Final Results

MITIE Group PLC 22 May 2006 MITIE Group PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2006 'MITIE is in excellent shape for future growth. There is an energy and spirit in MITIE that is very rare and this makes me very positive about our prospects.' Ian R Stewart, Chief Executive - Strong growth in revenues and profits - Acquisitions take MITIE Security to second place in the UK Manned Guarding market - Major contract awards in social housing - Full year dividend up 26.5% to 4.3p - 72% of 2006/07 budgeted revenue secured FINANCIAL HIGHLIGHTS 2006 2005 Revenue Â£935.6m Â£799.7m 17.0% Profit before tax pre-amortisation of intangible assets (1) Â£50.7m Â£46.4m 9.3% Profit before tax Â£50.5m Â£47.9m 5.4% Earnings per share pre-amortisation and discontinued operations (1,2) 10.6p 9.6p 10.2% Basic earnings per share pre-amortisation (2) 9.9p 8.8p 12.3% Basic earnings per share 9.8p 8.8p 11.6% Dividend per share 4.3p 3.4p 26.5% 1. Excludes other operating income in 2005 of Â£1.5m 2. Reconciliation provided in Note 11 in the Consolidated Financial Information FOR FURTHER INFORMATION: Ian Stewart, Chief Executive, MITIE Group PLC Mobile: 07979 701002 Ruby McGregor-Smith, Chief Operating Officer, MITIE Group PLC Mobile: 07979 701004 Suzanne Baxter, Group Finance Director, MITIE Group PLC Mobile: 07979 701889 CHAIRMAN'S STATEMENT This has been an exceptional year for MITIE. We have continued our track record and delivered an impressive set of results, completed our largest ever acquisition and won a series of new and exciting contracts across a number of emerging and established markets. With a clear corporate strategy, we are extremely well placed for the future. MITIE provides a comprehensive range of support services to both public and private sector clients in the UK. We will build on our success by further strengthening the range of services we provide and by achieving service excellence for all our customers. MITIE has achieved 19 years of consecutive revenue, profit and dividend growth and now employs over 39,000 staff. Our success is testament to the Group's unique culture, which motivates both management and staff to grow the business by concentrating on the needs of our customers. The dedication of our employees, our core skills in managing and motivating a large and diverse workforce, and our passion to support our customers is a real and valuable differentiator in the marketplace. On behalf of the Board I would like to welcome the employees of our acquired companies to the Group and thank everyone in MITIE for their contribution to our success and their hard work over the financial year. Results Turnover in the period rose to Â£935.6m (2005: Â£799.7m), an increase of 17.0% on continuing operations, while profit before tax and intangible amortisation from continuing operations excluding other operating income rose by 9.3% to Â£50.7m (2005: Â£46.4m). Basic earnings per share (EPS) increased by 11.6% to 9.8p (2005: 8.8p), whilst EPS pre-amortisation, other operating income and discontinued activities rose by 10.2% to 10.6p (2005: 9.6p). Dividend The Board is recommending a final dividend of 2.4p per share, which gives a total of 4.3p (2005: 3.4p) for the year. This represents an increase of 26.5%. The dividend will be paid on 29 September 2006 to Shareholders on the Register at the close of business on 8 September 2006. The dividend cover, based on the Group's profits for dividends declared in the year, is 2.5 times. The dividend cover for dividends paid in the year is 3.1 times. Share buyback programme We continued the share buyback programme started in the previous financial year and purchased 992,305 MITIE Group PLC ordinary shares of 2.5p at an average price of 162.6p. The highest price paid was 164.0p while the lowest price paid was 158.5p. All shares purchased have been cancelled. We will be seeking to renew the authority granted by our Shareholders to purchase up to 10% of the issued share capital of the Company, at our next Annual General Meeting on 27 July 2006. Acquisitions The year was exceptional in terms of our acquisition activity. Firstly, we made four external acquisitions in the year at a total consideration of Â£91.5m, including Initial Security Ltd our largest acquisition to date. Secondly, and in accordance with our unique business model, we purchased the minority interests in seven MITIE businesses for a total purchase consideration of Â£9.4m. Three of our external acquisitions were in the security sector, an area we have been strategically targeting, and saw us purchase: - Initial Security Ltd, the UK manned guarding business of Rentokil Initial, for Â£70.7m (including repayment of debt) in March 2006; - The Watch Security Ltd, a provider of manned guarding and electronic security solutions in the Midlands, for Â£8.0m in June 2005; and - Intruder International Ltd, a specialist provider of electronic security solutions in the UK, for Â£4.0m in May 2005. These acquisitions have transformed our Security business into a strong nationwide operation which is now ranked as the UK's second largest provider of manned guarding. The integration of the businesses is on plan. We are confident that our Security business has considerable potential for the future. Lyndhurst Services Ltd, a provider of external grounds maintenance to commercial property sites across the UK, was also acquired by MITIE. The purchase of this company in February 2006, for Â£8.8m, has added to MITIE's regional coverage in the landscaping market and has been an important development in our strategy of growing that business. Board Changes There have been a number of changes to the MITIE Group PLC Board. Ruby McGregor-Smith, previously Finance Director, was appointed Chief Operating Officer in September 2005, while Suzanne Baxter was appointed Group Finance Director, following the year end, in April 2006. David Jenkins and Ishbel Macpherson have both joined the Board as Non-Executive Directors during the period, bringing with them considerable financial and professional experience. Manish Chande has retired from the Board as Non-Executive Director after four years of service. I would like to thank him on behalf of the Board for his valuable contribution to the development of the Group. Pensions In March 2006, the Group made a one-off contribution of Â£7.8m to eliminate the actuarial deficit on the MITIE Group PLC Pension Scheme. This is the Group's principal defined benefit pension scheme and is now closed to new entrants. Corporate Governance The Board recognises its responsibilities in terms of ensuring that MITIE achieves high standards of Corporate Governance and conducts itself appropriately in order to protect the interests of all MITIE stakeholders. Corporate Responsibility This year we are acting to improve our communication with MITIE stakeholders on matters concerning corporate responsibility. We are therefore publishing a separate report, that will also be available on our corporate website, which expands further on the areas already covered in this Annual Report. The report will look in more detail at how MITIE motivates and looks after its people, relates to the community, works with charities and behaves in relation to our environmental responsibilities. Outlook MITIE has a solid track record in developing a profitable business and it is our strategy to ensure that this continues. We will seek to grow further organically and will make acquisitions within our chosen markets when appropriate opportunities arise. We will continue managing our business in a manner which facilitates sustainable growth and delivers service excellence for our customers. We are developing national coverage across the portfolio of services we provide, which will enhance our ability to work with customers across many sites providing multiple services. The support services market is increasingly looking for companies who are able to offer a wide range of services with their own workforce and we are clearly benefiting from that trend. As a result of this we expect significant contract opportunities which, when combined with the energy and commitment of our employees, will ensure MITIE will continue to prosper. We are well positioned for future growth. CHIEF EXECUTIVE'S REVIEW Overview It has been a year of great progress within MITIE. We were particularly delighted to acquire the manned guarding business of Rentokil Initial towards the end of the year. This acquisition will transform our security business and after integration with our existing security companies, it will have revenue in excess of Â£200m. Support Services has achieved strong organic growth. Engineering Services has continued to experience some difficulties in achieving an acceptable margin within a highly competitive market and, as we indicated in our interim statement, a certain amount of restructuring has taken place which produced a better outcome for the business in the second half of the year. Property Services has had an excellent year, developing our position in the Social Housing market and we announced at the end of March their success in gaining a substantial repair and maintenance contract with Birmingham City Council. The performance of our individual operating companies during the year is covered in more detail in the Chief Operating Officer's Review. Strategy 1. Organic growth 2. Bundled Services 3. Acquisitions 4. 'The MITIE model' 5. Invest in our people 6. New markets 7. Corporate responsibility MITIE has had a consistent strategy for a number of years and we are confident that it is appropriate for the challenging environment we face. The strategy covers all aspects of MITIE including the markets in which we operate, our customers, the people and resources that we need, and our impact in terms of corporate responsibility. 1) Organic growth We operate in markets that are growing and are fragmented. This enables MITIE to achieve good levels of organic growth by taking market share from competitors and benefiting from the increasing trend towards the outsourcing of non-core services. We are able to increase market share because of the excellence of our services and the passion of our employees, who are committed to supporting our customers and helping them to achieve their business goals. It is our aim to grow all of our businesses to a level where our position in the market is in the top five by size. 2) Bundled Services There is a distinct movement towards bundled services. We define a bundle as when a customer has chosen to take more than one MITIE service on the same site rather than a full facilities management service. This typically occurs when a customer wishes to maintain an active involvement in the management of their facilities but is looking to rationalise its supply chain. Bundles can start from any of our MITIE businesses, particularly when we have an excellent relationship with a customer on site. Recent Building Services Research and Information Association data shows that between 2002 and 2005 the proportion of contracts that are run as bundles has increased from 20% to 30%. 3) Acquisitions We are continuing to look for acquisitions that fit with our range of services. When making an acquisition we pay particular attention to three issues; a) Cultural fit - MITIE has a strong entrepreneurial culture that has been built over the past 19 years. We carefully evaluate whether the business culture of any acquisition is similar to ours. This is primarily related to the approach at an operational level, and to an obsession with customer service, which involves listening to customers' needs, providing excellent services, having a determination to succeed and a desire to work closely with other MITIE businesses. b) Opportunity for growth - The markets in which an acquisition takes place must have growth potential. The majority of our recent acquisitions have been in the manned guarding market. We believe that with the increasing awareness of security matters and the impact of the licensing of the security industry, there will be ongoing changes in this sector which will create opportunities for us. c) Quality of management - The success of MITIE has come from the strength and motivation of its management teams. We always consider the abilities of the management when looking at potential acquisitions, to ensure they will fit with the rest of the Group and have the ability to run and grow their business independently. 4) The MITIE model This year we have started three companies, in the divisions of Property Services, Business Services and Catering. Start-up companies tend to have very high rates of growth, but their impact on the Group growth rates will be progressively reduced. We believe that the opportunities provided to the managers of our start-up companies should be available to the managers in our more mature businesses where they have not had an equity stake. It is our intention to extend the ethos of the MITIE model through our Second Generation Equity Scheme. We recapitalised our Cleaning business with Shareholder approval in 2004 and we intend to seek Shareholder approval to recapitalise Property Services in 2006. 5) Invest in our people To ensure that our customers receive quality service, and that we have the right skills in the business going forward, we regularly evaluate the abilities of our employees and provide them with appropriate training and development. We have also expanded our core skills competency, so that we are able to offer additional services. We prepare for growth and change within MITIE by maintaining succession plans for all of our businesses. 6) New markets There are some customers that prefer to work with businesses who specialise in their sector, such as retail, transport and social housing. We have structured our businesses to ensure that we meet the needs of those customers and have achieved good results to date. We will establish additional specialist businesses where appropriate and anticipate that this strategy will produce strong profitable growth. 7) Corporate responsibility It is becoming increasingly important for a business to be able to demonstrate that it behaves in a way that is responsible in terms of how it treats its employees, interacts with customers and suppliers, relates to the community and charities, and manages relationships with other stakeholders. MITIE is a responsible business and is producing a separate Corporate Responsibility Report for the first time this year, which will be published with our Annual Report and Accounts. This report will also be available on our website, www.mitie.co.uk. Forward order book MITIE has benefited from the longer term nature of many of our contracts. The contracts in Support Services have an average term of three years and this is now lengthening, with several extending to five years or more. Property Services has an order book that is increasing rapidly, as a consequence of its success in winning social housing partnering contracts, and Engineering Services has a high level of its revenue secured for 2006. The overall percentage of budgeted Group revenue secured for 2007 is 72%, compared to 70% last year. Markets We have always maintained that MITIE benefits from having a broad mix of customers, and that this spread reduces our risk in terms of potential downturns in a sector. We also believe that a good balance between public and private sector work provides protection from any particular changes in government policy. People We place great emphasis on the development of our people. Without a motivated workforce to satisfy customers, we do not have a business. We now employ over 39,000 people and are immensely proud of their achievements. The management of such a large and diverse, skilled and semi-skilled workforce is our core competency and we have very robust processes in place to manage both the efficiency and development of our employees. We have a range of training and management development programmes in place across the Group. These vary from very specific training, such as the usage of chemicals for our pest control operatives, to customer service training for our receptionists in Business Services, to senior management strategy courses. We also recognise the achievements of our employees with several award schemes, which cover all our employees across the Group. MITIE is aware that as the economy grows there will be skills shortages in some of the trades we need. We are therefore establishing a network of MITIE Skills Centres in secondary schools across the UK, where we are supporting vocational skills training. We established four in 2005 and will be opening another four in 2006. We are also working closely with regional development agencies, such as the East London Business Alliance, to recruit apprentices into MITIE businesses. I would like to thank our employees personally for their hard work and dedication over the past year and their contribution towards this very good set of results. Future prospects MITIE is in excellent shape for future growth. We have a very strong management team, a substantial customer base in growing markets, a motivated and passionate workforce, and a business model that is sufficiently flexible to react to market changes. Our markets will remain competitive, but the agility of our management and their leadership will enable MITIE to continue growing. There is an energy and spirit in MITIE that is very rare and this makes me very positive about our prospects. CHIEF OPERATING OFFICER'S REVIEW MITIE has seen another year of double digit growth and strong financial performances. Our Support Services and Property Services businesses have performed exceptionally well and we are pleased to report recovery within our Engineering business. We have made a number of important acquisitions during the year, dominated by the acquisition of Initial Security Ltd, which provide scale and growth opportunities for our Security and Landscape operations. We remain well placed to continue our strategy of profitable growth, investment and service excellence. MITIE Support Services Support Services encompasses a number of complimentary services including Cleaning, Catering, Landscape, Pest Control, Security, Managed Services, Business Services and Engineering Maintenance. It has had an excellent year with major single service and bundled contract awards for Engineering Maintenance and Security, and with key acquisitions in Security and Landscape . -------- -------- ------------ 2006 2005 Growth Â£m Â£m Â£m -------- -------- ------------ Revenue 516.0 440.2 75.8 17.2% Segment operating profit 32.8 29.1 3.7 12.7% MITIE Cleaning Cleaning provides services to offices, industrial buildings, transport, healthcare facilities and retail premises. Services include window cleaning, computer cleaning, food hygiene, recycling and waste management. Cleaning has performed in line with expectations and has had a good year, achieving organic growth of 7.9%. During the year Cleaning reviewed its customer base and, in response to customers' changing needs, has separated the management of its national contracts from that of its site managed contracts. Two new customer orientated services have been created - 'Connect', which focuses on larger site managed contracts, and 'Cleaning and National Accounts', which delivers single and multi-site contracts through the national infrastructure of the business. Our newly structured business has been recapitalised in line with the MITIE Second Generation Equity Plan. Major contract awards for Cleaning across the UK include those at Celtic Football Club and Queen Margaret University College. In the South, significant contract awards include Motorola and Sutton Council. In London we secured a new contract with UBS. Business re-tendered and retained in the year included our contracts at Yorkshire Water Services, United Utilities, Kellogg's and Homebase. Our contract at the Historic Royal Palaces was extended to include both cleaning and waste management at The Tower of London. A further major extension from a renewed contract was at Barclays Bank, where the scope of our work was extended from 607 to 1,211 branches. Outside the traditional Cleaning offering, MITIE Waste & Environmental, provides specialist environmental advice and services to over 700 sites, which is an increasingly important differentiator in the market. Initiatives, such as the TREEHUGGER(TM), have proved to be very popular with clients, and this desktop recycling facility sold almost 25,000 units last year. The profile of MITIE Waste & Environmental has been raised by the external recognition it has received for its services. In November 2005, the business won four awards, including one gold and two silver Green Apple accolades for environmental best practice. MITIE Waste & Environmental also won the prestigious Sustainability Category at the Premises and Facilities Management Partnership Awards for its contract with Hewlett-Packard. Together with our customer, we have been working on the development of a sustainable workplace, by improving the recycling capacity of the Hp Invent plant in Scotland. MITIE also won two Kimberley-Clark Golden Service Awards during the year. Firstly, the Best Cleaned Office (below 15,000 square feet) award, which was for our contract with Birmingham Midshires Building Society, and secondly, the Best Cleaned Transport facility, which was in recognition of our contract with Dover Harbour Board. We anticipate continued progress for this business in 2006/07, with further strong growth expected in Retail and Transport Cleaning. MITIE Catering Catering offers hospitality and executive dining, vending, consultancy services and employee catering to a wide range of clients across the UK. Catering has continued its growth in event catering and has seen an encouraging level of interest from prospective clients particularly in niche commercial catering contracts within visitor attractions and retail venues. In London our start-up business is developing well and has won a number of exciting new contracts. These include the cafe in Hamleys toy superstore on Regent Street, London, and the Jaeger cafe , which is also located on Regent Street in their flagship store. The new Jaeger cafe opens in Summer 2006. The menu has been designed to reflect fair trade produce, which is organic, fresh and seasonal; which are important factors for Jaeger corporate clients who will have the opportunity to hire the cafe for special events. Also in London, Bayerische Hypo-und Vereinsbank AG will be employing Catering for their new Moorgate building, which operates a cafe bar and provides hospitality for some five hundred members of staff, while the Landflex contract will provide hospitality, vending and cafe services across their new estate, which so far comprises four buildings. Current bidding activity is focused on the increasing demand for corporate catering within a client's building, which typically has limited facilities but requires high quality food service. We have, however, also seen a rise in the number of tenders for significant multi-site national catering contracts, an area previously restricted to the larger national catering companies. We believe this shift is largely attributable to the fact that Catering now has national operational reach. An example of the type of national contract being sought is the NTL Incorporated catering contract, which was awarded to Catering in January 2006. The contract spans twelve sites including Belfast, Glasgow, Teeside, Manchester, Nottingham, Luton, Hook and Swansea. Market conditions remain challenging and competition is strong, but we are pleased to have developed a good pipeline of new and existing contracts. Catering will continue to pursue organic growth in 2006/07 and will look to achieve a higher market share going forward. MITIE Landscape Landscape encompasses a traditional range of services including grounds maintenance, sports ground and leisure facilities care, exterior landscape design, installation and maintenance, including golf courses. The business also provides arboriculture and interior tropical plant services. Landscape performed well during the year and achieved organic growth of 120%. In February 2006, we acquired the grounds maintenance business, Lyndhurst Services Ltd (Lyndhurst). Serving commercial property sites across the UK, Lyndhurst complements MITIE's existing landscaping and grounds maintenance business, and has significantly increased its ability to provide customers with a broader range of services. The acquisition has expanded the scale of this business and it is now bidding for larger, national contracts. New work secured this year includes, five-year contracts with both the City of York Council and West Lindsey District Council, and an additional two years for the national Lloyds TSB contract, which sees our northern and southern businesses working together on Landscape's largest secured contract. We have also renewed our contracts at BOC headquarters in Surrey and the UK Government Home Office contract. Landscape is also working with its MITIE PFI colleagues on the Ealing Schools project and, in addition, has secured work to landscape other new schools with Costain, the international engineering and construction group. This business will benefit from the acquisition of Lyndhurst and we anticipate continued growth in 2006/07. MITIE Pest Control Pest Control offers insect, bird and other pest management services. The pest control market remains very competitive with the largest two operators continuing to dominate. During the year Pest Control, which has contracts with Compass Group for its service facilities at Twickenham Stadium in London and the Millennium Stadium in Cardiff, has won a number of new contracts, which include those with Balfour Beatty Construction and Meridian Healthcare. Going forward the Pest Control market is likely to remain very fragmented, and we will therefore look to improve margins by expanding our skills base and service offering. MITIE Security Security provides static guarding, electronic and mobile guarding, gallery attendants, front of house and warden services, key holding, consultancy and remote monitoring services for its clients. This has been an excellent year for Security with three acquisitions and strong organic growth in our existing business. The organic growth rate was 17.8%. In May 2005, we acquired Intruder International Ltd (Intruder), a specialist provider of electronic security solutions, and in June 2005 acquired Midlands based The Watch Security Ltd (The Watch). The purchase of The Watch, a manned guarding and electronic security business, completed our national footprint in the sector. The acquisition enabled Security to offer a more comprehensive service to clients, and consequently compete for larger national contracts. While our security business is still primarily focused on the manned guarding sector, the acquisition of Intruder and strategic alliances with security consultancy companies has meant that Security is better able to provide its customers with total security solutions. An example of this is our expanded contract with the Department for Communities and Local Government, formerly the Office of the Deputy Prime Minister, where the manned guarding provision is now being complemented by a high tech electronic security system provided by Intruder. In March 2006, MITIE acquired Initial Security Ltd (ISL), a leading UK manned guarding company whose services include contract guarding, aviation security, key holding, patrol and alarm response services. Its client base covers a wide range of sectors from government and commercial to industrial and retail. Providing services at over 2,000 sites, more than 6,000 staff throughout the UK transferred to MITIE from ISL. The acquisition has added specialist aviation and retail work to Security's portfolio of services and has further strengthened its regional operations. The acquisition of ISL has transformed Security and it is now the second largest manned guarding business in the UK. The integration plan is progressing well and we expect to realise significant synergy benefits across the business. While the acquisition is expected to be earnings enhancing in the year ending 31 March 2007, the benefits of the cost savings will be absorbed by the integration costs in the first full year of ownership. The financial benefits of integration are therefore expected to be realised in the financial year ending 31 March 2008. On 20 March 2006 it became illegal, in England and Wales, to work as or supply a contracted manned security officer without a Security Industry Authority (SIA) licence. This change to the industry's legislative framework has seen our investment in training rewarded as Security has met all the SIA licensing deadlines, becoming one of the first companies to achieve Approved Contractor Status (ACS). This has been a very exciting year for Security, and our focus is now on integrating our acquisition and consolidating our national presence. We will look to capitalise on our investments and expect good growth in the future. MITIE Managed Services Managed Services encompasses facilities management, building and estate management, integrated service delivery, PFI (Private Finance Initiative) service delivery, procurement and supplier evaluations, and consultancy to a wide range of customers across a number of sectors. Managed Services has had a very good year making a considerable improvement in its profitability and winning new contracts which will impact the next financial year. Managed Services secured a three-year contract with the Department for Culture, Media and Sport, delivering facilities management, full maintenance and fabric services to four of their buildings in central London. This contract has been further extended at the end of the year to cover the Big Lottery Fund buildings in Birmingham, Newcastle, Glasgow and London. It was also awarded a contract with T-Mobile that covers ten major T-Mobile buildings, 15 switch centres and 130 retail outlets across the UK. Managed Services has recently launched an Energy Awareness initiative with the National Offender Management Service (NOMS) at their offices in Staffordshire and Nottingham. With the ultimate aim being to establish best practice in all NOMS offices throughout the UK, the initiative has been designed to make employees more aware of their environment, encouraging energy efficient behaviour both in the home and the workplace. In line with the growing number of customers seeking external strategic advice on energy use in the business place, we have grown the management team, to accommodate the rise in demand. The business has been awarded six new PFI school projects where it provides full facilities management services. MITIE has not taken equity participation in these projects. The contracts vary in length, but are all between 25 to 30 years. The total number of PFI education facilities services contracts awarded to MITIE now equates to some 15% of the total market, which positions the business as a market leader in its specific sector. Overall, the business has had a very profitable year and is well placed for further growth. MITIE Business Services Business Services provides mailroom management, reception and switchboard facilities services, records management, reprographics, print management and distribution management, to its clients. Business Services has seen a definitive shift in the market towards bundled services and with its broad service offering, the business has achieved some major contract awards. Business Services now provides customers with a full spectrum of document management services ranging from creative design to digital and lithographic printing through to logistics and distribution services from its document solutions and mail solutions centres. Our bundled Business Services offering with other MITIE areas of expertise continues to be a significant advantage for Business Services. It has recently delivered success in a new Business Services contract at the European Headquarters of The Walt Disney Company, which is a bundled solution for the provision of their mail, switchboard, reception, cleaning services and maintenance. Our mail services, reprographics and porterage contract at the London Stock Exchange was also extended in the year for a further three years and has now been bundled with services from Cleaning. Our reprographics contract at the international investment bank, ABN AMRO, was expanded in the year and now includes the provision of mail services. It is now one of the largest contracts for the business in the City of London. Osborne Clarke, the Solicitors, awarded Business Services a bundled services contract for their prestigious new London offices where the business provides reception, catering and cleaning. Business Services was also recently appointed by 3i to manage the mail, reprographics and cleaning services at their new headquarters in Victoria, London. The largest contract award for Business Services during the year has been at PricewaterhouseCoopers with the award of a five-year contract for document management, distribution services, reprographic services, mail and record management which is valued at over Â£50m. Business Services has introduced a new suite of technology tools. These build on the success experienced with previous systems, which had been developed over the past six years and are amongst the most advanced in the marketplace. The new offering delivers many of the tools to client desktops, via the internet or client intranets, and includes print submission, courier shipping, document tracking and stationery ordering. Overall, Business Services has had a good twelve months in terms of business development. The outlook remains very positive and we believe there are many exciting opportunities in the future. MITIE Engineering Maintenance Engineering Maintenance provides heating, lighting, ventilation and air conditioning maintenance, mechanical and electrical systems, boiler maintenance, plumbing and water hygiene, and estate maintenance to a variety of clients throughout the UK. Engineering Maintenance has delivered a strong performance during the year, experiencing an exceptional level of organic growth at 38.8%. New contracts include those at four United States Air Force bases in England, and at the Paddington Central and Sheldon Square project. The latter contract, which began in January 2006, comprises mechanical and engineering maintenance services with some small property maintenance work in both commercial and residential accommodation. The business also secured work, in December 2005, with the University of the Arts in London where it is providing mechanical and engineering maintenance services and property maintenance work for the University property portfolio of 21 buildings. New contracts, which have been awarded, but not yet commenced, include those at the Fort Shopping Centre in Birmingham and at Vertex, a subsidiary of United Utilities where we provide services to buildings in London, the Midlands, the North of England and Scotland under a three year contract. Re-tendered business includes a twelve-month contract with the UK Government Foreign and Commonwealth Office, at their buildings in London and Hanslope Park. Contracts with Microsoft, which is bundled with Cleaning, and the Alliance and Leicester were also re-secured during the period, while the scope of the AIG contract, which was originally for two buildings in London, has significantly increased to cover all their regional offices. Engineering Maintenance continues to provide extensive bundling opportunities for the Group, acting as a springboard for our full range of services. We were recently awarded a three-year contract with the Bank of England, for their sports facilities, which will be mobilised in conjunction with Cleaning. Our maintenance contract with Dell Computers, has been expanded to include their City Park complex in Glasgow and now includes work for Cleaning. Engineering Maintenance has had an exceptional year and we remain confident of further success and progress for the business in 2006/07. MITIE Property Services Property Services provides refurbishment and interior fit-out work, office furniture, painting, repair and maintenance, roofing, plastering, partitioning, industrial flooring, and fire protection to clients. The recent Birmingham City Council contract is an excellent demonstration of the success the business is achieving in Social Housing, which by its nature encompasses many of Property Services' activities. -------- -------- ------------ 2006 2005 Growth Â£m Â£m Â£m -------- -------- ------------ Revenue 163.5 129.1 34.4 26.6% Segment operating profit 8.9 7.6 1.3 17.1% Property Services has had a very good year with significant growth in turnover and profits. Organic growth was up at 26.6%. There has, however, been some pressure on profitability, which is likely to continue this year as the work mix moves towards Social Housing. The particular success in the year is the recently awarded Birmingham City Council Social Housing contract, which is worth in excess of Â£90m over four years, with an option to extend for an additional three years. The contract commenced on 1 April 2006 and covers the repair and maintenance of housing in the southern area of the city. This covers 27,000 properties and involves over 80,000 repairs per annum. In addition, Property Services also mobilised a contract with Milton Keynes Council to provide responsive and void property repairs to its entire portfolio of 12,000 homes. The five-year contract also started on 1 April 2006 and is estimated to be worth in excess of Â£25m with an option for the Council to extend for an additional five years. Property Services is also working with Yorkshire Coast Homes, Southampton City Council, the Glasgow Housing Association and Leeds City Council amongst many others and in total the business now holds contracts with over 150 local authority and housing associations throughout the UK. Market conditions for this division remain encouraging with Social Housing and the Fit-out sector in London being particularly buoyant. The outlook for the business is very positive. MITIE Engineering Services Engineering Services covers the installation of mechanical and electrical systems, information and communication technology, air conditioning, utilities infrastructure and retail engineering, serving a wide range of clients from many different sectors. -------- -------- ------------- 2006 2005 Growth Â£m Â£m Â£m -------- -------- -------------- Revenue 256.1 230.3 25.8 11.2% Segment operating profit 6.4 7.6 (1.2) (15.8)% Engineering Services has experienced a challenging year but margins improved in the second half of the year. During the period we closed the Engineering Services 'Cleanrooms' and 'Scientific Projects' businesses, and restructured operations in the Midlands and Leeds. The restructured business has achieved organic growth of 11.2%. Engineering Services, has a strong forward order book largely consisting of repeat work from blue chip clients. The business has contracts with Rhondda Hospital, the University of Manchester and IBM, amongst others, and has grown its existing contracts with a number of clients including Plymouth University and Land Securities Trillium. Social Housing, Technology, Retail and Utilities work has been very encouraging and the business has a pipeline of repeat orders that extends into 2008. During the year, the business has been involved in a number of exciting projects including the Thomas Deacon City Academy in Peterborough. This prestigious new Academy was designed by Lord Foster and Engineering Services was appointed to work with Laing O'Rourke on the mechanical and electrical design and installation package. Engineering Services has also secured the contract to provide emergency lighting and fire alarms to the Eastenders set in Elstree. In London, the business was appointed as the sub-contractor for mechanical and electrical work on the new Victoria and Albert Museum garden. This work has now been completed and the garden was officially opened by HRH the Prince of Wales and will be used for corporate functions throughout the summer. While this has been a challenging year, our restructured business has a good forward order book. Margins in this business still remain under pressure and improving them remains the focus going forward. Future prospects During the period we have seen strong performances from MITIE Support Services and MITIE Property Services. MITIE Engineering Services has had a challenging year, but steps have been taken to ensure it is better positioned for the future and we are starting to see the benefits of this. The quality and strength of our individual businesses and our people continue to drive growth in turnover and profits for the Group. By focusing on our customers, and their needs, we are confident that we can grow our business and our market share further. We will continue our track record of success throughout this financial year by building on our strengths, concentrating on the integration of our recent acquisitions and growing our bundled service offering. We have a strong customer focus that provides a solid basis for profitable growth in the future. Group Finance Director's Review Our financial results are underpinned by strong operational cash flows. Acquisitions made during the year have changed our profile and have enhanced the efficiency of our balance sheet. We have a sound financial platform for future profitable growth. Introduction We are pleased to present the financial results of the Group for the year ended 31 March 2006. This is the first financial year in which the Group has reported its results under International Financial Reporting Standards (IFRS). An explanation of the transition to IFRS was provided in our Transition Statement which accompanied the interim report released on 28 November 2005 and is reproduced on our website. All comparatives throughout this report have been restated under IFRS. Revenue Revenue from continuing operations increased by 17.0% to Â£935.6m (2005: Â£799.7m). Revenue from the businesses acquired during the year was Â£24.2m. Excluding the effect of the acquisitions, revenue from continuing business grew by 14.0%. Each of our three operational segments reported strong, double digit growth in revenue during the year. After the effect of acquisitions, revenue growth rates in Support Services, Property Services and Engineering Services were 17.2%, 26.6% and 11.2% respectively. Profit from operations Profit from operations excluding other operating income has increased by 8.6% to Â£48.1m (2005: Â£44.3m). Other operating income in 2005 of Â£1.5m related to the profit on the sale of a property that did not recur in 2006. Support Services and Property Services reported growth in their segment profit from continuing operations of 12.7% and 17.1% respectively. Segment operating profit from continuing operations in Engineering reduced by 15.7%. Investment income and finance costs Investment revenue and finance costs totalled Â£2.4m (2005: Â£2.1m). Investment revenue related to interest on the overall net funding position of the Group. Profit before tax and intangible amortisation Profit before tax and intangible amortisation (PBTA) increased by 5.8% to Â£50.7m (2005: Â£47.9m). PBTA from businesses acquired during the year was Â£0.2m after integration costs. Discontinued items The loss for the year on discontinued operations of Â£2.4m relates to the final settlement on the disposal of the MITIE Access contracting businesses in June 2002. This amount was paid in October 2005. Intangible amortisation Intangible amortisation was Â£0.2m (2005: Â£Nil) and represents the amortisation of intangible assets recognised on acquisitions made during the year over the estimated lives of those assets. There was no similar charge in the prior year since no third party acquisitions were made in that period. Profit before tax Profit before tax for the year was Â£50.5m (2005: Â£47.9m). Tax The tax charge for the year was Â£15.5m, a rise of 11.5% on last year's charge of Â£13.9m. The effective rate of tax for the Group was 30.7% (2005: 29.8%). The Group's effective rate of tax before amortisation was 30.6% (2005: 29.8%). Pensions The Group operates two defined benefit pension schemes and a defined contribution scheme for its employees as described in Note 30. The total pension charge under IAS 19 for the year was Â£3.7m (2005: Â£3.2m). In response to the deficit on our principal defined benefit scheme, the Group made a special contribution of Â£7.8m to that scheme in March 2006 in order to eliminate the funding deficit. We have closed the scheme to new members and have decreased the final salary ratio effective for the years of service after this change. The latest actuarial valuation under IAS 19 'Employee Benefits' shows a pre-tax surplus of Â£1.8m (2005: deficit Â£7.6m). At the year end, the net asset position of the scheme was positively affected by the performance of equities and the slight improvement in the AA bond rate. This movement is reflected within the Statement of Recognised Income and Expense. Earnings per share (EPS) EPS is based upon profits after tax and minority interests and represents the amount of profit earned by a share. The calculation of EPS has been based on the weighted average number of shares in the year of 305.9 million (2005: 306.4 million). Basic EPS grew by 11.6% (2005: down 21.1%) to 9.8p (2005: 8.8p). Basic EPS pre-amortisation, discontinued operations and other operating income in 2005 grew by 10.2% to 10.6p (2005: 9.6p). Diluted EPS grew by 11.8% to 9.7p (2005: 8.7p). Diluted EPS pre-amortisation, discontinued operations and other operating income in 2005 grew by 10.5% to 10.5p (2005: 9.5p). Dividends In 2004 we set a dividend policy to achieve an annual dividend cover of no more than three times. We review this policy on a regular basis. The total dividend cover for the year based on the profits earned in the year and dividends proposed in the year is 2.5 times (2005: 2.9 times) The total dividend per share for the year is 4.3p (2005: 3.4p), an increase of 26.5%. The proposed final dividend per share for the year is 2.4p (2005: 1.8p), an increase of 33.3%. Share buybacks The Company has acquired 0.3% of its own share capital in the year, equating to 992,305 shares (2005: 10,310,006), all of which were cancelled. In total these cost Â£1.6m (2005: Â£14.6m). Acquisitions MITIE acquired four businesses from third parties during the year. On 3 May 2005, MITIE acquired 100% of the share capital in Intruder International Ltd (Intruder). The consideration of Â£4.0m was paid in cash. The acquisition gave rise to goodwill of Â£3.5m and acquisition costs of Â£0.2m. No intangible asset was recognised on acquisitions. From the date of ownership, Intruder contributed Â£3.9m to the revenue and a loss of Â£0.4m to the PBTA of the Group. On 30 June 2005, MITIE acquired 100% interest in The Watch Security Ltd (The Watch). The consideration of Â£8.0m comprised Â£6.0m in cash at completion and Â£2.0m deferred consideration dependent on post-acquisition performance. The acquisition gave rise to goodwill of Â£6.4m and acquisition costs of Â£0.2m. Intangible assets arising on the acquisition of Â£0.8m relate to customer lists and are being amortised on a straight-line basis over their expected useful life of 8 years. From the date of ownership The Watch contributed Â£13.5m to the revenue and Â£0.3m to the PBTA of the Group. On 17 February 2006, MITIE acquired 100% interest in Lyndhurst Services Ltd (Lyndhurst). The consideration of Â£8.8m comprised Â£8.2m in cash at completion and Â£0.6m in deferred consideration dependent on post acquisition performance. The acquisition gave rise to goodwill of Â£4.9m and acquisition costs of Â£0.1m. Intangible assets arising on the acquisition of Â£3.5m relating to customer lists have been recognised and are being amortised on a straight-line basis over their expected useful life of 6 years. From the date of ownership Lyndhurst contributed Â£0.7m to the revenue and Â£0.1m to the PBTA of the Group. On 7 March 2006, MITIE acquired 100% interest in Initial Security Ltd (ISL). The consideration of Â£59.1m was entirely paid in cash, while other debts of some Â£11.6m were also assumed. The acquisition gave rise to goodwill of Â£59.8m and acquisition costs of Â£0.6m. Intangible assets arising on the acquisition of Â£7.5m relating to customer lists have been recognised and are being amortised on a straight-line basis over their expected useful life of 8 years. From the date of ownership, ISL contributed Â£6.1m to the revenue and Â£0.2m to the PBTA of the Group. Treasury Group Treasury has responsibility for managing and reducing financial risk and ensuring sufficient liquidity is available to meet foreseeable needs. It operates within policies and procedures approved by the Board which have not changed during the year. Borrowings are arranged centrally by Group Treasury and made available to operating subsidiaries on commercial terms. The Board's ongoing policy is to finance the Group through retained earnings and borrowings. The maturity profile of banking facilities is reviewed regularly and the facilities are extended and replaced as appropriate well in advance of their expiry. Further details on financial assets and liabilities are given in the notes to the Preliminary Announcement and in particular details on the bank overdraft and loans in Note 18. Cash flows The net funds position of the Group in the year moved from an opening cash position of Â£61.5m to a closing net cash position Â£7.6m, with loans of Â£31.0m, which were drawn down in March 2006 to partially fund the acquisition of Initial Security Ltd. All loans are repayable within one year, but can be rolled over at our option. The movement in the Group's net funds position this year is largely attributable to the outflow of Â£85.0m (including net overdrafts acquired of Â£6.6m) used to finance our external acquisitions. In addition, at acquisition MITIE repaid the loan in Initial Security of Â£11.6m. The total net cash outflow for the year was Â£53.9m (2005: inflow Â£12.0m). Excluding new loans of Â£31.0m (2005: Â£Nil), the cash outflow was Â£84.9m (2005: inflow Â£12.0m). Cash generated by operations before interest, tax and additional pension contribution was Â£53.2m (2005: Â£46.7m). Non-recurring cash payments that were made in the year were a special contribution to the Group defined benefit pension scheme of Â£7.8m and final settlement amounts on the disposal of the MITIE Access contracting business of Â£2.4m. Included in cash and cash equivalents are deposits totalling Â£9.6m (2005: Â£3.8m) held by the Group's insurance subsidiary, which are not readily available for the general purposes of the Group. Minorities In accordance with the MITIE model, on 24 August 2005, the Group acquired some or all of the minority interests in the following subsidiaries for a total consideration of Â£9.4m (see Note 25): - MITIE Air Conditioning (Wales) Ltd - MITIE Air Conditioning (West) Ltd - MITIE Business Services Ltd - MITIE Engineering Services (Retail) Ltd - MITIE Engineering Services (Swansea) Ltd - MITIE Security (North) Ltd - MITIE Security (Scotland) Ltd Capital Expenditure Capital expenditure as a percentage of turnover. As the Group has grown and continues to grow strongly, measuring total capital expenditure does not provide a useful indicator of performance; we therefore measure our net capital expenditure as a percentage of turnover. Since 1999 this has fallen from 4.6% of turnover to 1.2% in the current year. Capital expenditure for the year was Â£13.8m (2005: Â£15.0m). This clearly reflects the full year effect of the completion of the Group's stated objective to move away from capital-intensive businesses. The disposal of MITIE Generation Ltd, in September 2004, was the final step in achieving this objective. Our policy not to invest in heavily capital intensive businesses allows us to reduce the amount of capital tied up in long-term projects and to direct funds to other areas which generate greater shareholder value. Consolidated Income Statement For the year ended 31 March 2006 Year ended 31 March 2006 2005 Notes Â£m Â£m Continuing operations Revenue 3 935.6 799.7 Cost of sales (757.0) (638.9) -------------------------------- ------ -------- ------- Gross profit 178.6 160.8 Other operating income - 1.5 -------------------------------- ------ -------- ------- Other administrative expenses (130.3) (116.5) Amortisation of intangible assets (0.2) - -------------------------------- ------ -------- ------- Administrative expenses (130.5) (116.5) -------------------------------- ------ -------- ------- Profit from operations 4,5 48.1 45.8 -------------------------------- ------ -------- ------- Profit from operations excluding other operating 48.1 44.3 income ------ -------- ------- -------------------------------- Investment revenue 7 2.6 2.2 Finance costs 8 (0.2) (0.1) -------------------------------- ------ -------- ------- Profit before tax 50.5 47.9 Tax 9 (15.5) (13.9) -------------------------------- ------ -------- ------- Profit for the year from continuing operations 35.0 34.0 Discontinued operations Loss for the year from discontinued operations (2.4) (3.8) -------------------------------- ------ -------- ------- Profit for the year 32.6 30.2 -------------------------------- ------ -------- ------- Attributable: Equity holders of the parent 30.2 27.0 Minority interest 2.4 3.2 -------------------------------- ------ -------- ------- 32.6 30.2 -------------------------------- ------ -------- ------- Earnings per share (EPS) - basic 11 9.8p 8.8p - diluted 11 9.7p 8.7p EPS excluding discontinued operations: - basic 11 10.6p 10.1p - diluted 11 10.5p 10.0p Consolidated Statement of Recognised Income and Expense For the year ended 31 March 2006 Year ended 31 March 2006 2005 Notes Â£m Â£m Actuarial gains / (losses) on defined benefit pension 30 1.1 (1.5) schemes Tax (charge)/credit on actuarial gains/(losses) taken directly 24 (2.6) 0.2 to equity -------- ------ Net expense recognised directly in equity (1.5) (1.3) Profit for the year 32.6 30.2 -------- ------ Total recognised income and expense for the financial 31.1 28.9 year -------- ------ Attributable to: Equity holders of the parent 28.7 25.7 Minority interests 2.4 3.2 Consolidated Balance Sheet as at 31 March 2006 As at 31 March 2006 2005 Notes Â£m Â£m Non-current assets Goodwill 12 143.8 52.7 Other intangible assets 13 11.5 - Property, plant and equipment 14 34.5 27.2 Deferred tax assets 19 4.9 4.6 Retirement benefit surplus 30 1.8 - -------------------------------- ------ -------- ------ Total non current assets 196.5 84.5 -------------------------------- ------ -------- ------ Current assets Inventories 15 8.8 6.3 Trade and other receivables 16 244.3 178.6 Cash and cash equivalents 17 9.6 61.5 -------------------------------- ------ -------- ------ Total current assets 262.7 246.4 -------------------------------- ------ -------- ------ -------------------------------- ------ -------- ------ Total assets 459.2 330.9 -------------------------------- ------ -------- ------ Current liabilities Trade and other payables 20 (214.5) (159.9) Current tax liabilities (7.6) (7.4) Provisions 22 (11.7) - Obligations under finance leases 21 (0.8) (0.2) Bank overdrafts and loans 18 (33.0) - -------------------------------- ------ -------- ------ Total current liabilities (267.6) (167.5) -------------------------------- ------ -------- ------ -------------------------------- ------ -------- ------ Non-current liabilities Obligations under finance leases 21 (1.0) (0.8) Retirement benefit obligation 30 - (7.6) Provisions 22 (10.2) (9.2) Deferred tax liabilities 19 (4.7) (0.2) -------------------------------- ------ -------- ------ Total non-current liabilities (15.9) (17.8) -------------------------------- ------ -------- ------ -------------------------------- ------ -------- ------ Total liabilities (283.5) (185.3) -------------------------------- ------ -------- ------ -------------------------------- ------ -------- ------ Net assets 175.7 145.6 -------------------------------- ------ -------- ------ Equity Share capital 23 7.7 7.6 Share premium account 24 13.7 11.5 Merger reserve 24 52.0 44.1 Revaluation reserve 24 (0.2) (0.2) Capital redemption reserve 24 0.3 0.3 Other reserve 24 0.3 0.6 Share based payments reserve 24 1.4 0.7 Retained earnings 24 90.1 71.4 -------------------------------- ------ -------- ------ Equity attributable to equity holders of the parent 165.3 136.0 -------------------------------- ------ -------- ------ Minority interests 10.4 9.6 -------------------------------- ------ -------- ------ Total equity 175.7 145.6 -------------------------------- ------ -------- ------ Consolidated Cash Flow Statement For the year ended 31 March 2006 Year to 31 March 2006 2005 Notes Â£m Â£m Net cash from operating activities 26 32.1 33.2 Investing activities Interest received 2.5 2.3 Purchase of property, plant and equipment (13.8) (14.0) Purchase of subsidiary undertakings (85.5) (0.2) Disposals of property, plant and equipment 2.6 3.2 Disposal of subsidiary undertaking - 8.9 -------------------------------- ------ -------- ------ Net cash (outflow) / inflow from investing activities (94.2) 0.2 -------------------------------- ------ -------- ------ Financing activities Repayments of obligations under finance leases (0.2) (0.3) Proceeds on issue of share capital 2.1 3.0 Repayment of loans on purchase of subsidiary (11.6) - undertakings New bank loans raised 31.0 - Share buybacks (1.6) (14.9) Equity dividends paid (11.3) (9.1) Minority dividends paid (0.2) (0.1) -------------------------------- ------ -------- ------ Net cash inflow/(outflow) from financing 8.2 (21.4) -------------------------------- ------ -------- ------ -------------------------------- ------ -------- ------ Net (decrease)/increase in cash and cash equivalents (53.9) 12.0 -------------------------------- ------ -------- ------ Net cash and cash equivalents at beginning of year 61.5 49.5 -------------------------------- ------ -------- ------ Net cash and cash equivalents at end of year 7.6 61.5 -------------------------------- ------ -------- ------ Net cash and cash equivalents comprises of : Cash at bank 9.6 61.5 Overdraft (2.0) - --------------------------------------- ------ ------ 7.6 61.5 --------------------------------------- ------ ------ Notes to the Preliminary Announcement 1. Preliminary Announcement The financial information in this announcement, which was approved by the Board of Directors on 19 May 2006, does not constitute the Company's statutory accounts for the years ended 31 March 2006 or 2005 but is derived from these accounts. Statutory accounts for 31 March 2005 have been delivered to the Registrar of Companies and those for 31 March 2006 will be delivered following the Company's annual general meeting. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. The preliminary announcement has been prepared in the accordance with the accounting policies adopted under IFRS for the first time with a transition date of 1 April 2004. The disclosures required by IFRS 1 'First-time Adoption of International Financial Reporting Standards' concerning the transition from UK GAAP to IFRS can be found on our website. www.mitie.co.uk This financial information has been prepared on a historical cost basis. During the period the Group adopted IAS 39 'Financial Instruments: Recognition and Measurement' and IAS 32 'Financial Instruments: Disclosure and Presentation'. The Group has taken advantage of the exemption in IFRS 1 that enabled the Group to apply these standards from 1 April 2005 - accordingly comparatives are not restated. The adoption has had no financial impact on this financial information. Whilst the financial information included in this Preliminary Announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements that comply with IFRS in June 2006. 2. Significant accounting policies under IFRS The significant accounting policies adopted in the preparation of the Group's IFRS financial information are set out below. Basis of consolidation The consolidated financial information comprise the financial statements of MITIE Group PLC and all its subsidiaries. The financial statements of the parent Company and subsidiaries are prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP). Adjustments are made in the consolidated accounts to bring into line any dissimilar accounting policies that may exist between UK GAAP and IFRS. All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for resale in accordance with IFRS 5 Non Current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Cost of acquisition includes all deferred amounts that become payable in the future. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less accumulated impairment losses. It is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amounts of the cash-generating units is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in the subsequent period. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Intangible assets Intangible assets acquired separately are capitalised at cost. Intangible assets identified in a business acquisition are capitalised at fair value as at the date of acquisition. Following initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and any accumulated impairment losses. Amortisation expense is charged to administrative expenses in the income statement on a straight line basis over it's useful life. Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Other than in respect of long-term contracts, described below, revenue represents fee income recognised in respect of services provided during the period (stated net of value added tax). Revenue is earned solely within the United Kingdom. Revenue from long-term contracts represents the sales value of work done in the year, including fees invoiced and estimates in respect of amounts to be invoiced after the year end. Profits are recognised on long-term contracts where the final outcome can be assessed with reasonable certainty. In calculating this, the percentage of completion method is used based on the proportion of costs incurred to the total estimated cost. Cost includes direct staff costs and outlays. Full provision is made for all known or anticipated losses on each contract immediately such losses are forecast. Gross amounts due from customers are stated at the proportion of the anticipated net sales value earned to date less amounts billed on account. To the extent that fees paid on account exceed the value of work performed, they are included in creditors as gross amounts due to customers. Variations in contract work and claims are included to the extent that they have been agreed with the customer. Revenue from bundled contracts consists of various components which operate independently of each other and for which reliable fair values can be established. Accordingly, each component is accounted for separately as if it were an individual contractual arrangement. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholders' rights to receive payment have been established. Leasing Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated life of the asset or the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease-term. Any lease incentives are amortised over the lesser of the life of the operating lease or to the first opportunity for termination. Foreign currency Transactions in foreign currencies are recorded at the rate of exchange at the date of transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity. Retirement benefit costs The Group operates two defined benefit pension schemes. The Group also operates a fully insured defined contribution pension scheme, the assets of which are held in independently administered funds. Payments to the defined contribution pension scheme are charged as an expense as they fall due. For the defined benefit pension schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside profit or loss and presented in the statement of recognised income and expense. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is charged so as to write off the cost of the assets over their estimated useful lives and is calculated on a straight-line basis as follows: Freehold buildings and long leasehold property - over 50 years Leasehold improvements - period of the lease Plant and equipment - 3-14 years Annually the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Inventories Inventories are stated at the lower of cost and net realisable value. Costs represent materials, direct labour and overheads incurred in bringing the inventories to their present condition and location. Net realisable value is based on estimated selling price, less further costs expected to be incurred to completion and estimated selling costs. Provision is made for obsolete, slow moving or defective items where appropriate. Investments All investments are initially recorded at cost, being the fair value of the consideration given and including acquisition charges associated with the investment. Subsequently they are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. Financial instruments Trade receivables are measured at initial recognition at fair value. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement where there is objective evidence that the asset is impaired. Cash and cash equivalents comprise cash in hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Interest bearing bank loans and overdrafts are stated at the amount of the net proceeds after deduction of issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables are measured at fair value. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost. Pre-contract costs All bid costs are expensed through the income statement up to the point where contract award (or full recovery of costs) is virtually certain. Bid costs incurred after this point are then capitalised within trade and other receivables. On the contract award these bid costs are amortised through the income statement over the contract period by reference to the stage of completion of the contract activity at the balance sheet date. Share based payments The Group operates a number of executive and employee share option schemes. For all grants of share options and awards, the fair value as at the date of grant is calculated using the Black-Scholes model and the corresponding expense is recognised on a straight line basis over the vesting period based on the Group's estimate of shares that will eventually vest. The Group has taken advantage of the transitional provisions of IFRS 2 in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested before 1 April 2005. 3. Revenue 2006 2005 Â£m Â£m Support Services Cleaning 204.7 189.7 Catering 13.6 13.5 Landscaping 4.4 2.0 Pest Control 4.7 4.5 Security 87.2 54.1 Managed Services 82.3 84.0 Business Services 16.8 18.7 Engineering Maintenance 102.3 73.7 ----------------------------------- -------- -------- 516.0 440.2 ----------------------------------- -------- -------- Property Services 163.5 129.1 Engineering Services 256.1 230.4 ----------------------------------- -------- -------- Total Continuing operations 935.6 799.7 Discontinued operations - 18.9 ----------------------------------- -------- -------- Total 935.6 818.6 ----------------------------------- -------- -------- Investment Revenue 2.6 2.2 The revenue analysis provides additional disclosure regarding the three divisions of the Group. 4. Business and geographical segments The Group manages its business on a service division basis. These divisions are the basis on which the Group reports its primary segment information. Business segments For management purposes, the Group is currently organised into three operating divisions - Support Services, Property Services and Engineering Services. Principal activities are as follows: Support Services offers a flexible range of services supporting the occupiers of buildings. This ranges from Engineering Maintenance and Facilities Management to Security. Property Services act as a main contractor improving buildings either by fitting them out, refurbishing or maintaining them. Engineering Services is predominantly a mechanical and electrical services specialist installing heating, lighting, air conditioning and data cabling. The Group was also previously involved in scaffolding operations. That operation and segment was discontinued with effect from 30 September 2004. Segment information about these businesses is presented below. 2006 Support Property Engineering Consolidated Services Services Services 2006 2006 2006 2006 Â£m Â£m Â£m Â£m Revenue 516.0 163.5 256.1 935.6 Result Segment result 32.8 8.9 6.4 48.1 Unallocated corporate expenses - - - - ------------------- --------- -------- -------- --------- Operating profit 32.8 8.9 6.4 48.1 ------------------- --------- -------- -------- --------- Investment income 1.7 0.1 0.8 2.6 Finance costs (0.2) - - (0.2) ------------------- --------- -------- -------- --------- Profit before tax 34.3 9.0 7.2 50.5 ------------------- --------- -------- -------- --------- Margin 6.6% 5.5% 2.8% 5.4% ------------------- --------- -------- -------- --------- Tax (15.5) Loss for the period from discontinued operations (2.4) ------------------- --------- -------- -------- --------- Profit after tax and discontinued operations 32.6 ------------------- --------- -------- -------- --------- 2006 Support Property Engineering Consolidated Services Services Services 2006 2006 2006 2006 Â£m Â£m Â£m Â£m Other segment information Assets by segment Assets Intangible assets 138.3 5.4 11.6 155.3 Assets 140.2 65.8 97.9 303.9 -------------------- --------- -------- --------- -------- Total assets 278.5 71.2 109.5 459.2 -------------------- --------- -------- --------- -------- Liabilities by segment Liabilities (167.3) (42.8) (73.4) (283.5) -------------------- --------- -------- --------- -------- Total liabilities (167.3) (42.8) (73.4) (283.5) -------------------- --------- -------- --------- -------- -------------------- --------- -------- --------- -------- Total net assets 111.2 28.4 36.1 175.7 -------------------- --------- -------- --------- -------- Capital expenditure Tangible assets 10.0 2.1 1.7 13.8 Depreciation charge 6.8 1.5 1.5 9.8 Intangible assets 101.5 - 1.3 102.8 Intangible amortisation 0.2 - - 0.2 2005 Support Property Engineering Discontinued Unallocated Consolidated Services Services Services Corporate Profit(i) 2005 2005 2005 Operations 2005 2005 Â£m Â£m Â£m 2005 Â£m Â£m Â£m Revenue 440.2 129.1 230.4 18.9 - 818.6 Result Segment result 29.1 7.6 7.6 1.0 - 45.3 Unallocated corporate profit - - - - 1.5 1.5 ------------- ------- ------ ------- -------- --------- -------- Operating profit 29.1 7.6 7.6 1.0 1.5 46.8 ------------- ------- ------ ------- -------- --------- -------- Investment income 0.8 0.4 1.0 - - 2.2 Finance costs (0.1) - - - - (0.1) ------------- ------- ------ ------- -------- --------- -------- Profit before tax 29.8 8.0 8.6 1.0 1.5 48.9 ------------- ------- ------ ------- -------- --------- -------- Margin 6.8% 6.2% 3.7% 5.3% - 6.0% ------------- ------- ------ ------- -------- --------- -------- Tax (13.9) Loss for the period from discontinued operations (4.8) ------------- ------- ------ ------- -------- --------- -------- Profit after tax and discontinued operations 30.2 ------------- ------- ------ ------- -------- --------- -------- (i) Relates to sale of a property 2005 Support Property Engineering Consolidated Services Services Services 2005 2005 2005 2005 Â£m Â£m Â£m Â£m Other segment information Assets by segment Assets Intangible assets 37.0 5.4 10.3 52.7 Assets 151.1 43.2 83.9 278.2 -------------------- --------- -------- --------- -------- Total assets 188.1 48.6 94.2 330.9 -------------------- --------- -------- --------- -------- Liabilities by segment Liabilities (103.7) (22.9) (58.7) (185.3) -------------------- --------- -------- --------- -------- Total liabilities (103.7) (22.9) (58.7) (185.3) -------------------- --------- -------- --------- -------- -------------------- --------- -------- --------- -------- Total net assets 84.4 25.7 35.5 145.6 -------------------- --------- -------- --------- -------- Capital expenditure Tangible assets 12.2 1.3 1.5 15.0 Depreciation charge 7.5 1.5 1.7 10.7 Intangible assets - 0.6 1.4 2.0 Intangible amortisation - - - - Geographical segments All Group operations are located in the United Kingdom. The Group considers all operations form part of that single geographical segment. 5. Profit from operations Profit from operations has been arrived at after charging/(crediting): 2006 2005 Â£m Â£m Depreciation of property, plant and equipment 9.8 10.7 Amortisation of intangible assets included in other operating expenses 0.2 - Gain on disposal of property, plant and equipment (0.6) (1.8) Staff costs (see note 6) 391.9 363.6 Auditors' remuneration for audit services (see below) 0.4 0.3 A more detailed analysis of auditors' remuneration is provided below. 2006 2005 Â£'000 Â£'000 Audit services: statutory audit 339 279 Further assurance services 67 - Tax services: advisory services 56 32 Other services - 4 --------------------------------- -------- -------- 462 315 --------------------------------- -------- -------- Fees for further assurance services principally comprise IFRS opening balance sheet and related audit work. In addition to the amounts shown above, the auditors received fees of Â£10,300 (2005: Â£9,800) for the audit of the Group pension schemes. Â£39,000 (2005: Â£Nil) of fees were incurred in relation to the acquisitions in the year and have been included in the acquisition costs. 6. Staff costs 2006 2005 No. No. The average number of persons employed during the financial year was: Support services 29,298 27,757 Property services 1,826 1,420 Engineering services 1,297 1,199 ---------------------------------- -------- -------- Average number of Group employees 32,421 30,376 ---------------------------------- -------- -------- Details of Directors' remuneration and interests are provided in the Directors' Remuneration Report and the audited section should be regarded as an integral part of this Note. 2006 2005 Â£m Â£m Employment costs: Wages and salaries 356.0 332.7 Social security costs 31.5 27.2 Other pension costs 3.7 3.2 Share-based payments (Note 29) 0.7 0.5 ---------------------------------- -------- -------- Total Employment Costs 391.9 363.6 ---------------------------------- -------- -------- 7. Investment revenue 2006 2005 Â£m Â£m Interest on bank deposits 1.6 2.1 Other interest receivable 1.0 0.1 --------------------------------- -------- -------- Investment revenue 2.6 2.2 --------------------------------- -------- -------- 8. Finance costs 2006 2005 Â£m Â£m Interest on bank overdrafts and loans 0.2 - Interest on obligations under finance leases - 0.1 --------------------------------- -------- -------- Total finance costs 0.2 0.1 --------------------------------- -------- -------- 9. Tax Continuing Discontinued Total operations operations 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Current tax 15.4 14.3 - 0.2 15.4 14.5 Deferred tax (note 19) 0.1 (0.4) - - 0.1 (0.4) ---------------- ------- ------- ------- -------- ------- ------ 15.5 13.9 - 0.2 15.5 14.1 ---------------- ------- ------- ------- -------- ------- ------ Corporation tax is calculated at 30% (2005: 30%) of the estimated assessable profit for the year. The charge for the year can be reconciled to the profit per the income statement as follows: 2006 2005 Â£m Â£m Profit before tax: Continuing operations 50.5 47.9 Discontinued operations (2.4) (3.6) Tax at the UK corporation tax rate of 30% 14.4 13.3 Expenses not deductible for tax purposes 1.1 0.1 Tax losses not recognised 0.7 0.5 Goodwill - (1.6) Loss on disposal of investment - 2.9 Profit on disposal of property - (0.5) Prior year adjustments (0.7) (0.6) --------------------------------- ------- ------- Tax charge for the year: Continuing operations 15.5 13.9 Discontinued operations - 0.2 --------------------------------- ------- ------- In addition to the amount charged to the income statement, deferred tax relating to retirement benefit costs, share based payments and short-term timing differences amounting to Â£0.5m has been charged (2005: Â£0.4m credited) directly to equity (see Note 19). The benefit of tax savings relating to retirement benefit costs and share based payments amounting to Â£1.0m has been credited (2005: Â£0.1m charged) directly to equity. 10. Dividends 2006 2005 Â£m Â£m Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 March 2005 of 1.8p (2004: 1.4p) per share. 5.6 4.4 Interim dividend for the year ended 31 March 2006 of 1.9p (2005:1.6p) per share. 5.9 4.8 ---------------------------------- ------- ------- 11.5 9.2 ---------------------------------- ------- ------- Proposed final dividend for the year ended 31 March 2006 of 2.4p 7.3 5.5 (2005: 1.8p) per share. The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 11. Earnings per share ------- -------- Number of shares: 31 March 2006 31 March 2005 No. m No. m ------- -------- Weighted average number of ordinary shares for the purpose of basic EPS 305.9 306.4 Effect of dilutive potential ordinary shares; share options 3.2 4.1 Weighted average number of ordinary shares for the purpose of diluted EPS 309.1 310.5 The calculation of the basic and diluted earnings per share is based on the following data: 2006 Per share 2005 Per share amount amount Earnings Earnings Â£m Â£m Basic EPS Net profit attributable to equity holders of the parent 30.2 9.8p 27.0 8.8p Add back: Loss for the period from discontinued operations 2.4 0.8p 3.8 1.3p Basic earnings before discontinued activities 32.6 10.6p 30.8 10.1p Diluted EPS Earnings for the purpose of diluted EPS 30.2 9.7p 27.0 8.7p Add back: Loss for the period from discontinued operations 2.4 0.8p 3.8 1.3p Diluted earnings before discontinued activities 32.6 10.5p 30.8 10.0p EPS from continuing operations pre-amortisation and other operating income Basic earnings before discontinued activities 32.6 10.6p 30.8 10.1p Add back: Amortisation of intangibles 0.2 0.0p - - Less: Other operating income - - (1.5) (0.5p) Pre-amortisation and other operating income per Ordinary Share 32.8 10.6p 29.3 9.6p Diluted EPS pre-amortisation, discontinued operations and other operating income 32.8 10.5p 29.3 9.5p 12. Goodwill Â£m Cost At 1 April 2004 51.9 Acquisition of minorities 2.0 Disposal of subsidiaries (1.2) At 1 April 2005 52.7 Acquisition of subsidiaries 74.6 Increased consideration for subsidiaries acquired in prior years 9.0 Acquisition of minorities 7.5 ---------------------------------------- -------- At 31 March 2006 143.8 ---------------------------------------- -------- ---------------------------------------- -------- Accumulated impairment losses At 1 April 2004 - At 1 April 2005 - ---------------------------------------- -------- At 31 March 2006 - ---------------------------------------- -------- Carrying amount ---------------------------------------- -------- At 31 March 2006 143.8 ---------------------------------------- -------- At 31 March 2005 52.7 Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGU) that are expected to benefit from that business combination. Goodwill has been allocated to CGUs in the following business segments, which is how goodwill is monitored by the Group internally. Cost 2006 2005 Â£m Â£m Support Services 126.8 37.0 Property Services 5.4 5.4 Engineering Services 11.6 10.3 ----------------------------------- -------- -------- 143.8 52.7 ----------------------------------- -------- -------- The Group tests goodwill at least annually for impairment. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next five years and extrapolates cash flows for the following five years based on an estimated growth rate of 2 per cent. This rate does not exceed the average long-term growth rate for the relevant markets. The rates used to discount the forecast cash flows from CGUs are as follows: 2006 2005 % % Support Services 8.0 8.0 Property Services 8.0 8.0 Engineering Services 8.0 8.0 13. Other intangible assets Customer relationships Â£m Cost At 1 April 2004 and 1 April 2005 - Acquired on acquisition of subsidiaries 11.7 ----------------------------------- ------------- At 31 March 2006 11.7 ----------------------------------- ------------- Amortisation At 1 April 2004 and 1 April 2005 - Charge for the year 0.2 ----------------------------------- ------------- At 31 March 2006 0.2 ----------------------------------- ------------- Carrying amount ----------------------------------- ------------- At 31 March 2006 11.5 ----------------------------------- ------------- At 31 March 2005 - Customer relationships are amortised over the remaining period of the contract, which ranges on average between 6 and 8 years. 14. Property, Plant and Equipment Freehold Long leasehold Plant and Total properties properties vehicles Â£m Â£m Â£m Â£m Cost At 1 April 2004 5.8 3.2 65.0 74.0 Additions - - 15.0 15.0 Disposals (1.1) - (35.7) (36.8) ---------------------- -------- -------- -------- -------- At 1 April 2005 4.7 3.2 44.3 52.2 ---------------------- -------- -------- -------- -------- Additions 0.8 1.5 11.5 13.8 Acquisition of subsidiaries 1.4 0.4 3.5 5.3 Disposals (0.9) - (7.1) (8.0) ---------------------- -------- -------- -------- -------- At 31 March 2006 6.0 5.1 52.2 63.3 ---------------------- -------- -------- -------- -------- Accumulated depreciation and impairment At 1 April 2004 0.6 0.3 32.8 33.7 Charge for the year 0.1 0.1 10.5 10.7 Disposals (0.2) - (19.2) (19.4) ---------------------- -------- -------- -------- -------- At 1 April 2005 0.5 0.4 24.1 25.0 ---------------------- -------- -------- -------- -------- Charge for the year 0.1 0.4 9.3 9.8 Disposals - - (6.0) (6.0) ---------------------- -------- -------- -------- -------- At 31 March 2006 0.6 0.8 27.4 28.8 ---------------------- -------- -------- -------- -------- Carrying amount ---------------------- -------- -------- -------- -------- At 31 March 2006 5.4 4.3 24.8 34.5 ---------------------- -------- -------- -------- -------- At 31 March 2005 4.2 2.8 20.2 27.2 The net book value of plant and vehicles held under finance leases included above was Â£1.8m (2005: Â£1.0m). 15. Inventories 2006 2005 Â£m Â£m Work-in-progress 8.0 6.3 Payments received on account - (0.1) Finished goods 0.8 0.1 --------------------------------- -------- --------- 8.8 6.3 --------------------------------- -------- --------- 16. Trade and other receivables 2006 2005 Â£m Â£m Amounts receivable for the sale of services 211.3 156.7 Amounts recoverable on contracts 17.9 12.1 Other debtors 2.2 5.6 Prepayments and accrued income 12.9 4.2 --------------------------------- -------- --------- 244.3 178.6 --------------------------------- -------- --------- The average credit period taken on sales of services was 76 days (2005: 72 days). Interest is charged on overdue debts when appropriate. An allowance has been made for estimated irrecoverable amounts from the sale of services of Â£3.9m (2005: Â£1.3m). This allowance has been determined by reference to past default experience. The Directors consider that the carrying amount of trade and other receivables approximates their fair value. Credit risk The Group's principal financial assets are bank balances and cash and trade and other receivables. The Group's credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. The credit risk on liquid funds and financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 17. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of the assets approximates their fair value. All balances are held in sterling. Included in cash and cash equivalents are deposits totalling Â£9.6m (2005: Â£3.8m) held by the Group's insurance subsidiary, which are not readily available for the general purposes of the Group. 18. Bank overdraft and loans The loans are repayable as follows: 2006 2005 Â£m Â£m Overdraft 2.0 - Bank loans 31.0 - --------------------------------- -------- --------- 33.0 - --------------------------------- -------- --------- All borrowings are in sterling. The Directors estimate that the carrying amount of the Group's borrowings approximate to their fair value. The bank loans are repayable within one year and the overdrafts are repayable on demand. 2006 2005 % % The weighted average interest rates paid during the period the loans were outstanding were as follows: Overdrafts 5.4 - Bank loans 5.1 - At 31 March 2006, the Group had available Â£70m (2005: Â£60m) of undrawn borrowing facilities in respect of which all conditions precedent had been met. The facilities have various expiry dates between February 2008 and 2010. The loans carry interest rates which are currently fixed at 5.1%. The overdraft carries interest at 0.9% over base rate. 19. Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period: Accelerated Retirement Intangible Share based Short term Tax Total benefit assets (E) payments timing obligations business differences combinations tax Â£m Â£m Â£m Â£m losses Â£m depreciation Â£m Â£m -------------- -------- ------- -------- ------- ------- ------ ------ At 1 April 2004 (0.8) 2.1 - 0.3 0.6 0.2 2.4 -------------- -------- ------- -------- ------- ------- ------ ------ (Charge)/credi t to income 0.6 - - 0.2 (0.2) (0.2) 0.4 (Charge)/credi t to equity - 0.2 - 0.2 - - 0.4 Disposal of subsidiary 1.2 - - - - - 1.2 -------------- -------- ------- -------- ------- ------- ------ ------ At 1 April 2005 1.0 2.3 - 0.7 0.4 - 4.4 -------------- -------- ------- -------- ------- ------- ------ ------ (Charge)/credi t to income (0.2) (0.2) - 0.2 (0.1) 0.2 (0.1) (Charge)/credi t to equity - (2.6) - 0.4 1.7 - (0.5) (Charge) to goodwill - - (3.6) - - - (3.6) -------------- -------- ------- -------- ------- ------- ------ ------ At 31 March 2006 0.8 (0.5) (3.6) 1.3 2.0 0.2 0.2 -------------- -------- ------- -------- ------- ------- ------ ------ Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: 2006 2005 Â£m Â£m Deferred tax assets 4.9 4.6 Deferred tax liabilities (4.7) (0.2) ----------------------------------- -------- -------- Net deferred tax asset 0.2 4.4 ----------------------------------- -------- -------- The Group has unutilised tax losses of Â£3.1m (2005: Â£1.6m) that are available for offset against future profits. Deferred tax assets have not been recognised in respect of Â£2.4m (2005: Â£1.6m) of these losses as their recoverability is uncertain. 20. Trade and other payables 2006 2005 Â£m Â£m Payments received on account - 0.8 Trade creditors 133.4 97.3 Other taxes and social security 40.7 28.7 Other creditors 1.1 4.1 Accruals and deferred income 39.3 29.0 ----------------------------------- -------- -------- 214.5 159.9 ----------------------------------- -------- -------- Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 55 days (2005: 56 days). The Directors consider that the carrying amount of trade and other payables approximates to their fair value. 21. Obligations under finance leases Minimum Present value of lease payments lease payments 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Amounts payable under finance leases: Within one year 0.8 0.2 0.7 0.2 In the second to fifth years inclusive 1.3 0.2 1.2 0.2 After five years - 0.7 - 0.5 ----------------------- -------- -------- -------- -------- 2.1 1.1 1.9 0.9 ----------------------- -------- -------- -------- -------- Less: future finance charges 0.3 0.1 n/a n/a ----------------------- -------- -------- -------- -------- Present value of lease obligations 1.8 1.0 1.9 0.9 ----------------------- -------- -------- -------- -------- Less: Amount due for settlement within 12 0.8 0.2 0.7 0.2 months (shown under current liabilities) ----------------------- -------- -------- -------- -------- Amount due for settlement after 12 1.0 0.8 1.2 0.7 months -------- -------- -------- -------- ----------------------- The average remaining lease term is 22 months (2005: 31 months). For the year ended 31 March 2006, the average effective borrowing rate was 5.1% (2005: 5.1%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in sterling. The fair value of the Group's lease obligations approximates their carrying amount. The Group's obligations under finance leases are secured by the lessors' rights over the leased assets. 22. Provisions Contingent Insurance Total deferred reserve consideration Â£m Â£m Â£m At 1 April 2005 3.2 6.0 9.2 Additional provision in the year 12.2 1.8 14.0 Utilised during the year - (1.3) (1.3) --------------------------- -------- -------- -------- At 31 March 2006 15.4 6.5 21.9 --------------------------- -------- -------- -------- Included in current liabilities 11.7 Included in non current liabilities 10.2 --------------------------- -------- -------- -------- 21.9 --------------------------- -------- -------- -------- Contingent Insurance Total deferred reserve consideration Â£m Â£m Â£m At 1 April 2004 3.2 4.1 7.3 Additional provision in the year - 2.8 2.8 Utilised during the year - (0.9) (0.9) --------------------------- -------- -------- -------- At 31 March 2005 3.2 6.0 9.2 --------------------------- -------- -------- -------- Included in current liabilities - Included in non current liabilities 9.2 --------------------------- -------- -------- -------- 9.2 --------------------------- -------- -------- -------- Provision is made for contingent deferred consideration, which will become payable in the future, at the best estimate of the Directors. Further details are given in Note 27. The provision for insurance claims represents amounts payable by MITIE Reinsurance Company Ltd in respect of outstanding claims incurred at the balance sheet dates. These amounts will become payable as each year's claims are settled. 23. Share capital ORDINARY SHARES ORDINARY SHARES OF 2.5p OF 2.5p No. Â£m Authorised at 1 April 2005 and 31 March 2006 340,000,000 8.5 2006 Allotted and fully paid At beginning of year 303,173,780 7.6 Issued as Directors' remuneration 66,773 - Issued for acquisitions 4,832,770 0.1 Issued under share option schemes 1,681,551 - Own shares acquired (992,305) - --------------------------------- -------- -------- At end of year 308,762,569 7.7 --------------------------------- -------- -------- 2005 Allotted and fully paid At beginning of year 309,393,539 7.7 Issued as Directors' remuneration 72,812 - Issued for acquisitions 2,560,052 0.1 Issued under share option schemes 1,457,383 0.1 Own shares acquired (10,310,006) (0.3) --------------------------------- -------- -------- At end of year 303,173,780 7.6 --------------------------------- -------- -------- During the year 66,773 (2005: 72,812) Ordinary Shares of 2.5p were allotted as remuneration in respect of services provided by Directors at a market price of 199.5p (2005: 162.0p) giving rise to share premium of Â£0.1m (2005: Â£0.1m). During the year 4,832,770 (2005: 2,560,052) Ordinary Shares of 2.5p were allotted in respect of acquiring minority interests at a mid-market price of 166.0p (2005: 129.0p) giving rise to a merger reserve of Â£7.9m (2005: Â£3.2m). During the year 1,681,551 (2005: 1,457,383) Ordinary Shares of 2.5p were allotted in respect of share option schemes at a price between 57.75p and 176.25p (2005: 85.0p and 168.0p) giving rise to share premium of Â£2.2m (2005: Â£1.6m). During the year 992,305 (2005: 10,310,006) Ordinary Shares of 2.5p were purchased at market prices between 160.0p and 164.0p (2005: 131.0p and 165.0p). These were then cancelled. This resulted in a capital redemption reserve of Â£0.0m (2005: Â£0.3m). 24. Reserves Called up share Share premium Merger reserve Re-valuation Capital Other reserve capital account reserve redemption Â£m Â£m Â£m Â£m reserve (i) Â£m Â£m Balance at 1 April 2004 7.7 9.8 40.9 (0.4) - 1.0 Shares issued and net premium arising in respect of acquisitions 0.1 - 3.2 - - - Shares issued and net premium in connection of exercise of share options - 1.7 - - - (0.4) Own shares acquired (0.2) - - - 0.3 - Profit for the period attributable to equity holders of - - - - - - the parent Property revaluation - - - 0.2 - - Dividend paid - - - - - - Expense in relation to share based payments - - - - - - Tax charge on items taken directly to equity - - - - - - ------------- ------- ------- ------ ------- -------- ------- Net actuarial loss on defined benefit pension schemes - - - - - - Tax credit on actuarial loss taken - - - - - - directly ------- ------- ------ ------- -------- ------- to equity Net expense recognised directly in equity in the year - - - - - - ------------- ------- ------- ------ ------- -------- ------- Balance at 31 March 2005 7.6 11.5 44.1 (0.2) 0.3 0.6 ------------- ------- ------- ------ ------- -------- ------- Share based Retained Total payment reserve earnings Â£m Â£m Â£m Balance at 1 April 2004 0.2 69.8 129.0 Shares issued and net premium arising in respect of acquisitions - - 3.3 Shares issued and net premium in connection of exercise of share options - - 1.3 Own shares acquired - (14.7) (14.6) Profit for the period attributable to equity holders of - 27.0 27.0 the parent Property revaluation - (0.2) - Dividend paid - (9.3) (9.3) Expense in relation to share based payments 0.5 - 0.5 Tax charge on items taken directly to equity - 0.1 0.1 ------------- ------ ------ ----- Net actuarial loss on defined benefit pension schemes - (1.5) (1.5) Tax credit on actuarial loss taken - 0.2 0.2 directly ------ ------ ----- to equity ------------- Net expense recognised directly in equity in the year - (1.3) (1.3) ------ ------ ----- Balance at 31 March 2005 0.7 71.4 136.0 ------ ------ ----- Called up share Share premium Merger reserve Re-valuation Capital Other reserve capital account reserve redemption Â£m Â£m Â£m Â£m reserve (i) Â£m Â£m Balance at 1 April 2005 7.6 11.5 44.1 (0.2) 0.3 0.6 Shares issued and net premium arising in respect of acquisitions 0.1 - 7.9 - - - Shares issued and net premium in connection of exercise of share options - 2.2 - - - (0.3) Own shares acquired - - - - - - Profit for the period attributable to equity holders of - - - - - - the parent Property revaluation Dividend paid - - - - - - Expense in relation to share based payments - - - - - - Tax credit on items taken directly to equity - - - - - - ------------- ------- ------- ------ ------- -------- ------- Net actuarial gain on defined benefit pension schemes - - - - - - Tax charge on actuarial gain taken - - - - - - directly ------- ------- ------ ------- -------- ------- to equity Net expense recognised directly in equity in the year - - - - - - ------------- ------- ------- ------ ------- -------- ------- Balance at 31 March 2006 7.7 13.7 52.0 (0.2) 0.3 0.3 ------------- ------- ------- ------ ------- -------- ------- (i) This is a non-distributable reserve. Share based Retained Total payment reserve earnings Â£m Â£m Â£m Balance at 1 April 2005 0.7 71.4 136.0 Shares issued and net premium arising in respect of acquisitions - - 8.0 Shares issued and net premium in connection of exercise of share options - - 1.9 Own shares acquired - (1.6) (1.6) Profit for the period attributable to equity holders of - 30.2 30.2 the parent Property revaluation Dividend paid - (11.5) (11.5) Expense in relation to share based payments 0.7 - 0.7 Tax credit on items taken directly to equity - 3.1 3.1 ------ ------ ----- Net actuarial gain on defined benefit pension schemes - 1.1 1.1 Tax charge on actuarial gain taken - (2.6) (2.6) directly ------ ------ ----- to equity ------------- Net expense recognised directly in equity in the year - (1.5) (1.5) ------ ------ ----- Balance at 31 March 2006 1.4 90.1 165.3 ------ ------ ----- 25. Acquisition of Subsidiaries a) Purchase of minority interests MITIE Air MITIE Air MITIE Business MITIE MITIE MITIE Security MITIE Security Conditioning Conditioning Services Ltd (North) Ltd (Scotland) Ltd (Wales) Ltd (West) Ltd Â£m Â£m Â£m Engineering Engineering Â£m Â£m Services Services (Retail) Ltd (Swansea) Ltd Â£m Â£m Minority interest 0.1 0.1 1.1 0.1 0.2 0.2 0.1 Goodwill 0.4 0.3 4.9 - 0.6 1.2 0.1 ------------- ------- ------- ------- ------- ------- ------- ------- Total purchase consideration 0.5 0.4 6.0 0.1 0.8 1.4 0.2 ------------- ------- ------- ------- ------- ------- ------- ------- Shares issued (E) MITIE Group 0.4 0.4 5.1 0.1 0.7 1.1 0.2 PLC Deferred consideration - - 0.7 - 0.1 0.1 - ------------- ------- ------- ------- ------- ------- ------- ------- Cash consideration being cash outflow in the period 0.1 - 0.2 - - 0.2 - ------------- ------- ------- ------- ------- ------- ------- ------- Total Â£m Minority interest 1.9 Goodwill 7.5 ------ Total purchase consideration 9.4 ------ Shares issued (E) MITIE Group 8.0 PLC Deferred consideration 0.9 ------ Cash consideration being cash outflow in the period 0.5 ------ b) Acquisition of Intruder International Ltd On 3 May 2005 MITIE acquired 100% of the issued share capital of Intruder International Ltd, a provider of Security services, for total consideration of Â£4.2m. The transaction has been accounted for by the purchase method of accounting. Book value Fair value Fair value adjustments Â£m Â£m Â£m Net assets acquired: Intangible assets 0.1 (0.1) - Property, plant and equipment 1.2 (0.1) 1.1 Inventories 0.1 - 0.1 Trade and other receivables 1.1 - 1.1 Cash and cash equivalents 0.4 - 0.4 Trade and other payables (0.8) - (0.8) Current tax liabilities (0.1) - (0.1) Provisions (0.8) (0.2) (1.0) Obligations under finance leases (0.1) - (0.1) ------- -------- ------ Net assets acquired 1.1 (0.4) 0.7 Goodwill 3.5 ------ Total consideration 4.2 Satisfied by: Cash 4.0 Directly attributable costs 0.2 Net cash outflow arising on acquisition: Cash consideration 4.2 Cash and cash equivalents acquired (0.4) ------ Net cash outflow 3.8 The goodwill arising on the acquisition of Intruder International Ltd is attributable to the expected profitability arising from new business and the anticipated future operating synergies arising from assimilation into the Group. Intruder International Ltd contributed Â£3.9m to revenue and a loss of Â£0.4m to the Group's profit before tax for the period between the date of acquisition and the balance sheet date. c) Acquisition of The Watch Security Ltd On 30 June 2005 MITIE acquired 100% of the issued share capital of The Watch Security Ltd, a provider of Security services, for total consideration of Â£8.2m. The transaction has been accounted for by the purchase method of accounting. Book value Fair value Fair value adjustments Â£m Â£m Â£m Net assets acquired: Intangible assets - 0.8 0.8 Deferred tax liability - (0.2) (0.2) Property, plant and equipment 0.8 - 0.8 Inventories 0.1 - 0.1 Trade and other receivables 1.8 - 1.8 Cash and cash equivalents 1.1 - 1.1 Trade and other payables (2.4) - (2.4) Current tax liabilities (0.1) - (0.1) Loans (0.1) - (0.1) ------- -------- ------ Net assets acquired 1.2 0.6 1.8 Goodwill 6.4 ------ Total consideration 8.2 Satisfied by: Cash 6.0 Deferred consideration 2.0 Directly attributable costs 0.2 ------ Total consideration 8.2 Net cash outflow arising on acquisition: Cash consideration 6.2 Cash and cash equivalents acquired (1.1) ------ Net cash outflow 5.1 The goodwill arising on the acquisition of The Watch Security Ltd is attributable to the expected profitability arising from new business and the anticipated future operating synergies arising from assimilation into the Group. The Company contributed Â£13.5m to revenue and Â£0.3m to the Group's profit before tax for the period between the date of acquisition and the balance sheet date. d) Acquisition of Lyndhurst Services Ltd On 17 February 2006 MITIE acquired 100% of the issued share capital of Lyndhurst Services Ltd, a provider of Landscaping services, for total consideration of Â£8.9m. The transaction has been accounted for by the purchase method of accounting. Book value Fair value Fair value adjustments Â£m Â£m Â£m Net assets acquired: Intangible assets - 3.5 3.5 Deferred tax liability - (1.0) (1.0) Property, plant and equipment 0.8 (0.1) 0.7 Inventories 0.1 - 0.1 Trade and other receivables 1.4 - 1.4 Cash and cash equivalents 0.3 - 0.3 Trade and other payables (0.5) - (0.5) Current tax liabilities (0.5) - (0.5) -------- -------- -------- Net assets acquired 1.6 2.4 4.0 Goodwill 4.9 -------- Total consideration 8.9 Satisfied by: Cash 8.2 Deferred consideration 0.6 Directly attributable costs 0.1 -------- Total consideration 8.9 Net cash outflow arising on acquisition: Cash consideration 8.3 Cash and cash equivalents acquired (0.3) -------- Net cash outflow 8.0 The goodwill arising on the acquisition of Lyndhurst Services Ltd is attributable to the expected profitability arising from new business and the anticipated future operating synergies arising from assimilation into the Group. The Company contributed Â£0.7m to revenue and Â£0.1m to the Group's profit before tax for the period between the date of acquisition and the balance sheet date. e) Acquisition of Initial Security Ltd On 7 March 2006 MITIE acquired 100% of the issued share capital of Initial Security Ltd, a provider of Security services, for total consideration of Â£59.7m. The transaction has been accounted for by the purchase method of accounting. Book value Fair value Fair value adjustments Â£m Â£m Â£m Net assets acquired: Intangible assets 10.5 (3.0) 7.5 Deferred tax liability - (2.3) (2.3) Property, plant and equipment 2.8 - 2.8 Inventories 0.5 (0.5) - Trade and other receivables 34.9 (1.0) 33.9 Overdrafts (8.4) - (8.4) Trade and other payables (20.8) - (20.8) Current tax liabilities (0.2) - (0.2) Loans (11.6) - (11.6) Obligations under finance leases (1.0) - (1.0) -------- -------- ------- Net assets/(liabilities) acquired 6.7 (6.8) (0.1) Goodwill 59.8 ------- Total consideration 59.7 Satisfied by: Cash 59.1 Directly attributable costs 0.6 ------- Total consideration 59.7 Net cash outflow arising on acquisition: Cash consideration 59.7 Overdrafts 8.4 Loans repaid 11.6 ------- Net cash outflow 79.7 The goodwill arising on the acquisition of Initial Security Ltd is attributable to the expected profitability arising from new business and the anticipated future operating synergies arising from assimilation into the Group. The Company contributed Â£6.1m to revenue and Â£0.2m to the Group's profit before tax for the period between the date of acquisition and the balance sheet date. All acquisitions The fair values on the acquisitions above are provisional as they are based upon the Group's estimate of recoverability of debtors and other assets. If all of the acquisitions had been completed on 1 April 2005 instead of the dates above, total Group revenue for the period would have been approximately Â£1,069m, and profit before tax and amortisation for the year would have been approximately Â£54.6m on a pro forma basis. 26. Notes to the Cashflow Statement Reconciliation of operating profit to net cash from operating activities 2006 2005 Â£m Â£m Operating profit from continuing operations 48.1 45.6 Operating profit from discontinued operations (2.4) 1.0 Adjustments for: Share based payment expense 0.7 0.5 Depreciation of property, plant and equipment 9.8 10.7 Amortisation of intangible assets 0.2 - Gain on disposal of property, plant and equipment (0.6) (1.8) Increase/(decrease) in provisions 0.5 1.9 ------------------------------ ------- ------- Operating cash flows before movements in working capital 56.3 57.9 ------------------------------ ------- ------- Pension charge 2.6 2.3 Pension contributions (3.2) (3.4) (Increase)/decrease in inventories (2.2) 0.7 Decrease in receivables (29.5) (26.6) Increase in payables 31.2 15.8 ------------------------------ ------- ------- Cash generated by operations 55.2 46.7 ------------------------------ ------- ------- Additional pension contributions (7.8) - Income taxes paid (15.1) (13.5) Interest paid (0.2) - ------------------------------ ------- ------- Net cash from operating activities 32.1 33.2 ------------------------------ ------- ------- Additions to fixtures and equipment during the year amounting to Â£0.1m (2005: Â£1.0m) were financed by new finance leases. Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less. 27. Contingent Liabilities The Company is party with other Group companies to cross guarantees of each other's bank loans and overdrafts of Â£33m (2005: Â£Nil). The Company and various of its subsidiaries are, from time to time, parties to legal proceedings and claims that are in the ordinary course of business. The Directors do not anticipate that the outcome of these proceedings and claims, either individually or in aggregate, will have a material adverse effect on the Group's financial position. Included in provisions for liabilities and charges (Note 22) is Â£15.4m (2005: Â£3.2m) of contingent consideration relating to the acquisitions of Trident Safeguards Ltd ('Trident'), Eagle Pest Control Services (UK) Ltd ('Eagle'), Lyndhurst Services Ltd ('Lyndhurst') and The Watch Security Ltd ('The Watch'). For Trident Â£10.8m (2005: Â£2.0m) is payable at any time between 2006 and 2010 if an agreed profit threshold is met. In total Â£9.2m (2005: Â£9.2m) has been paid up to 31 March 2006. For Eagle Â£1.2m, (2005: Â£1.2m) is payable at any time between 2008 and 2013 if an agreed profit threshold is met, if this profit threshold is exceeded then an additional amount will become payable, with the total consideration capped at Â£6.0m. In total Â£2.8m has been paid up to 31 March 2006 (2005: Â£2.8m). For Lyndhurst a further Â£0.6m is payable in July 2007 if an agreed profit threshold is exceeded with the total consideration capped at Â£9.0m. In total Â£7.9m has been paid up to 31 March 2006. For The Watch a further Â£2.0m is payable in June 2007 dependent upon a number of performance conditions being met. In total Â£6.0m has been paid up to 31 March 2006. Contingent consideration, to be satisfied in shares, for the acquisition of minority interests in subsidiary undertakings is dependent on future profits of those subsidiaries and is at the discretion of the Company. It is therefore not possible to quantify accurately, in advance, the final amounts that may become payable. In connection with the sale of The Platform Company (UK) Ltd (formerly MITIE Powered Access Ltd) in the year to 31 March 2004, the Group has guaranteed lease commitments amounting to Â£nil (2005: Â£0.1m). Against these guarantees, the Group has received indemnities from the Group's bankers of Â£nil (2005: Â£0.0m) and from the suppliers of the leased equipment of Â£nil (2005: Â£0.0m), giving a net contingent liability of Â£nil (2005: Â£0.1m). In addition, the Group and subsidiaries have given indemnities in respect of performance guarantees amounting to Â£6.1m (2005: Â£4.1m). 28. Operating Lease Arrangements The Group as Lessee --------------------------- -------- -------- 2006 2005 Â£m Â£m --------------------------- -------- -------- Minimum lease payments under operating leases 4.5 4.4 recognised in income for the year --------------------------- -------- -------- At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: 2006 2005 Â£m Â£m Within one year 1.0 0.7 In the second to fifth years inclusive 2.9 2.9 After five years 1.3 1.4 --------------------------- -------- -------- 5.2 5.0 --------------------------- -------- -------- 29. Share based payments Equity-settled share option scheme The Company has four share option schemes: The MITIE Group PLC 1991 Executive Share Option Scheme The Executive share option scheme is open to all employees. The exercise price is equal to the market value of the shares on the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options maybe forfeited if the employee leaves the Group. No options have been granted under this scheme since August 2001. The MITIE Group PLC 2001 Executive Share Option Scheme The Executive Share Option Scheme is open to all employees. The exercise price is equal to the market value of the shares on the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant the options expire. Options may be forfeited if the employee leaves the Group before options can be exercised, the performance condition that must be satisfied is that the percentage growth in the earnings per share over a three year period must be equal or greater than 10% per annum compound. The MITIE Group PLC 1991 and 2001 Savings Related Share Option Scheme The Savings Related Share Option scheme is open to all employees. The exercise price is not less than 80% of the market value of the shares on the day preceding the date on which invitations to participate in the Scheme are issued. The vesting period is five years. If the options remain unexercised after a period of five years and six months from the date of grant, the options expire. Options maybe forfeited if the employee leaves the Group. Details of the share options outstanding during the year are as follows. 2006 2005 Number of share Weighted Number of share Weighted options average options average exercise price exercise price (in p) (in p) Outstanding at beginning of period (1) 12,089,064 124 11,572,984 118 Granted during the period 3,278,927 149 3,526,467 136 Forfeited during the period (1,406,688) 150 (1,553,004) 132 Exercised during the period (1,681,551) 138 (1,457,383) 150 -------------------------- -------- -------- -------- --------- Outstanding at the end of the period 12,279,752 130 12,089,064 124 -------------------------- -------- -------- -------- --------- Exercisable at the end of the period 2,098,698 124 2,785,100 121 The Group recognised the following expenses related to share based payments 2006 2005 Â£m Â£m 2001 Executive share options 0.4 0.3 2001 SAYE 0.3 0.2 -------------------------- -------- --------- 0.7 0.5 -------------------------- -------- --------- (1) Included within this balance are 3,719,291 (2005: 5,503,845) options that have not been recognised in accordance with IFRS 2 as the options were granted on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. The weighted average share price at the date of exercise for share options exercised during the period was 181p (2005: 150p). The options outstanding at 31 March 2006 had a weighted average exercise price of 130p (2005:126p), and a weighted average remaining contractual life of 5.18 years (2005: 4.35 years). In the year ended 31 March 2006, options were granted on 23 June 2005 and 20 July 2005 in respect of the Executive and Savings Related share option schemes respectively. The aggregate of the estimated fair values of the options granted on those dates is Â£1.1m. In the year ended 31 March 2005, options were granted on 11 June 2004 and 28 July 2004 in respect of the Executive and Savings Related share option schemes respectively. The aggregate of the estimated fair values of the options granted on those dates is Â£1.1m. The fair value of options granted under the scheme is measured by use of the Black-Scholes model. The inputs into the Black-Scholes model are as follows: 2006 2005 Share price(p) 98-161 98-130 Exercise price(p) 99-162 99-139 Expected volatility (%) 28-30 28-30 Expected life(years) 5-6 5-6 Risk-free rate (%) 4.17-5.12 4.17-5.17 Expected dividends (%) 1.43-2.12 1.43-2.12 Expected volatility was based upon the historical volatility over the expected life of the schemes. The expected life is based upon historical data and has been adjusted based on management's best estimates for the effects of non- transferability, exercise restrictions and behavioural considerations. 30. Retirement benefit schemes Defined contribution scheme The Group operates a defined contribution retirement benefit scheme for all qualifying employees. The assets of the scheme are held separately from those of the Group in funds controlled by the scheme providers. The total cost charged to income of Â£1.1m (2005: Â£0.9m) represents contributions payable to this scheme by the Group at rates specified in the rules of the plans. As at 31 March 2006, contributions of Â£0.1m (2005: Â£0.1m) due in respect of the current reporting period had not been paid over to the schemes. Defined benefit schemes The Group operates two defined benefit pension schemes called the MITIE Group PLC Pension Scheme and the MITIE Group PLC Passport Pension Scheme. In addition, the Group contributes to the Executive Group Limited Shared Cost Section of the Railway Pension Scheme. The assets of the MITIE schemes are held separately from the Group, being invested in equities and with insurance companies. Contributions to the schemes are charged to the Income Statement so as to spread the cost of pensions over the employees' working lives with the Group. Under the schemes, the employees are entitled to retirement benefits varying between 0 and 66 per cent of final salary on attainment of a retirement age of 65. No other post-retirement benefits are provided. The schemes are funded schemes. The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out at 1 April 2006 by Mr David Higgs, Fellow of the Institute of Actuaries. The present values of the defined benefit obligation, the related current service cost, and past service cost were measured using the projected unit credit method. Valuation at 2006 2005 Key assumptions used for IAS 19 valuation: Discount rate 5.10% 5.50% Expected return on scheme assets: Equities 8.00% 7.75% Bonds 5.00% 5.50% Others 5.00% 5.50% Property 7.50% 7.50% Expected rate of salary increases 3.75% 3.00% Future pension increases 3.00% 3.00% Amounts recognised in administrative expenses in respect of these defined benefit schemes are as follows: 2006 2005 Â£m Â£m Current service cost (3.0) (2.5) Interest cost (3.2) (2.6) Expected return on scheme assets 3.6 2.8 -------------------------------- -------- -------- Total (2.6) (2.3) -------------------------------- -------- -------- The actual return on scheme assets was Â£12.8m (2005: Â£5.1m) The amount included in the balance sheet arising from the Group's obligations in respect of its defined benefit retirement benefit schemes is as follows: 2006 2005 Â£m Â£m Present value of defined benefit obligations 72.2 56.6 Fair value of scheme assets 74.0 49.0 -------------------------------- -------- -------- Surplus/(deficit) in scheme 1.8 (7.6) -------------------------------- -------- -------- Deferred tax (asset)/liability (0.5) 2.3 -------------------------------- -------- -------- Asset/(liability) recognised in the balance sheet 1.3 (5.3) -------------------------------- -------- -------- Movements in the present value of defined benefit obligations were as follows: 2006 2005 Â£m Â£m At 1 April 56.6 45.9 Service cost 3.0 2.5 Interest cost 3.2 2.6 Contributions from scheme members 2.2 2.2 Actuarial gains and losses 8.2 3.8 Benefits paid (1.0) (0.4) -------------------------------- -------- -------- At 31 March 72.2 56.6 -------------------------------- -------- -------- Movements in the fair value of scheme assets were as follows: 2006 2005 Â£m Â£m At 1 April 49.1 38.8 Expected return on scheme assets 3.6 2.8 Actuarial gains and losses 9.3 2.2 Contributions from the sponsoring companies 11.0 3.4 Contributions from scheme members 2.1 2.2 Benefits paid (1.1) (0.4) -------------------------------- -------- -------- At 31 March 74.0 49.0 -------------------------------- -------- -------- The analysis of the scheme assets and the expected rate of return at the balance sheet date were as follows: Expected return Fair value of assets 2006 2005 2006 2005 % % Â£m Â£m Equity instruments 8.00 7.75 46.6 34.1 Debt instruments 5.00 5.50 2.8 1.8 Property 7.50 7.50 3.4 2.8 Other assets 5.00 5.50 21.2 10.3 --------------------------- -------- -------- -------- -------- 74.0 49.0 --------------------------- -------- -------- -------- -------- The overall expected return on assets is calculated as the weighted average of the expected return of each asset class. The expected return on the equities is the sum of inflation, the dividend yield, economic growth and investment expenses. The return on Gilts and bonds is the current market yield on long term bonds. The expected return on property has been set equal to that expected on equities less a margin. The expected return on other assets is the rate earned by the scheme on cash. Post retirement mortality The mortality is based upon up to date tables which project mortality improvements in the future. For a male aged 65 years the expected life is 85.1 years (2005: 84.0 years) and for a female aged 65 years the expected life is 88.0 years (2005: 86.9 years). The history of experience adjustments is as follows: 2006 2005 Â£m Â£m Present value of defined benefit obligations 72.2 56.6 Fair value of scheme assets 74.0 49.0 Surplus / (deficit) in the scheme 1.8 (7.6) Experience adjustments on scheme liabilities 8.2 (3.7) Amount (Â£) Percentage of scheme liabilities (%) (11.4%) (7%) Experience adjustments on scheme assets Amount (Â£) 9.3 2.3 Percentage of scheme liabilities (%) 12.6% 5% The estimated amounts of contributions expected to be paid to the scheme during the current financial year is Â£3.2m. End of Preliminary Announcement This information is provided by RNS The company news service from the London Stock Exchange

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