Ricardo : Interim Results

28 February 2017

Ricardo plc

Interim results for the six months ended 31 December 2016

Ricardo plc is a global engineering and strategic, technical and environmental consultancy business with a value chain that includes the niche manufacture and assembly of high-performance products.

HIGHLIGHTS

· Another record order book of £244m following strong order intake in the second quarter

· Good order intake, up 11% to £181m

· Reported revenue up 6%

· Dividend up 7%, reflecting growth in underlying basic earnings per share

· Net debt of £47.0m after £3.7m of net acquisition expenditure

· Acquisition of Motorcycle Engineering Italia (Exnovo) completed in the period and all prior acquisitions performing well, and

· Our progress on diversification across geographies and sectors provides a good platform for continued growth

Commenting on the results, Dave Shemmans, Chief Executive Officer said:

'Our growth strategy remains focused on the strategic diversification of our business through organic and acquisitive actions. We continue to develop technology that will help our clients meet the global challenges of urbanisation, electrification of transport, climate change and the management of scarce resources.

'We have been successful in winning good levels of new business within the Rail, Energy & Environment and High-Performance Vehicles & Motorsport sectors. Our Automotive businesses in the US, the UK and the rest of Europe experienced a weaker than expected first quarter, but performance improved in the second quarter.

'We maintain our strategic objective to explore a range of organic and acquisitive growth options to continue the development of a growing and resilient Group.

'Overall, we continue to trade in line with our expectations and are pleased with another record order book of £244m.'

Excludes specific adjusting items, which comprise amortisation of acquired intangible assets of £1.9m (31 December 2015: £1.7m) and acquisition-related expenditure of £1.1m (31 December 2015: £1.0m). In the prior period, non-recurring income of £1.5m for claims under the Research & Development Expenditure Credit ('RDEC') scheme in respect of prior years was also included.

Excludes the performance of acquisitions (Motorcycle Engineering Italia and Cascade on a like-for-like basis with the prior period).

INTERIM MANAGEMENT REVIEW

GROUP RESULTS

The Group has delivered a good operating performance in the period. Total Group revenues increased to £167.0m, representing a 6% increase on the prior period (31 December 2015: £157.8m). Underlying profit before tax, which excludes specific adjusting items as set out in more detail in Note 3, increased by 5% to £15.1m (31 December 2015: £14.4m).

The closing order book at 31 December 2016 increased by 6% on the year-end order book to £244m (30 June 2016: £231m). The closing order book, together with the significant pipeline of further opportunities, continues to represent a diversified spread of orders across market sectors, customers and geographies. Our order book comprises the value of all unworked purchase orders received.

Reported profit before tax for the period is £12.1m compared to £13.2m in the prior period. The decrease is primarily as a result of non-recurring income in the prior period for claims under the Research & Development Expenditure Credit ('RDEC') scheme in respect of prior years of £1.5m, together with a £0.2m increase in the amortisation charge on acquired intangible assets, a £0.1m increase in acquisition-related expenditure and a £0.4m increase in net interest payable on borrowings. This movement is partially offset by £1.0m of additional RDEC claims received in the period and £0.1m of profit generated on a like-for-like basis with the prior period by Cascade, a water consultancy business that was acquired on 18 August 2015.

As set out below, organic growth in both underlying revenues and profit before tax was 4%, which excludes the performance of acquisitions.

Using exchange rates consistent with the prior period, organic revenue and organic underlying profit before tax would have been £155.7m and £14.7m, respectively.

On 29 July 2016, the Group acquired the entire issued share capital of Motorcycle Engineering Italia s.r.l., which was subsequently renamed Ricardo Motorcycle Italia s.r.l. This business was formed from the operating assets and employees of Exnovo s.r.l., a leading vehicle design house, which creates class-leading aesthetics for global motorcycle and scooter brands. The performance of the acquired entity has been reported in the Technical Consulting segment (see Note 6).

SEGMENTAL RESULTS

The segmental results for the Group's operating segments are as follows:

Technical Consulting results

Technical Consulting had revenues and underlying operating profits of £133.6m and £12.9m, respectively. Underlying organic revenues and operating profit, which excludes performance from acquisitions as noted above, increased to £131.3m (31 December 2015: £130.1m) and £12.8m (31 December 2015: £12.3m), representing growth of 1% and 4%, respectively.

Our European Technical Consulting division experienced a low level of orders in the first quarter, but this recovered in the second quarter and overall orders were slightly ahead of the prior period end. This puts the business in a good position to grow in the second half of the financial year.

The Rail business is now completely integrated and has had a strong order intake in the period from a wide geographical spread of customers. Rail's revenue and operating profit reported in the period also benefited from favourable foreign exchange translation.

The US market remains challenging but the Group's strategic focus continues to shift towards our operations in California where the market for new vehicle technologies provides greater opportunities.

Our Energy & Environment consulting business continued to broaden its customer base and reduce its reliance on the public sector. In November 2016 it was reappointed as the UK's National Atmospheric Emissions Inventory ('NAEI') agency on behalf of the Department of Business, Environment and Industrial Strategy.

The performance of our business in Asia has been pleasing, and we enter the second half of the financial year with a stronger order book than the prior period, particularly in our Rail business.

Our Strategic Consulting activities continue to make good progress.

Performance Products results

Performance Products had a strong first half, as reported revenues increased on the prior period by 21% to £33.4m (31 December 2015: £27.7m) and underlying operating profits increased on the prior period by 13% to £3.4m (31 December 2015: £3.0m). The result in the current period was driven principally by increased volumes of engines in respect of the contract for McLaren, offset by lower one-off software licence sales than the prior period.

MARKET AND STRATEGY UPDATE

We have continued to win good levels of new business within the Rail, Energy & Environment and High-Performance Vehicles & Motorsport sectors. The Automotive sector experienced a slow start to the period, but improved in the second quarter. Pleasingly, the businesses we have acquired in recent years (across the Rail, Energy, Water and Motorcycle market sectors) have all seen high levels of activity.

Ricardo's strategic focus on diversification and the ongoing development of innovative products and technologies, together with the management of complex, large-scale turnkey programmes, continues to underpin the growth of our Technical Consulting business. Our Performance Products business also continues to perform well.

In addition to the organic growth generated by our existing activities, we completed the acquisition of Motorcycle Engineering Italia - a newly incorporated entity that was formed from the operating assets and employees of Exnovo. The operations of this entity are now being integrated into the Ricardo Motorcycle business and will add to Ricardo's already established full product development capability in the rapidly growing scooter, motorcycle and urban mobility market.

Also in this period, and following formal accreditation by the United Kingdom Accreditation Service ('UKAS') to provide certified assurance services for the global rail sector, we launched Ricardo Certification. The accreditation means that Ricardo Certification, which operates separately and entirely independently from the rest of the Ricardo Group, can perform 'notified body', 'designated body' and 'assessment body' roles on any rail project that is required to comply with relevant national and international technical rules. The accreditation also covers railway product certification services.

The growth of the Group continues to be underpinned by the following global drivers:

· The need to reduce carbon dioxide emissions as a result of agreements reached at COP21 and now COP22;

· Market and regulatory requirements for improved energy efficiency;

· The need to eliminate the release of noxious pollutants and particulates;

· A changing and diverse global energy mix;

· Increasing levels of urbanisation and resource scarcity; and

· The rise of global connectivity.

Our expertise in all of these areas means we are well placed to assist major international private and public sector customers across sectors including Automotive, Commercial Vehicles, High-Performance Vehicles & Motorsport, Rail, Energy & Environment, Defence, Motorcycle & Personal Transportation and Off-Highway.

Our strategy will continue to focus on three core growth areas: Transport & Security, Energy, and Scarce Resources & Waste. In each of these areas we are looking to exploit our Technical Consulting and Performance Products areas of core competence to further grow and expand the business. We are also looking to further strengthen and expand the strategic partnerships that we have established - for example, with McLaren - to provide longer-term visibility and a platform for sustained growth. We continue to seek opportunities to grow both organically and through partnerships and acquisitions.

Ricardo continues to invest in its people, technology and facilities to capitalise upon the market drivers and conditions that it faces. We believe that our current overall strategy offers a good balance of risk management, avoidance of cyclicality and the promotion of growth.

TECHNICAL CONSULTING

At the centre of our business, the Technical Consulting segment provides engineering, environmental and management consulting services to customers across a range of different market sectors. We deliver projects focused on class-leading innovation, ranging from detailed collaborations with customers on strategy, advanced engineering work, technology evaluations and market studies to large-scale turnkey commercial programmes, encompassing multiple products and international markets. Our core product offerings are in the following areas:

· Engines;

· Vehicle Systems;

· Driveline & Transmission Systems;

· Hybrid & Electric Systems;

· Critical Systems;

· Strategic Consulting;

· Energy Consulting;

· Environmental Consulting;

· Independent Assurance; and

· Test Services.

We have a global infrastructure in place that helps us to meet the needs of our customers, including technical centres in the UK, the Netherlands, Germany, Italy, the Czech Republic, the US and China, supported by offices where a local presence is needed to service our customers. The technical centres include specialists in mechanical and electrical design, control and electronics development, prototype build, project management, cost estimation, supply chain management and manufacturing. Engineers from any of the technical centres can be deployed on projects across the globe using common engineering processes and often by making use of short-term geographical secondments.

Our energy and environmental consulting services are delivered from a number of UK locations and are making increasing use of our global network.

Our rail and strategic consulting teams already have a well-established global team operating out of a number of different locations. Our independent assurance team is based in key rail locations including the UK, Spain, Denmark, the Netherlands and China.

Automotive and Commercial Vehicles

Despite a slow start in the first quarter in our Automotive business in the US and in Europe, order intake improved in the second quarter. We have seen good levels of activity in the Automotive and Commercial Vehicles sectors in Asia, particularly in China.

Fuel economy, electrification and CO reduction are top global industry priorities and are being driven strongly by both consumers and legislation. We have secured a range of large programmes in the core powertrain areas of our business, especially in the Engines sector across both light- and heavy-duty applications. We are also seeing significant opportunities in the Hybrid & Electric Systems sector.

We continue to invest in advanced combustion and other key technologies in areas related to improving overall vehicle efficiency, such as intelligent driveline and electrification. The future of mobility solutions, including connected and autonomous vehicle technology in particular, is now attracting significant interest across all geographies.

Rail

Our Rail business continues to perform well, all the post-acquisition integration activities have been completed and the business has won significant levels of new orders in the UK, Europe and Asia.

The business has the following core product offerings: Independent Assurance; Rolling Stock; Signalling and Train Control and Intelligent Rail and Operations. The latter includes asset management, human factors and Noise, Vibration and Harshness ('NVH') development and optimisation. We are pursuing a range of large, long-term rail contracts, particularly in Asia and the Middle East, whilst also investing in the development of our portfolio of niche rail products, such as 'PanMon' and 'SmartFleet'.

Energy & Environment

We have secured a number of significant, multi-year contracts in this reporting period through the provision of consultancy services to governments, their agencies and private sector clients. Our value proposition is based on our in-depth knowledge of legislative challenges and future technology developments in the energy and environmental consulting sectors.

Growth in our environmental consulting business is focused on private sector and international expansion. Key practice areas are Air Quality; Climate Change and Sustainability; Energy; Resource Efficiency and Waste Management; Sustainable Transport; Water; and, Chemical Risk. Recently we have seen good growth in private sector and international projects, and we are well placed to support clients with the implementation of commitments agreed at COP21 and COP22.

Within the power generation business, our focus remains on growing the large-scale generator sets, together with consultancy on 'smart grids', energy economics and technologies. Across the renewables business, we continue to pursue a range of opportunities in off-shore wind and energy storage applications.

PERFORMANCE PRODUCTS

The Performance Products segment includes the manufacture of high-quality prototypes and niche volumes of complex engine, transmission and vehicle products and assemblies.

We have advanced manufacturing capabilities, from single components to full vehicle builds. To service our customers, we have a global support infrastructure built around our network of technical centres in the UK, Europe, the US and China.

This segment also includes the activities of Ricardo Software, which develops leading-edge powertrain and vehicle computer-aided engineering ('CAE') software products which are licenced to over 2,000 global clients. We have a global development team based throughout our network of technical centres.

We currently have a diverse portfolio of opportunities within the Performance Products segment which covers the Automotive, High-Performance Vehicles & Motorsport and Defence sectors, together with industrial applications.

High-Performance Vehicles & Motorsport

Production of engines for the McLaren 650S, 675LT and 570S continue to successfully meet the needs of our long-term customer, which manufactured its 10,000 car using a Ricardo-built engine in December 2016. The production of Bugatti transmissions likewise continues to successfully meet the terms of the supply agreement.

Ricardo remains a key supplier to the Motorsport sector and continues to manufacture for Formula 1 and the Porsche Cup, whilst providing design and development services, including manufactured products to GT3, LMP1, WRC, R5 Rally and also specification Formula Series, such as Japanese Super Formula 14, Indy Lights and the Formula V8 3.5.

PEOPLE

As the celebrations of our centenary year have drawn to a close, we are now shaping our vision for the start of Ricardo's second century. As a consultancy and services focused business, our people are a key factor in that - both those employed with us today, as well as those who will form our workforce in the future.

With our ambitious growth strategy in mind, recruitment remains one of the key tasks of the human resource agenda around the globe. We continue to be viewed as an employer of choice for top-level science and engineering opportunities, together with technical and non-technical graduate and apprenticeship roles. Our recruitment processes and employee value proposition are constantly reviewed to make sure we not only attract highly qualified engineers and scientists, but that we are also appealing to a diverse range of possible candidates.

True to our vision of an increasingly diverse and inclusive culture within Ricardo, we have continued to concentrate our efforts on promoting engineering careers for women. This includes hiring female graduates and professionals whilst reviewing our internal promotion processes to exclude any implicit gender bias. With a broader sense of social responsibility, we have also established a mentoring programme for female undergraduates and are sponsoring a prize for the 'most improved female undergraduate', which has been extremely well received. The first of this prize was awarded to a student from Cambridge University.

We remain committed to the promotion of the Science, Technology, Engineering and Mathematics ('STEM') agenda in schools, in order to nurture our future engineering resources. We have also established a programme in the UK that engages our own engineering graduates in these activities, allowing them to take on social responsibility, grow their interpersonal skills and share their enthusiasm at the same time. Similar activities are being undertaken in other international locations.

In the UK, commitment to apprentice development continues to be strong with most apprentices achieving further qualification. Our apprentice programme now encompasses a broader range of functions across our business, including human resources and finance, in addition to traditional engineering apprenticeships.

Once hired, we make sure our new employees have the best possible on-boarding experience, with a globally standardised induction programme which includes a 'buddy scheme', structured induction plans, interactive online material and training, as well as a survey at the end of the on-boarding period to ensure continuous improvement. From the beginning, we encourage our employees to actively engage in their own career development by stretching their wings and seeking opportunities to broaden their experiences and deepen their knowledge. In addition to any formal training, this might be through taking part in one of our various internal strategic- or improvement-oriented projects, working on a customer project at a different technical centre or on-site at a client organisation, or by going on an international assignment.

There will be significant and interesting changes in people, technology and society in the future - and with Ricardo's shared vision of contributing to safety and sustainability in mobility and energy generation while protecting scarce resources, our people will have a chance to positively contribute to them all.

OTHER FINANCIAL MATTERS

Acquisitions and acquisition-related intangible assets

On 29 July 2016, the Group acquired the entire issued share capital of Motorcycle Engineering Italia s.r.l., a business that was formed from the operating assets and employees of Exnovo s.r.l,, for consideration of £2.1m (€2.5m). This investment added provisional goodwill of £2.4m to the Ricardo Motorcycle cash-generating unit, and acquisition-related intangible assets have been provisionally identified, which have a net book value at the period end of £0.5m.

As set out in more detail in Note 6, an exercise to assess the fair value of the identifiable net assets as a result of this acquisition has commenced during the period. In accordance with IFRS 3 'Business Combinations', management has one year from the date of acquisition to finalise this assessment. In addition, the preliminary assessment made at year-end of the provisional fair value of identifiable net assets in respect of the Chinese joint venture operation acquired from the Lloyd's Register Group on 1 March 2016 has been finalised during the period, adding £0.2m of goodwill to the Ricardo Rail cash-generating unit.

As a result of the acquisition completed in the period, amortisation of acquisition-related intangible assets has increased to £1.9m (31 December 2015: £1.7m). The Group also incurred acquisition-related expenditure of £1.1m (31 December 2015: £1.0m) during the period, £0.4m of which was in respect of the acquisition completed in the period. The acquisition-related expenditure and amortisation of acquisition-related intangible assets have been charged to the Condensed Consolidated Income Statement as specific adjusting items. Further detail is disclosed in Note 3.

Research and Development

The Group continues to invest in Research and Development ('R&D'), and spent £4.0m (31 December 2015: £3.8m) before government grant income of £0.9m (31 December 2015: £0.8m). This includes costs capitalised in accordance with IFRS of £1.3m (31 December 2015: £0.9m) in respect of continued development expenditure on a range of product developments around the Group and reflects our continued focus on development activity within Europe and the US.

The total Research and Development Expenditure Credit ('RDEC') credit for the current period is £3.0m (31 December 2015: £2.0m). This is comprised of an estimated RDEC credit in respect of the current period of £2.0m, together with £1.0m arising from the routine amendment of open applications in respect of the previous accounting period, as a result of further analysis of the qualifying expenditure incurred.

Net finance costs

Finance income was £0.1m (31 December 2015: £0.2m), which is similar to the prior period, and finance costs were £1.3m (31 December 2015: £1.1m), giving a net finance cost of £1.2m (31 December 2015: £0.9m). Finance costs were higher as a result of interest payments on the Group's loan facilities drawn at the end of the period, offset by a slightly favourable shift in respect of the interest charge on the defined benefit pension scheme.

Taxation

The total tax charge for the period was £2.7m (31 December 2015: £3.1m), with the total effective rate of tax being 22.3% (31 December 2015: 23.5%).

Included within the Group's deferred tax assets of £13.2m (30 June 2016: £13.0m), the Directors have considered the recoverability of the existing net deferred tax assets of £3.7m (30 June 2016: £3.6m) and £5.3m (30 June 2016: £4.9m) which primarily relate to the availability of historic losses in Germany and R&D tax credits in the US, respectively. The Directors remain satisfied that it is probable that sufficient taxable profits will be generated in the future, against which the recognised assets can be utilised.

Earnings per share

Basic earnings per share decreased by 8% to 17.7p (31 December 2015: 19.2p). The Directors consider that an underlying earnings per share provides a more useful indication of underlying performance and trends over time. Underlying basic earnings per share for the period increased by 7% to 22.3p (31 December 2015: 20.8p).

Basic earnings per share, with a reconciliation to an underlying basic earnings per share, which excludes the net-of-tax impact of specific adjusting items, is disclosed in Note 4.

Dividend

The Board has declared an increased interim dividend of 5.42p per share (31 December 2015: 5.07p) reflecting the Board's confidence in the prospects of the Group. The dividend will be paid on 6 April 2017 to shareholders on the register at the close of business on 10 March 2017.

Capital investment

Cash expenditure on property, plant and equipment was £3.5m (31 December 2015: £5.1m) as we continue to invest in our business operations. This expenditure included new and upgraded test cell equipment and IT hardware, together with continued spend to finalise the construction of the Centenary Innovation Centre at our Shoreham Technical Centre in the UK.

In light of changes in the market and the desire to increase operational effectiveness, we are carrying out a review of the management and usage of our test facilities around the Group.

Net debt

Closing net debt was £47.0m (30 June 2016: £34.4m; 31 December 2015: £32.2m). The Group used net cash of £12.6m (30 June 2016: £48.7m; 31 December 2015: £46.5m), after £1.6m of acquisition-related payments (30 June 2016: £3.4m; 31 December 2015: £1.2m) and a cash outflow, net of cash acquired, of £2.1m (30 June 2016: £45.4m; 31 December 2015: £40.3m) in respect of acquisitions completed in the financial period. The composition of net debt is defined in Note 8.

The Group continues to focus on its management of working capital, which increased during the period, primarily within our European Technical Consulting and Energy & Environment businesses. This was as a result of a number of factors, including revenue growth with customers in certain territories and the phasing of revenue towards the second quarter, as a result of the slow start to the period in order intake. We also continued to invest in our major long-term assembly programme.

Banking facilities

At the end of the financial period, the Group held total facilities of £91.6m (30 June 2016: £90.9m), which included committed facilities of £75.0m (30 June 2016: £75.0m). Of the committed facilities, a £35.0m facility is available until September 2019 and £40.0m is available until April 2020. In addition, the Group has uncommitted facilities including overdrafts of £16.6m (30 June 2016: £15.9m), which mature throughout this financial year and are renewable annually.

Committed facilities of £69.6m, net of direct issue costs, were drawn (30 June 2016: £54.5m) and primarily reflects the outflow associated with the acquisition of LR Rail in July 2015, together with cash generated from operations and dividend payments made. These are denominated in Pounds Sterling and have variable rates of interest dependent upon the Group's adjusted leverage, which range from 1.6% to 2.35% above LIBOR and are repayable in the year ending 30 June 2020.

Foreign exchange

On consolidation, income and expense items are translated at the average exchange rates for the period. The Group is exposed to movements in the Pound Sterling exchange rate, principally from work carried out with customers that transact in Euros, US Dollars and Chinese Renminbi. The average value of Pound Sterling was 16.4% lower against the Euro, 16.7% lower against the US Dollar and 11.2% lower against the Chinese Renminbi during the six months ended 31 December 2016 compared to the six months ended 31 December 2015.

Had the results for the six months ended 31 December 2016 been stated at constant exchange rates, reported revenue and profit before tax would have been £9.0m and £0.3m lower, respectively. Significant resulting exposures are hedged through foreign currency contracts.

The movement in foreign exchange rates and the corresponding impact on financial performance was more significant as a result of the UK referendum vote to leave the EU on 23 June 2016.

Pensions

The Group's defined benefit pension scheme operates within the UK. At 31 December 2016, the pre-tax accounting deficit measured in accordance with IAS 19 'Employee Benefits' was £30.1m (30 June 2016: £21.5m; 31 December 2015: £18.5m).

The £8.6m increase in the pension deficit since the year-end was primarily due to both a reduction in the discount rate assumption to 2.65% (30 June 2016: 2.95%) and an increase in inflation to 3.3% (30 June 2016: 2.8%), offset by the return on plan assets of £5.7m, together with £2.2m of cash contributions paid to the scheme during the financial period.

OUTLOOK

Our growth strategy remains focused on the strategic diversification of our business through organic and acquisitive actions. We continue to develop technology that will help our clients meet the global challenges of urbanisation, electrification of transport, climate change and the management of scarce resources.

We have been successful in winning good levels of new business within the Rail, Energy & Environment and High-Performance Vehicles & Motorsport sectors. Our Automotive businesses in the US, the UK and the rest of Europe experienced a weaker than expected first quarter, but performance improved in the second quarter.

We maintain our strategic objective to explore a range of organic and acquisitive growth options to continue the development of a growing and resilient Group.

Overall, we continue to trade in line with our expectations and are pleased with another record order book of £244m.

Dave Shemmans

Chief Executive Officer

27 February 2017

Note: Certain statements in this press release are forward-looking. Although these forward-looking statements are made in good faith based on the information available to the Directors at the time of their approval of the report, we can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Condensed consolidated income statement

for the six months ended 31 December 2016

(1) Specific adjusting items comprise amortisation of acquired intangible assets and acquisition-related expenditure. In the prior period, non-recurring income for claims under the Research & Development Expenditure Credit ('RDEC') scheme in respect of prior years was also included. Further details are given in Note 3.

Condensed consolidated statement of comprehensive income

for the six months ended 31 December 2016

Condensed consolidated statement of financial position

as at 31 December 2016

Condensed consolidated statement of changes in equity

for the six months ended 31 December 2016

Condensed consolidated statement of cash flows

for the six months ended 31 December 2016

Notes to the condensed interim financial statements

for the six months ended 31 December 2016 (unaudited)

1. General information

Ricardo plc ('the Company') is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the United Kingdom. The address of its registered office is Shoreham Technical Centre, Shoreham-by-Sea, West Sussex, BN43 5FG, United Kingdom, and its registered number is 222915.

This preliminary announcement is based on the interim report of Ricardo plc for the six months ended 31 December 2016, which was approved for issue by the Board of Directors on 27 February 2017. The interim report has not been audited but it has been subject to an independent review by PricewaterhouseCoopers LLP.

This preliminary announcement has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting', as adopted by the European Union. The financial information herein does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006.

The second half of the Group's financial year has historically seen a higher level of profit as it is normally subject to a greater number of working days and less annual leave being taken, both internally and by our customers.

2. Operating segments

Six months ended 31 December 2016

Underlying operating profit for the period ended 31 December 2016 includes £3.0m of income in respect of RDEC, which has been allocated between Technical Consulting (£2.6m) and Performance Products (£0.4m) on a basis that is consistent with the segment in which the qualifying expenditure is incurred.

2. Operating segments (continued)

Six months ended 31 December 2015

Underlying operating profit for the period ended 31 December 2015 includes £2.0m of income in respect of RDEC, which has been allocated between Technical Consulting (£1.8m) and Performance Products (£0.2m) on a basis that is consistent with the segment in which the qualifying expenditure is incurred.

Year ended 30 June 2016

Underlying operating profit for the year ended 30 June 2016 includes £5.4m of income in respect of RDEC, which has been allocated between Technical Consulting (£4.7m) and Performance Products (£0.7m) on a basis that is consistent with the segment in which the qualifying expenditure is incurred.

3. Specific adjusting items

The expenditure associated with the Lloyd's Register Rail ('LR Rail') acquisition comprises expenditure incurred for services rendered to, and consumed by, the Group to effect the LR Rail acquisition, in addition to costs associated with the subsequent integration of the LR Rail businesses and dual-running costs incurred during a transitional services period with Lloyd's Register.

Other acquisition-related expenditure primarily comprises costs incurred for services rendered to, and consumed by, the Group to effect the Motorcycle Engineering Italia s.r.l. acquisition of £0.4m (see Note 6), in addition to the costs of the associated earn-out arrangements of completed acquisitions in the current and prior period of £0.2m.

On 2 July 2013, legislation was enacted to allow UK companies to elect for the Research and Development Expenditure Credit ('RDEC') on qualifying expenditure incurred since 1 April 2013, instead of the 'super deduction' rules, which were abolished from 1 April 2016. Management elected to adopt the RDEC regime as of 1 July 2015, which also permitted claims to be made on qualifying expenditure under RDEC in excess of the tax relief received under the legacy scheme since 1 July 2013. The credit in the comparative periods relating to claims made for the excess in RDEC over the tax relief received under the legacy scheme in prior years was recorded as other income and classified as a specific adjusting item on the basis that it was non-recurring and there was no corresponding expenditure against which these credits could be offset.

4. Earnings per share

Underlying earnings per share is shown because the Directors consider that this provides a more useful indication of underlying performance and trends over time.

5. Dividends

The Directors have declared an interim dividend of 5.42p per share (31 December 2015: 5.07p), which will be paid on 6 April 2017 to shareholders who are on the register of members at the close of business on 10 March 2017.

6. Acquisitions

Motorcycle Engineering Italia s.r.l. acquisition

On 29 July 2016 the Group acquired the entire issued share capital of Motorcycle Engineering Italia s.r.l., which was subsequently renamed Ricardo Motorcycle Italia s.r.l., for initial cash consideration of £2.1m (€2.5m). This business was formed from the operating assets and employees of Exnovo s.r.l., a leading vehicle design house, which creates class-leading aesthetics for global motorcycle and scooter brands.

The following table sets out the consideration paid for Motorcycle Engineering Italia s.r.l., together with the provisional assessment of the net assets acquired:

All of the cash consideration of £2.1m was paid in July 2016. The acquisition was completed on a cash-free and debt-free basis, subject to normal levels of working capital.

Adjustments have been made to identifiable assets and liabilities on acquisition to reflect their fair value. These include the recognition of customer-related intangible assets amounting to £0.5m. The fair values of net assets acquired are provisional and represent estimates following a preliminary valuation exercise. These estimates of fair value may be adjusted in future in accordance with the requirements of IFRS 3 'Business Combinations'. The provisional fair value of trade and other receivables of £0.5m includes net trade receivables of £0.4m, all of which is expected to be collectible.

The goodwill arising on acquisition can be ascribed to the existence of a skilled, active workforce, developed expertise and processes and the opportunities to obtain new contracts and develop the business. None of these meet the criteria for recognition as intangible assets separable from goodwill. None of the goodwill recognised is expected to be deductible for tax purposes.

Acquisition-related expenditure of £0.4m has been charged to the Condensed Consolidated Income Statement for the six months ended 31 December 2016 and is disclosed as a specific adjusting item in Note 3.

The revenue included in the Condensed Consolidated Income Statement in relation to the acquired business was £1.8m. The underlying operating profit over the same period was £Nil. This is reported in the Technical Consulting segment.

Had Motorcycle Engineering Italia s.r.l. been acquired and consolidated from 1 July 2016, revenue and underlying operating profit in the Condensed Consolidated Income Statement would be £0.3m higher and £0.1m lower, respectively, based on available information for the month from 1 July 2016 to the acquisition date.

7. Cash generated from operations

8. Net debt (non-GAAP measure)

Net debt is defined by the Group as net cash and cash equivalents less borrowings.

The borrowings maturing after one year are repayable in the year ending 30 June 2020 and are denominated in Pounds Sterling. The borrowings maturing after one year have variable rates of interest which are dependent upon the adjusted leverage of the Group and range from 1.6% to 2.35% above LIBOR. At the reporting date, the Group has an adjusted leverage which attracts the lowest rate of interest, being LIBOR + 1.6%.

At the period end, the Group held total facilities of £91.6m (30 June 2016: £90.9m). This included committed facilities of £75.0m (30 June 2016: £75.0m). Committed facilities of £69.6m, net of direct issue costs, were drawn at 31 December 2016 (30 June 2016: £54.5m) and primarily reflects the outflow associated with the acquisition of LR Rail in July 2015, together with cash generated from operations and dividend payments made. Of the committed facilities, a £35.0m facility is available for the period to September 2019 and £40.0m is available until April 2020. In addition, the Group has uncommitted facilities including overdrafts of £16.6m at 31 December 2016 (30 June 2016: £15.9m), which mature throughout this financial year and are renewable annually.