Peter Kenyon, TunnelTalk

It has taken time to filter through but the effects of the global economic downtown are laid bare in Halcrow’s 2010 annual report with analysts seeing little prospect for this year's figures to buck the trend. Peter Kenyon reports.

In the end, even a ruthless two year round of job cuts, to what Halcrow's management called a "new slimmed down corporate structure", were not enough to see the business maintain its independent status.

At the end of 2008, Halcrow Holdings employed more than 7,300 staff, 6,100 of them in a professional and technical capacity. Just two years later the workforce had shrunk by 1,000, at a cost in redundancy packages of nearly £10 million.

To put this in context, Halcrow's profit after tax in the calendar year to 31 December 2010 was £7.08 million. Alarmingly for the company, operating costs, mostly made up of wages and salaries, remained virtually unchanged at the height of the restructuring programme.

Turnover crashed by 8.1% year-on-year from a record-breaking £506.5 million at the end of 2009 (enough to elevate the company to 114^th in the Sunday Times' Top Track table of private UK companies ranked by sales) to a disappointing £465.48 million by the end of last year (2010). Meanwhile pre-tax profits slipped to £8.8 million, barely half that of 2009, and more than £3 million less than those recorded in 2006 (Table 1).

Table 1: Halcrow Holdings consolidated profit/loss accounts for the years 2006 to 2010 (£000)

The 2010 annual report tells a story of a firm that, not unlike its competitors, was suffering badly in the UK and USA core markets that accounted for more than half of all business, while at the same time experiencing rapid growth in the more marginal markets of Latin America and Australasia.

Unfortunately for Halcrow, a 30% increase in revenues from these secondary markets represented only an additional £10 million to the balance sheet.

Political problems, social unrest and bad debt in the Middle East also contributed to revenue from this important region, Halcrow's second biggest market by some distance after the UK, declining by an alarming £35 million. Between 2009 and 2010 income from this region fell from £148.2 million to £113.5 million (23.5%).

As the business summary in the 2010 annual report put it: "Behind this year's figures lies a complex story of strongly differing performances in different markets around the world. Our new, slimmed-down corporate structure has removed significant costs from the business and made us more agile and responsive to clients." (Table 2 & 3).

Table 2: Halcrow turnover by region 2006 to 2010 2010 2009 2008 2007 2006 (£000) (£000) (£000) (£000) (£000) UK&Ireland 212,154 231,221 230,951 208,415 184,398 East Asia 26,546 18,379 13,976 14,500 14,032 North Am. 43,463 49,532 52,093 44,142 32,711 Latin Am 15,728 11,019 8,661 6,153 12,417 Middle East 113,538 148,229 121,825 82,698 59,796 Europe 16,729 15,145 18,785 15,958 14,045 South Asia 8,311 8,910 5,525 5,160 4,776 Africa 3,072 3,519 2,606 3,757 2,381 Australia 25,940 20,612 12,917 7,358 5,820

Table 3: Annual profit (loss) by region 2006 to 2010 2010 2009 2008 2007 2006 (£000) (£000) (£000) (£000) (£000) UK&Ireland 16,112 20,689 23,691 23,012 9,820 East Asia 972 (44) 101 (594) (522) North Am. (6,102) (364) (5,372) 4,086 2,454 Latin Am (2,257) (484) 719 (502) (224) Middle East 860 13,420 (4,027) 1,295 (1,426) Europe (73) (652) 922 531 206 South Asia 998 (930) 56 (941) (134) Africa 480 (147) 336 (150) 604 Australia 2,365 (3,552) (3,985) 1,623 545

Chief Executive Peter Gammie noted in his report: "Globally, conditions continued to be challenging as major infrastructure opportunities were postponed or cancelled."

Chief Executive Peter Gammie

A UK government public sector spending squeeze contributed to falling revenues in the UK while in the US "challenging conditions" were not helped by the cancellation of two major contracts for a new tunnel in New York City and a new port in Jacksonville, Florida.

In the Middle East Gammie noted a "significant" turnover fall between 2009 and 2010 with "the region continuing to be affected by macro-economic uncertainty and much-reduced government spending."

He added in his report: "Although liquidity (in the Middle East) continued to be a major issue for many of our clients we succeeded in settling some outstanding debts."

But with cash flows under threat, moves to restructure the company and cut costs from the balance sheet appear to have made Halcrow ripe for a takeover or sale. Under the terms of the takeover, share-holding employees and directors will be entitled to £5.64 for every share they hold (or be entitled to shares to equivalent value in the new company). This is far more than the 395.2p weighted average share price value just nine months ago.

Between them seven of the company's eight executive directors have interests in 392,028 of Halcrow's 25 million shares in the form of share options at a range of prices between £1.95 and £4.03.

Halcrow's board of directors (2007). Standing from left: Alan Saffer, Tony Pryor CBE, Ken Mair, Les Buck. Sitting from left: David Kerr, Neil Holt, Peter Gammie, John Theakston

According to the 2010 annual report, Chief Executive Peter Gammie has options on 75,287 shares that may be exercised at an option price of £2.61, exercisable between August 2010 and August 2017. Alan Saffer, Group Finance Director, had options on 92,443 exercisable shares at £2.61-£2.89; Les Buck, (recently retired from the board), 64,559 shares at £2.61; and Group Board Director David Kerr 53,065 also at £2.61.

But by far the vast majority of shares in the company are held by the company's employees, all of whom look set for a windfall when CH2M HILL is finally authorised to pay $193 million for the balance of all the shares.

References

Halcrow sells out to CH2M HILL - TunnelTalk, Sept 2011
ARC cancellation hits industry hard - TunnelTalk, Nov 2010
Scheduling for success at Crossrail - TunnelTalk, April 2011

Downloadable 2010 Halcrow Holdings Annual Report PDF

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