the construction and regeneration group Interim report 2008
Morgan Sindall, the construction and regeneration group, employs over 8,500 people. The Group now operates through five divisions: Fit Out, Construction, Infrastructure Services, Affordable Housing and Urban Regeneration. The strength of the Group is derived from this balance of activity and the ability to provide integrated solutions across these five areas. Fit Out Construction Fit Out operates through four businesses. Overbury is the leading office fit out and refurbishment specialist and Morgan Lovell provides a design and build service for office interiors. Vivid Interiors fits out hotel, retail, leisure and education facilities. Backbone Furniture supplies and installs commercial office furniture. Morgan Ashurst is a construction and design business with activities ranging from small works, repair and maintenance services to large-scale projects. It operates across the UK with expertise in the health, education, light industrial, property services, defence and retail sectors. Affordable Housing Lovell specialises in mixed tenure developments, urban regeneration and large-scale housing refurbishment schemes, working in partnership with housing associations and local authorities. Urban Regeneration Muse Developments is a UK-wide urban regeneration business specialising in the delivery of complex mixed use development projects, predominantly in town and city centre locations. Muse Developments has a portfolio of around 30 projects, the majority of which are delivered in partnerships with public and private sector landowners.
Infrastructure Services Morgan Est is a major UK provider of infrastructure services across the public and private sectors. The business specialises in the design and delivery of complex civil engineering projects and utilities services to the defence, water, gas, electricity and transport sectors. Contents Financial highlights 01 Interim report 02 Condensed consolidated income statement 07 Condensed consolidated balance sheet 08 Condensed consolidated cash flow statement 09 Condensed consolidated statement of recognised income and expense 10 Notes to the interim financial statements 11 Responsibility Statement 19
Highlights 1,239mRevenue (up 48%) 33.1mAdjusted profit before tax 1 (up 31%) 28.6mProfit before tax (up 13%) 98mNet cash (up 58%) 60.9pAdjusted earnings per share 1 (up 48%) 50.1pBasic earning per share (up 22%) 12.0pInterim dividend per share (up 20%) 1 Adjusted for amortisation of intangible assets Revenue ( m) 1,497 2,115 Profit before tax ( m) 47.6 57.6 Dividend declared (p) 20.0 28.0 674 836 1,239 21.3 25.2 28.6 8.0 10.0 12.0 06 07 08 06 07 08 06 07 08 1
Interim report We are pleased to announce record results for the six months to 30 June 2008. Profit before tax and amortisation of intangible assets rose by 31% to 33.1m (2007: 25.2m) on revenue that increased by 48% to 1.24bn (2007: 0.84bn). Adjusted earnings per share before amortisation increased by 48% to 60.9p (2007: 41.1p). Profit before tax for the period (after amortisation of intangible assets) was 28.6m (2007: 25.2m). The Board has declared an interim dividend of 12.0p (2007: 10.0p), an increase of 20%. Our strategy remains the same, to develop market leading positions within our chosen sectors in the construction and regeneration markets. The Group has made excellent progress in this strategy over the past year. Fit Out has increased its market share in the commercial office fit out sector. Construction and Infrastructure Services have both significantly extended their capabilities and geographic coverage as a result of the businesses acquired from Amec plc in July 2007. Affordable Housing has strengthened its position in the social housing sector, partly compensating for the decline in affordable open market housing. And finally, the Group has added a leading mixed use regeneration capability through its Urban Regeneration division, which was also acquired in July 2007. The overall growth in profitability of the Group for the first six months of 2008 was driven primarily by contributions from the businesses acquired in July 2007. These contributions are seen in improved performances from Construction and Infrastructure Services compared with the six months to 30 June 2007, as well as in profit from Urban Regeneration. Construction and Infrastructure Services also expanded organically, benefitting from the buoyant market conditions in their respective markets. Conversely, Fit Out and Affordable Housing have both faced more challenging market conditions than those experienced in 2007. Consequently the underlying profitability of the Group achieved in the first half of 2008 was broadly similar to that achieved in the corresponding period in 2007. Net cash at 30 June 2008 was 98m (2007: 62m) with average cash during the six months to the end of June of 95m compared with 39m for the same period last year. The performance of each of the operating divisions for the six months to 30 June 2008 is set out below. Divisional operating profits are stated before the amortisation of intangible assets. 2
Morgan Sindall Interim report 2008 3 Fit Out Fit Out produced another excellent performance during the first half of 2008, generating an operating profit of 11.5m (2007: 12.4m) on revenue of 205m (2007: 225m). The operating margin of 5.6% (2007: 5.5%) was another record for the division demonstrating the benefits of its Perfect Delivery quality programme. Overall demand in the commercial office fit out market has been reasonably robust, and the division s performance was driven by a strengthening of its market share and its broad sector spread, which helped it offset some softening of demand from the financial services sector. The division continues to focus on growth from increased geographic spread; expansion into the retail, leisure, entertainment and education sectors; and larger value contracts. Notable projects undertaken or secured during the period include new open plan offices, restaurant and meeting rooms for Guardian Media Group valued at 16m, the 19m fit out of two buildings for London Borough of Newham comprising offices and a new business centre, and a 9m fit out to create new headquarters for the Intercontinental Hotel Group in Buckinghamshire. The order book has increased both year-on-year and since the start of the year from 179m to 220m (2007: 206m) and revenue for the second half of the year is therefore expected to be ahead of that for the first half. As previously announced, we continue to expect some softening of demand in 2009 albeit current signs are very encouraging with the order book for 2009 ahead of where the 2008 order book was at this time last year. Construction The Construction division delivered an operating profit of 4.1m (2007: 2.2m) on revenue of 418m (2007: 199m). This revenue level reflects year-on-year growth of around 5% in the underlying business complemented by growth from last year s acquisition. The operating profit is stated after one-off costs of 1.0m relating to the acquisition. Adjusting the operating profit for these costs gives an operating margin for the period of 1.2% (2007: 1.1%). As has been well documented, demand in commercial property has weakened. However, demand from the rest of the private sector is reasonably robust while demand from the public sector, which now accounts for approximately 70% of the division s revenue, is strong, particularly in education where we have recently won some major new contracts. The division significantly expanded its capabilities, project range, market coverage and geographic coverage through last year s acquisition and this is reflected in many of the new contracts secured during the period. These include the division s appointment as a construction partner in the delivery of a seven year, 200m building programme for Cambridgeshire County Council and as prime contractor on the 44m Bideford College for Devon County Council a School Pathfinder Project under the Government s Building Schools for the Future ( BSF ) programme. The order book at the end of June was 828m (2007: 891m) with the overall outlook for the construction market remaining encouraging. Infrastructure Services Infrastructure Services enjoyed buoyant market conditions during the first half of 2008, driven in particular by investment in the transport and utilities sectors. We expect these favourable conditions to continue for the foreseeable future. The division achieved an operating profit of 7.6m (2007: 4.0m) on revenue of 395m (2007: 221m). This increase in revenue of 79%
reflects growth in the underlying business of approximately 25%, with the remainder from last year s acquisition. The operating profit is also stated after one-off IT costs relating to the acquisition of 1.4m. Adjusting the operating profit for these costs gives an improved operating margin of 2.3% (2007: 1.8%). Infrastructure Services also strengthened its market position through last year s acquisition and it is now a market leader in the water, tunnelling, transport and utilities sectors. This leadership has contributed to its success in securing, as part of the Interlink joint venture, a share of the 445m M74 completion project, Scotland's largest ever road construction scheme, and delivering the BAA infrastructure and pavement works at Heathrow in the first half of 2008. The order book at the end of June was 1.8bn (2007: 1.5bn) with the outlook for the infrastructure market remaining positive. Affordable Housing The refurbishment and new build social housing sectors, which now account for 90% of the division s revenue for the first half of this year, remain healthy underpinned by the Government s Decent Homes programme and funding to the Housing Corporation. The division strengthened its position in these sectors in the first half of the year, in particular securing Decent Homes contracts at Dudley, West Midlands valued at 11m, and in North Warwickshire valued at 12m as well as being appointed development partner by Hounslow Homes for a 53m contract to build 350 new homes for rent and shared ownership. In recent months, however, the division s open market house sales have been increasingly impacted by the availability of mortgages. Therefore, despite the growth of its revenue from social housing, overall the division delivered a reduced operating profit of 8.8m (2007: 11.5m) on revenue of 176m (2007: 192m) achieving an operating margin of 5.0% (2007: 6.0%). The order book at the end of June was 1.4bn (2007: 1.5bn). The outlook for social housing in the UK remains positive albeit, as previously announced, we expect the division to continue to be impacted during the remainder of 2008 and in 2009 by the downturn in open market house sales. To mitigate the effects of this downturn the division is successfully increasing its focus on refurbishment and new build social housing, reducing production costs and selling units designated for open market sale to housing associations. 4
Morgan Sindall Interim report 2008 5 Urban Regeneration Urban Regeneration performed in line with management s expectations over the first six months of 2008 delivering operating profit, including share of joint ventures, of 5.6m on revenue of 45m. The division, which was acquired last year, gives the Group a leading mixed use property development and urban regeneration business with interests in 30 long-term regeneration projects. Its share of the project pipeline is valued at 1.1bn and it has a share in four further projects currently at preferred bidder stage, valued at an additional 1.0bn. The division is responding to the recent slowdown of the commercial property market by revisiting existing plans and rephasing developments to ensure it is best placed to take full advantage when the market improves. Although the recent softening of the commercial and residential property sectors means the shortterm outlook for the division is subdued, the Group remains of the view that mixed use development is central to the regeneration of urban communities in areas of social and economic deprivation and will be a major opportunity in the long-term. Financial review and principal risks Revenue for the six months to 30 June 2008 increased by 48% to 1.24bn (2007: 0.84bn). This increase is due to the impact of the acquisition in July 2007 as well as organic growth at Infrastructure Services and Construction offset by a fall in revenue from Fit Out and Affordable Housing. Overall underlying revenue increased by 4% with the remaining growth contributed by the businesses acquired. Group profit from operations prior to the amortisation of intangible assets increased by 30% to 30.8m (2007: 23.7m). The operating margin was 2.5% (2007: 2.8%) reflecting the change in the mix of the business with a shift in revenue away from our higher margin divisions. The increase in the profit from operations was driven by the acquisition with underlying profitability being broadly flat year-on-year; increased profit as a result of organic growth at Construction and Infrastructure Services being offset by a decline in profit from Fit Out and Affordable Housing. The cost of Group Activities was broadly similar to that for the same period last year. Net finance income was 2.3m (2007: 1.5m) reflecting the higher level of average cash over the period of 95m (2007: 39m). Profit before
We have delivered a record set of interim results and remain on track to deliver record results for this year in line with our expectations. tax and amortisation of intangible assets of 33.1m was 31% ahead of last year s 25.2m. The income tax expense was 7.5m (2007: 7.9m), lower than the same period last year, reflecting the lower headline rate and an increase in the operating profit derived from joint ventures, which is stated after tax. Profit after tax was 21.1m (2007: 17.3m). Shareholders equity increased to 176.8m (2007: 154.1m). The average cash for the period was 95m (2007: 39m) and the cash at 30 June 2008 was 98m (2007: 62m). This reflects operating profitability and corresponding strength in operating cash flow over the past twelve months. During the period the Group renewed the 25m, 364-day revolving facility for a further twelve months to June 2009. In addition to its cash resources the Group has in total 75m of committed bank facilities and a 10m overdraft facility. Related party transactions for the period are disclosed in note 11 to the financial statements following this report. The directors consider that the key risks which may have a material impact on the Group s performance in the remaining six months of the financial year are unchanged from those detailed in the 2007 annual report and accounts. These include but are not limited to; the ability to attract, develop and retain talented employees, safe operation as a construction business, market related risks, regulatory risks, contract related risks and acquisition related risks. Outlook As previously announced, for the remainder of 2008 and 2009 we expect the strength in the infrastructure sector and the weakness in the commercial property and open market housing sectors to continue. Against this market backdrop, the Group remains firmly on course to achieve its targets for 2008 and beyond. Strategically it is better placed than ever, with all of its businesses having further developed their market positions and with the addition of a leading mixed use regeneration business during the past year. Our confidence is reflected in our forward order book, which now stands at 4.2bn (2007: 4.1bn) and in our strong net cash position of 98m (2007: 62m). Forward-looking statements This interim report has been prepared solely to assist shareholders to assess the Board s strategies and their potential to succeed. It should not be relied on by any other party for other purposes. Forward-looking statements have been made by the directors in good faith using information available up until the date on which they approved the interim report. Forwardlooking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks. 6
Morgan Sindall Interim financial statements 2008 Consolidated income statement for the six months to 30 June 2008 (unaudited) Unaudited Unaudited six months to six months to Year ended 30 June 2008 30 June 2007 31 December 2007 m m m Continuing operations Revenue (note 4) 1,238.5 836.1 2,114.6 Cost of sales (1,115.3) (744.1) (1,892.9) Gross profit 123.2 92.0 221.7 Other administrative expenses (95.9) (67.9) (168.4) Amortisation of intangible assets (4.5) - (4.5) Total administrative expenses (100.4) (67.9) (172.9) Share of net profit/(loss) of equity accounted joint ventures 3.5 (0.4) 4.7 Profit from operations 26.3 23.7 53.5 Finance income 4.5 3.0 8.5 Finance expense (2.2) (1.5) (4.4) Net finance income 2.3 1.5 4.1 Profit before income tax expense 28.6 25.2 57.6 Income tax expense (note 5) (7.5) (7.9) (18.2) Profit for the period attributable to equity holders of the parent company 21.1 17.3 39.4 There are no discontinued activities in either the current or comparative periods. Earnings per share From continuing operations Basic (note 8) 50.1p 41.1p 93.8p Diluted (note 8) 49.4p 40.1p 91.7p 7
Consolidated balance sheet at 30 June 2008 (unaudited) Unaudited Unaudited Restated 30 June 2008 30 June 2007 31 December 2007 m m m Non current assets Property, plant and equipment 26.4 18.8 23.8 Goodwill 183.3 72.7 183.3 Other intangible assets 28.0-32.5 Investments in equity accounted joint ventures 46.7 10.8 38.1 Investments 0.1 0.1 0.1 Deferred tax assets 5.5 3.6 5.0 290.0 106.0 282.8 Current assets Inventories 176.4 92.5 128.8 Amounts recoverable on construction contracts 277.3 210.8 209.1 Trade and other receivables 267.2 150.1 238.3 Cash and cash equivalents 98.3 62.4 218.9 819.2 515.8 795.1 Total assets 1,109.2 621.8 1,077.9 Current liabilities Trade and other payables (839.8) (417.4) (814.1) Amounts received in advance on construction contracts (66.7) (36.3) (67.4) Current tax liabilities (7.4) (6.6) (10.6) Finance lease liabilities (3.6) (1.5) (1.4) (917.5) (461.8) (893.5) Net current (liabilities)/assets (98.3) 54.0 (98.4) Non current liabilities Trade and other payables (10.9) - (12.2) Retirement benefit obligation (2.6) (2.8) (3.3) Finance lease liabilities (1.4) (3.1) (3.2) (14.9) (5.9) (18.7) Total liabilities (932.4) (467.7) (912.2) Net assets 176.8 154.1 165.7 Equity Share capital 2.2 2.1 2.1 Share premium account 26.5 26.2 26.3 Capital redemption reserve 0.6 0.6 0.6 Own shares (7.2) (4.7) (5.5) Hedging reserve 0.1 2.9 (2.2) Retained earnings 154.6 127.0 144.4 Total equity 176.8 154.1 165.7 8
Morgan Sindall Interim financial statements 2008 Consolidated cash flow statement for the six months to 30 June 2008 (unaudited) Unaudited Unaudited six months to six months to Year ended 30 June 2008 30 June 2007 31 December 2007 m m m Net cash (outflow)/inflow from operating activities (note 9) (103.3) (19.2) 158.1 Cash flows from investing activities Interest received 4.6 2.9 8.4 Proceeds on disposal of property, plant and equipment 0.2 0.1 0.6 Purchases of property, plant and equipment (4.1) (3.6) (8.0) Payments to acquire interests in joint ventures (2.8) (2.4) (5.0) Payments for the acquisition of a subsidiary - - (25.5) Net cash acquired on acquisition of a subsidiary - - 14.2 Net cash outflow from investing activities (2.1) (3.0) (15.3) Cash flows from financing activities Payments to acquire own shares (1.7) (1.3) (2.1) Dividends paid (11.9) (8.4) (12.6) Repayment of obligations under finance leases (1.9) (1.1) (4.7) Proceeds on issue of share capital 0.3-0.1 Net cash outflow from financing activities (15.2) (10.8) (19.3) Net (decrease)/increase in cash and cash equivalents during the period (120.6) (33.0) 123.5 Cash and cash equivalents at beginning of period 218.9 95.4 95.4 Cash and cash equivalents at end of period 98.3 62.4 218.9 9
Consolidated statement of recognised income and expense for the six months to 30 June 2008 (unaudited) Unaudited Unaudited six months to six months to Year ended 30 June 2008 30 June 2007 31 December 2007 m m m Actuarial gains/(losses) arising on defined benefit plan 0.5 (0.3) (0.9) Deferred tax on defined benefit plan liabilities recognised directly in equity (0.1) - 0.3 Movement in cash flow hedges in equity accounted joint ventures 2.3 3.7 (1.4) Net income/(expense) recognised directly in equity 2.7 3.4 (2.0) Profit for the period 21.1 17.3 39.4 Total recognised income and expense attributable to equity holders of the parent company 23.8 20.7 37.4 10
Morgan Sindall Interim financial statements 2008 Notes to the interim financial statements (unaudited) 1 Basis of preparation and significant accounting policies General information The results for the half years ended 30 June 2008 and 2007 and the balance sheets as at those dates have not been audited and do not constitute statutory accounts. The financial information for the year ended 31 December 2007 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor s report on those accounts was not qualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. Statement of compliance The condensed set of financial statements included in this interim report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Services Authority. Accounting policies The same accounting policies and methods of computation are followed in these condensed set of financial statements as applied in the Group s latest annual report and accounts for the year ended 31 December 2007. At the date of authorisation of these financial statements, IFRS 8 Operating Segments was in issue but not yet effective and has not been applied in these interim financial statements. The directors anticipate that the adoption of this standard in future periods will have no material impact on the financial statements of the Group except for additional disclosures in relation to IFRS 8. 2 Restatement of comparative balances As was stated in note 23 on page 76 of the 2007 annual report and accounts, the fair value adjustments arising on the acquisition of Amec Developments Limited and certain assets and business carried on by Amec Investments Limited and the assets, liabilities and contracts relating to the Design and Project Services division of Amec plc were provisional and subject to finalisation in accordance with IFRS 3 Business Combinations. The fair value exercise has now been completed and the final acquisition balance sheet and related fair value adjustments are disclosed in note 10 of these interim financial statements. In accordance with IFRS 3 Business Combinations the affected financial statement balances have been restated. None of the restatements have had an impact on gross profit, profit from operations or net assets. There was no impact on recognised income or expense as stated. 3 Seasonality The Group s Fit Out, Construction, Infrastructure Services, Affordable Housing and Urban Regeneration activities are generally not subject to significant seasonal variation. 11
4 Analysis of revenue and profit from business segments For management purposes, the Group is organised into five operating divisions: Fit Out, Construction, Infrastructure Services, Affordable Housing and Urban Regeneration. The divisions are the basis on which the Group reports its primary segment information. Segment information about the Group s continuing operations is presented below: Unaudited for the six months to 30 June 2008 Infrastructure Affordable Urban Group Fit Out Construction Services Housing Regeneration Activities Total m m m m m m m Revenue 204.5 417.7 394.8 175.8 45.1 0.6 1,238.5 Operating profit before amortisation 11.5 4.1 7.6 8.8 2.7 (7.4) 27.3 Share of results of associates and joint ventures after tax - - - - 2.9 0.6 3.5 Profit from operations before amortisation 11.5 4.1 7.6 8.8 5.6 (6.8) 30.8 Amortisation of intangible assets - (1.0) (0.4) - (3.1) - (4.5) Profit from operations 11.5 3.1 7.2 8.8 2.5 (6.8) 26.3 Net finance income 2.3 Profit before tax 28.6 Unaudited for the six months to 30 June 2007 Infrastructure Affordable Urban Group Fit Out Construction Services Housing Regeneration Activities Total m m m m m m m Revenue 225.0 199.0 220.5 191.6 - - 836.1 Operating profit before amortisation 12.4 2.2 4.0 11.5 - (6.0) 24.1 Share of results of associates and joint ventures after tax - - - - - (0.4) (0.4) Profit from operations before amortisation 12.4 2.2 4.0 11.5 - (6.4) 23.7 Amortisation of intangible assets - - - - - - - Profit from operations 12.4 2.2 4.0 11.5 - (6.4) 23.7 Net finance income 1.5 Profit before tax 25.2 12
Morgan Sindall Interim financial statements 2008 4 Analysis of revenue and profit from business segments (continued) Year ended 31 December 2007 Infrastructure Affordable Urban Group Fit Out Construction Services Housing Regeneration Activities Total m m m m m m m Revenue 491.7 621.4 575.4 398.0 25.9 2.2 2,114.6 Operating profit before amortisation 25.9 4.9 10.6 25.5 0.9 (14.5) 53.3 Share of results of associates and joint ventures after tax - - - - 3.3 1.4 4.7 Profit from operations before amortisation 25.9 4.9 10.6 25.5 4.2 (13.1) 58.0 Amortisation of intangible assets - (1.0) (0.3) - (3.2) - (4.5) Profit from operations 25.9 3.9 10.3 25.5 1.0 (13.1) 53.5 Net finance income 4.1 Profit before tax 57.6 5 Income tax expense Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 m m m Current tax expense UK corporation tax 7.6 7.8 19.7 Adjustment in respect of prior years 0.2-0.3 7.8 7.8 20.0 Deferred tax expense Current year (0.3) 0.1 (0.1) Adjustment in respect of prior years - - (1.7) (0.3) 0.1 (1.8) Total income tax expense 7.5 7.9 18.2 Income tax for the six month period is charged at 30% (2007: 31%), being the estimated annual effective tax rate expected for the full financial year, applied to the profit before income tax expense excluding the share of net profit/loss of equity accounted joint ventures for the six month period (which are stated net of income tax). 13
6 Dividends Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 m m m Final dividend for the year ended 31 December 2007 of 28.0p (2006: 20.0p) per share 11.9 8.4 8.4 Proposed interim dividend for the period to 30 June 2008 of 12.0p (2007: 10.0p) per share 5.2 4.3 4.2 The interim dividend was approved by the Board on 4 August 2008 and has not been included as a liability at 30 June 2008. The interim dividend of 12.0p (2007: 10.0p) per share will be paid on 12 September 2008 to shareholders on the register at 15 August 2008. The ex-dividend date will be 13 August 2008. 7 Statement of changes in total equity Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 m m m Balance at beginning of the period 165.7 141.9 141.9 Total recognised income and expense 23.8 20.7 37.4 Final dividend for 2007 (11.9) (8.4) (8.4) Interim dividend - - (4.2) Share-based payments 1.1 1.2 1.7 Issue of shares at a premium 0.3-0.1 Exercise of share options 0.4 - - Deferred tax on share based payments 0.3 - (0.7) Own shares acquired (1.7) (1.3) (2.1) Share award under long term incentive plan (1.2) - - Balance at end of the period 176.8 154.1 165.7 14
Morgan Sindall Interim financial statements 2008 8 Earnings per share There are no discontinued operations in either the current or comparative periods. The calculation of the basic and diluted earnings per share is based on the following data: Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 Earnings m m m Earnings before taxation 28.6 25.2 57.6 Deduct: taxation expense per income statement (7.5) (7.9) (18.2) Earnings for the purpose of basic and dilutive earnings per share being net profit attributable to equity holders of the parent company 21.1 17.3 39.4 Add back: amortisation expense 4.5-4.5 Earnings for the purposes of basic and dilutive earnings per share adjusted for amortisation expense 25.6 17.3 43.9 Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 Number of shares No. 000 s No. 000 s No. 000 s Weighted average number of ordinary shares for the purposes of basic earnings per share 42,095 42,003 41,989 Effect of dilutive potential ordinary shares: Share options 355 867 720 Conditional shares not vested 196 179 239 Weighted average number of ordinary shares for the purposes of diluted earnings per share 42,646 43,049 42,948 Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 pence pence pence Basic and diluted earnings per share Basic earnings per share 50.1p 41.1p 93.8p Diluted earnings per share 49.4p 40.1p 91.7p Basic and diluted earnings per share adjusted for amortisation Basic earnings per share 60.9p 41.1p 104.5p Diluted earnings per share 60.1p 40.1p 102.2p 15
9 Reconciliation of profit from operations to net cash from operating activities Unaudited six months to 30 June Year ended 2008 2007 31 December 2007 m m m Cash flows from operating activities Profit from operations for the period 26.3 23.7 53.5 Adjusted for: Amortisation of intangible assets 4.5-4.5 Share of results of joint ventures (3.5) 0.4 (4.7) Depreciation of property, plant and equipment 3.5 2.8 6.3 Expense in respect of share options 0.3 1.2 1.7 Defined benefit pension payment (0.3) (0.1) (0.2) Defined benefit pension charge 0.1 0.1 0.1 (Gain)/loss on disposal of property, plant and equipment (0.1) 0.4 1.2 Operating cash flows before movements in working capital 30.8 28.5 62.4 Increase in inventories (47.6) (5.7) (10.4) Increase in receivables (97.2) (79.8) (33.3) Increase in payables 23.7 46.8 159.2 Cash (absorbed by)/generated by operations (90.3) (10.2) 177.9 Income taxes paid (11.0) (7.6) (15.8) Interest paid (2.0) (1.4) (4.0) Net cash (outflow)/inflow from operating activities (103.3) (19.2) 158.1 During the period, the Group acquired property, plant and equipment with an aggregate cost of 5.3m of which 1.2m was acquired by means of finance leases. Cash payments of 4.1m were made to purchase property, plant and equipment. Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less. 16
Morgan Sindall Interim financial statements 2008 10 Final acquisition balance sheet On 27 July 2007 the Group acquired Amec Developments Limited and certain assets and business carried on by Amec Investments Limited and the assets, liabilities and contracts relating to the Design and Project Services ( DPS ) division of Amec plc, save for certain excluded assets and liabilities. On page 76 of the 2007 annual report and accounts, the provisional fair values of the net assets and goodwill acquired were reported. The Group has since completed the fair value exercise as announced on 1 July 2008. This has lead to further adjustments of 60.5m. The final fair values are as follows: m Purchase consideration: Cash paid 23.7 Costs directly attributable to the acquisition 1.8 Total purchase consideration 25.5 Net liabilities acquired (85.1) Goodwill 110.6 Provisional Acquiree's fair value Final fair value carrying adjustments made adjustments made Fair value amount 31 December 2007 30 June 2008 30 June 2008 m m m m Cash and cash equivalents 14.2 - - 14.2 Intangible fixed assets: Secured customer contracts - 3.1 1.1 4.2 Other contracts and related relationships - 30.7 (3.8) 26.9 Software - 0.9-0.9 Non-compete agreement - 5.0-5.0 Tangible fixed assets 2.0 0.2 (0.2) 2.0 Investments in joint ventures and associates 28.7 (4.2) - 24.5 Working capital (68.2) (37.0) (57.6) (162.8) Net liabilities acquired (23.3) (1.3) (60.5) (85.1) Purchase consideration settled in cash 23.7 Directly attributable acquisition costs 1.8 Cash and cash equivalents acquired (14.2) Cash outflow on acquisition 11.3 17
11 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below and are unsecured and will be paid in cash. Other than construction related performance guarantees given in the ordinary course of business, no guarantees have been given or received and there is no provision for impairment in respect of the amounts owed by related parties. Trading transactions During the period, Group companies entered into the following significant transactions with related parties. Transactions and amounts owed in the period are as follows: Amounts owed Provision of goods by/(owing to) and services related parties Six months to 30 June 2008 m m Community Solutions for Primary Care (Holdings) Limited 26.3 5.4 Lingley Mere Business Park Development Company Limited 13.6 (4.5) Ician Developments Limited 13.2 - PFF Dorset Limited 12.3 1.4 Amounts owed Provision of goods by/(owing to) and services related parties Six months to 30 June 2007 m m Community Solutions for Primary Care (Holdings) Limited 5.0 0.5 Morgan Sindall Investments (3PD) Limited 1.7 0.1 Amounts owed Provision of goods by/(owing to) and services related parties Year ended 31 December 2007 m m Community Solutions for Primary Care (Holdings) Limited 7.7 0.8 The Compendium Group Limited 2.2 - Eurocentral Partnership Limited 11.3 - Lingley Mere Business Park Development Company Limited 2.6 (6.5) Bromley Park Limited 8.2 (5.9) PFF Dorset Limited 9.5 2.4 18
Morgan Sindall Interim financial statements 2008 12 Contingent liabilities Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating companies in the Group. There are contingent liabilities in respect of bonds, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business. On 17 April 2008 the Office of Fair Trading ( OFT ) issued a Statement of Objections to the Company together with a number of construction companies in England in connection with its investigation into alleged infringements of UK Competition law in the sector. The Company has co-operated with the OFT s investigation under the OFT s leniency policy and, as a result, has been provisionally granted a reduction in any penalty which the OFT might ultimately impose, however, the directors remain unable to estimate the size of any potential liability and as a result no provision has been made in these interim financial statements. Responsibility statement The directors confirm that the interim report includes a fair review of the information required by FSA Disclosure and Transparency Rules 4.2.7 and 4.2.8. The directors also confirm that the condensed set of financial statements for the six months to 30 June 2008 have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. By order of the Board Paul Smith Chief executive David Mulligan Finance Director 4 August 2008 19
Share prices The Company s share price (15 minute delay) is displayed on the Company s website. The EPIC code as used in the Topic and Datastream Share Price information service is MGNS. Telephone share dealing service Details of a low cost telephone dealing service with Stocktrade are available on the Company s website under Investor Relations. Electronic Communications Shareholders may now view their shareholdings on line through the website of the Company s registrars, Capita Registrars. If you wish to view your shareholding, please log on to www.capitaregistrars.com and click on the link shareholder services then follow the instructions. A resolution was passed at the annual general meeting of the Company in 2007 to amend its articles of association to incorporate the provisions under the Companies Act 2006 s1143 to 1148 and Schedules 4 and 5 (the Act ) regarding electronic communications between the Company, shareholders and others that came into force on the 20 January 2007. The Company is intending to write to shareholders individually as required by the Act to seek their consent to receiving future communications electronically from the Company. Company Secretary Mary Nettleship Registered Office Kent House, 14-17 Market Place, London, W1W 8AJ Tel: 020 7307 9200 Fax: 020 7307 9201 Registration No: 521970 Website morgansindall.co.uk Registrars Capita Registrars The Registry, 34 Beckenham Road Beckenham, Kent, BR3 4TU Tel: 0871 664 0300 (Calls cost 10p per minute plus network extras) 20
Morgan Sindall plc, Kent House 14-17 Market Place, London W1W 8AJ Tel: 020 7307 9200 Fax: 020 7307 9201 Visit our website at www.morgansindall.co.uk 50% recycled stock