Annual Report • Dec 31, 2010
Annual Report
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| 2010 | 2,102 |
|---|---|
| 2009 | 2,214 |
| 2008 | 2,548 |
| 2010 | 51.3 | |
|---|---|---|
| 2009 | 51.5 | |
| 2008 | 71.4 |
| 2010 | 40.7 | |
|---|---|---|
| 2009 | 44.7 | |
| 2008 | 62.3 |
| 2010 | 92.9 | |
|---|---|---|
| 2009 | 93.9 | |
| 2008 | 127.8 |
Basic EPS pence
| 2010 | 70.5 |
|---|---|
| 2009 | 77.9 |
| 2008 | 106.3 |
Adjusted EPS pence
| 2010 | 42.0 |
|---|---|
| 2009 | 42.0 |
| 2008 | 42.0 |
Operating profit is profit from operations before amortisation ofintangible assets and non-recurring items.
The Group operates through four divisions and a specialist investment unit:
Construction & Infrastructure Operating as Morgan Sindall
Affordable Housing Operating as Lovell
Regeneration Operating as Muse Developments
Urban
Operating as Morgan Sindall Investments and Community Solutions
Investments
Cautionary statement
This directors' report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potentialfor those strategies to succeed.
The directors' report contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business factors, underlying any such forwardlooking information.
The directors, in preparing this directors' report, have complied with s417 of the Companies Act 2006. They have also sought to comply with the guidance set out in the Accounting Standards Board's Reporting Statement: Operating and Financial Review. This directors' report has been prepared for the Group as a whole and, therefore, gives greater emphasis to those matters which are significant to Morgan Sindall Group plc and its subsidiary undertakings when viewed as a whole.
Morgan Sindall Group plc Annual report and accounts 2010 Directors' report: business review 01
The Group has returned robust financial results in tough market conditions and continues to make progress in building leading positions in all its markets.
| Chief Executive's statement | 02 |
|---|---|
| The Group's strategy | 06 |
| Rigour | 08 |
| Flexibility | 12 |
| Innovation | 16 |
| Sustainability | 20 |
| Quality | 24 |
| Business model | 28 |
| The market | 30 |
| Financial review | 32 |
| Key risks | 36 |
| Construction & Infrastructure | 40 |
| Affordable Housing | 42 |
| Fit Out | 44 |
| Urban Regeneration | 46 |
| Investments | 48 |
| Key performance indicators table | 50 |
Directors' report: governance 51//72 Information about our Board of directors and corporate governance.
| Corporate governance statement | 54 |
|---|---|
| Remuneration report | 59 |
| Other statutory information | 68 |
| Directors' responsibilities statement | 72 |
The Group's consolidated financial statements for the financial year ended 31 December 2010.
| 74 |
|---|
| 75 |
| 75 |
| 76 |
| 77 |
| 78 |
| 79 |
| 87 |
The Company's financial statements for the financial year ended 31 December 2010.
| 116 |
|---|
| 117 |
| 118 |
| 119 |
| 121 |
Shareholder information 128
'2010 was a year of strategic progress and we have improved our capability to deliver larger and more complex projects, added resources in strategically important sectors and streamlined our structure to serve our customers better.'
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
The Group delivered a robust financial performance in 2010 against the backdrop of continued economic challenges and reductions in public spending.We are reporting a small decline in revenue to £2,102m (2009: £2,214m) with profit before tax, amortisation and non-recurring items in line with last year at £51.3m (2009: £51.5m). Non-recurring items of £5.1m arose from the acquisition and integration of two maintenance businesses and the merger of the Construction and Infrastructure Services divisions offset by a one-off gain on Urban Regeneration's acquisition of certain joint venture interests. Profit before tax (after amortisation and non-recurring items) was £40.7m (2009: £44.7m).
Adjusted earnings per share before amortisation of intangible assets and non-recurring items was 92.9p (2009: 93.9p). The Board recommends a final dividend of 30.0p giving a total dividend for the year maintained at 42.0p (2009: 42.0p).
Our year end cash balance was strong at £149m (2009: £118m) and we achieved, as expected, an increased average cash balance for the year of £63m (2009: £31m). The Group's solid financial position, including committed banking facilities of £100m available until mid-2012, ensures that we retain the capability to fund opportunities as they arise.
We continue to pursue the strategic goal of achieving leading positions in all of our chosen markets. 2010 was a year of strategic progress and we have improved our capability to deliver larger and more complex projects, added resources in strategically important sectors and streamlined our structure to serve our customers better.
The Construction and Infrastructure Services divisions merged in 2010 to create a new enlarged division, trading as Morgan Sindall. This has enhanced our capability to deliver integrated construction projects to clients covering all elements of design, construction and infrastructure. The merger created operating efficiencies and realised annualised cost savings of £6m but, more importantly, places the business in a stronger position to deliver
efficiently to the private sector and respond to changing demands from the public sector. The division achieved an improved operating margin of 2.2% (2009: 2.0%) and operating profit of £26.9m (2009: £30.1m) from revenue of £1.3bn (2009: £1.5bn). The performance of the Construction & Infrastructure division is broken down on page 41.
Affordable Housing delivered an improved financial performance in 2010 with marginally increased revenue of £387m (2009: £374m) and operating profit of £16.1m (2009: £14.9m) demonstrating that the division's full lifecycle approach to clients' housing needs and the ability to mix allforms of tenure is creating opportunities even in the most challenging market conditions. The division acquired Powerminster in June 2010, and this was complemented by securing new clients, staff and assets from Connaught in September 2010 to create a full-service social housing business covering new build open market and social housing, and planned and response maintenance. The Connaught interests were acquired out of administration and half of the clients approached have appointed Affordable Housing as maintenance contractor. These acquisitions place Affordable Housing in a stronger position to secure both response and integrated maintenance opportunities and open up new opportunities to provide a wider service to its expanded client base.
Fit Out achieved significant growth in revenue during 2010 increasing by 43% to £415m (2009: £291m), with operating profit increasing to £14.8m (2009: £13.8m). This performance was driven by a number oflarge schemes in the London office fit out market, primarily in the financial services sector. Very challenging conditions persist in the commercial fit out and refurbishment markets where intense competition is creating downward pressure on tender prices. Consequently the operating margin reduced to 3.6% (2009: 4.7%). During 2010 the division streamlined its structure by combining Vivid Interiors and Overbury to strengthen its operations in the retail, education, hotel and leisure sectors and thereby simplified the division's offering in the market. In addition, the strength of the Overbury brand will help accelerate growth in non-office markets where there is opportunity to increase market share.
'Overall we are pleased with the financial performance of the Group in 2010 while the enhancements we have made to the Group during the year leave us well placed to meet future challenges and opportunities presented by the market.'
In 2010 Urban Regeneration saw an improvement in activity and delivered an improved operating profit of £2.0m (2009: £0.7m) on revenue of £46m (2009: £32m). This performance is due to the division's flexible approach and its ability to exploit opportunities in the development market. An increase in development management fee income, improved open market residential sales, progress on a number offorward-sold new developments and land trading have contributed to this performance. Also during 2010 a significant effort has been made to enhance the existing portfolio of development schemes through restructuring and refinancing to improve opportunities in the medium-term.
The Investments unit continued to generate construction opportunities for the operating divisions and also created long-term value in its portfolio. During the year £221m of construction revenue was generated from contracts financed by the unit and its partners for the Group's clients. The directors' valuation of the investment portfolio increased during the year to £53m (2009: £38m), largely as a result of achieving financial close on the Tayside Mental Health PFI and the Hull BSF programme. The basis of calculation for this valuation is on page 49.
The Group continued to maintain tight control of working capital and to drive cost efficiencies. Further restructuring realised annualised cost savings giving £21m of savings in the year and £59m of accumulated annualised savings achieved over the last three years.We remain highly flexible and able to adjust our organisational structure, either reducing costs or making investment available in response to changes in our markets. Our cash performance improved with average cash balances for the year of £63m (2009: £31m) and a year end cash balance of £149m (2009: £118m). This position is enhanced by committed banking facilities of £100m in place through to mid-2012 and a defined benefit pension deficit of only £2m (2009: £3m). Advances in the management of our supply chain through procurement initiatives willfurther improve operating efficiency, helping to protect our margins and maintain our competitiveness in the market in the short-term, and improving operating margins in the medium-term when markets recover.
As previously announced, Simon Gulliford joined the Board on 1 March 2010 and JonWalden retired from the Board on 6 May 2010. There were no other changes to the Board during 2010.
Improved forward order book
Forward order book – Construction & Infrastructure £bn
| 2010 | 2.0 |
|---|---|
| 2009 | 1.6 |
Forward order book – A!ordable Housing £bn
| 2010 | 1.5 |
|---|---|
| 2009 | 1.3 |
Forward order book – Fit Out £m
| 2010 | 180 |
|---|---|
| 2009 | 171 |
Total forward order book £bn
| 2010 | 3.6 |
|---|---|
| 2009 | 3.2 |
Development pipeline – Urban Regeneration £bn
| 2010 | 1.4 |
|---|---|
| 2009 | 1.4 |
The Group's forward order book at the year end strengthened by £0.4bn to £3.6bn (2009: £3.2bn). The forward order book represents anticipated future revenue from secured projects and an estimate of work to be awarded under framework arrangements. In addition, the Urban Regeneration division maintained its development pipeline at £1.4bn (2009: £1.4bn).
'Our capabilities in project financing, combined with the construction and lifecycle services offered by our divisions, place the Group in an excellent position to secure profitable opportunities as they arise.'
The UK construction market is expected to weaken over the next three years and the industry is now anticipating the likely impacts of the changes in public spending following the Comprehensive Spending Review ('CSR'). Although capital expenditure directly from the public sector willfall in line with the CSR, the underlying need for infrastructure investment remains in the key sectors of health, housing, energy, transport and education.
Our capabilities in project financing, combined with the construction and lifecycle services offered by our divisions, place the Group in an excellent position to secure profitable opportunities as they arise. Overall we are pleased with the financial performance of the Group in 2010 while the enhancements we have made to the Group during the year leave us well placed to meet future challenges and opportunities presented by the market.
John Morgan Paul Smith Executive Chairman Chief Executive 4 March 2011
to exercise rigorous and prudent standards of operational and financial management and to relentlessly pursue improvement.
to adapt to meet the needs ofits clients and markets.
to innovate by empowering employees to deliver excellence and achieve the improbable.
to operate safely and sustainably.
to deliver an exceptional quality construction service to its construction clients and regeneration partners.
Morgan Sindall Group plc Annual report and accounts 2010 Directors' report: business review 07
The Group's strategic goal is to create leading positions in all ofits chosen markets which, ultimately, will be measured by the quality of operating margins achieved.
The Group is committed to exercising rigorous and prudent standards of operational and financial management and relentlessly pursuing improvement by:
The Group monitors progress against this strategy by measuring:
| Operating margin % | Year end cash balance £m | |||
|---|---|---|---|---|
| 2010 | 2.4 | 2010 | 149 | |
| 2009 | 2.3 | 2009 | 118 | |
| 2008 | 2.8 | 2008 | 120 | |
Average cash in bank £m
| 2010 | 100 |
|---|---|
Committed banking facilities £m
| 2010 | 63 | 2010 | 100 |
|---|---|---|---|
| 2009 31 |
2009 | 100 | |
| 2008 | 77 | 2008 | 75 |
M o r g a n S i n d a l l G ro u p p l c A n n u a l r e p o r a n d a c c o u n t s 2 0 D i r e c t o r s r e p o r t b u s i n e s s rev i ew
The financial strength of the Group has increased during 2010 by realising further annualised cost savings and by securing profitable long-term projects and frameworks. In addition, the directors' valuation of the investment portfolio has increased largely through the financial close of two major PFI/PPP projects and the Group has broadened its activities, establishing a full-service Affordable Housing business by strengthening its response and planned maintenance capabilities. It continues to derive benefits from sales of homes under the shared equity scheme.
The Group's divisions continue to make efficient use of working capital and are realising cost savings within their businesses, with £21m of saving realised in 2010. In the last three years, the Group has realised £59m of annualised cost savings consisting primarily of headcount reductions, which have helped to protect the Group's operating profit margins. In addition, the Group remains flexible and continues to adjust cost structures as market conditions change. The overhead percentage has been broadly maintained at 7.9% (2009: 7.7%) through ongoing management of the cost base.
The Group is involved in a number oflong-term schemes and frameworks that will generate revenue into the future. The Group's forward order book was significantly improved at 31 December 2010 at £3.6bn (2009: £3.2bn), including some projects expected to run until 2020. During 2010, the Group continued to secure profitable long-term schemes, including the Hull Building Schools for the Future ('BSF') framework under which the first two schools valued at £70m were secured, the £417m five year Lee Tunnel project in joint venture, the appointment to a ten year £500m framework for E.ON and, in joint venture, the five year £75m YorkshireWater framework. In the Affordable Housing division,further long-term schemes included a £75m three year project for Glasgow City Council and
Bridge supports being lifted into place on the 38-kilometre stretch of the A1M between Dishforth and Barton to upgrade the dual-carriageway to a three-lane motorway.
Lovell Respond expands
Lovell Respond, the Affordable Housing division's response maintenance business, has been dramatically enhanced in 2010 by the acquisition of Powerminster and the maintenance business from Connaught. This has helped to broaden the division's capabilities.
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
appointment to the four year £135m Places for People framework in Central Scotland. During 2010, the Urban Regeneration division enhanced its existing portfolio of development schemes through restructuring and refinancing to improve opportunities in the medium-term. Muse's ten year Doncasterproject commencedconstruction on the first phase comprising new council offices, despite the loss of public sector grant support.
The directors' valuation of the Investments unit's investment portfolio, as detailed on page 49 has increased by 39% to £53m (2009: £38m), which includes committed investment in equity and subordinated debt of £12m. This was due to both increased value created from existing schemes and the achievement of financial close during 2010 on the Hull BSF Programme and Tayside Mental Health Trust. The Group's investment portfolio is another way to generate long-term returns as, over time, the asset value is expected to grow and allow profit to be realised from asset sales at some point in the future.
The Group monitors working capital closely, with a particular emphasis on overdue debt and work in progress as part of its core financial and commercial disciplines. The Group has established procedures to report actual and forecast cash, pays close attention to payment terms in contracts and has
reported increased average levels of cash in the year. The Group generated operating cash flow of £93.1m (2009: £25.0m).
The shared equity schemes in use in both the Affordable Housing and Urban Regeneration divisions continued to stimulate open market housing sales during a period when mortgage financing remained restricted, which helped to release working capitalfor reinvestment in other projects. Although open market affordable housing continues to be challenging, some 40% of the divisions' sales were achieved using the shared equity schemes. This also creates a valuable asset that has potentialfor growth in value as markets recover.
The Group endeavours to adapt to meet the needs ofits clients and markets by:
The Group measures its progress against this strategy by monitoring the forward order book and its share of the development pipeline.
Forward order book £bn
Share of development pipeline £bn
| 2010 | 3.6 | 2010 | 1.4 |
|---|---|---|---|
| 2009 | 3.2 | 2009 | 1.4 |
| 2008 | 3.7 | 2008 | 1.3 |
M
D
N e w o f f i c e s p a c e c r e a t e d fo r t h i s l e a d i n g t e c h n o l o g y b u s i n e s s u n d e r t h e F i t O u t d i v i s i o n ' s h i g h l y f e x i b l e d e s i g n a n d b u i l d s e r v i c e w h i c h d e l i v e r e d h i g h q u a l i t y b e s p o k e a c c o m m o d a t i o n b a s e d o n t h e c l i e n t ' s n e e d .
D i t o ' p o t b u n e e e 0 2//5 0 D i r e c t o r s r e p o r t : g o v e r n a n c e 51// 7 2 C o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s 73// 1 1 4 C o m p a n y fi n a n c a s t a t e m e n t s 115//1 2 7 S h a r e h o d e r i n fo r m a t i o n 128
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The Group's strategic focus on remaining flexible to meet the needs ofits current and future markets continued in 2010. This focus included significant acquisition activity to enhance the integrated maintenance capabilities in the Affordable Housing division and to create a full-service capability, organisational changes to create the Construction & Infrastructure division and a streamlining of operations within the Fit Out division. Progress has also been made in further developing the role of the Investments unit in generating construction opportunities within the Group.
As a direct strategic move to increase the Affordable Housing division's integrated maintenance capabilities, the Group acquired Gleeson's response and planned maintenance business, Powerminster, in June 2010. In September 2010, the division acquired a response and planned maintenance business from the administrators of Connaught Partnerships Limited including the right to collect outstanding invoiced and uninvoiced debt and the opportunity to secure contracts from a significant proportion of the client base. Half of the Connaught clients approached have appointed the division as a maintenance contractor. These acquisitions have significantly transformed the division's integrated maintenance capability, improved its geographical coverage and its ability to secure maintenance opportunities in the future. The integration of these businesses is largely complete and the division's greatly enhanced capability has created a full-service that is expected to drive the division's growth over coming years.
The direct result of the division's flexibility and speed of action taking on new staff meant that critical programmes of social housing maintenance could be rapidly restarted following Connaught Partnerships Limited entering administration. This included the mobilisation of the division's new response maintenance team to Norwich County Council in just three days from first discussion with the client.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
A complex lifting operation in progress at the creation of the new fuel testing facility designed to test fuel and fuel systems for one of the leaders of the aviation industry.
Part of the 25-acre regeneration, delivered in partnership with Doncaster Council, to create a mixed use cultural and civic quarter, which began its first phase of development in 2010.
The Construction and Infrastructure Services divisions merged in 2010 to create a new, enlarged division, trading as Morgan Sindall. This enhances the Group's capability to deliver integrated construction projects to clients for all elements of design, construction, infrastructure and maintenance. As an example, projects undertaken for BAA (such as the creation of a combined heat and energy plant at Heathrow) draw expertise from teams previously within the separate divisions. The merger created operating efficiencies and annualised cost savings of £6m but, more importantly, places the division in an excellent position to deliver efficiently to the private sector and respond to changing demands from the public sector.
During 2010, the Fit Out division consolidated its structure and strengthened its presence in the retail, education and leisure markets by bringing its existing operations in these markets under the Overbury name. This has streamlined and simplified the division's operations and enabled it to offer clients a more integrated service,for example to RBS and Lloyds Banking Group, who each operate combined retail and office refurbishment frameworks. In addition, the strength of the Overbury brand name will help accelerate growth in these non-office markets where there is opportunity to grow market share.
Methods and cycles of procurement in the public sector are changing following the Comprehensive Spending Review (commented on more fully on pages 30 to 31). In direct response, the Investments unit is working closely with the operating divisions to create innovative financing options to facilitate public sector projects. During the year, the Group carried out construction work on a number of schemes facilitated by the Investments unit and financed by its partners, including the social housing regeneration continuing at Miles Platting in Manchester with the Affordable Housing division, the Tayside Mental Health PFI project with the Construction & Infrastructure division and the first two of the 17 schools to be built or refurbished under the £400m Hull Building Schools for the Future programme. The Group is also developing alternative funding models for the social housing market, including asset and land swaps, to offset the reduced level of direct public sector financing of the sector over the coming years.
The Group's strategy to stimulate innovation through empowering its people is delivered by:
The Group determines progress against this strategy through tracking:
M o r g a n S i n d a l l G ro u p p l c A n n u a l r e p o r a n d a c c o u n t s 2 0 i r e c t o r s r e p o r t b u s i n e s s rev i ew
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L a n d m a r k We s t E n d t h e a t r e r e f u r b i s h e d b y t h e F i t O u t d i v i s i o n a s p a r t o f a P e r fe c t D e l i v e r y i n i t i a t i v e , e n s u r i n g a h i g h q u a l i t y, o n t i m e c o m p l e t i o n , e n a b l i n g t h e t h e a t r e t o c o n t i n u e i t s s c h e d u l e d p r o d u c t i o n s w i t h o u t d i s r u p t i o n .
D i t o ' p o t b u n e e e 0 2//5 0 D i r e c t o r s r e p o r t : g o v e r n a n c e 51// 7 2 C o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s 73// 1 1 4 C o m p a n y fi n a n c a s t a t e m e n t s 115//1 2 7 S h a r e h o d e r i n fo r m a t i o n 128
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The Group offers innovative solutions to its clients for the delivery of their projects as well as extending and improving the lifecycle of the buildings that it constructs on clients' behalf. The Group encourages its employees to be proactive in their dealings with clients and is committed to training and developing them to achieve this.
The Affordable Housing division is working with Hackney Council to achieve its commitment to residents of delivering high quality and affordable homes to local people. It has been awarded a contract worth £25m to build two new sustainable housing schemes for Hackney Council that will consist of107 new affordable homes for rent as well as 42 properties for sale. The division will invest in the schemes by constructing 20 homes for council ownership in return for the council enabling the development of the 42 open market properties on a site overlooking Finsbury Park. As part of the delivery of the schemes, the division has agreed to provide construction apprenticeship opportunities for local people.
On a project for River Clyde Homes in Inverclyde, the Affordable Housing division was able to assist the client in reducing costs without affecting the quality of the work undertaken by finding ways to reuse the 26,000m3 of excavated rock from the site both in other aspects of the project and on other local projects.
The team on the M74 completion project in Glasgow achieved a significant reduction in the project's carbon footprint with some innovative solutions. The route of the project has a legacy ofindustrial pollution with the existing ground being contaminated by heavy metals, hydrocarbons and various other industrial by-products. The nature of these contaminants meant that the nearest licensed landfill site capable of receiving this waste was almost 200 miles away in the Middlesbrough area and the
Workington Bridge, Cumbria Following the devastating Cumbria floods of November 2009, this shows the award winning temporary bridge rejoiningWorkington which had been divided by the River Derwent, created in just 72 days using innovative design and construction techniques.
Birmingham City Council, Pershore Road The first council homes to be built in over 30 years, completed under partnership with Birmingham City Council and the Homes and Communities Agency, delivered using the latest construction techniques.
volume of material would have required hundreds of tipper truck journeys to dispose ofit.Working in close collaboration with a specialist subcontractor and with the approval of the relevant authorities, the team used a variety of chemical and biotech treatments to neutralise the contaminants and convert the waste into a suitable engineering materialfor inclusion within the embankments of the new motorway. Local soft clay was also moisture conditioned with lime to ensure that it was suitable for civil engineering use, which further reduced the need for material tobebrought intotheproject from external sources.
During 2010, the Fit Out division has further developed its Customer Experience programme, which encourages staff to seek recommendations from their clients. This programme, builds on Perfect Delivery by encouraging constant innovation in delivery to clients and in its business processes. The programme rewards innovation by staff with awards and incentives, and shares best practice through regular site tours, conferences, seminars and other internal communications. The direct result is a steadily rising rate of recommendations by clients and a resulting improvement in operating margins on those projects.
The Group continues to recognise the link between a constantly developing workforce and innovation in its businesses. As such, importance continues to be placed on the ongoing training and development of staff to enable employees to utilise their talents for the benefit of clients. Central to the Group's approach is its management development programme, which focuses on instilling the values, attitudes and culture needed to meet clients' needs. Since its creation in 2005, 273 managers have graduated from the programme, greatly improving the depth of management talent and creating opportunities for internal succession throughout the Group. In addition, the Group offers its wider workforce a variety of different training courses including induction training, toolbox talks, apprenticeships and graduate training programmes.
In 2010, the Group continued to develop its approach to sustainability based on the themes of People, Planet, Profit by:
The Group measures its progress by regularly:
Accident incident rate
| CO2e equivalent emissions for the | |
|---|---|
| Group's vehicle fleet tonnes |
2010 28,184
| 2010 | 429 | |
|---|---|---|
| 2009 | 519 | |
| 2008 | 719 | |
Wasted diverted from landfill tonnes m
| 2010 | 1.5 | |
|---|---|---|
| 2009 | 1.4 | |
| 2008 | 0.9 |
Number of apprentices at di!erent stages of development
| 2010 | 196 | ||
|---|---|---|---|
| 2009 | 138 | ||
| 2008 | 188 |
Number of graduates recruited during the year
| 2010 | 102 | |
|---|---|---|
| 2009 | 50 | |
| 2008 | 37 |
Total waste diverted % Expressed as percentage of total waste created
| 2010 | 87 |
|---|---|
| 2009 | 83 |
| 2008 | 67 |
Number of graduates on years out or being sponsored
| 2010 | 65 | |
|---|---|---|
| 2009 | 94 | |
| 2008 | 110 |
Further sustainability measures are shown on page 50.
M o r g a n S i n d a l l G ro u p p l c A n n u a l r e p o r a n d a c c o u n t s 2 0 D i r e c t o r s r e p o r t b u s i n e s s rev i ew
D i t o ' p o t b u n e e e
D i r e c t o r s r e p o r t : g o v e r n a n c
C o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s 73// 1 1 4
C o m p a n y fi n a n c a s t a t e m e n t
S h a r e h o d e r i n fo r m a t i o 2 1
7 2
2 7
0 2//5 0
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A h i g h l y s u s t a i n a b l e s c h o o l t h a t p r o v i d e s t h e l o c a l c o m m u n i t y w i t h m u c h n e e d e d fa c i l i t i e s s u c h a s a d e d i c a t e d c o m m u n i t y r o o m , I T s u i t e a n d a r t fa c i l i t i e s fo r l o c a l r e s i d e n t s t o u s e d u r i n g t h e d a y a n d a ft e r s c h o o l h o u r s .
2010 has been a year for building on the Group's sustainability statement Delivering today fortomorrow, which was adopted in 2009. The People, Planet, Profit model has been further developed, by focusing on the areas ofleadership, governance, reporting and communications.
A particular initiative was to raise the profile of the Group's capability and its approach to sustainability. The Group has communicated more widely its commitment to sustainability, both internally among employees and externally to customers, subcontractors, suppliers, investors and other stakeholders. The Group's website is now being used extensively to deliver information about its approach to sustainability to both internal and external audiences, via dedicated news and case studies. In December 2010, the Group held a sustainability conference, bringing senior management and project teams together to discuss the latest developments in sustainability and provided the opportunity to hear from key customers.
The Group has made significant progress in its commitment and approach to sustainability over the last few years and it remains committed to continuous improvement by integrating its sustainable approaches more fully into its activities. Consequently, the Group's sustainability forum set more ambitious aims and objectives relating to sustainability for 2011/12. This report highlights some examples of the positive actions undertaken by the Group in 2010.
Providing a safe working environment for employees, subcontractors and suppliers is vital to the continued success of the Group and is of paramount importance to everyone in the Group. It is currently developing safety risk profiling as part of the bidding process and an active health and safety forum continues to share leading edge best practice across the Group. The Group undertakes investigations to understand the cause of all incidents and how procedures can be improved to guard against future occurrence. Training and development play key roles in establishing safe working practices. Near-misses are investigated thoroughly and lessons learned are communicated to employees. Regular toolbox talks take place on site and a newly commissioned training film, which uses real life examples of best practice, is due to be distributed in 2011. The Group has focussed on improving its health and safety performance throughout the year and the AIR shows a significant reduction.
Several recent examples of the Group's commitment to health and safety, community, training skills and education can be found on the Group's website www.morgansindall.com/sustainability. In Scotland, the Affordable Housing division's £24m River Clyde Homes development has engaged the local community at many levels. In addition to keeping residents informed through regular newsletters and meetings, schoolchildren have been given site visits to provide an insight into construction as a career.Work placement opportunities, including several apprenticeships, have also been created for local people.
Policies on equal opportunity employment are actively promoted throughout the Group, helping to attract and retain the best talent in the industry. Procedures are in place to provide fair treatment for anyone with a disability, especially regarding training and career development. In the event of employees becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. Investment and resources continue to be provided to support, train and motivate all employees.
A key part of employee engagement is communication. The Group ensures that all significant events, economic factors and financial updates and the impact of these on the performance of the Group are communicated to employees through email alerts and regular newsletters.
The implementation of the Government's Carbon Reduction Commitment Energy Efficiency Scheme ('CRC') in 2011 will see the Group reporting its energy use as part of the CRC for the first time. Standards for measuring and reporting consumption were established by the Group during 2010. It is also seeking accreditation during 2011 in the Achilles CEMARS scheme, which ensures that data collection and recording can be independently verified.
As a leader in construction and regeneration, the Group recognises the important role that it plays in energy conservation. More efficient use of energy both in the way the business operates its permanent offices and in the management of project sites can help to reduce carbon
Two 4,250m3 tanks delivered as part of a ten year framework to upgradeWelshWater's sewerage systems, working in close collaboration with the Environment Agency.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
River Clyde Homes, Port Glasgow, Scotland Following significant rock excavation, the project team and client were able to reuse excavated rock on nearby dockside projects, saving the client money and limiting the environmental impact of transportation and disposal.
British Ecological Society Headquarters, London The Fit Out division transformed a 1950s office building, described prior to the fit out as a black hole with little natural light, into a bright and inspirational workplace with impressive green standards.
emissions. However, the Group's most important role in reducing carbon emissions is the positive influence it can have in recommending and implementing energy efficient construction solutions for clients. Clients are not only demanding more sustainable solutions to their construction and regeneration challenges, they also frequently seek guidance on how innovative design and construction methods can be applied to reduce energy consumption and minimise environmental impact by the occupiers of the properties. This can have a particularly beneficial impact when design and build projects are undertaken.
As one of the first UK contractors able to achieve Code for Sustainable Homes Level 6 for a new build housing project, the Affordable Housing division applied its expertise to a retro fit project inWellingborough, Northamptonshire. The objective was to demonstrate how existing technologies and materials could be used affordably, to achieve a greater than 60% reduction in carbon emissions.
During the year, Fit Out's design and build specialist, Morgan Lovell, became the first organisation in the UK to gain accreditation for the BS EN 16001 energy management system standard. This achievement not only demonstrates the business' own commitment to improving energy efficiency, but also its ability to advise clients on the implementation of energy conservation measures during fit out projects.
Waste minimisation continues to be a focus for all divisions. Where appropriate, the Group's divisions are signatories to theWaste & Resources Action Programme 'halving waste to landfill' commitment.
The Group has played an active role in the development of the proposed new BS 8903 standard for sustainable procurement. Sponsorship of the Construction Industry Research and Information Association project and sharing of best practice demonstrate the Group's commitment to improve sustainable practices in the construction sector. Being at the leading edge of current thinking in procurement will help the Group to further improve its competitiveness and will also ensure that the Group's supply chain delivers to a consistently high standard.
The Group has in place sustainable procurement policies, particularly in relation to responsible sourcing of materials. During 2010, the audited level of directly procured timber from sustainable sources reached 88%. Muse Developments, together with its English Cities Fund partners Legal & General and the Homes and Communities Agency, has undertaken the landmark St. Paul's Square redevelopment in Liverpool, which involved the application of a sustainable procurement plan to the entire construction, fit out and operation of the £41m third phase of the project. This not only fulfilled Regional Economic Strategy goals for procurement of raw materials and services, it also helped deliver a BRE Environmental Assessment Method ('BREEAM') Excellent rating.
The Group aims to deliver an exceptional quality service to its construction clients and regeneration partners by:
The Group monitors its success by:
Perfect Delivery score* %
| 2010 | 83 |
|---|---|
| 2009 | 84 |
| 2008 | 84 |
and Fit Out divisions.
During 2010, the Group continued to develop its capability to deliver exceptional quality construction. This included the enhanced capability in the Construction & Infrastructure division for technically demanding projects and the ability to offer consistent quality in the Affordable Housing division. The Group also improved its supply chain management and extended Perfect Delivery to cover 80% of the Group's activities.
The Affordable Housing division introduced a new programme of service delivery called Service First, based on four cornerstones, which include delighting the client and delivering contracts on time and with no defects. This programme was introduced in two of the division's regions in 2010 and will be extended across the whole division by the end of 2011.
The combined design and construction capabilities of the Construction & Infrastructure division enable it to deliver highly complex projects, in line with its clients' needs for a broader range of capabilities from a single contractor. For example, the £417m seven kilometre long Lee Tunnel in Stratford, being delivered in joint venture, will improve river water quality for London by reducing sewage flowing into the Thames. This tunnel will be the deepest in the capital, around 80 metres below the ground and includes, within the scope of the project, the Beckton Pumping Station. This station is being designed to cater for flows not only from Abbey Mills but also the Thames Tunnel which will be constructed at a later stage. Also technically challenging is the £91m Airbus wing assembly plant in Broughton, where construction is being carried out in parallel with the aviation design of the components to be made at the plant. This means design and construction have to remain highly flexible and able to respond rapidly to advances in component design.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Affordable Housing division achieved Level 4 under the Code for Sustainable Homes with a 44% energy reduction over current building regulations. The project offered apprenticeships and training opportunities for local young people.
Lee Tunnel, London A worker looking over the site where a substantial project is underway to create a seven kilometre tunnel to enhance London's flood defences.
The Group has a breadth of capabilities that can be joined up as required to meet clients' needs. It is increasingly common for the divisions to work together. For example, the Affordable Housing division will undertake a project with the Urban Regeneration division during 2011 at Stockton-on-Tees and is also working with the Construction & Infrastructure division on projects in London and Birmingham. In addition, the Affordable Housing division is able to offer clients a full-service covering new build, refurbishment and maintenance, enhancing quality through continuity of staff, systems and processes. The newly merged Construction & Infrastructure division has capabilities for design, construction and infrastructure projects, offering clients a single team approach to highly complex projects which directly enhances quality through common approaches and systems.
The Group requires a high level of quality, competitiveness and sustainability from its principal suppliers and subcontractors to ensure that it can continue to bid projects competitively and secure long-term revenue. Group procurement arrangements are put in place to realise buying gains and to ensure a consistency of performance.
The Construction & Infrastructure, Affordable Housing and Fit Out divisions operate innovative supply chain methodologies with its strategic supply chain. This improves the Group's position with critical suppliers and provides clients with exceptional and committed suppliers and subcontractors. It also fosters close working between the divisions and their supply chain to develop new products and solutions for clients' projects.
The Group's innovation of Perfect Delivery, which began in the Fit Out division, is now in use across a significant majority of the Group's operations, namely the Fit Out and Construction & Infrastructure divisions. This standard encompasses measures for final quality, timeliness, defect free completion, safety performance and clients' nominated key priorities and is used to determine quality of delivery. The standard is only awarded to a project by sign offfrom both the client and the other professional parties involved. One of the major benefits to the Group of pursuing this initiative is that it drives improvement in margin through quality efficiencies and creates good client relationships. The Group's drive for staff training in Perfect Delivery through conferences and workshops and the use of incentive schemes continued in 2010. The application of Perfect Delivery was broadened during 2010, whilst the achievement level was significantly maintained at 83% (2009: 84 %) of qualifying projects.
The role of Morgan Sindall Group plc is to support the divisions in their performance and to harness the strength of the Group by driving strategy and culture.
Construction & Infrastructure
O!ers a national service for design, construction and infrastructure to public and private sector clients.
| 2010 | |
|---|---|
| Revenue | £1,250m |
| Operating profit | £26.9m |
| Employees | 4,807 |
A full-service social housing business covering new build open market and social housing and planned and response maintenance. The division operates a full mixed tenure model to create homes for rent, shared ownership and sale on the open market.
| 2010 | ||
|---|---|---|
| Revenue | £387m | |
| Operating profit | £16.1m | |
| Employees | 2,204 |
Empowered sta! that are given the resources to achieve their potential for the Group and its clients.
Respected supply chain treated fairly
A key resource to the Group is its Investments unit with the capability to facilitate finance options for clients, thereby providing construction revenue to the divisions.
Undertakes refurbishment and fit out projects in the o"ce, education, retail, hotel and leisure sectors through Overbury as a national fit out operator and Morgan Lovell as a specialist in the design and build of o"ces.
| 2010 | |
|---|---|
| Revenue | £415m |
| Operating profit | £14.8m |
| Employees | 549 |
Works in partnership with landowners, local authorities and other partners to progress development opportunities and maximise the contribution to urban renewal through mixed use projects, typically creating commercial, leisure, residential and community facilities.
2010
The Group operates across a large number of private regulated sectors of the market. Examples include:
The Group undertakes both development and construction schemes as appointed contractors and also as development partners on behalf of central and local Government. Examples include:
Revenue is derived from the activities
of the Group mainly from:
Construction p
This involves working with other critical organisations and bodies, including:
The divisions remain flexible in their methods and structures of working relationships and will regularly work under di!erent procurement methods, for example:
fund construction activities of joint ventures. Fixed assets: plant and facilities that are used in support of our operations and construction activity.
Construction project activities.
Joint ventures: equity and loans are provided to fund construction activities of joint ventures.
Fixed assets: invested primarily in IT equipment, plant and facilities that are used in support of our operations and construction activity.
Strategic development: The Group uses profits generated to fund significant developments in its organisation, for example the merger in 2010 of the Construction and Infrastructure Services divisions to create a single division better equipped to meet the needs of its clients.
Shareholder returns: a significant proportion of the Group's profits are returned to shareholders through dividend payments.
Following an 11% reduction in the overall size of the UK construction market in 2009, the volume of activity was estimated to have recovered slightly in 2010 to reach £99.4bn (2009: £94.8bn), an increase of 5%.
The Group's strategic goal remains to secure leading positions in its markets measured by the quality of the operating margins achieved. Although slight, the reduction in the Group revenue in 2010 indicated a loss of absolute market share. The Group has refused to follow a volume strategy with low cost pricing and has, therefore, succeeded in maintaining its operating margins.
Public work expenditure is estimated to have reached 41.4% as a proportion of overall UK construction volume during 2010 (2009: 37.8%), continuing the trend set over the last few years ofincreases in absolute and relative public sector spend. However, public sector construction volumes are estimated to have peaked in 2010, with a smallfall in absolute and relative levels forecast in 2011 and accelerating in 2012 as the effects of the CSR begin to be felt. These reductions are forecast to be offset by a growing private sector.
Given low overall growth, the Group will succeed in what will be difficult and rapidly changing markets only by being able to identify and capitalise on opportunities. The Group will look to achieve this by concentrating on the following:
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
| 2009 (actual) |
2010 (estimated) |
2011 (forecast) |
2012 (forecast) |
|||||
|---|---|---|---|---|---|---|---|---|
| £bn | % | £bn | % | £bn | % | £bn | % | |
| New work | ||||||||
| Public housing | 2.9 | 3.1 | 4.0 | 4.0 | 3.3 | 3.4 | 2.4 | 2.5 |
| Private housing | 10.9 | 11.5 | 11.9 | 12.0 | 11.9 | 12.4 | 13.3 | 13.9 |
| Infrastructure | 9.3 | 9.8 | 11.4 | 11.5 | 11.5 | 12.0 | 12.4 | 13.0 |
| Public non-residential | 9.9 | 10.4 | 12.9 | 13.0 | 11.0 | 11.5 | 8.6 | 9.0 |
| Private industrial | 3.1 | 3.3 | 3.5 | 3.5 | 3.6 | 3.8 | 3.9 | 4.1 |
| Private commercial | 22.9 | 24.2 | 22.5 | 22.6 | 22.1 | 23.1 | 22.1 | 23.2 |
| 59.0 | 62.2 | 66.2 | 66.6 | 63.4 | 66.2 | 62.7 | 65.7 | |
| Repairs and maintenance | ||||||||
| Public housing | 6.1 | 6.4 | 6.0 | 6.0 | 5.7 | 5.9 | 5.6 | 5.9 |
| Private housing | 9.8 | 10.3 | 9.8 | 9.9 | 9.7 | 10.1 | 10.0 | 10.5 |
| Public non-residential | 7.6 | 8.0 | 6.9 | 6.9 | 6.5 | 6.8 | 6.2 | 6.5 |
| Private non-residential | 12.3 | 13.0 | 10.5 | 10.6 | 10.5 | 11.0 | 10.9 | 11.4 |
| 35.8 | 37.8 | 33.2 | 33.4 | 32.4 | 33.8 | 32.7 | 34.3 | |
| Total | 94.8 | 100.0 | 99.4 | 100.0 | 95.8 | 100.0 | 95.4 | 100.0 |
| Public work | 35.8 | 37.8 | 41.2 | 41.4 | 38.0 | 39.7 | 35.2 | 36.9 |
| Private work | 59.0 | 62.2 | 58.2 | 58.6 | 57.8 | 60.3 | 60.2 | 63.1 |
| Total | 94.8 | 100.0 | 99.4 | 100.0 | 95.8 | 100.0 | 95.4 | 100.0 |
Examples of the Group's approach in each of these areas are as follows:
The CSR protected critical programmes ofinvestment in the UK, particularly in transport and power generation infrastructure. Major schemes and future investment in rail and major road projects have been preserved. The need for investment in power generation and distribution infrastructure will create a long-term market for innovative energy and waste schemes, an area of expertise for the Group. The newly merged Construction & Infrastructure division is well placed to benefit from this investment, where recent cost savings and operational economies will enable it to compete both in its own right and with partners in joint venture.
Reductions in spend on education building programmes are forecast and the cessation of the BSF programme has been well publicised. Longer term, the need for increased capacity in the education sector persists and local government is investigating alternative funding options, different procurement routes and standardisation. The Investments unit has the skills to be able to develop options with clients, offering a route for the Construction & Infrastructure division to continue to win work.
Changes to the way social housing targets are to be met are likely to become clearer over the next 12 months as local authorities, registered social landlords and the construction industry seek to create new vehicles to address the Notes to 'The Market' analysis:
significant persisting need for social housing in a funding environment that has changed considerably. Opportunities will arise as social landlords offer a growing proportion of new social tenants intermediate rental contracts at rent levels between those available in the market and current social housing rents, increasing social landlords' ability to invest in new schemes. Another important change is that local authorities will have decision making responsibility for grant spending, with the Homes and Communities Agency moving to an enabling role.
Though overall spend on new build public housing is expected to decline, the Group has identified the repairs and maintenance sectors as an area where it can grow profitably. The reason for this is that clients are increasingly demanding a full range of services from a marketplace that is relatively fragmented and localised. The acquisitions of Powerminster Gleeson Services and of the response and planned maintenance business from Connaught enable the Affordable Housing division to make a step change in these markets by significantly increasing its integrated maintenance capabilities and geographical spread and establishing a full-service capability.
As reported in 2009, the Group anticipated a significant reduction in public sector spending. Alongside the activities described above, the Construction & Infrastructure and Affordable Housing divisions are working closely with the Group's Investments unit to create innovative project finance options to help stimulate projects to address the UK's underlying construction needs for new homes, schools, infrastructure and healthcare. This also creates the opportunity for profitable market share growth.
Data represented within this market analysis has been sourced from Experian and the Office for National Statistics. It provides a high level view of the overall shape and trend in the UK market based on output prices that have been normalised at 2005 levels to enable ease of comparison.
Robust 2010 performance Additional information on the Group's financial performance can be found elsewhere in the annual report and accounts as follows:
Revenue £m
| 2010 | 2,102 |
|---|---|
| 2009 | 2,214 |
Profit from operations before amortisation and non-recurring items £m
| 2010 | 52.4 |
|---|---|
| 2009 | 50.5 |
Profit before tax, amortisation and non-recurring items £m
| 2010 | 51.3 |
|---|---|
| 2009 | 51.5 |
Profit before tax £m
| 2010 | 40.7 |
|---|---|
| 2009 | 44.7 |
Year end cash balance £m
| 2010 | 149 |
|---|---|
| 2009 | 118 |
Where stated, operating profit is profit from operations before amortisation and non-recurring items.
'The Group has delivered robust results in challenging market conditions. The Group has continued to shape its divisions either through internal merger and restructure or through acquisition, to better address the markets in which they operate.'
David Mulligan
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
Although 2010 has been another difficult year for the economy, the Group has delivered robust results in challenging market conditions. The Group has continued to shape its divisions either through internal merger and restructure or through acquisition, to better address the markets in which they operate. The amended structure provides a strong platform from which to exploit opportunities and to provide future growth when conditions in the Group's markets improve. The Group continues to address its cost base and this has resulted in annualised cost savings of £59m being realised since the start of 2008. Further action will continue to be taken as necessary.
In the year, the Group has significantly extended its Affordable Housing offering through the acquisition of Powerminster in June and, in September, by acquiring from the administrators of Connaught Partnerships Limited the Connaught social housing maintenance business through the ability to pursue the novation of certain contracts, together with invoiced and uninvoiced debts. Provisional goodwill and other intangible assets of £33.9m have arisen on these two acquisitions and the Group believes that these transactions will transform the division, which now provides a unique full affordable housing service covering planned maintenance, response maintenance and new build open market and social housing.
The Group has incurred non-recurring items during the year of £3.9m in acquiring and integrating the Connaught and Powerminster businesses and £3.2m in merging its Construction and Infrastructure Services divisions. These costs were offset by a one-off gain of £2.0m that arose on Urban Regeneration's purchase of certain joint venture interests.
Revenue has fallen by 5% to £2,102m (2009: £2,214m), with the main components being a fall of £263m in Construction & Infrastructure offset by rises of £124m in Fit Out and smaller rises in Affordable Housing and Urban Regeneration. Most of the increase in revenue in Affordable Housing is attributable to the Powerminster and Connaught acquisitions.
Operating profit has risen by £1.9m to £52.4m (2009: £50.5m), with increases in Fit Out (£1.0m), Affordable Housing (£1.2m), Urban Regeneration (£1.3m) and Group Activities (£1.9m) being offset by a decrease of £3.2m in Construction & Infrastructure. The Investments unit incurred an operating loss of £3.3m (2009: £3.0m).
Construction & Infrastructure delivered a stronger operating margin at 2.2% (2009 2.0%). The operating margin in Fit Out has fallen to 3.6% (2009: 4.7%), due to continued tough market conditions and, at Affordable Housing it improved to 4.2% (2009: 4.0%).
The net finance expense of £1.1m compares with net finance income of £1.0m in 2009. This change is due to £1.7m of other finance charges being recognised in the net finance expense in 2010. Lower interest rates on what have been higher average cash balances, have also contributed to the impact on net finance cost.
Overall, profit before tax, amortisation and non-recurring items is in line with the previous year at £51.3m (2009: £51.5m). Amortisation in the year was £5.5m (2009: £6.8m).
The Group's tax charge of £10.9m (2009: £11.8m) represents an effective tax rate of 26.8% (2009: 26.4%). The effective tax rate is lower than the standard rate of corporation tax largely due to prior year adjustments of £0.9m (2009: £1.2m). The Group continues to discuss with HMRC the corporation tax treatment of the fair value adjustments which arose following the 2007 acquisition of certain businesses and assets from Amec. As a result of these discussions, the Group reduced the payments of corporation tax which it would otherwise have made to HMRC during 2010 by £3.9m. In 2009, the Group reduced its corporation tax payments by £9.2m and received repayments from HMRC of £9.5m. No benefit has been recognised in the tax charge in the income statement in respect of this matter, as discussions are still progressing and the eventual outcome is unclear.
continued
Adjusted basic earnings per share before amortisation and non-recurring items have fallen by 1% from 93.9p to 92.9p, reflecting the slight fall in adjusted profit before tax and the slight increase in the effective tax rate. Basic earnings per share have fallen by 9% from 77.9p to 70.5p.
The Board recommends a final dividend of 30.0p payable on 16 May 2011 to shareholders on the register at the close of business on 26 April 2011. This will give a total dividend for the year maintained at 42.0p (2009: 42.0p). This is covered by adjusted earnings per share 2.2 times (2009: 2.2 times). The Group's long-term policy remains one ofincreasing the dividend broadly in line with the growth in earnings, aiming to cover the dividend by earnings between two-and-a-half and three times. Although in the short-term the cover has remained at 2.2 times, the Board is comfortable with this as the dividend is covered by operating cash flows. The Group will seek to re-establish the longer-term level of cover as and when profits increase.
Total equity increased to £221.7m (2009: £209.3m). The number of shares in issue at 31 December 2010 was 43.2m (2009: 43.2m). The small increase of 28,000 shares was due to the exercise of options under employee share option schemes.
The cash position of the Group at the year end was robust at £149m (2009: £118m). Average cash during 2010 increased to £63m (2009: £31m).
The net cash inflow from operating activities was £93.1m (2009: £25.0m). This is primarily the result of the working capital improvement of £53.7m (2009: worsening of £31.3m). Additionally, the Group has £13.9m (2009: £9.0m) of shared equity receivables relating to open market sales in the Affordable Housing and Urban Regeneration divisions. There were net payments of £35.2m to acquire subsidiaries and other businesses (2009: £1.1m), capital expenditure was £3.1m (2009: £7.5m) and payments to increase interests in joint ventures were £4.3m (2009: £4.2m), all of which reflect ongoing investment in the business. Cash dividends of £0.8m (2009: £2.2m) were received from joint ventures. After tax payments, dividends and servicing of finance, the net increase in cash and cash equivalents was £30.9m (2009: £2.6m decrease). It is anticipated that these cash resources will be available for the development of the Group's businesses, either to fund acquisitions or invest in working capital as required.
The Group has £100m of committed facilities available through to mid-2012. The banking facilities are subject to financial covenants, all of which have been met during the year. These committed facilities supplement the cash balances in providing financial security to the Group.
The Group has clear treasury policies which set out approved counterparties and determine the maximum period of borrowings and deposits. Deposits are restricted to periods of no longer than three months. The Group has very limited exposure to foreign exchange risk because its operations are based almost entirely in the UK; non-UK suppliers are used only occasionally.
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
Although the Group does not use derivatives, some ofits joint venture businesses use interest rate swaps to hedge floating interest rate exposures and Retail Prices Index swaps to hedge inflation exposure. The Group considers that its exposure to interest rate and inflation movements is appropriately managed. Further information on the Group's use of financial instruments is explained in the consolidated financial statements.
The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in this business review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described above. In addition, note 29 to the consolidated financial statements includes the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details ofits financial instruments and hedging activities; and its exposure to credit risk and liquidity risk. The Board aims to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the Group and achieve a suitable balance between higher returns that may be possible through borrowing and the stability afforded by a sound capital position. There were no changes in the Group's approach to capital management during the year and the Group is not subject to any capital requirements imposed by regulatory authorities.
As at 31 December 2010, the Group had cash of £149m and committed banking facilities of £100m extending until mid-2012.
The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level ofits current banking facilities.
The directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the annual financial statements.
The Group's achievement ofits goal and strategies is subject to a number of key risks. Risk management processes are designed to continually assess, identify, understand the key risks and challenge the effectiveness of mitigating actions. The Board considers that the most significant risks and the main mitigating actions are:
The market sectors in which the Group operates are affected to varying degrees by general macroeconomic conditions and changes in Government spending priorities. The Group is particularly focused at present on managing the impact of the challenging economic conditions and continuing to invest for the long-term to be prepared for opportunities when they arise.
Excessive consumption of cash leads to inability to carry out work
Investigation and proposal to clients of new methods of project finance provided by the Group and its partners
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Group operates within a constantly changing regulatory environment governed by legislation and industry specific regulation. Non-compliance with legislation or regulations can damage the Group's reputation, market standing and ability to secure new business and may lead to financial penalties.
The Group's health and safety and environmental performance affect employees, subcontractors and the public and, in turn, can affect its reputation and commercial performance.
Environmental or safety incidents caused by the Group's activities
Fines and prosecution
Key executives with specific responsibility for HSE are identified in each division and on the Board
The ability of the Group to secure and deliver projects successfully to clients, grow in profitability and develop strong, sustained financial performance relies on the quality ofits employees. It is critical that talented individuals are attracted, developed and retained.
The Group regularly identifies and evaluates potential acquisitions and it is important that acquisitions deliver the planned benefits.
Excessive resources required to be directed towards the acquisition
All acquisitions approved at Board level
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Group undertakes several hundred contracts each year and it is important that contractual terms reflect risks arising from the nature and complexity of the works and the duration of the contract.
The terms on which the Group trades with counterparties affect its liquidity.Without sufficient liquidity, the Group's ability to meet its liabilities as they fall due would be compromised, which could ultimately lead to its failure to continue as a going concern. Further disclosure on liquidity risks and liquidity risk management is contained in the consolidated financial statements on pages 111 to 114.
Group cannot continue in business or cannot grow as desired, due to lack offunds
Work only carried out for financially sound clients, established through credit checks
External view of the highly sophisticated National Institute for Biological Standards Research Facility designed and built by Morgan Sindall, containing a laboratory and controlled environments.
The Group's Construction & Infrastructure division was created during 2010 by the merger of the existing Construction division with the Infrastructure Services division; it also includes the design activities of Morgan Sindall Professional Services.
The new division offers a national integrated service for design, construction and infrastructure to public and private sector clients.
Revenue £m
| 2009 743 770 |
1,250 |
|---|---|
| 1,513 | |
| 2008 813 799 |
1,612 |
Operating profit £m
| 2010* | 14.3 | 12.6 | 26.9 |
|---|---|---|---|
| 2009 | 13.0 | 17.1 | 30.1 |
| 2008 | 9.5 | 14.4 | 23.9 |
Operating margin %
| 2010* | 1.9 | 2.5 | 2.2 |
|---|---|---|---|
| 2009 | 1.7 | 2.2 | 2.0 |
| 2008 | 1.2 | 1.8 | 1.5 |
Construction Infrastructure
*Before amortisation and non-recurring items.
| 2010 | 2.0 | |
|---|---|---|
| 2009 | 1.6 | |
| 2008 | 2.2 |
Revenue for the year reduced by 17% due to a slowdown in the infrastructure market caused by the timing of some major projects compounded by the completion of some long-term frameworks in the utilities sector. The operating profit margin has increased to 2.2% (2009: 2.0%) due to a combination of realised cost savings and improving margin performance underpinned by the division's improving operational performance.
The division's operating profit of £26.9m (2009: £30.1m) represents a robust performance given the competitive pressures in the market and the change in priorities brought about by the CSR.
The Construction & Infrastructure division continued to perform well, in securing a number of high quality projects and frameworks during 2010. Significant projects included the five year Lee Tunnelfor ThamesWater, a £417m joint venture project in which the division has a 50% share, the successful appointment, in joint venture, to the Highways Agency's four year £2bn motorways framework and the £400m Hull Building Schools for the Future programme. In addition, the division has been appointed, in joint venture, to the five year £75m YorkshireWater framework and a ten year £500m framework for E.ON in central England.
We remain cautious about the outlook in the short-term due to the sharp reduction in public sector capital spending and the anticipated modest recovery of the commercial sector. Opportunities remain in the infrastructure market due to the planned investment in power generation and utilities infrastructure.
The forward order book for Construction & Infrastructure has increased by £0.4bn to £2.0bn (2009: £1.6bn). This level of secured workload provides underlying stability for the division whilst its extended capabilities ensures that it remains in a strong position to secure further high quality, technically demanding projects. In addition the division is working with both Urban Regeneration, on theWakefield and Doncaster regeneration schemes, and the Investments unit to create innovative financing options to enable projects to progress.
'2010 has been a year of change as we have adapted our operating structure to better align us to growing sectors of the construction market. Our extended capabilities, trading under the Morgan Sindall name, enable us to better serve our current clients and importantly to offer a service that meets the needs of our future markets. Growth opportunities will come from both the private and regulated sectors and through new procurement styles likely to evolve in the public sector.'
Graham Shennan Managing Director, Construction & Infrastructure
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
The Group's Affordable Housing division operates under the Lovell name providing a full-service capability to develop, construct, refurbish and maintain affordable housing. The division operates a full mixed tenure model to create homes for rent, shared ownership and sale on the open market.
Revenue £m
| 2010 | 387 |
|---|---|
| 2009 | 374 |
| 2008 | 377 |
| 2010* | 16.1 | |
|---|---|---|
| 2009 | 14.9 | |
| 2008 | 21.0 |
Operating margin %
| 2010* | 4.2 | |
|---|---|---|
| 2009 | 4.0 | |
| 2008 | 5.6 |
Order book £bn
| 2010 | 1.5 |
|---|---|
| 2009 | 1.3 |
| 2008 | 1.3 |
*Before amortisation and non-recurring items.
Although it has been another tough year for open market housing due to the lack of available mortgage finance, the impact of new acquisitions has enabled Affordable Housing to increase revenue in 2010 to £387m (2009: £374m).
The operating profit margin has been improved to 4.2% (2009: 4.0%) and operating profit was £16.1m (2009: £14.9m). This increase in revenue and profit was largely driven by the growth in the division's response and planned maintenance capability.
The Affordable Housing division has extended its client base during 2010 and continued to secure key schemes across all work streams in the affordable housing market. As a direct result of the Powerminster and Connaught acquisitions, the division has been able to secure new long-term contracts with 45 local authorities and housing associations. The acquisitions have transformed Affordable Housing and helped it to become a full-service provider of affordable housing covering open market and new build social housing, planned and response maintenance. They have also reinforced the division's national coverage as well as extending its geographic coverage in the south and south-west of England.
In addition to the acquisition, key new project wins in 2010 included a three year, £75m redevelopment framework for Glasgow City Council, a £45m new build social housing contract to create 545 new homes forWest Lothian Council and a position on the £135m four year framework to deliver 1,500 new homes in central Scotland for Places for People. The division also secured three schemes for Southampton City Council to build energy efficient homes worth over £30m. Another notable contract secured was its first project under the Homes and Communities Agency's Delivery Partner Panel at Longfield Drive, Bradford (£6m).
The value of the division's forward order book at the start of 2011 was improved at £1.5bn (2009: £1.3bn). The division has largely completed the integration of Powerminster and Connaught and expects further expansion ofits activities in 2011 as it seeks to build on these broader capabilities and exploit both response and integrated maintenance opportunities. In addition, the division is pursuing crosssubsidy mixed tenure projects as well as other innovative financing options with the Investments unit to address the changes in the UK social housing model announced in the CSR.
'This has been a year of considerable change for the Affordable Housing division, underlined by a robust financial performance. Our capability to work with our clients through the entirety of their housing property cycle gives an exciting proposition to the market. Added to this, the transformation of our integrated maintenance capabilities through the two acquisitions in the year leaves us in a good position for further expansion of our activities in 2011 and beyond.'
Stewart Davenport Managing Director, Affordable Housing
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
The division
The Group's Fit Out division undertakes refurbishment and fit out projects in the office, education, retail, hotel and leisure sectors. Following a reorganisation in 2010, this is now delivered through Overbury as a national fit out operator and Morgan Lovell as a specialist in the design and build of offices.
Revenue £m
| 2010 | 415 | |
|---|---|---|
| 2009 | 291 | |
| 2008 | 474 | |
Operating profit £m
| 2010* | 14.8 | |
|---|---|---|
| 2009 | 13.8 | |
| 2008 | 25.8 | |
Operating margin %
| 2010* | 3.6 | |
|---|---|---|
| 2009 | 4.7 | |
| 2008 | 5.4 | |
Order book £m
| 2010 | 180 |
|---|---|
| 2009 | 171 |
| 2008 | 124 |
*Before amortisation and non-recurring items.
Fit Out continued to pursue and secure high quality fit out and refurbishment projects during 2010. Key contracts secured for the division included the delivery of a media learning campus for the University of Salford, refurbished offices in Glasgow for Hewlett Packard and for Microsoft in Reading. In London, significant contracts included the refurbishment of the Shell office headquarters building on the South Bank, the fit out of new offices for Macquarie Bank, the Bank of China and the Bank of Tokyo, and new trading facilities at Barclays Capital. In addition, the division secured projects under long-term frameworks for RBS and Lloyds Banking Group. In the education and leisure sectors, key projects included the refurbishment of the London Palladium and Thompson's Hotel in Belgravia as well as education sector projects for the University of London and London Metropolitan University.
The division's forward order book is at a similar level to the start of 2010 at £180m (2009: £171m). Both the London and regional office markets are expected to remain competitive and tighten in 2011. In London, the lack of major property developments completing in 2011 will mean the fit out market is expected to tighten in the short-term.
'2010 was a year of strong growth in revenue as Overbury was able to secure a high percentage oflarger, London office fit out projects, a consequence of occupiers chasing limited grade A space. Tough competition persists in both the London and regional office markets. However, our reorganisation, combined with our drive for Perfect Delivery and the best customer experience, will continue to differentiate us in our markets and enable us to secure high quality opportunities as they become available.'
A major mixed use urban regeneration scheme comprising social and private housing, retail, offices and leisure amenities, the final housing phase of which was released to market during 2010 and all units were sold.
The Group's Urban Regeneration division works in partnership with landowners, local authorities and investors to progress development opportunities and maximise the contribution to urban renewal through mixed use projects, typically creating commercial, leisure, residential and community facilities.
Revenue £m
Operating profit £m
| 2009 0.7 |
|
|---|---|
| 2008 | 7.8 |
Share of development pipeline £bn
| 2010 | 1.4 |
|---|---|
| 2009 | 1.4 |
| 2008 | 1.3 |
*Before amortisation and non-recurring items.
Urban Regeneration saw a modest improvement in market conditions, which helped it to deliver revenue of £46m (2009: £32m). This growth was delivered through strong sales of open market residential units, an increase in development management fee income from regeneration projects, progress on a number offorwardsold new developments and land trading opportunities. The increased activity led to a recovery in operating profit to £2.0m (2009: £0.7m). Also as part ofits strategy to enhance its portfolio, the division was successful during the year in buying out its joint venture partners on three schemes, which generated a one-off gain of £2.0m in addition to the division's operating profit of £2.0m.
The division continued with its strategy of targeting and developing high quality regeneration opportunities. During the year, it commenced construction of two new major regeneration projects; at Doncaster, a £300m town centre redevelopment where the first phase comprises 185,000 sq ft of new council offices and at Canning Town where the first phase will deliver 271 residential apartments in a 21 storey tower. It also brought forward the latest phase ofits development at Eurocentral Business Park in Lanarkshire with the construction of two new energy efficient distribution units totalling 150,000 sq ft. AtWakefield,following the completion of the first phase of apartments, offices and retail, construction has begun on the new council offices. 2010 also saw the release and subsequent sale of the final 54 residential units at Chatham Place, Reading.
The division's share ofits development pipeline, its best measure offorward activity, remains at £1.4bn. This is due to the division concentrating its resources on continuing to develop its existing portfolio whilst there have been few quality development opportunities in the market during 2010. This portfolio is now in an enhanced position and, through the restructuring of deals, the division is well placed to act on opportunities as they present themselves in the medium-term.
'Our innovative development of existing schemes and acquisition of partners' shareholdings in a number of our joint venture companies has enhanced our portfolio in 2010. Strong residential sales in the first half of the year, increased fee income and opportunistic land trading have underpinned our financial performance. Good progress also continues to be made with our two national strategic partnerships, ECf and ISISWaterside Regeneration. Closer joint working within the Group is creating new opportunities for us.'
Matt Crompton and Nigel Franklin Joint Managing Directors, Urban Regeneration
Wigan Life Centre,facilitated through Morgan Sindall's Investments unit, under construction in 2010, will be completed in 2011 creating a state-of-the-art leisure, health, learning and information complex and revitalise the town's civic heart.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Investments unit facilitates project finance for a range of construction, regeneration and infrastructure projects. The unit functions as a facilitator for projects that involve other Group divisions as a delivery partner in order to secure construction revenue as well as investment returns.
Portfolio value £m
| 2010 | 53 | |
|---|---|---|
| 2009 | 38 | |
| 2008 | 28 | |
| 2010 | 4.0 | ||
|---|---|---|---|
| 2009 | 3.0 | ||
| 2008 | 1.0 |
| 2010* | (3.3) |
|---|---|
| 2009 | (3.0) |
| 2008 | (2.2) |
*Before amortisation and non-recurring items.
The directors' valuation of the investment portfolio increased significantly during 2010 to £53m (2009: £38m). This is due to both increased value created from existing schemes and the achievement of financial close during 2010 on the Hull BSF Programme and Tayside Mental Health PFI Project. Revenue was £4m (2009: £3m) and the operating loss was £3.3m (2009: £3.0m). This reflects the significant upfront costs of creating and securing project opportunities.
The role ofInvestments is likely to become increasingly important as changes to procurement methods and reductions in public sector spend through traditional routes affect the market. Its ability to develop alternative financing options can help the public sector achieve its underlying construction needs, particularly in health, education, infrastructure and housing. The structure and expertise of Investments places the Group in an excellent position to create opportunities for construction-related projects and reinvigorate schemes in an uncertain funding environment.
| Equity and sub-debt £m |
Valuation £m |
|
|---|---|---|
| Invested | 14.5 | 41 |
| Committed | 12.0 | 12 |
| 26.5 | 53 |
At 31 December 2010, the Group had total equity and subordinated debt, invested and committed, in its portfolio of PPP/PFI concessions of £26.5m (2009: £19.2m). Of this total, £14.5m had been invested and £12.0m is committed to be invested over the next three years.
At 31 December 2010, the directors' valuation of the PPP/PFI concession portfolio, prior to the application of Group tax, is £53m (2009: £38m). The valuation is derived from the Group's latest detailed financial models discounted using rates appropriate to the particular scheme's nature and stage of development. These vary from 7.0% to 9.0% (post tax). Committed, but not currently invested, subordinated debt is added to this discounted cash flow value to give the directors' valuation. Investment properties are valued on a traditional basis using property yields that reflect the nature of the leases and stability of the tenants.
The valuation of this portfolio is based on discounting expected future cash flows but does not include potential refinancing gains or projects at preferred bidder stage or profit made by Investments from providing services or profit made by other parts of the Group that perform the construction, maintenance or facilities management work.
'Whilst 2010 has been a year of uncertainty for many public sector schemes the Investments unit has been able to continue to grow its portfolio and improve its offer to clients following the change of Government. There is now an appetite in the market for innovative and flexible financing options to help tackle the country's continuing need for new homes, schools, health facilities and improvements in infrastructure. We are ideally placed to be able to stimulate activity in the market and facilitate construction opportunities for the Group's divisions.'
Ernie Battey Managing Director, Investments unit
| KPI's | 2010 | 2009 | 2008 | ||
|---|---|---|---|---|---|
| Financial | Revenue | £m | 2,102 | 2,214 | 2,548 |
| Profit before tax, amortisation and non-recurring items | £m | 51.3 | 51.5 | 71.4 | |
| Profit before tax | £m | 40.7 | 44.7 | 62.3 | |
| Adjusted EPS | pence | 92.9 | 93.9 | 127.8 | |
| Basic EPS | pence | 70.5 | 77.9 | 106.3 | |
| Total dividend | pence | 42.0 | 42.0 | 42.0 | |
| Operating margin | % | 2.4 | 2.3 | 2.8 | |
| Average cash in bank | £m | 63 | 31 | 77 | |
| Year end cash balance | £m | 149 | 118 | 120 | |
| Committed banking facilities | £m | 100 | 100 | 75 | |
| Forward order book | £bn | 3.6 | 3.2 | 3.7 | |
| Share of development pipeline | £bn | 1.4 | 1.4 | 1.3 | |
| Non-financial | People | ||||
| Fatalities | no. | 0 | 0 | 1 | |
| Major incidents | no. | 32 | 45 | 79 | |
| Over three day incidents | no. | 50 | 68 | 94 | |
| Total of all reportable incidents | no. | 82 | 113 | 173 | |
| Accident incident rate(1) | 429 | 519 | 719 | ||
| Average number of employees | no. | 7,662 | 7,977 | 8,585 | |
| Average absence due to sickness days | no. | 3.0 | 2.0 | 4.5 | |
| Proportion of women employed | % | 13 | 16 | 15 | |
| Proportion of ethnic minorities employed | % | 15 | 7 | 6 | |
| Average training days per employee | no. | 2.0 | 5.0 | 5.0 | |
| Apprentices at different stages of development | no. | 196 | 138 | 188 | |
| Undergraduates on years out or being sponsored | no. | 65 | 94 | 110 | |
| Graduates recruited during the year | no. | 102 | 50 | 37 | |
| Planet | |||||
| Total waste diverted from landfill | tonnes | 1,483,518 | 1,411,358 | 938,090 | |
| Total waste produced | tonnes | 1,699,569 | 1,701,214 | 1,400,262 | |
| Total waste diverted from landfill | % | 87 | 83 | 67 | |
| Percentage of directly purchased timber from | |||||
| FSC/PEFC certified sources | % | 88 | 88 | 77 | |
| Electricity used in permanent buildings(2) | kWh | 8,686,252 | 4,537,548 | N/R | |
| Gas used in permanent buildings | kWh | 1,986,000 | 1,442,676 | N/R | |
| CO2 equivalent emissions for Group vehicle fleet |
tonnes | 28,184 | 27,466 | N/R | |
| Profit | |||||
| Perfect Delivery scores | % | 83 | 84 | 84 |
(1) The accident incident rate is per 100,000 persons employed and is calculated as:
Number of reported incidents ––––––––––––––––––––––––––––––––––––––––––––– x 100,000
Average number of people employed
(2) During 2010, the Group has reviewed and improved its reporting of data for carbon equivalent emissions. The 2010 figure reflects the increased number of permanent buildings for which the Group has collected data from 29 to 41.
Morgan Sindall Group plc Annual report and accounts 2010 Directors' report: governance 51
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
John is the executive chairman, taking overall responsibility for the Group's strategy and ensuring that the Board functions effectively. He co-founded Morgan Lovell in 1977 which then reversed intoWilliam Sindall plc in 1994 to form Morgan Sindall Group plc. He was chief executive from 1994 to 2000 and has been executive chairman since 2000.
Paul is the Group's chief executive and takes responsibility for developing and implementing the Group's strategy and for managing the business. Appointed chief executive in March 2003, his previous positions include managing director of Accord plc, managing director of Cleanaway Limited and manager at McKinsey & Co. Inc.
David, as the Group's finance director, has Board responsibility for the Group's financing,financial reporting and information systems. Appointed finance director in April 2004 having been with the Group in finance roles since 1997, he had previously worked at Smiths Group plc and Ernst & Young where he qualified as a chartered accountant.
Paul, as commercial director, is the Group's senior executive for commercial operations. In addition, he has Board responsibility for health, safety and sustainability. Appointed a director in April 2000, he is a chartered surveyor and had previously held the position of John Laing plc.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
Senior independent non-executive director Appointed: December 2008
Adrian assumed the role of senior independent director in May 2010 after two years with the Group. His career includes 30 years with BDO Stoy Hayward, the last eight as managing partner, before becoming chief executive and then consultant at Reynolds Porter Chamberlain LLP until 2009. Adrian brings experience from a number of other non-executive directorships, including H R Owen plc, M&C Saatchi plc and Safestore Holdings plc.
Independent non-executive director Appointed: September 2004
Gill is currently group marketing director of Co-operative Group Limited. Gill's previous positions include senior roles at MasterCard UK, John Lewis plc,Woolworth plc, Kingfisher plc and KPMG plc.
Independent non-executive director Appointed: August 2007
Geraldine is currently managing director of The Executive Coaching Consultancy. Previously, she was head of group management development for The Burton Group plc (now Arcadia plc) and with
Independent non-executive director Appointed: December 2009
Patrick's career includes 23 years with Microsoft, culminating as chairman for Europe, Middle East and Africa from 2003. Since leaving Microsoft in 2006, he has served on the boards of a number of European public and private companies. He is currently a non-executive director of Victrex plc, CPP Group plc and a number of private companies as well as a member of the advisory board to a division ofING Bank NV.
Independent non-executive director Appointed: March 2010
Simon is currently chief marketing officer at Standard Life plc and has run his own marketing consultancy since 1992, after leaving Ashridge College where he was head of the marketing faculty. He has previously held marketing roles at companies including Sears plc, EMAP plc and Barclays plc.
The Board recognises the importance of high standards of corporate governance and is committed to managing the Group's affairs in accordance with the principles of good governance set out in section 1 of the Combined Code on Corporate Governance published in June 2008 by the Financial Reporting Council ('the Code'). A copy of the Code is available from the FRC's website (www.frc.org.uk).
In accordance with the Listing Rules, the Company is required to confirm whether it has complied with the relevant provisions of section 1 of the Code and to report on how it has applied the main principles of section 1 of the Code.
The Board has complied with the provisions of section 1 of the Code throughout the year ended 31 December 2010 and up to the date of this report. A summary of how the Company has applied the main principles of the Code is set out below.
The Board has noted the introduction of the UK Corporate Governance Code, which applies to accounting periods beginning on or after 29 June 2010, and will report on its compliance with this code next year.
The Board currently comprises an executive chairman, three further executive directors and five non-executive directors. Simon Gulliford joined the Board as a non-executive director on 1 March 2010 and JonWalden served during the year as a non-executive director until the annual general meeting on 6 May 2010. All of the non-executive directors are considered by the Board to be independent and the Board's structure, therefore, meets the requirements of the Code.
Adrian Martin is the senior independent director.
The Board has a separate chairman and chief executive. John Morgan, as executive chairman, takes responsibility for the overall strategy of the Group and for leading the Board and ensuring that it functions effectively whilst Paul Smith, as chief executive, is responsible for managing the business and critically assessing the Group's strategy. The Board has set out and agreed a schedule that describes their individual roles and responsibilities.
The Board considers that the balance of relevant experience amongst its members enables it to exercise effective leadership and control of the Group. It also ensures that the decision making process cannot be dominated by any individual or small group ofindividuals.
The directors are aware of their duties under the Companies Act 2006 provisions relating to the management of conflicts ofinterest. The Company's articles of association ('the Articles') were amended in 2008 to give the Board a general power to authorise potential conflicts ofinterest. In addition to the directors' duty to seek Board approvalfor any new potentially conflicting situations or changes to existing interests, the register of potential conflicts is circulated for review by the Board on an annual basis. This process was carried out satisfactorily during the year.
The Articles require each director to submit himself or herself for election by shareholders at the first annual general meeting after his or her appointment and for re-election at every third annual general meeting thereafter. John Morgan, PaulWhitmore, David Mulligan, Gill Barr and Geraldine Gallacher were all last appointed in 2008 and will submit themselves for re-election at the forthcoming annual general meeting. Their biographies are set out on pages 52 and 53. The Board has considered the recommendation of the nominations committee on the composition of the Board. In particular, Gill Barr's reappointment for a seventh year was subject to a particularly rigorous review, in accordance with the provisions of the Code relating to nonexecutive directors who serve for more than six years. It has also considered the formal performance evaluation described below of the Board's performance and that ofindividual directors. Following such performance evaluation, the Board believes that the performance of the non-executive directors, Gill and Geraldine, continues to be effective and that they continue to show commitment to the role. In particular, Gill continues to contribute to Board discussion, drawing on her experience in retail and marketing, whilst Geraldine's strength is her experience in executive development and people skills.
Ten scheduled meetings of the Board were held during the year. The key purposes of the scheduled meetings were to review all significant aspects of the Group's activities, to supervise the executive management, to review the overall system ofinternal control and risk management and to make decisions in relation to those matters that are specifically reserved to the Board. There is a formal schedule of these matters, which includes the approval of the Group's strategic plans, annual budget, significant capital expenditure and investment proposals, major projects, acquisitions and disposals, internal control arrangements and annual and half year results. Other specific responsibilities are delegated to the Board committees described below and under the Group's delegated authorities.
A formal agenda for each scheduled meeting is agreed with the chairman and is circulated in advance of the meeting to allow time for proper consideration, together with relevant papers including key strategic, operational and financial information.
Attendance ofindividual directors during 2010 at scheduled Board meetings and meetings of the remuneration, audit and nominations committees are set out below.
| Board | Remuneration committee |
Audit committee |
Nominations committee |
|
|---|---|---|---|---|
| Total no. of meetings | 10 | 6 | 3 | 2 |
| John Morgan | 10 | — | — | 2 |
| Paul Smith | 10 | — | — | — |
| David Mulligan | 10 | — | — | — |
| PaulWhitmore | 10 | — | — | — |
| Gill Barr | 10 | 6 | 2 | 2 |
| Patrick De Smedt | 10 | 5 | 3 | 2 |
| Geraldine Gallacher | 10 | 2 | — | 2 |
| Adrian Martin | 10 | 4 | 3 | 2 |
| Simon Gulliford(1) | 8 | — | — | 1 |
| JonWalden(2) | 3 | 4 | 1 | 1 |
(1) Simon Gulliford attended all the Board and nominations committee meetings after his appointment.
(2) JonWalden ceased to be a director on 6 May 2010.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
Non-attendance by directors at committee meetings was due to illness or conflicting commitments and, in the latter case, was previously agreed with the chairman of the committee.Where possible, papers were read in advance and comments passed to the chairman prior to the meeting.
Three of the scheduled board meetings in 2010 were held at offices of the Group's divisional operations and were combined with site visits and presentations by divisional management. These meetings provided the non-executive directors with the opportunity to meet the senior managers in the divisions and to increase their knowledge and understanding of the Group's operations and thus contribute more effectively to discussions of strategic and operational issues.
In addition to the scheduled meetings, the Board held a strategy day at which the strategy and direction of the Group were reviewed and debated.
Newly appointed directors receive a full induction, including a detailed information pack, visits to the Group's operations and meetings with senior divisional management. Training on the role and responsibilities of directors is offered on appointment and subsequently as necessary. The non-executive directors update their knowledge of and familiarity with the Group by regular visits to its operations. There are agreed procedures by which directors are able to take independent professional advice, at the expense of the Company, on matters relating to their duties. The directors also have access to the advice and services of the company secretary.
The Board continues to find its internal process an effective method of evaluating the Board's performance, and that ofits committees. During the year, this process took the form of an internally developed assessment form, requiring each director to provide a rating and comments against a series of statements. Particular emphasis was given to matters highlighted as action points from last year's evaluation process.
The statements relating to the Board as a whole involved consideration of a broad range of matters including:
In relation to the committees, the assessment form focused on the frequency and conduct of meetings, the quality of information provided to the committee and of reports from the committee to the Board and the extent to which the committees were fulfilling their terms of reference.
Evaluation ofindividual directors took the form of written feedback from the other directors, which was followed by one to one meetings between the chairman and each director and, in the case of the chairman's evaluation, between himself and the senior independent director.
The responses to the assessment form and the written feedback were aggregated and circulated to the directors and discussed at a subsequent Board meeting, leading to a number of agreed actions for the forthcoming year.
The Board has established three committees: the audit, remuneration and nominations committees. Each committee has terms of reference, approved by the Board, setting out its authorities and responsibilities. Copies of the terms of reference are available on the Company's website.
| Members |
|---|
| Adrian Martin (chair) Gill Barr Patrick De Smedt JonWalden (resigned 6 May 2010) |
All committee members are independent non-executive directors. Adrian Martin took over as chair when JonWalden retired at the annual general meeting in May 2010. Biographical details of each member of the committee are set out on page 53. The Board is satisfied that Adrian Martin, who is a fellow of the Institute of Chartered Accountants in England andWales and formerly a partner in BDO Stoy Hayward, has the recent and relevant financial experience required to fulfil the role.
The committee had three scheduled meetings during the year. The first took place prior to the announcement of the Company's results for 2009 and approval of the annual report, the second prior to the announcement ofits half year results and the third before commencement of the audit for 2010. Senior representatives from the external auditors, the finance director and the Group head of audit and assurance were invited to attend each of these meetings. The committee also met privately with the external auditors and the Group head of audit and assurance.
The main purpose of the meetings was to review the scope and results of the audit and the effectiveness of the external audit process, to monitor the integrity of the annual and half year financial statements and to discuss with the external auditors their overall work plan for the forthcoming audit. In addition, at each meeting the committee reviewed reports from the Group head of audit and assurance on the results of reviews carried out by the internal audit team. Further details of the internal audit function are set out under internal controls below.
The chairman of the audit committee reports to the full Board on matters of significance arising at meetings of the committee.
To fulfil its obligations, the committee reviewed the external auditors' presentation of their policies and safeguards to ensure their continued independence within the meaning of all regulatory and professional requirements and to ensure that the objectivity of the audit engagement partner and audit staff had not been impaired. This included details of changes in external audit executives in the audit plan in accordance with the external auditors' policy on rotating audit executives. Those policies and safeguards, together with the Company's own policy on engaging the external auditors for non-audit work, enabled the committee to confirm that it was satisfied with Deloitte LLP's continued independence and objectivity.
As part ofits responsibility for assessing the effectiveness of the external audit, the committee discussed the external audit plan at the audit committee meeting held in November. At the meeting prior to the announcement of the preliminary results, it reviewed the external auditors'fulfilment of the agreed audit plan and any major issues highlighted as part of the external audit.
The Company's policy on the engagement of the external auditors for non-audit related services provides that, where the fees for such services would exceed either an absolute limit or a specified proportion of the audit fee, they should be referred to the committee for approval.Where fees fall below the threshold, they have to be approved by the finance director. No non-audit services to the Company provided by Deloitte LLP in 2010 required the approval of the committee. The fees for non-audit services during the year are set out in note 2 to the consolidated financial statements on page 89. These represented approximately 9% of the audit fee and comprised taxation services to joint ventures. The committee has reviewed the nature of the work and level offees for these services and concluded that this has not affected Deloitte LLP's objectivity or independence.
The committee considers the reappointment of the external auditor each year and makes a recommendation to the Board. The committee has satisfied itself that Deloitte LLP, the external auditors, remains independent and effective. The committee has recommended to the Board that Deloitte LLP be reappointed.
The committee also reviewed the Group's raising concerns policy containing arrangements by which employees may, in confidence, raise concerns about possible wrongdoing in the workplace, unethical behaviour or other matters of concern. Following recommendations made by the committee, during the year the Company introduced an external call line provider and a new process for investigating and following up calls in order to improve the effectiveness of these arrangements and to encourage employees with concerns to bring them to the attention of the Group. The committee reviews a summary of the calls received at each meeting, although any significant matter arising from a call would be brought to the attention of the committee without delay.
| Gill Barr (chair) |
|---|
| Patrick De Smedt |
| Geraldine Gallacher |
| Adrian Martin |
| JonWalden (resigned 6 May 2010) |
The activities of the committee during the year are set out in the separate remuneration report on pages 59 to 67.
Morgan Sindall Group plc Annual report and accounts 2010 Directors' report: governance 57
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
Members John Morgan (chair) Gill Barr Patrick De Smedt Geraldine Gallacher Adrian Martin Simon Gulliford (appointed 1 March 2010) JonWalden (resigned 6 May 2010)
The committee recommended to the Board that Simon Gulliford be appointed as an additional non-executive director. This followed an introduction to the Company through a personal recommendation and a careful review of Simon's skills and experience as well as several interviews and meetings with the committee and the executive directors.
The nominations committee also met formally during the year to review the structure, size and composition of the Board. Its recommendation to the Board was that,following the changes to the Board at the end of 2009 and during 2010, no further changes were required at this time.
The executive directors undertake a programme of regular communication with institutional shareholders and with analysts covering the Company's activities. In particular, presentations are made to institutional investors and analysts following the announcements of the preliminary and half year results.Written feedback from these meetings and presentations is distributed to all members of the Board. The senior independent director meets from time to time with major shareholders and the other non-executive directors are also available to meet with them to listen to their views.
The Company encourages all shareholders to use the annual general meeting as an opportunity for effective communication with the Company. All of the directors attended the annual general meeting held in 2010. Details of proxy votes submitted for each resolution at general meetings, including proxy directions to withhold votes, are published on the Company's website.
The Board acknowledges that it has overall responsibility for the Group's system ofinternal control and for reviewing its effectiveness. The internal control system is designed to manage rather than eliminate the risk offailure to achieve certain business objectives due to circumstances which may reasonably be foreseen. It can only provide reasonable, but not absolute, assurance against material misstatement or loss. The system ofinternal control, which includes financial, operational and compliance controls, is based on a process ofidentifying, evaluating and managing risks. It accords with the guidance in the Turnbull Report and was in place for the year under review and up to the date of approval of this report.
The key features of the Group's system ofinternal control are as follows:
The Group's operating structure comprises four operating divisions and one specialist unit, each with its own management board which is given authority and responsibility for managing its division or unit within a framework of overarching Group policies, reporting lines and detailed delegated authorities, which ensure that decisions and approvals are made at the appropriate level. Whilst responsibility for managing each division is delegated to the individual management team as far as practicable, responsibility for certain of the Group's key functions, including treasury, internal audit, pensions and insurance, is retained at Morgan Sindall Group plc level.
The Board recognises that an essential part of the responsibility for running a business is the effective safeguarding of assets, the proper recognition ofliabilities and the accurate reporting of profits. The Group has a comprehensive budgeting and forecasting system in place which is regularly reviewed and updated, together with a management reporting system established in each division for monthly reporting to the Board. In addition, the internal audit plan for the year includes specific financial reviews to validate the integrity of the divisions' management accounts.
There are detailed procedures and defined levels of authority in relation to corporate transactions, investment, capital expenditure, significant cost commitments and asset disposals with approvals required from the Board, the executive directors or divisional boards, depending on the value and/or nature of the investment or contract.
Individual tenders or projects are subject to detailed review with approvals required at relevant levels and at various stages from commencement of the bidding process through to contract award. As part of this process, the financial standing of both clients and key subcontractors is assessed.
Robust procedures exist to manage the ongoing risks associated with contracts with monthly reviews at an appropriate level of each contract's performance covering both financial and operational issues.
The Group continually monitors current and forecast cash and working capital balances through a regime of daily and monthly reporting.
The Group has well established safety systems including site visits and regular training and updates. Monthly monitoring and reporting to the Board includes a report on the Group's performance in relation to health and safety matters and environmental compliance. Further details are included under Sustainability on pages 20 to 23.
The Board has reserved to itself specific responsibility for the formulation of the risk management strategy of the Group. A formal process is in place through which the Group identifies the significant risks attached to its strategy and objectives, confirms the control strategy for each risk, identifies the root cause and appropriate treatment for each, including the relevant internal controls and actions required. Internal control and risk management systems are embedded in the operations of the divisions. A consolidated report of each of the divisional risk reviews, together with risks identified at Group level, are compiled in a Group risk register, which is updated and reviewed by the Board twice yearly. The principal risks identified as facing the Group are highlighted in the business review on pages 36 to 39. In addition to the standing risk register review process, the Board devotes time during some of the scheduled Board meetings to considering the commercial issues which at the time represent the greatest risks to the achievement of the Group's objectives and the mitigating actions in place to address these risks.
The Group head of audit and assurance is responsible for managing the internal audit function, overseeing the divisional heads ofinternal audit and assisting with risk management practices. Internal audit and assurance work carried out during the year included operational, project and financial reviews across the key business units within the Group. The results of these reviews were recorded in audit reports and presented to the audit committee. The status of agreed management actions to address identified operational weaknesses is actively tracked until implementation.
The Group head of audit and assurance reports to the Board monthly on a range of performance metrics including the current status of agreed audit actions and progress against the annual audit plan.
The internal audit process is supplemented by a rolling programme of peer group reviews within the divisions, which assist in the professional development of the individual staff concerned whilst, at the same time, providing a mechanism for the cross-fertilisation ofideas and best practice throughout the divisions. These reviews are overseen by the divisional heads of internal audit and tracking of agreed management actions is included within the overall internal audit process.
The Board has conducted a review of the effectiveness of the system ofinternal controls for the year ended 31 December 2010 and for the period to the date of this report. The process included a formal review conducted by the Board of the Group risk register, referred to under Risk management above, as well as a review of the results ofinternal audit work and the overall effectiveness of the process.
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
Despite robust financial and operational performance by the Group in 2010, our markets continue to face economic challenges and cuts in public spending. The Remuneration committee has continued to monitor its remuneration policy for senior executives to ensure that it remains aligned to the Group's strategy.We continue to constrain fixed costs, although we considered that it was appropriate for there to be a modest increase in base salary levels in line with the average of the workforce generally,following two years without an increase. The key issue for the committee remains how to set appropriate targets for both short-term and long-term incentives in these challenging times and to ensure that the level of risk encouraged through the incentive plans remains appropriate. Once again, the committee carried out a careful review of the annual bonus and long-term incentive arrangements and believes that the awards to be granted this year will prove sufficiently challenging whilst still realistic, relevant and therefore valued by the recipients.
Chair of the Remuneration Committee
This report has been prepared by the Remuneration committee ('the committee') on behalf of the Board in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. This report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and the Combined Code on Corporate Governance ('the Code'). A resolution to approve the report will be proposed at the annual general meeting of the Company to be held on 5 May 2011.
The Companies Act 2006 ('the Act') requires the auditors to report to the Company's members on certain parts of the remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Act. The report has, therefore, been divided into separate sections for unaudited and audited information.
The members of the committee during 2010 were Gill Barr (chair), JonWalden (until 6 May 2010), Geraldine Gallacher, Adrian Martin and Patrick De Smedt. All members during the year were independent non-executive directors.
The committee is responsible for determining and agreeing with the Board the broad policy for the remuneration of the executive directors, including the executive chairman and it sets their salaries and remuneration packages. In addition, the committee monitors the structure and level of remuneration for other senior executives in the Group and is aware of pay and conditions in the workforce generally.
During the year, the committee received advice from Hewitt New Bridge Street ('HNBS') in relation to its consideration of the structure of the executive directors' remuneration for 2011. The committee also consulted the chief executive and the executive chairman but, in each case, not in relation to their own remuneration. HNBS provided advice to the Company on accounting for share awards but provided no other material services to the Company or the Group.
The committee's approach to executive directors' remuneration The general principles underlying the committee's approach to developing remuneration packages for the executive directors are:
The Committee takes account of remuneration levels offered to other senior executives within the Group as well as pay awards affecting Group employees when determining policy in relation to executive directors. During the year, the committee reviewed a breakdown of the total compensation received by the divisional managing directors during the last three financial years as well as details of their base salaries and annual bonus performance targets for the current financial year and a summary of employee pay awards for 2011 operating throughout the Group.
Proportionate breakdown of directors' remuneration
A significant proportion of the package is subject to performance related elements. The chart below shows that just under half of the value of the package at a broadly target level of performance comprises performance related elements whilst at a maximum level of reward (assuming a maximum bonus and full vesting of the Executive Remuneration Plan awards) more than 60% of the total remuneration comprises performance related elements.
The base salary ofindividual executive directors is determined by the committee prior to the beginning of each year and, if appropriate, in the event of a change in an individual's position or responsibilities. A formal benchmarking exercise of executive directors' remuneration is carried out periodically on behalf of the committee to ensure that it remains aware of relevant market data. The committee is aware, however, of the risk of an upward ratchet in remuneration levels through the use of comparative pay surveys.
At its meeting in November 2010, the committee noted the budgeted level ofincreases for the wider management group and the workforce generally (average of c.3%) and the current level of UK inflation and determined that the salaries of John Morgan, Paul Smith and David Mulligan for 2011 should be increased by 3% to £438,000, £515,000 and £304,000 respectively.
Morgan Sindall Group plc Annual report and accounts 2010 Directors' report: governance 61
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The committee has, however, increased the base salary of Paul Whitmore by 11% to £300,000. It decided that this increase was appropriate to recognise the increasing complexity and scope of his role as commercial director, arising from the Group's divisions undertaking larger and more complex projects. The impact of this salary increase on the total remuneration package has been quantified by reference to market data and, overall, the package remains in line with the committee's policy and is broadly midmarket compared with comparator businesses.
The Company makes contributions equivalent to 10% of base salary, in the case of Paul Smith and David Mulligan, to The Morgan Sindall Retirement Benefits Plan ('the Plan') and, in the case of the other executive directors, to their individual personal pension plans.
The Company operates a salary exchange process that allows all employees who are members of the Plan flexibility in setting the proportion in which salary and bonus is distributed between cash payments and additional pension contributions.Where additional pension contributions are made through the salary exchange process, the Company enhances the contributions by half of the saved employer's National Insurance Contribution ('NIC').
In response to the Government's changes to the taxation treatment of pension contributions from April 2011, the Company has agreed to relax the requirement that employees contribute a minimum percentage of their base salary to their pension saving where such contributions would result in the Annual Allowance or Lifetime Allowance being exceeded. It has also offered to reduce the employer pension contributions of senior employees whose contributions would otherwise exceed the Annual or Lifetime Allowance and to pay instead an additional cash allowance of an amount equal to the reduction less one half of the additional NIC cost to the Company. The committee has sanctioned these changes for the executive directors and, in particular, has agreed that with effect from 1 April 2011 the Company will pay Paul Smith a cash allowance equal to 10% of his base salary in lieu of any pension contribution less half of the Company's additional NIC cost.
The executive directors receive certain other benefits, principally a car allowance, private medical insurance, permanent health insurance and life assurance.
For the 2011 annual bonus plan, the committee has retained a performance condition based on a profit before tax and amortisation ('PBTA') target range, set relative to the Group's budget. This has the benefit of transparency and simplicity and encourages the executive directors to focus on the overall financial performance of the Group. Other performance measures have been considered by the committee but, as most of the Company's annualfinancial performance is reflected in its PBTA, the use of other financial and non-financial measures was considered inappropriate due to the additional complexity and, in the case of the latter, potential lack of objectivity around target measurement.
The committee has sought to structure the bonus with an appropriate sliding scale range around a challenging target for executives recognising, however, that the target has to be realistic in order to serve as a proper incentive and needs to take into account the difficult economic environment in which the Company continues to operate.
The maximum potential annual cash bonus for executive directors for 2011 is unchanged from 2010 at 100% of base salary.
The Group's current long-term incentive arrangement for senior executives is the Morgan Sindall Executive Remuneration Plan 2005 ('the 2005 Plan'). The 2005 Plan was approved by shareholders in April 2005.
A summary of the 2005 Plan is set out below.
In normal circumstances, the maximum annual award, which is subject to the achievement of testing performance targets, is for an award of performance shares worth (at face value as at the time of grant) 75% of base salary (100% of salary in exceptional circumstances). For a number of years, executives have been given the choice at the time of grant of receiving their awards either in the form of performance shares or by electing to receive market price share options to replace some or all of their performance shares at a rate offour share options for every one performance share.
In 2009, the committee reviewed the structure of the 2005 Plan and how it had been operating since first introduced in 2005. It concluded that the normal maximum award level of performance shares at 75% of base salary remained appropriate and that the ability to choose between an award of performance shares or a grant of share options catered for individual attitudes to risk and was, therefore, valued by the executives. The 4:1 ratio of share options to performance shares was also considered and, in view
of the additional share price risk attached to the value of the options and the tougher performance conditions which are imposed, the committee determined that this ratio remained appropriate. The committee has decided that the conclusions reached in 2009 remain valid and has adopted a similar structure for awards to be granted in 2011.
The committee continues to believe that long-term incentives should be structured so as to focus executives on maximising long-term profitability by use of a performance condition based on earnings per share before amortisation ofintangible assets and non-recurring items ('adjusted EPS') measured at the end of a single three year period, as this provides a clear linkage between performance and reward for senior executives and should be reflected over time in enhanced shareholder value.
The committee has decided to retain an absolute EPS performance condition for awards to be made in 2011 and the EPS target ranges required in respect of the financial year ended 2013 are set out below.
The committee remains committed to setting challenging EPS targets for each award. For the awards made in 2011, despite the fact that the lower end of the target range is lower than actual adjusted EPS for the year ended 31 December 2010, the committee is satisfied that the range is at least as challenging in the circumstances as targets that have been attached to prior years' awards. In highly challenging and uncertain market conditions, these targets are considered an appropriate incentive to preserve and maximise long-term profitability within an appropriate risk framework, thereby providing a good link with the strategy of the business.
In setting this range, the committee recognises that the value of the award is relatively low compared to market norms and the structure of the sliding scale (with zero vesting at the EPS performance threshold and a significant upside stretch) is tougher than market norms.
Adjusted EPS performance for the year ending 31 December 2013:
| Performance shares | Share options | Vesting percentage |
|---|---|---|
| Less than 69.5p | Less than 77.6p | 0% |
| At 81.7p | At 81.7p | 50% |
| Between 69.5p | Between 77.6p | Pro rata on a |
| and 81.7p | and 81.7p | straight-line basis |
| 102.2p or more | 102.2p or more | 100% |
| Between 81.7p | Between 81.7p | Pro rata on a |
| and 102.2p | and 102.2p | straight-line basis |
The adjusted EPS performance required for the threshold vesting point for share options has been maintained at a more challenging level than for performance shares. This is considered appropriate in light of the potential award level of the share options compared with the performance shares.
The committee will continue to set targets for future awards appropriate to the economic outlook prevailing at the time, ensuring that such targets remain challenging in the circumstances, whilst remaining realistic enough to motivate and incentivise management. The committee will also bear in mind the need to avoid incentive arrangements which encourage management to take undue risk.
Through participation in performance linked share-based plans, there is strong encouragement for senior executives to build and maintain a significant shareholding in the business.
The Company currently operates two other share plans for its employees:
Shares required for the Morgan Sindall 1995 Executive Share Option Scheme are satisfied by new issue shares, those for the 2007 Scheme are satisfied by shares purchased in the market via the Company's employee benefit trust and shares for the 2005 Plan may be satisfied using either new issue shares or market purchased shares. The Company's present intention is to use market purchase shares to satisfy awards under the 2005 Plan. However, it retains the ability to use new issue shares instead and may decide to do so up to the dilution limits recommended by the Association of British Insurers (10% ofissued ordinary share capitalfor all employee share plans over a ten year period and, within this limit, no more than 5% ofissued ordinary share capital for executive or discretionary share plans). The outstanding level of dilution against these limits equates to 4.4% of the current issued ordinary share capital under all employee share plans, of which 2.0% relates to discretionary share plans.
Separately, the employee benefit trust currently holds 781,444 shares which may be used to satisfy awards.
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
The graph below shows a comparison of Total Shareholder Return ('TSR') for the Company's shares over the last five financial years against TSR for the companies in the FTSE 350 index excluding investment trusts. This is considered by the committee to be the most suitable comparable broad index against which the Company's performance should be measured for this purpose, as the Company was a constituent of this index for most of the five year measurement period.
The graph shows the value to 31 December 2010 of £100 invested in Morgan Sindall Group plc on 1 January 2005, compared with the value of £100 invested in the FTSE 350.
Source: Thomson Reuters
It is the Company's policy that executive directors' service contracts should be terminable on one year's notice. In circumstances of termination by notice (except in cases of removalfor misconduct), compensation will be determined by the committee having regard to the particular circumstances of the case. The committee's guidelines will be to determine an equitable compensation package whilst avoiding rewarding poor performance and having regard to the departing director's obligations to mitigate his loss.
In ordinary circumstances, base salary and employer pension contributions for the full period of notice of one year would be paid, together with accrued bonus entitlements and shares or share options granted under long-term incentive schemes where the relevant performance criteria had been satisfied. Other employee benefits would also be maintained for the notice period subject to the rules of the appropriate Group scheme. There are no specific provisions for compensation on early termination or loss of office due to a takeover bid nor is there a provision for an amount in lieu of bonus to be payable over any part of the notice period not worked.
| John Morgan | 28 October 1994 |
|---|---|
| Paul Smith | 18 February 2003 |
| David Mulligan | 1 March 2004 |
| PaulWhitmore | 21 March 2000 |
At the discretion of the Board, executive directors are allowed to act as non-executive directors of other companies and retain any fees relating to those posts. None of the executive directors is currently receiving fees for non-executive positions with other companies.
The dates of the terms of engagement of the non-executive directors are:
| Gill Barr | 11 August 2004 |
|---|---|
| Patrick De Smedt | 26 November 2009 |
| Geraldine Gallacher | 16 August 2007 |
| Adrian Martin | 28 November 2008 |
| Simon Gulliford | 24 February 2010 |
All non-executive directors have specific terms of engagement being an initial period of three years which thereafter may be extended by mutual consent, subject always to the requirements for re-election and the Act. Their remuneration is determined by the Board within the limits set by the Articles and is based on surveys, together with external advice as appropriate. Having remained constant since 2008, the basic fee for non-executive directors has been increased for 2011 by 3%, in line with the level ofincrease for most of the executive directors, to £41,200. The additionalfee payable to the chair of the audit committee will remain at £7,500 but the additionalfee payable to the chair of the remuneration committee has been increased from £5,000 to £6,000 to reflect the additional time commitment involved in the role. Non-executive directors receive no other benefits and do not participate in short-term or long-term reward schemes.
continued
The total amounts for directors' remuneration were as follows:
| 2010 £'000s |
2009 £'000s |
|
|---|---|---|
| Emoluments | 3,274 | 2,156 |
| Amounts vesting under long-term incentive schemes | 58 | 201 |
| Gains made on the exercise of share options | – | – |
| Money purchase pension contributions | 154 | 163 |
| Name of director | Fees/basic salary £'000s |
Benefits £'000s |
Annual cash bonuses(1) £'000s |
Total 2010 £'000s |
Total 2009 £'000s |
|---|---|---|---|---|---|
| Executive | |||||
| John Morgan | 425 | 20 | 425 | 870 | 559 |
| Paul Smith(2) | 500 | 21 | 500 | 1,021 | 655 |
| David Mulligan(2) | 295 | 16 | 295 | 606 | 390 |
| PaulWhitmore | 270 | 18 | 270 | 558 | 360 |
| 1,490 | 75 | 1,490 | 3,055 | 1,964 | |
| Non-executive | |||||
| Gill Barr | 45 | – | – | 45 | 45 |
| Patrick De Smedt | 40 | – | – | 40 | 3 |
| Geraldine Gallacher | 40 | – | – | 40 | 40 |
| Adrian Martin | 45 | – | – | 45 | 40 |
| Simon Gulliford(3) | 33 | – | – | 33 | – |
| JonWalden(4) | 16 | – | – | 16 | 48 |
| Bernard Asher | – | – | – | – | 16 |
| 219 | – | – | 219 | 192 | |
| Totals | 1,709 | 75 | 1,490 | 3,274 | 2,156 |
(1) Group PBTA (after non-recurring items) in 2010 of £51.3m resulted in the executive directors becoming entitled to 100% of the maximum cash bonus. The maximum cash bonus required PBTA of £50.0m and the threshold PBTA was £40.0m.
(2) The Company operates a salary exchange process for members of The Morgan Sindall Retirement Benefits Plan, which allows employees flexibility in setting the proportion in which salary and bonus is distributed between pay and additional pension. The figures shown for both 2009 and 2010 represent the salary and bonus entitlements before any salary exchange has taken place.
(3) Simon Gulliford was appointed with effect from 1 March 2010.
(4) JonWalden ceased to be a director on 6 May 2010.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Company contributes 10% of salary to The Morgan Sindall Retirement Benefits Plan ('the Plan') in the case of Paul Smith and David Mulligan and to personal pension plans in the case of the other executive directors.
As explained in the pension arrangements in the unaudited section of this report and under directors' emoluments above, the Company operates a salary exchange process for members of the Plan. Both Paul Smith and David Mulligan have participated in this process and the contributions set out below include the additional 6.4% enhancement to any salary or bonus exchanged (representing half of the saved employer's National Insurance Contribution) but exclude any other contributions made through the salary exchange mechanism.
The contributions paid by the Company to these plans were as follows:
| 2010 £'000s |
2009 £'000s |
|
|---|---|---|
| John Morgan | 43 | 43 |
| Paul Smith | 52 | 61 |
| David Mulligan | 32 | 32 |
| PaulWhitmore | 27 | 27 |
The following long-term incentive awards have been made to executive directors under the 2005 Plan during 2010:
| No. of awards outstanding as at 1 Jan 2010 |
No. of shares awarded March 2010 |
No. of dividend equivalent shares awarded March 2010(1) |
Total no. of shares vested March2010(3) |
Monetary value of vested shares(2) £'000s |
No. of shares lapsed March 2010(3) |
No. of awards outstanding as at 31 Dec 2010 |
|
|---|---|---|---|---|---|---|---|
| Paul Smith | 64,263 | 33,784 | 694 | 4,166 | 23 | (10,417) | 84,158 |
| David Mulligan | 35,608 | 19,932 | 339 | 2,036 | 11 | (5,093) | 48,750 |
| PaulWhitmore | 67,158 | 36,486 | 709 | 4,258 | 24 | (10,649) | 89,446 |
(1) The rules of the 2005 Plan provide that, if the committee so determines, executives are entitled to receive the value of dividends paid on performance shares during the three year performance period. In respect of the performance shares which vested in March 2010, this was satisfied by the transfer of additional shares to the executives. These additional shares are included in the 'Total no. of shares vested' column.
(2) Based on the HMRC value on the date of vesting of £5.55205. Awards that vested during the year were granted on 6 March 2007 when the Company's share price was £12.32.
(3) In respect of the performance shares awarded on 6 March 2007, the Company achieved average adjusted EPS growth of RPI + 4% for the three years ended 31 December 2009, resulting in 25% of the performance shares vesting and the remaining performance shares lapsing.
| Date of award |
No. of shares awarded |
Date awards vest | |
|---|---|---|---|
| Paul Smith | 9 April 2008 | 18,046 | 9 April 2011 |
| 30 March 2009 | 32,328 | 30 March 2012 | |
| 17 March 2010 | 33,784 | 17 March 2013 | |
| David Mulligan | 9 April 2008 | 9,745 | 9 April 2011 |
| 30 March 2009 | 19,073 | 30 March 2012 | |
| 17 March 2010 | 19,932 | 17 March 2013 | |
| PaulWhitmore | 9 April 2008 | 18,046 | 9 April 2011 |
| 30 March 2009 | 34,914 | 30 March 2012 | |
| 17 March 2010 | 36,486 | 17 March 2013 |
The market price of a share on 9 April 2008 was £10.34, on 30 March 2009 was £5.61 and on 17 March 2010 was £5.52.
continued
| No. of options outstanding as at 1 Jan 2010 |
No. of options granted 17 March 2010 |
No. of options lapsed(1) 6 March 2010 |
No. of options outstanding as at 31 Dec 2010 |
|
|---|---|---|---|---|
| John Morgan | 625,740 | 229,728 | (94,444) | 761,024 |
| Paul Smith | 373,706 | 135,136 | (55,556) | 453,286 |
| David Mulligan | 206,248 | 79,730 | (27,160) | 258,818 |
(1) The threshold performance condition for the options granted on 6 March 2007 was not met and the options lapsed.
| Date | No. of share | Exercise | Date from which | |
|---|---|---|---|---|
| of grant | options granted | price | exercisable | |
| John Morgan | 20 May 2005 | 107,736 | £7.24 | 20 May 2008 |
| 5 April 2006 | 81,016 | £12.59 | 5 April 2009 | |
| 9 April 2008 | 122,716 | £10.39 | 9 April 2011 | |
| 30 March 2009 | 219,828 | £5.80 | 30 March 2012 | |
| 17 March 2010 | 229,728 | £5.55 | 17 March 2013 | |
| Paul Smith | 20 May 2005 | 68,370 | £7.24 | 20 May 2008 |
| 5 April 2006 | 47,656 | £12.59 | 5 April 2009 | |
| 9 April 2008 | 72,814 | £10.39 | 9 April 2011 | |
| 30 March 2009 | 129,310 | £5.80 | 30 March 2012 | |
| 17 March 2010 | 135,136 | £5.55 | 17 March 2013 | |
| David Mulligan | 20 May 2005 | 35,220 | £7.24 | 20 May 2008 |
| 5 April 2006 | 28,594 | £12.59 | 5 April 2009 | |
| 9 April 2008 | 38,980 | £10.39 | 9 April 2011 | |
| 30 March 2009 | 76,294 | £5.80 | 30 March 2012 | |
| 17 March 2010 | 79,730 | £5.55 | 17 March 2013 |
The market price of a share on 31 December 2010 was £7.05 and the range during the year was £4.91 to £7.25.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The executive directors hold the following options granted under the SAYE scheme,further details of which are given in note 24 on page 103.
| Outstanding as at 31 Dec 2009 |
Granted during the year |
Exercised during the year |
Lapsed during the year |
Outstanding as at 31 Dec 2010 |
Option exercise price |
Dates within which exercisable |
|
|---|---|---|---|---|---|---|---|
| Paul Smith | 1,338 | – | – | – | 1,338 | £7.02 | 1/9/2011- 28/2/2012 |
| David Mulligan | 1,338 | – | – | – | 1,338 | £7.02 | 1/9/2011- 28/2/2012 |
| PaulWhitmore | 1,338 | – | – | – | 1,338 | £7.02 | 1/9/2011- 28/2/2012 |
This report was approved by the Board and signed on its behalf by:
Chair of the Remuneration Committee 4 March 2011
The Companies Act 2006 ('the Act') requires the Company to set out in the directors' report a fair review of the business of the Group during the financial year ended 31 December 2010 and the position of the Group at the end of the year, including but not limited to a description of the principal risks and uncertainties facing it and analysis using key performance indicators. The information required to fulfil these requirements of the Act can be found in this governance section of the directors' report and in the chairman and chief executive's statement on pages 02 to 05 and in the business review section of the directors' report on pages 06 to 50, each of which is incorporated by reference into (and is deemed to form part of) the directors' report. The liabilities of the directors in connection with this report shall be limited as provided by applicable English law.
Morgan Sindall is a construction and regeneration group with four divisions: Construction & Infrastructure, Affordable Housing, Fit Out and Urban Regeneration and one specialist unit, Investments. The principal subsidiary companies operating within this divisional structure are listed in note 14 of the Company financial statements on page 127.
The Group's profit before tax for the year amounted to £40.7m (2009: £44.7m). An interim dividend of 12.0p (2009: 12.0p) per share amounting to £5.1m (2009: £5.0m) was paid on 16 September 2010. The directors recommend a final dividend for the year of 30.0p (2009: second interim dividend 30.0p) per share amounting to £12.8m (2009: £12.7m) payable on 16 May 2011 to shareholders on the register at close of business on 26 April 2011. Together with the interim dividend, this makes a total dividend of 42.0p for the year (2009: 42.0p).
As at 23 February 2010, the Company's issued share capital comprised a single class of ordinary shares of 5p each ('shares'). During the year, 27,870 shares were allotted and issued on the exercise of options under the Company's employee share option schemes. No other shares were issued during the year. Details of the Company's share capital and capital structure, including the rights attaching to the shares, are set out in note 24 of the consolidated financial statements on page 103. Note 24 also gives details of shares held by the Morgan Sindall Employee Benefit Trust, voting rights of which are exercisable at the discretion of the trustees and dividends in respect of which have been waived.
The following paragraphs summarise certain provisions of the Articles and applicable English law concerning companies. The Articles were amended by special resolution at the annual general meeting held on 6 May 2010 and the following paragraphs describe the Articles as so amended.
Subject to applicable statutes (in this section the Act), shares may be issued with such rights and restrictions as the Company may by ordinary resolution decide or (if there is no such resolution or so far as it does not make specific provision) as the Board (as defined) in the Articles may decide. Subject to the Articles, the Act and other shareholders' rights, unissued shares are at the disposal of the Board.
Subject to any other provisions of the Articles, every member present in person or by proxy at a general meeting has, upon a show of hands, one vote and, upon a poll, one vote for every share held by him or her. In the case ofjoint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and,for this purpose, seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.
No member shall be entitled to vote at any general meeting in respect of any share held by him if any call or other sum then payable by him in respect of that share remains unpaid or if a member has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Act.
No person has any special rights of control over the Company's share capital and the directors are not aware of any agreements between holders of shares which may result in restrictions in the transfer of shares or on voting rights.
The Company may, by ordinary resolution,from time to time declare dividends not exceeding the amount recommended by the Board. Subject to the Act, the Board may pay interim dividends, and also any fixed rate dividend, whenever the financial position of the Company, in the opinion of the Board, justifies its payment.
The Board may withhold payment of all or any part of any dividends or other monies payable in respect of the Company's shares from a person with a 0.25% interest (as defined in the Articles) if such a person has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Act.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
Subject to the Act, rights attached to any class of shares may be varied with the written consent of the holders of not less than three-fourths in nominal value of the issued shares of that class (calculated excluding any shares held as treasury shares), or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares.
The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue offurther shares ranking pari passu with them.
There are no restrictions on the transfer of securities in the Company, except:
The Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities.
Any amendments to the Articles may be made in accordance with the provisions of the Act by way of special resolution.
The directors shall be not less than two and not more than twelve in number. The maximum number of directors was increased from ten to twelve at the annual general meeting on 6 May 2010. The Company may by ordinary resolution vary the minimum and/or maximum number of directors. Directors may be appointed by the Company by ordinary resolution or by the Board. A director appointed by the Board holds office only until the next annual general meeting of the Company and is then eligible for reappointment.
At every annual general meeting of the Company, any director who has been appointed by the Board since the last annual general meeting, or who held office at the time of the two preceding annual general meetings and who did not retire at either of them, shall retire from office and may offer himselffor reappointment by the members. The Company may, by special resolution, remove any director before the expiration of his period of office. The office of a director shall be vacated if: (i) he resigns or offers to resign and the Board resolves to accept such offer; (ii) his resignation is requested by all of the other directors and all of the other directors are not less than three in number; (iii) he is or has been suffering from mental ill health and the Board resolves that his office be vacated; (iv) he is absent without the permission of the Board from meetings of the Board (whether or not an alternate director appointed by him attends) for six consecutive months and the Board resolves that his office is vacated; (v) he becomes bankrupt or compounds with his creditors generally; (vi) he is prohibited by law from being a director; (vii) he ceases to be a director by virtue of the Act; or (viii) he is removed from office pursuant to the Articles.
Subject to the Articles, the Act and any directions given by the Company by special resolution, the business of the Company will be managed by the Board who may exercise all the powers of the Company, whether relating to the management of the business or not. In particular, the Board may exercise all the powers of the Company to borrow money, to mortgage or charge any ofits undertaking, property, assets (present and future) and uncalled capital and to issue debentures and other securities and to give security for any debt, liability or obligation of the Company or of any third party.
The directors were granted authority at the annual general meeting on 6 May 2010 to allot relevant securities up to a nominal amount of £107,901. That authority will apply until the conclusion of this year's annual general meeting and a resolution to renew the authority will be proposed at the forthcoming annual general meeting, as explained further in the circular to shareholders accompanying this document.
A special resolution will also be proposed to renew the directors' power to make non-pre-emptive issues for cash, as explained in the circular accompanying this document.
At the annual general meeting on 6 May 2010, a resolution was passed giving the directors authority to make market purchases ofits shares up to 4,316,042 shares at a maximum price based on the market price of a share at the relevant time, as set out in the resolution. No purchases of shares were made during the year pursuant to this authority. The authority expires on 6 August 2011 and a resolution to renew the authority will be proposed at the forthcoming annual general meeting, as explained further in the circular to shareholders accompanying this document.
There are no agreements between the Company and its directors or employees providing for compensation for loss of office or employment occurring because of a takeover bid. The Group's banking facilities are described in the business review on page 34; its facilities for surety bonding require provision of cash collateral for outstanding bonds upon a change of control of the Company.
The names of the directors as at the date of this report are set out below under Directors' interests. All of these directors held office throughout the year except for Simon Gulliford who was appointed as a non-executive director with effect from 1 March 2010. JonWalden retired at the annual general meeting in May 2010 and so is not listed in the table below.
John Morgan, David Mulligan, PaulWhitmore, Gill Barr and Geraldine Gallacher will retire at the annual general meeting to be held on 5 May 2011 and, being eligible, offer themselves for re-election. Their biographical details, including details of significant external commitments, are set out on pages 52 and 53.
The interests of the directors, all of which are beneficial, in the shares of the Company are given below:
| 2010 No. of shares |
2009 No. of shares |
|
|---|---|---|
| John Morgan Paul Smith David Mulligan PaulWhitmore Gill Barr Geraldine Gallacher Adrian Martin Patrick De Smedt |
4,497,508 217,915 24,544 62,840 1,013 7,772 2,000 – |
4,497,508 213,749 22,508 60,328 1,013 7,772 2,000 – |
| Simon Gulliford | – | – |
There have been no changes in the interests of the directors between 31 December 2010 and 4 March 2011.
The directors' share options and interests in shares under longterm share incentive and other schemes are set out in the remuneration report on pages 65 to 67.
The Articles entitle the directors of the Company to be indemnified, to the extent permitted by the Act and any other applicable legislation, out of the assets of the Company in the event that they suffer any loss or incur any liability in connection with the execution of their duties as directors.
In addition, and in common with many other companies, the Company had during the year and continues to have in place directors' and officers' insurance in favour ofits directors and other officers in respect of certain losses or liability to which they may be exposed due to their office.
As at 4 March 2011, the Company had been notified of the following interests in voting rights attaching to the Company's shares in accordance with chapter 5 of the Disclosure and Transparency Rules:
| Name of holder | No. of shares |
Percentage of total |
|---|---|---|
| Aviva plc | 5,545,900 | 12.84% |
| John Morgan | 4,497,508 | 10.41% |
| Standard Life Group | 3,033,392 | 7.02% |
| John James Clifford Lovell | 2,415,273 | 5.64% |
| Aberdeen Asset Management plc | 2,234,219 | 5.17% |
| JPMorgan Chase & Co | 2,123,287 | 4.94% |
| Barclays Global Investors | 1,303,861 | 3.03% |
The Group undertakes research and development activity in creating innovative construction techniques and designs integral to the delivery ofits projects. The direct spending incurred is generally not separately identifiable as the investment is usually contained within project work performed for customers.
The average number of employees in the Group during the year is given in note 3 to the consolidated financial statements on page 89.
Information on the Group's employment policies and practices, including its policies on equal opportunities for disabled employees and employee consultation, are included in the business review on page 22. Details of the Company's share option schemes are set out in note 24 of the consolidated financial statements on page 103.
Morgan Sindall Group plc Annual report and accounts 2010 Directors' report: governance 71
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Company's policy, which is also adopted by the Group, is to agree clearly and set down terms of payment with suppliers and subcontractors when agreeing the terms for each transaction and to make payments in accordance with its obligations, save in cases of genuine dispute.
As at 31 December 2010, the Group's number of creditor days outstanding was equivalent to 25 days' purchases (2009: 23 days), based on the average daily amount invoiced by suppliers during the year.
During the year, the Group made charitable donations of £60,314 (2009: £118,950), principally to local charities serving the communities in which it operates. More details of the Group's involvement in the community can be found in the business review on pages 20 to 23.
No contributions were made to any political parties during the current or preceding year.
There is no material difference between the book value and current market value of the Group's interest in land and buildings.
The directors who held office at the date of approval of this directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Act.
Deloitte LLP has expressed its willingness to continue in office as external auditor and a resolution to reappoint it will be proposed at the forthcoming annual general meeting.
The annual general meeting of the Company will be held at the offices of RBS Hoare Govett, 250 Bishopsgate, London EC2M 4AA on 5 May 2011 at 12.00 noon. The formal notice convening the annual general meeting, together with explanatory notes, can be found in the separate circular accompanying this document and is available on the Company's website at www.morgansindall.com. Shareholders will also find enclosed with this document a form of proxy for use in connection with the meeting.
The directors' report from pages 02 to 72 inclusive was approved by the Board and signed on its behalf by:
Company Secretary 4 March 2011
The directors are responsible for preparing the annual report and the financial statements in accordance with applicable laws and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (UK Accounting Standards and applicable law). Under company law, the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing the parent company financial statements, the directors are required to:
In preparing the Group financial statements, International Accounting Standard 1 requires that directors:
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection offraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination offinancial statements may differ from legislation in other jurisdictions.
Each of the directors, whose names are set out on page 70, confirms that to the best of his or her knowledge:
By order of the Board
Paul Smith David Mulligan
Chief Executive Finance Director 4 March 2011 4 March 2011
Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
| Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements |
73 |
|---|---|
| Directors' report: business review | 02//50 |
| Directors' report: governance | 51//72 |
We have audited the Group financial statements of Morgan Sindall Group plc for the year ended 31 December 2010 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of changes in equity and the related notes 1 to 30. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body,for our audit work,for this report, or for the opinions we have formed.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
In our opinion, the Group financial statements:
In our opinion, the information given in the directors' report for the financial year for which the Group financial statements are prepared is consistent with the Group financial statements.
Under the Companies Act 2006, we are required to report to you if, in our opinion:
Under the Listing Rules, we are required to review:
We have reported separately on the parent company financial statements of Morgan Sindall Group plc for the year ended 31 December 2010 and on the information in the directors' remuneration report that is described as having been audited.
(Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 4 March 2011
for the year ended 31 December 2010
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Continuing operations Revenue Cost of sales |
1 | 2,101.9 | 2,213.5 (1,884.7) (1,993.0) |
| Gross profit | 217.2 | 220.5 | |
| Amortisation ofintangible assets Non-recurring items Other administrative expenses |
1, 2, 9 2 |
(5.5) (5.1) (165.2) |
(6.8) – (170.1) |
| Total administrative expenses | (175.8) | (176.9) | |
| Share of net profit of equity accounted joint ventures Other gains and losses |
1, 12 13 |
0.1 0.3 |
0.1 – |
| Profit from operations | 1 | 41.8 | 43.7 |
| Finance income Finance costs |
5 5 |
1.7 (2.8) |
3.3 (2.3) |
| Net finance (costs)/income | (1.1) | 1.0 | |
| Profit before income tax expense | 1 | 40.7 | 44.7 |
| Income tax expense | 6 | (10.9) | (11.8) |
| Profit for the year | 2 | 29.8 | 32.9 |
| Attributable to: Owners of the Company Non-controlling interests |
29.9 (0.1) |
33.0 (0.1) |
|
| 29.8 | 32.9 | ||
| Earnings per share From continuing operations Basic Diluted |
8 8 |
70.5p 69.7p |
77.9p 77.1p |
There were no discontinued operations in either the current or comparative year.
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Profit for the year | 29.8 | 32.9 | |
| Other comprehensive income/(expense): Actuarial gain/(loss) arising on defined benefit obligation Deferred tax on defined benefit obligation Movement on cash flow hedges in equity accounted joint ventures |
19 20 12 |
0.8 (0.3) (1.4) |
(0.6) – 0.6 |
| Other comprehensive expense for the year, net ofincome tax | (0.9) | – | |
| Total comprehensive income for the year | 28.9 | 32.9 | |
| Attributable to: Owners of the Company Non-controlling interests |
29.0 (0.1) 28.9 |
33.0 (0.1) 32.9 |
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Non-current assets Goodwill Other intangible assets |
9 9 |
213.2 16.6 |
184.4 16.6 |
| Property, plant and equipment Investment property Investments in equity accounted joint ventures |
10 11 1, 12 |
27.8 4.3 45.4 |
31.3 1.8 50.2 |
| Investments Shared equity loan receivables Deferred tax assets |
13 20 |
0.1 13.9 3.2 |
0.1 9.0 3.8 |
| 324.5 | 297.2 | ||
| Current assets Inventories Amounts due from construction contract customers Trade and other receivables Cash and cash equivalents |
14 16 15 29 |
141.1 178.4 229.2 148.6 |
141.2 192.5 142.3 117.7 |
| Total assets | 1 | 697.3 1,021.8 |
593.7 890.9 |
| Current liabilities Trade and other payables Amounts due to construction contract customers Current tax liabilities Finance lease liabilities Provisions |
17 16 18 21, 25 |
(667.2) (70.7) (30.6) (1.7) (6.6) |
(576.3) (49.0) (27.3) (1.8) – |
| Net current liabilities | (776.8) (79.5) |
(654.4) (60.7) |
|
| Non-current liabilities Trade and other payables Finance lease liabilities Retirement benefit obligation Provisions |
17 18 19 21 |
– (6.0) (1.9) (15.4) |
(0.1) (7.1) (3.2) (16.8) |
| Total liabilities Net assets |
(23.3) (800.1) 221.7 |
(27.2) (681.6) 209.3 |
|
| Equity Share capital Share premium account Capital redemption reserve Own shares Hedging reserve Retained earnings |
24 | 2.2 26.7 0.6 (5.9) (3.1) 201.4 |
2.2 26.7 0.6 (6.0) (1.7) 187.6 |
| Equity attributable to owners of the Company Non-controlling interests |
221.9 (0.2) |
209.4 (0.1) |
|
| Total equity | 221.7 | 209.3 |
The consolidated financial statements of Morgan Sindall Group plc (company number 00521970) were approved by the Board and authorised for issue on 4 March 2011 and signed on its behalf by:
Paul Smith David Mulligan
Chief Executive Finance Director
for the year ended 31 December 2010
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
| Notes | 2010 £m |
2009 £m |
|---|---|---|
| Net cash inflow from operating activities 26 |
93.1 | 25.0 |
| Cash flows from investing activities Interest received Dividend from joint ventures 12 Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Payments to acquire interests in joint ventures 12 Payments for the acquisition of subsidiaries and other businesses 25 |
1.9 0.8 1.1 (3.1) (4.3) (35.2) |
3.4 2.2 1.0 (7.5) (4.2) (1.1) |
| Net cash outflow from investing activities | (38.8) | (6.2) |
| Cash flows from financing activities Net payments to acquire own shares Dividends paid Repayments of obligations under finance leases Proceeds on issue of share capital |
– (17.8) (5.6) – |
(0.1) (17.7) (3.7) 0.1 |
| Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year |
(23.4) 30.9 117.7 |
(21.4) (2.6) 120.3 |
| Cash and cash equivalents at the end of the year Bank balances and cash |
148.6 | 117.7 |
for the year ended 31 December 2010
| Attributable to owners of the Company | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Share capital £m |
Share premium account £m |
Capital redemption reserve £m |
Reserve for own shares held £m |
Cash flow hedging reserve £m |
Retained earnings £m |
Total £m |
Non- controlling interests £m |
Total equity £m |
|
| Balance at 1 January 2009 | 2.2 | 26.6 | 0.6 | (6.4) | (2.3) | 171.6 | 192.3 | – | 192.3 |
| Total comprehensive income for the year: Net profit Other comprehensive income: |
– | – | – | – | – | 33.0 | 33.0 | (0.1) | 32.9 |
| Actuarial loss arising on defined benefit obligation (note 19) Movement on cash flow hedges in equity |
– | – | – | – | – | (0.6) | (0.6) | – | (0.6) |
| accounted joint ventures (note 12) | – | – | – | – | 0.6 | – | 0.6 | – | 0.6 |
| Total comprehensive income for the year, net ofincome tax |
– | – | – | – | 0.6 | 32.4 | 33.0 | (0.1) | 32.9 |
| Share-based payments | – | – | – | – | – | 1.0 | 1.0 | – | 1.0 |
| Issue of shares at a premium Exercise of share options Movement on deferred tax asset |
– – |
0.1 – |
– – |
– 0.5 |
– – |
– (0.5) |
0.1 – |
– – |
0.1 – |
| on share-based payments Own shares acquired in the year Dividends paid: |
– – |
– – |
– – |
– (0.1) |
– – |
0.8 – |
0.8 (0.1) |
– – |
0.8 (0.1) |
| Final dividend for 2008 Interim dividend for 2009 |
– – |
– – |
– – |
– – |
– – |
(12.7) (5.0) |
(12.7) (5.0) |
– – |
(12.7) (5.0) |
| Balance at 31 December 2009 | 2.2 | 26.7 | 0.6 | (6.0) | (1.7) | 187.6 | 209.4 | (0.1) | 209.3 |
| Balance at 1 January 2010 | 2.2 | 26.7 | 0.6 | (6.0) | (1.7) | 187.6 | 209.4 | (0.1) | 209.3 |
| Total comprehensive income for the year: Net profit Other comprehensive income: |
– | – | – | – | – | 29.9 | 29.9 | (0.1) | 29.8 |
| Actuarial gain arising on defined benefit obligation (note 19) Deferred tax on defined benefit |
– | – | – | – | – | 0.8 | 0.8 | – | 0.8 |
| obligation (note 19) Movement on cash flow hedges in equity |
– | – | – | – | – | (0.3) | (0.3) | – | (0.3) |
| accounted joint ventures (note 12) | – | – | – | – | (1.4) | – | (1.4) | – | (1.4) |
| Total comprehensive income for the year, net ofincome tax |
– | – | – | – | (1.4) | 30.4 | 29.0 | (0.1) | 28.9 |
| Share-based payments | – | – | – | – | – | 0.7 | 0.7 | – | 0.7 |
| Issue of shares at a premium Exercise of share options Movement on deferred tax asset |
– – |
– – |
– – |
– 0.1 |
– – |
– (0.1) |
– – |
– – |
– – |
| on share-based payments Own shares acquired in the year |
– – |
– – |
– – |
– – |
– – |
0.6 – |
0.6 – |
– – |
0.6 – |
| Dividends paid: Second interim dividend for 2009 Interim dividend for 2010 |
– – |
– – |
– – |
– – |
– – |
(12.7) (5.1) |
(12.7) (5.1) |
– – |
(12.7) (5.1) |
| Balance at 31 December 2010 | 2.2 | 26.7 | 0.6 | (5.9) | (3.1) | 201.4 | 221.9 | (0.2) | 221.7 |
The share premium account represents the difference between the fair value of consideration received and the nominal value of the shares issued.
The capital redemption reserve was created on the redemption of preference shares in 2003.
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 (note 24).
The number of shares held by the Trust at 31 December 2010 was 781,444 (2009: 797,034).
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.
Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements 79
for the year ended 31 December 2010
Morgan Sindall Group plc (the 'Company') is domiciled and incorporated in the UK. The report and accounts includes the consolidated financial statements of the Company and its subsidiaries (collectively referred to as the 'Group') and the Group's interest in joint ventures and separate financial statements for the Company. The nature of the Group's operations and its principal activities are set out in note 1 and in the business review on pages 02 to 50.
The consolidated financial statements have been prepared on a going concern basis as discussed in the business review on page 35 and in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union and, therefore, comply with Article 4 of the EU IAS Regulation.
The consolidated financial statements have been prepared under the historical cost convention, except where otherwise indicated.
These consolidated financial statements are presented in pounds sterling which is the Group's functional currency. Allfinancial information, unless otherwise stated, has been rounded to the nearest £0.1m.
(i)New and revised accounting standards adopted by the Group The Group has adopted the following new, amended and revised standards and interpretations from 1 January 2010:
| IFRS 3 (revised) 'Business combinations': requires expensing |
|---|
| of all acquisition related transaction costs (previously certain |
| costs were included as part of consideration) and the |
| recognition and measurement of contingent consideration |
| at fair value, with subsequent changes in fair value usually |
| taken through the income statement. The revision also |
| provides the option of measuring non-controlling interests |
| at fair value and, in the case of a business combination |
| achieved in stages, requires goodwill to be determined |
| only at the acquisition date, rather than at each stage. |
| Any previously held equity interest is remeasured to |
| fair value with any resulting gain or loss recognised in |
| the income statement. |
This revised standard has been applied to all of the acquisitions that occurred during the year as outlined in note 25 and has resulted in £3.2m of costs that would previously have been included in the consideration. Adoption of this standard has also resulted in a loss of £0.3m being recognised in respect of the Group's previously held equity interest in Eurocentral Holdings Limited.
International Financial Reporting Interpretations Committee ('IFRIC') 12 'Service Concession Arrangements': addresses the accounting by private sector operators involved in the provision of public sector infrastructure assets and services where the assets are not controlled by the operator, typically under PPP and PFI arrangements. Under IFRIC 12, infrastructure assets are not recognised as the property, plant and equipment of the operator, rather as a financial asset because the operator has an unconditional right to receive a specified amount of cash or investment or other financial asset over the life of the agreement. Consequently, the operator now recognises investment income in respect of the financial asset on an effective interest rate basis. The interpretation results in a change in the timing of profit recognition over the life of the contract. However, there is no change in the overall project cash flows arising or in the directors' valuation.
IFRIC 12 was applied with retrospective effect. The effect of the adoption on comparative amounts was immaterial, and so comparative amounts have not been restated.
During the year, the Group has also adopted the following standards, amendments and interpretations. However, they have not had any material impact on the Group's consolidated financial statements or are not currently relevant to the Group (but may affect future transactions and events):
The following have been published and, when approved by the EU, will be mandatory for periods beginning on or after 1 January 2011 and have not been adopted early by the Group:
The preparation offinancial statements under IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates.
Estimates and assumptions are reviewed on an ongoing basis and any revision to estimates or assumptions are recognised in the period in which they are revised.
The following are critical judgments, apart from those involving estimations (which are dealt with separately below), that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements.
The Group continues to discuss with HMRC the corporation tax treatment of the fair value adjustments which arose following the 2007 acquisition from Amec. Pending the resolution of the discussions, the Group has materially reduced its net tax payments to HMRC. As the outcome of these discussions is unclear, the Group has not recognised any benefit from this matter in the tax charge in the income statement. Accordingly, a balance of £23.2m (2009: £22.0m) is recorded in respect of this matter within current tax liabilities.
For the purposes of performing the Group's annual impairment testing, goodwill is allocated to the cashgenerating unit or groups of cash-generating units which represent the lowest level at which goodwill is monitored for management purposes and which are expected to benefit from the business combination giving rise to the goodwill.
The Group has presented certain items of a one-off and material nature as non-recurring items in the income statement. These items have been disclosed because the directors view their presentation as relevant to the understanding of the Group's underlying financial performance. Inclusion within this category is restrictive and is applied consistently to one-off costs and one-off gains.
The Group has made certain fair value adjustments in respect of the acquisition of the business, obligations and certain assets from the administrators of Connaught Partnerships Limited. These are provisional due to the inherent uncertainty relating to asset realisation and quantification of provisions.
The key assumptions concerning the future, and other key sources of estimation at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year, are discussed below.
Accounting for construction and service contracts Recognition of revenue and margin is based on judgments made in respect of the ultimate profitability of a contract. Such judgments are arrived at through the use of estimates in relation to the costs and value of work performed to date and to be performed in bringing contracts to completion, including satisfaction of maintenance responsibilities. These estimates are made by reference to recovery of pre-contract costs, surveys of progress against the construction programme, changes in work scope, the contractual terms under which the work is being performed, costs incurred and external certification of the work performed. The Group has appropriate control procedures to ensure all estimates are determined on a consistent basis and subject to appropriate review and authorisation.
The Group recognises certain intangible assets in respect of secured customer contracts, other contracts and related relationships, software, non-compete agreements and goodwill. Recognition and subsequent measurement requires management to make certain assumptions and estimates, particularly in respect of the future potential benefits to be derived and the estimated useful lives over which the future economic benefits are expected to flow to the Group. To assist in making these judgments, the directors engage independent experts to assist in the determination of the fair values and the estimated useful lives of these assets.
Goodwill and other intangible assets are subject to an impairment test on an annual basis or earlier where any event or change in circumstance is identified that indicates that the carrying value may not be recoverable. Testing for impairment requires a comparison of the carrying amount of goodwill and other intangible assets against the recoverable amount, which is the value-in-use of the cash-generating unit to which the goodwill and other intangible assets are allocated.
Value-in-use requires estimation of the future cash flows expected from the cash-generating unit as well as an appropriate growth factor and discount rate to calculate the present value of the cash flows.
In assessing whether work in progress is impaired, estimates are made offuture sales revenue, timing and build costs. The Group has controls in place to ensure that estimates of sales revenue are consistent, and external valuations are used where appropriate.
Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements 81
| 02//50 51//72 |
|---|
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
The directors engage an independent and qualified actuary to calculate the Group's liability in respect of the defined benefit plan. In order to arrive at this valuation, certain assumptions in respect of discount rates, salary escalations, expected return on the plan's assets and future pension increases have been made. Estimates and judgments regarding future mortality are derived using published statistics and mortality tables. As the actual rates ofincrease and mortality may differ from those assumed, the actual pension liability may differ from that recognised in these consolidated financial statements.
In valuing the provision for the Group's retained insurance risks, estimates are made of the rate of occurrence and severity of events for which the Group will bear liability and external valuations are used where appropriate.
Certain Group joint ventures use swaps to hedge interest rate and Retail Price Index (inflation) risk to which PFI/PPP concessions are exposed. These are initially recognised and subsequently remeasured at each year end, at fair value derived from current market rates.
In assessing the fair value of certain financial receivables, including trade receivables and those held by joint ventures, estimates are made offuture cash flows and the appropriate discount rate to be used.
Judgments are required in establishing the Group's liability to pay taxes where tax positions are uncertain.
Recognition and measurement of share-based payments requires estimation of the fair value of awards at the date of grant and,for cash-settled awards, remeasurement at each reporting date. Judgment is exercised when estimating the number of awards that will ultimately vest and these estimates have a significant impact on the amounts recognised in the income statement and the balance sheet. To assist in determining each award's fair value, the directors engage a qualified and independent valuation expert. Assumptions in relation to the number of awards that will ultimately vest is based on estimates at the reporting date of the extent to which performance conditions are anticipated to be satisfied, anticipated future lapses by leavers and the current intrinsic value of those awards.
The Group's balance sheet includes loans that arise on the sale of properties under shared equity home ownership schemes which are recognised and measured at fair value through profit or loss (as discussed in the Group's accounting policies below). Because it is impracticable to obtain regular market valuations on a property-by-property basis, except as required at repayment, the Group makes judgments on the fair value of the loans on a portfolio basis. This approach requires judgment on inputs used to determine fair value and which include
property price indices, the discount rate, the anticipated loan duration and the expected rate of debtor default. Assumptions made in relation to these inputs have a material impact on the carrying value of the loan portfolio recognised on the balance sheet and the fair value movement recognised in the income statement.
The accounting policies as set out below have been applied consistently to all periods presented in these consolidated financial statements.
The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company (its subsidiaries), together with the Group's share of the results ofjoint ventures made up to 31 December each year.
Business combinations are accounted for using the acquisition method. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and equity interests issued by the Group in exchange for control of the acquiree. Consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed in administrative expenses as incurred. All identifiable assets and liabilities acquired and contingent liabilities assumed are initially measured at their fair values at the acquisition date. As permitted, on an acquisition-by-acquisition basis, a non-controlling interest in the acquiree is recognised at fair value or at the acquiree's share of the acquiree's net assets.
The excess of the consideration transferred, the amount of any non-controlling interest and the acquisition date fair value of any previously held equity interest in the acquiree as compared with the Group's share of the identifiable net assets are recognised as goodwill.Where the Group's share ofidentifiable net assets acquired exceeds the total consideration transferred, a gain from a bargain purchase is recognised immediately in the income statement after the fair values initially determined have been reassessed.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Subsequent to acquisition, non-controlling interests consist of the amount of those interests at the date of the original business combination (see below) and the noncontrolling interest's share of the changes in equity since the date of the combination.
Subsidiaries are entities that are controlled by the Group. Control is exerted where the Group has the power to govern, directly or indirectly, the financial and operating policies of the entity so as to obtain economic benefits from its activities. Typically, a shareholding of more than 50% of the voting rights is indicative of control. However, the impact of potential voting rights currently exercisable is taken into consideration.
The financial statements of subsidiaries are included in the consolidated financial statements of the Group from the date that control is obtained to the date that control ceases. The accounting policies of new subsidiaries are changed where necessary to align them with those of the Group.
Non-controlling interests in the net assets of the acquiree are initially measured at the non-controlling interests' share of the net fair value of the assets and liabilities recognised or at fair value, as determined on an acquisition-by-acquisition basis.
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control, which requires unanimous consent for strategic financial and operating decisions.
A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The results, assets and liabilities ofjointly controlled entities are incorporated in the financial statements using the equity method of accounting.
Goodwill relating to a joint venture which is acquired directly is included in the carrying amount of the investment and is not amortised. After application of the equity method, the Group's investments in joint ventures are reviewed to determine whether any additional impairment loss in relation to the net investment in the joint venture is required.When there is a change recognised directly in the equity of the joint venture, the Group recognises its share of any change and discloses this, where applicable, in the consolidated statement of comprehensive income.
Where the Group's share oflosses exceeds its equity accounted investment in a joint venture, the carrying amount of the equity interest is reduced to nil and the recognition offurther losses is discontinued except to the extent that the Group has incurred legal or constructive obligations. Appropriate adjustment is made to the results ofjoint ventures where material differences exist between a joint venture's accounting policies and those of the Group.
Dividend income from investments is recognised when the shareholders' rights to receive payment have been established.
Construction contracts carried out in joint venture without the establishment of a legal entity are jointly controlled operations. The Group's share of the results and net assets of these jointly controlled operations are included under each relevant heading in the income statement and the balance sheet.
Intra-group balances and transactions, and any unrealised income and expense arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investments are eliminated to the extent of the Group's interest in that investment. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence ofimpairment.
Revenue and margin are recognised as follows:
Revenue comprises the fair value of construction carried out in the year based on an internal assessment of work carried out. This assessment is carried out by reference to the construction programme, the construction contract, costs incurred and external certification of the work performed. Once the outcome of a construction contract can be estimated reliably, margin is recognised in the income statement on a stage of contract completion basis by reference to costs incurred to date and total forecast costs on the contract as a whole. Losses expected in bringing a contract to completion are recognised immediately in the income statement as soon as they are forecast.
Where houses for open market sale are included in a construction contract as part of a mixed tenure development, revenue on open market sales is recognised on sale completion and margin is recognised using the same principle as for the construction contract element of the development.
Revenue comprises the fair value of work performed in the year based on an internal assessment of work carried out. This assessment is carried out by reference to the service contract, costs incurred, surveys of work performed and external certification of work performed.
Revenue from the sale of development properties is measured at the fair value of the consideration received or receivable. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, there is no continuing management involvement with the properties and the amount of revenue can be estimated reliably.
The transfer of risks and rewards vary depending on the individual terms of the contract of sale. For properties, transfer usually occurs when the ownership has been legally transferred to the purchaser. Revenue from the sale of properties taken in part exchange is not included in revenue.
Costs incurred prior to the award of a contract are expensed until the point where it becomes probable that the contract will be obtained. Only after it is probable that the contract is forecast to be profitable, costs that were directly related to obtaining the contract and which are separately identifiable and can be measured reliably are recognised as contract assets. Pre-contract costs are expensed in the income statement over the period of the contract.
In the case of PPP/PFI contracts, all costs incurred before the appointment as preferred bidder are expensed.
Where pre-contract costs are reimbursable, the amount received is applied against amounts expensed with any surplus over this amount being applied to costs which have been recognised as contract assets.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | |
| 128 |
Mobilisation costs are those costs specifically incurred to enable performance of obligations in a contract after its award and form an integral part of the overall costs of a contract. Such costs are amortised over the period of the contract except where the contract becomes loss making, in which case the balance is immediately expensed.
Funding received in respect of developer grants, where funding is awarded to encourage the building and renovation of affordable housing, is recognised as revenue on a stage of completion basis over the life of the project to which the funding relates.
Funding received to support the construction of housing where current market prices would otherwise make a scheme financially unviable is recognised as revenue on a legal completion basis when the properties to which it relates are sold.
Finance income comprises interest income on funds invested and other interest earned. Interest income is recognised as it accrues in the income statement using the effective interest rate method.
Finance expense comprises interest on bank overdrafts, the unwinding of discounts on provisions, impairment losses recognised on financial assets, amortisation of prepaid bank facility arrangement fees, commitment fees charged by lenders on the undrawn portion of available bank facilities and losses on hedging instruments recognised through the income statement. The finance charge component of minimum lease payments made under finance leases is also recognised as a finance expense using the effective interest rate method.
Borrowing costs are recognised in the income statement on an effective interest rate method in the period in which they are incurred except where such costs relate to qualifying assets for which the commencement date for capitalisation was on or after 1 January 2009. Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are included as part of the cost of that asset.
The income tax expense represents the current and deferred tax charges. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity.
Current tax is the Group's expected tax liability on taxable profit for the year using tax rates enacted or substantively enacted at the reporting date and any adjustments to tax payable in respect of previous years.
Taxable profit differs from that reported in the income statement because it is adjusted for items ofincome or expense that are assessable or deductible in other years and is adjusted for items that are never assessable or deductible.
Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the corresponding tax bases used in tax computations. Deferred tax is not recognised for the initial recognition of assets or liabilities in a transaction that is not a business combination and affects neither accounting nor taxable profit, or differences relating to investments in subsidiaries and joint ventures to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax is recognised on temporary differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at the tax rates expected to apply when they reverse based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted and are only offset where there is a legally enforceable right to offset current tax assets and liabilities.
Goodwill arises on the acquisition of subsidiaries, associates, joint ventures and other business assets and liabilities. Goodwill represents the excess of the cost of an acquisition over the Group's share of the identifiable net assets of the acquiree at the acquisition date.Where that excess is negative, it is immediately recognised in the consolidated income statement as a gain from a bargain purchase.
Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investments, goodwill acquired directly is included in the carrying amount of the investment.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The cash-generating units to which the goodwill has been allocated is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. The largest group to which goodwill is allocated for impairment testing purposes is the operating segment level.
If the recoverable amount of the cash-generating unit is lower than the carrying amount of the unit, then the impairment loss is first applied to the goodwill allocated to the cash-generating unit and then to the other assets of the unit on a pro-rata basis, based on the carrying amount of each asset in the unit. Any such impairment loss is recognised immediately in the income statement and is not subsequently reversed.
Other intangible assets, such as those identified on acquisition by the Group that have finite useful lives, are recognised at fair value and measured at cost less accumulated amortisation and impairment losses.
The Group has the following significant classes offinite life intangible assets:
On acquisition, value is attributable to customer contracts to the extent that future economic benefits are expected to flow from the contracts. The fair value of customer contracts recognised in the consolidated financial statements has been determined with the assistance of an independent expert. Secured customer contracts are amortised over their expected useful lives at a rate to match the expected future economic benefits.
On acquisition, value is attributed to non-contractual relationships and other contracts with long-standing or valued clients to the extent that future economic benefits are expected to flow from the relationships. The fair value of other contracts and related relationships recognised in the consolidated financial statements has been determined with the assistance of an independent expert. Other contracts and related relationships are amortised over their expected useful lives at a rate to match the expected future economic benefits.
Software acquired on acquisition is valued on a replacement cost basis and is amortised over its expected useful life on a straightline basis.
Value is attributable to contractual non-compete agreements acquired through acquisition to the extent that they ensure that the value paid for a business is not diminished by the previous owner or its employees taking away revenue through competition. Non-compete agreements are amortised over their useful lives on a straight-line basis.
The estimated useful lives for the Group's finite life intangible assets are:
| secured customer contracts | 1–3 years |
|---|---|
| other contracts and related relationships | 1–12 years |
| software | 1–3 years |
| non-compete agreements | 3 years |
Freehold and leasehold property, plant, machinery and
equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost or valuation of the assets, other than land, over their estimated useful lives using the straight-line method on the following basis:
| plant, machinery and equipment | between 8.3% and 33% per annum |
|---|---|
| freehold property | 2% per annum |
| leasehold property | over the period of the lease |
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Residual values of property, plant and equipment are reviewed and updated annually. Assets under construction are not depreciated until they become available for productive use.
Gains and losses on disposal are determined by comparing the proceeds from disposal against the carrying amount and are recognised in the income statement.
Investment property, which is property held to earn rentals and/or capital appreciation is stated at its fair value at the balance sheet date. Gains or losses arising from changes in the fair value ofinvestment property are included in the income statement for the period in which they arise.
The Group offers shared equity home ownership schemes under which qualifying home buyers can defer payment of part of the agreed sales price up to a maximum of 25% until the earlier of ten years, remortgage or resale of the property. On occurrence of one of these events, the Group will receive a repayment based on its contributed equity percentage and the applicable market value of the property as determined by a member of the Royal Institute of Chartered Surveyors. Early or part repayment is allowable under the scheme and amounts are secured by way of a second charge over the property.
The shared equity loans receivable are a hybrid financial instrument consisting of an initial principal component and an embedded derivative whose fair value varies in accordance with movements in the specific property prices to which the loan relates. The loans are non-interest bearing.
The Group has elected to designate the financial assets resulting from the shared equity schemes as fair value through profit or loss. This election can only be made at initial recognition and is irrevocable. As it is not practicable to obtain current market valuations on a property-by-property basis at each reporting date, the fair value of the loans is calculated on a portfolio basis using region specific property price indices, a discount rate which reflects the prevailing interest rate and a suitable risk premium for the borrowers, an anticipated loan duration and the expected rate of debtor default. Fair value movements are recognised in operating profit and the resulting financial asset is presented as a non-current receivable.
At each reporting date, the accuracy of each of these assumptions is reviewed and, where appropriate, adjusted to reflect changes in market conditions and the Group's experience with the debtors.
Revenue resulting from the sale of properties under the shared equity scheme is recognised at the fair value of the consideration received or receivable.
Inventories are stated at the lower of cost and net realisable value. The cost of work in progress comprises raw materials, direct labour, other direct costs and related overheads. Net realisable value is the estimated selling price less applicable costs.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
Trade receivables are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest rate method with an appropriate allowance for estimated irrecoverable amounts recognised in the income statement when there is objective evidence that the asset is impaired.
Cash and cash equivalents comprise cash in hand, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value.
Trade payables are recognised initially at fair value and are subsequently measured at amortised cost using the effective interest rate method.
Leases in which the Group assumes substantially all the risks and rewards incidental to ownership are classified as finance leases. Finance lease assets are recognised as assets of the Group at an amount equal to the lower of their fair value and the present value of the minimum lease payments, each determined at the inception of the lease. Subsequent to recognition,finance lease assets are measured at cost less accumulated depreciation and impairment losses.
The lease liability is included in the balance sheet as a finance lease liability. Lease payments are apportioned between finance charges and the reduction oflease liabilities so as to achieve a constant rate ofinterest on the remaining balance of the liability. Finance charges are charged directly against income.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.
A defined contribution plan is a post-retirement benefit plan under which the Group pays fixed contributions to a separate entity and has no legal or constructive obligation to pay further amounts. The Group recognises payments to defined contribution pension plans as staff costs in the income statement as and when they fall due. Prepaid contributions are recognised as an asset to the extent that a cash refund or reduction on future payments is available.
A defined benefit plan is a post-retirement plan other than a defined contribution plan. The Group's net liability is recognised in the balance sheet and is calculated by estimating the amount offuture benefit that employees have earned in return for their service in the current and prior periods and discounting this to its present value. Any unrecognised past service costs and the fair value of the plan's assets are deducted.
The calculation of the net liability is performed by a qualified actuary on an annual basis using the projected unit credit method. The cost of the plan is charged to the income statement based on actuarial assumptions at the beginning of the financial year.Where the calculation results in a benefit to the Group, the asset recognised is limited to the net of the total unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.
When the benefits of the plan are improved, the portion of increased benefit relating to past service by employees is recognised in the income statement on a straight-line basis over the average period until the benefits become vested. Where the benefits vest immediately, the expense is recognised in the income statement immediately.
Actuarial gains and losses are recognised in full in the statement of comprehensive income in the period in which they occur. Net pension obligations are included in the balance sheet at the present value of the plan liabilities, less the fair value of the plan assets.
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount of the obligation can be estimated reliably.
Financial assets, other than shared equity assets, are assessed for indicators ofimpairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been reduced. For loans and receivables, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The carrying amount offinancial assets is reduced by the impairment loss directly for allfinancial assets with the exception of trade receivables where the carrying amount is reduced through the use of a provision for impairment losses.When a trade receivable is uncollectible, it is written off against the provision. Subsequent recoveries of amounts previously written off are credited against the provision. Changes in the carrying amount of the allowance are recognised in the income statement.
With the exception of available for sale financial assets, if, in a subsequent period, the amount of the impairment loss previously recognised decreases and this decrease can be objectively related to an event that occurred after the impairment was recognised, the previously recognised impairment loss is reversed through the income statement.
Government grants are initially recognised as deferred income at fair value when there is reasonable assurance that the Group will comply with the conditions attached and the grants will be received.
Revenue arising from Government grants is recognised on either a stage of completion or legal completion basis.
The Group issues equity-settled and cash-settled share-based payments (share awards or share options) to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant and are recognised as an employee expense, with a corresponding increase in equity, over the period from the date of grant to the date on which the employees become unconditionally entitled to the awards or options.
Cash-settled share-based payments are measured at fair value at each balance sheet date and recognised as an expense, with a corresponding increase in liabilities, over the period from the date of grant to the date on which the employees become unconditionally entitled to the payment. Any changes in the fair value of the liability are recognised as an employee expense in the income statement. Fair value is measured by use of a modified Black-Scholes model. None of these awards when granted was subject to a share price related performance condition.
Related National Insurance Contributions are accrued on the basis of the intrinsic value of outstanding share-based payments and are remeasured at each reporting date.
The Group has applied the requirements ofIFRS 2 'Sharebased Payments' ('IFRS 2'). In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that had not vested as of 1 January 2005.
Certain joint ventures'financial receivables are measured at fair value at the balance sheet date. The fair value is determined by discounting the future cash flows directly associated with the financial receivables at a risk-adjusted discount rate. The change in fair value is recognised in equity to the extent of the Group's equity accounted investment.
Derivative financial instruments are used in joint ventures to hedge long-term floating interest rate and Retail Prices Index ('RPI') exposures.
Under IAS 39 'Financial Instruments: Recognition and Measurement' ('IAS 39'), interest rate and RPI swaps are stated in the balance sheet at fair value. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Where financial instruments are designated as cash flow hedges and are deemed to be effective, gains and losses on remeasurement relating to the effective portion are recognised in equity and gains and losses on the ineffective portion are recognised in the income statement, both to the extent of the Group's equity accounted investment.
Embedded derivatives are separated from the underlying host contract where the economic characteristics and risks of the host contract and the embedded derivative are not closely related except, as is the case with the Group's shared equity loan receivables, an election has been made to designate the financial asset which contains an embedded derivative as fair value through profit or loss as permitted by IAS 39. This designation can only be made at initial recognition and is irrevocable but can be made on a transaction-by-transaction basis.
Dividends to the Company's shareholders are recognised as a liability in the consolidated financial statements in the period in which thedividends are approvedby the Company's shareholders.
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
The Group has merged its Construction and Infrastructure Services segments, which are now reported in the new Construction & Infrastructure segment. The comparative result for the year to 31 December 2009 has been restated. Revenue is generated from each of the Group's operating segments as follows:
For management purposes, the Group is organised into four operating divisions: Construction & Infrastructure, Affordable Housing, Fit Out, Urban Regeneration and one specialist unit, Investments. Group Activities includes activities of the parent Company, Morgan Sindall Group plc. The divisions and the specialist unit are the basis on which the Group reports its segment information. Segment information about the Group's continuing operations is presented below:
| Construction & Infrastructure £m |
Affordable Housing £m |
£m | Urban Fit Out Regeneration £m |
Investments £m |
Group Activities £m |
£m | Eliminations £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|---|
| Revenue: external Revenue: inter-segment Operating profit/(loss) |
1,249.8 49.6 |
387.3 2.2 |
415.1 3.5 |
45.8 – |
3.9 – |
– – |
2,101.9 55.3 |
– (55.3) |
2,101.9 – |
| before amortisation and non-recurring items Share of results of associates and joint ventures after tax |
26.9 – |
16.3 (0.2) |
14.8 – |
2.5 (0.5) |
(4.1) 0.8 |
(4.1) – |
52.3 0.1 |
– – |
52.3 0.1 |
| Profit/(loss) from operations before amortisation and non-recurring items Amortisation ofintangible assets (note 9) |
26.9 (0.5) |
16.1 (0.3) |
14.8 – |
2.0 (4.7) |
(3.3) – |
(4.1) – |
52.4 (5.5) |
– – |
52.4 (5.5) |
| Non-recurring items (note 2) Profit/(loss) from operations |
(3.2) 23.2 |
(3.9) 11.9 |
– 14.8 |
2.0 (0.7) |
– (3.3) |
– (4.1) |
(5.1) 41.8 |
– – |
(5.1) 41.8 |
| Net finance income | (1.1) | (1.1) | |||||||
| Profit before income tax expense | 40.7 | 40.7 |
continued
| Construction & Infrastructure £m |
Affordable Housing £m |
£m | Urban Fit Out Regeneration £m |
Investments £m |
Group Activities £m |
£m | Eliminations £m |
Total £m |
|
|---|---|---|---|---|---|---|---|---|---|
| Revenue: external Revenue: inter-segment Operating profit/(loss) |
1,513.2 13.1 |
373.8 – |
291.2 – |
31.9 – |
3.4 6.1 |
– – |
2,213.5 19.2 |
– (19.2) |
2,213.5 – |
| before amortisation Share of results of associates |
30.1 | 14.9 | 13.8 | 0.6 | (3.0) | (6.0) | 50.4 | – | 50.4 |
| and joint ventures after tax | – | – | – | 0.1 | – | – | 0.1 | – | 0.1 |
| Profit/(loss) from operations before amortisation Amortisation ofintangible |
30.1 | 14.9 | 13.8 | 0.7 | (3.0) | (6.0) | 50.5 | – | 50.5 |
| assets (note 9) | (1.5) | – | – | (5.3) | – | – | (6.8) | – | (6.8) |
| Profit/(loss) from operations | 28.6 | 14.9 | 13.8 | (4.6) | (3.0) | (6.0) | 43.7 | – | 43.7 |
| Net finance income | 1.0 | 1.0 | |||||||
| Profit before income tax expense | 44.7 | 44.7 |
2010
| Construction & Infrastructure £m |
Affordable Housing £m |
£m | Urban Fit Out Regeneration £m |
Investments £m |
Group Activities £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Goodwill | 151.1 | 45.7 | – | 16.4 | – | – | 213.2 |
| Other intangible assets | 0.1 | 4.4 | – | 12.1 | – | – | 16.6 |
| Equity accounted joint ventures | – | – | – | 28.3 | 17.1 | – | 45.4 |
| Other assets | 418.8 | 229.0 | 118.9 | 21.7 | 0.5 | (42.3) | 746.6 |
| Total assets Total liabilities Other information: |
570.0 (449.7) |
279.1 (189.3) |
118.9 (99.1) |
78.5 (13.6) |
17.6 (19.6) |
(28.8) | (42.3) 1,021.8 (800.1) |
| Amortisation ofintangible assets (note 9) | 0.5 | 0.3 | – | 4.7 | – | – | 5.5 |
| Depreciation (note 10) | 6.7 | 0.3 | 1.0 | 0.2 | 0.1 | 0.5 | 8.8 |
| Property, plant and equipment additions (note 10) | 3.9 | 0.2 | 0.2 | – | – | 0.2 | 4.5 |
| Construction & Infrastructure £m |
Affordable Housing £m |
£m | Urban Fit Out Regeneration £m |
Investments £m |
Group Activities £m |
Total £m |
|
|---|---|---|---|---|---|---|---|
| Goodwill | 151.2 | 16.5 | – | 16.7 | – | – | 184.4 |
| Other intangible assets | 0.5 | – | – | 16.1 | – | – | 16.6 |
| Equity accounted joint ventures | – | 0.1 | – | 35.2 | 14.9 | – | 50.2 |
| Other assets | 372.4 | 168.7 | 73.1 | 14.7 | 3.8 | 7.0 | 639.7 |
| Total assets | 524.1 | 185.3 | 73.1 | 82.7 | 18.7 | 7.0 | 890.9 |
| Total liabilities | (321.9) | (131.0) | (44.0) | (39.8) | (18.4) | (126.5) | (681.6) |
| Other information: | |||||||
| Amortisation ofintangible assets (note 9) | 1.5 | – | – | 5.3 | – | – | 6.8 |
| Depreciation (note 10) | 7.2 | 0.2 | 1.1 | 0.3 | 0.2 | 0.3 | 9.3 |
| Property, plant and equipment additions (note 10) | 7.9 | 0.1 | 0.1 | 0.2 | – | 0.2 | 8.5 |
Significantly, all of the Group's operations are carried out in the UK.
Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements 89
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
Profit for the year is stated after charging/(crediting):
| 2010 £m |
2009 £m |
|
|---|---|---|
| Non-recurring items (see below) | 5.1 | – |
| Depreciation of property, plant and equipment (note 10) | 8.8 | 9.3 |
| Gain on disposal of property, plant and equipment | (0.5) | (0.4) |
| Staff costs (note 4) | 368.4 | 389.8 |
| Amortisation ofintangible assets (note 9) | 5.5 | 6.8 |
| Write downs in work in progress recognised as an expense | – | 1.0 |
| (Write back)/impairment of trade receivables (note 29) | (0.6) | 0.6 |
| Auditors' remuneration for audit and other services (see below) | 1.1 | 1.0 |
A more detailed analysis of non-recurring items is provided below:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Acquisition related costs | 3.9 | – |
| Integration costs | 3.2 | – |
| One off gain from a bargain purchase | (2.0) | – |
| Total non-recurring items | 5.1 | – |
| Total non-recurring items post income tax | 4.0 | – |
A more detailed analysis of auditors' remuneration is provided below:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Fees payable to the Company's auditors for the audit of the Company's annual report and accounts | 0.1 | 0.1 |
| Fees payable to the Company's auditors and their associates for other services to the Group The audit of the Company's subsidiaries and joint ventures pursuant to legislation |
0.9 | 0.8 |
| Total audit fees | 1.0 | 0.9 |
| Services to joint ventures relating to tax | 0.1 | 0.1 |
| Total non-audit fees | 0.1 | 0.1 |
| Total auditors' remuneration | 1.1 | 1.0 |
The average monthly number of people employed by the Group during the year was:
| 2010 No. |
2009 No. |
|
|---|---|---|
| Construction & Infrastructure | 4,807 | 5,989 |
| Affordable Housing | 2,204 | 1,324 |
| Fit Out | 549 | 569 |
| Urban Regeneration | 50 | 49 |
| Investments | 33 | 24 |
| Group Activities | 19 | 22 |
| 7,662 | 7,977 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Wages and salaries | 324.3 | 342.8 |
| Social security costs | 34.6 | 37.6 |
| Other pension costs | 9.5 | 9.4 |
| 368.4 | 389.8 |
continued
| 2010 £m |
2009 £m |
|
|---|---|---|
| Interest income on bank deposits | 0.2 | 1.8 |
| Other interest income Interest receivable from joint ventures |
0.2 1.3 |
0.2 1.3 |
| Finance income | 1.7 | 3.3 |
| Interest payable on bank overdrafts and borrowings Interest payable on finance leases Loan arrangement and commitment fees Interest payable to joint ventures Other interest payable |
– (0.5) (1.7) – (0.6) |
(1.7) (0.5) – – (0.1) |
| Finance costs | (2.8) | (2.3) |
| Net finance (costs)/income | (1.1) | 1.0 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Current tax expense: | ||
| UK corporation tax | 11.7 | 12.2 |
| Adjustment in respect of prior years | (1.4) | (1.1) |
| 10.3 | 11.1 | |
| Deferred tax expense: | ||
| Current year | 0.1 | 0.8 |
| Adjustment in respect of prior years | 0.5 | (0.1) |
| 0.6 | 0.7 | |
| Income tax expense for the year | 10.9 | 11.8 |
Corporation tax is calculated at 28.0% (2009: 28.0%) of the estimated assessable profit for the year.
The total tax charge for the year of £10.9m is lower (2009: lower) than the standard rate of corporation tax in the UK of 28.0% (2009: 28.0%). The difference can be reconciled as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Current tax expense: Profit before tax Income tax expense at UK corporation tax rate |
40.7 11.4 |
44.7 12.5 |
| Tax effect of: Share of net profit of equity accounted joint ventures Expenses that are not deductible in determining taxable profits Adjustments in respect of prior years Effect of expected forthcoming change in tax rates upon closing deferred tax balance Other |
– 0.8 (0.9) 0.1 (0.5) |
– 0.8 (1.2) – (0.3) |
| Income tax expense for the year | 10.9 | 11.8 |
| Effective tax rate for the year Effective tax rate for the year ignoring prior year adjustments |
26.8% 29.0% |
26.4% 29.1% |
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
Amounts recognised as distributions to equity holders in the period:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Second interim dividend for the year ended 31 December 2009 of 30.0p (2008:final dividend 30.0p) per share Interim dividend for the year ended 31 December 2010 of 12.0p |
12.7 | 12.7 |
| (2009: 12.0p) per share | 5.1 | 5.0 |
| 17.8 | 17.7 | |
| Proposed final dividend for the year ended 31 December 2010 of 30.0p (2009: second interim dividend of 30.0p) per share |
12.8 | 12.7 |
The proposed final dividend is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. The proposed final dividend will be paid on 16 May 2011 to shareholders on the register at 26 April 2011. The ex-dividend date will be 20 April 2011.
There are no discontinued operations in either the current or prior year.
The calculation of the basic and diluted earnings per share is based on the following data:
| Earnings before tax | 40.7 | |
|---|---|---|
| Deduct tax expense per the income statement Non-controlling interests |
(10.9) 0.1 |
44.7 (11.8) 0.1 |
| Earnings for the purposes of basic and dilutive earnings per share being net profit attributable to owners of the Company Add back: |
29.9 | 33.0 |
| amortisation expense (see notes 2 and 9) non-recurring items (note 2) |
5.5 4.0 |
6.8 – |
| Earnings for the purposes of adjusted basic and dilutive earnings per share being net profit attributable to owners of the Company adjusted for amortisation expense and non-recurring items |
39.4 | 39.8 |
| Number of shares | 2010 No. '000s |
2009 No. '000s |
|---|---|---|
| Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: |
42,391 | 42,281 |
| Share options Conditional shares not vested |
93 389 |
92 332 |
| Weighted average number of ordinary shares for the purposes of diluted earnings per share |
42,873 | 42,705 |
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 £5.93 (2009: £6.11).
continued
Earnings per share as calculated in accordance with IAS 33, 'Earnings per Share' are disclosed below:
| 2010 | 2009 | |
|---|---|---|
| Basic earnings per share | 70.5p | 77.9p |
| Diluted earnings per share | 69.7p | 77.1p |
Earnings per share adjusted for amortisation expense and non-recurring items:
| 2010 | 2009 | |
|---|---|---|
| Basic earnings per share adjusted for amortisation expense and non-recurring items | 92.9p | 93.9p |
| Diluted earnings per share adjusted for amortisation expense and non-recurring items | 91.9p | 93.0p |
A total of 2,246,025 share options that could potentially dilute earnings per share in the future were excluded from the above calculations because they were anti-dilutive at 31 December 2010 (2009: 2,820,160).
| Other intangible assets | ||||||
|---|---|---|---|---|---|---|
| Secured customer £m |
Other contracts and related contracts relationships £m |
Software £m |
Non-compete agreement £m |
Total other intangible assets £m |
Goodwill £m |
|
| Cost or valuation Balance at 1 January 2009 Additions in the year (note 25) |
4.2 – |
26.9 – |
0.9 – |
5.0 – |
37.0 – |
192.3 1.1 |
| Balance at 31 December 2009 | 4.2 | 26.9 | 0.9 | 5.0 | 37.0 | 193.4 |
| Balance at 1 January 2010 Additions in the year (note 25) Disposals during the year (note 25) |
4.2 – – |
26.9 5.8 (2.0) |
0.9 – – |
5.0 0.8 – |
37.0 6.6 (2.0) |
193.4 29.1 (0.3) |
| Balance at 31 December 2010 | 4.2 | 30.7 | 0.9 | 5.8 | 41.6 | 222.2 |
| Accumulated amortisation Balance at 1 January 2009 Amortisation charge for the year |
(2.9) (1.0) |
(7.6) (3.9) |
(0.7) (0.2) |
(2.4) (1.7) |
(13.6) (6.8) |
(9.0) – |
| Balance at 31 December 2009 | (3.9) | (11.5) | (0.9) | (4.1) | (20.4) | (9.0) |
| Balance at 1 January 2010 Amortisation charge for the year Disposals during the year |
(3.9) (0.3) – |
(11.5) (4.1) 0.9 |
(0.9) – – |
(4.1) (1.1) – |
(20.4) (5.5) 0.9 |
(9.0) – – |
| Balance at 31 December 2010 | (4.2) | (14.7) | (0.9) | (5.2) | (25.0) | (9.0) |
| Carrying amount Carrying amount at 31 December 2010 Carrying amount at 31 December 2009 |
– 0.3 |
16.0 15.4 |
– – |
0.6 0.9 |
16.6 16.6 |
213.2 184.4 |
Other contracts and related relationships arise from valuing the relationship with a number of clients where there is a secured pipeline of work or historic experience of a relationship and the real prospective opportunity of repeat work. Following a review of estimated useful lives, other contracts and related relationships will be fully amortised by 2019.
Software was fully amortised by 31 December 2009 and secured customer contracts were fully amortised by 31 December 2010.
The non-compete agreement acquired in 2007 expired in July 2010. The Group acquired a non-compete agreement with a cost of £0.8m as a result of the acquisition of Powerminster Gleeson Services Limited on 30 June 2010 (note 25). This is of three years duration and is being amortised on a straight-line basis.
Goodwill represents the value of people, track record and expertise acquired within acquisitions that are not capable of being individually identified and separately recognised.
Segmentation of goodwill and other intangible assets is disclosed in note 1.
Note 25 provides further details in respect of the fair value ofintangible assets identified on acquisition and for the determination of goodwill arising on acquisition. Amortisation charges in respect ofintangible assets with a finite life are recorded within administration expenses in the income statement. The amortisation rates are given in the significant accounting policies.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
In testing goodwill and other intangible assets for impairment, the carrying value of goodwill and other intangible assets in each cashgenerating unit has been compared against value in use. Value in use has been determined by using forecast pre-tax cash flows from Board approved budgets for the next three years and extrapolating future growth and applying risk-adjusted discount rates that are specific to the cash-generating unit in question.
Cash flows beyond three years have been extrapolated using an estimated growth rate of 2.50% (2009: 2.25%) which is equal to the HM Treasury's November 2010 forecast for the UK economy: a comparison ofindependent forecasts for GDP. The risk-adjusted nominal discount rates used are 12% (2009: 12%) for Construction & Infrastructure, 13% (2009: 13%) for Affordable Housing and 15% (2009: 15%) for Urban Regeneration. The directors have reviewed the rates used and believe they are still appropriate.
The key assumptions in forecasting pre-tax cash flows relate to future budgeted revenue, margin likely to be achieved and, likely rates oflong-term growth by market sector. Budgeted revenue and margin are based on views on past performance, secured workload and workload likely to be achievable in the short to medium-term, given trends in the relevant market sector as well as macroeconomic factors. In carrying out this exercise, no impairment of goodwill or other intangible assets has been identified.
| Owned plant, Leased plant, machinery and machinery and equipment £m |
equipment £m |
Freehold property and land £m |
Leased property £m |
Total £m |
|
|---|---|---|---|---|---|
| Cost or valuation | |||||
| Balance at 1 January 2009 | 38.7 | 13.5 | 2.8 | 7.8 | 62.8 |
| Additions in the year | 5.7 | 2.0 | – | 0.8 | 8.5 |
| Transfers | 1.2 | (1.2) | – | – | – |
| Disposals during the year | (1.6) | (1.1) | (0.4) | – | (3.1) |
| Balance at 31 December 2009 | 44.0 | 13.2 | 2.4 | 8.6 | 68.2 |
| Balance at 1 January 2010 | 44.0 | 13.2 | 2.4 | 8.6 | 68.2 |
| Additions in the year | 2.8 | 0.7 | – | 1.0 | 4.5 |
| Additions through acquisitions | 1.4 | – | – | – | 1.4 |
| Transfers | 0.8 | (0.8) | – | – | – |
| Disposals during the year | (2.7) | (0.3) | – | (0.2) | (3.2) |
| Balance at 31 December 2010 | 46.3 | 12.8 | 2.4 | 9.4 | 70.9 |
| Accumulated depreciation | |||||
| Balance at 1 January 2009 | (22.8) | (3.9) | – | (3.4) | (30.1) |
| Depreciation charge for the year | (6.4) | (1.7) | – | (1.2) | (9.3) |
| Transfers | (1.1) | 1.1 | – | – | – |
| Disposals during the year | 1.5 | 1.0 | – | – | 2.5 |
| Balance at 31 December 2009 | (28.8) | (3.5) | – | (4.6) | (36.9) |
| Balance at 1 January 2010 | (28.8) | (3.5) | – | (4.6) | (36.9) |
| Depreciation charge for the year | (5.9) | (1.5) | – | (1.4) | (8.8) |
| Transfers | (0.6) | 0.6 | – | – | – |
| Disposals during the year | 2.2 | 0.2 | – | 0.2 | 2.6 |
| Balance at 31 December 2010 | (33.1) | (4.2) | – | (5.8) | (43.1) |
| Net book value | |||||
| Net book value at 31 December 2010 | 13.2 | 8.6 | 2.4 | 3.6 | 27.8 |
| Net book value at 31 December 2009 | 15.2 | 9.7 | 2.4 | 4.0 | 31.3 |
Within the carrying value of property, plant and equipment, there are no assets under construction (2009: £nil).
Contractual commitments for the acquisition of property, plant and equipment are £0.1m (2009: £0.8m).
continued
| Valuation | 2010 £m |
2009 £m |
|---|---|---|
| At 1 January Additions in the year Revaluation in the year |
1.8 2.5 – |
– 1.8 – |
| At 31 December | 4.3 | 1.8 |
Investment properties comprise certain residential properties constructed by the Group as part oflarger mixed tenure projects for rental to social or private residential clients.
The fair value of the Group's investment property at 31 December 2010 is based on a valuation carried out at that date by the directors. The valuation, which conforms to International Valuation Standards, was determined by reference to market evidence of transaction proceeds for similar properties.
The property rental income earned by the Group from its investment property, all of which is leased out under operating leases, amounted to £0.1m (2009: £nil). Direct operating expenses arising on the investment property in the period amounted to £0.1m (2009: £nil).
Properties were transferred from inventories to investment properties late in 2009 and hence there was no material rental income or direct operating expense during the preceding year.
The Group has the following interests in significant joint ventures:
Access forWigan (Holdings) Limited is developing theWigan Life Centre.
Ashton Moss Developments Limited has developed a mixed use site in Manchester.
Blue Light Holdings Limited is a joint venture with Barclays Capital set up to hold the investment in a joint venture with Carden Croft for the Dorset Emergency Services PFI scheme.
Bromley Park Limited has developed a site for housing in Kent acquired from the Ministry of Defence.
Claymore Roads (Holdings) Limited is responsible for the upgrade and operation of the A92 between Dundee and Arbroath in Scotland.
Community Solutions Investment Partners Limited carries out strategic development and regeneration projects in the health sector.
ECfis a limited partnership with English Partnerships and Legal & General to develop mixed use regeneration schemes in assisted areas. Joint control is exercised through the board of the general partner at which each partner is represented by two directors and no decision can be taken without the agreement of a director representing each partner.
Hull Esteem Consortium PSP Limited is the private sector investor in the Hull BSF scheme currently building two schools and with a pipeline of a further 15.
ISISWaterside Regeneration is a limited partnership between BritishWaterways andWarp 4 Limited Partnership (itself a joint venture between Morley Fund Management and Muse Developments) to undertake regeneration of waterside sites. Joint control is exercised through the board of the general partner at which each of BritishWaterways andWarp 4 Limited Partnership is represented by three directors and no decision can be taken without the agreement of a director representing each partner.
Lewisham Gateway Developments Limited is redeveloping a mixed use site comprising retail, office, hotel, residential, education, health and leisure space.
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
Lingley Mere Business Park Development Company Limited is developing new office space and ancillary facilities atWarrington in Cheshire.
Morgan-Vinci Limited is responsible for the construction and operation of the Newport Southern Distributor Road.
North Shore Development Partnership Limited is creating a high quality extension to Stockton-on-Tees' town centre in partnership with Tees Valley Regeneration, Stockton Council and English Partnerships.
On 24 January 2011, this joint venture became a wholly owned subsidiary of the Group.
Renaissance Miles Platting Limited is a joint venture with IIC Miles Platting Equity Limited and Adactus Housing Association to refurbish existing homes and build new homes on a mixed tenure development under a PFI arrangement for Manchester City Council.
St Andrews Brae Developments Limited is securing planning permission for residential development.
Taycare Health (Holdings) Limited is invested 50% in a Non Profit Distributing project to develop two mental health hospitals for Tayside Health Board.
The Compendium Group Limited is a company formed to carry out strategic development and regeneration projects of a primarily residential nature.
In the course of the year, the Group acquired full control of three joint ventures in which it previously had a 50% interest (note 25).
Investments in equity accounted joint ventures are as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| At 1 January | 50.2 | 53.0 |
| Equity accounted share of net profits for the year | 0.1 | 0.1 |
| Increase in investment | 4.3 | 4.2 |
| Disposals | (5.8) | – |
| Dividends received | (2.0) | (7.7) |
| Movement on cash flow hedges | (1.4) | 0.6 |
| At 31 December | 45.4 | 50.2 |
The increase in investments in joint ventures during the year was mainly due to equity and loan investment in Hull Esteem Consortium PSP Limited and loan investment in Community Solutions Investment Partners Limited.
Of the dividends received in the year, £0.8m (2009: £2.2m) were paid in cash and £1.2m (2009: £5.5m) through settlement of amounts owing to joint ventures.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Non-current assets (100%) | 296.8 | 340.7 |
| Current assets (100%) | 376.9 | 306.3 |
| Current liabilities (100%) | (92.3) | (100.6) |
| Non-current liabilities (100%) | (458.4) | (436.6) |
| Net assets reported by equity accounted joint ventures (100%) | 123.0 | 109.8 |
| Revenue (100%) | 148.9 | 104.4 |
| Expenses (100%) | (148.5) | (106.6) |
| Net profit/(loss) (100%) | 0.4 | (2.2) |
continued
Results of equity accounted joint ventures:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Group share of profit before tax Group share ofincome tax expense |
0.6 (0.5) |
0.2 (0.1) |
| Group share of profit after tax | 0.1 | 0.1 |
Commitments in respect ofinterests in joint ventures:
| 2010 | 2009 | |
|---|---|---|
| £m | £m | |
| Commitment to provide further equity to Urban Regeneration joint ventures | 0.8 | 1.6 |
| Commitment to provide further equity and subordinated debt to PFI/PPP joint ventures | 12.0 | 7.1 |
| 12.8 | 8.7 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Balance at 1 January | 9.0 | – |
| Additions arising from the sale of properties | 4.0 | 8.9 |
| Additions through acquisitions (note 25) | 0.6 | – |
| Movement in fair value | 0.3 | 0.1 |
| Repayment | – | – |
| Balance at 31 December | 13.9 | 9.0 |
The Group has elected to recognise the shared equity loan receivables at fair value through profit or loss under IAS 39. This is an irrevocable election and results in all movements in the fair value of the loans being recognised in profit or loss.
All of the shared equity loan receivables are secured by way of a second charge over the property. During the year, there were no defaults on any of the shared equity loans (2009: £nil) and there were a very small number of voluntary repayments of shared equity loan receivables in the year (2009: £nil). All repayments were at values at or above the values held in the accounts. The Group's maximum credit exposure is limited to the carrying value of the shared equity loan receivables granted.
Because it is impracticable to obtain regular market valuations on a property-by-property basis and there is no directly observable fair value for individual loans arising from the sale of specific properties under the scheme, the Group has developed a modelfor determining the fair value of the portfolio ofloans based on region specific property prices, expected property price increases, expected loan defaults and a discount factor which reflects the interest rate expected on an instrument of similar risk and duration in the market. Details of the key assumptions made in this valuation are as follows:
| 2010 | 2009 | |
|---|---|---|
| Assumption | ||
| Period over which shared equity loan receivables are discounted | 7 years | 7 years |
| Weighted average annual property price increase assumed | 3.8% | 3.8% |
| Nominal discount rate applied to initial shared equity receivable | 6.6% | 6.6% |
| Rate of default assumed in valuation of shared equity loan portfolio | 0.0% | 0.0% |
At 31 December 2010, a total of 462 (2009: 302) properties had been sold under the shared equity scheme for which a loan was outstanding at the year end.
At 31 December 2010, the weighted average shared equity loan contribution (being the Group's weighted average loan as a proportion of the selling price of a property) was 25% (2009: 25%). The maximum loan contribution by the Group under the shared equity scheme is 25% (2009: 25%).
The fair value measurement for shared equity loan receivables is classified as Level 3 as defined by IFRS 7 'Financial Instruments: Disclosures'.
Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements 97
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
| 2010 £m |
2009 £m |
|
|---|---|---|
| Raw materials Work in progress |
2.2 138.9 |
3.5 137.7 |
| 141.1 | 141.2 |
Work in progress comprises land and housing, commercial and mixed developments in the course of construction.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Trade receivables (note 29) | 209.7 | 123.0 |
| Provision for impairment losses (note 29) | (2.0) | (2.9) |
| 207.7 | 120.1 | |
| Amounts owed by joint ventures (note 28) | 9.8 | 3.1 |
| Deferred tax asset (note 20) | – | – |
| Prepayments and accrued income | 5.5 | 8.2 |
| Other receivables | 6.2 | 10.9 |
| 229.2 | 142.3 |
The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The average credit period on revenue is 23 days (2009: 18 days). No interest is charged on the trade receivables outstanding balance. Trade receivables overdue are provided for based on estimated irrecoverable amounts.
Included in the Group's trade receivable balance are debtors with a carrying amount of £50.4m (2009: £32.7m) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the Group considers that the amounts are still recoverable. The average age of these receivables is 32 days (2009: 121 days).
The Group's exposure to credit risks and impairment losses related to trade and other receivables are disclosed in note 29, Financial Instruments.
In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and spread across the Group's operating segments. Accordingly, the directors believe that there is no further credit provision required in excess of the provision for impairment losses. No collateral is held by the Group as security.
Within the provision for impairment losses, there are no specific trade receivables (2009: £nil) from debtors which have been placed into liquidation or administration.
At the reporting date, there were no trade and other receivables which have had renegotiated terms that would otherwise have been past due.
continued
| 2010 £m |
2009 £m |
|
|---|---|---|
| Amounts due from construction contract customers Amounts due to construction contract customers |
178.4 (70.7) |
192.5 (49.0) |
| Carrying amount at the end of the year | 107.7 | 143.5 |
| Contract costs incurred plus recognised profits less recognised losses to date Less: progress billings |
7,497.7 | 9,607.7 (7,390.0) (9,464.2) |
| 107.7 | 143.5 |
Contract costs incurred plus recognised profits less recognised losses to date and progress billings include contract activity which the Group has not recognised in the income statement as it occurred prior to acquisition.
Amounts recoverable on construction contracts are stated at cost plus the profit attributable to that contract, less any impairment losses. Progress payments for construction contracts are deducted from amounts recoverable. Amounts due to construction contract customers represent amounts received in excess of revenue recognised on construction contracts.
At 31 December 2010, retentions held by customers for contract work amounted to £57.2m (2009: £62.0m).
None of the Group's amounts due from construction contract customers' balances is past due at the reporting date (2009: £nil). The Group does not hold any collateral over these balances.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Trade payables (note 29) | 149.9 | 145.9 |
| Amounts owed to joint ventures (note 28) | 0.8 | 0.8 |
| Other tax and social security | 20.4 | 21.2 |
| Accruals and deferred income | 480.7 | 396.2 |
| Other payables | 15.4 | 12.2 |
| 667.2 | 576.3 |
Trade payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method.
The directors consider that the carrying amount of trade payables approximates to their fair value. The average credit period taken for trade purchases is 25 days (2009: 23 days). No interest was incurred on outstanding balances. The Group has financial risk management policies in place to ensure that all payables are paid when due except in cases of genuine dispute.
Non-current liabilities include trade and other payables of £nil (2009: £0.1m) that fall due between two and five years.
| Minimum lease payments |
Capital element oflease payments |
|||
|---|---|---|---|---|
| 2010 £m |
2009 £m |
2010 £m |
2009 £m |
|
| Amounts payable under finance leases: Within one year In the second to fifth years inclusive After five years |
2.1 5.0 1.9 |
2.2 5.5 2.8 |
1.7 4.2 1.8 |
1.8 4.6 2.5 |
| Less:future finance charges | 9.0 (1.3) |
10.5 (1.6) |
7.7 n/a |
8.9 n/a |
| Present value oflease obligations | 7.7 | 8.9 | 7.7 | 8.9 |
| Current lease liability Non-current lease liability |
1.7 6.0 |
1.8 7.1 |
||
| 7.7 | 8.9 |
It is theGroup'spolicy tolease certainofitsproperty,plant andequipmentunder finance leases.The average lease termis six years (2009: five years).For the year ended31December 2010, the average effectiveborrowingrate was 5% (2009:6%). Interest rates are fixedat the contractdate.All leases areona fixedrepaymentbasis andnoarrangementshavebeenenteredintofor contingent rentalpayments.
All lease obligations are denominated in sterling. The fair value of the Group's lease obligations approximates to their carrying amount. The Group's obligations under finance leases are secured on the assets to which the leases relate.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Morgan Sindall Retirement Benefits Plan ('the Plan') was established on 31 May 1995 and currently operates on defined contribution principles for employees of the Group. The assets of the Plan are held separately from those of the Group in funds under the control of the Trustees of the Plan. The total cost charged to the income statement of £9.2m (2009: £9.2m) represents contributions payable to the defined contribution section of the Plan by the Group.
As at 31 December 2010, contributions of £1.0m (2009: £0.7m) were due in respect of December's contribution not paid over to the Plan. The Company, with the consent of the Trustees, can decide how to use monies held in a defined contribution general account.
The Group makes contributions on defined contribution principles to a number of Local Government Pension Schemes for employees who transferred from Connaught Partnerships Limited. The assets of these plans are held separately from those of the Group under the control of the Trustees of the plans. The total cost charged to the income statement of £0.1m (2009: £nil) represents contributions payable to these plans by the Group.
The Plan includes a defined benefit section comprising liabilities and transfers offunds representing the accrued benefit rights of active and deferred members and pensioners of pension plans of companies which are now part of the Group. These include salary related benefits for members in respect of benefits accrued before 31 May 1995 (and benefits transferred in from The Snape Group Limited Retirement Benefits Scheme include accruals up to 1 August 1997). No further defined benefit membership rights can accrue after those dates.
The most recent valuation of the Plan assets and the present value of the defined benefit liabilities was prepared at 31 December 2010. The present value of the defined benefit liabilities, the related current service cost and past service cost were measured using the projected unit credit method.
| Key assumptions used: | 2010 % |
2009 % |
|---|---|---|
| Discount rate | 5.4 | 5.6 |
| Expected return on the Plan assets | 4.8 | 4.9 |
| Expected rate of salary increases | 4.6 | 4.8 |
| Future pension increases(1) | 3.5 | 3.5 |
| Inflation increases | 3.6 | 3.8 |
(1) depending on their date ofjoining, members receive fixed pension increases of 3.0% or 3.5%.
For the disclosures as at 31 December 2010, the S1NXA series of tables (31 December 2009, the PXA92 series of tables) from the Continuous Mortality Investigation were adopted appropriate to members' actual years of birth and with a 95% scaling factor for males and 100% for females. Medium cohort projections with a minimum underpin of 1.5% were adopted for future improvements in life expectancy.
The average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date is as follows:
| 2010 | 2009 | |
|---|---|---|
| Male | 87.1 | 87.0 |
| Female | 89.6 | 89.9 |
The average life expectancy in years of a pensioner retiring at age 65, twenty years after the balance sheet date is as follows:
| 2010 | 2009 | |
|---|---|---|
| Male | 90.0 | 88.1 |
| Female | 92.5 | 90.9 |
An increase of one year to the average life expectancy at 65 would increase the present value of the Plan liabilities by around 3.0%. If such an assumption had been adopted as at 31 December 2010, the present value of the Plan liabilities would have increased to £8.8m (2009: increase of 3.0% with the present value of the Plan liabilities increasing from £8.9m to £9.2m).
The amount included in the balance sheet arising from the Group's liabilities in respect of the Plan is as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Present value of the Plan liabilities Fair value of the Plan assets |
(8.5) 6.6 |
(8.9) 5.7 |
| Deficit in the Plan liability recognised in the balance sheet | (1.9) | (3.2) |
continued
Amounts recognised in the income statement in respect of the Plan are as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Interest cost Expected return on the Plan assets |
(0.5) 0.3 |
(0.5) 0.3 |
| Net periodic cost | (0.2) | (0.2) |
The charge for the year has been included in administrative expenses. Actuarialgains and losses havebeen reportedin the consolidated statement of comprehensive income. The actual return on the Plan assets was a gain of £0.2m (2009: £0.4m).
Movements in the present value of the Plan liabilities were as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Liabilities at 1 January | (8.9) | (8.0) |
| Interest cost | (0.5) | (0.5) |
| Actuarial gain/(loss) | 0.6 | (0.8) |
| Benefits paid | 0.3 | 0.4 |
| Liabilities at 31 December | (8.5) | (8.9) |
The liabilities in respect of pensions in payment account for around 35% of the total liabilities (2009: 16%). The average term to retirement is 7.5 years for active members (i.e. members who are still employed by the Group and whose past service benefits are linked to their final salary but are no longer accruing final salary benefits) (2009: six years) and 6.4 years (2009: three years) for deferred members.
Movements in the value of the Plan assets were as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Assets at 1 January | 5.7 | 5.0 |
| Expected return on the Plan assets | 0.3 | 0.2 |
| Actuarial gains | 0.2 | 0.2 |
| Contributions from sponsoring company | 0.7 | 0.7 |
| Benefits paid | (0.3) | (0.4) |
| Assets at 31 December | 6.6 | 5.7 |
The effect of a 1% movement in the key financial assumptions is set out below:
| Increase of 1% £m |
Decrease of 1% £m |
|
|---|---|---|
| Discount rate | ||
| Effect on interest cost | – | – |
| Effect on the defined benefit obligation | (1.4) | 1.7 |
| Inflation rate | ||
| Effect on interest cost | – | – |
| Effect on the defined benefit obligation | 0.4 | (0.4) |
| Expected rate of return on assets Effect on the expected return on the Plan assets |
– | – |
The sensitivities to the interest cost and expected return on assets shown above relate to the calendar year ending 31 December 2010. The sensitivities to the defined benefit obligation relate to the liability as at 31 December 2009.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Actuarial (gain)/loss recognised in the consolidated statement of comprehensive income | (0.8) | 0.6 |
| Cumulative actuarial loss recognised in the statement of comprehensive income | 3.0 | 3.8 |
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Plan assets and the expected rate of return at the balance sheet date were as follows:
| Fair value of assets | Expected return | |||
|---|---|---|---|---|
| 2010 £m |
2009 £m |
2010 % |
2009 % |
|
| Fixed interest gilts | 3.3 | 3.2 | 4.2 | 4.4 |
| Corporate bonds | 3.3 | 2.5 | 5.4 | 5.6 |
| 6.6 | 5.7 |
The expected return on the Plan assets is determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity reflect long-term real rates of return expected in the respective markets.
The history of experience adjustments is as follows:
| 2010 £m |
2009 £m |
2008 £m |
2007 £m |
2006 £m |
|
|---|---|---|---|---|---|
| Present value of the Plan liabilities Fair value of the Plan assets |
(8.5) 6.6 |
(8.9) 5.7 |
(8.0) 5.0 |
(8.0) 4.7 |
(7.3) 4.8 |
| Deficit in the Plan | (1.9) | (3.2) | (3.0) | (3.3) | (2.5) |
| Experience adjustments on the Plan liabilities: Amount Percentage of the Plan liabilities |
0.6 6.7% |
(0.8) 8.9% |
0.2 (1.9%) |
(0.4) 4.4% |
0.7 (9.2%) |
| Experience adjustments on the Plan assets: Amount Percentage of the Plan assets |
0.3 3.6% |
0.2 2.6% |
(0.3) (6.6%) |
(0.5) (11.0%) |
– 0.4% |
The amount of contributions expected to be paid to the Plan during 2011 is £0.7m (2010: £0.7m).
The Group has a liability to this defined benefit scheme for former Gloucestershire County Council employees who transferred to the Group under TUPE arrangements. The amount of any liability to fund any deficit on the termination of the Contractor Admission Agreement is capped at £0.8m. This liability is not included in any of the disclosures above.
| Non-current asset amortisation £m |
Short-term timing differences £m |
Retirement benefit obligation £m |
Share-based payments £m |
Total £m |
|
|---|---|---|---|---|---|
| At 1 January 2009 Credit/(charge) to income Credit to equity |
1.5 0.2 – |
1.0 (0.4) – |
0.8 0.1 – |
0.4 (0.6) 0.8 |
3.7 (0.7) 0.8 |
| At 31 December 2009 | 1.7 | 0.6 | 0.9 | 0.6 | 3.8 |
| At 1 January 2010 Credit/(charge) to income (Charge)/credit to equity Acquisition of subsidiary Effect of change in tax rate: Income statement |
1.7 0.2 – (0.3) (0.1) |
0.6 (0.7) – – – |
0.9 (0.1) (0.3) – – |
0.6 0.1 0.6 – – |
3.8 (0.5) 0.3 (0.3) (0.1) |
| At 31 December 2010 | 1.5 | (0.1) | 0.5 | 1.3 | 3.2 |
The UK Corporation tax rate is set to reduce to 27% in April 2011, affecting the closing deferred tax balance as shown above. Further reductions in the corporation tax rate to 24% are expected but not yet legislated.
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Deferred tax within non-current assets | 3.2 | 3.8 |
At 31 December 2010, the Group had unused tax losses of £0.6m (2009: £0.6m) available for offset against future profits. No deferred tax asset has been recognised in respect of such losses due to the unpredictability offuture profit streams against which these losses may be utilised. Losses may be carried forward indefinitely.
continued
Current liabilities
| Contract provisions £m |
Employee provisions £m |
Total £m |
|
|---|---|---|---|
| At 1 January 2009 | – | – | – |
| Utilised | – | – | – |
| Additions | – | – | – |
| Released | – | – | – |
| At 31 December 2009 | – | – | – |
| At 1 January 2010 | – | – | – |
| Utilised | (7.5) | (12.3) | (19.8) |
| Additions through acquisitions (note 25) | 11.1 | 15.3 | 26.4 |
| Released | – | – | – |
| At 31 December 2010 | 3.6 | 3.0 | 6.6 |
The contract provisions were established on acquisition to reflect the fair value of novated contracts. Employee provisions relate to redundancy and other costs associated with contracts that did not novate.
| Employee provisions £m |
Insurance provisions £m |
Other £m |
Total £m |
|
|---|---|---|---|---|
| At 1 January 2009 Utilised Additions Released |
1.8 (0.1) – – |
8.8 (2.4) 3.6 – |
7.7 (2.6) – – |
18.3 (5.1) 3.6 – |
| At 31 December 2009 | 1.7 | 10.0 | 5.1 | 16.8 |
| At 1 January 2010 Utilised Additions Released |
1.7 (2.0) 1.8 (0.8) |
10.0 (1.7) 3.0 – |
5.1 (2.5) 1.8 (1.0) |
16.8 (6.2) 6.6 (1.8) |
| At 31 December 2010 | 0.7 | 11.3 | 3.4 | 15.4 |
Employee provisions comprise obligations to former employees other than retirement or post-retirement obligations. Insurance provisions include £1.9m (2009: £1.8m) held in the Group's captive insurance company, Newman Insurance Company Limited and comprise the Group's selfinsurance of certain risks. Other provisions include onerous lease commitments and legal claims.
The majority of the provisions are expected to be utilised within five years.
| 2010 | 2009 | |
|---|---|---|
| £m | £m | |
| Minimum lease payments under operating leases recognised as an expense for the year | 17.2 | 17.5 |
At 31 December 2010, the Group had outstanding commitments for minimum lease payments under non-cancellable operating leases which fall due as follows:
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Land and buildings £m |
Other £m |
Total £m |
Land and buildings £m |
Other £m |
Total £m |
|
| Within one year Within two to five years After five years |
6.9 17.5 5.2 |
2.7 2.8 – |
9.6 20.3 5.2 |
8.1 18.3 4.6 |
3.7 4.9 – |
11.8 23.2 4.6 |
| At 31 December | 29.6 | 5.5 | 35.1 | 31.0 | 8.6 | 39.6 |
Operating lease payments represent rentals payable by the Group for certain properties and other items. Leases are negotiated for an average term of three years (2009:five years) and rentals are fixed for an average of two years (2009:four years).
The total offuture minimum sublease payments expected to be received under non-cancellable subleases at 31 December 2010 is £0.9m (2009:£1.2m).
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
| 128 |
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 surety bond facilities, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business.
| 2010 | Expected return | |||
|---|---|---|---|---|
| No. '000s | £'000s | No. '000s | £'000s | |
| Issued and fully paid: At the beginning of the year Exercise of share options |
43,160 28 |
2,158 1 |
43,004 156 |
2,150 8 |
| At the end of the year | 43,188 | 2,159 | 43,160 | 2,158 |
The Company has one class of ordinary shares of 5p each ('shares') which carries no rights to fixed income. All ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company's residual assets.
No member shall, however, be entitled to vote at any general meeting in respect of any share held by him if any call or other sum then payable by him in respect of that share remains unpaid or if a member has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Act 2006.
The shares of the Company issued during the year are shown below. Details of employee share option schemes referred to are given below and in note 27.
27,870 shares were issued in respect of options exercised under the Company's 1995 Scheme for a total consideration of £1,394 (2009: 156,561 shares for a total consideration of £74,078). All options exercised under the 1995 Scheme during the year were settled on a net basis.
No shares were issued in respect of the ESOP 2007, the Save As You Earn scheme or the 2005 Plan (2009: nil).
The Company has four share option schemes:
Own shares at cost represent 781,444 (2009: 797,034) shares in the Company held in the Morgan Sindall Employee Benefit Trust ('the Trust') in connection with the ESOP 2007 and certain share incentive schemes as detailed in the remuneration report on pages 59 to 67. The trustees of the Trust purchase the Company's shares in the open market with financing provided by the Company on the basis of regular reviews of the share liabilities of the relevant schemes. A total of 781,444 (2009: 797,034) shares were unallocated at the year end and dividends on these shares have been waived. The cost of shares expected to be awarded is charged over the three year period to which the award relates. Based on the Company's share price at 31 December 2010 of £7.05 (2009: £6.00), the market value of the shares was £5,509,180 (2009: £4,782,204).
continued
On 30 June 2010, the Group acquired 100% of the issued ordinary share capital of Powerminster Gleeson Services Limited. The company subsequently changed its name to Lovell Powerminster Limited. Details of the net assets acquired and goodwill arising are as follows:
| Goodwill (note 9) | 6.7 |
|---|---|
| Net liabilities acquired | (0.1) |
| Total purchase consideration: cash | 6.6 |
| £m |
Goodwill arising on this acquisition represents the value of people, track record and expertise acquired within acquisitions that are not capable of being individually identified and separately recognised.
| Acquiree's | Fair value | ||
|---|---|---|---|
| carrying | Fair value adjustments |
||
| amount | |||
| £m | £m | £m | |
| Intangible fixed asset | – | 0.8 | 0.8 |
| Tangible fixed asset | 1.4 | – | 1.4 |
| Trade receivables | 3.4 | – | 3.4 |
| Trade creditors and accruals | (2.7) | (4.5) | (7.2) |
| Cash | 1.8 | – | 1.8 |
| Deferred tax | (0.3) | – | (0.3) |
| Net liabilities acquired | 3.6 | (3.7) | (0.1) |
| Purchase consideration settled in cash | 6.6 | ||
| Cash and cash equivalents acquired | (1.8) | ||
| Cash outflow on acquisition | 4.8 |
The acquired business contributed £7.1m of revenue in the period from 30 June 2010 to 31 December 2010. Due to the fact that the business has been integrated into the existing Affordable Housing division, it is impracticable to disclose the amount of operating profit that is included in the Group's results or for the full year.
On 9 September 2010, the Group acquired the business, obligations and certain assets from the administrators of Connaught Partnerships Limited ('Connaught'). Details of the assets acquired and provisional goodwill arising are as follows:
| £m | |
|---|---|
| Total purchase consideration: cash Net assets acquired |
28.0 5.6 |
| Goodwill (note 9) | 22.4 |
Goodwill arising on this acquisition represents the value of people, track record, expertise and opportunity to access new markets acquired within acquisitions that are not capable of being individually identified and separately recognised.
| Acquiree's carrying amount £m |
Provisional fair value adjustments £m |
Provisional fair value £m |
|
|---|---|---|---|
| Intangible fixed asset | – | 4.0 | 4.0 |
| Trade receivables and amounts on construction contracts recorded by Connaught | 72.4 | (44.4) | 28.0 |
| Provisions (note 21) | – | (26.4) | (26.4) |
| Net assets acquired | 72.4 | (66.8) | 5.6 |
| Purchase consideration settled in cash | 28.0 | ||
| Cash and cash equivalents acquired | – | ||
| Cash outflow on acquisition | 28.0 |
Provisionalfair value adjustments on trade receivables and amounts due from construction contract customers recorded by Connaught include correction of errors and adjustments to reflect the anticipated amount likely to be recovered.
| 02//50 |
|---|
| 51//72 |
| Consolidated financial statements 73//114 |
| 115//127 |
The acquired business contributed £20.9m of revenue in the period from 9 September 2010 to 31 December 2010. Due to the fact that the business has been integrated into the existing Affordable Housing division, it is impracticable to disclose the amount of operating profit that is included in the Group's results or for the full year.
The above acquisitions were made in order to create a full service social housing business covering new build, open market and social housing and planned and response maintenance.
The fair value of the acquired assets and liabilities are provisional due to the inherent uncertainty relating to asset realisations and quantification of provisions.
In the course of the year, the Group acquired full control of three legal entities in which it previously had 50% shareholdings. Two of the acquisitions were acquired at fair value and one was negotiated at a price which was less than fair value.
Details of the assets acquired and the gain arising are as follows:
| One off gain from a bargain purchase | (2.0) |
|---|---|
| Goodwill on original shareholdings | (2.3) 0.3 |
| Total purchase consideration Net assets acquired |
2.9 5.2 |
| Purchase consideration: Cash paid Fair value non-cash consideration |
0.1 2.8 |
| £m |
The gain has arisen because the assets were acquired at their respective equity cost rather than their value after applying equity accounting principles.
| Acquiree's carrying |
Fair value | ||
|---|---|---|---|
| amount £m |
adjustments £m |
Fair value £m |
|
| Intangible fixed assets | 1.1 | 0.7 | 1.8 |
| Shared equity loan receivables | 0.6 | – | 0.6 |
| Inventories | 12.7 | – | 12.7 |
| Trade receivables | 1.5 | – | 1.5 |
| Trade creditors and accruals | (13.0) | – | (13.0) |
| Cash and cash equivalents | 2.2 | – | 2.2 |
| Corporation tax | (0.6) | – | (0.6) |
| Net assets acquired | 4.5 | 0.7 | 5.2 |
| Purchase consideration settled in cash | 0.1 | ||
| Repayment ofloans in cash | 4.5 | ||
| 4.6 | |||
| Cash and cash equivalents acquired | (2.2) | ||
| Cash outflow on acquisition | 2.4 |
The acquired businesses contributed £24.6m of revenue and an operating profit of £5.2m before tax in the periods from acquisition to 31 December 2010. If the acquisitions had been completed on 1 January 2010, the total revenue from the acquired businesses would have been £24.6m.
continued
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Profit from operations for the year | 41.8 | 43.7 | |
| Adjusted for: | |||
| Amortisation offixed life intangible assets | 2 | 5.5 | 6.8 |
| Share of net profit of equity accounted joint ventures | 12 | (0.1) | (0.1) |
| Depreciation of property, plant and equipment | 2 | 8.8 | 9.3 |
| Expense in respect of share options | 0.7 | 1.0 | |
| Defined benefit obligation payment | 19 | (0.7) | (0.7) |
| Defined benefit obligation charge | 19 | 0.2 | 0.3 |
| Net gain from bargain purchase of subsidiary previously held as equity interest | 25 | (2.0) | – |
| Gain on disposal of property, plant and equipment | (0.5) | (0.4) | |
| Increase in shared equity loan receivables | 13 | (4.3) | (9.0) |
| Write downs in work in progress recognised as an expense | – | 1.0 | |
| Decrease in provisions | 21 | (1.4) | (1.5) |
| Operating cash flows before movements in working capital | 48.0 | 50.4 | |
| Decrease in inventories | 12.8 | 29.1 | |
| (Increase)/decrease in receivables | (66.8) | 62.3 | |
| Increase/(decrease) in payables and short-term provisions | 107.7 | (122.7) | |
| Movements in working capital | 53.7 | (31.3) | |
| Cash generated from operations | 101.7 | 19.1 | |
| Income taxes (paid)/received | (6.4) | 7.7 | |
| Interest paid | (2.2) | (1.8) | |
| Net cash inflow from operating activities | 93.1 | 25.0 |
Additions to leased property, plant and equipment during the year amounting to £0.7m (2009: £2.0m) and additions to leasehold property amounting to £nil (2009: £0.2m) were financed by new finance leases. 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.
The Company's 2005 Plan and the ESOP 2007 provide for a grant price equal to the average of the middle market price of the Company's shares at close of business on the five dealing days preceding the date of grant. The Company's 1995 Scheme provides for the average quoted middle market price of the Company's shares on the three dealing days preceding the date of grant. Details of the 1995 Scheme and the ESOP 2007 option vesting periods are given in note 24 and the vesting periods for options and share awards granted under the 2005 Plan are given in the remuneration report on pages 65 and 66.
Under the SAYE scheme, employees are granted an option to purchase shares at up to 20% less than the market price at grant in three years' time, depending on their entering into a contract to make monthly contributions into a savings account over the relevant period. These funds are used to fund the option exercise price. The scheme is open to all employees with six months' continuous service at the invitation date. No performance criteria are applied to the exercise of SAYE options.
The weighted average share price at the date of exercise for share options exercised during the year was £6.47 (2009: £5.82). The options outstanding at 31 December 2010 had a weighted average exercise price of £7.12 (2009: £7.76) and, a weighted average remaining contractual life of 1.2 years (2009: 1.6 years). In 2010, options under the ESOP 2007 were granted on 17 March and 24 May and the estimated fair value of the options granted on those dates was £0.1m (2009: £0.2m). Options and share awards under the 2005 Plan were granted on 17 March 2010. The estimated fair value of the options granted on those dates was £0.6m (2009: £0.5m) and the estimated fair value of the share awards granted on those dates was £1.0m (2009: £1.1m). There were no options granted under the SAYE scheme in 2010 (2009: nil).
Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements 107
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
A modified Black-Scholes model has been used to value the options and awards set out below. None of the options or awards granted was subject to a share price related performance condition.
| Mar 10 | May 10 | |
|---|---|---|
| 2007 ESOP options | ||
| Number of options granted | 63,000 | 50,000 |
| Weighted average fair value at date of grant per option | £1.00 | £0.88 |
| Weighted average share price at date of grant | £5.52 | £5.26 |
| Weighted average exercise price | £5.55 | £5.29 |
| Expected term (from date of grant)(2) | 6 years | 6 years |
| Expected volatility(3) | 40.00% | 40.00% |
| Expected dividend yield(4) | 7.60% | 8.00% |
| Risk-free rate | 3.00% | 2.40% |
| Options Mar 10 |
Share awards Mar 10(5) |
|
|---|---|---|
| 2005 Plan shares and options | ||
| Number of options/shares granted(1) | 630,776 | 181,062 |
| Weighted average fair value at date of grant (per option/share) | £1.00 | £5.52 |
| Weighted average share price at date of grant | £5.52 | £5.52 |
| Weighted average exercise price | £5.55 | n/a |
| Expected term (from date of grant)(2) | 6 years | 3 years |
| Expected volatility(3) | 40.00% | 51.00% |
| Expected dividend yield(4) | 7.60% | 0.00% |
| Risk-free rate | 3.00% | 2.60% |
(1) In March 2010, 630,776 options and 181,062 share awards were granted to executives of the Group under the 2005 Plan.
(2) Adjusted from maximum term, based on management's best estimate,for the effects of non-transferability, exercise restrictions, vesting conditions and behavioural considerations.
(5) At the end of the vesting period, award holders may receive the value of any dividends paid during the vesting period in respect of their vested shares. Consequently, the fair value is not discounted for value lost in respect of dividends.
The Group recognised total remuneration expenses of £0.7m and £1.0m related to equity-settled share-based payment transactions in 2010 and 2009 respectively.
continued
The following tables provide a summary of the options granted under the Group's employee share option schemes during the current and comparative year.
2010
| Balance at end of year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Grant date |
Exercise date on or after |
Expiry date |
Exercise price £ |
Balance at the beginning of year No. |
Options granted No. |
Options lapsed No. |
Options forfeited No. |
Options exercised No. |
No. | In issue Exercisable | Proceeds received £ (net of No. settlements) |
|
| 1995 Scheme | ||||||||||||
| 25 Feb 04 | 25 Feb 09 | 24 Feb 11 | 4.20 | 90,000 | – | 52,130 | – | 27,870 | 10,000 | 10,000 | 1,394 | |
| 14 Sep 04 | 14 Sep 09 | 13 Sep 11 | 4.38 | 60,000 | – | – | – | – | 60,000 | 60,000 | – | |
| 2007 Scheme | ||||||||||||
| 13 Aug 07 | 13 Aug 10 | 12 Aug 17 | 16.76 | 23,000 | – | – | – | – | 23,000 | 23,000 | – | |
| 24 Sep 07 | 24 Sep 10 | 23 Sep 17 | 15.81 | 37,000 | – | – | – | – | 37,000 | 37,000 | – | |
| 20 Dec 07 | 20 Dec 10 | 19 Dec 17 | 10.51 | 100,000 | – | 6,000 | – | – | 94,000 | 94,000 | – | |
| 15 Apr 08 | 15 Apr 11 | 14 Apr 18 | 10.03 | 50,000 | – | – | – | – | 50,000 | – | – | |
| 27 May 08 | 27 May 11 | 26 May 18 | 9.92 | 50,000 | – | – | – | – | 50,000 | – | – | |
| 28 Oct 08 | 28 Oct 11 | 27 Oct 18 | 4.36 | 42,500 | – | – | – | – | 42,500 | – | – | |
| 26 Nov 08 | 26 Nov 11 | 25 Nov 18 | 4.75 | 25,000 | – | – | – | – | 25,000 | – | – | |
| 3 Mar 09 | 3 Mar 12 | 2 Mar 19 | 5.35 | 94,000 | – | – | – | – | 94,000 | – | – | |
| 28 May 09 | 28 May 12 | 27 May 19 | 6.36 | 90,000 | – | – | – | – | 90,000 | – | – | |
| 17 Mar 10 | 17 Mar 13 | 16 Mar 20 | 5.55 | – | 63,000 | – | – | – | 63,000 | – | – | |
| 24 May 10 | 24 May 13 | 23 May 20 | 5.29 | – | 50,000 | – | – | – | 50,000 | – | – | |
| 2005 Plan | ||||||||||||
| 20 May 05 | 20 May 08 | 19 May 15 | 7.24 | 318,024 | – | – | – | – | 318,024 | 318,024 | – | |
| 5 Apr 06 | 5 Apr 09 | 4 Apr 16 | 12.59 | 246,624 | – | 17,872 | – | – | 228,752 | 228,752 | – | |
| 6 Mar 07 | 6 Mar 10 | 5 Mar 17 | 12.15 | 258,024 | – | 258,024 | – | – | – | – | – | |
| 9 Apr 08 | 9 Apr 11 | 8 Apr 18 | 10.39 | 342,066 | – | 32,484 | – | – | 309,582 | – | – | |
| 16 Jun 08 | 16 Jun 11 | 15 Jun 18 | 7.42 | 25,048 | – | – | – | – | 25,048 | – | – | |
| 30 Mar 09 | 30 Mar 12 | 29 Mar 19 | 5.80 | 503,018 | – | – | – | – | 503,018 | – | – | |
| 17 Mar 10 | 17 Mar 13 | 16 Mar 20 | 5.55 | – | 630,776 | – | – | – | 630,776 | – | – | |
| 2008 SAYE Scheme |
||||||||||||
| 1 Jul 08 | 1 Sep 11 | 28 Feb 12 | 7.02 1,280,380 | – | – | 259,761 | – 1,020,619 | 19,819 | – | |||
| Total | 3,634,684 | 743,776 | 366,510 | 259,761 | 27,870 3,724,319 | 790,595 | 1,394 | |||||
Morgan Sindall Group plc Annual report and accounts 2010 Consolidated financial statements 109
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
2009
| Balance at end of year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Grant date |
Exercise date on or after |
Expiry date |
Exercise price £ |
Balance at the beginning of year No. |
Options granted No. |
Options lapsed No. |
Options forfeited No. |
Options exercised No. |
No. | In issue Exercisable | Proceeds received £ (net of No. settlements) |
|
| 1995 Scheme | ||||||||||||
| 29 Oct 02 | 29 Oct 07 | 28 Oct 09 | 2.70 | 246,000 | – | 93,354 | – | 152,646 | – | – | 73,882 | |
| 25 Feb 04 | 25 Feb 09 | 24 Feb 11 | 4.20 | 100,000 | – | 6,085 | – | 3,915 | 90,000 | 90,000 | 196 | |
| 14 Sep 04 | 14 Sep 09 | 13 Sep 11 | 4.38 | 60,000 | – | – | – | – | 60,000 | 60,000 | – | |
| 2007 Scheme | ||||||||||||
| 13 Aug 07 | 13 Aug 10 | 12 Aug 17 | 16.76 | 23,000 | – | – | – | – | 23,000 | – | – | |
| 24 Sep 07 | 24 Sep 10 | 23 Sep 17 | 15.81 | 41,000 | – | – | 4,000 | – | 37,000 | – | – | |
| 20 Dec 07 | 20 Dec 10 | 19 Dec 17 | 10.51 | 100,000 | – | – | – | – | 100,000 | – | – | |
| 15 Apr 08 | 15 Apr 11 | 14 Apr 18 | 10.03 | 55,000 | – | – | 5,000 | – | 50,000 | – | – | |
| 27 May 08 | 27 May 11 | 26 May 18 | 9.92 | 55,000 | – | – | 5,000 | – | 50,000 | – | – | |
| 28 Oct 08 | 28 Oct 11 | 27 Oct 18 | 4.36 | 42,500 | – | – | – | – | 42,500 | – | – | |
| 26 Nov 08 | 26 Nov 11 | 25 Nov 18 | 4.75 | 25,000 | – | – | – | – | 25,000 | – | – | |
| 3 Mar 09 | 3 Mar 12 | 2 Mar 19 | 5.35 | – | 94,000 | – | – | – | 94,000 | – | – | |
| 28 May 09 | 28 May 12 | 27 May 19 | 6.36 | – | 90,000 | – | – | – | 90,000 | – | – | |
| 2005 Plan | ||||||||||||
| 20 May 05 | 20 May 08 | 19 May 15 | 7.24 | 318,024 | – | – | – | – | 318,024 318,024 | – | ||
| 5 Apr 06 | 5 Apr 09 | 4 Apr 16 | 12.59 | 258,532 | – | – | 11,914 | – | 246,618 246,624 | – | ||
| 6 Mar 07 | 6 Mar 10 | 5 Mar 17 | 12.15 | 271,357 | – | – | 13,333 | – | 258,024 | – | – | |
| 9 Apr 08 | 9 Apr 11 | 8 Apr 18 | 10.39 | 342,066 | – | – | – | – | 342,066 | – | – | |
| 16 Jun 08 | 16 Jun 11 | 15 Jun 18 | 7.42 | 25,048 | – | – | – | – | 25,048 | – | – | |
| 30 Mar 09 | 30 Mar 12 | 29 Mar 19 | 5.80 | – | 503,018 | – | – | – | 503,018 | – | – | |
| 2008 SAYE Scheme |
||||||||||||
| 1 Jul 08 | 1 Sep 11 | 28 Feb 12 | 7.02 1,549,831 | – | – | 269,451 | – 1,280,380 | 20,726 | – | |||
| Total | 3,512,358 | 687,018 | 99,439 | 308,698 | 156,561 3,634,678 735,374 | 74,078 | ||||||
The Group grants to certain employees share appreciation rights ('phantoms') that require the Group to pay the intrinsic value of the phantoms to the employee at the date of exercise. As cash-settled share-based payment awards, the phantoms are revalued at the end of each reporting year. There were no phantoms granted during the year (2009: nil). Phantoms are exercisable between three and eight years from the date of grant of the phantom. The total intrinsic value at 31 December 2010 was £nil (2009: £nil). The Group had recorded liabilities of £0.1m at 31 December 2010 in respect of phantoms (2009: £0.1m).
| Date of grant | price £ |
Balance at Exercise beginning of the year No. |
Phantom options lapsed No. |
Phantom options exercised No. |
Balance at end of the year No. |
Fair value per award £ |
|---|---|---|---|---|---|---|
| 17 Aug 2005 | 6.65 | 68,000 | – | – | 68,000 | 0.78 |
| 11 Oct 2005 | 8.49 | 51,000 | – | – | 51,000 | 0.25 |
| 5 Dec 2005 | 8.31 | 60,000 | – | – | 60,000 | 0.28 |
| 5 Apr 2006 | 12.59 | 50,000 | – | – | 50,000 | 0.01 |
| 5 Apr 2006(1) | 12.59 | 50,000 | – | – | 50,000 | 0.01 |
| 18 May 2006 | 11.09 | 30,000 | – | – | 30,000 | 0.04 |
| 10 Aug 2006 | 10.86 | 10,000 | – | – | 10,000 | 0.05 |
| 9.67(2) 319,000 | – | – | 319,000 | 0.27(2) |
(1) This grant is subject to a performance condition. To the extent that this condition is not expected to be satisfied and the options are expected to lapse, the income statement charge is adjusted. Similar adjustment is made in the event of a bad leaver.
(2) Weighted average.
The market price of a share on 31 December 2010 was £7.05 (2009: £6.00).
continued
The fair value of the phantoms was determined by the use of a modified Black-Scholes model using the assumptions noted in the table below:
| 31 Dec 2010 | 31 Dec 2009 | |
|---|---|---|
| Expected term (from date of grant)(1) | 4.6 – 5.6 years | 4.6 – 5.6 years |
| Expected remaining term | 1 year | 1 – 1.6 years |
| Share price at valuation date | £7.05 | £6.00 |
| Expected volatility of return(2) | 29% | 43% – 60% |
| Expected dividend yield(3) | 6.0% | 7.0% |
| Risk-free rate | 0.7% | 2.2% |
(1) Adjusted from maximum term, based on management's best estimate,for the effects of non-transferability, exercise restrictions, vesting conditions and behavioural considerations.
(2) Assumed to be equal to historic volatility of the Company's share price over the year prior to grant equal in length to the expected term.
(3) Set as equal to dividend yield prevailing at date of grant.
The Group recorded a credit to profit of £nil during the year in respect of phantoms (2009: £nil credit).
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.
During the year, Group companies entered into transactions to provide construction and property development services with related parties, all of which were joint ventures, not members of the Group. Transactions and amounts owed at the year end are as follows:
| Provision of goods and services |
Amounts owed by/(to) related parties |
|||
|---|---|---|---|---|
| 2010 £m |
2009 £m |
2010 £m |
2009 £m |
|
| Morgan-Vinci Limited | – | 0.1 | – | – |
| Community Solutions Investment Partners Limited | 19.5 | 12.9 | 0.5 | 1.4 |
| Renaissance Miles Platting Limited | 0.1 | 0.1 | – | – |
| Blue Light Holdings Limited | 0.3 | 15.0 | 0.1 | 0.2 |
| Ashton Moss Developments Limited | – | – | (0.2) | (0.2) |
| Bromley Park Limited | – | – | (0.6) | (0.6) |
| Chatham Place (Building 1) Limited | 0.1 | 0.4 | n/a | – |
| ECf (General Partner) Limited | 1.7 | 1.4 | – | 0.6 |
| Eurocentral Partnership Limited | 1.9 | – | n/a | 0.2 |
| Lewisham Gateway Developments Limited | – | – | 0.2 | 0.2 |
| Lingley Mere Business Park Development Company Limited | – | 0.3 | – | – |
| North Shore Development Partnership Limited | – | – | 0.1 | 0.1 |
| Ician Developments Limited | – | – | n/a | 0.4 |
| The Compendium Group Limited | 0.5 | 1.4 | 0.1 | – |
| Access forWigan (Holdings) Limited | 0.1 | – | – | – |
| Hull Esteem Consortium PSP Limited | 50.2 | – | 4.8 | – |
| St Andrews Brae Developments Limited | 4.0 | – | 4.0 | – |
| Taycare Health (Holdings) Limited | 1.8 | – | – | – |
| 80.2 | 31.6 | 9.0 | 2.3 |
| Amounts owed by/(to) related parties |
||
|---|---|---|
| 2010 £m |
2009 £m |
|
| Amounts owed by related parties Amounts owed to related parties |
9.8 (0.8) |
3.1 (0.8) |
| 9.0 | 2.3 |
All transactions with related parties were made on an arm's length basis.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The amounts outstanding are unsecured and will be settled in cash. Other than construction related performance guarantees given in the ordinary course of business, no guarantees have been given to or received from related parties. No provisions have been made for doubtful debts in respect of amounts owed by related parties. All amounts owed to or owing by related parties are non-interest bearing.
The remuneration of the directors, who are key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'. Further information about the remuneration ofindividual directors is provided in the audited part of the remuneration report on pages 64 to 67.
| 2010 £m |
2009 £m |
|
|---|---|---|
| Emoluments | 3.3 | 2.2 |
| Social security contributions | 0.3 | 0.3 |
| Other long-term benefits | 0.1 | 0.2 |
| Share option exercises | – | – |
| Post-employment benefits | 0.2 | 0.4 |
| 3.9 | 3.1 |
In the course of the year, Eurocentral Partnership Limited (a wholly owned subsidiary of the Group) sold some land and buildings to a syndicate ofinvestors on arm's length terms. The Group retained a small minority investment in this syndicate. Senior employees and directors of Muse Developments Limited, together with John Morgan (£269k) and Paul Smith (£163k), purchased part of the investment in the syndicate in cash. The transaction was carried out on an arm's length basis and on the same commercial terms as those offered to the other investors in the syndicate. There are no amounts outstanding.
There have been no other related party transactions with any director either during the year or in the subsequent period to 4 March 2011.
No director held any material interest in any contract with the Company or any Group company in the year or in the subsequent period to 4 March 2011.
Cash and cash equivalents comprise cash in hand, demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. The carrying amount of these assets approximates to their fair value.
Included within cash and cash equivalents is £26.7m (2009: £23.8m) which is the Group's share of cash held within jointly controlled operations.
The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. A formal risk assessment and management framework for assessing, monitoring and managing the strategic operational and financial risks of the Group is in place to ensure appropriate risk management ofits operations. Internal control and risk management systems are embedded in the operations of the divisions.
The key business risks identified are discussed in detail in the business review on pages 36 to 39 and the corporate governance statement on pages 57 and 58.
continued
The Group has exposure to a variety offinancial risks through the conduct ofits operations. Risk management is governed by the Group's operational policies, which are subject to periodic review by the Group's internal audit team and twice yearly review by management. The policies include written principles for the Group's risk management as well as specific policies, guidelines and authorisation procedures in respect of specific risk mitigation techniques such as the use of derivative financial instruments. The Group does not enter into derivative financial instruments for speculative purposes.
The following represent the key financial risks resulting from the Group's use offinancial instruments:
Credit risk is the risk offinancial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and results primarily from the Group's trade receivables and amounts due from construction contract customers.
The Group's primary exposure to credit risk arises from the potentialfor non-payment or default from construction contract debtors and trade receivables. The degree to which the Group is exposed to this credit risk depends on the individual characteristics of the contract counterparty and the nature of the project. The Group's credit risk is also influenced by general macroeconomic conditions. The Group primarily operates in one geographical segment, being the UK. The Group does not have any significant concentration risk in respect of amounts due from construction contract customers or trade receivable balances at the reporting date with receivables spread across a wide range of customers. Due to the nature of the Group's operations, it is normal practice for customers to hold retentions in respect of contracts completed. Retentions held by customers at 31 December 2010 were £57.2m (2009: £62.0m).
The Group manages its exposure to credit risk through the application ofits credit risk management policies which specify the minimum requirements in respect of the creditworthiness of potential customers, assessed through reports from credit agencies, and the timing and extent of progress payments in respect of contracts.
The risk management policies of the Group also specify procedures in respect of obtaining parent company guarantees or, in certain circumstances, use of escrow accounts which, in the event of default, mean that the Group may have a secure claim. The Group does not require collateral in respect of amounts due from construction contract customers or trade receivables.
The Group manages the collection of retentions through its post-completion project monitoring procedures and ongoing contact with customers to ensure that potential issues that could lead to the non-payment of retentions are identified and addressed promptly. The Group assesses amounts due from construction contract customers and trade receivable balances for impairment and establishes a provision for impairment losses that represents its estimate ofincurred losses.
The ageing of trade receivables at the reporting date was as follows:
| 2010 | 2009 | |||
|---|---|---|---|---|
| Gross trade receivables £m |
Provision for impairment losses £m |
Gross trade receivables £m |
Provision for impairment losses £m |
|
| Not past due | 157.7 | 0.4 | 88.9 | 1.5 |
| Past due 1 to 30 days | 15.3 | 0.1 | 13.1 | – |
| Past due 31 to 120 days | 16.8 | 0.1 | 10.4 | – |
| Past due 121 to 365 days | 10.2 | 0.5 | 4.4 | 0.2 |
| Greater than one year | 9.7 | 0.9 | 6.2 | 1.2 |
| 209.7 | 2.0 | 123.0 | 2.9 |
The movement in the provision for impairment losses on trade receivables during the year was as follows:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Balance at beginning of the year | 2.9 | 2.7 |
| Amounts written off during the year Amounts recovered during the year |
(0.2) (0.1) |
(0.2) (0.2) |
| (Decrease)/increase in provision recognised in the income statement | (0.6) | 0.6 |
| Balance at 31 December | 2.0 | 2.9 |
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The ultimate responsibility for liquidity risk rests with the Board.
The Group aims to manage liquidity by ensuring that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stress conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
The Group actively manages its liquidity profile whilst ensuring that the return achieved on cash and investments is maximised. The Group had no drawn down debt facilities as at 31 December 2010 (2009: £nil).
As discussed below under capital management, the Group does not have any derivative or non-derivative financial liabilities with the exception offinance lease liabilities, trade and other payables, current tax liabilities and retirement benefit obligations. Current tax liabilities and trade and other payables are generally non-interest bearing and, therefore, have no weighted average effective interest rates. Retirement benefit obligations are measured at the net of the present value of retirement benefit obligations and the fair value of the Plan assets. Finance lease liabilities are carried at the present value of the minimum lease payments. An analysis of the maturity profile for finance lease liabilities is contained in note 18.
The Group reports cash balances daily and invests surplus cash to maximise income whilst preserving credit quality. The Group prepares weekly short-term and monthly long-term cash forecasts, which are used to assess the Group's expected cash performance and compare with the facilities available to the Group and the Group's covenants.
In addition to its cash balances, the Group has £100m of committed loan facilities available until mid-2012.
Key risks to liquidity and cash balances are a downturn in contracting volumes, a decrease in the value of open market sales, deterioration in credit terms obtainable in the market from suppliers and subcontractors, a downturn in the profitability of work, delayed receipt of cash from customers and the risk that major clients or suppliers suffer financial distress leading to non-payment of debts or costly and time consuming reallocation and rescheduling of work. Certain measures and KPIs are continually monitored throughout the Group and used to quickly identify issues as they arise, enabling the Group to address them promptly.
Key amongst these are continual monitoring of the forward order book, including the status of orders and likely timescales for realisation so that contracting volumes are well understood; monitoring of overhead levels to ensure they remain appropriate to contracting volumes, weekly monitoring of open market house sales volumes and prices; continual monitoring of working capital exceptions (overdue debts and conversion of work performed into certificates and invoices); continual review oflevels of current and forecast profitability on contracts; review of client and supplier credit references; and approval of credit terms with clients and suppliers to ensure they are appropriate.
The ageing of trade payables at the reporting date was as follows:
| 2010 | 2009 | |
|---|---|---|
| £m | £m | |
| Not past due | 123.9 | 128.4 |
| Past due 1 to 30 days | 12.0 | 6.6 |
| Past due 31 to 120 days | 7.4 | 7.5 |
| Past due 121 to 365 days | 6.6 | 3.4 |
| Greater than one year | – | 0.1 |
| 149.9 | 146.0 |
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates or equity prices, will affect the Group's income or the carrying amount ofits holdings offinancial instruments. The objective of market risk management is to achieve a level of market risk that is within acceptable parameters as set out in the Group risk management framework.
The Group is not exposed to significant interest rate risk as it does not have significant interest bearing liabilities and its only interest bearing asset is cash invested on a short-term basis.
Certain of the Group's equity accounted joint ventures enter into interest rate swaps to manage their exposure to interest rate risk arising on floating rate bank borrowings.
The Group's share ofjoint ventures' interest rate and Retail Prices Index swap contracts with nominal values of £129.0m (2009: £80.8m) have fixed interest payments at an average rate of 4.83% (2009: 5.01%) for periods up until 2041.
continued
The Group's share of the fair value of swaps entered into at 31 December 2010 by joint ventures is estimated at a £3.1m liability (2009: £1.7m liability). These amounts are based on market values of equivalent instruments at the balance sheet date. All interest rate swaps are designated as hedging instruments and are effective as cash flow hedges. The fair value thereof has been taken to the hedging reserve.
The majority of the Group's operations are carried out in the UK and the Group has an insignificant level of exposure to currency risk on sales and purchases. Given the insignificant exposure to foreign currency movements, the Group's policy is not to hedge foreign currency transactions unless they are material, at which point derivative financial instruments are entered into so as to hedge forecast or actualforeign currency exposures.
The Board aims to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business.
The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings as disclosed in note 24 and the consolidated statement of changes in equity. The cash and cash equivalents are supplemented by the £100m of bank facilities which are committed until mid-2012.
The Group dividend policy is stated in the business review on page 34.
The Board aims to achieve a suitable balance between higher returns that may be possible through borrowing and the stability afforded by a sound capital position.
There were no changes in the Group's approach to capital management during the year and the Group is not subject to any capital requirements imposed by regulatory authorities.
There were no significant subsequent events that affected the financial statements of the Group.
Morgan Sindall Group plc Annual report and accounts 2010 Company financial statements 115
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
We have audited the parent company financial statements of Morgan Sindall Group plc for the year ended 31 December 2010 which comprise the Company balance sheet, the combined Company statement of movements in reserves and shareholders' funds, the statement of significant accounting policies and the related notes 1 to 14. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body,for our audit work,for this report, or for the opinions we have formed.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
In our opinion, the parent company financial statements:
In our opinion:
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
We have reported separately on the group financial statements of Morgan Sindall Group plc for the year ended 31 December 2010.
(Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 4 March 2011
Morgan Sindall Group plc Annual report and accounts 2010 Company financial statements 117
at 31 December 2010
Directors' report: business review 02//50 Directors' report: governance 51//72 Consolidated financial statements 73//114 Company financial statements 115//127 Shareholder information 128
| Notes | 2010 £m |
2009 £m |
|
|---|---|---|---|
| Fixed assets | |||
| Tangible assets Investments |
4 5 |
0.8 372.1 |
1.2 322.2 |
| 372.9 | 323.4 | ||
| Current assets | |||
| Trade debtors | 0.1 | 0.1 | |
| Amounts owed by subsidiary undertakings | 66.2 | 88.6 | |
| Other debtors | 0.3 | 0.1 | |
| Prepayments and accrued income | 0.9 | 1.6 | |
| Deferred tax asset Cash at bank and in hand |
6 | 1.7 109.7 |
1.0 85.2 |
| 178.9 | 176.6 | ||
| Creditors: amounts falling due within one year | |||
| Bank overdraft | (158.2) | (122.3) | |
| Trade creditors | (0.6) | (2.6) | |
| Amounts owed to subsidiary undertakings | (201.3) | (170.4) | |
| Corporation tax payable | (22.5) | (19.1) | |
| Other tax and social security | (0.3) | (0.2) | |
| Other creditors | (1.1) | (0.8) | |
| Accruals and deferred income | (7.8) | (3.5) | |
| (391.8) | (318.9) | ||
| Net current liabilities | (212.9) | (142.3) | |
| Total assets less current liabilities Provision for liabilities |
10 | 160.0 (10.1) |
181.1 (10.0) |
| Net assets excluding retirement benefit obligation Retirement benefit obligation |
7 | 149.9 (1.4) |
171.1 (2.3) |
| Net assets including retirement benefit obligation | 148.5 | 168.8 | |
| Shareholders'funds | |||
| Share capital | 8 | 2.2 | 2.2 |
| Share premium account | 26.7 | 26.7 | |
| Capital redemption reserve | 0.6 | 0.6 | |
| Own shares | (5.9) | (6.0) | |
| Special reserve | 13.7 | 13.7 | |
| Profit and loss account | 111.2 | 131.6 | |
| Shareholders'funds | 148.5 | 168.8 |
The financial statements of the Company (company number 00521970) were approved by the Board and authorised for issue on 4 March 2011 and signed on its behalf by:
Paul Smith David Mulligan
Chief Executive Finance Director
for the year ended 31 December 2010
| Called up share capital £m |
Share premium account £m |
Own shares £m |
Capital redemption reserve £m |
Special reserve £m |
Retained earnings £m |
Total equity £m |
|
|---|---|---|---|---|---|---|---|
| Balance at 1 January 2010 | 2.2 | 26.7 | (6.0) | 0.6 | 13.7 | 131.6 | 168.8 |
| Loss for the year | – | – | – | – | – | (4.2) | (4.2) |
| Recognition of share-based payments | – | – | – | – | – | 0.7 | 0.7 |
| Interim dividend for 2010 | – | – | – | – | – | (5.1) | (5.1) |
| Second interim dividend for 2009 | – | – | – | – | – | (12.7) | (12.7) |
| Exercise of share options | – | – | 0.1 | – | – | (0.1) | – |
| Deferred tax credit arising on recognition of share-based payments |
– | – | – | – | – | 0.5 | 0.5 |
| Deferred tax charge arising on actuarial gain on retirement benefit obligation Actuarial gain on retirement benefit obligation |
– – |
– – |
– – |
– – |
– – |
(0.3) 0.8 |
(0.3) 0.8 |
| Balance at 31 December 2010 | 2.2 | 26.7 | (5.9) | 0.6 | 13.7 | 111.2 | 148.5 |
Morgan Sindall Group plc Annual report and accounts 2010 Company financial statements 119
for the year ended 31 December 2010
| Directors' report: business review review |
00//00 02//50 |
|---|---|
| Directors' report: governance | 00//00 51//72 |
| Consolidated financial statements 00//00 | 73//114 |
| Company financial statements statements |
115//127 00//00 |
| Shareholder information information |
128 00 |
The separate financial statements of the Company are presented as requiredbytheCompaniesAct2006.Thesefinancial statements have been prepared on a going concern basis as discussed in the business review on page 35, under the historic cost convention in accordance with the applicable United Kingdom Accounting Standards. The financial statements are presented in pounds sterling, which is the Company's functional currency, and unless otherwise stated have been rounded to the nearest £0.1m.
Under Financial Reporting Standard ('FRS') 1 (revised 1996) 'Cash Flow Statements', the Company is exempt from the requirement to prepare a cash flow statement on the basis that its consolidated financial statements, which include the Company and present a consolidated statement of cash flows, are publicly available.
Under FRS 8 'Related Party Disclosures', the Company is exempt from the requirement to disclose related party transactions with entities within the Group where the Company's interest is 100%.
The Company's accounting policies have been applied on a consistent basis throughout the year.
The preparation offinancial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates.
Estimates and assumptions are reviewed on an ongoing basis and any revision to estimates or assumptions are recognised in the period in which revised and in any future periods affected.
The estimates and judgments concerning the future at 31 December 2010 and that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year are as follows:
Judgments are required in establishing the Company's liability to pay taxes where tax positions are uncertain. Details of deferred tax assets and liabilities are set out in note 6.
The directors engage an independent and qualified actuary to calculate the Company's liability in respect of the defined benefit plan. In order to arrive at this valuation, certain assumptions in respect of discount rates, salary escalations, expected return on the plan's assets and future pension increases have been made. Assumptions regarding future mortality are based on published statistics and mortality tables. As the actual rates ofincrease and mortality may differ from those assumed, the actual pension liability may differ from that recognised in these financial statements. Assumptions used and full details of the Company's liability are set out in full in note 7.
Recognition and measurement of share-based payments require estimation of the fair value of awards at the date of grant and for cash-settled awards, remeasurement at each reporting date. Judgment is also exercised when estimating the number of awards that will ultimately vest. Both of these judgments have a significant impact on the amounts recognised in the profit or loss and in the balance sheet. To assist in determining each award's fair value, the directors engage a qualified and independent valuation expert. Estimation of the number of awards that
will ultimately vest is based on historic vesting trends for similar awards, taking into consideration specific features of the awards and the current intrinsic value of those awards.
Investments held as fixed assets are stated at cost less provision for any impairment in value. Investments are reviewed for impairment at the earlier of the Company's reporting date or where an indicator ofimpairment is identified.
No depreciation is provided on freehold land. On other assets, depreciation is provided at rates calculated to write off the cost or valuation offixed assets over their estimated useful lives as follows:
| Freehold property | 2% per annum |
|---|---|
| Plant, machinery and equipment |
Between 10% and 33% per annum |
The tax expense represents the current tax and deferred tax charges. Tax is recognised in the profit and loss account except to the extent that it relates to items recognised directly in equity.
Current tax is the Company's expected tax liability on taxable profit for the year using tax rates enacted or substantively enacted at the reporting date and any adjustments to tax payable in respect of previous years. Taxable profit differs from that reported in the profit and loss account because it is adjusted for items ofincome or expense that are assessable or deductible in other years and is adjusted for items that are never assessable or deductible.
Deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Timing differences arise from the inclusion ofitems ofincome and expenditure in tax computations in periods different from those in which they are included in the financial statements. Deferred tax is not provided on timing differences arising from the revaluation offixed assets where there is no commitment to sell the asset, or on unremitted earnings of subsidiaries and associates where there is no commitment to remit these earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that there will be future taxable profits against which to recover carried forward future tax losses and from which the reversal of underlying timing differences can be deducted. Deferred tax assets and liabilities are not discounted.
The Company has two retirement benefit plans:
A defined contribution plan is a post-retirement benefit plan under which the Company pays fixed contributions to a separate entity and has no legal or constructive obligation to pay further amounts. The Company recognises payments to defined contribution pension plans as an employee expense in the profit and loss account as and when they are due.
A defined benefit plan is a post-retirement plan other than a defined contribution plan. The Company's net liability is recognised in the balance sheet and is calculated by estimating the amount offuture benefit that employees have earned in return for their service in the current and prior periods and discounting this to its present value. Any unrecognised past service costs and the fair value of the plan's assets are deducted.
The calculation is performed by a qualified actuary on an annual basis using the projected unit credit method. The cost of the plan is charged to the profit and loss account based on actuarial assumptions at the beginning of the financial year.Where the calculation results in a benefit to the Company, the asset recognised is limited to the net of the total unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.
When the benefits of the plan are improved, the portion of increased benefit relating to past service by employees is recognised in the profit and loss account on a straight-line basis over the average period until the benefits are vested.Where the benefits vest immediately, the expense is recognised in the profit and loss account immediately.
Actuarial gains and losses are recognised in full in the combined statement of movements in reserves and shareholders'funds in the period in which they occur. Net pension obligations are included in the balance sheet at the present value of the plan liabilities, less the fair value of the plan assets and any related deferred tax asset.
Provisions are recognised when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and the amount of the obligation can be estimated reliably.
The Company has applied the requirements of FRS 20 'Share-Based Payment'. In accordance with the transitional provisions, FRS 20 has been applied to all grants of equity instruments after 7 November 2002 that had not vested as of 1 January 2005.
The Company grants equity-settled and cash-settled sharebased payments (share awards or share options) to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant and are recognised as an employee expense, with a corresponding increase in equity, over the period from date of grant to the date on which the employees become unconditionally entitled to the awards or options.
Cash-settled share-based payments are measured at fair value at each balance sheet date and recognised as an expense, with a corresponding increase in liabilities, over the period from date of grant to the date on which the employees become unconditionally entitled to the payment. Any changes in the fair value of the liability are recognised as an employee expense or income in the profit and loss account. Fair value is measured by use of a modified Black-Scholes model.
None of these awards when granted was subject to a share price related performance condition.
Related National Insurance Contributions are accrued on the basis of the intrinsic value of outstanding share-based payments and are remeasured at each reporting date.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.
Finance income comprises bank and other interest. Interest income is recognised in the profit and loss account using the effective interest rate method. Finance expense comprises interest on bank overdrafts, amortisation of prepaid bank facility arrangement fees and commitment fees charged by lenders on the undrawn portion of available bank facilities.
Borrowing costs are recognised in the profit and loss account on an effective interest method in the period in which they are incurred.
The Company provides certain guarantees in respect of the indebtedness ofits subsidiary undertakings and in respect of bonds and claims under contracting and other arrangements which include joint arrangements and joint ventures entered into in the ordinary course of business.
The Company considers such agreements to be indemnity arrangements and, as such, accounts for them as contingent liabilities unless it becomes probable that the Company will be required to make a payment under the guarantee.
The Company has adopted FRS 21 'Events after the Balance Sheet Date' and accordingly only recognises a liability once there is an obligation to pay. As a result, a dividend will only be recognised once the shareholders approve it.
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The average monthly number of people employed by the Company, including directors, during the year was 19 (2009: 22).
| 2010 £m |
2009 £m |
|
|---|---|---|
| Wages and salaries | 4.9 | 3.8 |
| Social security costs | 1.1 | 0.6 |
| Other pension costs | 0.6 | 0.6 |
| 6.6 | 5.0 |
The Company has taken advantage of section 408 of the Companies Act 2006 and consequently the profit and loss account of the parent company is not presented as part of these accounts. The loss of the parent company for the financial year amounted to (£4.2m) (2009: profit of £21.0m).
| Owned plant, machinery and equipment £m |
Freehold property £m |
Total £m |
|
|---|---|---|---|
| Cost or valuation Balance at 1 January 2010 Additions in the year |
3.2 0.1 |
0.1 – |
3.3 0.1 |
| Balance at 31 December 2010 | 3.3 | 0.1 | 3.4 |
| Accumulated depreciation Balance at 1 January 2010 Depreciation charge for the year |
(2.1) (0.5) |
– – |
(2.1) (0.5) |
| Balance at 31 December 2010 | (2.6) | – | (2.6) |
| Net book value Net book value at 31 December 2010 Net book value at 31 December 2009 |
0.7 1.1 |
0.1 0.1 |
0.8 1.2 |
| Subsidiary undertakings | |||
|---|---|---|---|
| Shares £m |
Loans £m |
Total £m |
|
| Cost | |||
| Balance at 1 January 2010 | 325.7 | – | 325.7 |
| Additions during the year: | |||
| Transfers from subsidiary undertakings during the year(1) | 21.9 | – | 21.9 |
| Issue of additional share capital – Morgan Sindall Holdings Limited(2) | 120.9 | – | 120.9 |
| Transfers to subsidiary undertakings during the year(2,3) | (120.9) | – | (120.9) |
| Issue of additional share capital – Lovell Partnerships Limited(4) | 28.0 | – | 28.0 |
| At 31 December 2010 | 375.6 | – | 375.6 |
| Provisions | |||
| Balance at 1 January 2010 | (3.5) | – | (3.5) |
| Balance at 31 December 2010 | (3.5) | – | (3.5) |
| Net book value | |||
| Net book value at 31 December 2010 | 372.1 | – | 372.1 |
| Net book value at 31 December 2009 | 322.2 | – | 322.2 |
continued
During the year, the Company changed its name from Morgan Sindall plc to Morgan Sindall Group plc.
Also during the year, the following subsidiaries or former subsidiaries of Morgan Sindall Group plc (direct or indirect) changed their names:
The following transactions occurred during the year and refer to the registered company names at 31 December 2010:
(4) On 16 December 2010, the Company increased its investment in its wholly owned subsidiary, Lovell Partnerships Limited, by £28.0m through the purchase of 28.0m fully paid ordinary shares of £1.00. Consideration for the investment was settled through intercompany loan.
| Accelerated allowances and other short-term timing differences £m |
Retirement benefit obligation £m |
Share-based payments £m |
Total £m |
|
|---|---|---|---|---|
| At 1 January 2010 | 0.4 | 0.9 | 0.6 | 1.9 |
| Credit/(charge) to income | – | (0.1) | 0.2 | 0.1 |
| (Charge)/credit to equity | – | (0.3) | 0.5 | 0.2 |
| At 31 December 2010 | 0.4 | 0.5 | 1.3 | 2.2 |
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:
| 2010 £m |
2009 £m |
|
|---|---|---|
| Deferred tax within current assets Retirement benefit obligations |
1.7 0.5 |
1.0 0.9 |
| 2.2 | 1.9 |
At 31 December 2010, the Company had unused tax losses of £0.6m (2009: £0.6m) available for offset against future profits. No deferred tax asset has been recognised in respect of such losses due to the unpredictability offuture profit streams against which these losses may be utilised. Losses may be carried forward indefinitely.
The UK Corporation tax rate is set to reduce to 27% in April 2011, affecting the closing deferred tax balance as shown above. Further reductions in the corporation tax rate to 24% are expected but not yet legislated. The closing deferred tax asset would reduce by a further £0.2m to £2.0m if these changes were taken into account.
The Morgan Sindall Retirement Benefits Plan ('the Plan') was established on 31 May 1995 and operates on defined contribution ('DC') principles for employees of the Group. The assets of the Plan are held separately from those of the Group in funds under the control of the Trustee directors of the Plan. The total cost charged to the profit and loss account of £0.4m (2009: £0.4m) represents contributions payable to the DC section of the Plan by the Company at rates specified in the Plan rules.
As at 31 December 2010, contributions of £0.1m (2009: £0.1m) were due in respect of December's contribution not paid over to the Plan. The Company, with the consent of the Trustee directors, can decide how to use monies held in a 'DC General Account'. During the year, the Company made contributions of £0.7m (2009: £0.7m) in respect of the Plan.
The Plan includes some defined benefit liabilities and transfers offunds representing the accrued benefit rights offormer active and deferred members and pensioners of pension plans of companies which are now part of the Group. These include salary related benefits for members in respect of benefits accrued before 31 May 1995 (and benefits transferred in from The Snape Group Limited Retirement Benefits Scheme include accruals up to 1 August 1997). No further defined benefit membership rights can accrue after that date.
Under the Plan, employees are entitled to retirement benefits at a retirement age of 65. No other retirement benefits are provided. The Plan is currently being funded by the Company.
The last triennial valuation of the Plan was undertaken on 5 April 2007. The results of the latest valuation as at 5 April 2010 are in draft form but have been allowed for in these pension disclosures. The 2010 valuation was prepared using ongoing assumptions of a rate ofinvestment return of 4.8% per annum in the period before retirement and 4.9% in the period after retirement, a rate of earnings escalation of 5.3% per annum and a rate ofinflation of 3.8% per annum. The ongoing liabilities of the Plan were assessed using the projected unit credit method and the assets were taken as realisable market value. The 2010 actuarial valuation referred to showed that the defined benefit liabilities were partly funded and the value of the assets of £5.9m represented 64% of the value of these liabilities on an ongoing funding basis. The next triennial valuation will be carried out as at 5 April 2013 when the funding position will be reappraised.
The most recent valuation of the Plan assets and the present value of the defined benefit liabilities was prepared as at 31 December 2010. The present value of the defined benefit liabilities, the related current service cost and past service cost were measured using the projected unit credit method.
| 2010 % |
2009 % |
2008 % |
|
|---|---|---|---|
| Key assumptions used: | |||
| Discount rate | 5.4 | 5.6 | 6.1 |
| Expected rate of salary increases | 4.6 | 4.8 | 4.0 |
| Expected return on Plan assets | 4.8 | 4.9 | 4.8 |
| Rate ofinflation | 3.6 | 3.8 | 3.0 |
| Future pension increases – members who left before 1 June 1995(1) | 3.5 | 3.5 | 3.5 |
| Future pension increases – members who left after 31 May 1995 | 3.0 | 3.0 | 3.0 |
| Future pension increases – non-guaranteed deferred pensions | 3.5 | 3.5 | 3.5 |
(1) depending on their date ofjoining, members receive fixed pension increases of 3.0% or 3.5%.
For the disclosures as at 31 December 2010, the S1NXA (2009: PXA92) series of tables from the Continuous Mortality Investigation were adopted appropriate to members' actual years of birth and with a 95% scaling factor for males and 100% for females. Medium cohort projections with a minimum underpin of 1.5% were adopted for future improvements in life expectancy.
The average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date is as follows:
| 2010 | 2009 | |
|---|---|---|
| Male | 87.1 | 87.0 |
| Female | 89.6 | 89.9 |
The average life expectancy in years of a pensioner retiring at age 65, twenty years after the balance sheet date is as follows:
| 2010 | 2009 | |
|---|---|---|
| Male | 90.0 | 88.1 |
| Female | 92.5 | 90.9 |
An increase of one year to the average life expectancy at 65 would increase the present value of the Plan liabilities by around 3.0% (2009: 3.0%).
continued
The amount included in the balance sheet arising from the Company's liabilities in respect of the Plan is as follows:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| £m | £m | £m | |
| Present value of the Plan liabilities(1) | (8.5) | (8.9) | (8.0) |
| Fair value of the Plan assets(2) | 6.6 | 5.7 | 5.0 |
| Deficit in the Plan | (1.9) | (3.2) | (3.0) |
| Related deferred taxation at 27% (2009: 28%) | 0.5 | 0.9 | 0.8 |
| Liability recognised in the balance sheet | (1.4) | (2.3) | (2.2) |
The total pension costs of the Company in respect of:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| £m | £m | £m | |
| Defined benefit section of the Plan(3) | 0.4 | 0.4 | 0.2 |
| Defined contribution section of the Plan(3) | 0.4 | 0.4 | 0.3 |
There are no amounts to be included within the operating profit for current or past service costs in 2010, 2009 or 2008.
(1) Any pension which accrues in respect of service after 6 April 1997 will increase in line with inflation, subject to a maximum of 5% per annum.
(2) Represents the ongoing value of assets invested in managed funds operated by AEGON (69%) (formerly Scottish Equitable) and Legal & General (31%) at the valuation date. The assets and liabilities relating to defined contribution members are in addition to these figures.
(3) The minimum amount of contributions the Company expects to be paid to the defined benefit section of the Plan in the year to 31 December 2011 is £0.7m. The Trustee directors of the Plan have yet to finalise a revised Schedule of Contributions as part of the 5 April 2010 formal actuarial valuation.
Amounts recognised in the profit and loss account of the Company in respect of the Plan:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| £m | £m | £m | |
| Interest cost | (0.5) | (0.5) | (0.5) |
| Expected return on the Plan assets | 0.3 | 0.2 | 0.3 |
| Net return | (0.2) | (0.3) | (0.2) |
| Total amount charged to profit and loss (total operating charge less net return) | 0.2 | 0.3 | 0.2 |
Analysis of the movement in the Plan deficit during the year:
| 2010 | 2009 | 2008 | |
|---|---|---|---|
| £m | £m | £m | |
| Deficit at 1 January | (3.2) | (3.0) | (3.3) |
| Interest cost | (0.5) | (0.5) | (0.5) |
| Actuarial gain/(losses) | 0.8 | (0.6) | (0.2) |
| Expected return on the Plan assets | 0.3 | 0.2 | 0.3 |
| Contributions from sponsoring Company | 0.7 | 0.7 | 0.7 |
| Deficit at 31 December | (1.9) | (3.2) | (3.0) |
Liabilities in respect of pensions in payment account for 35% of the total (2009: 32%). The average term to retirement is 7.5 years (2009: 5 years) for active members (i.e. members who are still employed by the Company and whose past service benefits are linked to their final salary but are no longer accruing final salary benefits) and 6.4 years (2009: 3 years) for deferred members.
The Plan assets and the expected rate of return at the balance sheet date were as follows:
| Fair value of assets | Expected return | ||||||
|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||
| £m | £m | £m | % | % | % | ||
| Equity instruments | – | – | – | n/a | n/a | n/a | |
| Fixed interest gilts | 3.3 | 3.2 | 2.8 | 4.2 | 4.4 | 3.8 | |
| Corporate bonds | 3.3 | 2.5 | 2.2 | 5.4 | 5.6 | 6.1 | |
| Cash | – | – | – | 2.0 | 2.0 | 2.0 | |
| 6.6 | 5.7 | 5.0 |
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The expected return on Plan assets is determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date.
The Plan does not hold any financial instruments issued by the Company and does not hold any property or other assets used by the Group.
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| £m | % asset or liability value |
£m | % asset or liability value |
£m | % asset or liability value |
£m | % asset or liability value |
£m | % asset or liability value |
|
| Difference between the expected and actual return on the Plan assets |
0.2 | 3.0 | 0.2 | 3.5 | (0.4) | (6.6) | (0.5) | (11.0) | – | 0.4 |
| Experience gain/(loss) arising on the Plan liabilities |
0.6 | 7.1 | (0.8) | (9.0) | 0.2 | 1.9 | (0.4) | (4.4) | 0.7 | 9.2 |
| Total actuarial gain/(loss) | 0.8 | (0.6) | (0.2) | (0.9) | 0.7 |
Actuarial gains/(losses) recognised in the combined statement of movements in reserves and shareholders'funds
| 2010 £m |
2009 £m |
2008 £m |
|
|---|---|---|---|
| Actuarial gains/(losses) recognised during the year | 0.8 | (0.6) | (0.2) |
| Cumulative actuarial losses recognised during the year | (3.0) | (3.8) | (3.2) |
| 2010 | 2009 | |||
|---|---|---|---|---|
| No. '000s | £'000s | No. '000s | £'000s | |
| Issued and fully paid: At the beginning of the year Exercise of share options |
43,160 28 |
2,158 1 |
43,004 156 |
2,150 8 |
| At the end of the year | 43,188 | 2,159 | 43,160 | 2,158 |
The Company has one class of ordinary shares of 5p each ('shares') which carry no rights to fixed income. All ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company's residual assets.
No member shall however be entitled to vote at any general meeting in respect of any share held by him if any call or other sum then payable by him in respect of that share remains unpaid or if a member has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Act 2006.
The shares of the Company issued during the year are shown below. Details of employee share option schemes referred to are given below and in note 27 in the consolidated financial statements.
27,870 shares were issued in respect of options exercised under the Company's 1995 Scheme for a total consideration of £1,394 (2009: 156,561 shares for a total consideration of £74,078). All options exercised under the 1995 Scheme during the year were settled on a net basis.
No shares were issued in respect of the ESOP 2007, the Save As You Earn scheme or the 2005 Plan (2009: nil).
The weighted average share price at the date of exercise for share options exercised during the year was £6.47 (2009: £5.82). The options outstanding at 31 December 2010 had a weighted average exercise price of £7.12 (2009: £7.76) and a weighted average remaining contractual life of 1.2 years (2009: 1.6 years). In 2010, options under the ESOP 2007 were granted on 17 March and 24 May and the estimated fair value of the options granted on those dates was £0.1m (2009: £0.2m). Options and share awards under the 2005 Plan were granted on 17 March 2010. The estimated fair value of the options granted on those dates was £0.6m (2009: £0.5m) and the estimated fair value of the share awards granted on those dates was £1.0m (2009: £1.1m). There were no options granted under the SAYE scheme in 2010 (2009: nil).
continued
Own shares at cost represent 781,444 (2009: 797,034) shares in the Company held in the Morgan Sindall Employee Benefit Trust ('the Trust') in connection with the ESOP 2007 and certain share incentive schemes as detailed in the remuneration report on pages 59 to 67. The trustees of the Trust purchase the Company's shares in the open market with financing provided by the Company on the basis of regular reviews of the share liabilities of the relevant schemes. A total of 781,444 (2009: 797,034) shares were unallocated at the year end and dividends on these shares have been waived. The cost of shares expected to be awarded is charged over the three year period to which the award relates. Based on the Company's share price at 31 December 2010 of £7.05 (2009: £6.00), the market value of the shares was £5,509,180 (2009: £4,782,204).
For details of dividends paid during the year and proposed but not approved by shareholders at the balance sheet date, refer to note 7 of the consolidated financial statements.
| Employee provisions £m |
Insurance provisions £m |
Total £m |
|
|---|---|---|---|
| At 1 January 2010 | 1.6 | 8.4 | 10.0 |
| Utilised | (0.1) | (2.0) | (2.1) |
| Additions | – | 3.0 | 3.0 |
| Released | (0.8) | – | (0.8) |
| At 31 December 2010 | 0.7 | 9.4 | 10.1 |
The Company has provisions for self-insurance in respect of claims incurred but not yet received and employee provisions which comprise obligations to former employees that are not related to retirement or post-retirement obligations. The majority of the provisions are expected to be utilised within five years.
The Company has an operating lease commitment in respect ofland and buildings for between one and two years for £0.2m (2009: £0.2m). Lease payments recognised as an expense in the year amounted to £0.2m (2009: £0.2m).
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 surety bond facilities, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business.We have not disclosed an estimate of the financial effect of uncertainties relating to the amount of timing of any outflow and possibility of reimbursement in respect of the above as it is impracticable to do so.
There were no subsequent events that affected the financial statements of the Company.
Morgan Sindall Group plc Annual report and accounts 2010 Company financial statements 127
| Directors' report: business review | 02//50 |
|---|---|
| Directors' report: governance | 51//72 |
| Consolidated financial statements 73//114 | |
| Company financial statements | 115//127 |
| Shareholder information | 128 |
The Company acts as a holding company for the Group and has the following principal subsidiary undertakings and significant interests in joint ventures which affected the Group's results or net assets:
| Subsidiary undertakings | Activity |
|---|---|
| Lovell Partnerships Limited | Affordable housing |
| Magnor Plant Hire Limited | Construction plant hire |
| Morgan Sindall plc | Construction and infrastructure |
| Morgan Lovell plc | Specialist in office design and build |
| Morgan Sindall Professional Services Ltd | Design services |
| Morgan Sindall Investments Limited | Project investments |
| Muse Developments Limited | Urban regeneration |
| Newman Insurance Company Limited | Insurance |
| Overbury plc | Fitting out and refurbishment specialists |
| Morgan Sindall Underground Professional Services Ltd | Infrastructure design services |
| Joint Ventures | |
| Access forWigan (Holdings) Limited (50%)* | Investment in public services centre |
| Ashton Moss Developments Limited (50%)* | Inner city regeneration |
| Blue Light Holdings Limited (50%)* | Investment in the development of emergency services facilities |
| Bromley Park Limited (50%)* | Residential development |
| Claymore Roads (Holdings) Limited (50%)* | Infrastructure services |
| Community Solutions Investment Partners Limited | Strategic development and regeneration projects |
| (previously called Community Solutions for | in the health sector |
| Primary Care (Holdings) Limited) (50%)* | |
| English Cities Fund (12.5%)* | Inner city regeneration |
| Hull Esteem Consortium PSP Limited (33⅓%)* | Investment in the development of education facilities |
| ISISWaterside Regeneration (25%)* | Waterside regeneration |
| Lewisham Gateway Developments Limited (50%)* | Mixed use regeneration |
| Lingley Mere Business Park Development Company Limited (50%)* | New commercial office space development |
| Morgan-Vinci Limited (50%)* | Infrastructure services |
| North Shore Development Partnership Limited† (50%)* | Mixed use regeneration |
| Renaissance Miles Platting Limited (33⅓%)* | Mixed tenure development |
| St Andrews Brae Developments Limited 50% share* | Residential development |
| Taycare Health Management LLP (50%)* | Healthcare management |
| Taycare Health (Holdings) Limited (50%)* | Investment in primary healthcare |
| The Compendium Group Limited (50%)* | Investment in affordable housing |
All subsidiary undertakings are wholly owned unless shown otherwise and, with the exception of companies marked *, all shareholdings are in the name of Morgan Sindall Group plc. The proportion of ownership interest is the same as the proportion of voting power held except for English Cities Fund and ISISWaterside Regeneration, details of which are shown in the consolidated financial statements note 12.With the exception of Newman Insurance Company Limited, registered and operating in Guernsey, all undertakings are registered in England andWales and the principal place of business is the UK. Newman Insurance Company Limited has a year end of 30 November coterminous with the renewal date for the insurance arrangements in which it participates.
†On 24 January 2011, this joint venture became a wholly owned subsidiary.
| Shareholder information | 128 |
|---|---|
| Company financial statements | 115//127 |
| Consolidated financial statements 73//114 | |
| Directors' report: governance | 51//72 |
| Directors' report: business review | 02//50 |
| Financial year end Preliminary results announcement Annual general meeting Interim management statement |
31 December 2010 22 February 2011 5 May 2011 5 May 2011 |
|---|---|
| Final dividend: Ex-dividend date Record date Payment date |
20 April 2011 26 April 2011 16 May 2011 |
| Half year results announcement Interim dividend payable |
August 2011 September 2011 |
| Interim management statement | November 2011 |
All administrative enquiries relating to shareholdings, such as lost certificates, changes of address, change of ownership or dividend payments and requests to receive corporate documents by email should, in the first instance, be directed to the Company's Registrar ('Registrar') and clearly state the shareholder's registered address and, if available, the full shareholder reference number:
Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
0871 664 0300 (calls cost 10p per minute plus network extras). Lines are open Monday to Friday 8.30am to 5.30pm. If calling from overseas, please call +44 20 8639 3399.
Registering on the Registrar's website enables you to view your shareholding in Morgan Sindall Group plc including an indicative share price and valuation, a transaction audit trail and dividend payment history. If you wish to view your shareholding, please log on to www.capitashareportal.com and click on the link 'shareholder services', then follow the instructions.
Shareholders who do not currently have their dividends paid directly to a bank or building society account and wish to do so should complete a mandate instruction available from the Registrar on request or at www.capitashareportal.com.
Shareholders who receive more than one copy of communications from the Company may have more than one account in their name on the Company's register of members. Any shareholder wishing to amalgamate such holdings should write to the Registrar giving details of the accounts concerned and instructions on how they should be amalgamated.
AtelephonedealingservicehasbeenarrangedwithStocktrade whichprovidesasimplewayforbuyingor sellingMorganSindall Groupplcshares.Basiccommissionis0.5%upto£10,000, reducing to0.2%thereafter (subject toaminimumcommissionof£15). Salesarecarriedoutonatendaysettlementbasiswithpurchases onafivedaybasis.Whenpurchasingshares,paymentmustbe madebydebitcardat thetimeofdealing.For further information, pleasecall08456010995andquotereferenceLowCo140.
The 2010 annual report andother information about the Company are available on its website, www.morgansindall.com. The Company operates a service whereby you can register to receive notice by email of all announcements released by the Company.
The Company's share price (15 minutes delay) is displayed on the Company's website.
Shareholderdocuments are now,followingchanges in Company law and shareholder approval, primarily made available via the Company's website at www.morgansindall.com/investors unless a shareholder has requested to continue to receive hard copies of suchdocuments. If a shareholder has registeredtheir up-to-date email address, an email will be sent to that address when such documents are available on the website. If shareholders have not provided an up-to-date email address and have not elected to receive documents in hard copy, a letter will be posted to their address on the register notifying them that the documents are availableon the website. Shareholders can continue toreceive hard copies of shareholder documents by contacting the Registrar.
If you have not already registered your current email address, you can do so at www.capitashareportal.com.
Investors who hold their shares via an intermediary should contact the intermediary regarding the receipt of shareholder documents from the Company.
The Company is obliged by law to make its share register publicly available and, as a consequence, some shareholders may receive unsolicited mail, including from unauthorised investment firms. For more information on unauthorised investment firms targeting UK investors, visit the website of the Financial Services Authority at www.moneymadeclear.fsa.gov.uk. If you wish to limit the amount of unsolicited mail you receive, contact The Mailing Preference Service, FREEPOST 29 (LON20771), LondonW1E 0ZT or visit the website at www.mpsonline.org.uk.
| No. of accounts |
% of total accounts |
No. of shares | % of total shares |
|
|---|---|---|---|---|
| Holding of shares | ||||
| Up to 1,000 | 851 | 52.6 | 423,532 | 1.0 |
| 1,001 to 5,000 | 441 | 27.3 | 1,012,825 | 2.4 |
| 5,001 to 100,000 | 256 | 15.8 | 6,664,608 | 15.4 |
| 100,001 to 1,000,000 | 61 | 3.8 | 18,701,767 | 43.3 |
| Over 1,000,000 | 8 | 0.5 | 16,385,554 | 37.9 |
| 1,617 | 100.0 | 43,188,286 | 100.0 |
| Email: | [email protected] |
|---|---|
| Telephone: | 020 7307 9200 |
Kent House, 14-17 Market Place, LondonW1W8AJ Registered in England andWales, No: 00521970
| Brokers | RBS Hoare Govett Limited |
|---|---|
| Solicitors | Slaughter and May Wragge & Co LLP |
| Bankers | Lloyds TSB Bank plc The Royal Bank of Scotland plc Yorkshire Bank |
Independent auditors Deloitte LLP
Designed and produced by Bostock and Pollitt Limited, London. This brochure is printed on Chorus Lux Silk and Tauro Offset, comprising offibres sourced from well managed sustainable forests (incorporating FSC certified fibre) and bleached without the use of chlorine. The production millfor this paper operates to EMAS, ISO 14001 environmental and ISO 9001 quality standards. This report was printed by Granite Communications, an FSC certified printer who, through their environmental standards and working to ISO 14001 policies, minimises the impact of printing on the environment. Vegetable based inks have been used and dry/wet solvent waste associated with this production have been recycled.
Morgan Sindall Group plc
Kent House 14–17 Market Place LondonW1W 8AJ 020 7307 9200
www.morgansindall.com
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