Mitie taking accounting write-down, trying to avoid covenant breach

The FTSE 250 firm said the outcome of the accounting review was presented to the audit committee and board on 2 May, and all numbers in the statement remained subject to audit.

Trading performance, before the impact of the accounting review, was said to be largely in line with previous expectations, referenced in Mitie’s January trading update.

Revenues remained flat in FY17 compared to FY16, reflecting what the board said had been a “challenging” environment.

As it announced in January, the company reviewed all major balance sheet items to provide confidence that all relevant accounting standards were appropriately reflected in its financial reporting.

That work was complemented by KPMG's review, which covered certain aspects of the material balances of accrued income, mobilisation costs, percentage of completion accounting and the recoverability of trade receivables, as well as the carrying value of certain other assets.

KPMG confirmed that the customer contract-related methodologies and policies used by Mitie complied with all relevant accounting standards.

However, KPMG commented that the company’s application of percentage of completion accounting and costs of contract mobilisation was less conservative, albeit still justifiable, than others in the market.

In response to those findings, and in addition to the £14m of one-off charges identified in the January trading update, the board currently expected to write down its balance sheet by between £40m and £50m.

Of that total, it said only £6m related to provisions which were expected to result in cash outflows in FY18, with the majority being non-cash write-downs of trading assets, and having no impact on the future profitability of the business.

Additionally, the review identified a number of material errors which may necessitate restating its FY16 accounts, which would likely result in an increase in FY17 reported results of between £10m and £20m.

The costs of change had increased by £5m to £15m since January as some further 160 roles had been removed in the first wave of a new cost reduction programme, the board said - the full details of which would be shared at the time of its preliminary results.

Mitie’s year-end net debt position at 31 March was £146m, narrowing from £178m, and the board currently expected to comply with the conditions of its debt covenants as measured at that point.

“However, as the company expects to have only limited headroom under its covenants as at 31 March, the company intends to engage with its lenders with a view to negotiating an amendment to our banking covenants so as to permit further one-off charges and thereby remove the risk of a possible technical breach,” the board explained.

“These changes would also enable the company to review its accounting policies in respect of percentage of completion contracts and mobilisation and take a more cautious approach in advance of adopting IFRS15 Revenue from Contracts with Customers.”

As a result of the one-off asset write downs and adjustments to reserves in FY17, the board said it was proposing a technical adjustment to its articles of association, raising borrowing limits from 2x reserves to a fixed amount of £1.5bn.

That would be put to an extraordinary general meeting on 12 June, with formal notice to be issued shortly.

Looking ahead, the board approved Mitie's FY18 annual operating plan on 14 March 2017, explaining that the plan was in line with previous expectations.

“FY17 has undoubtedly been a challenging year but Mitie remains a strong and successful business, and is continuing to deliver for our customers,” said CEO Phil Bentley.

“Whilst these accounting adjustments in FY'17 affect our reported profits, they do not affect the underlying strength of our business.”

Since his appointment as CEO in December, Bentley said the company had worked hard to build a new ‘connected workspace’ strategy, with clear deliverables and measurements for customers, costs, people and technology.

“Mitie has a well-diversified portfolio of high quality customers and an outstanding range of capabilities.

“We have appointed a new executive leadership team - with a new way of working - and we are confident the business will generate significant shareholder returns over the forthcoming years.”

Full year results for the 12 months ending 31 March 2017 and an update on the board’s strategy would be announced on 12 June, Bentley confirmed.

“This is later than originally planned to allow sufficient time for the complex changes outlined above to be processed and for our auditors to conclude their work.”