Full Year results announcement

25th February 2011

BERENDSEN PLC

 Full Year results announcement

for the year ended 31st December 2010

Financial Highlights

* before net exceptional credits of £6.4 million (£6.7 million charge), impairments and recognition of onerous contract provisions of £47.3 million (£6.0 million) and amortisation of customer contracts of £21.6 million (£17.3 million)

** growth at both actual and constant currency exchange

Highlights

Nordic

·; Adjusted operating profit increased 12% to £57.3million

·; Disposal of Björnkläder, non-core Swedish direct sales business

·; Acquisition of core growth washroom businesses

Continent

·; Adjusted operating profit increased 2% to £33.5 million

·; Acquisition of German workwear business at the start of 2010 already contributing at above the average margin

UK and Ireland

·; Adjusted operating profit of textile maintenance businesses up 16% to £41.2 million

·; Good underlying volume growth in UK hotel and healthcare linen

·; Provision taken for future losses in UK decontamination onerous contracts with full impairment of related goodwill and other assets

Group

·; Actions from the Strategic Review being implemented

Christopher Kemball, Chairman of Berendsen plc, commented:

"We are pleased to report underlying group results for 2010 at the upper end of our expectations, driven by a strong result in our core textile maintenance business.

"Last year we concluded our Strategic Review and we have begun to position the group for higher growth rates, in line with the targets for our new business line structure.

"We expect a good performance in textile maintenance in 2011 where we anticipate some modest improvement in our markets, coupled with increasing economic stability.

"We continue to focus on cash delivery and on maintaining a strong balance sheet.

The Board believes that the group is well positioned to achieve further growth in the current year."

For further information contact:

Berendsen Plc Financial Dynamics

Peter Ventress, Chief Executive Richard Mountain

Kevin Quinn, Finance Director Telephone 020 7269 7291

Telephone 020 7269 7291 (today until 12 noon)

Telephone 020 7259 6663 (thereafter)

Analyst Meeting

The company will be presenting to a meeting of analysts at 09.00am today. A live audiocast of the presentation and questions will be available on the company's website on www.berendsen.com . Questions will only be taken at the meeting.

Overview of the 12 months ended 31st December 2010

We are pleased to report a good set of results for the group at the upper end of our expectations, with our core textile maintenance businesses delivering a 130 basis points improvement in adjusted operating margin compared with 2009 and, after accounting for the loss in Clinical Solutions and Decontamination and central costs, group adjusted operating profit increased 7% to £123.9 million (2009: £115.3 million).

Free cash flow was in line with last year at £75.5 million (£76.7 million), reflecting a further year of strong cash conversion at 107% (115%) of our adjusted profit after tax. Our net debt of £540.2 million compares with £484.9 million as at 31st December 2009. This reflects our investment in strategic acquisitions in the core workwear and facility business lines while our disposal of Björnkläder, our non-core direct sales business generated cash for reinvestment.

In November 2010, we presented the results of our Strategic Review and announced our intention to move to a business line organisation instead of our current geographical structure. Plans for implementation of this move are underway and we expect to be managing our operations along business lines from 1st July 2011. We also set out at that time those business lines that we consider to offer Core Growth (workwear, facilities including mats, washroom and cleanroom and UK healthcare and hotel linen) and those which we will Manage for Value (Clinical Solutions and Decontamination and healthcare and hotel linen outside the UK). During 2010 we have delivered revenue growth of 3% in our Core Growth businesses but our Manage for Value businesses decreased 2%, excluding Björnkläder.

Results

Revenue increased to £986.1 million in the year, up 2% on the prior year (2009: £970.9 million). Adjusted operating profit (before exceptional items and amortisation of customer contracts) was £123.9 million, compared with £115.3 million last year, an increase of 7%. Foreign exchange translation had minimal impact on both revenue and adjusted operating profit translation compared to the prior year. Our net finance expense was £26.8 million compared with £23.6 million last year, reflecting the higher fixed interest rates of our Private Placement Notes issued in December 2009, which have provided the group with further long term funding and reduced our reliance on bank finance. We will be renewing our bank facilities during 2011 and well in advance of their expiry in June 2012. Adjusted profit before tax was £97.1 million (£91.7 million) and adjusted earnings per share were 41.7 pence (39.4 pence).

Our effective tax rate on adjusted profit before tax was 26.6%, similar to last year, and it is expected to remain at around this level in 2011.

In 2010, we had net exceptional credits of £6.4 million and made impairments to the goodwill of our German healthcare business and also in relation to our UK decontamination contracts of £34.1 million as well as provisioning for future losses on these contracts of £9.9 million. Restructuring costs were £9.7 million with £8.1 million related to German Healthcare where, as previously announced, we closed a loss making plant at Glűckstadt, near Hamburg, with a cash cost of £4.2 million. A further and final £2.3 million is expected to be charged in 2011. Our restructuring in German Healthcare comes in the wake of a loss of volume over the last two years in difficult market conditions and although we are now better positioned for the future following this restructuring we have also recognised an impairment to the goodwill allocated to this business of £13.1 million. Restructuring costs of £1.6 million followed the acquisition of the ISS mats business in Norway.

We incurred losses of £5.5 million on our UK decontamination contracts and, although we have taken some important steps with our customers to reach a financially sustainable position on these contracts, we believe it will take some time. As a consequence, we have impaired all the goodwill of £21.0 million related to this business and provided £9.9 million for the losses we expect to incur, primarily in 2011 and 2012, until the contracts reach a financially sustainable position. We have also impaired other assets related to commissioning and pre-contract costs of £3.3 million.

Acquisition transaction costs of £1.1 million were incurred in the year and we have incurred costs of £1.4 million associated with the implementation of our strategic review announced in November 2010 including £0.6 million of restructuring costs incurred in our Irish flat linen business where we have started the process of realigning our Manage for Value business to our new strategic priorities. We have previously indicated that the cash cost of implementing our strategic actions is expected to be between £5 million and £10 million.

We generated a profit of £11.4 million through the disposal of Björnkläder. In addition, there was a £7.0 million reduction in our UK pension liabilities in line with UK regulation which has changed the way of measuring inflation increases from the higher measure of RPI to the lower measure of CPI for defined benefit schemes.

Amortisation of acquired customer contracts increased to £21.6 million (£17.3 million). After these items and net exceptional costs, operating profit was £61.4 million (£85.3 million), profit before taxation was £34.6 million (£61.7 million) and basic earnings per share were down to 12.9 pence compared with 26.6 pence in 2009.

Our net capital expenditure was £160.1 million, compared to £146.0 million in the previous year. This was 95% (86%) of depreciation charged in the year. This includes the investment in our new mat plant in Stockholm which was opened in May 2010 and the new workwear and mat plant in Czech Republic, opened in March 2010. The investment in textiles and other rental assets increased by £12.9 million to £117.9 million (£105.0 million) in support of an increase in new contract wins particularly in Sweden in the second half of the year. We have also continued to make improvements in the terms of sourcing our textiles and savings of approximately £3 million were negotiated in 2010, which we have used in part to offset underlying inflation in textile prices; accumulated annual savings since 2008 amount to £19 million. Free cash flow was £75.5 million (£76.7 million).

Following the completion of the triennial valuation in February 2010, we contributed £6 million to the UK pension fund with a further £5 million planned in 2011. We ended the year with net retirement benefit obligation liabilities for the group of £3.6 million (£32.9 million). The UK pension fund shows an asset of £22.5 million on an IFRS accounting basis but a deficit at the triennial valuation for funding purposes, with our overseas pension funds showing a liability of £26.1 million. Net debt at 31st December 2010 was £540.2 million (£484.9 million) with exchange rate translation increasing net borrowings by £17.1 million. £85.6 million cash consideration was invested in Klarner, a German workwear business, and on 30th December 2010, we acquired the Norwegian, Swedish and Danish washroom service businesses of ISS. These acquired businesses are profitable and cash generative, and the group has well-developed plans to increase both sales and margins.

Overall the group retains a strong balance sheet with a ratio of net debt to earnings before exceptional items, interest, tax, depreciation and amortisation (EBITDA) of 1.85 times at year end, compared with a covenant level of not more than three times. At current exchange rates we have total private placement notes of £354.0 million with maturities between 2014 and 2021. In addition the group's bank facilities extend to June 2012 and amount to £592 million, of which £243.8 million was drawn at the year end.

We have increased our return on invested capital from 7.1% last year to 7.4% in 2010, moving us back to the 2008 level. Further improving these returns is a key strategic objective.

The Board is recommending a final dividend of 14.7 pence, which, together with the interim dividend of 6.5 pence paid in October 2010, gives a total of 21.2 pence, an increase of 6% on last year's level. The final dividend will be paid on 5th May 2011 to shareholders on the register at the close of business on 15th April 2011.

Strategic Review

We are on track with implementation of the actions identified by last year's Strategic Review. We effected the group's change of name on the 4th of January 2011, we are close to completing the diagnostic phase of the capital efficiency review and we have agreed our senior management structures in preparation for the realignment of the organisation later in the year. To support the operating divisions we have appointed a Business Development Director and, as reported above, we disposed of the Björnkläder direct sales business in Sweden. As part of our change in priorities for the Manage for Value businesses we will manage all our Scandinavian flat linen businesses together under a new structure and we have initiated a restructuring in Ireland. We look forward to reporting the implementation of further strategic actions as the programme unfolds in 2011.

Nordic Region

Revenue increased 5% to £348.8 million and adjusted operating profit increased 12% to £57.3 million (£51.2 million). In constant currency and excluding acquisition benefits, revenue was similar to last year but adjusted operating profit was up 5%. The adjusted operating margin increased significantly to 16.4% from 15.5%.

In December 2010, we took two important steps in executing our strategy of redirecting our capital towards higher margin and higher return opportunities. On 22nd December, we completed the sale of Björnkläder, the direct sales business in Sweden, to a private equity buyer for a cash consideration of £28.3 million. In 2010 Björnkläder contributed revenue of £46.4 million and adjusted operating profit of £3.1 million. On 29th December, we completed the acquisition of the washroom activities of ISS in Denmark, Sweden and Norway for £34.3 million. This acquisition doubles the size of our existing activities and results in a business that is a market leader in washrooms across Scandinavia. The business we acquired is expected to deliver strong margins and the strategic partnership agreement we have entered into with ISS complements and significantly enhances our existing operations.

The washroom acquisition builds on the acquisition we made of the ISS mats business in Norway and Sweden at the start of 2010. This acquisition has performed well and, as expected is delivering strong margins. Across the Nordic region, the higher margin mat and facility businesses now represent almost 40% of revenue (on a 2010 proforma basis).

Our Norwegian business delivered a record adjusted operating margin, increasing its revenues by more than 30% and its adjusted operating profits by more than 40%, benefitting from the above acquisition as well as good organic growth. Our investment in the Herbergasen plant near Oslo, to increase capacity in facility operations is progressing well and we are delighted with the excellent progress that this business has made in capturing the opportunities in this strong market.

After a dramatic decline in 2009 when GDP dropped 5%, the Swedish economy rebounded well in 2010 and after a particularly strong second half, re-established itself at the 2008 level. Our Swedish business also returned to growth in both revenue and adjusted operating profit with volume in workwear and facility seeing some significant improvement and an encouraging trend in new contract sales towards the end of 2010. The business has also reduced production costs, in particular capitalising on projects to lower consumption in utilities and to achieve production staff efficiencies.

Revenue and adjusted operating profit in Denmark were down almost 5%. This was below our expectations as our markets were relatively stable in 2009, but went into decline in 2010. Management took immediate action to address its cost base and to compensate for the loss of volume, which enabled it to maintain its adjusted operating margin. We have seen more positive signs in the level of sales activity as we entered 2011 but overall we remain cautious particularly for the first half of 2011.

Our mats businesses in the Baltic States saw a relatively small drop in revenue and delivered a small loss for the year and, while the economies of the region are still weak, we have seen our businesses move onto a much stronger footing, with a high level of new sales towards the end of the year.

Continent Region

Revenue declined 3% to £239.0 million (£245.2 million) and adjusted operating profit increased 2% to £33.5 million (£32.7 million). In constant currency and excluding acquisition benefits, revenue was down 4% and adjusted operating profit down 2%.

Revenue of our workwear and facility businesses, which makes up nearly two thirds of the region's revenue, was broadly flat before acquisition benefits. The economies of the region have yet to deliver a sustained improvement in employment. However, the prospects for growth in 2011 are improving. Poland in particular saw high single digit growth, converting to increased margins, in the second half of 2010, which is a much improved position from what we experienced in the first half of the year. This has enabled the business to introduce a number of initiatives to improve the pricing environment, having defended effectively its contract base through the downturn. 

In Germany the acquisition of Klarner has contributed well to workwear operations and, in line with expectations, delivered above average margins. Elsewhere in the German workwear business, the improvement in economic climate has so far had only a limited impact on our business where our customers tend to be less cyclical, and focused on food and smaller scale manufacturing. We remain a relatively minor player in the market but we are introducing significant innovation to our production, service and sales processes, leveraging the know how of the business we have developed in other markets. 

We have a strong business in Holland, and while the market stagnated in 2010, resulting in some increase in price pressure, we saw growth in volume in three quarters of the plants we operate, indicating a good increase in market share. Our state of the art clean room operation performed particularly well showing an 8% increase in revenue. Overall, we maintained revenue and adjusted operating profit at the same level as last year. 

Our operations in the Czech Republic, where we opened the new plant in 2010, are showing encouraging signs of growth and the small acquisition of contracts we made in 2010 has moved us forward in our plan to break even.

Revenue in German Healthcare declined by 10%, accounting for most of the decline in regional revenue. With the expectation of a further, albeit smaller, decline in 2011 (based on known losses) we undertook restructuring with the closure of the Glűckstadt plant, near Hamburg, and the reduction of 108 heads. This plant was loss making and its volumes are being served from our other plants in the North of Germany. The business has secured its business base at these lower levels of volume, extending most of its major contracts for further periods of between 2 and 7 years and we believe that the majority of other contracts are at or near the prevailing market price. The business has also gained in competitiveness, benefiting from the restructuring, with more new contract wins than we have seen for some time. Despite the lower level of volume, the business further improved its margin from 5% in 2009 to 7% in 2010 and is targeting to further improve this in 2011. Healthcare operations in Austria continue to perform well. 

UK and Ireland

It was an outstanding year for our textile maintenance business with adjusted operating profit up 16% to £41.2 million (£35.4 million) despite a decline in revenue of 1% to £330.3 million compared to £334.7 million last year. The adjusted operating margin increased strongly to 12.5% from 10.6%.

Our hotel linen business saw like-for-like volume grow 4% in group hotels compared with a decline in 2009, which was ahead of where we expected to be at the start of the year. The business has benefited strongly from the operating and efficiency changes it has made in recent years, particularly in the utilisation of linen stocks, which has been achieved at the same time as improving our service model to customers. We are greatly encouraged that this has enabled us to achieve the return targets that were set for the business earlier than we expected, at the same time as improving our market position by negotiating a number of key contracts in 2010 to secure volume for 2011. We expect some pressure as higher input costs from commodity prices work through, particularly from cotton and oil prices, but we are managing the impact of these through efficiencies, leveraging our scale in procurement and experience in passing on relevant increases to our customers.

The Healthcare linen business also benefited from increased volume, and was likewise able to leverage this with higher adjusted operating profit. The current pricing framework agreement (PaSA), which was scheduled to end in May 2010, remains in force with the review now set for agreement in April 2011. We continue to work with NHS trusts to ensure we deliver enhanced value in the current environment. This is not only a question of price, as the service we provide is broad and touches many parts of hospital operations. We continue to see opportunities for further outsourcing of hospitals that are still managing the service in-house at a higher all-in cost.

Workwear in the UK saw revenue slightly lower than in 2009 with a small loss of margin. The market remains challenging but there are some signs of this stabilising in 2011.

Our businesses in Ireland were impacted by the wider economic difficulties with significantly lower revenue and adjusted operating profits, despite strong management action on costs. There is more to do in bringing the cost base into line with the current market environment and management actions are underway to achieve this through 2011.

Revenue in our Clinical Solutions and Decontamination increased to £68.0 million (£60.2 million) as a result of the full year contribution from the decontamination contracts for North West London and for Kent as well as growth in the sterile consumables and reusable textiles business. Losses in the decontamination contracts were £5.5 million for the full year, with all avenues being explored to work with our customers to resolve the volume and operational issues previously reported. It is clear that we initially underestimated the complexity of the contractual arrangements and the difficulties of transitioning the service to a fully outsourced model. We have learned from this experience and we are working on a 3 year plan to return these contracts to financial sustainability. In 2010, we have provisioned £9.9 million for future losses on these contracts in addition to impairing goodwill of £21.0 million and other assets of £3.3 million. Adjusted operating profits in the sterile consumables and reusable textiles business increased 13% to £4.2 million (£3.7 million) on revenue growth of 1% and this part of the business continues to make steady progress.

Outlook

We are pleased to report underlying group results for 2010 at the upper end of our expectations, driven by a strong result in our core textile maintenance business.

Last year we concluded our Strategic Review and we have begun to position the group for higher growth rates, in line with the targets for our new business line structure.

We expect a good performance in textile maintenance in 2011 where we anticipate some modest improvement in our markets, coupled with increasing economic stability.

We continue to focus on cash delivery and on maintaining a strong balance sheet.

The Board believes that the group is well positioned to achieve further growth in the current year.

Consolidated income statement

For the year ended 31st December 2010

Consolidated statement of comprehensive income

For the year ended 31st December 2010

Items in the statement above are disclosed net of tax.

Consolidated balance sheet

As at 31st December 2010

Consolidated cash flow statement

For the year ended 31st December 2010

Consolidated statement of changes in equity

At 31st December 2010, the company held 1,025,000 (2009: 1,025,000) treasury shares with a nominal value of 30 pence each.

The group has an Employee Benefit Trust to administer share plans and to acquire company shares, using funds contributed by the group, to meet commitments to group employees. At 31st December 2010, the Trust held 1,965,939 (2009: 1,447,409) shares.

Notes to the consolidated financial statements

1 Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The Berendsen plc's Report and Accounts 2010 (the "Annual Report") will be posted to shareholders on 17th March 2011. The Annual Report will also be made available on the company's website, www.berendsen.eu, from 17th March 2011. The financial information set out herein does not constitute the company's statutory accounts for the year ended 31st December 2010 but is derived from those financial statements and the accompanying directors' report. The statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 28th April 2011. The auditors have reported on the company's statutory accounts; the report was unqualified and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

The comparative figures for the year ended 31st December 2009 are not the financial statements for the financial year but are derived from those accounts which have been reported on by the group's auditors and delivered to the Registrar of Companies. The report was unqualified and did not contain statements under Section 237 (2) or (3) of the Companies Act 1985.

Notes to the consolidated financial statements

2 Segment information

The segment results for the year ended 31st December 2010 are as follows:

Capital expenditure comprises additions to property, plant and equipment and intangible assets, including additions resulting from acquisitions through business combinations.

Sales between segments are carried out at arm's length. The company is domiciled in the UK.

Analysis of revenue by category:

Analysis of revenue by country:

The segment results for the year ended 31st December 2009 were as follows:

The segment assets and liabilities at 31st December 2010 are as follows:

The segment assets and liabilities at 31st December 2009 were as follows:

Segment assets consist primarily of property, plant and equipment, goodwill, other intangible assets, inventories, receivables and cash.

Assets such as investments, pension scheme surplus, deferred tax assets, income tax assets and assets classified as held for sale are separately identified.

Segment liabilities comprise operating liabilities and separately identified pension scheme deficits, deferred tax liabilities, income tax liabilities and corporate borrowings.

Unallocated assets include segment assets as above for corporate entities.

Unallocated liabilities include segment liabilities as above for corporate entities.

Analysis of non-current assets other than financial instruments, deferred tax assets and retirement benefit assets by country are:

3 Net finance costs

(i) This relates to loan issue costs arising on the £420 million and €200 million Revolving Credit Facilities and the 2006 $250 million and 2009 $259 million and £25 million US Private Placements. The costs have been capitalised and are being amortised over the shortest period of the loan being seven, four, eight and seven years respectively.

4 Exceptional items

Included within operating profit are the following items which the group considers to be exceptional:

The goodwill impairment charge includes £13.1 million in relation to the German Healthcare business where we have lost significant contract volume over the last two years in difficult market conditions. Also included is £21.0 million in relation to the UK Decontamination business which continues to incur significant losses. The tax credit on this is £3.8 million (2009: nil).

A £9.9 million onerous contract provision has been provided for the losses we expect to incur until the decontamination contracts reach a financially sustainable position over the next four years. The provision is expected to be utilised principally over the next two years. The tax credit on this is £2.7 million.

In addition, pre-contract and commissioning costs associated with the decontamination contracts have been written off. The tax credit on this is £1.0 million.

The restructuring costs relate primarily to our German Healthcare business where we closed a loss making plant at Glückstadt, near Hamburg following the loss of a significant contract. We have also incurred restructuring costs following the acquisitions of the ISS mats business in Norway. The tax credit on these is £2.1 million (2009: £3.0 million).

The group incurred costs of £1.4 million associated with the implementation of its strategic review announced in November 2010. This includes £0.6 million of restructuring costs incurred in the Irish flat linen business which is being realigned with the new strategic priorities. The tax credit on these costs is £0.4 million.

Acquisition costs of £1.1 million have been expensed to the income statement in line with IFRS 3 (revised). These would previously have been accounted for as part of the business combination. The tax credit on these was £0.4 million.

On 22nd December 2010, the group disposed of Björnkläder, the Swedish direct sales business for a profit of £11.4 million. The tax charge incurred is £0.2 million.

Following the UK Government's announcement in summer 2010, the inflation index to be used to derive statutory pension increase has been changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). Due to a number of differences between the indices, CPI is expected to be less than RPI over the long-term which means that the Scheme liabilities have reduced. The reduction has been recognised as a negative past service cost of £7.0 million. The tax charge on this is £2.0 million.

During the year a net profit has been realised on property disposals in Sweden and the UK. The tax charge on this is nil (2009: credit of £0.4 million).

The amendment to the past service cost has been recognised in Administrative expenses. All other exceptional items have been recorded in other income or other expenses respectively.

5 Taxation

The amount of overseas tax included in the total tax charge is £14.2 million (2009: £18.1 million).

 6 Dividends

The directors recommend a final dividend for the financial year ended 31st December 2010 of 14.7 pence per ordinary share to be paid on 5th May 2011 to shareholders who are on the register at 15th April 2011. This dividend is not reflected in these financial statements as it does not represent a liability at 31st December 2010.

7 Earnings per share

Basic earnings per ordinary share are based on the group profit for the year and a weighted average of 169,059,590 (2009: 169,533,679) ordinary shares in issue during the year.

Diluted earnings per share are based on the group profit for the year and a weighted average of ordinary shares in issue during the year calculated as follows:

An adjusted earnings per ordinary share figure has been presented to eliminate the effects of exceptional items, amortisation of customer contracts and intellectual property rights and non-recurring tax items. This presentation shows the trend in earnings per ordinary share that is attributable to the underlying trading activities of the total group.

The reconciliation between the basic and adjusted figures for the group is as follows:

8 Goodwill

(i) This relates to the finalisation of fair values for acquisitions in 2008 where the amount has been reclassified to customer contracts.

(ii) This relates to goodwill disposed on exiting the Swedish direct sales business (2009: exiting the Finland flat linen operations).

8 Goodwill continued

During the year, goodwill was tested for impairment in accordance with IAS 36 'Impairment of assets'. As a result, an impairment charge of £34.1 million (2009: £6.0 million) was made and is shown in other operating expenses in the income statement. The components of the impairment charge are explained below.

The allocation to reportable segments is as follows:

The group's goodwill is allocated across 18 cash-generating units (CGUs) which now include Clinical Solutions and Decontamination as individual CGUs. The recoverable amount of each CGU is based on value-in-use calculations. These calculations require the use of estimates and use pre-tax cash flow projections based on the group's current three-year strategic plan. Cash flows beyond the three-year period have been generally extrapolated using an estimated growth rate of 2%-2.25% depending upon the CGU and are appropriate because these are long-term businesses. The main assumptions on which forecast cash flows have been based are revenue and operating margin growth. The growth rates used are consistent with the long-term average growth rates for the industry.

Projected cash flows have been discounted using pre-tax discount rates of 11%-13% depending upon the CGU (2009: weighted average pre-tax rate of 11%-17%).The discount rates have been revised to reflect the latest market assumptions for the Risk Free-rates and Equity Risk Premiums and also to take into account the net cost of debt.

Impairment tests are carried out annually, or when indicators show that assets may be impaired. The UK Decontamination business continues to incur significant losses and as a result the goodwill associated with this business has been impaired. The group has recognised an impairment charge of £24.3 million comprising a full write down of the goodwill (£21.0 million) and written off capitalised pre-contract and commissioning costs (£3.3m). No other class of assets have been impaired, as their carrying values are supported by their value in use. The key assumptions used to support this assessment are as follows:

- New contract wins will increase revenues significantly from 2013 onwards

- The margin achieved for the new contracts will be in line with other existing Clinical Solutions and decontamination contracts

- The pre-tax discount rate used for the CGU is 11%.

If the above assumptions are not achieved then impairment of the plant and machinery may become necessary. For example:

- If only half the estimated new contract win revenue was achieved, the group would have to recognise an impairment of £4.1 million.

- If the new contract gross margin was 5% less than management's estimates at 31 December 2010, the group would need to reduce the carrying value by £2.4 million.

- If the pre-tax discount rate had been 1% higher than management's estimates, the group would have to recognise an impairment of £0.8 million. 

In addition the German Healthcare business has lost significant contract volume over the last two years in difficult market conditions and therefore we have impaired £13.1 million of goodwill associated with this business. No other class of assets have been impaired, as their carrying values are supported by their value in use. The discount rate used for the CGU is 11% (2009: 11%). The key assumptions used for the value-in-use calculation are as follows:

- Revenue growth in excess of long term growth rate achieved for the next two years.

- Operating margins continue to increase for the next 4 years.

- The pre-tax discount rate used for the CGU is 11%.

If the above revenue and margin assumptions are not achieved then an impairment of goodwill may become necessary. The annual impairment tests carried out have resulted in a total impairment charge of £34.1 million (2009: £6.0 million) resulting in the carrying value of goodwill being written down to its recoverable amount. Both of these have been previously disclosed in the accounts as having limited headroom between the carrying value and future cash flow forecasts. 

9 Other intangible assets

(i) This relates to the finalisation of fair values for acquisitions in 2009 where the amount has been reclassified from property, plant and equipment. It is not considered material for the restatement of comparative information.

(i) This relates to the finalisation of fair values for acquisitions in 2008 where the amount has been reclassified from goodwill. It is not considered material for the restatement of comparative information.

(ii) The disposal of customer contracts relates to contracts disposed of on exiting the Finland flat linen operations.

All amortisation charges have been charged through other operating expenses. The following useful lives have been determined for the intangible assets acquired during the year:

Computer software - three to five years.

Intellectual property rights - three to five years.

Customer contracts - two to five years.

10 Property, plant and equipment

(i) This relates to the finalisation of fair values for acquisitions in 2009 where the amount has been reclassified from property, plant and equipment. It is not considered material for the restatement of comparative information.

Plant and machinery net book value includes assets held under finance leases of £10.0 million (2009: £9.1 million). Additions in the year include £4.7 million relating to finance leases (2009: £3.0 million).

11 Financial liabilities - borrowings

Bank loans are denominated in a number of currencies and bear interest based on LIBOR or foreign equivalents appropriate to the currency in which the borrowing is incurred together with a margin as appropriate.

The effective interest rates (EIR) for the group's bank borrowings (including interest rate swaps) by currency at the balance sheet date were as follows:

The group has two revolving credit facilities, for £420 million and €200 million. Both of these facilities expire on 23rd June 2012.

In December 2009, the group issued private placement notes of US$259 million and £25 million. The US$259 million was immediately swapped into euros.

In May 2006, the group issued private placement notes of US$250 million which were immediately swapped into a basket of Danish krone, Swedish krona and euros.

The private placement amounts in the table above are stated at the year end exchange rates.

As underlying currencies have been swapped from US dollars via derivative contracts on which the group has a gain on financial instruments (see note 17) which is offset by the currency translation loss on the underlying borrowing noted above. The borrowing under the US private placements of £357.7 million reflects the £25 million, the US$509 million translated at the year end sterling to dollar rate and the impact of fair value hedge movement.

The fair value of the group's fixed rate loans are based on available market information at the balance sheet date and are calculated by discounting expected future cash flows using the appropriate yield curve. The book values of floating rate borrowings approximate their fair value.

The group has the following undrawn committed borrowing facilities available at 31st December and on which it incurs commitment fees at market rates:

The minimum lease payments under finance leases fall due as follows:

12 Provisions

All provisions except for the property disposal and onerous contract provisions are current in nature.

Vacant property provisions are made in respect of vacant and partly sub-let leasehold properties to the extent that the future rental payments are expected to exceed future rental income. It is further assumed, where reasonable, that the properties will be able to be sub-let beyond the present sub-let lease agreements.

Restructuring provisions comprise largely of employee termination payments. Provisions are not recognised for future operating losses.

The group has outstanding warranties, indemnities and guarantees given previously on a number of properties operated by businesses which have been disposed. The majority of these expire in 2017 with the remaining expiring by 2022.

A provision for £9.9 million has been recognised for the two decontamination contracts which are considered to be onerous. The provision will be utilised principally over the next two years. The contracts are expected to reach a financially sustainable position after four years. If this assumption is not achieved, further provisioning may be required. The amounts are shown in other operating expenses in the income statement as well as being disclosed as an exceptional cost.

13 Cash flow from operating activities

Reconciliation of operating profit to net cash inflow from operating activities:

In the cash flow statement, proceeds from sale of property, plant and equipment comprise:

14 Reconciliation of net cash flow to movement in net debt

15 Acquisitions and disposals

Acquisitions

During the year the group acquired the trade and assets of a number of textile maintenance businesses with the primary acquisition being the ISS washroom businesses in Scandinavia, which was acquired in December 2010.

Details of the provisional fair values of the assets and liabilities are set out below:

The fair value amounts contain provisional amounts which will be finalised in the accounts for the year ended 31st December 2011.

Acquisition costs of £1.1 million are included in the income statement in exceptional items (note 4).

The contingent consideration arrangements require the group to pay the former owners additional consideration contingent on future sales. The maximum amount payable is an undiscounted amount of £2.0 million. The contingent consideration has given rise to goodwill, none of which is expected to be deductible for tax purposes.

The fair value of trade and other receivables is £4.5 million and includes trade receivables with a fair value of £1.7 million. The gross contractual amount for trade receivables due is £2.0 million of which £0.3 million is expected to be uncollectable.

Shown below is the revenue and profit for the year after tax as if the above acquisitions had been made at the beginning of the period. The information may not be indicative of the results of operations that would have occurred had the purchase been made at the beginning of the period presented or the future results of the combined operations.

From the date of acquisition to 31st December 2010, the above acquisitions contributed £10.6 million to revenue and £0.7 million to the profit after tax for the year.

During the year the group paid deferred consideration on previous acquisitions. A reconciliation of the total net cash paid for acquisitions is provided:

The group made several acquisitions during the year ended 31st December 2009. Certain of the fair values assigned to these net assets at the date of acquisition were provisional and in accordance with IFRS 3 Business Combinations. The group has finalised the fair values attributable to property, plant and equipment and customer contracts and this has not had a material impact on the consolidated accounts.

In December 2010, the group completed the sale of Björnkläder, its direct sales operation in Sweden, for a gross consideration of £30.0 million.

(i) The £29.5 million cash proceeds are stated at year to date average exchange rates. At the date of transaction the cash proceeds were £31.3 million. The net cash proceeds excluding the cash disposed of with the business, were £28.3 million.

16 Pension commitments

Pension costs for defined contribution schemes are as follows:

Within the United Kingdom, the group principally operates a registered defined benefit scheme (The Davis Service Group Retirement Benefits Scheme). There was a triennial valuation in February 2010. In 2010, £6 million was contributed to the fund with a further £5 million planned in 2011.

Overseas, the only significant defined benefit pension arrangements are the defined benefit scheme operated in Ireland and unfunded schemes within Sweden, Germany and Norway. Under such schemes the group discharges its pension obligations through schemes administered by insurance companies or government agencies.

The overall surplus on the funded plans is £20.4 million (of which £22.5 million surplus is in respect of the main UK plan). There is a deficit of £23.7 million on unfunded plans.

Where a defined benefit scheme is administered by an insurance company with a collective of other companies and the insurance company is unable to assess the share of the group's pension obligation, the pension scheme has been accounted for as a defined contribution scheme.

16 Pension commitments continued

17 Contingent liabilities

The group operates from 132 laundries across Europe. Some of the sites have operated as laundry sites for many years, and historic environmental liabilities may exist, although the group has indemnities from third parties in respect of a number of sites. The extent of these liabilities and the cover provided by the indemnities are reviewed where appropriate with the relevant third party. The company is currently defending a legal claim to the warranties received for any environmental damage that might have existed when it purchased laundry sites in Sweden and Holland. The company expects to have its warranties, which were contractually received in a clear and unequivocal manner, to be confirmed in full. The company does not expect to incur any significant loss in respect of these or any other sites.

18 Related parties

There have been no significant related party transactions in the year ended 31st December 2010 (2009: nil).

19 Principal risks and uncertainties

The company believes the following to be the principal risks and uncertainties facing the group. If any of these risks occur the company's business, financial condition and results of operations could be aversely impacted. 

In the continually challenging economic environment certain risks may gain greater prominence either individually or when taken together and accordingly their potential impact on the group's business, financial condition and results of operations may be exacerbated.

1) Implementing our strategic change programme

2) Delivering sustainable organic growth

3) Maintaining a sound financial position/improving capital efficiency

4) Improving financial returns by leveraging operational efficiency

5) Maintaining a motivated workforce driven by an experienced management team

6) Maintaining health and safety and other governance matters as a priority

7) Reducing our impact on the environment 

20 Forward-looking statements

This announcement contains certain statements about the future outlook for the group. Although the company believes that expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different. These forward-looking statements speak only as at the date of this announcement. The company undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Factors that may affect the group's operations are described in section 19 "Principal risks and uncertainties" above.

21 Responsibility statements

The company's Annual Report for the year ended 31st December 2010, which will be published on 17th March 2011, contains the following statement regarding responsibility for the financial statements and management report included in the Annual Report:

In accordance with DTR 4.1.12, each of the directors confirms that, to the best of their knowledge:

i) the financial statements of the group, prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the financial statements of the company, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

ii) the management report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

By order of the board

David Lawler

Company Secretary

24th February 2011