RESULTS FOR THE HALF-YEAR ENDED 27 JUNE 2014

News Release

11 August 2014

BALFOUR BEATTY PLC

RESULTS FOR THE HALF-YEAR ENDED 27 JUNE 2014

Balfour Beatty, the international infrastructure group, reports its financial results for the half-year ended 27 June 2014. The Group is currently in an offer period which ends on 21 August 2014. This deadline may be extended by agreement between the parties and the consent of the Takeover Panel. The Group's income statements have been re-presented to classify the Mainland European rail business in Italy within discontinued operations.

Summary

·   Overall first-half results are in line with our most recent trading update.

·   Review of the Directors' Valuation of our UK PPP portfolio has been completed over the first half to take into account current market conditions. An update will be released as soon as possible.

·   Competitive sale process of Parsons Brinckerhoff is well advanced. Subject to satisfying the interests of key stakeholders, it is anticipated that the Group will return up to £200 million to shareholders.

·   Operational issues in our UK mechanical & electrical engineering business significantly impacted overall first- half financial performance. Remedial action plan and cost efficiencies are being implemented.

·   Elsewhere in Construction Services the US performed strongly, with 14% revenue growth at constant currency whilst the order book remained stable. Good wins in Asia and the Middle East.

·   Professional Services performance is in line with 2013, increased profitability in Support Services.

·   Infrastructure Investments delivered another good performance, with disposal proceeds significantly above the Directors' Valuation.

·   Underlying^{2, 3} half-year pre-tax profit of £22 million (2013: £47 million) and underlying^{2, 3} EPS of 3.9 pence (2013: 6.6 pence).

·   Order book² stable at £13.0 billion, down 1% from the year end at constant currency.

·   Interim dividend of 5.6 pence per ordinary share (2013: 5.6 pence per ordinary share).

"Balfour Beatty's key priorities are clear; the Group is being simplified and refocused. The process for recruiting a new Group CEO is well underway. The Parsons Brinckerhoff sale process has remained competitive, and is also now well advanced. Our first-half trading and financial performance is in line with our most recent trading update. Whilst our first-half performance has been significantly impacted by recent UK Engineering Services contract write-downs, the other parts of the Group have continued to perform well. The Investments business has again demonstrated its significant value to the Group."

Steve Marshall, Executive Chairman

KEY GROUP PRIORITIES

The Board is committed to restoring shareholder value. This will be achieved by addressing a number of important priorities over the coming period. The key priorities are as follows:

·   Refocus the Group in order to reduce complexity and improve the risk profile.

·   Conclude the Parsons Brinckerhoff sales process at a value attractive to shareholders.

·   An optimal approach to restoring value from the UK construction business including progressively returning it back to peer group margins.

·   Select and recruit an outstanding CEO to drive the Group forward. This process is being actively progressed.

·   Balfour Beatty will be refocused as an Anglo-American construction and specialist services group, where there is strong US market opportunity and UK margin recovery potential. The Group's over-arching investments business is value creating and synergistic. Joint ventures in the Far East and the Middle East will be retained subject to them being value accretive.

·   Assess other value creation opportunities on an ongoing basis.

UPDATE ON SALE OF PARSONS BRINCKERHOFF

The Parsons Brinckerhoff sale process is proceeding in line with the Board's expectations and is well advanced with strong competitive interest being maintained. Round three bids are expected very shortly. 

At the point of announcing a transaction the Board will set out the application of disposal proceeds, which will need to satisfy the interests of shareholders, debt providers and the pension fund. It is anticipated that the Group will return up to £200 million to shareholders. This can only take place after the end of the offer period.

The Board will consider the implications of the disposal on the Group dividend. This is likely to be reassessed at the year end.  The Board will consider the sustainability and appropriateness of the level of ongoing dividend cover. It will take into account the characteristics of the Group once Parsons Brinckerhoff is sold, whilst maintaining a prudent approach to the Group balance sheet.

TRADING OVERVIEW

Unless otherwise stated, all commentary in this section is on a continuing operations basis only.

Overall trading is in line with our most recent trading update on 3 July 2014. Operational issues in the mechanical and electrical engineering (Engineering Services) parts of our UK construction business have resulted in a disappointing 2014 first-half performance for the Group as a whole.

At the end of the period the order book was £13.0 billion, down 1% in constant currency since the start of the year (down 2% at actual exchange rates). Revenue increased by 2% at constant currency (down 2% at actual exchange rates), compared with the first-half of 2013. Underlying profit from continuing operations decreased to £37 million (2013: £54 million).

The Group ended the period with a resilient balance sheet supported by a strong investments portfolio. Average net debt was higher than management expectations, predominantly due to the issues in UK construction, and higher than expected working capital in Professional Services and Support Services. Working capital and net debt were also impacted by proceeds of £55 million from first half PPP disposals being received after the period end.   

·   At constant currency Professional Services revenues and profitability were up 1% and 6% respectively in the period. The order book reduced in the period as a number of large awards in the Middle East in the first-half of 2013 converted to revenue.

·   Construction Services order book remained in line with the year-end position with good wins in the US, Hong Kong and the Middle East. At constant currency revenue was up 6% compared with the first-half of 2013. However the profit shortfall in UK construction, the vast majority of which impacted the first-half, resulted in a significant loss for the division.

·   Support Services order book was down 4% in the period with new wins in relation to AMP 6, the next water asset management regulatory cycle being more than offset by anticipated reductions in the power business. Revenue declined 5% largely due to anticipated volume reductions in the power business. Profit from operations improved by 29% in the period to £22 million.

·   Infrastructure Investments had a successful first-half with a 14% improvement in profit from operations in the period. Given the strength of the secondary PPP market we have reviewed the Directors' Valuation of our UK portfolio. This has included revisions to the assumed underlying cash flows to reflect expected cost savings, an update to the macroeconomic assumptions and a change in the discount rate applied to the cash flows. An update will be provided as soon as possible.

OPERATIONAL PERFORMANCE

Professional Services

In May we announced the results of a strategic review to explore ways to simplify the Group structure and create a more focused business. The review led to a decision to evaluate options for the possible sale of Parsons Brinckerhoff. The sale process is well advanced, with completion expected by the end of the year, subject to shareholder approval.

The Professional Services order book was slightly down at £1.4 billion, since the 2013 year end position. The US order book remained flat from the year end position whereas there was good recovery in Australia. The Middle East order book declined as a number of large contracts awarded in the first half of 2013 converted to revenue. Revenue increased by 1% at constant currency to £802 million (down 8% at actual exchange rates) with stable revenues across the business.

In the US, where 80% of our activity is in the transportation sector, we have seen growth in first half revenues and an improvement in the order book. The US power business performed at a similar level to the first half of 2013, although performance was lower than anticipated after a number of projects were delayed into the second half. Performance of the US Federal business - which performs housing inspection services for the Federal Emergency Management Agency (FEMA) - was lower than the first half of 2013, which had included a period of extensive flooding. Performance in Canada has remained flat but we continue to see opportunities in transportation and power.

There was a good first half performance in the UK with improved profitability, particularly in the highways and rail sectors. The Middle East performed in line with our expectations with good progress being made on a number of contracts in Qatar and Saudi Arabia secured during 2013. The actions to reduce costs in Australia are taking effect. We saw reduced losses and a sequentially better Q2.  During the first-half we reached financial close on the Roy Hill iron ore project. Whilst the market remains challenging we are seeing some very early signs of improvement in the pipeline for transportation and mining projects.

In April we announced the outcome of the arbitration process in relation to the previously highlighted longstanding contract dispute. Other than a small level of legal costs, this has had a nil impact on the income statement. We expect to receive net cash in excess of US$20 million, primarily from an escrow account established at the time of the Parsons Brinckerhoff acquisition, subject to final agreement with the previous owners.

Construction Services

The Construction Services results below have been presented to exclude the Mainland European rail operations in Germany, Scandinavia and Spain (classified as discontinued in 2013), and Italy (classified as discontinued in 2014) following our decision to exit these businesses.

The construction order book remained broadly in line with the previous year-end, at £7.6 billion. A reduction in the UK was offset by improvements in the rest of the world, predominantly by wins in Hong Kong. US order book remained stable, as order intake grew to offset strong revenue growth of 14% at constant exchange rates (6% at actual exchange rates).

First-half trading and financial performance of the division was in line with our most recent trading update. Revenue from continuing operations was up 6% in the period, or up 1% at actual exchange rates.   Improvements in the US and the rest of the world were partially offset by a 7% reduction in the UK. The division delivered a  loss from continuing operations of £69 million (2013: £39 million) for the period largely due to the previously announced ongoing operational issues experienced in Engineering Services in the UK and to a lesser extent, the UK major building projects business.

UK

As previously highlighted we are on a 12-18 month programme to restore our UK construction business to a firm footing. Whilst the legacy contract portfolio within our UK construction business is being worked through, some short-term risks will still remain. Performance in the regional business has significantly improved on last year, whilst the major infrastructure projects business trading was stable. However, as we highlighted above, our financial performance has been significantly impacted by continuing operational issues in the Engineering Services business, and to a lesser extent the UK major building projects business.

The UK order book declined by 11%, and was largely due to increased selectivity in bidding activity, and reduced order intake within the Engineering Services business. The order book in our regional and major infrastructure projects were in line with the 2013 year end position.  However, across the business we have seen an improvement in the quality of new order intake, with joint venture awards such as the £160 million Sellafield nuclear facility contract, and the £184 million smart motorway upgrade scheme for the M60 and M62. Furthermore we were awarded a framework contract to deliver up to £180 million of infrastructure works at Heathrow airport. The majority of this work is yet to be recorded in the order book.

In June we were appointed preferred bidder alongside the Infrastructure Investments business for the £745m Aberdeen Western Peripheral Route project in a three way joint venture, which is expected to be recorded in the order book in the second half. In July, after the period end, our major infrastructure projects business also announced the award of the £129 million M3 Smart Motorway contract and a £35 million improvement scheme to upgrade the A21.

In Engineering Services, which represents less than 10% of UK construction revenues, we highlighted in March that the business had been impacted by adverse market conditions towards the end of 2013. These conditions have continued into 2014, and poor operational delivery issues on a number of contracts have caused the business to experience an extremely challenging six months. First-half trading and financial performance was in line with our most recent trading update.   A number of factors have contributed to this deterioration, including design changes, project delays, rework and contractual disputes on a number of projects. In addition, greater selectivity in a slow market coupled with better rigour in estimating and greater discipline on tender margins has resulted in a lower order intake, and consequently lower revenue and profitability.

Since May we have appointed new leaders to the Engineering Services business to strengthen management control and project reviews. With the arrival of a new managing director in mid-August, these changes will be complete. These changes are improving transparency and introducing greater challenge and scrutiny of contract positions. The problem contracts are being stabilised, with the majority of the loss making contracts due to complete in 2014. Whilst short term risks still remain, we continue to pursue contractual entitlement. Given these issues, we have reviewed the size and geographic footprint of this business with the aim of ensuring a smaller, more focussed business. In central London, Engineering Services will only be working with Balfour Beatty Group companies, where it can influence design and add value for customers.

In the regional business (which represents over 60% of UK construction revenues), the actions we put in place during 2013 are taking effect and improving operational control and focus in the business. These changes included: strengthening of the leadership team, improvement of key disciplines such as tendering, estimating and commercial governance, and greater selectivity in our tendering opportunities. At the bid stage we are selecting larger scale contracts, particularly those comprising repeat business with customers with whom we have been able to build collaborative relationships, and gain a strong understanding of their needs. At the same time we are also reducing our exposure to the places, sectors and customers with poor quality pipelines.

We have been improving operational controls and introducing lead and lag metrics. A regional business requires a local focus, and these tools are enabling us to intervene, and place support behind our teams wherever necessary. We have undertaken significant work to ensure we are thorough in securing customer feedback, to enhance collaborative relationships with customers, and further develop the embedded supply chain knowledge needed to work locally.

The regional pipeline remains extremely active with improving market conditions. Lead indicators suggest that our strategy is working. We have seen a reduction in the proportion of live jobs at the smaller end of the market. We have also seen a steady increase in our bid margins on new orders and since the start of 2013 the bid margins in our regional business have improved by 2.8% in absolute terms. However this increase is from a low base, and will take time to feed through into profitability. Finally, as a result of stabilising and strengthening the business we have seen the number of unprofitable delivery units reduce and expect all regional delivery units (before indirect overheads) to be profitable by January 2015.

As highlighted in our Q1 IMS, the major building projects business (c.10% of UK construction revenues) experienced further cost increases of approximately £10 million and delays during the first-half.  The majority of these projects are expected to complete in 2014.

Performance in our major infrastructure projects business was up on 2013 driven by good levels of activity in highways. The Major Projects business has strengthened its work winning capability, with changes to the working winning team. At the same time we have improved tender submissions through engaging earlier with our customers, and working hard on collaborative behaviours that address key client concerns.  Whilst the order book remained flat since the year end, it is up 6% since this time last year. As highlighted above we will benefit from a number of new awards in the second half, which are currently Awarded But Not Contracted ('ABNC'). If we look at the total of our order book and ABNC, the level at June 2014 is up 26% on the prior year. However, given their long term nature of the awards, these will not benefit financial performance until 2016. 

Across Construction Services UK our overhead and the cost improvement plans are well established, having already reduced overheads between 2011 and 2013 by over £40m. However as revenues have also declined over that period, overall overheads have remained above 6%. We continue to target further cost cutting initiatives, alongside the changes already underway. The implementation of a single ERP business data platform for the business goes live in parts of the business from Q4 this year, concluding in Q1 2015. When that is completed we will have an enhanced analytical capability, which will improve operational control and help us consolidate procurement further.

We believe our UK construction business is recovering but some short term risks remain whilst the legacy contracts are being worked through.

US

Our US construction business has performed strongly in the period with 14% revenue growth at constant currency.  Order intake grew, and the visibility of future opportunities in our target sectors continues to improve.

We have worked closely with our Investments business in the period resulting in the award of two new student accommodation projects, worth US$104 million, for Texas A&M University and Tarleton State University. Furthermore, the strength of our joint offering has contributed to success in Canada with the award of the Children's and Women's Hospital redevelopment project in Vancouver.

Building on our extensive experience in military housing we have transferred knowledge and expertise to growing sectors such as multi-family housing where we were awarded US$289 million of new work.

Across the US, both government and commercial customers are increasingly seeking sustainable new buildings. By developing innovative, environmentally responsible projects, and sharing best practice, we have achieved further wins in the period.

The National Science Foundation selected us for a US$156 million contract to construct their prestigious new headquarters in Arlington, Virginia, USA. The National Science Foundation is an independent federal agency that funds research conducted by colleges and universities across the country.

The mission critical (data centres) sector made good strides with US$208 million of new orders and we continue to see strong long term growth prospects in this market.

We have won a number of significant contracts in North Carolina to develop commercial and economic infrastructure in support of its economic growth.  In July, we announced a US$136 million contract to build a prestigious office building, called 300 South Tryon, in the heart of Charlotte. The 25-storey building is designed to achieve Leadership in Energy and Environmental Design (LEED) Gold certification. LEED is the internationally-recognised green building certification system established by the U.S. Green Building Council, which promotes sustainable buildings.

In May 2014, the City of Charlotte awarded our infrastructure business a US$131 million rail contract to build track and systems components to extend the city's light rail system. This award followed a US$106 million civil engineering contract in February 2014 for the same light rail system. 

The Architectural Billings Index (ABI), a leading indicator for US non-residential activity, has been in positive territory for 8 out of the last 12 months. While we believe a broader market recovery is underway, it is likely to be somewhat patchy until it has been sustained over a 24 month period.

International

Outside of the UK and US construction businesses, we also operate in Southeast Asia, the Middle East, and Australia.

In Hong Kong and Singapore our construction joint venture, Gammon, has grown its order book with wins such as the new S$210 million (£100 million) Havelock Station award for Singapore's Mass Rapid Transit system. The long term nature of recent project wins and delays to a small number of existing projects mean it will take time for these to feed through into financial performance. In July Gammon won two building contracts in Hong Kong with a combined value of HK$3.91 billion (£300 million) to build a public rental housing development and a research and development office.

In the Middle East, our M&E joint venture has incurred cost overruns on a small number of building projects. The market across the region remains very difficult, and as a result we have focused our bid activity largely back on the Dubai market.  The market for our construction joint venture in Dubai has continued to improve and order intake was significantly up in the first-half with wins including the Dubai Mall extension project. The outlook continues to strengthen.

Revenues in our Australian rail business were lower than anticipated, due to delays in new tender opportunities. Furthermore, we withdrew from a significant PPP tender due to the risk profile of the project. Following a review of our activities in Australia, we have now concluded that we will no longer be bidding for new rail construction contracts in the region.

Support Services

The Support Services order book has reduced by 4% since the year-end to £4.0 billion. The order book in the Water sector has significantly increased with the award of several new contracts in the first-half under the AMP6 regulatory cycle, due to commence in April 2015. These contract wins have been offset by an expected contraction of the power and transportation order books, as we continue to execute on long term contracts. Revenue for the division was down 5% on the first-half of 2013 at £615 million due to anticipated volume reductions in the power and water sectors. Underlying profit from operations increased to £22 million (HY 2013: £17 million), driven by strong performances within the transportation businesses.

The power business saw revenues and profitability decline as expected. The transmission sector experienced lower volumes after contracted volume targets were completed ahead of schedule in the second half of 2013, and capital replacement programmes were reduced in the first-half of 2014.

In March we were appointed to two major National Grid power infrastructure frameworks. The first is the overhead lines design and build framework, over a four year contract length with two optional two year extensions. The total work available for panel members is worth up to £2.5 billion. The second is for National Grid's onshore underground cable framework, over a four year contract length with an optional two year extension, worth up to a total of £800 million. Individual contracts are yet to be added to the order book.

In transportation, revenues from local authority work increased as we continued to mobilise the Hereford and Wiltshire contracts which started in 2013, more than offsetting revenue declines as we exited contracts in North Yorkshire and Essex. Our work for the Highways Agency continued to perform very well in the period. Revenues from our rail renewals business, which accounts for roughly 20% of the division, were higher than expected as a contract with Network Rail was extended to July before handover to the new contractor.

The Water business benefited from new contracts tendered under the AMP 6 regulatory cycles, which controls capital expenditure across the network from April 2015 through to 2020. In May we were awarded approximately £115 million of work by Anglian Water as part of their investment programme. In addition we have also won a new contract award from United Utilities valued at £125 million. We previously announced a three-way joint venture contract worth a potential £1.5 billion with Thames Water. While the 23-month early contractor involvement is in our order book, the vast majority of this work is yet to be booked.

Infrastructure Investments

Underlying profit from operations was higher at £72 million (2013: £63 million), driven by disposal gains of £51 million in the first-half (2013: £45 million) and revisions to expected lifecycle and other operating costs within the PPP investment portfolio. In line with the Group's accounting policy for PPP concession companies, as set out in the 2013 Annual Report and Accounts, movements in the fair value of PPP financial assets attributable to non-market related changes in future cash flow assumptions are recognised in the income statement.  This has given rise to a fair value gain of £15 million (2013: £nil) which has been recognised within underlying profit from operations. Pre-tax profits, including net interest income, increased to £88 million (2013: £78 million).

The Investments business has delivered another very strong performance in the first-half, as we continued to expand both geographically and in our existing markets. In the period we announced that we had become preferred bidder on five new projects, four of which have now reached financial close.  In addition, two further projects already at the preferred bidder stage reached financial close, one being the first close of a two phase student accommodation project.  We currently are appointed or remain preferred bidder on four projects.

Our UK business continued to perform well. We were appointed preferred bidder for the £745 million Aberdeen Western Peripheral Route project, as part of the Connect Roads consortium. The design, build, finance and operate contract will generate a significant amount of work for our UK construction business. Balfour Beatty will be working in joint venture to construct the project and will take sole responsibility for the management and maintenance of the road assets for 30 years once construction is complete. In June we reached financial close for the £46 million NHS Ayrshire & Arran Acute Mental Health and Community Development project, having been announced as preferred bidder in February. We will finance, design and construct the project and once complete we will operate the asset for 25 years. In May we announced delays in reaching financial close on the Thanet and Gwynt y Môr offshore transmission projects (OFTOs), but we are now making good progress, and expect to reach financial close towards the end of this year and early next year, respectively.

In North America, we reached financial close on five projects, including our first two projects in Canada. The C$350 million (£196 million) Children's and Women's Hospital redevelopment covers the design, construction, financing and facilities management for a new children's and women's acute care centre in Vancouver. The North Island Hospitals projectis a 30 year PPP project which includes the financing, design, construction, and facilities management of two new acute care hospitals on Vancouver Island. In the US we reached financial close on phase one of the Texas A&M University student accommodation project valued at US$104 million, where we will earn a development fee for our participation and the US construction business will provide design and build services. We also achieved financial close on a second phase of student accommodation at Tarleton State University, valued at US$38 million, as well as close of the US Air Force ACC III military housing project valued at US$60 million. We remain preferred bidder on the University of West Florida project valued at US$500 million.

In 2014 we also continued to implement our successful PPP disposal programme. In June the disposal of the Knowsley Building Schools for the Future project and our 50% interest in the University Hospital of North Durham PPP project realised total consideration of £97 million, generating total gains on disposal of £51 million. The proceeds from these transactions exceeded the Directors' Valuation of these assets by £44 million, representing an uplift of 82%.

As a consequence of prices achieved on these and other recent disposals, we have undertaken a review of the Directors' Valuation of our UK portfolio with the intention of taking into account current market conditions.  This has included a review of the assumed underlying cash flows to reflect likely cost savings, an update of the macroeconomic assumptions and a change in the discount rate applied to the cash flows. Our US portfolio has not been revalued. 

The Group is in an offer period until 21 August 2014. An update will be released as soon as possible.

During the first-half Balfour Beatty Infrastructure Partners reached final close on its first fund, with total commitments of US$618 million. Balfour Beatty has a total commitment of US$110 million, which we expect to be drawn down and invested over the next three years.

Discontinued operations

Discontinued operations in 2014 comprise the Mainland European rail operations in Germany (classified as discontinued in 2013) and Italy (classified as discontinued in 2014) following our decision to exit these businesses. The 2013 comparatives also include the Spanish and Scandinavian rail operations and the UK facilities management businesses which were classified as discontinued in 2013. 

  ¹ including joint ventures and associates

  ² before non-underlying items (see Note 7)

 ³ 2013 re-presented to classify the Mainland European rail business in Italy within discontinued operations

Discussions in respect of the sale of the German rail business (which was classified as discontinued in 2013) remain ongoing with a number of potential buyers. Whilst the business has performed ahead of last year, it has delivered an underlying loss from operations of £12 million (2013: loss of £20 million) principally due to underperformance on previously highlighted contracts.

We have made good progress on advancing sale discussions on our Italian rail business and as a result have classified the business in discontinued operations. The business broadly broke even in the first-half of 2014 and 2013. Having reviewed the likely sales proceeds achievable on disposal we have written down the value of goodwill within our Italian rail business to £4 million, resulting in a non-underlying and non-cash charge of £20 million.

FINANCIAL SUMMARY

Unless otherwise stated, all commentary in this section is on a continuing operations basis.

Revenue including joint ventures and associates declined 2% in the period to £4,851 million (2013: £4,956 million). Excluding the impact of currency, underlying revenue increased by 2%.

Our share of underlying post-tax profits from continuing joint ventures and associates increased to £42 million from £30 million last year, principally due to the impact of improved profitability within the PPP investments portfolio.

Underlying profit from continuing operations decreased by 31% to £37 million (2013: £54 million), including the benefit of £51 million of gains from PPP disposals up £6 million from the first-half last year. Net finance cost of £15 million was up on the prior year (2013: £7 million) due to the impact of the US private placement and unsecured convertible bonds. Underlying pre-tax profit from continuing operations therefore decreased to £22 million (2013: £47 million).

Non-underlying items

Non-underlying items from continuing operations of £21 million (2013: £51 million) before tax were charged to the income statement. This comprised amortisation of acquired intangible assets of £10 million (2013: £16 million) and other items of £11 million (2012: £35 million). The amortisation charge declined in the year as some intangible assets became fully written down. Other items included £6 million (2013: £11 million) related to further costs of implementing shared service centres in the UK and US, £4 million (2013: £23 million) related to restructuring and reorganisation costs of continuing businesses and £1 million (2013: £nil) related to a goodwill impairment charge in connection with one of the Group's investments in a joint venture in the Middle East.

Non-underlying items from discontinued operations of £30 million (2013: £54 million) before tax were charged to the income statement. This included £20 million (2013: £38 million) in respect of a goodwill impairment charge on our Mainland European rail businesses and a £10 million (2013: £nil) IFRS 5 impairment charge in respect of our German rail business.

Taxation

The underlying tax credit for continuing operations for the period of £5 million (2013: £2 million charge), excluding the Group's share of the results of joint ventures and associates, equates to an effective tax rate of 24% (2013: 12%). Adjusting to include tax in joint ventures and  associates, and comparing this to pre-tax profits for the continuing Group and joint ventures and associates, the effective tax rate was 16% (2013: 15%).

Our half-year effective tax rate is impacted by the mix of profits in the period, in particular the performance of the UK construction business.  Based on our expected full year profit mix, our forecast effective tax rate (excluding joint ventures) is 42% (2013: 43%).

Earnings per share

Underlying earnings per share for continuing operations were 3.9 pence (2013: 6.6 pence), which along with an underlying loss per share from discontinued operations of 2.0 pence (2013: 2.3 pence) gave an underlying earnings per share for total operations of 1.9 pence (2013: 4.3 pence).

Dividends

The Board has declared an unchanged interim dividend of 5.6 pence per ordinary share.

Balance sheet and capital structure

We look to achieve a balance between the negative working capital, liquid funds and facilities and the PPP investments portfolio. We have seen reductions in net liquid funds during the first-half of 2014, and in the levels of negative working capital. However, after taking into account our PPP investments portfolio, we have continued to maintain good balance sheet strength.

Cash flow performance

Cash used in operations of £286 million (2013: £236 million) was impacted by a working capital outflow of £211 million (excluding PPP disposal receipts of £55 million) (2013: £153 million) and pension deficit payments of £25 million (2013: £37 million). We expect an overall cash inflow in the second half of the year.

Average net borrowings in the six month period were £424 million (2013: £298 million), with the Group's net debt at 27 June 2014 at £364 million (2013: £173 million), before taking into account the consolidation of £224 million (2013: £380 million) of non-recourse net borrowings held in wholly owned PPP project companies. The average net debt was slightly higher than anticipated, predominantly due to the issues in UK construction and proceeds from first-half PPP disposals being received later than anticipated.

Working capital

Negative working capital (where payables exceed receivables) in continuing operations ended the period at £401 million (excluding PPP disposal receivables), so total negative working capital as a percentage of annualised revenue ("WCPR") at the period end was 4.8% (2013: 7.3%). The most significant component of negative working capital at £498 million relates to Construction Services, which ended the period with WCPR of 9.4% (2013: 11.6%).

Within Professional Services, working capital became more positive (where receivables exceed payables) since the 2013 year end position partly due to delayed receipts in both the Middle East and to a lesser extent the US. Negative working capital in Construction Services decreased in the same period both in the UK and the US. In the UK this was broadly as anticipated, although it was impacted further by a revenue decline in the period. The movement in the US was consistent with the recent trend being seasonally lower at the half-year and then increasing again at the full year. The Support Services working capital became more positive in the period due to the payment profile on a previously highlighted significant contract.

Banking facilities

The Group's principal committed bank facilities total £950 million and extend through to 2016. At 27 June 2014 we had £262 million drawn against our £950 million of committed bank facilities. Additional sources of funding include a US$350 million US private placement issued in March 2013 with an average coupon of 4.94% per annum over an average maturity of 9.3 years and approximately £253 million of unsecured convertible bonds due 2018 at a coupon of 1.875% per annum. 

Outlook

Balfour Beatty's key priorities are clear; the Group is being simplified and refocused. The process for recruiting a new Group CEO is well underway. The Parsons Brinckerhoff sale process has remained competitive, and is also now well advanced. Our first-half trading and financial performance is in line with our most recent trading update.  Whilst our first-half performance has been significantly impacted by recent UK Engineering Services contract write-downs, the other parts of the Group have continued to perform well. The Investments business has again demonstrated its significant value to the Group.

Responsibility statement

We confirm that to the best of our knowledge:

·   the condensed Group financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting;

·   the interim management report, as required by Disclosure and Transparency Rules 4.2.7R and 4.2.8R, includes a fair review of:

o important events during the half-year ended 27 June 2014 and their impact on the condensed Group financial statements

o a description of the principal risks and uncertainties for the second half of the year and

o related parties' transactions and changes therein.

On behalf of the Board

S Marshall

Executive Chairman

D J Magrath

Chief Financial Officer

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James Isola

Forward-looking statements

This announcement may include certain forward-looking statements, beliefs or opinions, including statements with respect to Balfour Beatty plc's business, financial condition and results of operations. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other various or comparable terminology. These statements are made by the Balfour Beatty plc Directors in good faith based on the information available to them at the date of this announcement and reflect the Balfour Beatty plc Directors' beliefs and expectations.  By their nature these statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, developments in the global economy, changes in UK and US government policies, spending and procurement methodologies, and failure in Balfour Beatty's health, safety or environmental policies.

No representation or warranty is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements speak only as at the date of this announcement and Balfour Beatty plc and its advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this announcement. No statement in the announcement is intended to be, or intended to be construed as, a profit forecast or profit estimate and no statement in the announcement should be interpreted to mean that earnings per Balfour Beatty plc share for the current or future financial years will necessarily match or exceed the historical earnings per Balfour Beatty plc share. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.

This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for any securities. The making of this announcement does not constitute a recommendation regarding any securities.

Notes to editors

Balfour Beatty (www.balfourbeatty.com) is an international infrastructure group that delivers world class services essential to the development, creation and care of infrastructure assets; from finance and development, through design and project management to construction and maintenance.

Our businesses draw on more than 100 years of experience to deliver the highest levels of quality, safety and technical expertise to our clients principally in the UK and the US, with developing businesses in Australia, Canada, the Middle East, South Africa and South East Asia.

With proven expertise in delivering infrastructure critical to support communities and society today and in the future, our key market sectors focus on infrastructure - transportation (roads, rail and aviation), power and energy, water, and complex buildings (both commercial and social).

Balfour Beatty employs 40,000 people around the world.

Additional information

A presentation to analysts and investors will be made at 9:00 (UK time) via webcast. Please register by visiting http://www.balfourbeatty.com/webcast. 

Alternatively you can dial in using the numbers and password below:

+44 (0) 20 3003 2666 - Standard International Access

0808 109 0700 - UK Toll Free

Password - Balfour Beatty

The financial report for the half-year ended 27 June 2014 can also be viewed on our website at www.balfourbeatty.com/results.

Publication on website

A copy of this announcement will be made available subject to certain restrictions relating to persons resident in restricted jurisdictions on Balfour Beatty's website at www.balfourbeatty.com by no later than 12 noon (London time) on 12 August 2014.

The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

INDEPENDENT REVIEW REPORT TO BALFOUR BEATTY PLC

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 27 June 2014 which comprises the Condensed Group Income Statement, the Condensed GroupStatement of Comprehensive Income, the Condensed Group Statement of Changes in Equity, the Condensed Group Balance Sheet, the Condensed Group Statement of Cash Flows and related Notes 1 to 26. 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 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.  Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review 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, for our review 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 inquiries, 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 27 June 2014 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.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

10 August 2014