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Mouchel Grp plc (MCHL)

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Thursday 28 October, 2010

Mouchel Grp plc

Preliminary Results

RNS Number : 1338V
Mouchel Group plc
28 October 2010
 



28 October 2010

 

Preliminary Results

For the year ended 31 July 2010

Mouchel Group plc (Mouchel or the Group): consulting and business services group - announcement of audited results for the year ended 31 July 2010.

 

Financial headlines

 
2010
2009
% change
Revenue
£632.6m
£740.6m
- 15%
Underlying operating profit1
 £41.2m
 £47.3m
-13%
Underlying operating margins1
      6.5%
6.4%
 
Underlying profit before tax and exceptional items
 £30.5m
     £40.1m
- 24%
Exceptional items
£(45.2)m
 £(53.6)m
 
Loss before tax
£(14.7)m
 £(13.5)m
-9%
Net bank borrowings
  £83.4m
 £101.3m
- 18%
Net cash generated from operations
£52.9m
£25.2m
+110%
Adjusted earnings per share1,2
     18.9p
      26.4p
-28%
Basic loss per share
   (12.1)p
   (11.7)p
 
Dividend per share3
      2.25p
     6.10p
 
Order book
£1,824m
£1,863m
 
Bidding pipeline
£2,171m
£2,163m
 

1 Underlying operating profit, underlying operating margins and adjusted earnings per share exclude exceptional items (including the annual amortisation of intangible assets arising from business combinations) - see note 3 for full details.

2 Adjusted earnings per share is calculated after adding back shares held by the employee share trusts to the weighted average number of shares and adjusting earnings for exceptional items (net of taxation).

3 Includes paid and proposed dividends in respect of the year.

 

Business headlines

·      Management restructuring, reduction in staff numbers and introduction of improved support systems providing full-year cost savings of more than £25m;

·      Commenced refinancing of banking facilities and lending banks are supportive of the process to complete by March 2011;

 

·      Board succession plans implemented1 after the year end, with David Tilston joining as Group Finance Director and Seamus Keating, Richard Rae and David Sugden appointed as Non-Executive Directors;

 

·      Strategic contract wins including Highways Agency (HA) managing agent contractor (MAC) contracts in Areas 1 and 13 and the appointment as preferred bidder for the Bournemouth Council integrated services partnership;

 

·      Entry into the Australasian market with two new highway maintenance contractor appointments (as preferred proponent) for Main Roads Western Australia;

 

·      Win rate has again been above the top end of our target range of one in three to two in five of all tenders by value; and

 

·      Continuing good visibility with forward order book of £1.8bn and bidding pipeline of £2.2bn.

 

Richard Cuthbert, Chief Executive of Mouchel Group plc, commented:

'Mouchel has faced some challenges in recent times. We have taken the tough decisions needed to ensure that we are operating appropriately in the current business environment and that we can maximise the benefits of a return to growth. Trading in the current year has started more slowly than expected and the immediate outlook remains uncertain. Whilst we expect to see some improvement in the second half of 2010/11 as cost savings impact, in these circumstances it is right that the Group takes a more cautious approach to performance through 2011 and perhaps beyond. However, the Coalition Government's policies together with our focused business strategy, our reliance on long-term contracts and our leading role in transforming essential services and in sustaining vital infrastructure all give us confidence in the medium- and long-term prospects for the Group.'

 

A presentation will be given to analysts at 9.15am today, Thursday  28 October 2010, at the offices of RBS, Hoare Govett,  250 Bishopsgate, London EC2M 4AA.  For further information please contact:

 

Mouchel Group plc                 

Richard Cuthbert, Chief Executive                                   ]
David Tilston, Group Finance Director                              ]          
01483 731731
Ian Parker, Marketing and Communications Director         ]                      

Finsbury          

Faeth Birch                                                                   ]           020 7251 3801

Charles Watenphul                                                        ]



1 See separate statement issued also on 28 October 2010

 

 

BUSINESS REVIEW


Overview

Mouchel has experienced a difficult year in 2009/10 and this has had an impact on the Group's financial performance.

 

In the early months of the financial year demand remained relatively strong for Mouchel's services but since the end of March 2010 - and in particular, following the change of Government in May - there has been an extensive reassessment of spending priorities and, in consequence, the postponement or reduction in scale of various programmes. The timing and impact of these measures has been particularly noticeable in the more discretionary areas of capital expenditure; for example in relatively small-scale highway improvement schemes and in school building projects.

 

Compared with last year, Mouchel's Regulated Industries business accounts for most of the Group's £108m reduction in revenue as a result of: 

·      a significant fall off of work in the Middle East;

·      Mouchel's withdrawal from rail re-signalling work, and the end of its bridge examination and assessment activities for Network Rail; and

·      a temporary drop in workload in the water business as a result of the transition from Asset Management Plan 4 (AMP) to AMP 5. 

The collapse of workload in the Middle East also accounts for most of the movement in underlying profit.

However, Mouchel's reliance on long-term relationships, and its focus on the delivery of essential services and vital infrastructure, has meant that the core business is being sustained and that medium- to long-term prospects for the business remain strong. Mouchel believes that pressure on the public sector to reduce costs will lead to greater demand for private sector support and that the drive for greater efficiency will present further opportunities for partnerships and collaboration. In addition, Mouchel's business in the privatised utilities sector is not subject to the same degree of pressure, with money being ring-fenced following recent regulatory reviews. As the water industry enters a new spending (AMP) cycle, prospects for Mouchel, one of Britain's largest consultants in this area, remain good.

 

The October 2010 Comprehensive Spending Review (CSR) sets out Government objectives for reduced expenditure across all departments (averaging 19 per cent) and outlines a number of underlying themes for how services might be delivered. It describes a desire to localise decisions on services and to improve transparency. There was also an emphasis on greater inclusion of the voluntary and community sector in delivering services. The CSR also outlined a shift in how services will be paid for, with a move towards simpler payment mechanisms and a greater emphasis on payments being based on results.

 

Increased competition within the public service markets in which Mouchel continues to trade has presented some additional challenges for the Group. In response, it has taken some decisive steps to improve medium-term resilience by restructuring its management resources, by reviewing its office portfolio and by reshaping its support functions to reflect changing market needs. The significant investment made in new systems over the past two years has facilitated this restructuring. However, this, together with asset impairment charges across the business and amortisation of intangible assets arising from business combinations, has resulted in exceptional costs of £45.2m, which includes £15.2m in the first half of the year for the Middle East business (£10m contract receivables impairment and £5.2m for restructuring). (Further details on exceptional items can be found in Note 3). In consequence, Mouchel is reporting a loss before tax of £14.7m for the financial year.  Given this performance and the tough short term outlook the Board has decided not to pay a final dividend for the year so as to conserve its resources to reduce debt and support commercial bidding activity, which is expected to yield longer term benefit for shareholders. The overall dividend per share for the year, after taking account of the interim dividend already paid, is therefore 2.25p (2009: 6.10p).  

 

Good progress has been made during the financial year to strengthen the medium- to longer-term resilience of Mouchel's business by improving contract win rates in Highways and Government and Business Services, by tackling the Middle East debt position, by improving cash management, and by refocusing its Management Consulting business.

Mouchel has again exceeded its target win rate of one-in-three to two-in-five of all tenders submitted, by value. This results from major highways wins in Highways Agency Areas 1 and 13; and in Western Australia, where it has been named preferred proponent for a highway maintenance contract in Perth and has, since the year end, been named as preferred proponent for the Mid-West & Gascoyne Regions tender. Alongside these wins was the outsourcing partnership with Bournemouth Borough Council, where the Group was named as preferred bidder in June 2010.

The restructuring of Mouchel's Management Consulting business is now complete and the business has reported a number of significant wins during the year, including its appointment to operate the Department of Health's Centre for Workforce Intelligence, a landmark commission that positions the business well for further expansion into the health sector.

In the Middle East, the Group's business operations have been stabilised and are now focused on Abu Dhabi. Discussions continue around the future of the business. Payments have been received from Dubai World, Mouchel's principal creditor in that region, in respect of a proportion of certified balances, and the Group continues to pursue other outstanding debts.

Mouchel has continued to strengthen its financial position, successfully delivering improvements in working capital, capital expenditure and procurement savings; and it has put in place new third-party bonding facilities at no extra cost to further improve the headroom of its main banking facilities. The Group has made a significant investment in new management systems during the past two years and the programme to integrate SAP into business operations is now substantially complete. This has already contributed to the efficiency improvements described previously and is expected to create further lasting benefits.

 

 

Segmental performance
Highways

Market overview

Mouchel has an established track record in the highways market and is considered to be a market leader in terms of technology maintenance and operations. It helps to deliver improvements throughout the whole life of a road network and is the leading consultant for the active management of traffic on motorways.

 

Mouchel's highways market can be divided into three principal customer markets, comprising:

·      national, strategic road networks in the UK (Highways Agency, Transport Scotland, Northern Ireland Roads Service and Transport for London;

·      strategic road networks overseas - in countries with mature economies and with similar operational needs to the UK; and 

·      local authority road networks in the UK.

Strategic road networks in the UK
As part of the CSR, the Government has announced that the Department for Transport (DfT) will reduce overall spending by 15 per cent in real terms, with savings of 21 per cent from its resource budget and an 11 per cent reduction in capital spending.

 

While the DfT has yet to announce more detail about its proposed cuts, the move towards technology-based improvements such as the HA's Managed Motorway programme will continue as this provides an economic alternative to motorway widening schemes and maximises use of the existing road asset. This presents an opportunity for Mouchel, which remains one of Britain's leading consultants in active management of traffic on strategic road networks.

 

Highways clients will continue to look at cost and efficiency savings through improved procurement models. As a leader in both technology management and maintenance contracts (known as TechMAC contracts) and Managing Agent Contractor (MAC) contracts, Mouchel is ideally positioned for these new opportunities.

As confirmed in the CSR, some targeted capital spending will continue. The £650m to £850m A5 cross-border scheme in north-west Ireland is the largest capital road scheme in the UK and is expected to continue in line with its current programme. Mouchel was appointed as designer for the scheme in 2007 and is continuing to deliver consultancy services on the project.

Local authorities

As a result of the CSR, local authorities will be required to make savings of 28 per cent in transport spending over the review period. Capital highways schemes have been reduced and new procurement will play a key part in this efficiency drive.

 

The Government has made it clear that it expects the private sector to play a greater role in public service delivery and Mouchel anticipates an increase in integrated highways services opportunities over the next few years. The Group has an established track record in the local authority highways market and has established JV partners to deliver the anticipated increase in integrated service contracts. When services are bundled Mouchel has a competitive edge, due to the Group's ability to provide a diverse range of services in house, including 'back-office' functions, property maintenance, technology and parking/civil enforcement, IT, finance and human resources.

Strategic road networks overseas
In Australia, the effects of the economic downturn have been less severe with government spending holding up well. Part of the Group's longer-term strategy has been to use the expertise gained through existing highway maintenance contracts in the UK to enter selected overseas markets where this expertise is in demand. As a result, Mouchel has been tracking the market in Australia over the past few years and has established a fully-integrated joint venture (JV) with Australian contractor, Downer, to address new opportunities in Western Australia.

Performance
Highways revenues were unchanged on last year at £254.6m and, in a challenging environment, underlying operating profits fell by only two per cent to £19.4m in 2009/10. This is due to a number of factors, most notably the fact that the impact of Government stimulus was not sufficient to offset lost business and re-tendered contracts at lower margins. However, the business did successfully address both its cost base in the core regional business and resolved a number of performance issues. The award of two HA MAC contracts (where Mouchel was already part incumbent in both) was particularly significant. Each contract was secured through a 50:50 JV with Enterprise, which means, in the case of Area 13, that Mouchel now has a larger share. (Previously it was undertaken through a JV with Amey, where the Group had only a 25 per cent interest.)

Mouchel's parking software business made good progress, although this was more than offset by the move into developing Mouchel's on-street parking business which has been slow to gain market traction.

 

The Highways business also incurred initial investment costs in its move into Australia - a move which has already yielded positive results with the Group being named as preferred proponent in a JV with Downer for the Metropolitan Integrated Service Arrangement (ISA) contract in Perth, Western Australia. The ISA is a new contract model whereby combined client/provider teams manage and maintain all road assets within the region. It covers asset management, network operations, maintenance delivery and business management.

The Perth Metropolitan ISA is the first of three ongoing tenders to provide road management and maintenance services as an integrated services provider with Main Roads, the government body responsible for all state-wide road assets in Western Australia. The approach taken by Western Australia is market-leading and is being watched by other states with interest. It is likely that some states will adopt a similar approach, providing DownerMouchel with further opportunities in the long term. Since the end of the financial year, Mouchel has also been named as preferred proponent for the Mid West & Gascoyne ISA in Western Australia. A third ISA tender, for the Kimberley region, has been submitted and the result of that competition will be announced later in the year.

 

Mouchel's leading role in the HA's Managed Motorways programme continued this year with the opening of the M6 hard-shoulder running scheme between junctions 4 and 5 (part of the 'Birmingham Box'). This provides an innovative and cost-effective way of increasing capacity by utilising motorway hard shoulders as additional running lanes during peak periods. Mouchel believes that similar schemes will be developed as a way of managing increasing traffic on the most congested sections of the network. In addition to reducing congestion, HA figures show that personal injury accidents have fallen by 35 per cent with no fatal or serious injury accidents occurring during times when hard-shoulder running is active.

The New Zealand Transport Agency has appointed Mouchel to provide strategic advice and support for the development of a hard-shoulder scheme on State Highway 1 between Ngauranga and Aotea Quay. A key part of Mouchel's role will be to transfer knowledge from the successful UK schemes to the teams in New Zealand, enabling local consultants and contractors to deliver the project.

The Group has been awarded contract extensions by Wiltshire County Council (from 1 June 2011 to 31 May 2012), by Westminster Council (from October 2010 to September 2011) and by the HA for its Project Support Framework (from 4 July 2010 to 3 April 2011).

Over the year, Mouchel's Highways business has secured contracts with an estimated value of £269m at a win rate of 58 per cent (by value).

Strategy/outlook

Mouchel will continue to focus on the managed services market, providing visibility of future income streams. The Group's long-term contracts and relationships, which are focused on the delivery of essential services and the maintenance of vital infrastructure, mean that its core business can be sustained through fluctuating economic conditions.

The Group's new HA MAC contract wins in Areas 1 and 13 began in July 2010 and will run for five years with potential extensions for another two years. Further opportunities in Areas 2 and 10 are expected to arise in 2011. In Scotland, Mouchel has been awarded a one-year extension to its North East operating company commission, which covers integrated management and operational delivery. A fourth generation of operating company contracts will be tendered in 2011 and the Group will look to maintain/increase its market share of these.

The Group anticipates an increase in local authority outsourcing as a result of the economic climate and is well placed to take advantage of these opportunities and to increase its penetration into local authority markets. It will target integrated network management and PFI opportunities. For example, Mouchel is currently short-listed to bid in JV with Carillion for a 25-year highway maintenance PFI contract for Sheffield and for a 10-year bundled services contract in Essex.

Mouchel will build on its recent success in the Australian highways network management market through consolidation and development of further opportunities, both in Australia and New Zealand.


Government and Business Services (GBS)


Market overview
Following the CSR, GBS clients will face cuts in central Government funding over the next four years. At the same time, the Government has made a strong commitment towards devolving greater financial responsibility to councils and removing a large number of ring-fenced budgets. This will provide councils with extra flexibility to manage the cuts in spending. Mouchel is confident that the outsourcing and service re-engineering required to meet these challenges provide significant prospects for growth, especially in view of the Group's recent development, following the acquisition and successful integration of HBS, the local authority business process outsourcing (BPO) specialist in August 2007, and the Hedra management consulting practice in March 2008.

Local government
There are 466 authorities covering England and Wales. Together they represent more than 50 million people and currently spend around £113bn a year on local services. They include county councils, metropolitan district councils, English unitary authorities, London boroughs, shire district councils and Welsh unitary authorities. The local government market is complex and fragmented, and historically there has been little joint procurement activity or common approaches across authorities. As a result, Mouchel has a wide range of service-based contracts, which include large multiple-service partnership contracts, single-service contracts and framework agreements.

The Government's proposals to tackle national debt mean that local authorities face deep budgetary cuts. In the short term the impact of these will be felt in more discretionary areas of spending, with a proposed 30 per cent cut in capital funded schemes. Mouchel's strategy of focusing on long-term managed service contracts has reduced its exposure to a fall in these schemes; but short-term revenue projections will inevitably be affected.

Despite these short-term challenges, the Group is optimistic about the medium- to long-term prospects within the local government market. There is already evidence of more local authorities looking to outsource services to the private sector as they seek efficiencies, service improvements and reduced costs. Mouchel is in a good position to provide support as it has a large number of long-term, large-scale local authority bundled service partnership contracts. There will be opportunities to support authorities who are yet to embrace outsourcing on any significant scale and others who may have outsourced single services already, but may now see further benefits of adopting bundled service arrangements.

There is now an unprecedented case for councils to share back-office support costs, and in many cases the realisation of benefits will be accelerated through the procurement of a strategic private sector partner. The introduction of Community or Place-based budgets also presents an opportunity for councils to share services with other organisations in the same locality.

Mouchel's development of its transformation capability in recent years, and the integration of these capabilities with its business and professional services, means that it is well positioned to support clients in the transformation of their whole organisation to achieve budget cuts.

Infrastructure and capital investment has been used by local authorities as the primary driver for regeneration and urban renaissance in recent years. A fall in public sector funding will move authorities away from such schemes. However, economic and social regeneration will remain key priorities. Mouchel will continue to grow its community regeneration proposition, which provides a delivery vehicle to solve the problems of unemployment, skills shortages, poor health, industrial restructuring and housing shortages. This is closely aligned to the plans for local enterprise partnerships (with the business sector taking an increasingly important role) as well as supporting the principles of localism.

 

Education
The total budget for Education has increased under the CSR, rising by £3.6bn in real terms to around £39bn. Despite this increase, only £15.8bn has been allocated for capital spending, representing a 60 per cent cut during the review period. The cancellation of the Building Schools for the Future Programme does present further opportunity for Mouchel as contractors no longer have responsibility for selecting their partners which makes it easier and cheaper for Mouchel to bid for work.

New Government policies seek to improve standards by giving parents more freedom in their choice of school, by giving schools more choice in how they operate, and by increasing the range of education providers. Free schools, promoted by parents and teachers, will be established and Education Trusts and Academy sponsors will increase the number of schools under their control. Within this new environment, Mouchel believes that schools will work together via federations and clusters to deliver broader educational services in a more efficient way. As more schools operate outside local government control, the role of local authorities will change.

These new groupings of schools create a demand for Mouchel's learning-led services and the Group anticipates that there will be a role for it in supporting, or delivering, a new operating model for the local authority education function. Mouchel has a successful track record both in the Academies programme and as a provider of school support services. Its existing experience, combined with its specialist consultancy expertise in local authorities and children's services, will position the Group favourably for future growth in this market, and for its planned expansion into further and higher education.

Mouchel supports schools with a full range of support services (in property and facilities management, ICT, finance, payroll and HR, training, procurement etc). Its understanding of the operations of schools and colleges allows it to identify and deliver operating efficiencies which will be important as revenue reduces. The Group anticipates opportunities to act in programme management roles for local authorities and groups of schools, and to bid for ICT contracts for new schools.

Blue light/emergency services
Under the CSR, there is to be a 14 per cent cut in police resource funding in real terms. Despite these cuts, there is a commitment to maintain front-line services, which means there will be a clear focus on reviewing terms and conditions of service, and making efficiencies in IT, back-office and procurement to improve productivity.

The blue-light sector remains some way behind many local authorities who have collaborated with the private sector to simplify business processes, automate their systems, and ensure that they are compatible and accessible. If it is to meet internal and external calls for savings and improvement, the sector will have to become more innovative, efficient, intelligence-driven and collaborative. Mouchel already works with 18 out of the 43 police services in England and Wales, and is therefore well placed to capitalise on this trend.

Performance
GBS saw underlying operating profit increase by 23 per cent to £15m (with revenues up three per cent at £231m). This was due to improved performance of the bundled service contracts, combined with the impact of efficiency measures across the business. Performance was offset slightly by some customers deciding to reduce certain areas of discretionary spend and by an adverse property market, particularly in the second half of the year.

During the year, GBS has developed its major partnerships in Lincolnshire, Milton Keynes, Middlesbrough, Bath and North East Somerset, Liverpool, Knowsley, Rochdale and Oldham; and sees the prospect of broadening these relationships in the future. By positioning itself for these additional opportunities, Mouchel has established the Group as one of the leading providers of bundled business process outsourcing services to local authorities in the UK. The prospects for new work in GBS are especially strong, reflecting the desire for local authorities to work with each other, alongside the private sector, to deliver services more efficiently and to reduce costs.

Mouchel has been appointed as preferred bidder for the 10-year contract with Bournemouth Council during the period. We will deliver ICT, property and revenues and benefits services, and anticipates further service transfers (which fall within the provisions of this incremental partnership) during the course of the contract. One of the most exciting aspects of this new relationship is that we will be working closely with the Council to deliver efficiencies and transformation across the whole Council. There is the potential of a five-year extension.

The partnership between Middlesbrough Council and Mouchel is now set to continue to 2016, following the Council Executive's decision to extend the contract by a further five years. The extension has been secured following extensive negotiations and represents a step-change to the existing contract terms.

The Group has also secured a position with North East Lincolnshire Council on its four-year framework contract in support of its economic wellbeing programme.

Over the year, Mouchel's GBS business has secured contracts with an estimated value of £238m at a win rate of 37 per cent (by value).


Strategy/outlook
The CSR indicates that local government will be given more freedom and more responsibility, and will increasingly focus on policy and commissioning rather than delivery. Mouchel will continue to explore how it can support existing customers by providing a wide basket of services, allowing it to deliver more for councils in terms of saving money and improving people's lives. Each of its large-scale partnership contracts has grown organically and most of Mouchel's clients are talking about further significant contract expansion plans.

Aligned with this approach, Mouchel will seek to extend its services into other areas, such as neighbouring councils, educational establishments, the health sector, police forces, local enterprise partnerships and other local public sector bodies. It will develop strong new propositions in economic development, adult care and sustainable communities, and will become more influential in the market.

Mouchel will target new business in its core bundled service market - choosing opportunities where it can develop true partnerships, transform services and add most value to clients.

The Group will also look to grow its business selectively in central government, challenging some of the more established players. It will target known client relationships and cross-over services and develop new partners where it needs complementary capability and knowledge. For example, it has recently partnered with A4E on a 'welfare to work' prospect (a Department for Work and Pensions scheme that helps unemployed people get back to work and break the cycle of benefit dependency). It will also target niche opportunities that play to its core strengths (such as pension management and administration).

The Government's changes to education policy have resulted in a fragmented market and a wider range of potential clients, each with a differing skills base and experience. Mouchel's focus will be to work with these new education providers using its existing knowledge and competencies in the sector and building on its portfolio of services from across the business.

 

 

Management Consulting

Market overview
Spending cuts in Central Government departments and across the public sector during the year have led to a downturn in the demand for consulting services. However, Mouchel anticipates a new climate of cost reduction, service transformation and performance improvement, which the Group's Management Consulting business is well-positioned to address.
 

Local government
With a changing political environment and a Government that has embarked on a radical agenda of change for all areas of the public sector, there are many challenges facing local government.  Mouchel is at the forefront of the change agenda, helping clients to manage costs, and supporting innovative change programmes. In Lincolnshire, it is assisting the County Council's 'Efficiency Programme' by providing change management through 'new ways of working' (developing more agile and flexible work strategies), increasing process efficiencies in its adult and social care programmes, and providing advice to improve procurement and sourcing strategy.

A key area of potential growth in this sector is through Community Budgeting, a pilot programme which will give communities more power to target spending on key local priorities. From April next year, the first phase of 16 areas, covering 31 councils and their partners, will be put in charge of 'community budgets', which bring together various central government funding strands to develop local solutions to local problems. Mouchel is involved in two of these pilot areas: Lincolnshire and Greater Manchester (through its partnerships with Oldham and Rochdale Metropolitan Borough Councils).


Health
The white paper 'Equity and Excellence: Liberating the NHS' calls for the abolition of strategic health authorities and primary care trusts. GP consortia will be given authority to commission local health services, while NHS trusts will become foundation trusts. Patients will be given greater access to, and control over, their health data; and there will be greater focus on outcomes, safety and patient experience. In addition to traditional health care provision, there is a new trend in the health market towards wider programmes dealing with social care and public health. An example is the National Healthy Schools Programme, which promotes the health and wellbeing of pupils and staff, and which Mouchel continues to manage.


Central government

Strategies are in development, with major Government departments currently drawing up their 'deficit reduction plans'. These are likely to include smaller departments, improved efficiency, leaner procurement, greater sustainability and rationalised estates. By leveraging its Group-wide capability, Mouchel can design innovative propositions to meet these strategies. Two recent examples are its 'estates rationalisation proposition' to analyse existing assets, recommend geographical and personnel integration, and assist with 're-commercialisation' of the redundant estate; and its 'sustainability proposition', which looks at improving both day-to-day environmental factors and the procurement process, and at increasing savings throughout departments.

With increased cuts to back-office spending, central and local government organisations may struggle to secure funding for ICT projects to support their transformation programmes. However, corporate document and records management solutions are increasingly being seen as a way to improve the efficiency and effectiveness of frontline services. Specific drivers include the rationalisation of office space, the introduction of new ways of working, and better use of information to provide improved quality of services for patients and citizens.

Performance
The general cut back in consulting expenditure had an adverse impact on the management consulting business, although it made progress in the health sector. The new management team cut costs and headcount and completed some low-margin and loss-making contracts in the year while winning new work on more favourable terms. The management consulting business has also been more closely integrated with the rest of Group. Gross margins improved as a result of these changes during the year and the business saw a 65 per cent increase in underlying operating profit to £3.8m, despite revenues declining by 25 per cent.

In March, Mouchel was appointed for a five-year commission to establish the Centre for Workforce Intelligence (CfWI) - an organisation commissioned by the Department of Health to determine its future health and social care workforce requirements.

The Group is also part of four of the six consortia chosen to bid for the construction of new health facilities via the new P21+ framework; and is an active member of the Computer Sciences Corporation (CSC) Alliance, which delivers the NHS' National Programme for IT across northern England. The CSC Alliance delivers computer systems and services that improve ways in which patient information is stored and accessed.

Mouchel's ability to compete head-to-head with the major consulting businesses is also evident from its recent success in the Office of Government Commerce Buying Solutions tender (previously known as the 'Catalist' framework). This is the main channel for Government procurement of consulting and ICT services. Mouchel is on 12 out of 23 lots tendered across the various frameworks - the second highest number awarded to an individual provider.

In spite of the challenging market conditions, the Group secured contracts to the value of £85m at a win rate of 55 per cent (by value).


Strategy/outlook
Despite the uncertain outlook for consultancy support in central and local government, Mouchel will continue to benefit from key long-term contracts and from its expertise in transforming the way assets and services are funded, managed and delivered. Given the breadth of its service offer, the Group believes that, although it faces challenges in the short term, its prospects in the medium to long term remain healthy.

Building on its complementary activities with GBS (particularly in providing services to Lincoln, Milton Keynes and Bath), Mouchel's management consulting business aimsto penetrate the local government market further, providing cost reduction programmes, procurement, business processing improvement and outsourcing. The potential for community budgets will provide the opportunity to work with a range of local third-party organisations.

The central government market is expected to present fewer prospects to management consultants in the next financial year. However, there are opportunities in Health and Education, and within the Department of Work and Pensions, which the Group plans to pursue. This is a rapidly changing market and, while Mouchel remains cautious, it will continue to pursue those outsourcing and service contracts that match its strengths.

Health represents a significant opportunity for Mouchel's management consulting business. Building on its long-term work with the CSC Alliance, the CfWI and Healthy Schools, there is a real opportunity for the Group to influence and deliver within this market, particularly in areas of health and wellbeing, performance improvement and cost cutting.

Private-sector utility companies offer an alternative market that is not under the same financial pressures as the public sector. Mouchel will build on its engineering and operational experience in regulated industries and its extensive client relationships to offer advisory services to water and electricity companies to help them with their performance improvement and cost reduction processes.


Regulated Industries

Market overview
Mouchel's Regulated Industries (RI) business operates in the Water, Energy, Environment and Rail sectors and also includes Mouchel's business in the Middle East. The Group is the UK's third largest water business and one of the UK's leading gas design businesses. The RI markets are heavily driven by legislation and the regulators - the Office of the Water Services (Ofwat), the Office of Gas and Electricity Markets and the Office of the Rail Regulator - who determine spend on asset base and outputs required.

There is a trend in the RI market towards price-driven procurement and each sector is turning to technology to improve efficiencies and reduce costs. Mouchel believes it is ahead of its competitors in this regard.

Utilities (Water and Energy)
In April 2010, Ofwat determined spending of £22bn for Asset Management Period 5 (AMP5) on water and sewerage by 2015. This provides a significant opportunity for Mouchel, which delivers most of its services to water and sewerage companies through long-term frameworks. It is currently year one of the AMP5 cycle and peak spend is planned for years two and three, commencing April 2011 and 2012.

In 2011, the responsibility for most private gravity sewers and lateral drains will transfer to water and sewerage companies, doubling the length of mains to be maintained by them. Mouchel has already widened its traditional consultancy services to include operational and maintenance activities in order to take advantage of this opportunity.

In the past five years, there has been an increasing focus on the UK's natural gas storage capabilities and Mouchel's work in this field is increasing. Its engineering services include the design of major infrastructure projects, with an increasing emphasis on developing its project services offering.

Rail
In 2008/09, Mouchel substantially withdrew from its operational work within Network Rail. Mouchel's strategy in Rail is to concentrate on London Underground's committed tube signalling and power upgrades, including the Jubilee and Northern Line Upgrade Project and the Sub Surface Railway (SSR) programme, together with aspects of Network Rail's core funded programme. Over the past six months, the SSR upgrade programme has provided significant success for Mouchel's rail signal design services.

Engineering and Environment
During the course of the Spending Review period, the Department for Environment, Food and Rural Affairs will reduce resource spending by 29 per cent and capital spending by 34 per cent. A 15 per cent efficiency saving will be made in the procurement strategy for flood and coastal defences and this will be reinvested into safeguarding and enhancing protection for people and property. This presents an opportunity for Mouchel to deliver cost-effective flood alleviation and coastal defence schemes.


Performance
Regulated industries' turnover declined by £93m and underlying operating profit by £10.1m to £87.6m and £2.9m respectively, with margins more than halving to 3.3 per cent. This fall is primarily explained by the sharp decline in Middle East activities where turnover reduced by more than 70 per cent. The water related business, while maintaining margin, saw both turnover and profitability decline by approximately 20 per cent due to a temporary reduction in workload during the transition from AMP4 to AMP5. However, Mouchel's reduced rail activities returned to profit with a focus on higher value consultancy activities following the withdrawal from loss making re-signalling work.

 

Utilities (Water and Energy)
Mouchel is the third largest provider of consultancy services to the UK water sector, working with nearly every water and sewerage company in the UK. This year, it has consolidated this position by securing appointments to new and extended frameworks in AMP5 to the value of £100m (over five years). Wins include contracts with United Utilities (as part of KMI Plus - the joint venture with Murphy Group, Interserve Project Services and Kier Construction); Yorkshire Water; Wessex Water, and South West Water. In addition, it has claimed a significant share of the market to prepare surface water management plans. These are a regulatory requirement following the Pitt Review and new legislation under the Flooding Regulations 2009 and Water Management Act 2010.

UK Water Industry Research (which coordinates research for UK water operators), has appointed Mouchel to lead an industry-wide review of the case for smart metering in the water industry. The Government has announced its smart meter initiative for the energy sector and confirmed the target of universal metering across the UK for 2020. Demand for metering services will provide significant growth opportunities for Mouchel. 

Rail
The past year has seen expansion into new markets for Mouchel's rail business, following its exit from the former mainline operational business. Focusing on its two principal market areas of multi-disciplinary design and project delivery, the rail business has made progress in widening its customer base within the rail industry to include Network Rail's contracting supply chain, train operating companies and local authorities.

Engineering and Environment
By combining Mouchel's complementary engineering and environment teams, the Group has developed a business where its engineers design solutions and its environmental, land and planning teams deliver the statutory consents. The result is a multi-disciplinary team capable of managing major infrastructure projects for clients.

Over the year, the Group has secured contracts in the Regulated Industries sector to the value of £168m at a win rate of 55 per cent (by value).

Strategy/outlook
Mouchel's strategy is to consolidate and if possible improve on its current position as one of the top three water consultants in the UK, while increasing its client base within AMP5. It intends to drive its water operations business into metering and private sewers in line with client needs.

Advances in technology are vital to the water and energy industries and Mouchel will continue to play a key role in driving innovation in technology.  In addition, Mouchel has begun to undertake commissions for large commercial and industrial consumers of energy in the UK, concentrating on energy efficiency and the appropriate use of natural gas resources.

Mouchel's strategy is to develop an integrated engineering and environment business that delivers multi-disciplinary schemes in a sustainable manner for its clients. Mouchel will focus on delivering opportunities from its framework contracts by building alliances with its partners.


People

In 2009/10, the company reduced its workforce by approximately eight per cent to 10,210 (at 31 July 2010). Since the financial year-end, this figure has been cut by a further four per cent (at 31 October 2010)2 as a result of a substantial management restructuring exercise. This rationalisation has involved a redesign of the management grades to widen levels of responsibility and extend spans of effective control so that, while it was necessary to make a proportion of management roles redundant, prospects for the resulting management team remain healthy within a leaner and fitter organisation.

In addition, Mouchel is continuing to review the way in which it provides core support functions to the business and expects to make significant improvements in the cost effectiveness of these services within the first half of 2010/11.

2 Figure based on Oct 2010 headcount projection

 

Board

A number of changes have been made to the Board, both during the financial year and more recently, as part of the Group's planned succession arrangements.

On 2 June 2010, Lynton Barker stood down as a Non-Executive Director of Mouchel. Lynton joined the Mouchel Board in April 2008 following Mouchel's acquisition of Hedra Group plc, of which he had been Chairman.

Kevin Young, who had been Group Finance Director for Mouchel since 1998, stood down from the post of  Group Finance Director on 31 August 2010. David Tilston, who joined Mouchel on 13 September 2010 as Group Finance Director, has held a number of senior financial posts and has strong industry experience, having worked with Amec plc, Atkins, British Energy and Balfour Beatty.

Three new Non-Executive Directors will join the Mouchel board during the current financial year. They are: Richard Rae, David Sugden and Seamus Keating. Richard and Seamus will join on 4 November 2010; David on 1 January 2011.

Seamus will become chairman of the Audit Committee immediately, in place of Ian Knight who will step down from the Board on 1 September 2011. Rodney Westhead will step down following the Group's AGM on 31 January 2011, and Sir Michael Lyons will succeed Rodney as Senior Independent Director, in so doing relinquishing his chairmanship of the Remuneration Committee. Debbie Hewitt will take up the chair of the Remuneration Committee.

The Group has issued a separate statement on these appointments.

 

FINANCIAL REVIEW

Order book and pipeline
At 31 July 2010 the Group's forward order book was £1.8bn (2009: £1.9bn), demonstrating Mouchel's continuing good visibility of future workload. The order book includes more than 500 clients across all the Group's core sectors, with the largest clients including the Highways Agency; GBS partnership authorities (Lincolnshire County Council, Milton Keynes, etc); Transport for London; Main Roads; the government body responsible for all state-wide road assets in Western Australia; and a number of water utility companies (United Utilities, Severn Trent, Thames etc).

Mouchel's bidding pipeline of near-term opportunities (actual tenders being prepared, decisions awaited and anticipated extensions to existing contracts) stands at £2.2bn, equal in value to that in July 2009. The pipeline similarly includes opportunities from all sectors, including a further highway management opportunity in Western Australia; managed service opportunities with UK water companies; and strategic bids in Sheffield, Essex and Edinburgh.

Mouchel targets a win rate in the range of one-in-three to two-in-five, by value. This year Mouchel has again achieved a win rate of above the top end of this range. This has resulted from some significant wins with the HA and Main Roads Western Australia, together with a large number of AMP5 framework contract appointments in the water sector.

Cash flow and working capital
At the operating cash flow level, the net cash generated from operations before exceptional items was £70.5m for the year versus £32.8m for the previous year, with equivalent annual cash conversion ratios of 171 per cent and 69 per cent respectively. This improvement was driven by a reduction in working capital of £18.1m resulting from a combination of targeted UK cash flow improvement plans and a 15 per cent reduction in turnover. This compared with an increase in 2009 of £28.4m which was largely as a result of gross working capital tied up in the Middle East.

£17.9m of the cash generated from operations in 2010 has been used to reduce the net bank debt from £101.3m at the beginning of the year to £83.4m at 31 July 2010. The balance of the cash generated was consumed by exceptional costs of £17.6m (2009: £7.6m) relating to this year's charges and amounts provided for in 2009; net interest, including interest rate swap payments of £9.3m (2009: £6.5m); and capital expenditure of £10.6m (2009: £25.3m), which was lower due to completion of the corporate information system implementation during 2010. The remainder, mainly relating to dividends and pension deficit funding, was at similar levels to 2009.

Banking facilities
During the year the Group's credit facilities were amended and restated. As at 31 July 2009, the facilities were £125m in the form of revolving credit facilities and £65m term loan, in the aggregate £190m provided collectively by Royal Bank of Scotland, LloydsTSB and Barclays. The term loan is due for repayment on 31 October 2012. The revolving credit facilities reduce by £10m in March of each year (which commenced in March 2010), with £30m expiring on 1 August 2012 and £65m on 31 October 2012. As at 31 July 2010, therefore, the credit facilities were £180m.

Interest is charged at LIBOR plus a margin. The margin ranges from 0.65 per cent to 3.65 per cent, adjusted according to the ratio of net borrowings to earnings before interest, taxation, depreciation and amortisation.

The directors recognise that the current trading environment and short-term outlook provides some challenges to Mouchel. However, as set out in the business review, the directors are confident that they have taken decisive action to secure the long-term prospects of the Group, one of which is the significant restructuring to ensure that the cost base is in line with revenue expectations. The directors are therefore satisfied that there is sufficient available headroom in the existing banking facilities to support the current business for the foreseeable future.

As previously announced, the Board has commenced refinancing its principal banking facilities and its lending banks are supportive of the process to complete such an exercise on appropriate terms by the time of Mouchel's interim results are announced in March 2011.

It is anticipated that, as a result of current market conditions, the cost associated with any re-financed facilities will be higher than is currently the case.

Taxation
The effective rate of tax on profit before tax and exceptional items was 30.4 per cent, compared with 26 per cent for the previous year with the majority of the increase resulting from the change in rate on deferred tax assets and liabilities from 28 per cent to 27 per cent, with effect from 1 April 2011. The remaining difference between the effective rate of tax and the statutory rate of 28 per cent reflects the benefit of additional reliefs and research and development tax credits partly offset by the normal level of disallowable expenditure.

 

Pensions
The Group currently operates three main defined benefit pension schemes; namely, the Mouchel Superannuation Fund (MSF), the Mouchel Staff Pension Scheme (MSPS) and the Mouchel Business Services Limited Pension Scheme. The Group also has Admitted Body status in the Teesside pre-funded defined benefit scheme. Approximately 13 per cent of employees are members of one or other of these schemes. All remaining employees who contribute to a pension are members of the Group's defined contribution schemes.

The Group accounts for all four defined benefit schemes under IAS 19, Employee Benefits. The IAS 19 charge for the year was £6.6m compared with £7.1m last year. The decrease was attributable to a £1.3m reduction in the current service cost and a £0.8m adverse movement in the financing element of the charge. The charge continues to benefit from the changes to the MSF and MSPS schemes in 2006/07, whereby most members in the non-public sector sections of the two schemes moved from a final salary arrangement to a career average revalued earnings (CARE) basis for the calculation of their pension benefits.

At 31 July 2010, the total deficit under IAS 19 was £53.1m, compared with £60.3m at 31 July 2009. The movement in the deficit compared with a year ago reflects actuarial experience in the intervening period, principally increased asset values partially offset by increased liabilities arising from a reduction in the discount rate applied to the liabilities from 6 per cent at 31 July 2009 to 5.4 per cent at 31July 2010.

The Group has decided that the current pension arrangements must be changed and has therefore begun a process of consultation with scheme members that is expected to lead to a restructuring of its pension arrangements. The proposals involve the closure of the defined benefit schemes to future accrual for non-public sector members and a reduction in the overall employer contribution to the defined contribution pension schemes.

(Loss)/Earnings per share
Adjusted earnings per share decreased from 26.4p to 18.9p.  Adjusted earnings per share is calculated after adding back shares held by the employee share trusts to the weighted average number of shares. Earnings are adjusted to exclude amortisation of intangible assets arising from business combinations, impairment of intangible assets arising from business combinations and other exceptional items (net of taxation). Basic loss per share increased from 11.7p to 12.1p.

Dividends
The Group does not intend to pay a final dividend (2009: 3.85p)per ordinary share.  The Board plans to resume dividend payments once improved performance, on the back of increased demand for its services, has become firmly established.

Outlook

While demand remains satisfactory in many areas, some of the Group's services have been affected by measures taken by the new Government to address the budget deficit and by related cutbacks in the local authority market.  Our focus, therefore, is on reducing our costs and conserving our cash resources.

 

The full benefit of our most recent cost reduction measures will impact during the second half of 2010/11 and we will continue to monitor our cost base, taking further actions as necessary to control operating costs.  In parallel, the Board has commenced refinancing its principal banking facilities and its lending banks are supportive of the process to complete such an exercise on appropriate terms by the time our interim results announcement is made in March 2011. The Group's renewed focus on cash generation and the efficient management of working capital will further strengthen our financial position.

Alongside these steps our attention remains firmly fixed on our clients and on helping them to maintain the highest possible levels of service to their customers and end-users. In spite of the downturn we continue to enjoy a significant level of secured workload and our expertise in tackling the challenges involved in providing public services more efficiently creates new opportunities as prospective clients formulate their plans for service delivery in the prevailing public sector economic climate. 

Mouchel has faced some challenges in recent times. We have taken the tough decisions needed to ensure that we are operating appropriately in the current business environment and that we can maximise the benefits of a return to growth. Trading in the current year has started more slowly than expected and the immediate outlook remains uncertain. Whilst we expect to see some improvement in the second half of 2010/11 as cost savings impact, in these circumstances it is right that the Group takes a more cautious approach to performance through 2011 and perhaps beyond. However, the Coalition Government's policies together with our focused business strategy, our reliance on long-term contracts and our leading role in transforming essential services and in sustaining vital infrastructure all give us confidence in the medium- and long-term prospects for the Group.

On behalf of the Board

 

Richard Cuthbert                                                                     David Tilston

Chief Executive                                                                          Group Finance Director

28 October 2010



Consolidated income statement (audited)

For the year ended 31 July 2010

 


Notes

Results
before
exceptional
items
2010
£000

Exceptional
items1
2010
£000

Total
2010
£000

Results
before
exceptional
items
2009
£000

Exceptional
items1
2009
£000

Total
2009
£000

Continuing operations:








Revenue

2

632,616

 -

632,616

740,550

 -

740,550

Cost of sales


(522,227)

 -

(522,227)

(616,370)

 -

(616,370)

Gross profit


110,389

 -

110,389

124,180

 -

124,180

Administrative expenses


(69,205)

(45,229)

(114,434)

(76,855)

(53,562)

(130,417)

Operating profit/(loss)

2

41,184

(45,229)

(4,045)

47,325

(53,562)

(6,237)

Interest receivable


235

 -

235

1,565

 -

1,565

Finance costs


(10,918)

 -

(10,918)

(8,834)

 -

(8,834)

Profit/(loss) before tax


30,501

(45,229)

(14,728)

40,056

(53,562)

(13,506)

Taxation

4

(9,284)

10,552

1,268

(10,401)

10,916

515

Profit/(loss) for the year


21,217

(34,677)

(13,460)

29,655

(42,646)

(12,991)









Basic and diluted loss per share

6



 (12.1)p



(11.7)p

 

 

 

 

 

Consolidated statement of comprehensive income (audited)

For the year ended 31 July 2010



Notes

2010
£000

2009
£000

Loss for the year



(13,460)

(12,991)






Differences on exchange



1,037

(1,350)

Changes in fair value of cash flow hedges (interest rate swaps)



(3,367)

(4,699)

Actuarial loss on pension scheme valuations


12

(689)

(34,036)

Deferred tax on actuarial movement in pension scheme valuations


7

186

7,203

Net losses not recognised in the Consolidated Income Statement



(2,833)

(32,882)

Total recognised loss for the year



(16,293)

(45,873)

 

1 Exceptional items are disclosed in note 3. 

Consolidated balance sheet (audited)

As at 31 July 2010

 



Notes

2010
£000

2009
£000

ASSETS





Non-current assets





Goodwill



109,717

109,717

Other intangible assets



60,096

60,538

Property, plant and equipment



16,913

24,769

Deferred tax assets


7

26,524

28,739




213,250

223,763






Current Assets





Trade and other receivables



141,061

183,033

Cash and cash equivalents


11

45,376

52,426




186,437

235,459

LIABILITIES





Current liabilities





Borrowings


8

(736)

(2,153)

Trade and other payables



(118,463)

(128,509)

Current tax liabilities



(12,253)

(8,909)

Retirement benefit obligations


12

(719)

(857)




(132,171)

(140,428)






Net current assets



54,266

95,031






Non-current liabilities





Borrowings


8

(125,978)

(150,764)

Trade and other payables



(157)

(1,404)

Derivative financial Instruments


8

(7,729)

(4,362)

Provision for liabilities and charges


9

(28,983)

(23,298)

Deferred tax liabilities


7

(8,347)

(12,325)

Retirement benefit obligations


12

(52,342)

(59,430)




(223,536)

(251,583)






Net assets



43,980

67,211






EQUITY





Share capital



280

280

Share premium



27,853

27,853

Other reserves



10,943

13,214

Retained earnings



4,904

25,864

Total equity



43,980

67,211

 

 



Consolidated cash flow statement (audited)

For the year ended 31 July 2010

 



Notes

2010
£000

2009
£000

Cash flows from operating activities





Cash generated from operations before exceptional costs


10

70,514

32,801

Exceptional costs



(17,580)

(7,585)

Cash generated from operations 


10

52,934

25,216

Interest element of finance lease payments



(24)

(46)

Interest element of other loan repayments



(105)

(193)

Taxation refunded/(paid)



2,144

(4,192)

Net cash generated from operating activities



54,949

20,785






Cash flows from investing activities





Investment in joint venture entities



 -

(20)

Proceeds from sale of property, plant and equipment



 -

9,500

Purchase of property, plant and equipment



(2,083)

(14,953)

Purchase of intangible assets - software and assets in the course of construction



(8,529)

(10,344)

Special contributions to defined benefit pension schemes



(7,915)

(8,310)

Interest received



235

1,565

Net cash used in investing activities



(18,292)

(22,562)






Cash flows from financing activities





Net proceeds from issue of ordinary share capital



 -

674

Sale of own shares by employee share trusts



36

18

Dividends paid to shareholders


5

(6,770)

(7,184)

Loan facility (repaid)/drawn down, net of loan issues costs



(26,103)

17,656

Other loan payments



(1,171)

(1,172)

Loan (to)/repaid by related party



(191)

95

Finance lease principal payments



(153)

(153)

Finance costs paid



(9,455)

(7,856)

Net cash (used in)/generated from financing activities



(43,807)

2,078






Effects of exchange rate changes



100

333






Net (decrease)/increase in cash and cash equivalents



(7,050)

634

Cash and cash equivalents at 1 August



52,426

51,792

Cash and cash equivalents at 31 July


11

45,376

52,426

 

 

  

Consolidated statement of changes in equity (audited)

As at 31 July 2010

 




Share
Capital
£000

Share
Premium
£000

Other
Reserves
£000

Retained
Earnings
£000


Total
£000

Balance as 1 August 2008


279

27,180

22,379

69,052

118,890









Comprehensive income







Loss for the year


 -

 -

 -

(12,991)

(12,991)

Other comprehensive income







Actuarial loss on pension scheme valuations


 -

 -

 -

(34,036)

(34,036)

Deferred tax on pension scheme valuations


 -

 -

 -

7,203

7,203

Changes in fair value of derivatives designated as cash flow hedges

 -

 -

(4,699)

 -

(4,699)

Currency translation differences


 -

 -

(1,350)

 -

(1,350)

Total other comprehensive income


 -

 -

(6,049)

(26,833)

(32,882)

Total comprehensive income


 -

 -

(6,049)

(39,824)

(45,873)

Transactions with owners







Employee share option schemes:








- proceeds from shares issued


1

673

 -

 -

674


- sale of own shares by employee share trusts


 -

 -

96

 -

96

Loss on sale of own shares held in employee share trusts


 -

 -

 -

(78)

(78)

Share based payments


 -

 -

 -

686

686

Release of revaluation reserve on sale of property


 -

 -

(3,212)

3,212

 -

Dividends


 -

 -

 -

(7,184)

(7,184)

Balance as 31 July 2009


280

27,853

13,214

25,864

67,211









Balance as 1 August 2009


280

27,853

13,214

25,864

67,211









Comprehensive income







Loss for year


 -

 -

 -

(13,460)

(13,460)

Other comprehensive income







Actuarial loss on pension scheme valuations


 -

 -

 -

(689)

(689)

Deferred tax on pension scheme valuations


 -

 -

 -

186

186

Changes in fair value of derivatives designated as cash flow hedges

 -

 -

(3,367)

 -

(3,367)

Currency translation differences


 -

 -

1,037

 -

1,037

Total other comprehensive income


 -

 -

(2,330)

(503)

(2,833)

Total comprehensive income


 -

 -

(2,330)

(13,963)

(16,293)

Transactions with owners







Employee share option schemes:








- sale of own shares by employee share trusts


 -

 -

59

 -

59

Loss on sale of own shares held in employee share trusts





(23)

(23)

Share based payments


 -

 -

 -

(204)

(204)

Dividends


 -

 -

 -

(6,770)

(6,770)

Balance as 31 July 2010


280

27,853

10,943

4,904

43,980

 

 

 

Notes to the condensed preliminary financial statements (audited)

For the year ended 31 July 2010

 

1              Basis of preparation

This condensed preliminary financial information, which is audited for the year ended 31 July 2010, has been extracted from the Annual Report and prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority.  It has also been prepared in accordance with the accounting policies the Group is adopting in its 2010 Annual Report and unless stated are consistent with those adopted in the consolidated financial statements for the year ended 31 July 2009. These accounting policies are based on the EU-adopted International Financial Reporting Standards (IFRS's) and International Financial Reporting Interpretations Committee (IFRIC) interpretations adopted by the Group for the year ended 31 July 2010.

This condensed preliminary financial information does not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006.  Comparative figures for the year ended 31 July 2009 have been extracted from the Group Report and Accounts, on which the auditors gave an unqualified opinion and did not include a statement under section 498 of the Companies Act 2006.  The Group Report and Accounts for the year ended 31 July 2009 have been filed with the Registrar of Companies. 

The condensed preliminary financial information has been prepared under the historical cost convention except for the following items: land and buildings are valued at deemed cost and share based payments, cash flow hedges and retirement benefit obligations are fair valued.

The financial statements have been prepared on a going concern basis.

 

The directors recognise that the current trading environment and short term outlook provides some challenges to Mouchel. However, as set out in this annual report, the directors are confident that they have taken a number of actions to secure the long term prospects of the Group, one of which is the significant restructuring to ensure that the cost base is in line with revenue expectations. The directors are therefore satisfied that there is sufficient available headroom in the existing banking facilities to support the current business for the foreseeable future.

 

As previously announced, the Board has commenced refinancing its principal banking facilities and its lending banks are supportive of the process to complete such an exercise on appropriate terms  by the time of our interim results announcement in March 2011.

The Group is currently in full compliance with the financial covenants contained in its borrowing agreements. However, whilst the Group is satisfied with the progress being made and fully expects to be able to conclude a satisfactory refinancing this timetable is not wholly under the Group's control. As the Group's forecasts show expected covenant breaches in the short term, in the absence of a refinancing, the Group will be dependent on the existing lenders either waiving the covenant tests or not exercising their right to demand immediate repayment of those facilities and continuing to make the full amount of those facilities, including undrawn amounts, available until their maturity.

 

 As a result the directors are making appropriate disclosure, as required by accounting standards, to indicate the existence of a material uncertainty which may cast significant doubt about the Company's and the Group's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Company or Group were unable to continue as a going concern as the Directors do not believe that this is required.

 

The unqualified audit report includes an emphasis of matter in this respect. 

 

Changes to accounting policies

The group has adopted the following accounting standards in the period which are mandatory for the financial year ended 31 July 2010:

IAS 1 (revised), 'Presentation of financial statements'. The revised standard prohibits the presentation of items of income and expenses (that is 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All 'non-owner changes in equity' are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The Group has elected to present two statements: an income statement and a statement of comprehensive income. The condensed preliminary financial statements have been prepared under the revised disclosure requirements.

IFRS 8, 'Operating segments'. IFRS 8 replaces IAS 14, 'Segment reporting'. It requires a 'management approach' under which segment information is presented on the same basis as that used for internal reporting purposes. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Executive Directors. The disclosure under the revised standard is set out in Note 2.

 

New accounting standards and amendments

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year ended 31 July 2010, but do not have a material impact on the group's results:

IFRS 2 (amendment), 'Share-based payment; Vesting conditions and cancellations'.

IAS 32 (amendment), 'Financial instruments: Presentation'.

IFRIC 13, 'Customer loyalty programmes'.

IFRIC 15, 'Agreements for the construction of real estate'.

IFRIC 16, 'Hedges of a net investment in a foreign operation'.

IAS 39 (amendment), 'Financial instruments: Recognition and measurement'.

IFRS 3 (revised), 'Business combinations' and consequential amendments to IAS 27, 'Consolidated and separate financial statements', IAS 28, 'Investments in associates' and IAS 31, 'Interests in joint ventures',

IFRIC 17, 'Distributions of non-cash assets to owners'.

The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 August 2009 and have not been early adopted:

IFRS 2 (amendment), 'Share-based payment; Group cash settled share based payment transactions' - effective for annual periods beginning on or after 1 January 2010.

IFRIC 18, 'Transfers of assets from customers', effective for annual periods beginning on or after 31 October 2009.

 

2      Segmental analysis

The chief operating decision-maker has been identified as the Executive Directors. The Executive Directors review the group's internal reporting in order to assess performance and allocate resources. The Group has determined the operating segments based on these reports.

The Executive Directors assess the performance of the operating segments based on a measure of adjusted earnings before interest, tax and amortisation ('Underlying operating profit'). This measurement basis also excludes exceptional items from the operating segments, such as restructuring costs and impairments when the impairment is the result of an isolated, non-recurring event. Interest income and finance costs are not included in the result for each operating segment.

Analysis of results by business segment is as follows:

2010


Highways
£000

Government
and Business
Services
£000

Management
Consulting
£000

Regulated
Industries
£000

Total
Group
£000







Revenue

254,567

231,271

87,639

632,616







Underlying operating profit

19,422

15,021

3,847

2,894

41,184

Restructuring costs and asset impairment charges

(7,268)

(8,194)

(3,648)

(17,390)

(36,500)

Amortisation of intangible assets arising from business combinations

(2,132)

(1,337)

(2,823)

(504)

(6,796)

Segment operating profit/(loss)

10,022

5,490

(2,624)

(15,000)

(2,112)

Other Group exceptionals





(1,933)

Operating loss





(4,045)

Interest receivable





235

Finance costs





(10,918)

Loss before tax





(14,728)

Taxation





1,268

Loss for the year





(13,460)

 

2009


Highways
£000

Government
and Business
Services
£000

Management
Consulting
£000

Regulated
Industries
£000

Total
Group
£000







Revenue

255,824

224,981

180,925

740,550







Underlying operating profit

19,824

12,244

2,301

12,956

47,325

Restructuring costs and asset impairment charges

 -

 -

(4,740)

(28,134)

(32,874)

Amortisation of intangible assets arising from
business combinations

(2,163)

(1,354)

(3,332)

(512)

(7,361)

Impairment of goodwill and intangible assets arising
on business combinations

 -

 -

 -

(17,141)

(17,141)

Segment operating profit/(loss)

17,661

10,890

(5,771)

(32,831)

(10,051)

Net gain on disposal of freehold property





3,814

Operating loss





(6,237)

Interest receivable





1,565

Finance costs





(8,834)

Loss before tax





(13,506)

Taxation





515

Loss for the year





(12,991)

 

Geographical analysis

 

The table below represents revenue by geographical origin (the analysis by geographical destination is not materially different to that by origin).  The analysis in the table below is based on the location of the customer, which is not materially different from the location where the order was received:



2010
£000

2009
£000

United Kingdom


612,055

667,466

Middle East


19,192

68,648

Ireland and other overseas


1,369

4,436

Total revenue


632,616

740,550

 

3              Exceptional items



2010
£000

2009
£000

Restructuring costs and asset impairment charges in the Middle East1


(15,164)

(21,008)

Restructuring costs and asset impairment charges in Management Consulting2, 4


(3,648)

(4,740)

Restructuring costs and asset impairment charges in Rail3


 -

(24,267)

Restructuring costs and asset impairment charges in Government and Business Services4


(8,194)

 -

Restructuring costs and asset impairment charges in Highways4


(7,268)

 -

Restructuring costs and asset impairment charges in Regulated Industries4


(2,226)

 -

Restructuring costs and asset impairment charges in Group4


(1,266)

 -

Bid defence costs5


(667)

 -

Profit on sale of freehold property6


 -

3,814

Amortisation of intangible assets arising from business combinations7


(6,796)

(7,361)

Total exceptional items


(45,229)

(53,562)

 

 

1 The economic slow down in Dubai has resulted in the decision to close our Dubai operations following our significant presence reduction in 2009.  As a result, the Group incurred restructuring charges of £5.2m (2009: £6.0m) mainly in respect of redundancies and surplus property provisions. The Group also recorded asset impairment charges in the period of £10.0m (2009: £15.0m) to reduce the value of contract receivables to the amounts the Group believes it should be able to collect.

2 Restructuring costs and asset impairment charges were incurred in the second half of 2009 to better align demand and supply for the Group's management consulting services with the current environment.

3 During 2009 the Group decided to substantially withdraw from the rail sector. The Group incurred restructuring charges of £7.2m, mainly in respect of redundancies and surplus property provisions, and has impaired in full the intangible assets (mainly goodwill and customer relationships) associated with the Rail business of £17.1m.

4 Restructuring costs and asset impairment charges were incurred in 2010, ensuring that we have the right organisation structure, staffing levels and office portfolio going forward. 

5 Costs incurred as a result of the VT Group plc's unsolicited approach for Mouchel in December 2009.   

6 The Group completed the sale of its freehold property in March 2009 and relocated staff and equipment prior to completion to new leasehold premises in Woking. The sale proceeds of £9.5m exceeded the carrying value of the property and the associated disposal costs.

7 The Group does not consider the amortisation of intangible assets arising from business combinations to be part of the underlying business performance and therefore treats them as exceptional costs.

The tax effect of the exceptional items above is a credit of £10,552,000 (2009: £10,916,000) in the Consolidated Income Statement. 

 

 

4              Taxation

 

a              Analysis of tax charge for the year



2010
£000

2009
£000

Corporation tax charge for the year


(398)

(1,414)

Over provision of tax in prior years


110

1,125

Current tax charge


(288)





Deferred tax credit for the year


1,556

1,895

Deferred tax - under provision of tax in prior years


 -

(1,091)

Total deferred tax credit


1,556

804

Tax credit for the year


1,268

515

 

 

b              Factors affecting the tax charge for the year

The tax charge for each year is different to the standard rate of corporation tax in the UK of 28% (2009: 28%).  The difference is explained below:



2010
£000

2009
£000

Loss before tax


(14,728)

(13,506)

Loss before tax multiplied by the standard rate of corporation tax in the
UK of 28% (2009: 28%)


4,124

3,782

Effects of:




Permanent differences


(946)

(2,895)

Change in future tax rate


(816)

 -

Research and development


871

 -

Adjustment in respect of prior years


110

34

Losses utilised, previously unrecognised


508

(406)

Unrecognised losses


(2,583)

 -

Tax credit for the year


1,268

515

 

 

c              Tax on items charged to equity



2010
£000

2009
£000

Movement in pension scheme valuations


186

7,203

Adjustments to estimated recoverable deferred tax assets


 -

(359)

Deferred tax on items credited to equity


186

6,844

 

 

d              Net movement in deferred tax



2010
£000

2009
£000

Movement in pension scheme valuations


186

7,203

Adjustments to estimated recoverable deferred tax assets


 -

(359)

Deferred tax on items credited to equity


186

6,844

Deferred tax on items credited to the income statement


1,556

804

Total deferred tax credit


1,742

7,648

 

Unrecognised deferred tax assets in relation to trading losses total £19,438,000 (2009: £17,000,000). In addition there are unrecognised deferred tax assets in respect of non-trading losses of £3,648,000 (2009: £3,260,000).

 

Deferred tax assets have been recognised as the Directors believe that there will be sufficient future profits for the asset to be recovered.

 

A number of changes to the UK Corporation tax system were announced in the June 2010 Budget Statement. The Finance (No 2) Act 2010, which was substantively enacted on 20 July 2010, includes legislation reducing the main rate of corporation tax from 28 per cent to 27 per cent from 1 April 2011. The effect of this change was to reduce the net deferred tax asset provided at 31 July 2010 by £757,000, with a corresponding decrease in profit for the year but with no effect on other comprehensive income.

 

Proposed reductions to the main rate of corporation tax by 1 per cent per annum to 24 per cent by 1 April 2014 are expected to be enacted separately each year.  As these had not been enacted at the balance sheet date they have not been included in these Financial Statements. The overall effect of the further proposed changes from 27 per cent to 24 per cent, if these applied to the net deferred tax balance at 31 July 2010, would be to reduce the net deferred tax asset by approximately £2,019,000 (being £673,000 recognised in 2012, £673,000 recognised in 2013 and £673,000 recognised in 2014).

 

5              Dividends



2010
£000

2009
£000

Final paid in respect of the previous year 3.85p (2009: 4.25p)


4,326

4,774

Interim paid in respect of the current year 2.25p (2009: 2.25p)


2,528

2,528

Less: dividend waived by the employee share ownership trusts


(84)

(118)

Total dividends paid


6,770

7,184

 

 

6      (Loss)/earnings per share



2010

2009

Basic and diluted loss per share


(12.1)p

(11.7)p

Adjusted earnings per share


18.9 p

26.4 p

 



2010
£000

2009
£000

Loss for the year


(13,460)

(12,991)

Loss for basic and diluted earnings per share


(13,460)

(12,991)

Adjustments:




- other exceptional costs (net of taxation)


29,716

20,205

- amortisation of intangible assets arising from business combinations (net
  of taxation)


4,961

5,300

- impairment of goodwill and intangible assets arising on business
  combinations (net of taxation)


 -

17,141

Earnings for adjusted earnings per share


21,217

29,655

 

 



2010
000s

2009
000s

Weighted average number of ordinary shares


111,400

111,156

Dilutive share options


 -

 -

Dilutive Save As You Earn schemes


 -

 -

Diluted weighted average number of ordinary shares


111,400

111,156





Weighted average number of ordinary shares


111,400

111,156

Average number of shares held by the employee share trusts


1,361

1,709

Share options matured in respect of executive option schemes


(392)

(520)

Adjusted weighted average number of ordinary shares


112,369

112,345

 

 

Basic loss per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares during the year.

Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all dilutive share options in issue and shares under Save As You Earn Schemes. The share price used to calculate diluted earnings per share is based on a weighted average price of 196.31p (2009: 296.47p).  Potential ordinary shares are not treated as dilutive when their conversion would increase earnings per share or decrease loss per share from continuing operations.   

Adjusted earnings per share is calculated after adding back shares held by the employee share trusts to the weighted average number of shares. Earnings are adjusted to exclude exceptional items (net of taxation). The Directors believe that this additional measure provides a better indicator of the underlying trends in the business.

 

 

 

7.             Deferred tax

 

Deferred tax assets


Employee benefits
£000

Share based payments
£000

Accelerated capital allowances
£000

Retirement benefit obligations
£000

Losses and provisions
£000

Total
£000

At 1 August 2009

699

3,559

 -

16,488

7,993

28,739

Effect of reduction in future tax rate to 27%

(25)

(298)

 -

(589)

(285)

(1,197)

Depreciation in excess of capital allowances

 -

 -

6,742

 -

 -

6,742

Actuarial loss on pension scheme valuations

 -

 -

 -

186

 -

186

Timing differences on exceptional items

 -

 -

 -

 -

908

908

Special contributions to retirement benefit schemes

 -

 -

 -

(2,584)

 -

(2,584)

Share based payments

 -

(222)

 -

 -

 -

(222)

Share based payment claim in prior year

 -

              -  

 -

 -

 -

              -  

Losses utilised in year

 -

 -

 -

 -

(6,360)

(6,360)

Losses carried forward

 -

 -

 -

 -

291

291

Foreign exchange movement





21

21

Reclassification

 -

(637)

(107)

1,288

(544)

 -

At 31 July 2010

674

2,402

6,635

14,789

2,024

26,524

 

 

Deferred tax liabilities



Intangible
assets
£000

Accelerated capital allowances
£000

ESOP
£000

Freehold property
£000

Total
£000

At 1 August 2009


(10,447)

(1,148)

(112)

(618)

(12,325)

Effect of reduction in tax rate to 27%


373

41

4

22

440

Amortisation of intangible assets


1,835

 -

 -

 -

1,835

Depreciation in excess of capital allowances


 -

1,107

 -

 -

1,107

Unwind of deferred tax liability


 -

 -

 -

596

596

At 31 July 2010


(8,239)

 -

(108)

 -

(8,347)

 

The rate of corporation tax reduces to 27% on 1 April 2011, as detailed in note 4. 



 

8.             Borrowings

 

The Group had unsecured revolving credit facilities of £190.0m at 31 July 2009, with a group of core relationship banks, which reduced by £10.0m in March 2010.  Of the remaining £180.0m, £115.0m is in the form of revolving credit facilities which reduce by £10.0m in March 2011 and 2012, with the remaining balances of £30.0m expiring on 1 August 2012, and £65.0m expiring on 31 October 2012. The balance of £65.0m is in the form of a term loan which also falls due for repayment on 31 October 2012.

 

As at 31 July 2010 amounts totalling £128.7m had been drawn down. Also drawn against the facility are bonds and guarantees, as detailed in note 13, of £21.5m, leaving £29.8m of the facility undrawn. Interest is charged at LIBOR plus a margin. The margin ranges from 0.65% to 3.65% adjusted according to the ratio of net borrowings to earnings before interest, taxation, depreciation and amortisation.

 

In addition there are two secured loans totalling £0.8m at 31 July 2010 (31 July 2009 £2.0m) which are repayable in instalments until October 2011. Interest is charged at 6.84% on the first loan and 7.44% on the second loan, per annum.

Loans are repayable as follows:



2010
£000

2009
£000

Obligations due within one year


736

2,153

Obligations due between one and two years


103

10,839

Obligations due between two and five years


128,740

142,758

Total loans due


129,579

155,750

Loan issue costs incurred


(4,540)

(3,437)

Amortisation of loan issue costs


1,675

604

Total borrowings


126,714

152,917

Add: Non bank borrowings and issue costs


2,026

823

Deduct: Cash and cash equivalents net of bank overdrafts (note 11)


(45,376)

(52,426)

Net bank borrowings


83,364

101,314

 

 

 

Loan issue costs of £4,540,000 have been capitalised and are being amortised over the life of the loan.

 

The Group has complied with its banking facility covenants during the year. 

 

The Group has entered into agreements to partially hedge against the interest rate risk on the revolving credit facilities above.  The fixed interest rate hedges vary from 3.76% to 5.36% against the floating LIBOR rate. The expiry date of these hedges is between 17 December 2010 and 31 October 2012.  At 31 July 2010, the total fair value of derivatives designated as cash flow hedges was a liability of £7,729,000 (2009: liability of £4,362,000).  The whole movement in the fair value is recorded in the consolidated statement of changes in equity as the hedges are considered highly effective.

 

 

9.             Provisions for liabilities and charges

 



Restructuring provisions
£000

Insurance/ claims provisions
£000

Dilapidation provisions
£000

Onerous contract provisions
£000

Total
£000

At 1 August 2009


5,069

5,340

3,542

9,347

23,298

Amounts provided for during the year


19,994

1,179

490

2,558

24,221

Amounts released to the income statement


(84)

(1,832)

(299)

(80)

(2,295)

Amounts utilised during the year


(8,687)

(1,325)

(185)

(6,044)

(16,241)

Reclassification


976

238

(238)

(976)

                  -  

At 31 July 2010


17,268

3,600

3,310

4,805

28,983

 

Restructuring provisions will unwind within one year.  Insurance/claims provisions will unwind when claims are settled.  Dilapidation provisions will unwind over the life of the lease which may be between one and 10 years.  Onerous contract provisions will be released over the next two years. 

 

 

10.           Cash generated from operations





2010
£000

2009
£000

Loss for the year before taxation



(14,728)

(13,506)

Adjustments for:






- Depreciation



6,558

8,406


- Gross loss/(profit) on disposal of property, plant and equipment


25

(5,516)


- Amortisation of intangible assets

- arising from business combinations


6,796

7,361



- software and other acquired intangibles


4,866

4,231


- Impairment of goodwill and intangible assets arising from business combinations


 -

17,141


- Share based payments (credit)/cost (excluding tax)


(204)

1,272


- Other exceptional costs



38,433

34,576


- Interest receivable



(235)

(1,565)


- Finance costs



10,918

8,834

Changes in working capital






- Decrease/(increase) in trade and other receivables including unbilled revenue
  (before exceptional impairment charges)


34,199

(32,512)


- (Decrease)/increase in trade and other payables and provisions


(16,114)

4,079

Cash generated from operations before exceptional items


70,514

32,801

Exceptional items



(17,580)

(7,585)

Cash generated from operations 



52,934

25,216

 

 

11.           Cash and cash equivalents net of bank overdrafts




2010
£000

2009
£000

Cash and cash equivalents


45,376

52,426

 

Of the above cash balances £23,272,000 is restricted by virtue of it being held within our joint ventures and captive insurance company (2009: £22,874,000).

 

 

 

12.          Retirement benefit obligations

 

The Group operates several occupational pension schemes for its employees. These schemes are a combination of defined benefit, defined contribution and third party defined benefit schemes. 

a              Schemes accounted for on a defined contribution basis

Cash contributions to the Group's defined contribution schemes are recognised as pension costs in the Consolidated Income Statement and no asset or liability is shown on the balance sheet.

 

Some employees who transferred to the Group under the Transfer of Undertakings (Protection of Employment) Regulations (1981) as amended (TUPE) remain members of their previous schemes, which are pre-funded, defined benefit schemes.  Where under the terms of the contracts, the defined benefit liability remains with the relevant council, the Group accounts for these schemes as defined contribution schemes. Cash contributions are recognised as pension costs and no asset or liability is shown on the balance sheet.

b              Schemes accounted for on a defined benefit basis

 

The Mouchel Business Services Limited Pension Scheme (MBS), the Mouchel Superannuation Fund (MSF) and the Mouchel Staff Pension Scheme (MSPS) are funded defined benefit schemes and are disclosed as Group schemes in the tables below.  In addition, MBS has admitted body status in the Teesside pre-funded defined benefit scheme as employees of MBS who were previously employed by the local council remain members of the Teesside Pension Fund. The assets and liabilities of this scheme are identified under retirement benefit obligations on the balance sheet and disclosed as third party schemes below.

 

Movements in the present value of the defined benefit obligation are as follows:



Group
schemes
£000

Third party
schemes
£000

 
Total
£000

Retirement benefit obligation at 1 August 2009

(54,891)

(5,396)

(60,287)

Service cost


(5,203)

(1,251)

(6,454)

Net interest (cost)/income

(703)

563

(140)

Company contributions

13,145

1,364

14,509

Actuarial loss


(1,373)

684

(689)

Retirement benefit obligation at 31 July 2010

(49,025)

(4,036)

(53,061)






Current liability


(719)

 -

(719)

Non-current liability


(48,306)

(4,036)

(52,342)

Total liability in the balance sheet as above

(49,025)

(4,036)

(53,061)

 

 

The amounts recognised in the income statement are as follows:




2010
£000

2009
£000

Current service cost - included in cost of sales


5,880

6,967

Current service cost - included in administrative expenses


574

767

Total current service cost


6,454

7,734

Interest cost



19,900

20,559

Expected return on plan assets


(19,760)

(21,205)

Net finance cost/( income)


140

(646)

Total recognised in the income statement


6,594

7,088

 

 



Group
schemes
£000

Third party
schemes
£000

 
Total
£000

Actual return less expected return on pension scheme assets

16,011

4,694

20,705

Effect of changes in assumptions on the present value of scheme liabilities

(17,384)

(4,010)

(21,394)

Deferred tax on movement in scheme deficit

371

(185)

186

Total recognised in the statement of comprehensive income

(1,002)

499

(503)

 

For the three principal defined benefit schemes that the Group is now responsible for, the future liabilities for benefits are provided for by the accumulation of assets held externally to the Group in separate, trustee administered funds. The cost of these schemes is determined in accordance with the advice of independent, professionally qualified actuaries on the basis of formal actuarial valuations using the projected unit credit method. In line with normal business practice these valuations are undertaken on a triennial basis.

All schemes are closed to new entrants except for employees transferring to the Group under TUPE, where the Group is required to provide benefits which are broadly comparable to those provided under the Local Government Pension Scheme or another defined benefit scheme provided by the transferring employer.

Given the membership of the schemes, under the projected unit credit method, the current service cost would be expected to increase as the members of the scheme approach retirement. 

The date of the last full triennial actuarial valuations for each of the schemes was as at March 2007.

The key assumptions used in valuing the retirement benefit obligation at the end of the period were:




2010
%

2009
%

Discount rate



5.4/5.4

6.0/6.0

Expected rate of increase in pensionable salaries


2.6/3.0

3.0/3.3

Expected rate of increase in pension in payments


2.3/3.0

3.2/3.3

Expected rate of price inflations


3.0/3.0

3.3/3.3

Note: data for Group schemes is given first, followed by data for third party schemes











2010
Years

2009
Years

Life expectancy at age 65:




Current pensioners:

male


87.1/87.2

87.0/87.0


female


90.0/90.1

89.9/89.9

Future pensioners:

male


88.1/88.1

88.1/88.1


female


90.9/90.9

90.9/90.9

Note: data for Group schemes is given first, followed by data for third party schemes



 

The expected return for the scheme assets in the forthcoming year is as follows:





%

Equities




7.9/8.3

Bonds, gilts and cash



4.4/2.7

Property




6.5/6.5

Note: data for Group schemes is given first, followed by data for third party schemes



 

 

13.           Contingent liabilities

 

Contingent liabilities at 31 July 2010 in respect of guarantees and indemnities in the normal course of business totalled £21,523,000 (2009: £26,997,000).

In addition, bank overdrafts of subsidiaries were guaranteed at 31 July 2010 up to £260,445 (2009: £244,463); the amount overdrawn at that time being £nil (2009: £nil).

The Company and several of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business.  Provisions are maintained by the Group having regard to the size and nature of the claims and the Group's best estimate of the likely settlement.  The Directors do not believe that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a materially adverse affect upon the Group's financial position. 

 

14.           Post balance sheet events

 

There have been no significant post balance sheet events.

 

15.           Related party transactions

The following transactions were undertaken with the joint venture entities to which the Group is party:



2010
£000

2009
£000

Sales to joint ventures


20,925

16,778

Purchases from joint venture


821

222

Net amount due to the Group at the year end


5,493

8,468

 

 

Loans to related parties:



2010
£000

2009
£000

Balance at 1 August


1,003

1,144

Loans advanced during the year


2,893

2,846

Loan repayments received


(2,703)

(2,991)

Interest charged on loans


1

4

Balance at the end of the year


1,194

1,003

 

The loans to related parties are to joint venture companies.

The Group made contributions (including deficit funding) of £14,509,000 to the defined benefit pension schemes during the year (2009: £15,398,000).

Compensation paid to key management of the Group was £2,382,000 for the year (2009: £2,310,000).

 

 

 

 

 

 


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