions on the ability of: (a) the Company or any of its direct and indirect subsidiaries from paying dividends or making any other distributions, loans or advances to Intertek Finance plc, the subsidiary of the Company which issued the Notes, or (b) the direct and indirect subsidiaries of the Company from paying dividends or making any other distributions, loans or advances to the Company.
17
Investigations by the U.S. Environmental Protection Agency
Two of our subsidiary corporations are currently involved in investigations by the U.S. Environmental Protection Agency (“EPA”). Details of each investigation are given below:
Intertek Testing Services Environmental Laboratories, Inc. – Richardson, Texas
On October, 5, 2001, Intertek Testing Services Environmental Laboratories Inc. (“Environmental”), a subsidiary of Intertek Testing Services Limited (ITS) that is no longer operational, reached a settlement with the U.S. Department of Justice, fully resolving all criminal litigation. The settlement related to tests conducted between 1994 and 1997 by former Environmental employees in a facility in Richardson, Texas. Some of the testing procedures were found to be irregular by ITS’ own quality control and in January 1998 were promptly reported to the Environmental Protection Agency (EPA). Most important, extensive review of the data provided to customers has shown that it poses no risk of harm to human health or the environment.
Under the terms of the settlement, which have yet to be approved by the Court, Environmental pleaded guilty to a conspiracy. As part of the guilty plea, Environmental will pay a fine of $4.5 million within 60 days after sentencing and has agreed to pay $1.5 million in each of the next three years to the U.S. Government, for a total of $9 million. The provision for $9 million (GBP £6.2 million) was made in our financial statements for the period ended September 30, 2001. Imposition of the sentence by the Court is scheduled for December 14, 2001.
In addition, Environmental is presently engaged in discussion with the Government regarding the resolution of any potential civil claim the Government may have arising from these events. Potential civil claims are not covered by the settlement of the criminal matter.
To date, three former customers of ITS Environmental have filed lawsuits arising from laboratory analyses performed under contracts with those customers. On December 9, 1999, a complaint was filed by a customer in Federal Court in Chicago, Illinois against Intertek Testing Services Environmental Laboratories, Inc. seeking declaratory judgement and damages arising from analyses performed between 1991 and 1997. This complaint was dismissed without prejudice on September 12, 2001. On December 17, 1999, a complaint was filed in state court in Kansas City, Missouri, against Intertek Testing Services Limited seeking damages from improper testing and analysis. This complaint was dismissed without prejudice on August 6, 2001. On January 12, 2000, a third complaint was filed in state court in Los Angeles, California, against Intertek Testing Services Limited and Intertek Testing Services Environmental Laboratories, Inc. seeking damages arising for improper t esting and analysis and alleging fraud. An agreement to settle this complaint was made on October 24, 2001.
On September 20, 2000, the U.S. Department of Justice announced that a Federal Grand Jury in Dallas, Texas returned an indictment of thirty counts against thirteen persons who were formerly employed by Environmental in Richardson, Texas. Charges against the thirteen persons include conspiracy to commit mail fraud, conspiracy to present false, fictitious and fraudulent claims against the United States and wire fraud. Prior to the commencement of the trial, four of the former employees under indictment pled guilty to making a false demand to the United States, which is a misdemeanor, and one of the former employees under indictment, pled guilty to conspiracy to commit mail fraud, which is a felony. On October 9, 2001, the trial commenced against the eight remaining former employee defendants. Environmental is responsible for any criminal acts of these former employees even though such acts were reported by the company and not committed with its knowle dge or permission.
On March 23, 2001, a Complaint was filed in state court in Marshall, Texas, by 418 individual plaintiffs against Intertek Testing Services Environmental Laboratories, Inc. and thirteen former employees seeking $80 million in damages. The individual defendants named in the lawsuit are the same people who were indicted in September 2000. The Complaint alleges common fraud, negligent misrepresentation and malice. Plaintiffs previously sued various suppliers to the Longhorn Army Ammunition Plant (“Longhorn”) for
18
personal injury and property damage. They claim here that ITS Environmental understated environmental test results for Longhorn as a result of which they settled that case for less than they otherwise would have. All defendants have sought to remove the case to the Federal Court and have moved to dismiss the Complaint. On August 21, 2001, the court heard oral argument with respect to plaintiffs’ motions to remand and defendants’ motion to dismiss and is expected to rule on these pending motions in the near future. We believe we have a meritorious defense and the outcome is unlikely to have a material adverse effect on our business and our financial position.
We are unable to predict the outcome of these actions and we are unable to estimate the cost of any civil damages or penalties arising from this investigation. However, on the basis of currently available information, we consider that the outcome is unlikely to have a material adverse effect on our business and our financial position. We have notified Inchcape plc of our agreement to pay a fine of $9 million and of the ongoing civil investigation and are pursuing possible rights of recovery against Inchcape plc under the Share Purchase Deed. Our group professional indemnity insurance policy may respond at least to third party claims, civil damages and associated legal costs and may respond to some degree to any costs relating to the civil case with the United States government. In August 2001, we received £379k, net of the policy deductible of £300k, from our insurers as reimbursement of legal costs incurred in connection with third part y claims. We expect further settlements in due course.
Caleb Brett USA, Inc – Puerto Rico
Caleb Brett USA, Inc has been informed that an investigation is underway by the U.S. Department of Justice Environmental Crime Section of certain practices at its Puerto Rico facility. The investigation relates to events in 1997 and prior, and we are unable to predict the outcome or estimate the cost of any civil or criminal penalties that may arise. However, on the basis of currently available information, we consider that the outcome is unlikely to have a material adverse effect on our business and our financial position.
New Accounting Standards
U.K. Accounting Standards
Financial Reporting Standard 17: Retirement Benefits, was issued in December 2000 and contains important changes to the accounting for defined benefit pension schemes. FRS 17 is not fully effective until accounting periods ending on or after 22 June 2003.
Financial Reporting Standard 19: Deferred tax, replaces SSAP 15: Accounting for Deferred Tax, and was issued in December 2000. It makes significant changes to FRS 7: Fair Values in Acquisition Accounting, concerning the recognition of deferred tax on acquisitions. The standard is mandatory for accounting periods ending on or after 23 January 2002.
We have not yet determined the impact, if any, the adoption of these standards will have on our financial position or results of operations.
U.S. Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”) and No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 applies to all business combinations initiated after June 30, 2001 and requires that such combinations be accounted for using the purchase method of accounting. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortised but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortised over their useful lives. The amortisation and non-amortisation provisions of SFAS 142 apply to all goodwill and intangible assets acquired after June 30,
19
2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002. Because of the extensive effort needed to comply with adopting SFAS 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying value of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company is required to adopt SFAS 143 effective January 1, 2003. We are currently evaluating the effect, if any, the adoption of SFAS 143, including the transitional provisions, will have on the results of operation s and financial position.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, addresses financial accounting and reporting for the impairment or disposal of long lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within t hose fiscal years. The Statement is to be applied prospectively. Early adoption is permitted. We have not yet determined the impact, if any, the adoption of this standard will have on our financial position or results of operations.
European Monetary Union - Euro
On January 1, 1999, eleven of the European Union member states, including seven countries in which we operate, established fixed conversion rates between their existing currencies and adopted one common currency, the Euro. The conversion to the Euro eliminates currency exchange rate risk among the eleven member countries. On January 1, 2000, Greece also established a fixed conversion rate between its national currency and the Euro.
The currencies of the twelve member states remain legal tender in the participating countries during a three-year transition period from January 1, 1999 through January 1, 2002. Effective January 1, 1999, the Euro is traded on currency exchanges and is available for non-cash transactions during the three-year transitional period. Beginning on January 1, 2002, the European Central Bank will issue Euro-denominated bills and coins for use in cash transactions. On or before July 1, 2002, the participating countries will withdraw all bills and coins and use the Euro as their legal currency.
Our operating units affected by the Euro have established plans to address the issues raised by the conversion. These issues, among others, include such matters as pricing, continuity of contracts, accounting and financial reporting, taxation, treasury activities and computer systems. A number of our operating units in Europe have converted their systems and are reporting in Euros. The remaining operating units will convert their local records to the Euro during 2001.
Although we have not identified any immediate problems, we cannot be certain that the harmonisation of currencies in Europe will not have a material adverse impact on the operating results, financial position or liquidity of our European businesses.
20
Intertek Testing Services Limited
Consolidated Statements of Operations
| (Unaudited) | ||||
| Nine months to | Nine months to | |||
| September 30, | September 30, | |||
| 2000 | 2001 | |||
| £m | £m | |||
| Revenues | ||||
| Continuing operations | 291.2 | 335.8 | ||
| Discontinued operations | 0.7 | — | ||
| Group revenues | 291.9 | 335.8 | ||
| Operating costs | (245.7 | ) | (301.7 | ) |
| Group operating income | 46.2 | 34.1 | ||
| Share of operating profit in associates | 0.6 | 0.6 | ||
| Total operating income | 46.8 | 34.7 | ||
| Operating income/(loss) before exceptional items | ||||
| Continuing operations | 43.3 | 48.8 | ||
| Discontinued operations | (0.7 | ) | — | |
| 42.6 | 48.8 | |||
| Exceptional items credited/(charged) to operating income | ||||
| Continuing operations | 7.2 | (4.7 | ) | |
| Discontinued operations | (3.0 | ) | (9.4 | ) |
| Total operating income | 46.8 | 34.7 | ||
| Operating income/(loss) after exceptional items | ||||
| Continuing operations | 50.5 | 44.1 | ||
| Discontinued operations | (3.7 | ) | (9.4 | ) |
| Total operating income | 46.8 | 34.7 | ||
| Non-operating exceptional items | ||||
| Continuing operations | (3.0 | ) | — | |
| Discontinued operations | (12.2 | ) | — | |
| Total non-operating exceptional items | (15.2 | ) | — | |
| Income on ordinary activities before net interest | 31.6 | 34.7 | ||
| Net interest expense | (26.4 | ) | (29.0 | ) |
| Income before taxation | 5.2 | 5.7 | ||
| Taxation | (7.6 | ) | (9.1 | ) |
| Loss after taxation | (2.4 | ) | (3.4 | ) |
| Minority interests | (2.4 | ) | (3.3 | ) |
| Net loss for the group and its share of associates | (4.8 | ) | (6.7 | ) |
The accompanying notes on pages F-6 to F-21 are an integral part of these financial statements.
F-1
Intertek Testing Services Limited
Consolidated Statements of Operations
| (Unaudited) | ||||
| Three months to | Three months to | |||
| September 30, | September 30, | |||
| 2000 | 2001 | |||
| £m | £m | |||
| Group revenues | 102.4 | 114.0 | ||
| Operating costs | (79.4 | ) | (111.1 | ) |
| Group operating income | 23.0 | 2.9 | ||
| Share of operating profit in associates | 0.1 | 0.1 | ||
| Total operating income | 23.1 | 3.0 | ||
| Operating income before exceptional items | 15.7 | 17.1 | ||
| Exceptional items credited/(charged) to operating income | ||||
| Continuing operations | 8.4 | (4.7 | ) | |
| Discontinued operations | (1.0 | ) | (9.4 | ) |
| Total operating income | 23.1 | 3.0 | ||
| Operating income/(loss) after exceptional items | ||||
| Continuing operations | 24.1 | 12.4 | ||
| Discontinued operations | (1.0 | ) | (9.4 | ) |
| Total operating income | 23.1 | 3.0 | ||
| Non-operating exceptional items | ||||
| Discontinued operations | 0.1 | — | ||
| Total non-operating exceptional items | 0.1 | — | ||
| Income on ordinary activities before net interest | 23.2 | 3.0 | ||
| Net interest expense | (9.3 | ) | (10.2 | ) |
| Income before taxation | 13.9 | (7.2 | ) | |
| Taxation | (2.0 | ) | (2.8 | ) |
| Income/(loss) after taxation | 11.9 | (10.0 | ) | |
| Minority interests | (1.0 | ) | (1.3 | ) |
| Net income/(loss) for the group and its share of associates | 10.9 | (11.3 | ) | |
The accompanying notes on pages F-6 to F-21 are an integral part of these financial statements.
F-2
Intertek Testing Services Limited
Consolidated Balance Sheets
| (Audited) | (Unaudited) | |||||
Notes | December 31, | September 30, | ||||
| 2000 | 2001 | |||||
| £m | £m | |||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash | 7 | 21.3 | 27.3 | |||
| Trade receivables | 81.6 | 83.5 | ||||
| Inventories | 1.7 | 1.8 | ||||
| Other current assets | 19.1 | 22.3 | ||||
| Total current assets | 123.7 | 134.9 | ||||
| Goodwill | 16.8 | 16.1 | ||||
| Property, plant and equipment, net | 67.9 | 72.0 | ||||
| Investments | 0.9 | 1.1 | ||||
| Total assets | 209.3 | 224.1 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||
| Current liabilities | ||||||
| Borrowings (including current portion of long term borrowings) | 3 | 22.1 | 35.2 | |||
| Accounts payable, accrued liabilities and deferred income | 80.5 | 89.4 | ||||
| Income taxes payable | 6.9 | 6.4 | ||||
| Total current liabilities | 109.5 | 131.0 | ||||
| Long term borrowings | 3 | 300.3 | 304.9 | |||
| Provisions for liabilities and charges | 13.9 | 10.8 | ||||
| Minority interests | 6.3 | 6.7 | ||||
| Shareholders’ deficit | ||||||
| Ordinary shares | 0.8 | 0.8 | ||||
| Redeemable preference shares | 105.5 | 105.5 | ||||
| Shares to be issued | 2.8 | 2.8 | ||||
| Premium in excess of par value | 3.6 | 3.6 | ||||
| Accumulated deficit | (333.4 | ) | (342.0 | ) | ||
| Total shareholders’ deficit | (220.7 | ) | (229.3 | ) | ||
| Total liabilities and shareholders’ deficit | 209.3 | 224.1 | ||||
The accompanying notes on pages F-6 to F-21 are an integral part of these financial statements.
F-3
Intertek Testing Services Limited
Consolidated Statements of Cash Flows
| (Unaudited) | ||||||
Notes | Nine months to | Nine months to | ||||
| September 30, | September 30, | |||||
| 2000 | 2001 | |||||
| £m | £m | |||||
| Total operating cash inflow | 5 | 51.1 | 43.4 | |||
| Returns on investments and servicing of finance | 6 | (15.8 | ) | (17.6 | ) | |
| Taxation | (7.3 | ) | (8.8 | ) | ||
| Capital expenditure and financial investment | 6 | (14.1 | ) | (16.7 | ) | |
| Acquisitions and disposals | 6 | 0.1 | (0.6 | ) | ||
| Cash inflow/(outflow) before financing | 14.0 | (0.3 | ) | |||
| Financing | 6 | (0.9 | ) | 7.3 | ||
| Increase in cash in the period | 13.1 | 7.0 | ||||
| Reconciliation of net cash flow to movement in net debt | 7 | |||||
| Increase in cash in the period | 13.1 | 7.0 | ||||
| Cash inflow/(outflow) from movement in debt | 1.0 | (7.3 | ) | |||
| Change in net debt resulting from cash flows | 14.1 | (0.3 | ) | |||
| Debt issued in lieu of interest payment | (7.2 | ) | (8.6 | ) | ||
| Acquisitions and disposals | (0.8 | ) | — | |||
| Other non-cash movements | (1.6 | ) | (1.7 | ) | ||
| Exchange adjustments | (25.1 | ) | (1.1 | ) | ||
| Increase in net debt in the period | (20.6 | ) | (11.7 | ) | ||
| Net debt at the start of the period | (273.4 | ) | (301.1 | ) | ||
| Net debt at the end of the period | (294.0 | ) | (312.8 | ) | ||
The accompanying notes on pages F-6 to F-21 are an integral part of these financial statements.
F-4
Intertek Testing Services Limited
Consolidated Statements of Total Recognised Gains and Losses
| (Unaudited) | ||||
| Nine months to | Nine months to | |||
| September 30, | September 30, | |||
| 2000 | 2001 | |||
| £m | £m | |||
| Net loss from group companies | (4.6 | ) | (7.1 | ) |
| Net (loss)/income from associates | (0.2 | ) | 0.4 | |
| (4.8 | ) | (6.7 | ) | |
| Exchange adjustments | (21.4 | ) | (1.9 | ) |
| Total recognised losses | (26.2 | ) | (8.6 | ) |
There is no material difference between income before taxation and net income for the financial periods, as stated in the statements of operations, and their historical cost equivalents.
Consolidated Statements of Changes in Shareholders’ Deficit
| (Unaudited) | ||||||||||||
| Ordinary | Redeemable | Shares to | Premium in | Accumulated | Total | |||||||
| shares | preference | be issued | excess of par | deficit | ||||||||
| shares | value | |||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Balance at January 1, 2000 | 0.8 | 105.5 | 2.8 | 3.6 | (315.2 | ) | (202.5 | ) | ||||
| Net loss | — | — | — | — | (4.8 | ) | (4.8 | ) | ||||
| Goodwill adjustments | — | — | — | — | 10.0 | 10.0 | ||||||
| Exchange adjustments | — | — | — | — | (21.4 | ) | (21.4 | ) | ||||
| Balance at September 30, 2000 | 0.8 | 105.5 | 2.8 | 3.6 | (331.4 | ) | (218.7 | ) | ||||
| Balance at January 1, 2001 | 0.8 | 105.5 | 2.8 | 3.6 | (333.4 | ) | (220.7 | ) | ||||
| Net loss | — | — | — | — | (6.7 | ) | (6.7 | ) | ||||
| Exchange adjustments | — | — | — | — | (1.9 | ) | (1.9 | ) | ||||
| Balance at September 30, 2001 | 0.8 | 105.5 | 2.8 | 3.6 | (342.0 | ) | (229.3 | ) | ||||
Included in accumulated deficit is £287.3 million relating to goodwill (at September 30, 2000: £289.8 million). This comprises goodwill of £284.0 million written off to reserves in relation to the acquisition of subsidiaries prior to December 1997 (at September 30, 2000: £287.8 million) and £3.3 million amortised goodwill in relation to acquisitions from January 1, 1998 (at September 30, 2000: £2.0 million).
The accompanying notes on pages F-6 to F-21 are an integral part of these financial statements.
F-5
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
1. Basis of presentation
The accompanying condensed consolidated financial statements of the Company and its subsidiaries at September 30, 2001, for the nine months to September 30, 2000 and the nine months to September 30, 2001 and for the three months to September 30, 2000 and the three months to September 30, 2001 are unaudited. In the opinion of the Directors, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of these periods are not necessarily indicative of results for the entire year and have been prepared in conformity with accounting principles generally accepted in the United Kingdom (“U.K. GAAP”) and are presented under the historical cost convention. These principles differ in certain material respects from generally accepted accounting principles in the United States (“U.S. GAAP”) – see note 8.
For the purpose of these unaudited condensed consolidated financial statements, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Kingdom have been condensed or omitted. These unaudited statements should be read in conjunction with the audited financial statements and notes as of and for the year ended December 31, 2000.
2. Accounting policies
The significant accounting policies adopted by the Company and its subsidiaries are set out below.
Basis of consolidation
The consolidated financial statements of the Company include the financial statements of the Company and its subsidiaries. The acquisition method of accounting has been adopted. Under this method, the results of subsidiaries acquired or sold are included in the consolidated statement of income of the Company from, or up to, the date control passes. The consolidated statements of income of the Company include their respective shares of income from associated undertakings. The consolidated balance sheets of the Company include interests in associates at their respective shares of the net tangible assets.
Use of estimates
Preparation of financial statements in conformity with U.K. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for an accounting period. Such estimates and assumptions could change in the future as more information becomes known or circumstances alter, such that the group’s actual results may differ from the amounts reported and disclosed in the financial statements.
Foreign currencies
The results of operations and cash flows of overseas subsidiaries and associated undertakings are translated into sterling at the average of the month end rates of exchange for the period. Assets and liabilities in foreign currencies are translated into sterling at closing rates of exchange except where rates are fixed under contractual arrangements. The difference between net income/(loss) translated at average and at closing rates of exchange is included in the statement of total recognised gains and losses and as a movement in shareholders’ equity/(deficit). Exchange differences arising from the retranslation to closing rates of exchange of opening shareholders’ equity, and long-term foreign currency borrowings used to finance foreign currency investments are also reflected in the statement of total recognised gains and losses and as movements inshareholders’ equity/(deficit). All other exchange differences are dealt with in the consolidated statement of operations.
F-6
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
Accounting policies(continued)
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less depreciation, which is provided, except for freehold land, on a straight line basis over the estimated useful lives of the assets, mainly at the following annual rates:
| Freehold buildings and long leasehold land and buildings | 2% |
| Short leasehold land and buildings | Term of lease |
| Plant, machinery and equipment | 10% - 33.3% |
Leases
Assets held under capital leases are treated as if they had been purchased at the present value of the minimum lease payments. This cost is included in property, plant and equipment, and depreciation is provided over the shorter of the lease term or the estimated useful life. The corresponding obligations under these leases are included within borrowings. The finance charge element of capital lease payments is charged to operations to produce a constant rate of interest. Operating lease rentals are charged to operations on a straight-line basis over the periods of the leases.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises expenditure incurred in the normal course of business in bringing inventories and work in progress to their present location and condition.
Revenues
Revenues represent the total amount receivable for services provided and goods sold, excluding sales-related taxes and intra-group transactions. Revenue is recognised when the relevant service is completed or goods delivered.
Taxation
Deferred taxation is provided on timing differences using the liability method at current taxation rates, to the extent that the directors consider that it is probable that a liability or asset will crystallise.
Pension benefits
Liabilities under defined contribution pension schemes are charged to operations when incurred. ITS has a number of defined benefit pension schemes for which contributions are based on triennial actuarial valuations. Pension charges in operations have been calculated at a constant percentage of current and expected future pensionable payroll, with variations from regular cost spread over the expected remaining service lives of employees.
Goodwill and other intangible assets
Purchased goodwill in respect of acquisitions since January 1, 1998 is capitalised in accordance with the requirements of FRS 10: Goodwill and Intangible Assets, and is amortised on a straight line basis over its estimated useful life, which is limited to a maximum of 20 years. Other intangible assets, such as non compete covenants, are amortised over the term of the respective agreements, generally between two to five years. Purchased goodwill in respect of acquisitions before January 1, 1998 was written off to reserves in the year of each acquisition in accordance with the accounting standard then in force. When a subsequent disposal occurs, any goodwill previously written off to reserves is written back through the consolidated statement of operations and is considered in determining the gain or loss on the disposal.
Cash and cash equivalents
Cash for the purposes of the balance sheet and the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.
F-7
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
Accounting policies (continued)
Derivative financial instruments
The company uses various derivative financial instruments to manage its exposure to foreign exchange and interest rate risks. Derivative financial instruments are considered hedges if they meet certain criteria. A forward exchange contract is considered a hedge of an identifiable foreign currency commitment if such contract is designated as, and is effective as, a hedge of a firm foreign currency commitment. An interest rate swap agreement is considered a “synthetic alteration” (and accounted for like a hedge) when the agreement is designated with a specific liability and it alters the interest rate characteristics of such liability. An interest rate cap agreement must also meet the same criteria as an interest rate swap to be considered a hedge of a specific liability. Derivative financial instruments failing to meet the aforementioned criteria are accounted for at fair value, with the resulting unrealised gains and losses included in the statement of operations.
Forward exchange contracts.Forward exchange contracts are designated as hedges of firm foreign currency commitments. Gains and losses on such contracts are deferred and recognised in income or as an adjustment of the carrying amount when the hedged transaction occurs.
Interest rate cap agreements.Interest rate cap agreements are accounted for under the accruals basis. Amounts receivable under the agreements are accrued when due as a reduction of interest charges. Premiums paid for purchased interest rate cap agreements are amortised to interest charges over the term of the caps.
Interest rate swaps.Interest rate swap agreements are designated to change the interest rate characteristics of floating-rate borrowings. The interest differential between the amounts received and amount paid is recognised as an adjustment to interest charges over the term of the swap.
3. Borrowings
| December 31, | September 30, | |||
| 2000 | 2001 | |||
| £m | £m | |||
| Due in less than one year: | ||||
| Senior Term Loan A | 12.8 | 14.0 | ||
| Senior Revolver | 10.0 | 23.0 | ||
| Other borrowings | — | 0.1 | ||
22.8 | 37.1 | |||
| Debt issuance costs | (0.7 | ) | (1.9 | ) |
22.1 | 35.2 | |||
| Due in more than one year: | ||||
| Senior Term Loan A | 47.0 | 39.4 | ||
| Senior Term Loan B | 35.5 | 34.2 | ||
| Senior Term Loan C | — | 1.0 | ||
| Senior Subordinated Notes | 138.1 | 139.0 | ||
| Parent Subordinated PIK Debentures | 87.5 | 96.8 | ||
308.1 | 310.4 | |||
| Debt issuance costs | (7.8 | ) | (5.5 | ) |
300.3 | 304.9 | |||
F-8
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
Borrowings(continued)
Maturity of borrowings:
| Senior | Senior | Senior | Senior | Senior | Parent | Other | Total | |||||||||
| Term | Term | Term | Revolver | Subordinated | Subordinated | borrowings | borrowings | |||||||||
| Loan A | Loan B | Loan C | Notes | PIK | ||||||||||||
| Debentures | ||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||
| Due in less than 1 year | 14.0 | — | — | 23.0 | — | — | 0.1 | 37.1 | ||||||||
| Due in 1-2 years | 23.5 | — | — | — | — | — | — | 23.5 | ||||||||
| Due in 2-3 years | 15.9 | 17.1 | — | — | — | — | — | 33.0 | ||||||||
| Due in 3-4 years | — | 17.1 | — | — | — | — | — | 17.1 | ||||||||
| Due in 4-5 years | — | — | 1.0 | — | — | — | — | 1.0 | ||||||||
| Due in over 5 years | — | — | — | — | 139.0 | 96.8 | — | 235.8 | ||||||||
| 53.4 | 34.2 | 1.0 | 23.0 | 139.0 | 96.8 | 0.1 | 347.5 | |||||||||
| Debt issuance costs | (0.9 | ) | (0.6 | ) | (0.3 | ) | — | (4.3 | ) | (1.3 | ) | — | (7.4 | ) | ||
52.5 | 33.6 | 0.7 | 23.0 | 134.7 | 95.5 | 0.1 | 340.1 | |||||||||
4. Reconciliation of movement in shareholders’ deficit
| Nine months | Nine months | |||
| to September | to September | |||
| 30, 2000 | 30, 2001 | |||
| £m | £m | |||
| Total recognised losses for the period | (26.2 | ) | (8.6 | ) |
| Goodwill adjustments | 10.0 | — | ||
| (16.2 | ) | (8.6 | ) | |
| Opening shareholders’ deficit | (202.5 | ) | (220.7 | ) |
| Closing shareholders’ deficit | (218.7 | ) | (229.3 | ) |
F-9
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
5. Reconciliation of operating income to operating cash flows
| Nine months | Nine months | |||
| to September | to September | |||
| 30, 2000 | 30, 2001 | |||
| £m | £m | |||
| Operating income after exceptional items | 46.8 | 34.7 | ||
| Depreciation charge | 9.4 | 11.5 | ||
| Goodwill amortisation | 0.8 | 1.0 | ||
| Loss on sale of fixed assets | 0.2 | 0.1 | ||
| Increase in inventories | (0.2 | ) | (0.1 | ) |
| Increase in receivables and other current assets | (10.9 | ) | (6.9 | ) |
| Increase in payables | 4.9 | 6.3 | ||
| Discontinued operating exceptional provision – Environmental | 3.0 | 3.2 | ||
| Decrease in provisions | (2.7 | ) | (6.1 | ) |
| 51.3 | 43.7 | |||
| Equity income of associates | (0.6 | ) | (0.7 | ) |
| Dividends received from associates | 0.4 | 0.4 | ||
| Total operating cash inflow | 51.1 | 43.4 | ||
6. Analysis of cash flows
| Nine months | Nine months | |||
| to September | to September | |||
| 30, 2000 | 30, 2001 | |||
| £m | £m | |||
| Returns on investment and servicing of finance | ||||
| Net interest paid | (13.0 | ) | (15.0 | ) |
| Dividends paid to minorities | (2.8 | ) | (2.6 | ) |
| (15.8 | ) | (17.6 | ) | |
| Capital expenditure and financial investment | ||||
| Purchase of property, plant and equipment | (14.3 | ) | (16.8 | ) |
| Sale of property, plant and equipment | 0.2 | 0.1 | ||
| (14.1 | ) | (16.7 | ) | |
| Acquisitions and disposals | ||||
| Purchase of subsidiary undertakings | (1.4 | ) | (0.1 | ) |
| Sale of subsidiary undertakings | 1.6 | 0.1 | ||
| Deferred consideration payments | (0.1 | ) | (0.6 | ) |
| 0.1 | (0.6 | ) | ||
| Financing | ||||
| Issue of debt | 2.9 | 14.0 | ||
| Repayment of loans | (3.9 | ) | (6.7 | ) |
| Cash subscribed by minorities | 0.1 | — | ||
| (0.9 | ) | 7.3 | ||
F-10
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
7. Analysis of net debt
| At December | Cash flow | Debt issued | Other non- | Exchange | At September | |||||||
| 31, 2000 | in lieu of | cash changes | adjustments | 30, 2001 | ||||||||
| interest | ||||||||||||
| payment | ||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Net cash | ||||||||||||
| Cash in hand and at bank | 21.3 | 7.0 | — | — | (1.0 | ) | 27.3 | |||||
| Debt | ||||||||||||
| Debt due within one year | (22.1 | ) | (12.8 | ) | — | (0.2 | ) | (0.1 | ) | (35.2 | ) | |
| Debt due after one year | (300.3 | ) | 5.5 | (8.6 | ) | (1.5 | ) | — | (304.9 | ) | ||
| (322.4 | ) | (7.3 | ) | (8.6 | ) | (1.7 | ) | (0.1 | ) | (340.1 | ) | |
| Total net debt | (301.1 | ) | (0.3 | ) | (8.6 | ) | (1.7 | ) | (1.1 | ) | (312.8 | ) |
8. Summary of differences between U.K. and U.S. GAAP
The consolidated financial statements are prepared in conformity with U.K. GAAP. These accounting principles differ in certain material respects from U.S. GAAP. Described below are the material differences between U.K. GAAP and U.S. GAAP affecting the net income/(loss) and shareholders’ equity/(deficit) which are set forth in the tables that follow. The results for the nine months ended September 30, 2001 are not necessarily indicative of the expected results for the year to December 31, 2001.
Goodwill and other intangible assets
Under U.K. GAAP, purchased goodwill in respect of acquisitions before January 1, 1998 was written off to reserves in the year of acquisition. Purchased goodwill in respect of acquisitions since January 1, 1998 is capitalised in accordance with the requirements of FRS 10, Goodwill and Intangible Assets. Other intangible assets, such as non compete covenants, are amortised over the term of the agreement, generally between two to five years. Positive goodwill is amortised to nil in equal instalments over its estimated useful life, generally not exceeding 20 years. Under U.S. GAAP, goodwill and identifiable intangibles are capitalised and are written off over their estimated useful lives, generally not exceeding 40 years. U.S. GAAP goodwill and identifiable intangibles are being written off over periods not exceeding 20 years.
Redeemable preference shares
Under U.K. GAAP, preference shares with mandatory redemption features or redeemable at the option of the security holders are classified as a component of shareholders’ equity. U.S. GAAP requires such redeemable preference shares to be classified outside of shareholders’ equity. Additionally under U.S. GAAP, when the fair value of mandatorily redeemable preferred shares at the time of its issuance is less than the mandatory redemption amount, the carrying amount is increased by periodic accretion using the interest method, such that the carrying amount will equal the mandatory redemption amount at the mandatory redemption date. The periodic accretion would be shown as an additional dividend on the redeemable preference shares in U.S. GAAP financial statements and as a movement in shareholders’ equity.
Disposal of business segment
Under U.K. GAAP, the profit or loss arising on the disposal of a business segment after the year end, but before the earlier of three months and the date when the financial statements are approved, is not recognised in the financial statements but is disclosed as a post balance sheet event and the disposed business segment is classified as a
F-11
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
Summary of differences between U.K. and U.S. GAAP(continued)
discontinued operation in the financial statements. U.S. GAAP, requires that if a loss is expected from such disposal, such loss be recognised in the not yet released financial statements.
Pension costs — defined benefit plans
Under U.K. GAAP, the cost of providing pension benefits is expensed over the average expected service lives of eligible employees on the basis of a constant percentage of current and estimated future earnings. Under U.S. GAAP, costs and surpluses are similarly spread over the remaining service lives but based on prescribed actuarial assumptions, cost allocation and valuation methods, which differ in certain respects from those used for U.K. GAAP.
As a result of this difference in methodology, the U.S. GAAP pension expense can differ from that determined under U.K. GAAP and tends to be more sensitive to changing economic conditions.
Compensated absences
Under U.S. GAAP, compensated absences, being an employee's paid holiday entitlements, are accrued as earned. U.K. GAAP does not require such provision to be made.
Derivative instruments and hedging activities
Under U.K. GAAP, forward exchange contracts are designed as hedges of firm foreign currency commitments. Gains and losses on such contracts are deferred and recognised in income or as an adjustment of the carrying amount when the hedged transaction occurs. Interest rate swap agreements are designed to change the interest rate characteristics of floating rate borrowings. Accordingly, under these agreements the interest differential between the amounts received and amount paid is recognised as an adjustment to interest charges over the terms of the respective swaps.
Under U.S. GAAP, Statement of Financial Accounting Standards (‘SFAS’) No.133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No.138 Accounting for Certain Derivative Instruments and Certain Hedging Activities-An Amendment to SFAS No.133, requires that an entity recognises all derivatives in the consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Derivatives that are not designated as part of a hedging relationship must be adjusted to fair value through income. Changes in the fair value of derivatives designated as fair value hedges are recorded in income as well as the gain or loss on the hedged asset or liability. Changes in the fair value of derivatives designated as cash flow hedges are classified as other comprehensive income until the hedged item is recognised in income. The ineffective portions of derivatives tha t are hedges are immediately recognised in income.
Deferred taxation
Under U.K. GAAP, deferred taxation is accounted for using the liability method to the extent that it is considered probable that a liability or asset will crystallise in the foreseeable future. Under U.S. GAAP, deferred taxation is provided on all temporary differences and carryforwards. Deferred tax assets are recognised to the extent that it is more likely than not that they will be realised. Where doubt exists as to whether a deferred tax asset will be realised, an appropriate valuation allowance is established.
F-12
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
Summary of differences between U.K. and U.S. GAAP(continued)
8(a) Net loss
| Nine months | Nine months | |||
| to September | to September | |||
| 30, 2000 | 30, 2001 | |||
| £m | £m | |||
| Net loss reported under U.K. GAAP | (4.8 | ) | (6.7 | ) |
| Goodwill amortisation | (7.2 | ) | (9.1 | ) |
| Derivative instruments and hedging | — | (1.1 | ) | |
| Previously recognised loss on disposal and closure of discontinued operation | 11.6 | — | ||
| Compensated absences | 0.2 | (0.1 | ) | |
| Tax effect on U.S. GAAP reconciling adjustments | — | — | ||
| Net loss in conformity with U.S. GAAP | (0.2 | ) | (17.0 | ) |
| Continuing operations | 15.7 | (17.0 | ) | |
| Discontinued operations | (15.9 | ) | — | |
| Net loss in conformity with U.S. GAAP | (0.2 | ) | (17.0 | ) |
(b) Shareholders’ deficit
The approximate effects on shareholders’ deficit of material differences between U.K. and U.S. GAAP are as follows:
| December 31, | September 30, | |||
| 2000 | 2001 | |||
| £m | £m | |||
| Shareholders’ deficit reported under U.K. GAAP | (220.7 | ) | (229.3 | ) |
| Goodwill | 188.2 | 178.4 | ||
| Redeemable preference shares, including cumulative accretion | (30.0 | ) | (33.4 | ) |
| Derivative instruments and hedging | — | (1.1 | ) | |
| Pensions | 0.3 | 0.3 | ||
| Compensated absences | (0.6 | ) | (0.7 | ) |
| Shareholders’ deficit in conformity with U.S. GAAP | (62.8 | ) | (85.8 | ) |
F-13
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
Summary of differences between U.K. and U.S. GAAP(continued)
8(c) Cash flows
The statements of cash flows prepared in accordance with U.K. GAAP present substantially the same information as that required under U.S. GAAP. Under U.S. GAAP however, there are certain differences from U.K. GAAP with regard to classification of items within the cash flow statement and with regard to the definition of cash.
Under U.K. GAAP, cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources and financing. Under U.S. GAAP, three categories of cash flow activity are reported, those being operating activities, investing activities and financing activities. Cash flows from taxation and returns on investments and servicing of finance would, with the exception of dividends paid, be included as operating activities under U.S. GAAP. Capital expenditure and financial investment, acquisitions and disposals and management of liquid resources would be included as investing activities. The payment of dividends would be included under financing activities under U.S. GAAP. Additionally, under U.K. GAAP overdrafts payable on demand are offset against cash, but are not offset against cash un der U.S. GAAP.
Set out below is a summary of the statements of cash flows under U.S. GAAP.
| Nine months | Nine months | |||
| to September | to September | |||
| 30, 2000 | 30, 2001 | |||
| £m | £m | |||
| Net cash provided by operating activities | 25.6 | 16.9 | ||
| Net cash used in investing activities | (10.6 | ) | (17.2 | ) |
| Net cash (used in)/provided by financing activities | (6.1 | ) | 7.3 | |
| 8.9 | 7.0 | |||
| Effect of exchange rate changes | 1.1 | (1.0 | ) | |
| Net increase in cash from continuing operations | 10.0 | 6.0 | ||
| Increase in cash from continuing operations | 10.0 | 6.0 | ||
| Increase in cash from discontinued operations | 3.4 | — | ||
| Cash at beginning of period | 20.2 | 21.3 | ||
| Cash at end of period | 33.6 | 27.3 | ||
F-14
Intertek Testing Services Limited
Unaudited Notes To The Consolidated Financial Statements
9. Issuer, guarantor and non-guarantor companies
Intertek Finance plc (“the Issuer”) is a wholly owned direct subsidiary of the Company and the Issuer has issued the Notes which are fully and unconditionally guaranteed on a senior subordinated basis by the Company and certain of its wholly owned direct subsidiaries: Intertek Testing Services UK Limited, Testing Holdings USA Inc., Yickson Enterprises Limited, Kite Overseas Holdings BV, ITS Holding Limited, Testing Holdings Sweden AB, Testing Holdings France EURL, Testing Holdings Germany GmbH (collectively, the “Guarantor subsidiaries” and, together with the Company, the “Guarantors”). In addition, each of the Guarantor’s guarantee is itself guaranteed by each other Guarantor, fully and unconditionally, on a senior subordinated basis. Subject to the provisions of the agreement under which the loans to finance the acquisition of the business were made, certain exceptions and applicable law, there are no restrictions on the ability of:
| (a) | the Company or any of its direct and indirect subsidiaries from paying dividends or making any other distributions or loans or advances to the Issuer or |
| (b) | the direct and indirect subsidiaries of the Company from paying dividends or making any other distribution or loans or advances to the Company. |
Separate financial statements and other disclosures concerning the Issuer and the Guarantors are not presented because management has determined that they are not material to the investors. In lieu of the separate guarantor financial statements, management has presented condensed consolidated financial information. The condensed consolidated financial information presented below has been segregated between (a) the Issuer, (b) the Company, (c) the Guarantor subsidiaries and (d) the non-Guarantor subsidiaries.
F-15
Intertek Testing Services Limited
Notes To The Consolidated Financial Statements
Issuer, guarantor and non-guarantor companies (continued)
Statements of Operations
Nine months to September 30, 2001
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | |||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | |||||||
| Services Ltd | subsidiaries | |||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Total group revenue | — | — | — | 376.1 | (40.3 | ) | 335.8 | |||||
| Operating costs (including exceptionals) | — | (8.0 | ) | — | (334.0 | ) | 40.3 | (301.7 | ) | |||
| Share of operating profit in associates | — | — | — | 0.6 | — | 0.6 | ||||||
| Operating (loss)/income | — | (8.0 | ) | 42.7 | — | 34.7 | ||||||
| Non-operating exceptional items | — | — | — | — | — | — | ||||||
| (Loss)/income before interest | — | (8.0 | ) | — | 42.7 | — | 34.7 | |||||
| Net interest expense | 0.1 | (7.9 | ) | (6.1 | ) | (15.1 | ) | — | (29.0 | ) | ||
| Income/(loss) before taxation | 0.1 | (15.9 | ) | (6.1 | ) | 27.6 | — | 5.7 | ||||
| Taxation | — | — | (0.2 | ) | (8.9 | ) | — | (9.1 | ) | |||
| Income/(loss) after taxation | 0.1 | (15.9 | ) | (6.3 | ) | 18.7 | — | (3.4 | ) | |||
| Minority interests | — | — | — | (3.3 | ) | — | (3.3 | ) | ||||
| Dividends from/(to) group companies | — | — | 0.5 | (0.5 | ) | — | — | |||||
| Net income/(loss) | 0.1 | (15.9 | ) | (5.8 | ) | 14.9 | — | (6.7 | ) | |||
Statements of Operations
Three months to September 30, 2001
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | |||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | |||||||
| Services Ltd | subsidiaries | |||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Total group revenue | — | — | — | 128.9 | (14.9 | ) | 114.0 | |||||
| Operating costs (including exceptionals) | — | (9.2 | ) | — | (116.8 | ) | 14.9 | (111.1 | ) | |||
| Share of operating profit in associates | — | — | — | 0.1 | — | 0.1 | ||||||
| Operating (loss)/income | — | (9.2 | ) | — | 12.2 | — | 3.0 | |||||
| Non-operating exceptional items | — | — | — | — | — | — | ||||||
| (Loss)/income before interest | — | (9.2 | ) | — | 12.2 | — | 3.0 | |||||
| Net interest expense | 0.1 | (3.0 | ) | (2.2 | ) | (5.1 | ) | — | (10.2 | ) | ||
| Income/(loss) before taxation | 0.1 | (12.2 | ) | (2.2 | ) | 7.1 | — | (7.2 | ) | |||
| Taxation | — | — | 0.3 | (3.1 | ) | — | (2.8 | ) | ||||
| Income/(loss) after taxation | 0.1 | (12.2 | ) | (1.9 | ) | 4.0 | (10.0 | ) | ||||
| Minority interests | — | — | — | (1.3 | ) | — | (1.3 | ) | ||||
| Dividends from/(to) group companies | — | — | — | — | — | — | ||||||
| Net income/(loss) | 0.1 | (12.2 | ) | (1.9 | ) | 2.7 | — | (11.3 | ) | |||
F-16
Intertek Testing Services Limited
Notes To The Consolidated Financial Statements
Issuer, guarantor and non-guarantor companies(continued)
Statements of Operations
Nine months to September 30, 2000
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | |||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | |||||||
| Services | subsidiaries | |||||||||||
| Ltd | ||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Total group revenue | — | — | — | 322.9 | (31.0 | ) | 291.9 | |||||
| Operating costs (including exceptionals) | — | (0.5 | ) | — | (276.2 | ) | 31.0 | (245.7 | ) | |||
| Share of operating profit in associates | — | — | — | 0.6 | — | 0.6 | ||||||
| Operating (loss)/income | — | (0.5 | ) | — | 47.3 | — | 46.8 | |||||
| Non-operating exceptional items | — | (3.0 | ) | (4.4 | ) | (7.8 | ) | — | (15.2 | ) | ||
| (Loss)/income before interest | — | (3.5 | ) | (4.4 | ) | 39.5 | — | 31.6 | ||||
| Net interest expense | 0.1 | (6.3 | ) | (6.0 | ) | (14.2 | ) | — | (26.4 | ) | ||
| Income/(loss) before taxation | 0.1 | (9.8 | ) | (10.4 | ) | 25.3 | — | 5.2 | ||||
| Taxation | — | — | 0.5 | (8.1 | ) | — | (7.6 | ) | ||||
| Income/(loss) after taxation | 0.1 | (9.8 | ) | (9.9 | ) | 17.2 | — | (2.4 | ) | |||
| Minority interests | — | — | — | (2.4 | ) | — | (2.4 | ) | ||||
| Dividends from/(to) group companies | — | — | 0.9 | (0.9 | ) | — | — | |||||
| Net income/(loss) | 0.1 | (9.8 | ) | (9.0 | ) | 13.9 | — | (4.8 | ) | |||
Statements of Operations
Three months to September 30, 2000
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | |||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | |||||||
| Services | subsidiaries | |||||||||||
| Ltd | ||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Total group revenue | — | — | — | 113.9 | (11.5 | ) | 102.4 | |||||
| Operating costs (including exceptionals) | — | (0.3 | ) | — | (90.6 | ) | 11.5 | (79.4 | ) | |||
| Share of operating profit in associates | — | — | — | 0.1 | — | 0.1 | ||||||
| Operating (loss)/income | — | (0.3 | ) | — | 23.4 | — | 23.1 | |||||
| Non-operating exceptional items | — | (1.0 | ) | (0.1 | ) | 1.2 | — | 0.1 | ||||
| (Loss)/income before interest | — | (1.3 | ) | (0.1 | ) | 24.6 | — | 23.2 | ||||
| Net interest expense | (0.4 | ) | (2.3 | ) | (2.0 | ) | (4.6 | ) | — | (9.3 | ) | |
| (Loss)/income before taxation | (0.4 | ) | (3.6 | ) | (2.1 | ) | 20.0 | — | 13.9 | |||
| Taxation | — | — | 0.3 | (2.3 | ) | — | (2.0 | ) | ||||
| (Loss)/income after taxation | (0.4 | ) | (3.6 | ) | (1.8 | ) | 17.7 | — | 11.9 | |||
| Minority interests | — | — | — | (1.0 | ) | — | (1.0 | ) | ||||
| Dividends from/(to) group companies | — | — | — | — | — | — | ||||||
| Net (loss)/income | (0.4 | ) | (3.6 | ) | (1.8 | ) | 16.7 | — | 10.9 | |||
F-17
Intertek Testing Services Limited
Notes To The Consolidated Financial Statements
Issuer, guarantor and non-guarantor companies(continued)
Balance Sheets
September 30, 2001
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | |||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | |||||||
| Services | subsidiaries | |||||||||||
| Ltd | ||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash | — | (4.1 | ) | 0.2 | 31.2 | — | 27.3 | |||||
| Trade receivables | — | — | 0.1 | 83.4 | — | 83.5 | ||||||
| Inventories | — | — | — | 1.8 | — | 1.8 | ||||||
| Other current assets | 156.3 | 111.4 | 225.1 | 307.5 | (778.0 | ) | 22.3 | |||||
| Total current assets | 156.3 | 107.3 | 225.4 | 423.9 | (778.0 | ) | 134.9 | |||||
| Goodwill | — | — | — | 16.1 | — | 16.1 | ||||||
| Property, plant and equipment, net | — | — | — | 72.0 | — | 72.0 | ||||||
| Investments in subsidiary undertakings | — | 128.6 | 214.6 | 75.1 | (418.3 | ) | — | |||||
| Investments | — | — | — | 1.1 | — | 1.1 | ||||||
| Total assets | 156.3 | 235.9 | 440.0 | 588.2 | (1,196.3 | ) | 224.1 | |||||
| LIABILITIES AND SHAREHOLDERS’ FUNDS | ||||||||||||
| Current liabilities | ||||||||||||
| Borrowings (including current portion of | ||||||||||||
| Long term borrowings) | — | 23.0 | 13.5 | (1.3 | ) | — | 35.2 | |||||
| Accounts payable, accrued liabilities and | ||||||||||||
| Deferred income | 20.1 | 60.4 | 239.1 | 547.8 | (778.0 | ) | 89.4 | |||||
| Income taxes (receivable)/payable | — | — | (1.2 | ) | 7.6 | — | 6.4 | |||||
| Total current liabilities | 20.1 | 83.4 | 251.4 | 554.1 | (778.0 | ) | 131.0 | |||||
| Long term borrowings | 135.8 | 96.2 | 72.9 | — | — | 304.9 | ||||||
| Provisions for liabilities and charges | — | — | — | 10.8 | — | 10.8 | ||||||
| Minority interests | — | — | — | 6.7 | — | 6.7 | ||||||
| Shareholders’ equity/(deficit) | ||||||||||||
| Ordinary shares | 0.1 | 0.8 | 115.6 | 212.4 | (328.1 | ) | 0.8 | |||||
| Redeemable preference shares | — | 105.5 | — | — | — | 105.5 | ||||||
| Shares to be issued | — | 2.8 | — | — | — | 2.8 | ||||||
| Premium in excess of par value | — | 3.6 | 25.9 | 4.6 | (30.5 | ) | 3.6 | |||||
| Accumulated earnings/(deficit) | 0.3 | (56.4 | ) | (25.8 | ) | (200.4 | ) | (59.7 | ) | (342.0 | ) | |
| Total shareholders’ equity/(deficit) | 0.4 | 56.3 | 115.7 | 16.6 | (418.3 | ) | (229.3 | ) | ||||
| Total liabilities and shareholders’ funds | 156.3 | 235.9 | 440.0 | 588.2 | (1,196.3 | ) | 224.1 | |||||
F-18
Intertek Testing Services Limited
Notes To The Consolidated Financial Statements
Issuer, guarantor and non-guarantor companies(continued)
Balance Sheets
December 31, 2000
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | |||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | |||||||
| Services Ltd | subsidiaries | |||||||||||
| £m | £m | £m | £m | £m | £m | |||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash | — | (11.2 | ) | 0.7 | 31.8 | — | 21.3 | |||||
| Trade receivables | — | — | — | 81.6 | — | 81.6 | ||||||
| Inventories | — | — | — | 1.7 | 1.7 | |||||||
| Other current assets | 145.8 | 92.9 | 218.6 | 294.9 | (733.1 | ) | 19.1 | |||||
| Total current assets | 145.8 | 81.7 | 219.3 | 410.0 | (733.1 | ) | 123.7 | |||||
| Goodwill | — | — | — | 16.8 | — | 16.8 | ||||||
| Property, plant and equipment, net | — | — | — | 67.9 | — | 67.9 | ||||||
| Investments in subsidiary undertakings | — | 128.6 | 217.8 | 74.5 | (420.9 | ) | — | |||||
| Investments | — | — | — | 0.9 | — | 0.9 | ||||||
| Total assets | 145.8 | 210.3 | 437.1 | 570.1 | (1,154.0 | ) | 209.3 | |||||
| LIABILITIES AND SHAREHOLDERS’ FUNDS | ||||||||||||
| Current liabilities | ||||||||||||
| Borrowings (including current portion of | ||||||||||||
| Long term borrowings) | — | 10.0 | 12.0 | 0.1 | — | 22.1 | ||||||
| Accounts payable, accrued liabilities and | ||||||||||||
| Deferred income | 11.0 | 42.7 | 223.2 | 536.7 | (733.1 | ) | 80.5 | |||||
| Income taxes (receivable)/payable | — | (0.4 | ) | (2.3 | ) | 9.6 | — | 6.9 | ||||
| Total current liabilities | 11.0 | 52.3 | 232.9 | 546.4 | (733.1 | ) | 109.5 | |||||
| Long term borrowings | 134.4 | 86.1 | 81.4 | (1.6 | ) | — | 300.3 | |||||
| Provisions for liabilities and charges | — | — | — | 13.9 | — | 13.9 | ||||||
| Minority interests | — | — | — | 6.3 | — | 6.3 | ||||||
| Shareholders’ equity/(deficit) | ||||||||||||
| Ordinary shares | 0.1 | 0.8 | 115.1 | 195.9 | (311.1 | ) | 0.8 | |||||
| Redeemable preference shares | — | 105.5 | — | — | — | 105.5 | ||||||
| Shares to be issued | — | 2.8 | — | — | — | 2.8 | ||||||
| Premium in excess of par value | — | 3.6 | 25.8 | 0.6 | (26.4 | ) | 3.6 | |||||
| Accumulated earnings/(deficit) | 0.3 | (40.8 | ) | (18.1 | ) | (191.4 | ) | (83.4 | ) | (333.4 | ) | |
| Total shareholders’ equity/(deficit) | 0.4 | 71.9 | 122.8 | 5.1 | (420.9 | ) | (220.7 | ) | ||||
| Total liabilities and shareholders’ funds | 145.8 | 210.3 | 437.1 | 570.1 | (1,154.0 | ) | 209.3 | |||||
F-19
Intertek Testing Services Limited
Notes To The Consolidated Financial Statements
Issuer, guarantor and non-guarantor companies(continued)
Statements of Cash Flows
Nine months to September 30, 2001
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | ||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | ||||||
| Services | subsidiaries | ||||||||||
| Ltd | |||||||||||
| £m | £m | £m | £m | £m | £m | ||||||
| Total operating cash inflow | — | 1.0 | 0.3 | 42.1 | — | 43.4 | |||||
| Returns on investments and servicing of finance | (5.4 | ) | (0.9 | ) | (1.8 | ) | (9.5 | ) | — | (17.6 | ) |
| Taxation | — | 0.3 | 0.7 | (9.8 | ) | — | (8.8 | ) | |||
| Capital expenditure and financial investment | — | — | — | (16.7 | ) | — | (16.7 | ) | |||
| Acquisitions and disposals | — | — | — | (0.6 | ) | — | (0.6 | ) | |||
| Cash (outflow)/inflow before financing | (5.4 | ) | 0.4 | (0.8 | ) | 5.5 | — | (0.3 | ) | ||
| Financing | 5.4 | 6.7 | 0.2 | (5.0 | ) | — | 7.3 | ||||
| Increase/(decrease) in cash in the period | — | 7.1 | (0.6 | ) | 0.5 | — | 7.0 | ||||
| Reconciliation of net cash flow to movement in net debt: | |||||||||||
| Increase/(decrease) in cash in the period | — | 7.1 | (0.6 | ) | 0.5 | — | 7.0 | ||||
| Cash inflow from increase in debt | — | (14.0 | ) | 6.6 | 0.1 | — | (7.3 | ) | |||
| Change in net debt resulting from cash flows | — | (6.9 | ) | 6.0 | 0.6 | — | (0.3 | ) | |||
| Debt issued in lieu of interest payment | — | (8.6 | ) | — | — | — | (8.6 | ) | |||
| Acquisitions and disposals | — | — | — | — | — | — | |||||
| Other non-cash movements | (0.4 | ) | — | (0.5 | ) | (0.8 | ) | — | (1.7 | ) | |
| Exchange adjustments | (1.0 | ) | (0.5 | ) | 1.2 | (0.8 | ) | — | (1.1 | ) | |
| Movement in net debt in the period | (1.4 | ) | (16.0 | ) | 6.7 | (1.0 | ) | — | (11.7 | ) | |
| Net debt at the start of the period | (134.4 | ) | (107.3 | ) | (92.9 | ) | 33.5 | — | (301.1 | ) | |
| Net debt at the end of the period | (135.8 | ) | (123.3 | ) | (86.2 | ) | 32.5 | — | (312.8 | ) | |
F-20
Intertek Testing Services Limited
Notes To The Consolidated Financial Statements
Issuer, guarantor and non-guarantor companies(continued)
Statements of Cash Flows
Nine months to September 30, 2000
| Intertek | Intertek | Guarantor | Non- | Consolidation | Consolidated | ||||||
| Finance plc | Testing | subsidiaries | Guarantor | adjustments | totals | ||||||
| Services | subsidiaries | ||||||||||
| Ltd | |||||||||||
| £m | £m | £m | £m | £m | £m | ||||||
| Total operating cash (outflow)/inflow | — | 0.4 | (0.4 | ) | 51.1 | — | 51.1 | ||||
| Returns on investments and servicing of finance | (0.2 | ) | 0.2 | (2.2 | ) | (13.6 | ) | — | (15.8 | ) | |
| Taxation | — | 0.7 | 0.5 | (8.5 | ) | — | (7.3 | ) | |||
| Capital expenditure and financial investment | — | — | — | (14.1 | ) | — | (14.1 | ) | |||
| Acquisitions and disposals | — | (1.2 | ) | (0.6 | ) | 1.9 | — | 0.1 | |||
| Cash inflow/(outflow) before financing | (0.2 | ) | 0.1 | (2.7 | ) | 16.8 | — | 14.0 | |||
| Financing | 0.2 | 2.5 | 3.0 | (6.6 | ) | — | (0.9 | ) | |||
| Increase in cash in the period | — | 2.6 | 0.3 | 10.2 | — | 13.1 | |||||
| Reconciliation of net cash flow to movement in net debt : | |||||||||||
| Increase in cash in the period | — | 2.6 | 0.3 | 10.2 | — | 13.1 | |||||
| Cash (outflow)/inflow from increase in debt | — | (2.8 | ) | 3.3 | 0.5 | — | 1.0 | ||||
| Change in net debt resulting from cash flows | — | (0.2 | ) | 3.6 | 10.7 | — | 14.1 | ||||
| Debt issued in lieu of interest payment | — | (7.2 | ) | — | — | — | (7.2 | ) | |||
| Acquisitions and disposals | — | — | — | (0.8 | ) | — | (0.8 | ) | |||
| Other non-cash movements | (0.5 | ) | (0.1 | ) | (0.4 | ) | (0.6 | ) | — | (1.6 | ) |
| Exchange adjustments | (12.5 | ) | (8.1 | ) | (5.7 | ) | 1.2 | — | (25.1 | ) | |
| Movement in net debt in the period | (13.0 | ) | (15.6 | ) | (2.5 | ) | 10.5 | — | (20.6 | ) | |
| Net debt at the start of the period | (122.1 | ) | (86.5 | ) | (93.5 | ) | 28.7 | — | (273.4 | ) | |
| Net debt at the end of the period | (135.1 | ) | (102.1 | ) | (96.0 | ) | 39.2 | — | (294.0 | ) | |
F-21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 6-K and has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorised.
INTERTEK TESTING SERVICES LIMITED
(Registrant)
By:/s/ WILLIAM SPENCER
Name: William Spencer
Title: Director
Date: November 14, 2001