TPG.L Regulatory News (TPG)

18 September 2012

CORAC GROUP PLC

("Corac" or the "Group")

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2012

Corac Group plc the innovative technology-led engineering group, serving the global oil and gas, defence and industrial markets, announces its half year results for the six months ended 30 June 2012.

Operational Highlights

·; Acquired Wellman Hunt Graham Ltd and Wellman Defence Limited for a total consideration of £10.91m in April 2012, who continue to perform strongly

·; Corac Energy Technologies (CET) remains focused on commercialisation:

- Developing non-bespoke mass unit sale commercial products for:

o In-pipe compressors for land based gas wells

o On platform compressors for offshore gas production platforms

o Downhole compressors for depleting gas wells

o Compression solutions for waste heat recovery and low pressure blowers

- CET's technology being recognised as potentially game changing by major existing and potential customers in significant unit sale markets:

o Addressable oil and gas and industrial markets run to thousands of units globally

o Oil and gas - working with end users on systems with unit prices anticipated in the range $2.0 - 4.0m

o Industrial compression - working with manufacturers on prototype build and manufacturing licensing opportunities

o First sales of commercial products in the above markets anticipated in 2013-14

- Growing the value of CET's intellectual property, which the Directors believe is currently under-recognised:

o Continued investment in R&D with new patent applications for Downhole Gas Compressor (DGC) and In-Pipe Gas Compressor (IGC) technologies including 15 inventions which, if granted, will take patents to 47 plus 8 design registrations

- Secured contracts for design and consultancy studies in Industrial and oil and gas markets

- Full DGC system for American partner scheduled to progress in late September for final acceptance testing

·; Prepared the Group for operational success:

- IT and business services successfully integrated across the Group

- Rebranded the three operating companies

- Began technical collaboration between the companies

- New market opportunities identified for existing, underexploited products and services

·; Robust performance by Hunt Graham (HG) and Atmosphere Control International (ACI) since acquisition:

- £2m of new HG orders signed

- HG continues to play a key supporting role to UK downstream sector, supplying heat exchange systems to 5 of the 7 active refineries in 2012, with four since acquisition

- ACI awarded the second part of a nine year, multi-million pound, worldwide in-service maintenance and support contract

- ACI delivered a further two regenerable CO2 removal systems to Navantia, the Spanish submarine builder

- ACI completed sea trials for Combined Oxygen Generation System ("COGS")

Financial Highlights

·; Results in line with management expectations for the year as a whole

·; Group revenue of £4.26m (2011: £0.19m) included a contribution from the acquired businesses of £4.17m

- Group revenue on a pro forma2 basis, including the half year revenue for the acquired businesses was £8.26m

·; On a pro forma2 basis, the acquired businesses generated an adjusted EBITDA3 profit of £0.93m for the full half year

·; Net cash of £6.29m raised from investors to support the acquisition of the two Wellman businesses

·; £6.81m cash at half year end (31 December 2011: £15.33m):

- Total R&D4 spend of £1.69m (2011: £1.47m) taking total R&D4 investment since float to £26.73m

- £4.46m of cash utilised as part-consideration for acquisitions

·; Group loss before tax of £3.84m (2011: loss before tax of £2.35m)

·; Adjusted Group EBITDA3 loss (before share based payments and exceptional items) of £2.48m (2011: loss £2.29m)

·; Group order book stood at £16.81m as at 30 June 2012 providing good visibility for second half (£9.75m) and longer term revenues

·; Pipeline of qualified potential sales opportunities valued at three times the current order book

Notes

1 EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment and amortisation of acquired intangible assets.

2 The directors have provided the pro forma financial information to give an indication of performance as though the acquisitions of ACI and HG had occurred on 1 January 2012. The pro forma financial information is based on unaudited management accounts of both ACI and HG for the period from 1 January 2012 to 4 April 2012, aggregated with the trading results of the Group for the six month period ended 30 June 2012, which include the trading results of ACI and HG for the period from 5 April 2012 to 30 June 2012. The aggregated financial information is then further adjusted to eliminate certain exceptional items that do not relate to underlying trading contained in the unaudited management accounts of both ACI and HG for the period from 1 January 2012 to 4 April 2012.

3 Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation of acquired intangible assets and any other acquisition related charges, share based payment charges and exceptional items. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence, and in the current period comprise costs associated with the acquisitions of ACI and HG on 5 April 2012 and the associated equity fundraising on 2 April 2012.

4 Total R&D spend includes cost of sales within CET.

Commenting, Phil Cartmell, Executive Chairman, said:

"The first half of the financial year has seen a major development in the profile of the Group to create an innovative, technology-led British engineering business.

"The acquisitions of Hunt Graham and Atmosphere Control International have brought a growing financial contribution whilst Corac Energy Technologies continues to focus on commercialisation. Thethree businesses share a UK technology heritage and approach and we are actively working to exploit opportunities and synergies.

"Overall, market activity levels remain encouraging. We are trading in line with our expectations for the year with continuing good order book visibility for the balance of the year and going into 2013. We are in an extremely positive position to achieve growth in 2013 and beyond."

For further information please contact:

NOTES TO EDITORS

Corac is a UK based group of advanced technology and engineering companies. The Group produce innovative, diverse and valuable solutions in compression systems, atmosphere control and heat exchangers for government, energy and industrial users. It has traded shares on the London Alternative Investment Market (AIM) since July 2001.

Executive Chairman's Statement

Introduction

The first half of the financial year has seen a major development in the profile of the Group to create an innovative, technology-led British engineering business.

The Group's successful acquisition and integration of Wellman Hunt Graham and Wellman Defence has established a balanced technology development, engineering and manufacturing capability across three locations, all in the UK.

The companies have rebranded and are operating as independent businesses, under the Group umbrella as follows:

·; Corac Energy Technologies - the original core company, focusing on turbomachinery and advanced motor technologies (based in Slough)

·; Hunt Graham - heat exchange technology (based in Greater Manchester)

·; Atmosphere Control International - air purification and transfer systems (based in Portsmouth)

The transition of these complimentary businesses has progressed well and the individual operations have maintained focus on business success. There is evidence of synergies emerging for new market access and technology transfer opportunities between the companies that will benefit performance going forward.

Strategy

Corac aims to develop innovative, technology based systems for the management and control of energy systems, air, other gases and fluids. The goal is to build a sustainable group of UK businesses, capable of becoming leaders in their chosen technologies and being first to market with innovative systems that become standards for our customers and partners.

The group companies combine R&D activity (Corac Energy Technologies) with proven manufacturing capability (Hunt Graham and Atmosphere Control International) to deliver valuable solutions for government and industrial users.

The Group's focus is to:

·; Develop connected and complementary technologies and group-wide capability to support our partners as fully as possible

·; Identify technology or service gaps in the market and introduce these through partnerships, internal investment or acquisition

·; Manage individually profitable operating companies that are economically, environmentally and socially sustainable

Financial Review

The financial results for the half year ended 30 June 2012 show a loss before tax of £3.84m (2011: £2.35m) and an adjusted EBITDA3 (before share based payments and exceptional items) of £2.48m loss (2011: £2.29m loss).

Revenues for Corac Energy Technologies were £0.09m (2011: £0.19m), which were derived from partner finance to support its technology development programmes. CET continues to invest in its core technology, now across a broader range of development programmes including In-Pipe Gas Compressor, Downhole Gas Compressor, On-Platform Compressor and other turbo-compression solutions. It reported a segment operating result of £2.48m loss (2011: £1.76m loss).

In the period from the acquisition, 5 April 2012 until 30 June 2012, the ACI and HG businesses contributed combined revenue of £4.18m and adjusted EBITDA3 of £0.57m to the Group. On a pro forma2 basis, for the six months from 1 January to 30 June 2012, ACI and HG generated combined revenue of £8.17m and adjusted EBITDA3 of £0.93m.

The strong order book for the acquired businesses has been maintained. Post-acquisition order intake and closing order book for Hunt Graham were £2.00m and £5.90m and for ACI £0.77m and £9.77m, respectively.

The Group is pursuing a pipeline of qualified opportunities which is valued at three times the value of the current order book. Business development teams are working to maximise the conversion of these opportunities and grow the order book through the year. At year-end, the order book for the acquired companies is expected to represent circa 50% of 2013 forecast revenue for both companies.

Central unallocated costs were £2.03m (2011: £0.68m) although comparison to prior periods is not meaningful given the mid period acquisition. For the half year ended 30 June 2012, central costs include £0.20m (2011: £nil) amortisation of the intangibles recognised on the acquisition of the Wellman businesses and £0.98m (2011: £nil) of exceptional costs directly associated with the Wellman acquisition.

The fair value of the identifiable assets acquired and liabilities assumed with the Wellman businesses were £8.94m. Consideration was £10.91m (of which £10.75m was settled in cash on completion, and £0.16m was settled in cash in July 2012) and £1.97m of goodwill has been recognised on the balance sheet. The cost of the acquisition was supported by the raising of £6.35m through a placing.

Net cash at 30 June 2012 was £6.81m compared to £15.33m at 31 December 2011. Consideration of £10.91m for the Wellman acquisition was offset by the net cash of £6.29m from the placing. Net cash used in operating activities was £4.08m of which £1.69m was spent on R&D4 activity.

In line with Group's current strategy, no dividend has been declared.

Group Integration

In the last two years Corac has transformed itself into a pioneering technology-led British engineering company. Prior to the acquisitions, Corac relocated to a purpose-equipped technology centre in Slough that now hosts both CET and the Corac Plc functions. The new facility and recruiting to strengthen a talented workforce has enabled CET to present itself more professionally to potential partners, resulting in a stronger and more diverse partner network.

The successful integration of ACI and HG into the Group has enhanced this network further, with Group customers now including BP, BAE Systems, BHP Billiton, Saudi Aramco and the Ministry of Defence.

The enlarged Group is already benefiting from collaborations across the three companies particularly in terms of R&D. For example, engineers from Hunt Graham are collaborating on heat exchanger applications for compressors with the engineers from the CET business.

IT and business services have also been integrated successfully across the Group.

Group Technology Development

The Group now holds an extensive range of patents, design registrations, copyright, design and database rights across the three operating companies. As the principal R&D contributor, CET holds 45 patents and 8 European design registrations in the fields of bearing technologies, rotating shafts, compressor systems and electrical machines. In addition, ACI holds 11 international patents in the field of carbon dioxide removal, textile ducting and smoke removal. At Hunt Graham there is significant proprietary technical know-how relating to estimating and thermal design for heat exchangers and condensers.

All of these assets provide substantial competitive advantage in our fields of operation and have led to the identification of a number of market opportunities for underutilised and underinvested products and services in Hunt Graham and ACI's existing portfolios. We intend to take advantage of these through development support, market development and cross-selling to Group customers. ACI's Texvent air transfer system is currently being marketed to some of the Group's non-military partners and discussions are progressing both in the UK and overseas.

Corac Energy Technologies

CET is a pre-commercial business developing compression applications and products that enhance performance in oil and gas production and in turbo machinery. £26.73m has been invested in research and development of CET's technology since the Company listed on AIM. In addition to the existing patents a further 2 patents have been applied for in 2012, growing the overall value of CET's intellectual property which the Directors believe is currently under-recognised. The new patents relate to:

·; A novel method for producing dry gas that both lubricates the patented gas bearings as well as cooling the motor; in addition, the separator that removes the liquid from the production gas in the DGC

·; A modular compression system incorporating 14 new inventions from the IGC programme

Management believe that CET is the only company which is actively involved in the development of these technologies. Overall, this represents a highly valuable intellectual property portfolio which could not be easily replicated.

CET Commercialisation strategy and business model

Significant progress has been made both in the performance and commercialisation of the technology in the current year. The technology potential is now being identified as game changing by major existing and potential global customers in significant (i.e. non-bespoke) unit sale markets.

1. In-pipe compressors for land-based gas wells - there are many thousands of wells globally where we could deploy systems with unit sale price circa $3m. In the pilot programme, CET engineers are working closely with our partners at Saudi Aramco to define a standard, modular system for the IGC programme that will satisfy a broad range of operational requirements.

2. On platform compressors for offshore gas production platforms - there are many thousands of offshore platforms globally. Work is continuing on an engineering study with a major oil and gas operator for a compression system which is simple, compact and lightweight, with application on a range of platforms. This work will determine the addressable share for CET's application with a unit sale price circa $2.5m.

3. Downhole Gas Compression - A full DGC system for our American partner is scheduled to progress in late September for final acceptance testing at the upgraded Spadeadam facility. In addition, discussions are in progress with ENI on a schedule for final testing and delivery of their DCG prototype system. The plan for the DGC development program is to move the technology towards a less bespoke, core system specification that will satisfy higher volume deployments. Discussions have taken place to explore the potential for small batches of systems with a common configuration to operate in fields with wells of similar characteristics. Initial estimates indicate a batch of five similar devices is possible.

4. Compression solutions for waste heat recovery and low pressure blowers - global manufacturers produce more than 100 industrial compressor brands that could utilise CET's technologies. The Company is pursuing development partnership opportunities for engineering studies valued in tens of thousands of pounds. These can lead to prototype projects valued in hundreds of thousands of pounds with the longer term goal of delivering volume systems through licensing or manufacturing arrangements. CET has already received purchase orders for engineering tasks following successful consultancy assignments in the fields of waste heat recovery and low pressure blowers.

Market drivers

CET believes that its oil and gas customers are being driven to invest by significant global trends in energy policy as the global fuel mix evolves from oil and coal towards gas and renewables. Operators are becoming highly focused on maximising the returns from their reserves and improving the efficiency and productivity of their platforms and wells. They recognise that CET's solutions can potentially make a significant contribution to achieving these aims.

In the turbo-machinery market, manufacturers are exploring new applications with innovative systems in fields such as waste heat recovery and clean process gases. These require reliable and efficient systems with specialised handling of unusual gases or thermal conditions. CET solutions are ideally suited to deliver on these aspirations.

Hunt Graham

Hunt Graham is a specialist producer of heat exchange equipment used in the cooling and heating of large scale industrial processes. A balanced business model includes design and engineering, original equipment supply, refurbishment, term support agreements and provision of spares and other services. HG has established long term user relationships in oil and gas, chemical processing, power generation, foods and pharmaceuticals sectors. These are served from an integrated design and production facility near Manchester.

HG has had a strong performance since the time of acquisition, with £2m of new orders signed. It has been working on developing a new automated tube end welding technique which achieves a faster and more reliable technical process. This improves the company's capabilities for future performance in its key end-user markets of downstream oil and gas, chemical, energy and food. HG has already taken two orders for heat exchangers to be built in this way; a clear indicator that high quality and reduced lead times are contributing to competitive market advantage.

They continue to play a key role supporting the UKs downstream refinery activity, and have delivered heat exchange systems to five of the seven active refineries during 2012, with four of these since acquisition.

Atmosphere Control International

ACI are specialists in miniaturising chemical processes for rugged environments, and are acknowledged international leaders in the field. They have extensive working knowledge of submarine environments, coupled with world leading technology to manage the atmosphere on board where men and women living and working will degrade air quality over time. From early in the UK programme, ACI has supplied the major items of air purification equipment to all the Royal Navy's nuclear-powered submarines. In addition, ACI has a track record of supplying equipment and providing recurring maintenance and spares to the wider global defence market:

·; Awarded the second part of a nine year worldwide in-service maintenance and support contract for Submarine Atmosphere Control Equipment for the Royal Navy's fleet of Nuclear Powered Submarines. This four year, multi million pound key contract extension provides significant future revenue and contribution visibility and further reinforces the commitment to the ACI technical solution.

·; Delivered the last two of four regenerable CO2 removal systems to Navantia, the Spanish submarine builder, for installation in its advanced S-80 Class Submarine programme. These are the latest and most advanced designs produced by ACI for the worldwide Air-Independent Propulsion submarine market and have attracted the attention of a number of overseas submarine builders.

ACI has significant involvement in the rapidly evolving nuclear submarine programme with the Royal Navy. The first Combined Oxygen Generation System (COGS) has now passed sea trials in readiness for introduction into service in the current submarine fleet. Approximately 20 units are expected to be supplied to the Royal Navy over 20 years at a sales value approaching £30m at 2012 prices.

Long deployments and the planned introduction of female crew are drivers to improve atmosphere quality even further. ACI has a long history supplying CO2 removal systems to submarine fleets worldwide, and the Group has approved investment in the development of the next generation of CO2 removal systems which, if successful, will set new standards of performance and efficiency for the global market. These will be prepared for service introduction following trials and acceptance in the second half of the current decade.

Through a long service history with the MoD, which has relied on a multi-discipline engineering approach to R&D, design, production, testing and maintenance, ACI is well positioned for continuing through-life capability support of their equipment. This protects future business continuity as circa 50% of revenues are drawn from this and similar long term global support programmes.

Management and Staff

The integration of the companies and their teams into the wider Group has been completed successfully.

Dr Melanie Rigby has been appointed Managing Director of Corac Energy Technologies, with responsibility for day to day management of the CET business. Melanie brings senior level technical and commercial experience of the compressor industry. She is a Fellow of the Institution of Mechanical Engineers and will provide the balanced leadership to take CET's development programmes to fruition and commercial exploitation.

Dr Rigby joins the senior operating company leadership alongside the two long standing and highly experienced leaders of the two acquired businesses, Steve Cassidy, Managing Director of ACI, and David Norton, Managing Director of Hunt Graham.

Summary and outlook

The performance of the Group through the transition period has been good and our outlook is positive. As three independent companies sharing a UK technology heritage and approach, we are actively working to exploit commercial opportunities arising from our strong partner community and to fill technology or service gaps through internal investment in shared development, acquisition or partnerships.

The focus for CET during the remainder of the year and into 2013 will be to move towards sustainable commercial revenue from our technology platform by deploying systems with oil and gas majors and also adding value to industrial manufacturers' compressors.

In the acquired companies, ACI will build upon successful sea trials of oxygen generation systems and Hunt Graham expansion of its innovative heat exchanger business, improving market share to generate growth and increase the contributions to Group success.

Overall, market activity levels remain encouraging. We are trading in line with our expectations for the year with continuing good order book visibility for the balance of the year and going into 2013. We are in an extremely positive position to achieve growth in 2013 and beyond.

Notes

1 EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment and amortisation of acquired intangible assets.

2 The directors have provided the pro forma financial information to give an indication of performance as though the acquisitions of ACI and HG had occurred on 1 January 2012. The pro forma financial information is based on unaudited management accounts of both ACI and HG for the period from 1 January 2012 to 4 April 2012, aggregated with the trading results of the Group for the six month period ended 30 June 2012, which include the trading results of ACI and HG for the period from 5 April 2012 to 30 June 2012. The aggregated financial information is then further adjusted to eliminate certain exceptional items that do not relate to underlying trading contained in the unaudited management accounts of both ACI and HG for the period from 1 January 2012 to 4 April 2012.

3 Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation of acquired intangible assets and any other acquisition related charges, share based payment charges and exceptional items. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence, and in the current period comprise costs associated with the acquisitions of ACI and HG on 5 April 2012 and the associated equity fundraising on 2 April 2012.

4 Total R&D spend includes cost of sales within CET.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. Nature of operations and general information

Following the acquisition of ACI and HG in April 2012, the principal activities of Corac Group plc and its subsidiaries (the "Group") undertaken by the CET, ACI and HG businesses comprise:

·; CET - Innovation and development of turbomachinery systems for use in the oil and gas sector and a wide range of other applications in industrial sectors. CET has active development programmes for oil-less compression for waste heat recovery and clean gas handling, and compact compression systems to enhance natural gas production operating inside the pipe both downhole and at the wellhead.

·; ACI - Specialised miniaturisation of chemical processes for rugged environments. ACI supplies air purification equipment, oxygen/hydrogen generation and purification for submarines and air handling and distribution systems in maritime and other environments.

·; HG - Production of specialised heat exchange equipment used in the cooling and heating of large scale industrial processes. HG supply original equipment and spares, and perform refurbishment and term support services to user communities in oil and gas, chemical processing, power generation, foods and pharmaceuticals from an integrated design and production facility.

Corac Group plc (the "Parent Company") is the Group's ultimate parent company which is incorporated and domiciled in the United Kingdom. The address of the Company is Technology Centre, 683-685 Stirling Road, Slough, Berkshire, SL1 4ST. The Parent Company's shares are listed on the Alternative Investment Market of the London Stock Exchange.

The condensed consolidated interim financial statements are presented in pounds sterling, which is also the functional currency of the Parent Company, and all values are rounded to the nearest thousand pounds except when otherwise indicated.

The financial information set out in this interim report does not constitute statutory accounts as defined in Section 404 of the Companies Act 2006. The Group's statutory financial statements for the year ended 31 December 2011, prepared under IFRS as adopted by the EU, have been delivered to the Registrar of Companies. The auditor's report on the 2011 financial statements was unqualified and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

The condensed consolidated interim financial statements were approved for issue by the Board of Directors on 17 September 2012.

2. Basis of preparation

These condensed consolidated interim financial statements are for the six months ended 30 June 2012. They have been prepared following the principal accounting policies set out in the Group's Annual Report and Accounts for the year ended 31 December 2011, except for the application of the additional accounting policies described below.

The directors are satisfied that the group, despite the general economic uncertainty, has adequate resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

These condensed consolidated interim financial statements have been prepared under the historical cost convention using accounting policies consistent with International Financial Reporting Standards (IFRS) as adopted by the European Union. Except as described below, the same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements. While the financial figures included in this half-yearly report have been computed in accordance with IFRS applicable to interim periods, this half-yearly report does not contain sufficient information to constitute an interim financial report as that term is defined in IAS 34

3. Accounting policies

3.1 Revenues

Revenue is measured by reference to the fair value of consideration received or receivable by the Group for goods supplied and services provided, excluding VAT and trade discounts. Revenue is recognised upon the performance of services or transfer of risk to the customer.

(i) Sale of goods

Revenue from the sale of goods is recognised when all the following conditions are satisfied:

·; the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

·; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

·; the amount of revenue can be measured reliably;

·; it is probable that the economic benefits associated with the transaction will flow to the entity; and

·; the costs incurred or to be incurred in respect of the transaction can be measured reliably.

(ii) Long term contracts

Where the outcome of a long term contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract 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 the amount can be measured reliably and its receipt is considered probable.

Where the outcome of a long term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

(iii) Financing from R&D partners

When the outcome of a transaction involving prototype and concept assessment, front end design, feasibility studies and R&D work can be estimated reliably, revenue is recognised by reference to the stage of completion at the balance sheet date, taking into account any preferential terms post commercialisation.

3.2 Business combinations

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3(2008) are recognised at their fair value at the acquisition date, except that deferred tax assets or liabilities and liabilities are recognised and measured in accordance with IAS 12 Income Taxes.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.

The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date, and is subject to a maximum of one year.

3.3 Goodwill

Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest (if any) in the entity over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

3.4 Impairment of tangible and intangible assets excluding goodwill

At each balance sheet date, 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 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 to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment at least annually and whenever there is an indication that the asset may be impaired.

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 cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) 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 cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

3.5 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

4. Segmental Reporting

 The following table presents revenue, profit and certain net asset information for each business segment.

4 Central unallocated costs include exceptional items of £980,000 associated with the Wellman acquisition (2010: £332,000).

1 EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment and amortisation of acquired intangible assets.

3 Adjusted EBITDA is defined as operating profit adjusted to add back depreciation of property, plant and equipment, amortisation of acquired intangible assets and any other acquisition related charges, share based payment charges and exceptional items. Exceptional items are those items believed to be exceptional in nature by virtue of their size and or incidence, and in the current period comprise costs associated with the acquisitions of ACI and HG on 5 April 2012 and the associated equity fundraising on 2 April 2012.

5. Acquisition of subsidiaries

 On 5 April 2012 the Group acquired 100% of the share capital of Wellman Hunt Graham Ltd and Wellman Defence Limited for an aggregate consideration of £10.91m, of which £10.75m was settled in cash on completion and £0.16m was settled in cash in July 2012. The Directors believe that the acquisition will transform the Group from being a research and technology group into a technology-led industrial engineering group with established commercial relationships and a track record of revenue and profit contribution. Exceptional costs associated with the acquisition were £980,000.

The differences between the book values and fair values of the assets acquired and liabilities assumed relate to reassessment of contract balances and accruals and the valuation of intangible assets.

6. Loss per share

 The calculation of the loss per share is based on the loss for the period divided by the weighted average number of shares in issue during the period as follows:

The weighted average number of shares in issue has been reduced by deducting the weighted average number of shares held by the Employee Benefit Trust of 1,506,347 shares (six months ended 30 June 2010 and year ended 31 December 2011: 1,506,347 shares).

The issue of additional shares on exercise of employee share options would decrease the basic loss per share and there is therefore no dilutive effect of employee share options.

7. Share Issues

 At 31 December 2011 Corac Group plc had called up share capital of 247,404,225 ordinary shares of nominal value 10p each. On 2 April 2012 the Company issued 60,476,191 new ordinary shares of nominal value 10p each at 10.5p per share by way of a placing. Expenses associated with the issue of shares and the acquisition of the Wellman businesses were £1,358,000 of which £332,000 was recognised in the income statement to 31 December 2011, £56,000 was recognised in equity and £980,000 was recognised in the income statement in 2012. At 30 June 2012 Corac Group plc had called up share capital of £30,788,042.