Morgan Sindall Group Regulatory News (MGNS)

MORGAN SINDALL GROUP plc

('Morgan Sindall Group' or 'the Group')

Morgan Sindall Group plc, the construction and regeneration group, today announces half year results.

Group Highlights

·; Solid performance, in line with expectations

·; Continuing challenging market conditions, which are impacting margins

·; Increasing ability to exploit opportunities across a broad range of sectors

·; Strategic progress achieved last year has further developed our market leading positions

·; Construction & Infrastructure secured positions on a number of major frameworks and won major contracts in the rail and roads sectors

·; Growth at Affordable Housing driven by increase in new build and response maintenance activity

·; Strong revenue growth at Fit Out as it continues to take market share

·; Maintained interim dividend of 12.0p reflects balance sheet strength and confidence in the medium-term outlook

Outlook

·; Strong order book of £3.5bn supplemented by regeneration pipeline of £1.8bn, with a further £0.8bn of regeneration schemes at preferred bidder stage

·; While market remains challenging the Group continues to invest in order to position divisions for growth in the medium-term

·; Group in robust operational and financial shape and we remain confident of meeting our expectations for the full year

John Morgan, Executive Chairman, commented:

"Our broad sector spread, increasingly joined up approach and focus on more complex projects has helped to underpin a solid set of results. While market conditions remain challenging, we continue to make the most of opportunities as they present themselves and invest in our businesses in order to position them for growth in the medium-term. We look to the future with cautious optimism and are confident that we are well positioned to deliver long-term sustainable growth."

Divisional Highlights

* Operating profit is profit from operations before the amortisation of intangible assets and non-recurring items.

Construction & Infrastructure

·; Operating profit of £9.5m (2010: £12.2m) on revenue of £617m (2010: £612m)

·; As expected, market conditions remained very competitive with downward pressure on margins and changing work mix resulting in an operating margin of 1.5% (2010: 2.0%)

·; Division successful in securing positions on a number of major frameworks and won major contracts in targeted infrastructure sectors of rail and roads

·; Public sector construction market set to contract over next two years; commercial sector, particularly in London, and economic infrastructure set for growth

·; Well placed to exploit opportunities in aviation, rail, energy distribution and commercial/industrial sectors

·; Order book of £1.9bn (2010: £2.1bn) maintained since the start of the year

Affordable Housing

·; Operating profit up 20% to £8.3m (2010: £6.9m) on revenue of £228m (2010: £173m)

·; Revenue growth driven by increases in response maintenance work following acquisitions in 2010 and new build social housing

·; Operating margin of 3.6% (2010: 4.0%), down due to changing mix of work

·; Division traded well across mixed tenure, new build social housing and planned and response maintenance projects given challenging market conditions

·; Recent acquisitions provide platform for further growth in response and planned maintenance while mixed tenure remains important to division's performance

·; Order book steady since the start of the year at £1.5bn (2010: £1.4bn)

Fit Out

·; Strong revenue growth in competitive market environment with revenue up by 24% to £222m (2010: £179m)

·; Division continues to take market share

·; Operating profit of £6.1m (2010: £6.9m) resulting in an operating margin of 2.7% (2010: 3.8%)

·; Division focusing on growth sectors of technology and retail banking

·; Gradual market recovery expected from 2012; market leading position leaves division well placed to benefit

·; Order book of £133m (2010: £213m). Order book expected to rebound in near-term on confirmation of major contract awards

Urban Regeneration

·; Improved operating profit of £1.0m (2010: £0.8m) on increased revenue of £19m (2010: £15m)

·; Division continues to secure opportunities and is benefitting from a lack of competition from developers

·; Outlook set to continue to improve with division shortlisted on a number of development opportunities

·; Regeneration pipeline of £1.4bn, with a further £0.4bn at preferred bidder stage

Investments

·; Directors' portfolio valuation of £42m (2010: £39m)

·; Total equity invested of £14m with further £12m committed; carrying value at 30 June 2011 of £19m

·; Division closed some notable schemes in the period; £0.4bn Bournemouth regeneration scheme and next phase of the £0.4bn Hull Building Schools for the Future programme

·; £0.4bn Southampton regeneration scheme at preferred bidder stage

·; Short-term focus on developing innovative financing for a number of complex land swap schemes

·; PFI expected to emerge later this year in a different form

Key financial information

·; Revenue up 11% to £1.09bn (2010: £0.98bn)

·; Adjusted PBT (before amortisation and non-recurring items) of £19.5m (2010: £23.1m)

·; Amortisation of £1.9m (2010: £2.8m) and non-recurring items of £0.9m (2010: £1.9m) relating to modification of IT systems following the merger of our construction and infrastructure activities in 2010

·; PBT of £16.7m (2010: £18.4m)

·; Average cash balance of £43m (2010: £61m)

·; Period end cash of £65m (2010: £138m) reflects significant investment in land and developments and the unwinding of working capital following a strong performance at the 2010 year-end

·; Fair value tax matter successfully resolved with HMRC leading to £2.6m one-off benefit to tax charge

Morgan Sindall Group will hold its half year report presentation for analysts and institutional investors at 9.30am on 8 August 2011 at Kent House, 14-17 Market Place, London W1W 8AJ.

A copy of the presentation and an audio webcast will be available from 12.00pm at

www.corporate.morgansindall.com/investors.

This half year report and other information about Morgan Sindall Group plc are available at

www.corporate.morgansindall.com/investors.

Half year report for the six months to 30 June 2011

Market overview and performance

We have delivered a resilient performance in the six months to 30 June 2011, in line with our expectations. The strategic progress, enhanced service capability and improved positioning we achieved last year have all contributed to a solid result in market conditions that continue to be challenging. The Connaught acquisition has given us a stronger presence in response and integrated maintenance opportunities, part of our full-service offering in Affordable Housing. Broadening the scope of Perfect Delivery allowed us to improve client satisfaction across the Group, and to continue to provide better value year on year to our clients. We are also well placed to take advantage of opportunities in new markets such as photo-voltaics ('PV'), and sectors that are set to grow, such as energy distribution, rail, airports and the commercial sector in London. The Group remains in a robust financial position, with a healthy and stable forward order book.

Underlying profit before tax, amortisation of intangible assets and non-recurring items was £19.5m (2010: £23.1m) reflecting the tough market conditions, on increased revenue of £1.09bn (2010: £0.98bn). Adjusted earnings per share on the same basis were 35.1p (2010: 42.0p). Non-recurring items of £0.9m have been incurred as expected relating to the modification of IT systems following the integration of our construction and infrastructure services activities in 2010. Profit before tax for the period (after amortisation of intangible assets of £1.9m and non-recurring items of £0.9m) was £16.7m (2010: £18.4m). The interim dividend has been maintained at 12.0p (2010: 12.0p).

An essential part of our success has been the diversification of the Group across a wide spread of sectors, reducing reliance on any one in particular. Underlying trends in the market are a shift from public to private investment and from investment in social to economic infrastructure. As conditions evolve we continue to position our divisions to take advantage of new opportunities as they present themselves. Our broad range of skills has led to involvement in large, complex construction and infrastructure schemes, projects involving land swaps and major, long-term urban regeneration schemes that enable a more joined up approach from our divisions. Our sector spread is now 50% public (60% a year ago), 15% regulated and 35% commercial, the commercial sector expected to improve over time as public sector spending reduces. Anticipating improvement in the construction market in the medium-term, we continue to invest in our business in order to emerge from the current challenging market conditions in a stronger position.

The Fit Out and Construction & Infrastructure markets have been especially competitive, with operating margins under downward pressure in both. Encouragingly, revenue growth in Fit Out has been strong, suggesting the division is still taking market share. This puts us in the right place to benefit from the gradual improvement expected in the sector from 2012. The Construction & Infrastructure division is similarly well placed to exploit commercial sector recovery, especially in London, and take advantage of investment driven, economic infrastructure opportunities in energy distribution, airports and rail.

The broader capabilities of Affordable Housing enabled it to secure major contracts in mixed tenure and new build social housing over the last six months. In addition the division secured its first PV installation contracts for Flintshire County Council and Clwyd Alyn Housing Association. Urban Regeneration is well placed to build on the encouraging progress it has made this year, as we expect market conditions in the commercial sector to improve further. The Investments division continues to build on its successful track record, winning a substantial regeneration contract through an innovative financial model, and being appointed as the preferred developer on a major regeneration scheme in the last six months.

Divisional performance

The performance of each of the operating divisions for the six months to 30 June 2011 is set out below. Divisional operating profits are profits from operations stated before the amortisation of intangible assets and non-recurring items.

Construction & Infrastructure

Construction & Infrastructure delivered a reduced operating profit of £9.5m (2010: £12.2m) on maintained revenue of £617m (2010: £612m). The division traded in line with our expectations, with operating margins falling, as expected, by 0.5% to 1.5% (2010: 2.0%) reflecting the competitive market and changing work mix. This result includes revenue from the division's construction activities of £402m (2010: £345m) and revenue from its infrastructure activities of £215m (2010: £267m).

Private sector and economic infrastructure work is expected to grow despite the significant fall in public sector construction forecast over the next two years. This growth will be driven by the £200bn, five-year National Infrastructure Plan and a revival in the commercial sector, particularly in London. Airports, rail, energy distribution and commercial/industrial are all sectors where the division is well placed to exploit emerging opportunities.

Over the last six months the division was particularly successful in securing places on key major frameworks including the £500m Smarte East Alliance, the £400m South East Wales Schools Capital Working Group and the £1.2bn Gatwick Airport upgrade and improvement framework. We were also reappointed to the £100m Milton Keynes major building framework and the £1bn Improvement and Efficiency South East (iESE) framework. The education sector remains important with the division securing significant contracts including University of Reading (£28m), King's College, London (£26m), Manchester School of Art at Manchester Metropolitan University (£23m), North Lanarkshire Council (£22m) and three further contracts through the Hull Building Schools for the Future programme (£65m).

Important contracts secured in the rail sector include two major Crossrail contracts, the Pudding Mill Lane C350 station works (circa £50m), and in joint venture, the £235m Whitechapel and Liverpool Street Station Tunnels contracts, while in the roads sector the division, in joint venture, secured a £136m Highways Agency contract to upgrade the M62. The division continues to successfully deliver its gas and electricity frameworks and has recently won contracts in high and extra high voltage segments of the energy distribution sector.

Looking forward, the market is expected to remain highly competitive with public sector work and roads construction continuing to shrink. However, we are focused on sectors that are expanding and, as set out above, we have recently secured several large economic infrastructure projects and positions on a number of key frameworks. The forward order book at 30 June 2011 was £1.9bn (2010: £2.1bn).

Affordable Housing

In the six months to 30 June 2011, Affordable Housing delivered an operating profit up by 20% to £8.3m (2010: £6.9m) on increased revenue of £228m (2010: £173m) driven by the growth in response maintenance following last year's acquisitions and new build social housing. The operating margin was lower than last year at 3.6% (2010: 4.0%) due to the changing mix of work.

Our close partnerships with housing associations and local authorities together with our reputation for delivering market leading service helped us secure major opportunities in social housing over the last six months. The division traded well across its business streams, in mixed tenure, new build social housing, and on planned and response maintenance frameworks. In a steady but competitive market, contracts secured over the last six months included two mixed tenure development schemes in Doncaster worth £20m, a £25m mixed tenure scheme in Hackney, a mixed tenure development in Skipton worth £30m and a £40m planned maintenance improvements programme for Cartrefi Cymunedol Gwynedd. In Scotland, we secured a place on new build social housing frameworks for Port of Leith and West of Scotland Housing Associations, valued at up to £210m. Lovell's joint venture, Compendium Living, was selected as preferred bidder for Derby's £100m Castleward Urban Village development.

There has been a slight improvement in conditions for open market housing, though the division continues to support sales through shared equity and other initiatives for first time buyers, which are important alternatives to financing home ownership given ongoing limited mortgage availability. In March, Lovell began construction on the first phase of 150 residential units for the £300m Northshore regeneration scheme in Stockton-on-Tees in conjunction with our Urban Regeneration division.

Social housing planned and response maintenance projects traded well over the last six months. The Connaught acquisition widened our client base and strengthened our position in response and integrated maintenance opportunities. Social housing maintenance contracts secured from Connaught performed as expected, and to date the recovery of the debts and WIP acquired from the administrator totals £17m, which is in line with our expectations, and we remain confident of recovering our £28m target by the end of 2012. The retro-fit sector, raising environmental standards in the social housing sector, continues to mature. One example is PV installation contracts where recent tendering activity has been high and we enjoyed success in securing contracts for Flintshire County Council and Clwyd Alyn Housing Association.

Recent acquisitions mean we can look to grow volume in planned and response maintenance nationally, while open market and new build housing remain important to the division's performance. Affordable Housing's forward order book stood at £1.5bn (2010: £1.4bn) at 30 June 2011, in line with the start of the year.

Fit Out

In the six months to 30 June 2011, Fit Out delivered a slightly lower operating profit of £6.1m (2010: £6.9m) on growing revenue of £222m (2010: £179m), an increase of 24%. The operating margin was 2.7% (2010: 3.8%).

With fewer major commercial projects being completed, a shortage of prime office space, and the public sector still affected by a moratorium on major new projects, the Fit Out division saw a scarcity of large contracts over the last six months. Competitive conditions have affected the operating margin, as expected, but revenue grew strongly over the corresponding period last year. We believe we continue to take market share and by providing exceptional customer service remain market leaders in the sector.

Strategies to broaden Fit Out's offering are already achieving results. The recently established Technology team, delivering data-centre and technology-led projects, won its first project in April for Northern Trust. The Retail and Education teams made good progress in expanding their client base of retail banks and universities, and the division has successfully targeted international banks continuing to invest in London's financial services sector, for example delivering a fit out for Macquarie Group.

Our leading market position means we are ideally placed to exploit the expected gradual recovery in the market from 2012. In the short-term, a scarcity of Grade A offices offers opportunities for refurbishment in London as a wave of lease renewals are expected over the next 18 months. With further Far Eastern investment also expected into London over the same period, there will be further potential opportunities.

In the short-term we anticipate margins in Fit Out remaining at current levels with gradual improvement expected to begin from 2012. Public sector fit out is expected to recover slowly from 2012 from a low base, and we are confident of securing major refurbishment opportunities as new fit out opportunities remain constrained. The forward order book at 30 June 2011 was £133m (2010: £213m). We currently await confirmation of some major contract awards and expect the order book to return to more normal levels in the near-term.

Urban Regeneration

With revenue of £19m (2010: £15m) in the period, Urban Regeneration delivered as expected an increased operating profit of £1.0m (2010: £0.8m). The division is currently on site delivering an increased number of new buildings with a construction value of £110m (2010: £58m). In the period, we were appointed development partner on Warrington Borough Council's £130m regeneration of Bridge Street. In Bearsden, Glasgow, the division is set to deliver 108 homes in a £35m joint venture with Miller Homes. Planning consent has also been secured for a £200m residential-led mixed-use development in Brentford, West London, for 48 waterfront homes at Millbay, Plymouth and for a mixed-use scheme in Larkhall comprising a food store for Asda and 330 residential units.

Renewed activity in the commercial sector is encouraging. With many developers left inactive as a result of the banking crisis there is reduced competition for new opportunities which is helping the division to make progress. Sustained by the Group's strong balance sheet, the last six months have seen the division short-listed on a greater number of potential projects than in the whole of last year. The next six months for the division hold the prospect of securing further development opportunities as current bidding activity is healthy.

The outlook for the division is set to continue to improve, with reduced competition from other developers keeping market conditions favourable. The food retail sector is currently strong and there is a shortage of new office accommodation in certain provincial cities while, in the longer-term, the continuing housing shortage should increase the potential for new residential development as part of wider mixed-use regeneration. The division's share of its future regeneration pipeline stood at £1.4bn on 30 June 2011, with a further £0.4bn of regeneration schemes at preferred bidder stage, an increase of £130m since the start of the year.

Investments

For the six months to 30 June 2011 the Investments division reported a loss of £2.1m (2010: loss of £0.4m), a figure that represents its net costs on bidding for investment opportunities, on revenue of £1m (2010: £3m). This result includes its share of operating profits of equity accounted joint ventures of £0.6m (2010: £0.5m).

At 30 June 2011 the Group had total equity and debt in its investments of £14m (2010: £14m). The directors' valuation of the division's portfolio of investments is £42m (2010: £39m) using discount rates of 7-9%. This increase in value of the portfolio is mainly as a result of schemes achieving financial close. The valuation is based on discounting expected future cash flows but does not include potential refinancing gains on projects at preferred bidder stage or profits made by Investments from providing services or profit made by other parts of the Group in performing construction, maintenance or facilities management work. In addition to this valuation is committed, but not currently invested, subordinated debt of £12m (2010: £12m). The carrying value of these investments at 30 June 2011 was £19m.

The financing provided by our Investments division is an important element in the Group's integrated offer. While constraints remain on the public purse, there is still a clear need for investment in infrastructure projects, which provides opportunities for investment-led construction projects. The last six months have seen the division secure some notable opportunities.

Our use of the innovative Local Asset Backed Vehicle ('LABV') financial model secured a £350m regeneration contract for Bournemouth Borough Council. An exclusive agreement integrating investment and construction with Southampton City Council, the Crown Estate and Associated British Ports, has given the Group access to a potential £450m waterfront regeneration scheme. In Hull, financial close was reached on the next tranche of schools in the £400m Hull City Council Building Schools for the Future (BSF) programme.

Short-term opportunities are limited in the PFI market and while PFI is expected to emerge later this year in a different form, with schemes subject to intense competition, the Investments division is instead currently focusing on developing a number of complex land swap opportunities. A complex land swap project is when public sector owned land is released, typically for residential or commercial development, and the land value created by its development is then used to subsidise the building of civic facilities. This approach allows the public sector to use its land assets to deliver public buildings and services. The division's financing expertise also looks likely to benefit Affordable Housing, in seeking to secure further opportunities for the division in the PV sector.

The diverse skills of the division mean that from project finance for PV to BSF schemes, the Group is well placed to win complex, finance-led construction work over the next 18 months which can be delivered through its construction and regeneration divisions. At 30 June 2011 the division's regeneration pipeline stood at £0.4bn with a further £0.4bn of opportunities at preferred bidder stage.

Financial review

Revenue for the period was £1.09bn (2010: £0.98bn), an increase of 11% on the same period last year. The increase was due to significant rises in revenue in Affordable Housing and Fit Out, offset by a small fall in Construction & Infrastructure. Underlying operating profit prior to the amortisation of intangible assets and non-recurring items was £19.6m (2010: £22.7m). Operating profit margin fell in Construction & Infrastructure to 1.5% (2010: 2.0%), in Affordable Housing to 3.6% (2010: 4.0%) and in Fit Out to 2.7% (2010: 3.8%) reflecting more competitive markets, as well as anticipated lower short-term margins on response maintenance work in Affordable Housing. Investments' operating loss increased to £2.1m (2010: loss of £0.4m) reflecting the timing of financial closure on projects and a sustained level of bidding activity. The Group continues to address its cost base where appropriate.

Net finance expense for the period was £0.1m (2010: income of £0.4m) mainly reflecting lower treasury balances compared with the corresponding period last year. Profit before tax, amortisation of intangible assets and non-recurring items was £19.5m (2010: £23.1m). Income tax expense was reduced at £1.8m (2010: £5.3m). The reduction in the tax charge was due to the Group successfully resolving its discussions with HMRC concerning corporation tax matters following the acquisition of certain businesses and assets from Amec in 2007 leading to a one-off credit of £2.6m to the tax charge in the period. Further details can be found in note 8 to the condensed financial statements.

Cash at 30 June 2011 was £65m (2010: £138m). Average cash for the period of £43m (2010: £61m) was lower than in the corresponding period last year but slightly exceeded our expectations of between £30m and £40m. The lower level of average cash compared with the corresponding period in 2010 is mainly due to the cash impact of the Connaught acquisition in the second half of 2010. Net cash outflow from operating activities at £66.8m (2010: inflow of £44.1m) reflected a significant increase in working capital in the period. The principal reasons for this increase were investment in land and developments in Affordable Housing and Urban Regeneration (£19m), the unwinding of working capital following a strong cash performance at the 2010 year-end (approximately £40m) and the delayed financial close on Hull BSF (£12m). In addition other significant cashflows were capital expenditure of £3.9m (2010: £1.5m) and dividends paid of £12.7m (2010: £12.7m). Overall the net decrease in cash and cash equivalents was £83.7m (2010: increase of £20.4m). In the period, the Group refinanced its banking facilities and now has £100m of committed banking facilities through to mid-2015 as well as an existing £25m facility through to mid-2012.

Outlook

A solid performance in the first half of the year combined with our leading positions in a range of growing sectors leaves us confident of meeting our expectations for this financial year. The Group's forward order book stood at £3.5bn as at 30 June 2011, in line with the start of the year, and is supplemented by a growing regeneration pipeline of £1.8bn, with a further £0.8bn of regeneration schemes at preferred bidder stage. The forward order book represents the expected future revenue from secured projects and a conservative estimate of work to be awarded under framework arrangements.

While trading conditions remain challenging we remain cautious about the short-term outlook for the construction markets in which we operate. However, we continue to take advantage of opportunities as they present themselves and continue to invest in our divisions in order to position them for growth in the medium-term. We expect to see gradual improvement in a number of our key markets over the course of next year and beyond and the recent strategic progress within the Group leaves us ideally positioned to capitalise on these trends.

Financially and operationally, the Group is in robust condition. We look to the future with cautious optimism and are confident that we are well positioned to deliver long-term sustainable returns for our shareholders.

Principal risks and uncertainties

The principal risks that the directors consider may have a material impact on the Group's performance in the remaining six months of the year are explained in more detail in note 15 to the condensed financial statements.

Going concern

As stated in note 3 to the condensed financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Forward looking statements

This half year report has been prepared solely to assist shareholders in assessing the strategies of the board and in gauging their potential to succeed. It should not be relied on by any other party or for other purposes. Forward looking statements have been made by the directors in good faith using information available up until the day that they approved this half year report. Forward looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks.

Condensed consolidated income statement (unaudited)

For the six months to 30 June 2011

Condensed consolidated statement of comprehensive income (unaudited)

For the six months to 30 June 2011

Share premium account

The share premium account represents the difference between the fair value of consideration received and the nominal value of the shares issued.

Capital redemption reserve

The capital redemption reserve was created on the redemption of preference shares in 2003.

Reserve for own shares held

The shares are held as 'treasury shares' and represent the cost to Morgan Sindall Group plc of shares purchased in the market and held by the Morgan Sindall Employee Benefit Trust (the 'Trust') to satisfy options under the Group's share incentive schemes.

The number of shares held by the Trust at 30 June 2011 was 776,555 (2010: 781,444).

Cash flow hedging reserve

Under cash flow hedge accounting, movements on the effective portion of hedges are recognised through the hedging reserve, whilst any ineffectiveness is taken to the income statement.

1 General information

The financial information set out in this half year report does not constitute the company's statutory accounts for the year ended 31 December 2010. A copy of the statutory accounts for that year was delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

This half year report was prepared solely to assist shareholders in assessing the strategies of the Board and in gauging their potential to succeed. It should not be relied on by any other party or for other purposes. Forward looking statements have been made by the directors in good faith based on the information available to them up to the time of their approval of this half year report. Such statements should be treated with caution due to the inherent uncertainties, including both economic and business factors, underlying any such forward looking information.

While the financial information included in this half year report was prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this half year report does not itself contain sufficient information to comply with IFRS.

2 Basis of preparation

The annual financial statements of Morgan Sindall Group plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial statements included in this half year report were prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

3 Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

4 Accounting policies

The same accounting policies, presentation and methods of computation are followed in the condensed consolidated financial statements as applied in the Group's latest annual audited financial statements.

5 Restatement of comparative balances

As was stated in note 25 on pages 104 and 105 of the 2010 annual report and accounts, the fair value adjustments arising on the acquisition of the business, obligations and certain assets from the administrators of Connaught Partnerships Limited 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 14 of these condensed 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.

6 Seasonality

The Group's Construction & Infrastructure, Affordable Housing, Fit Out, Urban Regeneration and Investment activities are generally not subject to significant seasonal variation.

7 Business segments

For management purposes, the Group is organised into five operating divisions: Construction & Infrastructure, Affordable Housing, Fit Out, Urban Regeneration and Investments. The divisions' activities are as follows:

·; Construction & Infrastructure: offers a national service for design, construction and infrastructure to public and private clients;

·; Affordable Housing: development and construction of social and open market affordable housing, and planned and response maintenance of social housing;

·; Fit Out: undertakes refurbishment and fit out projects in the offices, education, retail & hotel and leisure markets;

·; Urban Regeneration: development through partnership agreements of large-scale mixed-use urban regeneration projects with a view to letting and/or sale; and

·; Investments: facilitates project finance and provides investment management expertise to the Group's PPP/PFI activities and investment portfolio.

Group Activities represents costs and income arising from corporate activities which cannot be allocated to the operating segments. These include costs for central activities such as treasury management, corporate tax coordination, insurance management, pension administration and company secretarial and legal services. The divisions are the basis on which the Group reports its segment information. Segment information about the Group's continuing operations is presented below:

During the six month period to 30 June 2011, six month period to 30 June 2010 and the year ended 31 December 2010, inter-segment sales were charged at prevailing market prices and significantly all of the Group's operations were carried out in the UK.

During the period the Group resolved its discussions with HMRC concerning corporation tax matters which arose following the acquisition of certain businesses and assets from Amec in 2007. This resulted in a significant deferral of the Group's net tax liabilities. Consequently a provision of £22.4m for current taxation was released, but a provision of £19.8m for deferred tax (calculated at 26%) was created, with both these items shown as "adjustments in respect of prior periods" in the table above. The net effect, a prior period credit of £2.6m to the tax charge, is due to reductions in UK corporation tax rates since 2007 as the release of the current tax provision is calculated using higher tax rates than the 26% used for creation of the provision for deferred tax liabilities.

Income tax for the six month period is charged at 27.0% (2010: 29.0%), 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).

The proposed interim dividend was approved by the Board on 8 August 2011 and was not included as a liability at 30 June 2011.

The interim dividend of 12.0p (2010: 12.0p) per share will be paid on 16th September 2011 to shareholders on the register at 19th August 2011. The ex-dividend date will be 17th August 2011.

10 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:

The average market value of the Company's shares for the purpose of calculating the dilutive effect of share options and long-term incentive plan shares was based on quoted market prices for the period that the options were outstanding. The weighted average share price for the period was £6.76 (2010: £5.53).

Earnings per share as calculated in accordance with IAS 33, 'Earnings per Share' are disclosed below:

A total of 1,797,512 share options that could potentially dilute earnings per share in the future were excluded from the above calculations because they were anti-dilutive at 30 June 2011 (June 2010: 3,604,457; December 2010: 2,246,025).