23rd May 2005 07:00
MITIE Group PLC23 May 2005 MITIE Group PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2005 "MITIE has had a good year and I am pleased with the progress that we have made.The business has excellent prospects."Ian R Stewart, Chief Executive • Strong financial performance • Opportunities for growth • 36% increase in dividend • Exit from capital intensive businesses is complete • Share buyback programme FINANCIAL HIGHLIGHTS 2005 2004________________________________________________________________________________Turnover £818.6m £694.5m 17.9%________________________________________________________________________________Profit before tax - pre-goodwill £46.9m £40.3m 16.3%and exceptional items*________________________________________________________________________________Profit before tax - pre-goodwill* £38.8m £40.3m (3.9%)________________________________________________________________________________Profit before tax £35.9m £38.2m (5.9%)________________________________________________________________________________Basic Earnings per share - pre-goodwill 9.6p 8.3p 15.0%and exceptional items**________________________________________________________________________________Basic Earnings per share - pre-goodwill** 6.9p 8.3p (16.8%)________________________________________________________________________________Basic Earnings per share 6.0p 7.6p (20.8%)________________________________________________________________________________Dividend per share 3.4p 2.5p 36.0%________________________________________________________________________________ *See Group Profit and Loss Account for reconciliation to statutory numbers.**See Note 9 for reconciliation of basic earnings per share. Notes:MITIE: Management Incentive Through Investment EquityACTIVITY: MITIE, the support services company, maintains, manages and improves buildings and infrastructure for its customers. FOR FURTHER INFORMATION:Ian Stewart, Chief Executive, MITIE Group PLC Mobile: 07979 701002Ruby McGregor-Smith, Finance Director, MITIE Group PLC Mobile: 07979 701004John Telling, Head of Corporate Affairs, MITIE Group PLC Mobile: 07979 701006On 23 May at UBS Investment Bank, 1 Finsbury Avenue Press Room: 020 7568 8736 Switchboard: 020 7567 8000 Chairman's Statement MITIE has an 18-year track record of continual growth. The Company is in anexcellent financial position and is well positioned for further success. I am pleased that I am able to report that we have produced another good set ofresults for this financial year, achieving growth in all of our businesses. I believe that as Chairman my role is to maintain the environment for theexecutive team to manage the Company successfully and to motivate our employeesso that we can maintain our unequalled record of providing excellent services toour customers and achieving consistent growth. These results clearly demonstratethat we have succeeded again. I am determined that we will maintain our excellent performance. ResultsTurnover rose to £818.6 million, an increase of 17.9 % and profit before tax,goodwill amortisation and impairment and exceptional items* rose by 16.3% to£46.9 million. Profit before tax after goodwill (£2.8 million, 2004: £2.2million) and exceptional items (£8.2 million, 2004: £nil) fell by 5.9% to£35.9 million. Basic earnings per share before goodwill and exceptional items rose by 15.0% to9.6p. Basic earnings per share fell by 20.8% from 7.6p to 6.0p. The impact ofthe exceptional items was to reduce earnings per share by 2.7p in the currentyear.*See Group Profit and Loss Account. DividendThe Board is recommending a final dividend of 1.8p per share making a total of3.4p for the year, an increase of 36.0%. As stated in previous reports we willcontinue to review our dividend policy. Share Buyback ProgrammeWe commenced a share buyback programme in June 2004 and in the period underreview purchased 10,310,006 MITIE Group PLC ordinary shares of 2.5p at anaverage price of 144.6p. The highest and lowest prices paid were 165.0p and131.0p respectively. All shares purchased have been cancelled. We will beseeking to renew the authority, granted by Shareholders, to purchase up to 10%of the issued share capital of the Company at the Annual General Meeting ('AGM')on 28 July 2005. Corporate GovernanceWe endeavour to achieve the highest standards of Corporate Governance in thefurtherance of our business and achievement of corporate objectives, which isclearly detailed in the Annual Report. Our DifferenceWe provide a range of skilled and semi-skilled services to a wide range ofcustomers in both the private and public sectors. Our people are focused onworking hard together, supporting our customers, listening to them and makingsure that the services we provide connect with their needs. I would like to thank all of our employees for their hard work and dedicationover the year. Without their efforts we would not be able to satisfy ourcustomers and produce results like these. Every one of our thirty thousandemployees has made an important contribution. The Executive Directors have experienced a year of change, they havesuccessfully integrated the newly acquired companies and have discharged theirresponsibilities admirably. I would also like to thank my fellow Non-Executive Directors for thecontribution they have made this year. The Non-Executive Directors are facedwith increased responsibility and the Company is fortunate to have Directors ofsuch calibre and experience. Success is never easy, but MITIE has been able to achieve consistently highlevels of performance because our people are passionate about the quality ofservice we provide and because of their financial interest in the result. Thatmotivation makes the difference. OutlookWe have a clear strategy. We will continue to look for opportunities where it isviable to start new companies. We will continue to grow organically within ourchosen markets and look to expand our range of services within our skill base.We will look for opportunities to make bolt-on acquisitions provided ourcriteria are met. MITIE operates in a market that, although it is competitive, has plenty ofopportunities for growth. We are in the business of continuing to grow in orderto provide better services for our customers, more opportunities for ouremployees and improving returns for our shareholders. This Company is well positioned for further success. I am excited about ourprospects for the future. David C OrdChairman Chief Executive's Review This review of our operations has been prepared to enable our shareholders andothers to have a balanced and comprehensive understanding of our business andour performance for the year under review. The review provides a wide range of information. For ease of reference, we haveincluded the following list of contents within this section. Overview The business, its markets, values and strategyThe MITIE modelOur major marketsOur structure and servicesOur valuesOur strategy Operating ReviewPerformance in the periodDynamics of the businessCashFuture prospects Overview MITIE has had a good year and I am pleased with the progress that we have made. 1. Our forward order book has increased with 70% of budgeted revenue secured for 2006. 2. We have experienced good levels of contract renewals across all businesses. 3. Cleaning has been successfully restructured. 4. The recent acquisitions have been successfully integrated and their financial contribution is better than we expected. 5. In the final step of the strategy to exit capital-intensive activities we sold our entire shareholding in MITIE Generation Ltd ('Generation') to a management buyout team on 30 September 2004. 6. During the year we have built a corporate development team focused on acquisitions. 7. We have moved our head office to a more modern building at Emersons Green, north of Bristol, just four miles from Bristol Parkway station. As MITIE grows we need to provide our businesses with an increasingly robust support team. During the year we have reinforced the central team by recruiting a number of additional specialists. 8. We have set up a new department of Corporate Responsibility. The business, its markets, values and strategy The MITIE start-up model MITIE is now 18 years old and has started over 80 companies in accordance withthe MITIE model. However we still receive many requests to explain how the modelworks. In principle the model has not changed since we started, although there havebeen several refinements. The process normally develops as follows: 1. We will identify a team that wants the opportunity to run their own business. 2. Provided that their business idea fits with our strategy and does not conflict with any of our existing businesses, we interview the team. If we like the team they prepare a business plan which then follows an approval process and is signed off by the Board. 3. The business plan determines the capital requirement. MITIE invests at least 51% of the initial capital required and the management team invest the balance. 4. A limited company is established, placed in the structure depending on the business activity being pursued, sponsored by PLC Director and supported by the Head Office team as appropriate. 5. The team grow their business over the next five to ten years. 6. Between the fifth year and the tenth year the minority shareholders have an option to serve a transfer notice on MITIE Group PLC to earn out their minority interest, which MITIE Group PLC may or may not accept. This must be done within 7 to 14 days after our AGM. 7. In order to calculate the value of the minority stake in the business we use a multiple of ten times post-tax profits averaged over the previous two years, or three years depending on the type of business. The consideration is paid in either cash or MITIE Group PLC shares at the Board's option. 8. If the consideration is paid in MITIE Group PLC shares they cannot be traded for two years post the earnout, but the owners are entitled to receive dividends. 9. The management team stay in place after the earnout and continue to grow the business and progress their career within MITIE. The model continues to attract entrepreneurial managers who want to run theirown business in MITIE. Our major markets MITIE operates across the UK and has customers in all major market sectors.Currently 40% of our work comes from the public sector and 60% from the privatesector. We believe that this mix of business is healthy for the Company andenhances the long-term sustainability of our revenue stream. We have arelatively low market share in all of these sectors, giving us plenty ofopportunity for future growth. Our structure and services MITIE's operating businesses are structured in two divisions; Support Servicesand Building Services. The divisions are supported by a Head Office team, whichprovides policies, advice and assistance for Health & Safety, Human Resources,IT, Sales & Marketing, Risk Management, Finance, Legal, Insurance and Propertymatters. Support Services offers a flexible range of services supporting the occupiers ofbuildings. These range from Engineering Maintenance and Facilities Management toSecurity. We listen to our customers and create solutions that meet their needsand resources. Building Services are involved in the construction, refurbishment and repair ofbuildings. Engineering is predominantly a mechanical and electrical servicesspecialist installing heating, lighting, air conditioning and data cabling.Property Services act as a main contractor improving buildings either by fittingthem out, refurbishing or maintaining them. Our values Since MITIE started there has been a set of values that has enabled ourentrepreneurial and motivated managers to grow the business successfully. Theyhave been centred on the three core principles of Focus, Connect and Achieve: • Focus on our goals and those of our customers; • Connect with our customers at all levels to fulfil their needs; and • Achieve success by consistently delivering a quality service. The application of these values has enabled the business to grow consistently.Over the years we have developed the values so that our employees understandthem clearly and are able to apply them to their daily work. Our strategy Our strategy remains: 1. Grow our existing businesses organically and increase the amount of bundled services that we provide; 2. Start new companies in accordance with the equity model; 3. Make acquisitions in our markets when suitable companies are identified; 4. Invest in market sectors, such as education and social housing, where those markets offer good potential; and 5. Expand our core skills competency so that we are able to offer additional services. Operating Review Performance in the period I am pleased with our performance this year. We have made good progress. Support Services Cleaning On 1 November 2004 we received shareholder approval for our second-generationequity plan for the Cleaning business. We have a young management team withinCleaning, who had previously not had the opportunity to subscribe for equity.They have invested £600,000 in the new equity of MITIE Cleaning ServicesLimited. This is a significant development of the MITIE equity model and willallow the management to share in the additional value they create. This restructuring of the Cleaning business has been successful and the newmanagement team is operating the business on a national basis. The sales andmarketing team has been reinforced with the appointment of a Sales and MarketingDirector and a National Accounts Director. The specialist businesses that focuson individual market sectors have had a particularly good year gainingsignificant market share. During the year we have secured many notable contract wins including the newDoncaster Airport, BT Payphones, timetable installation for London Buses,multi-site Co-op retail outlets, Goodrich Engine Control Systems, BarclaysCapital, Nokia UK in a bundled service contract with Engineering Maintenance,West Yorkshire Police and Pfizer UK. We started the contract for the ScottishParliament that was awarded to us in the last financial year but had a delayedstart. Cleaning has conducted extensive customer research with the main conclusion thatcustomer satisfaction is directly linked to staff retention. To enhance levelsof staff retention Cleaning has launched a major recognition and rewardinitiative for staff that make an outstanding contribution for clients andfellow MITIE colleagues. Mike McCarthy decided to retire this year; Mike was responsible for our northernCleaning business. I would like to thank him for the important contribution hehad made to MITIE over the years. Catering Catering continues to develop. A new business commenced trading in London thathas started well. Catering has secured contracts with IMS Healthcare, OsborneClarke, GVA Grimley and the National Audit Office. Catering achievedaccreditation to the Hospitality Assured standard in October 2004. HospitalityAssured is the world-class standard for service and business excellence in theUK hospitality industry. Since the year-end we have recruited a dynamic team to set up MITIE Catering inthe north of England. The Catering business will grow through developing a food service that delivershigh levels of customer satisfaction, patronage and daily spend. This will keepclient subsidies at a competitive level which, allied to client relationships,will generate high levels of contract retention. The internal operating brand 'ingredients' will continue to be developed, acting as a clear differentiator inthe market. Catering will continue to invest in the food concept functiondedicated to driving up operating standards in vendor management, commodityselection, kitchen process and food offer ranges. Landscape Landscape has made further progress during the year. It has secured a nationalcontract with Lloyds TSB to maintain grounds and external areas and with Proctorand Gamble in Egham. Landscape has also started to penetrate the public sectorand has added a contract with Yorkshire Metropolitan Housing Group to ourexisting Local Authority and Police contracts. Pest Control Pest Control has had a year of consolidation following its acquisition in thelast financial year and has now integrated well into MITIE. They have beenawarded a five-year contract with Compass. It has also been awarded work withSafestore and Thameslink. Pest Control has invested in its sales force to achieve its organic growthtargets and will concentrate on multi-site retail outlets and railway-relatedservices, in addition to its core market of smaller businesses and localmarkets. It will continue to focus on maintaining its high levels of customerretention. The company is now the third largest pest control business in the UK. Security Security is performing well, having successfully integrated the acquisitionsfrom the previous year. Notable contract wins include CIS and Re: Sources UK(Publicis). MITIE Security (South West) started trading in September 2004 and on4 May 2005 we announced the acquisition of Intruder International Ltd('Intruder'), which is at the forefront of developing integrated networkedsecurity solutions. MITIE Security forges long-lasting relationships by understanding and supportingits clients and its people. It achieves this by delivering on its promises of atimely and properly structured security solution that clearly meets therequirements of its clients. The business is primarily a single service provider focused on the mannedguarding sector. Its strategy is to move the business to a broader-basedsecurity service combining the use of manpower and electronic security. The business has a series of objectives: 1. Complete the national footprint for manned guarding; 2. Achieve an improved geographical balance; and 3. Enhance its electronic security capability based on integrated solutions that utilise clients' existing network infrastructure. Licensing for security officers becomes mandatory in March 2006. We haveinvested in ten trainers who are qualified to deliver the required Level 1 & 2training programme and currently have 30% of our officer base that havecompleted the requisite certified training. By early September 2005 weanticipate 60% of our officer base will be certified and full compliance istargeted by the deadline date. We feel that our commitment and investment in ourofficer base will fully meet the requirements for licensing set by the SecurityIndustry Authority and we are confident that we will exceed the criteria set forthe proposed new Approved Contractor Scheme ('ACS'). The impact of licensing we believe will stimulate further consolidation in thesecurity marketplace as smaller providers struggle to meet the requirements ofboth the licensing regime and the standards set for ACS status. The short-termimpact, as the deadline of March 2006 approaches, could be instability of ashort-term nature in the labour supply market. However, in the medium tolong-term, standards will rise, margins should improve and a licensed officerwill become more highly valued by both customer and employer. Managed Services Managed Services has made good progress this year, focusing on customersatisfaction and retention, which has resulted in the expansion of many existingrelationships including our work with Land Securities on their Landflex sites inLondon and with ShopDirect in Manchester. Managed Services was awarded contractswith Transport for London, 3Com and Crown Castle during the past year. Since theyear-end we have regained and expanded our framework contract with RWE NPowerfor an additional five years. This success has been achieved by closelymonitoring customer needs, conducting extensive customer surveys, closelymonitoring performance and improving service levels. Managed Services has continued to improve its support functions for humanresources, sales and marketing, health and safety, energy management andcommercial management. We pay particular attention to the development of ouremployees to ensure that we have the appropriate skills as the business grows. PFI Our PFI company, which specialises in providing facilities management to PFIschool projects, where we take no equity, continues to develop. We now have 15signed contracts in respect of 33 schools and are preferred bidder on fivefurther contracts. Business Services Business Services had another good year adding further blue-chip customers totheir impressive list of leading corporations, financial institutions andprofessional firms, with contract wins at Morgan Stanley and Societe Generale.The business also renewed contracts in the last year at the London offices ofthe international law firms of White & Case, Skadden Arps and Sullivan &Cromwell as well as the London Stock Exchange. A growing part of the business is document solutions, involving the entirelifecycle of the document from creation, to print, through to distribution. Future growth will come from: 1. Developing existing relationships with key clients to expand the range of services;2. Investment in business development and obtaining new clients; and3. Expanding the range of services to include creative services, print management and distribution. Engineering Maintenance Engineering Maintenance had another successful year. The business is wellpositioned with one cohesive management structure and a central team supportingthe regional operating companies. A national sales and service delivery team hasbeen created to provide national customers with a consistent quality service.Engineering Maintenance has acted as the springboard for other MITIE services tocreate bundled opportunities. An increased number of customers are recognisingthe benefits that MITIE can bring as a co-ordinated Group in bundled servicescontracts. Engineering Maintenance has been awarded a number of notable contracts includingStandard Life, the University of Bath, Apsley House, Ayrshire and HighlandCouncils. Bundled service contract wins included the Department for Educationand Skills at their five main sites and Telecom Service Centres. Crucial to the future development of Engineering Maintenance is a highlydeveloped integrated Health, Safety and Environmental management system. Martin Brown has decided to retire this year; Martin was Head of our EngineeringMaintenance business. I would like to thank him for the important contributionhe had made to MITIE over the years. Building Services Engineering Services The trading climate in Engineering has not improved since our Interim Report andmargins continue to be under pressure. In the coming year Engineering Serviceswill be focused on improving margins, even though turnover growth as aconsequence may be lower. A key focus of Engineering is to develop long term relationships with forwardvisibility. The University of Plymouth has recently awarded MITIE an innovativethree year Mechanical and Electrical framework contract adding to the currentlist of frameworks which include Boots, MOD Prime South West, BT/Telereal andAnnington Homes. With strong experience in education, Engineering is well positioned forinvolvement in the Building Schools for the Future programme. In the currentschemes MITIE are a Tier 2 Contractor for the Birmingham Framework and have justcompleted Turves Green School. There has been continued success in the publicsector with procurement routes including LIFT and PFI/PPP. The focus on developing specialist solutions for our customers has seen ongoingsuccess. The specialist retail business, whose clients include ASDA and Primark,have completed 14 projects for Marks and Spencer and has now been awarded amajor store in Plymouth. The Social Housing business continues to grow with over80% of its work under partnering contracts. Since the year end, the commitment of Engineering to training and health &safety has been recognised through two industry awards - Mechanical & ElectricalSpecialist of the Year and HVAC Contractor of the Year. In line with the objective of identifying growth potential in both geographicaland specialist markets, an opportunity for the development of regionalcontracting businesses was identified in the Channel Islands. The establishmentof a Jersey office confirmed the potential of this venture and a Guernsey officehas since been opened to respond to the opportunities on the Islands. Property Services Property Services has had a good year, building upon the performance in thefirst six months and seeing increased levels of profitability. A strategicdecision was taken to change the corporate and operational structure which wasproving to be a barrier to tendering for the larger lucrative markets of socialhousing, education and health. During the year all of the trade from thewholly-owned subsidiaries were merged into one business to form MITIE PropertyServices (UK) Ltd. This is already starting to produce improved results and willhave a positive impact on performance in the coming year. Property Services has increased its investment in its social housing and localauthority team to accelerate growth in this market. Contracts will be performedwith directly employed teams for refurbishment, repairs and maintenance. Several long-term contracts have been secured during the period includingPavillion Housing Association, Brent Decent Homes, Warden Housing Association,Poole Housing Association and Southampton City Council, that have a combinedorder book value in excess of £60 million. Other contracts included a majorredecoration contract for North West Trains and a refurbishment project forDurham University. MITIE Interiors, the London-based fit-out business, has had a very good yearcompleting substantial projects for Land Securities, Legal & General andTerrafirma. Generation Generation was sold to its management team on 30 September 2004 and marked ourexit from capital-intensive businesses. We wish them every success for thefuture. Dynamics of the business MITIE is fortunate that a high percentage of our work comes from long-termcontracts. Support Services is able to grow steadily because it has an excellentrecord of customer retention and a reputation for providing quality servicesthat meet the needs of the customer. Building Services has traditionally beendifferent with relatively short-term order books, however, this is changing withthe trend towards partnering style or framework contracts, which has increasedthe visibility of Building Services' order book. The percentage of budgetedrevenue secured for 2006 is 70% compared to 67% last year. The percentage ofrevenue secured for 2007 is 44% compared to 42% last year. Cash MITIE is a cash-generative business. We recognise that the assets of thebusiness belong to the shareholders and that it is our responsibility tomaximise the long-term return from those assets. During the year we haveincreased the dividend by 36%, started a share buyback programme and consideredseveral acquisitions. Since the year end we have completed the acquisition ofIntruder for a consideration of £4 million. The Board regularly reviews thestructure of the Group's Balance Sheet, evaluates its optimum structure andcontinues to make this an important priority. Future prospects The business has excellent prospects. Our markets are favourable despite beingvery competitive, they have the capacity to sustain future growth. I amconfident that we can maintain our progress. I am always delighted to see the passion and commitment of our employees. Iwould like to thank each and every one of them for keeping that passion aliveand for driving our business forward and continuing to support our customers. Ours is not a business that is dependent upon technology or capital assets. Itis a business that will succeed or fail based primarily on how good its peopleare, how well they work together and anticipate and satisfy their customers'needs. The people in MITIE are excellent and are confident about the future.Your Company is in good hands and I am sure we will continue to deliver goodresults. Ian R StewartChief Executive Finance Director's Review 1. Financial Results a) TurnoverTotal turnover increased by 17.9% to £818.6 million (2004: £694.5 million).Turnover from continuing business grew by 20.4% to £799.7 million. b) Operating profitTotal operating profit has increased by 15.1% to £42.0 million (2004: £36.5million). Operating profit from continuing operations has increased by 15.7% to £40.9million (2004: £35.4 million). c) Exceptional itemsAs the final step of the strategy to exit capital-intensive businesses, theCompany sold its entire shareholding in Generation to a management buyout teamon 30 September 2004 for a total consideration of £12.0 million. The accounting loss on sale comprised: £mLoss on sale excluding goodwill 3.4Goodwill not previously amortised 1.2Goodwill previously written off to reserves 5.0 --- 9.6 A freehold property was also sold during the year that resulted in a net profitof £1.5 million. d) ProfitProfit on ordinary activities before tax, goodwill and exceptional items* was£46.9 million (2004: £40.3 million), an increase of 16.3%. The net profit marginon this basis is 5.7% compared to 5.8% in the previous year. Profit before taxafter goodwill (£2.8 million, 2004: £2.2 million) and exceptional items (£8.1million, 2004: £nil) fell by 5.9% to £35.9 million. * See Group Profit and Loss Account for reconciliation. e) GoodwillThe increase in the goodwill amortisation charge to £2.8 million (2004: £2.2million) reflects a full year of goodwill amortisation on the acquisition ofthree companies in the previous year and the acquisition of the minority sharesin the businesses that earned out during the year. f) TaxationThe tax charge for the year was £14.3 million, a rise of 16.4% on last year'scharge of £12.3 million. The effective tax rate is 39.8% (2004: 32.2%). Thecurrent year effective rate is impacted significantly by the loss on sale ofGeneration and goodwill amortisation, both of which are not allowable for tax. The effective rate of tax before exceptional items and goodwill is 30.5% (2004:30.5%). g) PensionsThe Group operates two defined benefit pension schemes and a definedcontribution scheme for its employees as described in Note 28. The total pensioncharge for the year was £4.3 million (2004: £4.5 million) with the definedbenefit schemes accounting for £3.3 million of this (2004: £3.6 million). The Group continues to apply SSAP 24 in accounting for retirement benefits. Theintroduction of the accounting standard FRS 17: Retirement Benefits has beendelayed by the Accounting Standards Board until 2006. The Group has continued toapply the transitional rules and disclosures as detailed in Note 28. At 31 March2005, the actuary estimated that there was a net deficit of £5.0 million (2004:£5.0 million) in relation to the defined benefit schemes. The defined benefit schemes have a Minimum Funding Requirement cover of 115%.Contribution rates remain at 7.5% (2004: 7.5%) for employees and at 10% (2004:10%) for the Group Scheme. h) AcquisitionsOn 23 August 2004, the Group acquired some or all of the minority interests inthe following subsidiaries for a total consideration of £3.5m (See Note 22): • MITIE Air Conditioning (North) Ltd • MITIE Engineering Services (Retail) Ltd • MITIE Roofing Services Ltd • MITIE Security (Scotland) Ltd • MITIE Greencote Ltd 2. Financial Review a) Returns to Shareholders Earnings per share ("EPS")EPS is based upon profits after tax and minority interests and represents theamount of profit earned by each share. Basic EPS fell by 20.8% to 6.0p (2004: 7.6p). The majority of this is due to theexceptional items which reduced EPS by 2.7p. EPS before exceptional items and goodwill grew by 15.1% from 8.3p in 2004 to9.6p this year (see Note 9 for reconciliation to basic earnings per share). DividendsIn 2004 we set a dividend policy to achieve an annual dividend cover of no morethan three times. We also noted that we would review this policy on a regularbasis. The dividend total of 3.4p per share is at a cover of 2.9 times. For thepurposes of calculating this cover we have ignored the impact of goodwillamortisation and the exceptional items in the year. Share buybacksThe Company has acquired 3.4% of its own share capital in the year, equating to10,310,006 shares, all of which were cancelled. In total these cost £14.9million. b) Treasury Policy 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 Group's exposure to interest rate fluctuations is currently limited to theperformance of our net funds position. A portfolio of AAA rated funds, moneymarket deposits and corporate deposit accounts is used to maximise returns fromfunds while minimising overall exposure to any one financial institution. 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 Note 17 to thePreliminary Announcement. c) Accounting DevelopmentsThere have been no significant impacts arising as a result of changes in UKGenerally Accepted Accounting Principles in the year. d) International Financial Reporting Standards ("IFRS")IFRS will be adopted in the Group's consolidated accounts for the year end 31March 2006. The Group will publish accounts under IFRS for our 2006 interimresults and restate 31 March 2005 figures for comparative purposes. The Group's transition project to prepare for this has continued during theyear. Other than the additional disclosures and presentational differences, IFRSis expected to have the most impact for the Group in the following areas: • Share based payments (IFRS 2) • Goodwill amortisation (IFRS 3) • Pensions (IAS 19) • Deferred tax (IAS 12) We have provided further explanations of each of these items, and whereappropriate the estimated financial impact, in the section on InternationalFinancial Reporting Standards below. We have also detailed the exemptions takenby the Group on the adoption of IFRS as set out in IFRS 1: First time adoptionof International Accounting Standards. e) Cash flows Net funds increased by £11.2 million during the year from £49.3 million to £60.5million. The total cash inflow in the year was £10.5 million (2004: outflow of£7.8 million). The Group has generated £46.9 million (2004: £43.9 million) from operatingactivities. Tax paid in the year was £13.5 million (2004: £12.4 million) and net capitalexpenditure reduced to £10.8 million (2004: £12.7 million). Of the £3.5 million consideration for the acquisitions of minority interests insubsidiaries, £0.2 million was in cash. We also received £8.9 million on thedisposal of a subsidiary undertaking, which represented the overdraft. In theprevious year we had a net outflow of £23.7 million from acquisitions in theyear. f) Investment for the future AcquisitionsAs noted above, during the year the Group acquired some or all of the minorityinterests in five of its subsidiaries for a total consideration of £3.5 millionof which £0.2 million was in cash. Since the year-end, on 4 May 2005, the Group acquired the entire share capitalof Intruder. The total consideration was £4 million. The total consideration canincrease by up to a further £0.5 million to the extent that the net assets atcompletion of Intruder exceed £0.95 million. The final consideration will beconfirmed in our Interim Report for the period ending 30 September 2005. In theyear to 31 October 2004, Intruder's turnover was £4.31 million, pre-tax profitswere £0.45 million and net assets were £0.94 million as at 31 October 2004. Capital Expenditure As the Group has grown and continues to grow strongly, measuring total capitalexpenditure does not provide a useful measure of performance; we thereforemeasure our capital expenditure as a percentage of turnover. Over the last fiveyears this has fallen from 4.6% of turnover to 1.3% in the current year. This clearly reflects the Group's stated objective to move away fromcapital-intensive businesses. Generation, which was disposed of earlier in theyear, was the final step in achieving this objective. This policy allows us to reduce the amount of capital tied up in long-termprojects and to direct funds to other areas which generate greater shareholdervalue. Ruby McGregor-SmithGroup Finance Director Group Profit and Loss Accountfor the year ended 31 March 2005 Note 2005 2004 £'000 £'0003 Turnover - Continuing operations 799,737 664,259 - Discontinued operations 18,892 30,254_____________________________________________________________________________________ 818,629 694,513 3 Cost of sales (651,503) (543,880)_____________________________________________________________________________________ 3 Gross profit 167,126 150,633_____________________________________________________________________________________ 3 Administrative (125,160) (114,149) expenses_____________________________________________________________________________________ Administrative - before amortisation of (122,335) (111,986) expenses goodwill Operating profit before goodwill amortisation 44,791 38,647 - amortisation of goodwill (2,825) (2,163)_____________________________________________________________________________________ 4 Operating Profit - Continuing operations 40,918 35,355 - Discontinued operations 1,048 1,129 ___________________ 41,966 36,484_____________________________________________________________________________________ Loss on sale excluding unamortised goodwill (3,366) - Goodwill not previously amortised (1,238) - Goodwill previously written off to reserves (5,013) -_____________________________________________________________________________________ 22b Exceptional loss on sale of discontinued operations (9,617) - 11 Exceptional profit on sale of tangible fixed assets from 1,471 - continuing operations ___________________ Profit on ordinary activities before interest 33,820 36,484 6 Interest 2,117 1,696 ___________________ Profit on ordinary activities before tax 35,937 38,180 7 Tax on profit on ordinary activities (14,315) (12,293) ___________________ Profit on ordinary activities after tax 21,622 25,887 Minority interests (3,174) (2,533) ___________________ Profit for the year 18,448 23,354 8 Dividends - equity (10,196) (7,884) ___________________ 20 Retained profit for the year 8,252 15,470 ___________________ 9 Earnings per ordinary share - Basic 6.0p 7.6p - Diluted 5.9p 7.6p - Basic before goodwill amortisation 6.9p 8.3p - Basic before goodwill amortisation and exceptional items 9.6p 8.3p ___________________ There are no recognised gains and losses for the current financial year or preceding financial year other than as stated in the Group Profit and Loss Account._____________________________________________________________________________________ Profit on ordinary activities before tax and goodwill and 46,908 40,343 exceptional items _____________________________________________________________________________________ Reconciliation of Movements in Shareholders' Fundsfor the year ended 31 March 2005 2005 2004 £'000 £'000________________________________________________________________________________ Profit for the financial year 18,448 23,354Dividends (10,196) (7,884)________________________________________________________________________________ 8,252 15,470 Goodwill previously written off included in retainedprofit for the year 5,013 -Shares issued- in respect of minority interests acquired 3,296 8,128- own shares acquired (15,015) -- other 1,368 735________________________________________________________________________________Net addition to Shareholders' funds 2,914 24,333Shareholders' funds at the beginning of the year 129,233 104,900________________________________________________________________________________Shareholders' funds at the end of the year 132,147 129,233________________________________________________________________________________ Note of Historical Cost Profits and Lossesfor the year ended 31 March 2005 2005 2004 £'000 £'000________________________________________________________________________________Profit on ordinary activities before tax 35,937 38,180Difference between the historical cost depreciation charge onrevalued assets and the actual depreciation charge for theyear calculated on the revalued amount 10 76Realisation of property revaluation losses/(gains) ofprevious years 179 (8)________________________________________________________________________________Historical cost profits on ordinary activities before tax,minority interests and dividends 36,126 38,248________________________________________________________________________________Historical cost profits for the year retained after tax,minority interests and dividends 8,441 15,538________________________________________________________________________________ Group Balance Sheetas at 31 March 2005 Note 2005 2004 £'000 £'000________________________________________________________________________________ Fixed Assets 10 Intangible assets 49,908 51,937 11 Tangible assets 27,214 40,329 77,122 92,266________________________________________________________________________________ Current Assets 12 Work in progress and stocks 6,343 7,055 13 Debtors 179,947 151,868 14 Investments 3,827 2,391 Cash at bank and in hand 57,667 47,165________________________________________________________________________________ 247,784 208,479________________________________________________________________________________ 15 Creditors - due within one year (173,102) (157,370)________________________________________________________________________________ Net Current Assets 74,682 51,109________________________________________________________________________________ Total Assets less Current Liabilities 151,804 143,375 16 Creditors - due after one year (776) (136) 18 Provisions for Liabilities and Charges (9,241) (7,390)________________________________________________________________________________ Net Assets 141,787 135,849________________________________________________________________________________ Capital and Reserves 19 Called up share capital 7,580 7,736 20 Share premium account 11,577 9,836 20 Merger reserve 44,128 40,895 20 Capital redemption reserve 257 - 20 Revaluation reserve (251) (440) 20 Other reserve 583 994 20 Profit and loss account 68,273 70,212________________________________________________________________________________ Equity Shareholders' Funds 132,147 129,233 Equity minority interest 9,640 6,616________________________________________________________________________________ 141,787 135,849________________________________________________________________________________ Company Balance Sheetas at 31 March 2005 Note 2005 2004 £'000 £'000________________________________________________________________________________ Fixed Assets 11 Tangible assets 1,215 910 27 Investments in subsidiary undertakings 108,273 110,019________________________________________________________________________________ 109,488 110,929________________________________________________________________________________ Current Assets 13 Debtors 40,012 39,864 Cash at bank and in hand 5,477 939________________________________________________________________________________ 45,489 40,803________________________________________________________________________________ 15 Creditors - due within one year (27,690) (30,051)________________________________________________________________________________ Net Current Assets 17,799 10,752________________________________________________________________________________ Net Assets 127,287 121,681________________________________________________________________________________ Capital and Reserves 19 Called up share capital 7,580 7,736 20 Share premium account 11,577 9,836 20 Merger reserve 44,128 40,895 20 Capital redemption reserve 257 - 20 Profit and loss account 63,745 63,214________________________________________________________________________________ Equity Shareholders' Funds 127,287 121,681________________________________________________________________________________ Group Cash Flow Statementfor the year ended 31 March 2005 Note 2005 2004 £'000 £'000________________________________________________________________________________ 21 Net cash inflow from operating activities 46,890 43,854________________________________________________________________________________ Returns on investments and servicing of finance Interest received 2,125 1,693 Interest paid - (39) Interest element of finance lease rentals (47) (26) Minority dividends paid (125) -________________________________________________________________________________ 1,953 1,628________________________________________________________________________________ Tax UK corporation tax paid (13,523) (12,352)________________________________________________________________________________ (13,523) (12,352)________________________________________________________________________________ Capital expenditure Payments to acquire tangible fixed assets (14,004) (17,267) Receipts from sales of tangible fixed assets 3,160 4,603________________________________________________________________________________ (10,844) (12,664)________________________________________________________________________________ 22 Acquisitions and disposals Payments to acquire subsidiary undertakings (205) (22,526) Net overdraft acquired with subsidiary - (1,163) undertakings Sale of subsidiary undertakings 8,935 -________________________________________________________________________________ 8,730 (23,689)________________________________________________________________________________ Equity dividends paid (9,104) (6,825)________________________________________________________________________________ Cash inflow / (outflow) before management of 24,102 (10,048) liquid resources and financing________________________________________________________________________________ Management of liquid resources Net (increase) / decrease in investments (1,436) 1,489________________________________________________________________________________ Financing Issue of Ordinary Share capital 3,013 967 Purchase of own shares (14,912) - Net capital element of finance lease rentals (265) (203)________________________________________________________________________________ (12,164) 764________________________________________________________________________________ 24 Increase / (decrease) in cash in the year 10,502 (7,795)________________________________________________________________________________ Notes to the Preliminary Announcement 1 Preliminary AnnouncementThe preliminary announcement was approved by the Board on 20 May 2005. The financial information as set out does not constitute the Group and Company'sstatutory accounts for the year ended 31 March 2005 or 2004, but is derived fromthose Accounts. Statutory accounts for 2004 have been delivered to the Registrarof Companies and those for 2005 will be delivered following the Company's AnnualGeneral Meeting. The auditors have reported on those Accounts; their reportswere unqualified and did not contain statements under s237(2) or (3) CompaniesAct 1985. 2 Accounting Policies Accounting ConventionThe Preliminary Announcement has been prepared under the historical costconvention as modified by the revaluation of certain freehold and long leaseholdproperties. The Preliminary Announcement has been prepared in accordance withapplicable United Kingdom accounting standards. Basis of ConsolidationThe consolidated Profit and Loss Account and Balance Sheet include the financialstatements of MITIE Group PLC and all its subsidiary undertakings. The resultsof the subsidiary undertakings acquired or sold are included from or up to theeffective date of acquisition or sale. Accounting DevelopmentsThere have been no new UK accounting standards adopted during the year ended 31March 2005. Goodwill and Intangible Fixed AssetsGoodwill is calculated as the surplus of fair value of purchase considerationover fair value attributed to the net assets of subsidiary undertakingsacquired. Following the introduction of FRS 10, goodwill in respect ofacquisitions made after the financial year ended 31 March 1998 has beencapitalised and amortised over its estimated useful economic life of up to 20years. For acquisitions made before 1 April 1998, goodwill was written off directly toreserves. In the event of a disposal of the businesses concerned, this goodwillwill be included in determining the gain or loss on disposal in the Profit andLoss Account. Tangible Fixed AssetsTangible fixed assets are stated at cost or valuation, less depreciation and anyprovision for impairment. Depreciation is provided on tangible fixed assets on astraight-line basis over the expected useful lives. No depreciation is providedon land. The expected useful lives are as follows:Freehold and long leasehold buildings 50 yearsPlant 3-14 yearsVehicles 4 years Financial InstrumentsThe Group uses derivative financial instruments to reduce exposure to foreignexchange risk. The Group does not hold or issue derivative financial instrumentsfor speculative purposes. For a forward foreign exchange contract to be treated as a hedge, the instrumentmust be related to actual foreign currency assets or liabilities or to aprobable commitment. It must involve the same currency or similar currencies asthe hedged item and must also reduce the risk of foreign currency exchangemovements on the Group's operations. Gains and losses arising on these contractsare deferred and recognised in the profit and loss account, or as adjustments tothe carrying amount of fixed assets, only when the hedged transaction has itselfbeen reflected in the Group's financial statements. If an instrument ceases to be accounted for as a hedge, for example because theunderlying hedged position is eliminated, the instrument is marked to market andany resulting profit or loss recognised at that time. Foreign CurrencyTransactions in foreign currencies are recorded at the rate of exchange at thedate of the transaction or, if hedged, at the forward contract rate. Monetaryassets and liabilities denominated in foreign currencies at the balance sheetdate are reported at the rates of exchange prevailing at that date or, ifappropriate, at the forward contract rate. InvestmentsShares in Group companies are stated at cost less provision for impairment invalue. Current asset investments are stated at the lower of cost and netrealisable value. Leased AssetsAssets acquired under finance leases are included in tangible fixed assets anddepreciated in accordance with the above policy. Outstanding future leaseobligations are shown in creditors. The finance element of the rental paymentsis charged to the Profit and Loss Account over the period of the lease.Operating lease rentals are charged to the Profit and Loss Account in equalinstalments over the lease term. Work in Progress and StocksStocks are valued at the lower of cost and net realisable value. Costs represent materials, direct labour and overheads. Net realisable value isbased on estimated selling price, less further costs expected to be incurred tocompletion and disposal. Provision is made for obsolete, slow moving ordefective items where appropriate. Amounts recoverable on long-term contracts, which are included in debtors, arestated at the net sales value of the work done, less amounts received asprogress payments on account. Excess progress payments are included in creditorsas payments on account. Cumulative costs incurred net of amounts transferred tocost of sales, less provision for contingencies and anticipated future losses oncontracts, are included as long-term contract balances in stock.Related Shares:
Mitie