ITV Preliminary Results

Wed 29 Feb 2012
/**/ RNS Number : 3243Y ITV PLC 29 February 2012  



29 February 2012

 

Revenue and profit growth as ITV strategy begins to deliver

 

·     External revenues up 4% at £2,140m (2010: £2,064m) driven by non-advertising revenues

·     Total non-NAR revenues up £93m or 11% to £922m (2010: £829m), mainly due to revenue growth from UK and international studios businesses

·     ITV Family NAR up 1% - outperforming the TV advertising market

·     ITV Family SOV up 1% with strong performance by digital channels up 10%

·     EBITA before exceptional items up 13% to £462m (2010: £408m)

·     Adjusted PBT up 24% to £398m (2010: £321m)

·     Adjusted EPS up 23% at 7.9p (2010: 6.4p)

·     Cost savings of £20m delivered - funding investments aligned to the Transformation Plan - with a further £20m identified for 2012

·     Positive net cash position of £45m (2010: net debt of £188m), with profit to cash conversion again over 100%

·     Continued improvement in the efficiency of the balance sheet with £339m of bonds bought back in 2011

·     The Board has proposed a final dividend of 1.2p to give a total dividend for 2011 of 1.6p

·     We expect ITV Family NAR to be down 2% in Q1 and April broadly flat. While we remain cautious on the outlook for advertising, we expect to outperform the market over the full year.

 

Adam Crozier, CEO of ITV, said:

 

"We're now almost two years into our five-year Transformation Plan and our continued growth in revenue and profit - at a time when the advertising market is broadly flat - demonstrates that we're performing in line with our strategic priorities. The increase in non-advertising revenues of £93m, driven by our studios and online businesses, is clear evidence of progress in rebalancing the Company and our ability to grow new revenue streams.

 

'Our financial position was further strengthened during the year through our ongoing focus on cash generation and cost reduction. We have our first positive net cash position since ITV was created in 2004 and more than delivered our targeted cost savings.

 

'ITV Studios, under the new management team, has made real progress creatively and operationally both in the UK and internationally.  We have delivered double digit revenue growth and a 28% increase in new commissions to 111, of which 45 are international.

 

'On screen we have grown family SOV and we continue to outperform the advertising market. We have seen strong growth in online video views as ITV Player was rolled out across more platforms. The VOD and pay deals we recently signed with Sky, Netflix and Lovefilm open up new pay revenue streams, which we will continue to build as part of our pay strategy.

 

'Although ITV Family NAR has started the year better than we anticipated, it is expected to be down 2% in Q1 against tough comparatives. We remain cautious on the market outlook for 2012 but we expect to outperform the market for the full year.

 

'We've made good progress and we remain focused on rebalancing the business and delivering the Transformation Plan. We will increasingly look to content, pay and online as the engines of growth in the UK and internationally as we invest further in our key strategic priorities.

 

 

FULL YEAR RESULTS

Year ended 31st December  (£ million)

 

2011

2010

Change

Change

Broadcasting & Online revenue

1,820

1,771

49

3%

ITV Studios (external) revenue

320

293

27

9%

Group external revenue

2,140

2,064

76

4%

Broadcasting & Online EBITA

379

327

52

16%

ITV Studios EBITA

83

81

2

2%

EBITA before exceptional items

462

408

54

13%

Adjusted profit before tax*

398

321

77

24%

Adjusted earnings per share (EPS)*

7.9p

6.4p

1.5p

23%

Dividend

1.6p

-

1.6p

-

*Adjusted profit before tax and adjusted EPS remove the effect of exceptional items, impairment of acquired intangible assets, amortisation of intangible assets acquired through business combinations, financing cost adjustments, and prior period and other tax adjustments from the statutory numbers.

 

 

Financial position

We have retained our tight focus on cost and cash management in 2011, delivering £20m of cost savings which is ahead of our £15m target. Our 13% increase in EBITA and continued strong cash conversion saw us end the year with positive net cash of £45m (2010: net debt of £188m). Profit to cash conversion was 103%, well ahead of our rolling three-year target of 90%. We bought back bonds to the value of £339m during the year and now have no debt repayments due until 2014. We will continue to look at options for the balance sheet that make economic sense but we are conscious of the uncertain economic environment and the need to maintain flexibility to deliver the Transformation Plan.

 

We invested £28m in the year to support our strategic objectives and will invest a further £25m in 2012. Capital expenditure rose to £43m in 2011, focused mainly on fixing our core business technology and the Manchester site move to MediaCity. This will increase to £70-80m in 2012.

 

Broadcasting and Online

Broadcasting and Online revenues rose 3% in 2011 to £1,820m (2010: £1,771m), driven by 13% growth in non-NAR revenues. ITV Family NAR was up 1%, outperforming the television advertising market which was up 0.7%.

 

EBITA before exceptional items increased 16% in 2011 to £379m (2010: £327m). This was driven by the revenue uplift falling through to profit, our tight focus on cash and costs and the 2010 Football World Cup costs dropping out, although this was offset to some extent by our investment in brand defining content for the digital channels. We will continue to invest in our channels in 2012 although the total ITV programme budget will remain at around £1bn.

 

ITV Family share of viewing (SOV) was up 1% in 2011, with a strong performance from our digital channels which were up 10%. ITV1 SOV, which benefited from the successful launch of ITV1+1, was down 2% - below where we want it to be and we will work to improve this performance in 2012. ITV Family share of commercial impacts (SOCI) was down 1% at 39.5% in 2011.

 

Online revenues increased by 21% to £34m (2010: £28m). Within Online, we are continuing to invest in fixing our legacy technology and in improving the quality and distribution of ITV Player. It is now available on Android and Apple devices, Freesat and PS3, contributing to a 44% increase in long form views to 376m (2010: 261m). Our pay strategy is beginning to gain momentum through recent content deals with Netflix, Lovefilm and Sky in addition to the pay HD channels on Sky. We plan to launch our Pay Player later in the year, while YouView will also launch in 2012.

 

ITV Studios

Under the new ITV Studios management team we have seen operational improvements and early signs of growth.  Total revenues have increased by 10% in 2011 to £612m (2010: £554m) driven by growth in both UK and international production. EBITA before exceptional items increased by £2m to £83m, the return from the increased revenues offsetting £8m of investment.

 

Our new management team is providing the creative leadership needed to transform the internal capability of the business. We had 111 new commissions in 2011, with 66 in the UK and 45 internationally, including our co-production of Titanic which was prefunded and has been sold to 86 countries. We have also had 101 recommissions. We will continue to invest in our strategy which is based on a 'mixed economy' approach of attracting new creative talent, building partnerships and investing internationally. In time, we may look to make acquisitions but we remain focused initially on growing the business organically. While the long lead times within production mean that it will take a while for the results to show through, there are signs of progress for ITV Studios' creative output.

 

Adjusted EPS

Adjusted EPS was up 23% to 7.9p (2010: 6.4p) reflecting the strong trading performance.

 

Adjusted financing costs are £50m (2010: £69m) helped by the impact of the £339m of buy-backs and the higher level of cash. In 2012 we expect adjusted financing costs to be broadly flat on 2011 with the full year impact of the bond buy-backs likely to be offset by the step up in costs on the 2019 debt. The adjusted effective tax rate of 23% is significantly lower than the statutory rate of UK corporation tax and is, as previously stated, expected to be maintained around this level for the next two years.

 

Statutory EPS

Statutory EPS is lower than 2010 at 6.4p (2010: 6.9p) due to the recognition of an exceptional deferred tax asset of £68m in 2010.

 

Pension

The aggregate IAS 19 deficit on the defined benefit schemes at 31st December 2011 was £390m (31st December 2010: £313m), increasing due to lower discount rates and the one-off costs associated with the longevity swap contract which was entered into by the Trustees in August. This measure was implemented as part of our long-term strategy to manage the risks and uncertainties associated with the Scheme. The one-off impact of the swap on the overall Scheme deficit was an increase of around £65m on both an accounting and a funding basis.  This equates to around a one year change in life expectancy.

 

On 8th July we extended the SDN pension partnership, which was originally agreed between the Group and the Trustees last year, increasing the value of SDN by £50m to £200m in total.

 

STV

On 27th April ITV and ITV Network agreed a wide ranging settlement with STV Group plc over the various legal actions that existed at the time. All legal actions ceased with immediate effect and the terms of the settlement included an £18m payment by STV to ITV to settle the court claims, payable in full by June 2013.

 

Dividend

The Board has proposed a final dividend of 1.2p. With the interim dividend of 0.4p, this gives a total dividend of 1.6p for 2011. The Board is committed to a progressive dividend policy, taking into account the outlook for earnings per share while balancing the need to invest in the business and to maintain financial prudence against the backdrop of an uncertain economic environment.

 

Outlook for 2012

We expect ITV Family NAR to be down 2% in Q1 with April broadly flat. We remain cautious on the economic outlook but expect to outperform the television advertising market for the full year.

 

 

NOTES TO EDITORS

 

1. Operational summary

 

Broadcasting and Online performance indicators

Year ended 31st December

2011

2010

ITV Family SOV

23.1%

22.9%

ITV1 SOV

15.6%

16.0%

ITV Family SOCI

39.5%

39.8%

ITV1 SOCI

26.3%

27.3%

ITV1 adult impacts

234 bn

237 bn

Total long form video views (all platforms)

376m

261m

Share of viewing and share of commercial impact data is for the twelve months to 31st December 2011, compared to equivalent period in 2010, based on BARB / AdvanetEdge data. Share of viewing data is for individuals and SOCI data is for adults. ITV Family includes: ITV1, ITV2, ITV3, ITV4, CITV, CITV Breakfast, Men&Motors and associated 'HD' and '+1' channels. 

Video views are based on internal Company and ComScore Digital Analytix data for itv.com.

 

2. ITV Family NAR was down 4% in January and down 4% in February. We expect it to be up 2% in March and down 2% for Q1 overall. We also expect it to be broadly flat in April.

Figures for ITV plc and market NAR are based on ITV estimates and current forecasts. 

 

3. Dividend payment date is 1 June 2012 and dividend record date is 4 May 2012.

 

4. This announcement contains certain statements that are or may be forward-looking with respect to the financial condition, results or operations and business of ITV plc. By their nature forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to (i) adverse changes to the current outlook for the UK television advertising market, (ii) adverse changes in tax laws and regulations, (iii) the risks associated with the introduction of new products and services, (iv) pricing, product and programme initiatives of competitors, including increased competition for programmes, (v) changes in technology or consumer demand, (vi) the termination or delay of key contracts, (vii) fluctuations in exchange rates and (viii) volatility in financial markets. 

 

For further enquiries please contact: 

 

Investor Relations

 

Pippa Foulds                        020 7157 6555 or 07778 031097

Edward Steel                        020 7157 6560 or 07810 528529

 

Media Relations

 

Mary Fagan                           020 7157 3965 or 07736 786448
Mike Large                            020 7157 3021 or 07768 261528

Caroline Cook                      0207 157 3709 or 07799 071509

 

 

Chief Executive's Review - Strategy & Operations

Adam Crozier

Overview of results

 

ITV has produced a strong set of financial results with continued growth in revenue and profitability and further improvement in our balance sheet strength. This was achieved against an unsettled economic backdrop. External revenues were up 4% at £2,140 million in a broadly flat television advertising market. Revenue growth was driven largely by our non-net advertising revenue (non-NAR) which, in line with our strategic priorities, grew significantly, up 11% or £93 million to £922 million.

 

This revenue growth, together with our tight control on costs, has fed through to a 13% increase in EBITA to £462 million, with adjusted EPS up 23% at 7.9p. We delivered £20 million of cost savings, which was in excess of the £15 million target. Our continued focus on cash and costs and our high profit to cash conversion saw us end the year with a positive net cash position of £45 million, having begun the year with net debt of £188 million. This gives us a strong financial base as we invest further in our key strategic priorities. 

 

We have made progress across the business and against virtually all of our key performance indicators in 2011. We saw a solid performance on-screen, with ITV Family share of viewing (SOV) up by 1% in 2011 and the digital channels continuing to show strong growth with SOV up 10%. ITV1 SOV, which benefited from the successful launch of ITV1+1, was down 2%, and ITV Family share of commercial impacts (SOCI) was down 1% but we will continue to work to improve these performances.  

 

Online we have improved the performance of itv.com and ITV Player, we have made our content available on more platforms and, with our recent video on demand (VOD) deals with Sky, Netflix and Lovefilm, we are driving our pay strategy forward. We have also increased long form video views by 44%.

 

ITV Studios, under the new management team,  performed strongly both in the UK and internationally. New commissions were up 28% to 111, which has driven the increase in non-NAR revenues. ITV Studios also increased its share of ITV1 output from 53% to 55% as we continue to strengthen the creative relationship between Broadcasting and Studios.

 

Our Vision

We are operating in an evolving and highly competitive digital market in which advances in technology are changing the way in which people consume media. We are transforming our business so that we are able to respond to the challenges of new technologies, changing patterns of user behaviour and new market entrants, while also ensuring that we are in a position to take advantage of the opportunities which the digital environment offers. The combination of our strong channel brands, access to content and commitment to our producer-broadcaster model gives us significant advantages but we are under no illusion about the need to remain focused on the task ahead.

 

Our vision remains to create world class content which we can make famous on our channels, before exploiting its value across multiple platforms, free and pay, in the UK and internationally. Content creation therefore lies at the heart of our Transformation Plan and we are encouraged by the momentum that is building. The high quality of content we produce and the programming we broadcast on our channels has been recognised by many industry awards.

 

We are also encouraged by the prospects for our free-to-air television business given current trends within the market. As we approach the end of analogue switch-off in the UK, the impact of fragmentation on audiences has already largely been felt. The daily average number of minutes of television watched has been rising in the UK in recent years, reaching record levels in 2010, and was broadly flat year-on-year in 2011 at 4 hours 2 minutes.  Live viewing via television sets is still around the same level as it was in 2004, but viewing via other devices is  growing. This suggests that VOD viewing to date has been incremental. 

 

We are less than two years into the Transformation Plan and there are clear signs that we are making good progress against our strategic priorities, but there is still a great deal to do. As we continue to improve the efficiency and performance of ITV, we will also look at further ways to rebalance our revenue streams as we focus on content, pay and online.

PerformanceDashboard

Reporting Progress against our five-year Transformation Plan:

 

1. Create a lean, creatively dynamic and fit-for-purpose organisation

 

Milestones achieved

· New senior leadership team delivering

· Employee engagement up to 85% (2010: 75%)

· Restructuring across ITV driving out waste and complexity

· £20m of cost savings

· More coordinated rights negotiation and management

· Investment in technology

· Manchester move to MediaCity under way

· Progress in simplifying network arrangements

· Pension longevity swap

· £339m bond buy-backs

 

Focus for 2012

· Focus on delivering the Transformation Plan

· Continue to build strength in the team across ITV

· Drive out further waste and complexity

· Deliver further cost efficiency target of £20m

· Strengthen collaborative creative process

· Further investment of £25m behind our strategy

· Capex of £70-80m as we implement site moves and technology improvements

 

2. Maximise audience and revenue share from our existing free-to-air broadcast business

 

Milestones achieved

·     Increased variety and quality within programme budget

·     Four out of top five new dramas on ITV1

·     Investment of £10m in brand defining content

·     Major sports rights deals renegotiated with savings

·     Successful launch of ITV1+1

·     ITV1 wins Terrestrial Channel of the Year

·     ITV2 and ITV3 largest digital channels

·     ITV Family SOV up 1%

·     Digital channels growing key audiences

·     ITV NAR up 1%, outperforming the market

 

Focus for 2012

·     Maintain ITV Family SOV

·     ITV programme budget confirmed at c.£1bn for 2012

·     Outperform the television advertising market

·     Refresh and enhance channel brands

·     Continue to invest in brand defining content

·     Build and develop non-spot advertising revenues

·     Ongoing implementation of news review

·     Focus on long running, returnable series

 

3. Drive new revenue streams by exploiting our content across multiple platforms, free and pay

 

Milestones achieved

· Investment in technology infrastructure online

· Improved quality and distribution of ITV Player

· 376m long form video views in 2011, up 44%

· 9% of VOD viewing in December on mobile

· 3m downloads of ITV Player App

· Online revenues up 21%

· Growing engagement with our viewers

· ITV2, 3, 4 pay HD channels on Sky performing in line with expectations

· New VOD deals with Sky, Netflix and Lovefilm

 

Focus for 2012

·     Improve ITV Player

·     Drive online viewing and revenues

·     Launch ITV Pay Player and pay 'products'

·     Increase pay VOD deals

·     Renegotiate existing VOD deals

·     Development of potential pay channels

·     Ensure ITV Player available on connected TV sets

·     Launch YouView

·     Roll out 'Total Value' exploitation

 

4. Build a strong international content business

 

Milestones achieved

·     New team in place driving creative renewal

·     Invested £8m in creative talent and developing new ideas and pilots

·     111 new commissions in 2011

·     Developing new partnerships

·     New dramas being sold successfully internationally

·     ITV Studios (ITVS) now producing 55% of ITV1 output

·     ITVS revenues up 10%

·     ITVS EBITA before exceptional items up £2m to £83m

 

Focus for 2012

·     Continue to build strength of creative team and talent

·     Invest in developing and piloting further new ideas

·     Focus on long running returnable series

·     ITVS to grow its share of ITV1 original commissions

·     Target off-ITV and international commissions

·     Increased focus on international co-productions and roll-out of ITVS formats

·     Develop and invest in the ITVS international network

Strategy In Action

 

Strategic Priority 1 - Create a lean, creatively dynamic and fit-for-purpose organisation

Our people remain key to ITV and to the delivery of the Transformation Plan. Our management team have now been in place for over a year and, together with the wider leadership team, are driving the Transformation Plan forward and continuing to facilitate cultural change at all levels of the business. We are very pleased to see that our employees are embracing the changes, with engagement having risen to 85% in 2011 (2010: 75%). We have also brought our recruitment operation in-house and the team have launched a brand new careers website to ensure we continue to attract and retain the best talent.

 

We have continued to restructure ITV where appropriate to drive out waste and complexity in the business. During 2011 we delivered cost savings of £20 million, ahead of the targeted £15 million. These savings follow on from the £40 million delivered in 2010. We will remain focused on costs to ensure that we have the appropriate cost base across the business and have identified a further £20 million of savings in 2012. Our continued commitment to the tight management of cash and costs has helped us move into a positive net cash position of £45 million at the end of 2011. We have also improved the efficiency of our balance sheet with £339 million of bond buy-backs. We continued our long-term strategy of managing the costs and risks associated with the pension schemes through our longevity swap and an extension to the SDN pension partnership.

 

In 2011 we launched our investment programme in technology in order to make the business fit-for-purpose. We have begun to roll out our desktop refresh, which is aimed at giving all of our people the best tools for the job, and we will continue this refresh throughout 2012. We are now taking steps towards complete digital production for all of our shows by implementing plans for tapeless content. Significant technology projects are being implemented across the organisation - we are aware that they will take time to accomplish but we are confident that they will lead to great improvements to the way in which we operate.

 

We remain committed to our producer-broadcaster model and want to gain maximum benefit from it. The improved rights negotiation and management process which we introduced has strengthened the collaboration between Broadcast and Studios and allows us to secure rights at the best value.

 

The move of the Company's Manchester base from Quay Street to MediaCity is now well under way and will deliver a bespoke, state-of-the-art production facility for Coronation Street as well as providing modern offices for everyone working in Manchester with improved technology. The first move for staff in Manchester into the new site will take place later this year. We will also be moving all staff in Leeds to one site and modernising a number of our regional offices with HD studios. As a result of our investment in technology and property, there is expected to be an increase in capital expenditure in 2012 to £70-£80 million.

 

During 2011, we made progress in simplifying the network structure through the acquisition of Channel Television.

 

Significant progress has been made towards creating a lean, creatively dynamic and fit-for-purpose organisation. This process will be ongoing as we prepare for the next stage in the plan. We continue to look for ways in which we can improve the business and make it work more efficiently.

 

Strategic Priority 2 - Maximise audience and revenue share from our existing free-to-air broadcast business

Although we delivered significant growth in non-NAR revenues in 2011, we still have a high degree of reliance on advertising revenues. We therefore remain firmly focused on maximising our audience and revenue share from our free-to-air broadcast business.

 

Our performance relative to the market is an important metric for us and this is reflected in our share of broadcast (SOB) - one of our key performance indicators. ITV Family net advertising revenue (NAR) was up 1% in 2011, ahead of the television advertising market for the fourth consecutive year, with SOB increasing from 45.1% to 45.3%. This outperformance was driven by an improved second half performance as advertisers concentrated spend around our autumn schedule of sport, drama and entertainment.

 

In 2011, ITV Family's share of viewing (SOV) was up 1%, driven by the continued strong growth of our digital channels which were up 10%. ITV1 SOV, which benefited from the successful launch of ITV1+1, was down 2% - this is below where we want it to be and we will work to improve performance in 2012.

 

ITV Family share of commercial impacts (SOCI) was down 1% in 2011 with ITV1 Adult SOCI down 4%, although we saw stronger performances from many of our key sub-demographics (Housewives, Adult ABC1s, 16-34s) which have a bearing on the contract rights renewal mechanism. Our digital channels' SOCI was again strong, up 9%.

 

ITV1's on-screen successes in 2011 have included Vera, Marchlands, Scott and Bailey, Strangeways, the Rugby World Cup, Doc Martin, and Downton Abbey, which won a Golden Globe for best mini-series, as well as winning the Christmas ratings battle with a consolidated audience of 12 million. Four of the top five performing new dramas were on ITV1 in 2011 and ITV1 also won the Terrestrial Channel of the Year Award at the Edinburgh Television Festival.

 

Our soaps continued to perform strongly with Emmerdale (average 7.6 million viewers per episode) increasing SOV by 3% during the year, while Coronation Street (9.4 million viewers) was only marginally down (-1%) despite the tough comparative of the 50th anniversary year in 2010.

 

Some of our key shows, including X Factor and I'm a Celebrity, did not perform as well as in 2010, but they remain very important brands for us as they still drive large, diverse audiences, which appeal greatly to advertisers. We remain committed to these programmes and continually look at ways of refreshing them to improve their on-screen performance. ITV1 continues to deliver some of the largest audiences on television. The average X Factor audience across the series was 12.3 million, which made it the largest entertainment format on UK television in 2011, as it has been for three of the last four years. It was also the third most successful series ever of the show in terms of audience.

 

Our digital channels continue to perform very strongly. ITV2 and ITV3 remain the largest digital channels in the UK and saw SOV rise 8% and 11% respectively, while ITV4 saw a 13% rise in SOV making it one of the fastest growing digital channels. ITV2, which won Channel of the Year and Best Entertainment Channel at the Broadcast Digital Awards, has seen particular success with the BAFTA award-winning The Only Way is Essex (TOWIE) and Celebrity Juice, both of which will be returning in 2012. TOWIE averaged 1.8 million viewers (up 21%) across the series while Celebrity Juice averaged 2.2 million viewers (up 12%), with one episode peaking at 3.1 million (14% share) making it the most-watched non-terrestrial programme of the year. We are continuing to invest in brand-defining content for our digital channels with new drama commissions for ITV2 and rights to the French Open, Europa League and the African Cup of Nations for ITV4.

 

Our channel brands are increasingly important in the constantly evolving digital market. Those channels linked to a strong 'mother brand' (ITV, BBC, C4, C5 and Sky) have recorded growth in SOV this year while other independent digital channels have seen a marked 9% decline. To consolidate this strength and build upon it we will be rebranding all of our channels during the second half of 2012 to position them for the challenges and opportunities which lie ahead.

 

In December, Ofcom announced that it would not be referring the advertising trading model to the Competition Commission. While our strategy is not dependent upon regulatory relief, we welcomed this decision as we had always maintained that a lengthy market review, at a time of such rapid change and increasing competition, would not be beneficial for UK consumers or the UK television industry.

 

Television is a long-term business and Peter Fincham and his team continue to make plans for the schedule several years in advance. In 2011, we spent just over £1 billion on programming and we continue to ensure that our programming investment is made as efficiently as possible, while maintaining variety and quality. Our programme budget for 2012 will remain at around £1 billion - we believe this is a sufficient level to provide the breadth, variety and freshness that audiences and advertisers require. We recently secured c.£35 million of savings from 2013 onwards when we renegotiated a number of rights deals including the Champions' League and FA Cup. Some of these savings may be reinvested back into the schedule.

 

We will continue to work at delivering maximum value from our free-to-air business while at the same time building and developing new non-spot advertising revenues.

 

Strategic Priority 3 - Drive new revenue streams by exploiting our content across multiple platforms, free and pay

We are continuing to execute our strategy of developing new revenue streams that are more balanced between pay and free television through building our programme brands and platform offerings. As well as the latest programmes, ITV has a huge archive of content and the technical advances of the digital market have opened up great opportunities for monetising this archive across the many devices on which people now consume content.

 

Online revenues grew by 21% in 2011 to £34 million, which contributed to the 13% growth in non-NAR revenues within Broadcasting and Online to £310 million (2010: £275 million). While this represents encouraging growth we are still aware of the need to build scale within Online. Our challenge is to choose the best monetisation strategy for our content and to continue to innovate, to open up new revenue streams.

 

As part of this strategy, ITV Player is now available on more platforms, including PS3, Android, iOS and Freesat. This improvement in the distribution of ITV's content has driven the 44% growth in long form video views across all platforms to 376 million (2010: 261 million). This is a key performance indicator as we seek to monetise our online traffic.

 

While our pay revenues are still relatively small in the context of ITV, they are derived from an increasing number of sources and our pay strategy is beginning to gain momentum.

 

2011 was the first full year of the pay HD channels ITV2, ITV3 and ITV4 on the Sky platform, and they performed in line with our expectations. In early 2012 we signed archive video on demand (VOD) deals with Lovefilm and Netflix and a VOD and catch up deal with Sky. These are non-exclusive deals which enable us to retain the option of doing similar deals with other parties should opportunities arise. We will also be launching a pay version of ITV Player later this year, which we will start to test internally in the second quarter of 2012. While this is slightly later than originally anticipated, we want to guarantee the quality of the user experience before launching to the public.

 

We are continually looking at ways in which we can develop closer engagement with our viewers in order to provide greater value to advertisers. While we are starting from a small base, we have seen significant increases in audience engagement via the 15.4 million Facebook fans which we have across all of our pages (2010: 7.4 million). We have also now collected 3.6 million contactable email addresses (2010: 1.6 million). These interactions are indicative of the power of the ITV brand and aid the exploitation of our content across multiple platforms as part of our Transformation Plan.

 

Mobile viewing has increased rapidly in 2011, representing 9% of all VOD viewing of ITV content in December, comparable with the BBC iPlayer. This enables us to engage ever more closely with consumers. In the first seven months following its launch the ITV Player app had more than three million downloads.

 

These all represent encouraging trends in our engagement with consumers but our challenge is to monetise the audiences we now have across multiple platforms. We have invested in fixing our online technology platform in 2011 but still have some way to go and the quality and the performance of ITV Player will further improve. We will continue to invest in navigation, ease of use, content and robustness to improve the quality of the overall user experience on our website.

 

The SDN business, which operates one of the six digital terrestrial multiplex licences in the UK that make up Freeview, saw 37% growth in its revenues as a result of the renegotiation of a number of its licences in 2010. This revenue growth will not be repeated in 2011 as this was a one-off increase.

 

In 2011 we announced the first product placement deals in the UK with Nationwide and Nestlé but the market remains very small. We previously highlighted that the new rules which Ofcom implemented would impact our ability to exploit this new revenue stream and this continues to be the case.

 

Strategic Priority 4 - Build a strong international content business

Creative renewal lies at the heart of our strategy to build an international content business. 2011 saw a significant increase in our development budget and the number of new pilots created. This contributed to ITV Studios (ITVS) securing 111 new commissions in the year (up 28% compared to 2010), of which 66 were in the UK and 45 were international.

 

The new ITVS management team is now in place and providing the creative leadership needed to transform the internal capability of the business. We have rebuilt our creative team in the UK and internationally with several new appointments, demonstrating that we are able to attract the right talent.

 

Our Studios business has shown particularly strong growth in 2011. Total ITVS revenues grew 10% from £554 million to £612 million, driven primarily by international production. External revenues were up 9% to £320 million. This revenue growth has more than offset the investment made in creative renewal, enabling EBITA before exceptional items to rise £2 million to £83 million during the year.

 

Our new UK commissions for ITV1 include SWAGS (a six-part drama about service wives and girlfriends), Superstar (in collaboration with Lord Andrew Lloyd Webber) which will be screened in 2012, and Mr Selfridge (a ten-part drama about the life of the flamboyant American entrepreneur, Harry Gordon Selfridge) for 2013. We also had ten off-ITV commissions including The Devil's Dinner Party for Sky Atlantic and Dirk Gently for BBC.

 

Our strategy revolves around creating long-running, returnable drama and entertainment formats which travel well internationally, so recommission levels are also a key focus for us. 75 recommissions in the UK, including Vera, Lewis and a celebrity version of The Chase, relative to 57 in 2010, represent positive steps in this area as we build up our pipeline of content.

 

On top of our UK activity, we are beginning to build momentum internationally. Our 45 new international commissions included Bill Cunningham and Buried Treasure in the US, as well as a production deal for a US version of Jeremy Kyle which was sold throughout the US, with Sekretarinnen being commissioned in Germany. We also had 26 international recommissions, including Four Weddings in France and the US and I'm a Celebrity in Germany.

 

We have highlighted the need to have a significant stake in the intellectual property rights of the content we show on our screens, and have made progress in this area in 2011. ITVS produced 1,929 hours of original commissions (2010: 1,740) for the ITV1 network, increasing its share of the network's spend to 55% from 53% in 2010 but we want to grow our share further still.

 

Our strategy is based upon a 'mixed economy' approach to content production: while we want to own more of what is shown on our channels, we are also prepared to enter into partnerships to ensure we are working with the best creative talent. The UK and US remain our main creative engines but we are also investing in growth in our other production hubs (France, Sweden, Australia and Germany), as well as exploring opportunities in other emerging creative markets, as we want to be making and distributing programmes in as many countries as possible.

 

We continue to look at new ways of working with creative talent and have signed a development agreement with an independent production company, The Garden. We have also entered into a joint venture with BAFTA-winning Channel 4 drama commissioners Camilla Campbell and Robert Wulff-Cochrane to establish a new scripted production company, Noho Film and TV, which will begin development on a number of projects in 2012.

 

We have increased our co-production activity as well: in 2011, we co-produced Julian Fellowes' Titanic which has now been sold into 86 countries ahead of its screening in April to coincide with the centenary of the Titanic's disaster; we also co-produced Prime Suspect in the US with Universal Television for NBC, which was sold into 116 countries. In 2012 we will be co-producing Mrs Biggs, a drama about Ronnie Biggs' wife, with Seven Network in Australia.

 

We are making encouraging progress but, given the long lead time involved in production, there is still a lot of work to do to develop scale in our content business on the international stage. We will continue to develop and invest in our international network as we build on the momentum which has been created within ITVS.

2012 and beyond

We are less than two years into our five-year Transformation Plan and there is still much to do but we have made good progress and are building momentum. Our aim is to rebalance the business away from a dependency on television advertising revenues. Our non-NAR revenue growth, driven by ITVS, shows that we are making progress against our strategic priorities.

 

The first phase of the plan has been primarily focused on fixing the business. While we relentlessly look for ways to improve the efficiency and performance of ITV, we have put in place a solid foundation for the growth phase of the plan which lies ahead of us. 

 

In 2012 we will look to build on the momentum we have created. In 2011 we invested £28 million in ITVS, Online, technology and our digital channels, and in 2012 we expect to invest a further £25 million.

 

Create a lean, creatively dynamic and fit-for-purpose organisation

In 2012 we will continue to build strength in the team across ITV to drive forward the Transformation Plan. We will look for further ways to improve efficiency and performance, driving out waste and complexity. We have identified a further £20 million of cost savings and planned further improvements in technology - our desktop refresh will continue throughout the year to ensure that our people have the right equipment to do their jobs. Capital expenditure in 2012 is expected to be £70-£80 million as we make these technological improvements and implement our site move from Manchester. We will also continue to build the improved collaborative creative process between Broadcast and Studios to help focus on creating long-running, returnable formats.

 

Maximise audience and revenue share from existing free-to-air broadcast business

In 2012, we aim to repeat the performance of 2011 by outperforming the television advertising market, as we did in 2011, and hold ITV Family SOV. We will refresh and enhance all of our channel brands and continue to invest in brand defining content as efficiently as possible.

 

Our total programming budget for 2012 will be around £1 billion, of which around £800 million will be spent on the ITV1 NPB, as we work to improve the variety of the schedule across the year. Schedule costs in the first half will increase due to Euro 2012 in June.

 

We will increasingly focus on long-running, returnable series and have a strong schedule for 2012 with returning dramas such as Downton Abbey, Vera, and Scott and Bailey alongside an exciting line-up of new drama including SWAGS, Titanic and Mrs Biggs - many of which are being made by ITVS. A number of ITV's top entertainment shows will be returning in 2012, including X Factor, I'm a Celebrity, Dancing on Ice and Long Lost Family, while we will be screening new shows including Superstar and Fool Britannia.

 

Live top sporting events in 2012 include Euro 2012, Champions League, Europa League, Tour de France and The French Open tennis. We will also continue to implement our ongoing news review.

 

Drive new revenue streams by exploiting our content across multiple platforms, free and pay

We will continue to build scale in our online business, improving the distribution and performance of ITV Player, and driving up online viewing and revenues. We also plan to make ITV Player available on manufacturers' connected television sets and launch YouView. We will expand our pay strategy in 2012, as we launch ITV Pay Player and pay products, renegotiate existing video on demand deals and negotiate new ones, and develop potential pay channels over time. We also plan to roll out our 'Total Value' exploitation under new teams.

 

Build a strong international content business

We will continue to invest in building our creative strength and talent and developing and piloting new ideas. We will further grow ITVS' share of ITV1 network commissions, focusing on long-running, returnable series,  whilst increasing off-ITV commissions both in the UK and internationally. We will increasingly focus on new international co-productions and rolling out ITVS formats but will also look at different ways of working with creative talent. We will develop and invest in our international network through our creative engines, production hubs and emerging creative markets. In time, we may look to make acquisitions but we remain focused initially on growing the business organically.

 

Outlook

Our 2011 financial and operating results demonstrate the progress we are making and the momentum we have built up. We will increasingly look to content, pay and online as engines for growth in the UK and internationally as we invest further in our key strategic priorities. Everyone at ITV remains firmly focused on delivering the Transformation Plan and we remain on track to do so.

 

We will maintain our tight focus on cash management throughout the organisation. With positive net cash of £45 million, ITV is in a strong position financially which gives us the flexibility to invest in the business while making the right decisions for the long-term future of the business. After £339 million of bond buy-backs in 2011 we will continue to look at options for the balance sheet that make economic sense. We are conscious of the uncertain economic environment and the need to maintain flexibility to deliver our strategic priorities.

 

Although ITV Family NAR has started the year better than we expected, it is still down 2% in Q1 and, whilst we expect to outperform the market again in 2012, we remain cautious on the full year outlook for the television advertising market.

 

Adam Crozier

Chief Executive

Financial and Performance Review

Ian Griffiths

 


2011

£m

2010

£m

Change

£m

Change

%

Net Advertising Revenue ('NAR')

1,510

1,496

14

1

Total non-NAR revenue

922

829

93

11

Total revenue

2,432

2,325

107

5

Total external revenue

2,140

2,064

76

4






EBITA before exceptional items

462

408

54

13

Adjusted earnings per share

7.9p

6.4p

1.5p

23

Net cash/(debt)

45

(188)

233


 

We have delivered another strong financial performance in 2011. External revenue has grown by 4%, which has been driven by non-NAR revenue, in particular from ITV Studios. This revenue growth, coupled with tight control of costs, has led to 13% growth in EBITA before exceptional items and 23% growth in adjusted EPS.

 

After 'profit to cash' conversion of 103% we now have positive net cash for the first time in seven years, and having bought back £339 million of debt in 2011, the gross debt levels have significantly reduced as well. Continuing this focus on cash and costs has meant that we are now in a strong financial position from which to implement the next stage of the Transformation Plan.

 

In 2011 we have taken further cost out of the business. £20 million of cost savings have been delivered, which is ahead of our £15 million target, and we have kept a tight grip on the schedule costs (the costs of programmes shown on air).

 

The cost savings have been reinvested in areas key to the Transformation Plan. Investment of £28 million was made in 2011 against specific initiatives aligned to the plan: improving the online experience and making the ITV Player available on more platforms; re-energising the creative pipeline by investing in additional creative staff and development of new programmes; more brand defining content for the digital channels; and technology investments to improve efficiency across the business. Despite this investment, we have been able to keep our average headcount flat as we reallocate resources to areas of the business which will drive the strategy.

 

There will be further investment in 2012 of around £25 million, which will be partly funded by new incremental cost savings of £20 million, as we continue to look at ways to improve the efficiency and performance of ITV.

 

The following review focuses on the adjusted results as, in management's view, these show more meaningfully our business performance in a consistent manner and reflect how the business is managed and measured on a daily basis. A reconciliation from the statutory to adjusted results is set out in the earnings per share section.

 

Broadcasting & Online


2011

£m

2010

£m

Change

%

Net Advertising Revenue ('NAR')

1,510

1,496

1

SDN external revenues

59

43

37

Online & On Demand

34

28

21

Other commercial income

217

204

6

Broadcasting & Online non-NAR revenue

310

275

13

Total Broadcasting & Online revenue

1,820

1,771

3

Total schedule costs

(1,004)

(1,023)

2

Other costs

(437)

(421)

(4)

Total Broadcasting & Online EBITA before exceptional items

379

327

16

 

Total Broadcasting & Online revenue was up 3% with EBITA before exceptional items up 16%. The majority of revenue growth in the Broadcasting & Online division has come from non-NAR revenues, in particular from SDN, Online & On Demand and pay revenues. Total costs have been held flat as cost efficiencies and schedule savings have funded investment in the digital channels and Online & On Demand in line with the strategic priorities.

 

Despite the tough economic environment, our television advertising revenues have increased by 1%, outperforming the rest of the market for the fourth year in a row.

 

Our largest advertising categories of retail, food, and entertainment & leisure all declined in 2011 in the context of a challenging consumer environment, but this was compensated for by strong growth in finance, cars and car dealers, and  telecommunications.

 

Across the wider advertising market, internet advertising has taken share from press, whilst television has remained broadly flat as a proportion of total advertising spend.

 

SDN external revenues increased by 37%, largely due to the full year impact of the new contracts signed in the second half of 2010. Growth of this scale will not be repeated in 2012 as there were no material changes to SDN contracts in 2011.

 

Online & On Demand revenues have increased by £6 million, continuing the growth of recent years which has seen these revenues almost double from £18 million in 2008.

 

Other commercial income includes sponsorship, minority revenues, pay, PRS, media sales and other income. The 6% growth in 2011 has been helped by the new pay revenues from ITV2, 3 and 4 HD on Sky. These pay revenues will increase again in 2012 due to the new deals signed with Sky, Lovefilm and Netflix.

 

Broadcasting & Online costs have been tightly managed. The £19 million decrease in schedule costs is principally due to there being no football World Cup costs in 2011. This has been offset in part by £10 million investment in more brand defining content for the digital channels, supporting their continuing growth in key demographic audiences. Other costs have increased by 4% due to investment and revenue-related costs, such as £7 million investment in Online & On Demand and the launches of ITV1+1 and pay HD channels, offset in part by general efficiency savings.

 

ITV Studios


2011

£m

2010

£m

Change

%

UK Productions

345

318

8

International Productions

141

106

33

Global Entertainment

126

130

(3)

Total Revenue

612

554

10

Total Studios costs

(529)

(473)

(12)

Total EBITA before exceptional items

83

81

2





Sales from ITV Studios to Broadcasting & Online

292

261

12

External Revenue

320

293

9

Total Revenue

612

554

10

 

ITV Studios had a good year with strong revenue growth both in the UK and internationally, driven by increased new commissions.

 

EBITA before exceptional items has increased by £2 million to £83 million, the return from the increased revenues offsetting £8 million of investment. The revenue growth from new commissions has a lower margin on original commission, but as these programmes are recommissioned and sold internationally the margins should rise.

 

UK production revenues have increased by £27 million, largely as a result of an increase in supply to ITV channels, where there has been an increase in the ITV Studios proportion of ITV1 original commissions from 53% in 2010 to 55% in 2011.

 

The number of original hours delivered in the UK has increased by 8%, with most of the growth coming across entertainment and factual. There was also a 13% increase in the number of original drama hours delivered with new dramas such as Vera and Marchlands.

 

International production revenues improved by £35 million. The US and Germany were particularly strong, with the return of Kitchen Nightmares in the US and Ich Bin Ein Star... (I'm a Celebrity) and Der Bulle in Germany. The number of hours produced internationally is up 30%, with the growth occurring in the US and France and across all genres.

 

Due to a challenging environment in Spain we took the decision not to progress our local production operation, ITV Studios Spain. However, we still consider Spain to be an important market for our content and we continue to work with local broadcasters through our distribution business.

 

Revenues in Global Entertainment, our distribution business, were down by £4 million, mainly due to a decline in DVD sales. The UK DVD market remains under pressure and was down 5%.

 

By nature it takes longer for the impact of the creative renewal to feed through into the distribution business, but there are signs of progress. Prime Suspect has now been sold to 116 countries and Titanic, which will air in the spring, has already been sold to 86 countries.

 

Most of the costs of the production business are variable and linked to revenue, hence the increased costs are primarily a function of the improved revenues and more hours being produced. There has also been £8 million investment in new creative talent and in developing the pipeline with more scripts and pilots.

 

The creative renewal process within ITV Studios is beginning to show signs of momentum, as evidenced by the increase in  new commissions, which are up 28% in 2011. However, the lead time between commission, delivery and transmission means it takes time for this momentum to come through into the financial numbers.

 

Net financing costs


2011

£m

2010

£m

Financing costs directly attributable to loans and bonds

(45)

(59)

Cash-related net financing income

    8

1

Cash-related financing costs

(37)

(58)

Amortisation of bonds

(13)

(11)

Adjusted financing costs

(50)

(69)

Mark-to-market on swaps and foreign exchange gains

16

5

Imputed pension interest

(5)

(13)

Losses on buy-backs

(39)

(10)

Other net financing income

3

12

Net financing costs

(75)

(75)

 

Adjusted financing costs are £19 million (28%) lower as we continue to make the balance sheet more efficient. Financing costs directly attributable to bonds have reduced due to the benefit of £485 million of bond buy-backs over the last two years, including £339 million in 2011. Cash-related net financing income has increased by £7 million, mainly due to the increased level of cash held and the benefit of receiving a better return through a slightly longer investment horizon.

 

Despite the reduction in adjusted financing costs, statutory net financing costs are flat at £75 million. This is primarily because of £39 million of one-off losses incurred on the buy-backs of certain bonds, in particular that of the 2015 £100 million bond tap which was issued at a substantial discount in 2009. These losses were partially offset by mark-to-market gains and lower imputed pension interest.

 

The mark-to-market gains resulted from a further reduction in implied interest rates during the year. Imputed pension interest has reduced due to the increase in the expected return on assets and a decrease in the interest on liabilities.

 

The adjusted financing costs in 2012 are likely to be broadly flat as the full year benefit from the bond buy-backs carried out in 2011 is likely to be largely offset by a step up in the interest rate on the 2019 loan.

 

Tax

The adjusted tax rate of 23% is lower than the standard tax rate due to the release of overseas prior year provisions (2010: the utilisation of available losses being in excess of normal disallowable costs). The total reported tax charge is £79 million (2010: £16 million).

 


2011

£m

2010

£m

Profit before tax as reported

 327

286

Exceptional items (net)

(1)

(19)

Amortisation and impairment of intangible assets*

47

48

Adjustments to net financing costs

25

6

Adjusted profit before tax

398

321

 


2011

£m

2010

£m

Tax charge as reported

(79)

(16)

Net charge for exceptional and other items

-

5

Credit in respect of amortisation and impairment of intangible assets*

(12)

(13)

Charge in respect of adjustments to net financing costs

(7)

(2)

Other tax adjustments

7

(47)

Adjusted tax charge

(91)

(73)

Effective tax rate on adjusted profits

        23%

23%

 

* In respect of intangible assets arising from business combinations.

 

The total reported tax charge of £79 million results in an effective tax rate slightly lower than the statutory rate of tax of 26.5%, for the reasons noted above. The 2010 charge was lower primarily due to the recognition of a deferred tax asset of £68 million in 2010 in respect of tax losses not previously recognised. 

 

Cash tax paid of £68 million arises as a result of a full year of making payments for taxable profits, partially offset by the use of losses and tax treatment of allowable pension contributions.

 

The adjusted rate of tax applied to adjusted profits is lower than the statutory rate. This is the result of the consistent application of our policy to adjust the tax charge for losses utilised in the year to more closely reflect the cash tax paid in the year.

 

Dividend

The Board has proposed a final dividend of 1.2p. With the interim dividend of 0.4p, this gives a total dividend of 1.6p for 2011.

 

The final dividend will be payable on 1 June 2012 to shareholders on the register as at 4 May 2012. The ex-dividend date will be
2 May 2012.

 

The Board is committed to a progressive dividend policy, taking into account the outlook for earnings per share, while balancing the need to invest in the business and to maintain financial prudence against the backdrop of an uncertain economic environment.

 

Earnings per share

Adjusted earnings per share were 7.9 pence (2010: 6.4 pence). Basic earnings per share were 6.4 pence (2010: 6.9 pence).

 

Whilst statutory profit before tax of £327 million (2010: £286 million) has improved, basic earnings per share are lower than 2010 due to the statutory tax charge. The reason for this statutory tax charge increase of £63 million is primarily due to the recognition of a deferred tax asset of £68 million in 2010 in respect of tax losses not previously recognised.

 

Reconciliation between reported and adjusted earnings

 


Reported

£m

Adjustments

£m

Adjusted

£m

EBITA before exceptional items

462

-

462

Exceptional items

1

(1)

-

Amortisation and impairment

(59)

47

(12)

Financing costs

(75)

25

(50)

JVs and Associates

(2)

-

(2)

Profit before tax

327

71

398

Tax

(79)

 (12)

(91)

Profit after tax

248

 59

307

Non-controlling interest

(1)

-

(1)

Earnings

247

59

306





Number of shares (million)

3,883


3,883

Earnings per share (pence)

6.4p


7.9p

 

The adjustments remove the impact of those items that, in management's view, do not show the performance of the business in a consistent manner and do not reflect how the business is managed and measured on a daily basis. The adjustments made are consistent with those made last year and are explained below.

 

Amortisation of intangible assets acquired through business combinations is not included within adjusted earnings. Amortisation of software licences and development is included as management considers these assets to be core to supporting the operations of the business.

 

The tax and net financing costs sections of this review show the adjustments to these balances.

 

Cash flow, working capital management and positive net cash

Cash flow and working capital management

Cash and working capital management continues to be a key priority. We have generated £474 million of adjusted cash flow from £462 million of EBITA before exceptional items, driven by further improvements in working capital. The 'profit to cash' ratio was 103% for the year, ahead of the KPI target of 90% on a three-year rolling basis.

 


2011

£m

2010

£m

EBITA before exceptional items ('profit')

462

408

Decrease in programme rights and other inventory and distribution rights

-

108

Decrease/(increase) in receivables

52

(8)

Decrease in payables

(34)

(1)

Working capital movement

18

99

Depreciation

26

30

Share-based compensation

11

8

Cash flow generated from operations before exceptional items

517

545

Acquisition of property, plant and equipment and intangible assets

(43)

(28)

Adjusted cash flow

 474

517

'Profit to cash' ratio

    103%

127%

 

The 'profit to cash' ratio is more in line with target this year following the very high conversion rates over the previous two years. Programme rights and other inventory have reduced by over £200 million since 2008, meaning that they are now at more normal levels.

 

Cash spend on acquisition of property, plant and equipment and intangible assets was £43 million (2010: £28 million), as we started to upgrade our technology across the business and invest in future-proofing our soaps, in particular the new site for Coronation Street. This is expected to increase significantly in 2012 to around £70-£80 million due to increased investment in core technology and moving the Manchester site to MediaCity.

 

Positive Net Cash

A £233 million improvement in the year has resulted in a positive net cash position at 31 December 2011 of £45 million (31 December 2010: net debt of £188 million). Total cash has reduced by £59 million in the year to £801 million, as a significant portion of the cash generated from operations has been used to reduce gross debt. This reduction in gross debt has been achieved through £339 million (nominal) of debt buy-backs.

 

Interest paid was lower than 2010 as our adjusted financing costs reduced, but we also had one-off losses on debt buy-backs of £39 million and higher corporation tax payable as we returned to a full year of making payments for taxable profits. We also resumed the payment of dividends.

 

The £16 million of dividend payments represents only the payment of the interim dividend whereas in 2012 we are likely to pay both the 2011 final and the 2012 interim dividends.

 

There is no IFRS definition of net cash/(debt) and our figures represent our measure of this metric, which is consistent with previous years; this can be seen in section 4.1 of the Financial Statements. The major credit rating agencies each adjust our definition of net cash/(debt) in assessing our credit worthiness, taking a wider view of total indebtedness, which each agency views differently. Adjustments include the IAS 19 pension deficit, an imputed level of debt in lieu of operating leases, and adjustments to cash to exclude amounts not considered available for immediate debt repayment or core.

 

Liquidity risk and funding

Strong free cash flow generation in 2011 further strengthened the balance sheet and liquidity position.

 

Financing

Our debt is financed using instruments with a range of maturities. Borrowings at 31 December 2011 (net of currency hedges and secured gilts) are repayable as follows:

 

Amount repayable

£m

Maturity

€188 million Eurobond*

126

June 2014

£154 million Eurobond

154

Oct 2015

£135 million Convertible bond

135

Nov 2016

£250 million Eurobond

250

Jan 2017

£200 million Bank loan†

62

March 2019

Finance leases

53

Various

Total repayable

780


 

* Net of Cross Currency Swaps.

† Net of £138 million (nominal) Gilts secured against the loan.

 

There are no financial covenants on any of our debt and the next scheduled repayment is in June 2014.

 

Debt Structure

During the year we took further steps to improve the efficiency of our balance sheet, where it made economic sense to do so. In 2011 we repurchased £339 million nominal value of bonds comprising all of the £110 million 2013 bonds (at a book loss of £4 million) and £229 million of the 2015 bonds. The repurchase of 2015 bonds was at a book loss of £35 million, which was mainly incurred against repurchasing all £100 million of a tap issue to this series of bonds undertaken in early 2009 at the height of the financial crisis.

 

In addition, during the year a €54 million Eurobond (£47 million book value) matured along with associated cross currency interest rate swaps (book value £63 million), resulting in a net cash inflow of £16 million.

 

These repurchases have smoothed our maturity profile and have ensured that we have no scheduled debt repayments due within two years.

 

Given the improved cash position, some cash deposits are now made over a longer investment horizon; this has improved the returns on our cash balances.

 

We are aware of the inefficiency of the balance sheet and, as noted above, have continued to take steps during the course of the year to help address this. Since October 2009 we have repurchased £662 million (nominal value) of debt.

 

In 2012 we will continue to look at the options for the balance sheet that make economic sense. Any potential course of action will take into account our prudent view of liquidity under an uncertain economic outlook, and ensure that sufficient flexibility is maintained to invest in the business and to deliver the Transformation Plan.

 

Ratings

Our credit ratings continued to improve in 2011. In April, Standard & Poor's upgraded the long-term credit rating from B+ (Stable Outlook) to BB (Stable Outlook) and Moody's Investors Service increased its rating from Ba3 (Stable Outlook) to Ba2 (Stable Outlook). In May, Fitch revised its outlook on our BB rating from Stable to Positive. In August, Moody's Investors Service similarly revised upward the outlook.

 

Despite improvements in the credit ratings from all three agencies over the past two years, we remain sub-investment grade and would require two notch upgrades from each agency in the future in order to restore investment grade. The sub-investment grade status reflects the business' high degree of operational gearing, exposure to the economic cycle, lack of business and geographical diversity and ongoing structural changes in the media industry. We recognise these issues and seek to address them through the Transformation Plan.

 

Pensions

IAS 19 - the accounting deficit

The aggregate IAS 19 deficit on defined benefit schemes at 31 December 2011 was £390 million (31 December 2010: £313 million). The most significant reason for the increase was as a result of the fall in corporate bond yields which are used to value the liabilities, although this was partially offset by a reduction in the rate of market implied inflation. The value of the assets of the ITV Pension Scheme ('the Scheme') increased during the year, driven by a strong performance by the bonds and swaps used for hedging interest and inflation risk. This gain has been reduced by losses in the Scheme's equity portfolio and the impact of the introduction of the longevity swap. 

 

Measures to manage the costs and risks associated with the Scheme

We have a long-term strategy to implement a programme of measures to manage the costs and risks associated with the Scheme, and as part of this strategy two significant steps - a longevity swap and an extension to the SDN pension partnership - were taken during the year to reduce the exposure of our business to legacy pension risk.

 

(i) Longevity Swap

On 22 August 2011 the trustee of the Scheme ('the Trustee') completed a transaction that removes the risk of increases in pension liabilities that would arise if a significant portion of the Scheme's defined benefit pensioner population were to enjoy a longer life than is currently expected. The instrument is known as a longevity swap and it de-risks the future cash flows of the pension scheme.

 

Initial recognition of the swap resulted in a reduction to the Scheme's assets of £65 million, thereby increasing the net IAS 19 pension deficit. The valuation reflects the value of the fixed cash flows the Trustee will make to the counterparty compared to the value of the forecast payments that the counterparty makes to the Trustee based on actual requirements.

 

The swap is included in the valuation of Scheme assets and in the future it will move up or down in value based on changes to actuarial assumptions including mortality, discount rates and inflation. Although the value of the instrument will move, the net cash flows made by the pension scheme in respect of these members are now fixed.

 

Pensions continue to be paid from the Scheme based on actual requirements.

 

(ii) SDN pension partnership extension

On 8 July 2011, the partnership's interest in SDN was increased by a further £50 million, enabled by the increase in the value of the SDN business. As a result of this, the partnership will increase the annual contribution to the Scheme by £3 million to £11 million per annum from 2013 onwards; the 2012 cash contribution will be £10 million. Under the partnership arrangements, we have committed to making a payment to the main section of the Scheme of up to £200 million in 2022 (an increase of £50 million compared to the original agreement made in 2010), if and to the extent that it remains in deficit.

 

Actuarial valuations

Full actuarial valuations are carried out every three years. The latest completed actuarial valuation of Section A of the main defined benefit scheme was carried out as at 1 January 2008 and, on the bases adopted by the Trustee, that Section was in deficit to an amount of £190 million or 9% of the liabilities in that section. An actuarial valuation of Section A is being undertaken as at 1 January 2011.

 

Actuarial valuations of Sections B and C of the main scheme were carried out at 1 January 2010 and on the bases adopted by the Trustees, both were in deficit with a combined deficit of £49 million or 11% of the liabilities in those sections.

 

Given that the timetable for the valuation of Section A of the Scheme was different to that of Sections B and C, in order to increase efficiency and to streamline the processes the Group has agreed with the Trustee that actuarial valuations of all three sections will be undertaken as at 1 January 2011. We are in ongoing discussions with the Trustee regarding the results.

 

Deficit funding contributions

We have agreed with the Trustee the level of contributions to the main section of the Scheme through to the end of 2014.

 

We expect to make deficit funding contributions of £71 million in 2012, £66 million to Section A and £5 million to Sections B and C. Details of how this is constituted can be seen in section 3.6 of the Financial Statements and are summarised below.

 

Expected Pension Contributions in 2012

£m

Section A


Regular deficit funding

35

Additional 2012 deficit funding for Section A*

5

10% of 2011 EBITA before exceptional items over £300 million

16

SDN pension partnership

10


66

Sections B and C


Regular deficit funding

5

Total expected pension contributions in 2012

71

 

* Since there were no initiatives in 2011 which reduced the Scheme's deficit by at least £10 million, compared with the level had such initiatives not been implemented.

 

Assuming no unforeseen circumstances, no further change is currently expected in our committed contributions to Section A of the Scheme before 2015.

 

Ian Griffiths

Group Finance Director

 

Consolidated Income Statement

 

For the year ended 31 December:

Note

 
2011
£m


2010
£m

Revenue

2.1

2,140

2,064

Operating costs


(1,736)

(1,700)

Operating profit


404

364





 Presented as:




 Earnings before interest, tax, amortisation (EBITA) before exceptional items

2.1

462

408

 Operating exceptional items

2.2

1

19

 Amortisation of intangible assets

3.3

(59)

(63)

 Operating profit


404

364





 Financing income

4.4

196

185

 Financing costs

4.4

(271)

(260)

Net financing costs

4.4

(75)

(75)

Share of profits or (losses) of joint ventures and associated undertakings

2.1

(2)

(3)

Loss on sale and impairment of non-current assets (exceptional items)

2.2

(3)

(4)

Gain on sale and impairment of subsidiaries and investments (exceptional items)

2.2

3

4

Profit before tax


327

286

Taxation

2.3

(79)

(16)

Profit for the year


248

270





Profit attributable to:




Owners of the Company


247

269

Non-controlling interests


1

1

Profit for the year


248

270





Earnings per share




Basic earnings per share

2.4

6.4p

6.9p

Diluted earnings per share

2.4

6.2p

6.6p

 

 

Consolidated Statement of Comprehensive Income

 

 

For the year ended 31 December:

2011

£m

2010

£m

Profit for the year

248

270




Other comprehensive income:



Foreign currency translation differences

-

3

Revaluation of available for sale financial assets

3

(3)

Actuarial (losses)/gains on defined benefit pension schemes

(124)

67

Income tax credit/(charge) on other comprehensive income

30

(22)

Other comprehensive (cost)/income for the year, net of income tax

(91)

45

Total comprehensive income for the year

157

315




Total comprehensive income attributable to:



Owners of the Company

156

314

Non-controlling interests

1

1

Total comprehensive income for the year

157

315

Consolidated Statement of Financial Position

 

As at 31 December

Note

2011

£m

2010

£m

Non-current assets




Property, plant and equipment

3.2

167

151

Intangible assets

3.3

934

969

Investments in joint ventures and associated undertakings


3

2

Available for sale financial assets


2

3

Held to maturity investments

4.1

147

148

Derivative financial instruments

4.3

110

89

Distribution rights

3.1.1

11

12

Net deferred tax asset

2.3

65

73



1,439

1,447

Current assets




Programme rights and other inventory

3.1.2

285

284

 Trade and other receivables due within one year

3.1.4

370

442

 Trade receivables due after more than one year

3.1.4

26

6

Trade and other receivables


396

448

Derivative financial instruments

4.3

-

69

Cash and cash equivalents

4.1

801

860

Assets held for sale

3.4

-

3



1,482

1,664

Current liabilities




Borrowings

4.2

(9)

(55)

Derivative financial instruments

4.3

(1)

(3)

 Trade and other payables due within one year

3.1.5

(639)

(672)

 Trade payables due after more than one year

3.1.6

(45)

(26)

Trade and other payables


(684)

(698)

Current tax liabilities


(36)

(65)

Provisions

3.5

(24)

(34)



(754)

(855)





Net current assets


728

809





Non-current liabilities




Borrowings

4.2

(912)

(1,223)

Derivative financial instruments

4.3

(44)

(39)

Defined benefit pension deficit

3.6

(390)

(313)

Other payables


(3)

(3)

Provisions

3.5

(9)

(15)



(1,358)

(1,593)

Net assets


809

663





Attributable to equity shareholders of the parent company




Share capital

4.7.1

389

389

Share premium

4.7.1

120

120

Merger and other reserves

4.7.2

300

304

Translation reserve


14

14

Available for sale reserve


8

5

Retained losses


(25)

(171)

Total equity attributable to equity shareholders of the parent company


806

661

Non-controlling interests


3

2

Total equity


809

663

 

Ian Griffiths

Group Finance Director

Consolidated Statement of Changes in Equity

 

    Attributable to equity shareholders of the parent company      
  Note Share capital £m Share premium £m Merger and other reserves £m Translation reserve £m Available for sale  reserve £m Retained losses £m     Total £m Non- controlling interests £m   Total equity £m
Balance at 1 January 2011   389 120 304 14 5 (171) 661 2 663
Total comprehensive income for the year                    
Profit   - - - - - 247 247 1 248
Other comprehensive income/(cost)                    
Revaluation of available for sale financial assets - - - - 3 - 3 - 3
Actuarial losses on defined benefit
pension schemes
3.6 - - - - - (124) (124) -  (124)
Income tax on other comprehensive income 2.3 - - - - - 30 30 - 30
Total other comprehensive income/(cost)   - - - - 3 (94) (91) - (91)
Total comprehensive income for the year   - - - - 3 153 156 1 157
Transactions with owners, recorded directly in equity                    
Contributions by and distributions to owners                  
Equity dividends   - - - - - (16) (16) - (16)
Equity portion of the convertible bond 4.1 - - (4) - - 4 - - -
Movements due to share-based compensation 4.7.7 - - - - - 11 11 -  11
Purchase of own shares via employees’ benefit trust 4.7.7 - - - - - (6) (6) -  (6)
Total contributions by and distributions to owners - - (4) - - (7) (11) - (11)
Change in ownership interest in subsidiaries
that do not result in a loss of control
                 
Total changes in ownership interests in subsidiaries - - - - - - - - -
Total transactions with owners   - - (4) - - (7) (11) - (11)
Balance at 31 December 2011 4.7 389 120 300 14 8 (25) 806 3 809

Consolidated Statement of Changes in Equity

    Attributable to equity shareholders of the parent company      
  Note Share capital £m Share premium £m Merger and other reserves £m Translation reserve £m Available for sale  reserve £m Retained losses £m     Total £m Non- controlling interests £m   Total equity £m
Balance at 1 January 2010   389 120 308 11 8 (491) 345 1 346
Total comprehensive income for the year                    
Profit   - - -   - 269 269 1 270
Other comprehensive income/(cost)                    
Revaluation of available for sale financial assets - - - - (3) - (3) - (3)
Foreign currency translation differences   - - - 3 - - 3 - 3
Actuarial gains on defined benefit
pension schemes
3.6 - - - - - 67 67 -  67
Income tax on other comprehensive income 2.3 - - - - - (22) (22) - (22)
Total other comprehensive income/(cost)   - - - 3 (3) 45 45 - 45
Total comprehensive income/(cost)
for the year
  - - - 3 (3) 314 314 1  315
Transactions with owners, recorded directly in equity                    
Contributions by and distributions to owners                  
Equity portion of the convertible bond 4.1 - - (4) - - 4 - - -
Movements due to share-based compensation 4.7.7 - - - - - 8 8 - 8
Purchase of own shares via employees’ benefit trust 4.7.7 - - - - - (6) (6) - (6)
Total contributions by and distributions to owners - - (4) - - 6 2 - 2
Change in ownership interest in subsidiaries
that do not result in a loss of control
                 
Total changes in ownership interests in subsidiaries - - - - - - - - -
Total transactions with owners   - - (4) - - 6 2 - 2
Balance at 31 December 2010 4.7 389 120 304 14 5 (171) 661 2 663
 

Consolidated Statement of Cash Flows

 

For the year ended 31 December: Note   £m 2011 £m   £m 2010 £m
Cash flows from operating activities          
Profit before tax   327   286  
Gain on sale and impairment of subsidiaries and investments (exceptional items) 2.2 (3)   (4)  
Loss on sale and impairment of non-current assets (exceptional items) 2.2 3   4  
Share of (profits) or losses of joint ventures and associated undertakings   2   3  
Net financing costs 4.4 75   75  
Operating exceptional items 2.2 (1)   (19)  
Depreciation of property, plant and equipment 3.2 26   30  
Amortisation and impairment of intangible assets 3.3 59   63  
Share-based compensation 4.7 11   8  
 Decrease in programme rights and other inventory,  and distribution rights   -   108  
    Decrease/(increase) in receivables   52   (8)  
 Decrease in payables   (34)   (1)  
Movement in working capital 3.1 18   99  
Cash generated from operations before exceptional items     517   545
Cash flow relating to operating exceptional items:          
Net operating income 2.2 1   19  
Decrease in payables and provisions and the impact of the exceptional pension gain   (5)   (45)  
Cash outflow from exceptional items     (4)   (26)
Cash generated from operations     513   519
Defined benefit pension deficit funding   (48)   (30)  
Interest received   48   40  
Interest paid on bank and other loans   (85)   (100)  
Interest paid on finance leases   (3)   (4)  
Net taxation paid   (68)   (23)  
      (156)   (117)
Net cash inflow from operating activities     357   402
Cash flows from investing activities          
Acquisition of subsidiary undertakings, net of cash and cash equivalents acquired and debt repaid on acquisition 3.4   (14)     -  
Proceeds from sale of property, plant and equipment   2   7  
Acquisition of property, plant and equipment   (35)   (26)  
Acquisition of intangible assets   (8)   (2)  
Loans granted to associates and joint ventures   (6)   (6)  
Loans repaid by associates and joint ventures   2   9  
Proceeds from sale of subsidiaries, joint ventures and available for sale investments   2   69  
Net cash (outflow)/inflow from investing activities     (57)   51
Cash flows from financing activities          
Bank and other loans – amounts repaid   (331)   (155)  
Capital element of finance lease payments   (5)   (7)  
Purchase of own shares via employees’ benefit trust   (6)   (6)  
Equity dividends paid   (16)   -  
Net cash outflow from financing activities     (358)   (168)
Net (decrease)/increase in cash and cash equivalents     (58)   285
Cash and cash equivalents at 1 January 4.1   860   582
Effects of exchange rate changes and fair value movements     (1)   (7)
Cash and cash equivalents at 31 December 4.1   801   860

 

Section 1 Basis of Preparation

 

The financial statements consolidate those of ITV plc ('the Company') and its subsidiaries (together referred to as 'the Group') and include the Group's interests in associates and jointly controlled entities. The Company is domiciled in the United Kingdom.

 

As required by EU law (IAS Regulation EC 1606/2002) the Group's accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS'), and approved by the Directors.

 

The financial statements are principally prepared on the basis of historical cost. Where other bases are applied these are identified in the relevant accounting policy.

 

The Company has elected to prepare its parent company financial statements in accordance with UK GAAP.

 

The financial information in this preliminary announcement represents non-statutory accounts within the meaning of Section 435 of the Companies Act 2006. The auditors have reported on the statutory accounts for the year ended 31 December 2011. Their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. These accounts will be sent to the Registrar of Companies following the Company's Annual General Meeting. A separate dissemination announcement in accordance with the Disclosure and Transparency Rules (DTR) 6.3 will be made when the annual report and audited financial statements are available on the Group's website.

 

Going concern

As a result of the Group's continued generation of significant free cash flows for the year the Group reduced its current level of net indebtedness to a positive net cash position, and has also improved both its short-term and medium-term liquidity position.

 

The Group continues to review forecasts of the television advertising market to determine the impact on ITV's liquidity position and create further cash headroom. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group will be able to operate within the level of its current funding.

 

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparing its consolidated financial statements.

 

Subsidiaries, joint ventures, associates and special purpose entities

Subsidiaries are entities that are directly or indirectly controlled by the Group. Control exists where the Group has the power to govern the financial and operating policies of the entity in order to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account.

 

A joint venture is an entity in which the Group holds an interest under a contractual arrangement where the Group and one or more other parties undertake an economic activity that is subject to joint control. The Group accounts for its interests in joint ventures using the equity method. Under the equity method the investment in the entity is stated as one line item at cost plus the investor's share of retained post-acquisition profits and other changes in net assets.

 

An associate is an entity, other than a subsidiary or joint venture, over which the Group has significant influence. Significant influence is the power to participate in, but not control or jointly control, the financial and operating decisions of an entity. These investments are also accounted for using the equity method.

 

The Group establishes special purpose entities (SPEs) for trading and investment purposes. An SPE is consolidated if, based on an evaluation of the substance of its relationships with the Group and the SPE's risks and rewards, it is concluded that the Group controls the SPE. Those SPEs controlled by the Group are established under terms that impose strict limitations on the decision-making powers of their management and that result in the Group receiving the majority of the benefits related to their operations and net assets, being exposed to the majority of risks incidental to their activities and receiving the majority of the residual or ownership risks related to the SPEs or their assets.

 

Current/non-current distinction

Current assets include assets held primarily for trading purposes, cash and cash equivalents, and assets expected to be realised in, or intended for sale or use in, the course of the Group's operating cycle. All other assets are classified as non-current assets.

 

Current liabilities include liabilities held primarily for trading purposes, liabilities expected to be settled in the course of the Group's operating cycle and those liabilities due within one year from the reporting date. All other liabilities are classified as non-current liabilities.

 

Classification of financial instruments

The financial assets and liabilities of the Group are classified into the following financial statement captions in the statement of financial position in accordance with IAS 39: financial instruments:

 

·     'Loans and receivables' - separately disclosed as cash and cash equivalents (excluding gilts over which unfunded pension commitments have a charge) and trade and other receivables;

·     'Available for sale financial assets' - measured at fair value through other comprehensive income. Includes gilts over which unfunded pension commitments have a charge and equity securities that do not meet the definition of subsidiaries, joint ventures or associates;

·     'Held to maturity investments';

·     'Financial assets/liabilities at fair value through profit or loss' - separately disclosed as derivative financial instruments,  assets/liabilities; and

·     'Financial liabilities measured at amortised cost' - separately disclosed as borrowings and trade and other payables.

 

Details on the accounting policies for measurement of the above instruments are set out in the relevant note.

 

Recognition and derecognition of financial assets and liabilities

The Group recognises a financial asset or liability when it becomes a party to the contract. Financial instruments are no longer recognised in the statement of financial position when the contractual cash flows expire or when the Group no longer retains control of substantially all the risks and rewards under the instrument.

 

Cash and cash equivalents

Cash and cash equivalents comprise cash balances, call deposits with maturity of less than or equal to three months from the date of acquisition, cash held to meet certain finance lease commitments and gilts over which unfunded pension commitments have a charge. The carrying value of cash and cash equivalents is considered to approximate fair value.

 

Foreign currencies

The primary economic environment in which the Group operates is the UK. The consolidated financial statements are therefore presented in pounds sterling ('£').

 

Where Group companies based in the UK transact in foreign currencies, these transactions are translated into pounds sterling at the exchange rate on that day. Foreign currency monetary assets and liabilities are translated into pounds sterling at the year-end exchange rate. Where there is a movement in the exchange rate between the date of the transaction and the year-end, a foreign exchange gain or loss may arise. Any such differences are recognised in the income statement. Non-monetary assets and liabilities measured at historical cost are translated into pounds sterling at the exchange rate on the date of the transaction.

 

The assets and liabilities of Group companies outside of the UK are translated into pounds sterling at the year-end exchange rate. The revenues and expenses of these companies are translated into pounds sterling at the average monthly exchange rate during the year. Where differences arise between these rates, they are recognised in the translation reserve within equity and other comprehensive income.

 

Exchange differences arising on the translation of the Group's interests in joint ventures and associates are recognised in the translation reserve within equity and other comprehensive income.

 

In respect of all Group companies outside of the UK only those translation differences arising since 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity. On disposal of an interest in a joint venture or an associate, the related translation reserve is released to the income statement as part of the gain or loss on disposal.

 

Accounting judgements and estimates

The preparation of financial statements requires management to exercise judgement in applying the Group's accounting policies. It also requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and in any future periods affected.

 

The areas involving a higher degree of judgement or complexity are set out below and in more detail in the related notes:

 

·     Revenue recognition (note 2.1)

·     Classification of financial instruments (included in this note)

·     Consolidation of SPEs (included in this note)

 

The areas involving the most sensitive estimates and assumptions that are significant to the financial statements are set out below and in more detail in the related notes:

 

·     Defined benefit pension schemes (note 3.6)

·     Taxation (note 2.3)

·     Provisions (note 3.5)

·     Employee benefits (note 4.7)

·     Intangible assets (note 3.3)

·     Impairment of assets (note 3.2 and note 3.3)

·     Programme rights and other inventory (note 3.1)

·     Trade receivables (note 3.1)

 

New or amended EU endorsed accounting standards

The table below represents new or amended EU endorsed accounting standards relevant to the Group's results that are effective in 2011:

 

Accounting Standard

Requirement

Impact on financial statements

IFRS 7 Financial Instruments: Disclosures

IFRS 7 is amended to add an explicit statement that the interaction between qualitative and quantitative disclosures better enables users to evaluate an entity's exposure to risks arising from financial instruments.

The Group has reviewed their disclosure of financial instruments to ensure they are in compliance with the amendment to IFRS 7.

IAS 1 Presentation of Financial Statements

IAS 1 is amended to clarify that a reconciliation from opening to closing balances is required to be presented in the statement of changes in equity for each component of equity. IAS 1 is also amended to allow the analysis of the individual OCI line items by component of equity to be presented in the notes. Previously, such analysis could only be presented in the SOCIE.

The Group has reviewed their Statement of changes in equity to ensure they are in compliance with the amendment to IAS 1.

 

The Directors also considered the impact of other new and revised accounting standards, interpretations or amendments on the Group that are currently endorsed but not yet effective. It was concluded that none were relevant to the Group's results.

Section 2 Results for the Year

2.1 Profit before tax

Accounting policies

Revenue recognition

Revenue is stated exclusive of VAT and comprises the sale of products and services to third parties. Selecting the appropriate timing and amount of revenue recognised requires judgement. The key area of judgement in respect of recognising revenue is the timing of recognition. Revenue from the sale of products is recognised when the Group has transferred both the significant risks and rewards of ownership and control of the products sold and the amount of revenue can be measured reliably. Revenue recognition criteria for the Group's key classes of revenue are recognised on the following bases:

 

Class of revenue

Recognition criteria

Advertising

on transmission or display

Sponsorship

on transmission of the sponsored programme or series

Programme production

on delivery and acceptance by the customer

Programme rights

when contracted and available for exploitation

Participation revenues (interactive & 'red button' services)

as the service is provided

 

Segmental information

Operating segments, which have not been aggregated, are reported in a manner that is consistent with the internal reporting provided to the Board of Directors, regarded as the chief operating decision-maker.

 

The Board of Directors considers the business primarily from a product or activity perspective. The reportable segments for the years ended 31 December 2011 and 31 December 2010 are therefore 'Broadcasting & Online' and 'ITV Studios', the results of which are outlined in the following table:

 


Broadcasting

& Online

2011

£m

 

ITV Studios

2011

£m

 

Consolidated

2011

£m

Total segment revenue

1,820

612

2,432

Intersegment revenue

-

(292)

 (292)

Revenue from external customers

1,820

320

2,140

EBITA before exceptional items

379

83

462

Share of profits or (losses) of joint ventures and associated undertakings

(2)

-

(2)

 


Broadcasting

& Online

2010

£m

 

ITV Studios

2010

£m

 

Consolidated

2010

£m

Total segment revenue

1,771

554

2,325

Intersegment revenue

-

(261)

(261)

Revenue from external customers

1,771

293

2,064

EBITA before exceptional items

327

81

408

Share of profits or (losses) of joint ventures and associated undertakings

(3)

-

(3)

 

Sales between segments are carried out on arm's length terms.

 

In preparing the segment information, costs have been allocated between reportable segments consistently on the basis of a relevant allocation methodology. For example, rent is allocated on the basis of square feet occupied. This reflects the basis of reporting to the Board of Directors.

 

Broadcasting & Online

This segment is responsible for commissioning and scheduling programmes on the ITV channels, marketing and programme publicity and online rights exploitation. Broadcasting & Online derives its revenue primarily from the sale of advertising airtime and sponsorship. Other sources of revenue are from participation revenue, online advertising and the digital terrestrial multiplex, SDN.

 

ITV Studios 

This segment generates revenue primarily from ITV Studios UK (a commercial programme production business), international production centres in the USA, Germany, Sweden, Australia and France and the distribution and exploitation businesses in ITV Studios Global Entertainment.

 

A significant portion of ITV Studios' revenue is generated when it creates ideas that are then produced and sold as programming to the 'Broadcasting & Online' segment, primarily for ITV1.

 

ITV Studios Global Entertainment sells programming, exploits merchandising and licensing worldwide, and is a distributor of DVD entertainment primarily in the United Kingdom.

 

EBITA before exceptional items

The Directors assess the performance of the reportable segments based on a measure of EBITA before exceptional items. The Directors use this measurement basis as it excludes the effect of non-recurring income and expenditure. Amortisation, investment income and share of profit/(losses) of joint ventures and associates are also excluded to reflect more accurately how the business is managed and measured on a day-to-day basis. Net financing costs are not allocated to segments as this type of activity is driven by the central treasury function, which manages the cash position of the Group.

 

A reconciliation from EBITA before exceptional items to profit before tax is provided as follows:

 


2011

£m

2010

£m

EBITA before exceptional items

462

408

Operating income - exceptional items

1

19

Amortisation and impairment of intangible assets

(59)

(63)

Net financing costs

(75)

(75)

Share of profits or (losses) of joint ventures and associated undertakings

(2)

(3)

Loss on sale and impairment of non-current assets (exceptional items)

(3)

(4)

Gain/(loss) on sale and impairment of subsidiaries and investments (exceptional items)

3

4

Profit before tax

327

286

 

The Group's principal operations are in the United Kingdom. Its revenue from external customers in the United Kingdom is £1,900 million (2010: £1,865 million), and the total revenue from external customers in other countries is £240 million (2010: £199 million).

 

There are three media buying agencies acting on behalf of a number of customers that represent the Group's major customers. These agencies are the only customers which individually represent over 10% of the Group's revenues. Revenues of approximately £480 million (2010: £400 million), £239 million (2010: £270 million) and £221 million (2010: £196 million) were derived from these customers. These revenues are attributable to the 'Broadcasting & Online' segment.

 

Operating costs

Staff costs

Staff costs before exceptional items can be analysed as follows:

 


2011

£m

2010

£m

Wages and salaries

220

212

Social security and other costs

36

32

Share-based compensation (see note 4.7)

11

8

Pension costs

20

17


287

269

 

There are no Staff costs within exceptional items in 2011 (2010: £11 million).

 

The number of full-time equivalent employees (excluding short-term contractors and freelancers), calculated on a weighted average basis, during the year was:

 


2011

2010

Broadcasting & Online

2,271

2,312

ITV Studios

1,687

1,635


3,958

3,947

 

Details of the Directors' emoluments, share options, pension entitlements and long-term incentive scheme interests are set out in the Remuneration Report.

 

Depreciation

Depreciation in the year was £26 million (2010: £30 million), of which £15 million (2010: £19 million) relates to 'Broadcasting & Online' and £11 million (2010: £11 million) to 'ITV Studios'.

 

Operating leases

The total future minimum lease payments under non-cancellable operating leases fall due for payment as follows:

 

2011

Transponders

Property

Total

Within 1 year

12

10

22

Later than 1 year and not later than 5 years

120

31

151

Later than 5 years

159

88

247


291

129

420

 

 

2010 (restated)



Total

(Property)

Within 1 year



14

Later than 1 year and not later than 5 years



32

Later than 5 years



87




133

 

The Group's operating leases relate to transponder assets and office and studio properties. During the year, the Group entered new transmission supply agreements that require the use of specific transponder assets for a period of up to 12 years with payments increasing over time, limited by specific RPI caps. These supply agreements are classified as operating leases, in accordance with the Group's policy on leases detailed in Section 3.2.

 

Property leases typically run for a period of between 3 and 15 years and may have an option to renew after that date. Lease payments are generally subject to market review every 5 years to reflect market rentals, but because of the uncertainty over the amount of any future changes, such changes have not been reflected in the table above. None of the leases include contingent rentals. The property operating lease disclosures in 2010 have been restated principally because of revised estimations of break clauses in the lease contracts.

 

The total future minimum sublease payments expected to be received under non-cancellable subleases at the year end is
£4 million (2010 restated: £6 million).

 

The total operating lease expenditure recognised during the year was £42 million (2010 restated: £12 million) and total sublease payments received was £4 million (2010 restated: £5 million).

 

Audit fees

The Group engages KPMG Audit Plc ('KPMG') on assignments additional to their statutory audit duties where their expertise and experience with the Group are important. The Group's policy on such assignments is set out in the Audit Committee Report.

 

Fees paid to KPMG and its associates during the year are set out below:

 


2011

£m

2010

£m

 For the audit of the Group's annual accounts 

0.7

0.7

 For the audit of subsidiaries of the Group  

0.1

0.2

 Audit-related assurance services

0.1

0.2

Total Audit and Audit-Related assurance services

0.9

1.1

    Taxation compliance services

0.1

0.1

 Taxation advisory services

0.7

0.7

Non-Audit Services

0.8

0.8


1.7

1.9

 

Fees payable to KPMG and associates for the auditing of accounts of any associate of the Group, internal audit services, services relating to corporate finance transactions entered into or proposed to be entered into, by or on behalf of the Group or any of its associates, and any other assurance services were £nil during 2011 and 2010.

 

Fees paid to KPMG for audit and other services to the Company are not disclosed in its individual accounts as the Group accounts are required to disclose such fees on a consolidated basis.

 

2.2 Exceptional Items

Accounting policies

Exceptional items as described above are disclosed on the face of the income statement.

 

Subsequent revisions of estimates for items initially recognised as exceptional provisions are recorded as exceptional items in the year that the revision is made. Gains or losses on disposal of non-core assets are also considered exceptional due to their nature and impact on the Group's underlying quality of earnings.

 

Exceptional items

Operating and non-operating exceptional items are analysed as follows:

 

 

(Charge)/credit

Ref

2011

£m

2010

£m

Operating exceptional items:




 Reorganisation and restructuring costs

A

-

(17)

 Onerous contract provisions


-

1

 Onerous property provision

B

1

7

 Pension scheme changes

C

-

28

Total net operating exceptional items


1

19

Non-operating exceptional items:




 Loss on sale and impairment of non-current assets

D

 (3)

(4)

 Gain on sale and impairment of subsidiaries and investments

E

3

4

Total non-operating exceptional items


-

-

Total exceptional items before tax


1

19

 

A - Reorganisation and restructuring costs

There were no exceptional reorganisation or restructuring costs in 2011 (2010: £17 million in relation to cost saving restructuring initiatives).

 

B - Onerous property provision

A £1 million credit (2010: £7 million credit) due to revised estimates for property provisions raised as exceptional items due to the large headcount reduction in 2009.

 

C - Pension scheme changes (see note 3.6)

In 2010 operating exceptional gains of £28 million were recognised for service credits relating to introduction of a member option to change pension payments at retirement and one-off change to pension payments, and settlement gain in relation to the enhanced transfer value exercise.

 

D - Loss on sale and impairment of non-current assets

In 2011 a £3 million (2010: £4 million) loss on sale and impairment of non-current assets was incurred primarily as a result of a detailed fixed asset review undertaken in preparation for moving premises in Manchester.

 

E - Gain on sale, net of impairment, of subsidiaries, joint ventures and associates

The £3 million gain principally relates to the sale of Screenvision Holdings (Europe) Limited. In 2010 the £4 million gain principally related to the sale of Screenvision US (Technicolor Cinema Advertising LLC).

 

2.3 Taxation

Accounting policies

The tax charge for the period is recognised in the income statement and the statement of comprehensive income, according to the accounting treatment of the related transaction. The tax charge comprises both current and deferred tax. The calculation of the Group's total tax charge involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until a resolution has been reached by the relevant tax authority.

 

Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment in respect of previous years. The current tax charge is based on tax rates that are enacted or substantively enacted at the year-end.

 

The Group recognises liabilities for anticipated tax issues based on estimates of the additional taxes that are likely to become due, which require judgement. Amounts are accrued based on management's interpretation of specific tax law and the likelihood of settlement. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

 

Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for taxation purposes. The following temporary differences are not provided for:

 

·     the initial recognition of goodwill;

·     the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and

·     differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.

 

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. A deferred tax asset is recognised only to the extent that it is probable that sufficient taxable profit will be available to utilise the temporary difference.

 

Recognition of deferred tax assets, therefore, involves judgement regarding the timing and level of future taxable income. Deferred tax assets and liabilities are disclosed net to the extent that they relate to taxes levied by the same authority and the Group has the right of set-off.

 

Taxation - Income statement

The total taxation charge in the income statement is analysed as follows:

 


2011

£m

2010

£m

Current tax:



 Current tax charge before exceptional items

(60)

(64)

 Current tax credit on exceptional items

-

3


(60)

(61)

 Adjustment for prior periods

19

-


(41)

(61)

Deferred tax:



 Origination and reversal of temporary differences

(38)

53

 Deferred tax on exceptional items

-

(8)

 Adjustment for prior periods

-

-


(38)

45

Total taxation charge in the income statement

(79)

(16)

 

In order to understand how, in the income statement, a tax charge of £79 million (2010: £16 million) arises on a profit before tax of £327 million (2010: £286 million), the taxation charge that would arise at the standard rate of UK corporation tax is reconciled to the actual tax charge as follows:

 


2011

£m

2010

£m

Profit before tax

327

286

Taxation charge at UK corporation tax rate of 26.5% (2010: 28%)

(87)

(80)

Non-taxable income/non-deductible expenses

(7)

(1)

Recognition of tax losses brought forward

11

68

Over provision in prior periods

8

-

Impact of changes in tax rate

(3)

-

Other

(1)

(3)

Total taxation charge in the income statement

(79)

(16)

 

Non-deductible expenses are expenses that are not expected to be allowable for tax purposes. Similarly non-taxable income is income that will not be taxed.

 

Tax losses brought forward may be utilised against current year profits if the brought forward losses and the current year profits are of the same type. Use of tax losses in this way leads to a reduction of the tax charge. Tax losses of £11 million (2010: £68 million) principally include the recognition of a deferred tax asset of £11 million (2010: £45 million) on the remaining financing losses linked to previous investments ('loan relationship deficits') following the successful conclusion of an enquiry with the tax authorities. In 2010 this also included a credit for utilisation of £16 million of previously deferred loan relationship deficits and a credit of £5 million on the recognition of a deferred tax asset on other losses.

 

Over provision in prior periods may arise where a more favourable outcome is obtained for tax purposes than was expected when the provision was made. Upon confirmation that the more favourable tax treatment will apply, the over provision is released to lower the current year tax charge. The opposite is true of under provisions.

 

The effective tax rate is the tax charge on the face of the income statement expressed as a percentage of the profit before tax. In the year ended 31 December 2011, the effective tax rate is lower than the standard rate of UK corporation tax primarily because of the release of an overseas prior year over provision. In the year ended 31 December 2010, the effective tax rate was lower than the standard rate of UK corporation tax primarily due to the recognition of deferred tax assets on brought forward tax losses. As explained in the Financial and Performance Review, the Group uses an adjusted tax rate to show the cash tax impact on its adjusted earnings.

 

Taxation - Other comprehensive income

Within other comprehensive income a tax credit totalling £30 million (2010: charge of £22 million) has been recognised representing deferred tax. An analysis of this is included below in the deferred tax movement table.

 

Taxation - Statement of financial position

The table below outlines the deferred tax assets/(liabilities) that are recognised in the statement of financial position, together with their movements in the year:

 


At

1 January

2011

£m

Recognised in

the income

statement

£m

Recognised

in equity

£m

At

31 December

2011

£m

Property, plant and equipment

2

(1)

-

1

Intangible assets

(65)

16

-

(49)

Programme rights

2

(1)

-

1

Pension scheme deficits

76

(35)

30

71

Tax losses

50

(18)

-

32

Interest-bearing loans and borrowings, and derivatives

(1)

-

-

(1)

Share-based compensation

7

1

-

8

Other

2

-

-

2


73

(38)

30

65

 


At

1 January

2010

£m

Recognised in

the income

statement

£m

Recognised

in equity

£m

At

31 December

2010

£m

Property, plant and equipment

1

1

-

2

Intangible assets

(82)

17

-

(65)

Programme rights

2

-

-

2

Pension scheme deficits

122

(24)

(22)

76

Tax losses

-

50

-

50

Interest-bearing loans and borrowings, and derivatives

(1)

-

-

(1)

Share-based compensation

7

-

-

7

Unremitted earnings of subsidiaries, associates and joint ventures

(3)

3

-

-

Other

4

(2)

-

2


50

45

(22)

73

 

At 31 December 2011, total deferred tax assets are £115 million (2010: £139 million) and total deferred tax liabilities are £50 million (2010: £66 million).

 

The deferred tax balance relates to:

 

·     property, plant and equipment principally relates to timing differences arising on assets qualifying for capital allowances;

·     intangible assets mainly relates to timing differences on intangible assets arising on business combinations;

·     programme rights relates to timing differences on intercompany profits on stock;

·     pension scheme deficits relate to timing differences on the IAS 19 pension deficit, additional contributions resulting from funding through the SDN pension partnership (not recognised as contributions under IAS 19) and the spreading of tax relief on one-off large pension funding payments;

·     tax losses relates to timing differences in receiving the benefit of the Group's tax losses;

·     interest-bearing loans and borrowings and derivatives relates to timing differences on hedging instruments;

·     share-based compensation relates to timing differences on share schemes;

·     unremitted earnings of subsidiaries, associates and joint ventures relates to tax losses of associated companies; and

·     other relates to timing differences on miscellaneous items including sale and leaseback arrangements and various provisions.

 

Due to the change in the statutory tax rate, deferred tax is provided at 25% (2010: 27%), which is the rate that has been substantively enacted to apply from 1 April 2012. The impact of the change in the tax rate is £6 million (2010: nil), of which £3 million was recognised in the deferred tax charge and the remainder recognised in equity.

 

The deferred tax balance associated with the pension deficit has been adjusted to reflect the current tax benefit obtained in the current year following the contribution of £101 million to the Group's defined benefit pension scheme. This comprises £59 million of employer contributions and £42 million, being the discounted value of the SDN pension partnership extension as described in the Financial and Performance Review.

 

A deferred tax asset of £558 million (2010: £602 million) in respect of capital losses of £2,230 million (2010: £2,230 million) has not been recognised due to uncertainties as to the amount and whether a capital gain will arise in the appropriate form and relevant territory against which such losses could be utilised. For the same reasons, deferred tax assets in respect of overseas losses of £9 million (2010: £9 million) that time expire between 2017 and 2026 have not been recognised.

 

2.4 Earnings per share

The calculation of basic, diluted and adjusted EPS is set out below:

 

Earnings per share 2011

 


Ref.

Basic

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


247

255

Weighted average number of ordinary shares in issue - million


3,883

3,883

Dilution due to share options


-

36

Dilution due to convertible bond

A

-

192

Total weighted average number of ordinary shares in issue - million


3,883

4,111

Earnings per ordinary share


6.4p

6.2p

 

Adjusted earnings per share 2011

 


Ref.

Adjusted

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


247

255

Exceptional items

B

(1)

(1)

Profit for the year before exceptional items


246

254

Amortisation and impairment of acquired intangible assets

C

35

35

Adjustments to net financing costs

D

18

18

Other tax adjustments

E

7

7

Adjusted profit

F

306

314

Total weighted average number of ordinary shares in issue - million


3,883

4,111

Adjusted earnings per ordinary share


7.9p

7.6p

 

Earnings per share 2010

 


Ref.

Basic

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


269

270

Weighted average number of ordinary shares in issue - million


3,884

3,884

Dilution due to share options


-

27

Dilution due to convertible bond

A

-

192

Total weighted average number of ordinary shares in issue - million


3,884

4,103

Earnings per ordinary share


6.9p

6.6p

 

Adjusted earnings per share 2010

 


Ref.

Adjusted

£m

Diluted

£m

Profit for the year attributable to equity shareholders of ITV plc


269

270

Exceptional items

B

(14)

(14)

Profit for the year before exceptional items


255

256

Amortisation and impairment of acquired intangible assets

C

35

35

Adjustments to net financing costs

D

4

4

Other tax adjustments

E

(47)

(47)

Adjusted profit

F

247

248

Total weighted average number of ordinary shares in issue - million


3,884

4,103

Adjusted earnings per ordinary share


6.4p

6.0p

 

A.   Diluted earnings per share are impacted by the £135 million 2016 Convertible Eurobond issued in November 2009.

B.   The exceptional items detailed in Section 2.2 are adjusted to reflect profit for the year before exceptional items. The exceptional items are not materially impacted by tax effects (2010: charge of £5 million).

C.  Amortisation and impairment of acquired intangible assets of £47 million (2010: £48 million) is adjusted, including a related tax credit of £12 million (2010: £13 million). The rationale for adjustments to amortisation of intangibles is provided in the Financial and Performance Review.

D.  Adjustments to net financing costs of £25 million (2010: £6 million) includes a related tax effect of a credit of £7 million (2010: credit of £2 million). The rationale for adjustments made to financing costs is provided in the Financial and Performance Review.

E.   Other tax adjustments reflect the reversal of the credit arising from the recognition of the deferred tax asset generated on certain losses partially offset by those losses utilised in the current year. This credit is the main reason why on a statutory basis the EPS for 2010 is higher than 2011.

F.   Adjusted profit is defined as profit for the year before exceptional items, amortisation and impairment of acquired intangible assets, net financing cost adjustments and other tax adjustments.

Section 3 Operating Assets and Liabilities

3.1 Working capital

 

Accounting policies

Distribution rights

'Distribution rights' are programme rights the Group buys from producers to derive future revenues principally through licensing to broadcasters. These are classified as non-current assets as these rights are used to derive long-term economic benefit for the Group.

 

Distribution rights are recognised initially at cost and charged through operating costs in the income statement over a maximum five-year period that is dependent on either cumulative sales and programme genre, or based on forecast future sales. Certain film rights are expensed over a period of up to ten years reflecting the estimated longer period over which these types of rights can be exploited. These estimates are based on historical experience with similar rights as well as anticipation of future events. Advances paid for the acquisition of distribution rights are disclosed as distribution rights as soon as they are contracted. These advances are not expensed until the programme is available for distribution. Up to that point they are assessed annually for impairment through the reassessment of the future sales expected to be earned from that title.

 

Programme rights and other inventory

Where programming, sports rights and film rights are acquired for the primary purpose of broadcasting, these are recognised within current assets.

 

Assets are recognised when the Group controls the respective assets and the risks and rewards associated with them.

 

For acquired programme rights, assets are recognised as payments are made and are recognised in full when the programme is available for transmission. Programmes produced internally, either for the purpose of broadcasting or to be sold in the normal course of the Group's operating cycle, are recognised within current assets at production cost.

 

Programme costs and rights, including those acquired under sale and leaseback arrangements, are generally expensed to operating costs in full on first transmission. Film rights, sports rights and certain acquired programmes are expensed over a number of transmissions reflecting the pattern in which the right is consumed.

 

Programme costs and rights not yet written off are included in the statement of financial position at the lower of cost and net realisable value. In assessing net realisable value for programmes in production, consideration is given to the contracted sales price and estimated costs to complete. For programme stock, sports rights and film rights, the net realisable value assessment is based on estimated airtime value, with consideration given to whether the number of transmissions purchased can be efficiently played out over the licence period. Any reversals of write-downs for programme costs and rights are recognised as a reduction in operating costs.

 

Historically, ITV has entered into sale and leaseback agreements in relation to certain programme titles. Related outstanding sale and leaseback obligations, which comprise the principal and accrued interest, are included within borrowings. The finance related element of the agreement is charged to the income statement over the term of the lease on an effective interest basis. Sale and leaseback obligations are secured against an equivalent cash balance held within cash and cash equivalents.

 

Trade receivables

Trade receivables are recognised initially at the value of the invoice sent to the customer and subsequently at the amounts considered recoverable (amortised cost). Where payments are not due for more than one year, they are shown in the financial statements at their net present value to reflect the economic cost of delayed payment. The Group provides goods and services to substantially all its customers on credit terms.

 

Estimates are used in determining the level of receivables that will not, in the opinion of the Directors, be collected. These estimates include such factors as historical experience, the current state of the UK and overseas economies and industry specific factors. A provision for impairment of trade receivables is established when there is sufficient evidence that the Group will not be able to collect all amounts due.

 

The carrying value of trade receivables is considered to approximate fair value.

 

Trade payables

Trade payables are recognised at the value of the invoice received from a supplier.

 

The carrying value of trade payables is considered to approximate to fair value.

 

Working capital management

Cash and working capital management continues to be a key focus. During the year the cash inflow from working capital was £18 million (2010: £99 million) derived as follows:

 


2011

£m

2010

£m

Decrease in programme rights and other inventory and distribution rights

-

108

Decrease/(increase) in receivables

52

(8)

Decrease in payables

(34)

(1)

Working capital inflow

18

99

 

3.1.1 Distribution rights

Movements in distribution rights during the year are shown in the table below:

 


2011

£m

2010

£m

Cost:



At 1 January

111

99

Additions

14

12

At 31 December

125

111




Charged to income statement:



At 1 January

99

83

Expense for the year

15

16

At 31 December

114

99




Net book value

11

12

 

3.1.2 Programme rights and other inventory

The programme rights and other inventory at the year-end are shown in the table below:

 


2011

£m

2010

£m

Acquired programming

122

170

Production

87

52

Commissions

36

36

Sports rights

36

21

Prepayments

2

4

Other

2

1


285

284

 

Programme rights and other inventory written down in the year were £5 million (2010: £3 million). There have been no reversals relating to inventory previously written down to net realisable value (2010: £nil).

 

3.1.3 Programme commitments

There are operating commitments in respect of programming entered into in the ordinary course of business with programme suppliers, sports organisations and film distributors in respect of rights to broadcast on the ITV network. Commitments in respect of these purchases, which are not reflected in the statement of financial position, are due for payment as follows:

 


2011

£m

2010

£m

Within one year

396

396

Later than one year and not more than five years

599

315

More than five years

85

-


1,080

711

 

Programme commitments increased in the year principally because of the signing of a new Champions League contract and the extension of the ITN news contract.

 

3.1.4 Trade and other receivables

Trade and other receivables can be analysed as follows:

 


2011

£m

2010

£m

Due within one year:



 Trade receivables

271

354

 Other receivables

22

14

 Prepayments and accrued income

77

74


370

442

Due after more than one year:



 Trade receivables

26

6




Total trade and other receivables

396

448

 

£297 million (2010: £360 million) of total trade receivables that are not impaired are aged as follows:

 


2011

£m

2010

£m

Current

277

301

Up to 30 days overdue

4

7

Between 30 and 90 days overdue

5

1

Over 90 days overdue

11

51


297

360

 

The table below shows the Group's net receivables relating to non-consolidated licensees in the 'Broadcasting & Online' segment, where the Group has both supplier and customer relationships.

 


2011

£m

2010

£m

Trade receivables - current

9

12

Trade receivables - past due but not impaired

12

55

Other receivables

5

5

Trade and other payables

(4)

(49)


22

23

 

As at 31 December 2011, trade receivables of £11 million (2010: £8 million) were provided against. Movements in the Group's provision for impairment of trade receivables can be shown as follows:

 


2011

£m

2010

£m

At 1 January

8

8

Charged during the year

8

5

Receivables written off during the year as uncollectable (utilisation of provision)

(1)

(1)

Unused amounts reversed

(4)

(4)

At 31 December

11

8

 

The £11 million provision for doubtful debts is aged as £4 million due in more than 90 days, £2 million due between 31 and 90 days and £5 million due in up to 30 days from the reporting date.

 

3.1.5 Trade and other payables due within one year

Trade and other payables due within one year can be analysed as follows:

 


2011

£m

2010

£m

Trade payables

69

56

Social security

16

16

Other payables

183

183

Accruals and deferred income

371

417


639

672

 

3.1.6 Trade payables due after more than one year

Trade payables due after more than one year can be analysed as follows:

 


2011

£m

2010

£m

Trade payables

45

26

 

This primarily relates to film creditors for which payment is due after more than one year.

 

3.2 Property, plant and equipment

 

Accounting policies

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Certain items of property, plant and equipment that were revalued to fair value prior to 1 January 2004, the date of transition to IFRS, are measured on the basis of deemed cost, being the revalued amount less depreciation up to the date of transition.

 

Leases


Finance leases are those which transfer substantially all the risks and rewards of ownership to the lessee. Certain service contracts involve the use of specific assets (e.g. transmission or studio equipment) and therefore contain an embedded lease.

 

Determining whether a lease is a finance lease requires judgement as to whether substantially all of the risks and benefits of ownership have been transferred to the Group. Estimates used by management in making this assessment include the useful economic life of assets, the fair value of the asset and the discount rate applied to the total payments required under the lease. Assets held under such leases are included within property, plant and equipment and depreciated on a straight-line basis over their estimated useful lives.

 

Outstanding finance lease obligations, which comprise the principal plus accrued interest, are included within borrowings. The finance element of the agreements is charged to the income statement over the term of the lease on an effective interest basis.

 

All other leases are operating leases, the rentals on which are charged to the income statement on a straight-line basis over the lease term.

 

Depreciation

Depreciation is provided to write off the cost of property, plant and equipment, less estimated residual value, on a straight-line basis over their estimated useful lives. The annual depreciation charge is sensitive to the estimated useful life of each asset and the expected residual value at the end of its life. The major categories of property, plant and equipment are depreciated as below.

 

Asset class

Depreciation policy

Freehold land

not depreciated

Freehold buildings

up to 60 years

Leasehold properties

shorter of residual lease term or 60 years

Leasehold improvements

shorter of residual lease term or estimated useful life

Vehicles, equipment and fittings(1)

3 to 20 years

 

(1)  Equipment includes studio production and technology assets.

 

Impairment of assets

Property, plant and equipment that is subject to depreciation is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indicators of impairment may include changes in technology and business performance.

 

Property, plant and equipment

Property, plant and equipment can be analysed as follows:

 


Freehold land

and buildings

Improvements to leasehold

land and buildings

Vehicles, equipment

and fittings

Total


 

£m

Long

£m

Short

£m

Owned

£m

Finance leases

£m

 

£m

Cost







At 1 January 2010

54

50

20

211

15

350

Additions

-

5

-

22

-

27

Reclassification

3

-

-

(3)

-

-

Reclassification to assets held for sale

-

(3)

-

(2)

-

(5)

Disposals and retirements

(5)

-

-

(3)

-

(8)

At 31 December 2010

52

52

20

225

15

364

Additions

-

5

-

39

-

44

Additions from acquisition

-

-

-

5

-

5

Reclassification

(1)

1

-

-

-

-

Reclassification from assets held for sale

-

1

-

-

-

1

Disposals and retirements

-

-

(2)

(64)

(1)

(67)

At 31 December 2011

51

59

18

205

14

347

Depreciation







At 1 January 2010

12

12

14

144

7

189

Charge for the year

1

1

1

25

2

30

Impairment charge for the year (see note 2.2)

-

-

1

2

-

3

Reclassification to assets held for sale

-

(1)

-

-

-

(1)

Disposals and retirements

(5)

-

-

(3)

-

(8)

At 31 December 2010

8

12

16

168

9

213

Charge for the year

2

2

1

18

3

26

Accumulated depreciation from acquisition

-

-

-

5

-

5

Reclassification

(1)

1

-

-

-

-

Disposals and retirements

-

-

(2)

(61)

(1)

(64)

At 31 December 2011

9

15

15

130

11

180

Net book value







At 31 December 2011

42

44

3

75

3

167

At 31 December 2010

44

40

4

57

6

151

 

Included within the book values above is expenditure of £27 million (2010: £9 million) on property, plant and equipment that are in the course of construction.

 

A review of tangible assets for obsolescence was undertaken in the period resulting in net impairments of £3 million to net book value, £67 million of cost and £64 million of accumulated depreciation.

 

Capital commitments

There are £10 million of capital commitments at 31 December 2011 (2010: £2 million).

 

3.3 Intangible assets

 

Accounting policies

Goodwill

Goodwill represents the future economic benefits that arise from assets that are not capable of being individually identified and separately recognised. The goodwill recognised by the Group has all arisen as a result of business combinations.

 

Due to changes in accounting standards goodwill has been calculated using three different methods depending on the date the relevant business was purchased:

 

Method 1: All business combinations that have occurred since 1 January 2009 were accounted for using the acquisition method. Under this method, goodwill is measured as the fair value of the consideration paid (including the recognition of any non-controlling interests of the business being bought), less the fair value of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date. Subsequent adjustments to the fair value of net assets acquired can only be made within 12 months of the acquisition date, and only if fair values were determined provisionally at an earlier reporting date. These adjustments are accounted for from the date of acquisition. Acquisitions of non-controlling interests are accounted for as transactions with owners and therefore no goodwill is recognised as a result of such transactions. Transaction costs incurred in connection with those business combinations, such as legal fees, due diligence fees and other professional fees were expensed as incurred.

 

Method 2: All business combinations that occurred between 1 January 2004 and 31 December 2008 were accounted for using the purchase method in accordance with IFRS 3 'Business Combinations (2004)'. Goodwill on those combinations represents the difference between the cost of the acquisition and the fair value of the identifiable net assets acquired and did not include the value of the non-controlling interest. Transaction costs incurred in connection with those business combinations, such as legal fees, due diligence fees and other professional fees were included in the cost of acquisition.

 

Method 3: For business combinations prior to 1 January 2004, goodwill is included at its deemed cost, which represents the amount recorded under UK GAAP at that time less amortisation up to 31 December 2003. The classification and accounting treatment of business combinations occurring prior to 1 January 2004, the date of transition to IFRS, has not been reconsidered as permitted under IFRS 1. Goodwill is stated at its recoverable amount being cost less any accumulated impairment losses and is allocated to cash-generating units.

 

Other intangible assets

Other intangible assets are those which are identifiable and can be sold separately or which arise from legal rights.

 

Within ITV there are two types of intangible assets: those acquired and those that have been internally generated (such as software licences and development).

 

Other intangible assets acquired directly by the Group are stated at cost less accumulated amortisation. Those separately identified intangible assets acquired as part of a business combination are shown at fair value at the date of acquisition less accumulated amortisation.

 

The main intangible assets the Group has been required to value are brands, licences, customer relationships and contracts.

 

Each class of intangible asset's valuation method on initial recognition, amortisation method and estimated useful life is set out in the table below:

 

Class of intangible asset

Valuation method

Amortisation method

Estimated useful life

Brands

 

Applying a royalty rate to the expected future revenues
over the life of the brand.

Straight-line

 

up to 11 years

 

Customer contracts and relationships

 

 

 

 

Expected future cash flows from those contracts and relationships existing at the date of acquisition are
estimated. If applicable, a contributory charge is deducted
for the use of other assets needed to exploit the cash flow.

The net cash flow is then discounted back to present

value.

Straight-line

 

 

 

 

 

up to 6 years for customer contracts

 

5 to 10 years for customer relationships

Licences

 

 

 

 

Start-up basis of expected future cash flows existing at
the date of acquisition. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.

Straight-line

11 to 17 years depending on term of licence

 

 

Software licences and development*

Initially at cost and subsequently at cost less accumulated amortisation.

Straight-line

 

1 to 5 years

 

Film libraries

 

Initially at cost and subsequently at cost less accumulated amortisation.

Sum of digits

 

20 years

 

 

* Internally generated software development costs in relation to itv.com are expensed as incurred.

 

Determining the fair value of intangible assets arising on acquisition requires judgement. The Directors make estimates regarding the timing and amount of future cash flows derived from exploiting the assets being acquired. The Directors then estimate an appropriate discount rate to apply to the forecast cash flows. Such estimates are based on current budgets and forecasts, extrapolated for an appropriate period taking into account growth rates, expected changes to selling prices, operating costs and the expected useful lives of assets. Judgements are also made regarding whether and for how long licences will be renewed; this drives our amortisation policy for those assets. The Directors estimate the appropriate discount rate using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the businesses being acquired.

 

Amortisation

Amortisation is charged to the income statement over the estimated useful lives of intangible assets unless such lives are judged to be indefinite. Indefinite life assets, such as goodwill, are not amortised but are tested for impairment at each year-end.

 

Impairment

Goodwill is not subject to amortisation and is tested annually for impairment and when circumstances indicate that the carrying value may be impaired.

 

Other intangible assets are subject to amortisation and are reviewed for impairment whenever events or changes in circumstances indicate that the amount carried in the statement of financial position is less than its recoverable amount.

 

Determining whether the carrying amount of intangible assets has any indication of impairment requires judgement. Any impairment is recognised in the income statement.

 

An impairment test is performed by assessing the recoverable amount of each asset, or for goodwill, the cash-generating unit (or group of cash-generating units) related to the goodwill. Assets are grouped at the lowest levels for which there are separately identifiable cash flows ('cash-generating unit' or 'CGU').

 

The recoverable amount is the higher of an asset's fair value less costs to sell and 'value in use'. The value in use is based on the present value of the future cash flows expected to arise from the asset. Growth assumptions derived from the Transformation Plan are not included in the estimated future cash flows used as the Group applies cautious assumptions for impairment testing.

 

Estimates are used in deriving these cash flows and the discount rate. Such estimates reflect current market assessments of the risks specific to the asset and the time value of money. The estimation process is complex due to the inherent risks and uncertainties. If different estimates of the projected future cash flows or a different selection of an appropriate discount rate or long-term growth rate were made, these changes could materially alter the projected value of the cash flows of the asset, and as a consequence materially different amounts would be reported in the financial statements.

 

Impairment losses in respect of goodwill are not reversed. In respect of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

 

Intangible assets

Intangible assets can be analysed as follows:

 


 

 

Goodwill

£m

 

 

Brands

£m

Customer

contracts

and relationships

£m

 

 

Licences

£m

Software

licences and

development

£m

Film libraries

and other

£m

 

 

Total

£m

Cost








At 1 January 2010

3,365

173

328

121

52

79

4,118

Additions

-

-

-

-

2

-

2

At 31 December 2010

3,365

173

328

121

54

79

4,120

Additions

14

-

-

-

10

-

24

Disposals

-

-

-

-

(2)

-

(2)

At 31 December 2011

3,379

173

328

121

62

79

4,142

Amortisation and impairment








At 1 January 2010

2,654

94

249

47

12

32

3,088

Charge for the year

-

16

20

9

15

3

63

At 31 December 2010

2,654

110

269

56

27

35

3,151

Charge for the year

-

17

18

9

12

3

59

Disposals

-

-

-

-

(2)

-

(2)

At 31 December 2011

2,654

127

287

65

37

38

3,208

Net book value








At 31 December 2011

725

46

41

56

25

41

934

At 31 December 2010

711

63

59

65

27

44

969

 

Goodwill has increased £14 million in 2011 following the acquisition of Channel Television Holdings Limited (see note 3.4).

 

Also included within the book values above is expenditure of £10 million (2010: £1 million) on software that is in the course of development.

 

Goodwill impairment tests

The following CGUs represent the carrying amounts of goodwill.

 


2011

£m

2010

£m

Broadcasting & Online

342

328

SDN

76

76

ITV Studios

307

307


725

711

 

There has been no impairment charge for the year (2010: nil).

 

When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate.

 

Cash flow projections are based on the Group's current five-year plan. Beyond the five-year plan these projections are extrapolated using an estimated long-term growth rate of 1%-2.5% (2010: 1%-2.5%) depending on the CGU. The growth rates used are consistent with the long-term average growth rates for the industry and are appropriate because these are long-term businesses.

 

The discount rate has been revised for each CGU to reflect the latest market assumptions for the Risk-Free rate, the Equity Risk Premium and the net cost of debt. There is currently no reasonably possible change in discount rate that would reduce the headroom in any CGU to zero.

 

Broadcasting & Online

The goodwill in this CGU arose as a result of the acquisition of broadcasting businesses since 1999, the largest of which were the acquisition by Granada of United News and Media's broadcast businesses in 2000 and the merger of Carlton and Granada in 2004 to form ITV plc.

 

No impairment charge arose in the Broadcasting & Online CGU during the course of 2011 (2010: nil). Management believes that currently no reasonably possible change in the advertising market would reduce the headroom in this CGU to zero.

 

The main assumptions on which the forecast cash flow projections for this CGU are based include: the share of the television advertising market; share of commercial impacts; programme and other costs; and the pre-tax market discount rate.

 

The key assumption in assessing the recoverable amount of Broadcasting & Online goodwill is the size of the television advertising market. In forming its assumptions about the television advertising market, the Group has used a combination of long-term trends, industry forecasts and in-house estimates, which place greater emphasis on recent experience. Industry consensus is 0.1% for 2012 and 1.1% for 2013. Cautious assumptions of -5% were applied for both years to the industry consensus for the purposes of the impairment test, with no impairment identified. The impairment test also assumed that ITV renews its broadcasting licences in 2014.

 

A pre-tax market discount rate of 11.6% (2010: 11.8%) has been used in discounting the projected cash flows.

 

The Directors believe that currently no reasonably possible change in these assumptions would reduce the headroom in this CGU to zero.

 

SDN

Goodwill was recognised when the Group acquired SDN (the licence operator for DTT Multiplex A) in 2005. It represented the wider strategic benefits of the acquisition specific to the Group, principally the enhanced ability to promote Freeview as a platform, business relationships with the channels which are on Multiplex A and additional capacity available from 2010.

 

No impairment charge arose on the SDN goodwill during the course of 2011 (2010: nil).

 

The main assumptions on which the forecast cash flows are based are income to be earned from medium-term contracts, the market price of available multiplex video streams in the period up to and beyond digital switchover and the pre-tax market discount rate. These assumptions have been determined by using a combination of current contract terms, recent market transactions and in-house estimates of video stream availability and pricing.

 

A pre-tax market discount rate of 12.7% (2010: 11.8%) has been used in discounting the projected cash flows.

 

The Directors believe that currently no reasonably possible change in the income and availability assumptions would reduce the headroom in this CGU to zero.

 

ITV Studios

The goodwill for ITV Studios arose as a result of the acquisition of production businesses since 1999, the largest of which were the acquisition by Granada of United News and Media's production businesses in 2000 and the merger of Carlton and Granada in 2004 to form ITV plc.

 

No impairment charge arose in the ITV Studios CGU during the course of 2011 (2010: nil).

 

The key assumptions on which the forecast cash flows were based include revenue (including the ITV Studios share of ITV1 output), margin growth and the pre-tax market discount rate. These assumptions have been determined by using a combination of extrapolation of historical trends within the business, industry estimates and in-house estimates of growth rates in all markets.

 

A pre-tax market discount rate of 12.4% (2010: 11.8%) has been used in discounting the projected cash flows.

 

The Directors believe that currently no reasonably possible change in the income and availability assumptions would reduce the headroom in this CGU to zero.

 

3.4 Acquisitions, assets held for sale and disposals

 

Accounting policies

Non-current assets or disposal groups are classified as held for sale if: their carrying amount will be recovered principally through sale, rather than continuing use; they are available for immediate sale; and the sale is highly probable. A disposal group consists of assets that are to be disposed of, by sale or otherwise, in a single transaction together with the directly associated liabilities. The group includes goodwill acquired in a business combination if the disposal group is a cash-generating unit to which goodwill has been allocated.

 

On initial classification as held for sale, non-current assets or components of a disposal group are remeasured in accordance with the Group's accounting policies. Thereafter, generally the assets or disposal groups are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment on a disposal group is first allocated to goodwill and then to remaining assets and liabilities on a pro rata basis, except to programming rights and other inventory, financial assets and deferred tax assets, which continue to be measured in accordance with the Group's accounting policies. Impairment on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in the income statement. Gains are not recognised in excess of any cumulative impairment.

 

No amortisation or depreciation is charged on non-current assets (including those in disposal groups) classified as held for sale. Assets classified as held for sale are disclosed separately on the face of the statement of financial position and classified as current assets or liabilities, with disposal groups being separated between assets held for sale and liabilities held for sale.

 

Acquisitions

On 22 November 2011 the Group acquired 100% of the ordinary shares in Channel Television Holdings Limited, holder of the Channel 3 licence in the Channel Islands, as part of the simplification of the Group's network arrangements. Consideration of £1 satisfied in cash was paid along with repayment of £14 million of loans to the vendor.

 

In the period from acquisition to 31 December 2011 the subsidiary contributed an immaterial amount of net profit to the consolidated net profit for the year. If the acquisition had occurred on 1 January 2011, Group revenue would have been £3 million higher and there would have been a decrease of £2 million to net profit after eliminating any transactions between the Company and the Group. The subsidiary was breaking even prior to acquisition, and it is expected to contribute favourably to future simplification of the Group's cost structure. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 January 2011.

 

Effect of acquisition

The acquisition had the following effect on the Group's assets and liabilities:

 


Recognised values on acquisition

£m

Acquiree's net assets at the acquisition date:


Trade and other receivables

2

Borrowings

(14)

Trade and other payables

(1)

Current taxation liabilities

(1)

Net identifiable assets and (liabilities)

(14)

Consideration paid:

-

Goodwill on acquisition

14

 

Goodwill has arisen on the acquisition representing the operational benefits to the Group from simplifying its network arrangements.

 

The Group incurred immaterial acquisition related costs relating to professional advice which have been included in administrative expenses in the Group's Consolidated Income Statement.

 

Disposals

The Group disposed of its long leasehold interest in property at Bedford on 25 March 2011 for a total consideration of £2 million resulting in an immaterial gain on sale. This property was included within assets held for sale in 2010 and 2011 up to the point of sale.

 

In 2010 the following disposals took place:

 

The Group disposed of its 100% interest in Friends Reunited Holdings Limited on 25 March 2010 to Brightsolid Online Innovation Limited (a wholly owned subsidiary of D.C. Thompson Limited) for a cash consideration of £27 million. The sale resulted in no material gain or loss on disposal in 2010.

 

The Group disposed of its 50% interest in Screenvision US (Technicolor Cinema Advertising LLC) on 14 October 2010 for a total consideration of $80 million (£50 million). Consideration of $75 million (£47 million) was received resulting in a gain on disposal of £4 million. $5 million (£3 million) was contingent on contractual commitments which were subsequently met, and payment received, in January 2012.

 

The Group disposed of its long leasehold interest in properties at Birmingham and Bristol on 12 August 2010 and 23 August 2010 respectively for a total consideration of £7 million resulting in a net £1 million loss on sale.

 

Assets held for sale

The movement in assets held for sale since 1 January 2011 is summarised in the table below:

 


2011

£m

At 1 January 2011

3

Disposal of properties held for sale

(2)

Property reclassified to non-current assets

(1)

At 31 December 2011

-

 

During the year the Group disposed of its long leasehold interest in property at Bedford, originally held for sale at £2 million (see disposals) and transferred property carried at £1 million to non-current assets as it is no longer being actively marketed for sale.

 

3.5 Provisions

 

Accounting policies

A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation arising from past events, it is probable cash will be paid to settle it and the amount can be estimated reliably. Provisions are determined by discounting the expected future cash flows by a rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a financing cost in the income statement. These provisions are estimates for which the amount and timing of actual cash flows are dependent on future events.

 

Provisions

The movements in provisions during the year are as follows:

 


Contract

provisions

£m

Restructuring

provisions

£m

Property

provisions

£m

Other

provisions

£m

Total

£m

At 1 January 2011

20

5

8

16

49

Addition/(release)

5

2

(1)

-

6

Unwind of discount

-

-

-

-

-

Utilised

(15)

(5)

(1)

(1)

(22)

At 31 December 2011

10

2

6

15

33

 

Provisions of £24 million are classified as current liabilities (2010: £34 million).

 

Contract provisions are for onerous sports rights commitments and are expected to be utilised over the remaining contract period.

 

Property provisions principally relate to onerous lease contracts due to empty space created by the significant reduction in headcount in 2009. Utilisation of the provision will be over the anticipated life of the leases or earlier if exited.

 

Other provisions of £15 million primarily relate to potential liabilities that may arise as a result of Boxclever having been placed into administration, most of which relate to pension arrangements. On 21 December 2011, the Determinations Panel of The Pensions Regulator determined that Financial Support Directions ('FSD') should be issued against certain companies within the Group in relation to the Boxclever pension scheme. The Group immediately lodged an appeal against this decision with the Upper Tribunal. A FSD would require the Company to put in place financial support for the Boxclever scheme; however, it cannot be issued during the period of the appeal. The Directors obtained leading counsel's opinion and extensive legal advice and continue to believe that the provision held is adequate.

 

3.6 Pensions

 

Accounting policies

Defined contribution schemes

Obligations under the Group's defined contribution schemes are recognised as an operating cost in the income statement as incurred.

 

Defined benefit schemes

The Group's obligation in respect of defined benefit pension schemes are calculated separately for each scheme by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value and the fair value of scheme assets is then deducted. The discount rate used is the yield at the valuation date on high quality corporate bonds.

 

The Group takes advice from independent actuaries relating to the appropriateness of the assumptions which include life expectancy of members, expected salary and pension increases, inflation and the return on scheme assets. It is important to note that comparatively small changes in the assumptions used may have a significant effect on the income statement and statement of financial position.

 

The liabilities of the defined benefit schemes are measured by discounting the best estimate of future cash flows to be paid using the projected unit method. This method is an accrued benefits valuation method that makes allowance for projected earnings. These calculations are performed by a qualified actuary.

 

Actuarial gains and losses are recognised in full in the period in which they arise through the Statement of Comprehensive Income.

 

An unfunded scheme in relation to previous Directors is accounted for under IAS 19. This is partly securitised by assets held outside of the ITV Pension scheme in the form of gilts and included within cash and cash equivalents.

 

The Group's pension schemes

 

Defined contribution schemes

Total contributions recognised as an expense in relation to defined contribution schemes during 2011 were £8 million (2010: £6 million). This is the default scheme for all new employees.

 

Defined benefit schemes

The Group's main scheme was formed from a merger of a number of schemes on 31 January 2006. The level of retirement benefit is principally based on pensionable salary at retirement. The Group's main scheme consists of three sections, A, B and C. The latest triennial valuation of section A was completed as at 1 January 2008 by an independent actuary for the Trustees of the ITV Pension Scheme. The latest triennial valuations of sections B and C were completed as at 1 January 2010 and agreed in 2011. The next triennial valuation of section A as at 1 January 2011 is in progress. The Trustees are also carrying out actuarial valuation of sections B and C as at this date in order to bring the triennial reporting date for the three sections into line. The Group will monitor funding levels annually.

 

The defined benefit pension deficit

The defined benefit pension deficit at 31 December 2011 was £390 million (2010: £313 million).

 

The assets and liabilities of the schemes are recognised in the Consolidated Statement of Financial Position and shown within non-current liabilities. The total recognised in the current and previous years are:

 


2011

£m

2010

£m

2009

£m

2008

£m

2007

£m

Total defined benefit scheme obligations

(3,036)

(2,746)

(2,687)

 (2,339)

 (2,603)

Total defined benefit scheme assets

2,646

2,433

2,251

2,161

2,491

Net amount recognised within the consolidated statement of financial position

(390)

(313)

(436)

 (178)

(112)

 

Addressing the deficit

The statutory funding objective is that a funded scheme has sufficient and appropriate assets to pay its benefits as they fall due. This is a long-term target. Future contributions will always be set at least at the level required to satisfy the statutory funding objective. The general principles adopted by the trustees are that the assumptions used, taken as a whole, will be sufficiently prudent for pensions and benefits already in payment to continue to be paid, and to reflect the commitments which will arise from members' accrued pension rights.

 

The levels of ongoing contributions to the defined benefit schemes are based on the current service costs (as assessed by the scheme trustees) and the expected future cash flows of the schemes. Normal employer contributions in 2012 for current service are expected to be in the region of £9 million (2011: £10 million) assuming current contribution rates continue as agreed with the Trustee. Based on the agreements currently in force, the following deficit funding payments are expected for forthcoming years.

 

In 2012 the Group expects to make deficit funding contributions of £71 million comprised as follows:

 

·     annual deficit funding contribution to Section A of £35 million;

·     total annual deficit funding contributions to Sections B and C of £5 million;

·     an additional £5 million to Section A as in 2011 the Group did not implement initiatives which reduce the Scheme's deficit by at least £10 million, compared with the level had such initiatives not been implemented;

·     £16 million, being 10% of the Group's EBITA before exceptional items that exceeds the £300 million threshold;  

·     £10 million of annual deficit contributions as a result of the SDN pension partnership. From 2013 onwards £11 million of annual deficit contributions will be paid. Under the partnership arrangements, the Group has committed to making a payment to the main Scheme of up to £200 million in 2022, if and to the extent that it remains in deficit at that time. These arrangements were extended during 2011 with the potential 2022 payment being increased by £50 million, from £150 million, and the annual payment being increased in proportion to this.

 

The Group estimates the average duration of its UK scheme's liabilities to be 15 years (2010: 15 years).

 

The remaining sections provide further detail of the value of scheme assets and liabilities, how these are accounted for and the impact on the income statement.

 

Total defined benefit scheme obligations

The movement in the present value of the Group's defined benefit obligation is analysed below:

 


2011

£m

2010

£m

Defined benefit obligation at 1 January

2,746

2,687

Current service cost

7

5

Curtailment loss/(gain) (redundancies)

-

1

Operating exceptional past service credit (one-off change to pension payment)

-

(2)

Operating exceptional past service credit (introduction of pensions payment change option)

-

(25)

Settlement (enhanced transfer values)

-

(21)

Interest cost

145

149

Net actuarial loss

268

80

Contributions by scheme participants

-

2

Benefits paid

(130)

(130)

Defined benefit obligation at 31 December

3,036

2,746

 

The present value of the defined benefit obligation is analysed between wholly unfunded and funded defined benefit schemes in the table below:

 


2011

£m

2010

£m

Defined benefit obligation in respect of funded schemes

2,997

2,709

Defined benefit obligation in respect of wholly unfunded schemes

39

37

Total defined benefit obligation

3,036

2,746

 

The principal assumptions used in the schemes valuations at the year-end were:

 


2011

2010

Discount rate for scheme liabilities

4.7%

5.4%

Inflation assumption

3.0%

3.4%

Rate of pensionable salary increases

0.9%

0.9%

Rate of increase in pension payment (LPI 5% pension increases)

2.9%

3.3%

Rate of increase to deferred pensions (CPI)

2.3%

2.9%

 

IAS 19 requires that the discount rate used be determined by reference to high quality fixed income investments in the UK that match the estimated term of the pension obligations. The discount rate has been based on the yield available on AA rated corporate bonds of a term similar to the liabilities.

 

The inflation assumption has been set by looking at the difference between the yields on fixed and index-linked Government bonds. The inflation assumption is used to calculate the remaining assumptions except where caps have been implemented as part of the Group's actions during 2009.

 

In estimating the life expectancy of pension scheme members, the Group has used PA92 year of birth tables with medium cohort improvements, with a 1% per annum underpin and a one year age rating (i.e. tables are adjusted so that a member is assumed to be one year older than actual age). Using these tables the assumed life expectations on retirement are:

 


2011

2011

2010

2010

Retiring today at age

60

65

60

65

Males

26.7

21.8

26.6

21.7

Females

30.0

25.0

29.9

24.9

Retiring in 20 years at age

60

65

60

65

Males

28.7

23.6

28.6

23.5

Females

32.1

26.9

32.0

26.8

 

The tables above reflect published mortality investigation data in conjunction with the results of investigations into the mortality experience of scheme members.

 

The sensitivities regarding the principal assumptions used to measure the defined benefit obligation are set out below:

 

Assumption

Change in assumption

Impact on scheme liabilities

Discount rate

Increase/decrease by 0.5%

Decrease/increase by 8% (£230 million)

Rate of inflation

Increase/decrease by 0.5%

Increase/decrease by 5% (£150 million)

Life expectations

Increase by 1 year

Increase by 2% (£70 million)

 

The sensitivities above consider the single change shown with the other assumptions assumed to be unchanged.

 

In practice, changes in one assumption may be accompanied by offsetting changes in another assumption (although this is not always the case). The Group's net pension deficit is the difference between the schemes' liabilities and the schemes' assets. Changes in the assumptions may occur at the same time as changes in the market value of scheme assets. These may or may not offset the change in assumptions. For example, a fall in interest rates will increase the schemes' liabilities, but may also trigger an offsetting increase in the market value of certain assets so there is no net effect on the Group's liability.

 

Total defined benefit scheme assets

The movement in the fair value of the defined benefit scheme's assets is analysed below:

 


2011

£m

2010

£m

Fair value of scheme assets at 1 January

2,433

2,251

Expected return on assets

140

136

Net actuarial gain

144

147

Employer contributions

59

47

Contributions by scheme participants

-

2

Settlement (enhanced transfer values)

-

(20)

Benefits and expenses paid

(130)

(130)

Fair value of scheme assets at 31 December

2,646

2,433

 

At 31 December 2011 the scheme's assets were invested in a diversified portfolio that consisted primarily of equity and debt securities. The fair value of the scheme's assets are shown below by major category:

 


Market value

2011

£m

Market value

2010

£m

Market value of assets - equity-type assets

745

901

Market value of assets - bonds

1,782

1,242

Market value of assets - other

119

290

Total scheme assets

2,646

2,433

 

The Trustee entered a longevity swap during the year to remove the risk of increases in pension liabilities that would arise if a significant portion of the scheme's defined benefit pensioner population were to enjoy a longer life than currently expected. The recognition of the swap resulted in a reduction to the scheme's assets due to its classification as a negative plan asset and is included within "Market value of assets - other" in the table above.

 

Exposure through the different asset classes is obtained through a combination of executing swaps and investing in physical assets.

 

The Trustee has a substantial holding of equity-type investments, mainly shares in listed and unlisted companies. The investment return related to these is variable, and they are generally considered 'riskier' investments. However, it is generally accepted that the yield on these investments will contain a premium to compensate investors for this additional risk. There is significant uncertainty about the likely size of this risk premium. In respect of overseas equity investments there is also a risk of unfavourable currency movements which the Trustee manage by hedging broadly 60% of the overseas investments against currency movements.

 

The Trustee also holds corporate bonds and other fixed interest securities. The risk of default on these is assessed by various rating agencies. Some of these bond investments are issued by the UK Government. The risk of default on these is very small compared to the risk of default on corporate bond investments, although some risk may remain. The expected yield on bond investments with fixed interest rates can be derived exactly from their market value.

 

The expected return for each asset class is weighted based on the target asset allocation for 2012 to develop the expected long-term rate of return on assets assumption for the portfolio. The benchmark for 2012 is to hold broadly 47% equities and 53% bonds. The majority of the equities held by the schemes are in international blue chip entities. The aim is to hold a globally diversified portfolio of equities, with a target of broadly 22% of equities being held in the UK and 78% of equities held overseas. Within the bond portfolio the aim is to hold 58% of the portfolio in government bonds (gilts) and 42% of the portfolio in corporate bonds and other fixed interest securities.

 

The expected rates of return on the scheme's assets by major category and target allocations are set out below:

 


Expected

long-term rate

of return

2012

% p.a.

Planned asset

allocation

2012

% of assets

Expected

long-term rate

of return

2011

% p.a.

Planned asset

allocation

2011

% of assets

Equity and property

7.0

47

7.8

47

Bonds

2.8-4.5

53

3.7-4.7

53

 

The actual return on the scheme's assets for the year ended 31 December 2011 was an increase of £284 million (2010: increase of £283 million).

 

Responsibility for deciding the investment strategy for the scheme's assets lies with the Trustee, although the Trustee is required to consult with the Group on changes in investment policies. It is recognised that the current asset allocation has moved away from the planned asset allocation, as a result of varying asset class performance and Trustee investment decisions. Rebalancing of the asset allocation is only carried out if equity type assets exceed the planned asset allocation by 3% and not if equity type assets fall below the planned asset allocation.

 

Amounts recognised through the income statement

Amounts recognised through the income statement in the various captions are as follows:


2011

£m

2010

£m

Amount charged to operating costs:



 Current service cost

(7)

(5)

 Curtailment (loss)/gain (redundancies)

-

(1)


(7)

(6)

Amount credited to operating income

- exceptional items:



 Past service credit (one-off change to pensions payment)

-

2

 Past service credit (introduction of pensions payment change option)

-

25

 Settlement gain (enhanced transfer values)

-

1


-

28

Amount (charged)/credited to net financing costs:



 Expected return on pension scheme assets

140

136

 Interest cost

(145)

(149)


(5)

(13)

Total credited in the consolidated income statement

(12)

9

 

Amounts recognised through the consolidated statement of comprehensive income/(cost)

The amounts recognised through the consolidated statement of comprehensive income/(cost) are:

 


2011

£m

2010

£m

Actuarial gains and (losses):



 Arising on scheme assets

144

147

 Arising on scheme liabilities

(268)

(80)


(124)

67

 

The £268 million actuarial loss on the scheme's liabilities was principally due to the fall in the discount rate partially offset by the reduction in the rate of market implied inflation.

 

The cumulative amount of actuarial gains and losses recognised through the consolidated statement of comprehensive income since 1 January 2004 is an actuarial loss of £376 million (2010: £252 million loss). Included within actuarial gains and losses are experience adjustments as follows:

 


2011

£m

2010

£m

2009

£m

2008

£m

2007

£m

Experience adjustments on scheme assets

144

147

48

(438)

15

Experience adjustments on scheme liabilities

95

(3)

-

-

(18)

 

Experience adjustments on the scheme's liabilities in 2011 arose primarily from the update of membership data as part of the ongoing 2011 triennial valuation process. For example, actual mortality experienced in the period since the last valuation compared to estimates.

 

Section 4 Capital Structure and Financing Costs

 

4.1 Net cash/(debt)

 

Analysis of net cash/(debt)

The table below analyses movements in the components of net cash/(debt) during the year:

 


1 January

2011

£m

Net cash flow

and acquisitions

£m

Currency and

non-cash

movements

£m

31 December

2011

£m

 Cash

761

(52)

(4)

705

 Cash equivalents

99

(6)

3

96

Total cash and cash equivalents

860

(58)

(1)

801

Held to maturity investments

148

-

(1)

147

 Loans and loan notes due within one year

(47)

47

-

-

 Finance leases due within one year

(8)

8

(9)

(9)

 Loans and loan notes due after one year

(1,170)

308

(6)

(868)

 Finance leases due after one year

(53)

-

9

(44)

Total debt

(1,278)

363

(6)

(921)

 Currency component of swaps held against Euro denominated bonds

98

(63)

(4)

31

 Convertible bond equity component

(31)

-

4

(27)

 Amortised cost adjustment

15

-

(1)

14

Net cash/(debt)

(188)

242

(9)

45

 


1 January

2010

£m

Net cash flow

and acquisitions

£m

Currency and

non-cash

movements

£m

31 December

2010

£m

 Cash

479

282

-

761

 Cash equivalents

103

(6)

2

99

Cash and cash equivalents

582

276

2

860

 Cash held within the disposal group

4

(4)

-

-

 Held to maturity investments

149

-

(1)

148

 Loans and loan notes due within one year

(1)

1

(47)

(47)

 Finance leases due within one year

(8)

8

(8)

(8)

 Loans and loan notes due after one year

(1,366)

146

50

(1,170)

 Finance leases due after one year

(65)

4

8

(53)

Total debt

(1,440)

159

3

(1,278)

 Currency component of swaps held against Euro denominated bonds

108

-

(10)

98

 Convertible bond equity component

  (35)

-

4

(31)

 Amortised cost adjustment

20

-

(5)

 15

Net debt

(612)

431

(7)

(188)

 

Cash and cash equivalents

Included within cash equivalents is £48 million (2010: £53 million), the use of which is restricted to meeting finance lease commitments under programme sale and leaseback commitments, and gilts of £37 million (2010: £36 million) over which the unfunded pension commitments have a charge.

 

Held to maturity investments

In February 2009 a net £50 million was raised through a £200 million covenant free loan with a maturity of March 2019, secured against the purchase of 4.5% March 2019 gilts with a nominal value of £138 million (for a cost of £150 million). As at December 2011 this gilt has a carrying value of £147 million.

 

Loans and loan notes due within one year

In October 2011 the €54 million Eurobond (£47 million) was repaid.

 

Loans and loan notes due after one year

All of the £110 million March 2013 bonds and £229 million of the 2015 bonds were repurchased during the year, including all of the £100 million tap issue to the 2015 series of bonds (2010: £50 million of the May 2013 loan and £42 million of the 2015 bonds were repurchased). 

 

Currency components of swaps held against euro denominated bonds

In October 2011 cross currency interest rate swaps matched against the €54 million Eurobond matured resulting in the realisation of the currency element of the swaps totalling £63 million. As at 31 December 2011 the currency element of the cross currency interest rate swaps is a £31 million asset (2010: £98 million asset) and this offsets the exchange rate movement of the 2014 Euro denominated bonds.

 

Convertible bond

In November 2009 ITV issued a £135 million convertible Eurobond with a maturity date of November 2016 and a coupon of 4%. As the bond contains an option for the issuer to convert a portion of the debt into ITV's equity, the components are treated as separate instruments. The accounting policy for this compound instrument is detailed in note 4.2 (i.e. partly debt and partly equity).

 

The debt portion is £105 million (2010: £100 million) and is included within Loans and loan notes due after one year. The effective interest rate on the carrying value of the debt component is 9.4%. The equity component of £27 million (2010: £31 million) is shown separately.

 

Amortised cost adjustment

The purpose of the amortised cost adjustment is to exclude the impact of the coupon step-up on net debt. ITV's Standard & Poor's credit rating was lowered to BB+ in August 2008, resulting in a coupon step-up in the 2011, 2014 and 2017 bonds. The recalculation of the amortised cost carrying values as required by IAS 39 resulted in a non-cash increase in net debt of £30 million as at 31 December 2008. The accounting treatment unwinds this increase in future years as a reduction in interest expense. As this adjustment has no impact on the cash interest paid, the interest charged to unwind the adjustment is excluded from adjusted net financing costs as described in the Financial and Performance Review.

 

4.2 Borrowings and held to maturity investments

 

Accounting policies

Borrowings

Borrowings are recognised initially at fair value less directly attributable transaction costs, with subsequent measurement at amortised cost using the effective interest rate method. Under the amortised cost method the difference between the amount initially recognised and the redemption value is recorded in the income statement over the period of the borrowing on an effective interest basis. Borrowings are referred to in this section using their redemption value when describing the terms and conditions.

 

The mechanism used to determine variable interest rates on a loan is analysed when the loan is initially taken out to determine if it is closely related to the loan. If the variable rate mechanism is closely related to the loan it is not valued separately but cash flow estimates are included in the effective interest rate on the loan. This assessment is not revisited unless the terms of the loan are changed significantly.

 

Compound financial instruments

Compound financial instruments are instruments that are classified as partly debt and partly equity due to the terms of the instrument.

 

The Group has one compound financial instrument which is a convertible note that can be converted to share capital at the option of the holder at maturity.

 

The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

 

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition but is transferred to retained losses over the term of the instrument on an effective interest rate basis.

 

Held to maturity assets

Where the Group has the positive intent and ability to hold financial assets to maturity, they are classified as held to maturity. Held to maturity financial assets are recognised initially at fair value including any directly attributable transaction costs. Subsequent to initial recognition, held to maturity financial assets are measured at amortised cost using the effective interest method, less any impairment.

 

Borrowings and held to maturity investments

The table below analyses the Group's borrowings by when they fall due for payment:

 


Loans and

 loan notes

£m

Finance leases

£m

2011
£m

Current




In 1 year or less, or on demand

-

9

9

Non-current




In more than 1 year but not more than 2 years

-

8

8

In more than 2 years but not more than 5 years

407

34

441

In more than 5 years

461

2

463


868

44

912

Total

868

53

921

 


Loans and

 loan notes

£m

Finance leases

£m

2010
£m

Current




In 1 year or less, or on demand

47

8

55

Non-current




In more than 1 year but not more than 2 years

-

10

10

In more than 2 years but not more than 5 years

607

34

641

In more than 5 years

563

9

572


1,170

53

1,223

Total

1,217

61

1,278

 

Current loans and loan notes due within one year

There are no loans repayable within one year. Loans repayable in one year or less in 2010 comprised the €54 million Eurobond (£47 million) which was repaid in full. This Eurobond had a coupon of 6.0%. After cross currency swaps the Group received a net £16 million in October 2011.

 

Loans and loan notes repayable between two and five years

Loans repayable between two and five years as at 31 December 2011 include an unsecured €188 million Eurobond (£126 million net of cross currency swaps) which has a coupon of 10.0% maturing in June 2014, an unsecured £154 million Eurobond which has a coupon of 5.375% maturing in October 2015 and an unsecured £135 million convertible Eurobond which has a coupon of 4.0% maturing in November 2016.

 

Loans and loan notes repayable after five years

Loans repayable after five years include an unsecured £250 million Eurobond which has a coupon of 7.375% maturing in January 2017.

 

Also included is the £200 million covenant free loan raised in February 2009 with a maturity of March 2019. This loan is secured against the 4.5% March 2019 gilts with a nominal value of £138 million (for a cost of £150 million) described in section 4.1. Interest on the loan is fixed at 6.75% for the first three years until March 2012 with a variable rate thereafter, likely to be 13.55% depending in part on the performance of an interest rate algorithm. Interest on the loan is offset by 3.5% in respect of the £138 million gilts. The interest mechanism on these instruments was adjusted during 2010. The change was not significant and did not impact the accounting treatment. The lender has the option to issue a further £150 million loan that would carry an interest rate of 7.34%.

 

Fair value versus book value

The tables below provide fair value information for the Group's borrowings and held to maturing investments:

 



Book value

Fair value

Assets

Maturity

2011

£m

2010

£m

2011

£m

2010

£m

Held to maturity investments

Mar 2019

147

148

166

150

 

The fair value of held to maturity investments is based on quoted market bid prices at the year-end.

 



Book value

Fair value

Liabilities

Maturity

2011

£m

2010

£m

2011

£m

2010

£m

€54 million Eurobond (previously €118 million Eurobond)

Oct 2011

-

47

-

48

£110 million Eurobond  

Mar 2013

-

110

-

109

€188 million Eurobond  

June 2014

149

150

171

185

£154 million Eurobond (previously £383 million Eurobond)

Oct 2015

153

347

150

373

£135 million Convertible bond

Nov 2016

105

100

167

172

£250 million Eurobond  

Jan 2017

261

263

253

258

£200 million loan

Mar 2019

200

200

290

269



868

1,217

1,030

1,414

 

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.

 

Movements in book values of the 2011 bonds are the result of scheduled repayments and the 2013 and 2015 bond buy-back programmes described in detail above. 

 

The fair value of the £135 million Convertible bond is based upon the par value, whereas the bonds are accounted for partly as debt and partly as equity, net of issue costs, as described in note 4.1.

 

The fair value of the £200 million loan increased during the year as a result of lower interest rates, lower credit costs and higher expected variable rate coupons.

 

Finance leases

The following table analyses when finance lease liabilities are due for payment:

 


Minimum lease

payments

£m

 

Interest

£m

2011

Principal

£m

Minimum lease

payments

£m

 

Interest

£m

2010

Principal

£m

In 1 year or less

12

3

9

11

3

8

In more than 1 year but not more than 5 years

47

5

42

50

6

44

In more than 5 years

2

-

2

10

1

9


61

8

53

71

10

61

 

Finance leases principally comprise programmes under sale and leaseback arrangements and a contractual arrangement relating to the provision of news accounted for as a lease. The net book value of tangible assets held under finance leases at 31 December 2011 was £3 million (2010: £6 million).

 

4.3 Derivative financial instruments

 

Accounting policies

The Group uses a limited number of derivative financial instruments to hedge its exposure to fluctuations in interest and foreign exchange rates. The Group does not hold or issue derivative instruments for speculative purposes.

 

Derivative financial instruments are initially recognised at fair value and are subsequently remeasured at fair value with the movement recorded in the income statement within net financing costs. Derivatives with a positive fair value are recorded as assets and negative fair values as liabilities.

 

The fair value of foreign currency forward contracts is determined by using the difference between the contract exchange rate and the quoted forward exchange rate at the reporting date. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account current interest rates and the current creditworthiness of swap counterparties.

 

Third party valuations are used to fair value the Group's derivatives. The valuation techniques use inputs such as interest rate yield curves and currency prices/yields, volatilities of underlying instruments and correlations between inputs.

 

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity.

 

Any ineffective portion of the hedge is recognised immediately in the income statement.

 

For financial assets and liabilities classified at fair value through profit or loss the fair value change and interest income/expense are not separated.

 

Derivative financial instruments

The following table shows the fair value of derivative financial instruments analysed by type of contract. Interest rate swap fair values exclude accrued interest.

 


Assets

£m

2011
Liabilities

£m

Current



Interest rate swaps - fair value through profit or loss

-

(1)

Non-current



Interest rate swaps - fair value through profit or loss

110

(44)


110

(45)

 


Assets

£m

2010
Liabilities

£m

Current



Interest rate swaps - fair value through profit or loss

69

(3)

Non-current



Interest rate swaps - fair value through profit or loss

89

(39)


158

(42)

 

Interest rate swap assets

The swap assets in relation to the €188 million 2014 Eurobond (see section 4.2) are as follows:

 

·     Cross currency and interest swaps with a fair value of £39 million. The swaps receive a coupon of 10% and €188 million at maturity (to match the bond coupon and principal repayment due to bond holders) and pay 10.92% on a notional amount of £125.7 million and pays £125.7 million at maturity.

 

The remaining £71 million of Interest rate swap assets relate to a number of floating rate swaps matched against the 2015 and 2017 Eurobonds. The following swap assets are matched against the 2015 Eurobond:

 

·     £162.5 million swap with a fair value of £19 million. This swap receives 5.375% (to match the bond coupon) and pays six-month sterling LIBOR plus 0.3%.

·     A portfolio of swaps totalling £162.5 million fair valued at £16 million. These swaps receive 5.375% (to match the bond coupon) and pay a weighted average of three-month sterling LIBOR plus 1.45%.

·     A further £120.5 million swap with a fair value at £3 million. This swap receives 5.375% (to match the bond coupon) and pays the higher of six-month sterling LIBOR plus 2.905% or six month US$ LIBOR plus 2.105%, set in arrears with a cap on payment of 8%.

 

The swap assets matched against the 2017 Eurobond are as follows:

 

·     £125 million swap with a fair value of £26 million. This swap receives 6.125% (to match the original bond coupon) and pays three-month sterling LIBOR plus 0.51% with the three-month sterling LIBOR capped at 5.25% for rates between 5.25% and 8.0%.

·     A further £125 million swap with a fair value at £7 million. This swap receives 7.375% (to match the bond coupon) and pays the higher of six month sterling LIBOR plus 4.52% or six month US$ LIBOR plus 3.72%, set in arrears with a cap on payment of 10%.

 

Interest rate swap liabilities

Interest rate swap liabilities of £45 million as at 31 December 2011 relate to various fixed and floating rate swaps matched against the 2015 and 2017 Eurobonds. The following swap liabilities are matched against the 2015 Eurobond and mature in October 2015:

 

·     £162.5 million swap fair valued at £20 million. The swap receives three-month sterling LIBOR and pays 4.35%. The bank has the right to cancel the swap.

·     A further £162.5 million swap fair valued at £1 million. The swap receives six-month sterling LIBOR plus 0.3%, and pays the higher of six-month sterling LIBOR minus 0.2% or six-month US$ LIBOR minus 1.0%, set in arrears or in advance.

·     A portfolio of swaps totalling £162.5 million fair valued at £2 million. The swaps pay 5.375% and receive a weighted average of six-month sterling LIBOR plus 3.49% set in arrears.

·     £120.5 million swap fair valued at £nil million, under which it receives six month LIBOR plus 3.605% and pays 5.375% set in arrears.

 

The following swap liabilities are matched against the 2017 Eurobond and mature in January 2017:

 

·     £125 million swap valued at £19 million, under which it receives three-month sterling LIBOR and pays 4.31%. The bank has the right to cancel the swap.

·     £125 million swap valued at £3 million, under which receives six-month sterling LIBOR plus 5.257% set in arrears and pays 7.375%.

 

4.4 Net financing costs

 

Accounting policies

Net financing costs comprise interest income on funds invested, gains/losses on the disposal of financial instruments, changes in the fair value of financial instruments, interest expense on borrowings and finance leases, unwinding of the discount on provisions, foreign exchange gains/losses and implied interest on pension assets and liabilities. Interest income and expense is recognised as it accrues in profit or loss, using the effective interest method.

 

Net financing costs

Net financing costs can be analysed as follows:

 


2011

£m

2010

£m

Financing income:



 Interest income

22

26

 Expected return on defined benefit pension scheme assets

140

136

 Change in fair value of instruments classified at fair value through profit or loss

30

11

 Foreign exchange gain

4

12


196

185

Financing costs:



 Interest expense on financial liabilities measured at amortised cost

(82)

(93)

 Interest on defined benefit pension scheme obligations

(145)

(149)

 Losses on early settlement

(39)

(10)

 Other interest expense

(5)

(8)


(271)

(260)

Net financing costs

(75)

(75)

 

Gains relating to changes in fair value of instruments of £30 million relate principally to interest rate swaps as a result of lower implied interest rates.

 

As detailed in the Financial and Performance Review, losses on early settlement of £39 million were incurred as a result of the extensive bond repurchase activity during 2011. The losses were primarily due to the repurchase of the 2015 £100 million bond tap. This bond was repurchased at no material difference to par value. The loss represents the accelerated amortisation to par value as they were issued in 2009 at a deep discount to nominal value, where the Group received £58.5 million in cash for £100 million nominal value. 

 

4.5 Financial risk factors

 

Market risk

Currency risk

The Group operates internationally and is therefore exposed to currency risk arising from movements in foreign exchange rates, primarily with respect to the US dollar and the Euro. Foreign exchange risk arises from: differences in the dates commercial transactions are entered into and the date they are settled; recognised assets and liabilities; and net investments in foreign operations.

 

The Group's foreign exchange policy is to hedge material foreign currency denominated costs at the time of commitment and to hedge a proportion of foreign currency denominated revenues on a rolling 12-month basis unless a natural hedge exists. The Group seeks to match contractual and forecast foreign currency costs and revenues. For any material unmatched portion, the Group hedges using forward foreign exchange contracts for up to two years. The Group also utilises foreign exchange swaps to match foreign currency cash flow timing differences.

 

The Group ensures that its net exposure to foreign denominated cash balances is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.

 

The Euro denominated interest and principal payments under the €188 million bonds have been fully hedged by cross currency interest rate swaps.

 

The Group's investments in subsidiaries are not hedged as those currency positions are considered to be long-term in nature.

 

At 31 December 2011, if sterling had weakened/strengthened by 10% against the US dollar with all other variables held constant, post-tax profit for the year would have been £3 million (2010: £2 million) higher/lower. Equity would have been £8 million (2010: £13 million) higher/lower.

 

At 31 December 2011, if sterling had weakened/strengthened by 10% against the Euro with all other variables held constant, post-tax profit for the year would have been £4 million (2010: £3 million) higher/lower. Equity would have been £2 million (2010: £2 million) higher/lower.

 

Interest rate risk

Interest rate risk is the risk that the Group is impacted by significant changes in interest rates. Borrowings issued at or swapped to floating rates expose the Group to interest rate risk.

 

The Group's interest rate policy changed during the year to 100% of its borrowings being at fixed rates (2010: between 40% and 60% of its borrowings at fixed rates). The change in policy was made to lock in low interest rates available. The Group utilises fixed and floating rate interest swaps and options in order to achieve the desired policy mix. These contracts match against underlying bonds or other interest bearing instruments.

 

All of the Group's interest rate swaps are classified as fair value through profit or loss so any movement in the fair value goes through the income statement rather than equity.

 

At 31 December 2011, if interest rates had increased/decreased by 0.1%, post-tax profit for the year would have been unchanged  (2010: £2 million lower/higher).

 

Price risk

Price risk is the risk that the Group's financial instruments change in value due to movements in market prices. This excludes movements in interest rate or foreign exchange. The Group is not exposed to any material price risk.

 

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. It arises principally from the Group's receivables from customers, cash and held to maturity investments. There is also credit risk relating to the Group's own credit rating as this impacts the availability and cost of future finance.

 

Trade and other receivables

The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The majority of trade receivables relate to airtime sales contracts with advertising agencies and advertisers. Credit insurance has been taken out against these companies to minimise the impact on the Group in the event of a possible default.

 

Cash and held to maturity investments

The Group operates strict investment guidelines with respect to surplus cash and the emphasis is on preservation of capital. Counterparty limits for cash deposits are largely based upon long-term ratings published by the major credit rating agencies and perceived state support. Deposits longer than 12 months require the approval of the Audit Committee.

 

Borrowings

ITV's credit ratings with Standard & Poor's and Moody's Investor Service are BB/Ba2 respectively and are 'sub-investment grade' with both agencies. The combination of ITV's lower credit rating and the deterioration in credit conditions adversely impacted the availability and cost of financing. Although ITV's credit ratings have since improved this did not change the cost of financing.

 

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's financing policy is to fund itself for the long term by using debt instruments with a range of maturities. It is substantially funded from the UK and European capital markets and it has a bilateral bank facility. Management monitors rolling forecasts of the Group's liquidity reserve (comprising undrawn bank facilities and cash and cash equivalents) on the basis of expected cash flows. This monitoring includes financial ratios to assess possible future credit ratings and headroom and takes into account the accessibility of cash and cash equivalents.

 

At 31 December 2011 the Group has available £125 million (2010: £125 million) of undrawn committed facilities. The £125 million facility is provided by one bank and is secured on advertising receivables. The facility has no financial covenants and matures in September 2015.

 

The table below analyses the Group's financial liabilities and derivative financial liabilities into relevant maturity groupings based on the period remaining until the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (including interest), so will not always reconcile with the amounts disclosed on the statement of financial position:

 

 

 

At 31 December 2011

Total

contractual

cash flows

£m

 

Less than

1 year

£m

 

Between

1 and 2 years

£m

 

Between

2 and 5 years

£m

 

Over

5 years

£m

Non-derivative financial liabilities






Borrowings

(1,371)

(79)

(85)

(668)

(539)

Held to maturity investments

220

11

11

33

165

Trade and other payables

(684)

(639)

(28)

(16)

(1)

Other payables - non-current

(3)

-

(2)

(1)

-

Derivative financial instruments






Interest rate swaps

89

12

11

59

7


(1,749)

(695)

(93)

(593)

(368)

 

 

 

 

Total

contractual

cash flows

£m

 

Less than

1 year

£m

 

Between

1 and 2 years

£m

 

Between

2 and 5 years

£m

 

Over

5 years

£m

Non-derivative financial liabilities






Borrowings

(1,812)

(138)

(90)

(899)

(685)

Held to maturity investments

231

11

11

33

176

Trade and other payables

(698)

(672)

(22)

(4)

-

Other payables - non-current

(3)

-

(3)

-

-

Derivative financial instruments






Interest rate swaps

142

74

9

50

9


(2,140)

(725)

(95)

(820)

(500)

 

Held to maturity investments are included within the table above as the £138 million March 2019 gilts are used as security against the £200 million 2019 loan, and the net repayment in 2019 is £62 million.

 

4.6 Fair value hierarchy

 

The table below sets out the financial instruments included on the ITV statement of financial position at 'fair value'.

 

 

 

 

Fair value

31 December

2011

£m

Level 1

31 December

2011

£m

Level 2

31 December

2011

£m

Level 3

31 December

2011

£m

Assets measured at fair value





Available for sale financial instruments





 STV shares

2

2

-

-

 Available for sale gilts

37

37

-

-

Financial assets at fair value through profit or loss





 Interest rate swaps

110

-

110

-


149

39

110

-

 

 

 

 

Fair value

31 December

2011

£m

Level 1

31 December

2011

£m

Level 2

31 December

2011

£m

Level 3

31 December

2011

£m

Liabilities measured at fair value





Financial liabilities at fair value through profit or loss





 Interest rate swaps

(45)

-

(45)

-


(45)

-

(45)

-

 

 

 

 

Fair value

31 December

2010

£m

Level 1

31 December

2010

£m

Level 2

31 December

2010

£m

Level 3

31 December

2010

£m

Assets measured at fair value





Available for sale financial instruments





 STV shares

1

1

-

-

 Available for sale gilts

36

36

-

-

Financial assets at fair value through profit or loss





 Interest rate swaps

158

-

158

-


195

37

158

-

 

 

 

 

Fair value

31 December

2010

£m

Level 1

31 December

2010

£m

Level 2

31 December

2010

£m

Level 3

31 December

2010

£m

Liabilities measured at fair value





Financial liabilities at fair value through profit or loss





 Interest rate swaps

(42)

-

(42)

-


(42)

-

(42)

-

 

Level 1

Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2

Fair values measured using inputs, other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly.

 

Interest rate swaps and options are accounted for at their fair value based upon termination prices. Forward foreign exchange contracts are accounted for at the difference between the contract exchange rate and the quoted forward exchange rate at the reporting date.

 

Level 3

Fair values measured using inputs for the asset or liability that are not based on observable market data.

 

4.7 Equity

 

Accounting policies

Available for sale reserve

Available for sale assets are stated at fair value, with any gain or loss recognised directly in the available for sale reserve in equity, unless the loss is a permanent impairment, when it is then recorded in the income statement.

 

Dividends

Dividends are recognised through equity on the earlier of their approval by the Company's shareholders or their payment.

 

Share-based compensation

The Group operates a number of share-based compensation schemes. The fair value of the equity instrument granted is measured at grant date and spread over the vesting period via a charge to the income statement with a corresponding increase in equity.

 

The fair value of the share options and awards is measured using either a Monte Carlo or Black-Scholes model, as appropriate, taking into account the terms and conditions of the individual scheme. Under these valuation methods, the share price for ITV plc is projected to the end of the performance period as is the Total Shareholder Return for ITV plc and the companies in the comparator groups. Based on these projections, the number of awards that will vest and their present value is determined.

 

The valuation of these share-based payments also requires estimates to be made in respect of the number of options that are expected to be exercised.

 

Vesting conditions are limited to service conditions and performance conditions. Conditions other than service or performance conditions are considered non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each reporting date, the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

 

4.7.1 Share capital and share premium

The Group's share capital at 31 December 2011 of £389 million (2010: £389 million) and share premium of £120 million (2010: £120 million) is the same as that of ITV plc. Details of this are given in the ITV plc Company financial statements section of this annual report.

 

4.7.2 Merger and other reserves

Merger and other reserves at 31 December 2011 include merger reserves arising on the Granada/Carlton and previous mergers of £119 million (2010: £119 million), capital reserves of £112 million (2010: £112 million), capital redemption reserves of £36 million (2010: £36 million), revaluation reserves of £6 million (2010: £6 million) and £27 million (2010: £31 million) in respect of the equity element of the 2016 convertible bond.

 

4.7.3 Translation reserve

The translation reserve comprises all foreign exchange differences arising on the translation of the accounts of, and investments in, foreign operations.

 

4.7.4 Available for sale reserve

The available for sale reserve comprises all movements arising on the revaluation and disposal of assets accounted for as available for sale.

 

4.7.5 Retained losses

The retained losses reserve comprises profit for the year attributable to owners of the Company of £247 million (2010: £269 million) and other items recognised directly through equity as presented on the consolidated statement of changes in equity.

 

4.7.6 Non-controlling interests

In 2011 £1 million (2010: £1 million of profit) was attributable to non-controlling interests.

 

4.7.7 Share-based compensation

A transaction will be classed as a share-based transaction where the Group receives services from employees and pays for these in shares or similar equity instruments. If the Group incurs a liability whose amount is based on the price or value of the Group's shares then this will also fall under a share-based transaction.

 

The Group operates a number of share-based compensation schemes. A description of each type of share-based payment arrangement that existed at any time during the period, including the general terms and conditions of each arrangement, such as vesting requirements, the maximum term of options granted, and the method of settlement (e.g. whether in cash or equity) are set out in the Remuneration Report.

 

Exercises of share options granted to employees can be satisfied by market purchase or issue of new shares. No new shares may be issued to satisfy exercises under the terms of the Deferred Share Award Plan. During the year all exercises were satisfied by using shares purchased in the market and held in the ITV Employees' Benefit Trust rather than by issuing new shares.

 

Share-based compensation charges totalled £11 million in 2011 (2010: £8 million).

 

The table below summarises the movements in the number of share options outstanding for the Group and their weighted average exercise price:

 


Number

of options

('000)

2011
Weighted

average

exercise price

(pence)

Number

of options

('000)

2010
Weighted

average

exercise price

(pence)

Outstanding at 1 January

77,302

22.32

101,989

63.94

Granted during the year - nil priced

16,333

-

25,792

-

Granted during the year - other

2,370

73.58

3,438

42.90

Forfeited during the year

(3,069)

60.25

(6,311)

21.63

Exercised during the year

(3,951)

27.02

(8,141)

1.79

Expired during the year

(7,506)

75.86

(39,465)

121.42

Outstanding at 31 December

81,479

12.74

77,302

22.32

Exercisable at 31 December

21,115

19.13

8,767

121.61

 

For those options exercised in the year, the average share price during 2011 was 69.35 pence (2010: 59.99 pence).

 

Of the options still outstanding, the range of exercise prices and weighted average remaining contractual life of these options can be analysed as follows:

 

Range of exercise prices (pence)

 

Weighted

average

exercise price

(pence)

 

 

Number

of options

('000)

2011
Weighted

average

remaining

contractual

life

(years)

 

Weighted

average

exercise price

(pence)

 

 

Number

of options

('000)

2010
Weighted

average

remaining

contractual

life

(years)

Nil

-

61,347

1.90

-

50,161

2.54

20.00 - 49.99

31.50

13,265

1.86

31.56

15,238

2.83

50.00 - 69.99

58.46

1,487

1.05

54.69

3,643

1.62

70.00 - 99.99

74.67

2,582

3.00

85.03

1,046

1.03

100.00 - 109.99

106.25

1,620

0.53

105.99

1,878

1.44

110.00 - 119.99

-

-

-

112.30

2,183

0.94

120.00 - 149.99

143.27

1,178

0.03

136.40

2,584

0.90

250.00 - 299.99

-

-

-

280.00

569

0.05

 

Share schemes

Further details of the ITV share plans and awards can be found in the Remuneration Report.

 

Awards made under the Granada and Carlton Executive Share Option schemes have reached the end of their various performance periods, and have vested or lapsed accordingly. Details of the performance criteria that applied to these awards are set out in the notes to previous financial statements, and in previous remuneration reports and have not been repeated in these financial statements on the grounds of relevance. Although awards remain vested but unexercised under these schemes, they are not considered material for the purposes of disclosure in this note.

 

The awards made under the ITV Turnaround Plan and ITV Performance Share Plan grants prior to 2011 include awards that have market based performance conditions that are taken into account in the fair value calculation using a Monte Carlo pricing model. The Black-Scholes model is used to value the SAYE Schemes as these do not have any market performance conditions. The ITV SAYE scheme is an Inland Revenue Approved SAYE scheme.

 

Assumptions made relating to grants of share options during 2011 and 2010 are as follows:

 

 

 

Scheme name

 

Date of grant

Share price

at grant

(pence)

Exercise price

(pence)

Expected

volatility

%

Expected life

(years)

Gross dividend

yield

%

Risk-free rate

%

Fair value

(pence)

Save As You Earn









ITV - three year

01 Apr 10

62.95

42.90

56.00%

3.25

-

1.97%

21.45

ITV - five year

01 Apr 10

62.95

42.90

45.00%

5.25

-

2.89%

22.75

ITV - three year

07 Apr 11

75.85

73.58

57.00%

3.25

-

2.02%

20.88

ITV - five year

07 Apr 11

75.85

73.58

47.00%

5.25

-

2.81%

22.95

Performance Share Plan









ITV - three year

26 Mar 10

58.70

-

56.00%

3.00

-

1.88%

39.55

ITV - three year

03 Aug 10

51.60

-

57.00%

3.00

-

1.42%

34.15

ITV - three year

08 Mar 11

90.05

-

*

3.00

*

*

90.05

ITV - three year

11 Oct 11

62.65

-

*

3.00

*

*

62.65

 

* Awards do not include market based performance conditions; therefore, Monte Carlo or Black-Scholes model not required to calculate fair value.

 

The expected volatility for awards made in 2011 reflects the historic volatility of ITV plc's share price and equity markets as a whole over the preceding three or five years, and depending on the expected life of the award, prior to the grant date of the share options awarded.

 

Employees' Benefit Trust

The Group has investments in its own shares as a result of shares purchased by the ITV Employees' Benefit Trust ('EBT'). Transactions with the Group-sponsored EBT are included in these financial statements. In particular, the EBT's purchases of shares in ITV plc are debited directly to equity.

 

The table below shows the number of ITV plc shares held in the trust at 31 December 2011 and the purchases/(releases) from the EBT made in the year to satisfy awards under the Group's share schemes.

 

 

 

Number of shares

(released)/

purchased

 

Nominal value

£

 

 

Scheme

1 January 2011

2,313,956

231,395



(301,231)

(30,123)

ITV Deferred Share Award Plan


(1,336,462)

(133,646)

Restricted Share Awards


(2,331,137)

(233,114)

ITV SAYE Scheme


9,009,568

900,957

Shares purchased

31 December 2011

7,354,694

735,469


 

The total number of shares held by the EBT at 31 December 2011 represents 0.19% (2010: 0.06%) of ITV's issued share capital. The market value of own shares held is £5 million (2010: £2 million).

 

The shares will be held in the EBT until such time as they may be transferred to participants of the various Group share schemes. Rights to dividends have been waived by the EBT in respect of shares held which do not relate to restricted shares under the Deferred Share Award Plan. In accordance with the Trust Deed, the Trustees of the EBT have the power to exercise all voting rights in relation to any investment (including shares) held within that trust.

Section 5 Other Notes

5.1 Related party transactions

 

Related party transactions

Transactions with joint ventures and associated undertakings

Transactions with joint ventures and associated undertakings during the year were:

 


2011

£m

2010

£m

Sales to joint ventures

10

13

Sales to associated undertakings

1

2

Purchases from joint ventures

26

21

Purchases from associated undertakings

44

50

 

The transactions with joint ventures primarily relate to sales and purchases of digital multiplex services with Digital 3&4 Limited.

 

The purchases from associated undertakings relate to the purchase of news services from ITN. All transactions with associated undertakings and joint ventures arise in the normal course of business on an arm's length basis. None of the balances are secured.

 

The amounts owed by and to these related parties at the year-end were:

 


2011

£m

2010

£m

Amounts owed by joint ventures

-

1

Amounts owed by associated undertakings

7

8

Amounts owed by pension scheme

1

1

Amounts owed to joint ventures

-

1

Amounts owed to associated undertakings

1

-

 

Amounts paid to the Group's retirement benefit plans are set out in section 3.6.

 

Transactions with key management personnel

Key management consists of ITV plc Executive and Non-executive Directors and the ITV Management Board. Key management personnel compensation is as follows:

 


2011

£m

2010

£m

Short-term employee benefits

6

8

Post-employment benefits

-

1

Termination benefits

-

2

Share-based compensation

6

4


12

15

 

Principal joint ventures, associated undertakings and investments

The Company indirectly held at 31 December 2011 the following holdings in significant joint ventures, associated undertakings and investments:

 

 

 

Name

Note

Interest in

ordinary

share capital

2011

%

Interest in

ordinary

share capital

2010

%

Principal activity

Freesat (UK) Limited

a

50.00

50.00

Provision of a standard and high definition enabled digital satellite proposition

Digital 3&4 Limited

a

50.00

50.00

Operates the Channel 3 and 4 digital terrestrial multiplex

YouView TV Limited

a

14.30

14.30

Internet connected television platform

 

Independent Television News Limited

b

 

40.00

 

40.00

Supply of news services to broadcasters

in the UK and elsewhere

Mammoth Screen Limited

b

25.00

25.00

Production of television programmes

 

ISAN UK Limited

b

 

25.00

 

25.00

Operates voluntary numbering system for the

identification of audiovisual works

STV Group plc(1)

c

6.79

6.91

Television broadcasting in central and north Scotland

 

(1) Incorporated and registered in Scotland.

 

a Joint venture.

b Associated undertaking.

c Available for sale financial asset.

 

 

5.2 Contingent liabilities

 

There are contingent liabilities in respect of certain litigation and guarantees, and in respect of warranties given in connection with certain disposals of businesses. None of these items are expected to have a material effect on the Group's results or financial position.

 

5.3 Subsequent events

 

There are no subsequent events.

ITV plc Company Financial Statements

Company Balance Sheet

 

 

At 31 December:                                                       

Note

2011

£m

2011

£m

2010

£m

2010

£m

Fixed assets:






Investments in subsidiary undertakings       

iii


1,646


1,646

Held to maturity investments



147


148

Derivative financial instruments



110


89




1,903


1,883

Current assets:






Amounts owed by subsidiary undertakings


1,610


9


Derivative financial instruments


-


67


Other debtors


4


-


Cash at bank and in hand and short-term deposits


620


33




2,234


109


Creditors - amounts falling due within one year:






Borrowings          

v

-


(47)


Amounts owed to subsidiary undertakings


(2,143)


(111)


Accruals and deferred income


(13)


(16)




(2,156)


(174)


Net current assets/(liabilities)



78


(65)

Total assets less current liabilities



1,981


1,818

Creditors - amounts falling due after more than one year:






Borrowings          

v


(868)


(1,171)

Derivative financial instruments



(44)


(39)




(912)


(1,210)

Net assets



1,069


608

Capital and reserves:






Called up share capital     

vi


389


389

Share premium  

vii


120


120

Other reserves    

vii


63


67

Profit and loss account     

vii


497


32

Shareholders' funds - equity



1,069


608

 

The accounts were approved by the Board of Directors on 29 February 2011 and were signed on its behalf by:

 

Ian Griffiths

Director

Notes to the ITV plc Company Financial Statements

i Accounting policies

Basis of preparation

These accounts have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP).

 

As permitted by section 408 (3) of the Companies Act 2006, a separate profit and loss account, dealing with the results of the parent company, has not been presented.

 

Under FRS 29 the Company is exempt from the requirement to provide its own financial instruments disclosures, on the grounds that it is included in publicly available consolidated financial statements which include disclosures that comply with the IFRS equivalent to that standard.

 

The Company has taken advantage of the FRS 1 exception from the requirement to prepare and disclose a cash flow statement.

 

Subsidiaries

Subsidiaries are entities that are directly or indirectly controlled by the Company. Control exists where the Company has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The investment in the Company's subsidiaries is recorded at cost, adjusted for the effect of UITF 41 when it was adopted in prior years. Annual FRS 20 share-based payment compensation costs are recharged to the subsidiaries through the profit and loss account.

 

Foreign currency transactions

Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of the transaction. Foreign currency monetary assets and liabilities at the balance sheet date are translated into sterling at the rate of exchange ruling at that date. Foreign exchange differences arising on translation are recognised in the profit and loss account. Non-monetary assets and liabilities measured at historical cost are translated into sterling at the rate of exchange on the date of the transaction.

 

Borrowings

Borrowings are recognised initially at fair value including directly attributable transaction costs, with subsequent measurement at amortised cost using the effective interest rate method. The difference between initial fair value and the redemption value is recorded in the profit and loss account over the period of the liability on an effective interest basis.

 

Derivatives and other financial instruments

The Company uses a limited number of derivative financial instruments to hedge its exposure to fluctuations in interest and other foreign exchange rates. The Company does not hold or issue derivative instruments for speculative purposes.

 

Derivative financial instruments are initially recognised at fair value and are subsequently remeasured at fair value with the movement recorded in the profit and loss account within net financing costs. Derivatives with a positive fair value are recorded as assets and negative fair values as liabilities.

 

The fair value of foreign currency forward contracts is determined by using the difference between the contract exchange rate and the quoted forward exchange rate at the balance sheet date. The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of swap counterparties.

 

Third party valuations are used to fair value the Company's derivatives. The valuation techniques use inputs such as interest rate yield curves and currency prices/yields, volatilities of underlying instruments and correlations between inputs.

 

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. Any ineffective portion of the hedge is recognised immediately in the profit and loss account.

 

For financial assets and liabilities classified at fair value through profit or loss the fair value change and interest income/expense are not separated.

 

Dividends

Dividends are recognised through equity on the earlier of their approval by the Company's shareholders or their payment.

 

ii Employees

Two (2010: four) Directors of ITV plc were employees of the Company during the year, both of whom remain at the year end. The costs relating to these Directors are disclosed in the Remuneration Report.

 

iii Investments in subsidiary undertakings

The principal subsidiary undertakings are listed in note xi. There was no movement on the balance of £1,646 million in 2011.

 

iv Amounts owed (to)/from subsidiary undertakings

The Company implemented a new inter-group banking policy in 2011 with certain 100% owned UK subsidiaries. The policy involves the daily closing cash position for participating subsidiaries whether positive or negative, being cleared to £nil via daily bank transfers to ITV plc. These daily transactions create a corresponding intercompany creditor or debtor which explains the increase in amounts owed to and from subsidiary undertakings in the Company balance sheet.

 

v Borrowings

Current loans and loan notes due within one year

There are no loans repayable within one year. Loans repayable in one year or less in 2010 comprise the €54 million Eurobond (£47 million) which was repaid in full during 2011. This Eurobond had a coupon of 6.0%. After cross currency swaps the Company received £16 million in October 2011.

 

Loans repayable after more than one year

Loans repayable after more than one year as at 31 December 2011 include:

 

·     an unsecured €188 million Eurobond (£126 million net of cross currency swaps) which has a coupon of 10.0% maturing in June 2014;

·     an unsecured £154 million Eurobond which has a coupon of 5.375% maturing in October 2015;

·     an unsecured £135 million convertible Eurobond which has a coupon of 4.0% maturing in November 2016;

·     an unsecured £250 million Eurobond which has a coupon of 7.375% maturing in January 2017; and

·     a £200 million covenant free loan raised in February 2009 with a maturity of March 2019. Interest on the loan is fixed at 6.75% for the first three years until March 2012 with a variable rate thereafter, depending in part on the performance of an interest rate algorithm.

 

vi Called up share capital

 


2011

£m

Authorised
2010

£m

2011

£m

Allotted, issued
and fully paid
2010

£m

Ordinary shares of 10 pence each





Authorised:





8,000,000,000
(2010: 8,000,000,000)

800

800



Allotted, issued and fully paid:





3,889,129,751
(2010: 3,889,129,751)



389

389

Total

800

800

389

389

 

The Company's ordinary shares give shareholders equal rights to vote, receive dividends and to the repayment of capital. There have been no issued ordinary share capital movements during the period.

 

vii Reconciliation of movements in shareholders' funds

 

 

 

Share

capital

£m

Share

premium

£m

 

Other

reserves

£m

Profit

and loss

account

£m

Total

£m

At 1 January 2011               

389

120

67

32

608

Retained profit for year for equity shareholders

-

-

-

466

466

Share-based compensation

-

-

-

11

11

External dividend paid

-

-

-

(16)

(16)

Equity portion of the convertible bond

-

-

(4)

4

-

At 31 December 2011

389

120

63

497

1,069

 

The profit after tax for the year dealt with in the accounts of ITV plc is £466 million (year ended 31 December 2010: loss of £101 million).

 

The profit and loss account reserves of £497 million at 31 December 2011 are all distributable.

 

The Company received dividends on 17 February 2011 of £75 million and on 24 June 2011 of £500 million from its subsidiary Carlton Communications Limited.

 

viii Contingent liabilities

Under a group registration, the Company is jointly and severally liable for VAT at 31 December 2011 of £35 million (31 December 2010: £39 million). The Company has guaranteed certain finance and operating lease obligations of subsidiary undertakings.

 

There are contingent liabilities in respect of certain litigation and guarantees and in respect of warranties given in connection with certain disposals of businesses and in respect of certain trading and other obligations of certain subsidiaries.

 

Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.

 

ix Capital and other commitments

There are no capital commitments at 31 December 2011 (2010: none).

 

x Related party transactions

Transactions with key management personnel

Key management consists of ITV plc Executive Directors.

 

Key management personnel compensation is as follows:

 


2011

£m

2010

£m

Short-term employee benefits

2

3

Termination benefits

-

1

Share-based compensation

2

2


4

6

 

xi Principal subsidiary undertakings and investments

Principal subsidiary undertakings

The principal subsidiary undertakings of the Company at 31 December 2011, all of which are wholly owned (directly or indirectly) and incorporated and registered in England and Wales except where stated, are:

 

Name

Principal activity

ITV Broadcasting Limited

Broadcast of television programmes

ITV Network Limited(1)

Scheduling and commissioning television programmes

ITV2 Limited

Operation of digital television channels

ITV Digital Channels Limited

Operation of digital television channels

ITV Breakfast Limited

 

Production and broadcast of breakfast time television under

national Channel 3 licence

ITV Consumer Limited

Development of platforms, broadband, transactional and mobile services

SDN Limited

Operation of Freeview Multiplex A

ITV Studios Limited

Production of television programmes

ITV Studios, Inc.(2)

Production of television programmes

ITV Studios Germany GmbH(3) (formerly Granada Produktion für Film und Fernsehen GmbH)

Production of television programmes

Granada Media Australia Pty Limited(4)

Production of television programmes

12 Yard Productions (Investments) Limited

Production of television programmes

Imago TV Film und Fernsehproduktion GmbH(3, 5)

Production of television programmes

3sixtymedia Limited(6)

Supplier of facilities for television productions

ITV Global Entertainment Limited

Rights ownership and distribution of television programmes and films

Granada Ventures Limited

Production and distribution of video and DVD products

ITV Global Entertainment, Inc(2)

Distribution of television programmes

ITV Services Limited

Provision of services for other companies within the Group

Carlton Communications Limited

Holding company

Granada Limited

Holding company

ITV Scottish Limited Partnership(7)

Holding company

 

 

(1)                      Interest in company limited by guarantee.
(2) Incorporated and registered in the USA.                                                                                                                                                      
(3)                      Incorporated and registered in Germany.

(4) Incorporated and registered in Australia.                                                                                                                                                     

(5)                      67.72% owned.

(6)                      80% owned.

(7)                      99.9% owned SPE partnership with the remaining interest held by the ITV pension scheme. Fully consolidated in the Group accounts. Incorporated and registered in Scotland holding the ownership interest in SDN. The Group has taken advantage of the exemption conferred by Regulation 7 of the Partnership (Accounts) Regulations 2008 and has, therefore, not appended the accounts of this                   qualifying partnership to these accounts. Separate accounts for the partnership are not required to be, and have not been, filed at Companies House.

 

A list of all subsidiary undertakings will be included in the Company's annual return to Companies House.

 

Principal joint ventures, associated undertakings and investments

The Company indirectly held at 31 December 2011 the following holdings in significant joint ventures, associated undertakings and investments:

 

 

 

Name

Note

Interest in

ordinary

share capital

2011

%

Interest in

ordinary

share capital

2010

%

     Principal activity

Freesat (UK) Limited

a

50.00

50.00

Provision of a standard and high definition

enabled digital satellite proposition

Digital 3&4 Limited

a

50.00

50.00

Operates the Channel 3 and 4 digital terrestrial multiplex

YouView TV Limited

a

14.30

14.30

Internet connected television platform

 

Independent Television News Limited    

b

 

40.00

 

40.00

Supply of news services to broadcasters

in the UK and elsewhere

Mammoth Screen Limited                

b

25.00

25.00

Production of television programmes

 

ISAN UK Limited 

b

 

25.00

 

25.00

Operates voluntary numbering system for the

identification of audiovisual works

STV Group plc(1)

c

6.79

6.91

Television broadcasting in Scotland

 

 

(1)                                                                        Incorporated and registered in Scotland.

a Joint venture.

b Associated undertaking.

c  Available for sale financial asset.

 

xii Post balance sheet events

There are no post balance sheet events.

 


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