Final Results

22nd May 2006 07:01

MITIE Group PLC22 May 2006 MITIE Group PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2006 "MITIE is in excellent shape for future growth. There is an energy and spirit inMITIE that is very rare and this makes me very positive about our prospects." Ian R Stewart, Chief Executive - Strong growth in revenues and profits - Acquisitions take MITIE Security to second place in the UK Manned Guarding market - Major contract awards in social housing - Full year dividend up 26.5% to 4.3p - 72% of 2006/07 budgeted revenue secured FINANCIAL HIGHLIGHTS 2006 2005Revenue £935.6m £799.7m 17.0%Profit before tax pre-amortisation of intangibleassets (1) £50.7m £46.4m 9.3%Profit before tax £50.5m £47.9m 5.4%Earnings per share pre-amortisation anddiscontinued operations (1,2) 10.6p 9.6p 10.2%Basic earnings per share pre-amortisation (2) 9.9p 8.8p 12.3%Basic earnings per share 9.8p 8.8p 11.6%Dividend per share 4.3p 3.4p 26.5% 1. Excludes other operating income in 2005 of £1.5m2. Reconciliation provided in Note 11 in the Consolidated Financial Information FOR FURTHER INFORMATION: Ian Stewart, Chief Executive, MITIE Group PLCMobile: 07979 701002 Ruby McGregor-Smith, Chief Operating Officer, MITIE Group PLCMobile: 07979 701004 Suzanne Baxter, Group Finance Director, MITIE Group PLCMobile: 07979 701889 CHAIRMAN'S STATEMENT This has been an exceptional year for MITIE. We have continued our track recordand delivered an impressive set of results, completed our largest everacquisition and won a series of new and exciting contracts across a number ofemerging and established markets. With a clear corporate strategy, we areextremely well placed for the future. MITIE provides a comprehensive range of support services to both public andprivate sector clients in the UK. We will build on our success by furtherstrengthening the range of services we provide and by achieving serviceexcellence for all our customers. MITIE has achieved 19 years of consecutive revenue, profit and dividend growthand now employs over 39,000 staff. Our success is testament to the Group'sunique culture, which motivates both management and staff to grow the businessby concentrating on the needs of our customers. The dedication of ouremployees, our core skills in managing and motivating a large and diverseworkforce, and our passion to support our customers is a real and valuabledifferentiator in the marketplace. On behalf of the Board I would like towelcome the employees of our acquired companies to the Group and thank everyonein MITIE for their contribution to our success and their hard work over thefinancial year. Results Turnover in the period rose to £935.6m (2005: £799.7m), an increase of 17.0% oncontinuing operations, while profit before tax and intangible amortisation fromcontinuing operations excluding other operating income rose by 9.3% to £50.7m(2005: £46.4m). Basic earnings per share (EPS) increased by 11.6% to 9.8p (2005:8.8p), whilst EPS pre-amortisation, other operating income and discontinuedactivities rose by 10.2% to 10.6p (2005: 9.6p). Dividend The Board is recommending a final dividend of 2.4p per share, which gives atotal of 4.3p (2005: 3.4p) for the year. This represents an increase of 26.5%.The dividend will be paid on 29 September 2006 to Shareholders on the Registerat the close of business on 8 September 2006. The dividend cover, based on the Group's profits for dividends declared in theyear, is 2.5 times. The dividend cover for dividends paid in the year is 3.1times. Share buyback programme We continued the share buyback programme started in the previous financial yearand purchased 992,305 MITIE Group PLC ordinary shares of 2.5p at an averageprice of 162.6p. The highest price paid was 164.0p while the lowest price paidwas 158.5p. All shares purchased have been cancelled. We will be seeking to renew the authority granted by our Shareholders topurchase up to 10% of the issued share capital of the Company, at our nextAnnual General Meeting on 27 July 2006. Acquisitions The year was exceptional in terms of our acquisition activity. Firstly, we made four external acquisitions in the year at a total considerationof £91.5m, including Initial Security Ltd our largest acquisition to date. Secondly, and in accordance with our unique business model, we purchased theminority interests in seven MITIE businesses for a total purchase considerationof £9.4m. Three of our external acquisitions were in the security sector, an area we havebeen strategically targeting, and saw us purchase: - Initial Security Ltd, the UK manned guarding business of Rentokil Initial, for£70.7m (including repayment of debt) in March 2006; - The Watch Security Ltd, a provider of manned guarding and electronic securitysolutions in the Midlands, for £8.0m in June 2005; and - Intruder International Ltd, a specialist provider of electronic securitysolutions in the UK, for £4.0m in May 2005. These acquisitions have transformed our Security business into a strongnationwide operation which is now ranked as the UK's second largest provider ofmanned guarding. The integration of the businesses is on plan. We are confidentthat our Security business has considerable potential for the future. Lyndhurst Services Ltd, a provider of external grounds maintenance to commercialproperty sites across the UK, was also acquired by MITIE. The purchase of thiscompany in February 2006, for £8.8m, has added to MITIE's regional coverage inthe landscaping market and has been an important development in our strategy ofgrowing that business. Board Changes There have been a number of changes to the MITIE Group PLC Board. RubyMcGregor-Smith, previously Finance Director, was appointed Chief OperatingOfficer in September 2005, while Suzanne Baxter was appointed Group FinanceDirector, following the year end, in April 2006. David Jenkins and Ishbel Macpherson have both joined the Board as Non-ExecutiveDirectors during the period, bringing with them considerable financial andprofessional experience. Manish Chande has retired from the Board asNon-Executive Director after four years of service. I would like to thank him onbehalf of the Board for his valuable contribution to the development of theGroup. Pensions In March 2006, the Group made a one-off contribution of £7.8m to eliminate theactuarial deficit on the MITIE Group PLC Pension Scheme. This is the Group'sprincipal defined benefit pension scheme and is now closed to new entrants. Corporate Governance The Board recognises its responsibilities in terms of ensuring that MITIEachieves high standards of Corporate Governance and conducts itselfappropriately in order to protect the interests of all MITIE stakeholders. Corporate Responsibility This year we are acting to improve our communication with MITIE stakeholders onmatters concerning corporate responsibility. We are therefore publishing aseparate report, that will also be available on our corporate website, whichexpands further on the areas already covered in this Annual Report. The reportwill look in more detail at how MITIE motivates and looks after its people,relates to the community, works with charities and behaves in relation to ourenvironmental responsibilities. Outlook MITIE has a solid track record in developing a profitable business and it is ourstrategy to ensure that this continues. We will seek to grow further organicallyand will make acquisitions within our chosen markets when appropriateopportunities arise. We will continue managing our business in a manner which facilitates sustainablegrowth and delivers service excellence for our customers. We are developingnational coverage across the portfolio of services we provide, which willenhance our ability to work with customers across many sites providing multipleservices. The support services market is increasingly looking for companies who are ableto offer a wide range of services with their own workforce and we are clearlybenefiting from that trend. As a result of this we expect significant contractopportunities which, when combined with the energy and commitment of ouremployees, will ensure MITIE will continue to prosper. We are well positioned for future growth. CHIEF EXECUTIVE'S REVIEW Overview It has been a year of great progress within MITIE. We were particularlydelighted to acquire the manned guarding business of Rentokil Initial towardsthe end of the year. This acquisition will transform our security business andafter integration with our existing security companies, it will have revenue inexcess of £200m. Support Services has achieved strong organic growth.Engineering Services has continued to experience some difficulties in achievingan acceptable margin within a highly competitive market and, as we indicated inour interim statement, a certain amount of restructuring has taken place whichproduced a better outcome for the business in the second half of the year.Property Services has had an excellent year, developing our position in theSocial Housing market and we announced at the end of March their success ingaining a substantial repair and maintenance contract with Birmingham CityCouncil. The performance of our individual operating companies during the year is coveredin more detail in the Chief Operating Officer's Review. Strategy 1. Organic growth 2. Bundled Services 3. Acquisitions 4. 'The MITIE model' 5. Invest in our people 6. New markets 7. Corporate responsibility MITIE has had a consistent strategy for a number of years and we are confidentthat it is appropriate for the challenging environment we face. The strategycovers all aspects of MITIE including the markets in which we operate, ourcustomers, the people and resources that we need, and our impact in terms ofcorporate responsibility. 1) Organic growth We operate in markets that are growing and are fragmented. This enables MITIE toachieve good levels of organic growth by taking market share from competitorsand benefiting from the increasing trend towards the outsourcing of non-coreservices. We are able to increase market share because of the excellence of ourservices and the passion of our employees, who are committed to supporting ourcustomers and helping them to achieve their business goals. It is our aim togrow all of our businesses to a level where our position in the market is in thetop five by size. 2) Bundled Services There is a distinct movement towards bundled services. We define a bundle aswhen a customer has chosen to take more than one MITIE service on the same siterather than a full facilities management service. This typically occurs when acustomer wishes to maintain an active involvement in the management of theirfacilities but is looking to rationalise its supply chain. Bundles can startfrom any of our MITIE businesses, particularly when we have an excellentrelationship with a customer on site. Recent Building Services Research andInformation Association data shows that between 2002 and 2005 the proportion ofcontracts that are run as bundles has increased from 20% to 30%. 3) Acquisitions We are continuing to look for acquisitions that fit with our range of services.When making an acquisition we pay particular attention to three issues; a) Cultural fit - MITIE has a strong entrepreneurial culture that has beenbuilt over the past 19 years. We carefully evaluate whether the business cultureof any acquisition is similar to ours. This is primarily related to the approachat an operational level, and to an obsession with customer service, whichinvolves listening to customers' needs, providing excellent services, having adetermination to succeed and a desire to work closely with other MITIEbusinesses. b) Opportunity for growth - The markets in which an acquisition takes placemust have growth potential. The majority of our recent acquisitions have been inthe manned guarding market. We believe that with the increasing awareness ofsecurity matters and the impact of the licensing of the security industry, therewill be ongoing changes in this sector which will create opportunities for us. c) Quality of management - The success of MITIE has come from the strength andmotivation of its management teams. We always consider the abilities of themanagement when looking at potential acquisitions, to ensure they will fit withthe rest of the Group and have the ability to run and grow their businessindependently. 4) The MITIE model This year we have started three companies, in the divisions of PropertyServices, Business Services and Catering. Start-up companies tend to have veryhigh rates of growth, but their impact on the Group growth rates will beprogressively reduced. We believe that the opportunities provided to themanagers of our start-up companies should be available to the managers in ourmore mature businesses where they have not had an equity stake. It is ourintention to extend the ethos of the MITIE model through our Second GenerationEquity Scheme. We recapitalised our Cleaning business with Shareholder approvalin 2004 and we intend to seek Shareholder approval to recapitalise PropertyServices in 2006. 5) Invest in our people To ensure that our customers receive quality service, and that we have the rightskills in the business going forward, we regularly evaluate the abilities of ouremployees and provide them with appropriate training and development. We havealso expanded our core skills competency, so that we are able to offeradditional services. We prepare for growth and change within MITIE bymaintaining succession plans for all of our businesses. 6) New markets There are some customers that prefer to work with businesses who specialise intheir sector, such as retail, transport and social housing. We have structuredour businesses to ensure that we meet the needs of those customers and haveachieved good results to date. We will establish additional specialistbusinesses where appropriate and anticipate that this strategy will producestrong profitable growth. 7) Corporate responsibility It is becoming increasingly important for a business to be able to demonstratethat it behaves in a way that is responsible in terms of how it treats itsemployees, interacts with customers and suppliers, relates to the community andcharities, and manages relationships with other stakeholders. MITIE is aresponsible business and is producing a separate Corporate Responsibility Reportfor the first time this year, which will be published with our Annual Report andAccounts. This report will also be available on our website, www.mitie.co.uk. Forward order book MITIE has benefited from the longer term nature of many of our contracts. Thecontracts in Support Services have an average term of three years and this isnow lengthening, with several extending to five years or more. Property Serviceshas an order book that is increasing rapidly, as a consequence of its success inwinning social housing partnering contracts, and Engineering Services has a highlevel of its revenue secured for 2006. The overall percentage of budgeted Grouprevenue secured for 2007 is 72%, compared to 70% last year. Markets We have always maintained that MITIE benefits from having a broad mix ofcustomers, and that this spread reduces our risk in terms of potential downturnsin a sector. We also believe that a good balance between public and privatesector work provides protection from any particular changes in governmentpolicy. People We place great emphasis on the development of our people. Without a motivatedworkforce to satisfy customers, we do not have a business. We now employ over39,000 people and are immensely proud of their achievements. The management ofsuch a large and diverse, skilled and semi-skilled workforce is our corecompetency and we have very robust processes in place to manage both theefficiency and development of our employees. We have a range of training andmanagement development programmes in place across the Group. These vary fromvery specific training, such as the usage of chemicals for our pest controloperatives, to customer service training for our receptionists in BusinessServices, to senior management strategy courses. We also recognise theachievements of our employees with several award schemes, which cover all ouremployees across the Group. MITIE is aware that as the economy grows there will be skills shortages in someof the trades we need. We are therefore establishing a network of MITIE SkillsCentres in secondary schools across the UK, where we are supporting vocationalskills training. We established four in 2005 and will be opening another four in2006. We are also working closely with regional development agencies, such asthe East London Business Alliance, to recruit apprentices into MITIE businesses. I would like to thank our employees personally for their hard work anddedication over the past year and their contribution towards this very good setof results. Future prospects MITIE is in excellent shape for future growth. We have a very strong managementteam, a substantial customer base in growing markets, a motivated and passionateworkforce, and a business model that is sufficiently flexible to react to marketchanges. Our markets will remain competitive, but the agility of our managementand their leadership will enable MITIE to continue growing. There is an energy and spirit in MITIE that is very rare and this makes me verypositive about our prospects. CHIEF OPERATING OFFICER'S REVIEW MITIE has seen another year of double digit growth and strong financialperformances. Our Support Services and Property Services businesses haveperformed exceptionally well and we are pleased to report recovery within ourEngineering business. We have made a number of important acquisitions during the year, dominated bythe acquisition of Initial Security Ltd, which provide scale and growthopportunities for our Security and Landscape operations. We remain well placedto continue our strategy of profitable growth, investment and serviceexcellence. MITIE Support Services Support Services encompasses a number of complimentary services includingCleaning, Catering, Landscape, Pest Control, Security, Managed Services,Business Services and Engineering Maintenance. It has had an excellent year with major single service and bundled contractawards for Engineering Maintenance and Security, and with key acquisitions inSecurity and Landscape . -------- -------- ------------ 2006 2005 Growth £m £m £m -------- -------- ------------Revenue 516.0 440.2 75.8 17.2% Segment operating profit 32.8 29.1 3.7 12.7% MITIE Cleaning Cleaning provides services to offices, industrial buildings, transport,healthcare facilities and retail premises. Services include window cleaning,computer cleaning, food hygiene, recycling and waste management. Cleaning has performed in line with expectations and has had a good year,achieving organic growth of 7.9%. During the year Cleaning reviewed its customer base and, in response tocustomers' changing needs, has separated the management of its nationalcontracts from that of its site managed contracts. Two new customer orientatedservices have been created - 'Connect', which focuses on larger site managedcontracts, and 'Cleaning and National Accounts', which delivers single andmulti-site contracts through the national infrastructure of the business. Ournewly structured business has been recapitalised in line with the MITIE SecondGeneration Equity Plan. Major contract awards for Cleaning across the UK include those at CelticFootball Club and Queen Margaret University College. In the South, significantcontract awards include Motorola and Sutton Council. In London we secured a newcontract with UBS. Business re-tendered and retained in the year included our contracts atYorkshire Water Services, United Utilities, Kellogg's and Homebase. Our contractat the Historic Royal Palaces was extended to include both cleaning and wastemanagement at The Tower of London. A further major extension from a renewedcontract was at Barclays Bank, where the scope of our work was extended from 607to 1,211 branches. Outside the traditional Cleaning offering, MITIE Waste & Environmental, providesspecialist environmental advice and services to over 700 sites, which is anincreasingly important differentiator in the market. Initiatives, such as theTREEHUGGER(TM), have proved to be very popular with clients, and this desktoprecycling facility sold almost 25,000 units last year. The profile of MITIE Waste & Environmental has been raised by the externalrecognition it has received for its services. In November 2005, the business wonfour awards, including one gold and two silver Green Apple accolades forenvironmental best practice. MITIE Waste & Environmental also won theprestigious Sustainability Category at the Premises and Facilities ManagementPartnership Awards for its contract with Hewlett-Packard. Together with ourcustomer, we have been working on the development of a sustainable workplace, byimproving the recycling capacity of the Hp Invent plant in Scotland. MITIE also won two Kimberley-Clark Golden Service Awards during the year.Firstly, the Best Cleaned Office (below 15,000 square feet) award, which was forour contract with Birmingham Midshires Building Society, and secondly, the BestCleaned Transport facility, which was in recognition of our contract with DoverHarbour Board. We anticipate continued progress for this business in 2006/07, with furtherstrong growth expected in Retail and Transport Cleaning. MITIE Catering Catering offers hospitality and executive dining, vending, consultancy servicesand employee catering to a wide range of clients across the UK. Catering has continued its growth in event catering and has seen an encouraginglevel of interest from prospective clients particularly in niche commercialcatering contracts within visitor attractions and retail venues. In London our start-up business is developing well and has won a number ofexciting new contracts. These include the cafe in Hamleys toy superstore onRegent Street, London, and the Jaeger cafe , which is also located on RegentStreet in their flagship store. The new Jaeger cafe opens in Summer 2006. Themenu has been designed to reflect fair trade produce, which is organic, freshand seasonal; which are important factors for Jaeger corporate clients who willhave the opportunity to hire the cafe for special events. Also in London, Bayerische Hypo-und Vereinsbank AG will be employing Cateringfor their new Moorgate building, which operates a cafe bar and provideshospitality for some five hundred members of staff, while the Landflex contractwill provide hospitality, vending and cafe services across their new estate,which so far comprises four buildings. Current bidding activity is focused on the increasing demand for corporatecatering within a client's building, which typically has limited facilities butrequires high quality food service. We have, however, also seen a rise in thenumber of tenders for significant multi-site national catering contracts, anarea previously restricted to the larger national catering companies. We believe this shift is largely attributable to the fact that Catering now hasnational operational reach. An example of the type of national contract beingsought is the NTL Incorporated catering contract, which was awarded to Cateringin January 2006. The contract spans twelve sites including Belfast, Glasgow,Teeside, Manchester, Nottingham, Luton, Hook and Swansea. Market conditions remain challenging and competition is strong, but we arepleased to have developed a good pipeline of new and existing contracts.Catering will continue to pursue organic growth in 2006/07 and will look toachieve a higher market share going forward. MITIE Landscape Landscape encompasses a traditional range of services including groundsmaintenance, sports ground and leisure facilities care, exterior landscapedesign, installation and maintenance, including golf courses. The business alsoprovides arboriculture and interior tropical plant services. Landscape performed well during the year and achieved organic growth of 120%. In February 2006, we acquired the grounds maintenance business, LyndhurstServices Ltd (Lyndhurst). Serving commercial property sites across the UK,Lyndhurst complements MITIE's existing landscaping and grounds maintenancebusiness, and has significantly increased its ability to provide customers witha broader range of services. The acquisition has expanded the scale of thisbusiness and it is now bidding for larger, national contracts. New work secured this year includes, five-year contracts with both the City ofYork Council and West Lindsey District Council, and an additional two years forthe national Lloyds TSB contract, which sees our northern and southernbusinesses working together on Landscape's largest secured contract. We havealso renewed our contracts at BOC headquarters in Surrey and the UK GovernmentHome Office contract. Landscape is also working with its MITIE PFI colleagues on the Ealing Schoolsproject and, in addition, has secured work to landscape other new schools withCostain, the international engineering and construction group. This business will benefit from the acquisition of Lyndhurst and we anticipatecontinued growth in 2006/07. MITIE Pest Control Pest Control offers insect, bird and other pest management services. The pest control market remains very competitive with the largest two operatorscontinuing to dominate. During the year Pest Control, which has contracts with Compass Group for itsservice facilities at Twickenham Stadium in London and the Millennium Stadium inCardiff, has won a number of new contracts, which include those with BalfourBeatty Construction and Meridian Healthcare. Going forward the Pest Control market is likely to remain very fragmented, andwe will therefore look to improve margins by expanding our skills base andservice offering. MITIE Security Security provides static guarding, electronic and mobile guarding, galleryattendants, front of house and warden services, key holding, consultancy andremote monitoring services for its clients. This has been an excellent year for Security with three acquisitions and strongorganic growth in our existing business. The organic growth rate was 17.8%. In May 2005, we acquired Intruder International Ltd (Intruder), a specialistprovider of electronic security solutions, and in June 2005 acquired Midlandsbased The Watch Security Ltd (The Watch). The purchase of The Watch, a mannedguarding and electronic security business, completed our national footprint inthe sector. The acquisition enabled Security to offer a more comprehensiveservice to clients, and consequently compete for larger national contracts.While our security business is still primarily focused on the manned guardingsector, the acquisition of Intruder and strategic alliances with securityconsultancy companies has meant that Security is better able to provide itscustomers with total security solutions. An example of this is our expandedcontract with the Department for Communities and Local Government, formerly theOffice of the Deputy Prime Minister, where the manned guarding provision is nowbeing complemented by a high tech electronic security system provided byIntruder. In March 2006, MITIE acquired Initial Security Ltd (ISL), a leading UK mannedguarding company whose services include contract guarding, aviation security,key holding, patrol and alarm response services. Its client base covers a widerange of sectors from government and commercial to industrial and retail.Providing services at over 2,000 sites, more than 6,000 staff throughout the UKtransferred to MITIE from ISL. The acquisition has added specialist aviation andretail work to Security's portfolio of services and has further strengthened itsregional operations. The acquisition of ISL has transformed Security and it is now the second largestmanned guarding business in the UK. The integration plan is progressing well andwe expect to realise significant synergy benefits across the business. While theacquisition is expected to be earnings enhancing in the year ending 31 March2007, the benefits of the cost savings will be absorbed by the integration costsin the first full year of ownership. The financial benefits of integration aretherefore expected to be realised in the financial year ending 31 March 2008. On 20 March 2006 it became illegal, in England and Wales, to work as or supply acontracted manned security officer without a Security Industry Authority (SIA)licence. This change to the industry's legislative framework has seen ourinvestment in training rewarded as Security has met all the SIA licensingdeadlines, becoming one of the first companies to achieve Approved ContractorStatus (ACS). This has been a very exciting year for Security, and our focus is now onintegrating our acquisition and consolidating our national presence. We willlook to capitalise on our investments and expect good growth in the future. MITIE Managed Services Managed Services encompasses facilities management, building and estatemanagement, integrated service delivery, PFI (Private Finance Initiative)service delivery, procurement and supplier evaluations, and consultancy to awide range of customers across a number of sectors. Managed Services has had a very good year making a considerable improvement inits profitability and winning new contracts which will impact the next financialyear. Managed Services secured a three-year contract with the Department for Culture,Media and Sport, delivering facilities management, full maintenance and fabricservices to four of their buildings in central London. This contract has beenfurther extended at the end of the year to cover the Big Lottery Fund buildingsin Birmingham, Newcastle, Glasgow and London. It was also awarded a contractwith T-Mobile that covers ten major T-Mobile buildings, 15 switch centres and130 retail outlets across the UK. Managed Services has recently launched an Energy Awareness initiative with theNational Offender Management Service (NOMS) at their offices in Staffordshireand Nottingham. With the ultimate aim being to establish best practice in allNOMS offices throughout the UK, the initiative has been designed to makeemployees more aware of their environment, encouraging energy efficientbehaviour both in the home and the workplace. In line with the growing number of customers seeking external strategic adviceon energy use in the business place, we have grown the management team, toaccommodate the rise in demand. The business has been awarded six new PFI school projects where it provides fullfacilities management services. MITIE has not taken equity participation inthese projects. The contracts vary in length, but are all between 25 to 30years. The total number of PFI education facilities services contracts awardedto MITIE now equates to some 15% of the total market, which positions thebusiness as a market leader in its specific sector. Overall, the business has had a very profitable year and is well placed forfurther growth. MITIE Business Services Business Services provides mailroom management, reception and switchboardfacilities services, records management, reprographics, print management anddistribution management, to its clients. Business Services has seen a definitive shift in the market towards bundledservices and with its broad service offering, the business has achieved somemajor contract awards. Business Services now provides customers with a fullspectrum of document management services ranging from creative design to digitaland lithographic printing through to logistics and distribution services fromits document solutions and mail solutions centres. Our bundled Business Services offering with other MITIE areas of expertisecontinues to be a significant advantage for Business Services. It has recentlydelivered success in a new Business Services contract at the EuropeanHeadquarters of The Walt Disney Company, which is a bundled solution for theprovision of their mail, switchboard, reception, cleaning services andmaintenance. Our mail services, reprographics and porterage contract at the London StockExchange was also extended in the year for a further three years and has nowbeen bundled with services from Cleaning. Our reprographics contract at theinternational investment bank, ABN AMRO, was expanded in the year and nowincludes the provision of mail services. It is now one of the largest contractsfor the business in the City of London. Osborne Clarke, the Solicitors, awarded Business Services a bundled servicescontract for their prestigious new London offices where the business providesreception, catering and cleaning. Business Services was also recently appointedby 3i to manage the mail, reprographics and cleaning services at their newheadquarters in Victoria, London. The largest contract award for Business Services during the year has been atPricewaterhouseCoopers with the award of a five-year contract for documentmanagement, distribution services, reprographic services, mail and recordmanagement which is valued at over £50m. Business Services has introduced a new suite of technology tools. These build onthe success experienced with previous systems, which had been developed over thepast six years and are amongst the most advanced in the marketplace. The newoffering delivers many of the tools to client desktops, via the internet orclient intranets, and includes print submission, courier shipping, documenttracking and stationery ordering. Overall, Business Services has had a good twelve months in terms of businessdevelopment. The outlook remains very positive and we believe there are manyexciting opportunities in the future. MITIE Engineering Maintenance Engineering Maintenance provides heating, lighting, ventilation and airconditioning maintenance, mechanical and electrical systems, boiler maintenance,plumbing and water hygiene, and estate maintenance to a variety of clientsthroughout the UK. Engineering Maintenance has delivered a strong performance during the year,experiencing an exceptional level of organic growth at 38.8%. New contracts include those at four United States Air Force bases in England,and at the Paddington Central and Sheldon Square project. The latter contract,which began in January 2006, comprises mechanical and engineering maintenanceservices with some small property maintenance work in both commercial andresidential accommodation. The business also secured work, in December 2005, with the University of theArts in London where it is providing mechanical and engineering maintenanceservices and property maintenance work for the University property portfolio of21 buildings. New contracts, which have been awarded, but not yet commenced, include those atthe Fort Shopping Centre in Birmingham and at Vertex, a subsidiary of UnitedUtilities where we provide services to buildings in London, the Midlands, theNorth of England and Scotland under a three year contract. Re-tendered business includes a twelve-month contract with the UK GovernmentForeign and Commonwealth Office, at their buildings in London and Hanslope Park.Contracts with Microsoft, which is bundled with Cleaning, and the Alliance andLeicester were also re-secured during the period, while the scope of the AIGcontract, which was originally for two buildings in London, has significantlyincreased to cover all their regional offices. Engineering Maintenance continues to provide extensive bundling opportunitiesfor the Group, acting as a springboard for our full range of services. We wererecently awarded a three-year contract with the Bank of England, for theirsports facilities, which will be mobilised in conjunction with Cleaning. Ourmaintenance contract with Dell Computers, has been expanded to include theirCity Park complex in Glasgow and now includes work for Cleaning. Engineering Maintenance has had an exceptional year and we remain confident offurther success and progress for the business in 2006/07. MITIE Property Services Property Services provides refurbishment and interior fit-out work, officefurniture, painting, repair and maintenance, roofing, plastering, partitioning,industrial flooring, and fire protection to clients. The recent Birmingham CityCouncil contract is an excellent demonstration of the success the business isachieving in Social Housing, which by its nature encompasses many of PropertyServices' activities. -------- -------- ------------ 2006 2005 Growth £m £m £m -------- -------- ------------Revenue 163.5 129.1 34.4 26.6% Segment operating profit 8.9 7.6 1.3 17.1% Property Services has had a very good year with significant growth in turnoverand profits. Organic growth was up at 26.6%. There has, however, been somepressure on profitability, which is likely to continue this year as the work mixmoves towards Social Housing. The particular success in the year is the recently awarded Birmingham CityCouncil Social Housing contract, which is worth in excess of £90m over fouryears, with an option to extend for an additional three years. The contractcommenced on 1 April 2006 and covers the repair and maintenance of housing inthe southern area of the city. This covers 27,000 properties and involves over80,000 repairs per annum. In addition, Property Services also mobilised a contract with Milton KeynesCouncil to provide responsive and void property repairs to its entire portfolioof 12,000 homes. The five-year contract also started on 1 April 2006 and isestimated to be worth in excess of £25m with an option for the Council to extendfor an additional five years. Property Services is also working with Yorkshire Coast Homes, Southampton CityCouncil, the Glasgow Housing Association and Leeds City Council amongst manyothers and in total the business now holds contracts with over 150 localauthority and housing associations throughout the UK. Market conditions for this division remain encouraging with Social Housing andthe Fit-out sector in London being particularly buoyant. The outlook for thebusiness is very positive. MITIE Engineering Services Engineering Services covers the installation of mechanical and electricalsystems, information and communication technology, air conditioning, utilitiesinfrastructure and retail engineering, serving a wide range of clients from manydifferent sectors. -------- -------- ------------- 2006 2005 Growth £m £m £m -------- -------- -------------- Revenue 256.1 230.3 25.8 11.2% Segment operating profit 6.4 7.6 (1.2) (15.8)% Engineering Services has experienced a challenging year but margins improved inthe second half of the year. During the period we closed the EngineeringServices 'Cleanrooms' and 'Scientific Projects' businesses, and restructuredoperations in the Midlands and Leeds. The restructured business has achievedorganic growth of 11.2%. Engineering Services, has a strong forward order book largely consisting ofrepeat work from blue chip clients. The business has contracts with RhonddaHospital, the University of Manchester and IBM, amongst others, and has grownits existing contracts with a number of clients including Plymouth Universityand Land Securities Trillium. Social Housing, Technology, Retail and Utilitieswork has been very encouraging and the business has a pipeline of repeat ordersthat extends into 2008. During the year, the business has been involved in a number of exciting projectsincluding the Thomas Deacon City Academy in Peterborough. This prestigious newAcademy was designed by Lord Foster and Engineering Services was appointed towork with Laing O'Rourke on the mechanical and electrical design andinstallation package. Engineering Services has also secured the contract to provide emergency lightingand fire alarms to the Eastenders set in Elstree. In London, the business was appointed as the sub-contractor for mechanical andelectrical work on the new Victoria and Albert Museum garden. This work has nowbeen completed and the garden was officially opened by HRH the Prince of Walesand will be used for corporate functions throughout the summer. While this has been a challenging year, our restructured business has a goodforward order book. Margins in this business still remain under pressure andimproving them remains the focus going forward. Future prospects During the period we have seen strong performances from MITIE Support Servicesand MITIE Property Services. MITIE Engineering Services has had a challengingyear, but steps have been taken to ensure it is better positioned for the futureand we are starting to see the benefits of this. The quality and strength of our individual businesses and our people continue todrive growth in turnover and profits for the Group. By focusing on ourcustomers, and their needs, we are confident that we can grow our business andour market share further. We will continue our track record of successthroughout this financial year by building on our strengths, concentrating onthe integration of our recent acquisitions and growing our bundled serviceoffering. We have a strong customer focus that provides a solid basis for profitablegrowth in the future. Group Finance Director's Review Our financial results are underpinned by strong operational cash flows.Acquisitions made during the year have changed our profile and have enhanced theefficiency of our balance sheet. We have a sound financial platform for futureprofitable growth. Introduction We are pleased to present the financial results of the Group for the year ended31 March 2006. This is the first financial year in which the Group has reported its resultsunder International Financial Reporting Standards (IFRS). An explanation of thetransition to IFRS was provided in our Transition Statement which accompaniedthe interim report released on 28 November 2005 and is reproduced on ourwebsite. All comparatives throughout this report have been restated under IFRS. Revenue Revenue from continuing operations increased by 17.0% to £935.6m (2005:£799.7m). Revenue from the businesses acquired during the year was £24.2m.Excluding the effect of the acquisitions, revenue from continuing business grewby 14.0%. Each of our three operational segments reported strong, double digit growth inrevenue during the year. After the effect of acquisitions, revenue growth ratesin Support Services, Property Services and Engineering Services were 17.2%,26.6% and 11.2% respectively. Profit from operations Profit from operations excluding other operating income has increased by 8.6% to£48.1m (2005: £44.3m). Other operating income in 2005 of £1.5m related to theprofit on the sale of a property that did not recur in 2006. Support Services and Property Services reported growth in their segment profitfrom continuing operations of 12.7% and 17.1% respectively. Segment operatingprofit from continuing operations in Engineering reduced by 15.7%. Investment income and finance costs Investment revenue and finance costs totalled £2.4m (2005: £2.1m). Investmentrevenue related to interest on the overall net funding position of the Group. Profit before tax and intangible amortisation Profit before tax and intangible amortisation (PBTA) increased by 5.8% to £50.7m(2005: £47.9m). PBTA from businesses acquired during the year was £0.2m afterintegration costs. Discontinued items The loss for the year on discontinued operations of £2.4m relates to the finalsettlement on the disposal of the MITIE Access contracting businesses in June2002. This amount was paid in October 2005. Intangible amortisation Intangible amortisation was £0.2m (2005: £Nil) and represents the amortisationof intangible assets recognised on acquisitions made during the year over theestimated lives of those assets. There was no similar charge in the prior yearsince no third party acquisitions were made in that period. Profit before tax Profit before tax for the year was £50.5m (2005: £47.9m). Tax The tax charge for the year was £15.5m, a rise of 11.5% on last year's charge of£13.9m. The effective rate of tax for the Group was 30.7% (2005: 29.8%). The Group's effective rate of tax before amortisation was 30.6% (2005: 29.8%). Pensions The Group operates two defined benefit pension schemes and a definedcontribution scheme for its employees as described in Note 30. The total pensioncharge under IAS 19 for the year was £3.7m (2005: £3.2m). In response to the deficit on our principal defined benefit scheme, the Groupmade a special contribution of £7.8m to that scheme in March 2006 in order toeliminate the funding deficit. We have closed the scheme to new members and havedecreased the final salary ratio effective for the years of service after thischange. The latest actuarial valuation under IAS 19 'Employee Benefits' shows apre-tax surplus of £1.8m (2005: deficit £7.6m). At the year end, the net asset position of the scheme was positively affected bythe performance of equities and the slight improvement in the AA bond rate. Thismovement is reflected within the Statement of Recognised Income and Expense. Earnings per share (EPS) EPS is based upon profits after tax and minority interests and represents theamount of profit earned by a share. The calculation of EPS has been based on the weighted average number of sharesin the year of 305.9 million (2005: 306.4 million). Basic EPS grew by 11.6% (2005: down 21.1%) to 9.8p (2005: 8.8p). Basic EPS pre-amortisation, discontinued operations and other operating incomein 2005 grew by 10.2% to 10.6p (2005: 9.6p). Diluted EPS grew by 11.8% to 9.7p (2005: 8.7p). Diluted EPS pre-amortisation, discontinued operations and other operating incomein 2005 grew by 10.5% to 10.5p (2005: 9.5p). Dividends In 2004 we set a dividend policy to achieve an annual dividend cover of no morethan three times. We review this policy on a regular basis. The total dividend cover for the year based on the profits earned in the yearand dividends proposed in the year is 2.5 times (2005: 2.9 times) The total dividend per share for the year is 4.3p (2005: 3.4p), an increase of26.5%. The proposed final dividend per share for the year is 2.4p (2005: 1.8p), anincrease of 33.3%. Share buybacks The Company has acquired 0.3% of its own share capital in the year, equating to992,305 shares (2005: 10,310,006), all of which were cancelled. In total thesecost £1.6m (2005: £14.6m). Acquisitions MITIE acquired four businesses from third parties during the year. On 3 May 2005, MITIE acquired 100% of the share capital in IntruderInternational Ltd (Intruder). The consideration of £4.0m was paid in cash. Theacquisition gave rise to goodwill of £3.5m and acquisition costs of £0.2m. Nointangible asset was recognised on acquisitions. From the date of ownership,Intruder contributed £3.9m to the revenue and a loss of £0.4m to the PBTA of theGroup. On 30 June 2005, MITIE acquired 100% interest in The Watch Security Ltd (TheWatch). The consideration of £8.0m comprised £6.0m in cash at completion and£2.0m deferred consideration dependent on post-acquisition performance. Theacquisition gave rise to goodwill of £6.4m and acquisition costs of £0.2m.Intangible assets arising on the acquisition of £0.8m relate to customer listsand are being amortised on a straight-line basis over their expected useful lifeof 8 years. From the date of ownership The Watch contributed £13.5m to therevenue and £0.3m to the PBTA of the Group. On 17 February 2006, MITIE acquired 100% interest in Lyndhurst Services Ltd(Lyndhurst). The consideration of £8.8m comprised £8.2m in cash at completionand £0.6m in deferred consideration dependent on post acquisition performance.The acquisition gave rise to goodwill of £4.9m and acquisition costs of £0.1m.Intangible assets arising on the acquisition of £3.5m relating to customer listshave been recognised and are being amortised on a straight-line basis over theirexpected useful life of 6 years. From the date of ownership Lyndhurstcontributed £0.7m to the revenue and £0.1m to the PBTA of the Group. On 7 March 2006, MITIE acquired 100% interest in Initial Security Ltd (ISL). Theconsideration of £59.1m was entirely paid in cash, while other debts of some£11.6m were also assumed. The acquisition gave rise to goodwill of £59.8m andacquisition costs of £0.6m. Intangible assets arising on the acquisition of£7.5m relating to customer lists have been recognised and are being amortised ona straight-line basis over their expected useful life of 8 years. From the dateof ownership, ISL contributed £6.1m to the revenue and £0.2m to the PBTA of theGroup. Treasury Group Treasury has responsibility for managing and reducing financial risk andensuring sufficient liquidity is available to meet foreseeable needs. Itoperates within policies and procedures approved by the Board which have notchanged during the year. Borrowings are arranged centrally by Group Treasury andmade available to operating subsidiaries on commercial terms. The Board'songoing policy is to finance the Group through retained earnings and borrowings. The maturity profile of banking facilities is reviewed regularly and thefacilities are extended and replaced as appropriate well in advance of theirexpiry. Further details on financial assets and liabilities are given in the notes tothe Preliminary Announcement and in particular details on the bank overdraft andloans in Note 18. Cash flows The net funds position of the Group in the year moved from an opening cashposition of £61.5m to a closing net cash position £7.6m, with loans of £31.0m,which were drawn down in March 2006 to partially fund the acquisition of InitialSecurity Ltd. All loans are repayable within one year, but can be rolled over atour option. The movement in the Group's net funds position this year is largelyattributable to the outflow of £85.0m (including net overdrafts acquired of£6.6m) used to finance our external acquisitions. In addition, at acquisitionMITIE repaid the loan in Initial Security of £11.6m. The total net cash outflow for the year was £53.9m (2005: inflow £12.0m).Excluding new loans of £31.0m (2005: £Nil), the cash outflow was £84.9m (2005:inflow £12.0m). Cash generated by operations before interest, tax and additional pensioncontribution was £53.2m (2005: £46.7m). Non-recurring cash payments that were made in the year were a specialcontribution to the Group defined benefit pension scheme of £7.8m and finalsettlement amounts on the disposal of the MITIE Access contracting business of£2.4m. Included in cash and cash equivalents are deposits totalling £9.6m (2005: £3.8m)held by the Group's insurance subsidiary, which are not readily available forthe general purposes of the Group. Minorities In accordance with the MITIE model, on 24 August 2005, the Group acquired someor all of the minority interests in the following subsidiaries for a totalconsideration of £9.4m (see Note 25): - MITIE Air Conditioning (Wales) Ltd - MITIE Air Conditioning (West) Ltd - MITIE Business Services Ltd - MITIE Engineering Services (Retail) Ltd - MITIE Engineering Services (Swansea) Ltd - MITIE Security (North) Ltd - MITIE Security (Scotland) Ltd Capital Expenditure Capital expenditure as a percentage of turnover. As the Group has grown and continues to grow strongly, measuring total capitalexpenditure does not provide a useful indicator of performance; we thereforemeasure our net capital expenditure as a percentage of turnover. Since 1999this has fallen from 4.6% of turnover to 1.2% in the current year. Capital expenditure for the year was £13.8m (2005: £15.0m). This clearly reflects the full year effect of the completion of the Group'sstated objective to move away from capital-intensive businesses. The disposalof MITIE Generation Ltd, in September 2004, was the final step in achieving thisobjective. Our policy not to invest in heavily capital intensive businesses allows us toreduce the amount of capital tied up in long-term projects and to direct fundsto other areas which generate greater shareholder value. Consolidated Income StatementFor the year ended 31 March 2006 Year ended 31 March 2006 2005 Notes £m £mContinuing operationsRevenue 3 935.6 799.7Cost of sales (757.0) (638.9)-------------------------------- ------ -------- -------Gross profit 178.6 160.8 Other operating income - 1.5-------------------------------- ------ -------- -------Other administrative expenses (130.3) (116.5)Amortisation of intangible assets (0.2) --------------------------------- ------ -------- -------Administrative expenses (130.5) (116.5)-------------------------------- ------ -------- -------Profit from operations 4,5 48.1 45.8 -------------------------------- ------ -------- -------Profit from operations excluding other operating 48.1 44.3income ------ -------- --------------------------------------- Investment revenue 7 2.6 2.2Finance costs 8 (0.2) (0.1)-------------------------------- ------ -------- -------Profit before tax 50.5 47.9Tax 9 (15.5) (13.9)-------------------------------- ------ -------- -------Profit for the year from continuing operations 35.0 34.0 Discontinued operationsLoss for the year from discontinued operations (2.4) (3.8)-------------------------------- ------ -------- -------Profit for the year 32.6 30.2-------------------------------- ------ -------- ------- Attributable:Equity holders of the parent 30.2 27.0Minority interest 2.4 3.2-------------------------------- ------ -------- ------- 32.6 30.2-------------------------------- ------ -------- ------- Earnings per share (EPS)- basic 11 9.8p 8.8p- diluted 11 9.7p 8.7p EPS excluding discontinued operations:- basic 11 10.6p 10.1p- diluted 11 10.5p 10.0p Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 March 2006 Year ended 31 March 2006 2005 Notes £m £m Actuarial gains / (losses) on defined benefit pension 30 1.1 (1.5)schemesTax (charge)/credit on actuarial gains/(losses) takendirectly 24 (2.6) 0.2to equity -------- ------ Net expense recognised directly in equity (1.5) (1.3) Profit for the year 32.6 30.2 -------- ------ Total recognised income and expense for the financial 31.1 28.9year -------- ------ Attributable to:Equity holders of the parent 28.7 25.7Minority interests 2.4 3.2 Consolidated Balance Sheetas at 31 March 2006 As at 31 March 2006 2005 Notes £m £mNon-current assets Goodwill 12 143.8 52.7Other intangible assets 13 11.5 -Property, plant and equipment 14 34.5 27.2Deferred tax assets 19 4.9 4.6Retirement benefit surplus 30 1.8 --------------------------------- ------ -------- ------Total non current assets 196.5 84.5-------------------------------- ------ -------- ------ Current assetsInventories 15 8.8 6.3Trade and other receivables 16 244.3 178.6Cash and cash equivalents 17 9.6 61.5-------------------------------- ------ -------- ------Total current assets 262.7 246.4-------------------------------- ------ -------- -------------------------------------- ------ -------- ------ Total assets 459.2 330.9-------------------------------- ------ -------- ------ Current liabilitiesTrade and other payables 20 (214.5) (159.9)Current tax liabilities (7.6) (7.4)Provisions 22 (11.7) -Obligations under finance leases 21 (0.8) (0.2)Bank overdrafts and loans 18 (33.0) --------------------------------- ------ -------- ------Total current liabilities (267.6) (167.5)-------------------------------- ------ -------- -------------------------------------- ------ -------- ------ Non-current liabilitiesObligations under finance leases 21 (1.0) (0.8)Retirement benefit obligation 30 - (7.6)Provisions 22 (10.2) (9.2)Deferred tax liabilities 19 (4.7) (0.2)-------------------------------- ------ -------- ------Total non-current liabilities (15.9) (17.8)-------------------------------- ------ -------- -------------------------------------- ------ -------- ------ Total liabilities (283.5) (185.3)-------------------------------- ------ -------- -------------------------------------- ------ -------- ------Net assets 175.7 145.6-------------------------------- ------ -------- ------ EquityShare capital 23 7.7 7.6Share premium account 24 13.7 11.5Merger reserve 24 52.0 44.1Revaluation reserve 24 (0.2) (0.2)Capital redemption reserve 24 0.3 0.3Other reserve 24 0.3 0.6Share based payments reserve 24 1.4 0.7Retained earnings 24 90.1 71.4-------------------------------- ------ -------- ------Equity attributable to equity holders of the parent 165.3 136.0-------------------------------- ------ -------- ------ Minority interests 10.4 9.6-------------------------------- ------ -------- ------Total equity 175.7 145.6-------------------------------- ------ -------- ------ Consolidated Cash Flow StatementFor the year ended 31 March 2006 Year to 31 March 2006 2005 Notes £m £m Net cash from operating activities 26 32.1 33.2 Investing activitiesInterest received 2.5 2.3Purchase of property, plant and equipment (13.8) (14.0)Purchase of subsidiary undertakings (85.5) (0.2)Disposals of property, plant and equipment 2.6 3.2Disposal of subsidiary undertaking - 8.9-------------------------------- ------ -------- ------Net cash (outflow) / inflow from investing activities (94.2) 0.2-------------------------------- ------ -------- ------ Financing activitiesRepayments of obligations under finance leases (0.2) (0.3)Proceeds on issue of share capital 2.1 3.0Repayment of loans on purchase of subsidiary (11.6) -undertakingsNew bank loans raised 31.0 -Share buybacks (1.6) (14.9)Equity dividends paid (11.3) (9.1)Minority dividends paid (0.2) (0.1)-------------------------------- ------ -------- ------Net cash inflow/(outflow) from financing 8.2 (21.4)-------------------------------- ------ -------- -------------------------------------- ------ -------- ------Net (decrease)/increase in cash and cash equivalents (53.9) 12.0-------------------------------- ------ -------- ------ Net cash and cash equivalents at beginning of year 61.5 49.5-------------------------------- ------ -------- ------Net cash and cash equivalents at end of year 7.6 61.5-------------------------------- ------ -------- ------ Net cash and cash equivalents comprises of :Cash at bank 9.6 61.5Overdraft (2.0) ---------------------------------------- ------ ------ 7.6 61.5--------------------------------------- ------ ------ Notes to the Preliminary Announcement 1. Preliminary Announcement The financial information in this announcement, which was approved by the Boardof Directors on 19 May 2006, does not constitute the Company's statutoryaccounts for the years ended 31 March 2006 or 2005 but is derived from theseaccounts. Statutory accounts for 31 March 2005 have been delivered to the Registrar ofCompanies and those for 31 March 2006 will be delivered following the Company'sannual general meeting. The auditors have reported on these accounts; theirreports were unqualified and did not contain statements under section 237(2) or(3) of the Companies Act 1985. The preliminary announcement has been prepared in the accordance with theaccounting policies adopted under IFRS for the first time with a transition dateof 1 April 2004. The disclosures required by IFRS 1 "First-time Adoption ofInternational Financial Reporting Standards" concerning the transition from UKGAAP to IFRS can be found on our website. www.mitie.co.uk This financial information has been prepared on a historical cost basis. During the period the Group adopted IAS 39 "Financial Instruments: Recognitionand Measurement" and IAS 32 "Financial Instruments: Disclosure andPresentation". The Group has taken advantage of the exemption in IFRS 1 thatenabled the Group to apply these standards from 1 April 2005 - accordinglycomparatives are not restated. The adoption has had no financial impact on thisfinancial information. Whilst the financial information included in this Preliminary Announcement hasbeen computed in accordance with IFRS, this announcement does not itself containsufficient information to comply with IFRS. The Company expects to publish fullfinancial statements that comply with IFRS in June 2006. 2. Significant accounting policies under IFRS The significant accounting policies adopted in the preparation of the Group'sIFRS financial information are set out below. Basis of consolidation The consolidated financial information comprise the financial statements ofMITIE Group PLC and all its subsidiaries. The financial statements of the parentCompany and subsidiaries are prepared in accordance with UK Generally AcceptedAccounting Principles (UK GAAP). Adjustments are made in the consolidatedaccounts to bring into line any dissimilar accounting policies that may existbetween UK GAAP and IFRS. All inter-company balances and transactions, including unrealised profitsarising from intra-group transactions, have been eliminated in full. Subsidiaries are consolidated from the date on which control is transferred tothe Group and cease to be consolidated from the date on which control istransferred out of the Group. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. Thecost of the acquisition is measured at the aggregate of the fair values, at thedate of exchange, of assets given, liabilities incurred or assumed, and equityinstruments issued by the Group in exchange for control of the acquiree, plusany costs directly attributable to the business combination. The acquiree'sidentifiable assets, liabilities and contingent liabilities that meet theconditions for recognition are recognised at their fair value at the acquisitiondate, except for non-current assets (or disposal groups) that are classified asheld for resale in accordance with IFRS 5 Non Current Assets Held for Sale andDiscontinued Operations, which are recognised and measured at fair value lesscosts to sell. Goodwill arising on acquisition is recognised as an asset and initially measuredat cost, being the excess of the cost of the business combination over theGroup's interest in the net fair value of the identifiable assets, liabilitiesand contingent liabilities recognised. If, after reassessment, the Group'sinterest in the net fair value of the acquiree's identifiable assets,liabilities and contingent liabilities exceeds the cost of the businesscombination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured atthe minority's proportion of the net fair value of the assets, liabilities andcontingent liabilities recognised. Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary, associate or jointly controlled entityat the date of acquisition. Cost of acquisition includes all deferred amountsthat become payable in the future. Goodwill is initially recognised as an asset at cost and is subsequentlymeasured at cost less accumulated impairment losses. It is reviewed forimpairment at least annually. Any impairment is recognised immediately in profitor loss and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of theGroup's cash-generating units expected to benefit from the synergies of thecombination. Cash-generating units to which goodwill has been allocated aretested for impairment annually, or more frequently when there is an indicationthat the unit may be impaired. If the recoverable amounts of the cash-generatingunits is less than the carrying amount of the unit, the impairment loss isallocated first to reduce the carrying amount of any goodwill allocated to theunit and then to the other assets of the unit pro-rata on the basis of thecarrying amount of each asset in the unit. An impairment loss recognised forgoodwill is not reversed in the subsequent period. On disposal of a subsidiary, associate or jointly controlled entity, theattributable amount of goodwill is included in the determination of the profitor loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date. Goodwill written off to reserves under UK GAAP prior to 1998 hasnot been reinstated and is not included in determining any subsequent profit orloss on disposal. Intangible assets Intangible assets acquired separately are capitalised at cost. Intangible assetsidentified in a business acquisition are capitalised at fair value as at thedate of acquisition. Following initial recognition, the carrying amount of anintangible asset is its cost less any accumulated amortisation and anyaccumulated impairment losses. Amortisation expense is charged toadministrative expenses in the income statement on a straight line basis overit's useful life. Revenue Revenue is recognised to the extent that it is probable that the economicbenefits will flow to the Group and the revenue can be reliably measured. Otherthan in respect of long-term contracts, described below, revenue represents feeincome recognised in respect of services provided during the period (stated netof value added tax). Revenue is earned solely within the United Kingdom. Revenue from long-term contracts represents the sales value of work done in theyear, including fees invoiced and estimates in respect of amounts to be invoicedafter the year end. Profits are recognised on long-term contracts where thefinal outcome can be assessed with reasonable certainty. In calculating this,the percentage of completion method is used based on the proportion of costsincurred to the total estimated cost. Cost includes direct staff costs andoutlays. Full provision is made for all known or anticipated losses on eachcontract immediately such losses are forecast. Gross amounts due from customers are stated at the proportion of the anticipatednet sales value earned to date less amounts billed on account. To the extentthat fees paid on account exceed the value of work performed, they are includedin creditors as gross amounts due to customers. Variations in contract work and claims are included to the extent that they havebeen agreed with the customer. Revenue from bundled contracts consists of various components which operateindependently of each other and for which reliable fair values can beestablished. Accordingly, each component is accounted for separately as if itwere an individual contractual arrangement. Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable, which is the ratethat exactly discounts estimated future cash receipts through the expected lifeof the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholders' rights toreceive payment have been established. Leasing Finance leases, which transfer to the Group substantially all the risks andbenefits incidental to ownership of the leased item, are capitalised at theinception of the lease at the fair value of the leased item or, if lower, at thepresent value of the minimum lease payments. Lease payments are apportionedbetween the finance charges and reduction of the lease liability so as toachieve a constant rate of interest on the remaining balance of the liability.Finance charges are charged directly against income. Capitalised leased assetsare depreciated over the shorter of the estimated life of the asset or the leaseterm. Leases where the lessor retains substantially all the risks and benefits ofownership of the asset are classified as operating leases. Operating leasepayments are recognised as an expense in the income statement on a straight-linebasis over the lease-term. Any lease incentives are amortised over the lesser ofthe 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 thedate of transaction. Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are reported at the rates of exchangeprevailing at that date. Non-monetary items carried at fair value that are denominated in foreigncurrencies are translated at the rates prevailing at the date when the fairvalue was determined. Non-monetary items that are measured in terms ofhistorical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on theretranslation of monetary items, are included in profit or loss for the period.Exchange differences arising on the retranslation of non-monetary items carriedat fair value are included in profit or loss for the period except fordifferences arising on the retranslation of non-monetary items in respect ofwhich gains and losses are recognised directly in equity. For such non-monetaryitems, any exchange component of that gain or loss is also recognised directlyin equity. Retirement benefit costs The Group operates two defined benefit pension schemes. The Group also operatesa fully insured defined contribution pension scheme, the assets of which areheld in independently administered funds. Payments to the defined contribution pension scheme are charged as an expense asthey fall due. For the defined benefit pension schemes, the cost of providing benefits isdetermined using the Projected Unit Credit Method, with actuarial valuationsbeing carried out at each balance sheet date. Actuarial gains and losses arerecognised in full in the period in which they occur. They are recognisedoutside profit or loss and presented in the statement of recognised income andexpense. Past service cost is recognised immediately to the extent that the benefits arealready vested, and otherwise is amortised on a straight-line basis over theaverage period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation as adjusted for unrecognisedpast service cost, and as reduced by the fair value of scheme assets. Any assetresulting from this calculation is limited to past service cost, plus thepresent value of available refunds and reductions in future contributions to theplan. Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilitiesand when they relate to income taxes levied by the same taxation authority andthe Group intends to settle its current tax assets and liabilities on a netbasis. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciationand any impairment in value. Depreciation is charged so as to write off the costof the assets over their estimated useful lives and is calculated on astraight-line basis as follows: Freehold buildings and long leasehold property - over 50 yearsLeasehold improvements - period of the leasePlant and equipment - 3-14 years Annually the Group reviews the carrying amounts of its tangible and intangibleassets to determine whether there is any indication that those assets havesuffered an impairment loss. If any such indication exists, the recoverableamount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where the asset does not generate cash flows that areindependent from other assets, the Group estimates the recoverable amount of thecash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset 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 tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis 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 recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss 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 theinventories to their present condition and location. Net realisable value isbased on estimated selling price, less further costs expected to be incurred tocompletion and estimated selling costs. Provision is made for obsolete, slowmoving or defective items where appropriate. Investments All investments are initially recorded at cost, being the fair value of theconsideration given and including acquisition charges associated with theinvestment. Subsequently they are reviewed for impairment if events or changesin circumstances indicate the carrying value may not be recoverable. Financial instruments Trade receivables are measured at initial recognition at fair value. Appropriateallowances for estimated irrecoverable amounts are recognised in the incomestatement where there is objective evidence that the asset is impaired. Cash and cash equivalents comprise cash in hand and demand deposits, and othershort-term highly liquid investments that are readily convertible to a knownamount 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 netproceeds after deduction of issue costs. Finance charges, including premiumspayable on settlement or redemption and direct issue costs, are accounted for onan accruals basis in the income statement and are added to the carrying amountof the instrument to the extent that they are not settled in the period in whichthey 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 balancesheet when the Group becomes a party to the contractual provisions of theinstrument. Provisions Provisions are recognised when the Group has a present obligation (legal orconstructive) as a result of a past event and it is probable that an outflow ofresources embodying economic benefits will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation. Where theGroup expects some or all of a provision to be reimbursed, for example under aninsurance contract, the reimbursement is recognised as a separate asset but onlywhen the reimbursement is virtually certain. The expense relating to anyprovision is presented in the income statement net of any reimbursement. If theeffect of the time value of money is material, provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflectscurrent market assessments of the time value of money and, where appropriate,the risks specific to the liability. Where discounting is used, the increase inthe 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 wherecontract award (or full recovery of costs) is virtually certain. Bid costsincurred after this point are then capitalised within trade and otherreceivables. On the contract award these bid costs are amortised through theincome statement over the contract period by reference to the stage ofcompletion of the contract activity at the balance sheet date. Share based payments The Group operates a number of executive and employee share option schemes. Forall grants of share options and awards, the fair value as at the date of grantis calculated using the Black-Scholes model and the corresponding expense isrecognised on a straight line basis over the vesting period based on the Group'sestimate of shares that will eventually vest. The Group has taken advantage of the transitional provisions of IFRS 2 inrespect of equity-settled awards and has applied IFRS 2 only to equity-settledawards granted after 7 November 2002 that had not vested before 1 April 2005. 3. Revenue 2006 2005 £m £mSupport ServicesCleaning 204.7 189.7Catering 13.6 13.5Landscaping 4.4 2.0Pest Control 4.7 4.5Security 87.2 54.1Managed Services 82.3 84.0Business Services 16.8 18.7Engineering Maintenance 102.3 73.7----------------------------------- -------- -------- 516.0 440.2----------------------------------- -------- --------Property Services 163.5 129.1Engineering Services 256.1 230.4----------------------------------- -------- --------Total Continuing operations 935.6 799.7Discontinued operations - 18.9----------------------------------- -------- --------Total 935.6 818.6----------------------------------- -------- --------Investment Revenue 2.6 2.2 The revenue analysis provides additional disclosure regarding the threedivisions of the Group. 4. Business and geographical segments The Group manages its business on a service division basis. These divisions arethe basis on which the Group reports its primary segment information. Business segments For management purposes, the Group is currently organised into three operatingdivisions - Support Services, Property Services and Engineering Services. Principal activities are as follows: Support Services offers a flexible range of services supporting the occupiers ofbuildings. This ranges from Engineering Maintenance and Facilities Management toSecurity. Property Services act as a main contractor improving buildings either by fittingthem out, refurbishing or maintaining them. Engineering Services is predominantly a mechanical and electrical servicesspecialist installing heating, lighting, air conditioning and data cabling. The Group was also previously involved in scaffolding operations. That operationand segment was discontinued with effect from 30 September 2004. Segment information about these businesses is presented below. 2006 Support Property Engineering Consolidated Services Services Services 2006 2006 2006 2006 £m £m £m £m Revenue 516.0 163.5 256.1 935.6 ResultSegment result 32.8 8.9 6.4 48.1Unallocated corporate expenses - - - -------------------- --------- -------- -------- ---------Operatingprofit 32.8 8.9 6.4 48.1------------------- --------- -------- -------- ---------Investmentincome 1.7 0.1 0.8 2.6Finance costs (0.2) - - (0.2)------------------- --------- -------- -------- ---------Profit beforetax 34.3 9.0 7.2 50.5------------------- --------- -------- -------- ---------Margin 6.6% 5.5% 2.8% 5.4%------------------- --------- -------- -------- ---------Tax (15.5)Loss for theperiod fromdiscontinuedoperations (2.4)------------------- --------- -------- -------- ---------Profit aftertax anddiscontinuedoperations 32.6------------------- --------- -------- -------- --------- 2006 Support Property Engineering Consolidated Services Services Services 2006 2006 2006 2006 £m £m £m £m Other segment informationAssets by segment AssetsIntangibleassets 138.3 5.4 11.6 155.3Assets 140.2 65.8 97.9 303.9-------------------- --------- -------- --------- --------Total assets 278.5 71.2 109.5 459.2-------------------- --------- -------- --------- -------- Liabilities by segmentLiabilities (167.3) (42.8) (73.4) (283.5)-------------------- --------- -------- --------- --------Totalliabilities (167.3) (42.8) (73.4) (283.5)-------------------- --------- -------- --------- ---------------------------- --------- -------- --------- --------Total netassets 111.2 28.4 36.1 175.7-------------------- --------- -------- --------- -------- Capital expenditureTangible assets 10.0 2.1 1.7 13.8Depreciationcharge 6.8 1.5 1.5 9.8Intangibleassets 101.5 - 1.3 102.8Intangibleamortisation 0.2 - - 0.2 2005 Support Property Engineering Discontinued Unallocated Consolidated Services Services Services Corporate Profit(i) 2005 2005 2005 Operations 2005 2005 £m £m £m 2005 £m £m £m Revenue 440.2 129.1 230.4 18.9 - 818.6 ResultSegment result 29.1 7.6 7.6 1.0 - 45.3Unallocatedcorporateprofit - - - - 1.5 1.5------------- ------- ------ ------- -------- --------- --------Operatingprofit 29.1 7.6 7.6 1.0 1.5 46.8------------- ------- ------ ------- -------- --------- --------Investmentincome 0.8 0.4 1.0 - - 2.2Finance costs (0.1) - - - - (0.1)------------- ------- ------ ------- -------- --------- --------Profit beforetax 29.8 8.0 8.6 1.0 1.5 48.9------------- ------- ------ ------- -------- --------- --------Margin 6.8% 6.2% 3.7% 5.3% - 6.0%------------- ------- ------ ------- -------- --------- --------Tax (13.9)Loss for theperiod fromdiscontinuedoperations (4.8)------------- ------- ------ ------- -------- --------- --------Profit aftertax anddiscontinuedoperations 30.2------------- ------- ------ ------- -------- --------- -------- (i) Relates to sale of a property 2005 Support Property Engineering Consolidated Services Services Services 2005 2005 2005 2005 £m £m £m £m Other segment informationAssets by segment AssetsIntangibleassets 37.0 5.4 10.3 52.7Assets 151.1 43.2 83.9 278.2-------------------- --------- -------- --------- --------Total assets 188.1 48.6 94.2 330.9-------------------- --------- -------- --------- -------- Liabilities by segmentLiabilities (103.7) (22.9) (58.7) (185.3)-------------------- --------- -------- --------- --------Totalliabilities (103.7) (22.9) (58.7) (185.3)-------------------- --------- -------- --------- ---------------------------- --------- -------- --------- --------Total netassets 84.4 25.7 35.5 145.6-------------------- --------- -------- --------- -------- Capital expenditureTangible assets 12.2 1.3 1.5 15.0Depreciationcharge 7.5 1.5 1.7 10.7Intangibleassets - 0.6 1.4 2.0Intangible amortisation - - - - Geographical segments All Group operations are located in the United Kingdom. The Group considers alloperations form part of that single geographical segment. 5. Profit from operations Profit from operations has been arrived at after charging/(crediting): 2006 2005 £m £mDepreciation of property, plant and equipment 9.8 10.7Amortisation of intangible assets included in other operatingexpenses 0.2 -Gain on disposal of property, plant and equipment (0.6) (1.8)Staff costs (see note 6) 391.9 363.6Auditors' remuneration for audit services (see below) 0.4 0.3 A more detailed analysis of auditors' remuneration is provided below. 2006 2005 £'000 £'000Audit services:statutory audit 339 279Further assurance services 67 - Tax services:advisory services 56 32Other services - 4--------------------------------- -------- -------- 462 315--------------------------------- -------- -------- Fees for further assurance services principally comprise IFRS opening balancesheet and related audit work. In addition to the amounts shown above, the auditors received fees of £10,300(2005: £9,800) for the audit of the Group pension schemes. £39,000 (2005: £Nil)of fees were incurred in relation to the acquisitions in the year and have beenincluded in the acquisition costs. 6. Staff costs 2006 2005 No. No. The average number of persons employed during the financialyear was:Support services 29,298 27,757Property services 1,826 1,420Engineering services 1,297 1,199---------------------------------- -------- --------Average number of Group employees 32,421 30,376---------------------------------- -------- -------- Details of Directors' remuneration and interests are provided in the Directors'Remuneration Report and the audited section should be regarded as an integralpart of this Note. 2006 2005 £m £mEmployment costs:Wages and salaries 356.0 332.7Social security costs 31.5 27.2Other pension costs 3.7 3.2Share-based payments (Note 29) 0.7 0.5---------------------------------- -------- --------Total Employment Costs 391.9 363.6---------------------------------- -------- -------- 7. Investment revenue 2006 2005 £m £mInterest on bank deposits 1.6 2.1Other interest receivable 1.0 0.1--------------------------------- -------- --------Investment revenue 2.6 2.2--------------------------------- -------- -------- 8. Finance costs 2006 2005 £m £mInterest on bank overdrafts and loans 0.2 -Interest on obligations under finance leases - 0.1--------------------------------- -------- --------Total finance costs 0.2 0.1--------------------------------- -------- -------- 9. Tax Continuing Discontinued Total operations operations 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m Current tax 15.4 14.3 - 0.2 15.4 14.5 Deferred tax (note19) 0.1 (0.4) - - 0.1 (0.4)---------------- ------- ------- ------- -------- ------- ------ 15.5 13.9 - 0.2 15.5 14.1---------------- ------- ------- ------- -------- ------- ------ Corporation tax is calculated at 30% (2005: 30%) of the estimated assessableprofit for the year. The charge for the year can be reconciled to the profit per the income statementas follows: 2006 2005 £m £mProfit before tax:Continuing operations 50.5 47.9Discontinued operations (2.4) (3.6)Tax at the UK corporation tax rate of 30% 14.4 13.3Expenses not deductible for tax purposes 1.1 0.1Tax losses not recognised 0.7 0.5Goodwill - (1.6)Loss on disposal of investment - 2.9Profit on disposal of property - (0.5)Prior year adjustments (0.7) (0.6)--------------------------------- ------- -------Tax charge for the year:Continuing operations 15.5 13.9Discontinued operations - 0.2--------------------------------- ------- ------- In addition to the amount charged to the income statement, deferred tax relatingto retirement benefit costs, share based payments and short-term timingdifferences amounting to £0.5m has been charged (2005: £0.4m credited) directlyto equity (see Note 19). The benefit of tax savings relating to retirementbenefit costs and share based payments amounting to £1.0m has been credited(2005: £0.1m charged) directly to equity. 10. Dividends 2006 2005 £m £m Amounts recognised as distributions to equity holders in theperiod:Final dividend for the year ended 31 March 2005 of 1.8p (2004:1.4p) per share. 5.6 4.4Interim dividend for the year ended 31 March 2006 of 1.9p(2005:1.6p) per share. 5.9 4.8 ---------------------------------- ------- ------- 11.5 9.2---------------------------------- ------- ------- Proposed final dividend for the year ended 31 March 2006 of2.4p 7.3 5.5(2005: 1.8p) per share. The proposed final dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. 11. Earnings per share ------- --------Number of shares: 31 March 2006 31 March 2005 No. m No. m ------- -------- Weighted average number of ordinary shares forthe purpose of basic EPS 305.9 306.4 Effect of dilutive potential ordinary shares;share options 3.2 4.1 Weighted average number of ordinary shares forthe purpose of diluted EPS 309.1 310.5 The calculation of the basic and diluted earnings per share is based on thefollowing data: 2006 Per share 2005 Per share amount amount Earnings Earnings £m £mBasic EPSNet profit attributable toequity holders of theparent 30.2 9.8p 27.0 8.8pAdd back: Loss for theperiod from discontinuedoperations 2.4 0.8p 3.8 1.3pBasic earnings beforediscontinued activities 32.6 10.6p 30.8 10.1p Diluted EPSEarnings for the purposeof diluted EPS 30.2 9.7p 27.0 8.7pAdd back: Loss for theperiod from discontinuedoperations 2.4 0.8p 3.8 1.3pDiluted earnings beforediscontinued activities 32.6 10.5p 30.8 10.0p EPS from continuing operationspre-amortisation and other operatingincomeBasic earnings beforediscontinued activities 32.6 10.6p 30.8 10.1pAdd back: Amortisation ofintangibles 0.2 0.0p - -Less: Other operatingincome - - (1.5) (0.5p)Pre-amortisation and otheroperating income perOrdinary Share 32.8 10.6p 29.3 9.6p Diluted EPSpre-amortisation,discontinued operationsand other operating income 32.8 10.5p 29.3 9.5p 12. Goodwill £mCostAt 1 April 2004 51.9Acquisition of minorities 2.0Disposal of subsidiaries (1.2) At 1 April 2005 52.7 Acquisition of subsidiaries 74.6Increased consideration for subsidiaries acquired in prior years 9.0Acquisition of minorities 7.5---------------------------------------- --------At 31 March 2006 143.8---------------------------------------- ------------------------------------------------ --------Accumulated impairment lossesAt 1 April 2004 - At 1 April 2005 ----------------------------------------- --------At 31 March 2006 ----------------------------------------- -------- Carrying amount---------------------------------------- --------At 31 March 2006 143.8---------------------------------------- -------- At 31 March 2005 52.7 Goodwill acquired in a business combination is allocated, at acquisition, to thecash generating units (CGU) that are expected to benefit from that businesscombination. Goodwill has been allocated to CGUs in the following businesssegments, which is how goodwill is monitored by the Group internally. Cost 2006 2005 £m £m Support Services 126.8 37.0Property Services 5.4 5.4Engineering Services 11.6 10.3----------------------------------- -------- -------- 143.8 52.7 ----------------------------------- -------- -------- The Group tests goodwill at least annually for impairment. The recoverable amounts of the CGUs are determined from value in usecalculations. The key assumptions for the value in use calculations are thoseregarding the discount rates, growth rates and expected changes to sellingprices and direct costs during the period. Management estimates discount ratesusing pre-tax rates that reflect current market assessments of the time value ofmoney and the risks specific to the CGUs. The growth rates are based on industrygrowth forecasts. Changes in selling prices and direct costs are based on pastpractices and expectations of future changes in the market. The Group prepares cash flow forecasts derived from the most recent financialbudgets approved by management for the next five years and extrapolates cashflows for the following five years based on an estimated growth rate of 2 percent. This rate does not exceed the average long-term growth rate for therelevant markets. The rates used to discount the forecast cash flows from CGUs are as follows: 2006 2005 % % Support Services 8.0 8.0Property Services 8.0 8.0Engineering Services 8.0 8.0 13. Other intangible assets Customer relationships £mCostAt 1 April 2004 and 1 April 2005 -Acquired on acquisition of subsidiaries 11.7----------------------------------- -------------At 31 March 2006 11.7----------------------------------- ------------- Amortisation At 1 April 2004 and 1 April 2005 -Charge for the year 0.2----------------------------------- -------------At 31 March 2006 0.2----------------------------------- ------------- Carrying amount----------------------------------- -------------At 31 March 2006 11.5----------------------------------- ------------- At 31 March 2005 - Customer relationships are amortised over the remaining period of the contract,which ranges on average between 6 and 8 years. 14. Property, Plant and Equipment Freehold Long leasehold Plant and Total properties properties vehicles £m £m £m £mCostAt 1 April 2004 5.8 3.2 65.0 74.0Additions - - 15.0 15.0Disposals (1.1) - (35.7) (36.8)---------------------- -------- -------- -------- --------At 1 April 2005 4.7 3.2 44.3 52.2---------------------- -------- -------- -------- --------Additions 0.8 1.5 11.5 13.8Acquisition ofsubsidiaries 1.4 0.4 3.5 5.3Disposals (0.9) - (7.1) (8.0)---------------------- -------- -------- -------- --------At 31 March2006 6.0 5.1 52.2 63.3---------------------- -------- -------- -------- -------- Accumulated depreciation andimpairmentAt 1 April 2004 0.6 0.3 32.8 33.7Charge for theyear 0.1 0.1 10.5 10.7Disposals (0.2) - (19.2) (19.4)---------------------- -------- -------- -------- --------At 1 April 2005 0.5 0.4 24.1 25.0---------------------- -------- -------- -------- --------Charge for theyear 0.1 0.4 9.3 9.8Disposals - - (6.0) (6.0)---------------------- -------- -------- -------- --------At 31 March2006 0.6 0.8 27.4 28.8---------------------- -------- -------- -------- -------- Carrying amount---------------------- -------- -------- -------- --------At 31 March2006 5.4 4.3 24.8 34.5---------------------- -------- -------- -------- -------- At 31 March2005 4.2 2.8 20.2 27.2 The net book value of plant and vehicles held under finance leases includedabove was £1.8m (2005: £1.0m). 15. Inventories 2006 2005 £m £m Work-in-progress 8.0 6.3Payments received on account - (0.1)Finished goods 0.8 0.1--------------------------------- -------- --------- 8.8 6.3--------------------------------- -------- --------- 16. Trade and other receivables 2006 2005 £m £m Amounts receivable for the sale of services 211.3 156.7Amounts recoverable on contracts 17.9 12.1Other debtors 2.2 5.6Prepayments and accrued income 12.9 4.2--------------------------------- -------- --------- 244.3 178.6--------------------------------- -------- --------- The average credit period taken on sales of services was 76 days (2005: 72days). Interest is charged on overdue debts when appropriate. An allowance hasbeen made for estimated irrecoverable amounts from the sale of services of £3.9m(2005: £1.3m). This allowance has been determined by reference to past defaultexperience. The Directors consider that the carrying amount of trade and other receivablesapproximates their fair value. Credit risk The Group's principal financial assets are bank balances and cash and trade andother receivables. The Group's credit risk is primarily attributable to its trade receivables. Theamounts presented in the balance sheet are net of allowances for doubtfulreceivables. An allowance for impairment is made where there is an identifiedloss event which, based on previous experience, is evidence of a reduction inthe recoverability of the cash flows. The credit risk on liquid funds and financial instruments is limited because thecounterparties are banks with high credit-ratings assigned by internationalcredit-rating agencies. The Group has no significant concentration of credit risk, with exposure spreadover a large number of counterparties and customers. 17. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bankdeposits with an original maturity of three months or less. The carrying amountof the assets approximates their fair value. All balances are held in sterling. Included in cash and cash equivalents are deposits totalling £9.6m (2005: £3.8m)held by the Group's insurance subsidiary, which are not readily available forthe general purposes of the Group. 18. Bank overdraft and loans The loans are repayable as follows: 2006 2005 £m £mOverdraft 2.0 -Bank loans 31.0 ---------------------------------- -------- --------- 33.0 ---------------------------------- -------- --------- All borrowings are in sterling. The Directors estimate that the carrying amountof the Group's borrowings approximate to their fair value. The bank loans arerepayable within one year and the overdrafts are repayable on demand. 2006 2005 % %The weighted average interest rates paid during the period theloans were outstanding were as follows:Overdrafts 5.4 -Bank loans 5.1 - At 31 March 2006, the Group had available £70m (2005: £60m) of undrawn borrowingfacilities in respect of which all conditions precedent had been met. Thefacilities have various expiry dates between February 2008 and 2010. The loanscarry interest rates which are currently fixed at 5.1%. The overdraft carriesinterest at 0.9% over base rate. 19. Deferred tax The following are the major deferred tax liabilities and assets recognised bythe Group and movements thereon during the current and prior reporting period: Accelerated Retirement Intangible Share based Short term Tax Total benefit assets (E) payments timing obligations business differences combinations tax £m £m £m £m losses £m depreciation £m £m -------------- -------- ------- -------- ------- ------- ------ ------At 1 April 2004 (0.8) 2.1 - 0.3 0.6 0.2 2.4-------------- -------- ------- -------- ------- ------- ------ ------ (Charge)/credit to income 0.6 - - 0.2 (0.2) (0.2) 0.4(Charge)/credit to equity - 0.2 - 0.2 - - 0.4Disposal ofsubsidiary 1.2 - - - - - 1.2 -------------- -------- ------- -------- ------- ------- ------ ------At 1 April 2005 1.0 2.3 - 0.7 0.4 - 4.4-------------- -------- ------- -------- ------- ------- ------ ------ (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) togoodwill - - (3.6) - - - (3.6) -------------- -------- ------- -------- ------- ------- ------ ------At 31 March2006 0.8 (0.5) (3.6) 1.3 2.0 0.2 0.2-------------- -------- ------- -------- ------- ------- ------ ------ Certain deferred tax assets and liabilities have been offset. The following isthe analysis of the deferred tax balances (after offset) for financial reportingpurposes: 2006 2005 £m £m Deferred tax assets 4.9 4.6Deferred tax liabilities (4.7) (0.2)----------------------------------- -------- --------Net deferred tax asset 0.2 4.4----------------------------------- -------- -------- The Group has unutilised tax losses of £3.1m (2005: £1.6m) that are availablefor offset against future profits. Deferred tax assets have not been recognisedin respect of £2.4m (2005: £1.6m) of these losses as their recoverability isuncertain. 20. Trade and other payables 2006 2005 £m £m Payments received on account - 0.8Trade creditors 133.4 97.3Other taxes and social security 40.7 28.7Other creditors 1.1 4.1Accruals and deferred income 39.3 29.0----------------------------------- -------- -------- 214.5 159.9----------------------------------- -------- -------- Trade creditors and accruals principally comprise amounts outstanding for tradepurchases and ongoing costs. The average credit period taken for trade purchasesis 55 days (2005: 56 days). The Directors consider that the carrying amount of trade and other payablesapproximates to their fair value. 21. Obligations under finance leases Minimum Present value of lease payments lease payments 2006 2005 2006 2005 £m £m £m £mAmounts payable under finance leases:Within one year 0.8 0.2 0.7 0.2In the second to fifth years inclusive 1.3 0.2 1.2 0.2After five years - 0.7 - 0.5----------------------- -------- -------- -------- -------- 2.1 1.1 1.9 0.9----------------------- -------- -------- -------- -------- Less: future finance charges 0.3 0.1 n/a n/a ----------------------- -------- -------- -------- --------Present value of lease obligations 1.8 1.0 1.9 0.9----------------------- -------- -------- -------- -------- Less: Amount due for settlement within12 0.8 0.2 0.7 0.2months (shown under current liabilities)----------------------- -------- -------- -------- --------Amount due for settlement after 12 1.0 0.8 1.2 0.7months -------- -------- -------- ------------------------------- The average remaining lease term is 22 months (2005: 31 months). For the yearended 31 March 2006, the average effective borrowing rate was 5.1% (2005: 5.1%).Interest rates are fixed at the contract date. All leases are on a fixedrepayment basis and no arrangements have been entered into for contingent rentalpayments. All lease obligations are denominated in sterling. The fair value of the Group's lease obligations approximates their carryingamount. The Group's obligations under finance leases are secured by the lessors' rightsover the leased assets. 22. Provisions Contingent Insurance Total deferred reserve consideration £m £m £m At 1 April 2005 3.2 6.0 9.2Additionalprovision inthe year 12.2 1.8 14.0Utilisedduring theyear - (1.3) (1.3)--------------------------- -------- -------- --------At 31 March2006 15.4 6.5 21.9--------------------------- -------- -------- -------- Included incurrentliabilities 11.7Included innon currentliabilities 10.2--------------------------- -------- -------- -------- 21.9--------------------------- -------- -------- -------- Contingent Insurance Total deferred reserve consideration £m £m £m At 1 April 2004 3.2 4.1 7.3Additionalprovision inthe year - 2.8 2.8Utilisedduring theyear - (0.9) (0.9)--------------------------- -------- -------- --------At 31 March2005 3.2 6.0 9.2--------------------------- -------- -------- -------- Included in current liabilities -Included innon currentliabilities 9.2--------------------------- -------- -------- -------- 9.2--------------------------- -------- -------- -------- Provision is made for contingent deferred consideration, which will becomepayable in the future, at the best estimate of the Directors. Further detailsare given in Note 27. The provision for insurance claims represents amounts payable by MITIEReinsurance Company Ltd in respect of outstanding claims incurred at the balancesheet dates. These amounts will become payable as each year's claims aresettled. 23. Share capital ORDINARY SHARES ORDINARY SHARES OF 2.5p OF 2.5p No. £m Authorised at 1 April 2005 and 31 March2006 340,000,000 8.5 2006Allotted and fully paidAt beginning of year 303,173,780 7.6 Issued as Directors' remuneration 66,773 -Issued for acquisitions 4,832,770 0.1Issued under share option schemes 1,681,551 -Own shares acquired (992,305) - --------------------------------- -------- --------At end of year 308,762,569 7.7--------------------------------- -------- -------- 2005Allotted and fully paidAt beginning of year 309,393,539 7.7 Issued as Directors' remuneration 72,812 -Issued for acquisitions 2,560,052 0.1Issued under share option schemes 1,457,383 0.1Own shares acquired (10,310,006) (0.3)--------------------------------- -------- --------At end of year 303,173,780 7.6--------------------------------- -------- -------- During the year 66,773 (2005: 72,812) Ordinary Shares of 2.5p were allotted asremuneration in respect of services provided by Directors at a market price of199.5p (2005: 162.0p) giving rise to share premium of £0.1m (2005: £0.1m). During the year 4,832,770 (2005: 2,560,052) Ordinary Shares of 2.5p wereallotted in respect of acquiring minority interests at a mid-market price of166.0p (2005: 129.0p) giving rise to a merger reserve of £7.9m (2005: £3.2m). During the year 1,681,551 (2005: 1,457,383) Ordinary Shares of 2.5p wereallotted in respect of share option schemes at a price between 57.75p and176.25p (2005: 85.0p and 168.0p) giving rise to share premium of £2.2m (2005:£1.6m). During the year 992,305 (2005: 10,310,006) Ordinary Shares of 2.5p werepurchased at market prices between 160.0p and 164.0p (2005: 131.0p and 165.0p).These were then cancelled. This resulted in a capital redemption reserve of£0.0m (2005: £0.3m). 24. Reserves Called up share Share premium Merger reserve Re-valuation Capital Other reserve capital account reserve redemption £m £m £m £m reserve (i) £m £mBalance at 1April 2004 7.7 9.8 40.9 (0.4) - 1.0 Shares issuedand netpremiumarising inrespect ofacquisitions 0.1 - 3.2 - - - Shares issuedand netpremium inconnection ofexercise ofshare options - 1.7 - - - (0.4) Own sharesacquired (0.2) - - - 0.3 - Profit fortheperiodattributableto equityholders of - - - - - - theparentPropertyrevaluation - - - 0.2 - - Dividend paid - - - - - - Expense inrelation toshare basedpayments - - - - - - Tax charge onitems takendirectly toequity - - - - - - ------------- ------- ------- ------ ------- -------- ------- Net actuarialloss ondefinedbenefitpensionschemes - - - - - - Tax credit onactuariallosstaken - - - - - - directly ------- ------- ------ ------- -------- ------- to equity Net expenserecogniseddirectly inequity in theyear - - - - - - ------------- ------- ------- ------ ------- -------- ------- Balance at 31March 2005 7.6 11.5 44.1 (0.2) 0.3 0.6 ------------- ------- ------- ------ ------- -------- ------- Share based Retained Total payment reserve earnings £m £m £m Balance at 1April 2004 0.2 69.8 129.0 Shares issuedand netpremiumarising inrespect ofacquisitions - - 3.3Shares issuedand netpremium inconnection ofexercise ofshare options - - 1.3Own sharesacquired - (14.7) (14.6)Profit fortheperiodattributableto equityholders of - 27.0 27.0theparentPropertyrevaluation - (0.2) -Dividend paid - (9.3) (9.3)Expense inrelation toshare basedpayments 0.5 - 0.5Tax charge onitems takendirectly toequity - 0.1 0.1------------- ------ ------ -----Net actuarialloss ondefinedbenefitpensionschemes - (1.5) (1.5)Tax credit onactuariallosstaken - 0.2 0.2directly ------ ------ -----to equity-------------Net expenserecogniseddirectly inequity in theyear - (1.3) (1.3) ------ ------ -----Balance at 31March 2005 0.7 71.4 136.0 ------ ------ ----- Called up share Share premium Merger reserve Re-valuation Capital Other reserve capital account reserve redemption £m £m £m £m reserve (i) £m £mBalance at 1April 2005 7.6 11.5 44.1 (0.2) 0.3 0.6 Shares issuedand netpremiumarising inrespect ofacquisitions 0.1 - 7.9 - - - Shares issuedand netpremium inconnection ofexercise ofshare options - 2.2 - - - (0.3) Own sharesacquired - - - - - - Profit fortheperiodattributableto equityholders of - - - - - - theparentPropertyrevaluationDividend paid - - - - - - Expense inrelation toshare basedpayments - - - - - - Tax credit onitems takendirectly toequity - - - - - - ------------- ------- ------- ------ ------- -------- ------- Net actuarialgain ondefinedbenefitpensionschemes - - - - - - Tax charge onactuarialgaintaken - - - - - - directly ------- ------- ------ ------- -------- ------- to equity Net expenserecogniseddirectly inequity in theyear - - - - - - ------------- ------- ------- ------ ------- -------- ------- Balance at 31March 2006 7.7 13.7 52.0 (0.2) 0.3 0.3 ------------- ------- ------- ------ ------- -------- ------- (i) This is a non-distributable reserve. Share based Retained Total payment reserve earnings £m £m £m Balance at 1April 2005 0.7 71.4 136.0 Shares issuedand netpremiumarising inrespect ofacquisitions - - 8.0Shares issuedand netpremium inconnection ofexercise ofshare options - - 1.9Own sharesacquired - (1.6) (1.6)Profit fortheperiodattributableto equityholders of - 30.2 30.2theparentPropertyrevaluationDividend paid - (11.5) (11.5)Expense inrelation toshare basedpayments 0.7 - 0.7Tax credit onitems takendirectly toequity - 3.1 3.1 ------ ------ -----Net actuarialgain ondefinedbenefitpensionschemes - 1.1 1.1Tax charge onactuarialgaintaken - (2.6) (2.6)directly ------ ------ -----to equity-------------Net expenserecogniseddirectly inequity in theyear - (1.5) (1.5) ------ ------ -----Balance at 31March 2006 1.4 90.1 165.3 ------ ------ ----- 25. Acquisition of Subsidiaries a) Purchase of minority interests MITIE Air MITIE Air MITIE Business MITIE MITIE MITIE Security MITIE Security Conditioning Conditioning Services Ltd (North) Ltd (Scotland) Ltd (Wales) Ltd (West) Ltd £m £m £m Engineering Engineering £m £m Services Services (Retail) Ltd (Swansea) Ltd £m £m Minorityinterest 0.1 0.1 1.1 0.1 0.2 0.2 0.1 Goodwill 0.4 0.3 4.9 - 0.6 1.2 0.1 ------------- ------- ------- ------- ------- ------- ------- ------- Total purchaseconsideration 0.5 0.4 6.0 0.1 0.8 1.4 0.2 ------------- ------- ------- ------- ------- ------- ------- ------- Shares issued(E) MITIEGroup 0.4 0.4 5.1 0.1 0.7 1.1 0.2 PLCDeferredconsideration - - 0.7 - 0.1 0.1 - ------------- ------- ------- ------- ------- ------- ------- ------- Cashconsiderationbeing cashoutflow in theperiod 0.1 - 0.2 - - 0.2 - ------------- ------- ------- ------- ------- ------- ------- ------- Total £m Minorityinterest 1.9 Goodwill 7.5 ------Total purchaseconsideration 9.4 ------Shares issued(E) MITIEGroup 8.0PLCDeferredconsideration 0.9 ------Cashconsiderationbeing cashoutflow in theperiod 0.5 ------ b) Acquisition of Intruder International Ltd On 3 May 2005 MITIE acquired 100% of the issued share capital of IntruderInternational Ltd, a provider of Security services, for total consideration of£4.2m. The transaction has been accounted for by the purchase method ofaccounting. Book value Fair value Fair value adjustments £m £m £mNet assets acquired:Intangible assets 0.1 (0.1) -Property, plant andequipment 1.2 (0.1) 1.1Inventories 0.1 - 0.1Trade and other receivables 1.1 - 1.1Cash and cash equivalents 0.4 - 0.4Trade and other payables (0.8) - (0.8)Current tax liabilities (0.1) - (0.1)Provisions (0.8) (0.2) (1.0)Obligations under financeleases (0.1) - (0.1) ------- -------- ------Net assets acquired 1.1 (0.4) 0.7 Goodwill 3.5 ------Total consideration 4.2 Satisfied by:Cash 4.0Directly attributable costs 0.2 Net cash outflow arising on acquisition:Cash consideration 4.2Cash and cash equivalentsacquired (0.4) ------Net cash outflow 3.8 The goodwill arising on the acquisition of Intruder International Ltd isattributable to the expected profitability arising from new business and theanticipated future operating synergies arising from assimilation into the Group. Intruder International Ltd contributed £3.9m to revenue and a loss of £0.4m tothe Group's profit before tax for the period between the date of acquisition andthe balance sheet date. c) Acquisition of The Watch Security Ltd On 30 June 2005 MITIE acquired 100% of the issued share capital of The WatchSecurity Ltd, a provider of Security services, for total consideration of £8.2m.The transaction has been accounted for by the purchase method of accounting. Book value Fair value Fair value adjustments £m £m £mNet assets acquired:Intangible assets - 0.8 0.8Deferred tax liability - (0.2) (0.2)Property, plant andequipment 0.8 - 0.8Inventories 0.1 - 0.1Trade and other receivables 1.8 - 1.8Cash and cash equivalents 1.1 - 1.1Trade and other payables (2.4) - (2.4)Current tax liabilities (0.1) - (0.1)Loans (0.1) - (0.1) ------- -------- ------Net assets acquired 1.2 0.6 1.8 Goodwill 6.4 ------Total consideration 8.2 Satisfied by:Cash 6.0Deferred consideration 2.0Directly attributable costs 0.2 ------Total consideration 8.2 Net cash outflow arising on acquisition:Cash consideration 6.2Cash and cash equivalentsacquired (1.1) ------Net cash outflow 5.1 The goodwill arising on the acquisition of The Watch Security Ltd isattributable to the expected profitability arising from new business and theanticipated future operating synergies arising from assimilation into the Group. The Company contributed £13.5m to revenue and £0.3m to the Group's profit beforetax for the period between the date of acquisition and the balance sheet date. d) Acquisition of Lyndhurst Services Ltd On 17 February 2006 MITIE acquired 100% of the issued share capital of LyndhurstServices Ltd, a provider of Landscaping services, for total consideration of£8.9m. The transaction has been accounted for by the purchase method ofaccounting. Book value Fair value Fair value adjustments £m £m £mNet assets acquired:Intangible assets - 3.5 3.5Deferred tax liability - (1.0) (1.0)Property, plant andequipment 0.8 (0.1) 0.7Inventories 0.1 - 0.1Trade and otherreceivables 1.4 - 1.4Cash and cash equivalents 0.3 - 0.3Trade and other payables (0.5) - (0.5)Current tax liabilities (0.5) - (0.5) -------- -------- --------Net assets acquired 1.6 2.4 4.0 Goodwill 4.9 --------Total consideration 8.9 Satisfied by:Cash 8.2Deferred consideration 0.6Directly attributablecosts 0.1 --------Total consideration 8.9 Net cash outflow arising on acquisition:Cash consideration 8.3Cash and cash equivalentsacquired (0.3) --------Net cash outflow 8.0 The goodwill arising on the acquisition of Lyndhurst Services Ltd isattributable to the expected profitability arising from new business and theanticipated future operating synergies arising from assimilation into the Group. The Company contributed £0.7m to revenue and £0.1m to the Group's profit beforetax for the period between the date of acquisition and the balance sheet date. e) Acquisition of Initial Security Ltd On 7 March 2006 MITIE acquired 100% of the issued share capital of InitialSecurity Ltd, a provider of Security services, for total consideration of£59.7m. The transaction has been accounted for by the purchase method ofaccounting. Book value Fair value Fair value adjustments £m £m £mNet assets acquired:Intangible assets 10.5 (3.0) 7.5Deferred tax liability - (2.3) (2.3)Property, plant andequipment 2.8 - 2.8Inventories 0.5 (0.5) -Trade and otherreceivables 34.9 (1.0) 33.9Overdrafts (8.4) - (8.4)Trade and other payables (20.8) - (20.8)Current tax liabilities (0.2) - (0.2)Loans (11.6) - (11.6)Obligations under financeleases (1.0) - (1.0) -------- -------- -------Net assets/(liabilities)acquired 6.7 (6.8) (0.1) Goodwill 59.8 -------Total consideration 59.7 Satisfied by:Cash 59.1Directly attributablecosts 0.6 -------Total consideration 59.7 Net cash outflow arising on acquisition:Cash consideration 59.7Overdrafts 8.4Loans repaid 11.6 -------Net cash outflow 79.7 The goodwill arising on the acquisition of Initial Security Ltd is attributableto the expected profitability arising from new business and the anticipatedfuture operating synergies arising from assimilation into the Group. The Company contributed £6.1m to revenue and £0.2m to the Group's profit beforetax for the period between the date of acquisition and the balance sheet date. All acquisitions The fair values on the acquisitions above are provisional as they are based uponthe Group's estimate of recoverability of debtors and other assets. If all of the acquisitions had been completed on 1 April 2005 instead of thedates above, total Group revenue for the period would have been approximately£1,069m, and profit before tax and amortisation for the year would have beenapproximately £54.6m on a pro forma basis. 26. Notes to the Cashflow StatementReconciliation of operating profit to net cash fromoperating activities 2006 2005 £m £m Operating profit from continuing operations 48.1 45.6Operating profit from discontinued operations (2.4) 1.0Adjustments for:Share based payment expense 0.7 0.5Depreciation of property, plant and equipment 9.8 10.7Amortisation of intangible assets 0.2 -Gain on disposal of property, plant and equipment (0.6) (1.8)Increase/(decrease) in provisions 0.5 1.9------------------------------ ------- -------Operating cash flows before movements in working capital 56.3 57.9------------------------------ ------- ------- Pension charge 2.6 2.3Pension contributions (3.2) (3.4)(Increase)/decrease in inventories (2.2) 0.7Decrease in receivables (29.5) (26.6)Increase in payables 31.2 15.8------------------------------ ------- -------Cash generated by operations 55.2 46.7------------------------------ ------- ------- Additional pension contributions (7.8) -Income taxes paid (15.1) (13.5)Interest paid (0.2) ------------------------------- ------- -------Net cash from operating activities 32.1 33.2------------------------------ ------- ------- Additions to fixtures and equipment during the year amounting to £0.1m (2005:£1.0m) were financed by new finance leases. Cash and cash equivalents (which are presented as a single class of assets onthe face of the balance sheet) comprise cash at bank and other short-term highlyliquid investments with a maturity of three months or less. 27. Contingent Liabilities The Company is party with other Group companies to cross guarantees of eachother's bank loans and overdrafts of £33m (2005: £Nil). The Company and various of its subsidiaries are, from time to time, parties tolegal proceedings and claims that are in the ordinary course of business. TheDirectors do not anticipate that the outcome of these proceedings and claims,either individually or in aggregate, will have a material adverse effect on theGroup's financial position. Included in provisions for liabilities and charges (Note 22) is £15.4m (2005:£3.2m) of contingent consideration relating to the acquisitions of TridentSafeguards Ltd ('Trident'), Eagle Pest Control Services (UK) Ltd ('Eagle'),Lyndhurst Services Ltd ('Lyndhurst') and The Watch Security Ltd ('The Watch').For Trident £10.8m (2005: £2.0m) is payable at any time between 2006 and 2010 ifan agreed profit threshold is met. In total £9.2m (2005: £9.2m) has been paid upto 31 March 2006. For Eagle £1.2m, (2005: £1.2m) is payable at any time between2008 and 2013 if an agreed profit threshold is met, if this profit threshold isexceeded then an additional amount will become payable, with the totalconsideration capped at £6.0m. In total £2.8m has been paid up to 31 March 2006(2005: £2.8m). For Lyndhurst a further £0.6m is payable in July 2007 if anagreed profit threshold is exceeded with the total consideration capped at£9.0m. In total £7.9m has been paid up to 31 March 2006. For The Watch a further£2.0m is payable in June 2007 dependent upon a number of performance conditionsbeing met. In total £6.0m has been paid up to 31 March 2006. Contingent consideration, to be satisfied in shares, for the acquisition ofminority interests in subsidiary undertakings is dependent on future profits ofthose subsidiaries and is at the discretion of the Company. It is therefore notpossible to quantify accurately, in advance, the final amounts that may becomepayable. In connection with the sale of The Platform Company (UK) Ltd (formerly MITIEPowered Access Ltd) in the year to 31 March 2004, the Group has guaranteed leasecommitments amounting to £nil (2005: £0.1m). Against these guarantees, the Grouphas received indemnities from the Group's bankers of £nil (2005: £0.0m) and fromthe suppliers of the leased equipment of £nil (2005: £0.0m), giving a netcontingent liability of £nil (2005: £0.1m). In addition, the Group and subsidiaries have given indemnities in respect ofperformance guarantees amounting to £6.1m (2005: £4.1m). 28. Operating Lease Arrangements The Group as Lessee--------------------------- -------- -------- 2006 2005 £m £m--------------------------- -------- --------Minimum lease payments under operating leases 4.5 4.4recognised in income for the year--------------------------- -------- -------- At the balance sheet date, the Group had outstanding commitments for futureminimum lease payments under non-cancellable operating leases, which fall due asfollows: 2006 2005 £m £m Within one year 1.0 0.7In the second to fifth years inclusive 2.9 2.9After five years 1.3 1.4--------------------------- -------- -------- 5.2 5.0--------------------------- -------- -------- 29. Share based payments Equity-settled share option scheme The Company has four share option schemes: The MITIE Group PLC 1991 Executive Share Option Scheme The Executive share option scheme is open to all employees. The exercise priceis equal to the market value of the shares on the date of grant. The vestingperiod is three years. If the options remain unexercised after a period of tenyears from the date of grant, the options expire. Options maybe forfeited ifthe employee leaves the Group. No options have been granted under this schemesince August 2001. The MITIE Group PLC 2001 Executive Share Option Scheme The Executive Share Option Scheme is open to all employees. The exercise priceis equal to the market value of the shares on the date of grant. The vestingperiod is three years. If the options remain unexercised after a period of tenyears from the date of grant the options expire. Options may be forfeited if theemployee leaves the Group before options can be exercised, the performancecondition that must be satisfied is that the percentage growth in the earningsper share over a three year period must be equal or greater than 10% per annumcompound. The MITIE Group PLC 1991 and 2001 Savings Related Share Option Scheme The Savings Related Share Option scheme is open to all employees. The exerciseprice is not less than 80% of the market value of the shares on the daypreceding the date on which invitations to participate in the Scheme are issued.The vesting period is five years. If the options remain unexercised after aperiod of five years and six months from the date of grant, the options expire.Options maybe forfeited if the employee leaves the Group. Details of the share options outstanding during the year are as follows. 2006 2005 Number of share Weighted Number of share Weighted options average options average exercise price exercise price (in p) (in p) Outstanding atbeginning ofperiod (1) 12,089,064 124 11,572,984 118Granted duringthe period 3,278,927 149 3,526,467 136Forfeitedduring theperiod (1,406,688) 150 (1,553,004) 132Exercisedduring theperiod (1,681,551) 138 (1,457,383) 150 -------------------------- -------- -------- -------- ---------Outstanding atthe end of theperiod 12,279,752 130 12,089,064 124-------------------------- -------- -------- -------- --------- Exercisable atthe end of theperiod 2,098,698 124 2,785,100 121 The Group recognised the following expenses related to share based payments 2006 2005 £m £m2001 Executive share options 0.4 0.32001 SAYE 0.3 0.2 -------------------------- -------- --------- 0.7 0.5 -------------------------- -------- --------- (1) Included within this balance are 3,719,291 (2005: 5,503,845) options thathave not been recognised in accordance with IFRS 2 as the options were grantedon or before 7 November 2002. These options have not been subsequently modifiedand 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 optionsexercised during the period was 181p (2005: 150p). The options outstanding at 31March 2006 had a weighted average exercise price of 130p (2005:126p), and aweighted average remaining contractual life of 5.18 years (2005: 4.35 years). Inthe year ended 31 March 2006, options were granted on 23 June 2005 and 20 July2005 in respect of the Executive and Savings Related share option schemesrespectively. The aggregate of the estimated fair values of the options grantedon those dates is £1.1m. In the year ended 31 March 2005, options were grantedon 11 June 2004 and 28 July 2004 in respect of the Executive and Savings Relatedshare option schemes respectively. The aggregate of the estimated fair values ofthe options granted on those dates is £1.1m. The fair value of options granted under the scheme is measured by use of theBlack-Scholes model. The inputs into the Black-Scholes model are as follows: 2006 2005 Share price(p) 98-161 98-130Exercise price(p) 99-162 99-139Expected volatility (%) 28-30 28-30Expected life(years) 5-6 5-6Risk-free rate (%) 4.17-5.12 4.17-5.17Expected dividends (%) 1.43-2.12 1.43-2.12 Expected volatility was based upon the historical volatility over the expectedlife of the schemes. The expected life is based upon historical data and hasbeen adjusted based on management's best estimates for the effects of non-transferability, exercise restrictions and behavioural considerations. 30. Retirement benefit schemes Defined contribution scheme The Group operates a defined contribution retirement benefit scheme for allqualifying employees. The assets of the scheme are held separately from those ofthe Group in funds controlled by the scheme providers. The total cost charged to income of £1.1m (2005: £0.9m) represents contributionspayable to this scheme by the Group at rates specified in the rules of theplans. As at 31 March 2006, contributions of £0.1m (2005: £0.1m) due in respectof the current reporting period had not been paid over to the schemes. Defined benefit schemes The Group operates two defined benefit pension schemes called the MITIE GroupPLC Pension Scheme and the MITIE Group PLC Passport Pension Scheme. Inaddition, the Group contributes to the Executive Group Limited Shared CostSection of the Railway Pension Scheme. The assets of the MITIE schemes are held separately from the Group, beinginvested in equities and with insurance companies. Contributions to the schemesare charged to the Income Statement so as to spread the cost of pensions overthe employees' working lives with the Group. Under the schemes, the employees are entitled to retirement benefits varyingbetween 0 and 66 per cent of final salary on attainment of a retirement age of65. No other post-retirement benefits are provided. The schemes are fundedschemes. The most recent actuarial valuations of plan assets and the present value of thedefined benefit obligation were carried out at 1 April 2006 by Mr David Higgs,Fellow of the Institute of Actuaries. The present values of the defined benefitobligation, the related current service cost, and past service cost weremeasured using the projected unit credit method. Valuation at 2006 2005 Key assumptions used for IAS 19 valuation:Discount rate 5.10% 5.50%Expected return on scheme assets:Equities 8.00% 7.75%Bonds 5.00% 5.50%Others 5.00% 5.50%Property 7.50% 7.50%Expected rate of salary increases 3.75% 3.00%Future pension increases 3.00% 3.00% Amounts recognised in administrative expenses in respect of these definedbenefit schemes are as follows: 2006 2005 £m £m Current service cost (3.0) (2.5)Interest cost (3.2) (2.6)Expected return on scheme assets 3.6 2.8-------------------------------- -------- --------Total (2.6) (2.3)-------------------------------- -------- -------- The actual return on scheme assets was £12.8m (2005: £5.1m) The amount included in the balance sheet arising from the Group's obligations inrespect of its defined benefit retirement benefit schemes is as follows: 2006 2005 £m £m Present value of defined benefit obligations 72.2 56.6Fair value of scheme assets 74.0 49.0-------------------------------- -------- --------Surplus/(deficit) in scheme 1.8 (7.6)-------------------------------- -------- -------- Deferred tax (asset)/liability (0.5) 2.3-------------------------------- -------- --------Asset/(liability) recognised in the balance sheet 1.3 (5.3)-------------------------------- -------- -------- Movements in the present value of defined benefit obligations were as follows: 2006 2005 £m £m At 1 April 56.6 45.9Service cost 3.0 2.5Interest cost 3.2 2.6Contributions from scheme members 2.2 2.2Actuarial gains and losses 8.2 3.8Benefits paid (1.0) (0.4)-------------------------------- -------- --------At 31 March 72.2 56.6-------------------------------- -------- -------- Movements in the fair value of scheme assets were as follows: 2006 2005 £m £m At 1 April 49.1 38.8Expected return on scheme assets 3.6 2.8Actuarial gains and losses 9.3 2.2Contributions from the sponsoring companies 11.0 3.4Contributions from scheme members 2.1 2.2Benefits paid (1.1) (0.4)-------------------------------- -------- --------At 31 March 74.0 49.0-------------------------------- -------- -------- The analysis of the scheme assets and the expected rate of return at the balancesheet date were as follows: Expected return Fair value of assets 2006 2005 2006 2005 % % £m £m Equity instruments 8.00 7.75 46.6 34.1Debt instruments 5.00 5.50 2.8 1.8Property 7.50 7.50 3.4 2.8Other assets 5.00 5.50 21.2 10.3--------------------------- -------- -------- -------- -------- 74.0 49.0--------------------------- -------- -------- -------- -------- The overall expected return on assets is calculated as the weighted average ofthe expected return of each asset class. The expected return on the equities isthe sum of inflation, the dividend yield, economic growth and investmentexpenses. The return on Gilts and bonds is the current market yield on long termbonds. The expected return on property has been set equal to that expected onequities less a margin. The expected return on other assets is the rate earnedby the scheme on cash. Post retirement mortality The mortality is based upon up to date tables which project mortalityimprovements in the future. For a male aged 65 years the expected life is 85.1 years (2005: 84.0 years) andfor a female aged 65 years the expected life is 88.0 years (2005: 86.9 years). The history of experience adjustments is as follows: 2006 2005 £m £m Present value of defined benefit obligations 72.2 56.6 Fair value of scheme assets 74.0 49.0 Surplus / (deficit) in the scheme 1.8 (7.6) Experience adjustments on scheme liabilities 8.2 (3.7)Amount (£) Percentage of scheme liabilities (%) (11.4%) (7%) Experience adjustments on scheme assetsAmount (£) 9.3 2.3 Percentage of scheme liabilities (%) 12.6% 5% The estimated amounts of contributions expected to be paid to the scheme duringthe current financial year is £3.2m. End of Preliminary Announcement This information is provided by RNS The company news service from the London Stock Exchange

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