Annual Report & Accounts 2008 Connaught plc Annual Report & Accounts 2008
Connaught plc Connaught House Grenadier Road Exeter Business Park Exeter Devon EX1 3QF
Tel 01392 444546 Fax 01392 444543 [email protected] www.connaught.plc.uk
Registered Company No. 3184319
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Connaught is a proven growth business. During 2008 we have strengthened our position as the leading integrated provider of essential services to the UK’s social housing and compliance markets. We continuously invest in our people, processes and technology to ensure we deliver greater efficiency and an outstanding experience to all our customers. Our future is built on solid foundations and a disciplined strategic approach which will continue to ensure we remain focused on the long-term visibility and sustainability of our earnings.
2 Introduction Connaught plc Annual Report 2008
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Contents Financial Contents 4 Financial Highlights 33 Directors’ Report 6 Chairman’s Statement 36 Corporate Governance Report 14 Operations Review 39 Remuneration Report 18 Financial Review 48 Statement of Directors’ Responsibilities 22 Corporate Responsibility Report 49 Independent Auditors’ Report to the members of Connaught plc 30 Board of Directors 51 Consolidated Income Statement 52 Consolidated Statement of Changes in Equity 53 Consolidated Balance Sheet 54 Consolidated Cash Flow Statement 55 Statement of Consolidated Accounting Policies 62 Notes to the Consolidated Financial Statements 84 Five-year Summary (Unaudited) 85 Company Financial Statements Contents
Connaught plc Annual Report 2008 Introduction 3
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4 Financial Highlights Connaught plc Annual Report 2008
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Confident future
“I am delighted to announce another set of very positive results. Over the years, we have built a strong and balanced business based on our leadership position in two growth markets with highly defensive characteristics and robust cash- generative qualities. I am confident about Connaught’s future. We have a solid, experienced management team and are well placed to continue to deliver high quality earnings growth for many years to come.”
Mark Tincknell Chairman
Revenue* (£m) EBITA** (£m) EPS*** (pence)
553
35.9 17.5 396
300 11.7 240 19.2 8.8 200 14.2 6.2 10.1 5.2 7.8 # # # # # # # # 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008
* Continuing operations ** Continuing operations *** Diluted EPS (adjusted) before exceptional items # IFRS # IFRS
Connaught plc Annual Report 2008 Financial Highlights 5
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Record results, excellent prospects Connaught has continued to make significant progress. The Group has further underpinned its market positions and enhanced its future prospects. Our disciplined strategic approach has steadfastly ensured that we remain focused on the visibility, cash generative and defensive nature of our earnings.
Our Social Housing division is the leading provider of housing maintenance, compliance and estate services.
Our Compliance division works with organisations to manage their health, safety and environmental risks.
The Group is very well placed to continue to deliver • Group operating margins increased from 4.9% to 6.5%* consistent growth despite uncertain economic conditions. • Total order intake for the period was £855m. The Group’s order book now stands at a record As a result the Board proposes a final dividend of 1.755 £2.6bn (2007: £2.1bn); 95% of 2009 and 84% of 2010 pence per share, resulting in a total dividend for the consensus social housing revenues already in the year of 2.68p (2007: 2.23p), an increase of 20%. The final secured order book dividend will be paid on 6 March 2009 to shareholders who are on the register as at 6 February 2009. • Order intake since the August year end currently stands at £150m Financial results • Strong cash conversion with operating profit to • Revenue up 40% to £553m (2007: £396m); organic operating cash conversion of 74%. revenue up 18% * before amortisation of acquisition intangibles of £7m and acquisition – Social Housing revenues up 28% to £447m integration exceptional of £2m (2007: £350m) – Compliance revenues up 130% to £106m (2007: £46m) • Adjusted operating profit up 87% to £35.9m* (2007: £19.2m), organic operating profit up 35% – Social Housing adjusted operating profit up 38% to £25.4m (2007: £18.4m) – Compliance adjusted operating profit up 206% to £13.8m (2007: £4.5m)
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Connaught plc Annual Report 2008 Chairmans Statement 7
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“The Group has further Total order book (£bn) underpinned its market 2.6
positions, enhancing its 2.1
1.7 future prospects.” 1.5
1.1
0.7 0.5 2002 2003 2004 2005 2006 2007 2008
Social Housing The social housing maintenance market is worth Connaught’s Social Housing division provides integrated £10.5 billion per annum, and is underpinned not only services to Local Authorities, Arm’s Length Management by the Government’s commitment to improve and Organisations and Registered Social Landlords throughout maintain the quality of social housing throughout the the UK. UK but also the non-discretionary and essential nature of much of the expenditure which is funded by the rental Results income and ring fenced by what is known as the Housing Revenue Account. The results for the 12 months reflect the underlying robustness of the social housing market and Connaught’s The 2004 Gershon Review set efficiency targets for all ever strengthening position within it. social landlords and in the current economic climate efficiency has become the number one driver for • Revenues up 28% to £447m (2007: £350m), with local authorities and housing associations. Property 19% organic revenue growth maintenance and repair represents 48% of a social • Adjusted operating profit up 38% to £25.4m landlord’s operating costs and is the biggest single (2007: £18.4m) efficiency saving opportunity. For most social landlords • Operating margin up from 5.5% in 2007 to 5.7% driven their supply chain is fragmented and costly to by service mix and operational leverage administrate which is leading many to seriously consider • Record order intake of £855m an integrated services approach.
• Strong earnings visibility with 95% of 2009 and 84% This drive for increasing efficiency has also led to the of 2010 market consensus social housing revenues in consolidation of Registered Social Landlords (RSLs). These current order book. RSLs now control over 50% of the UK’s social housing stock and their consolidation is generating longer, larger, The market and more integrated services contracts as they continue The market for social housing maintenance and repair is to seek ways to consolidate their inefficient and large and fragmented. It continues to offer Connaught, fragmented supply chains. as the market leader, significant growth potential. Connaught has positioned itself more than any other At a national level, there is expected to be an ever competitor to deliver these efficiencies on behalf of increasing demand for affordable housing: there are its clients. currently over five million households in social housing with over 1.6 million on waiting lists, the highest level for two decades.
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Connaught’s leading position Connaught is the clear market leader in a fragmented market where the top 10 players share just 21%.
The Group has established its integrated services capability by developing an unrivalled range of services for social landlords, largely self-delivered and underpinned by its in-house technology, ConntrolTM. As a consequence, Connaught has emerged as the partner of choice for social landlords seeking to deliver efficiencies in their property maintenance through longer-term partnerships.
Since 2006 when the Group secured its first integrated services contract with Paradigm Housing, the trend towards such longer-term multi-service partnerships has accelerated. This is demonstrated by the contract wins in 2008 – 83% of the £855 million order intake was integrated services (IS) contracts of which four are ten or more years in length:
Raglan Housing Association – 15-year IS contract worth £150m Matrix Housing Partnership – 10-year IS contract worth £180m Bromford Group – 10-year IS contract worth £60m Midland Heart – 10-year IS contract worth £40m
Since the year end the Group has secured an additional £150 million order intake including a 12-year integrated services partnership worth £117 million with A2Dominion, a leading housing association.
The Group’s investment in Scotland and Wales continues to bear fruit with a £50 million integrated services contract with Dumfries & Galloway Housing Partnership and a £30 million Welsh Housing Quality Standard partnership with RCT Homes.
The acquisitions made in 2007, Baldwins and AE Williams, have performed well and during the year we successfully rebid two of their key contracts, Harrogate District Council and the London Borough of Merton, worth a combined £35 million per annum.
Compliance Connaught’s Compliance division is one of the leading providers of safety, health and risk management solutions. The division provides a range of services unique to the UK market, combining both advisory and servicing capabilities to provide a fully integrated compliance solution.
Results Strong organic growth, coupled with an excellent contribution from acquisitions, has ensured the division achieved record results:
• Compliance revenues up 130% to £106m (2007: £46m), with 15% organic revenue growth • Adjusted operating profit up 206% to £13.8m (2007: £4.5m) • Operating margin up from 9.8% in 2007 to 13.0% driven by economies of scale and the impact of higher margin acquisitions.
Connaught plc Annual Report 2008 Chairman’s Statement 9
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Acquisitions Financially, there are increased penalties for non- In the year ending 31 August 2008 Connaught has made compliance. There are also higher insurance costs for three acquisitions in the Compliance division, the most companies who cannot demonstrate that they are fully significant being National Britannia for £91 million. The compliant with all relevant legislation. The reputation others, Water Technology and MSF, provide the Group risks associated with non-compliance together with the with excellent platforms to grow both water and fire corporate responsibility agenda are ensuring directors are compliance respectively as part of our integrated services encouraged to meet their obligations more now than at solution. any time in the recent past.
Since the year end we have also acquired the Lowe Group Furthermore, in the current economic climate, businesses (trading as Necta), which when combined with our are increasingly considering the integrated services existing capability establishes Connaught as the UK’s solution as the best way to drive down the overall cost of leading electrical compliance and testing business. compliance whilst remaining legal and safe. Connaught is very well placed in this respect. The integration of National Britannia and the other acquired businesses has proceeded extremely well. Connaught’s leading position The Compliance division operates under one Connaught is now the market leader in compliance and management structure with an integrated back office is the only UK provider of an integrated services solution and customer service operation based in Caerphilly. offering both an advisory and servicing capability. Our The integration has led to a streamlining of Connaught’s self-delivery model ensures a consistent UK-wide service operations with substantial savings at a cost of just and differentiates us significantly from the traditional under £2 million. The return on this investment will occur competition. Our unique in-house technology, e-risk within three years and will be a source of significant ManagerTM, gives clients full visibility and control of all operational leverage as the business grows. their compliance issues.
The market During 2008 Connaught was selected as the integrated Compliance is a highly attractive market worth an compliance servicing partner by a number of new estimated £5.7 billion per annum and growing at 7-8% national clients, notably National Children’s Homes per year. The market is fragmented and served primarily and Hanover Housing. Many of the division’s existing by single service providers, with the top ten players’ customers looked to the Group’s integrated model to share at only 15%. further control and reduce their compliance costs. These included Care UK, Hilton Group and Somerset Expenditure on compliance services is largely County Council. non-discretionary and is underpinned by three key factors: regulatory, financial and reputation. Our unique range of services and systems capability combined with the operational leverage we expect to The regulatory environment, driven by the increasing achieve ensures that we are extremely well positioned to level of EU health and safety legislation is holding continue growing our position in this fragmented market businesses and company directors to account. in the foreseeable future.
Divisional Split 2008 Revenue Operating Profit
19% 35%
65%
Compliance 81% Social Housing
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Connaught plc Annual Report 2008 Chairman’s Statement 11
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Community project Our environmental team in Weston-super-Mare donated their time to support the Race for Life in aid of Cancer Research UK. The event was held on the beach and our team was on hand to litter pick, supply euro bins where needed and to rake the beach with our tractor.
Social Responsibility Connaught is strongly committed to the communities it serves and to making “Connaught is a positive socio-economic impact wherever it operates. The Group is able to provide long-term employment opportunities through its self-delivery model, well positioned and has made a major commitment to training and development through the Connaught Academy. to continue to
The business works in close partnership with local residents and tenant groups deliver strong across all of its social housing partnerships. Providing a unique customer experience remains a core element of the Group’s service which is believed to and sustained be unsurpassed within its primary markets. earnings Connaught is also committed to creating cleaner, safer and more sustainable communities through its environmental business, which provides a range growth for of services to create better living spaces, encourage recycling and improve energy efficiency. many years Occupational health and safety remains a key priority and in 2008 the Group to come.” was awarded its 15th RoSPA Gold Award for health and safety.
People The Group currently employs over 8,000 people, and is totally committed to attracting, developing and retaining the best talent in the industry. Through the in-house Academy, Connaught now trains over 2,500 people per annum, including over 500 first-time managers who in 2008 attended an in-house Managing for Success programme.
The culture and values are an integral part of the Group’s success and remain the fundamental foundation on which Connaught’s future will be built.
Outlook These 2008 results demonstrate the Group’s robust position in both its markets. This is further reflected in its order book which over the last year has grown by 25% to £2.6 billion. The forward sales pipeline remains very healthy at £3.6 billion and earnings visibility is excellent with 95% of 2009 and 84% of 2010 consensus social housing revenues already in the order book.
Connaught has built an experienced and capable management team, a strong financial platform and as market leader in two high growth but highly defensive markets is very well positioned to continue to deliver strong and sustained earnings growth for many years to come.
Mark Tincknell Chairman
Connaught plc Annual Report 2008 Chairman’s Statement 13
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INNOVATIVE VALUE E AT EST Streets Estates Grounds Recycling of consensus social housing revenues for 2009 and 84% for 2010 already secured. the is earnings our of quality the improving Further activity, operational our of nature risk low especially ever our and systems operating our of robustness the increasing margins. In addition, the vast majority of our by required or nature in essential either are services in defensive highly revenues our making thereby law uncertain economic times. Integrated services strategy our is proposition customer our to Fundamental integrated services strategy. Both our Social Housing opportunity the clients offer divisions Compliance and to utilise our comprehensive service mix, our streamlined fundamentally to IT proprietary our and processes increase thereby and chains supply their consolidate working By effectiveness. and efficiency own their remove to only not able are we customers our with frontline the improve to also but cost unnecessary services they receive. ater TM COMPLIANCE Gas Electrical Fire W Asbestos Connaught plc Annual Report 2008 CONNTROL Customer experience oids Community engagement RESPONSE Maintenance V General areas
Operations Review PLANNED Cyclical repairs Decent Homes Adaptations Energy 14 Figure 1 – Social Housing Integrated Services In terms of earnings quality we only focus on areas of areas on focus only we quality earnings of terms In high visibility – as demonstrated by our order book which It 2020. to out extends and billion £2.6 at stands now no includes book order this that note to interesting is contract or contracts framework from revenue potential in benefit to placed well are we which from extensions, the future. Our earnings visibility is strong with 95% To do this we have aligned our activities to two both compliance, and housing social markets, significant we turn In fragmented. truly and well are which of significant such provide to business the designed have consolidation encourages it that customers our to value of the supplier base in these two markets. This trend has contributed to our considerable growth, which has 250 FTSE the to market AIM the from move to us enabled over the last three years. earnings growth in our highly attractive yet defensive marketplaces. Overview have We consistent. very remains story Connaught The whilst growth significant delivering upon focus a clear retaining the quality of our earnings. Group’s integrated services proposition which will sustain our our sustain will which proposition services integrated Group’s This year’s Operations Review focuses on the development of the the of development the on focuses Review Operations year’s This solid foundations solid Proven strategies, strategies, Proven Operations Review Operations c99397_BOOK.indb 14 Operations Review
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As the service mix is fundamental to this strategy our Compliance acquisition policy has been focused on extending the In the Compliance division our acquisition programme range of related services we provide, to the extent that has been the fundamental driver behind the creation of we now offer our customers the most comprehensive our integrated services solution outlined in figure 2. integrated service solutions available within our two markets. This started with the acquisition of Gasforce in 2002 and includes National Britannia, a health and safety risk Social Housing management business acquired for £91 million in October In the Social Housing division we provide clients with 2007. More recently we have completed the acquisitions a range of planned, response, compliance and estate of MSF, a fire service business for a net consideration of services as shown in figure 1. Whilst our planned business £6.5 million, and the Lowe Group (trading as Necta), an has been organically developed the remaining services electrical compliance business for £7.5 million. exist as a result of acquisitions. In 2007 these included AE Williams in London and Baldwins in Leeds, both of which Selective bolt-on acquisitions will remain a key part of are fully integrated and now form the backbone of our our ongoing growth strategy, either to extend our service response maintenance activities throughout the UK. range or to create a national capability in every service we provide. In the current economic climate we would The social housing market is worth a very significant expect such deals to be increasingly earnings enhancing £10.5 billion per annum and we are the market leader as vendors adjust their expectations. with only 4% market share. Expenditure is underpinned by rental income from over five million households The acquisition of National Britannia brought with it within the sector. Demand for social housing is increasing an excellent customer service and administrative centre in these uncertain times and there is a shortfall in the based in South Wales. As we integrate our acquisitions, number of properties available for rent with waiting lists this significant resource is becoming the operational higher than ever. and customer service hub for the Compliance division and we expect to generate ongoing economies of scale The trend towards market consolidation is apparent from as a result. the fact that in the last four years the market share of the top ten players has increased from 13% to 21%. The Compliance division operates in a highly attractive £5.7 billion market currently estimated to be growing at Furthermore, our order intake in the period was around 7% per annum. Expenditure is effectively non- £855 million with an additional £150 million secured discretionary and is driven by ever increasing legislation, since the year end. Of this £1 billion total order intake, enforcement by the Health & Safety Executive and rising over 80% were integrated service contracts – further insurance costs for any areas of non-compliance. evidence of the consolidation of the market and how well Connaught is placed to benefit from this trend. Whilst we only have a 2.5% market share in compliance our integrated services solution is driving consolidation through the trend towards larger multi-service contracts
Figure 2 – Compliance Integrated Services Solution
Occupational health Gas
TM
Reportline TION Health & Safety Water ResponselineTM TIFICA
TION SERVICES Environmental Fire Y SERVICES SAFEcontractorTM TRAINING SERVICES Food hygiene Electrical e-risk ManagerTM ADVISOR Energy Asbestos TESTING & CER RISK MANAGEMENT SYSTEMS H.S.E. INFORMA
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and an increased propensity to outsource. Our customers truly understanding each and every touch point with are looking for a trusted compliance partner who will our customers we are able to effectively manage our manage their compliance risk, to ensure they remain legal customer relationships and build long-term client loyalty. and safe, as efficiently as possible. Understanding our customers has been critical to our All of our acquired compliance businesses are now sustained success and is reflected in our increasing trading under the Connaught brand, which facilitates earnings visibility. cross-selling and ensures a consistent approach. The Connaught brand is a powerful tool and is recognised in Investing in our people our markets as providing excellent customer service whilst The very nature of our business requires us to employ being financially solid and secure. over 8,000 people. Effective engagement with our people has played a key part in Connaught becoming the Investing in technology successful business that it is today. Software solutions, when integrated with our operational activities, are becoming increasingly important as we Through the Connaught Academy we provide training undertake to deliver to our customers a level of value and development opportunities for all of our people. they would struggle to achieve elsewhere. We work hard to ensure that every employee In our Social Housing division we utilise ConntrolTM which understands how their contribution helps us achieve has been developed in-house to be the most efficient our overall objectives. This understanding and the and advanced system in the market for driving labour commitment of all our people has been critical in productivity and managing assets, thereby reducing costs. delivering the outstanding results outlined in this Annual The system is being continually updated and improved to Report and Accounts and in building the foundations further enhance the service we deliver to our customers. which will underpin our future success.
Within the Compliance division we have inherited a Conclusion number of excellent systems from National Britannia, all 2008 has been a year of great progress for Connaught. of which have been developed in-house. These systems We have established the most comprehensive integrated provide customers with complete visibility on the current service capability in the social housing and compliance status of their risk management obligations, as well as markets. Our clients are increasingly recognising the the most up-to-date health and safety information. They efficiency benefits of an integrated solution which is are also a useful tool for our customers to check the evident in our £1 billion order intake over the last compliance of their supply chain partners. 14 months.
Our outsourced accident reporting and call centre Both of our markets remain highly attractive with contracts with the Health & Safety Executive enhance the significant further growth potential whilst at the same information service we can provide and are a clear source time being highly defensive due to the non-discretionary of accreditation when selling compliance services to all of and essential nature of expenditure. The Group’s order our customers. book is at record levels, together with a healthy pipeline of new opportunities. Our margins remain on an upward Investing in customer experience trend and our financial position is strong. The Connaught brand stands for outstanding customer service within a financially stable framework. In order to Connaught is in good shape, our forward earnings deliver and even exceed the level of service our customers visibility is very healthy, our management teams require we have developed our unique customer across the Group continue to develop in both strength experience programme. and depth, and together we face the future with cautious optimism. This programme links the actions and attitudes of our people together with a set of consistent, operational Mark Davies processes which ensure that we deliver an outstanding Chief Executive level of service clearly differentiated from our competition.
Customer experience is more than just customer service – it is the end-to-end experience our customers receive every time they deal with us as an organisation. By
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Sustained investment, continuing success Connaught’s strong operational performance in 2008 translated into significant organic revenue and profit growth which was further enhanced by excellent operational performance from the acquisitions. The Group continued its consistent cash performance.
Acquisitions Connaught has made three acquisitions in the Compliance division further building our capability in the compliance market. Our self-delivery model ensures a consistent UK-wide service differentiating us significantly from the traditional competition.
Financial performance Amortisation of acquisition intangibles Revenue During the year Connaught acquired three businesses which resulted in the recognition of Revenue in the year was £553m (2007: £396m), acquisition intangibles that are being amortised an increase of 40%. Acquisitions contributed over their expected economic lives. £84m to the revenue in the year, underpinned by strong organic growth of 18%. The Social Operating profit Housing division contributed growth of 28% (organic 19%) reflecting a strong market Operating profit increased to £26.9m (2007: position, alongside a strong performance in £17.3m). Operating profit margins have the Compliance division with 130% growth increased to 4.9% (2007: 4.4%). (15% organic). Finance income and finance costs Earnings Before Interest, Tax and Net financing costs for the year were £5.2m Amortisation (EBITA) (2007: £1.5m), including interest on debt to EBITA (before amortisation of acquisition fund acquisitions in the year. intangibles, but after amortisation of other intangibles) has increased to £35.9m (2007: Profit Before Tax (PBT) £19.2m) before an exceptional item of £2m PBT for the year was £21.7m (2007: £15.8m). in relation to the integration of acquisitions within the Compliance division. EBITA margin has increased to 6.5% (2007: 5.1%).
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Amortisation of other intangibles The amortisation charge of £1.0m (2007: £0.9m) relates to costs incurred in “In the year to the development of ConntrolTM, the Group’s proprietary asset management software, and other externally purchased computer software. This charge is August 2008, included within our reported measures.
we completed Taxation three key The taxation charge for 2008 is £6.5m (2007: £4.8m), an effective rate of 29.9% (2007: 30%). acquisitions to Earnings Per Share (EPS) further build Diluted EPS for 2008 (before amortisation of acquisition intangibles, but after amortisation of other intangibles and excluding exceptional items) is 17.5p our capability (2007: 11.7p), an increase of 49%. Basic EPS for 2008 is 12.8p (2007: 10.8p), in the an increase of 18.5%. Dividends compliance The Board is proposing a final dividend in respect of the year ended 31 August 2008 of 1.755p (2007: 1.46p), giving a total dividend in respect of market.” the year ended 31 August 2008 of 2.68p (2007: 2.23p), and representing an increase of 20%. Final dividends relating to 2008 are declared and will be reflected in the 2009 financial accounts.
Cashflow The business has continued to focus on improving sustainable cashflow throughout 2008, and has delivered an adjusted operating cashflow to EBITA return of 74% (2007: 90%). The business remains focused on cash conversion through the efficient management of the cash cycle.
– Capital expenditure Net capital expenditure totalled £8.3m during the year including £1.4m of investment in our asset management system (ConntrolTM), with further investment in IT infrastructure and operational processes to support the growth profile of the business. This includes investment in intangible assets relating to the hub infrastructure in the Compliance division of £2m. A net cash disposal value of £5.2m relates to the disposal of assets during the year related in part to our alignment of the policies of acquired businesses. No material profit was recognised on disposal.
– Purchase of own shares During the year Connaught ESOS trust transferred 319,994 shares in Connaught plc to an offshore trust managed by AIBtrustworthy Limited in Jersey, also during the year 395,522 share options were vested. At the end of this period, the ESOS trust held 859,444 ordinary shares (2007: 934,972) at a cost of £1.7m to hedge the cost of ESOS share obligations.
– Net debt The net debt as at 31 August 2008 was £71m (2007: £17.4m), an increase of £53.6m. This change reflects the cost of acquisitions made during the year, but excludes the deferred consideration of £1.2m.
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Unique technology Conntrol™ is our in-house asset management system designed specifically for the social housing market.
e-risk Manager™ helps companies control health and safety via a web- based system.
Acquisitions Funding and liquidity risk In the year to August 2008, we completed three key As at 31 August 2008, the Group has a committed facility acquisitions to further build the capability in the of £157.3m in place. This facility includes acquisition compliance market. The businesses have been integrated funding and working capital lines which are sufficient into the Connaught Group, and are performing in line for our expected needs. The facilities are supported by with expectations. an RBS led syndicate, and mature in 2012. Of this facility, £54.6m was used for the acquisitions during the year. On 22 October 2007, we acquired National Britannia During August 2008 £10.75m was repaid. Further details Holdings Ltd for the total cost of £96.8m. National of borrowings can be found in Note 24 to the Report and Britannia is a leading national health and safety Consolidated Financial Statements. compliance advisory and training business, which strengthens and enhances the Group’s integrated Interest rate risk compliance solution. During the year we entered into interest rate hedges On 16 October 2007, we acquired Water Technology which fix the Group’s exposure to interest rate Ltd, a water hygiene and treatment business, further movements over approximately 70% of our core strengthening our compliance capability. The business long-term debt. Interest rate policy is monitored by was acquired for a total cost of £9.4m. the Board and is subject to periodic review. Currency derivatives are not used by the business as all material On 28 July 2008, we acquired MSF Ltd, which creates flows occur in sterling. a platform to develop our national fire compliance capability. The net consideration for the business was Credit risk £6.5m, payable in cash. The Group’s position with regard to amounts recoverable on contracts is routinely monitored. Customers of the In addition, on 15 September 2008, we acquired the Group consist substantially of public sector organisations entire share capital of Lowe Group Holdings Ltd, which and contracts are secured on a long-term recurring trades as Necta Ltd, for a total consideration of £7.5m. basis. The Directors consider the customer base therefore Necta is a leading provider of electrical inspection, testing to be of a nature where there is limited credit risk to and training. the Group.
Financial risk management Stephen Hill The main financial risks faced by the Group relate to Group Finance Director the availability of funds to meet business needs, fluctuations in interest rates and the risk of credit default by customers.
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The bigger picture Corporate responsibility has long been embedded in the way we do things at Connaught – not because we feel an obligation to do so, but because we genuinely believe it’s the right thing to do.
Community projects We take part in lots of community projects, from school site-safety assemblies to recycling schemes, as well as sponsoring a number of events. For example, we sponsor community football across the country, bringing children and their parents together to battle it out for the Connaught Community Cup.
Our key areas of focus are on local communities, • Over the past year we have been inviting residents to the environment, health and safety and, of course, vote for investment in their own community groups. our people. That’s why 36,000 people voted for a family centre makeover in Leeds, Lambeth residents asked for their Communities Orangery to be restored and relatives of Sandwell Our aim is to leave a lasting legacy in every community miners finally got the memorial they always wanted by giving people a better place in which to live and work, • In addition to our numerous community centre where they are happy, safe and proud to be. In practice, makeovers, we work with residents’ associations to this takes many shapes and forms – from leading specific transform disused communal areas into neighbourhood initiatives, to helping drive tangible socio-economic gardens and playgrounds that are safe and fun. We are improvements because of the way we do business. also working with our clients to increase the number of green flag public open spaces. Community initiatives To celebrate our 25th year we catalogued snapshots of • We take particular pride in ‘putting youth first’. 25 of this year’s community initiatives. This culminated Already, thousands of children have played for the in ‘The Bigger Picture’ book, which also contains Connaught Cup, taken part in our safety competitions testimonials from key public figures commenting on and attended our career workshops. This year we have the value of our initiatives. We are proud that our joined forces with Clubs for Young People, in support efforts were officially recognised when Business in the of the Department for Children, Schools and Families Community awarded us the ‘Team of the Year’ award for youth agenda. This will potentially reach out to over community impact. 400,000 young people across 3,000 clubs • We have also supported the elderly in various ways such as sourcing adapted alarms for residents across Worcestershire, initiating Community Transport in Glasgow, awarding ’silver surfers’ in Essex, or simply providing a bench for sheltered housing residents in Otley
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24 Corporate Responsibility Report Connaught plc Annual Report 2008
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Local employment and skills development Supporting our clients’ environmental agenda In a challenging economic climate, our commitment to • We currently recycle up to 85% of our waste and creating training and employment opportunities within are continually looking to improve on this figure by the communities in which we work takes on a new sense developing waste management plans aligned with the of urgency. Working in partnership with educational anticipated waste within our partnerships. By recycling institutions, government bodies and training partners, at source we have achieved a dramatic reduction we help to integrate apprentices and the unemployed of waste going to landfill plus a significant increase into the labour market. We are committed to using in material going down renewable routes. This also local labour, suppliers and subcontractors where reduces our costs and we are able to pass on these possible, to stimulate entrepreneurship and yield real savings to our customers economic benefits. • We seek to implement innovative ‘green’ practices wherever possible – whether it’s recycling waste from • We are working with RCT Homes and Community North Somerset kitchen refurbishments as animal Enterprise Wales to deliver Family Employment bedding, or distributing 100% biodegradable starch Initiatives by tackling unemployment and child poverty bags for kitchen waste to tenants in Kingston through skills training • Establishing our own commercial waste and recycling • We maintain Local Training Agreements with the service means we help our clients across the country Learning & Skills Council and Scottish Enterprise comply with the Cleaner Neighbourhoods Act. As • We work with the Construction Industry Training Board the ultimate zero carbon solution, we are piloting a (CITB) to recruit and support apprenticeship placements revolutionary bin which empties itself, eradicating the • Our work experience programme has won the Yorkshire need for transportation and landfill, in several boroughs and Humber Constructing Excellence award in the • Our energy audits help British businesses achieve Leadership and People Development category statutory Energy Performance Certificates. Our gas • A number of our apprentices have been honoured services teams advise clients on the replacement of old, independently this year for both their dedication inefficient gas appliances with energy efficient ones and hard work, most notably by the Learning Skills • We are training 300 ‘green’ engineers through our and British Plumbers Employer Councils. Building on specialist course in ‘green energy’ systems installation the success of our apprentice programmes, we have and have attained accreditation as a training centre for increased our apprentice recruits this year by 40%. solar thermal technology. In partnership with Worcester Bosch Group, we are delivering renewable energy Environment training to maintain ground source heat pumps. We As the Government sets ever higher standards to were also the first in Europe to launch a water efficiency meet the challenges posed by climate change, we are course through a partnership with Welsh Water working closely with the Carbon Trust and independent • We are working with Staffordshire University to collate environmental consultants to measure, monitor and data to improve the quality and access of resident improve our carbon footprint. We continue to take green spaces, by delivering training in environmental proactive steps, both on behalf of our clients and management with our partners in the Midlands. within our own organisation, to minimise our impact on the environment.
“We continue to take proactive steps, both on behalf of our clients and within our own organisation, to minimise our impact on the environment.”
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Community involvement 2008 was the Year of Food and Farming so we organised class trips to local farms to help children understand more about how food grows and to learn more about the environment.
Challenging our own carbon footprint • By embarking on a space rationalisation programme Within Connaught, we are constantly challenging our across our 80 leased locations, we have started to own carbon footprint. Given the mobile nature of our co-locate with clients and our supply chain. work, we have acknowledged that our fleet is a major contributor to our carbon output and we are now in We aim to reduce our carbon output by a further 40% the second year of realising significant efficiencies. over the next two years. There are many ways in which we strive to increase our fuel economy: As our commitment to the environment becomes more widely recognised, we are increasingly speaking about • A new carbon fleet policy ensures our five vehicle ‘green’ issues, on behalf of our sector. For example, as Members of the Business Council for Sustainable grades are now limited to a maximum CO2 level, and speed limiters are fitted to all vans Development and Business in the Community’s Mayday • New ultra-efficient vehicles boast a carbon dioxide Network, we are able to raise awareness of carbon emission of less than 100g per km and have average saving initiatives, tackle issues of fuel poverty and effect fuel efficiency of 74 mpg. These vehicles, used by many legislative change. of our front-line managers, are also exempt from We share best practice within our industry by speaking road tax. Other employees are encouraged to choose at events such as the Chartered Institute of Housing’s ‘greener’ cars with a vehicle tax subsidy offered as Sustainability Forum. We were also recently appointed an incentive to host launch events nationally, on behalf of the • Our in-house software, ConntrolTM, is able to track and Environment Agency, to introduce new Site Waste match jobs to resources, resulting in fewer journeys. Management Plan Regulations which came into force We have also installed vehicle mapping software to in April 2008. optimise vehicle routings • We estimate that we will save over half a million miles This year we were delighted to receive the FTSE4Good a year in journeys by office-based employees, now that environmental accreditation, having been identified we have networked six of our main offices with video by the FTSE All World Developed Index as fulfilling low conferencing facilities impact and social stakeholder requirements, following a monitoring period of over a year.
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Health and safety We work closely with our customers, partners, employees and insurers to ensure that we follow best practice throughout our business and make “We have health and safety our number one priority. This is why we score positively in independent audits and have achieved our 15th RoSPA Gold Award this year, achieved our an accolade few companies can match. 15th RoSPA We support our clients through best practice health and safety forums with the HSE. We also promote health, safety and environmental issues, by holding Gold Award lectures and sponsoring seminars. This year we were principal sponsor and lead lecturer at the revised CDM Regulations conference in conjunction with this year, an the HSE and held joint safety awareness seminars throughout the country. accolade few We support national safety campaigns, such as gas awareness with CORGI, water compliance with the Legionella Control Association (LCA), carbon companies monoxide awareness with the HSE and anti-scald awareness with bathroom suppliers Roper Rhodes. We also run regular ‘stay safe’ workshops in schools, can match.” aimed at pupils who live in the areas in which we are working.
Our accident statistics are published annually and are sent to clients and authorities to highlight our record. Our accident analysis this year is 10% improved on last year, illustrating a positive commitment to health and safety throughout the Group. Our reported incident rate provides confirmation of continual improvement across all business units, with the annual rate consistently falling well below government published statistics.
Having achieved the management quality system ISO 9001, we already encompass the fundamental principles of ISO 14001 within our Safety and Environmental Policy and we aim to obtain certification for all our major offices across the Group by December 2008.
People In addition to ensuring our people work in a healthy and safe environment, as Investors in People since 1996, we are committed to creating career opportunities whilst promoting equality and diversity.
Career opportunities We continue to strive to ensure that our people strategies (both recruitment and development) reflect our commitment to corporate responsibility.
This is achieved by our company-wide talent management and development programmes such as:
• Managing for Success (M4S) – open to all first-time people managers, the aim is to provide them with an understanding of how to manage their teams with due consideration to balancing business and personal developmental needs. The programme carries Institute of Leadership and Management award status
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Recruitment and training For our business to be a success it is crucial for us to recruit, train and promote the right people. The Connaught Academy provides training and development to a range of people, from apprentices to managers.
• Managing for Excellence (M4E) – applies to those Equality and diversity employees who have significantly progressed within Foremost in our ‘people strategy’ is the recognition the company and who now are regarded as future that to be an employer of choice in today’s marketplace leadership ‘talent’ requires a high degree of consideration and respect for • As well as developing people skills beyond the M4S the beliefs and needs of all people. entry level, greater significance is placed within the programme on focusing leadership behavioural We run a ‘respect @ work’ e-learning tool which is development. Within M4E we highlight the socio- being progressively deployed across the company economic benefits of building a lasting legacy within and requires all levels of employees to undertake a the communities in which we work. Connaught was self-awareness programme. This way we can evaluate awarded the Business in the Community Excellence the extent to which diversity awareness has been taken award for the work done by our M4E community on board by an individual. The tool has been developed regeneration work in Bristol in 2007 in partnership with Eversheds, the national law firm, so as to ensure that it reflects current legislation in the • Excellence in Leadership – open to those senior areas of equality and diversity. managers and executives who, by virtue of their responsibility and influence with our people, will We also work in partnership with Fairplay to develop progressively be champions of employee and customer initiatives, projects and activities which encourage a engagement in the future. The programme is delivered more diverse participation in employment, community in partnership with Cranfield University leadership and public life for under-represented groups. • We have also established Connaught Academy training centres around the UK, focused on David Wells local labour development in their respective Company Secretary geographic areas. These areas often include the very neighbourhoods in which we deliver our services. As such, our training centres play a key role in regeneration programmes giving hope and opportunities to disadvantaged youths and the long-term unemployed.
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c99397_BOOK.indb 29 5/11/08 11:24:14 Board of Directors
Mark Tincknell – Executive Chairman Tim Ross – Deputy Chairman and Mark, 47, has been employed by Connaught since the Senior Independent Director early 1980s, originally ‘working on the tools’ on the Tim, 59, read law at Oxford University before qualifying company’s first ever contract. Under his leadership the as a solicitor and practising in the City of London, Group has developed into one of the leading property- specialising in property and construction. He subsequently related support services organisations within the UK. He joined George Wimpey plc as a legal adviser before completed an MBA at Exeter University in 1990 and led studying at London Business School and moving into both the MBO in 1996 and the admission to AIM in 1998 general management. He was a Main Board Director at which time he became CEO. Mark is now Executive of George Wimpey from 1991 to 1996 and is currently Chairman. He will focus on sustaining Connaught’s record Non-Executive Chairman of Hargreaves Services plc and of growth whilst maintaining its reputation as a visionary, Superglass Holdings plc and a Director of Lavendon entrepreneurial and people-focused business. Group plc, May Gurney Integrated Services plc, Ennstone plc and of other, private companies. Mark Davies – Chief Executive Mark, 48, joined the Group in August 2004 as Chief Robert Alcock – Non-Executive Director Operating Officer. Following an early career in finance, Robert, 67, was a Non-Executive Director at Capita sales and marketing roles, Mark has run businesses for Group plc for 12 years and Chairman of Capita’s Audit the last 20 years – with Courtaulds plc and latterly as a Committee from 1993 to 2005. He is a Senior Non- divisional Managing Director of Chubb plc, responsible Executive Director and Chairman of the Audit Committee for its activities in the UK, Ireland and Southern Africa. at Huntsworth plc, Chairman of Anglo and Overseas plc, He has an MBA from INSEAD. He became Chief Executive Senior Independent Director of Leed Petroleum plc and in January 2006 and sees his role as ‘ensuring that a Director of the Next Pension Trustees Limited. Connaught delivers on its undoubted potential’. Caroline Price – Non-Executive Director Stephen Hill – Group Finance Director Caroline, 44, was Finance Director at TBI plc (now owned Stephen, 40, joined Connaught in September 2006 after by Abertis), a fast-growing FTSE 250 company, between 14 years’ experience of commercial and plc financial roles. 1995 and 2005. Between 1985 and 1995 she spent ten He was Corporate Finance Director at Serco Group plc years at Pricewaterhouse Coopers in both the audit and from 2001 to 2006 and prior to that he was European corporate finance practice. Caroline is a member of the Finance Director at Black & Decker Inc. Stephen is a audit committee of the Courtauld Institute of Art. Chartered Accountant and associate member of the Institute of Corporate Treasurers. He has a BA (Hons) in European Finance and a Diplom Betriebswirt.
30 Board of Directors Connaught plc Annual Report 2008
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Mark Tincknell Executive Chairman
Tim Ross Deputy Chairman and Senior Independent Director
Mark Davies Chief Executive
Robert Alcock Non-Executive Director
Stephen Hill Group Finance Director
Caroline Price Non-Executive Director
Connaught plc Annual Report 2008 Board of Directors 31
c99397_BOOK.indb 31 5/11/08 11:24:39 Connaught plc
Contents
Directors’ Report...... 33
Corporate Governance Report ...... 36
Remuneration Report...... 39
Statement of Directors’ Responsibilities...... 48
Independent Auditors’ Report to the members of Connaught plc...... 49
Consolidated Income Statement...... 51
Consolidated Statement of Changes in Equity...... 52
Consolidated Balance Sheet ...... 53
Consolidated Cash Flow Statement...... 54
Statement of Consolidated Accounting Policies...... 55
Notes to the Consolidated Financial Statements ...... 62
Five-year Summary (Unaudited)...... 84
Company Financial Statements contents...... 85
32 Financial Statements Connaught plc Annual Report 2008
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The Directors present their Annual Report and the audited financial statements for the year ended 31 August 2008.
Principal activity
The principal activity of the Group continues to be the provision of integrated asset services to the public and private sectors.
Review of business and future developments
The results of the Group can be found in the consolidated income statement on page 51.
The review of the Group’s business during the year and of future developments is included in the Chairman’s Statement, Operations Review and Financial Review set out on pages 6 to 21.
Details of the Group’s risk management objectives, policies and responses are set out in the Financial Review on page 21.
Acquisitions
On 15 October 2007, the Group acquired the entire share capital of Water Technology Group, a water hygiene and treatment business, for a total cost of £9.4m.
On 22 October 2007, the Group acquired the entire share capital of National Britannia Holdings Limited, a health and safety compliance business, for a total cost of £96.8m.
On 28 July 2008, the Group acquired the entire share capital of MSF Limited, a fire service business, for a net consideration of £6.5m.
Dividend
The final dividend of 1.46p per ordinary share in respect of 2007 was paid on 7 March 2008. An interim dividend of 0.925p (2007: 0.77p) per ordinary share was paid on 4 July 2008 and the directors recommend a final dividend of 1.755p (2007: 1.46p) for the year. After deducting the interim dividends for the year, the retained profit to be transferred to reserves is £12.3m (2007: profit of £9.0m).
Directors
The Directors who held office during the year and up to the date of this report are as follows:
M W Tincknell M D Davies S R Hill T S Ross C Price R Alcock
Information on the Directors’ interests in the ordinary shares of the Company during the year, and the rules concerning the reappointment and replacement of Directors can be found in the Remuneration Report on pages 39 to 47.
Employees
It is the Group’s policy to employ the most suitably qualified people, regardless of sex, ethnic origin or religion. The Group encourages the employment and career development of disabled people and the development and training of those employees who became disabled while in the Group’s employment.
The Group regularly reviews its responsibilities for the health, safety and welfare of its employees.
The Group recognises the benefit of keeping employees informed of the business’ performance and updates employees through regular communications.
The Company offers participation in a Share Incentive Plan for eligible employees.
Connaught plc Annual Report 2008 Financial Statements 33
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Internal audit function
The Directors consider that due to the size of the Group and the effectiveness of existing control and review procedures, including independent reviews of business units on a regular basis, a separate internal audit function is not required.
Share capital
The authorised share capital of the Company at 31 August 2008 was 162,700,000 ordinary shares of 2p each all having the same rights. During the year the authorised share capital was increased by 37,700,000 ordinary shares of 2p each all having the same rights at an Extraordinary General Meeting on 17 October 2007.
During the year 415,000 ordinary 2p shares were issued as a result of the maturing of share options and SAYE schemes.
Share option schemes
On 5 December 2007 the Company approved the 2007 Long-Term Incentive Plan (LTIP) for senior executives. The LTIP provides for the grant of performance awards and matching awards. Further details of the 2007 LTIP scheme, including the vesting conditions and grant awards made during the year, are included in the Remuneration Report on pages 39 to 47.
The Group also operates an all employees Share incentive Plan (SIP) The employees have to remain employed in the company for 3 years before a number of matched shares vest. All shares are purchased on the open market and the company held 521,135 shares on behalf of employees at the 31 August 2008 (2007: 295,334).
Substantial shareholdings
At the close of business on 16 October 2008 (being the latest practical date prior to the signing of the Directors’ Report), the Company had received notifications of the following substantial interests representing over 3% of the issued share capital:
Aegon Asset Management UK 9.01% Lloyds TSB 8.43% Black Rock Investment Management (UK) 8.18% Goldman Sachs Group Inc 5.32% Old Mutual Asset Managers 4.97% Standard Life Investments 4.88% Legal & General Group plc 4.01% Morley Fund Management 3.06%
Creditor payment policy
The Group’s policy is to agree terms with suppliers and pay in accordance with agreed terms. Where terms are not negotiated, the Group seeks to pay in accordance with the suppliers’ standard terms. At 31 August 2008, the Group had 49 days’ purchases outstanding (2007: 48 days).
Research and development
The Group is undertaking the development of a specific product that is anticipated to be profitable within identified markets. The costs attributable to the development are deferred and amortised over the expected life of the product. These deferred costs are currently being amortised over 5 years.
Donations
During the year the Group made donations of £20,878 (2007: £26,454) to UK charities. There were no donations to a political party (2007: £nil).
Post balance sheet events
On 15 September 2008 the Company agreed to acquire the entire share capital of Lowe Group Holdings Ltd, which trades as Necta Ltd, for £7.5m.
34 Financial Statements Connaught plc Annual Report 2008
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Takeover Directive
The Directors have considered the disclosure requirements of the Takeover Directive, and to the extent that they are relevant, the disclosures have been made.
Auditors and disclosure of information to auditors
(a) So far as each of the Directors is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
(b) Each of the Directors has taken all the steps they ought to have taken individually as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of S234ZA of the Companies Act 1985.
In accordance with section 384 of the Companies Act 1985, a resolution for the appointment of PricewaterhouseCoopers LLP as auditors of the Group is to be proposed at the forthcoming Annual General Meeting.
By order of the Board Connaught House Grenadier Road Exeter Business Park Exeter Devon EX1 3QF
David Wells Company Secretary 24 October 2008
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Statement of Compliance with the 2006 Combined Code on Corporate Governance (“Code”) and the Application of its Principles.
In the opinion of the Directors, the Company has, throughout the year ended 31 August 2008, complied with the provisions of Section 1 of the Code, except in respect of the role of the Executive Chairman. As reported last year, Mark Tincknell serves as Executive Chairman. Mr Tincknell has served the Group for a number of years, and the Board considers that Mr Tincknell’s experience and contribution to the strategic direction of the Group remain invaluable.
The Board continues to assess how the Company applies the provisions of the Code on an ongoing basis and continues to monitor any changes required to further develop and enhance its governance policies.
The Board
The Board is responsible for delivering sustained growth in shareholder value to the Company’s shareholders in a manner that meets legal and regulatory requirements and is consistent with good corporate governance.
The Board comprises an Executive Chairman, two Executive Directors and three independent Non-Executive Directors.
The Board held eight scheduled meetings during the year under review. The attendance of each Director at these meetings, and those of the Audit and Remuneration Committee is shown in the table below.
Board Audit Remuneration Eligible Eligible Eligible Attended to attend Attended to attend Attended to attend
Mark Tincknell 8 8 – – – – Mark Davies 8 8 – – – – Stephen Hill 8 8 – – – – Tim Ross 8 8 3 3 3 3 Robert Alcock 8 8 3 3 3 3 Caroline Price 8 8 3 3 3 3
Minutes of the Board meetings are agreed by all Directors, ensuring that an accurate record is made of all relevant matters.
Board decisions are generally on matters of strategy, acquisitions, policy and budgets. Decisions on the day to day management of the Group are delegated to a Group Management Board comprising the Executive Directors and business unit heads. Relevant papers are circulated to all members of the Board on a timely basis and in advance of each meeting to ensure that there is a full and informed debate at Board level and, in particular so that the Non-Executive Directors can contribute fully, as required by the Code.
The Group maintains a schedule of matters formally reserved for decisions by the Board, including approval of significant operating strategies, release of statutory and regulatory disclosures, composition of relevant Committees and management structures, and matters relating to ethical, health and safety concerns. The Group has approved terms of reference for all other Board committees. These are available on request and are published on the Company’s website at www.connaught.plc.uk. The Non-Executive Directors’ terms and conditions of appointment are available for inspection as required by the Code.
There is a formal policy in place to ensure that all Directors have access to independent professional advice if they have need to seek it. There is a formal induction process for new Directors and training is available when required.
Chairman, Chief Executive and Senior Independent Director
The roles of Chairman (Mark Tincknell) and Chief Executive (Mark Davies) are separate and their responsibilities independently defined.
The Code recommends that the Board should appoint one of its independent Non-Executive Directors to be the Senior Independent Director (SID). Tim Ross is the Board’s SID and is available to shareholders if they have concerns that contact through the normal channels of Chairman, Chief Executive or Group Finance Director have failed to resolve or for which such contact would be inappropriate.
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The Non-Executive Directors, led by Tim Ross, the Senior Independent Director, meet regularly in the absence of the Executive Directors.
Board balance
The Board comprises three Executive Directors and three Non-Executive Directors. All of the Non-Executive Directors are viewed as independent of management, are on a fixed fee basis, and are considered free from any business or other relationship which could materially interfere with the exercise of their independent judgement.
Tim Ross has served on the Board for ten years. Notwithstanding this length of service, Mr Ross is still considered by the Board to be independent in terms of Code A3.1 due to his robust judgement and character. In addition, his legal training and considerable corporate experience at George Wimpey plc, Lavendon Group plc and Ennstone plc remain invaluable to Connaught during this stage in the Group’s development. Therefore, he will continue to serve as a Non-Executive Director, but will submit himself for re-election annually at the Company’s Annual General Meeting.
Re-election
In accordance with the Articles of the Company and recommendations of the Code, a maximum of one third of the Directors offer themselves for re-election each year, provided that each Director shall stand for re-election within a time period not exceeding three years from the date of their previous re-election, with the exception of Mr Ross, as outlined in the preceding section.
Performance evaluation
The Board undertakes an annual evaluation of its performance and effectiveness led by the Senior Independent Director. The Directors complete detailed appraisals of the Board and its Committees, from which action plans are implemented to ensure the continued development of the Board. The evaluation of the performance of the Senior Independent Director is assessed by the other Non-Executive Directors.
Nomination Committee
The Nomination Committee is chaired by Tim Ross and its other members are Mark Tincknell and Caroline Price and accordingly the Group has complied with the recommendations of the Code that a majority of the members of the Nomination Committee shall be independent Non-Executive Directors. It reviews the composition of the Board and makes recommendations with regard to changes, both in the nomination of new Directors and the continuation of the appointment of existing Directors. It is also responsible for the Board’s succession planning.
Remuneration Committee
The Remuneration Committee comprises the three Non-Executive Directors, Robert Alcock, Tim Ross and Caroline Price, who acts as its Chairman. The Committee determines the employment terms and total remuneration of the Executive Directors and senior management. The Committee makes recommendations to the Board on an overall remuneration package for Executive Directors in order to attract, retain and motivate high quality executives capable of achieving the Group’s objectives. The package includes basic salary, pensions, performance related bonus and share options. Directors’ remuneration for the year is shown in the separate Remuneration Report, beginning on page 39.
The Remuneration Committee considers it is currently complying in full with the relevant provisions of the Code and outlines its procedures and guidelines in the Remuneration Report. Those disclosures form part of this report.
The Board determines the remuneration of the Non-Executive Directors.
Dialogue with shareholders
The Company is committed to maintaining a good dialogue with all its shareholders through the provision of regular interim and annual reports, other trading updates and the Annual General Meeting. The Group also arranges individual meetings with its institutional shareholders and analysts are invited to briefings by the Company immediately after the announcement of the interim and full year results. The views of analysts, brokers and major shareholders are relayed to the Board through the Chairman, Chief Executive and Group Finance Director.
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Constructive use of the Annual General Meeting
The Company holds its Annual General Meeting once a year at a location and time judged to be most convenient for its entire shareholder base. This provides an opportunity for all shareholders to be updated on the Company’s progress and ask questions of the Board. The Board complies with recommendations of the Code that the Notice of the Annual General Meeting and related papers should be sent to shareholders at least 20 working days before the meeting.
Financial reporting
As set out in the Statement of Directors’ Responsibilities on page 48, the Board has ultimate responsibility for both the preparation of financial records and accounts and the monitoring of systems of internal financial control.
Internal financial control
The Board is responsible for establishing and maintaining the Group’s internal financial control systems and reviewing its effectiveness. During the period covered by this report the Board has applied principle C2 of the Code by maintaining an ongoing and planned process which has identified, evaluated, reported and managed the significant risks faced by the Group during the financial period up to the date of this report. The process is in accordance with the Financial Reporting Council’s guidance: Internal Control, Revised Guidance for Directors on the Combined Code. In accordance with provision C2.1 of the Code, the Board confirms that through the Audit Committee it has reviewed the effectiveness of the Group’s systems of internal controls for assessing significant operational and strategic risks. The controls reviewed covered the financial, operational, compliance and risk management systems that have been in operation during this reporting period. The identification, management and monitoring of strategic risk remains the sole responsibility of the Board. The Board, in seeking to achieve the Group’s business objectives, cannot offer an absolute guarantee that the application of a risk management process will overcome, eliminate or mitigate all material risks. However, by developing and operating an annual risk management process to identify, report and manage material risks the Board is able to provide a reasonable assurance against material misstatement or loss.
Audit Committee and auditors
The Audit Committee comprises the three Non-Executive Directors, Tim Ross, Caroline Price (Chartered Accountant) and Robert Alcock (Chartered Accountant) who acts as its Chairman. The Committee met three times during the year under review. The members of the Audit Committee have relevant and recent financial experience at senior executive level. The Board, through the Audit Committee, has established formal and transparent arrangements for financial reporting, internal controls, the review of regulatory announcements relating to the Group’s financial performance, and external auditing. As required by its terms of reference, the Committee has, during the period under review, considered the Group’s internal financial controls, financial disclosure and areas of financial judgement. The Group has a formal policy governing the use of the Group’s auditors for non-audit work. During the year, the auditors were engaged to advise on the working capital review of acquisitions and tax advice. The Committee considered these engagements to be appropriate due to the auditors familiarity with the Group’s business and systems. The Committee has reviewed the scope and results of the audit as well as the non-audit services, the cost effectiveness, independence and objectivity of the auditors and has approved their fees. The Committee has also reviewed the Group’s arrangements to enable employees to raise confidentiality concerns about possible improprieties and the processes in place to investigate and follow these up. It has reviewed the interim and final results published in respect of the period under review and has considered its own effectiveness.
Going Concern
After making appropriate enquiries, the Directors consider that the Group has adequate resources to enable it to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
David Wells Company Secretary 24 October 2008
38 Financial Statements Connaught plc Annual Report 2008
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This report of the Remuneration Committee has been prepared in accordance with the requirements of the Listing Rules of the UK Listing Authority, the Directors’ Remuneration Report Regulations 2002 and the provisions of the 2006 Combined Code and has been approved by the Board.
Information relating to the Remuneration Committee, remuneration policy, pension policy, Non-Executive Directors’ remuneration, Directors’ service contracts and Company performance have not been audited.
Information relating to individual Directors’ remuneration, Directors’ share options, Directors’ pension entitlements, Directors’ interests and share options and other share awards have been audited.
Part A Unaudited Information
Remuneration Committee
The Remuneration Committee comprises three Non-Executive Directors of the Company, Robert Alcock, Tim Ross and Caroline Price, who acts as Chairman of the Committee. All of the Non-Executives are considered independent by the Company (please refer to the Board’s consideration of Mr Ross’ independence in the Corporate Governance section of this Annual Report). The terms of reference for the Committee are available on the Company’s website. During the year the Committee consulted Mr MW Tincknell (Chairman), Mr MD Davies (Chief Executive) and Mr SR Hill (Group Finance Director) about its proposals. The Committee also took advice on executive remuneration from Hewitt New Bridge Street (“HNBS”) who it has appointed as its independent remuneration advisers. HNBS provided no other services to the Company during the year.
The Committee is responsible for:
• determining and agreeing with the Board the framework or broad policy for the remuneration of the Chairman, the Chief Executive, the Executive Directors, the Company Secretary and certain other members of the executive management;
• reviewing the ongoing appropriateness and relevance of the remuneration policy;
• approving the design of, and determining targets for, any performance related pay schemes operated by the Company and approving the total annual payments made under such schemes; and
• reviewing the design of all share incentive plans for approval by the Board and shareholders. For any such plans, the Committee determines each year whether awards will be made and, if so, the overall amount of such awards, the individual awards to Executive Directors and other senior management and the performance targets to be used.
Non-Executive Directors’ fees are determined by the full Board (with relevant individuals absenting themselves from discussions where appropriate and none of whom take part in discussions regarding their own remuneration).
Remuneration policy
The Group’s remuneration policy is:
• to ensure that individual rewards and incentives are aligned with the performance of the Group and the interests of shareholders;
• to maintain a competitive overall remuneration package in order to attract, retain and motivate high calibre executives capable of achieving the Group’s objectives;
• to ensure that performance related elements form a significant proportion of total remuneration.
The Executive Directors’ total remuneration consists of salary, annual bonus, long-term incentives, pensions and other benefits. The Committee believes that a significant proportion of the Executive Directors’ potential rewards should be performance related, and seeks to achieve an appropriate balance between annual and long-term performance objectives through the annual cash-based bonus plan and share-based longer-term incentives.
In line with the Association of British Insurers’ Guidelines on Responsible Investment Disclosure, the Committee will ensure that the incentive structure for Executive Directors and senior management will not raise environmental, social or governance (“ESG”) risks by inadvertently motivating irresponsible behaviour. More generally, with regard to the overall remuneration structure, there is no restriction on the Committee which prevents it from taking into account corporate governance on ESG matters.
Connaught plc Annual Report 2008 Financial Statements 39
c99397_BOOK.indb 39 5/11/08 11:24:40 Remuneration Report continued
Remuneration policy continued
In developing and reviewing its remuneration policy the Remuneration Committee gives full consideration to the provisions of the 2006 Combined Code and has complied with the Code’s provisions relating to Directors’ remuneration throughout the year. The Remuneration Committee also takes account of pay and conditions in the Group as a whole.
Basic salary The Executive Directors’ salaries are determined by the Committee as near as is practicable to the beginning of each year. In deciding appropriate levels, the Committee considers individual performance during the year and relies on objective research which gives up-to-date information on appropriate comparator companies in the Support Services sector and companies of a similar size in general industry.
The current salaries of the Executive Directors, as at 1 September 2008, are: Mark Tincknell £400,000, Mark Davies £400,000 and Stephen Hill £275,000. The Committee considers that the increase in salary levels of the Executive Directors are entirely appropriate in light of base salary levels provided by other sector and size comparator companies and the continued outstanding performance of this management team in difficult general economic conditions.
Annual bonus Potential rewards under the Performance Related Bonus Scheme are based on the achievement of challenging targets determined by the Committee at the start of each year. The maximum bonus payable to Executive Directors is 100% of salary. In the year to 31 August 2008, bonuses were dependent on the achievement of demanding Group financial objectives, measured in terms of achieving and exceeding Earnings per Share growth targets.
The bonuses payable to the Executive Directors for the year under review reflect another year of continued growth in the business despite deteriorating general economic conditions and excellent Group and individual performance.
Long-term incentives In the year under review, the Company operated the 2007 Connaught LTIP Scheme as the sole long-term incentive for Executive Directors, an approach it intends to continue in the forthcoming year.
2007 Long-Term Incentive Plan (LTIP) The 2007 LTIP provides for the grant of performance awards and matching awards.
For the most senior executives, broadly the Executive Directors and senior function and business unit heads, initial awards under the LTIP made in the year under review could be made in shares worth 150% of salary. To ensure that the senior management was fully incentivised to effect a speedy integration of National Britannia, while continuing to deliver excellent value to shareholders, the first awards under the plan made in December 2007 were made over shares at this 150% of salary level. For the forthcoming and following years, the “normal” award level is 100% of salary, although the Committee can grant awards over shares worth up to 200% if it considers it appropriate to do so in exceptional circumstances. The Committee will take account of the continuing excellent performance of the Group and of the Executive Directors, whose retention and continued motivation is crucial to the continued delivery of returns to shareholders, when determining the level of the next awards to be made shortly after the AGM in December 2008.
In addition to awards of performance shares, executives are offered the opportunity to invest up to 50% of their net annual bonus in Connaught shares and in return receive an award of matching shares on a 2:1 gross basis for the most senior executives (and on a 1:1 gross basis for other participants).
All awards to the most senior executives (i.e. both performance share and matching share awards) vest after a three year period if demanding and stretching performance conditions have been achieved. For half of initial awards under the Plan, the performance condition was based on the Company’s Total Shareholders Return (TSR) performance against a comparator group of FTSE 350 companies from the Support Services and Construction and Materials Sectors.
40 Financial Statements Connaught plc Annual Report 2008
c99397_BOOK.indb 40 5/11/08 11:24:40 Remuneration Report continued
More particularly, this portion of these awards will vest as follows:
Percentage of this portion of award Connaught’s TSR ranking against the that vests Comparator Group
Nil Below median 25% Median Between 25% and 100% Between median and upper quartile
The remaining 50% of the awards made in the year under review are subject to an EPS-based performance condition based on real growth in Connaught’s adjusted EPS.
More particularly, this portion of awards will vest as follows:
Percentage of this portion of award Average annual compound growth in that vests Adjusted EPS
Nil Straight-line vesting will occur between the targets. To the extent that the performance conditions are not met in full at the end of the three year performance period, awards lapse. The Committee intends to adopt the same basic approach to performance conditions that will apply to awards made in the forthcoming year (i.e. a split of challenging EPS and TSR targets) on the basis that the approach provides a balanced incentive to generate above market returns and deliver significant financial growth. Pension policy The Company makes contributions of 15% of the salaries of Mark Davies and Stephen Hill to a defined contribution (money purchase) Executive Pension Scheme and 15% of the salary of Mark Tincknell to a defined contribution (money purchase) private pension arrangement. Pension benefits in respect of the Executive Directors are given in the table on page 43. Non-Executive Directors’ remuneration The remuneration of the Non-Executive Directors is determined by the Board in accordance with the Articles of Association and taking account of time commitment, responsibility and fee levels paid in other comparable organisations. The Non-Executive Directors do not have service contracts with the Company, neither are they eligible for bonuses, pensions or participation in the Company’s share incentive arrangements. The table below shows the date of appointment and re-appointment for each of the Non-Executive Directors. Tim Ross 5 December 2007 (re-appointment) Robert Alcock 1 September 2006 Caroline Price 1 September 2006 Connaught plc Annual Report 2008 Financial Statements 41 c99397_BOOK.indb 41 5/11/08 11:24:40 Remuneration Report continued Directors’ service contracts In accordance with recommended practices under the 2006 Combined Code, it is the Company’s policy to have service contracts for Executive Directors which contain a notice period of not more than twelve months. The Executive Directors all have service contracts with the Company, details of which are as follows: Contractual termination Contract date Unexpired term and notice period payments Mark Tincknell 1 September 2005 Rolling contract 12 months None Mark Davies 1 December 2005 Rolling contract 12 months None Stephen Hill 1 September 2006 Rolling contract 12 months None None of the Executive Directors currently earn remuneration from external non-executive appointments. Such appointments can be taken up, provided they do not prejudice the Director’s ability to fulfil his duties at Connaught. Whether any related fees are retained by the executive or remitted to the Company will be considered on a case-by-case basis. With the exception of service contracts there are no contracts in which any Director has a material interest. Company performance This graph shows a comparison of the Company’s total shareholder return (share price growth plus dividends paid) with that of the FTSE All-Share Support Services Index over the last five financial years. The Company has selected this index as it comprises companies with broadly similar activities and provides an appropriate indication of the Company’s relative performance for these purposes. Total Shareholder Return 700 600 500 400 £ Value 300 200 100 Source: Thomson Financial 0 31/08/2003 31/08/2004 31/08/200531/08/200631/08/200731/08/2008 Connaught plc FTSE All-Share Support Services Index This graph shows the value, by 31 August 2008, of £100 invested in Connaught plc on 31 August 2003 compared with the value of £100 in vested in the FTSE All-Share Support Services Index. The other points plotted are the values at intervening financial year-ends. 42 Financial Statements Connaught plc Annual Report 2008 c99397_03_Front.indd 42 5/11/08 12:24:25 Remuneration Report continued Part B Audited Information Directors’ remuneration Health Fees or Vehicle insurance Pension salary Bonus Benefits benefits Total Total contributions 2008 2007 2008 2007 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 M W Tincknell 350 223 17 1 591 416 55 44 M D Davies 350 223 17 1 591 416 55 56 S R Hill 225 156 15 396 233 36 30 T S Ross 50 50 50 – R Alcock 35 35 35 – C Price 27 27 27 – A Darkin – – 23 3 1,037 602 49 2 1,690 1,200 146 133 During the year no Directors (2007: nil) exercised share options resulting in a gain of £nil (2007: £nil). No changes in the beneficial or non beneficial interests of the Directors have occurred to 24 October 2008, except for the salary increases noted on page 40. Directors’ share incentives According to the Register of Directors’ interests, the rights of the Directors to subscribe for shares or debentures in Connaught plc are as follows: Number at Exercised / Number at 1 September lapsed / 31 August Earliest Exercise Date of 2007 Granted in waived in 2008 exercise price grant (2p shares) year year (2p shares) date Expiry date (pence) M W Tincknell 1998 LTIP 1 Dec 2004 81,000 – – 81,000 15 Dec 2007 1 Dec 2014 – 1998 LTIP 31 Dec 2006 20,637 – – 20,637 31 Dec 2008 31 Dec 2016 – 2007 LTIP 5 Dec 2007 – 137,076 – 137,076 5 Dec 2010 5 Dec 2017 – 101,637 137,076 – 238,713 M D Davies 1998 LTIP 1 Dec 2004 81,000 – – 81,000 15 Dec 2007 1 Dec 2014 – 1998 LTIP 31 Dec 2006 20,637 – – 20,637 31 Dec 2008 31 Dec 2016 – 2007 LTIP 5 Dec 2007 – 137,076 – 137,076 5 Dec 2010 5 Dec 2017 Share options 6 Dec 2004 2,500,000 – – 2,500,000 6 Dec 2007 6 Dec 2014 95 2,601,637 137,076 – 2,738,713 S R Hill 2007 LTIP 5 Dec 2007 – 88,120 – 88,120 5 Dec 2010 5 Dec 2017 – 2007 LTIP 18 Dec 2007 – 10,990 – 10,990 18 Dec 2010 18 Dec 2017 Share options 1 Sep 2006 1,000,000 – – 1,000,000 1 Sep 2009 1 Sep 2016 203 1,000,000 99,110 – 1,099,110 The market price of the Company’s shares as at 31 August 2008 was £4.00 (2007: £3.06) and on 5 December 2007 and on 18 December 2007 was £3.83 and £3.64 respectively. The share price in the year varied between £3.19 and £4.31. (2007: £2.00 and £3.49). The relevant performance conditions for all awards are described on pages 40, 41 and 44. Directors’ pension entitlement The Company made contributions of 15% of the salaries of Mark Davies and Stephen Hill to an Executive Pension Scheme and 15% of the salary of Mark Tincknell to a private pension arrangement. Connaught plc Annual Report 2008 Financial Statements 43 c99397_BOOK.indb 43 5/11/08 11:24:40 Remuneration Report continued Directors’ interests The Directors who held office at the end of the financial year, and up to the date of this report, had the following beneficial interests in the shares of Connaught plc as recorded in the Register of Directors’ share interests below. No Director had shares in any other Group company. Interest at beginning of year or at Interest at Class of date of Interest at 24 October share appointment end of year 2008 M W Tincknell Ordinary 2p 3,012,175 1,309,843 1,309,843 M D Davies Ordinary 2p 217,500 257,045 257,045 T S Ross Ordinary 2p 19,200 22,690 22,690 S R Hill Ordinary 2p 5,000 9,151 9,151 R Alcock Ordinary 2p 10,000 11,818 11,818 C Price Ordinary 2p – – – Caroline Price is prevented from holding shares in the Company due to her spouse’s professional independence rules. During the year, the following share transactions were made by the Directors: On 22 October 2007 the following Directors acquired shares under the National Britannia acquisition open offer at a price of £3.10. Mark Tincknell 547,668 shares: Mark Davies 39,545 shares: Stephen Hill 909 shares: Tim Ross 3,490 shares and Robert Alcock 1,818 shares. On 18 December 2007 Stephen Hill acquired 3,242 shares as part of the 2007 LTIP annual bonus scheme at a price of £3.64. On 2 April 2008 Mark Tincknell transferred 559,842 shares to his wife, Caryl Tincknell and 2,250,000 shares to a Trust of which Mr Tincknell was the primary beneficiary. On 29 April 2008, the Trust disposed of 2,250,000 shares. Share based payments The Group recognised the following expenses relating to equity-settled share based payment transactions: 2008 2007 £m £m Executive Share Option Scheme 0.3 0.4 Long-Term Incentive Plan 1.0 0.1 1.3 0.5 44 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 44 5/11/08 11:24:40 Remuneration Report continued Executive Share Option Scheme The Executive Share Option Scheme (ESOS) was introduced in November 1998. Under the ESOS the Remuneration Committee was able to grant options over shares in the Company to senior executives of the Company. Options were granted on a discretionary basis relative to executives’ seniority within the Group. Options were granted with a fixed exercise price equal to the market price of the shares under option at the date of grant. The contractual life of an option is ten years. Options granted under the ESOS will become exercisable on the third or fifth anniversary of the date of grant, subject to the growth in earnings per share over the period exceeding an average of inflation plus 5% to 15%. Exercise of an option is subject to continued employment. Options were valued using the Black Scholes option pricing model*. The Black Scholes model is considered to be appropriate for valuing options granted under this scheme as it most closely models management’s best assessment of the likely behavioural patterns of the option holders. The model uses the following assumptions: 2007 Grant date 2008 September 2006 – October 2007 August 2007 Weighted average share price at grant date 362.4p 242p Weighted average exercise price 362.4p 242p Expected life 3 – 5 years 3-5 years Expected volatility 17.6 – 23.5% 17.6 – 23.5% Risk free rate 4.43 – 4.70% 4.43 – 4.70% Expected dividend yield 1.0% 1.0% Weighted average fair value per option 54.4p 34.9p *as outlined on pages 58 and 90: Share-based payments policy. The model assumes participatory employees remain in employment with the Group and that all performance conditions are met. 2008 2007 Weighted Weighted average average exercise price exercise price Number Pence Number Pence Outstanding at 1 September 6,527,500 146.8 5,177,500 112.2 Granted 700,000 362.4 1,825,000 242.1 Lapsed (850,000) 298.5 (325,000) 175.9 Exercised (415,000) 125.8 (150,000) 50.2 Outstanding at 31 August 5,962,500 148.5 6,527,500 146.8 Exercisable at 31 August 3,212,500 94.9 277,500 50.0 The weighted average share price at the date of exercise for share options exercised during the year was 396.9p (2007: 306.2p). The options outstanding at 31 August 2008 had a weighted average exercise price of 148.5p (2007: 146.8p) and weighted average remaining contractual life of 7.0 years (2007: 7.9 years). The expected volatility of the share price is based on historical volatility over the last 3 years preceding the grant date. 1998 Long-Term Incentive Plan (LTIP) The 1998 Long-Term Incentive Plan (1998 LTIP) was introduced in November 1998. The 1998 LTIP allowed for a bonus in shares or a mixture of shares and cash to be granted to Directors and senior managers on exceeding profit growth targets. The scheme provided bonus shares equal to the value of an agreed percentage of the profits of the relevant business over the budgeted profit and after accounting for any other bonuses due to be paid. In normal circumstances, the shares granted are held for 3 years before vesting absolutely and the employee must generally remain in the employment of the Group in order for the bonus shares to vest. Connaught plc Annual Report 2008 Financial Statements 45 c99397_BOOK.indb 45 5/11/08 11:24:41 Remuneration Report continued The fair value of options granted under the 1998 LTIP is measured as the market price of the ordinary shares on the date of grant, less the present value of dividends expected to be paid during the vesting period. This method is considered to be the most appropriate for valuing options granted under the 1998 LTIP as it treats the options as share awards. 2007 Long-Term Incentive Plan (LTIP) The 2007 Long-Term Incentive Plan (2007 LTIP) was introduced in December 2007. The Plan provides for the grant of two types of awards (i) performance awards, being conditional rights to receive shares subject to continued employment over the vesting period and the satisfaction of performance criteria and (ii) matching awards, akin to performance awards except the initial grant and subsequent vesting of which are also conditional on the retention of linked investment shares, acquired prior to the grant of the matching award from an executive’s annual bonus. The fair value of options granted under the 2007 LTIP is measured as the market price of the ordinary shares on the date of grant, less the present value of dividends expected to be paid during the vesting period. This method is considered to be the most appropriate for valuing options granted under the 2007 LTIP as it treats the options as share awards. The model uses the following assumptions: 2007 2008 2008 December 2006 Grant date (2007 LTIP) (1998 LTIP) to April 2007 Share price at grant 365.0/386.0p 362.4p 292.0/333.5p Exercise price Nil Nil Nil Vesting period 3 Years 3 Years 3 years Option life 3 Years 3 Years 3 years Expected life 3 Years 3 Years 3 years Risk free rate 4.57% 4.57% 4.57% Expected dividend yield 1.0% 1.0% 1.0% The model assumes participatory employees remain in employment with the Group and that all performance conditions are met. 2008 (2007 LTIP) 2008 (1998 LTIP) 2007 Weighted Weighted Weighted average average average exercise exercise exercise price price price Number Pence Number Pence Number Pence Outstanding at 1 September – Nil 717,334 Nil 603,230 Nil Granted 772,777 Nil 660,812 Nil 159,970 Nil Waived (54,177) Nil (331,546) Nil (1,567) Nil Exercised – Nil (358,110) Nil (44,299) Nil Outstanding at 31 August 718,600 Nil 688,490 Nil 717,334 Nil Exercisable at 31 August – Nil 202,690 Nil 28,590 Nil 46 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 46 5/11/08 11:24:41 Remuneration Report continued Outstanding share options At the year end the outstanding options to purchase ordinary shares in Connaught plc, in accordance with the terms of the applicable schemes, were as follows: Number of Number of shares shares under under option at option at Exercise Date of 31 August 31 August price per Expiry Scheme grant 2008 2007 share Date Executive Share Option Scheme 13 Aug 1999 20,000 20,000 41.6p 13 Aug 2009 (unapproved) 2 Jan 2001 25,000 25,000 51.5p 2 Jan 2011 10 Dec 2001 27,500 32,500 59.5p 10 Dec 2011 30 Oct 2002 125,000 125,000 50.0p 30 Oct 2012 4 Mar 2003 15,000 75,000 48.5p 4 Mar 2013 6 Dec 2004 2,500,000 2,500,000 95.0p 6 Dec 2014 14 Mar 2005 500,000 500,000 113.4p 14 Mar 2015 7 Sep 2005 500,000 1,000,000 140.0p 7 Sep 2015 9 Jun 2006 500,000 500,000 181.0p 9 Jun 2016 1 Sep 2006 1,150,000 1,150,000 203.2p 1 Sep 2016 10 Jan 2007 100,000 100,000 296.5p 10 Jan 2017 17 Aug 2007 500,000 500,000 313.0p 17 Aug 2017 Long-Term Incentive Plan 2 Jan 2001 9,705 9,705 – 2 Jan 2011 14 Nov 2001 2,195 2,195 – 14 Nov 2011 10 Jan 2003 6,290 15,275 – 10 Jan 2013 30 Jan 2004 – 1,415 – 30 Jan 2014 15 Mar 2006 184,500 530,610 – 15 Mar 2016 31 Dec 2006 114,935 116,534 – 31 Dec 2016 24 Apr 2007 41,600 41,600 – 24 Apr 2017 26 Oct 2007 315,557 – – 26 Oct 2017 1 Nov 2007 13,708 – – 1 Nov 2017 5 Dec 2007 605,418 – – 5 Dec 2017 18 Dec 2007 113,182 – – 18 Dec 2017 Caroline Price Chairman of the Remuneration Committee 24 October 2008 Connaught plc Annual Report 2008 Financial Statements 47 c99397_BOOK.indb 47 5/11/08 11:24:41 Statement of Directors’ Responsibilities in respect of the Directors’ Report, the Directors’ Remuneration Report and the Financial Statements The Directors are responsible for preparing the Directors’ Report, the Directors’ Remuneration Report and the Group and the parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent company financial statements and the Directors’ Remuneration Report in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). The Group and parent company financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state that the Group financial statements comply with IFRSs as adopted by the European Union, and with regard to the parent company financial statements that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the Group and parent company financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation and the parent company financial statements and the Directors’ Remuneration Report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board David Wells Company Secretary 24 October 2008 48 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 48 5/11/08 11:24:41 Independent Auditors’ Report to the members of Connaught Plc We have audited the group financial statements of Connaught Plc for the year ended 31 August 2008 which comprise the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, the Group Statement of Change in Shareholders’ Equity and the related notes. These group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of Connaught Plc for the year ended 31 August 2008 and on the information in the Directors’ Remuneration Report that is described as having been audited. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report and the group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the group financial statements give a true and fair view and whether the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the group financial statements. The information given in the Directors’ Report includes that specific information presented in the Operating and Financial Review that is cross referred from the Review of business and future developments section of the Directors’ Report. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director’s remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited group financial statements. The other information comprises only the Directors’ Report, the Chairman’s Statement, the Operations Review, the Finance Review, the Corporate Responsibility Report, the Corporate Governance Report, and the unaudited part of the Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the group financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements. Connaught plc Annual Report 2008 Financial Statements 49 c99397_BOOK.indb 49 5/11/08 11:24:41 Independent Auditors’ Report to the members of Connaught Plc continued Opinion In our opinion: • the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 August 2008 and of its profit and cash flows for the year then ended; • the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and • the information given in the Directors’ Report is consistent with the group financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Bristol 28 October 2008 50 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 50 5/11/08 11:24:41 Consolidated Income Statement for the year ended 31 August 2008 2008 2007 Note £m £m Revenue 2 552.9 395.9 Cost of sales (474.8) (345.1) Gross profit 78.1 50.8 Administrative expenses (51.2) (33.5) Operating profit before amortisation of acquisition intangible assets and exceptional item 35.9 19.2 Amortisation of acquisition intangible assets 11 (7.0) (1.9) Exceptional item – reorganisation costs 30 (2.0) – Operating profit 26.9 17.3 Finance costs 5 (6.7) (3.8) Finance income 6 1.5 2.3 Profit before tax 3 21.7 15.8 Tax expense 7 (6.5) (4.8) Profit for the financial year attributable to equity shareholders 20 15.2 11.0 Earnings per ordinary share Pence per Pence share per share Basic 9 12.8 10.8 Diluted 9 12.2 10.4 Connaught plc Annual Report 2008 Financial Statements 51 c99397_BOOK.indb 51 5/11/08 11:24:41 Consolidated Statement of Changes in Equity Share Share Treasury Retained Other Total capital premium shares earnings reserves equity Note £m £m £m £m £m £m At 1 September 2007 18, 19, 20 2.1 20.0 (1.2) 24.4 7.4 52.7 Purchase of treasury shares 20 – – (0.3) – – (0.3) Net profit for year 20 – – – 15.2 – 15.2 Share options – proceeds from shares issued 18, 19 0.4 60.2 – – – 60.6 – share based payments 20 – – – 1.2 0.3 1.5 Dividends 8 – – – (2.9) – (2.9) At 31 August 2008 2.5 80.2 (1.5) 37.9 7.7 126.8 Share Share Treasury Retained Other Total capital premium shares earnings reserves equity Note £m £m £m £m £m £m At 1 September 2006 18, 19, 20 2.1 19.3 (1.4) 14.1 7.0 41.1 Sale of treasury shares 20 – – 0.2 – – 0.2 Net profit for year 20 – – – 11.0 – 11.0 Share options – proceeds from shares issued 18, 19 – 0.7 – – – 0.7 – share based payments 20 – – – 1.4 0.4 1.8 Dividends 8 – – – (2.1) – (2.1) At 31 August 2007 2.1 20.0 (1.2) 24.4 7.4 52.7 52 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 52 5/11/08 11:24:41 Consolidated Balance Sheet At 31 August 2008 2008 2007 Note £m £m Non-current assets Goodwill 10 147.6 52.4 Acquisition intangible assets 11 27.3 9.1 Other intangible assets 11 9.9 4.3 Property, plant and equipment 12 6.3 6.6 Trade and other receivables 15 12.6 5.1 Deferred tax asset 13 – 0.5 203.7 78.0 Current assets Inventories 14 13.8 7.6 Trade and other receivables 15 118.1 104.8 Current tax asset 15 – 1.7 Cash and cash equivalents 27 50.0 25.6 181.9 139.7 Total assets 385.6 217.7 Current liabilities Borrowings 16 (16.8) (1.0) Trade and other payables 16 (132.8) (122.0) (149.6) (123.0) Non-current liabilities Borrowings 17 (104.1) (42.0) Deferred tax liability 17 (5.1) – (109.2) (42.0) Total liabilities (258.8) (165.0) Net assets 126.8 52.7 Shareholders’ equity Ordinary shares 18 2.5 2.1 Share premium 19 80.2 20.0 Retained earnings 20 37.9 24.4 Other reserves 20 6.2 6.2 Total equity 126.8 52.7 These financial statements were approved and authorised for issue by the Board of Directors on 24 October 2008 and were signed on its behalf by: M W Tincknell S Hill Director Director Connaught plc Annual Report 2008 Financial Statements 53 c99397_BOOK.indb 53 5/11/08 11:24:41 Consolidated Cash Flow Statement for the year ended 31 August 2008 2008 2007 Note £m £m Cash flows from operating activities Cash flows from operating activities excluding operating cash impact of acquisitions 26.5 17.3 Operating cash impact of acquisitions (0.8) (3.2) Cash generated from operations 25 25.7 14.1 Interest received 1.5 1.7 Interest paid (6.7) (3.6) Tax paid (5.6) (2.4) Net cash generated from operating activities 14.9 9.8 Cash flows from investing activities Acquisition of subsidiaries/businesses (117.8) (13.9) Development expenditure (7.5) (1.8) Proceeds from sale of property, plant and equipment 5.2 3.3 Purchase of property, plant and equipment (4.8) (4.6) Net cash used in investing activities (124.9) (17.0) Cash flows from financing activities Net proceeds from issue of ordinary share capital 60.3 0.7 (Purchase)/sale of treasury shares (1.0) 0.1 Net proceeds from issue of new bank loan 93.5 37.9 Finance lease principal payments (0.3) (0.3) Repayment of borrowings (15.2) (20.1) Dividends paid to shareholders (2.9) (2.1) Net cash generated from financing activities 134.4 16.2 Net increase in cash and cash equivalents 28 24.4 9.0 Cash and cash equivalents at 1 September 25.6 16.6 Cash and cash equivalents at 31 August 27 50.0 25.6 54 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 54 5/11/08 11:24:41 Statement of Consolidated Accounting Policies The principal accounting policies adopted by the Group in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations adopted by the European Union (EU) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. These financial statements have been prepared under the historical cost convention modified for the fair value of share based payments and financial derivatives. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The primary statements within the financial statements contained in this document have been presented in accordance with IAS 1 ‘Presentation of Financial Statements’. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 August each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The results of subsidiaries and joint ventures acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal as appropriate. The Group balance sheet incorporates the shares held by the Connaught Employee Share Trust and which have not vested by the balance sheet date. These are shown as a deduction from shareholders’ equity until such a time as they vest unconditionally with the employees. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Recent accounting developments Standards, amendments and interpretations effective for 2007/08 with no significant impact on the Group’s results are set out below. The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2007, however, their implementation has not had a significant impact on the results or net assets of the Group: Standards, amendments and interpretations not yet effective, but not expected to have a significant impact on the Group’s results: ‘IFRS 8: Operating Segments’ was issued in November 2006. The new standard requires segment information to be prepared on the same basis as information reported to management for decision-making purposes. In addition, the operating profit reported will be calculated on the basis used for management reporting and some detailed disclosures will change. Connaught will determine an appropriate implementation date for the following standards, amendments and interpretations after they have been adopted by the European Union: Connaught plc Annual Report 2008 Financial Statements 55 c99397_BOOK.indb 55 5/11/08 11:24:41 Statement of Consolidated Accounting Policies continued An amendment to ‘IAS 23: Borrowing costs’ was issued in March 2007. The impact of the new policy on future reported performance is expected to be limited. ‘IFRIC 12: Service concession arrangements’ was issued in December 2006 and ‘IFRIC 13: Customer Loyalty Programmes’ was issued in June 2007. Neither interpretation is expected to have a material impact on the Group because it does not have any material contracts or programmes within the scope of these interpretations. ‘IFRIC 14: The limit on a defined benefit asset, minimum funding requirements and their interaction’ was issued on 6 July 2007. This interpretation provides guidance on the extent to which a pension scheme surplus should be recognised as an asset. ‘IFRIC 15: Agreements for the construction of real estate’ was issued on 3 July 2008. The Group is not involved in the construction or sale of residential real estate. However a review of contract accounting is being undertaken to establish whether or not the same principles apply to any transactions undertaken by the Group. The impact of adopting this interpretation will be determined once this review has been completed. ‘IFRIC 16: Hedges of a net investment in a foreign operation’ was issued on 3 July 2007. An initial review of the Group’s net investment hedging indicated that this interpretation is not likely to affect the accounting treatment. ‘IFRS 3: (Revised) business combinations’ and ‘IAS 27: (Revised) consolidated and separate financial statements’ were issued in January 2008. Implementing IFRS 3 (Revised) will significantly change the recognition of goodwill, acquisition costs and contingent consideration relating to acquisitions. However it only applies to acquisitions made after it has been adopted. IAS 27 (Revised) requires different accounting treatment for minority interest but it is not expected to affect the Group’s financial results or position materially. An amendment to ‘IFRS 2: Share based payment’ was issued in January 2008. This provides a definition of vesting conditions and specifies the accounting treatment for non-vesting conditions. It is not expected to materially affect the share based payment charge recognised in the Group accounts because only a small proportion of awards under employee share schemes are affected by failures to comply with non-vesting conditions. ‘IAS 1: (Revised) Presentation of financial statements’ was issued in January 2008. This changes the presentation requirements for other comprehensive income and transactions with shareholders, and requires increased disclosures when there is a restatement of comparatives. Adopting this standard will not affect the recognition, measurement or disclosure of any transactions or events. In February 2008 amendments to ‘IAS 32: Financial Instruments: Presentation’ and ‘IAS 1: (Revised) Presentation of financial statements’ were issued clarifying the treatment of puttable financial instruments. The adoption of these amendments is not expected to have any impact on the Group. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair value, at the date of exchange, of assets given, liabilities incurred or assumed, and the equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 ‘Business Combinations’ are recognised at their fair value at the acquisition date. Goodwill Goodwill arising on an acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in the income statement. Goodwill is recognised as an intangible asset. Goodwill is not amortised and is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. 56 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 56 5/11/08 11:24:41 Statement of Consolidated Accounting Policies continued On disposal of a subsidiary or jointly-controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has been carried forward as the net book value at the date of transition adjusted where appropriate for impairment. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes. Details of the Group’s accounting policies for long-term social housing contracts and maintenance contracts are set out below. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Long-term social housing contracts The Group has a number of long-term contracts in the social housing sector. Where the outcome of such long-term contracts can be measured reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date in accordance with IAS 18 ‘Revenue’. This is measured by the proportion that contract costs incurred for work performed to date bear to the estimated total costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that their recoverability is probable. Where the outcome of a long-term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs that it is probable will be recovered. Contract costs are matched with the contract revenue to which they relate. To the extent that costs are not recoverable they are expensed in the period in which they are incurred. When it is probable that the total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Maintenance contracts The Group has a number of contracts for planned maintenance and reactive maintenance in the Compliance segment. Planned maintenance revenue is recognised when the work is carried out. Reactive maintenance revenue is recognised over the period of the contract term. Segmental information Segmental information is based on the Group’s management structure, which is based on business segments. Unallocated items comprise mainly corporate expenses. Specific corporate expenses are allocated to the corresponding segments. Segment assets comprise goodwill, other intangible assets, property, plant and equipment, other debtors and prepayments, inventories and trade and other receivables (excluding corporation tax recoverable). Liabilities comprise trade and other payables. Inter-segment trading is not significant. Research and development expenditure Where the Group undertakes development activities, and where those activities are in respect of a specific product that is anticipated to be profitable within identified markets, the costs attributable to that development are deferred and amortised over the expected life of the product. These costs deferred in respect of existing products are being amortised on a straight line basis over five years being the period over which the Group is expected to benefit. Connaught plc Annual Report 2008 Financial Statements 57 c99397_BOOK.indb 57 5/11/08 11:24:42 Statement of Consolidated Accounting Policies continued Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a ‘finance lease’. The asset is recorded at its fair value in the balance sheet as a tangible fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element, which reduces the outstanding obligation for future instalments. All other leases are accounted for as ‘operating leases’ and the rental charges are charged to the profit and loss account on a straight line basis over the life of the lease. Share-based payment The Group has applied the requirements of IFRS 2 ‘Share-based payment’. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments at 7 November 2002 that were not fully vested as of 1 September 2005. The Group issues equity-settled share-based payments to certain employees and until 1 September 2006 operated an Inland Revenue approved Save As You Earn share option scheme open to eligible employees which allows the purchase of shares at a discount. These are measured at fair value at the date of grant. The fair value is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of the Black Scholes model as set out on page 45. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Where relevant, the value of the option has also been adjusted to take account of market conditions applicable to the option. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost: any difference between the proceeds (net of transactions) and the redemption value is recognised in the income statement over the period of the borrowings. All borrowing costs are recognised as an expense using the effective interest method. Pension costs The Group contributes into defined contribution and Group personal pension schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The amounts charged against profits represent the contributions payable to the schemes in respect of the accounting period. The Group also contributes to a number of immaterial defined benefit schemes established under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Government grants Capital based government grants are included within other payables in the balance sheet and credited to the profit and loss account over the estimated useful economic lives of the assets to which they relate in accordance with IAS 20 ‘Accounting for government grants and disclosure of government assistance’. Tax including deferred tax The tax expense represents the sum of current tax expense and deferred tax expense. Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. 58 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 58 5/11/08 11:24:42 Statement of Consolidated Accounting Policies continued Deferred tax is provided in full, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for accounting purposes. The Group’s liability for deferred tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which these items can be utilised. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is considered no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be utilised. Property, plant and equipment Assets held for use in the rendering of services, or for administrative purposes, are stated in the balance sheet at cost, net of accumulated depreciation and any provision for impairment. Freehold land is not depreciated. In respect of other assets depreciation is provided by the Group to write off the cost less the estimated residual value of tangible fixed assets over their estimated useful economic lives as follows: Buildings – 2% straight line per annum Leasehold improvements – Charged over life of lease Motor vehicles – 25% straight line per annum Fixtures, fittings, tools and equipment – 20% straight line per annum Plant and machinery – 20% straight line per annum Computer hardware – 25% straight line per annum Asset lives and residual values are reviewed annually. Intangible assets Intangible assets acquired in a business combination are capitalised at fair value at the date of acquisition. Following initial recognition, finite life intangible assets are amortised on a straight-line basis over their estimated useful economic lives, which vary between 3 and 5 years, with the expense taken to the income statement through operating expenses. Customer relationships represent the value of contracts acquired on the acquisition of subsidiaries and are amortised over the average length of the contracts which is currently 3.25 years. Computer software purchased is amortised over its useful life or 4 years. Development expenditure, relating to software, is capitalised as an intangible asset only if all of the following conditions are met: • an asset is created that can be identified; • it is probable that the asset created will generate future economic benefits; and • the development cost of the asset can be measured reliably. Development expenditure is amortised over the period in which the Group is expected to benefit. This period is between three to five years, or the length of the contract if longer. Provision is also made for any impairment, following an annual review of the above factors. All other development expenditure is written off as incurred. Connaught plc Annual Report 2008 Financial Statements 59 c99397_BOOK.indb 59 5/11/08 11:24:42 Statement of Consolidated Accounting Policies continued Impairment of tangible and intangible assets Annually, or whenever events or changes in circumstances indicate the carrying amounts may not be recoverable, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of an impairment loss is recognised as income immediately. Impairment losses on goodwill once impaired are not reversed. Impairment losses and reversals are included with other expenses within the consolidated income statement. Inventories Inventories are stated at the lower of cost and net realisable value and comprise service spares and long-term project based contract balances. Cost comprises direct materials and, where applicable, direct labour costs that have been incurred in bringing the inventories to their present location and condition. Long-term contract work in progress Contract work in progress is stated as costs incurred, less those transferred to the income statement, after deducting foreseeable losses and payments on account not matched with turnover. Amounts recoverable on contracts and pre-contract costs Amounts recoverable on contracts are included in trade and other receivables and represent turnover recognised in excess of payments on account. Pre-contract costs are expensed as incurred, except where there is a reasonable certainty that the contract will be awarded, in which case they are recognised as an asset (within amounts recoverable on contracts) which is amortised to the income statement over the period in which they are reimbursed, generally equivalent to the term of the contract. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and balances with bank and similar institutions, which are readily convertible to known amounts of cash which are subject to insignificant changes in value and have a maturity of three months or less. This definition is also used for the consolidated cash flow statement. Exceptional items The Directors consider that items of income or expense, which are material and non-recurring by virtue of their nature and amount, should be disclosed separately if the financial statements are to fairly present the financial performance of the Group. 60 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 60 5/11/08 11:24:42 Statement of Consolidated Accounting Policies continued Financial instruments The Group adopted IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ prospectively from 1 September 2005. The Group has classified its financial instruments in the following categories from 1 September 2005: i) Loans and receivables All loans and receivables are initially recognised at the fair value of the consideration received. Following initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. ii) Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates hedges of particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge). The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cashflow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain approximately 70% of its core long-term borrowings in fixed rate instruments. The Group enters into fixed-to-floating interest rate swaps to hedge the fair value interest rate risk arising where it has borrowed at fixed rates in excess of the 70% target. The Group recognises gains or losses on derivatives at fair value through the income statement. iii) Trade receivables Trade receivables do not carry any interest and are stated at their fair value as reduced by appropriate allowances for estimated irrecoverable amounts. iv) Trade payables Trade payables are not interest bearing and are stated at their fair value. The Group’s policy in respect of financial risk management is included in the Financial Review on page 18. Share capital and treasury shares Debt and equity instruments are classified according to the substance of the contractual arrangements as required by IAS 32 ‘Financial Instruments: Disclosure and Presentations’. Ordinary shares are classified as equity. Fair values The fair values of short term deposits, loans and overdrafts with a maturity of less than one year are assumed to be approximate to their book values. Dividends Interim dividends are recorded in the financial statements when they are paid. Final dividends are recorded in the financial statements in the period in which they are approved by the Company’s shareholders. Connaught plc Annual Report 2008 Financial Statements 61 c99397_BOOK.indb 61 5/11/08 11:24:42 Notes to the Consolidated Financial Statements 1 Critical accounting judgements Critical judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, which are described in the Statement of Consolidated Accounting Policies, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements. Revenue recognition Revenue is recognised for certain long-term project-based contracts based on the stage of completion of the contract activity. This is measured by the proportion of costs incurred to estimated contract costs except where this would not be representative of the stage of completion. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs to which goodwill has been allocated. The value in use calculation involves an estimation of the future cash flows of CGUs and also the selection of appropriate discount rates, which involves judgement, to calculate present values. The carrying value of goodwill is £147.6m (2007: £52.3m) at the balance sheet date. Intangible and tangible assets Intangible fixed assets (other than goodwill) and tangible fixed assets are amortised or depreciated over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Due to the long lives of assets, changes to the estimates used can result in significant variations in the carrying value. The Group assesses the impairment of tangible and intangible fixed assets subject to amortisation or depreciation whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include the following: • significant underperformance relative to historical or projected future operating results; • significant changes in the manner of the use of the acquired assets or the strategy for the overall business; and • significant negative industry or economic trends. Intangible assets are valued on the following key assumptions, useful lives, management’s cash flow forecasts and applying a pre-tax discount rate of 13.5% (weighted average cost of capital). 62 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 62 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 2 Segmental analysis The Group manages its business on a market segment basis and these segments are the basis on which the Group reports its primary segment results. A description of each segment is in the Chairman’s Statement. a) Business segments Social Housing Compliance Central Total Year ended 31 August 2008 £m £m £m £m Segment revenue 446.9 105.9 0.1 552.9 Operating profit before amortisation of acquisition intangible assets and exceptional items 25.4 13.8 (3.3) 35.9 Amortisation of acquisition intangible assets (3.3) (3.5) (0.2) (7.0) Exceptional items – (2.0) – (2.0) Operating profit 22.1 8.3 (3.5) 26.9 Finance costs (3.6) (0.3) (2.8) (6.7) Finance income 0.9 0.6 – 1.5 Profit before tax 19.4 8.6 (6.3) 21.7 Tax (3.1) (4.7) 1.3 (6.5) Segment result 16.3 3.9 (5.0) 15.2 Segment assets 155.9 69.0 – 224.9 Goodwill attributable 32.9 114.7 – 147.6 Unallocated assets – – 13.1 13.1 Total assets 188.8 183.7 13.1 385.6 Segment liabilities 154.5 60.8 – 215.3 Unallocated liabilities – – 43.5 43.5 Total liabilities 154.5 60.8 43.5 258.8 Other segment items Capital expenditure (net of disposals) 1.4 0.5 2.8 4.7 Other intangible expenditure (net of disposals) 1.5 1.9 3.4 6.8 Depreciation 0.6 0.7 0.5 1.8 Share based payments 0.2 0.2 0.4 0.8 Amortisation of acquisition intangible assets 3.3 3.5 0.2 7.0 Amortisation of other intangible assets – 0.2 0.7 0.9 Connaught plc Annual Report 2008 Financial Statements 63 c99397_BOOK.indb 63 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 2 Segmental analysis continued Social Housing Compliance Central Total Year ended 31 August 2007 £m £m £m £m Segment revenue 349.8 46.1 – 395.9 Operating profit before amortisation of acquisition intangible assets 18.4 4.5 (3.7) 19.2 Amortisation of acquisition intangible assets (1.9) – – (1.9) Operating profit 16.5 4.5 (3.7) 17.3 Finance costs (1.5) (0.2) (2.1) (3.8) Finance income 0.8 0.1 1.4 2.3 Profit before tax 15.8 4.4 (4.4) 15.8 Tax (4.9) (1.3) 1.4 (4.8) Segment result 10.9 3.1 (3.0) 11.0 Segment assets 137.0 15.0 – 152.0 Goodwill attributable 29.5 22.9 – 52.4 Unallocated assets – – 13.3 13.3 Total assets 166.5 37.9 13.3 217.7 Segment liabilities 122.2 10.6 – 132.8 Unallocated liabilities – – 32.2 32.2 Total liabilities 122.2 10.6 32.2 165.0 Other segment items Capital expenditure 1.6 0.4 1.6 3.6 Other intangible expenditure (net of disposals) 1.8 – 1.0 2.8 Depreciation 0.6 0.2 1.0 1.8 Share based payments 0.2 – 0.3 0.5 Amortisation of acquisition intangible assets 1.9 – – 1.9 Amortisation of other intangible assets 0.4 0.2 0.3 0.9 Unallocated assets include corporation tax, other taxes and social security, sundry debtors and prepayments relating to the Group central services. Unallocated liabilities include central Group borrowings, creditors and accruals. b) Geographic segments All of the Group’s activities are based in the United Kingdom. 64 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 64 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 3 Profit before tax 2008 2007 £m £m Profit before tax is stated after charging: Employees’ benefits expense (note 4) 198.8 121.1 Inventories – cost of inventories recorded as cost of sales 79.1 49.9 Auditors’ remuneration (see analysis below) – audit services 0.3 0.2 – other services 0.1 0.2 Depreciation of tangible fixed assets – owned 1.6 1.5 Depreciation of tangible fixed assets – on lease and hire purchase 0.2 0.3 Hire of plant and machinery – rentals payable under operating leases 8.6 6.4 Hire of other assets – operating leases 4.3 4.3 Amortisation of intangible assets (software) 0.3 0.5 Amortisation of acquisition customer relationships 7.0 1.9 Amortisation of research and development costs 0.7 0.4 At the AGM on 5 December 2007 PricewaterhouseCoopers LLP were re-appointed as the Group’s auditors. 2008 2007 £m £m Amounts paid to PricewaterhouseCoopers LLP were: Audit services: statutory audit 0.3 0.2 Other: main market listing – 0.1 Other: working capital report on acquisitions – 0.1 Other: tax advice 0.1 – Connaught plc Annual Report 2008 Financial Statements 65 c99397_BOOK.indb 65 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 4 Staff numbers and costs The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows: Number of employees 2008 2007 Social Housing 5,745 4,146 Compliance 1,412 527 Central 173 112 7,330 4,785 The aggregate payroll costs of these persons were as follows: 2008 2007 £m £m Wages and salaries 177.4 108.1 Social security costs 17.3 10.7 Other pension costs (note 21) 2.9 1.8 Share based payments (note 20) 1.2 0.5 198.8 121.1 Key management compensation The remuneration of the Directors of the business units of the Group, which includes statutory Directors, is set out below in aggregate: 2008 2007 £m £m Short term employee benefits 3.9 2.5 Post employment benefits 0.1 0.2 Share based payments 1.2 0.4 5.2 3.1 Further details are set out in the Remuneration Report in respect of the Directors’ remuneration. 5 Finance costs 2008 2007 £m £m On bank overdrafts 2.2 1.8 Bank loan interest 4.3 1.9 Loan note interest 0.1 0.1 Hire purchase and finance lease interest 0.1 – 6.7 3.8 6 Finance income 2008 2007 £m £m Income from short term deposits 1.3 1.7 Other interest receivable 0.2 0.6 1.5 2.3 66 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 66 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 7 Tax expense a) Analysis of charge in the year 2008 2007 £m £m Corporation tax: UK corporation tax at 29.17% (2007: 30%) on the profits for the year 5.8 4.6 Adjustments in respect of prior years 0.8 (0.1) 6.6 4.5 Deferred tax: Origination and reversal of temporary differences 0.4 0.4 Adjustments in respect of prior years (0.5) (0.1) (0.1) 0.3 Total tax charge for the year 6.5 4.8 b) Tax reconciliation 2008 2007 £m £m Profit before tax 21.7 15.8 Tax on profit at 29.17% (2007: 30%) 6.3 4.7 Effects of: Disallowed expenses and non-taxable income 0.5 0.3 Adjustments in respect of prior years (0.2) (0.2) Tax rate change (0.1) – Total tax charge for the year 6.5 4.8 c) Tax credited directly to equity 2008 2007 £m £m Share based payments 1.2 1.4 Factors that may affect future tax charges During the year, as a result of the change in the UK Corporation Tax rate from 30% to 28% that became effective from 1 April 2008, deferred tax balances have been remeasured. Deferred tax expected to reverse in the year to 31 August 2008 has been measured using the effective rate for the period (29.9%). Connaught plc Annual Report 2008 Financial Statements 67 c99397_BOOK.indb 67 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 8 Dividends 2008 2007 £m £m Equity shares: Final dividend for the year ended 31 August 2007 of 1.46p per share (2006: 1.25p) 1.8 1.3 Interim dividend for the year ended 31 August 2008 of 0.925p per share (2007: 0.77p) 1.1 0.8 2.9 2.1 In addition, the Directors are proposing a final dividend in respect of the financial year ending 31 August 2008 of 1.755p per share which will absorb an estimated £2.2m of shareholders’ funds. Subject to shareholder approval, it will be paid on 6 March 2009 to shareholders who are on the register of members on 6 February 2009. 9 Earnings per share The basic earnings per share calculations are based upon the average number of ordinary shares in issue in the year of 118,512,926 (2007: 101,630,116). The diluted earnings include the effects of all potentially dilutive ordinary shares, which increases the average number of shares to 124,290,896 (2007: 105,875,977). The earnings are as set out in the table below. Additional earnings measures have been included to highlight the impact of the amortisation of acquisition intangible assets and exceptional re-organisation costs in 2008 on the earnings per share in the year. Management believes that reporting additional measures, including adjusted earnings per share, provides a more meaningful comparison of business performance for the year. Earnings per share 2008 2007 2008 2007 £m £m Pence Pence Basic earnings 15.2 11.0 Basic 12.8 10.8 Diluted 12.2 10.4 Amortisation of acquisition intangible assets 7.0 1.9 Tax effect of amortisation of acquisition intangible assets (2.0) (0.5) Exceptional reorganisation costs 2.0 – Tax effect of exceptional reorganisation costs (0.5) – Adjusted earnings 21.7 12.4 Basic before amortisation of acquisition intangible assets and exceptional items. 18.3 12.2 Diluted before amortisation of acquisition intangible assets and exceptional items. 17.5 11.7 68 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 68 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 10 Goodwill 2008 2007 £m £m At 1 September 52.4 30.2 Additions 91.7 18.1 Finalisation of fair value adjustments relating to prior year acquisition 3.5 4.1 At 31 August 147.6 52.4 During the year, the acquired goodwill in respect of all companies was tested for impairment in accordance with IAS 36. Following the impairment test no impairment to the carrying values is required. The cash generating units are considered to be the Social Housing and Compliance divisions which at 31 August 2008 have goodwill of £32.9m and £114.7m respectively. Goodwill is reviewed annually or when other events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The recoverable amount is determined from value in use calculations. The key assumptions in these calculations are: • The achievement of budgeted operating profit • The achievement of growth in market share • The estimation of terminal values • The estimation of discount rates The forecasts are based on approved budgets and strategic plans for the next 5 years. Subsequent cash flows have been increased in line with the expected growth. The cash flows were discounted using a pre-tax discount rate of 10.5% (2007: 10.4%). No impairment charges were recognised in 2008 (2007: £nil). Connaught plc Annual Report 2008 Financial Statements 69 c99397_BOOK.indb 69 5/11/08 11:24:42 Notes to the Consolidated Financial Statements continued 11 Intangible assets Research & Acquisition Acquisition Computer development customer computer software expenditure relationships software Total £m £m £m £m £m Cost At 1 September 2007 3.0 3.2 11.0 – 17.2 Additions 5.9 1.3 0.3 – 7.5 Acquired (note 26) – – 19.1 5.8 24.9 Disposals (0.7) – – – (0.7) At 31 August 2008 8.2 4.5 30.4 5.8 48.9 Depreciation At 1 September 2007 1.3 0.6 1.9 – 3.8 Charged for year 0.3 0.7 6.0 1.0 8.0 Disposals (0.1) – – – (0.1) At 31 August 2008 1.5 1.3 7.9 1.0 11.7 Net book value At 31 August 2008 6.7 3.2 22.5 4.8 37.2 At 31 August 2007 1.7 2.6 9.1 – 13.4 Included within software is internally generated software. All amortisation has been charged to the income statement through administrative expenses. The Directors believe the useful life of the development asset to be 5 years. Other software purchased is amortised over its useful life or 4 years, whichever is shorter. Customer relationships represent the value of contracts acquired on the acquisition of subsidiaries and are amortised over the average length of the contracts which is currently 3.25 years. Research & Acquisition Computer development customer software expenditure relationships Total £m £m £m £m Cost At 1 September 2006 2.0 1.3 – 3.3 Additions 1.0 1.9 – 2.9 Acquired (note 26) – – 11.0 11.0 At 31 August 2007 3.0 3.2 11.0 17.2 Depreciation At 1 September 2006 0.8 0.2 – 1.0 Charged for year 0.5 0.4 1.9 2.8 At 31 August 2007 1.3 0.6 1.9 3.8 Net book value At 31 August 2007 1.7 2.6 9.1 13.4 At 31 August 2006 1.3 1.1 – 2.4 70 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 70 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 12 Property, plant and equipment Freehold & Short Plant, Fixtures, leasehold leasehold machinery and fittings, tools property improvements motor vehicles and equipment Total £m £m £m £m £m Cost At 1 September 2007 0.9 1.3 3.4 7.5 13.1 Additions – 0.8 0.4 3.5 4.7 Acquired 0.5 0.3 1.0 4.5 6.3 Disposals (0.9) - (2.0) (7.7) (10.6) At 31 August 2008 0.5 2.4 2.8 7.8 13.5 Depreciation At 1 September 2007 – 0.3 2.4 3.8 6.5 Charged for year – 0.2 0.5 1.1 1.8 Acquired – 0.1 0.8 3.7 4.6 Disposals – - (1.6) (4.1) (5.7) At 31 August 2008 – 0.6 2.1 4.5 7.2 Net book value At 31 August 2008 0.5 1.8 0.7 3.3 6.3 At 31 August 2007 0.9 1.0 1.0 3.7 6.6 Included in the total net book value of tangible fixed assets held under hire purchase contracts and finance leases is £1.6m (2007: £0.5m) in respect of plant, machinery and motor vehicles and fixtures, fittings, tools and equipment. Depreciation for the year on these assets was £0.2m (2007: £0.3m). As per note 17 the borrowings of the Group are secured by way of fixed and floating charges over the assets of the Group. Freehold & Short Plant, Fixtures, leasehold leasehold machinery and fittings, tools property improvements motor vehicles and equipment Total £m £m £m £m £m Cost At 1 September 2006 – 0.7 2.2 5.0 7.9 Additions – 0.6 0.5 2.4 3.5 Acquired 3.2 – 1.5 0.7 5.4 Disposals (2.3) – (0.8) (0.6) (3.7) At 31 August 2007 0.9 1.3 3.4 7.5 13.1 Depreciation At 1 September 2006 – 0.2 0.9 2.3 3.4 Charged for year – 0.1 0.5 1.2 1.8 Acquired – – 1.2 0.5 1.7 Disposals – – (0.2) (0.2) (0.4) At 31 August 2007 – 0.3 2.4 3.8 6.5 Net book value At 31 August 2007 0.9 1.0 1.0 3.7 6.6 At 31 August 2006 – 0.5 1.2 2.6 4.3 Included in the total net book value of tangible fixed assets held under hire purchase contracts and finance leases is £0.5m (2007: £0.9m) in respect of plant, machinery and motor vehicles and fixtures, fittings, tools and equipment. Depreciation for the year on these assets was £0.3m (2007: £0.4m). Connaught plc Annual Report 2008 Financial Statements 71 c99397_BOOK.indb 71 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 13 Deferred tax assets 2008 2007 £m £m As at 1 September 0.5 2.8 Provided during the year (0.5) (0.4) Adjustment in respect of share based payments – 0.3 Initial recognition of intangible assets (note 26) – (3.1) Adjustments in respect of acquired tax – 0.7 Adjustment in respect of prior periods – 0.2 As at 31 August – 0.5 Recognised deferred tax assets Accelerated capital allowances – (0.5) Temporary differences – (2.0) Share based payments – 2.6 Losses brought forward – 0.4 – 0.5 Deferred income tax assets are recognised for tax loss carry-forwards to the extent that the realisation of the related tax benefit through the future taxable profits is probable. 14 Inventories 2008 2007 £m £m Raw materials and work in progress 13.8 7.6 The Group consumed £79.1m (2007: £49.9m) of inventories during the period. 15 Trade and other receivables a) Current assets 2008 2007 £m £m Trade receivables 39.7 24.2 Amounts recoverable on contracts 62.2 74.3 Retentions owed by customers 3.6 2.2 Other trade receivables 3.4 0.3 Prepayments and accrued income 9.2 3.8 118.1 104.8 b) Current tax assets Corporation tax receivable – 1.7 c) Non-current assets Deferred tax asset (note 13) – 0.5 Amounts recoverable on contracts 12.6 5.1 130.7 112.1 72 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 72 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 15 Trade and other receivables continued Trade receivables and amounts recoverable on contracts are in respect of contractual agreements with the customers. The Directors consider the customer base to be of a nature where there is limited credit risk to the Group. Accordingly, the Directors believe there is no further credit risk provision required in excess of the normal provisions for accounts where recovery is doubtful. 2008 Part due Impaired Impaired Not yet due months months months Total 1 – 3 3 – 6 6+ £m £m £m £m £m Trade receivables 43.3 32.8 6.8 2.7 1.0 Amounts receivable on contracts 74.8 54.6 20.2 – – 118.1 87.4 27.0 2.7 1.0 2007 Part due Impaired Impaired Not yet due months months months Total 1 – 3 3 – 6 6+ £m £m £m £m £m Trade receivables 26.4 20.9 3.8 1.7 – Amounts receivable on contracts 79.4 45.1 30.2 – 4.1 105.8 66.0 34.0 1.7 4.1 The ageing profile for trade receivables includes, trade receivables and retentions owed by customers, net of bad debt provisions amounting to £1.8m (2007: £3.4m). Included in the amounts receivable on contracts within the ageing profile is both amounts receivable held under current and non-current assets respectively. Other receivables are excluded from the above analysis and have been treated as not yet due £3.4m (2007: £0.3m). Amounts recoverable on contracts represent the estimated amounts which have been earned, or which valuation under the terms of the respective contracts have not yet been agreed with the customers. These amounts have been included at their estimated recoverable values. Included within accounts not yet due is £12.6m (2007: £5.1m) which reflects accounts which are recoverable over the period of the contracts to which they relate. Accounts which are over 6 months overdue and are still to be agreed by the customers are prudently valued at their estimated written down recoverable value. Amounts not due represent contractual commitments which are not due for payment. Amounts classified as ‘past due’ represent the amounts that are due for payment but for which payment has not been received. Impaired amounts represent the net amount that is expected to be recovered, after making prudent provision for any items that are still subject to negotiation. The credit risk is managed on an overall group basis. The customers are largely local authorities and other large ‘blue chip’ organisations. The credit exposure is regarded as low risk given the nature of the customers and spread of customer contracts which minimise ‘concentration risk’. Connaught plc Annual Report 2008 Financial Statements 73 c99397_BOOK.indb 73 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 16 Current liabilities a) Trade and other payables 2008 2007 £m £m Trade payables 32.4 49.5 Amounts due to suppliers in respect of contracts 57.8 45.5 Deferred consideration 1.2 4.6 Other taxes and social security 24.4 11.6 Corporation tax 0.1 – Other trade payables 6.8 2.1 Accruals and deferred income 10.1 8.7 132.8 122.0 b) Borrowings: current liabilities Bank loans (note 17) 16.5 – Loan notes (note 17) – 0.6 Obligations under finance leases and hire purchase contracts (note 17) 0.3 0.4 16.8 1.0 17 Non current liabilities: borrowings a) Borrowings 2008 2007 £m £m Bank loans 103.7 37.9 Loan notes – 3.8 Obligations under finance leases and hire purchase contracts 0.4 0.3 104.1 42.0 Analysis of debt: Obligations under bank loans Less than 1 year 16.5 – 1 to 5 years 103.7 37.9 5 years+ – – 120.2 37.9 Obligations under loan notes Less than 1 year – 0.6 1 to 5 years – 3.8 – 4.4 Obligations under finance leases and hire purchase contracts Less than 1 year 0.3 0.4 1 to 5 years 0.4 0.3 0.7 0.7 The bank loans referred to above have been drawn down under a sterling based credit facility from syndicate banks, led by Royal Bank of Scotland, under which each Group Company has cross-guaranteed the borrowings of its fellow Group Companies. Interest rates are set according to agreed financial criteria at 31 August and at the end of every subsequent quarter. The borrowings are secured by way of fixed and floating charges over the assets of the Group. 74 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 74 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 17 Non current liabilities: borrowings continued Interest is payable on the loan notes at percentages of between 0.25% and 0.5% below base rate. Redemption is made by the loan note holder giving the required written notice of intention to redeem. The liabilities under finance leases and hire purchase contracts are secured on the related assets, some of which are held in subsidiary companies. The effective interest rates at the balance sheet dates were as follows: 2008 2007 Bank loans 7.3% 8.8% Loan notes – 5.6% Finance leases and hire purchase contracts 6.8% 6.1% The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. At 31 August 2008 the Group’s bank loans are subject to re-pricing within 3 months of the balance sheet date. b) Deferred tax liabilities As at 1 September 2007 (0.5) – Provided during the year (0.1) – Adjustment in respect of share based payments (1.2) – Initial recognition of intangible assets (note 26) 7.6 – Adjustments in respect of acquired tax 0.1 – Other adjustments (0.8) – As at 31 August 2008 5.1 – Recognised deferred tax liability Accelerated capital allowances 0.8 – Temporary differences 8.7 – Share based payments (4.0) – Losses brought forward (0.4) – 5.1 – 18 Called up share capital 2008 2007 £m £m Authorised 162,700,000 (2007: 125,000,000) ordinary shares of 2p each 3.3 2.5 Allotted, called up and fully paid 122,654,623 (2007: 102,742,504) ordinary shares of 2p each 2.5 2.1 During the year 415,000 (2007: 1,505,734) shares were issued as a result of the exercise of share options for a consideration of £0.5m (2007: £0.7m). Connaught plc Annual Report 2008 Financial Statements 75 c99397_BOOK.indb 75 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 19 Share premium 2008 2007 £m £m Balance at 1 September 20.0 19.3 Premium on shares issued 60.2 0.7 Balance at 31 August 80.2 20.0 Following shareholder approval, the Group raised £57.9m by the issue of 18,680,909 new ordinary shares at 310 pence each by way of a Placing and Open Offer. 20 Reserves a) Retained earnings 2008 2007 £m £m At 1 September 24.4 14.1 Profit for the year 15.2 11.0 Dividend paid (2.9) (2.1) Share based payments taken to equity – deferred tax 1.2 1.4 At 31 August 37.9 24.4 b) Other reserves Share Capital Own based Merger redemption shares payment reserve reserve reserve reserve Total £m £m £m £m £m 1 September 2006 6.1 0.5 (1.4) 0.4 5.6 Sale of treasury shares – – 0.2 – 0.2 Credit in relation to share based payment – – – 0.5 0.5 Tax on share based payments – – – (0.1) (0.1) 31 August 2007 6.1 0.5 (1.2) 0.8 6.2 Sale of treasury shares – – 0.1 – 0.1 Purchase of treasury shares – – (0.9) – (0.9) Credit in relation to share based payment – – 0.5 0.5 1.0 Tax on share based payments – – – (0.2) (0.2) 31 August 2008 6.1 0.5 (1.5) 1.1 6.2 Own shares held in the Employee Share Ownership Scheme (the ESOS) are held in a separate reserve and presented as a deduction from equity. At the year end the ESOS held 859,444 2p ordinary shares (2007: 934,972) at a cost of £1.7m (2007: £1.2m) of which all 859,444 (2007: 717,335) were provisionally allocated to meet the exercise of options or vesting of awards held by Executive Directors or employees of the Group, under the Unapproved Share Option Scheme or Long-Term Incentive Plan. The market value of the shares at 31 August 2008 was £4.00 (2007: £3.06). Shares held in the ESOS may be used to meet share requirements when share options are exercised or when awards vest under the Long-Term Incentive Scheme. Dividends on shares held in the ESOS have been waived. 76 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 76 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 21 Pension schemes The Group contributes into a defined contribution and a Group personal pension scheme. The pension cost charge for the year represents contributions paid by the Group to the schemes and amounted to £1.9m (2007: £1.3m). Contributions amounting to £0.3m (2007: £0.3m) were payable to the schemes at the year end. The Group also contributes to a number of immaterial defined benefit schemes. The pension cost charged directly to contracts relating to these schemes amounted to £1.0m (2007: £0.5m). There is an immaterial shortfall in these funds at 31 August 2008 (2007: £nil). Employer pension contributions, in respect of employees who transferred under TUPE to the Group, but who remain part of their former employers pension arrangements are treated as defined contribution schemes where under the terms of the contract the defined benefit liability remains with the relevant council. 22 Commitments (i) The Group did not have any capital commitments at the end of either financial year. (ii) At 31 August 2008 the Group had total future minimum lease payments under non-cancellable operating leases where payments fall due as follows: Land and buildings Vehicles 2008 2007 2008 2007 £m £m £m £m Within one year 2.7 2.1 12.1 8.5 In the second to fifth years inclusive 7.1 6.0 12.9 10.3 After five years 7.6 2.8 – – 17.4 10.9 25.0 18.8 23 Contingent liabilities On 17 April 2008, the Office of Fair Trading (“OFT”) issued a Statement of Objections arising from its wide ranging investigation into tender activities across the construction sector. The Group has provided the OFT with a response to the Statement of Objections and is fully co-operating with the OFT. The Statement of Objections relates to three contracts dated between 2000 and 2003 and does not refer to current trading. At the present time the Group has not received a decision from the OFT and therefore an assessment of any financial impact is not possible. An unlimited bank multilateral guarantee exists between the Company and other Group Companies. At the year end the Group had loans totalling £120.2m (2007: £37.9m). The Group has guaranteed the performance bonds of its subsidiary companies of £12.3m (2007: £10.3m). 24 Derivative financial instruments and hedging activities The Group’s financial instruments comprise cash and liquid resources, borrowings, loans, loan notes and various items, such as trade receivables and trade payables that arise directly from its operations. The Group’s policy is to finance its operations through retained earnings and borrowings, placing surplus cash on short term deposit. Group management has responsibility for reducing exposure to financial risk and for ensuring that adequate funds are available to meet anticipated requirements. It operates according to the policies and guidelines established by the Board. Cash management is carried out centrally. Where necessary, borrowings are raised centrally to provide adequate funds for the operating subsidiaries. The principal risk arising from the Group’s financial instruments relates to interest rates and liquidity. The Group’s borrowing facilities are drawn on as required to manage its cash needs. Banking facilities are reviewed regularly and extended and replaced in advance of their expiry. Connaught plc Annual Report 2008 Financial Statements 77 c99397_BOOK.indb 77 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 24 Derivative financial instruments and hedging activities continued During the year the Group entered into an interest rate hedging facility with the Royal Bank of Scotland. The facility consists of a £45m Vanilla Swap and a £15m Extendable Collar. The facilities are based on £60m of core debt which is in the Directors’ view a significant element of the core long-term debt of the Group. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising any resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Included as a credit within the consolidated income and expense account is a gain from hedging activities of £0.3m (2007: £nil), which is not considered to be material for further disclosure. The gain has been included within other trade receivables. Cash-flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash-flow hedges are recognised in equity. The gain or loss relating to any ineffective portion is recognised immediately in the income statement. The Group’s initial hedging facility with RBS (Royal Bank of Scotland) became active on 18 February 2008. At 31 August 2008, the Group had net borrowings. It had no financial assets other than amounts recoverable on contracts, trade receivables, hedging facility and cash at bank. The fair value of trade receivables and payables approximated to their book value. Fair value of borrowings 2008 2007 Book Fair Book Fair value value value value £m £m £m £m Bank loans 120.2 120.2 37.9 37.9 Loan notes – – 4.4 4.4 Obligations under finance leases and hire purchase contracts 0.7 0.7 0.7 0.7 120.9 120.9 43.0 43.0 Borrowing facilities The Group has the following additional undrawn committed borrowing facilities available at 31 August 2008 in respect of floating rate borrowing facilities which all conditions had been met at that date: 2008 2007 £m £m Undrawn committed facilities at 31 August 37.1 20.0 On 21 May 2008, the Group entered into an agreement for a new committed term loan facility for £112.3m until 2012. The Group also has committed revolving credit facilities of £45m until 2012. The Group had utilised £120.2m (2007: £37.9m) of these combined facilities at 31 August 2008, with approximately £37m of facilities available, but unutilised at the year end. The Group’s borrowings are subject to standard covenants tests for a facility of this nature. 78 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 78 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 25 Reconciliation of net profit to net cash flow from operating activities 2008 2007 Cash generated from operations £m £m Net profit 15.2 11.0 Adjustments for: Tax 6.5 4.8 Depreciation 1.8 1.8 Amortisation of acquisition intangibles 7.0 1.9 Amortisation of intangibles 1.0 1.0 Exceptional reorganisation costs 2.0 – Finance income (1.5) (2.3) Finance expense 6.7 3.8 Other non cash changes 0.9 0.3 Cash generated from operations before changes in working capital 39.6 22.3 Changes in working capital: (Increase) in inventories (6.2) (1.0) (Increase) in trade and other receivables (19.6) (19.5) Increase in payables 11.9 12.3 Changes in working capital (13.9) (8.2) Cash generated from operations 25.7 14.1 Operating cash impact of acquisitions 0.8 3.2 Cash generated from operations excluding operating cash impact of acquisitions 26.5 17.3 26 Acquisitions of subsidiaries During the year, the Group completed the following acquisitions. On 22 October 2007, the Group acquired 100% of the share capital of National Britannia Holdings Ltd for the total costs of £96.8m. Deferred consideration of £0.8m in the form of Connaught plc share capital was held. In connection with this acquisition loan notes totalling £1.6m were issued to the vendor which were repaid within the year. In the period to 31 August 2008 National Britannia contributed £41.9m and £6.7m to Group consolidated revenue and operating profit respectively, before amortisation of acquisition intangibles. If National Britannia had been part of the Group for the full financial year, then it would have contributed £48.6m in revenue and £7.7m in operating profit respectively. On 16 October 2007, the Group acquired 100% of the share capital of Water Technology Group, for the total cost of £9.4m. In the period to 31 August 2008 Water Technology Group contributed £5m and £1.1m to Group revenue and operating profit respectively. On 28 July 2008, the Group acquired 100% of the share capital of MSF Ltd, for the net consideration of £6.5m. In the period to 31 August 2008 MSF Ltd contributed £0.2m and £0.1m to Group revenue and operating profit respectively. If Water Technology and MSF had been part of the Group for the full financial year, then they would have contributed £5.5m and £2.5m in revenue, £1.2m and £1.2m in operating profit respectively. Connaught plc Annual Report 2008 Financial Statements 79 c99397_BOOK.indb 79 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 26 Acquisitions of subsidiaries continued The acquisitions after making fair value adjustments had the following effect on the Group’s assets and liabilities: National Britannia Others Book Book Fair value Fair value value value adjustments to Group £m £m £m £m Property, plant and equipment 1.0 0.7 (0.2) 1.5 Trade and other receivables 14.0 3.1 (2.4) 14.7 Cash and cash equivalents 1.5 2.1 - 3.6 Current liabilities (8.0) (2.2) (4.2) (14.4) Net identifiable tangible assets and liabilities 8.5 3.7 (6.8) 5.4 Provisional intangible assets – – 24.9 24.9 Deferred tax – – (8.0) (8.0) Total identifiable assets and liabilities 8.5 3.7 10.1 22.3 Provisional goodwill on acquisitions – – 91.7 91.7 114.0 Discharged by: Cash consideration 104.8 Deferred consideration shares 0.8 Loan notes 2.0 Costs of acquisition 6.4 114.0 Fair value adjustments comprise recognition of holiday pay liabilities and dilapidations accruals on leasehold properties and related deferred taxation thereon. Intangible assets have also been identified on acquisition (see next page). 80 Financial Statements Connaught plc Annual Report 2008 c99397_05_Notes.indd 80 5/11/08 12:26:21 Notes to the Consolidated Financial Statements continued 26 Acquisitions of subsidiaries continued The acquisitions effect on the Group’s assets and liabilities after making fair value adjustments by acquisition: Provisional National fair value Britannia Other to Group £m £m £m Property, plant and equipment 1.0 0.5 1.5 Trade and other receivables 13.2 1.5 14.7 Cash and cash equivalents 1.5 2.1 3.6 Current liabilities (12.2) (2.2) (14.4) Net identifiable tangible assets and liabilities 3.5 1.9 5.4 Provisional intangible assets 24.9 – 24.9 Deferred tax (8.0) – (8.0) Total identifiable assets and liabilities 20.4 1.9 22.3 Provisional goodwill on acquisitions 76.4 15.3 91.7 96.8 17.2 114.0 Discharged by: Cash consideration 88.2 16.6 104.8 Deferred consideration shares 0.8 – 0.8 Loan notes 2.0 – 2.0 Costs of acquisition 5.8 0.6 6.4 96.8 17.2 114.0 The intangible assets recognised represent the expected value to be derived from the acquired companies’ customer relationships. The difference remaining between the cost of acquisition and the fair value of the net assets represents a combination of the workforce acquired and future expected cash created from the expected synergistic benefits the acquisitions will provide to the Group in addition to that generated from existing customer relationships. The value of such intangible assets is not separately identifiable and therefore has been treated as goodwill. Finalisation of fair value adjustments relating to prior year acquisition The provisional fair values attributed to the tangible assets and liabilities were re-assessed at the anniversary date of the acquisition. Changes between the provisional fair values of the net assets acquired as at 31 August 2007 and the anniversary date are stated below. Fair value to Group £m Provisional fair value of net identifiable tangible assets at 31 August 2007 22.7 Re-assessment of trade receivables and work in progress (0.2) Re-assessment of current liabilities (3.7) Deferred tax 1.0 Goodwill 3.5 Final fair value of net identifiable tangible assets at anniversary date 23.3 Goodwill at 31 August 2007 18.1 Re-assessment of trade receivables and work in progress 0.2 Re-assessment of current liabilities 3.7 Deferred tax (1.0) Additional costs of acquisition 0.6 Final fair value of net identifiable tangible assets at anniversary date 21.6 Connaught plc Annual Report 2008 Financial Statements 81 c99397_BOOK.indb 81 5/11/08 11:24:43 Notes to the Consolidated Financial Statements continued 26 Acquisitions of subsidiaries continued Due to the long term nature of the contracts, the initial estimates of the value of work in progress and trade receivables were established at the time of acquisition. On this occasion the contracts were not capable of being assigned and therefore the fair value has been adjusted accordingly. This possibility had been reflected in the consideration paid for the acquisition and, therefore, no diminution in the value of goodwill has arisen. 27 Analysis of cash and cash equivalents 31 August 1 September 2008 Cash flows 2007 £m £m £m Cash in hand and at bank 50.0 24.4 25.6 The effective interest rate on short term deposits was 5.08% (2007: 4.65%) and these deposits were available on demand. 28 Reconciliation of net cash flow to movement in net debt 2008 2007 £m £m Increase in cash and cash equivalents in the year 24.4 9.0 (Increase) in debt and lease financing (78.0) (17.4) Change in net debt resulting from cash flows (53.6) (8.4) Other non cash movements: issue of loan notes – (3.8) Other non cash movements: finance leases assumed on acquisitions – (0.3) Movement in net debt in the year (53.6) (12.5) Net debt at beginning of the year (17.4) (4.9) Net debt at end of the year (71.0) (17.4) Net debt comprises all cash less bank loans, loan notes and obligations under finance leases and hire purchase agreements as at the end of the year. 29 Post balance sheet events Subsequent to the year end, the company acquired the entire share capital of Lowe Group Holdings Ltd, which trades as Necta Ltd, for a total consideration of £7.5m. Due to the size and timing post year end, no analysis of the separately identifiable assets and liabilities have been disclosed. 30 Exceptional items Exceptional items are items of expenditure that, in the judgement of management, should be disclosed separately on the basis that they are material, either by their nature or their size, to an understanding of the Group financial performance and distort the comparability of financial performance between periods. In the year to 31 August 2008 the Group incurred £2m of reorganisation costs following the integration of National Britannia into the Compliance segment. 2008 2007 £m £m Reorganisation costs 2.0 – 82 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 82 5/11/08 11:24:44 Notes to the Consolidated Financial Statements continued 31 List of principal subsidiary undertakings The companies listed below are, in the opinion of the Directors, the principle undertakings of Connaught plc as at 31 August 2008. Name of undertaking Principal activity Connaught Partnerships Limited Social housing maintenance services Connaught Environmental Ltd Estate management services Connaught Compliance Limited Electrical and mechanical maintenance services Conntrol Limited Web-enabled asset management services Connaught Technical Solutions Limited Gas heating, electrical, ventilation and air conditioning services Connaught Academy Limited Training gas technicians Connaught GasForce Limited Gas heating – ventilation and air conditioning services GasForce Technical Services Limited Gas heating and refrigeration services Connaught Baldwin Limited Social housing maintenance services Connaught Scotland Ltd Specialist maintenance services Environment Plus (UK) Limited Water analysis specialist P.C.L. (Nationwide) Limited Electrical and lighting installation and maintenance C B Services Limited Electrical installation and maintenance Apollo Plant Hire Limited Plant hire A.E. Williams & Son (Builders) Limited Social housing maintenance services Water Technology Limited Water hygiene and treatment services Chloroxy Tech Limited Water treatment services Magi-cal Water Filters Limited Water filter systems MSF Limited Fire protection services A.N.T. Environmental Services Limited Health and safety consultancy BCCR Holdings Limited Health and safety consultancy Corporate Governance Through Controls Assurance Limited Water safety and asbestos consultancy E.H.&S.S. Limited Occupational health services Elite Workwear UK Limited Health and safety consultancy Hygiene Monitoring Services Limited Health & safety and food safety consultancy National Britannia Certification Limited Accreditation and certification services National Britannia Group Limited Group service company National Britannia Limited Health and safety consultancy Occhea Limited Occupational health services Safety Works Limited Health and safety consultancy Corporate Health & Safety Solutions Limited Health and safety training company All of the above subsidiaries are incorporated in and operate in the United Kingdom and are included in the consolidation. All of the above undertakings are registered in England and Wales, except Connaught Scotland Ltd, which is registered in Scotland, and are wholly owned by the Group. 32 Registered office The Company is incorporated under the Companies Act in England and Wales and domiciled in the United Kingdom. The Company’s registered office is: Connaught House, Grenadier Road, Exeter Business Park, Exeter, Devon, EX1 3QF. Connaught plc Annual Report 2008 Financial Statements 83 c99397_BOOK.indb 83 5/11/08 11:24:44 Five-year Summary (Unaudited) Income 2008 2007 2006 2005 2004* Statement £m £m £m £m £m Revenue 552.9 395.9 299.7 239.5 208.6 Gross profit 78.1 50.8 36.9 32.1 23.0 Operating and administrative expenses (51.2) (33.5) (22.8) (22.7) (25.0) Operating profit before intangible asset amortisation and exceptional item 35.9 19.2 14.1 10.1 (0.6) Acquisition intangible asset amortisation and impairment (7.0) (1.9) – – (1.4) Exceptional item (2.0) – – (0.7) – Operating profit 26.9 17.3 14.1 9.4 (2.0) Net interest paid (5.2) (1.5) (1.2) (1.2) (0.5) Profit before taxation 21.7 15.8 12.9 8.2 (2.5) Tax charge (6.5) (4.8) (3.9) (2.4) – Profit for the financial year 15.2 11.0 9.0 5.8 (2.5) Dividends (2.9) (2.0) (1.8) (1.6) (1.5) Retained profit 12.3 9.0 7.2 4.2 (4.0) Earnings per share Basic 12.8p 10.8p 9.1p 6.0p (2.7)p Exceptional items 1.3p – – 0.4p – Acquisition intangible asset amortisation 4.2p 1.4p – – 8.1p Adjusted basic 18.3p 12.2p 9.1p 6.4p 5.4p Adjusted diluted 17.5p 11.7p 8.8p 6.2p 5.2p Dividends per share 2.4p 2.0p 1.8p 1.7p 1.6p Balance sheet Non-current assets 203.7 78.0 40.6 38.8 35.1 Net-current assets 32.3 16.7 19.7 8.9 5.6 Total assets less current liabilities 236.0 94.7 60.3 47.7 40.7 Non-current liabilities (109.2) (42.0) (19.2) (16.8) (17.0) Net assets 126.8 52.7 41.1 30.9 23.7 Net debt (71.0) (17.4) (4.9) (11.2) (10.4) 2008, 2007, 2006 and 2005 have been presented in accordance with IFRS. *2004 has not been adjusted to reflect differences between UK GAAP and EU adopted IFRSs. 84 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 84 5/11/08 11:24:44 Connaught plc Company Financial Statements Contents Report of the Independent Auditors to the members of Connaught plc...... 86 Company Balance Sheet ...... 88 Statement of Accounting Policies ...... 89 Notes to the Accounts...... 91 Investor Information...... 97 Connaught plc Annual Report 2008 Financial Statements 85 c99397_BOOK.indb 85 5/11/08 11:24:44 Report of the Independent Auditors to the members of Connaught plc We have audited the parent Company financial statements of Connaught plc for the year ended 31 August 2008 which comprise the balance sheet and the related notes. These parent Company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. We have reported separately on the Group financial statements of Connaught plc for the year ended 31 August 2008. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the parent Company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the parent Company financial statements give a true and fair view and whether the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the parent Company financial statements. The information given in the Directors’ Report includes that specific information presented in the Operations Review and Finance Review that is cross referred from the Review of business and future developments section of the Directors’ Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited parent Company financial statements. The other information comprises only the Chairman’s Statement, the Operations Review, the Finance Review, the Corporate Responsibility Report, the Directors’ Report, the Corporate Governance Report and the unaudited part of the Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent Company financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the parent Company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited. 86 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 86 5/11/08 11:24:44 Report of the Independent Auditors to the members of Connaught plc continued Opinion In our opinion: • the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 31 August 2008; • the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors’ Report is consistent with the parent Company financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Bristol 28 October 2008 Connaught plc Annual Report 2008 Financial Statements 87 c99397_06_Notes.indd 87 5/11/08 12:29:52 Company Balance Sheet at 31 August 2008 2008 2007 Note £m £m Fixed assets Tangible fixed assets 1 8.5 4.0 Investments 2 157.2 55.7 165.7 59.7 Current assets Debtors 3 21.1 15.9 Cash at bank and in hand 2.9 19.0 24.0 34.9 Creditors: amounts falling due within one year 4 (20.3) (15.2) Net current assets 3.7 19.7 Total assets less current liabilities 169.4 79.4 Creditors: amounts falling due after one year 5 (71.9) (41.7) Net assets 97.5 37.7 Capital and reserves Called up share capital 7 2.5 2.1 Share premium account 8 80.2 20.0 Merger reserve 8 6.1 6.1 Capital redemption reserve 8 0.5 0.5 Own share reserve 8 (1.5) (1.2) Share based payment reserve 8 1.1 0.8 Profit and loss account 8 8.6 9.4 Equity shareholders’ funds 97.5 37.7 These financial statements were approved by the Board of Directors on 24 October 2008 and were signed on its behalf by: M W Tincknell S Hill Director Director 88 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 88 5/11/08 11:24:44 Statement of Accounting Policies Except as stated below, the following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements. Basis of preparation The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules, in accordance with the Companies Act 1985 and applicable United Kingdom Accounting Standards (UK GAAP). As permitted by S230(3) of the Companies Act 1985, the Company’s profit and loss account and statement of total recognisable gains and losses has not been presented. The Connaught plc consolidated financial statements for the year ended 31 August 2008 contain a consolidated cash flow statement. Consequently, the Company has taken advantage of the exemption in FRS 1 (Revised 1996) ‘Cash Flow Statements’ not to present its own cash flow statement. The Company has taken advantage of the exemptions in FRS 8 ‘Related Party Disclosures’ not to disclose transactions with other Group members. Tangible fixed assets and depreciation Depreciation is provided by the Company to write off the cost less the estimated residual value of tangible fixed assets over their estimated useful economic lives as follows: Buildings – 2% straight line per annum Leasehold improvements – Charged over life of lease Motor vehicles – 25% straight line per annum Fixtures, fittings, tools and equipment – 20% straight line per annum Plant and machinery – 20% straight line per annum Computer equipment – 25% straight line per annum Management software packages – Charged over estimated life of package Leases Where the Company enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a ‘finance lease’. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element, which reduces the outstanding obligation for future instalments. All other leases are accounted for as ‘operating leases’ and the rental charges are charged to the profit and loss account on a straight line basis over the life of the lease. Pension costs The Company operates defined contribution and Group personal pension schemes. The assets of the schemes are held separately from those of the Group in independently administered funds. The amounts charged against profits represent the contributions payable to the schemes in respect of the accounting period. Tax including deferred tax The tax expense represents the sum of current tax expense and deferred tax expense. Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Full provision (on an undiscounted basis) is made for deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in the respective tax computations. Deferred tax assets are recognised only to the extent that they are more likely than not to be recovered in the short term. Connaught plc Annual Report 2008 Financial Statements 89 c99397_BOOK.indb 89 5/11/08 11:24:44 Statement of Accounting Policies continued Dividends Final dividends are recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid. Investments held as fixed assets Investments held as fixed assets comprise the Company’s investment in subsidiaries and are shown at initial cost (being the fair value of the consideration paid including amounts attributable to transaction costs) less any provision for impairment (reviewed on an individual basis if events or circumstances dictate the carrying value may not be fully recoverable). Share-based payment The Company has applied the requirements of FRS 20. The Company issues equity-settled share-based payments to certain employees and until 1 September 2006 operated an Inland Revenue approved Save As You Earn share option scheme open to eligible employees which allows the purchase of shares at a discount. These are measured at fair value at the date of grant. The fair value is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of the Black Scholes model as set out on page 45. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Where relevant, the value of the option has also been adjusted to take account of market conditions applicable to the option. 90 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 90 5/11/08 11:24:44 Notes to the Accounts 1 Fixed assets Short Plant, Fixtures, leasehold machinery and fittings, tools improvements motor vehicles and equipment Total £m £m £m £m Cost At 1 September 2007 0.8 0.2 6.9 7.9 Additions 0.5 – 8.4 8.9 Disposals – – (4.7) (4.7) 31 August 2008 1.3 0.2 10.6 12.1 Depreciation At 1 September 2007 0.3 0.1 3.5 3.9 Charged for year – – 0.9 0.9 Disposals – – (1.2) (1.2) At 31 August 2008 0.3 0.1 3.2 3.6 Net book value At 31 August 2008 1.0 0.1 7.4 8.5 At 31 August 2007 0.5 0.1 3.4 4.0 Connaught plc Annual Report 2008 Financial Statements 91 c99397_BOOK.indb 91 5/11/08 11:24:44 Notes to the Accounts continued 2 Investments Shares in Group companies 2008 2007 £m £m Cost and net book value At 1 September 55.7 33.7 Additions 101.5 22.0 Disposals – – At 31 August 157.2 55.7 At 31 August 2008 the acquisition of National Britannia accounted for £96.8m of investments held by Plc. At 31 August 2008 the Company owned the entire ordinary equity share capital, either directly or indirectly, of the following principal subsidiary undertakings: Name of undertaking Principal activity Connaught Partnerships Limited Social housing maintenance services Connaught Environmental Ltd Estate management services Connaught Compliance Limited Electrical and mechanical maintenance services Conntrol Limited Web-enabled asset management services Connaught Technical Solutions Limited Gas heating, electrical, ventilation and air conditioning services Connaught Academy Limited Training gas technicians Connaught GasForce Limited Gas heating – ventilation and air conditioning services GasForce Technical Services Limited Gas heating and refrigeration services Connaught Baldwin Limited Social housing maintenance services Connaught Scotland Ltd Specialist maintenance services Environment Plus (UK) Limited Water analysis specialist P.C.L. (Nationwide) Limited Electrical and lighting installation and maintenance C B Services Limited Electrical installation and maintenance Apollo Plant Hire Limited Plant hire A.E. Williams & Son (Builders) Limited Social housing maintenance services Water Technology Limited Water hygiene and treatment services Chloroxy Tech Limited Water treatment services Magi-cal Water Filters Limited Water filter systems MSF Limited Fire protection services A.N.T. Environmental Services Limited Health and safety consultancy BCCR Holdings Limited Health and safety consultancy Corporate Governance Through Controls Assurance Limited Water safety and asbestos consultancy E.H.&S.S. Limited Occupational health services Elite Workwear UK Limited Health and safety consultancy Hygiene Monitoring Services Limited Health & safety and food safety consultancy National Britannia Certification Limited Accreditation and certification services National Britannia Group Limited Group service company National Britannia Limited Health and safety consultancy Occhea Limited Occupational health services Safety Works Limited Health and safety consultancy Corporate Health & Safety Solutions Limited Health and safety training company All of the above subsidiaries are incorporated in and operate in the United Kingdom and are included in the consolidation. All of the above undertakings are registered in England and Wales, except Connaught Scotland Ltd which is registered in Scotland, and are wholly owned by the Group. 92 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 92 5/11/08 11:24:44 Notes to the Accounts continued 3 Debtors 2008 2007 £m £m Amounts falling due in less than one year: Amounts owed by subsidiary undertakings 8.4 6.6 Other taxes and social security 2.9 2.0 Corporation tax 5.9 5.2 Deferred tax asset – 0.4 Other debtors 1.8 – Prepayments and accrued income 2.1 1.7 21.1 15.9 There were no amounts falling due in more than one year. Amounts owed by subsidiary undertakings are interest free, unsecured and have no set date of repayment. 4 Creditors: amounts falling due within one year 2008 2007 £m £m Bank loans 10.8 – Loan notes (note 5) – 0.6 Obligations under finance leases and hire purchase contracts (note 5) – 0.1 Trade creditors 5.2 3.7 Amounts owed to subsidiary undertakings 0.7 2.8 Other creditors 0.8 0.1 Accruals and deferred income 1.6 3.3 Deferred consideration 1.2 4.6 20.3 15.2 Amounts owed to subsidiary undertakings are interest free, unsecured and have no set date of repayment. Connaught plc Annual Report 2008 Financial Statements 93 c99397_BOOK.indb 93 5/11/08 11:24:44 Notes to the Accounts continued 5 Creditors: amounts falling due after one year 2008 2007 £m £m Bank loans 71.9 37.9 Loan notes – 3.8 71.9 41.7 Analysis of debt: Obligations under bank loans In one year or less, or on demand 10.8 – Between two and five years 71.9 37.9 82.7 37.9 Obligations under loan notes On one year or less, or on demand – 0.6 Between one and two years – 3.8 – 4.4 Obligations under finance leases and hire purchase contracts In one year or less, or on demand – 0.1 – 0.1 The bank loans referred to above have been drawn down under a revolving credit facility under which each Group Company has cross-guaranteed the borrowings of its fellow Group Companies. Interest rates are set according to agreed financial criteria at 31 August and at the end of every subsequent quarter. The borrowings are secured by way of fixed and floating charges over the assets of the Group. 6 Dividends 2008 2007 £m £m Equity shares: Final dividend for the year ended 31 August 2007 of 1.46p per share (2006: 1.25p) 1.8 1.3 Interim dividend for the year ended 31 August 2008 of 0.925p per share (2007: 0.77p) 1.1 0.8 2.9 2.1 In addition, the Directors are proposing a final dividend in respect of the financial year ending 31 August 2008 of 1.755p per share which will absorb an estimated £2.2m of shareholders’ funds. Subject to shareholder approval, it will be paid on 6 March 2009 to shareholders who are on the register of members on 6 February 2009. 94 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 94 5/11/08 11:24:44 Notes to the Accounts continued 7 Share capital 2008 2007 £m £m Authorised 162,700,000 (2007: 125,000,000) ordinary shares of 2p each 3.3 2.5 Allotted, called up and fully paid 122,654,623 (2007: 102,742,504) ordinary shares of 2p each 2.5 2.1 During the year 415,000 (2007: 1,505,734) shares were issued as a result of the exercise of share options and SAYE schemes for a consideration of £0.5m (2007: £0.7m). 8 Reserves a) Retained earnings 2008 2007 £m £m At 1 September 9.4 2.3 Profit for the year 2.1 9.2 Dividend paid (2.9) (2.1) At 31 August 8.6 9.4 b) Other reserves Share Capital Share Own based Merger redemption premium shares payment reserve reserve account reserve reserve Total £m £m £m £m £m £m 1 September 2006 6.1 0.5 19.3 – – 25.9 Premium on shares issued – – 0.7 – – 0.7 Transfer from ESOP Trustee – – – (1.2) 0.8 (0.4) 31 August 2007 6.1 0.5 20.0 (1.2) 0.8 26.2 Premium on shares issued – – 60.2 – – 60.2 Share based payments – – – (0.3) 0.3 – 31 August 2008 6.1 0.5 80.2 (1.5) 1.1 86.4 The Group’s own shares reserve is held in an offshore trust in Jersey under the management of AIBWorthytrust Limited. However, the shares are under the control of the Remuneration Committee and have therefore been included in the Company’s shareholders equity. Following shareholder approval, the Group raised £57.9m by the issue of 18,680,909 new ordinary shares at 310 pence each by way of a Placing and Open Offer. Connaught plc Annual Report 2008 Financial Statements 95 c99397_BOOK.indb 95 5/11/08 11:24:44 Notes to the Accounts continued 9 Reconciliation of movements in shareholders’ funds 2008 2007 £m £m Profit for the year 2.1 9.2 Dividends (2.9) (2.0) Premium on shares issued 60.2 0.7 Shares issued 0.4 – Transfer from ESOP Trustee (note 8b) – (0.4) Net addition to shareholders’ funds 59.8 7.5 Opening shareholders’ funds as previously reported 37.7 30.2 Closing shareholders’ funds 97.5 37.7 10 Contingent liabilities An unlimited bank multilateral guarantee exists between the Company and other Group Companies. At the year end the Group had loans totalling £120.2m (2007: £37.9m). The Company has also guaranteed the performance bonds of its subsidiary companies of £12.3m (2007: £10.2m). 11 Other information As permitted by S230(3) of the Companies Act 1985, the profit and loss account of the Company has not been presented. The profit attributable to shareholders, dealt with in the financial statements of the Company is £2.1m (2007: £9.2m). This is after charging an audit fee of £0.1m (2007: £0.1m). 12 Staff costs 2008 2007 £m £m Wages and salaries 8.6 4.4 Social security costs 1.2 0.5 Pension 0.5 0.3 Share schemes 0.8 0.5 11.1 5.7 Average staff numbers were 173 (2007: 103) 13 Registered office Connaught plc is a Company incorporated in England and Wales. The Company’s registered office is: Connaught House, Grenadier Road, Exeter Business Park, Exeter, Devon, EX1 3QF. 96 Financial Statements Connaught plc Annual Report 2008 c99397_BOOK.indb 96 5/11/08 11:24:44 Investor Information Registrars Head Office Capita IRG Connaught House The Registry Grenadier Road 34 Beckenham Road Exeter Business Park Beckenham Exeter Kent Devon EX1 3QF BR3 4 01392 444546 Solicitors Jones Day 21 Tudor Street London EC4Y 0DJ Brokers Altium Securities 30 St James Square London SW1Y 4AL KBC Peel Hunt Ltd 111 Old Broad Street London EC2N 1PH Bankers The Royal Bank of Scotland 4 Floor Castlegate House Tower Hill Bristol BS2 0JA Corporate Finance Advisor Close Brothers 10 Crown Place London EC2A 4FT Auditors PricewaterhouseCoopers LLP 31 Great George Street Bristol BS1 5QD Connaught plc Annual Report 2008 Financial Statements 97 c99397_BOOK.indb 97 5/11/08 11:24:45 Printed using vegetable based, solvent free inks on Revive 100 Offset, a recycled grade containing 100% post consumer waste and manufactured at a mill accredited with IS0 14001 environmental management standard. The pulp used in this product is bleached using a Totally Chlorine Free process (TCF). Design by onebrandgroup Production by imprima c99397_07_Notes.indd 98 5/11/08 12:31:30 Introduction Connaught is a proven growth business. During 2008 we have strengthened our position as the leading integrated provider of essential services to the UK’s social housing and compliance markets. We continuously invest in our people, processes and technology to ensure we deliver greater efficiency and an outstanding experience to all our customers. Our future is built on solid foundations and a disciplined strategic approach which will continue to ensure we remain focused on the long-term visibility and sustainability of our earnings. 2 Introduction Connaught plc Annual Report 2008 c99397_BOOK.indb 2 5/11/08 11:20:17 Annual Report & Accounts 2008 Connaught plc Annual Report & Accounts 2008 Connaught plc Connaught House Grenadier Road Exeter Business Park Exeter Devon EX1 3QF Tel 01392 444546 Fax 01392 444543 [email protected] www.connaught.plc.uk Registered Company No. 3184319 c99397_BOOK.indb 1 5/11/08 11:19:58