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Morgan Sindall Group plc
Kent House
14–17 Market Place
London W1W 8AJ
020 7307 9200
www.morgansindall.com
Annual report
and accounts
2010
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Morgan Sindall Group plc
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8111 Front Cover 2010_Layout 1 09/03/2011 16:17 Page 2
Financial highlights
Revenue £m
2010
2009
2008
Profit before tax, amortisation
and non-recurring items £m
2,102
2,214
2,548
2010
2009
2008
51.3
51.5
Profit before tax £m
Adjusted EPS pence
2010
2009
2008
40.7
44.7
62.3
2010
2009
2008
92.9
93.9
Basic EPS pence
Total dividend pence
2010
2009
2008
70.5
77.9
106.3
2010
2009
2008
71.4
127.8
42.0
42.0
42.0
Operating profit is profit from operations before amortisation of intangible assets
and non-recurring items.
Group structure
The Group operates through four divisions and a specialist investment unit:
Construction
& Infrastructure
Operating as
Morgan Sindall
Affordable
Housing
Operating
as Lovell
Fit Out
Operating as
Overbury and
Morgan Lovell
Urban
Regeneration
Operating
as Muse
Developments
Investments
Operating as
Morgan Sindall
Investments
and Community
Solutions
Cautionary statement
This directors’ report has been prepared solely to provide additional information to shareholders to assess the Group’s strategies
and the potential for 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 forward-
looking 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.
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8111 Report 2010_Layout 1 09/03/2011 17:09 Page 01
Morgan Sindall Group
The Group has returned
robust financial results in
tough market conditions
and continues to make
progress in building leading
positions in all its markets.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
01
Directors’ report: business review 02//50
An in-depth look at the Group including
how we are delivering our strategy and
our targets for the future.
Chairman and
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.
Board of directors 52
Corporate governance statement 54
Remuneration report 59
Other statutory information 68
Directors’ responsibilities statement 72
Consolidated financial statements 73//114
The Group’s consolidated financial
statements for the financial year ended
31 December 2010.
Independent auditors’ report 74
Income statement 75
Statement of comprehensive income 75
Balance sheet 76
Cash flow statement 77
Statement of changes in equity 78
Significant accounting policies 79
Notes to the financial statements 87
Company financial statements 115//127
The Company’s financial statements for the
financial year ended 31 December 2010.
Independent auditors’ report 116
Balance sheet 117
Combined statement of movement
in reserves and shareholders’ funds 118
Significant accounting policies 119
Notes to the financial statements 121
Shareholder information 128
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Chairman and
Chief Executive’s
statement
‘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.’
Paul Smith
Chief Executive
John Morgan
Executive Chairman
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
03
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 robust performance despite challenging conditions
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.
Significant progress against our strategy in 2010
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.
Integrated capability improved through merger of
Construction and Infrastructure Services divisions
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.
Acquisitions transform Affordable Housing capability
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 all forms 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.
Growth in London fit out market in 2010
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 of large 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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Chairman and
Chief Executive’s
Statement continued
‘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.’
Innovation improves Urban Regeneration development
portfolio
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 of forward-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.
New projects increase the size of the Group’s investment
portfolio
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.
Continued stability and financial robustness
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 will further 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.
Board changes
As previously announced, Simon Gulliford joined the Board
on 1 March 2010 and Jon Walden retired from the Board on
6 May 2010. There were no other changes to the Board
during 2010.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
05
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
‘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.’
Continued opportunities are created by market changes
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 will fall 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
Executive Chairman
4 March 2011
Paul Smith
Chief Executive
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Improved forward order book
Forward order book – Construction & Infrastructure £bn
2010
2009
2.0
1.6
Forward order book – Affordable Housing £bn
2010
2009
Forward order book – Fit Out £m
2010
2009
Total forward order book £bn
2010
2009
1.5
1.3
180
171
3.6
3.2
Development pipeline – Urban Regeneration £bn
2010
2009
1.4
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).
2010: £3.6bn (2009: £3.2bn)
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
The Group’s strategy
1. Rigour:
to exercise rigorous and prudent standards of
operational and financial management and to
relentlessly pursue improvement.
2. Flexibility:
to adapt to meet the needs of its clients
and markets.
3. Innovation:
to innovate by empowering employees to
deliver excellence and achieve the improbable.
4. Sustainability:
to operate safely and sustainably.
5. Quality:
to deliver an exceptional quality construction
service to its construction clients and
regeneration partners.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
07
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 strategic goal is
to create leading positions in
all of its chosen markets which,
ultimately, will be measured
by the quality of operating
margins achieved.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
1. Rigour
The Group is committed to exercising rigorous and prudent
standards of operational and financial management and
relentlessly pursuing improvement by:
managing its resources and cost base efficiently;
managing working capital effectively;
ensuring the right balance of financial resources are in
place to fund its activities; and
focusing on the selection and development of long-term
revenue and profit opportunities.
The Group monitors progress against this strategy by measuring:
the quality of its operating margin expressed as a percentage
of revenue based on profit from operations before
amortisation of intangible assets and non-recurring items;
average cash balances reported daily throughout the year;
year end cash balances; and
earnings per share as shown on pages 91 and 92.
Operating margin %
Year end cash balance £m
2010
2009
2008
2.4
2.3
2.8
2010
2009
2008
149
118
120
Average cash in bank £m
Committed banking facilities £m
2010
2009
2008
31
63
77
2010
2009
2008
100
100
75
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M74 completion, Glasgow
Construction underway at the final section
of the M74 in Glasgow to create a dual
three-lane stretch of motorway on Scotland’s
largest current infrastructure project.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
09
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
1. Rigour
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.
£59m of cost savings realised over three years
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.
Long-term schemes continue to be secured
The Group is involved in a number of long-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 Yorkshire Water framework. In the Affordable
Housing division, further long-term schemes included a
£75m three year project for Glasgow City Council and
A1M Dishforth to Barton
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.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
11
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
reported increased average levels of cash in the year.
The Group generated operating cash flow of £93.1m
(2009: £25.0m).
Shared equity generates cash and long-term asset growth
potential
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 capital for 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 potential for growth
in value as markets recover.
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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 Doncaster project commenced construction
on the first phase comprising new council offices, despite
the loss of public sector grant support.
Investment portfolio grows in 2010
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.
Working capital management
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
Hull Building Schools for the Future
One of the first two schools under construction for the
long-term Hull BSF programme, which will go on to
provide 17 new and refurbished schools in a partnership,
including the Group’s Investments unit.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
2. Flexibility
The Group endeavours to adapt to meet the needs of its
clients and markets by:
taking opportunities to acquire resources to increase
its scope of operations;
adapting the structure of the Group in line with
changes in client and market needs; and
divisions working together to deliver to clients,
where appropriate.
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
2009
2008
3.6
3.2
3.7
2010
2009
2008
1.4
1.4
1.3
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Rackspace, Middlesex
New office space created for this leading
technology business under the Fit Out
division’s highly flexible design and build
service which delivered high quality
bespoke accommodation based on
the client’s need.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
13
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
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2. Flexibility
Network Rail, Marylebone Station
Trains running normally as work is carried out overhead
to refurbish the roof of this Grade II listed station in Central
London using an innovative rolling temporary roof to keep
the station and buildings in full use.
The Group’s strategic focus on
remaining flexible to meet the needs
of its 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.
Acquisitions significantly enhance social housing division
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
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Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Airbus, fuel testing facility
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.
Doncaster regeneration
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.
Investments unit creating financing options for clients
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.
Construction and Infrastructure Services divisions merge
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.
Fit Out division streamlined
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
3. Innovation
The Group’s strategy to stimulate innovation through
empowering its people is delivered by:
employing talented people who are given the resources
to achieve their potential for the Group and its clients;
encouraging employees to develop and use innovative
means of delivering projects; and
maintaining a decentralised organisation structure to create
an entrepreneurial culture where decisions can be taken locally.
The Group determines progress against this strategy
through tracking:
results of client satisfaction programmes such as Perfect
Delivery (as described in more detail on pages 24 to 27;
outcomes from employee development programmes; and
order book as described more fully on page 05.
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Queen’s Theatre, London
Landmark West End theatre refurbished
by the Fit Out division as part of a Perfect
Delivery initiative, ensuring a high quality,
on time completion, enabling the theatre
to continue its scheduled productions
without disruption.
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Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
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Morgan Sindall Group plc Annual report and accounts 2010
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3. Innovation
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.
Affordable Housing’s fresh ideas help to deliver
clients’ projects
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 of 107 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.
Construction & Infrastructure significantly reduces
the carbon footprint of the M74 project
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 of industrial pollution with the existing
ground being contaminated by heavy metals, hydro-
carbons 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
Merchant Gate, Wakefield
Developed through its English Cities Fund partnership,
the first phase of Muse’s £130m Merchant Gate scheme
in Wakefield was completed in 2010, demonstrating the
division’s capability in working through public private
partnerships.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Workington Bridge, Cumbria
Following the devastating Cumbria floods of November
2009, this shows the award winning temporary bridge
rejoining Workington 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 of it. 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 material for 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 to be brought into the project from external sources.
Improved Customer Experience drives the Fit Out division
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.
Continued investment in training and development
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.
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Morgan Sindall Group plc Annual report and accounts 2010
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4. Sustainability
In 2010, the Group continued to develop its approach
to sustainability based on the themes of People, Planet,
Profit by:
constantly seeking to improve its safety culture;
measuring and reducing carbon emissions;
creating and implementing sustainable procurement
strategies; and
engaging with communities local to its construction activities.
The Group measures its progress by regularly:
measuring and reporting the Accident Incident Rate (AIR),
the industry standard performance indicator;
reporting near misses and working with its insurers and
suppliers to reduce operating risks;
monitoring and reporting carbon dioxide emissions;
monitoring waste diverted from landfill; and
monitoring the number of apprenticeships and undergraduate
positions offered.
Accident incident rate
CO2e equivalent emissions for the
Group’s vehicle fleet tonnes
2010
2009
2008
429
519
719
2010
2009
2008
28,184
27,466
n/a
Wasted diverted from landfill tonnes m
Total waste diverted %
Expressed as percentage of total waste created
2010
2009
2008
0.9
1.5
1.4
2010
2009
2008
87
83
67
Number of apprentices at different
stages of development
Number of graduates on years out
or being sponsored
2010
2009
2008
138
196
188
2010
2009
2008
65
94
110
Number of graduates recruited
during the year
2010
2009
2008 37
50
102
Further sustainability measures are shown on page 50.
8111 Report 2010_Layout 1 09/03/2011 17:10 Page 21
Ynysowen Primary School, Wales
A highly sustainable school that provides
the local community with much needed
facilities such as a dedicated community
room, IT suite and art facilities for local
residents to use during the day and after
school hours.
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Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
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Morgan Sindall Group plc Annual report and accounts 2010
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4. Sustainability
Setting a more ambitious approach in sustainability
2010 has been a year for building on the Group’s
sustainability statement Delivering today for tomorrow,
which was adopted in 2009. The People, Planet, Profit
model has been further developed, by focusing on the
areas of leadership, 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.
Safety culture underpins all operations
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.
Group aids local communities
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.
Equal opportunities for all
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.
Employee communication
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.
Group significantly improved carbon data collection
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
Digestor, Afan, Wales
Two 4,250m3 tanks delivered as part of a ten year
framework to upgrade Welsh Water’s sewerage systems,
working in close collaboration with the Environment Agency.
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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.
Innovative developments in improving the
environmental performance of buildings
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 in Wellingborough,
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
the Waste & Resources Action Programme ‘halving waste
to landfill’ commitment.
Leading innovation for a sustainable supply chain
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
5. Quality
The Group aims to deliver an exceptional quality service
to its construction clients and regeneration partners by:
working together with its supply chain to obtain maximum
value for clients; and
delivering projects on time, on budget and in accordance
with client requirements.
The Group monitors its success by:
measuring client satisfaction;
measuring Perfect Delivery and Service First; and
direct client feedback programmes.
Perfect Delivery score* %
2010
2009
2008
83
84
84
*Based on client sign-off of agreed measures for all
qualifying projects in the Construction & Infrastructure
and Fit Out divisions.
8111 Report 2010_Layout 1 09/03/2011 17:10 Page 25
Thames Water, Brixton to Honor Oak Tunnel
View into part of the tunnel created for the
Thames Water Ring Main between Brixton
and Honor Oak in London, improving the
resilience of London’s mains water system.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
25
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Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
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Morgan Sindall Group plc Annual report and accounts 2010
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5. Quality
Banco Espirito Santo offices, London
Social areas created within the offices of an international
banking client in central London that also included a range
of meeting, reception, working and support areas.
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.
Technically demanding construction capabilities
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.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Windrush Court, Leeds
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.
Breadth of capability improves service and quality
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.
Supply chain excellence
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.
Perfect Delivery in use across 80% of the Group
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 off from
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Divisions
Route to market
Construction & Infrastructure
Offers a national service for design, construction and infrastructure
to public and private sector clients.
Revenue
Operating profit
Employees
2010
£1,250m
£26.9m
4,807
Customers
P
R
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.
Affordable Housing
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.
Resources
Empowered staff that are given the resources to achieve
their potential for the Group and its clients.
Respected supply chain treated fairly
Subcontractors
Suppliers
Materials providers
Revenue
Operating profit
Employees
2010
£387m
£16.1m
2,204
Fit Out
Undertakes refurbishment and fit out projects
in the office, 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 offices.
Revenue
Operating profit
Employees
2010
£415m
£14.8m
549
Investments unit
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.
Urban Regeneration
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.
Revenue
Operating profit
Employees
2010
£46m
£2.0m
50
O
£1,250m
O
£387m
O
2
£46m
O
£737m
O
O
£415m
2
£46m
O
£387m
£1,250m
£415m
£46m
O
A
O
U
O
8111 Report 2010_Layout 1 09/03/2011 17:11 Page 29
Business model
Route to market
Customers
Revenue, operating costs
and investment
Profit
Private sector
The Group operates across a large number
of private regulated sectors of the market.
Examples include:
Offices: resulting from the Group’s market leadership
in office fit out and its capability for new build.
Divisions work both alone and
together to offer an outstanding
construction service to the Group’s
clients.
This involves working with other critical organisations and
bodies, including:
Professional consultants
Joint venture partners
Funding partners
Landlords
Regulatory bodies
Strategic authorities
Development agencies
Public sector partners
The divisions remain flexible in their methods and
structures of working relationships and will regularly
work under different procurement methods, for example:
Energy: maintenance and development of electricity
and gas infrastructure.
Water: maintenance and development of
infrastructure, including major flood defence schemes.
Commercial and industrial: such as warehousing,
distribution and assembly facilities.
Technology: including design, construction and
fit out of privately funded hi-tech facilities.
Transport: including aviation, infrastructure and
associated buildings.
Revenue is derived from the activities
of the Group mainly from:
Construction p
Sale o
h
Leisure: based on the Group’s build and refurbishment
capabilities in theatres, hotels and other facilities.
Public sector
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:
Affordable Housing: long established reputation for
undertaking new build, refurbishment and maintenance
of social and affordable housing.
Transportation: includes development of major roads,
rail infrastructure and stations, including tunnelling
and bridges.
Energy and waste: design and construction of
innovative waste to energy plants, power and treatment
facilities for both the public and private sectors.
Education: construction and refurbishment of schools,
colleges, universities and student accommodation.
Health: including local services, GP and specialist
treatment facilities and hospitals.
Defence: secure projects for MoD facilities.
i
H
Joint ventures:
fund construction activities of joint ventures.
Fixed assets:
plant and facilities that are used in support of our
operations and construction activity.
PFI/PPP
Framework
Direct contract
Joint venture
Special purpose vehicle
Competitive tender
Negotiated contract
O
£1,250m
O
£387m
O
2
£46m
O
£737m
O
O
£415m
2
£46m
8111 Report 2010_Layout 1 09/03/2011 17:11 Page TO1
e, operating costs
a estment
Profit
venue is derived from the activities
o the Group mainly from:
Construction project activities.
Profit generated is then used within
the Group as follows:
Retained: Morgan Sindall Group plc operates a strong
positive cash position to ensure it is able to fund the
strategic development of the Group.
Sale of commercial developments and residential
house sales.
Maintenance income from long-term maintenance
contracts in the social housing and utilities sectors.
Rental income from social housing stock
and PFI assets.
The Group’s major categories of operating costs
within the divisions are as follows:
Staff: Payment of salaries, benefits, incentives
and employment related taxes.
Supply chain: Payment of subcontractors
and suppliers.
Property: Rent, rates, service charges and
costs of managing facilities.
The Group also invests cash in the following:
Working capital: to fund its financial assets
(inventories and trade receivables) particularly
in the Urban Regeneration and Affordable
Housing divisions.
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.
Acquisitions: The Group uses relevant acquisitions as a
means of growing the divisions. In 2010, these included:
Powerminster: the acquisition of the response and
planned business from MJ Gleeson Group plc.
Connaught: acquired the social housing maintenance
business through the ability to pursue the novation
of certain contracts, together with invoiced and
uninvoiced debts.
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.
£1,250m
O
A
O
£387m
O
£415m
O
£46m
O
£1,250m
O
£387m
O
2
£46m
O
£737m
O
O
£415m
2
£46m
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Morgan Sindall Group plc Annual report and accounts 2010
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29
Business model
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Morgan Sindall Group plc Annual report and accounts 2010
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The market
Total UK construction market £bn
Total new work
Total repairs and maintenance
120
100
80
60
40
20
0
105.3
40.2
104.6 105.7
38.8
40.3
108.2
38.9
107.0
39.7
99.4
33.2
94.8
35.8
95.8
32.4
95.4
32.7
65.0
64.3
66.9
69.3
67.3
66.2
63.4
62.7
59.0
04
05
06
07
08
09
10
11
12
Source: Experian/ONS
The estimated growth of the UK construction market
was 5% in 2010
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 underpinned 2010, private work expected to
recover from 2012
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 of increases in absolute and relative
public sector spend. However, public sector construction
volumes are estimated to have peaked in 2010, with a
small fall 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:
working in areas where it has real expertise and can
deliver superior quality service to clients;
offering a breadth of service so that clients can deal with
a single point of contact in their supply chain; and
utilising the Group’s skills to offer and facilitate innovative
alternative financing to enable clients to continue to
invest in infrastructure.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
31
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
Private housing
Infrastructure
Public non-residential
Private industrial
Private commercial
Repairs and maintenance
Public housing
Private housing
Public non-residential
Private non-residential
Total
Public work
Private work
Total
2.9
10.9
9.3
9.9
3.1
22.9
59.0
6.1
9.8
7.6
12.3
35.8
94.8
35.8
59.0
94.8
3.1
11.5
9.8
10.4
3.3
24.2
62.2
6.4
10.3
8.0
13.0
37.8
100.0
37.8
62.2
100.0
4.0
11.9
11.4
12.9
3.5
22.5
66.2
6.0
9.8
6.9
10.5
33.2
99.4
41.2
58.2
99.4
4.0
12.0
11.5
13.0
3.5
22.6
66.6
6.0
9.9
6.9
10.6
33.4
100.0
41.4
58.6
100.0
3.3
11.9
11.5
11.0
3.6
22.1
63.4
5.7
9.7
6.5
10.5
32.4
95.8
38.0
57.8
95.8
3.4
12.4
12.0
11.5
3.8
23.1
66.2
5.9
10.1
6.8
11.0
33.8
100.0
39.7
60.3
100.0
2.4
13.3
12.4
8.6
3.9
22.1
62.7
5.6
10.0
6.2
10.9
32.7
95.4
35.2
60.2
95.4
2.5
13.9
13.0
9.0
4.1
23.2
65.7
5.9
10.5
6.5
11.4
34.3
100.0
36.9
63.1
100.0
Examples of the Group’s approach in each of these areas
are as follows:
Infrastructure and energy provide opportunities for
growth
The CSR protected critical programmes of investment
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.
Falling education spending will impact Construction
& Infrastructure division
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.
Market change expected to offset reduction in public
funds for housing
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
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.
Innovative financing options create opportunities
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.
Notes to ‘The Market’ analysis:
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.
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32
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Financial review
Additional information on the Group’s financial
performance can be found elsewhere in the
annual report and accounts as follows:
Robust 2010 performance
Revenue £m
divisional trading performance is covered in note 1
to the consolidated financial statements on pages
87 and 88;
2010
2009
2,102
2,214
cash flow is analysed in detail in note 26 to the
consolidated financial statements on page 106;
Profit from operations before amortisation
and non-recurring items £m
this financial review addresses treasury risks and risk
management; the broader risks facing the Group are
dealt with under Key Risks on pages 36 to 39; and
2010
2009
directors’ valuation of PPP/PFI investments is
included under the Investments unit review on
page 49.
Profit before tax, amortisation
and non-recurring items £m
2010
2009
Profit before tax £m
2010
2009
Year end cash balance £m
52.4
50.5
51.3
51.5
40.7
44.7
2010
2009
149
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
Finance director
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
33
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Overview
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.
Non-recurring items
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 of £2,102m and operating profit of £52.4m
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).
The cash position of the Group at year
end was robust at £149m. Average
cash during 2010 increased to £63m.
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%).
Net finance expense of £1.1m
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).
Tax
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Financial review
continued
Earnings per share
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 Group has £100m of
committed facilities available
through to mid-2012.
Dividend
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 of increasing 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.
Continuing balance sheet strength
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.
Group has substantial year end cash balances
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.
Banking facilities of £100m committed until 2012
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.
Consistent approach to treasury risk management
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.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
35
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 forecasts and projections, taking account of
reasonably possible changes in trading performance, show
that the Group should be able to operate within the level
of its 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.
8111 Report 2010_Layout 1 09/03/2011 17:11 Page 35
Although the Group does not use derivatives, some of its
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.
Going concern
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
of its 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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Key risks
The Group’s achievement of its 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:
Market and economic environment
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.
Risks
Shortage of opportunities caused by macroeconomic
factors
Changes in Government spending
Reliance on key customers and sectors and increased
competition
Projects consuming excessive capital inhibit growth
Inability to manage overheads during downturn
More onerous financial security such as bonding
and other financial guarantees required in the
current market in order to qualify for work
Impacts
Loss of revenue
Profit effect magnified if overheads not managed
appropriately
Increased competition leads to falling margin on work
Reduced pipeline of work
Excessive consumption of cash leads to inability
to carry out work
Mitigation
Investigation and proposal to clients of new methods
of project finance provided by the Group and its
partners
Delegated authorities in place throughout the Group
require approval of tenders at appropriate levels
Refusal to compete solely on price: Perfect Delivery
quality programme seeks to differentiate the Group’s
offering on service and quality
Adequacy of cash resources and facilities available
Bonding lines and insurance programme are kept
under constant review
Sector spread and diversification offer some
protection against decline in individual sectors
Regular feedback from clients and others used
to tailor the Group’s offering
Regular monitoring and reporting of financial
performance, work won, prospects and pipeline
of opportunities
Regular review of resource levels against anticipated
workload
Scale gives some protection by enabling us to compete
and work in areas with higher barriers to entry
8111 Report 2010_Layout 1 09/03/2011 17:11 Page 37
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
37
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Regulatory environment
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.
Health, safety and environmental risks
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.
Risks
Risks
Regulatory or legislative breach, failure to understand
regulatory environment
Environmental or safety incidents caused by the Group’s
activities
Failure of employees and subcontractors to comply
with legislation
Impacts
Harm to individuals and communities
Impacts
Loss of reputation and market share
Cost of investigation, fines and prosecution
Mitigation
Regular communication of relevant regulation,
including changes and amendments
Key regulatory risks dealt with in Group policies
and induction processes
Regular training and updates for those with
responsibility for ensuring compliance
Regular reporting of significant measures relevant
to regulation
Systems of management to identify risks and
controls, audits and reviews to ensure that controls
are operating effectively
Periodic reviews by external professionals and
involvement of external experts in training where
necessary
Raising concerns and ethical policies and procedures
in place
Loss of reputation
Loss of market share
Fines and prosecution
Mitigation
Key executives with specific responsibility for HSE
are identified in each division and on the Board
Health and safety and environmental policy frameworks are
communicated and senior managers appointed in each division
Well established safety systems, site visits, monitoring and
reporting (including near miss and potential hazard reporting)
in place
Investigation and root cause analysis of accidents and
near misses
Regular health and safety and environmental training
and updates including behavioural training
Certification of workforce under Construction Skills
Certification Scheme
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Key risks
continued
Developing talent
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 of its employees. It is critical that talented
individuals are attracted, developed and retained.
Acquisitions
The Group regularly identifies and evaluates potential
acquisitions and it is important that acquisitions deliver
the planned benefits.
Risks
Risks
Failure to attract talented individuals to the Group
Inadequate succession planning
Failure to retain talented individuals
Talented people see better opportunities for
reward and satisfaction in other industries or
with competitors
Impacts
Quality of service and of project delivery falls
The Group fails to develop the people necessary
to provide future growth
Mitigation
Senior executives focused on creating a dynamic
working environment based on shared characteristics
and core values driven by the Board
Management development programmes in place
alongside formal individual appraisal and
development processes
Regular review of remuneration levels and
competitive bonus structure
Long-term incentivisation through Save As You
Earn and share option schemes
Succession and staff development considered in
annual and longer-term business planning cycles
Group fails to deliver benefits sought at time of
the acquisition, through issues with due diligence,
strategic assessment, alignment of cultures or
other reasons
Unknown liabilities are uncovered subsequent
to completion
Impacts
Loss of profitability and reputation
Excessive resources required to be directed
towards the acquisition
Mitigation
All acquisitions approved at Board level
Commercial and financial due diligence led by
senior teams, with clear roles and responsibilities
Post acquisition integration plans prepared and
monitored
KPIs established and monitored post acquisition
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
39
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Contractual risks
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.
Counterparty and liquidity risks
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.
Risks
Risks
Acceptance of work outside core competences
Insolvency of key client, subcontractor or supplier
Acceptance of unprofitable work
Inadequate liquidity
Poor project management leading to delays
and cost overruns
Inability to agree valuation of additional work
and variations
Significant levels of volatility in input prices for
key materials
Impacts
Loss of reputation
Excessive resources and attention devoted
to poorly performing projects
Loss of profitability on contracts or streams
of work
Mitigation
System of delegated authorities governs tenders
and the acceptance of work
Work carried out under standard terms wherever
possible
Well established systems of measuring and reporting
project progress and estimated outturns
Strategic trading arrangements in place with key
suppliers
For very significant purchases on large projects,
forward orders can be placed on a longer timescale
Collation and review of client feedback
Lessons learned exercises carried out on projects
Use of accredited subcontractors with established
relationships wherever possible
Staff incentivised on basis of contract performance
Cross regional peer reviews
Impacts
Significant financial loss due to bad debt
Cost of replacing supplier
Reputational impact
Group cannot continue in business or cannot grow
as desired, due to lack of funds
Mitigation
Work only carried out for financially sound clients,
established through credit checks
Specific commercial terms, including payment terms,
with escrow accounts used as appropriate
Seek and secure financial security where appropriate
Work with approved suppliers wherever possible
Contracts with clients, subcontractors or suppliers
only entered into after review at appropriate level
of delegated authority
Work carried out under standard terms of contract
as far as possible
Regular monitoring of cash levels and forecasting
of cash balances
Regular stress testing of longer-term cash forecasts
Regular assessment of the level of banking facilities
available to the Group
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
Construction &
Infrastructure
NIBSC Research Facility
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: business review
41
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 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.
Margin improvement underpins financial performance
Revenue £m
2010
2009
2008
737
743
813
513
1,250
1,513
1,612
770
799
Operating profit £m
2010*
2009
2008
14.3
13.0
12.6
17.1
9.5
14.4
Operating margin %
2010*
2009
2008
1.9
1.7
2.5
2.2
1.2
1.8
26.9
30.1
23.9
2.2
2.0
1.5
Construction
Infrastructure
*Before amortisation and non-recurring items.
Order book £bn
2010
2009
2008
2.0
1.6
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.
Key projects and frameworks secured in 2010
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 Tunnel for Thames Water, 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 Yorkshire Water framework and a ten
year £500m framework for E.ON in central England.
Cautious construction outlook with opportunities in
infrastructure
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 the Wakefield
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
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Affordable Housing
Canalside, Blackburn
Design and build scheme that created new
affordable housing at a canal-side site in
Blackburn, next to the former Infirmary
hospital. The project was delivered in close
collaboration with the local community,
employing local labour and achieved a
Code 3 for sustainable homes.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
The division
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.
Improved financial performance from expanded
capabilities
Revenue £m
2010
2009
2008
Operating profit £m
2010*
2009
2008
Operating margin %
2010*
2009
2008
Order book £bn
2010
2009
2008
16.1
14.9
4.2
4.0
387
374
377
21.0
5.6
1.5
1.3
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.
Full service provision created by extending response
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 for West 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).
Innovative approaches to address changes in funding
model
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 of its 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 cross-
subsidy 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
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Fit Out
Bank of China, London
A large scale fit out to create a London
headquarters building for one of China’s ‘big
four’ banks. The accommodation included
reception, meeting and working areas and
supporting social spaces. This is one of a
series of international banking projects
carried out by the division during 2010.
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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.
Market recovery drives significant revenue growth
and improved operating profit
Revenue £m
2010
2009
2008
415
291
Operating profit £m
2010*
2009
2008
14.8
13.8
Operating margin %
474
25.8
2010*
2009
2008
Order book £m
2010
2009
2008
3.6
124
4.7
5.4
180
171
*Before amortisation and non-recurring items.
The improvement in the commercial fit out market led to
Fit Out’s revenue increasing significantly by 43% to £415m
(2009: £291m). This growth was due in the most part to
a higher volume of large projects in the Central London
market driven by financial services clients taking advantage
of large prime floorplates being available. Operating profit
was £14.8m (2009: £13.8m), driven by revenue growth,
tight control of overheads, continuing focus on profitable
opportunities and close collaboration with the supply chain
to realise efficiencies. The operating profit margin reduced
to 3.6% (2009: 4.7%) due primarily to continued price
competition in the market.
Key projects secured across a broad spread of sectors
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.
Outlook
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 of larger, 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.’
Steve Elliott
Managing Director, Fit Out
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Urban Regeneration
Chatham Place, Reading
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.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
The division
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.
Modest improvement in the market drives recovery
in operating profit
Revenue £m
2010
2009
2008
46
32
Operating profit £m
2010*
2.0
2009
0.7
2008
Share of development pipeline £bn
2010
2009
2008
*Before amortisation and non-recurring items.
84
7.8
1.4
1.4
1.3
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 of forward-
sold 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 of its 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.
Progress made on major regeneration schemes
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 of its development
at Eurocentral Business Park in Lanarkshire with the
construction of two new energy efficient distribution
units totalling 150,000 sq ft. At Wakefield, 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.
Focus on development of existing portfolio
The division’s share of its development pipeline, its best
measure of forward 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 ISIS Waterside Regeneration. Closer joint working within
the Group is creating new opportunities for us.’
Matt Crompton and Nigel Franklin
Joint Managing Directors, Urban Regeneration
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Investments
Wigan Life Centre
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.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
The unit
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.
Further growth in portfolio’s value to £53m
Portfolio value £m
2010
2009
2008
28
Revenue £m
2010
2009
2008
1.0
Operating profit £m
53
4.0
38
3.0
2010*
2009
2008
(3.3)
(3.0)
(2.2)
*Before amortisation and non-recurring items.
2010 review
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 of Investments 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.
Directors’ valuation of investment portfolio
Invested
Committed
Equity and
sub-debt
£m
14.5
12.0
26.5
Valuation
£m
41
12
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
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Key performance indicators table
KPI’s
Financial
Revenue
Non-financial
Profit before tax, amortisation and non-recurring items
Profit before tax
Adjusted EPS
Basic EPS
Total dividend
Operating margin
Average cash in bank
Year end cash balance
Committed banking facilities
Forward order book
Share of development pipeline
People
Fatalities
Major incidents
Over three day incidents
Total of all reportable incidents
Accident incident rate(1)
Average number of employees
Average absence due to sickness days
Proportion of women employed
Proportion of ethnic minorities employed
Average training days per employee
Apprentices at different stages of development
Undergraduates on years out or being sponsored
Graduates recruited during the year
Planet
Total waste diverted from landfill
Total waste produced
Total waste diverted from landfill
Percentage of directly purchased timber from
FSC/PEFC certified sources
Electricity used in permanent buildings(2)
Gas used in permanent buildings
CO2 equivalent emissions for Group vehicle fleet
Profit
Perfect Delivery scores
£m
£m
£m
pence
pence
pence
%
£m
£m
£m
£bn
£bn
no.
no.
no.
no.
no.
no.
%
%
no.
no.
no.
no.
tonnes
tonnes
%
%
kWh
kWh
tonnes
%
2010
2,102
2009
2,214
51.3
40.7
92.9
70.5
42.0
2.4
63
149
100
3.6
1.4
0
32
50
82
429
7,662
3.0
13
15
2.0
196
65
102
51.5
44.7
93.9
77.9
42.0
2.3
31
118
100
3.2
1.4
0
45
68
113
519
7,977
2.0
16
7
5.0
138
94
50
2008
2,548
71.4
62.3
127.8
106.3
42.0
2.8
77
120
75
3.7
1.3
1
79
94
173
719
8,585
4.5
15
6
5.0
188
110
37
1,483,518
1,699,569
87
1,411,358
1,701,214
83
938,090
1,400,262
67
88
8,686,252
1,986,000
28,184
88
4,537,548
1,442,676
27,466
83
84
77
N/R
N/R
N/R
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.
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Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Directors’ report:
governance
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Directors’ report: governance
Board of directors
John Morgan
Executive chairman
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 into William 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 Smith
Chief executive
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 Mulligan
Finance director
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 Whitmore
Commercial director
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
chief executive of Laing Construction plc during his 27 years with
John Laing plc.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Adrian Martin
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.
Gill Barr
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.
Geraldine Gallacher
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
the Ford Motor Company.
Patrick De Smedt
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 of ING Bank NV.
Simon Gulliford
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Corporate governance statement
Board complies with the Code
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.
Directors
Changes to the Board
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 Jon Walden 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.
Executive chairman and chief executive have clear roles and
responsibilities
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
of individuals.
Procedures for managing conflicts of interest operating
satisfactorily
The directors are aware of their duties under the Companies
Act 2006 provisions relating to the management of conflicts
of interest. The Company’s articles of association (‘the Articles’)
were amended in 2008 to give the Board a general power
to authorise potential conflicts of interest. In addition to the
directors’ duty to seek Board approval for 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.
John Morgan, Paul Whitmore, David Mulligan, Gill Barr and
Geraldine Gallacher standing for election
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, Paul Whitmore,
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 non-
executive 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 of individual
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.
Description of Board activities
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 of internal
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 of individual directors during 2010 at scheduled
Board meetings and meetings of the remuneration, audit and
nominations committees are set out below.
Remuneration Audit Nominations
Board committee committee committee
Total no. of meetings 10 6 3 2
John Morgan 10 — — 2
Paul Smith 10 — — —
David Mulligan 10 — — —
Paul Whitmore 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
Jon Walden(2) 3 4 1 1
(1) Simon Gulliford attended all the Board and nominations
committee meetings after his appointment.
(2) Jon Walden ceased to be a director on 6 May 2010.
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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.
Evaluation of individual 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.
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.
Training, development and advice is provided
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.
Board evaluated its performance
The Board continues to find its internal process an effective
method of evaluating the Board’s performance, and that of its
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:
the structure and composition of the Board;
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.
Board committees
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.
Audit committee
Members
Adrian Martin (chair)
Gill Barr
Patrick De Smedt
Jon Walden (resigned 6 May 2010)
All committee members are independent non-executive
directors. Adrian Martin took over as chair when Jon Walden
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 and Wales and
formerly a partner in BDO Stoy Hayward, has the recent and
relevant financial experience required to fulfil the role.
Responsibilities
to ensure that the interests of shareholders are properly
protected in relation to financial reporting and internal control;
to monitor the integrity of the financial statements and related
information of the Company and, where practicable, any
formal announcements relating to the Company’s financial
performance, reviewing significant financial reporting
judgments contained in them;
the quality of information provided to the Board;
to review the Company’s internal financial controls;
the effectiveness of its meetings;
the ability of the chairman to lead the Board;
to approve the appointment and replacement of the Group
head of audit and assurance and to monitor and review the
effectiveness of the Company’s internal audit function;
the ability of the Board to understand the significant risks
facing the Group and to monitor corporate performance;
the Group’s management of risk; and
to make recommendations to the Board regarding the
appointment, reappointment and removal of the external
auditors and to approve their remuneration and terms of
engagement;
the allocation of time devoted to matters such as corporate
governance, sustainability, business risk and succession issues.
to review and monitor the external auditors’ independence
and objectivity and the effectiveness of the audit process;
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.
to apply the Board’s policy on the engagement of the external
auditors to supply non-audit services with the objective of
ensuring that the provision of such services does not impair
their independence or objectivity; and
to review the Company’s procedures for raising concerns.
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Corporate governance
statement continued
Activities
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 of its 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.
Reappointment of external auditors
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.
External call line introduced for raising concerns
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.
The chairman of the audit committee reports to the full Board
on matters of significance arising at meetings of the committee.
Remuneration committee
Members
Gill Barr (chair)
Patrick De Smedt
Geraldine Gallacher
Adrian Martin
Jon Walden (resigned 6 May 2010)
Responsibilities
to set all elements of remuneration and any compensation
payments for executive directors and the executive chairman;
to monitor the structure and level of remuneration for divisional
managing directors;
to ensure that the requirements for disclosure of directors’
remuneration are fulfilled; and
to select remuneration consultants to advise the committee.
Activities
The activities of the committee during the year are set out in the
separate remuneration report on pages 59 to 67.
External auditors
Monitoring the independence and objectivity of the external
auditors
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.
Assessing the effectiveness of the external auditors
As part of its 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.
Reviewing the use of the external auditors for non-audit work
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 of fees for these services and concluded
that this has not affected Deloitte LLP’s objectivity or
independence.
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Directors’ report: governance
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Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Nominations committee
Members
John Morgan (chair)
Gill Barr
Patrick De Smedt
Geraldine Gallacher
Adrian Martin
Simon Gulliford (appointed 1 March 2010)
Jon Walden (resigned 6 May 2010)
Responsibilities
to review the structure, size and composition of the Board;
to make recommendations to the Board for any changes
considered necessary;
to approve the description of the role and capabilities required
for a particular appointment; and
to ensure suitable candidates are identified and recommended
for appointment to the Board.
Activities
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.
Company welcomes regular dialogue with all its shareholders
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.
Internal controls
The Board acknowledges that it has overall responsibility
for the Group’s system of internal control and for reviewing
its effectiveness. The internal control system is designed to
manage rather than eliminate the risk of failure 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
of internal control, which includes financial, operational and
compliance controls, is based on a process of identifying,
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 of internal control are
as follows:
Group structure
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.
Robust financial reporting system
The Board recognises that an essential part of the responsibility
for running a business is the effective safeguarding of assets,
the proper recognition of liabilities 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.
Scrutiny of investment and capital expenditure
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.
Detailed review of tenders and project selection
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.
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Corporate governance
statement continued
Robust contract controls
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 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 of ideas 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.
Board review of effectiveness of internal controls
The Board has conducted a review of the effectiveness of the
system of internal 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 of internal audit work and the overall
effectiveness of the process.
Continual monitoring of working capital
The Group continually monitors current and forecast cash
and working capital balances through a regime of daily and
monthly reporting.
Health, safety and environmental issues
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.
Risk management
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.
Internal audit
The Group head of audit and assurance is responsible for
managing the internal audit function, overseeing the divisional
heads of internal 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.
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Remuneration report
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.
Gill Barr
Chair of the Remuneration Committee
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
59
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
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.
Unaudited information
Members of the committee
The members of the committee during 2010 were Gill Barr
(chair), Jon Walden (until 6 May 2010), Geraldine Gallacher,
Adrian Martin and Patrick De Smedt. All members during
the year were independent non-executive directors.
Responsibilities of the committee
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.
External advice received
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:
to attract, retain and motivate the best possible person for
each position, without paying more than is necessary;
that the remuneration packages should be perceived as simple
and fair and, therefore, should be valued by participants;
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Remuneration report
continued
to ensure that the fixed element of remuneration (salary,
pension and other benefits) is determined in line with market
rates, taking account of individual performance and
experience, and that a significant proportion of the total
remuneration package is determined by the Company’s
performance;
to recognise the importance of rewarding over performance
(but not under performance) in both the short and long-term;
Fixed versus performance related 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.
to focus the conditions for performance linked pay on the
achievement of financial performance objectives, as this
creates a clear line of sight for individuals between
performance and reward and provides a focus on improving
profitability (something which management can influence)
rather than rewarding directly through share price
performance (which management cannot influence directly);
to ensure that financial performance metrics and associated
sliding scale ranges are calibrated carefully to ensure that
performance is incrementally rewarded and that executives
are not incentivised inadvertently to take inappropriate
business risks;
to recognise that executives should be able to have different
share-based incentive structures depending on their appetite
for individual risk;
to provide a significant proportion of performance linked pay
in share-based form, providing an opportunity for executives
to build significant shareholdings in the business; and
to align the interests of executives with those of the
Company’s shareholders.
The committee considers pay and employment conditions of
employees elsewhere in the Group when determining executive
directors’ remuneration
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
at target and maximum reward
Target
Maximum
0%
20%
40%
60%
80%
100%
Percentage of maximum remuneration
Salary
Pension
Annual bonus
Executive Remuneration Plan
Modest increases to base salary levels for 2011
The base salary of individual 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 of increases 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.
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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 mid-
market compared with comparator businesses.
Pension arrangements
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.
Other benefits
The executive directors receive certain other benefits, principally
a car allowance, private medical insurance, permanent health
insurance and life assurance.
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
Challenging targets for annual bonus
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 annual financial 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.
Long-term incentives
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.
Award levels reviewed regularly and structure remains
appropriate
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 of four 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
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Directors’ report: governance
Remuneration report
continued
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.
Adjusted EPS remains the basis of the performance conditions
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 of intangible 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 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.
Other share plans
The Company currently operates two other share plans for its
employees:
Targets remain challenging
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 Morgan Sindall Sharesave Plan, in which executive
directors are permitted to participate on the same terms as
other employees; and
The Morgan Sindall Employee Share Option Plan 2007 (‘the
2007 Scheme’), under which executive directors do not
receive awards.
Dilution and share usage under employee share plans
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% of issued ordinary share
capital for all employee share plans over a ten year period and,
within this limit, no more than 5% of issued 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.
Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
63
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 dates of the executive directors’ contracts are:
John Morgan 28 October 1994
Paul Smith 18 February 2003
David Mulligan 1 March 2004
Paul Whitmore 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.
Non-executive directors’ terms of engagement
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
of increase for most of the executive directors, to £41,200. The
additional fee payable to the chair of the audit committee will
remain at £7,500 but the additional fee 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.
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Five year performance graph
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.
Total Shareholder Return
Value £
160
140
120
100
80
60
40
20
0
31 Dec
2005
31 Dec
2006
31 Dec
2007
31 Dec
2008
31 Dec
2009
31 Dec
2010
Morgan Sindall Group plc
FTSE 350 (excluding investment trusts) –
Total Return Index
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
Service contracts
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
removal for 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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Remuneration report
continued
Audited information
Aggregate directors’ remuneration
The total amounts for directors’ remuneration were as follows:
2010 2009
£’000s £’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
Directors’ emoluments
Fees/basic Annual cash Total Total
salary Benefits bonuses(1) 2010 2009
Name of director £’000s £’000s £’000s £’000s £’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
Paul Whitmore 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 –
Jon Walden(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) Jon Walden ceased to be a director on 6 May 2010.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
65
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Pension contributions
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 2009
£’000s £’000s
John Morgan 43 43
Paul Smith 52 61
David Mulligan 32 32
Paul Whitmore 27 27
The 2005 Plan
The following long-term incentive awards have been made to executive directors under the 2005 Plan during 2010:
Performance shares awarded and vested during 2010
No. of awards No. of dividend No. of awards
outstanding No. of shares equivalent shares Total no. of Monetary value of No. of shares outstanding
as at awarded awarded shares vested vested shares(2) lapsed as at
1 Jan 2010 March 2010 March 2010(1) March2010(3) £’000s March 2010(3) 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
Paul Whitmore 67,158 36,486 709 4,258 24 (10,649) 89,446
Notes
(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.
Details of performance shares outstanding as at 31 December 2010
Date No. of
of award 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
Paul Whitmore 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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Remuneration report
continued
Options granted and lapsed during 2010
No. of options
outstanding No. of No. of
as at options granted options lapsed(1)
1 Jan 2010 17 March 2010 6 March 2010
John Morgan 625,740 229,728 (94,444)
Paul Smith 373,706 135,136 (55,556)
David Mulligan 206,248 79,730 (27,160)
No. of options
outstanding
as at
31 Dec 2010
761,024
453,286
258,818
(1) The threshold performance condition for the options granted on 6 March 2007 was not met and the options lapsed.
Details of share options outstanding as at 31 December 2010
Date No. of share Exercise
of grant options granted price
John Morgan 20 May 2005 107,736 £7.24
5 April 2006 81,016 £12.59
9 April 2008 122,716 £10.39
30 March 2009 219,828 £5.80
17 March 2010 229,728 £5.55
Paul Smith 20 May 2005 68,370 £7.24
5 April 2006 47,656 £12.59
9 April 2008 72,814 £10.39
30 March 2009 129,310 £5.80
17 March 2010 135,136 £5.55
David Mulligan 20 May 2005 35,220 £7.24
5 April 2006 28,594 £12.59
9 April 2008 38,980 £10.39
30 March 2009 76,294 £5.80
17 March 2010 79,730 £5.55
Date from which
exercisable
20 May 2008
5 April 2009
9 April 2011
30 March 2012
17 March 2013
20 May 2008
5 April 2009
9 April 2011
30 March 2012
17 March 2013
20 May 2008
5 April 2009
9 April 2011
30 March 2012
17 March 2013
Notes
no options were exercised during the year;
the share options detailed above will, if not exercised, lapse ten years from the date of grant;
the awards of performance shares and share options made in 2008 are subject to an adjusted EPS performance condition
measured over a three year period with full vesting of awards for average adjusted EPS growth of RPI + 10% per annum, reducing
on a sliding scale to 25% vesting for average growth of RPI + 4% per annum (performance shares) or RPI + 5% per annum
(share options). The awards of performance shares and share options made in 2009 are subject to an absolute adjusted EPS
performance target with full vesting of awards for achieving adjusted EPS of 133.0p or more for the year ending 31 December
2011, reducing on a sliding scale to 0% vesting for achieving 103.0p (performance shares) or 115.0p (share options). The awards of
performance shares and share options made in 2010 are subject to an absolute adjusted EPS performance target with full vesting
of awards for achieving adjusted EPS of 101.2p or more for the year ending 31 December 2012, reducing on a sliding scale to 50%
vesting for achieving 81.0p and reducing on a sliding scale to 0% vesting for achieving 68.9p (performance shares) or 77.0p (share
options); and
average adjusted EPS growth for the three financial years ended 31 December 2007 and 31 December 2008 respectively exceeded
RPI + 10% and the options granted on 20 May 2005 and 5 April 2006 are, therefore, fully exercisable. The threshold performance
conditions for both the performance shares and the options granted on 9 April 2008 were not met and the awards and the options
have lapsed.
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
67
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 Savings Related Share Option Scheme (‘the SAYE scheme’)
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 Granted Exercised Lapsed Outstanding Option Dates within
as at during during during as at exercise which
31 Dec 2009 the year the year the year 31 Dec 2010 price 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
Paul Whitmore 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:
Gill Barr
Chair of the Remuneration Committee
4 March 2011
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Other statutory information
Requirement for business review
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.
The Group’s principal activities
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.
Results and dividends
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).
Share capital and shareholders’ rights
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.
Voting
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 of joint 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.
Dividends and other distributions
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
69
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Variation of rights
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
of further shares ranking pari passu with them.
Restrictions on transfer of securities in the Company
There are no restrictions on the transfer of securities in the
Company, except:
that certain restrictions may from time to time be imposed
by laws and regulations (for example, insider trading laws); or
pursuant to the Listing Rules of the Financial Services
Authority whereby certain employees of the Company require
its approval to deal in the Company’s shares.
The Company is not aware of any agreements between holders
of securities that may result in restrictions on the transfer of
securities.
Amendment of articles of association
Any amendments to the Articles may be made in accordance
with the provisions of the Act by way of special resolution.
Appointment and replacement of directors
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 himself for
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.
Powers of directors
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 of its 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.
Powers in relation to the Company issuing its own shares
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Other statutory information
continued
Purchase of own shares
At the annual general meeting on 6 May 2010, a resolution was
passed giving the directors authority to make market purchases
of its 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.
The directors’ share options and interests in shares under long-
term share incentive and other schemes are set out in the
remuneration report on pages 65 to 67.
Directors’ indemnities
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.
Significant agreements
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.
Directors
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. Jon Walden retired at the annual general meeting in May
2010 and so is not listed in the table below.
John Morgan, David Mulligan, Paul Whitmore, 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.
Directors’ interests
The interests of the directors, all of which are beneficial, in the
shares of the Company are given below:
John Morgan
Paul Smith
David Mulligan
Paul Whitmore
Gill Barr
Geraldine Gallacher
Adrian Martin
Patrick De Smedt
Simon Gulliford
2010
No. of shares
2009
No. of shares
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
–
–
There have been no changes in the interests of the directors
between 31 December 2010 and 4 March 2011.
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 of its directors and
other officers in respect of certain losses or liability to which they
may be exposed due to their office.
Substantial shareholdings
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
Aviva plc
John Morgan
Standard Life Group
John James Clifford Lovell
Aberdeen Asset Management plc
JPMorgan Chase & Co
Barclays Global Investors
No. of
shares
Percentage
of total
5,545,900
4,497,508
3,033,392
2,415,273
2,234,219
2,123,287
1,303,861
12.84%
10.41%
7.02%
5.64%
5.17%
4.94%
3.03%
Research and development
The Group undertakes research and development activity in
creating innovative construction techniques and designs integral
to the delivery of its projects. The direct spending incurred is
generally not separately identifiable as the investment is usually
contained within project work performed for customers.
Employment
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
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:
Mary Nettleship
Company Secretary
4 March 2011
8111 Accounts 2010_Layout 1 09/03/2011 16:14 Page 71
Supplier payment policy
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.
Political and charitable contributions
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.
Fixed assets
There is no material difference between the book value and
current market value of the Group’s interest in land and buildings.
Disclosure of information to the external auditors
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.
External auditor
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Directors’ report: governance
Directors’ responsibilities
statement
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:
select suitable accounting policies and then apply them
consistently;
make judgments and accounting estimates that are reasonable
and prudent;
state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
In preparing the Group financial statements, International
Accounting Standard 1 requires that directors:
properly select and apply accounting policies;
present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and
understandable information;
provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
make an assessment of the Company’s ability to continue as
a going concern.
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 of fraud 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 of financial statements may
differ from legislation in other jurisdictions.
Responsibility statement
Each of the directors, whose names are set out on page 70,
confirms that to the best of his or her knowledge:
the financial statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and
the management report, which is incorporated into the
directors’ report, includes a fair review of the development and
performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
By order of the Board
Paul Smith
Chief Executive
4 March 2011
David Mulligan
Finance Director
4 March 2011
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Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
73
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Consolidated
financial
statements
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74
Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
Independent auditors’ report
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.
Opinion on other matter prescribed by the Companies
Act 2006
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.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006, we are required to report to
you if, in our opinion:
certain disclosures of directors’ remuneration specified by law
are not made; or
we have not received all the information and explanations we
require for our audit.
Under the Listing Rules, we are required to review:
Respective responsibilities of directors and auditor
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.
the directors’ statement, contained within the financial review,
in relation to going concern; and
the part of the corporate governance statement relating to the
Company’s compliance with the nine provisions of the June
2008 Combined Code specified for our review;
certain elements of the report to shareholders by the Board on
directors’ remuneration.
Other matter
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.
Ian Krieger
(Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
4 March 2011
Scope of the audit of the financial statements
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.
Opinion on financial statements
In our opinion, the Group financial statements:
give a true and fair view of the state of the Group’s affairs as
at 31 December 2010 and of its profit for the year then ended;
have been properly prepared in accordance with IFRSs as
adopted by the European Union; and
have been prepared in accordance with the requirements of
the Companies Act 2006 and Article 4 of the IAS Regulation.
8111 Accounts 2010_Layout 1 09/03/2011 16:14 Page 75
Consolidated income statement
for the year ended 31 December 2010
Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
75
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 2009
Notes £m £m
Continuing operations
Revenue 1 2,101.9 2,213.5
Cost of sales (1,884.7) (1,993.0)
Gross profit 217.2 220.5
Amortisation of intangible assets 1, 2, 9 (5.5) (6.8)
Non-recurring items 2 (5.1) –
Other administrative expenses (165.2) (170.1)
Total administrative expenses (175.8) (176.9)
Share of net profit of equity accounted joint ventures 1, 12 0.1 0.1
Other gains and losses 13 0.3 –
Profit from operations 1 41.8 43.7
Finance income 5 1.7 3.3
Finance costs 5 (2.8) (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 29.9 33.0
Non-controlling interests (0.1) (0.1)
29.8 32.9
Earnings per share
From continuing operations
Basic 8 70.5p 77.9p
Diluted 8 69.7p 77.1p
There were no discontinued operations in either the current or comparative year.
Consolidated statement of comprehensive income
for the year ended 31 December 2010
2010 2009
Notes £m £m
Profit for the year 29.8 32.9
Other comprehensive income/(expense):
Actuarial gain/(loss) arising on defined benefit obligation 19 0.8 (0.6)
Deferred tax on defined benefit obligation 20 (0.3) –
Movement on cash flow hedges in equity accounted joint ventures 12 (1.4) 0.6
Other comprehensive expense for the year, net of income tax (0.9) –
Total comprehensive income for the year 28.9 32.9
Attributable to:
Owners of the Company 29.0 33.0
Non-controlling interests (0.1) (0.1)
28.9 32.9
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Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
Consolidated balance sheet
at 31 December 2010
2010 2009
Notes £m £m
Non-current assets
Goodwill 9 213.2 184.4
Other intangible assets 9 16.6 16.6
Property, plant and equipment 10 27.8 31.3
Investment property 11 4.3 1.8
Investments in equity accounted joint ventures 1, 12 45.4 50.2
Investments 0.1 0.1
Shared equity loan receivables 13 13.9 9.0
Deferred tax assets 20 3.2 3.8
324.5 297.2
Current assets
Inventories 14 141.1 141.2
Amounts due from construction contract customers 16 178.4 192.5
Trade and other receivables 15 229.2 142.3
Cash and cash equivalents 29 148.6 117.7
697.3 593.7
Total assets 1 1,021.8 890.9
Current liabilities
Trade and other payables 17 (667.2) (576.3)
Amounts due to construction contract customers 16 (70.7) (49.0)
Current tax liabilities (30.6) (27.3)
Finance lease liabilities 18 (1.7) (1.8)
Provisions 21, 25 (6.6) –
(776.8) (654.4)
Net current liabilities (79.5) (60.7)
Non-current liabilities
Trade and other payables 17 – (0.1)
Finance lease liabilities 18 (6.0) (7.1)
Retirement benefit obligation 19 (1.9) (3.2)
Provisions 21 (15.4) (16.8)
(23.3) (27.2)
Total liabilities (800.1) (681.6)
Net assets 221.7 209.3
Equity
Share capital 24 2.2 2.2
Share premium account 26.7 26.7
Capital redemption reserve 0.6 0.6
Own shares (5.9) (6.0)
Hedging reserve (3.1) (1.7)
Retained earnings 201.4 187.6
Equity attributable to owners of the Company 221.9 209.4
Non-controlling interests (0.2) (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
Chief Executive
David Mulligan
Finance Director
8111 Accounts 2010_Layout 1 09/03/2011 16:14 Page 77
Consolidated cash flow statement
for the year ended 31 December 2010
Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
77
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 2009
Notes £m £m
Net cash inflow from operating activities 26 93.1 25.0
Cash flows from investing activities
Interest received 1.9 3.4
Dividend from joint ventures 12 0.8 2.2
Proceeds on disposal of property, plant and equipment 1.1 1.0
Purchases of property, plant and equipment (3.1) (7.5)
Payments to acquire interests in joint ventures 12 (4.3) (4.2)
Payments for the acquisition of subsidiaries and other businesses 25 (35.2) (1.1)
Net cash outflow from investing activities (38.8) (6.2)
Cash flows from financing activities
Net payments to acquire own shares – (0.1)
Dividends paid (17.8) (17.7)
Repayments of obligations under finance leases (5.6) (3.7)
Proceeds on issue of share capital – 0.1
Net cash outflow from financing activities (23.4) (21.4)
Net increase/(decrease) in cash and cash equivalents 30.9 (2.6)
Cash and cash equivalents at the beginning of the year 117.7 120.3
Cash and cash equivalents at the end of the year
Bank balances and cash 148.6 117.7
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Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
Consolidated statement of changes in equity
for the year ended 31 December 2010
Attributable to owners of the Company
Share Capital Reserve for Cash flow Non-
Share premium redemption own shares hedging Retained controlling Total
capital account reserve held reserve earnings Total interests equity
£m £m £m £m £m £m £m £m £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 – – – – – 33.0 33.0 (0.1) 32.9
Other comprehensive income:
Actuarial loss arising on defined
benefit obligation (note 19) – – – – – (0.6) (0.6) – (0.6)
Movement on cash flow hedges in equity
accounted joint ventures (note 12) – – – – 0.6 – 0.6 – 0.6
Total comprehensive income
for the year, net of income 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 – 0.1 – – – – 0.1 – 0.1
Exercise of share options – – – 0.5 – (0.5) – – –
Movement on deferred tax asset
on share-based payments – – – – – 0.8 0.8 – 0.8
Own shares acquired in the year – – – (0.1) – – (0.1) – (0.1)
Dividends paid:
Final dividend for 2008 – – – – – (12.7) (12.7) – (12.7)
Interim dividend for 2009 – – – – – (5.0) (5.0) – (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 – – – – – 29.9 29.9 (0.1) 29.8
Other comprehensive income:
Actuarial gain arising on defined
benefit obligation (note 19) – – – – – 0.8 0.8 – 0.8
Deferred tax on defined benefit
obligation (note 19) – – – – – (0.3) (0.3) – (0.3)
Movement on cash flow hedges in equity
accounted joint ventures (note 12) – – – – (1.4) – (1.4) – (1.4)
Total comprehensive income
for the year, net of income 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 – – – 0.1 – (0.1) – – –
Movement on deferred tax asset
on share-based payments – – – – – 0.6 0.6 – 0.6
Own shares acquired in the year – – – – – – – – –
Dividends paid:
Second interim dividend for 2009 – – – – – (12.7) (12.7) – (12.7)
Interim dividend for 2010 – – – – – (5.1) (5.1) – (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
Share premium account
The share premium account represents the difference between the fair value of consideration received and the nominal value of the
shares issued.
Capital redemption reserve
The capital redemption reserve was created on the redemption of preference shares in 2003.
Reserve for own shares held
The shares are held as ‘treasury shares’ and represent the cost to Morgan Sindall Group plc of shares purchased in the market and held
by the Morgan Sindall Employee Benefit Trust (the ‘Trust’) to satisfy options under the Group’s share incentive schemes (note 24).
The number of shares held by the Trust at 31 December 2010 was 781,444 (2009: 797,034).
Cash flow hedging reserve
Under cash flow hedge accounting, movements on the effective portion of hedges are recognised through the hedging reserve,
whilst any ineffectiveness is taken to the income statement.
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Significant accounting policies
for the year ended 31 December 2010
Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
79
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Reporting entity
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.
Basis of preparation
(a) Statement of compliance
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.
(b) Basis of accounting
The consolidated financial statements have been prepared under
the historical cost convention, except where otherwise indicated.
(c) Functional and presentation currency
These consolidated financial statements are presented in pounds
sterling which is the Group’s functional currency. All financial
information, unless otherwise stated, has been rounded to the
nearest £0.1m.
(d) Changes in accounting policy and disclosures
(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):
IAS 27 (revised) ‘Consolidated and separate financial
statements’;
IAS 38 (amendment) ‘Intangible assets’;
IFRS 2 (amendment) ‘Group cash-settled and share-based
payment transactions’;
IFRIC 18 ‘Transfers of assets from customers’;
International Accounting Standards Board (‘IASB’) annual
improvements 2009;
IFRIC 9 ‘Reassessment of embedded derivatives’ and IAS 39
‘Financial Instruments: Recognition and measurement’; and
Improvements to IFRSs (2009).
(ii) Accounting standards, amendments and interpretations to
existing standards not yet effective, endorsed by the EU and
not adopted early by the Group
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:
IFRS 9 ‘Financial instruments’: the first step in the IASB’s
replacement programme for IAS 39. IFRS 9 seeks to simplify
the classification and measurement of financial instruments
according to a business model approach, which requires
recognition and measurement according to how an entity
manages its financial instruments and the contractual cash
flow characteristics of the financial assets. Although approved
by the IASB (and effective from 1 January 2013), this has not
been endorsed by the EU and endorsement is not expected
until the IAS 39 replacement programme is complete.
IAS 24 (amended) ‘Related party transactions’: although
endorsed by the EU, the revised standard is not yet effective.
IAS 24 clarifies and simplifies the definition of a related party
and removes certain disclosures in respect of government
related entities.
Amendments to IFRS 7 ‘Financial Instruments: Disclosures’:
improves disclosures in respect of transfer transactions of
financial assets (where an asset is transferred but not
derecognised).
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Morgan Sindall Group plc Annual report and accounts 2010
Consolidated financial statements
Significant accounting policies
for the year ended 31 December 2010
continued
Prepayments of a minimum funding requirement (amendment
to IFRIC 14): although endorsed by the EU, the amendment is
not yet effective. The amendment removes an unintended
consequence of IFRIC 14 where entities are not permitted to
recognise as an asset some voluntary prepayments for
minimum funding contributions.
Fair value adjustments in business combinations
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.
IFRIC 19 ‘Extinguishing financial liabilities with equity
instruments’: IFRIC 19 has been endorsed by the EU and
clarifies the accounting in respect of debt for equity swaps.
IASB annual improvements 2010: requires a number of smaller
amendments to existing IFRS with implementation dates
throughout 2011. The impact of these amendments is
currently being assessed.
(e) Critical accounting judgments and key sources of estimation
uncertainty
The preparation of financial 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.
(i) Critical accounting judgments
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.
Accounting for tax in relation to the Amec acquisition fair
value adjustments
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.
Determination of cash-generating units for goodwill
impairment testing
For the purposes of performing the Group’s annual
impairment testing, goodwill is allocated to the cash-
generating 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.
Disclosure of non-recurring items
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.
(ii) Key sources of estimation uncertainty
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.
Recognition and measurement of intangible assets
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.
Impairment of goodwill and other intangible 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.
Impairment of work in progress
In assessing whether work in progress is impaired, estimates
are made of future 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.
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Shareholder information 128
Accounting for the Group’s defined benefit plan
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 of increase and mortality may differ from
those assumed, the actual pension liability may differ from
that recognised in these consolidated financial statements.
Insurance provisions
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.
Private Finance Initiative (‘PFI’)/Private Public Partnership
(‘PPP’) derivative financial instruments
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.
Financial receivables
In assessing the fair value of certain financial receivables,
including trade receivables and those held by joint ventures,
estimates are made of future cash flows and the appropriate
discount rate to be used.
Tax
Judgments are required in establishing the Group’s liability
to pay taxes where tax positions are uncertain.
Share-based payments
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.
Recognition and measurement of embedded derivatives
contained in shared equity loans
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.
Basis of consolidation
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 of joint 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 of identifiable
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 non-
controlling interest’s share of the changes in equity since
the date of the combination.
(a) Subsidiaries
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.
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Significant accounting policies
for the year ended 31 December 2010
continued
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.
(b) Joint ventures
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.
(i) Jointly controlled entities
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 of jointly 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 of losses exceeds its equity accounted
investment in a joint venture, the carrying amount of the equity
interest is reduced to nil and the recognition of further losses is
discontinued except to the extent that the Group has incurred
legal or constructive obligations. Appropriate adjustment is
made to the results of joint 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.
(ii) Jointly controlled operations
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.
(c) Transactions eliminated on consolidation
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 of impairment.
Revenue and margin recognition
Revenue and margin are recognised as follows:
(a) Construction contracts
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.
(b) Service contracts
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.
(c) Sale of development properties
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.
(d) Pre-contract costs
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.
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Shareholder information 128
(e) Mobilisation costs:
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.
(f) Government grants
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 and expense
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.
Income tax
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 of income 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.
Intangible assets
(a) Goodwill
(i) Initial recognition
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.
(ii) Subsequent measurement
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.
(iii) Impairment
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.
(b) Other intangible assets
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.
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Significant accounting policies
for the year ended 31 December 2010
continued
The Group has the following significant classes of finite life
intangible assets:
(i) Secured customer contracts
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.
(ii) Other contracts and related relationships
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.
(iii) Software
Software acquired on acquisition is valued on a replacement cost
basis and is amortised over its expected useful life on a straight-
line basis.
(iv) Non-compete agreements
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
non-compete agreements
1–3 years
3 years
Property, plant and equipment
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
freehold property
leasehold property
between 8.3% and
33% per annum
2% per annum
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
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
of investment property are included in the income statement for
the period in which they arise.
Shared equity scheme receivables
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
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.
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Shareholder information 128
Trade receivables
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.
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.
Cash and cash equivalents
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.
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.
Trade payables
Trade payables are recognised initially at fair value and are
subsequently measured at amortised cost using the effective
interest rate method.
Leased assets
(a) Finance leases
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 of lease liabilities so as to achieve a
constant rate of interest on the remaining balance of the liability.
Finance charges are charged directly against income.
(b) Operating leases
Rentals payable under operating leases are charged to income
on a straight-line basis over the term of the relevant lease.
Retirement benefit schemes
(a) Defined contribution plan
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.
(b) Defined benefit plan
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
of future 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.
Provisions
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.
Impairment of financial assets
Financial assets, other than shared equity assets, are assessed
for indicators of impairment 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 of financial assets is reduced by the
impairment loss directly for all financial 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
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.
Share-based payments
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.
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Significant accounting policies
for the year ended 31 December 2010
continued
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 of IFRS 2 ‘Share-
based 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.
Financial receivables
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 and hedge accounting
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
Dividends to the Company’s shareholders are recognised as a
liability in the consolidated financial statements in the period in
which the dividends are approved by the Company’s shareholders.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
1 Business segments
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:
Construction & Infrastructure: offers a national service for design, construction and infrastructure to public and private clients;
Affordable Housing: development and construction of social and open market affordable housing, and planned and response
maintenance of social housing;
Fit Out: undertakes refurbishment and fit out projects in the offices, education, retail, hotel and leisure sectors;
Urban Regeneration: development through partnership agreements of large-scale mixed use urban regeneration projects with
a view to letting and/or sale;
Investments: facilitates project finance and provides investment management expertise to the Group’s PPP/PFI activities and
investment portfolio; and
Group Activities: represents costs and income arising from corporate activities which cannot be allocated to the operating
segments. These include costs for central activities such as treasury management, corporate tax coordination, insurance
management, pension administration and company secretarial and legal services.
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:
2010
Construction & Affordable Urban Group
Infrastructure Housing Fit Out Regeneration Investments Activities Eliminations Total
£m £m £m £m £m £m £m £m £m
Revenue: external 1,249.8 387.3 415.1 45.8 3.9 – 2,101.9 – 2,101.9
Revenue: inter-segment 49.6 2.2 3.5 – – – 55.3 (55.3) –
Operating profit/(loss)
before amortisation and
non-recurring items 26.9 16.3 14.8 2.5 (4.1) (4.1) 52.3 – 52.3
Share of results of associates
and joint ventures after tax – (0.2) – (0.5) 0.8 – 0.1 – 0.1
Profit/(loss) from operations
before amortisation and
non-recurring items 26.9 16.1 14.8 2.0 (3.3) (4.1) 52.4 – 52.4
Amortisation of intangible
assets (note 9) (0.5) (0.3) – (4.7) – – (5.5) – (5.5)
Non-recurring items (note 2) (3.2) (3.9) – 2.0 – – (5.1) – (5.1)
Profit/(loss) from operations 23.2 11.9 14.8 (0.7) (3.3) (4.1) 41.8 – 41.8
Net finance income (1.1) (1.1)
Profit before income tax expense 40.7 40.7
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1 Business segments continued
2009 (restated)
Construction & Affordable Urban Group
Infrastructure Housing Fit Out Regeneration Investments Activities Eliminations Total
£m £m £m £m £m £m £m £m £m
Revenue: external 1,513.2 373.8 291.2 31.9 3.4 – 2,213.5 – 2,213.5
Revenue: inter-segment 13.1 – – – 6.1 – 19.2 (19.2) –
Operating profit/(loss)
before amortisation 30.1 14.9 13.8 0.6 (3.0) (6.0) 50.4 – 50.4
Share of results of associates
and joint ventures after tax – – – 0.1 – – 0.1 – 0.1
Profit/(loss) from operations
before amortisation 30.1 14.9 13.8 0.7 (3.0) (6.0) 50.5 – 50.5
Amortisation of intangible
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
Balance sheet analysis of business segments:
2010
Construction & Affordable Urban Group
Infrastructure Housing Fit Out Regeneration Investments Activities Total
£m £m £m £m £m £m £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 570.0 279.1 118.9 78.5 17.6 (42.3) 1,021.8
Total liabilities (449.7) (189.3) (99.1) (13.6) (19.6) (28.8) (800.1)
Other information:
Amortisation of intangible 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
2009 (restated)
Construction & Affordable Urban Group
Infrastructure Housing Fit Out Regeneration Investments Activities Total
£m £m £m £m £m £m £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 of intangible 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.
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Company financial statements 115//127
Shareholder information 128
2 Profit for the year
Profit for the year is stated after charging/(crediting):
2010 2009
£m £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 of intangible 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 2009
£m £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 2009
£m £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
3 Employees
The average monthly number of people employed by the Group during the year was:
2010 2009
No. 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
4 Staff costs
2010 2009
£m £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
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5 Finance income and costs
2010 2009
£m £m
Interest income on bank deposits 0.2 1.8
Other interest income 0.2 0.2
Interest receivable from joint ventures 1.3 1.3
Finance income 1.7 3.3
Interest payable on bank overdrafts and borrowings – (1.7)
Interest payable on finance leases (0.5) (0.5)
Loan arrangement and commitment fees (1.7) –
Interest payable to joint ventures – –
Other interest payable (0.6) (0.1)
Finance costs (2.8) (2.3)
Net finance (costs)/income (1.1) 1.0
6 Income tax expense
2010 2009
£m £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 2009
£m £m
Current tax expense:
Profit before tax 40.7 44.7
Income tax expense at UK corporation tax rate 11.4 12.5
Tax effect of:
Share of net profit of equity accounted joint ventures – –
Expenses that are not deductible in determining taxable profits 0.8 0.8
Adjustments in respect of prior years (0.9) (1.2)
Effect of expected forthcoming change in tax rates upon closing deferred tax balance 0.1 –
Other (0.5) (0.3)
Income tax expense for the year 10.9 11.8
Effective tax rate for the year 26.8% 26.4%
Effective tax rate for the year ignoring prior year adjustments 29.0% 29.1%
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Company financial statements 115//127
Shareholder information 128
7 Dividends
Amounts recognised as distributions to equity holders in the period:
2010 2009
£m £m
Second interim dividend for the year ended 31 December 2009 of 30.0p
(2008: final dividend 30.0p) per share 12.7 12.7
Interim dividend for the year ended 31 December 2010 of 12.0p
(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.
8 Earnings per share
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:
2010 2009
Earnings £m £m
Earnings before tax 40.7 44.7
Deduct tax expense per the income statement (10.9) (11.8)
Non-controlling interests 0.1 0.1
Earnings for the purposes of basic and dilutive earnings per share being
net profit attributable to owners of the Company 29.9 33.0
Add back:
amortisation expense (see notes 2 and 9) 5.5 6.8
non-recurring items (note 2) 4.0 –
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
2010 2009
Number of shares No. ’000s No. ’000s
Weighted average number of ordinary shares for the purposes
of basic earnings per share 42,391 42,281
Effect of dilutive potential ordinary shares:
Share options 93 92
Conditional shares not vested 389 332
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).
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financial statements
continued
8 Earnings per share 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).
9 Goodwill and other intangible assets
Other intangible assets
Other
Secured contracts Total other
customer and related Non-compete intangible
contracts relationships Software agreement assets Goodwill
£m £m £m £m £m £m
Cost or valuation
Balance at 1 January 2009 4.2 26.9 0.9 5.0 37.0 192.3
Additions in the year (note 25) – – – – – 1.1
Balance at 31 December 2009 4.2 26.9 0.9 5.0 37.0 193.4
Balance at 1 January 2010 4.2 26.9 0.9 5.0 37.0 193.4
Additions in the year (note 25) – 5.8 – 0.8 6.6 29.1
Disposals during the year (note 25) – (2.0) – – (2.0) (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 (2.9) (7.6) (0.7) (2.4) (13.6) (9.0)
Amortisation charge for the year (1.0) (3.9) (0.2) (1.7) (6.8) –
Balance at 31 December 2009 (3.9) (11.5) (0.9) (4.1) (20.4) (9.0)
Balance at 1 January 2010 (3.9) (11.5) (0.9) (4.1) (20.4) (9.0)
Amortisation charge for the year (0.3) (4.1) – (1.1) (5.5) –
Disposals during the year – 0.9 – – 0.9 –
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 – 16.0 – 0.6 16.6 213.2
Carrying amount at 31 December 2009 0.3 15.4 – 0.9 16.6 184.4
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 of intangible assets identified on acquisition and for the determination of
goodwill arising on acquisition. Amortisation charges in respect of intangible assets with a finite life are recorded within administration
expenses in the income statement. The amortisation rates are given in the significant accounting policies.
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Shareholder information 128
9 Goodwill and other intangible assets continued
In testing goodwill and other intangible assets for impairment, the carrying value of goodwill and other intangible assets in each cash-
generating 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 of independent 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 of long-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.
10 Property, plant and equipment
Owned plant, Leased plant, Freehold
machinery and machinery and property Leased
equipment equipment and land property Total
£m £m £m £m £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).
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11 Investment property
2010 2009
Valuation £m £m
At 1 January 1.8 –
Additions in the year 2.5 1.8
Revaluation in the year – –
At 31 December 4.3 1.8
Investment properties comprise certain residential properties constructed by the Group as part of larger 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.
12 Investments in equity accounted joint ventures
The Group has the following interests in significant joint ventures:
Access for Wigan (Holdings) Limited 50% share
Access for Wigan (Holdings) Limited is developing the Wigan Life Centre.
Ashton Moss Developments Limited 50% share
Ashton Moss Developments Limited has developed a mixed use site in Manchester.
Blue Light Holdings Limited 50% share
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 50% share
Bromley Park Limited has developed a site for housing in Kent acquired from the Ministry of Defence.
Claymore Roads (Holdings) Limited 50% share
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 (previously called Community Solutions for Primary Care (Holdings) Limited)
50% share
Community Solutions Investment Partners Limited carries out strategic development and regeneration projects in the health sector.
English Cities Fund 12.5% equity participation
ECf is 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 33⅓% share
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.
ISIS Waterside Regeneration 25% equity participation
ISIS Waterside Regeneration is a limited partnership between British Waterways and Warp 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 British Waterways and Warp 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 50% share
Lewisham Gateway Developments Limited is redeveloping a mixed use site comprising retail, office, hotel, residential, education,
health and leisure space.
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Shareholder information 128
12 Investments in equity accounted joint ventures continued
Lingley Mere Business Park Development Company Limited 50% share
Lingley Mere Business Park Development Company Limited is developing new office space and ancillary facilities at Warrington
in Cheshire.
Morgan-Vinci Limited 50% share
Morgan-Vinci Limited is responsible for the construction and operation of the Newport Southern Distributor Road.
North Shore Development Partnership Limited 50% share
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 33⅓% share
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 50% share
St Andrews Brae Developments Limited is securing planning permission for residential development.
Taycare Health (Holdings) Limited 50% share
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 50% share
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 2009
£m £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.
Financial information related to equity accounted joint ventures:
2010 2009
£m £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)
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12 Investments in equity accounted joint ventures continued
Results of equity accounted joint ventures:
2010 2009
£m £m
Group share of profit before tax 0.6 0.2
Group share of income tax expense (0.5) (0.1)
Group share of profit after tax 0.1 0.1
Commitments in respect of interests 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
13 Shared equity loan receivables
2010 2009
£m £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.
Basis of valuation and assumptions made
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 model for
determining the fair value of the portfolio of loans 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’.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
14 Inventories
2010 2009
£m £m
Raw materials 2.2 3.5
Work in progress 138.9 137.7
141.1 141.2
Work in progress comprises land and housing, commercial and mixed developments in the course of construction.
15 Trade and other receivables
2010 2009
£m £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.
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
16 Construction contracts
2010 2009
£m £m
Amounts due from construction contract customers 178.4 192.5
Amounts due to construction contract customers (70.7) (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 7,497.7 9,607.7
Less: progress billings (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.
17 Trade and other payables
2010 2009
£m £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.
18 Finance lease liabilities
2010 2009 2010 2009
£m £m £m £m
Amounts payable under finance leases:
Within one year 2.1 2.2 1.7 1.8
In the second to fifth years inclusive 5.0 5.5 4.2 4.6
After five years 1.9 2.8 1.8 2.5
9.0 10.5 7.7 8.9
Less: future finance charges (1.3) (1.6) n/a n/a
Present value of lease obligations 7.7 8.9 7.7 8.9
Minimum lease
payments
Capital element
of lease payments
Current lease liability 1.7 1.8
Non-current lease liability 6.0 7.1
7.7 8.9
It is the Group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term is six years (2009:
five years). For the year ended 31 December 2010, the average effective borrowing rate was 5% (2009: 6%). Interest rates are fixed at the
contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
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.
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Company financial statements 115//127
Shareholder information 128
19 Retirement benefit schemes
Defined contribution plans
(i) The Morgan Sindall Retirement Benefits Plan
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.
(ii) Local Government Pension Schemes
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.
Defined benefit plan
The Plan includes a defined benefit section comprising liabilities and transfers of funds 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.
2010 2009
Key assumptions used: % %
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 of joining, members receive fixed pension increases of 3.0% or 3.5%.
Life expectancy
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 2009
£m £m
Present value of the Plan liabilities (8.5) (8.9)
Fair value of the Plan assets 6.6 5.7
Deficit in the Plan liability recognised in the balance sheet (1.9) (3.2)
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Notes to the consolidated
financial statements
continued
19 Retirement benefit schemes continued
Amounts recognised in the income statement in respect of the Plan are as follows:
2010 2009
£m £m
Interest cost (0.5) (0.5)
Expected return on the Plan assets 0.3 0.3
Net periodic cost (0.2) (0.2)
The charge for the year has been included in administrative expenses. Actuarial gains and losses have been reported in 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 2009
£m £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 2009
£m £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 Decrease
of 1% of 1%
£m £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 2009
£m £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
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
19 Retirement benefit schemes continued
The Plan assets and the expected rate of return at the balance sheet date were as follows:
2010 2009 2010 2009
£m £m % %
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
Fair value of assets
Expected return
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 2009 2008 2007 2006
£m £m £m £m £m
Present value of the Plan liabilities (8.5) (8.9) (8.0) (8.0) (7.3)
Fair value of the Plan assets 6.6 5.7 5.0 4.7 4.8
Deficit in the Plan (1.9) (3.2) (3.0) (3.3) (2.5)
Experience adjustments on the Plan liabilities:
Amount 0.6 (0.8) 0.2 (0.4) 0.7
Percentage of the Plan liabilities 6.7% 8.9% (1.9%) 4.4% (9.2%)
Experience adjustments on the Plan assets:
Amount 0.3 0.2 (0.3) (0.5) –
Percentage of the Plan assets 3.6% 2.6% (6.6%) (11.0%) 0.4%
The amount of contributions expected to be paid to the Plan during 2011 is £0.7m (2010: £0.7m).
Gloucestershire County Council Local Government Pension Scheme
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.
20 Deferred tax
Non-current Short-term Retirement
asset timing benefit Share-based
amortisation differences obligation payments Total
£m £m £m £m £m
At 1 January 2009 1.5 1.0 0.8 0.4 3.7
Credit/(charge) to income 0.2 (0.4) 0.1 (0.6) (0.7)
Credit to equity – – – 0.8 0.8
At 31 December 2009 1.7 0.6 0.9 0.6 3.8
At 1 January 2010 1.7 0.6 0.9 0.6 3.8
Credit/(charge) to income 0.2 (0.7) (0.1) 0.1 (0.5)
(Charge)/credit to equity – – (0.3) 0.6 0.3
Acquisition of subsidiary (0.3) – – – (0.3)
Effect of change in tax rate:
Income statement (0.1) – – – (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 2009
£m £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 of future profit streams against which
these losses may be utilised. Losses may be carried forward indefinitely.
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Notes to the consolidated
financial statements
continued
21 Provisions
Current liabilities
Contract Employee
provisions provisions Total
£m £m £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.
Non-current liabilities
Employee Insurance
provisions provisions Other Total
£m £m £m £m
At 1 January 2009 1.8 8.8 7.7 18.3
Utilised (0.1) (2.4) (2.6) (5.1)
Additions – 3.6 – 3.6
Released – – – –
At 31 December 2009 1.7 10.0 5.1 16.8
At 1 January 2010 1.7 10.0 5.1 16.8
Utilised (2.0) (1.7) (2.5) (6.2)
Additions 1.8 3.0 1.8 6.6
Released (0.8) – (1.0) (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 self insurance 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.
22 Operating lease commitments
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 Land and
buildings Other Total buildings Other Total
£m £m £m £m £m £m
Within one year 6.9 2.7 9.6 8.1 3.7 11.8
Within two to five years 17.5 2.8 20.3 18.3 4.9 23.2
After five years 5.2 – 5.2 4.6 – 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 of future minimum sublease payments expected to be received under non-cancellable subleases at 31 December 2010
is £0.9m (2009:£1.2m).
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Company financial statements 115//127
Shareholder information 128
23 Contingent liabilities
Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating
companies in the Group. There are contingent liabilities in respect of 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.
24 Share capital
No. ’000s £’000s No. ’000s £’000s
Issued and fully paid:
At the beginning of the year 43,160 2,158 43,004 2,150
Exercise of share options 28 1 156 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.
2010
Expected return
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.
Shares
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).
Share options
The Company has four share option schemes:
The Morgan Sindall 1995 Executive Share Option Scheme (‘the 1995 Scheme’) which received shareholders’ approval on
24 May 1995. The period for the granting of options under the 1995 Scheme expired in May 2005. Options under the 1995
Scheme are exercisable between five and seven years from the date of grant of the options.
The Morgan Sindall Employee Share Option Plan 2007 (‘the ESOP 2007’) received approval from the Board on 7 June 2007.
The ESOP 2007 did not require shareholder approval because all options granted and to be granted under it will be settled with
market purchased shares. Options granted under the ESOP 2007 are exercisable between three and ten years from the date of
grant. The period for granting options under the ESOP 2007 expires on 6 June 2017.
The Morgan Sindall Executive Remuneration Plan 2005 (‘the 2005 Plan’), details of which are disclosed in the directors’
remuneration report on pages 61 and 62.
The Morgan Sindall Savings Related Share Option scheme (‘the SAYE scheme’). The SAYE scheme was approved by shareholders
on 22 April 2008 and by HMRC on 9 May 2008. No options were granted during the year (2009: nil). The options are exercisable
after three years (for six months) from the date of grant. The period for granting options under the SAYE scheme expires on
21 April 2018. Further details of the SAYE scheme are given in note 27.
Own shares
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).
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
25 Acquisitions of subsidiaries
Acquisition of Powerminster Gleeson Services Limited
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:
£m
Total purchase consideration: cash 6.6
Net liabilities acquired (0.1)
Goodwill (note 9) 6.7
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
carrying Fair value
amount adjustments Fair value
£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.
Acquisition of the business, obligations and certain assets from the administrators of Connaught Partnerships Limited
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 28.0
Net assets acquired 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 Provisional
carrying fair value Provisional
amount adjustments fair value
£m £m £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
Provisional fair 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.
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Company financial statements 115//127
Shareholder information 128
25 Acquisitions of subsidiaries continued
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.
Acquisition of partner interests in Urban Regeneration joint ventures
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:
£m
Purchase consideration:
Cash paid 0.1
Fair value non-cash consideration 2.8
Total purchase consideration 2.9
Net assets acquired 5.2
(2.3)
Goodwill on original shareholdings 0.3
One off gain from a bargain purchase (2.0)
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 adjustments Fair value
£m £m £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 of loans 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.
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
26 Cash flows from operating activities
2010 2009
Notes £m £m
Profit from operations for the year 41.8 43.7
Adjusted for:
Amortisation of fixed 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.
27 Share-based payments
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).
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Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
27 Share-based payments continued
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%
Share
Options awards
Mar 10 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.
(3) Assumed to be equal to historic volatility of the Company’s share price over the period prior to grant equal in length to the
expected term.
(4) Set as equal to dividend yield prevailing at date of grant with the exception of share awards granted to executives of the Group,
which are subject to performance conditions.
(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.
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
27 Share-based payments 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
Balance
at the Proceeds
Exercise Exercise beginning Options Options Options Options received £
Grant date on Expiry price of year granted lapsed forfeited exercised In issue Exercisable (net of
date or after date £ No. No. No. No. No. No. 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
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Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
27 Share-based payments continued
2009
Balance at end of year
Balance
at the Proceeds
Exercise Exercise beginning Options Options Options Options received £
Grant date on Expiry price of year granted lapsed forfeited exercised In issue Exercisable (net of
date or after date £ No. No. No. No. No. No. 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
Cash-settled share-based payments
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).
At the reporting date, the fair value and number of phantom awards outstanding was:
Balance at Phantom Phantom Balance at
Exercise beginning of options options end of Fair value
price the year lapsed exercised the year per award
Date of grant £ No. No. No. No. £
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).
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
27 Share-based payments 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).
28 Related parties
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.
Trading transactions
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 Amounts owed by/(to)
and services related parties
2010 2009 2010 2009
£m £m £m £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 for Wigan (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 2009
£m £m
Amounts owed by related parties 9.8 3.1
Amounts owed to related parties (0.8) (0.8)
9.0 2.3
All transactions with related parties were made on an arm’s length basis.
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
28 Related parties continued
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.
Remuneration of key management personnel
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 of individual directors
is provided in the audited part of the remuneration report on pages 64 to 67.
2010 2009
£m £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
Directors’ transactions
In the course of the year, Eurocentral Partnership Limited (a wholly owned subsidiary of the Group) sold some land and buildings
to a syndicate of investors 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.
Directors’ material interests in contracts with the Company
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.
29 Financial instruments
Cash and cash equivalents
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.
General risk management principles
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 of its 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.
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
29 Financial instruments continued
Financial risks and management
The Group has exposure to a variety of financial risks through the conduct of its 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 of financial instruments:
credit risk
liquidity risk
market risk
(a) Credit risk
Credit risk is the risk of financial 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.
Amounts due from construction contract customers and trade receivables
The Group’s primary exposure to credit risk arises from the potential for 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 of its 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 of incurred losses.
The ageing of trade receivables at the reporting date was as follows:
2010 2009
Provision for Provision for
Gross trade impairment Gross trade impairment
receivables losses receivables losses
£m £m £m £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 2009
£m £m
Balance at beginning of the year 2.9 2.7
Amounts written off during the year (0.2) (0.2)
Amounts recovered during the year (0.1) (0.2)
(Decrease)/increase in provision recognised in the income statement (0.6) 0.6
Balance at 31 December 2.0 2.9
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Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
29 Financial instruments continued
(b) Liquidity risk
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 of finance 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 of levels 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
(c) Market risk
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 of its holdings of financial 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.
Interest rate risk
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 of joint 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.
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Consolidated financial statements
Notes to the consolidated
financial statements
continued
29 Financial instruments 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.
Currency risk
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 actual foreign currency exposures.
Capital management
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.
30 Subsequent events
There were no significant subsequent events that affected the financial statements of the Group.
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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
Company
financial
statements
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116
Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
Independent auditors’ report
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
the part of the directors’ remuneration report to be audited
has been properly prepared in accordance with the
Companies Act 2006; and
the information given in the directors’ report for the financial
year for which the financial statements are prepared is
consistent with the parent company financial statements.
Matters on which we are required to report by exception
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:
adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us;
the parent company financial statements and the part of
the directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified
by law are not made; or
we have not received all the information and explanations
we require for our audit.
Other matter
We have reported separately on the group financial statements of
Morgan Sindall Group plc for the year ended 31 December 2010.
Ian Krieger
(Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
4 March 2011
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.
Respective responsibilities of directors and auditor
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.
Scope of the audit of the financial statements
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.
Opinion on financial statements
In our opinion, the parent company financial statements:
give a true and fair view of the state of the Company’s affairs
as at 31 December 2010 and of its loss for the year then
ended;
have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and
have been prepared in accordance with the requirements
of the Companies Act 2006.
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Company balance sheet
at 31 December 2010
Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
117
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 2009
Notes £m £m
Fixed assets
Tangible assets 4 0.8 1.2
Investments 5 372.1 322.2
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 6 1.7 1.0
Cash at bank and in hand 109.7 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 160.0 181.1
Provision for liabilities 10 (10.1) (10.0)
Net assets excluding retirement benefit obligation 149.9 171.1
Retirement benefit obligation 7 (1.4) (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
Chief Executive
David Mulligan
Finance Director
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
Company combined statement of movements
in reserves and shareholders’ funds
for the year ended 31 December 2010
Share Capital
Called up premium redemption Special Retained
share capital account Own shares reserve reserve earnings Total equity
£m £m £m £m £m £m £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 – – – – – (0.3) (0.3)
Actuarial gain on retirement benefit obligation – – – – – 0.8 0.8
Balance at 31 December 2010 2.2 26.7 (5.9) 0.6 13.7 111.2 148.5
8111 Accounts 2010_Layout 1 09/03/2011 16:15 Page 119
Significant accounting policies
for the year ended 31 December 2010
Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
119
Directors’ report: business review 00//00
Directors’ report: business review 02//50
Directors’ report: governance 00//00
Directors’ report: governance 51//72
Consolidated financial statements 00//00
Consolidated financial statements 73//114
Company financial statements 00//00
Company financial statements 115//127
Shareholder information 00
Shareholder information 128
Basis of accounting
The separate financial statements of the Company are presented
as required by the Companies Act 2006. These financial 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.
Significant estimates and judgments
The preparation of financial 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:
(a) Taxation
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.
(b) Accounting for the Company’s defined benefit plan
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 of increase 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.
(c) Share-based payments
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.
Accounting policies
Fixed asset investments
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 of impairment is identified.
Tangible fixed assets and depreciation
No depreciation is provided on freehold land. On other assets,
depreciation is provided at rates calculated to write off the
cost or valuation of fixed assets over their estimated useful
lives as follows:
Freehold property
2% per annum
Plant, machinery
and equipment
Between 10% and 33% per annum
Taxation
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.
(a) Current tax
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 of income or expense that are assessable or deductible
in other years and is adjusted for items that are never assessable
or deductible.
(b) Deferred tax
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 of items of income
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 of fixed 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.
Retirement benefit schemes
The Company has two retirement benefit plans:
(a) Defined contribution plan
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.
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
Significant accounting policies
for the year ended 31 December 2010
continued
(b) Defined benefit plan
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 of future 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.
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.
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.
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.
Leased assets
Rentals payable under operating leases are charged to income
on a straight-line basis over the term of the relevant lease.
Finance income and expense
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.
Provisions
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.
Financial guarantees
The Company provides certain guarantees in respect of the
indebtedness of its 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.
Share-based payments
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 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 date of grant to the date on which the
employees become unconditionally entitled to the awards
or options.
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.
Dividends
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.
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Notes to the Company
financial statements
Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
121
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
1 Employees
The average monthly number of people employed by the Company, including directors, during the year was 19 (2009: 22).
2 Staff costs
2010 2009
£m £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
3 Profit/(loss) of the parent company
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).
4 Tangible assets
Owned plant,
machinery and Freehold
equipment property Total
£m £m £m
Cost or valuation
Balance at 1 January 2010 3.2 0.1 3.3
Additions in the year 0.1 – 0.1
Balance at 31 December 2010 3.3 0.1 3.4
Accumulated depreciation
Balance at 1 January 2010 (2.1) – (2.1)
Depreciation charge for the year (0.5) – (0.5)
Balance at 31 December 2010 (2.6) – (2.6)
Net book value
Net book value at 31 December 2010 0.7 0.1 0.8
Net book value at 31 December 2009 1.1 0.1 1.2
5 Investments
Subsidiary undertakings
Shares Loans Total
£m £m £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
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
Notes to the Company
financial statements
continued
5 Investments 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:
Morgan Ashurst plc changed its name to Morgan Sindall (Construction) plc on 4 June 2010
Morgan Sindall (Construction) plc changed its name to Morgan Sindall plc on 31 December 2010
Morgan Est plc changed its name to Morgan Sindall (Infrastructure) plc on 4 June 2010
Morgan Est Holdings Limited changed its name to Morgan Sindall Holdings Limited on 4 June 2010
Morgan Professional Services Limited changed its name to Morgan Sindall Professional Services Ltd on 4 June 2010
Underground Professional Services Limited changed its name to Morgan Sindall Underground Professional Services Ltd on 4 June 2010
The following transactions occurred during the year and refer to the registered company names at 31 December 2010:
(1) On 22 February 2010, the ownership of Hinkins & Frewin Limited, Barnes & Elliott Limited, Sindall Limited, Stansell Limited, The
Snape Group Limited, Roberts Construction Limited and Wheatley Construction Limited was transferred from the Company’s
former wholly owned subsidiary, Morgan Sindall plc, to the Company through the purchase of all of the £1.00 fully paid ordinary
shares of each of those companies (a total of £21.9m). All of the transferred companies were dormant companies and the
consideration for each transfer was settled through intercompany loans.
(2) On 31 December 2010, as part of an intra-group reorganisation, the Company transferred its investment in its wholly owned
subsidiary, Morgan Sindall plc, to Morgan Sindall Holdings Limited in a share-for-share transaction. As a result, the Company
increased its investment in its wholly owned subsidiary, Morgan Sindall Holdings Limited, by £120.9m through its issue of 120.9m
fully paid ordinary shares of £1.00 each.
(3) On 31 December 2010, as part of an intra-group reorganisation, the Company transferred its investment in its wholly owned
subsidiary, Morgan Sindall Underground Professional Services Ltd, to Morgan Sindall Professional Services Ltd in a share-for-share
transaction. As a result, the Company increased its investment in its wholly owned subsidiary, Morgan Sindall Professional Services
Ltd by £1 through its issue of one fully paid ordinary share of £1.00.
(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.
6 Deferred tax
Accelerated
allowances and Retirement
other short-term benefit Share-based
timing differences obligation payments Total
£m £m £m £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 2009
£m £m
Deferred tax within current assets 1.7 1.0
Retirement benefit obligations 0.5 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 of future 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.
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
123
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
7 Retirement benefit schemes
Defined contribution plan
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.
Defined benefit plan
The Plan includes some defined benefit liabilities and transfers of funds representing the accrued benefit rights of former 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
of investment 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 of inflation 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 of inflation 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 of joining, members receive fixed pension increases of 3.0% or 3.5%.
Life expectancy
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%).
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
Notes to the Company
financial statements
continued
7 Retirement benefit schemes 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.
Notes
(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
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
125
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
7 Retirement benefit schemes continued
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.
History of experience adjustments is as follows:
2010
2009
2008
2007
2006
% asset % asset % asset % asset % asset
or liability or liability or liability or liability or liability
£m value £m value £m value £m value £m 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 2009 2008
£m £m £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)
8 Share capital
2010 2009
No. ’000s £’000s No. ’000s £’000s
Issued and fully paid:
At the beginning of the year 43,160 2,158 43,004 2,150
Exercise of share options 28 1 156 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.
Shares
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).
Share 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).
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Morgan Sindall Group plc Annual report and accounts 2010
Company financial statements
Notes to the Company
financial statements
continued
8 Share capital continued
Own shares
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).
9 Dividends
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.
10 Provisions
Employee Insurance
provisions provisions Total
£m £m £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.
11 Operating lease commitments
The Company has an operating lease commitment in respect of land 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).
12 Contingent liabilities
Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating
companies in the Group. There are contingent liabilities in respect of 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.
13 Subsequent events
There were no subsequent events that affected the financial statements of the Company.
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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
14 Additional information on subsidiary undertakings and joint ventures
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 for Wigan (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
Primary Care (Holdings) Limited) (50%)*
in the health sector
English Cities Fund (12.5%)* Inner city regeneration
Hull Esteem Consortium PSP Limited (33⅓%)* Investment in the development of education facilities
ISIS Waterside 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 ISIS Waterside 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 and Wales 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.
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128
Morgan Sindall Group plc Annual report and accounts 2010
Shareholder information
Shareholder information
Directors’ report: business review 02//50
Directors’ report: governance 51//72
Consolidated financial statements 73//114
Company financial statements 115//127
Shareholder information 128
Financial calendar 2011
Financial year end
Preliminary results announcement
Annual general meeting
Interim management statement
Final dividend:
Ex-dividend date
Record date
Payment date
Half year results announcement
Interim dividend payable
Interim management statement
31 December 2010
22 February 2011
5 May 2011
5 May 2011
20 April 2011
26 April 2011
16 May 2011
August 2011
September 2011
November 2011
Registrar
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:
Website and electronic communications
The 2010 annual report and other 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.
Shareholder documents are now, following changes 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 such documents. If a shareholder has registered their 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
available on the website. Shareholders can continue to receive 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.
By post:
Capita Registrars, The Registry, 34 Beckenham Road,
Beckenham, Kent BR3 4TU.
Investors who hold their shares via an intermediary should
contact the intermediary regarding the receipt of shareholder
documents from the Company.
By telephone:
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.
By email:
ssd@capitaregistrars.com
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.
Dividend mandates
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.
Multiple accounts
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.
Telephone share dealing service
A telephone dealing service has been arranged with Stocktrade
which provides a simple way for buying or selling Morgan Sindall
Group plc shares. Basic commission is 0.5% up to £10,000, reducing
to 0.2% thereafter (subject to a minimum commission of £15).
Sales are carried out on a ten day settlement basis with purchases
on a five day basis. When purchasing shares, payment must be
made by debit card at the time of dealing. For further information,
please call 0845 601 0995 and quote reference Low Co140.
Unsolicited mail
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),
London W1E 0ZT or visit the website at www.mpsonline.org.uk.
Analysis of shareholdings at 31 December 2010
No. of % of total % of total
accounts accounts No. of shares 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
Shareholder communication
Email:
Telephone:
enquiries@morgansindall.com
020 7307 9200
Registered office
Kent House, 14-17 Market Place, London W1W 8AJ
Registered in England and Wales, No: 00521970
Advisers
Brokers
Solicitors
Bankers
RBS Hoare Govett Limited
Slaughter and May
Wragge & Co LLP
Lloyds TSB Bank plc
The Royal Bank of Scotland plc
Yorkshire Bank
Independent auditors
Deloitte LLP
8111 Front Cover 2010_Layout 1 09/03/2011 16:17 Page 2
Financial highlights
Revenue £m
2010
2009
2008
Profit before tax, amortisation
and non-recurring items £m
2,102
2,214
2,548
2010
2009
2008
51.3
51.5
Profit before tax £m
Adjusted EPS pence
2010
2009
2008
40.7
44.7
62.3
2010
2009
2008
92.9
93.9
Basic EPS pence
Total dividend pence
2010
2009
2008
70.5
77.9
106.3
2010
2009
2008
71.4
127.8
42.0
42.0
42.0
Operating profit is profit from operations before amortisation of intangible assets
and non-recurring items.
Group structure
The Group operates through four divisions and a specialist investment unit:
Construction
& Infrastructure
Operating as
Morgan Sindall
Affordable
Housing
Operating
as Lovell
Fit Out
Operating as
Overbury and
Morgan Lovell
Urban
Regeneration
Operating
as Muse
Developments
Investments
Operating as
Morgan Sindall
Investments
and Community
Solutions
Cautionary statement
This directors’ report has been prepared solely to provide additional information to shareholders to assess the Group’s strategies
and the potential for 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 forward-
looking 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.
Designed and produced by
Bostock and Pollitt Limited, London.
This brochure is printed on Chorus Lux
Silk and Tauro Offset, comprising of fibres
sourced from well managed sustainable
forests (incorporating FSC certified fibre)
and bleached without the use of chlorine.
The production mill for 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.
8111 Front Cover 2010_Layout 1 09/03/2011 16:16 Page 1
Morgan Sindall Group plc
Kent House
14–17 Market Place
London W1W 8AJ
020 7307 9200
www.morgansindall.com
Annual report
and accounts
2010
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Morgan Sindall Group plc
taking action