Preliminary Results

MITIE Group PLC 21 May 2007 MITIE GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2007 FINANCIAL HIGHLIGHTS 2007 2006 Increase Revenue Â£1,228.8m Â£935.6m 31.3% Operating profit before amortisation and integration costs (1) Â£62.2m Â£48.3m 28.8% Operating profit before amortisation Â£59.9m Â£48.3m 24.0% Profit before tax Â£56.6m Â£50.5m 12.1% Basic earnings per share before amortisation 12.3p 9.9p(2) 24.2% Basic earnings per share 11.9p 9.8p 21.4% Dividend per share 5.1p 4.3p 18.6% (1) Integration costs of Â£2.3m (2) After discontinued operations in 2006 â€¢ 20th successive year of strong growth in revenue and profits â€¢ Organic growth in revenue of 17.4% â€¢ Operating profit before amortisation and integration costs up 28.8% to Â£62.2m â€¢ Operating profit margin before integration costs maintained at 5.1% â€¢ Profit before tax up 12.1% to Â£56.6m â€¢ Full year dividend up 18.6% to 5.1p â€¢ Successful integration of acquisitions and delivery of Â£3m of annualised synergy savings â€¢ Acquisition of Robert Prettie & Co Limited in April 2007 â€¢ Forward order book of Â£4.1bn and 75% of 2007/08 revenue secured 'MITIE has delivered another year of strong growth in revenue, profits and dividends. We continue to focus on our growth strategy by increasing market share whilst maintaining margins. We believe in getting the basics right - delivering excellent service to our customers and maintaining our reputation for quality. We have a great business, a motivated, entrepreneurial team and excellent prospects for further sustainable growth.' Ruby McGregor-Smith, Chief Executive FOR FURTHER INFORMATION: MITIE Group PLC John Telling, Head of Corporate Affairs and Developing Businesses Mobile: 07979 701006 David Revis, Investor Relations and PR Manager Mobile: 07979 702465 Brunswick Group LLP Jonathan Glass/ Deborah Done 0207 404 5959 Chairman's Statement This has been a year of strong performance at MITIE and the Group is in great shape to sustain its excellent track record. The Group celebrates its 20th anniversary in May 2007, and over the past 12 months we have successfully managed the transition to a new senior management team under Chief Executive, Ruby McGregor-Smith. Her appointment marks a new era for the Group. She has clearly demonstrated her commitment to MITIE as well as the ability to take on this new role in her four years with the Company, firstly as Group Finance Director and latterly as Chief Operating Officer. Her new role as Chief Executive is providing important continuity and strong leadership for the Group. MITIE has a reputation for consistent sustainable growth. Our revenue and profit have grown in every one of our 20 years, delivering annual compound growth rate in revenue, both from acquisitions and organic growth, of 41.4% per annum. I am pleased that our record of growth continues. Results Revenue in the year to 31 March 2007 rose to Â£1,228.8m (2006: Â£935.6m), an increase of 31.3% on continuing operations, while profit before tax and intangible amortisation from continuing operations rose by 14.8% to Â£58.2m (2006: Â£50.7m). Profit before tax rose by 12.1% to Â£56.6m (2006: Â£50.5m). Basic earnings per share (EPS) increased by 21.4% to 11.9p (2006: 9.8p), while EPS pre-amortisation and discontinued activities rose by 16.0% to 12.3p (2006: 10.6p). Dividend The Board is recommending a final dividend of 2.7p per share, which gives a total of 5.1p (2006: 4.3p) for the year. This represents an increase of 18.6%. We have adopted a dividend cover metric based on post tax earnings before amortisation and integration costs per share to ensure that dividend payments to Shareholders track the underlying profitability of our business. Our dividend cover is set at 2.5 times on this adjusted measure of EPS. Our dividend payment timetable has been brought forward and the final dividend will be paid on 3 August 2007 to Shareholders on the Register at the close of business on 6 July 2007. Over the last five years, our annual compound dividend growth has been 28.0%. Share buyback programme Although we have not bought any shares this year under this programme, we will be seeking to renew the authority granted by our Shareholders to purchase up to 10% of the Company's issued share capital at the Annual General Meeting on 26 July 2007. Acquisitions The year to 31 March 2007 has not been a year of external acquisitions but one that has largely been spent integrating the businesses we bought in the previous year. I am pleased to be able to report that the integration has gone very well, and that the enlarged Security business is winning new contracts and experiencing good levels of organic growth. It has performed well and we have achieved the synergy savings that we anticipated. The Group continues to seek acquisitions that contribute to the development of its capabilities. In April 2007, MITIE completed the acquisition of the specialist plumbing, heating and mechanical services business, Robert Prettie & Co Limited (Robert Prettie). This business focuses on the housing market in the Midlands and Yorkshire and adds to the capabilities of our growing Property Services organisation. In line with our business model, we purchased the minority interests in eight MITIE businesses for a total maximum purchase consideration of Â£4.1m. In addition, we successfully implemented Second Generation Equity Plans in Property Services and Landscaping. The Property Services scheme required Shareholder approval which was granted in July 2006. People Ian Stewart was one of the founding members of MITIE and has successfully led the Group as Chief Executive over the past six years, guiding it through a period of significant change and development. I would like to thank him on behalf of the Board for his exceptional contribution and am pleased that the Board will continue to benefit from his sound advice as Non-Executive Deputy Chairman. Sir John Jennings was Non-Executive Deputy Chairman and Senior Independent Non-Executive Director until his retirement after nine years on 31 March 2007, and I would like to thank him for his substantial and long-standing contribution to MITIE's success. Cullum McAlpine, who has served as one of our Non-Executive Directors for over three years, has been appointed to the role of Senior Independent Non-Executive Director. In addition, David Jenkins, who has been a Non-Executive Director since early 2006 has taken over Sir John's role as Chairman of the Nominations Committee. Colin Acheson who is the Director responsible for Engineering Services will be retiring from MITIE in March 2008; he remains as Chairman of the Engineering division until this date. An internal successor, Mike Tivey, will lead our Engineering Services business going forward. Colin has worked in our Engineering business since 1989 and has made a major contribution to its growth. I would like to thank him for all of his efforts. I would like to welcome to the Board three new Directors who have been appointed during the year. Suzanne Baxter was appointed as Group Finance Director in April 2006. Graeme Potts and Roger Matthews were appointed as Non-Executive Directors on 27 July 2006 and 4 December 2006 respectively. They all bring considerable relevant experience to the MITIE Board. We now have over 44,000 employees and I would like to thank them all for their efforts during this financial year and throughout our 20 year history. While it is important that the Group has a quality leadership team, it is the everyday application of our motivated employees who deliver our services that enables MITIE to satisfy its customers and to succeed as a business. Corporate Governance Good corporate governance is essential for ensuring the future growth and success of MITIE. The Board recognises its responsibilities and conducts itself appropriately in order to protect the interests of all MITIE stakeholders. Corporate Responsibility Corporate Responsibility is embedded within our strategy. For the second year in succession therefore, MITIE is publishing a separate report that will also be available on our corporate website, and which expands on areas already covered in this Annual Report. It focuses on MITIE's efforts in developing skills and protecting the environment and is structured to describe our successes with our own people in the workplace, our work with customers to deliver their Corporate Responsibility strategies in their marketplace, our efforts with local communities and, most importantly, our progress in the area of health and safety. Outlook MITIE is a Group that has a passion for providing quality services to its customers. It is the energy, drive and enthusiasm of our people that makes MITIE different. There are considerable opportunities available to MITIE. We have great plans for the future and I am looking forward to our development in the years ahead. We have a very able and experienced management team that will take the business forward and I know that they will do so with the same energy and determination that has made the Group what it is today. We have a very clear strategy. We are financially strong and we are in a position to continue our excellent progress. David C. Ord Chairman Chief Executive's Statement The last year has been an important one for MITIE. It has been a year of great achievement with the highlights being the successful integration of our enlarged Security and Landscaping businesses, the development of our Board and the continued organic growth of our three divisions Facilities Services (formerly Support Services), Property Services and Engineering Services. We have changed the name of Support Services to Facilities Services because this more accurately reflects the range of services that we provide to our clients. From a personal perspective, I am pleased to present the results of our activities to you in my new role as Chief Executive of MITIE. I believe that MITIE has the ability to take full advantage of the opportunities that its markets offer and I feel privileged to be leading the business at this exciting time in its development. In 2007, we achieved growth in revenue of 31.3%, 17.4% of which was organic. Organic growth is an important measure for us as it reflects the success of both new and traditional services in our expanding client base. We are pleased to report the achievement of double digit organic revenue growth across all three of our divisions in 2007 - a reflection of the strength of our business offering. Our ability to introduce growth through acquisition is of increasing importance. We are pleased to have successfully managed the integration of the landscaping and security acquisitions made last year and the delivery of the planned synergy benefits. These activities have produced a Landscaping business with a national capability and a Security business that is the second largest manned guarding business in the UK. We continue to seek acquisitions that augment our service delivery capabilities and were pleased to announce the acquisition of Robert Prettie in April 2007 to enhance our Property Services business. Order book The success of our bidding activity and the strength of our business is reflected in our order book, which now stands at Â£4.1bn, and we start the year to March 2008 with some 75% (2006: 72%) of our budgeted revenue already secured. Our order book reflects some impressive contract wins including those at HBOS, Marks & Spencer and Birmingham City Council. Our people I recognise that the success of MITIE is a reflection of the success of our people and I would like to thank all of our employees for their contribution to this year's impressive results and for providing continued flexible support to our clients. At MITIE our people have a broad range of talents and backgrounds and we are committed to supporting a culture that continues to give opportunity to our people and that encourages inclusion and diversity in our business. Looking forward MITIE's equity based business model has delivered a consistent track record of revenue and earnings growth over the 20 years since the Group's formation. MITIE employed 44,866 people at 31 March 2007 and is now responsive to a broad stakeholder base. Our future success will be built upon the delivery of a clear strategy and vision. It will be underpinned by the continuation and development of our unique equity ethos, which will be measured by a challenging set of key performance indicators. I am excited about the future for MITIE. It is an immense pleasure to work with such a dedicated and aspirational team. No day at MITIE is the same and our common goals of growth, providing responsive services to our clients and developing our people drive us all. MITIE has delivered another year of strong growth in revenue, profits and dividends. We continue to focus on our growth strategy by increasing market share whilst maintaining margins. We believe in getting the basics right - delivering excellent service to our customers and maintaining our reputation for quality. We have a great business, a motivated, entrepreneurial team and excellent prospects for further sustainable growth. Ruby McGregor-Smith Chief Executive Business Review MITIE's business is structured into three divisions: Facilities Services which delivers services either singly, bundled or as a complete facilities management service, Property Services and Engineering Services. Facilities Services Facilities Services has had a strong year with good levels of growth across the business. The second half of the year was particularly pleasing with a number of substantial single service contract wins. 2007 2006 Â£m Â£m Growth Revenue 732.1 516.0 41.9% Operating profit 41.5 33.0 25.8% Operating profit margin 5.7% 6.4% Integration costs 2.3 - Operating profit before integration costs 43.8 33.0 32.7% Operating profit margin 6.0% 6.4% Single Services Security is the largest facilities service business and grew by 177.3% last year. This growth was principally attributable to the acquisitions made in the prior year, but also reflected organic growth of 40% for the enlarged business. The integration of the manned guarding businesses has gone well, and has generated annualised synergy savings of Â£3m, of which Â£2.5m have been realised this year, These activities have resulted in the establishment of a nationally focused business which is now the UK's second largest provider of manned guarding security services. Security has delivered an excellent sales performance, with client retention in line with expectations. We are finding that our market position is creating opportunities of a scale previously not available to us. In January, Security extended its long-established relationship with Her Majesty's Courts Service (HMCS) by securing all seven of the regional contracts tendered. The contracts are for an initial term of four years with the option of a two-year extension. Security's work with HMCS has grown from a regional contract with a value of Â£8m per annum to a portfolio of contracts which is now worth in excess of Â£22m per annum. We have also focused on the retail sector, which has significantly different requirements to other business areas, and the successful completion of a short-term contract with Marks & Spencer led to the award of a three-year contract to cover all stores nationwide. The market remains competitive although shows signs of consolidation with some smaller suppliers exiting the market. We have a strong revenue pipeline, and during 2007 we will be launching a dedicated transportation team to build on our experience in aviation to other parts of the broader transportation sector. The forthcoming requirement for security guards in Scotland to be licensed and trained will allow us to use our experience in England and Wales to secure additional market share north of the border. With over 22,000 employees, MITIE Cleaning is our largest employer and was the first to operate under the Second Generation Equity Plan. Its strengthened and restructured sales team is winning increasingly large contracts. Major wins during 2006/07 include HBOS, to clean more than 1,000 of its bank branches around the country. This is one of our largest single contracts and, with work that we already do with Barclays and other major banks, consolidates our position as the leading provider of specialist retail bank cleaning in Britain. Among our specialist cleaning business, Health & Hygiene, our specialist food manufacturing and healthcare cleaning team, won the high profile Great Ormond Street Hospital account. Retail won a major contract to clean over 500 Somerfield stores nationwide, while Transport has recently been awarded a contract to provide cleaning services at Heathrow's Terminal 5 (T5). Over the next year Cleaning will be maintaining its concentration on improving client retention. It will also be putting particular emphasis on working with other MITIE teams to expand the level of bundled services opportunities from our existing client base. Schools, museums and leisure facilities are included in the large and specifically non-housing contract that Engineering Maintenance won from Birmingham City Council. Also in Birmingham, the contract for BULLRING Shopping centre was re-secured. New Engineering Maintenance sections specialising in Fire Alarm Maintenance and Water Treatment have started and the business has also invested in a web enabled system to provide customers with better asset maintenance reporting. As well as these three substantial businesses, we also have four developing businesses within Facilities Services, namely Pest Control, Landscaping, Business Services and Catering. Our strategy is to grow these businesses to a top five position in their respective markets. Pest Control made a small acquisition of trade and assets during the year, started a new business in London and continued to make progress towards developing a national pest control offer. It also won a five-year contract with BAA, which includes Heathrow, Gatwick, Stansted and Southampton airports. Following the acquisition of Lyndhurst Services Limited in February 2006, we integrated it with our existing Landscape businesses in December 2006 to create MITIE Lyndhurst Services Limited, under a Second Generation Equity Plan. The implementation of Business Services' largest contract, with PricewaterhouseCoopers, has continued to go well and has included the provision of work placements as part of our multiple award winning 'Real Apprentice' scheme. Business Services has developed a suite of innovative software solutions for print management, package tracking, desktop courier booking and e-procurement that will be rolled out to its clients over the next 12 months. Our Document Solutions business has added a design and desktop publishing capability to its printing and fulfillment services. The strategy for the next 12 months is to concentrate growth in the financial services sector in which they already hold key contracts and in the legal and professional sector in which they currently provide services to 7 out of the top 20 global law firms. Catering has continued to make progress during the year. In particular the new start-up businesses in London and the North of England have achieved contract gains including the Brewery in Chiswell St, London, which is a hospitality venue for over 1,000 people, Beechcroft LLP in Bristol and London and the Matalan distribution centre in Manchester. In our Catering business we concentrate on providing fresh food that is cooked well. We use only the best ingredients in terms of both food and people to ensure that our customers receive exactly what they need. Our nutritionists work closely with our clients to help produce healthy menus that help combat the effects of city living. In each of the services we provide our aim is to be the best. We recognise that our customers want the best possible services from specialists in each area. That is what we provide. Bundled Services Over the past few years MITIE companies have experienced a rise in the number of clients who are looking to procure bundles of services; that is more than one service provided by a single service provider. With bundles, the client is happy to outsource the service delivery, but retains management control of the process. Bundling can arise in a number of ways: 1. MITIE provides a single service which is well received by the client, who then, over a period of time adds services as the relationship matures. We call this natural bundling. Natural bundling can involve a single contract with the original service provider; a series of individual contracts with the individual MITIE companies; or a master or framework contract that is amended as services are added. 2. The client wishes to reduce its supplier base and negotiates with a number of providers that can deliver the services. We call this a negotiated bundle. With this type of bundle the client typically places as great an emphasis on culture, relationships and the ability to bring innovation to the services, as to pure price. 3. Some clients use bundling simply to reduce costs. The philosophy being that the more work in the bundle, the more efficiencies will result and service providers will accept a lower margin in return for the scale and length of the contract term. We call this price bundling. MITIE is involved in all three. The largest bundled contract that we have is with Rolls-Royce. This began 11 years ago as a single cleaning contract on one site. That developed into a national Cleaning contract, to which was later added a mechanical and electrical Engineering Maintenance element. In recent years Catering, Security, Landscaping, Business Services and Pest Control have been added too. This contract now covers over 900 people working on nine sites across the Rolls-Royce estate from Inchinnan in Scotland to Bristol. The British Nuclear Group's reprocessing plant at Sellafield has now become established as our second largest bundle. During 2006/07 MITIE won a service contract at Sellafield which bundles Cleaning with Engineering Maintenance work, Security and Business Services. This contract involves over 200 people. Bundles can originate with any of our businesses, and it is the ability of our managers to make the connections between one service and another, that is driving our success in this area of the outsourcing market. In 2006/07, for example: â€¢ A Business Services contract with the London Stock Exchange was extended to include cleaning. â€¢ Goodrich Corporation, a global supplier of systems and services to the aerospace, defence and homeland security markets, expanded its contract with Cleaning to include Waste & Environmental on three Birmingham sites. The services include hazardous waste disposal, confidential waste destruction and industrial recycling solutions. â€¢ Bookham Technology has added Engineering Maintenance to a bundle that began with Catering and Cleaning. Facilities Management We principally provide integrated Facilities Management services through our Managed Services and PFI businesses. We have had a good year in Facilities Management. We secured a managing agent contract with Cable & Wireless to oversee the facilities management service provision across its UK estate. We were also pleased to be selected to provide services to the UK Government through the Office of Government Commerce (OGC) Property and Facilities Management Framework Agreement as well as additional services for the Big Lottery Fund and Littlewoods Shop Direct. We were also awarded a three-year contract with leading biotechnology company Amgen that also includes Engineering Maintenance, Catering, Security and Pest Control. It is this ability to draw together a range of MITIE's service offerings that is one of our main strengths in the Facilities Management market. We will always choose the service delivery method that is best for the client. That flexibility makes sure that we are always able to produce a solution that meets the needs of our customers. In the PFI market, we signed five PFI school contracts during the year bringing the number of schools that we manage to 85. This makes MITIE the UK's leading provider of Facilities Management services to PFI schools. We are also currently part of three consortia tendering for Building Schools for the Future contracts. An increasingly important part of our Facilities Management service delivery is our approach to energy efficiency and the environment. We have been nominated for a number of awards for our approach to the environment and one of our managers was recognised as Nemex Energy Manager of the Year. Furthermore, an energy awareness and energy efficiency campaign that we undertook with the National Offender Management Service was a finalist in the PFM Partners in Sustainability Award. The current order book for this division is Â£3.4bn. Property Services MITIE Property Services provides repair and maintenance, painting, roofing and fire protection, refurbishment, interior fit-out services and the supply and installation of office furniture across several market sectors. 2007 2006 Â£m Â£m Growth Revenue 215.1 163.5 31.6% Operating profit 10.6 8.9 19.1% Operating profit margin 4.9% 5.4% As the social housing market becomes increasingly important to us we have continued our strategy of reducing our exposure to one-off refurbishment contracts, striving instead for long-term relationships through framework or partnership arrangements with owners, occupiers, managers or property portfolios. We are also focusing on our painting business where we believe we have the necessary skills and experience to benefit from the higher margins and improved cash flows. Two large social housing contracts that started on 1 April 2006 are both performing well. To date we have carried out over 112,000 repairs for Birmingham City Council on their southern estate of 27,000 homes and reinstated 2,500 empty properties. On our Milton Keynes contract we have completed 37,000 routine repairs on their portfolio of 12,600 homes and reinstated 1,100 empty properties. Additional packages of work have been secured as a result of our developing relationship with Milton Keynes Council including disabled adaptations and security screening work. We have had further success in securing a sizeable contract from Stevenage Borough Council for the delivery of kitchens and bathrooms, and Decent Homes Standard work for a number of other housing associations. Since the end of the financial year we acquired Robert Prettie, a specialist plumbing, heating and mechanical services business concentrating on the housing market in the Midlands and Yorkshire. Robert Prettie employs over 250 staff. This acquisition adds significantly to MITIE Property Services' range of services in the housing sector and complements its existing regional operations. Robert Prettie works in partnership with Local Authorities, Councils, Developers and Registered Social Landlords on kitchen and bathroom installation, heating replacement, gas servicing, maintenance and call out services. There has also been strong organic growth across all other areas of the business. Large painting contracts have been secured for Angus Council and Dudley Metropolitan Borough Council. Refurbishment wins include additional work from BT, Royal Mail and LandSecurities Trillium. Our Interiors business won three large contracts for a city institution on their London office campus, a large fit-out contract for Scottish Widows and a further contract from Standard Life. The majority of these new fit-out contracts will be delivered in the year ending 31 March 2008 thus giving a strong secured order book for this business stream. Our Fire Protection business has had a very successful year helped by its involvement in the T5 project at Heathrow Airport. The current order book for this division is Â£450.3m. Engineering Services Engineering Services covers the design and 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. 2007 2006 Â£m Â£m Growth Revenue 281.6 256.1 10.0% Operating profit 7.8 6.4 21.9% Operating profit margin 2.8% 2.5% The progress of Engineering Services this year has been achieved as a direct result of a repositioning strategy. This began with specific margin improvements resulting from the restructuring of aspects of the business, and derived further benefit from a more balanced work mix. We have placed particular emphasis on developing sectors in which we have specific skills that are fundamental to the effective delivery of our customers' capital projects. We have a strong order book for 2007 and beyond and our scale and national presence make us an attractive partner. We have framework agreements with organisations such as Plymouth University, NHS Wales and the National Physical Laboratory. In addition, repeat opportunities are being serviced by the regional contracting businesses for customers such as Urban Splash in Birmingham and Cardonald College in Glasgow. The demand for increased resilience of organisations' data infrastructure is providing substantial opportunities for our Technology division, with business critical projects having been undertaken in 2006 for customers such as IBM, Centrica and Logica - and we have an extensive pipeline for 2007 and 2008. Activity in the retail and social housing sectors has been a significant contributor within the period and is expected to maintain its contribution in 2007. We continue to build on contracts with Primark, Marks & Spencer and Bhs and work closely with a number of housing associations. We have been actively involved for some time in the design and application of more efficient forms of energy generation and distribution. More customers are seeking to reduce their energy footprint and we have invested in the required technical, design and application skills that will be needed in the future. Engineering Services now has the accredited technical competence, delivery capability, commercial model and track record that has resulted in a compelling low carbon offer for the construction and improvement of heating, cooling, lighting resilience and motive power within the built environment. For example, Kingsmead School in Cheshire is currently the most energy efficient school in the UK with innovative features from MITIE such as a biomass boiler burning reclaimed wood pellets to provide heating; a rainwater recycling system that provides water to flush lavatories; solar panels and photovoltaic cells generating energy. Two combined heat and power schemes (CHP) have also recently been installed by MITIE Engineering at Sussex University and Bristol University which will generate around 20% of their electrical requirement and reduce overall CO2 omissions. Future prospects for Engineering Services look encouraging in the light of the rationalisation of the industry's way of procurement and both new and impending legislation on the energy performance of buildings. Customers are looking to combine contracts and enter three to five year commitments to secure supply in a market where demand is picking up. Engineering has the ability and scale to deliver multiple projects consistently on a national basis and will be able to take advantage of this trend. The current order book for this division is Â£254.2m. Group Finance Director's Statement Our financial results for the year reflect strong organic growth levels across our businesses and we are starting to see the synergistic benefits from our acquisitions in our underlying profitability. ----------------------------- ---------- ----------- -------- 2007 2006 Increase Â£m Â£m % ----------------------------- ---------- ----------- -------- Revenue 1,228.8 935.6 31.3% ----------------------------- ---------- ----------- -------- ----------------------------- ---------- ----------- -------- Operating profit before amortisation of intangibles, discontinued operations and integration costs 62.2 48.3 28.8% ----------------------------- ---------- ----------- -------- Integration costs (2.3) - ----------------------------- ---------- ----------- -------- 59.9 48.3 24.0% ----------------------------- ---------- ----------- -------- Amortisation of intangibles (1.6) (0.2) ----------------------------- ---------- ----------- -------- 58.3 48.1 21.2% ----------------------------- ---------- ----------- -------- Net investment revenue and finance cost (1.7) 2.4 ----------------------------- ---------- ----------- -------- Profit before tax 56.6 50.5 12.1% ----------------------------- ---------- ----------- -------- Tax (17.4) (15.5) ----------------------------- ---------- ----------- -------- 39.2 35.0 12.0% ----------------------------- ---------- ----------- -------- Discontinued operations - (2.4) ----------------------------- ---------- ----------- -------- 39.2 32.6 20.2% ----------------------------- ---------- ----------- -------- Effective tax rate on continuing operations 30.7% 30.7% Basic EPS before amortisation and discontinued operations 12.3p 10.6p 16.0% Basic EPS before amortisation 12.3p 9.9p 24.2% Basic EPS 11.9p 9.8p 21.4% Dividend per share 5.1p 4.3p 18.6% Key Performance Indicators Our financial KPI's of profit margins before the amortisation of intangibles, interest and tax (EBITA) and profit to cash conversion levels are important indicators of the trading performance of the Group. We are satisfied that the levels of performance in these measures across our three business sectors of Facilities Services, Property Services and Engineering Services, and for the Group overall are consistent with our medium term targets. Furthermore, our strategy of operating low capital intensive businesses continues and capital expenditure levels continue to be managed within the target range of less than 2% of revenue. Finally, our results support the continued growth in dividends. We are adopting a dividend cover metric based on post tax earnings attributable to ordinary Shareholders before amortisation of intangibles and integration costs per share to ensure that dividend payments to Shareholders track the underlying operating profits of our business. This has resulted in a dividend for the full year of 5.1 pence per share (2006: 4.3 pence), an increase of 18.6% for the year. This reflects a dividend cover of 2.5 times based on our adjusted EPS measure and 2.3 times based on basic EPS. In addition, for future dividends we have brought forward our traditional dividend payment cycle to reduce the period between the declaration date and the payment date. Our final dividend for the year ended 31 March 2007 will be paid on 3 August 2007. Historically that dividend would have been paid on 28 September 2007. Growth in revenue Revenue from continuing operations for the Group increased by 31.3 % to Â£1,228.8m (2006: Â£935.6m) in the year. This result has been driven by an organic revenue growth rate for the Group as a whole of 17.4% and from the impact of acquisitions made in the previous year. At the divisional level, double digit organic growth rates continue to be achieved in all three divisions. Our Facilities Services business achieved revenues of Â£732.1m (2006: Â£516.0m) of which Â£159.0m (2006: Â£24.2m) was generated by the acquisitions made in the prior year. Underlying organic growth levels in Facilities Services were some 16.5% (2006: 11.7%) and reflect success in our traditional single services activities as well as our integrated and bundled offerings. Revenues in Property Services have increased organically by 31.6% (2006: 16.6%) in the period to Â£215.1m (2006: Â£163.5m), largely reflecting the impact of new social housing contracts that commenced in April 2006, whilst Engineering Services revenues of Â£281.6m (2006: Â£256.1m) reflect controlled organic growth of 10.0% as the business continues its focus on sustainable growth. Profitability Operating profit before amortisation of intangibles (EBITA) of Â£59.9m (2006: Â£48.3m) is stated after the impact of non-recurring gross acquisition integration costs of Â£2.3m (2006: Â£nil) in respect of the consolidation of our enlarged Security business. It also includes a charge for share-based payments of Â£1.1m (2006: Â£0.7m) which reflects the accounting charges in respect of our Save As You Earn and Executive Share Option schemes. EBITA profit before integration costs increased by 28.8% to Â£62.2m (2006: Â£48.3m) reflecting a margin of 5.1% (2006: 5.1%). The maintenance of margins at a Group level has been achieved through an improvement of operating profit margins in our traditional Facilities Services business (before acquisitions) and through the improvement in operating profits in Engineering Services to Â£7.8m or 2.8% of revenue (2006: Â£6.4m; 2.5% of revenue). These areas of operating profit margin improvement have been offset by the dilution in operating profit margins in Property Services to 4.9% (2006: 5.4%) as expected, following the increase in the proportion of social housing contracts undertaken by that business. The charge in respect of the amortisation of intangible assets arising on acquisitions was Â£1.6m (2006: Â£0.2m). This related primarily to the acquisitions in Security in the prior year. Operating profit after the amortisation of intangibles was Â£58.3m (2006: Â£48.1m). Investment and finance costs for the period moved to a cost of Â£1.7m (2006: income Â£2.4m) reflecting the movement of the Group to a net debt position for the majority of the current year (2006: net cash) following the funding of acquisitions made in the prior year. The tax charge for the period was Â£17.4m (2006: Â£15.5m), representing an effective rate of tax on our profit on continuing operations of 30.7% (2006: 30.7%). These results generated a profit for the period of Â£39.2m (2006: Â£32.6m) an increase of 20.2% on the prior year. Of this, Â£37.0m or 94.4% (2006: Â£30.2m, 92.6%) is attributable to the Shareholders of MITIE Group PLC. Growth in earnings per share (EPS) Basic EPS before the amortisation of intangible assets and discontinued operations increased by 16.0% to 12.3 pence per share (2006: 10.6 pence per share). Diluted EPS before intangible amortisation and discontinued operations increased by 15.2% to 12.1 pence per share (2006: 10.5 pence per share). After intangible amortisation and discontinued operations, basic EPS was 11.9 pence (2006: 9.8 pence). On the same basis, diluted EPS was 11.8 pence (2006: 9.7 pence). Pensions The Group contributes to a range of defined benefit and defined contribution pension schemes. It operates two MITIE Group PLC defined benefit schemes and the net surplus before tax included in the Group's balance sheet arising from those two pension schemes was Â£0.5m (2006: Â£1.8m). In addition, MITIE makes contributions to its customers' defined benefit pension schemes under Admitted Body Local Government and other arrangements in respect of certain employees who have transferred to the Group under TUPE. The values of the assets and liabilities attributable to the Group in respect of those schemes are equal and therefore no surplus or deficit is included in the Group balance sheet at the end of the year. Acquisitions The Group acquired some or all of the minority interests in the equity share capital of eight of its subsidiaries in accordance with the MITIE Model. The total maximum consideration payable in respect of those acquisitions is Â£4.1m. The consideration will be largely settled in the shares of MITIE Group PLC. In August 2006, the Group also settled deferred consideration of Â£0.8m in respect of the acquisition of shares in MITIE Business Services Limited, MITIE Engineering Services (Swansea) Limited and MITIE Security (North) Limited in August 2005. The total of MITIE Group PLC shares issued in respect of these transactions was 1,727,180. Other acquisition related transactions include the settlement of deferred consideration of Â£10.8m in respect of the acquisition of MITIE Security (London) Limited (formerly MITIE Trident Security Limited). This transaction was settled through the issue of Â£8.9m of loan notes and cash of Â£1.9m. Further deferred consideration of Â£1.2m was settled in loan notes in respect of the acquisition of MITIE Pest Control Limited (formerly Eagle Pest Control Services UK Limited). Â£2.0m of deferred consideration was converted into loan notes in respect of The Watch Security Limited and subsequently Â£1.0m was redeemed during the year. Cash flow The underlying cash flow performance of the Group remains strong with the conversion of EBITDA to cash of 114% (2006: 95%). This was a particularly strong performance and we continue to target more sustainable levels of 90%-100% going forward. At 31 March 2007, the net funds position of the Group was Â£5.6m (2006: net debt Â£23.4m) with loans of Â£20.0m being drawn at that time (2006: Â£31.0m). Deposits held by the Group's reinsurance subsidiary, which are not readily available to the Group, totalled Â£10.3m at 31 March 2007 (2006: Â£9.6m). In March 2006, the Group moved into a net debt position following the acquisition of Initial Security Limited, having historically held net cash. The underlying operating cash flows of the Group have been strong during the year returning the Group to net cash at the year end. However, the Group maintained a net debt position for the majority of the year, and this is reflected in the financing costs within the income statement. Group Treasury has responsibility for managing and reducing financial risks 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 Boards' ongoing policy is to finance the Group through retained earnings and borrowings. During the year the Group reviewed its banking facilities and established a committed five-year Â£150m revolving credit facility. The principal covenants in respect of this facility put a cap on the maximum level of debt within the Group at 3.5 times EBITDA, and require a minimum ratio of profit to interest payable of 3:1. The Group has operated within these covenants throughout the year. Events after the balance sheet date On 2 April 2007, MITIE announced the acquisition of Robert Prettie, a specialist plumbing, heating and mechanical services business concentrating on the housing market in the Midlands and Yorkshire. The initial consideration was Â£8.6m, of which Â£7.0m was in cash, Â£1.6m in loan notes and Â£0.8m of cash retained against potential warranty claims. Debt of Â£3.7m was assumed by MITIE on the acquisition. Deferred consideration on the acquisition up to a maximum Â£23.3m is payable in a combination of loan notes and cash based on performance over a three-year period. The deferred consideration can be triggered between 2010 and 2012. Suzanne Baxter Group Finance Director Consolidated Income Statement For the year ended 31 March 2007 2007 2006 ----------- ------ ------------------------------------- ------------------------------------ Notes Before Amortisation of Total Before Amortisation of Total amortisation intangible amortisation intangible and assets and and assets and discontinued discontinued discontinued discontinued operations operations operations operations Â£m Â£m Â£m Â£m Â£m Â£m ----------- ------ -------- -------- -------- -------- -------- -------- Continuing operations Revenue 3,4 1,228.8 - 1,228.8 935.6 - 935.6 Cost of sales (999.8) - (999.8) (757.0) - (757.0) ----------- ------ -------- -------- -------- -------- -------- -------- Gross profit 229.0 - 229.0 178.6 - 178.6 ----------- ------ -------- -------- -------- -------- -------- -------- ----------- ------ -------- -------- -------- -------- -------- -------- Other administrative expenses (169.1) - (169.1) (130.3) - (130.3) Amortisation of intangible assets - (1.6) (1.6) - (0.2) (0.2) ----------- ------ -------- -------- -------- -------- -------- -------- ----------- ------ -------- -------- -------- -------- -------- -------- Total administrative expenses (169.1) (1.6) (170.7) (130.3) (0.2) (130.5) ----------- ------ -------- -------- -------- -------- -------- -------- Operating profit 3, 5 59.9 (1.6) 58.3 48.3 (0.2) 48.1 Investment revenue 7 0.8 - 0.8 2.6 - 2.6 Finance costs 8 (2.5) - (2.5) (0.2) - (0.2) ----------- ------ -------- -------- -------- -------- -------- -------- Profit before tax 58.2 (1.6) 56.6 50.7 (0.2) 50.5 ----------- ------ -------- -------- -------- -------- -------- -------- Tax 9 (17.9) 0.5 (17.4) (15.5) - (15.5) ----------- ------ -------- -------- -------- -------- -------- -------- Profit for the year from continuing operations 40.3 (1.1) 39.2 35.2 (0.2) 35.0 ----------- ------ -------- -------- -------- -------- -------- -------- Discontinued operations Loss for the year from discontinued operations - - - - (2.4) (2.4) ----------- ------ -------- -------- -------- -------- -------- -------- Profit for the year 40.3 (1.1) 39.2 35.2 (2.6) 32.6 ----------- ------ -------- -------- -------- -------- -------- -------- Attributable to: Equity holders of the parent 38.1 (1.1) 37.0 32.8 (2.6) 30.2 Minority interests 2.2 - 2.2 2.4 - 2.4 ----------- ------ -------- -------- -------- -------- -------- -------- 40.3 (1.1) 39.2 35.2 (2.6) 32.6 ----------- ------ -------- -------- -------- -------- -------- -------- Earnings per share (EPS) - basic 11 12.3 p (0.4) p 11.9 p 10.6 p (0.8) p 9.8 p - diluted 11 12.1 p (0.3) p 11.8 p 10.5 p (0.8) p 9.7 p ----------- ------ -------- -------- -------- -------- -------- -------- Consolidated Statement of Recognised Income and Expense For the year ended 31 March 2007 2007 2006 Notes Â£m Â£m -------------------------------- ------- --------- -------- Actuarial (losses)/gains on defined benefit 30 (4.7) 1.1 pension schemes Tax credit/(charge) on items taken directly to 24 1.5 (2.6) equity ------- --------- -------- -------------------------------- Net expense recognised directly in equity (3.2) (1.5) Profit for the year 39.2 32.6 -------------------------------- ------- --------- -------- Total recognised income and expense for the 36.0 31.1 financial year ------- --------- -------- -------------------------------- Attributable to: Equity holders of the parent 33.8 28.7 Minority interests 2.2 2.4 -------------------------------- ------- --------- -------- Consolidated Balance Sheet As at 31 March 2007 2007 2006 Notes Â£m Â£m -------------------------------- ------- -------- --------- Non-current assets Goodwill 12 148.4 143.8 Other intangible assets 13 9.9 11.5 Property, plant and equipment 14 41.5 34.5 Deferred tax assets 18 7.7 4.9 Retirement benefit surplus 30 0.5 1.8 -------------------------------- ------- -------- --------- Total non-current assets 208.0 196.5 -------------------------------- ------- -------- --------- Current assets Inventories 15 7.9 8.8 Trade and other receivables 16 272.8 244.3 Cash and cash equivalents 17 25.6 9.6 -------------------------------- ------- -------- --------- Total current assets 306.3 262.7 -------------------------------- ------- -------- --------- -------------------------------- ------- -------- --------- Total assets 514.3 459.2 -------------------------------- ------- -------- --------- Current liabilities Trade and other payables 19 (255.7) (214.5) Financial liabilities 20 (30.9) (33.8) Provisions 22 (0.3) (11.7) Current tax liabilities (8.2) (7.6) -------------------------------- ------- -------- --------- Total current liabilities (295.1) (267.6) -------------------------------- ------- -------- --------- -------------------------------- ------- -------- --------- Net current assets 11.2 (4.9) -------------------------------- ------- -------- --------- Non-current liabilities Financial liabilities 20 (2.8) (1.0) Provisions 22 (8.6) (10.2) Deferred tax liabilities 18 (3.9) (4.7) -------------------------------- ------- -------- --------- Total non-current liabilities (15.3) (15.9) -------------------------------- ------- -------- --------- -------------------------------- ------- -------- --------- Total liabilities (310.4) (283.5) -------------------------------- ------- -------- --------- -------------------------------- ------- -------- --------- Net assets 203.9 175.7 -------------------------------- ------- -------- --------- Equity Share capital 23 7.8 7.7 Share premium account 24 16.6 13.7 Merger reserve 24 54.9 52.0 Revaluation reserve 24 (0.2) (0.2) Capital redemption reserve 24 0.3 0.3 Other reserve 24 0.2 0.3 Share-based payments reserve 24 1.9 1.4 Retained earnings 24 110.2 90.1 -------------------------------- ------- -------- --------- Equity attributable to equity holders of the 191.7 165.3 parent ------- -------- --------- -------------------------------- Minority interests 12.2 10.4 -------------------------------- ------- -------- --------- Total equity 203.9 175.7 -------------------------------- ------- -------- --------- The financial statements were approved by the Board of Directors and authorised for issue on 18 May 2007. They were signed on its behalf by: Ruby McGregor-Smith Suzanne Baxter Chief Executive Group Finance Director Consolidated Cash Flow Statement For the year ended 31 March 2007 2007 2006 Notes Â£m Â£m -------------------------------- ------- -------- -------- Net cash from operating activities 26 63.9 32.1 Investing activities Interest received 0.7 2.5 Purchase of property, plant and equipment (20.8) (13.8) Purchase of subsidiary undertakings (3.9) (85.5) Disposals of property, plant and equipment 3.6 2.6 -------------------------------- ------- -------- -------- Net cash outflow from investing activities (20.4) (94.2) -------------------------------- ------- -------- -------- Financing activities Repayments of obligations under finance leases (0.9) (0.2) Proceeds on issue of share capital 2.5 2.1 Repayments of loans on purchase of subsidiary (1.0) (11.6) undertakings Bank loans (repaid)/raised (11.0) 31.0 Share buybacks - (1.6) Equity dividends paid (14.9) (11.3) Minority dividends paid (0.2) (0.2) -------------------------------- ------- -------- -------- Net cash (outflow)/inflow from financing (25.5) 8.2 -------------------------------- ------- -------- -------- -------------------------------- ------- -------- -------- Net increase/(decrease) in cash and cash 18.0 (53.9) equivalents ------- -------- -------- -------------------------------- Net cash and cash equivalents at beginning of the 7.6 61.5 year -------------------------------- ------- -------- -------- Net cash and cash equivalents at end of the year 25.6 7.6 -------------------------------- ------- -------- -------- Net cash and cash equivalents comprises: Cash at bank 25.6 9.6 Overdraft - (2.0) -------------------------------- ------- -------- -------- 25.6 7.6 -------------------------------- ------- -------- -------- Notes to the consolidated financial statements 1. Basis of preparation and significant accounting policies Basis of preparation The basis of preparation of this preliminary announcement is set out below. The financial information in this announcement, which was approved by the Board of Directors on 18 May 2007, does not constitute the Company's statutory accounts for the years ended 31 March 2007 or 2006, but is derived from these accounts. Statutory accounts for 2006 have been delivered to the Register of Companies and those for 2007 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 S237 (2) or (3) of the Companies Act 1986. The preliminary announcement has been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for used in the European Union. The financial statements have been prepared on the historical cost basis and there has been no change in accounting policies. Significant accounting policies under IFRS The significant accounting polices adopted in the preparation of the Group's IFRS financial information are set out below. Basis of consolidation The consolidated financial statements 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. Interests of minority shareholders is measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. 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. 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 its 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. Operating profit Operating profit is Profit from operations stated before investment revenue and finance costs. 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 and participates in a number of other defined benefit schemes. In respect of the other schemes in which the Group participates, the Group accounts for its legal and constructive obligations over the period of its participation which is for a fixed period only. In addition, the Group operates a number of defined contribution retirement benefit schemes for all qualifying employees. Payments to the defined contribution and stakeholder pension schemes 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 the profit and 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 - 3-10 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. 2. Critical accounting judgements and key sources of estimation uncertainty Critical judgements in applying the Group's accounting policies In the process of applying the Group's accounting policies, which are described in note 1 above, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements. Revenue recognition Revenue is recognised for certain project based contracts based on the stage of completion of the contract activity. This is measured by comparing the proportion of costs incurred against the estimated whole-life contract costs except where this would not be representative of the stage of completion. Key sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation involves an estimation of the future cash flows of cash-generating units and also the selection of the appropriate discount rates, which involves judgement, to use in order to calculate present values. The carrying value of goodwill is Â£148.4m (2006: Â£143.8m) at the balance sheet date; see note 12. Retirement benefit obligations The calculation of retirement benefit obligations is dependent on material key assumptions including discount rates, future returns on assets and future contribution rates. The present value of retirement benefit obligations at the balance sheet is Â£143.3m (2006: Â£72.2m); see note 30. 3. 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 - Facilities Services (formerly Support Services), Property Services and Engineering Services. Principal activities are as follows: Facilities 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. 2007 2006 ------------ ------------------------------------------- -------------------------------------------- Revenue Profit before Margin Profit before Revenue Profit before Margin Profit before interest tax tax interest tax tax and and amortisation amortisation Â£m Â£m % Â£m Â£m Â£m % Â£m ------------ ------- -------- ------ ------ --- ------- -------- ------ ------- Facilities Services 732.1 41.5 5.7 37.4 516.0 33.0 6.4 34.3 Property Services 215.1 10.6 4.9 10.9 163.5 8.9 5.4 9.0 Engineering Services 281.6 7.8 2.8 8.3 256.1 6.4 2.5 7.2 ------------ ------- -------- ------ ------ --- ------- -------- ------ ------- Continuing operations 1,228.8 59.9 4.9 56.6 935.6 48.3 5.1 50.5 ------------ ------- -------- ------ ------ --- ------- -------- ------ ------- Discontinued operations - - - - - (2.4) - (2.4) ------------ ------- -------- ------ ------ --- ------- -------- ------ ------- Total 1,228.8 59.9 4.9 56.6 935.6 45.9 4.9 48.1 ------------ ------- -------- ------ ------ --- ------- -------- ------ ------- The revenue analysis above is net of inter segment sales which are not considered significant. The results set out above are stated after integration costs of Â£2.3m (2006: Â£nil) relating to acquisitions made in the prior year. The results of the Group before the effect of integration costs are as follows: 2007 -------------------------------- ------------------------------------------- Revenue Profit before Margin Profit before interest tax tax and amortisation Â£m Â£m % Â£m -------------------------------- -------- -------- ------ ------ Facilities Services 732.1 41.5 5.7 37.4 Add: Integration costs - 2.3 - 2.3 -------------------------------- -------- -------- ------ ------ Total 732.1 43.8 6.0 39.7 -------------------------------- -------- -------- ------ ------ Property Services 215.1 10.6 4.9 10.9 Engineering Services 281.6 7.8 2.8 8.3 -------------------------------- -------- -------- ------ ------ Total continuing operations 1,228.8 62.2 5.1 58.9 -------------------------------- -------- -------- ------ ------ Other segmental analysis: ------------------------------- -------- ------- -------- ------ Other segment information Facilities Property Engineering Total Services Services Services 2007 2007 2007 2007 Â£m Â£m Â£m Â£m ------------------------------- -------- ------- -------- ------ Assets by segment Intangible assets 140.6 5.6 12.1 158.3 Divisional assets 226.5 75.5 100.6 402.6 ------------------------------- -------- ------- -------- ------ 367.1 81.1 112.7 560.9 Unallocated assets (46.6)(i) ------------------------------- -------- ------- -------- ------ Total assets 514.3 ------------------------------- -------- ------- -------- ------ Liabilities by segment Divisional liabilities (159.7) (55.0) (81.2) (295.9) Unallocated liabilities (14.5)(i) ------------------------------- -------- ------- -------- ------ Total liabilities (310.4) ------------------------------- -------- ------- -------- ------ ------------------------------- -------- ------- -------- ------ Total net assets 203.9 ------------------------------- -------- ------- -------- ------ Capital expenditure Tangible assets 12.7 7.0 2.8 22.5 Depreciation charge 9.0 2.4 1.6 13.0 Intangible assets 3.9 0.2 0.5 4.6 Intangible amortisation 1.6 - - 1.6 ------------------------------- -------- ------- -------- ------ ------------------------------- -------- ------- -------- ------ Other segment information Facilities Property Engineering Total Services Services Services 2006 2006 2006 2006 Â£m Â£m Â£m Â£m ------------------------------- -------- ------- -------- ------ Assets by segment Intangible assets 138.3 5.4 11.6 155.3 Divisional assets 197.1 55.0 87.8 339.9 ------------------------------- -------- ------- -------- ------ 335.4 60.4 99.4 495.2 Unallocated assets (36.0)(i) ------------------------------- -------- ------- -------- ------ Total assets 459.2 ------------------------------- -------- ------- -------- ------ Liabilities by segment Divisional liabilities (142.0) (34.7) (67.2) (243.9) Unallocated liabilities (39.6)(i) ------------------------------- -------- ------- -------- ------ Total liabilities (283.5) ------------------------------- -------- ------- -------- ------ ------------------------------- -------- ------- -------- ------ Total net assets 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 ------------------------------- -------- ------- -------- ------ (i)Relates to interdivisional funding The 2006 comparatives have been revised to separately identify assets and liabilities that are not directly attributable to a business segment. Geographical segments All Group operations are located in the United Kingdom and the Channel Islands. The Group considers all operations form part of that single geographical segment. 4. Revenue The following analysis is provided for additional information: 2007 2006 Â£m Â£m ---------------------------------- -------- --------- Facilities Services Cleaning 220.9 204.7 Security 241.8 87.2 Engineering Maintenance 109.7 102.3 Managed Services 84.9 71.6 Business Services 24.1 16.8 PFI 15.0 10.7 Catering 19.7 13.6 Landscape 10.3 4.4 Pest Control 5.7 4.7 ---------------------------------- -------- --------- Total Facilities Services 732.1 516.0 ---------------------------------- -------- --------- Property Services 215.1 163.5 Engineering Services 281.6 256.1 ---------------------------------- -------- --------- Total 1,228.8 935.6 ---------------------------------- -------- --------- 5. Operating profit Operating profit has been arrived at after charging/(crediting): --------------------------------- -------- --------- 2007 2006 Â£m Â£m --------------------------------- -------- --------- Depreciation of property, plant and equipment 13.0 9.8 Amortisation of intangible assets 1.6 0.2 Gain on disposal of property, plant and equipment (1.1) (0.6) Staff costs (see note 6) 455.9 391.9 Auditors' remuneration for audit services (see below) 0.5 0.4 --------------------------------- -------- --------- A more detailed analysis of auditors' remuneration is provided below. ------------------------------------- -------- ------ 2007 2006 Â£'000 Â£'000 ------------------------------------- -------- ------ Fees payable to the Company's auditors for the audit of the Company's annual accounts 35 30 Fees payable to the Company's auditors and their associates for other services to the Group: - the audit of the Company's subsidiaries pursuant to legislation 350 309 -------- ------ Total audit fees 385 339 Tax services 40 56 Other services 56 67 -------- ------ Total non-audit fees 96 123 ------------------------------------- -------- ------ Total 481 462 ------------------------------------- -------- ------ Â£26,000 (2006: Â£39,000) of fees were incurred in relation to acquisitions and have been included in the acquisition costs. In addition to the amounts shown above, the auditors received fees of Â£11,750 (2006: Â£10,300) for the audit of the Group pension schemes. 6. Staff costs 2007 2006 No. No. ---------------------------------- -------- -------- The average number of people employed during the financial year was: Facilities Services 38,429 29,298 Property Services 2,697 1,826 Engineering Services 1,241 1,297 ---------------------------------- -------- -------- Total Group 42,367 32,421 ---------------------------------- -------- -------- The number of people employed at 31 March was: ---------------------------------- -------- -------- Total Group 44,866 41,762 ---------------------------------- -------- -------- -------- -------- 2007 2006 Â£m Â£m ---------------------------------- -------- -------- Their aggregate remuneration comprised: Wages and salaries 417.3 356.0 Social security costs 30.6 31.5 Other pension costs 6.9 3.7 Share-based payments (note 29) 1.1 0.7 ---------------------------------- -------- -------- 455.9 391.9 ---------------------------------- -------- -------- 7. Investment revenue --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Interest on bank deposits 0.1 1.6 Other interest receivable 0.7 1.0 --------------------------------- -------- -------- 0.8 2.6 --------------------------------- -------- -------- 8. Finance costs --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Interest on bank overdrafts and loans 2.3 0.2 Interest on obligations under finance leases 0.2 - --------------------------------- -------- -------- 2.5 0.2 --------------------------------- -------- -------- 9. Tax --------------------------------- -------- --------- 2007 2006 Â£m Â£m --------------------------------- -------- --------- Current tax 17.9 15.4 Deferred tax (note 18) (0.5) 0.1 --------------------------------- -------- --------- 17.4 15.5 --------------------------------- -------- --------- Corporation tax is calculated at 30.0% (2006: 30.0%) 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: --------------------------------- -------- --------- 2007 2006 Â£m Â£m --------------------------------- -------- --------- Profit before tax: Continuing operations 56.6 50.5 Discontinued operations - (2.4) Tax at the UK corporation tax rate of 30.0% 17.0 14.4 Expenses not deductible for tax purposes 0.6 1.1 Tax losses not recognised 0.3 0.7 Profit on disposal of property (0.1) - Prior year adjustments (0.4) (0.7) --------------------------------- -------- --------- Tax charge for the year 17.4 15.5 --------------------------------- -------- --------- 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£1.8m (2006: Â£0.5m charged) has been credited directly to equity (see note 18). The benefit of tax savings relating to retirement benefit costs and share-based payments amounting to Â£0.5m (2006: Â£1.0m) has been credited directly to equity. 10. Dividends --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 March 2006 of 2.4p (2005:1.8p) per share 7.6 5.6 Interim dividend for the year ended 31 March 2007 of 2.4p (2006:1.9p) per share 7.5 5.9 --------------------------------- -------- -------- 15.1 11.5 --------------------------------- -------- -------- Proposed final dividend for the year ended 31 March 2007 of 2.7p (2006: 2.4p) per share 8.4 7.3 --------------------------------- -------- -------- 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 Basic and diluted earnings per share have been calculated in accordance with IAS 33 'Earnings Per Share'. The calculation of the basic and diluted EPS is based on the following data: ---------------------------------- --------- -------- Number of shares 2007 2006 million million ---------------------------------- --------- -------- Weighted average number of Ordinary Shares for the purpose of basic EPS 310.6 305.9 Effect of dilutive potential Ordinary Shares: share options 4.4 3.2 Weighted average number of Ordinary Shares for the purpose of diluted EPS 315.0 309.1 ---------------------------------- --------- -------- Basic EPS on continuing operations is 11.9p (2006: 10.6p). Basic and diluted EPS on discontinued operations in 2006 was (0.8)p. 12. Goodwill Â£m ---------------------------------------- -------- Cost 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 1 April 2006 143.8 ---------------------------------------- -------- Acquisition of subsidiaries/ assets 0.3 Decreased consideration for subsidiaries acquired in prior years (0.1) Acquisition of minorities 2.5 Changes in fair values of subsidiaries acquired in prior year 1.9 ---------------------------------------- -------- At 31 March 2007 148.4 ---------------------------------------- -------- Accumulated impairment losses At 1 April 2005 - At 1 April 2006 - ---------------------------------------- -------- At 31 March 2007 - ---------------------------------------- -------- Carrying amount ---------------------------------------- -------- At 31 March 2007 148.4 ---------------------------------------- -------- At 31 March 2006 143.8 ---------------------------------------- -------- Changes in fair values of subsidiaries acquired in the prior year relate to revisions in estimates of bad debts and property related provisions. As these are not material prior year goodwill has not been restated. Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (CGU's) that are expected to benefit from that business combination. Goodwill has been allocated to CGU's in the following business segments, which is how goodwill is monitored by the Group internally. --------------------------------- -------- -------- Cost 2007 2006 Â£m Â£m --------------------------------- -------- -------- Facilities Services 130.7 126.8 Property Services 5.6 5.4 Engineering Services 12.1 11.6 --------------------------------- -------- -------- 148.4 143.8 --------------------------------- -------- -------- The Group tests goodwill at least annually for impairment. The recoverable amounts of the CGU's 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 CGU's. 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 annum. 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 CGU's are as follows: --------------------------------- -------- -------- 2007 2006 % % --------------------------------- -------- -------- Facilities Services 9.2 8.0 Property Services 9.2 8.0 Engineering Services 9.2 8.0 --------------------------------- -------- -------- 13. Other intangible assets ---------------------------------------- -------- Customer relationships Â£m ---------------------------------------- -------- Cost At 1 April 2005 - Acquired on acquisition of subsidiaries 11.7 ---------------------------------------- -------- At 1 April 2006 11.7 ---------------------------------------- -------- Additions - ---------------------------------------- -------- At 31 March 2007 11.7 ---------------------------------------- -------- Amortisation At 1 April 2005 - Charge for the year 0.2 ---------------------------------------- -------- At 1 April 2006 0.2 ---------------------------------------- -------- Charge for the year 1.6 ---------------------------------------- -------- At 31 March 2007 1.8 ---------------------------------------- -------- Carrying amount ---------------------------------------- -------- At 31 March 2007 9.9 ---------------------------------------- -------- At 31 March 2006 11.5 ---------------------------------------- -------- Customer relationships are amortised over the remaining period of the contract, which ranges on average between six and eight years. 14. Property, plant and equipment ---------------------- -------- -------- -------- ------- Long Freehold leasehold Plant and Total properties properties vehicles Â£m Â£m Â£m Â£m ---------------------- -------- -------- -------- ------- Cost 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 1 April 2006 6.0 5.1 52.2 63.3 ---------------------- -------- -------- -------- ------- Additions 0.5 1.2 20.8 22.5 Disposals (0.3) (0.2) (10.6) (11.1) ---------------------- -------- -------- -------- ------- At 31 March 2007 6.2 6.1 62.4 74.7 ---------------------- -------- -------- -------- ------- Accumulated depreciation and impairment 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 1 April 2006 0.6 0.8 27.4 28.8 ---------------------- -------- -------- -------- -------- Charge for the year 0.1 0.4 12.5 13.0 Disposals - (0.1) (8.5) (8.6) ---------------------- -------- -------- -------- -------- At 31 March 2007 0.7 1.1 31.4 33.2 ---------------------- -------- -------- -------- --------- Carrying amount ---------------------- -------- -------- -------- --------- At 31 March 2007 5.5 5.0 31.0 41.5 ---------------------- -------- -------- -------- --------- At 31 March 2006 5.4 4.3 24.8 34.5 ---------------------- -------- -------- -------- --------- The net book value of plant and vehicles held under finance leases included above was Â£2.4m (2006: Â£1.8m). 15. Inventories --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Work-in-progress 6.9 8.0 Finished goods 1.0 0.8 --------------------------------- -------- -------- 7.9 8.8 --------------------------------- -------- -------- 16. Trade and other receivables --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Amounts receivable for the sale of services 218.9 211.3 Amounts recoverable on contracts 23.4 17.9 Other debtors 7.2 2.2 Prepayments and accrued income 23.3 12.9 --------------------------------- -------- -------- 272.8 244.3 --------------------------------- -------- -------- The average credit period taken on sales of services was 65 days (2006: 76 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£3.5m (2006: Â£3.9m). This allowance has been determined by considering the recoverability of each debt. 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 Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 17. Cash and cash equivalents 2007 2006 Â£m Â£m Cash and cash equivalents 25.6 9.6 --------------------------------- -------- -------- 25.6 9.6 --------------------------------- -------- -------- 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£10.3m (2006: Â£9.6m) held by the Group's insurance subsidiary, which are not readily available for the general purposes of the Group. 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. 18. 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 Business Share-based Short-term Tax Total tax benefit combinations payments timing losses Â£m depreciation obligations differences Â£m Â£m Â£m Â£m Â£m Â£m ------------- -------- -------- -------- -------- -------- ------ ------ At 1 April 1.0 2.3 - 0.7 0.4 - 4.4 2005 (Charge)/credit to income (0.2) (0.2) - 0.2 (0.1) 0.2 (0.1) (Charge)/credit to equity - (2.6) - 0.4 1.7 - (0.5) (Charge) to goodwill - - (3.6) - - - (3.6) ------------- -------- -------- -------- -------- -------- ------ ------ At 1 April 0.8 (0.5) (3.6) 1.3 2.0 0.2 0.2 2006 ------------- -------- -------- -------- -------- -------- ------ ------ Credit /(charge) to income 0.1 (1.1) 0.5 0.4 0.6 - 0.5 Credit to equity - 1.5 - 0.3 - - 1.8 (Charge)/credit to goodwill - - (0.2) - 1.5 - 1.3 ------------- -------- -------- -------- -------- -------- ------ ------ At 31 March 2007 0.9 (0.1) (3.3) 2.0 4.1 0.2 3.8 ------------- -------- -------- -------- -------- -------- ------ ------ 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: ----------------------------------- -------- -------- 2007 2006 Â£m Â£m ----------------------------------- -------- -------- Deferred tax assets 7.7 4.9 Deferred tax liabilities (3.9) (4.7) ----------------------------------- -------- -------- Net deferred tax asset 3.8 0.2 ----------------------------------- -------- -------- The Group has unutilised income tax losses of Â£3.7m (2006: Â£3.1m) that are available for offset against future profits. In addition the Group has Â£0.8m (2006: Â£1.2m) of capital losses. Deferred tax assets have not been recognised in respect of Â£3.8m (2006: Â£3.6m) of these losses as their recoverability is uncertain. Deferred tax has been calculated at the current corporation tax rate of 30%, as the expected reduction in the corporation tax rate to 28% has not yet been substantively enacted. 19. Trade and other payables ----------------------------------- -------- -------- 2007 2006 Â£m Â£m ----------------------------------- -------- -------- Payments received on account 1.0 - Trade creditors 155.3 133.4 Other taxes and social security 45.5 40.7 Other creditors 2.6 1.1 Accruals and deferred income 51.3 39.3 ----------------------------------- -------- -------- 255.7 214.5 ----------------------------------- -------- -------- Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 48 days (2006: 55 days). The Directors consider that the carrying amount of trade and other payables approximates their fair value. 20. Financial liabilities --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Overdraft - 2.0 Bank loans 20.0 31.0 Secured loan notes 9.9 - Unsecured loan notes 1.2 - Obligations under finance leases (note 21) 2.6 1.8 --------------------------------- -------- -------- 33.7 34.8 --------------------------------- -------- -------- Included in current liabilities 30.9 33.8 Included in non-current liabilities 2.8 1.0 --------------------------------- -------- -------- 33.7 34.8 --------------------------------- -------- -------- Included in non-current liabilities are Â£1.6m (2006: Â£1.0m) of obligation under finance leases (see note 21) and Â£1.2m (2006: Â£nil) of unsecured loan notes which are repayable between 2008 and 2013. All borrowings are in sterling. The Directors estimate that the carrying amount of the Group's borrowings approximates their fair value. The bank loans are repayable within one year and the overdrafts are repayable on demand. --------------------------------- -------- -------- 2007 2006 % % --------------------------------- -------- -------- The weighted average interest rates paid during the period on the overdrafts and loans outstanding were as follows: Overdrafts 5.6 5.4 Bank loans 5.8 5.1 Loan notes 4.3 - --------------------------------- -------- -------- At 31 March 2007, the Group had available Â£117m (2006: Â£34m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. The facilities have an expiry date of January 2012. The loans carry interest rates which are currently fixed at 5.8% and are currently determined at 0.4% over LIBOR. The overdraft carries interest at 0.9% over base rate. The secured loan notes are backed by a bank guarantee. Full details of the Group's contingent liabilities are provided in note 27. Foreign currency risk The Group has very limited trading transactions in foreign currency and currently there is no hedging of these exposures. Any material transactions would be appropriately hedged. Liquidity risk The Group monitors its risk to a shortage of funds using a cash flow projection model which considers the maturity of the Group's assets and liabilities and the projected cash flow from operations. Bank facilities which allow for appropriate headroom in the Group's daily cash movements are then arranged. Interest rate risk All Group debt is currently due to short-term working capital fluctuations and hence is not hedged as at 31 March 2007. 21. Obligations under finance leases Minimum lease payments Present value of lease payments ----------------------- -------- -------- -------- --------- 2007 2006 2007 2006 Â£m Â£m Â£m Â£m ----------------------- -------- -------- -------- --------- Amounts payable under finance leases: Within one year 1.0 0.8 1.0 0.7 In the second to fifth years inclusive 1.9 1.3 1.6 1.2 ----------------------- -------- -------- -------- --------- 2.9 2.1 2.6 1.9 ----------------------- -------- -------- -------- --------- Less: future finance charges (0.3) (0.3) - - ----------------------- -------- -------- -------- --------- Present value of lease obligations 2.6 1.8 2.6 1.9 ----------------------- -------- -------- -------- --------- Less: Amount due for settlement within 12 months (1.0) (0.8) (1.0) (0.7) ----------------------- -------- -------- -------- --------- Amount due for settlement after 12 months 1.6 1.0 1.6 1.2 ----------------------- -------- -------- -------- --------- The average remaining lease term is 28 months (2006: 22 months). For the year ended 31 March 2007, the average effective borrowing rate was 5.3% (2006: 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 2006 15.4 6.5 21.9 Additional provision in the year 0.3 3.8 4.1 Converted to loan notes during the year (12.1) - (12.1) Utilised during the year (3.3) (1.7) (5.0) --------------------------- -------- -------- -------- At 31 March 2007 0.3 8.6 8.9 --------------------------- -------- -------- -------- Included in current liabilities 0.3 Included in non-current liabilities 8.6 --------------------------- -------- -------- -------- 8.9 --------------------------- -------- -------- -------- 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 --------------------------- -------- -------- -------- During the period Â£1.9 million of deferred consideration was paid in respect of MITIE Security (London) Limited (formerly MITIE Trident Security Limited). In addition, Â£8.9m of loan notes were issued to the original shareholders of MITIE Security (London) Limited (formerly MITIE Trident Security Limited) in respect of the settlement of deferred consideration. Â£1.2m of loan notes were also issued to the vendors of MITIE Pest Control Limited (formerly Eagle Pest Control Services UK Limited). Â£0.8m of deferred consideration in respect of the purchase last year of the minority shareholdings in MITIE Business Services Limited, MITIE Engineering Services (Swansea) Limited and MITIE Security (North) Limited was settled by the issue of new MITIE shares. Â£0.5m was paid to the vendors of MITIE Lyndhurst Services Limited (formerly Lyndhurst Services Limited). Â£2.0m was converted into loan notes in respect of The Watch Security Limited and subsequently Â£1.0m was redeemed during the year. Provision is made for contingent deferred consideration, which may become payable in August 2007 subject to certain profit targets being attained, at the best estimate of the Directors. A total of Â£0.3m was provided for deferred consideration to the minority shareholders of MITIE Air Conditioning (London) Limited and MITIE Engineering Maintenance (South West) Limited. The provision for insurance claims represents amounts payable by MITIE Reinsurance Company Limited 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 2006 and 31 March 2007 340,000,000 8.5 --------------------------------- -------- -------- 2007 Allotted and fully paid At beginning of year 308,762,569 7.7 Issued as Directors' remuneration 46,219 - Issued for acquisitions 1,727,180 - Issued under share option schemes 1,913,227 0.1 --------------------------------- -------- -------- At end of year 312,449,195 7.8 --------------------------------- -------- -------- 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 --------------------------------- -------- -------- During the year 46,219 (2006: 66,773) Ordinary Shares of 2.5p were allotted as remuneration in respect of services provided by Directors at a market price of 239.0p (2006: 199.5p) giving rise to share premium of Â£0.1m (2006: Â£0.1m). During the year 1,727,180 (2006: 4,832,770) Ordinary Shares of 2.5p were allotted in respect of acquiring minority interests at a mid-market price of 191.2p (2006: 166.0p) giving rise to share premium of Â£0.4m (2006: Â£nil) and a merger reserve of Â£2.9m (2006: Â£7.9m). During the year 1,913,227 (2006: 1,681,551) Ordinary Shares of 2.5p were allotted in respect of share option schemes at a price between 165p and 191p (2006: 138p and 162p) giving rise to share premium of Â£2.4m (2006: Â£2.2m). During the year nil Ordinary Shares of 2.5p were purchased (2006: 992,305 at market prices between 158.5p and 164.0p). These were then cancelled. 24. Reserves Called Share Merger Revaluation Capital Other Share- Retained Total -up premium reserve reserve redemption reserve based earnings share account reserve (i) payment capital reserve Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------ ------- ------ -------- ------- ------ ------- ------- ------ Balance at 1 April 2006 7.7 13.7 52.0 (0.2) 0.3 0.3 1.4 90.1 165.3 Shares issued and net premium arising in respect of acquisitions - 0.4 2.9 - - - - - 3.3 Shares issued and net premium in connection with exercise of share options 0.1 2.5 - - - (0.1) - - 2.5 Profit for the period attributable to equity holders of the parent - - - - - - - 37.0 37.0 Dividends paid - - - - - - - (15.1) (15.1) Expense in relation to share-based payments - - - - - - 1.1 - 1.1 Transfer in relation to share-based payments - - - - - - (0.6) 0.6 - Tax charge on items taken directly to equity - - - - - - - 0.8 0.8 ------------- ------ ------- ------ -------- -------- ------ ------- ------- ------ Net actuarial loss on defined benefit pension schemes - - - - - - - (4.7) (4.7) Tax credit on actuarial loss taken directly to equity - - - - - - - 1.5 1.5 ------------- ------ ------- ------ -------- -------- ------ ------- ------- ------ Net expense on defined benefit pension schemes recognised directly in equity in the year - - - - - - - (3.2) (3.2) ------------- ------ ------- ------ -------- -------- ------ ------ ------- ------ Balance at 31 March 2007 7.8 16.6 54.9 (0.2) 0.3 0.2 1.9 110.2 191.7 ------------- ------ ------- ------ -------- -------- ------ ------- ------- ------ Called Share Merger Revaluation Capital Other Share- Retained Total -up premium reserve reserve redemption reserve based earnings share account reserve (i) payment capital reserve Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------ ------- ------ -------- ------- ------ ------- ------- ------ Balance at 1 April 2005 7.6 11.5 44.1 (0.2) 0.3 0.6 0.7 71.4 136.0 Shares issued and net premium arising in respect of acquisitions 0.1 - 7.9 - - - - - 8.0 Shares issued and net premium in connection with exercise of share options - 2.2 - - - (0.3) - - 1.9 Own shares acquired - - - - - - - (1.6) (1.6) Profit for the period attributable to equity holders of the parent - - - - - - - 30.2 30.2 Dividends paid - - - - - - - (11.5) (11.5) Expense in relation to share-based payments - - - - - - 0.7 - 0.7 Tax charge 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 directly to equity - - - - - - - (2.6) (2.6) ------------- ------ ------- ------ -------- -------- ------ ------- ------- ------ Net expense on defined benefit pension schemes recognised directly in equity in the year - - - - - - - (1.5) (1.5) ------------- ------ ------- ------ -------- -------- ------ ------- ------- ------ Balance at 31 March 2006 7.7 13.7 52.0 (0.2) 0.3 0.3 1.4 90.1 165.3 ------------ ------ ------- ------ -------- -------- ------ ------- ------- ------ (i) This is a non-distributable reserve. 25. Acquisition of subsidiaries Purchase of minority interests MITIE Landscape (Northern) Ltd & MITIE MITIE Air MITIE Air MITIE MITIE MITIE Engineering Conditioning Conditioning Engineering Environmental Landscape Maintenance (London) Ltd (Wales) Ltd Services Ltd (Southern) (South West)Ltd (Retail) Ltd Ltd Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m ------------- -------- -------- -------- -------- -------- ------- ------- Minority interests 0.6 0.2 - 0.1 0.5 0.2 1.6 ------------- -------- -------- -------- -------- -------- ------- ------- Goodwill 1.6 0.3 0.1 0.1 - 0.4 2.5 ------------- -------- -------- -------- -------- -------- ------- ------- Total purchase consideration 2.2 0.5 0.1 0.2 0.5 0.6 4.1 Shares issued - MITIE Group PLC 1.8 0.4 0.1 0.2 - - 2.5 Deferred contingent consideration 0.2 0.1 - - - - 0.3 ------------- -------- -------- -------- -------- -------- ------- ------- Cash consideration being cash outflow in the period 0.2 - - - 0.5 0.6 1.3 ------------- -------- -------- -------- -------- -------- ------- ------- In addition, MITIE acquired the minority interest in MITIE Industrial Cleaning (North) Limited for Â£61,000. Purchase of subsidiary post balance sheet date On 2 April 2007 MITIE acquired 100% of Robert Prettie for total consideration of Â£23.0m. The transaction will be accounted for by the purchase method of accounting. Below we provide provisional information on fair values acquired. Book value Fair value Fair value adjustments Â£m Â£m Â£m ------------------------------------ ------- -------- ------ Net assets acquired: Intangible assets 8.6 (6.7) 1.9 Deferred tax liability - (0.6) (0.6) Property, plant and equipment 0.2 - 0.2 Inventories 4.9 (0.2) 4.7 Trade and other receivables 1.2 - 1.2 Cash and cash equivalents 0.2 - 0.2 Trade and other payables (6.3) (0.2) (6.5) Current tax liabilities (0.7) - (0.7) Loans (3.7) - (3.7) Pension liabilities (0.4) - (0.4) ------------------------------------ ------- -------- ------ Net assets acquired 4.0 (7.7) (3.7) Goodwill 26.7 ------------------------------------ ------- -------- ------ Total consideration 23.0 ------------------------------------ ------- -------- ------ Satisfied by: Cash 7.0 Loan notes 1.6 Deferred contingent consideration 14.0 Directly attributable costs 0.4 ------------------------------------ ------- -------- ------ Total consideration 23.0 ------------------------------------ ------- -------- ------ Net cash outflow arising on acquisition: Cash consideration 7.0 Cash and cash equivalents acquired (0.2) Loans repaid 3.7 ------------------------------------ ------- -------- ------ Net cash outflow 10.5 ------------------------------------ ------- -------- ------ The goodwill arising on the acquisition of Robert Prettie is attributable to the underlying profitability of the company, expected profitability arising from new business and the anticipated future operating synergies arising from assimilation into the Group. 26. Notes to the cashflow statement --------------------------------- -------- -------- Reconciliation of operating profit to net cash from operating 2007 2006 activities Â£m Â£m --------------------------------- -------- -------- Operating profit from continuing operations 58.3 48.1 Operating loss from discontinued operations - (2.4) Adjustments for: Share-based payment expense 1.1 0.7 Pension charge 1.8 2.6 Pension contributions (5.2) (3.2) Depreciation of property, plant and equipment 13.0 9.8 Amortisation of intangible assets 1.6 0.2 Gain on disposal of property, plant and equipment (1.1) (0.6) --------------------------------- -------- -------- Operating cash flows before movements in working capital 69.5 55.2 --------------------------------- -------- -------- Decrease/(increase) in inventories 0.9 (2.2) Increase in receivables (28.5) (29.5) Increase in payables 39.4 31.2 Increase in provisions 2.1 0.5 --------------------------------- -------- -------- Cash generated by operations 83.4 55.2 --------------------------------- -------- -------- Additional pension contributions - (7.8) Income taxes paid (17.0) (15.1) Interest paid (2.5) (0.2) --------------------------------- -------- -------- Net cash from operating activities 63.9 32.1 --------------------------------- -------- -------- Additions to fixtures and equipment during the year amounting to Â£1.7m (2006: Â£0.1m) 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, commitments and overdrafts of Â£190m (2006: Â£105m). The Company and various of its subsidiaries are, from time to time, party 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. In addition, the Group and its subsidiaries have provided guarantees and indemnities in respect of performance, issued by financial institutions on its behalf, amounting to Â£19.0m (2006: Â£6.1m) in the ordinary course of business. These are not expected to result in any material financial loss. 28. Operating lease arrangements The Group as Lessee --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Minimum lease payments under operating leases 4.4 4.5 recognised in income for the year --------------------------------- -------- -------- At the balance sheet date, the Group had total outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: --------------------------------- -------- -------- 2007 2006 Â£m Â£m --------------------------------- -------- -------- Within one year 1.8 1.0 In the second to fifth years inclusive 2.7 2.9 After five years 1.8 1.3 --------------------------------- -------- -------- 6.3 5.2 --------------------------------- -------- -------- 29. Share-based payments Equity-settled share option schemes 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 may be 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 10.0% 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 80.0% 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 nine months from the date of grant, the options expire. Options may be forfeited if the employee leaves the Group. No options have been granted under the 1991 scheme since August 2001. Details of the share options outstanding during the year are as follows: 2007 2006 -------------------------- --------------- --------------- 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) 12,279,752 130 12,089,064 124 Granted during the period 3,870,461 177 3,278,927 149 Forfeited during the period (1,377,747) 141 (1,406,688) 150 Exercised during the period ( 1,913,227) 125 (1,681,551) 138 -------------------------- -------- -------- -------- --------- Outstanding at the end of the period 12,859,239 143 12,279,752 130 -------------------------- -------- -------- -------- --------- Exercisable at the end of the period 1,739,348 126 2,098,698 124 The Group recognised the following expenses related to share-based payments: 2007 2006 Â£m Â£m -------------------------------- -------- --------- 2001 Executive share options 0.6 0.4 2001 Savings Related share options 0.5 0.3 -------------------------------- -------- --------- 1.1 0.7 -------------------------------- -------- --------- (1) Included within this balance are 2,263,571 (2006: 3,719,291) 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 216p (2006: 181p). The options outstanding at 31 March 2007 had exercise prices ranging from 58p - 191p (2006: 58p - 174p) and a weighted average remaining contractual life of 5.12 years (2006: 5.18 years). In the year ended 31 March 2007, options were granted on 22 June 2006 and 24 July 2006 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£1.5m. 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. The fair value of options is measured by use of the Black-Scholes model. The inputs into the Black-Scholes model are as follows: 2007 2006 -------------------------------- --------- --------- Share price (p) 130-193 98-161 Exercise price (p) 120-191 99-162 Expected volatility (%) 28-30 28-30 Expected life (years) 4-6 5-6 Risk-free rate (%) 4.17-5.12 4.17-5.12 Expected dividends (%) 1.43-2.29 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 schemes The Group operates a number of defined contribution retirement benefit schemes for qualifying employees. The assets of the schemes are held separately from those of the Group in funds controlled by the scheme providers. The total cost charged to income of Â£1.7m (2006: Â£1.1m) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes. As at 31 March 2007, contributions of Â£0.5m (2006: Â£0.1m) due in respect of the current reporting period had not been paid over to the schemes. Defined benefit schemes Group 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. The assets of the schemes are held separately from the Group. 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 the Group schemes' assets and the present value of their defined benefit obligations were carried out at 1 April 2005 by Mr David Higgs, Fellow of the Institute of Actuaries. Other defined benefit schemes Grouped together under 'Other schemes' are schemes where the Group has allocated sections of two multi-employer schemes in which the Group is a participating employer and several schemes to which the Group makes contributions under Admitted Body status to our customers' defined benefit schemes in respect of certain TUPE employees. These valuations are updated by the actuaries at each balance sheet date. The present values of the defined benefit obligations, the related current service cost, and past service cost were measured using the projected unit credit method. For the Admitted Body Schemes (principally the West Midlands Pension Fund), which are all part of the Local Government Pension Scheme, the Group will only participate for a finite period up to the end of the contracts. The Group is required to pay regular contributions as decided by the relevant Scheme Actuaries and detailed in the schemes' Schedule of Contributions. In a number of cases contributions payable by the employer are capped and any excess recovered from the body that the employees transferred from. In addition, in certain cases, at the end of the contract the Group will be required to pay any deficit (as determined by the Scheme Actuary) that is remaining for its notional section of the scheme. Group schemes Other schemes ------------------- ----------- -------- ------- ------- 2007 2006 2007 2006 % % % % ------------------------- ----------- -------- ------- ------- Key assumptions used for IAS 19 valuation: Discount rate 5.30 5.10 5.30 - Expected return on scheme assets: Equity instruments 8.00 8.00 8.00 - Debt instruments 5.00 5.00 5.00 - Property 7.50 7.50 7.50 - Other assets 5.25 5.00 5.25 - Expected rate of salary increases 4.00 3.75 3.75 - Future pension increases 3.00 3.00 3.00 - ------------------------- ----------- -------- ------- ------- The overall expected return on assets is calculated as the weighted average of the expected return of each asset class. The expected return on equities is the sum of dividend growth and capital growth net of 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. Amounts recognised in administrative expenses in respect of these defined benefit schemes are as follows: 2007 2006 ----------------- ------- ------- ------- ------- ------- -------- Group schemes Other schemes Total Group schemes Other schemes Total Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- Current service cost (3.2) (1.5) (4.7) (3.0) - (3.0) Interest cost (3.7) (2.7) (6.4) (3.2) - (3.2) Expected return on scheme assets 5.3 4.0 9.3 3.6 - 3.6 ----------------- ------- ------- ------- ------- ------- -------- (1.6) (0.2) (1.8) (2.6) - (2.6) ----------------- ------- ------- ------- ------- ------- -------- Amounts recognised in the consolidated statement of recognised income and expense are as follows: 2007 2006 ----------------- ------- ------- ------- ------- ------- -------- Group schemes Other schemes Total Group schemes Other schemes Total Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- Actual return on scheme assets 4.8 4.0 8.8 12.9 - 12.9 Expected return on scheme assets (5.3) (4.0) (9.3) (3.6) - (3.6) Experience adjustments arising on plan liabilities (3.2) (1.0) (4.2) (8.2) - (8.2) ----------------- ------- ------- ------- ------- ------- -------- (3.7) (1.0) (4.7) 1.1 - 1.1 ----------------- ------- ------- ------- ------- ------- -------- The cumulative amount of actuarial loss recognised since 1 April 2004 in the consolidated statement of recognised income and expense is Â£5.3m (2006: Â£0.4m). The amounts included in the balance sheet arising from the Group's obligations in respect of its defined benefit retirement benefit schemes are as follows: 2007 2006 ----------------- ------- ------- ------- ------- ------- -------- Group schemes Other schemes Total Group schemes Other schemes Total Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- Fair value of scheme assets 83.2 61.4 144.6 74.0 - 74.0 Present value of defined benefit obligations (82.7) (60.6) (143.3) (72.2) - (72.2) ----------------- ------- ------- ------- ------- ------- -------- Surplus/(deficit) in scheme 0.5 0.8 1.3 1.8 - 1.8 Contract adjustment - (0.8) (0.8) - - - ----------------- ------- ------- ------- ------- ------- -------- Net pension asset 0.5 - 0.5 1.8 - 1.8 ----------------- ------- ------- ------- ------- ------- -------- Movements in the present value of defined benefit obligations were as follows: 2007 2006 ----------------- ------- ------- ------- ------- ------- -------- Group schemes Other schemes Total Group schemes Other schemes Total Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- At 1 April 72.2 - 72.2 56.6 - 56.6 Service cost 3.2 1.5 4.7 3.0 - 3.0 Interest cost 3.7 2.7 6.4 3.2 - 3.2 Reclassification (0.4) 0.4 - - - - Contributions from scheme members 2.1 0.5 2.6 2.2 - 2.2 Actuarial gains and losses 3.2 0.3 3.5 8.2 - 8.2 Benefits paid (1.3) (0.1) (1.4) (1.0) - (1.0) Contract transfers - 55.3 55.3 - - - ----------------- ------- ------- ------- ------- ------- -------- At 31 March 82.7 60.6 143.3 72.2 - 72.2 ----------------- ------- ------- ------- ------- ------- -------- Movements in the fair value of scheme assets were as follows: 2007 2006 ----------------- ------- ------- ------- ------- ------- -------- Group schemes Other schemes Total Group schemes Other schemes Total Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- At 1 April 74.0 - 74.0 49.1 - 49.1 Expected return on scheme assets 5.3 4.0 9.3 3.6 - 3.6 Actuarial gains and losses (0.5) - (0.5) 9.3 - 9.3 Contributions from the sponsoring companies 3.9 1.3 5.2 11.0 - 11.0 Contributions from scheme members 2.2 0.5 2.7 2.1 - 2.1 Reclassification (0.4) 0.4 - - - - Benefits paid (1.3) (0.1) (1.4) (1.1) - (1.1) Contract transfers - 55.3 55.3 - - - ----------------- ------- ------- ------- ------- ------- -------- At 31 March 83.2 61.4 144.6 74.0 - 74.0 ----------------- ------- ------- ------- ------- ------- -------- The analysis of the scheme assets at the balance sheet date was as follows: 2007 2006 ----------------- ------- ------- ------- ------- ------- -------- Group schemes Other schemes Total Group schemes Other schemes Total Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- Equity instruments 47.8 46.6 94.4 46.6 - 46.6 Debt instruments 3.0 7.6 10.6 2.8 - 2.8 Property 15.3 5.1 20.4 3.4 - 3.4 Other assets 17.1 2.1 19.2 21.2 - 21.2 ----------------- ------- ------- ------- ------- ------- -------- At 31 March 83.2 61.4 144.6 74.0 - 74.0 ----------------- ------- ------- ------- ------- ------- -------- The pension schemes have invested in property occupied by the Group with a fair value of Â£3.2m (2006: Â£nil) generating rental of Â£0.3m (2006: Â£nil). The pension schemes have not invested in any of the Group's own financial instruments or other assets used by the Group. Transactions between the Group and the pension schemes are conducted at arm's length. The mortality for the Group schemes is based upon up to date tables which project mortality improvements in the future. For a male aged 65.0 years the expected life is 85.1 years (2006: 85.1 years) and for a female aged 65.0 years the expected life is 88.0 years (2006: 88.0 years). Mortality for the other schemes is that used by the relevant scheme actuary. The history of experience adjustments is as follows: Group schemes Other schemes ----------------- ------------------ ------------------- 2007 2006 2005 2007 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m ----------------- ------- ------- ------- ------- ------- -------- Fair value of scheme assets 83.2 74.0 49.0 61.4 - - Present value of defined benefit obligations (82.7) (72.2) (56.6) (61.4) - - ----------------- ------- ------- ------- ------- ------- -------- Surplus / (deficit) in the scheme 0.5 1.8 (7.6) - - - Experience adjustments on scheme liabilities (3.2) (8.2) (3.7) (1.0) - - Percentage of scheme liabilities 3.9% 11.4% 7.0% 1.6% - - Experience adjustments on scheme assets (0.5) 9.3 2.3 - - - Percentage of scheme assets 1.0% 12.6% 5.0% - - - ------------------ ------ ------- ------- ------- ------- -------- The estimated contributions expected to be paid to the Group schemes during the current financial year are Â£3.4m (2006: Â£3.2m) and to other schemes Â£1.2m (2006: Â£nil). END OF ANNOUNCEMENT This information is provided by RNS The company news service from the London Stock Exchange

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