Servelec Half year results to 30 June 2017

11 September 2017

Servelec Group PLC

("Servelec" or the "Group")

Half year results for the six months to 30 June 2017

Servelec Group plc ("Servelec" or the "Group"), the UK-based technology group which provides software, hardware and services predominantly to the UK Healthcare, Local Government, Oil & Gas, Nuclear, Power and Utilities sectors, today announces its results for the six months ended 30 June 2017.

FINANCIAL HIGHLIGHTS

Notes:  * after adding back exceptional costs, amortisation on acquired intangibles and share based payments / expense.

** order entry is the total contract value of revenue from an order received in the period.

*** this is the total future revenue we expect from orders received

****after adding back exceptional costs, amortisation on acquired intangibles, share base payments and the related tax adjustment

SUMMARY

Servelec Group reports a return to growth in revenue and profit in the first half of the year. Cash conversion has returned to anticipated levels and the Group is aiming to be debt free by the year-end. There has been a deferment of orders in some areas of our Automation business, which will reduce the anticipated growth for the full year.

Alan Stubbs, Chief Executive Officer, Servelec Group Plc, commented:

"The Board is pleased with the progress made in the first half of 2017, particularly in Servelec HSC and Servelec Controls Oil & Gas and this progression is expected to continue into H2 and beyond. There are challenges in Servelec Controls Power & Infrastructure and in Servelec Technologies where there has been a deferment in customer demand. In Servelec Technologies, this is particularly related to SCADA / Telemetry projects and Remote Telemetry Unit (RTU) orders expected under AMP6 as budgets have been reallocated to compensate for the overhang of 'Open Water'1.

"The Board has carried out a thorough review of the Combined Heat & Power project in Turkey, including the previously advised debt position. We are concerned at the lack of progress that has been made by the customer in resolving their funding arrangements and the £2.6m related debt from 2015 remains unpaid. If the Board considers there is still no demonstrable improvement in progress by the customer at the year-end, the debt will be fully provided for.

 "Servelec HSC and Servelec Controls Oil & Gas are trading well and whilst the deferment of customer spend in Servelec Technologies is disappointing, we have market leading products in Servelec Technologies and its global business is developing, The Board remains positive about the longer term prospects for the Group."

For further enquiries, please contact:

Notes to Editors

Servelec Group plc is a UK-based technology group, with significant intellectual property, providing software, hardware and services predominantly to the UK healthcare, oil & gas, nuclear, power, water, utilities, broadcast and rail sectors.

 Servelec has two operating divisions; Servelec HSC and Servelec Automation:

 - Servelec HSC specialises in the design, development and implementation of Electronic Patient Record (EPR) and Patient Administration Systems (PAS), Social Care Case Management software and early Years education software within secondary care and social care and education in local government settings and is a market leader in the Mental Health, Community Health and Social Care sectors in England.

 - Servelec Automation provides complex, mission-critical control systems to large blue-chip companies mainly in the UK, focusing on the oil & gas, nuclear, power, infrastructure, utilities, broadcast and rail industries. Servelec Automation also provides services from consultancy through to design, implementation, delivery, installation and on-going customer support and maintenance.

CHIEF EXECUTIVE OFFICER'S REVIEW

The Board is pleased to report a return to growth for Servelec Group in the six months ended 30 June 2017. Underlying operating profit has increased by 44% and organic profit growth (growth excluding acquisitions) is up 20% against H1 2016.

Servelec HSC is the main driver for growth in the first half, bolstered by the successful go-live of Oceano, our new Patient Administration System for the acute market, at University Hospitals Birmingham NHS Foundation Trust. Despite Social Care performance being behind expectations, Synergy is performing exceptionally well in the Children's Services market. In Servelec Automation, Servelec Controls Oil & Gas is seeing a strong turnaround in performance, offsetting a weaker performance in Power & Infrastructure. Servelec Technologies continues to develop its market opportunities albeit it is hampered by the continued slow pace of the UK Remote Telemetry Unit market.

Overall, Group revenue increased by 11% to £31.5m (H1 2016: £28.4m). Underlying operating profit rose 44% to £6.5m (H1 2016: £4.5m). Order entry reduced by 7% to £34.7m (H1 2016 £37.4m), predominantly in Automation. Cash generation from operations increased to £6.9m (H1 2016: £1.6m) reducing the overall net debt to £6.0m (H1: 2016 £13.0m).

Servelec HSC

Servelec HSC performed well in the first half of the year. However, performance was impacted by our Social Care business, Corelogic, which did not convert as many sales as anticipated in the period. Actions have been taken to improve our win-rate and there is a strong pipeline in place, which continues to build. Strong contribution from Synergy has mitigated Corelogic's sluggish first half. Operating profit increased to £6.0m (H1 2016: £4.2m). Revenue was ahead of prior year at £17.5m (H1 2016: £15.0m). Order entry in the first half of the year was 14% ahead of that in the corresponding period meaning our order bank increased to £62.2m (H1 2016: £56.7m).

Healthcare

Our Healthcare business performed strongly, delivering a steady performance in challenging market conditions. It has received a recent boost with the successful go live of Oceano at our high profile reference customer, University Hospitals Birmingham NHS Foundation Trust (UHB). UHB will act as an excellent reference site for us in the future and is one of 16 acute trusts selected by NHS England as a Global Digital Exemplar (GDE). Servelec is the only supplier with established customers on both the Acute GDE programme and the Mental Health GDE programme, meaning the Group is well placed to benefit as funding arrangements continue to unlock. Royal Cornwall Hospitals NHS Trust will go live with Oceano in H1 2018.

The Healthcare business is a strong contributor of profit growth due to the cost saving measures taken in 2016. Recurring revenues increased slightly to 66% (from 64% H1 2016). We are also focusing on account management sales with our existing installed base and further investment in our products is generating customer demand.

One area we are focusing our product development is mobile product extensions to RiO and the delivery of modern, role-based apps to support our customers in the delivery of improved patient care. To expedite our route to market, we have launched an open API, engendering interoperability, which will be first used by our RiO mobile role-based apps. We have already signed up another third party provider. Clinical testing of our first app, supporting District Nurses in the delivery of patient-centred care, has been successful, ensuring a robust product which is available to customers now and is in-line with NHS Digital's endorsement of the Royal College of Nursing's campaign to ensure 'every nurse is an e-nurse'.

Our role-based apps will be delivered to customers on a Pay per User per Month (PUPM) recurring revenue model resulting in good margins and revenue share with the third party developers. The market opportunity is significant, with a straightforward implementation and strong customer demand. Our mobile offerings will contribute to profits and revenues from Q4 2017 and beyond.

Social Care

The Social Care market remains active with an existing competitor announcing their exit from the market creating further opportunity for 2018 onwards. However, after a very strong 2016 and a much improved sales process of our only real competitor, Mosaic sales are lagging expectations for the period. We are confident about our product and our pricing and that issues identified in the period have been addressed, are short term and relatively isolated. Actions taken include revitalising our go-to-market strategy through a further sharpening of our sales team, improved product demonstrations and a focus on increasing the referencability of our live customer sites. We maintain high visibility of the growing pipeline and have a number of active opportunities with decisions due in 2017, although related licences would be Q4 2017 weighted. In addition to new sales opportunities, which remain strong, we are focussing on more active account management of our existing installed base.

We recently signed a deal to bring best-of-breed product extensions in line with known customer demand, to deliver true end-to-end portal product capability. This enhanced version of Finestra, our portal extension for the Mosaic case-management system, will transform the way people manage their own care (and that of family members) through the transferral of service selection to an online tool. Through a combination of in-house and third party development, Servelec will deliver a market place for care services enabling local authorities to manage invoicing, reduce operating expenditure and improve efficiencies in the delivery of care. The portal product extensions are available to Mosaic customers now.

A decision to close our Indian development centre (in Cochin), where the portal development work was being carried out, was actioned in August 2017.

Children's Services

The Synergy business, acquired in April 2016, provides software to Children's Services within local government, and continues to be a strong performer for the Group. The business performed well in the half year to 30 June 2017 and is a significant contributor of revenue growth for Servelec HSC.

Market opportunities with local government customers remain buoyant as the drive to reduce system maintenance expenditure continues. Synergy continues to outperform its main competitors within the market place maintaining a high win rate of available contracts. We anticipate a strong contribution from Synergy at the full year compared to 2016, which only included nine months from Synergy.

Amongst a number of other significant wins for the Synergy product suite, Royal Borough of Greenwich Council became the tenth council to move its entire early years management system across to Synergy in the last three years, confirming Synergy as the system of choice in London with over 40% of London customers using Synergy for admissions.

Integrated Care

The 44 locally based Sustainability and Transformation Partnerships (STPs) announced by NHS England last year to transform healthcare services, are aimed at bringing together NHS and local authorities to share records and improve the delivery of integrated and consistent care. Political events and funding challenges for the delivery of the Local Digital Roadmaps, which support STPs, have delayed IT investment. Servelec is well positioned to deliver on the government's strategy and we are working closely with customers in a number of STPs in Birmingham, London and Cornwall to bring about the delivery of truly integrated care.

Servelec Automation

Overall, Servelec Automation has delivered an improved result on H1 2016. Operating profits increased to £1.9m (H1 2016: £1.7m). Revenue across the division is up 4% to £14.0m (H1 2016: £13.4m). Servelec Controls Oil & Gas has recovered well. Order entry and order bank have reduced due to continued-sluggishness in the UK water industry's AMP6 RTU and project spend together with a downturn in the Power & Infrastructure part of Servelec Controls, which has continued from H2 2016. We expect this trend to continue through the second half of the year and into 2018.

Servelec Controls

Servelec Controls operating profit is up 34% to £0.6m (H1 2016: £0.4m) and revenue is up 6% to £5.7m (H1 2016: £5.4m).

Servelec Controls Oil & Gas has seen a significant improvement, is ahead of forecast and is benefitting from a renewed focus by the new management team, which incorporates a refreshed sales team. The market is coming back to us, as customers continue to look at best value solutions to keep platforms open for longer. Large orders for our remote operations solution continue to come through from Centrica. Following a joint presentation with Centrica at the industry's leading event, Topsides UK, there is increased interest from other operators for the innovative remote operations solution. The business continues to benefit from a high win rate of lower value but faster turnaround jobs as predicted.

In H2 2016 and H1 2017, our Power & Infrastructure business has been under pressure due to both the stalling nuclear market and proposed termination of coal-fired power production by 2025. We have taken action in August 2017 to consolidate our offices and engineering team around available pipeline and to reduce overheads. Whilst we foresee this situation continuing into 2018, we believe in the long-term demand for our skills and services and we are confident the market will recover. We are also focusing our sales team on available opportunities including those in complementary verticals such as defence and infrastructure.

"The Board has carried out a thorough review of the Combined Heat & Power project in Turkey, including the previously advised debt position. We are concerned at the lack of progress that has been made by the customer in resolving their funding arrangements and the £2.6m related debt from 2015 remains unpaid. If the Board considers there is still no demonstrable improvement in progress by the customer at the year-end, the debt will be fully provided for.

Servelec Technologies

Servelec Technologies has delivered broadly flat revenue for the first half of the year at £8.3m (H1 2016 £8.0m) with an increase in profit of 6% to £1.4m (H1 2016 £1.3m). Order entry is behind 2016 and order bank is similar to prior year.

Business Optimisation has shown an uptick in growth for the period as UK water companies are looking to invest in opex and leakage reduction.

During the first half of the year, we have won a major framework contract with Severn Trent Water to supply Remote Telemetry Units (RTUs). We are well positioned to succeed in the UK water industry, having won six out of the eight framework contracts that have come to market so far during AMP6. However, 2017 orders through these frameworks for RTUs and SCADA / Telemetry projects have been delayed owing to budget reallocation to cover the overhang of 'Open Water' and water companies' increased costs of chemicals and capital projects as a consequence of the fall in the value of Sterling.

'Open Water' is the opening up of the wholesale water market for UK business' national water procurement. Launched in April 2017, this new legislative requirement, which involves the separating out of an independent, retail business including the IT systems which our products interface with, has been a significant corporate distraction for most UK Water companies. We are confident this is a timing issue due to budget constraints and that the structural demand for our product remains and orders will start to build in 2018.

With the recent appointment of our Global Channel Director we are improving our approach to our distribution network by changing underperforming partners and capitalising on key geographies and niche industries where our competitors are no longer focusing. Globally, our focus is on optimising our channel partner network in geographies including China, the Middle East and USA.

In the UK, our focus remains on developing closer relationships with our existing customer base through improved account management in order to deliver the full end-to-end product range where there is demand and funding available. We continue to invest in developing our range of products, specifically our Business Optimisation suite as the market indicates towards trends best served by these products, of operational efficiency and least-cost production. The 'common RTU' (ensuring efficient production of an enhanced RTU across our three RTU product ranges) the first variant of which is on track for launch in early 2018 and we will have a range of cloud based SaaS solutions across our software suite to enable simpler international sales and delivery.

Servelec Group Outlook

The Group is in a robust financial position with a strong balance sheet. Cash conversion has increased to 96% in the half year and net debt has reduced by £3.6m in the period leaving a net debt balance of £6.0m at the half year, which will reduce further by the year-end.

In Servelec HSC, mobile and portal product extensions will contribute to 2018 revenues alongside ongoing account management sales to our existing installed base. In Servelec Automation, the Servelec Controls business will benefit from the cost reductions put in place in Q3 2017 and there is a building pipeline of opportunities particularly in Oil & Gas, which will contribute to full year performance and into 2018. Servelec Technologies continues to expand its global customer base and business optimisation opportunities. These will be developed whilst we await the return of AMP6 RTU and project opportunities.

CHIEF FINANCIAL OFFICERS REVIEW

The Group has delivered a strong performance in the first half of 2017 and returned to growth. Revenue increased by 11% to £31.5m (H1 2016: £28.4m); organic revenue increased by 2%. Underlying operating profit increased 44% to £6.5m (H1 2016: £4.5m) with organic profit growth of 20%. Expensed R&D costs increased to £3.4m (H1 2016: £2.8m) reflecting the continued investment in our core products.

The effective tax rate for the period is 19% (H1 2016: 20%).

Adjusted diluted EPS has increased 45% to 7.1p (H1 2016: 4.9p), see Note 6.

Cashflow in the first half of 2017 returned to anticipated levels at £6.9m (H1:2016: £1.6m) with a cash conversion of 96% (H1 2016: 38%) and is ahead of our target of 80% cash conversion for the full year. Net debt at June 2017 is £6.0m, compared to a net debt of £13.0 in H1 2016.

Capital expenditure was £0.4m (H1 2016: £0.9m) and reflects continued investment in hosting and general IT equipment refresh.

DIVIDEND

The Board has declared an interim dividend of 2.00p per share to be paid on 27 October 2017 to shareholders on the register at the close of business on 22 September 2017.

RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties, which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 31 December 2016. A detailed explanation of the risks summarised below, and how the Group seeks to mitigate the risks, can be found on page 38 to 41 of the annual report which is available at www.servelec-group.com

Regulatory

Changes to legislation may cause customers to divert their spending on the Group's products.

Public Sector Healthcare Spending

A key driver of the Group's business is the level of UK Government spending on IT relating to healthcare delivery. The rate of growth in expenditure on healthcare related IT may reduce significantly.

Competitor Activity

The Group may face significant competition from both domestic and overseas competitors.

Operational

The Group's business involves providing customers with highly reliable software and hardware. If the software or hardware contain undetected defects, the Group may fail to meet its customer's performance requirements or otherwise satisfy the contract specifications.

Revenue recognition and Project Control

The Group recognises revenue on projects based on the percentage complete of the individual project. A key element of this calculation is the estimation of the costs to complete on contracts, which is an inherent risk of project accounting.

People

The ability of the Group to retain and attract appropriately qualified and experienced staff is key to the continued success of the business.

Currency

The Group is exposed to translation foreign exchange risk from its overseas operations and indirectly from impact on customer budgets.

Information Technology

Loss of data from failure of systems or cyber-attack.

Oil Price

Following the reduction in the US Dollar price of oil in the global market, it has now stabilised and so projects are starting to be proposed.

Going Concern

As stated in note 2 to the condensed financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Servelec Group plc

Statement of directors' responsibilities

The directors confirm that to the best of their knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

· the interim management report includes a fair review of the information required by: 

a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annual report that could do so.

The directors of Servelec Group plc are listed in the Annual Report for the year ended 31 December 2016. A list of current directors is maintained on the Group website at www.servelec-group.com

By order of the Board

Alan Stubbs Mike Cane

Chief Executive Officer Chief Financial Officer

Servelec Group plc

Independent Review Report to Servelec Group plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Statement of Changes in Shareholders' Equity, the Condensed Consolidated Cash Flow Statement and the related notes 1 to 13. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Leeds

9 September 2017

Servelec Group plc

Condensed Group income statement

For the six months ended 30 June 2017

* EBITA equals operating profit from continuing operations excluding amortisation on acquired intangibles.

** After adding back exceptional costs, amortisation on acquired intangibles, share based payments expense and the related tax adjustment.

Servelec Group plc

Condensed Group statement of comprehensive income

For the six months ended 30 June 2017 

Servelec Group plc

Condensed Group statement of financial position

Servelec Group plc

Condensed Group statement of changes in equity

Servelec Group plc

Condensed Group Cash flow statement

For the six months ended 30 June 2016

(i) £1,778,000 of amortisation in the period relates to acquired intangible assets (H1 2016: £1,388,000. FY 2016 £3,090,000)

Servelec Group plc

Notes to the financial statements

1. Corporate Information

Servelec Group plc is a limited liability company, incorporated and registered under the laws of England and Wales, whose shares are publicly traded. 

The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2016 comprise the Company and its subsidiaries (together referred to as the "Group") were approved by the Board on 7 September 2016. These statements have not been audited but have been reviewed by the Group's auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

These interim condensed consolidated financial statements do not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2015 have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

New standards and interpretations

There are no accounting standards or interpretations that have become effective in the current reporting period which have had a material effect on the net assets, results and disclosures of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

Adoption of new and revised standards

The directors also considered the impact on the Group of other new and revised accounting standards, interpretations or amendments. The following revised and new accounting standards may have a material impact on the Group are currently issued but not yet effective for the year ended 31 December 2017:

· IFRS 15, "Revenue from Contracts with Customers" (effective date 1 January 2018

· IFRS 16, "Leases" (effective date 1 January 2019)

· IFRS 9, "Financial Instruments" (effective date 1 January 2018)

The Group is in the process of assessing the impact that the application of these standards will have on the Group's Financial Statements.

The Group has made an assessment of IFRS 15 and concluded that the impact of implementing the new standard will not have a material impact on the results.

2. Accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2016 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34 "Interim Financial Reporting" as adopted by the European Union. It does not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2015.

The accounting policies, presentation and methods of computation applied by the Group in these interim condensed consolidated financial statements are the same as those applied in the Group's latest audited annual consolidated financial statements for the year ended 31 December 2015.

Going Concern

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

 3. Segment information

For management purposes, the Group is organised into business divisions according to the nature of the products and services. It has two divisions and three reportable segments as follows:

· The HSC division specialises in the design, development and implementation of Electronic Patient Record (EPR) and Patient Administration Systems (PAS) and Social Care Case Management software within secondary care and social care settings and is a market leader in the Mental Health, Community Health and Social Care and Education sectors in the UK.

· The Automation division is engaged in the provision of complex, mission critical systems to the oil & gas, power, nuclear and water industries. The division specialises in safety systems, protection systems, control systems and wide area telemetry control systems. The division also offers business optimisation consultancy and remote telemetry units, which are designed and manufactured in house.

The HSC division is made up of three operating segments, Healthcare, Social Care and Children's Services, which have been aggregated as the Board considers that they have similar economic characteristics.

The Automation division is made up of two operating segments, Controls and Technologies, both of which are reportable.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss, which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the consolidated financial statements. This measurement basis excludes the effect of central services, non-recurring expenditure, amortisation, share based payments and group financing costs which are not allocated to operating segments.

Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.

The following tables present revenue and profit information for continuing operations regarding the Group's business segments for the six months ended 30 June 2017, 30 June 2016 and the year ended 31 December 2016.

Operating assets and liability information are measured on a Group basis and so have not been disclosed at segment level.

Adjustments and eliminations

Segment profit for each operating segment excludes net finance costs of £157,000 (H1 2016: costs of £97,000).

4. Non-recurring items

The aborted acquisition costs represent the professional fees incurred during a potential acquisition process which the Group's management decided to terminate before completion.

The restructuring costs relate mainly to redundancy costs incurred during the restructuring processes within the Health and Social Care and Technologies divisions during the period.

5. Research and Development costs

6. Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. The following reflects the income and share data used in the basic earnings per share computation:

Adjusted earnings per share

7. Dividends paid and proposed

Based on weighted average number of shares.

The proposed interim dividend of 2.00p was approved by the Board on 11 September 2017 and has not been included as a liability as at 30 June 2017.

 8. Income tax expense

The tax charge on continuing operations for the period is based on an effective rate of 19.25% (2016: 20.0%) to reflect the current rate of tax.

Tax rate changes that were substantially enacted at the balance sheet date have been factored into the calculation of the effective tax rates.

9. Property, Plant and Equipment

During the six months ended 30 June 2017, the Group acquired assets with a cost of £355,000 (six months to 30 June 2016: £873,000).

10. Loans and borrowings

The revolving credit facility agreement has a three year duration with amounts drawn falling due for repayment or rollover every three months. Accordingly, the amount drawn at 30 June 2017 has been categorised within current liabilities.

Interest is charged quarterly based on LIBOR plus a margin of between 1.00% and 1.95%, depending on the Group's leverage ratio for the relevant period.

11. Issued capital and reserves

Authorised shares

Ordinary shares issued and fully paid

12. Share based payments

Group executive share option plan (ESOP)

Share options were granted to employees, as determined by the Remuneration Committee. The exercise price of the options is equal to the market price of the shares on the date of grant. The options only vest in accordance with the performance conditions for each executive as determined by the Remuneration Committee. Conditions are based on operating profit targets for the year to 31 December 2017, provided the employee remains in the group's employment for 3 years. The options cannot be exercised within 3 years and have a maximum life of 10 years. The option will be settled by the issue of new shares and there are no cash settlement alternatives.

Save-as-you-earn (SAYE) scheme

The Company has an all-employee Save As You Earn share option plan whereby employees may enter into a savings contract under which they agree to save up to a maximum of £500 per month (or such limited as may be permitted by the tax legislation governing SAYE schemes from time to time) for 3 to 5 years.

Deferred share bonus plan (DSBP)

No share awards were granted to senior executives during the current period. During the prior period, share awards were granted to senior executives as determined by the Remuneration Committee. The exercise price of the awards is nil. Awards will be subject to time pro-rating.

Long term incentive plan (LTIP)

Share options were granted to senior executives, as determined by the Remuneration Committee. The exercise price of the options is nil. The options only vest in accordance with the performance conditions for each executive as determined by the Remuneration Committee provided the employee remains in in the group's employment for 3 years. The options cannot be exercised within 3 years and have a maximum life of 10 years. The option will be settled by the issue of new shares and there are no cash settlement alternatives.

Further details of the vesting conditions are in the Remuneration Committee report on pages 60 to 73 of the Annual Report for the year ended 31 December 2016 and the clarification RNS issued on 6 April 2017.

The following tables summarise the number and weighted average exercise prices (WAEP) of and movements in, share options during the period.

The expired options relate to options where performance conditions have not been met and leavers.

 The fair value of the options granted and the assumptions used in the model are set out below.

The fair value of the share options is measured at the grant date taking into account the terms and conditions upon which the instruments were granted. The cost of the options is recognised over expected vesting period. Until the liability is settled it is re-measured at each reporting date with changes in fair value recognised in profit or loss.

The expense recognised during the six months to 30 June 2017 is £285,000 (six months to 30 June 2016 £346,000).

 13. Post Balance Sheet Event

In August 2017, the Group announced the closure of its Power & Infrastructure office in Glasgow and its HSC offshore development office in Cochin, India.