Preliminary Results

John Menzies plc

Final Results for the period ended 31 December 2012

John Menzies Plc - Another year of stability and growth

Highlights

- John Menzies plc delivers further shareholder value

- Menzies Aviation provides sustainable growth

- Underlying operating profit up 16% on a constant currency basis

- Expansion plans being delivered - new contracts won, key contracts renewed and new countries entered

- Restructuring of loss making cargo operations completed

- Menzies Distribution provides a stable profit stream

- Underlying operating profit held at £28.8m with excellent cash generation

- Acquisition of Orbital Marketing provides growth opportunities away from the core business

- Integration and synergy benefits on track

- Progressive dividend policy continues - final dividend 17.85p up 5%

Iain Napier, Chairman said:

"The Group continues to trade on a sound footing with both divisions returning good results. Market conditions remain tough but despite this we continue to deliver our targets. Menzies Aviation turned in a strong performance despite airline failures and currency headwinds. Future prospects remain good as we seek to deliver on our organic and selective acquisition growth plans. At Menzies Distribution the acquisition of Orbital Marketing Services Group provides the division with a highly synergistic business that will offer new areas of potential growth.

Overall the Group is well placed to continue to deliver growth. "

There will be a presentation for analysts at 9am (GMT) today. The details of which can be obtained from FTI Consulting on details below.

For further information:

Paul Dollman, Group Finance Director, John Menzies plc 0131 459 8018

John Geddes, Group Company Secretary, John Menzies plc 0131 459 8180

Jonathon Brill/Alex Beagley, FTI Consulting, 0207 831 3113

Notes to Editors

1. John Menzies plc is one of Scotland's largest companies. The company has two operating divisions, Menzies Aviation and Menzies Distribution. Both divisions operate in distinct B2B sectors where success depends on providing an efficient, high quality, time-critical service to their customers and partners. The company was established in 1833 and its head office is in Edinburgh, Scotland. Today the company is an international business with operations worldwide.

2. Menzies Aviation is the fastest growing, and now second largest, ground and cargo handling organisation in the world. It also owns AMI, a global wholesale freight forwarder. The business is highly successful - operating at 132 airports in 30 countries, with annual revenue in excess of US$1bn and employing some 18,000 highly trained people. Customers include easyJet, Cathay Pacific, British Airways, Emirates, Qatar, Virgin America & Australia, Jet Airways, Asiana & Singapore Airlines. Best in class safety & security as well as great customer service are core to its success and sets it apart from other handlers.

3. Menzies Distribution is a leading provider of added value distribution and marketing services to the newspaper and magazine supply chain in the UK. The division handles around 5 million newspapers and 2.1 million magazines (covering 3,000 magazine titles) each day, with deliveries to more than 25,000 customers. The division employs over 4,000 people at 48 sites throughout the UK - and is a strongly cash generative business, with around 45% of the newspaper and magazine wholesale distribution market in the UK. It has a track record of investment in innovation and customer service delivery.

4. Further information on John Menzies plc can be found at: www.johnmenziesplc.com, www.menziesdistribution.com and www.menziesaviation.com.

OPERATING REVIEW

GROUP PERFORMANCE

Overview

The Group performed strongly during the year despite difficult trading conditions at both operating divisions. At Menzies Aviation operating profit on a constant currency basis was up 16% while Menzies Distribution held profits flat, a commendable performance from both divisions.

The Group continues to be on a very strong financial footing. Underlying profit before taxation was up 4% to £58.4m on turnover of £1,996.8m (2011: £2,013.8m). Total net bank debt continues to be below £100m.

Menzies Aviation's growth continued with turnover up 3% to £697.2m generating operating profits of £35.6m, a rise of 10%. At constant exchange rates profits increased to £37.5m. At Menzies Distribution, turnover fell by 3% reflecting falling volumes in the core business. Despite this operating profit was flat on the previous year at £28.8m.

Cash flow and Investment

The Group had another strong year with a free cash flow[6] of £34.7m. Capital expenditure was less than last year at £15.9m. The Group spent £15m on acquisitions covering both divisions. After additional payments into the pension fund, cash spend on exceptional items and a higher level of dividend the net cash outflow for the Group was £12.9m including a currency translation gain of £2.1m.

Debt and Interest

Group net debt increased to £93m mainly due to spend on acquisitions. Although year-end net debt increased the average debt in the year was broadly flat and average interest costs fell year on year. The pension interest charge moved from a credit of £1.4m in 2011 to a debit of £0.9m in 2012 due mainly to a decrease in the returns from pension fund assets.

Exceptional Items

The Group incurred exceptional items in the year totalling £18.4m. The main items were restructuring and network rationalisation costs of £4.1m in Distribution and at Aviation the reorganisation of UK cargo operations for £3.2m and the provision for the onerous lease for the Chicago cargo facility of £6.8m.

Dividend

The Board has declared a final dividend of 17.85p which is payable on 21 June 2013 to all shareholders on the register on 24 May 2013. This represents an increase of 5% on the prior year and underlines the Board's continuing confidence in the Group's future, the cash generative nature of the Group and the resilience of its earnings.

MENZIES AVIATION

Performance

Menzies Aviation delivered another strong performance in the face of tough overall trading conditions with airline consolidation and the uncertain global economic climate prevalent. Despite this, operating profit on a constant currency basis at £37.5m was up 16% (10% actual).

As in previous years, the division continued to grow its core business through contract wins. Excluding contracts lost to airline failures, there was a net gain of 30 contracts that deliver £19m of revenue. In addition some 94 contracts were renewed, for an average contract length of three years, securing £118m of revenue. Airline failures offset some of the positive momentum gained from new contracts as they represented profitable business that was not replicated at the stations affected. Best in class safety & security as well as great customer service are core to contract successes and sets the division apart from other handlers.

Three businesses were acquired in the year. In the UK, Flight Support, a ground handling business operating at 4 stations, was acquired for £5.3m. This synergistic acquisition brought three new stations to the division's network and deepened relationships with a number of existing customers. In the Czech Republic, the ground handling company of Prague Airport was acquired. This acquisition brought a number of new customers and also consolidated the number of players in the market from three to two. In Romania, Kamino Cargo, a cargo handling business at Otopeni International Airport in Bucharest, was acquired and bolted on to the existing ground handling operation allowing a one stop shop service, which is more important at stations of this size, to be offered to all airlines.

Ground Handling

The ground handling business continued to prosper during the year securing notable new contracts across the network. Underlying operating profit increased by £1.1m. This represents a 5% rise in difficult markets and shows the continuing strength of the business.

Continuing contract win momentum is reflected in the ground handling volumes. Absolute aircraft turns were up 8.9% with like for like turns up 3.5%. The ground handling business continues to be the primary driver of growth for the division and offers very strong growth dynamics. Currently this business segment generates 61% of divisional turnover and is very well placed to pursue further market opportunities.

Cargo Handling

Cargo handling endured a difficult year with volumes affected by the general economic slowdown. Absolute volume fell 0.2% with like for like volume down 5.6%. Despite this operating profits at £10.3m were up £1.6m reflecting the annualisation of previous year's contract wins and restructuring actions.

Reflecting the difficult economic conditions faced, some decisive management actions were taken. In July, it was announced that the division would focus its UK cargo business on its London Heathrow operations and exit most of its UK regional operations. The restructuring was successfully completed in quarter three and has placed the UK cargo handling business on a more stable platform. In December, it was decided, having exhausted all alternative courses of action, to close the cargo handling operations in Chicago, USA. This operation was loss making and the closure will improve EBIT in 2013 by around £1.5m.  

The business, which now represents 23% of divisional revenues, has been significantly re-structured over the last three years and the management actions taken during 2012 now complete the eradication of the four major loss making operations that had been previously reported. The business now operates predominantly at locations where the airport is not over supplied and the cargo business complements a successful ground handling operation.

Cargo Forwarding

The air freight wholesaling business, AMI, made further progress with profit at £2.5m up £0.6m on the previous year. The business expanded during the year opening a new office in Mumbai. This key cargo gateway expands the AMI network and offers customers a global solution. AMI is a strong niche business and is well placed to continue to grow and develop in a large available market.

MENZIES DISTRIBUTION

Performance

Menzies Distribution delivered a stable performance with operating profit held at £28.8m, despite challenging market conditions.

During the period the division made positive progress in shaping the division for the future by completing two acquisitions, securing new regional and national press contracts together with new logistics contracts.

Core Business

The magazine market continues to be weak as the recessionary environment in the UK resulted in a reduction in discretionary spend. Overall like for like revenue was down 6%. There was limited upside during the year from the Queen's Diamond Jubilee and the Olympic Games and the sticker category received a boost resulting from Euro 2012. Monthly magazines were relatively resilient with like for like revenue down 5%. The weekly magazine sector, where like for like revenues were down 7%, continues to experience fierce price cutting activity particularly within the crowded celebrity magazine sector.

Newspapers sales were ahead of expectations after a number of cover price increases and additional business gains from News International and DC Thomson. In particular, Monday to Friday sales performed strongly. Overall like for like sales were down 3%. In the Sunday market some stability returned following the launch of the Sun on Sunday and a high degree of cut price activity. Overall the demise of the News of the World and the launch of the Sun on Sunday has been broadly neutral.

In August, contract terms were agreed with News International for a further seven years. As part of this renewal, additional business in Kent, Lancashire and Northern Ireland was secured. This was a key renewal as News International represents 34% of the total UK newspaper market. Following on from this, the business of the UK's second largest magazine distributor, Marketforce, was also secured through to 2019. These contracts secure some £245m of annual revenue and allow the division to plan positively for the future with long term contracts in place.

A further re-organisation of the branch network, which was highlighted at the half year, has been delivered and is now achieving its projected savings. Profit Improvement Plans are embedded in the business and they continue to deliver cost savings at branch level. A dedicated team are already focussing on further areas of savings through to 2015 and together with the benefits being felt from the fully implemented SAP system visibility on cost savings is good. During 2012 cost savings of £5.6m were delivered.

New Revenue Streams

During the year two acquisitions were made:

In November, the division made its most significant investment away from its core business to date by acquiring Orbital Marketing Services Group (Orbital). Orbital comprises a portfolio of UK based logistics and marketing services businesses serving the travel, tourism, education, charity, publishing and healthcare sectors. The business was established in 1972 and employs over 550 staff at 9 locations across the UK. The acquisition of Orbital takes Menzies Distribution into new business sectors and adds further complementary services to its existing logistics and marketing services capabilities. Given the respective infrastructure of both businesses there are significant network, operational and system synergies to be gained as part of the integration process in the medium term.

During July the division also acquired the retail consultancy division of the Fore Partnership, which it has integrated with its own category management business D-Cipher to become part of Menzies Marketing Services. The combined businesses, which trade as Fore, looks after more than 8,000 retail outlets with a combined annual news turnover of £500m - 12% of the UK market. Customers include M&S, Spar, Boots, Martin McColl, Nisa and One Stop.

BOARD COMPOSITION

A number of changes to the Board have recently been announced. Ian Harrison, who has been a Director for 25 years and Paul Dollman, Group Finance Director, will not stand for re-election at the AGM on 17 May. Paula Bell will replace Paul Dollman as Group Finance Director. She joins the Group on 10 June 2013 from Ricardo plc, a globalmulti-industry consultancy, where she held the post of Group Finance Director for over six years.

GROUP STRATEGY

John Menzies plc continues to pursue its stated strategy of investing in its two operating divisions to generate sustainable returns that in turn enhance shareholder value.

Menzies Aviation will continue to grow, by leveraging existing customer relationships to win more contracts at existing and new airports as well as developing new customer relationships and identifying new attractive markets where it can deliver our market leading safety and service provision.

Menzies Distribution, with its strong market position and stable cash generation, provides stability to the Group and it will continue to innovate and evolve the business model to mitigate declining sales whilst pursuing attractive new revenue opportunities away from the core business.

By operating these two distinct, strong businesses, each with strong cash flows, the Group is well placed to provide shareholders with both stability and growth.

OUTLOOK

Menzies Aviation is trading in line with expectations with good visibility on summer schedules across the network. The closure of the Chicago cargo operations are on track and global relationships with affected airlines have been maintained. Contract wins are most prevalent in the first half and the year has started well with a number of new contracts gained across the network.

Trading at Menzies Distribution in its core business has continued to be challenging with weekly magazines in particular continuing to underperform. However, the Orbital Marketing Services business acquired in November 2012 is performing well with integration plans and synergy benefits on track. In addition, contract negotiations with a number of publishers continue and it is expected a number of these will be concluded during the year.

Overall the challenging trading climate continues but prospects for the Group remain strong and the Board are confident of delivering further growth during 2013.

GROUP INCOME STATEMENT

for the year ended 31 December 2012 (year ended 31 December 2011)

* Underlying operating profit is consistently presented adjusting for non-recurring exceptional items, intangible amortisation associated with goodwill impairment on associate assets and contract amortisation, and the Group's share of interest and tax on joint ventures and associates to provide an appreciation of the impact of those items on operating profit.

GROUP STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2012 (year ended 31 December 2011)

GROUP AND COMPANY BALANCE SHEETS

as at 31 December 2012 (31 December 2011)

The accounts were approved by the Board of Directors on 4 March 2013 and signed on its behalf by:

* Recycled to income statement on disposal of associated undertaking (Note 4(a)).

GROUP AND COMPANY STATEMENT OF CASH FLOWS

for the year ended 31 December 2012 (year ended 31 December 2011)

* Net cash and cash equivalents include cash at bank and in hand and bank overdrafts.

Notes to the Accounts

The consolidated accounts of the Group for the year ended 31 December 2012 were approved and authorised for issue in accordance with a resolution of the directors on 4 March 2013. John Menzies plc is a limited company incorporated in Scotland and is listed on the London Stock Exchange.

1. Accounting policies

A summary of the more significant accounting policies, which have been consistently applied, is set out below.

New Accounting Standards and Interpretations

The following standards and interpretations have been adopted in these accounts and have not had a material impact on the Group's accounts in the period of initial application:

The above standards and interpretations will be adopted in accordance with their effective dates and have not been adopted in these financial statements. The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group's financial statements in the period of initial application with the exception of IAS 19 (revised).

Under IAS 19R the interest cost on the defined benefit obligation, and the expected rate of return on plan assets, will be replaced with a net interest charge that is calculated by applying the discount rate to the net defined benefit liability. The impact on the results for the year ended 31 December 2013 will be to increase net operating costs by £1.0m and to increase pension related finance charges by £1.3m. In addition, amortisation for benefits that do not vest immediately is eliminated resulting in an increase to net operating costs of £1.0m. The deficit at 31 December 2012 would reduce by £5.6m.

For these standards with a later effective date, the directors are in the process of assessing the likely impact and look to finalisation of the standards before formalising their view.

As permitted by Section 408 of the Companies Act 2006 no income statement is presented by the Company.

Basis of consolidation

The consolidated accounts, which have been prepared under the historical cost convention and in accordance with EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS, incorporate the accounts of the Company and its subsidiaries, joint ventures and associates from the effective date of acquisition or to the date of deemed disposal.

The consolidated accounts of the Group include the assets, liabilities and results of the Company and subsidiary undertakings in which John Menzies plc has a controlling interest, using accounts drawn up to 31 December except where entities have non-coterminus year ends. In such cases, the information is based on the accounting period of these entities and is adjusted for material changes up to 31 December. Accordingly, the information consolidated is deemed to cover the same period for all entities throughout the Group.

RESTATEMENT

During the year the provisional fair value attributed to the 2011 acquisition of Swissport Menzies was finalised. The effect has been to increase the exceptional gain recorded in 2011 on the assets exchanged in the acquisition by £4.2m to £8.2m, increase the amortisation of intangible assets by £0.2m and to increase the exchange loss recognised in other comprehensive income by £0.3m to £8.8m. In the balance sheet the effect is to increase the carrying value of intangible assets by £3.7m to £108.8m. See notes 4 and 14.

The company balance sheet reflects a reclassification of £8.3m Treasury shares held at 31 December 2011 from Trade and other receivables to Shareholders' equity aligning with the historic treatment in the Group balance sheet.

Joint ventures and associates

A joint venture is an entity in which the Group holds an interest on a long-term basis and which is jointly controlled by the Group and one or more other venturers under a contractual agreement.

An associate is an undertaking, not being a subsidiary or joint venture, over which the Group has significant influence and can participate in the financial and operating policy decisions of the entity.

The Group's share of the results of joint ventures and associates is included in the Group Income Statement using the equity method of accounting. Investments in joint ventures and associates are carried in the Group Balance Sheet at cost plus post-acquisition changes in the Group's share of the net assets of the entity, less any impairment in value. The carrying values of investments in joint ventures and associates include acquired goodwill.

Revenue

Distribution - revenue is recognised on the weekly dispatched value of goods sold, excluding value-added tax. Product is sold to UK retailers on a sale or return basis. Revenue for goods supplied with a right of return is stated net of the value of any returns.

Aviation - cargo revenue is recognised at the point of departure for exports and at the point that the goods are ready for dispatch for imports. Other ramp, passenger and aviation-related services income is recognised at the time the service is provided in accordance with the terms of the contract. Revenue excludes value-added and sales taxes, charges collected on behalf of customers and intercompany transactions.

Property, plant and equipment

Property, plant and equipment is stated at cost, including acquisition expenses, less accumulated depreciation. Depreciation is provided on a straight-line basis at the following rates:

Freehold and long leasehold properties - over 50 years

Short leasehold properties - over the remaining lease term

Plant and equipment - over the estimated life of the asset between 3 and 20 years

Inventories

Inventories, being goods for resale and consumables, are stated at the lower of purchase cost and net realisable value.

Pensions

The operating and financing costs of pensions are charged to the income statement in the period in which they arise and are recognised separately. The costs of past service benefit enhancements, settlements and curtailments are also recognised in the period in which they arise. The difference between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the statement of comprehensive income.

Pension costs are assessed in accordance with the advice of qualified actuaries.

With regard to defined contribution schemes, the income statement charge represents contributions made.

Pension financing costs are shown separately in the income statement.

Taxation

Current tax is the amount of tax payable or recoverable in respect of the taxable profit or loss for the period.

Deferred tax is provided in full, using the liability method, on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax arising from the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss, is not recognised. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, the carry forward of unused tax losses and the carry forward of unused tax credits.

Deferred tax is determined using the tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Current and deferred tax is recognised in the income statement except if it relates to an item recognised directly in equity or in other comprehensive income, in which case it is recognised directly in equity or in the Group Statement of Comprehensive Income respectively.

Intangible assets

Goodwill

Business combinations from 1 January 2010 are accounted using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. Acquisition costs incurred are expensed and included in administrative expenses.

Goodwill arising on acquisitions before 26 December 2004 (the date of transition to IFRS) has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date.

Goodwill acquired is recognised as an asset and reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Any impairment is recognised in the income statement

Goodwill arising on the acquisition of joint ventures and associates is included within the carrying value of the investment.

Contracts

The fair value attributed to contracts at the point of acquisition is determined by discounting the expected future cash flows to be generated from that asset at the risk-adjusted weighted average cost of capital for the Group. This amount is included in intangible assets as "contracts" and amortised over the estimated useful life on a straight-line basis. Separate values are not attributed to internally-generated customer relationships.

Contract amortisation is business-stream dependent. At Distribution, publisher distribution contracts capitalised are not amortised due to the very long-term nature of the business in the UK. These contracts are, however, tested annually for impairment using similar criteria to the goodwill test. At Aviation and for non-publisher related contracts in Distribution, contracts are amortised on a straight-line basis over ten years as this period is the minimum time-frame management considers when assessing businesses for acquisition.

Computer software

Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly attributable with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of software development employees. Costs are amortised over their estimated useful lives, usually three to five years.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets acquired under finance leases are capitalised in the balance sheet at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is recorded in the balance sheet as a finance lease obligation. The lease payments are apportioned between finance charges (charged to the income statement) and a reduction of the lease obligations.

Rental payments under operating leases are charged to the income statement on a straight-line basis over applicable lease periods.

Trade receivables

If there is objective evidence that the Group will not be able to collect all of the amounts due under the original terms of an invoice, a provision on the respective trade receivable is recognised. In such an instance, the carrying value of the receivable is reduced, with the amount of the loss recognised in the income statement.

Cash and cash equivalents

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.

Foreign currencies

Foreign currency assets and liabilities of the Group are translated at the rates of exchange ruling at the balance sheet date. The trading results of overseas subsidiaries, joint ventures and associates are translated at the average exchange rate ruling during the year, with the exchange difference between average rates and the rates ruling at the balance sheet date being taken to reserves.

Any differences arising on the translation of the opening net investment, including goodwill, in overseas subsidiaries, joint ventures and associates, and of applicable foreign currency loans, are dealt with as adjustments to reserves. All other exchange differences are dealt with in the income statement.

Derivative financial instruments and hedging activities

The Group uses forward contracts and cross-currency swaps as derivatives to hedge the risk arising from the retranslation of foreign currency denominated items.

The Group has derivatives which are designated as hedges of overseas net investments in foreign entities (net investment hedges) and derivatives which are designated as hedges of the exchange risk arising from the retranslation of highly probable forecast revenue denominated in non-local currency of some of our overseas operations (cash flow hedges).

In all cases, the derivative contracts entered into by the Group have been highly effective during the reporting period, and are expected to continue to be highly effective until they expire. As a result, all derivatives have been recorded using hedge accounting, which is explained below.

All derivatives are measured at fair value, which is calculated as the present value of all future cash flows from the derivative discounted at prevailing market rates.

Changes in the fair value of the effective portion of net investment hedges are recorded in equity, and are only recycled to the income statement on disposal of the overseas net investment.

Changes in the fair value of the effective portion of cash flow hedges are recorded in equity until such time as the forecast transaction occurs, at which time they are recycled to the income statement. If, however, the occurrence of the transaction results in a non-financial asset or liability, then amounts recycled from equity would be included in the cost of the non-financial asset or liability. If the forecast transaction remains probable but ceases to be highly probable then, from that point, changes in fair value would be recorded in the income statement within finance costs. Similarly, if the forecast transaction ceases to be probable then the entire fair value recorded in equity and future changes in fair value would be posted to the income statement within finance costs.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Share capital

Ordinary shares are classed as equity. Where the Company purchases its own shares the consideration paid including any directly attributable incremental costs, is deducted from the equity attributable to the Company's equity holders until the shares are cancelled, reissued or disposed of.

Share-based payments

Equity-settled share-based payments are measured at fair value at the date of grant and recognised as an expense over the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest unless the options do not vest as a result of a failure to satisfy market conditions. Fair value is measured by use of a relevant pricing model.

USE OF ESTIMATES AND JUDGEMENTS

The preparation of the consolidated accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates will, by definition, seldom equal the related actual results particularly so given the prevailing difficult economic conditions and the level of uncertainty regarding their duration and severity.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The most important estimates and judgements are set out below.

- Intangible Assets

On the acquisition of a business it is necessary to attribute fair values to any intangible assets acquired (provided they meet the criteria to be recognised). The fair values of these intangible assets are dependent on estimates of attributable future revenues, margins and cashflows, as well as appropriate discount rates. In addition, the allocation of useful lives to acquired intangible assets requires the application of judgement based on available information and management expectations at the time of recognition.

- Impairment

IFRS requires companies to carry out impairment testing on any assets that show indications of impairment and annually on goodwill and intangibles that are not subject to amortisation. This testing involves exercising management judgement about future cashflows and other events which are, by their nature, uncertain.

- Retirement Benefits

The assumptions underlying the calculation of retirement benefits are important and based on independent advice. Changes in these assumptions could have a material impact on the measurement of the Group's retirement benefit obligations.

- Income Taxes

The Group is subject to income tax in numerous jurisdictions and significant judgement is required in determining the provision for tax. There are transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises provisions for tax based on estimates of the taxes that are likely to become due. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made.

EXCEPTIONAL ITEMS

Exceptional items are those material items which, by virtue of their size or incidence, are presented separately in the income statement to enable a full understanding of the Group's financial performance. These exclude certain elements of intangible asset impairment and amortisation, which are also presented separately in the income statement.

Transactions which may give rise to exceptional items include restructurings of business activities (in terms of rationalisation costs and onerous lease provisions) and gains or losses on the disposal of businesses.

DIVIDEND DISTRIBUTIONS

Final ordinary dividends are recognised as liabilities in the accounts in the period in which the dividends are approved by the Company's shareholders.

FINANCIAL RISK FACTORS

The Group is exposed to financial risks: liquidity risk, interest rate fluctuations, foreign exchange exposures and credit risk.

Definitions & Non-GAAP measures used by management

Management believes that the following non-GAAP or adjusted measures provide a useful comparison of business performance and reflect the way in which the business is controlled:

- Underlying profit before taxation is defined as profit before taxation, intangible amortisation and exceptional items.

- Underlying operating profit includes each division's share of pre-tax profit from joint ventures and associates, and excludes intangible amortisation and exceptional items.

- Underlying earnings per share is profit after taxation and non-controlling interest, but before intangible amortisation and exceptional items, divided by the weighted average number of ordinary shares in issue.

- Turnover includes revenue from subsidiaries, joint ventures and associates.

- Free cash flowis defined as the cash generated by the business after net capital expenditure, interest and taxation, before special pension contributions, acquisitions, disposals, cash raised, ordinary dividends and net spend on shares.

- Total debt to EBITDA ratio Total debt is net debt plus guarantees and excluding financial derivatives and preference shares. EBITDA is underlying operating profit plus depreciation and computer software amortisation.

- Interest coveris EBITA divided by external interest charge. EBITA is underlying operating profit plus computer software amortisation. External interest charge excludes net financial income/(charge) related to pensions.

2. SEGMENT INFORMATION

For management purposes the Group is organised into two operating divisions: Distribution and Aviation. These two divisions are organised and managed separately based upon their key markets. The Distribution segment provides newspaper and magazine distribution services across the UK along with marketing services. The Aviation segment provides cargo and passenger ground handling services across the world.

The information presented to the Board for the purpose of resource allocation and assessment of segment performance is focused on the performance of each division as a whole but also contains performance information on a number of operating segments within the Aviation division. The Board assesses the performance of the operating segments based on a measure of adjusted segment result before exceptional items and intangibles amortisation. Net finance income and expenditure are not allocated to segments as this type of activity is driven by the central treasury function. The Board does not monitor assets and liabilities on a divisional basis.

Segment information is presented in respect of the Group's reportable segments together with additional geographic and balance sheet information. Transfer prices between segments are set on an arm's length basis.

A reconciliation of segment pre-exceptional operating profit/(loss) to profit before tax is provided below.

* Pre-exceptional operating profit/(loss) is defined as operating profit/(loss) excluding intangible amortisation as shown in Note 4(b) and exceptional items but including the pre-tax share of results from joint ventures and associates.

Unallocated assets comprise deferred tax assets, cash and cash equivalents.

Unallocated liabilities comprise retirement benefit obligations, borrowings, current income tax liabilities and deferred tax liabilities.