TIDMMRO
RNS Number : 0981S
Melrose Industries PLC
07 March 2019
7 March 2019
MELROSE INDUSTRIES PLC
AUDITED RESULTS
FOR THE YEARED 31 DECEMBER 2018
Melrose Industries PLC today announces its audited results for
the year ended 31 December 2018. This includes 8 months of
contribution from GKN since acquisition. An additional measure to
guide ongoing performance, the 2018 unaudited, annualised
adjusted(1) numbers, is also shown below.
Highlights
-- The results for 2018 are ahead of the Board's previous
expectations
-- This outperformance has been achieved before including a
GBP63 million positive impact from the required IFRS accounting
treatment for loss-making contracts. Resolution of these
loss-making positions offers significant potential for further
performance improvement
-- Adjusted(1) diluted earnings per share were up 36% on last
year, with a proposed final dividend of 3.05 pence per share which
is 9% up on last year, giving a full year dividend of 4.6 pence per
share, up 10%
-- Total free cash flow from trading was GBP196 million. This
was after all costs including restructuring, special pension
contributions and tax
-- The net debt to EBITDA(1) leverage ratio has reduced to 2.3x,
ahead of the previous guidance of 2.5x
-- North America Aerostructures is approaching operational
break-even, on a run rate basis, and relationships with key
aerospace customers have been much improved
-- In Automotive, present indications are consistent with a
slowdown, but this is not currently expected to cause a major
impact on 2019 profitability. Improvement actions are underway to
ensure the successful long-term development of the business
-- Nortek Group adjusted(1) operating margins have increased
from 8.7% at acquisition to 14.7% in 2018 with the potential for
further improvement
-- The GKN UK defined benefit pension accounting deficit has
reduced from GBP691 million to GBP588 million since December 2017,
and an independent Chairman of the trustees has been appointed
-- An investor event for Aerospace and Automotive will be held
on 3 April 2019 in London
Justin Dowley, Chairman of Melrose Industries PLC, today
said:
"This has been a transformational year for Melrose and we are
delighted to announce, on an annualised adjusted basis, an
operating profit of over one billion pounds. The former GKN
businesses are proving their potential to offer the outstanding
opportunities we expected and much has already been achieved in the
short period of ownership. Despite the current economically
uncertain environment, we have every confidence that we will be
able to continue to unlock the substantial shareholder value from
the former GKN businesses and further improve Nortek."
The audited results
Results
Statutory Adjusted(1)
GBPm GBPm
--------- ------------
Revenue 8,605 9,102
--------- ------------
Operating (loss)/profit (392) 847
--------- ------------
(Loss)/profit before tax (550) 703
--------- ------------
Diluted earnings per share (12.0)p 13.3p
-------
-- The statutory and adjusted(1) results include GKN for the
eight months since acquisition on 19 April 2018
-- The 2018 adjusted(1) operating profit was GBP847 million;
excluding the positive impact from the required IFRS accounting for
loss-making contracts in GKN it would have been GBP784 million
-- The statutory loss before tax of GBP550 million arose
primarily due to significant acquisition related items, most of
which arise from GKN
The unaudited annualised adjusted(1) results - including 12
months of GKN
Annualised adjusted(1)
results including
12 months of
GKN
GBPm
----------------------
Revenue 12,247
----------------------
Operating profit 1,095
----------------------
Profit before tax 886
----------------------
Diluted earnings per share 13.8p
-----
-- The annualised adjusted(1) results include a full 12 months
of GKN assuming it was acquired on 1 January 2018, and give a
meaningful measure of annualised performance to guide ongoing
results
-- The annualised adjusted(1) operating profit was GBP1,095
million; excluding the positive impact from the required IFRS
accounting for loss-making contracts in GKN it would have been
GBP1,002 million
-- The annualised adjusted(1) diluted earnings per share were
13.8 pence, up 41% on Melrose adjusted(1) diluted earnings per
share last year
(1. Described in the glossary to the 2018 Preliminary
Announcement, released on 7 March 2019)
S
Enquiries:
Montfort Communications: +44 (0) 20 3514 0897
Nick Miles +44 (0) 7973 130 669 / Charlotte McMullen +44 (0)
7921 881 800
miles@montfort.london / mcmullen@montfort.london
CHAIRMAN'S STATEMENT
I am pleased to report on our 16(th) set of annual results since
flotation in 2003.
CALAR YEAR 2018
The past year has been transformational for Melrose in a number
of ways. We achieved strong results, with statutory revenue for the
Melrose Group of GBP8,605 million (2017: GBP2,092 million) and,
despite declaring a statutory operating loss of GBP392 million
(2017: GBP7 million) primarily as a result of the required
accounting for the GKN acquisition, our adjusted[1] operating
profit was GBP847 million (2017: GBP279 million), and adjusted
diluted earnings per share were up 36% on last year.
This performance builds on the success of our public takeover of
GKN plc. Following the bid, we immediately set about initiating the
changes we believe are necessary to unlock the full potential of
the GKN businesses. These changes are already having a positive
effect as shown in our 2018 preliminary results announced
today.
We continue to see many opportunities to improve GKN and have
found enthusiastic and energised employees within the GKN
businesses who are keen on partnering with us to achieve these
ambitions. While it is still early days, I would like to thank them
all for their hard work already and we look forward to continuing
to work with them to deliver the exciting opportunity before
us.
Although much of the public attention has been on the GKN
businesses, we have continued to build and improve our existing
businesses in 2018. Nortek Global HVAC ('HVAC') is making good
progress with its industry leading StatePoint(R) technology, backed
by the significant investment required to partner with some of the
biggest global names in the data centre sector. Although facing
challenges elsewhere, Security & Smart Technology ('SST') made
an important step in securing the acquisition of IntelliVision
Inc., enabling the application of video analytics across its
product range. While Brush has delivered its restructuring in
accordance with its plans and is well set for the future, their
generator services market has faced further declines.
Further details of these results are contained in the Chief
Executive's Report and Finance Director's Review and I would like
to thank all employees for their efforts in helping to produce this
strong performance.
DIVID
The Board proposes to pay a final dividend of 3.05 pence per
share (2017: 2.8 pence) making a total of 4.6 pence for the year
(2017: 4.2 pence), an increase of 10% in line with its progressive
annual dividend policy. This will be paid on 20 May 2019 to those
shareholders on the register at 5 April 2019, subject to approval
at the Annual General Meeting (AGM) on 9 May 2019.
SHAREHOLDERS
Melrose has been fortunate to enjoy long-term support from its
key shareholders, many of whom have been investors since Melrose
was established in 2003 and have experienced a sustained period of
success. We are very pleased to welcome the large number of new
shareholders who have joined the Melrose register as a result of
our acquisition of GKN. These shareholders may be less familiar
with the Melrose model and we are excited about the opportunity of
delivering the same level of performance for them.
BOARD MATTERS
We are pleased that Charlotte Twyning joined us as an additional
independent non-executive director in October 2018. A lawyer by
training and currently Consents Director with the Heathrow
Expansion Programme Board, Charlotte is already making her mark at
Melrose and we welcome her to the team.
From the start of this year, I relinquished my roles as Senior
Independent Director and Chairman of the Remuneration Committee to
take up the role of inaugural Non-Executive Chairman. The previous
Chairman, co-founder Christopher Miller, who had held the position
since Melrose started in 2003, will continue in a full-time
executive capacity as Executive Vice Chairman.
Further details on this and other changes will be set out in the
Nomination Committee Report, but I would like to thank Christopher
for his contribution to the record of Melrose so far and look
forward to working with him to achieve further success for Melrose
and all of its stakeholders.
ANNUAL REPORT & ACCOUNTS
The Annual Report & Accounts will be posted on 5 April
2019.
STRATEGY
Melrose continues to demonstrate the success of its 'Buy,
Improve, Sell' strategy. There are already clear indicators in the
GKN businesses that the Melrose model of simplifying corporate
structures and injecting pace and accountability into businesses
while investing heavily for their long-term success continues to be
effective. The same strategic focus continues to be applied within
Nortek to build on its recent successes.
OUTLOOK
There were wider macro challenges for some of our businesses in
2018 and we see these continuing into this year. However, with
culture change based on accountability, backed by significant
investment and a more disciplined strategic focus being applied to
improve all aspects of our businesses, we remain confident of
further success as we enter 2019.
Justin Dowley
Chairman
7 March 2019
CHIEF EXECUTIVE'S REPORT
2018 has obviously been a significant year in Melrose's history.
We were pleased to be given the opportunity by shareholders to
unlock the undoubted potential that exists within the GKN
businesses and we look forward to delivering value to all of our
shareholders. Upon taking control of GKN, we immediately set about
removing the duplicated central functions and decentralising the
GKN businesses, simultaneously reorganising the Melrose Group into
the five divisions we have today: Aerospace; Automotive; Powder
Metallurgy; Nortek Air & Security; and Other Industrial.
For the GKN businesses, decentralisation was the first step in
bringing about the change in culture we believe is vital to
securing long-term improvement. For GKN Aerospace and GKN Powder
Metallurgy, we worked with incumbent management teams to agree
their management plans. For GKN Automotive, we were pleased to fill
the CEO vacancy with a high calibre candidate with a strong track
record in the sector. With an ambitious new executive team around
him, the GKN Automotive business will be transformed. In all cases
these businesses present the exciting opportunity to improve their
performance, as expected.
Having agreed their approach, the GKN businesses have been given
the freedom and responsibility to start to deliver on their
commitments. Part of this has been a refocus on profitable sales
rather than solely on growth. There is also a clear expectation
that they be good stewards of their businesses for the benefit of
all stakeholders. Despite inheriting the cash cost of unwinding the
significant creditor stretch employed by the previous GKN
management, net debt leverage was better than previous guidance at
2.3x EBITDA. Following this, a key task for this year is to have a
better control and focus on the working capital in the GKN Group.
Optimising cash management is a key area for improvement for all of
the GKN businesses.
Strong customer relationships are at the centre of any
successful business, but these had been troubled for GKN businesses
prior to our acquisition. With our support, the businesses have
renewed their focus on improving their performance and delivery,
particularly in critical supply chains. To reassure key customers
of the strength of our commitment, Melrose has funded the
significant investment required to achieve the necessary
operational improvements fundamental to securing this improved
performance.
Part of these improving relationships has been the focus coming
from the opening balance sheet review that identified a significant
number of poorly performing contracts which are further detailed in
the Finance Director's Review. While we have adopted the
appropriate accounting treatment for these, we have also been clear
that addressing these is a key priority for each of the GKN
businesses and progress is already being made which has been
welcomed by customers. Some of our investments to date have also
been supporting this. We look forward to further updating
shareholders on progress with these over the months to come. It is
apparent that at acquisition these contracts constituted
approximately 10% of GKN net sales, requiring a provision of GBP629
million as discussed in the Finance Director's Review. We think
these contracts offer a large potential for performance improvement
in the future.
As we said at the time of the GKN acquisition, we will be
responsible custodians of the GKN pension schemes and we stand by
that commitment. Since acquisition we have improved their corporate
governance by appointing the first independent chairman of the UK
schemes.
At each of our businesses, investment in technology and
operational improvements is at the heart of our efforts to unlock
their potential. For Nortek Air & Security, ongoing support for
the industry leading StatePoint(R) technology for HVAC, the
refreshing of the product range for Air Quality & Home
Solutions ('AQH') and the data analytics acquired for SST through
IntelliVision are vital to their ongoing development and are paying
real dividends. This has been matched by investments to upgrade
their production capacity and continue their operational
improvements which have been key to the increase in operating
margins in Nortek businesses by approximately six percentage points
since acquisition.
Whilst FKI has been a very successful acquisition for
shareholders, Brush has in recent years suffered from very
difficult markets. A largescale restructuring was initiated in 2018
as a result, and it has been successfully implemented by Brush's
management. This will be completed in 2019. Unfortunately, the well
publicised further difficult market conditions mean that your Board
considers it should again reduce the holding value of this company
and this has been done in these accounts.
For the GKN businesses, our commitment at the time of the
acquisition to invest an amount equal to 2.2% of sales on research
and development was always considered a floor, not a ceiling. We
are tracking in line with expectations, including commencing work
on the new Aerospace Global Technology Centre in Filton, UK. In
parallel we are also investing heavily to achieve the operational
improvements and so far we have approved capital expenditure of
more than GBP200 million in a mix of initiatives, including plant
extensions, capacity upgrades and procurement efficiencies. This
investment process has benefited from, and also been speeded up by
the more rigorous approval process we have introduced.
OUTLOOK
Alongside the continued progress in Nortek, we believe that our
businesses will deliver some of the significant upside we see in
2019 despite continuing market volatility, particularly for
Automotive. Our businesses are not without their challenges,
particularly geopolitical, with Brexit and automotive sector
uncertainty continuing. However, our businesses are proactive and
will adjust their operations where appropriate. We will continue to
be prudent in our approach and ambitious in our aims. We believe
the rigorous focus on cost control, productivity and improved
customer delivery will continue to drive improvement in performance
for all of our businesses. This gives us confidence that we will
continue to meet our expectations and that 2019 will be another
successful year.
Simon Peckham
Chief Executive
7 March 2019
AEROSPACE DIVISION
GKN Aerospace is a world-leading multi-technology manufacturer
of aircraft and engine structures and electrical interconnection
systems for the global aerospace industry, supplying both civil and
military platforms. Its technology is used throughout the aerospace
industry: from high-use single aisle aircraft and the world's
largest passenger planes, through to business jets, helicopters and
the world's most advanced fighter jets.
GKN Aerospace has manufacturing locations in 15 countries and
supplies more than 90% of the world's aircraft and engine
manufacturers. GKN Aerospace has three core competencies: (i)
Aerostructures, which provides components for most of the major
platforms, making use of lightweight composites, additive
manufacturing and innovative high-speed machining technologies, as
well as electrical wiring and interconnection systems and a
complete aerostructures service business; (ii) Engine Systems,
which is a systems integration partner for global aircraft engine
programmes, supplying high performance metallic and composite
structural engine components; and (iii) Special Technologies, a
global partner in transparencies and other specialist technologies
for aircraft.
After a challenging end to 2017, particularly in North America,
GKN Aerospace made substantial progress in 2018. Embracing the
decentralisation and cultural change brought about by the Melrose
acquisition, the business has invested heavily in its North
American sites, which will continue into 2019, with a view to embed
improved manufacturing processes and drive long-term site
performance. This was backed by a renewed focus on its North
American footprint strategy that saw the opening of a new
state-of-the-art advanced composites site in Florida, US, and the
exit of three non-core sites.
Elsewhere, improving relationships with key blue-chip customers
have helped in winning new, long-term contracts worth over GBP2
billion, as well as securing an important position on Airbus' Wing
of Tomorrow development platform, all of which will position
Aerostructures well for future programmes. The existing commercial
position is also the subject of significant attention, with the
opening balance sheet review undertaken on acquisition by Melrose
having highlighted a number of loss-making contracts. Improvement
in performance is being addressed as a priority.
With Melrose support, GKN Aerospace has reinvigorated its
investment in research and development. The centrepiece for this
was the announcement of the development of a new GBP32 million UK
global technology centre near its Filton production facility in the
UK. This will be a base for the Wing of Tomorrow programme to
develop the next generation of composite and additive manufacturing
technologies to 'Industry 4.0' standards, enabling GKN Aerospace to
maintain its position as a technology leader, improving both
productivity and profitability.
Recognising emerging opportunities in Asia, GKN Aerospace is
opening three new sites in the region to support the growing
market. This includes a new US $30 million fan blade repair centre
in Malaysia, a new US $10 million wiring facility in Pune, India,
and the signing of a framework agreement with Comac and AVIC for a
new aerostructures joint venture in China.
The Aerospace division overall invested GBP154 million in 2018
in various parts of the business with a view to improve or
accelerate key business cases. In North America, significant
investment was made at previously underinvested sites. In Europe,
investment was made to improve productivity and expand capacity for
the benefit of ramp-up programmes such as for the F-35.
OUTLOOK
The global aerospace market remains strong and leading
indicators - air passenger traffic, order backlog, and predicted
aircraft requirements - appear positive. With the North American
operational challenges being overcome, cultural change taking hold
and a clear improvement plan set out for the business, GKN
Aerospace has a well-balanced portfolio of work on growth
platforms, improving relationships with a strong customer base
across all major OEMs, world-leading technology, and a global
footprint. The business is well established in the strong US and
European aerospace markets and is well-set for the growth of the
Asian market in the years ahead, giving the business confidence in
meeting its expectations for 2019.
AUTOMOTIVE DIVISION
GKN Automotive supports over 90% of the world's car
manufacturers as a leading developer, manufacturer and supplier of
market leading driveline products and systems throughout the global
automotive industry. The recent appointment of a new Chief
Executive has led to the creation of a focused new central
executive team and a reorganisation of the management structure of
the business. Internally the business is principally organised
around its two core competencies: (i) Driveline, which is the
world's preeminent driveshaft manufacturer; and (ii) ePowertrain,
the industry leader in electric powertrains ("eDrive") and
intelligent all-wheel drive ("AWD") systems.
GKN Automotive supplies to all subsections of the automotive
industry, from small ultra low-cost cars to the most sophisticated
and dynamic premium and motorsport vehicles. The business is also
centralising its commercial function to ensure that it presents a
globally consistent and single face to customers, whilst ensuring
the right level of commercial discipline is in place to drive
profitable growth and manage key commercial relationships. Like all
the GKN businesses, GKN Automotive is also working hard on
addressing its loss-making contracts identified during the opening
balance sheet review.
With an unrivalled global production footprint across 21
countries, GKN Automotive is closely aligned with its key
customers. Its unparalleled experience in the traditional
driveshaft business provides platform opportunities to be the
premier technology partner for OEMs, as well as having the in-depth
knowledge and unique perspective from which to grow its market
leading eDrive business. Accordingly, this year GKN Automotive
invested a further GBP50 million in e-Powertrain research and
development which was instrumental in delivering its first fully
electric drive programme with a leading global OEM. This is an
important step forward for the eDrive business and increases GKN
Automotive's ability to further differentiate its business from
competitors.
GKN Automotive has been able to successfully take advantage of
the aggressive growth of the eDrive market in China by working in
close collaboration with its long-standing partner HASCO, through
its joint venture vehicle Shanghai GKN HUAYU Driveline Systems
("SDS"), which resulted in several significant business wins during
2018. GKN Automotive and SDS continue to work together closely as
the focus turns to execution to ensure that these projects deliver
their potential.
To further broaden its opportunities in Asia, the business
opened a new manufacturing facility in Japan during 2018, investing
over GBP25 million in new equipment to enable the specialist
production of state-of-the-art AWD and eDrive systems. The factory
will serve the growing demand in Asia, as well as global export
markets and represents a substantial technological upgrade in
capabilities for the production and delivery of advanced eDrive and
AWD technologies.
The Driveline business has been and will continue to be heavily
focused on reviewing its cost structure, driving operational
performance and delivering market leading technologies to its OEM
customers around the world. A key component of this focus is to
ensure Driveline's installed capacity is fully aligned to its core
competencies and able to serve customers appropriately in addition
to being located in the most appropriate countries. Under the
direction of a newly appointed CPO and restructured operating
model, GKN Automotive is conducting an ambitious procurement
efficiency drive, looking to secure savings in both direct and
indirect commodities and achieve further improvements across all
sites in the business.
With the support of Melrose, further investment has been
approved to deliver additional capacity expansion at the Bruneck
site, Italy. Additional investment is scheduled to increase
capacity in North America, Mexico, China and Japan, and to support
automation projects to further improve productivity, output and the
quality of Driveline products.
OUTLOOK
GKN Automotive has very strong technology know how ensuring that
it is uniquely positioned in its market place. It will continue to
build long-term customer relationships and invest in its world
class manufacturing capabilities. The opportunities presented by
the move to electrification are significant, but given the current
uncertainties in the automotive market, GKN Automotive will
continue to adopt a prudent approach. Investment initiatives are
focused on driving towards a more flexible cost structure, reducing
fixed costs and improving overall commercial discipline with
customers and suppliers. The business is confident of delivering an
improvement in its performance in 2019.
POWDER METALLURGY DIVISION
GKN Powder Metallurgy is the top global producer of industrial
powder metallurgy products and solutions. A global leader in both
precision powder metal parts for the automotive and industrial
sectors, as well as the production of metal powder, through its
prized vertically integrated business platform. Whilst we will
continue to review the position in the months to come, we expect
Powder Metallurgy to remain in the Group for the present.
GKN Powder Metallurgy comprises three segments: (i) Sinter
Metals - the world's leading manufacturer of precision automotive
components and components for industrial and consumer applications:
(ii) Hoeganaes - the world's second largest manufacturer of metal
powder, the essential raw material for powder metallurgy, with
manufacturing facilities in North America, Europe and China; and
(iii) Additive - a leading digital manufacturer of metal additive
manufacturing parts and materials for prototypes, planning to
quickly expand into medium series and the aftermarket.
Since entering the Melrose Group, the GKN Powder Metallurgy
business has continued to expand its partnerships with technology
leaders of additive manufacturing equipment. As a sought-after
partner with unique production capabilities, GKN Powder Metallurgy
has recently entered into a new partnership with Hewlett Packard
and Volkswagen to produce additive manufacturing parts through
binder jetting technology, and a strategic partnership with EOS,
the world's leading equipment supplier in the field of industrial
3D printing of metals and polymers.
These partnerships are dedicated to the design of a new,
high-productivity process for laser metal 3D printing using GKN
Powder Metallurgy proprietary additive manufacturing steel powder,
which over time will reduce production time by up to 70% and
overall production cost by up to 50%. As customisation trends drive
customer demand for smaller lot sizes, GKN Powder Metallurgy's
additive manufacturing expertise puts it ahead of its peers to
benefit from the significant growth potential. 3D technology will
also shorten time to market substantially as no tools are
required.
Having consistently outperformed peers' sales growth in recent
years, GKN Powder Metallurgy is focused on continuous improvement
to ensure its profitability better reflects its leading position
and to improve its performance in the years to come. Investment in
research and development as industry trends like electrification
continue and regulatory requirements increase, have further
differentiated GKN Powder Metallurgy from its peers.
With increasing automation across its production footprint GKN
Powder Metallurgy continues to concentrate on operational
improvements, delivering high performing continuous improvement
plans, supported by further advances in the digital agenda. A
detailed review has highlighted some loss-making contracts and
under-performing sites and these are an area of focus to ensure an
improved performance as well as a reduction in the overall cost of
quality issues.
OUTLOOK
Although it is being prudent in the face of wider automotive
sector uncertainty, with significant opportunities for organic
improvement as well as step-change developments through identified
acquisition targets, the confidence of the business is high. By
continuing to put customer service even more in the centre of its
business activities and enhance its partnerships to develop and
commercialise new technologies, in particular in additive
manufacturing, GKN Powder Metallurgy is optimistic of another
strong performance in 2019.
NORTEK AIR & SECURITY DIVISION
The Nortek Air & Security Division comprises three
businesses: (i) Nortek Global HVAC, (ii) Air Quality & Home
Solutions, and (iii) Security & Smart Technology.
NORTEK GLOBAL HVAC
Nortek Global HVAC ("HVAC") is led by a management team based in
Missouri, US, and includes the custom and commercial business
Nortek Air Solutions ("NAS"), a residential and light commercial
business, as well as the dedicated StatePoint Liquid Cooling
("SPLC") business.
Investment in research and development has continued to enhance
core product platforms and breakthrough technologies, including the
launch of the business's StatePoint(R) technology for the rapidly
growing data centre sector and its integrated CLEANSUITE(R) product
family to capitalise on the retrofit and new construction
opportunity in medical operating rooms.
The StatePoint Liquid Cooling system offers breakthrough
technology at the heart of many challenges facing the hyper scale
data centre space and addresses the need for companies to drive
energy and water efficiency, while in parallel achieving lower
lifecycle costs. Having already secured a commitment from one
global customer with significant potential upside, HVAC continues
to expand its blue-chip, hyper-scale customer relationships.
As well as some site consolidations in accordance with its
footprint strategy, HVAC implemented common operating procedures
across all NAS sites, with strong costing disciplines to drive
further financial efficiency. The residential business focused on
initiatives to address gaps in quality, customer service and
speed-to-market, and delivering significant revenue improvements in
end markets with greatest differentiation. The successful
separation of the light commercial business has expanded margins
and refocused capacity towards new products such as
high-performance computing for mission critical customers.
OUTLOOK
This business is well positioned for further improvement this
year. HVAC is committed to the successful commercialisation of the
SPLC system and unlocking of the value within its supply chain and
cost to manufacture products. HVAC is well placed to meet its
expectations in 2019 with the potential for further upside
identified.
AIR QUALITY & HOME SOLUTIONS
AQH is a leading manufacturer of ventilation products for the
professional remodelling and replacement market, new residential
construction market and DIY market. It supplies to distributors and
dealers of electrical and lighting products, kitchen and bathroom
dealers, retail home centres and private label customers from its
four manufacturing locations around the world.
Despite macro headwinds, AQH had a strong end to 2018 with an
increase in sales during the second half of the year. Commodity
increases and tariff activity during the middle of the year
presented some challenges. However, the arrival of a range of new
products resulted in sales growth gaining momentum in the second
half of the year.
Facility consolidations, capital investments, sourcing and
engineering initiatives and other improvements yielded cost savings
of over US $10 million in 2018 and the new Hartford distribution
centre has delivered significant improvements to "On Time and
Complete" delivery rates. The sales organisation was also
restructured in order to focus on distribution channels and the
investment in digital activity has helped AQH to respond to new
trends for consumer/distributor interactions.
OUTLOOK
AQH is poised for continuing sales growth from all regions in
the US in 2019 supported by the new product development pipeline.
Operationally, further incremental improvement opportunities are
planned for 2019, alongside mitigation plans for projected tariff
and commodity increases. The business expects to continue
operational improvements, operating profit gains and sales growth
and is optimistic about its performance for the coming year.
SECURITY & SMART TECHNOLOGY
The Security & Smart Technology ("SST") business is a
leading developer and manufacturer of security, home automation and
access control technologies for the residential and commercial
markets, principally in North America. The business continues to
build on its expertise in the design and manufacture of wireless
connectivity devices, its strong brand presence in professional
security, integrator and custom installer channels and its
relationships with top resellers.
The business endured a difficult year in 2018. Whilst facing
considerable market headwinds, it completed its move to its new
headquarters in California, consolidating its management and back
office functions as well as significantly upgrading its research
and development capabilities. This was further enhanced through the
acquisition of IntelliVision, a pioneering leader in artificial
intelligence, smart cameras and deep-learning based video analytics
software which gives the business far more Smart capabilities
across its product range.
SST has also restructured its production management and sales
functions to place greater focus on lead times to market and to
grow its international sales opportunities. The business is moving
production away from China in response to the onset of higher
tariffs, which will also reduce inventory requirements and increase
supply chain flexibility.
OUTLOOK
SST's core US residential security market has declined in 2018
and has become more competitive requiring a renewed focus on its
differentiating technologies and the need to accelerate the
development of new analytics-based products, adapt its sourcing and
manufacturing strategies and reduce its overall cost base for its
products. With these changes in progress, the business will be as
well positioned as any competitor to participate in the development
in its market.
OTHER INDUSTRIAL DIVISION
The Other Industrial Division comprises four businesses: (i)
Brush, (ii) Ergotron, (iii) Walterscheid Powertrain Group
(previously GKN Off-Highway Powertrain), and (iv) GKN Wheels &
Structures.
BRUSH
Having gone through a major restructuring in 2018, Brush is now
structured around its core competencies of turbogenerators,
switchgear, transformers and aftermarket services.
Whilst the restructuring announced at the start of the start of
2018 has gone successfully, the market conditions for Brush in the
generator services sector have worsened. This has negatively
impacted the value of Brush which is discussed more in the Finance
Director's Review. The switchgear business continued to perform
well during the year and launched the next generation of an 11KV AC
indoor panel called Quantum, increasing its market penetration in
the utility and industrial sectors, as well as securing its first
significant order from the UK rail industry. The transformers
business endured another difficult year but enters 2019 well placed
to improve.
OUTLOOK
There is some optimism for aftermarket performance in 2019 with
the expansion of the Brush field service network and repair
capabilities. Nonetheless, global economic prospects still remain
uncertain in Brush's main markets and the underlying trading
environment in 2019 is expected to remain challenging.
ERGOTRON
Ergotron is a leading designer, manufacturer and distributor of
ergonomic products for use in a variety of working, learning and
medical care environments. Based in Minneapolis, US, Ergotron
comprises three businesses: Commercial, Consumer and Original
Design and Manufacturer.
Ergotron continues to drive a quality and design-led product
strategy, focusing on high-growth market segments. In 2018 the
business revitalised its leadership team and launched its
proprietary eCommerce channel supported by a successful digital
marketing campaign. While continuing to face tariff headwinds that
triggered a production review, there has been further investment in
product leadership and agile processes and a US $1 million capital
investment in rapid prototyping equipment and labotories.
OUTLOOK
Ergotron expects its core businesses to perform well in 2019,
supported by its restructured leadership team and refined
footprint. New sales leadership, fresh branding and investments in
product development will accelerate innovative solutions to give
confidence in the business for 2019.
WALTERSCHEID POWERTRAIN GROUP
The rebranded Walterscheid Powertrain Group is a leading
supplier of engineered power transmission products, systems and
service solutions to the world's leading off-highway and industrial
equipment manufacturers driving efficiency in the agriculture,
construction, mining and industrial markets, as well as providing
aftermarket services for powertrain solutions.
During 2018 Walterscheid Powertrain Group delivered on
expectations, with growth in both revenue and profit on the back of
strong conditions in both the key agriculture and construction
industries, despite headwinds from tariffs and raw material price
increases, as well as growth in aftermarket.
The construction of the new highly automated manufacturing site
in Welsburg, Italy was completed, and the business continues to
adapt to the market's adoption of smart, connected drivetrain
solutions, including further automation in the areas of standard
manufacturing processes in its sites at Lohmar, Germany and
Rockford and Woodridge in the US.
OUTLOOK
As announced on 6 March 2019, Melrose has agreed to sell
Walterscheid Powertrain to One Equity Partners, a US-based private
equity firm. The sale is subject to the customary regulatory
conditions and is expected to complete in the first half of this
year.
This coming year, Walterscheid Powertrain will seek to
capitalise on its distinctive capabilities and strong market
positions to continue to grow and improve. Several key business
growth initiatives are in place, including continued development of
the Aftermarket & Services offering in North America, the
growth of its business in China, and selected product initiatives,
which reinforce the business's positive outlook for 2019.
GKN WHEELS & STRUCTURES
GKN Wheels & Structures is a leading global manufacturer of
off-highway wheels for agricultural, construction, mining and
industrial use, as well as metallic structures for automotive and
off-highway vehicles.
The business continued to make significant progress during 2018
with major investments coming on-stream and excellent profit
conversion on additional sales which outgrew the market. Over GBP20
million of new business was won during 2018, including diversifying
its structures customer base into off-highway customers.
Additionally, the business de-risked over 90% of its input steel
price movement exposure. Improved performance has come about
through more tightly controlled fixed costs and introduction of new
technology, such as a fully flexible, automatic welding cell at the
Denmark facility and a new automated off-highway rim line at the UK
facility.
OUTLOOK
Market conditions have continued to improve and the full benefit
from improvement initiatives implemented in 2018 is expected to
flow from 2019. Although some uncertainty has been caused by the
introduction of import tariffs in the US, the business is well
placed to deal with this uncertainty and the outlook for 2019
remains positive.
FINANCE DIRECTOR'S REVIEW
The acquisition of GKN plc ("GKN") on 19 April 2018
significantly increased the size of the Melrose Group.
Consequently, the statutory and adjusted results for the year ended
31 December 2018 only include eight months of trading for GKN,
whilst the prior year did not include any results for GKN. This
makes a meaningful year-on-year comparison of statutory or adjusted
results more difficult.
ACQUISITION OF GKN
Under the terms of the acquisition GKN shareholders received
1.69 new Melrose shares and 81 pence in cash for every GKN share.
In addition GKN shareholders received the final GKN dividend of 6.2
pence per share, which was paid in May 2018 during Melrose
ownership.
In accordance with IFRS 3 "Business Combinations", the
consideration paid to acquire GKN in the Financial Statements is
calculated using the share price at the date of acquisition of
GBP2.35 and only includes approximately 85% of the total amount
paid, being the percentage of acceptances received from GKN
shareholders by 19 April 2018. The remaining 15% of shares that
were acquired in the period from 19 April 2018 to 30 June 2018 are
treated as the purchase of non-controlling interests and are shown
as a movement in equity.
Details of the banking facilities entered into to allow Melrose
to acquire GKN are discussed later in this review.
MELROSE GROUP RESULTS
Following the acquisition of GKN in the year, there are three
sets of results to consider:
Statutory results:
The statutory results include eight months of trading for GKN,
are shown on the face of the Income Statement and are audited. The
statutory results show revenue of GBP8,605 million (2017: GBP2,092
million), an operating loss of GBP392 million (2017: loss of GBP7
million) and a loss before tax of GBP550 million (2017: loss of
GBP28 million). The diluted earnings per share ("EPS"), calculated
using the weighted average number of shares in issue during the
year of 3,959 million, were a loss of 12.0 pence (2017: loss of 1.2
pence).
The statutory loss before tax of GBP550 million arose primarily
due to significant acquisition related items and other adjusting
items, most of which arise from GKN.
Adjusted results:
The adjusted results include eight months of trading for GKN,
are shown on the face of the Income Statement and are audited. They
are adjusted to exclude certain items which are significant in size
or volatility or by nature are non-trading or non-recurring, or are
items released to the Income Statement that were previously a fair
value item booked on an acquisition. It is Melrose's accounting
policy to exclude these items from the adjusted results, which are
used as an Alternative Performance Measure ("APM") as described by
the European Securities and Markets Authority ("ESMA").
The Melrose Board considers the adjusted results to be an
important measure used to monitor how the businesses are performing
as they achieve consistency and comparability between reporting
periods when all businesses are held for the complete reporting
period.
The adjusted results in the year ended 31 December 2018 show
revenue of GBP9,102 million (2017: GBP2,095 million), an operating
profit of GBP847 million (2017: GBP279 million) and a profit before
tax of GBP703 million (2017: GBP258 million). Adjusted diluted EPS,
calculated using the weighted average number of shares in issue
during the year were 13.3 pence (2017: 9.8 pence).
The description of adjusting items and a reconciliation of the
statutory results to the adjusted results is discussed later in the
review.
Annualised adjusted results:
The Melrose Board believes that the annualised adjusted results
give a meaningful measure of annualised performance to guide
ongoing results when adjusted results include businesses owned for
part of a period. They include the adjusted results of the GKN
businesses for twelve months, as if GKN had been acquired on 1
January 2018. They are calculated using the ongoing adjusted
interest charge, the expected ongoing divisional long-term
incentive plan charge, the effective tax rate of the enlarged Group
and the diluted number of shares in issue at 31 December 2018.
Annualised adjusted results in the year ended 31 December 2018
show revenue of GBP12,247 million, an operating profit of GBP1,095
million and a profit before tax of GBP886 million. Annualised
adjusted diluted EPS, calculated using the number of shares in
issue at 31 December 2018, of 4,858 million were 13.8 pence.
A reconciliation of adjusted results to the annualised adjusted
results is shown later in this review.
The statutory, adjusted and annualised adjusted results for the
year included a positive impact from unwinding loss-making contract
provisions which were required under IAS 37: "Provisions,
contingent liabilities and contingent assets", and identified
during the opening Balance Sheet review process for GKN, which is
discussed later in this review.
Excluding the positive impact of the unwind of the loss-making
contracts provision, the adjusted results would show an operating
profit of GBP784 million, the annualised adjusted results would
show an operating profit of GBP1,002 million and an EPS of 12.5
pence.
STATUTORY, ADJUSTED AND ANNUALISED ADJUSTED RESULTS BY REPORTING
SEGMENT
The following table shows revenue split by reporting segment,
including equity accounted investments (EAIs) for adjusted revenue
and annualised adjusted revenue:
Powder Nortek
Aerospace Automotive Metallurgy Air & Security Other Industrial Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ----------- ------------ ----------- ---------------- ---------------- ---------
Statutory revenue 2,479 2,936 846 1,458 886 8,605
------------------------ ----------- ------------ ----------- ---------------- ---------------- ---------
Reconciling item:
Revenue from EAIs 42 446 5 - 4 497
------------------------ ----------- ------------ ----------- ---------------- ---------------- ---------
Adjusted revenue 2,521 3,382 851 1,458 890 9,102
------------------------ ----------- ------------ ----------- ---------------- ---------------- ---------
GKN revenue (1 January
to 18 April) 1,013 1,567 361 - 204 3,145
------------------------ ----------- ------------ ----------- ---------------- ---------------- ---------
Annualised adjusted
revenue 3,534 4,949 1,212 1,458 1,094 12,247
------------------------ ----------- ------------ ----------- ---------------- ---------------- ---------
The following table shows operating profit/(loss) split by
reporting segment. Adjusting items are described later in this
review.
Powder Nortek
Aerospace Automotive Metallurgy Air & Security Other Industrial Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ----------- ------------ ----------- ---------------- ---------------- ----------- --------
Statutory
operating
(loss)/profit (44) 15 38 126 (159) (368) (392)
------------------- ----------- ------------ ----------- ---------------- ---------------- ----------- --------
Reconciling
item:
Adjusting
items 294 216 60 72 257 340 1,239
------------------- ----------- ------------ ----------- ---------------- ---------------- ----------- --------
Adjusted operating
profit 250 231 98 198 98 (28) 847
------------------- ----------- ------------ ----------- ---------------- ---------------- ----------- --------
GKN operating
profit (1
January to
18 April) 91 130 45 - 18 (36) 248
------------------- ----------- ------------ ----------- ---------------- ---------------- ----------- --------
Annualised
adjusted
operating
profit 341 361 143 198 116 (64) 1,095
------------------- ----------- ------------ ----------- ---------------- ---------------- ----------- --------
The performances of each of the reporting segments are discussed
in the Chief Executive's Report. The adjusted operating costs in
the corporate cost centre of GBP28 million (2017: GBP23 million)
included GBP20 million (2017: GBP15 million) of Melrose corporate
costs, GBP6 million (2017: GBPnil) of the remaining GKN central
costs and GBP2 million (2017: GBP8 million) of costs in respect of
the divisional cash-based long-term incentive plans.
RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS
The following table reconciles the statutory operating loss to
adjusted operating profit:
2018 2017
GBPm GBPm
------------------------------------------------------ ------ -----
Statutory operating loss (392) (7)
------------------------------------------------------ ------ -----
Adjusting items:
------------------------------------------------------ ------ -----
Amortisation of intangible assets acquired in
business combinations 401 82
------------------------------------------------------ ------ -----
Restructuring costs 240 35
------------------------------------------------------ ------ -----
Acquisition and disposal costs, including associated
transaction taxes 153 6
------------------------------------------------------ ------ -----
Impairment of assets 152 145
------------------------------------------------------ ------ -----
Currency movements in derivatives and associated
financial assets and liabilities 143 -
------------------------------------------------------ ------ -----
Reversal of one-off uplift in the value of inventory
in GKN businesses 121 -
------------------------------------------------------ ------ -----
Other 29 18
------------------------------------------------------ ------ -----
Adjustments to statutory operating loss 1,239 286
------------------------------------------------------ ------ -----
Adjusted operating profit 847 279
------------------------------------------------------ ------ -----
Adjusting items:
The value of intangible assets acquired in business combinations
has significantly increased during the year following the
acquisition of GKN. As a result, the amortisation charge in the
year was GBP401 million (2017: GBP82 million) and included eight
months of amortisation of intangible assets acquired with GKN. This
is excluded from adjusted results due to its non-trading nature and
to enable comparison with companies that grow organically. Where
intangible assets are trading in nature, such as computer software
and development costs, the amortisation is not adjusted.
Restructuring and other associated costs totalled GBP240 million
(2017: GBP35 million), including GBP7 million (2017: GBP1 million)
of losses incurred following the announcement of the closure of
certain businesses within the Group. Restructuring costs are
adjusting items due to their size and non-trading nature and during
the year ended 31 December 2018 they included:
-- A charge of GBP156 million in respect of the GKN businesses.
Within this, GBP56 million related to the Aerospace division,
predominantly in North America, with key focus on improving quality
and delivery for customers. Within the Automotive business GBP46
million of costs have been incurred restructuring and enhancing the
future performance of the business under new leadership. In
addition, GBP54 million of restructuring costs were incurred in
respect of early actions within other GKN businesses, including the
ceasing of GKN head office functions.
-- A charge of GBP59 million (2017: GBP6 million) in respect of
the closure of the Dutch turbogenerator facility in Brush and the
restructuring of its turbogenerator production in the UK following
the announcement on 1 February 2018.
-- A charge of GBP22 million (2017: GBP27 million) within Nortek
Air & Security, which mostly related to footprint
rationalisation within the HVAC business.
Acquisition and disposal costs of GBP153 million (2017: GBP6
million) were incurred in the year and included general transaction
fees and associated transaction taxes, predominantly in respect of
the acquisition of GKN. These costs also included a small amount of
fees relating to the GBP26 million bolt-on acquisition of
IntelliVision Inc., by the Security & Smart Technology business
and the cost of certain other corporate deal activities in the
year. These items are excluded from adjusted results due to their
non-trading nature.
An impairment charge totalling GBP152 million (2017: GBP145
million) was incurred in the year ended 31 December 2018. This
included GBP132 million in respect of the carrying value of assets
held within the Brush business of which GBP123 million related to
goodwill, discussed later in this review, and GBP9 million to
property, plant and equipment. In addition GBP15 million of
intangible assets and GBP5 million of property, plant and equipment
were impaired in respect of assets held within the GKN businesses.
The impairment charges are shown as an adjusting item due to their
non-trading nature and size.
Melrose policy is to hedge account where possible, however,
hedge accounting has not historically been applied to the GKN
businesses for transactional foreign exchange exposure. For
consistency, the movement in the value of derivative financial
instruments (primarily forward foreign currency exchange contracts)
entered into to mitigate the potential volatility of future cash
flows on long-term foreign currency customer and supplier
contracts, along with foreign exchange movements on the associated
financial assets and liabilities, totalling a charge of GBP143
million (2017: GBPnil), is shown as an adjusting item because of
its volatility and size.
Finished goods and work in progress inventory which are present
in a business when acquired, in accordance with IFRS 3, are
required to be uplifted in value to closer to their selling price.
As a result, in the early months of an acquisition, reduced profits
are generated as this inventory is sold. The one-off effect in the
year, relating to GKN acquired inventory, was a charge of GBP121
million (2017: GBPnil) and is excluded from adjusted results due to
its size and non-recurring nature.
The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer's tax charge, of GBP13 million
(2017: GBP24 million), is excluded from adjusted results due to its
volatility. The shares that would be issued, based on the Scheme's
current value at the end of the reporting period, are included in
the calculation of the adjusted diluted earnings per share, which
the Board considers to be a key measure of performance.
On 26 October 2018, a High Court judgement was made in respect
of the gender equalisation of guaranteed minimum pensions for
occupational pension schemes. The judgement concluded the schemes
should be amended to equalise pension benefits for men and women in
relation to guaranteed minimum pension benefits, an issue which
affects many UK defined benefit pension schemes. The impact of this
amendment on the pension schemes within the Group resulted in a
specific GBP11 million increase in the pension deficit with a
corresponding past service cost in the Income Statement. This cost
is excluded from adjusted results due to its non-trading and
non-recurring nature.
The Group has a number of EAIs in which it does not hold full
control, the largest of which is a 50% interest in Shanghai GKN
HUAYU Driveline Systems ("SDS"), within the Automotive business.
The EAIs generated GBP497 million of revenue in 2018, which is not
included in the statutory results but is shown within adjusted
revenue so as not to distort the operating margins reported in the
businesses when the adjusted operating profit earned from these
EAIs is included.
In addition, the profits and losses of EAIs, which are shown
after amortisation of intangible assets, interest and tax in the
statutory results, are adjusted to show the adjusted operating
profit consistent with the adjusted operating profits of the
subsidiaries of the Group. The revenue and profit of EAIs are
adjusted because they are considered to be significant in size and
are important in assessing the performance of the business.
Certain items recognised as fair value items on an acquisition
totalling GBP20 million (2017: GBP6 million), which have been
resolved for more favourable amounts than first anticipated, were
released as an adjusting item to avoid positively distorting
adjusted results.
RECONCILIATION OF ADJUSTED RESULTS TO ANNUALISED RESULTS
2018
GBPm
--------------------------------------------- -----
Adjusted operating profit 847
---------------------------------------------- -----
Reconciling item:
--------------------------------------------- -----
Adjusted operating profit of GKN (1 January
2018 to 18 April 2018) 248
---------------------------------------------- -----
Annualised adjusted operating profit 1,095
---------------------------------------------- -----
FINANCE COSTS AND INCOME
The net finance costs in the year ended 31 December 2018 were
GBP158 million (2017: GBP21 million), which included GBP15 million
(2017: GBPnil) of finance costs treated as adjusting items. These
adjusting items include GBP8 million relating to the fair value
changes on cross-currency swaps entered into by GKN prior to
Melrose ownership, along with GBP7 million relating to the
acceleration of amortisation of debt fees associated with the
previous Melrose bank facility, written off when the new bank
facility was entered into to acquire GKN and the previous facility
was repaid and cancelled. These charges are shown as adjusting
items because of their volatility and non-trading nature.
The net adjusted finance costs in the year ended 31 December
2018 were GBP144 million (2017: GBP21 million), the year-on-year
increase reflecting the increase in the size of the Group and the
new debt facilities following the acquisition of GKN.
Net interest on external bank loans, bonds, overdrafts and cash
balances was GBP98 million (2017: GBP16 million). Melrose uses
interest rate swaps to fix the majority of the interest rate
exposure on its drawn debt. More detail on these swaps is given in
the finance cost risk management section of this review.
In addition, finance charges included an GBP11 million (2017:
GBP2 million) amortisation charge relating to the arrangement costs
of raising the bank facility in 2018, a net interest charge on net
pension liabilities of GBP24 million (2017: GBP1 million), a charge
for the unwind of discounting on long-term provisions of GBP10
million (2017: GBP2 million), of which GBP9 million related to the
unwind of discounts on the loss-making contract provisions
identified within GKN businesses, and GBP1 million relating to the
interest charge in EAIs.
TAX
The statutory results show a tax credit of GBP75 million (2017:
GBP4 million) which arises on a statutory loss before tax of GBP550
million (2017: GBP28 million), a statutory tax rate of 14% (2017:
13%). This rate is lower than the adjusted effective tax rate
because many of the adjusting items, discussed earlier in this
review, do not give rise to tax deductions.
The effective rate on the adjusted profit before tax for the
year ended 31 December 2018 was 23% (2017: 26%). The adjusted tax
rate that is applicable to GKN profits is similar to the expected
average tax rate of the Melrose Group had the acquisition of GKN
not happened. In both cases, the reduction in the tax rate between
2017 and 2018 is predominantly due to the reduction of US Federal
tax rates.
The Group has tax losses and other deferred tax assets with a
value of GBP898 million (31 December 2017: GBP193 million). These
are offset by deferred tax liabilities of GBP1,446 million (31
December 2017: GBP198 million) on intangible assets and GBP177
million (31 December 2017: GBP15 million) of other deferred tax
liabilities. The Group tax losses will generate future cash tax
savings, whereas the deferred tax liabilities on intangible assets
are not expected to give rise to cash tax payments.
Cash tax paid in the year ended 31 December 2018 was GBP66
million (2017: GBP16 million) representing 9% (2017: 6%) of
adjusted profit before tax. This was lower than the effective tax
rate because the Group benefits from certain adjusting items being
tax allowable, from existing tax assets brought forward, and the
new tax losses and other deferred tax assets acquired with GKN.
IFRS 3 "BUSINESS COMBINATIONS"
In accordance with IFRS 3, the GKN assets, liabilities and
accounting policies were reviewed following the acquisition,
resulting in a significant amount of required adjustments to the
acquired GKN Balance Sheet.
A summary of these adjustments is shown in the table below:
GKN Balance
GKN acquired Fair Value Sheet at
Balance Sheet & other Fair Value
at 19 April adjustments GBPm
2018 GBPm
GBPm
------------------------------------------ --------------- -------------- --------------
Goodwill 466 2,056 2,522
------------------------------------------ --------------- -------------- --------------
Intangible assets acquired with business
combinations 488 5,243 5,731
------------------------------------------ --------------- -------------- --------------
Tangible assets, computer software
and development costs 3,043 44 3,087
------------------------------------------ --------------- -------------- --------------
Equity accounted investments (EAIs) 272 240 512
------------------------------------------ --------------- -------------- --------------
Net working capital 886 (131) 755
------------------------------------------ --------------- -------------- --------------
Retirement benefit obligations (1,369) - (1,369)
------------------------------------------ --------------- -------------- --------------
Provisions (144) (1,036) (1,180)
------------------------------------------ --------------- -------------- --------------
Deferred tax and current tax 58 (908) (850)
------------------------------------------ --------------- -------------- --------------
Net debt (1,159) - (1,159)
------------------------------------------ --------------- -------------- --------------
Net other (28) (73) (101)
------------------------------------------ --------------- -------------- --------------
Total Net Assets 2,513 5,435 7,948
------------------------------------------ --------------- -------------- --------------
Third party experts were appointed to value intangible assets,
freehold property, the significant EAI in the Automotive business,
SDS, leasehold property commitments and retirement benefit
obligations. Adjustments identified in respect of these valuations
are included in the table above.
Acquisition related intangible assets identified and
independently valued on the acquisition of GKN totalled GBP5,731
million and are discussed later in this review. A deferred tax
liability of GBP1,285 million was also recognised in respect of the
GKN intangible assets, which is not expected to give rise to a cash
liability.
In addition to the independent valuations, external advisers
carried out a comprehensive series of visits to all GKN sites to
perform balance sheet reviews line by line. These reviews
identified a number of required adjustments, in particular in
respect of net working capital and provisions.
The required adjustments to net working capital included a
GBP252 million reduction in receivables and inventory, partially
offset by the GBP121 million IFRS 3 uplift to the value of
inventory, discussed in the adjusting items section of this review.
Within this, the receivables balance acquired was reduced by GBP63
million, 2%, aligning provisioning policy. The gross reduction in
inventory of GBP189 million included the reclassification of GBP52
million of long-life tooling assets as tangible fixed assets and
GBP137 million, 11% of the acquired balance, relating to inventory
write offs and alignment of provisioning policy.
A significant adjustment to the GKN Balance Sheet was the
requirement to increase provisions to GBP1,180 million, which
included GBP629 million relating to loss-making contracts
identified in GKN at the time of acquisition. These are discussed
later in the provisions section of this review.
ADOPTION OF IFRS 15 "REVENUE FROM CONTRACTS WITH CUSTOMERS" AND
THE FUTURE IMPACT OF IFRS 16 "LEASES"
IFRS 15 was adopted on 1 January 2018 and had a sizeable impact
within the Aerospace division but did not materially impact the
other businesses in the Melrose Group.
The overall impact of IFRS 15 was to recognise a contract asset
which was recorded at a fair value of GBP524 million upon the
acquisition of GKN and predominantly in the Aerospace division. The
impact of IFRS 15 has reduced annual revenue by approximately GBP80
million, mainly as a result of the netting of certain expenses
against revenue that were previously shown within cost of sales,
and to increase annual adjusted operating profit by approximately
GBP15 million, mainly as a result of the earlier recognition of
variable consideration from risk and revenue sharing
partnerships.
IFRS 16 is effective from 1 January 2019 and requires all leases
to be recognised on the Balance Sheet. Currently only finance
leases are recognised on the Balance Sheet, with leases categorised
as operating leases expensed through the Income Statement. The
impact of IFRS 16 will be to recognise a lease liability in the
range GBP550 million to GBP600 million, with a corresponding asset
in the Balance Sheet. The expected annual impact of IFRS 16 on the
Income Statement in 2019 will be to increase operating profit, but
is not expected to be significant, and will be more than offset by
an associated increase in finance costs in the year of
approximately GBP20 million. In addition, approximately GBP75
million of costs will be reclassified from a lease expense to
depreciation.
CASH GENERATION AND MANAGEMENT
Group net debt at 31 December 2018, translated at closing
exchange rates (being US $1.27 and EUR1.11), was GBP3,482 million
(31 December 2017: GBP572 million). For bank covenant purposes, the
Group's net debt is calculated at average exchange rates (being US
$1.33 and EUR1.13), to align the calculation with the currency
rates used to calculate profits, and was GBP3,396 million.
The movement in net debt in the year is summarised as
follows:
2018 2017
Movement in Group net debt GBPm GBPm
----------------------------------------------------- -------- -----
At 1 January (572) (542)
----------------------------------------------------- -------- -----
Non-trading items:
----------------------------------------------------- -------- -----
Net debt acquired with GKN (1,159) -
----------------------------------------------------- -------- -----
Cash consideration for GKN (81 pence per share) (1,398) -
----------------------------------------------------- -------- -----
Payment of GKN 2017 final dividend (107) -
----------------------------------------------------- -------- -----
Acquisition costs and related transaction tax costs (177) (3)
----------------------------------------------------- -------- -----
Acquisition of IntelliVision Inc. (26) -
----------------------------------------------------- -------- -----
Dividend paid to Melrose shareholders (129) (63)
----------------------------------------------------- -------- -----
Foreign exchange and other non-cash movements (110) 48
----------------------------------------------------- -------- -----
Cash flow from non-trading items (3,106) (18)
----------------------------------------------------- -------- -----
Free cash flow (after all costs including tax) 196 (12)
----------------------------------------------------- -------- -----
At 31 December at closing exchange rates (3,482) (572)
----------------------------------------------------- -------- -----
At 31 December at average exchange rates (3,396) (595)
----------------------------------------------------- -------- -----
The significant increase in Group net debt in the year includes
GBP3,106 million relating to non-trading items, of which GBP2,867
million, 92% was in respect of acquisition related activity. The
remaining 8% was in respect of the GBP129 million payment of
dividends to Melrose shareholders and GBP110 million of foreign
exchange and non-cash movements.
The GKN net debt acquired on 19 April 2018 was higher than GKN
plc announced for 31 December 2017 predominantly because of trading
movements, the payment of GBP129 million of GKN defence costs by
the GKN Board and a working capital outflow of GBP182 million which
included resolving the previous late payments to suppliers.
An analysis of the free cash flow (after all costs) is shown in
the table below:
2018 2017
Free cash flow (after all costs) GBPm GBPm
--------------------------------------------------- ------ -----
Adjusted operating cash flow (pre capex) 921 298
--------------------------------------------------- ------ -----
Net capital expenditure (359) (49)
--------------------------------------------------- ------ -----
Net interest and net tax paid (172) (31)
--------------------------------------------------- ------ -----
Defined benefit pension contributions (102) (4)
--------------------------------------------------- ------ -----
Incentive scheme payments (including associated
employer's tax) - (148)
--------------------------------------------------- ------ -----
Restructuring (122) (48)
--------------------------------------------------- ------ -----
Dividend income from equity accounted investments 66 -
--------------------------------------------------- ------ -----
Net other (36) (30)
--------------------------------------------------- ------ -----
Free cash flow (after all costs) 196 (12)
--------------------------------------------------- ------ -----
The total free cash flow (after all costs) of GBP196 million is
after cash spent on restructuring projects of GBP122 million (2017:
GBP48 million). The restructuring activities are described earlier
in this review, in the reconciliation of statutory results to
adjusted results section.
In addition, net capital expenditure spent in the year was
GBP359 million (2017: GBP49 million), representing 1.3x
depreciation.
Net interest paid in the year was GBP106 million (2017: GBP15
million) and tax was GBP66 million (2017: GBP16 million)
representing 9% (2017: 6%) of adjusted profit before tax. This rate
was lower than the effective tax rate as explained earlier in the
tax section of this review.
Defined benefit pension scheme cash contributions of GBP102
million included GBP56 million of the Melrose commitment to
contribute GBP150 million to the GKN UK 2012 and 2016 plans within
the first twelve months of GKN ownership, in addition to ongoing
payments. The remainder of this upfront commitment is to be paid by
19 April 2019 as agreed with the Trustees.
ASSETS AND LIABILITIES
The summarised Melrose Group assets and liabilities are shown
below:
2018 2017
GBPm GBPm
---------------------------------------------- -------- ------
Goodwill and intangible assets acquired with
business combinations 10,591 2,229
---------------------------------------------- -------- ------
Tangible fixed assets, computer software and
development costs 3,651 228
---------------------------------------------- -------- ------
Equity accounted investments 492 -
---------------------------------------------- -------- ------
Net working capital 960 241
---------------------------------------------- -------- ------
Retirement benefit obligations (1,413) (18)
---------------------------------------------- -------- ------
Provisions (1,445) (209)
---------------------------------------------- -------- ------
Deferred tax and current tax (788) (27)
---------------------------------------------- -------- ------
Net other (305) 13
---------------------------------------------- -------- ------
Total 11,743 2,457
---------------------------------------------- -------- ------
These assets and liabilities are funded by:
2018 2017
GBPm GBPm
---------- --------- --------
Net debt (3,482) (572)
---------- --------- --------
Equity (8,261) (1,885)
---------- --------- --------
Total (11,743) (2,457)
---------- --------- --------
GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW
The total value of goodwill as at 31 December 2018 was GBP4,052
million (31 December 2017: GBP1,432 million) and intangible assets
acquired with business combinations was GBP6,539 million (31
December 2017: GBP797 million). These items are split by division
as follows:
Powder Nortek Other Industrial
Aerospace Automotive Metallurgy Air & Security GBPm Total
31 December 2018 GBPm GBPm GBPm GBPm GBPm
------------------------- ----------- ------------ ----------- ---------------- ---------------- ---------
Goodwill 974 1,049 529 973 527 4,052
------------------------- ----------- ------------ ----------- ---------------- ---------------- ---------
Intangible assets
acquired with business
combinations 3,410 1,478 736 543 372 6,539
------------------------- ----------- ------------ ----------- ---------------- ---------------- ---------
Total goodwill and
intangible assets 4,384 2,527 1,265 1,516 899 10,591
------------------------- ----------- ------------ ----------- ---------------- ---------------- ---------
The goodwill and intangible assets have been tested for
impairment as at 31 December 2018. In accordance with IAS 36
"Impairment of assets" the recoverable amount is assessed as being
the higher of the fair value less costs to sell and the value in
use.
The Board is comfortable that no impairment is required in
respect of the goodwill and intangible assets of the recently
acquired GKN businesses or the Nortek businesses.
Both Security & Smart Technology and Ergotron have
manufacturing facilities located in China that export to the US and
their results in 2018, and the ongoing market environment, have
been negatively impacted by the increase in US tariffs placed on
Chinese goods. The intention is to pass any increased tariffs
through to customers, but the uncertainty around how customers will
react and/or a further escalation of US tariffs on Chinese goods
and the impact that this could have on the behaviour of competitors
means that there is a risk that future forecasts could be
negatively impacted.
In the previous year, the assets of the Brush business were
impaired by GBP145 million to a value of GBP300 million, using the
fair value less costs to sell basis. This method of valuation, at
the time, was higher than the value in use method, because that
excluded the benefits of the restructuring announced in February
2018, and would have given a value of GBP178 million.
The restructuring of the Brush business that was announced in
February 2018 followed a full review of the power generation
industry and highlighted the surplus generator manufacturing
capacity existing in the market. The restructuring programme has
been implemented in line with plan.
However, in 2018 the conditions in the generator services
business have also become more challenging as the year has
progressed, with competitors taking a decision to look to service
opportunities to offset surplus capacity issues in the generator
manufacturing market. Alongside this, customers and competitors in
the power generation sector have continued to reorganise and
restructure in the second half of 2018.
These newly developed generator services market conditions and
the decisions from significant market participants have had a
direct impact on the trading of Brush and reduced forecasts in the
Brush generator servicing business.
At 31 December 2018, the recoverable amount of the Brush assets,
using the reduced forecasts and the value in use method, was GBP103
million, resulting in a further impairment to Brush goodwill of
GBP123 million in the year.
PROVISIONS
Total provisions at 31 December 2018 were GBP1,445 million (31
December 2017: GBP209 million), a significant increase from the
previous year, due to the acquisition of GKN and inheriting
provisions with a fair value of GBP1,180 million in the opening
Balance Sheet, discussed earlier in this review.
The following table details the movement in provisions in the
year:
Total
GBPm
--------------------------------------------------------------- -----
At 1 January 2018 209
--------------------------------------------------------------- -----
Acquisition of GKN 1,180
--------------------------------------------------------------- -----
Net charge to adjusted operating profit 89
--------------------------------------------------------------- -----
Net charge shown as an adjusting item in the Income Statement 168
--------------------------------------------------------------- -----
Spend against provisions (221)
--------------------------------------------------------------- -----
Unwind of loss-making contract provision (63)
--------------------------------------------------------------- -----
Other (including foreign exchange) 83
--------------------------------------------------------------- -----
At 31 December 2018 1,445
--------------------------------------------------------------- -----
As discussed earlier in this review, GBP1,180 million of
provisions were recognised on the acquisition of GKN. These
included GBP629 million in respect of loss-making contracts, of
which GBP63 million was utilised in the Income Statement in the
eight months of ownership. Approximately half of the loss-making
contract provisions were recorded in the Aerospace division,
approximately one third in the Automotive division and the
remainder predominantly within Powder Metallurgy. The loss-making
contract review identified approximately 10% of GKN's annual
revenue requiring some provision, with the majority of relevant
contracts spanning multiple years and with a tail of certain
smaller contracts spanning approximately fifteen years.
The provisions in GKN also include warranty related items
totalling GBP295 million and environmental and litigation related
items of GBP123 million, equivalent to 1.0% and 0.4% respectively
of the previous three years total revenue.
The increase to provisions in the year arising from a net charge
to adjusted operating profit of GBP89 million relates primarily to
warranty, product liability and workers' compensation, which are
matched by similar cash payments in the year.
The increase to provisions in the year arising from the net
charge shown as an adjusting item in the Income Statement of GBP168
million, primarily related to charges associated with
restructuring, which are discussed in the adjusting items section
of this review. During the year GBP111 million of cash was spent on
restructuring provisions.
Included within other movements in provisions are foreign
exchange movements and the unwind of discounting on certain
provisions.
PENSIONS AND POST-EMPLOYMENT OBLIGATIONS
Melrose operates a number of defined benefit pension schemes and
retiree medical plans across the Group, accounted for using IAS 19
Revised: "Employee Benefits". During the year the acquisition of
GKN has significantly increased the Melrose Group's IAS 19 net
deficit, with GBP1,402 million of the GBP1,413 million Group net
deficit recorded in the Balance Sheet at 31 December 2018 relating
to the acquired business.
At 31 December 2018, total plan assets of the Group's defined
benefit pension plans were GBP3,273 million (31 December 2017:
GBP524 million) and total plan liabilities were GBP4,686 million
(31 December 2017: GBP542 million), of which GBP749 million (31
December 2017: GBP4 million) related to unfunded plans.
The most significant pension plans in the Group are the GKN UK
2012 and 2016 plans. The net accounting deficit on these plans was
GBP579 million at 31 December 2018. These plans had assets at 31
December 2018 of GBP2,529 million and liabilities of GBP3,108
million. In addition, there are GKN UK post-employment medical
plans with a net deficit of GBP9 million at 31 December 2018.
Melrose committed to contribute GBP150 million in total to the
GKN UK 2012 and 2016 plans in the first twelve months of ownership,
as well as ongoing annual contributions of GBP60 million. In
addition, Melrose has committed to contribute GBP270 million upon
the disposal of Powder Metallurgy, 10% of the proceeds from
disposal of other GKN businesses and 5% of the proceeds from
disposal of non-GKN businesses to the GKN UK pension plans. These
commitments cease when the funding target which has been agreed
with Trustees is achieved, being gilts plus 25 basis points for the
GKN UK 2016 plan and gilts plus 75 basis points for the GKN UK 2012
plan.
The GKN UK 2012 and 2016 Plans are closed to new members and the
2012 plan is closed to the accrual of future benefits for current
members, whilst the 2016 plan has no active members.
The values of the Group plans were updated at 31 December 2018
by independent actuaries to reflect the latest key assumptions. A
summary of the assumptions used are shown in note 12 of the
Preliminary Announcement.
It is noted that a 0.1 percentage point decrease in the discount
rate would increase the pension accounting liabilities of the
Group, on an IAS 19 basis, by GBP73 million, or 2%, and a 0.1
percentage point increase to inflation would increase the
liabilities by GBP52 million, or 1%. Furthermore, an increase by
one year in the expected life of a 65 year old member would
increase the pension liabilities on these plans by GBP163 million,
or 3%.
Contributions to the Melrose Group defined benefit pension plans
and post-employment plans are expected to be approximately GBP192
million in 2019, consisting of GBP94 million of one-off special
payments, being the balance of the GBP150 million upfront
commitment, and GBP98 million of ongoing commitments.
FINANCIAL RISK MANAGEMENT
The financial risks the Group faces were considered and
re-evaluated following the acquisition of GKN and policies have
been implemented to appropriately deal with each risk. The most
significant financial risks are considered to be liquidity risk,
finance cost risk, exchange rate risk, contract and warranty risk
and commodity cost risk.
These are discussed in turn below.
Liquidity risk management
The Group's net debt position at 31 December 2018 was GBP3,482
million (31 December 2017: GBP572 million).
A new multi-currency committed bank facility was entered into on
17 January 2018 to assist with the acquisition of GKN, which
replaced the previous bank facility of US $1.25 billion. The US
$1.25 billion facility was repaid and cancelled on the 30 April
2018. The new facility included a GBP1.5 billion multi-currency
term loan with a duration of three years and six months. In
addition, the new facility included a five year multi-currency
revolving credit facility, denominated GBP1.1 billion, US $2.0
billion and EUR0.5 billion.
On 29 October 2018, GBP663 million of the new term loan was
surplus to requirements, and therefore cancelled, because potential
change of control clauses on the bonds were not exercised by the
relevant bond holders.
At 31 December 2018 the drawings on the term loan were GBP100
million and US $960 million. There was a significant amount of
headroom on the multi-currency committed revolving credit facility,
as at 31 December 2018. Applying the exchange rates at 31 December
2018 the headroom equated to GBP1,352 million, which includes an
amount available to replace the 2019 bond when it matures, or
before. There are also a number of uncommitted overdraft, guarantee
and borrowing facilities made available to the Group. These
uncommitted facilities have been lightly used.
Cash, deposits and marketable securities amounted to GBP415
million at 31 December 2018 (31 December 2017: GBP16 million) and
are offset to arrive at the Group net debt position of GBP3,482
million (31 December 2017: GBP572 million). The combination of this
cash and the headroom on the new facility allows the Directors to
consider that the Group has sufficient access to liquidity for its
current needs. The Board takes careful consideration of
counterparty risk with banks when deciding where to place cash on
deposit.
As with previous facilities the new facility has two financial
covenants being a net debt to adjusted EBITDA covenant and an
interest cover covenant, both of which are tested half yearly in
June and December.
The EBITDA covenant test is set at 3.5x leverage for each of the
half yearly measurement dates for the remainder of the term of the
facility. For the year ended 31 December 2018 it was 2.3x (31
December 2017: 1.9x), showing reasonable headroom compared to the
covenant test.
The interest cover covenant is set at 4.0x throughout the life
of the facility and was 11.6x at 31 December 2018 (31 December
2017: 19.6x), affording comfortable headroom compared to the
covenant test.
The GKN net debt at acquisition included three capital market
borrowings totalling GBP1.1 billion, which are detailed in the
table below. The bonds maturing in 2019 and 2022 have
cross-currency swaps associated with them.
Interest rate
Notional Cross-currency on
amount Coupon swaps swaps
Maturity date GBPm % p.a. million % p.a.
---------------- ---------- ------- -------------- --------------
October 2019 350 6.75% US $578 6.80%
---------------- ---------- ------- -------------- --------------
September 2022 450 5.375% US $373 5.70%
EUR284 3.87%
---------------- ---------- ------- -------------- --------------
May 2032 300 3.375% n/a n/a
---------------- ---------- ------- -------------- --------------
The coupon rate on the GBP300 million bond, maturing in 2032 is
expected to increase to 4.625% from May 2019.
The series of cross-currency swaps which were acquired with GKN
had a fair value liability at the date of acquisition of GBP109
million. At 31 December 2018 they were valued at a liability of
GBP199 million, the rise being predominantly due to the change in
foreign exchange rates.
The bonds remain within the Group at 31 December 2018, but to
simplify the corporate reporting requirements of the Group, the
2019 bonds were transferred onto the Professional Securities Market
in September 2018 and the 2022 and 2032 bonds will transfer during
March 2019. Bond holders and rating agencies no longer require
Consolidated Financial Statements for GKN Holdings Limited, but
instead will receive the detailed information they require from the
Melrose Group Consolidated Financial Statements. The 2022 and 2032
bond holders will have the same guarantees from the Melrose Group
companies as those provided to the banks lending in the new bank
facility.
The Group has a small number of uncommitted working capital
programmes, which predominantly relate to programmes inherited as
part of the GKN acquisition. These programmes provide favourable
financing terms on eligible customer receipts and competitive
financing terms to suppliers on eligible supplier payments.
Businesses which participate in the receivables working capital
programme have the ability to choose whether to receive payment
earlier than the normal due date, for specific customers on a
non-recourse basis. Due to the short-term nature of the financing,
the interest cost to the Group for this beneficial cash flow is
favourable compared to the interest cost of the Group's committed
bank facilities. As at 31 December 2018, the drawings on these
facilities were GBP139 million, compared to GBP189 million by GKN
as at 31 December 2017.
Finance cost risk management
The bank margin on the bank facility depends on the Group
leverage, and ranges from 0.75% to 2.0% on the term loan, and 0.95%
to 2.25% on the revolving credit facility. As at 31 December 2018
the margin was 1.4% on the term loan and 1.65% on the revolving
credit facility (31 December 2017: 1.35% on the Melrose committed
bank debt).
The Group holds interest rate swap instruments to fix the cost
of LIBOR. The policy of the Board is to hedge approximately 70% of
the interest rate exposure of the Group. Given the recent
restructuring of the bonds and noting that the 2019 bonds mature
this year, the Group is in the process of increasing the interest
rate swaps to be in line with Group policy. Under the terms of the
existing swap arrangements and excluding the bank margin, the Group
will pay a weighted average fixed cost of approximately 2% until
the swaps terminate on 17 January 2023.
The average cost of the debt for the new enlarged Group is
expected to be approximately 3.8% over the next 12 months.
Exchange rate risk management
The Group trades in various countries around the world and is
exposed to movements in a number of foreign currencies. The Group
therefore carries exchange rate risk that can be categorised into
three types: transaction, translation and disposal related risk, as
described in the paragraphs below. The Melrose policy is designed
to protect against the majority of the cash risks but not the
non-cash risks.
The most common exchange rate risk is the transaction risk the
Group takes when it invoices a customer or purchases from suppliers
in a different currency to the underlying functional currency of
the business. The Melrose policy is to review transactional foreign
exchange exposures and place contracts quarterly on a rolling
basis. To the extent the cash flows associated with a transactional
foreign exchange risk are committed Melrose will hedge 100%. For
forecast cash flows, Melrose hedges a proportion of the expected
cash flows, with the percentage being hedged lowering as the time
horizon lengthens. The average time horizons are longer for GKN
Aerospace, GKN Automotive and Powder Metallurgy to reflect the
long-term nature of the contracts within these divisions.
Typically, the Group hedges around 90% of foreign exchange
exposures expected over the next twelve months and approximately
60% to 70% of exposures expected between twelve and twenty four
months. This policy does not eliminate the cash risk but does bring
some certainty to it.
The translation rate risk is the effect on the Group results in
the period due to the movement of exchange rates used to translate
foreign results into Sterling from one period to the next. No
specific exchange instruments are used to protect against the
translation risk because it is a non-cash risk to the Group, unless
foreign currency is converted to Sterling. However, the Group has
debt drawn in Euros and US Dollars, and the hedge of having debt
drawn in these currencies funding the trading units with US Dollars
or Euro functional currencies protects against some of the Balance
Sheet and banking covenant translation risk.
Lastly, and potentially most significantly for Melrose, exchange
rate risk arises when a business that is predominantly based in a
foreign currency is sold. The proceeds for those businesses may be
received in a foreign currency and therefore an exchange rate risk
may arise on conversion of foreign currency proceeds into Sterling,
for instance to pay a dividend or Capital Return to shareholders.
Protection against this risk is considered on a case-by-case
basis.
Exchange rates used for currencies most relevant to the Group in
the year are:
Twelve month average 8 month average Closing
US Dollar rate (GKN businesses) rate
----------- --------------------- ------------------ --------
2018 1.33 1.31 1.27
----------- --------------------- ------------------ --------
2017 1.29 N/A 1.35
Euro
----------- --------------------- ------------------ --------
2018 1.13 1.13 1.11
----------- --------------------- ------------------ --------
2017 1.14 N/A 1.13
A 10 percent strengthening of the major currencies, if they were
to strengthen in isolation against all other currencies, within the
Group would have the following impact on the re-translation of
annualised adjusted operating profit into Sterling:
GBPm USD EUR CNY Other
--------------------------------------- ---- ---- ---- ------
Movement in adjusted operating profit 72 24 11 17
--------------------------------------- ---- ---- ---- ------
% impact on adjusted operating profit 6% 2% 1% 2%
--------------------------------------- ---- ---- ---- ------
The impact from transactional foreign exchange exposures is not
material in the short term due to hedge coverage being
approximately 90%.
A 10 percent strengthening in either the US Dollar or Euro would
have the following impact on net debt as at 31 December 2018:
GBPm USD EUR
------------------ ---- ----
Increase in debt 176 59
-------------------- ---- ----
Contract and warranty risk management
Under Melrose management a robust bid and contract management
process exists in the businesses, which includes thorough reviews
of contract terms and conditions, contract-specific risk
assessments and clear delegation of authority for approvals. These
processes aim to ensure effective management of risks associated
with complex contracts. The financial risks connected with
contracts and warranties include the consideration of commercial,
legal and warranty terms and their duration, which are all
considered carefully by the businesses and Melrose centrally before
being entered into.
Commodity Risk Management
The cumulative expenditure on commodities is important to the
Group and under Melrose management the risk of base commodity costs
increasing is mitigated, wherever possible, by passing on the cost
increases to customers or by having suitable purchase agreements
with suppliers which fix the price over a future period. These
risks are also managed through sourcing policies, including the use
of multiple suppliers, where possible, and procurement contracts
where prices are agreed in advance to limit exposure to price
volatility. On occasion, Melrose does enter into financial
instruments on commodities when this is considered to be the most
efficient way of protecting against price movements.
BREXIT
Whilst the effect of Brexit on the European economy is unclear
at present, due to the Group's geographically balanced
manufacturing footprint, resulting tariffs and customs clearance
are not expected to have material negative effects on the Group as
a whole.
Sales of product between the UK and Europe are a small minority
of the Group's overall revenues. Aerospace components are typically
exempt from import duties under global agreements, whilst
Automotive parts tariffs typically range between tariff free and up
to 7%, with the blended result somewhere midway between. However
the outcome of any Brexit agreement is unknown, which is also the
case for any legal or regulatory changes.
On a wider macro level the Group's financial results may be
impacted by general lack of confidence and economic instability
arising from a delayed or disruptive exit from the EU. Depending on
the outcome of Brexit, the Group could be exposed to translational
and transactional foreign exchange fluctuations. The impact from
movements in foreign exchange rates on translating profits into
Sterling is provided in the table above, whilst transactional
exposures are generally well protected in the short-term due to
approximately 90% of exposures being hedged for the next twelve
months.
The Board will continue to monitor Brexit developments and
adjust the plans for its businesses accordingly.
POST BALANCE SHEET EVENT
On 6 March 2019 the Group announced the agreement to sell
Walterscheid Powertrain to One Equity Partners, a US-based private
equity firm. In addition the Group announced the completion of the
sale of the minority 43.57% interest in Société Anonyme Belge de
Constructions Aéronautiques (SABCA), previously held within the
Aerospace reporting segment, to SABCA's majority shareholder,
Dassault Belgique Aviation S.A. The sale of Walterscheid Powertrain
is subject to the customary regulatory conditions and is expected
to complete in the first half of this year. The combined net
proceeds of the sales are approximately GBP200 million.
GOING CONCERN
The Melrose Group's business activities, together with the
factors likely to affect its future development, performance and
position are set out in the Chief Executive's Report. In addition,
the Consolidated Financial Statements include details of the
Melrose Group's borrowing facilities and hedging activities along
with the processes for managing its exposures to liquidity risk,
finance cost risk, exchange rate risk, contract and warranty risk
and commodity cost risk.
The Melrose Group has a strong record of cash management, and,
as a consequence, the Directors believe that the Melrose Group is
well placed to manage its business risks successfully despite the
more economically uncertain environment.
After making enquiries, the Directors have a reasonable
expectation that the Melrose Group has adequate resources to
continue in operational existence for the foreseeable future. For
this reason, they continue to adopt the going concern basis in
preparing the Financial Statements.
Geoffrey Martin
Group Finance Director
7 March 2019
CAUTIONARY STATEMENT
This announcement contains forward-looking statements. These
statements are made in good faith based on the information
available up to the time of the approval of this announcement, and
should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying any
such forward-looking information. Accordingly, readers are
cautioned not to place undue reliance on any such forward-looking
statements. Subject to compliance with applicable laws and
regulations, the Company does not undertake any obligation to
update any forward-looking statement to reflect events or
circumstances after the date of this announcement.
This announcement has been prepared solely to provide
information to shareholders to assess the Company's strategies and
the potential for those strategies to succeed, and neither the
Company nor its directors accept any liability to any other person
save as would arise under English law.
Melrose Industries PLC
Consolidated Income Statement
Year ended Year ended
31 December 31 December
2018 2017
Continuing operations Notes GBPm GBPm
------------------------------------- ------- ------------ ------------
Revenue 3 8,605 2,092
Cost of sales (6,920) (1,439)
------------------------------------- ------- ------------ ------------
Gross profit 1,685 653
Share of results of equity accounted
investments 10 34 -
Net operating expenses (2,111) (660)
------------------------------------- ------- ------------ ------------
Operating loss 3, 4 (392) (7)
Finance costs (163) (22)
Finance income 5 1
Loss before tax (550) (28)
Tax 5 75 4
------------------------------------- ------- ------------ ------------
Loss after tax for the year (475) (24)
Attributable to:
Owners of the parent (475) (24)
Non-controlling interests - -
------------------------------------- ------- ------------ ------------
(475) (24)
Earnings per share
- Basic 7 (12.0)p (1.2)p
- Diluted 7 (12.0)p (1.2)p
Adjusted Results
Adjusted revenue 3 9,102 2,095
Adjusted operating profit 3, 4 847 279
Adjusted profit before tax 4 703 258
Adjusted profit after tax 4 539 191
Adjusted basic earnings per share 7 13.3p 9.9p
Adjusted diluted earnings per share 7 13.3p 9.8p
------------------------------------- ------- ------------ ------------
Melrose Industries PLC
Consolidated Statement of Comprehensive Income
Year ended Year ended
31 December 31 December
2018 2017
Notes GBPm GBPm
------------------------------------------------- ------- ------------ ------------
Loss for the year (475) (24)
------------------------------------------------- ------- ------------ ------------
Items that will not be reclassified subsequently
to the Income Statement:
Net remeasurement (loss)/gain on retirement
benefit obligations (36) 12
Income tax credit/(charge) relating to
items that will not be reclassified 5 9 (1)
------------------------------------------------- ------- ------------ ------------
(27) 11
Items that may be reclassified subsequently
to the Income Statement:
Currency translation on net investments 625 (133)
Share of other comprehensive income from
equity accounted investments 9 -
Transfer to Income Statement from equity
of cumulative translation differences
on disposal of foreign operations - (1)
(Losses)/gains on hedge relationships (97) 9
Transfer to Income Statement on hedge
relationships (2) (4)
Income tax credit/(charge) relating to
items that may be reclassified 5 29 (1)
564 (130)
Other comprehensive income/(expense)
for the year 537 (119)
Total comprehensive income/(expense) for the
year 62 (143)
Attributable to:
Owners of the parent 44 (143)
Non-controlling interests 18 -
------------------------------------------------- ------- ------------ ------------
62 (143)
Melrose Industries PLC
Consolidated Statement of Cash Flows
Year ended Year ended
31 December 31 December
2018 2017
Continuing operations Notes GBPm GBPm
---------------------------------------------- ------- ------------ ------------
Net cash from operating activities 14 373 32
Investing activities
Disposal of businesses, net of cash disposed (4) 10
Purchase of property, plant and equipment (344) (48)
Proceeds from disposal of property, plant
and equipment 20 2
Purchase of computer software and capitalised
development costs (35) (3)
Dividends received from equity accounted
investments 66 -
Equity accounted investment additions (3) -
Acquisition of subsidiaries, net of cash
acquired(1) (1,009) (9)
Interest received 5 1
Net cash used in investing activities (1,304) (47)
Financing activities
Purchase of non-controlling interests (224) -
Costs of issuing shares (1) -
Repayment of borrowings (820) -
New bank loans raised 2,558 56
Costs of raising debt finance (51) -
Repayment of finance leases - (1)
Dividends paid to non-controlling interests (1) -
Dividends paid to owners of the parent 6 (129) (63)
------------ ------------
Net cash from/(used in) financing activities 1,332 (8)
Net increase/(decrease) in cash and cash
equivalents 401 (23)
Cash and cash equivalents at the beginning
of the year 14 16 42
Effect of foreign exchange rate changes 14 (2) (3)
Cash and cash equivalents at the end
of the year 14 415 16
(1) Comprises consideration of GBP1,316 million, net of cash and
cash equivalents acquired of GBP307 million (note 9).
As at 31 December 2018, the Group had net debt of GBP3,482
million (31 December 2017: GBP572 million). A reconciliation of the
movement in net debt is shown in note 14.
Melrose Industries PLC
Consolidated Balance Sheet
31 December 31 December
2018 2017
Notes GBPm GBPm
------------------------------------------ ------- ----------- -------------
Non-current assets
Goodwill and other intangible assets 11,071 2,238
Property, plant and equipment 3,171 219
Interests in equity accounted investments 492 -
Deferred tax assets 149 49
Derivative financial assets 26 4
Trade and other receivables 504 2
15,413 2,512
Current assets
Inventories 1,489 276
Trade and other receivables 2,328 332
Derivative financial assets 15 10
Current tax assets 74 -
Cash and cash equivalents 415 16
4,321 634
Total assets 3 19,734 3,146
Current liabilities
Trade and other payables 2,583 367
Interest-bearing loans and borrowings 377 -
Finance lease obligations 5 -
Derivative financial liabilities 204 1
Current tax liabilities 137 7
Provisions 11 381 92
3,687 467
Net current assets 634 167
Non-current liabilities
Trade and other payables 778 2
Interest-bearing loans and borrowings 3,378 588
Finance lease obligations 52 -
Derivative financial liabilities 227 -
Deferred tax liabilities 874 69
Retirement benefit obligations 12 1,413 18
Provisions 11 1,064 117
7,786 794
Total liabilities 3 11,473 1,261
Net assets 8,261 1,885
Equity
Issued share capital 13 333 133
Share premium account 8,138 1,493
Merger reserve 109 109
Other reserves (2,330) (2,330)
Hedging reserve (67) 8
Translation reserve 562 (66)
Retained earnings 1,492 2,538
------------------------------------------- -------
Equity attributable to owners of
the parent 8,237 1,885
Non-controlling interests 24 -
Total equity 8,261 1,885
The Financial Statements were approved and authorised for issue
by the Board of Directors on 7 March 2019 and were signed on its
behalf by:
......................................................
...................................................
Geoffrey Martin Simon Peckham
Group Finance Director Chief Executive
Melrose Industries PLC
Consolidated Statement of Changes in Equity
Equity
Issued Share attributable Non-controlling
share premium Other Translation to owners interests Total
capital account Merger reserves Hedging reserve Retained of the GBPm Equity
GBPm GBPm reserve GBPm reserve GBPm earnings parent GBPm
GBPm GBPm GBPm GBPm
----------------- -------- ----------------- ------------ -------------- --------- ------------ ------------- ---------------- ---------------- ---------
At 1 January 2017 129 1,493 112 (2,330) 4 68 2,686 2,162 - 2,162
Loss for the year - - - - - - (24) (24) - (24)
Other
comprehensive
income/(expense) - - - - 4 (134) 11 (119) - (119)
----------------- --------- ------------ ---------------- ---------------- ---------
Total
comprehensive
income/(expense) - - - - 4 (134) (13) (143) - (143)
Dividends paid - - - - - - (63) (63) - (63)
Equity-settled
share-based
payments - - - - - - 10 10 - 10
Deferred tax on
share-based
payment
transactions - - - - - - 34 34 - 34
Incentive scheme
related 4 - (3) - - - (116) (115) - (115)
At 31 December
2017 133 1,493 109 (2,330) 8 (66) 2,538 1,885 - 1,885
Loss for the year - - - - - - (475) (475) - (475)
Other
comprehensive
(expense)/income - - - - (75) 628 (34) 519 18 537
----------------- -------- ----------------- ------------ -------------- --------- ------------ ------------- ---------------- ---------------- ---------
Total
comprehensive
(expense)/income - - - - (75) 628 (509) 44 18 62
Acquisition of
GKN(1) 169 5,631 - - - - - 5,800 857 6,657
Purchase of
non-controlling
interests 31 1,014 - - - - (419) 626 (850) (224)
Implementation of
IFRS 9(2) - - - - - - (2) (2) - (2)
Dividends paid - - - - - - (129) (129) (1) (130)
Equity-settled
share-based
payments - - - - - - 13 13 - 13
At 31 December
2018 333 8,138 109 (2,330) (67) 562 1,492 8,237 24 8,261
(1) Relates to the purchase of approximately 85% of the issued
share capital of GKN plc. The amount recognised within the share
premium account for the acquisition of GKN of GBP5,631 million is
net of GBP1 million for costs associated with issuing shares.
(2) The Group adopted IFRS 9 on 1 January 2018. See note 1 for
details.
Notes to the Financial Statements
1. Corporate information
The financial information included within this Preliminary
Announcement does not constitute the Company's statutory Financial
Statements for the years ended 31 December 2018 or 31 December 2017
within the meaning of s435 of the Companies Act 2006, but is
derived from those Financial Statements. Statutory Financial
Statements for the year ended 31 December 2017 have been delivered
to the Registrar of Companies and those for the year ended 31
December 2018 will be delivered to the Registrar of Companies
during April 2019. The auditor has reported on those Financial
Statements; their reports were unqualified, did not draw attention
to any matters by way of emphasis and did not contain statements
under s498(2) or (3) of the Companies Act 2006.
While the financial information included in this Preliminary
Announcement has been prepared in accordance with the recognition
and measurement criteria of International Financial Reporting
Standards ("IFRSs"), this announcement does not itself contain
sufficient information to comply with IFRSs. The Company expects to
publish full Financial Statements that comply with IFRSs during
April 2019.
The Group has adopted a number of Standards and Interpretations
which became mandatory during the current financial year. The
adoption of these new Standards and Interpretations has not had a
significant impact on the comparative amounts reported in this
Preliminary Announcement, however, does impact results reported in
the current year. The most significant changes relate to IFRS 15:
"Revenue from Contracts with Customers" and IFRS 9: "Financial
Instruments".
The Group adopted IFRS 15 on 1 January 2018 using the full
retrospective approach. Due to the immaterial impact of IFRS 15 on
the Group for the year ended 31 December 2017, no further
disclosure is provided on the comparative results or balance sheet
position. The GKN IFRS 15 impact forms part of the acquired
business and therefore is not included in the transitional impact
within this Preliminary Announcement. The impact of IFRS 15 on the
enlarged Group reduced annual revenue by approximately GBP80
million, due to the reclassification of certain costs. There was a
GBP15 million increase in operating profit, which principally
relates to recognition of variable consideration.
The Group adopted IFRS 9 on 1 January 2018. IFRS 9 replaces IAS
39 and the main impacts relate to; a) classification and
measurement of financial assets and liabilities, b) impairment of
financial assets, and c) hedge accounting. The Group has elected
not to restate the comparatives but instead record any adjustments
identified in retained earnings in line with the transition
arrangement within the standard. Following management's review, a
GBP2 million reduction in net assets was identified. The GKN IFRS 9
impact forms part of the acquired business and therefore is not
included in the transitional impact within this Preliminary
Announcement.
The Directors do not expect that the adoption of Standards and
Interpretations in issue but not yet effective, with the exception
of IFRS 16, will have a material impact on the Financial Statements
of the Group in future periods.
IFRS 16 is effective for accounting periods beginning on or
after 1 January 2019. IFRS 16 will supersede the current lease
guidance including IAS 17: "Leases" and related interpretations. It
will require all leases to be recognised on the Balance Sheet.
Currently, IAS 17 only requires arrangements categorised as finance
leases to be recognised on the Balance Sheet, with other
arrangements categorised as operating leases not recognised on the
Balance Sheet but expensed through the Income Statement
instead.
The impact of IFRS 16 will be to recognise a lease liability and
a corresponding asset in the Balance Sheet for leases currently
classified as operating leases, except for short-term leases and
leases of low value assets. There will also be a specific
reclassification from operating costs to finance costs.
IFRS 16 will be adopted for the year ending 31 December 2019 via
a modified retrospective approach and it is anticipated that the
right-of-use asset recognised on transition will be measured at an
amount materially equal to the lease liability. At 31 December
2018, the Group had non-cancellable operating lease commitments of
GBP710 million. A preliminary assessment has been undertaken
involving all businesses. This entailed a review of all
arrangements to identify those affected by IFRS 16. Future cash
flow obligations have been collated for each identified lease and
the associated lease liability has been assessed. For arrangements
that meet the definition of a lease under IFRS 16, the Group will
recognise a right-of-use asset and corresponding liability unless
they qualify as low value or short-term leases as defined by IFRS
16. The right-of-use asset and lease liability to be recognised
upon transition is expected to be in the range of GBP550 million to
GBP600 million. The expected annual impact of IFRS 16 on the Income
Statement in the year ended 31 December 2019 will be an increase to
operating profit, expected to be in the range GBP10 million to
GBP15 million. This is expected to be more than offset by an
increase in finance costs in the range of GBP15 million to GBP20
million.
For arrangements previously classified as finance leases, where
the Group is a lessee, as the Group has already recognised an asset
and a related finance lease liability for the lease arrangement,
the Directors do not anticipate that the application of IFRS 16
will have a significant impact on the amounts recognised in the
Group's Consolidated Financial Statements, at 31 December 2018.
The accounting policies followed are the same as those detailed
within the 2017 Annual Report and Accounts as updated in the 2018
Interim Report, which are available on the Group's website
www.melroseplc.net.
The Board of Directors approved the Preliminary Announcement on
7 March 2019.
2. Alternative Performance Measures
The Group presents Alternative Performance Measures ("APMs") in
addition to the statutory results of the Group. These are presented
in accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA").
APMs used by the Group are set out in the glossary to this
Preliminary Announcement and the reconciling items between
statutory and adjusted results are listed below and described in
more detail in note 4.
Adjusted revenue includes the Group's share of revenue from
equity accounted investments.
Adjusted profit/(loss) excludes items which are significant in
size or volatility or by nature are non-trading or
non-recurring, and any item released to the Income Statement
that was previously a fair value item booked on an acquisition.
On this basis, the following are the principal items included
within adjusting items impacting operating profit:
-- Amortisation of intangible assets that are acquired in a
business combination, excluding computer software and development
costs;
-- Significant restructuring costs and other associated costs,
including losses incurred following the announcement of closure for
identified businesses, arising from significant strategy changes
that are not considered by the Group to be part of the normal
operating costs of the business;
-- Acquisition and disposal costs;
-- Impairment charges that are considered to be significant in
nature and/or value to the trading performance of the business;
-- Movement in derivative financial instruments not designated
in hedging relationships, including revaluation of associated
financial assets and liabilities;
-- Reversal of inventory uplift in value recorded on acquisition;
-- Removal of adjusting items, interest and tax on equity
accounted investments to reflect operating results;
-- The charge for the Melrose equity-settled compensation
scheme, including its associated employer's tax charge;
-- One-off costs associated with gender equalisation of
guaranteed minimum pensions ("GMP") for occupational schemes;
and
-- The release of fair value items booked on acquisitions.
Further to the adjusting items above, adjusting items impacting
profit before tax include:
-- Acceleration of unamortised debt issue costs written off as a
consequence of Group refinancing; and
-- The fair value changes on cross-currency swaps, entered into
by GKN prior to acquisition, relating to cost of hedging which are
not deferred in equity.
In addition to the items above, adjusting items impacting profit
after tax include:
-- Net effect of significant new tax legislation changes; and
-- The tax effects of adjustments to profit/(loss) before tax.
The Board considers the adjusted results to be an important
measure used to monitor how the businesses are performing as this
provides a meaningful reflection of how the businesses are managed
and measured on a day-to-day basis and achieves consistency and
comparability between reporting periods, when all businesses are
held for a complete reporting period.
The adjusted measures are used to partly determine the variable
element of remuneration of senior management throughout the Group
and are also in alignment with performance measures used by certain
external stakeholders. The adjusted measures are also taken into
account when valuing individual businesses as part of the "Buy,
Improve and Sell" Group strategy model.
Adjusted profit is not a defined term under IFRS and may not be
comparable with similarly titled profit measures reported by other
companies. It is not intended to be a substitute for, or superior
to, GAAP measures. All APMs relate to the current year results and
comparative periods where provided.
3. Segment information
Segment information is presented in accordance with IFRS 8:
"Operating Segments" which requires operating segments to be
identified on the basis of internal reports about components of the
Group that are regularly reported to the Group's Chief Operating
Decision Maker ("CODM"), which has been deemed to be the Group's
Board, in order to allocate resources to the segments and assess
their performance.
The Group's reportable operating segments were reconsidered
following the acquisition of GKN in April 2018. The Group now
reports under a revised segment structure and comparative results
have been restated accordingly. The operating segments are as
follows:
Aerospace - comprises GKN's aerospace operations: a
multi-technology tier one supplier of air frame and engine
structures, including Aerostructures, Engine Systems and Special
Technologies.
Automotive - comprises GKN's Driveline, All Wheel Drive and
eDrive (together ePowertrain), and Cylinder Liners businesses; a
global technology and systems engineer which designs, develops,
manufactures and integrates an extensive range of driveline
technologies.
Powder Metallurgy - a global leader in the manufacture of
precision powder metal parts for the automotive and industrial
sectors, as well as the production of powder metal.
Nortek Air & Security - comprises the Group's Air Management
and Security & Smart Technology businesses, previously reported
as separate segments. The Air Management and Security & Smart
Technology segments have been aggregated based on commonality of
economic characteristics, including manufacturing footprint. Air
Management includes the Air Quality & Home Solutions business
("AQH") and the Global Heating, Ventilation & Air Conditioning
business ("HVAC"). AQH is a leading manufacturer of ventilation
products for the professional remodelling and replacement markets,
residential new construction market and DIY market. Global HVAC
manufactures and sells split-system and packaged air conditioners,
heat pumps, furnaces, air handlers and parts for the residential
replacement and new construction markets along with custom designed
and engineered products and systems for non-residential
applications. Security & Smart Technology manufactures and
distributes products designed to provide convenience and security
primarily for residential applications and audio visual equipment
for the residential audio video and professional video market.
Other Industrial - comprises the Group's Ergotron and Brush
businesses, previously reported separately as the Ergonomics and
Energy segments respectively, as well as GKN's Wheels &
Structures and Walterscheid Powertrain (formerly Off-Highway
Powertrain) businesses. Further details are provided in the Chief
Executive's Report.
In addition, there are central cost centres which are also
reported to the Board. The central corporate cost centres contain
the Melrose Group head office costs, the remaining GKN central
costs and charges related to the divisional management long-term
incentive plans.
Prior year comparatives have been restated following the change
in the Group's segment structure. Reportable segment results
include items directly attributable to a segment as well as those
which can be allocated on a reasonable basis. Inter-segment pricing
is determined on an arm's length basis in a manner similar to
transactions with third parties.
The Group's geographical segments are determined by the location
of the Group's non-current assets and, for revenue, the location of
external customers. Inter-segment sales are not material and have
not been disclosed.
The following tables present the results and certain asset and
liability information regarding the Group's operating segments and
central cost centres for the year ended 31 December 2018.
a) Segment revenues
The Group derives its revenue from the transfer of goods and
services over time and at a point in time. The Group has assessed
that the disaggregation of revenue recognised from contracts with
customers by operating segments is appropriate as this is the
information regularly reviewed by the CODM in evaluating financial
performance. The Group also believes that presenting this
disaggregation of revenue based on the timing of transfer of goods
or services provides useful information as to the nature and timing
of revenue from contracts with customers.
Year ended 31 December 2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Continuing operations Aerospace GBPm GBPm Security GBPm GBPm
GBPm GBPm
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Adjusted revenue 2,521 3,382 851 1,458 890 9,102
Equity accounted
investments (42) (446) (5) - (4) (497)
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Revenue 2,479 2,936 846 1,458 886 8,605
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Timing of revenue
recognition
At a point in time 1,483 2,936 846 1,458 879 7,602
Over time 996 - - - 7 1,003
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Revenue 2,479 2,936 846 1,458 886 8,605
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Year ended 31 December 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Continuing operations Aerospace GBPm GBPm Security GBPm GBPm
GBPm GBPm
------------------------- ----------- --------------- --------------- ----------- ------------- --------
Adjusted revenue - - - 1,600 495 2,095
Equity accounted
investments - - - - (3) (3)
------------------------- ----------- --------------- --------------- ----------- ------------- --------
Revenue - - - 1,600 492 2,092
------------------------- ----------- --------------- --------------- ----------- ------------- --------
b) Segment operating profit
Year ended 31
December Powder Nortek Other
2018 Aerospace Automotive Metallurgy Air & Industrial Total
GBPm GBPm GBPm Security GBPm GBPm
GBPm
Continuing Corporate(2)
operations GBPm
------------------- ------------ -------------- ------------- ----------- ------------- ------------- ---------
Adjusted operating
profit/(loss) 250 231 98 198 98 (28) 847
Items not included
in
adjusted operating
profit(1)
:
Amortisation of
intangible
assets acquired
in business
combinations (176) (103) (34) (54) (34) - (401)
Restructuring
costs (56) (46) (11) (22) (73) (32) (240)
Acquisition and
disposal
costs (7) - (1) - - (145) (153)
Impairment of
assets (17) - (3) - (132) - (152)
Movement in
derivatives
and associated
financial
assets and
liabilities - - - - - (143) (143)
Reversal of uplift
in
value of
inventory (50) (42) (11) - (18) - (121)
Equity accounted
investments
adjustments (1) (24) - - - - (25)
Melrose
equity-settled
compensation
scheme
charges - - - - - (13) (13)
Impact of GMP
equalisation
on UK pension
schemes (2) (1) - - (1) (7) (11)
Release of fair
value
items 15 - - 4 1 - 20
Operating
(loss)/profit (44) 15 38 126 (159) (368) (392)
Finance costs (163)
Finance income 5
Loss before tax (550)
Tax 75
Loss for the year (475)
Year ended 31 December 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air Industrial Total
Continuing Aerospace GBPm GBPm & Security GBPm Corporate(2) GBPm
operations GBPm GBPm GBPm
-------------------- ----------- --------------- ------------- ------------ ------------ ------------- --------
Adjusted operating
profit/(loss) - - - 215 87 (23) 279
Items not included
in
adjusted operating
profit(1)
:
Impairment of
assets - - - - (145) - (145)
Amortisation of
intangible
assets acquired in
business
combinations - - - (56) (26) - (82)
Restructuring costs - - - (27) (8) - (35)
Melrose
equity-settled
compensation
scheme
charges - - - - - (24) (24)
Acquisition and
disposal
costs - - - - - (6) (6)
Release of fair
value
items - - - 5 1 - 6
Operating
profit/(loss) - - - 137 (91) (53) (7)
Finance costs (22)
Finance income 1
Loss before tax (28)
Tax 4
Loss for the year (24)
(1) Further details on adjusting items are discussed in note
4.
(2) Corporate adjusted operating loss of GBP28 million (2017:
GBP23 million), includes GBP6 million in respect of remaining GKN
central costs (2017: GBPnil) and GBP2 million (2017: GBP8 million)
of costs in respect of divisional long-term incentive plans.
c) Segment total assets and liabilities
At 31 December 2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------- ------------- ---------- ---------
Total assets 7,738 5,675 2,070 2,142 1,494 615 19,734
Total liabilities (3,053) (2,320) (521) (492) (499) (4,588) (11,473)
------------------- ---------- -------------- ------------- ----------- ------------- ---------- ---------
At 31 December 2017 - restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------- ------------- ---------- ---------
Total assets - - - 2,030 1,047 69 3,146
Total liabilities - - - (484) (173) (604) (1,261)
------------------- ---------- -------------- ------------- ----------- ------------- ---------- ---------
d) Segment capital expenditure and depreciation
Year ended 31 December 2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
Capital expenditure(1) 105 198 53 44 22 - 422
Depreciation(1) 88 116 37 24 17 - 282
------------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
Year ended 31 December 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
---------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
Capital
expenditure(1) - - - 48 4 - 52
Depreciation(1) - - - 23 12 - 35
---------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
(1) Including computer software and development costs. Capital
expenditure excludes finance lease additions.
e) Geographical information
The Group operates in various geographical areas around the
world. The parent company's country of domicile is the UK and the
Group's revenues and non-current assets in Europe and North America
are also considered to be material.
The Group's revenue from external customers and information
about its segment assets (non-current assets excluding deferred tax
assets; non-current trade and other receivables; and non-current
derivative financial assets) by geographical location are detailed
below:
Revenue(1) from external
customers Segment assets
---------------------------- -----------------------------
Year ended Year ended
31 December 31 December 31 December 31 December
2018 2017 2018 2017
Continuing operations GBPm GBPm GBPm GBPm
------------------------- ------------- ------------- ------------- --------------
UK 852 105 2,432 130
Rest of Europe 2,043 124 3,609 109
North America 4,602 1,768 7,241 2,207
Other 1,108 95 1,452 11
Total 8,605 2,092 14,734 2,457
(1) Revenue is presented by destination.
4. Reconciliation of adjusted profit measures
As described in note 1, adjusted profit measures are an
alternative performance measure used by the Board to monitor the
operating performance of the Group.
a) Operating profit
Year ended Year ended
31 December 31 December
2018 2017
Continuing operations Notes GBPm GBPm
-------------
Operating loss (392) (7)
---------------------------------------------- ------------- -------------
Amortisation of intangible
assets acquired in business
combinations a 401 82
Restructuring costs b 240 35
Acquisition and disposal costs c 153 6
Impairment of assets d 152 145
Movement in derivatives and
associated financial assets e 143 -
and liabilities
Reversal of uplift in value
of inventory f 121 -
Equity accounted investments
adjustments g 25 -
Melrose equity-settled compensation
scheme charges h 13 24
Impact of GMP equalisation
on UK pension schemes i 11 -
Release of fair value items j (20) (6)
Total adjustments to operating
loss 1,239 286
Adjusted operating profit 847 279
a. The value of intangible assets acquired in business
combinations has significantly increased during the year following
the acquisition of GKN. As a result, the amortisation charge in the
year was GBP401 million (2017: GBP82 million) and included eight
months of amortisation of intangible assets acquired with GKN. This
is excluded from adjusted results due to its non-trading nature and
to enable comparison with companies that grow organically. Where
intangible assets are trading in nature, such as computer software
and development costs, the amortisation is not adjusted.
b. Restructuring and other associated costs totalled GBP240
million (2017: GBP35 million), including GBP7 million (2017: GBP1
million) of losses incurred following the announcement of the
closure of certain businesses within the Group. Restructuring costs
are adjusting items due to their size and non-trading nature and
during the year ended 31 December 2018 they included:
-- A charge of GBP156 million in respect of the GKN businesses.
Within this, GBP56 million related to the Aerospace division,
predominantly in North America, with key focus on improving quality
and delivery for customers. Within the Automotive business GBP46
million of costs have been incurred restructuring and enhancing the
future performance of the business under new leadership. In
addition, GBP54 million of restructuring costs were incurred in
respect of early actions within other GKN businesses, including the
ceasing of GKN head office functions.
-- A charge of GBP59 million (2017: GBP6 million) in respect of
the closure of the Dutch turbogenerator facility in Brush and the
restructuring of its turbogenerator production in the UK following
the announcement on 1 February 2018.
-- A charge of GBP22 million (2017: GBP27 million) within Nortek
Air & Security, which mostly related to footprint
rationalisation within the HVAC business.
c. Acquisition and disposal costs of GBP153 million (2017: GBP6
million) were incurred in the year and included general transaction
fees and associated transaction taxes, predominantly in respect of
the acquisition of GKN. These costs also included a small amount of
fees relating to the GBP26 million bolt-on acquisition of
IntelliVision Inc., by the Security & Smart Technology business
and the cost of certain other corporate deal activities in the
year. These items are excluded from adjusted results due to their
non-trading nature.
d. An impairment charge totalling GBP152 million (2017: GBP145
million) was incurred in the year ended 31 December 2018. This
included GBP132 million in respect of the carrying value of assets
held within the Brush business of which GBP123 million related to
goodwill and GBP9 million to property, plant and equipment. In
addition, GBP15 million of intangible assets and GBP5 million of
property, plant and equipment were impaired in respect of assets
held within the GKN businesses. The impairment charges are shown as
an adjusting item due to their non-trading nature and size.
e. Melrose policy is to hedge account where possible, however,
hedge accounting has not historically been applied in the GKN
businesses for transactional foreign exchange exposure. For
consistency, the movement in the value of derivative financial
instruments (primarily forward foreign currency exchange contracts)
entered into to mitigate the potential volatility of future cash
flows on long-term foreign currency customer and supplier
contracts, along with foreign exchange movements on the associated
financial assets and liabilities, totalling a charge of GBP143
million (2017: GBPnil), is shown as an adjusting item because of
its volatility and size.
f. Finished goods and work in progress inventory which are
present in a business when acquired, in accordance with IFRS 3, are
required to be uplifted in value to closer to their selling price.
As a result, in the early months of an acquisition, reduced profits
are generated as this inventory is sold. The one-off effect in the
year, relating to GKN acquired inventory, was a charge of GBP121
million (2017: GBPnil) and is excluded from adjusted results due to
its size and non-recurring nature.
g. The Group has a number of equity accounted investments
("EAIs") in which it does not hold full control, the largest of
which is a 50% interest in Shanghai GKN HUAYU Driveline Systems
("SDS"), within the Automotive business. The EAIs generated GBP497
million of revenue in 2018, which is not included in the statutory
results but is shown within adjusted revenue so as not to distort
the operating margins reported in the businesses when the adjusted
operating profit earned from these EAIs is included.
In addition, the profits and losses of EAIs, which are shown
after amortisation of acquired intangible assets, interest and tax
in the statutory results, are adjusted to show the adjusted
operating profit consistent with the adjusted operating profits of
the subsidiaries of the Group. The revenue and profit of EAIs are
adjusted because they are considered to be significant in size and
are important in assessing the performance of the business.
h. The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer's tax charge, of GBP13 million
(2017: GBP24 million), is excluded from adjusted results due to its
volatility. The shares that would be issued, based on the Scheme's
current value at the end of the reporting period, are included in
the calculation of the adjusted diluted earnings per share, which
the Board considers to be a key measure of performance.
i. On 26 October 2018, a High Court judgement was made in
respect of the gender equalisation of guaranteed minimum pensions
for occupational pension schemes. The judgement concluded the
schemes should be amended to equalise pension benefits for men and
women in relation to guaranteed minimum pension benefits, an issue
which affects many UK defined benefit pension schemes. The impact
of this amendment on the pension schemes within the Group resulted
in a specific GBP11 million increase in the pension deficit with a
corresponding past service cost in the Income Statement. This cost
is excluded from adjusted results due to its non-trading and
non-recurring nature.
j. Certain items recognised as fair value items on an
acquisition totalling GBP20 million (2017: GBP6 million), which
have been resolved for more favourable amounts than first
anticipated, were released as an adjusting item to avoid positively
distorting adjusted results.
b) Profit before tax
Year ended Year ended
31 December 31 December
2018 2017
Continuing operations Notes GBPm GBPm
------------------------------------- -------- ------------- ---------------
Loss before tax (550) (28)
------------------------------------------------ ------------- ---------------
Adjustments to operating loss
per above 1,239 286
Write-off previous debt facility
unamortised fees k 7 -
Fair value changes on cross-currency
swaps l 8 -
Equity accounted investments
- interest m (1) -
Total adjustments to loss before
tax 1,253 286
------------------------------------------------ ------------- ---------------
Adjusted profit before tax 703 258
k. To enable the acquisition of GKN, a new bank facility was
negotiated which replaced the old Group bank facility. As a result,
the amortisation of the remaining GBP7 million of debt fees
relating to the old facility was accelerated and written off in the
year. This charge is shown as an adjusting item because of its
one-off, non-trading nature.
l. The fair value changes on cross-currency swaps relating to
cost of hedging which are not deferred in equity, are shown as an
adjusting item because of its volatility and non-trading
nature.
m. As explained in paragraph g above, the profits and losses of
EAIs are shown after interest and tax in the statutory results.
They are adjusted to show the profit before tax and the profit
after tax, consistent with the subsidiaries of the Group.
c) Profit after tax
Year ended Year ended
31 December 31 December
2018 2017
Continuing operations Notes GBPm GBPm
---------------------------------- ------- -------------------- -------------------
Loss after tax (475) (24)
---------------------------------- ------- -------------------- -------------------
Adjustments to loss before tax
per above 1,253 286
Equity accounted investments
- tax m, 5 (9) -
Net effect of new tax legislation
in the US n - (27)
Tax effect of adjustments to
loss before tax 5 (230) (44)
---------------------------------- ------- -------------------- -------------------
Total adjustments to loss after
tax 1,014 215
Adjusted profit after tax 539 191
n. The net tax credit arising from US tax legislation enacted in
December 2017, including an estimated repatriation charge and
changes to closing deferred tax items due to a reduction in the
Federal tax rate from 35% to 21%, was included as an adjusting item
because of its size and nature.
5. Tax
Year ended Year ended
31 December 31 December
2018 2017
Continuing operations GBPm GBPm
-------------------------------------------------- -------------------- ------------
Analysis of tax credit in year:
Current tax
Current year tax charge 55 13
Adjustments in respect of prior years (21) -
Total current tax charge 34 13
-------------------------------------------------- -------------------- ------------
Deferred tax
Origination and reversal of temporary differences (33) 6
Adjustments in respect of prior years (6) -
Tax on the change in value of derivative
financial instruments (31) -
Adjustments to deferred tax attributable
to changes in tax rates (34) (39)
Loss utilisation against US repatriation
charge - 16
Recognition of previously unrecognised deferred
tax assets (5) -
Total deferred tax credit (109) (17)
-------------------------------------------------- -------------------- ------------
Total tax credit (75) (4)
Analysis of credit in year:
GBPm GBPm
------------------------------------------------- ------- -------
Tax charge in respect of adjusted profit before
tax 164 67
Tax credit in respect of adjusting items (239) (71)
------------------------------------------------- ------- -------
Total tax credit (75) (4)
The tax charge of GBP164 million (2017: GBP67 million) arising
on adjusted profit before tax of GBP703 million (2017: GBP258
million), results in an effective tax rate of 23% (2017: 26%).
Tax in respect of adjusting items includes a credit of GBP230
million (2017: GBP44 million) arising on adjusting items of
GBP1,253 million (2017: GBP286 million), GBPnil (2017: GBP27
million) arising from the impact of the US tax measures enacted in
December 2017 and GBP9 million (2017: GBPnil) in respect of tax on
equity accounted investments.
The tax credit for the year for continuing operations can be
reconciled to the loss before tax per the Income Statement as
follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
------------------------------------------------------ ------------------- ---------------
Loss before tax (550) (28)
Tax credit on loss before tax at the weighted
average rate of 20% (2017: 14%) (110) (4)
Tax effect of:
Disallowable expenses and other permanent differences
within adjusted profit 10 5
Disallowable items included within adjusting
items 57 22
Temporary differences not recognised in deferred
tax 14 11
Recognition of previously unrecognised deferred
tax assets (5) -
Withholding taxes 10 -
Adjustments in respect of prior years (27) (10)
Tax charge/(credit) classified within adjusting
items 10 (27)
Effect of changes in tax rates (34) (1)
------------------------------------------------------
Total tax credit for the year (75) (4)
The reconciliation has been performed at a blended Group tax
rate of 20% (2017: 14%) which represents the weighted average of
the tax rates applying to profits and losses in the jurisdictions
in which those results arose.
Tax credits included in Other Comprehensive Income are as
follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
------------------------------------------------ ------------- -------------
Deferred tax on retirement benefit obligations (9) 1
Deferred tax on hedge relationship gains
and losses (24) 1
Deferred tax on foreign currency gains and (5) -
losses
------------------------------------------------ ------------- -------------
Total (credit)/charge for the year (38) 2
In addition to the amounts recognised in Other Comprehensive
Income in 2017, a deferred tax credit of GBP34 million in respect
of share based payments was recognised directly in retained
earnings.
6. Dividends
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
------------------------------------------------ ------------ ------------
Final dividend for the year ended 31 December
2016 paid of 1.9p - 36
Interim dividend for the year ended 31 December
2017 paid of 1.4p - 27
Final dividend for the year ended 31 December
2017 paid of 2.8p 54 -
Interim dividend for the year ended 31 December
2018 paid of 1.55p 75 -
129 63
Proposed final dividend for the year ended 31 December 2018 of
3.05p per share (2017: 2.8p per share) totalling GBP148 million
(2017: GBP54 million).
The final dividend of 3.05p was proposed by the Board on 7 March
2019 and, in accordance with IAS 10: "Events after the reporting
period", has not been included as a liability in this Preliminary
Announcement.
7. Earnings per share
Year ended Year ended
31 December 31 December
Earnings attributable to owners of the 2018 2017
parent GBPm GBPm
----------------------------------------- ------------ ----------------
Earnings for basis of earnings per share
from continuing operations (475) (24)
Year ended Year ended
31 December 31 December
2018 2017
Number Number
---------------------------------------------------- ------------ ------------
Weighted average number of ordinary shares for
the purposes of basic earnings
per share (million) 3,959 1,919
Further shares for the purposes of diluted earnings
per share (million) - 22
---------------------------------------------------- ------------ ------------
Weighted average number of ordinary shares for
the purposes of diluted earnings
per share (million) 3,959 1,941
---------------------------------------------------- ------------ ------------
On 19 April 2018, 2,469 million ordinary shares were issued as a
result of the acquisition of GKN. Further issues of share capital
totalling 448 million took place between 19 April 2018 and 30 June
2018 in order to purchase the remaining non-controlling interests
of GKN. The total number of ordinary shares in issue therefore
increased from 1,941 million at 31 December 2017 to 4,858 million
at 31 December 2018.
Year ended Year ended
31 December 31 December
Earnings per share 2018 2017
--------------------------- ------------ ------------
Basic earnings per share (12.0)p (1.2)p
Diluted earnings per share (12.0)p (1.2)p
Year ended Year ended
31 December 31 December
2018 2017
Adjusted earnings GBPm GBPm
-------------------------------------------- ------------------- ------------
Adjusted earnings for the basis of adjusted
earnings per share(1) 526 191
--------------------------------------------- ------------------- ------------
((1) Adjusted earnings for the year ended 31 December 2018 comprises
adjusted profit after tax of GBP539 million (note 4), net of
an allocation to non-controlling interest of GBP13 million.
Adjusted earnings per share
Year ended Year ended
31 December 31 December
Continuing operations 2018 2017
-------------------------------------------- ------------------- ------------
Adjusted basic earnings per share 13.3p 9.9p
Adjusted diluted earnings per share 13.3p 9.8p
8. Goodwill and other intangible assets
Goodwill acquired in business combinations, net of impairment,
has been allocated to the businesses, each of which comprises
several cash-generating units ("CGUs"). Goodwill in respect of GKN
businesses remains provisional at 31 December 2018.
31 December 31 December
2018 2017
Goodwill GBPm GBPm
------------------------- ------------ ------------
Brush - 122
Nortek businesses:
AQH 370 348
HVAC 246 232
Security & Smart
Technology 357 320
Ergotron 435 410
GKN businesses:
Aerostructures 576 -
Aerospace Engine 347 -
Systems
Aerospace Special 51 -
Technologies
Automotive Driveline 704 -
Automotive ePowertrain 345 -
Powder Metallurgy 529 -
Walterscheid Powertrain 92 -
4,052 1,432
Impairment Testing
The Group tests goodwill annually or more frequently if there
are indications that goodwill might be impaired. In accordance with
IAS 36: "Impairment of assets" the Group values goodwill at the
recoverable amount, being the higher of the value in use basis and
the fair value less costs to sell basis.
Value in use calculations have been used to determine the
recoverable amount of goodwill allocated to each group of CGUs. The
calculation uses the latest approved forecast extrapolated to
perpetuity using growth rates shown below, which do not exceed the
long-term growth rate for the relevant market.
Based on impairment testing completed at the year end, no
impairment was identified in respect of the Nortek businesses or
the GKN businesses. No reasonably possible change in key
assumptions would result in an impairment in the AQH and HVAC
groups and GKN groups of CGUs. The recoverable amount of the GKN
groups of CGUs at 31 December 2018 are higher than the recent
acquisition date fair values. As a result, no sensitivity analysis
has been disclosed for these businesses.
Both Security & Smart Technology and Ergotron have
manufacturing facilities located in China that export to the US and
their results in 2018, and the ongoing market environment, have
been negatively impacted by the increase in US tariffs placed on
Chinese goods. The intention is to pass any increased tariffs
through to customers, but the uncertainty around how customers will
react and/or a further escalation of US tariffs on Chinese goods
and the impact that this could have on the behaviour of competitors
means that there is a risk that future forecasts could be
negatively impacted. No impairment of goodwill is required within
these businesses, but sensitivity analysis has been provided.
An impairment charge of GBP123 million in respect of goodwill
recorded in the Brush group of CGUs has been recorded in the
Consolidated Income Statement and is shown as an adjusting item
(note 4).
Significant assumptions and estimates
Each group of CGUs has been assessed through a value in use
methodology, using the following significant assumptions.
The basis of these impairment tests and the key assumptions are
set out in the table below:
31 December 2018 31 December 2017
---------------- ------------------------------------------- -------------------------------------------
Pre-tax Long-term Pre-tax Long-term
discount growth Period discount growth Period
Group of CGUs rates rates of forecast rates rates of forecast
---------------- --------------- ---------- -------------- --------------- ---------- --------------
Brush 10.8% 1.5% 5 11.9% 2.2% 5
AQH 11.8% 3.3% 3 12.6% 3.0% 4
HVAC 11.8% 3.1% 3 12.6% 3.0% 4
Security &
Smart
Technology 12.0% 3.3% 3 12.6% 3.0% 4
Ergotron 11.8% 3.3% 3 12.6% 3.0% 4
Aerostructures 10.2% 2.0% 5 - - -
Aerospace
Engine
Systems 10.1% 2.5% 5 - - -
Aerospace
Special
Technologies 9.7% 2.5% 5 - - -
Automotive
Driveline 11.6% 0.0% 5 - - -
Automotive
ePowertrain 12.0% 3.0% 5 - - -
Powder
Metallurgy 12.0% 2.0% 5 - - -
Walterscheid
Powertrain 14.5% 2.0% 5 - - -
Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific
to each group of CGUs. Discount rates reflect the current market
assessments of the time value of money and the territories in which
the CGU operates. In determining the cost of equity, the Capital
Asset Pricing Model ("CAPM") has been used. Under CAPM, the cost of
equity is determined by adding a risk premium, based on an industry
adjustment ("Beta"), to the expected return of the equity market
above the risk-free return. The relative risk adjustment reflects
the risk inherent in each group of CGUs relative to all other
sectors and geographies on average.
The cost of debt is determined using a risk-free rate based on
the cost of government bonds, and an interest rate premium
equivalent to a corporate bond with a similar credit rating to
Melrose.
Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial
budgets and medium-term forecasts. Each forecast has been prepared
using a cash flow period deemed most appropriate by management,
considering the nature of each group of CGUs. The key assumptions
used in forecasting pre-tax cash flows relate to future budgeted
revenue and operating margins likely to be achieved and the
expected rates of long-term growth by market sector. Underlying
factors in determining the values assigned to each key assumption
are shown below:
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on
financial budgets and medium-term forecasts by management, taking
into account industry growth rates and management's historical
experience in the context of wider industry and economic
conditions. Projected sales are built up with reference to markets
and product categories. They incorporate past performance,
historical growth rates, projections of developments in key
markets, secured orders and orders forecast to be achieved in the
short to medium term given trends in the relevant market
sector.
Operating margins have been forecast based on historical levels
achieved considering the likely impact of changing economic
environments and competitive landscapes on volumes and revenues and
the impact of management actions on costs. Projected margins
reflect the impact of all initiated projects to improve operational
efficiency and leverage scale. The projections do not include the
impact of future restructuring projects to which the Group is not
yet committed. Forecasts for other operating costs are based on
inflation forecasts and supply and demand factors.
Aerospace - The key drivers for growth in revenue and operating
margins are global demand for commercial and military aircraft.
Consumer spending, passenger load factors, raw material input
costs, market expectations for aircraft production requirements,
technological advancements, and other macroeconomic factors
influence demand for these products.
Automotive - The key drivers for growth in revenue and operating
margins are global demand for a large range of cars including
smaller low-cost to larger premium vehicles. Demand is influenced
by technological advancements particularly in electric and full
hybrid vehicles, market expectations for global vehicle production
requirements, fuel prices, raw material input costs, consumer
spending, credit availability, and other macroeconomic factors.
Powder Metallurgy - The key drivers for growth in revenue and
operating margins are trends in the automotive and industrial
markets. Market expectations for global light vehicle production
requirements, raw material input costs, technological advancements,
particularly in additive manufacturing, influence demand for these
products along with other macroeconomic factors.
Walterscheid Powertrain - The key drivers for growth in revenue
and operating margins are the global demand in the agricultural,
construction, mining, utility and industrial markets. Demand for
these products is impacted by raw material input costs, consumer
spending, market expectations on future production requirements,
particularly in the agricultural and industrial sectors, and other
macroeconomic factors.
HVAC and AQH - The key drivers for growth in revenue and
operating margins are the levels of residential remodelling and
replacement activity and the levels of residential and
non-residential new construction in the markets in which these
businesses operate. New residential and non-residential
construction activity and, to a lesser extent, residential
remodelling and replacement activity are affected by seasonality
and cyclical factors such as interest rates, credit availability,
inflation, consumer spending, employment levels and other
macroeconomic factors.
Security & Smart Technology - The key driver for growth in
revenue and operating margins is global demand for security and
home automation products. Consumer spending, employment levels,
regulation, technological advancements and the evolution of the
traditional security market towards home automation and other
macroeconomic factors influence demand for these products.
Ergotron - The key driver for growth in revenue and operating
margins is demand for technology and wellness products in the
markets in which Ergotron operates. Seasonal factors, public
authority spending, corporate and consumer spending, employment
levels, the public awareness of wellness, regulation, technological
advancements and other macroeconomic factors influence demand for
these products.
Brush - The key drivers for growth in revenues and operating
margins are: i) original equipment investments in the global power
market, both new capacity (mainly emerging markets) and replacement
capacity (mainly in mature markets); ii) growth in service
requirements of the installed base; and iii) new product
introduction. Independent forecasts of growth in these power
generation markets have been used to derive revenue growth
assumptions. Forecasts for other operating costs are based on
inflation forecasts and supply and demand factors.
Long-term growth rates:
Long-term growth rates are based on long-term forecasts for
growth in the sectors and geography in which the CGU operates.
Long-term growth rates are determined using a blend of publicly
available data and a long-term growth rate forecast that takes into
account the international presence and the markets in which each
business operates.
Brush group of CGUs
In the previous year, the assets of the Brush business were
impaired by GBP145 million to a value of GBP300 million, using the
fair value less costs to sell basis. This method of valuation, at
the time, was higher than the value in use method, because the
latter excluded the benefits of the restructuring announced in
February 2018, and would have given a value of GBP178 million.
The restructuring of the Brush business that was announced in
February 2018 followed a full review of the power generation
industry and highlighted the surplus generator manufacturing
capacity existing in the market. The restructuring programme has
been implemented in line with plan.
However, in 2018 the conditions in the generator services
business have also become more challenging as the year has
progressed, with competitors taking a decision to look to service
opportunities to offset surplus capacity issues in the generator
manufacturing market. Alongside this, customers and competitors in
the power generation sector have continued to reorganise and
restructure in the second half of 2018.
These newly developed generator services market conditions and
the decisions from significant market participants have had a
direct impact on the trading of Brush and reduced forecasts in the
Brush generator servicing business.
At 31 December 2018, the recoverable amount of the Brush assets,
using the reduced forecasts and the value in use method, was GBP103
million, resulting in a further impairment to Brush goodwill of
GBP123 million in the year.
Sensitivity analysis
Further sensitivity analysis has been carried out on the Brush
group of CGUs. For illustration purposes, a further 0.1 percentage
point increase in the discount rate or a further five percent
reduction in the annual and terminal value of operating profit
could result in a reduction in the value in use of GBP1 million and
GBP5 million respectively. A further 0.1 percentage point decrease
in the long-term growth rate could result in a reduction in the
value in use of GBP1 million.
Security & Smart Technology group of CGUs
The goodwill related to the Security & Smart Technology
("SST") group of CGUs is tested for impairment by comparing the
carrying amount of the SST group against recoverable amounts of the
SST CGUs. Determination of the recoverable amount involved
management judgement on highly uncertain matters, particularly with
respect to the possible increase in tariffs in the US for goods
being imported from China; the level of competition and
technological change in the market; the timing and quantity of
forecast unit sales; long-term growth rates and discount factors.
The value in use model prepared for the SST group was prepared
using latest cash flow projections for the period 2019-2021
followed by an assumed long-term growth rate of 3.3%. These cash
flow projections were discounted at a pre-tax discount rate of
12.0% and used sale price and cost inflation data from available
market sources.
Sensitivity analysis
The forecasts, prepared using a methodology required by IAS 36,
show headroom of GBP88 million above the carrying amount for the
SST group of CGUs. In accordance with IAS 36 a sensitivity analysis
has been undertaken and a reasonably possible increase in the
discount rate from 12.0% to 13.4% would reduce headroom to GBPnil.
A reasonably possible decrease in the long-term growth rate from
3.3% to 1.7% would reduce headroom to GBPnil. In relation to a
possible increase in US tariffs, it is difficult to model the
precise impact on business performance at this time but this would
likely lead to reduced sales and margins in the short term. A five
percent reduction in the annual and terminal value of operating
profit could result in a reduction in the value in use of GBP34
million.
Ergotron group of CGUs
The goodwill related to the Ergotron group of CGUs is tested for
impairment by comparing the carrying amount of the Ergotron group
against recoverable amounts of the Ergotron CGUs. Determination of
the recoverable amount involved management judgement on highly
uncertain matters, particularly with respect to the possible
increase in tariffs in the US for goods being imported from China
as well as long-term growth rates. The value in use model prepared
for the Ergotron group used the latest cash flow projections for
the period 2019-2021 followed by an assumed long-term growth rate
of 3.3%. These cash flow projections were discounted at a pre-tax
discount rate of 11.8% and used sale price and cost inflation data
from available market sources.
Sensitivity analysis
The forecasts, prepared using a methodology required by IAS 36,
show headroom of GBP198 million above the carrying amount for the
Ergotron group of CGUs. In accordance with IAS 36 a sensitivity
analysis has been undertaken and a reasonably possible decrease in
the long-term growth rate from 3.3% to 0.2% would reduce headroom
to GBPnil. In relation to a possible increase in US tariffs, it is
difficult to model the precise impact on business performance at
this time but this would likely lead to reduced sales and margins
in the short term. A five percent reduction in the annual and
terminal value of operating profit could result in a reduction in
the value in use of GBP42 million.
9. Acquisitions
GKN
On 19 April 2018 the Group acquired approximately 85% of the
issued share capital and obtained control of GKN plc for
consideration of GBP7,091 million. The remaining 15% of share
capital was acquired subsequently, at a cost of GBP1,260 million
which has been treated as a purchase of a non-controlling
interest.
GKN is a global engineering business which designs, manufactures
and services systems and components for original equipment
manufacturers, specialising in the aerospace and automotive
markets.
The Group has reviewed the assets and liabilities acquired. Due
to the size of the acquired business, the assessment of the fair
value of the assets and liabilities acquired has not yet been
finalised. In accordance with IFRS 3: "Business combinations", the
acquisition Balance Sheet of GKN at 19 April 2018 remains
provisional as of 31 December 2018 as there could be further
adjustment to the fair values recognised in the table below, if
additional information comes to light.
Provisional
GKN IntelliVision fair value
GBPm GBPm GBPm
------------------------------------------ --------- --------------- -----------
Property, plant and equipment 2,619 - 2,619
Intangible assets 6,199 9 6,208
Interests in equity accounted investments 512 - 512
Inventories 1,173 - 1,173
Trade and other receivables, excluding
contract assets(1) 1,973 1 1,974
Contract assets 524 - 524
Cash and cash equivalents 307 - 307
Trade and other payables (2,915) - (2,915)
Derivative financial instruments (137) - (137)
Provisions and contingent liabilities (1,180) - (1,180)
Deferred tax (761) - (761)
Retirement benefit obligations (1,369) - (1,369)
Current tax liabilities (89) - (89)
Interest-bearing loans and borrowings (1,430) - (1,430)
Non-controlling interests(2) (857) - (857)
------------------------------------------ --------- --------------- -----------
Net assets attributable to the
parent 4,569 10 4,579
Total consideration 7,091 26 7,117
------------------------------------------ --------- --------------- -----------
Provisional goodwill 2,522 16 2,538
Total consideration satisfied by:
Cash consideration 1,290 26 1,316
Shares issued to GKN shareholders 5,801 - 5,801
------------------------------------------ --------- --------------- -----------
(1) The fair value of financial assets include gross trade and
other receivables of GBP1,994 million. The best estimate at the
acquisition date of the contractual cash flows not to be collected
is GBP20 million.
(2) Non-controlling interests include an amount of GBP830
million in respect of approximately 15% of the issued share capital
of GKN not acquired on 19 April 2018, but subsequently purchased in
the period 19 April 2018 to 30 June 2018.
GKN contributed GBP7,212 million to adjusted revenue and GBP607
million to adjusted operating profit for the period between the
date of acquisition and the balance sheet date. The amounts
recognised in relation to GKN for the period from the 19 April to
31 December 2018 include revenue and profit and the associated
impact on working capital, based on an estimate of activity from 19
April to 30 April 2018. If the acquisition of GKN had been
completed on the first day of the financial year, Group adjusted
revenues would have been GBP12,247 million and Group adjusted
operating profit would have been GBP1,095 million.
IntelliVision Inc. ("IntelliVision")
On 27 April 2018, the Group's Security & Smart Technology
business acquired 100% of the issued share capital and obtained
control of IntelliVision, a leader in artificial intelligence,
smart cameras and video analytics software, for consideration of
GBP26 million. The amounts recognised in respect of the
identifiable assets acquired and liabilities assumed are set out in
the table above. Fair values remain provisional as at 31 December
2018 in case additional information comes to light that would
require adjustment to the fair values recognised in the table
above.
10. Equity accounted investments
Year ended Year ended
31 December 31 December
2018 2017
Group share of results GBPm GBPm
------------------------------------- ---------------- -----------------
Revenue 497 3
Operating costs (438) (3)
-------------------------------------- ---------------- -----------------
Adjusted operating profit 59 -
Adjusting items (15) -
Net finance costs (1) -
-------------------------------------- ---------------- -----------------
Profit before tax 43 -
Tax (9) -
-------------------------------------- ---------------- -----------------
Share of results of equity accounted 34 -
investments
11. Provisions
Property Environmental Warranty
Loss-making related and related
contracts costs litigation costs Restructuring Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2018 3 14 88 73 20 11 209
Acquisition
of
businesses 629 62 123 295 24 47 1,180
Utilised(1) (63) (5) (60) (36) (111) (9) (284)
Net charge
to
operating
profit(2) (1) - 43 37 181 (3) 257
Unwind of
discount 9 - - - - 1 10
Disposal of
businesses (8) - - - - - (8)
Exchange
adjustments 47 3 8 18 2 3 81
------------ ------------ -------- ------------- --------- -------- ----------------------- ----------
At 31
December
2018 616 74 202 387 116 50 1,445
Current 65 15 58 130 108 5 381
Non-current 551 59 144 257 8 45 1,064
616 74 202 387 116 50 1,445
(1) Includes GBP63 million of non-cash unwind of loss-making
contracts provisions, positively impacting operating profit in
2018.
(2) Includes restructuring charges and other adjusting items of
GBP168 million, along with GBP89 million relating to items charged
through adjusted operating profit.
The Group's provision categories have been reconsidered
following the acquisition of GKN which has resulted in certain
reclassifications between provision categories.
Loss-making contracts
Provisions for loss-making contracts are considered to exist
where the Group has a contract under which the unavoidable costs of
meeting the obligations exceed the economic benefits expected to be
received under it. This obligation has been discounted and will be
utilised over the period of the respective contracts, which is up
to 15 years.
Calculation of loss-making contract provisions is based on
contract documentation and delivery expectations, along with an
estimate of directly attributable costs and represents management's
best estimate of the unavoidable costs of fulfilling the
contract.
Property related costs
The provision for property related costs represents the
estimated net payments for surplus property or off-market lease
contracts on acquisition, due over the term of the leases and any
dilapidation costs for ongoing leases. This is expected to result
in cash expenditure over the next eight years. Calculations of
surplus leasehold property costs and dilapidations are based on
lease agreements with landlords and external quotes, or in the
absence of specific documentation, management's best estimate of
the costs required to fulfil obligations.
Environmental and litigation
Environmental and litigation provisions relate to the estimated
remediation costs of pollution, soil and groundwater contamination
at certain sites and estimated future costs and settlements in
relation to legal claims and associated insurance obligations.
Liabilities for environmental costs are recognised when
environmental assessments are probable and the associated costs can
be reasonably estimated.
Provisions are recorded for product and general liability claims
which are probable and for which the cost can be reliably
estimated. These liabilities include an estimate of claims incurred
but not yet reported and are based on actuarial valuations using
claim data. Due to their nature, it is not possible to predict
precisely when these provisions will be utilised.
The Group has on occasion been required to take legal or other
actions to defend itself against proceedings brought by other
parties. Provisions are made for the expected costs associated with
such matters, based on past experience of similar items and other
known factors, considering professional advice received. This
represents management's best estimate of the likely outcome. The
timing of utilisation of these provisions is frequently uncertain,
reflecting the complexity of issues and the outcome of various
court proceedings and negotiations. Contractual and other
provisions represent management's best estimate of the cost of
settling future obligations and reflect management's assessment of
the likely settlement method, which may change over time. However,
no provision is made for proceedings which have been, or might be,
brought by other parties against Group companies unless management,
considering professional advice received, assess that it is more
likely than not that such proceedings may be successful.
Warranty related costs
Provisions for the expected cost of warranty obligations under
local sale of goods legislation are recognised at the date of sale
of the relevant products and subsequently updated for changes in
estimates as necessary. The provision for warranty related costs
represents the best estimate of the expenditure required to settle
the Group's obligations, based on past experience, recent claims
and current estimates of costs relating to specific claims.
Warranty terms are, on average, between one and five years.
Restructuring
Restructuring provisions relate to committed costs in respect of
restructuring programmes, usually resulting in cash spend within
one year. A restructuring provision is recognised when the Group
has developed a detailed formal plan for the restructuring and has
raised a valid expectation in those affected that it will carry out
the restructuring by either starting to implement the plan or by
announcing its main features to those affected by it. The
measurement of a restructuring provision includes only the direct
expenditures arising from the restructuring, which are those
amounts that are necessarily entailed by the restructuring
programmes.
Other
Other provisions include long-term incentive plans for
divisional senior management and the employer tax on equity-settled
incentive schemes which are expected to result in cash expenditure
over the next two to five years.
Where appropriate, provisions have been discounted using
discount rates between 0% and 9% (31 December 2017: 3%) depending
on the territory in which the provision resides and the length of
its expected utilisation.
12. Retirement benefit obligations
Defined benefit plans
The Group sponsors defined benefit plans for qualifying
employees of certain subsidiaries. The funded defined benefit plans
are administered by separate funds that are legally separated from
the Group. The Trustees of the funds are required by law to act in
the interest of the fund and of all relevant stakeholders in the
plans. The Trustees of the pension funds are responsible for the
investment policy with regard to the assets of the fund.
Contributions
The Group committed to contribute GBP150 million in total to the
GKN UK 2012 and 2016 plans in the first twelve months of ownership,
as well as ongoing annual contributions of GBP60 million. In
addition, the Group has committed to contribute GBP270 million upon
the disposal of Powder Metallurgy, 10% of the proceeds from
disposal of other GKN businesses and 5% of the proceeds from
disposal of non-GKN businesses to the GKN UK pension plans. These
commitments cease when the funding target which has been agreed
with Trustees is achieved, being gilts plus 25 basis points for the
GKN UK 2016 plan and gilts plus 75 basis points for the GKN UK 2012
plan.
The Group contributed GBP102 million (2017: GBP4 million) to
defined benefit pension plans and post-employment plans in the year
ended 31 December 2018, including GBP56 million of the Melrose
commitment to contribute GBP150 million to the GKN UK 2012 and 2016
plans within the first twelve months of GKN ownership.
The Group expects to contribute GBP192 million to defined
benefit pension plans and post-employment plans in 2019, consisting
of GBP94 million of one-off special payments, being the balance of
the GBP150 million upfront commitment, and GBP98 million of ongoing
commitments.
Actuarial assumptions
The major assumptions used by the actuaries in calculating the
Group's pension liabilities are as set out below:
Rate of increase
of pensions in Discount rate Price inflation
payment % per annum % per annum
% per annum
--------------- ------------------- ---------------- ------------------
31 December
2018
GKN UK - 2012
plan 3.1 2.9 2.1
GKN UK - 2016
plan 3.1 2.9 2.1
GKN US plans n/a 4.1 2.5
GKN Europe
plans 2.5 1.9 1.8
Brush UK plan 3.2 2.9 2.1
31 December
2017
Brush UK plan 3.2 2.5 2.1
--------------- ------------------- ---------------- ------------------
Balance Sheet disclosures
The amount recognised in the Consolidated Balance Sheet arising
from net liabilities in respect of defined benefit plans was as
follows:
31 December 31 December
2018 2017
GBPm GBPm
----------------------------------- ---- ---------------- --------------
Present value of funded defined
benefit obligations (3,937) (538)
Fair value of plan assets 3,273 524
------------------------------------------ ---------------- --------------
Funded status (664) (14)
Present value of unfunded defined
benefit obligations (749) (4)
------------------------------------ --- ---------------- --------------
Net liabilities (1,413) (18)
The plan liabilities and assets at 31 December 2018 were as
follows:
UK US European Other
Plans(1) Plans Plans Plans Total
GBPm GBPm GBPm GBPm GBPm
------------------ ---------------- --------------- ----------- --------------- ---------------
Plan assets 2,791 412 29 41 3,273
Plan liabilities (3,378) (565) (690) (53) (4,686)
------------------ ---------------- --------------- ----------- --------------- ---------------
Net liabilities (587) (153) (661) (12) (1,413)
(1) Includes a net deficit in respect of the GKN UK 2012 plan,
GKN post-employment medical plans, and the Nortek UK plan and a
surplus in respect of the Brush UK plan and the GKN UK 2016
plan.
13. Issued capital and reserves
31 December 31 December
2018 2017
Share Capital GBPm GBPm
------------------------------------------------ -------------------- -----------
Allotted, called-up and fully paid
4,858,254,963 (31 December 2017: 1,941,200,503)
Ordinary Shares of 48/7p each (31 December
2017: 48/7p each) 333 133
12,831 (31 December 2017: 12,831) 2017 Melrose - -
Incentive Plan Shares of GBP1 each
333 133
The rights of each class of share are described in the
Directors' Report.
On 19 April 2018, 2,469 million ordinary shares were issued as a
result of the acquisition of GKN. Further issues of share capital
totalling 448 million took place between 19 April 2018 and 30 June
2018 in order to purchase the remaining non-controlling interest of
GKN. The total number of ordinary shares in issue therefore
increased from 1,941 million at 31 December 2017 to 4,858 million
at 31 December 2018.
Translation reserve
The Translation reserve contains exchange differences on the
translation of subsidiaries with a functional currency other than
Sterling and exchange gains or losses on the translation of
liabilities that hedge the Company's net investment in foreign
subsidiaries.
Hedging reserve
The Hedging reserve represents the cumulative fair value gains
and losses on derivative financial instruments for which cash flow
hedge and net investment hedge accounting has been applied.
Merger reserve and Other reserves
The Merger reserve represents the excess of fair value over
nominal value of shares issued in consideration for the acquisition
of subsidiaries. Other reserves comprise accumulated adjustments in
respect of Group reconstructions.
14. Cash flow statement
Year ended Year ended
31 December 31 December
2018 2017
Note GBPm GBPm
---------------------------------------------- ------ ---------------- -----------------
Reconciliation of adjusted operating
profit to cash generated by continuing
operations
Adjusted operating profit(1) 4 847 279
Adjustments for:
Depreciation of property, plant and equipment 238 31
Amortisation of computer software and
development costs 44 4
Share of adjusted operating profit of (59) -
equity accounted investments
Restructuring costs paid and movements
in provisions (207) (74)
Defined benefit pension contributions
paid (102) (4)
Increase in inventories (108) (8)
Decrease in receivables 181 8
Decrease in payables (159) (16)
Acquisition costs and associated transaction
taxes (125) (8)
Tax paid (66) (16)
Interest paid (111) (16)
Incentive scheme tax related payments - (148)
Net cash from operating activities 373 32
(1) See note 4 for reconciliation of operating loss to adjusted
operating profit.
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings
(excluding any acquisition related fair value adjustments),
cross-currency swaps and cash and cash equivalents. Currency
denominated balances within net debt are translated to Sterling at
swapped rates where hedged by cross-currency swaps.
Net debt is considered to be an alternative performance measure
as it is not defined in IFRS. The most directly comparable IFRS
measure is the aggregate of interest-bearing loans and borrowings
(current and non-current) and cash and cash equivalents.
A reconciliation from the most directly comparable IFRS measure
to net debt is given below:
31 December 31 December
2018 2017
GBPm GBPm
-------------------------------------------- ----------- -----------
Interest-bearing loans and borrowings
- due within one year (377) -
Interest-bearing loans and borrowings
- due after one year (3,378) (588)
-------------------------------------------- ----------- -----------
External debt (3,755) (588)
Less:
Cash and cash equivalents 415 16
-------------------------------------------- ----------- -----------
(3,340) (572)
Adjustments:
Impact of cross-currency swaps (199) -
Non-cash acquisition fair value adjustments 57 -
Net debt (3,482) (572)
The table below shows the key components of the movement in net
debt:
At 31 Other Effect
December Cash non-cash of foreign At 31 December
2017 flow Acquisitions movements exchange 2018
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- -------- --------------- --------------------- --------------- ---------------
External debt (588) (1,732) (1,430) 49 (54) (3,755)
Impact of
cross-currency
swaps - 10 (109) (16) (84) (199)
Non-cash acquisition
fair value
adjustments - - 73 (16) - 57
--------------------- ----------- -------- --------------- --------------------- --------------- ---------------
(588) (1,722) (1,466) 17 (138) (3,897)
Cash and cash
equivalents 16 1,802 (1,401) - (2) 415
--------------------- ----------- -------- --------------- --------------------- --------------- ---------------
Net debt (572) 80 (2,867) 17 (140) (3,482)
15. Post Balance Sheet events
On 6 March 2019 the Group announced the agreement to sell
Walterscheid Powertrain to One Equity Partners, a US-based private
equity firm. In addition the Group announced the completion of the
sale of the minority 43.57% interest in Société Anonyme Belge de
Constructions Aéronautiques ("SABCA"), previously held within the
Aerospace reporting segment, to SABCA's majority shareholder,
Dassault Belgique Aviation S.A. The sale of Walterscheid Powertrain
is subject to the customary regulatory conditions and is expected
to complete in the first half of this year. The combined net
proceeds of the sales are approximately GBP200 million.
Glossary
--------
Alternative Performance Measures ("APMs")
In accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA"), additional information
is provided on the APMs used by the Group below.
In the reporting of financial information, the Group uses
certain measures that are not required under IFRS. These additional
measures (commonly referred to as APMs) provide additional
information on the performance of the business and trends to
stakeholders. These measures are consistent with those used
internally, and are considered important to understanding the
financial performance and financial health of the Group. APMs are
considered to be an important measure to monitor how the businesses
are performing because this provides a meaningful comparison of how
the business is managed and measured on a day-to-day basis and
achieves consistency and comparability between reporting
periods.
These APMs may not be directly comparable with similarly titled
profit measures reported by other companies and they are not
intended to be a substitute for, or superior to, IFRS measures.
Reconciling
Closest equivalent items to statutory
APM statutory measure measure Definition and purpose
---------------- --------------------- ------------------------ -------------------------------------------------
Income Statement Measures
--------------------------------------------------------------------------------------------------------------------
Adjusted Revenue Share of revenue Adjusted revenue includes the
revenue of equity accounted Group's share of revenue of equity
and Annualised investments accounted investments. Annualised
adjusted (note 3) and adjusted revenue reflects the
revenue full period Group's adjusted revenue as if
impact of acquisitions all acquisitions in the period
had occurred on the first day
of the financial year.
This enables comparability between
reporting periods.
Year ended Year ended
31 December 31 December
2018 2017
Revenue GBPm GBPm
--------------------- ------------ ------------
Revenue 8,605 2,092
Share of revenue
of equity accounted
investments 497 3
--------------------- ------------ ------------
Adjusted revenue 9,102 2,095
Full year impact
of acquisitions 3,145 -
------------
Annualised adjusted
revenue 12,247 2,095
--------------------- ------------ ------------
Adjusting None Adjusting Those items which the Group excludes
items items (note from its adjusted profit metrics
4) in order to present a further
measure of the Group's performance.
These include items which are
significant in size or volatility
or by nature are non-trading
or non-recurring, and any item
released to the Income Statement
that was previously a fair value
item booked on an acquisition.
This provides a meaningful comparison
of how the business is managed
and measured on a day-to-day
basis and provides consistency
and comparability between reporting
periods.
Adjusted Operating Adjusting The Group uses adjusted profit
operating profit/(loss)(1) items (note measures to provide a useful
profit 4) and full and more comparable measure of
and Annualised period impact the ongoing performance of the
adjusted of acquisitions Group. Adjusted measures are
operating reconciled to statutory measures
profit by removing adjusting items,
the nature of which are disclosed
above and further detailed in
note 4.
Annualised adjusted operating
profit reflects the Group adjusted
operating profit as if all acquisitions
in the period had occurred on
the first day of the financial
year.
Year ended Year ended
31 December 31 December
2018 2017
Operating profit GBPm GBPm
-------------------------------------- ----------------- -----------------------------------------
Operating loss (392) (7)
Adjusting items
(note 4) 1,239 286
-------------------------------------- ----------------- -----------------------------------------
Adjusted operating
profit 847 279
Full year impact
of acquisitions 248 -
Annualised adjusted
operating profit 1,095 279
-------------------------------------- ----------------- -----------------------------------------
Closest equivalent Reconciling
statutory items to statutory
APM measure measure Definition and purpose
----------------------- ---------------------- ------------------------ --------------------------------------
Adjusted Operating Share of revenue Adjusted operating margin represents
operating margin(2) of equity accounted Adjusted operating profit as
margin investments a percentage of Adjusted revenue.
and Annualised (note 3), adjusting Annualised adjusted operating
adjusted items (note margin represents Annualised
operating 4) and full adjusted operating profit as
margin period impact a percentage of Annualised adjusted
of acquisitions revenue.
----------------------- ---------------------- ------------------------ --------------------------------------
Adjusted Operating Adjusting items Adjusted operating profit before
EBITDA, profit/(loss)(1) (note 4), depreciation depreciation and impairment
Annualised of property, of property, plant and equipment
adjusted plant and equipment and before the amortisation
EBITDA and amortisation and impairment of computer software
and Annualised of computer and development costs.
adjusted software and
EBITDA development Adjusted EBITDA and Annualised
for covenant costs, share adjusted EBITDA are measures
purposes of depreciation used to value individual businesses
of property, as part of the "Buy, Improve
plant and equipment and Sell" Melrose strategy model
and amortisation and by certain external stakeholders
of computer to measure performance.
software and
development
costs of equity
accounted investments,
as well as
full period
impact of acquisitions
and adjustments
for covenant
purposes
Year ended Year ended
31 December 31 December
2018 2017
Adjusted EBITDA GBPm GBPm
------------------------ --------------------- ------------------------
Adjusted operating
profit 847 279
Depreciation of
property, plant
and equipment 238 31
Amortisation of
computer software
and development
costs 44 4
Share of depreciation
and amortisation
of equity accounted 18 -
investments
Adjusted EBITDA 1,147 314
Full year impact 378 -
of acquisitions
Annualised adjusted
EBITDA 1,525 314
Other adjustments
required for covenant (33) -
purposes
Annualised adjusted
EBITDA for covenant
purposes 1,492 314
---------------------
Reconciling
Closest equivalent items to
statutory statutory
APM measure measure Definition and purpose
-------------------- ----------------------
Adjusted Profit/(loss) Adjusting Profit before the impact of adjusting
profit before tax items (note items and tax. As discussed above,
before 4) and full adjusted profit measures are
tax and period impact used to provide a useful and
Annualised of acquisitions more comparable measure of the
adjusted ongoing performance of the Group.
profit Adjusted measures are reconciled
before to statutory measures by removing
tax adjusting items, the nature of
which are disclosed above and
further detailed in note 4.
As discussed above, the Group
uses adjusted profit measures
to provide a useful and comparable
measure of the ongoing performance
of the Group.
Year ended Year ended
31 December 31 December
2018 2017
Profit before GBPm GBPm
tax
--------------------- --------------------- ----------------
Loss before tax (550) (28)
Adjusting items
(note 4) 1,253 286
--------------------- --------------------- ----------------
Adjusted profit
before tax 703 258
Full year impact
of acquisitions 183 -
Annualised adjusted
profit before
tax 886 258
Adjusted Profit/(loss) Adjusting Profit after tax but before the
profit after tax items (note impact of the adjusting items.
after 4) and full As discussed above, adjusted
tax and period impact profit measures are used to provide
Annualised of acquisitions a useful and more comparable
adjusted measure of the ongoing performance
profit of the Group. Adjusted measures
after are reconciled to statutory measures
tax by removing adjusting items,
the nature of which are disclosed
above and further detailed in
note 4.
As discussed above, the Group
uses adjusted profit measures
to provide a useful and comparable
measure of the ongoing performance
of the Group.
Year ended Year ended
31 December 31 December
2018 2017
Profit after tax GBPm GBPm
------------ ------------
Loss after tax (475) (24)
Adjusting items
(note 4) 1,014 215
------------ ------------
Adjusted profit
after tax 539 191
Full year impact
of acquisitions 141 -
Annualised adjusted
profit after tax 680 191
------------ ------------
Adjusted Effective Adjusting The income tax charge for the
tax rate tax rate items, adjusting Group excluding adjusting tax,
tax items the net effect of new tax legislation
and the tax in the US enacted in December
impact of 2017 and the tax impact of adjusting
adjusting items, divided by adjusted profit
items (note before tax.
4 and note
5) This measure is a useful indicator
of the ongoing tax rate for the
Group.
Year ended Year ended
31 December 31 December
2018 2017
Adjusted tax rate GBPm GBPm
Tax credit per
Income Statement 75 4
Adjusting tax
items - (27)
Tax impact of
adjusting items (239) (44)
--------------------- ------------ -----------------
Adjusted tax charge (164) (67)
--------------------- ------------ -----------------
Adjusted profit
before tax 703 258
--------------------- ------------ -----------------
Adjusted tax rate 23.3% 25.9%
Reconciling
Closest equivalent items to
statutory statutory
APM measure measure Definition and purpose
-------------------
Adjusted Basic earnings Adjusting Profit after tax attributable
basic per share items (notes to owners of the Parent and before
earnings 4 and 7) the impact of adjusting items,
per share divided by the weighted average
number of ordinary shares in issue
during the financial year.
Adjusted Diluted earnings Adjusting Profit after tax attributable
diluted per share items (notes to owners of the Parent and before
earnings 4 and 7) the impact of adjusting items,
per share divided by the weighted average
number of ordinary shares in issue
during the financial year adjusted
for the effects of any potentially
dilutive options.
The Board considers this to be
a key measure of performance when
all businesses are held for the
complete reporting period.
Annualised Diluted earnings Adjusting Annualised profit after tax attributable
adjusted per share items (notes to owners of the Parent and before
diluted 4 and 7) the impact of adjusting items,
earnings and full divided by the number of ordinary
per share period impact shares in issue at 31 December
of acquisitions 2018 adjusted for the effects
of any potentially dilutive options.
The Board considers this to be
a key measure of performance when
adjusted results include businesses
owned for part of a period.
Year ended
31 December
Annualised adjusted diluted 2018
earnings per share GBPm
---------------
Annualised adjusted profit
after tax 680
---------------
Attributable to:
Owners of the parent 670
Non-controlling interests 10
Diluted number of shares
at 31 December 2018 (million) 4,858
Annualised adjusted diluted
earnings per share 13.8p
---------------
Interest None Not applicable Adjusted EBITDA as a multiple
cover of net interest payable on bank
loans and overdrafts, being 11.6x
in year ended 31 December 2018
(2017: 19.6x).
This measure is used for bank
covenant testing.
Balance Sheet Measures
Working Inventories, Not applicable Working capital comprises inventories,
capital trade and current and non-current trade
other receivables and other receivables and current
less trade and non-current trade and other
and other payables.
payables
Net debt Cash and Reconciliation Net debt comprises cash and cash
cash equivalents of net debt equivalents, interest-bearing
less interest-bearing (note 14) loans and borrowings and cross-currency
loans and swaps but excludes non-cash acquisition
borrowings fair value adjustments.
and finance
related Net debt is one measure that could
derivative be used to indicate the strength
instruments of the Group's Balance Sheet position
and is a useful measure of the
indebtedness of the Group.
Leverage None Not applicable Bank covenant definition of net
of net debt divided by Annualised adjusted
debt EBITDA for bank covenant purposes.
to Annualised
adjusted This measure is used for bank
EBITDA covenant testing.
Reconciling
Closest equivalent items to
statutory statutory
APM measure measure Definition and purpose
Bank Cash and Impact of Net debt (as above) is presented
covenant cash equivalents foreign in the Balance Sheet translated
definition less interest-bearing exchange at year end exchange rates.
of net loans and and adjustments
debt borrowings for bank For bank covenant testing purposes
at average and finance covenant net debt is converted using average
rates related derivative purposes exchange rates for the year.
instruments
31 December 31 December
2018 2017
Net debt GBPm GBPm
----------------------
Net debt at closing
rates (note 14) 3,482 572
Impact of foreign
exchange (86) 23
----------------------
Net debt at average
rates 3,396 595
Other adjustments
required for covenant 11 -
purposes
----------------------
Bank covenant definition
of net debt at
average rates 3,407 595
----------------------
Leverage 2.3x 1.9x
----------------------
Cash flow measures
Adjusted Net cash Non-working Adjusted operating cash flow (pre-capex)
operating from operating capital is calculated as adjusted EBITDA
cash flow activities items (note attributable to subsidiaries less
(pre-capex) 14) movements in working capital.
and Adjusted
operating Adjusted operating cash flow (pre-capex)
cash flow conversion is adjusted operating
conversion cash flow (pre-capex) divided
by adjusted EBITDA attributable
to subsidiaries.
This measure provides additional
useful information in respect
of cash generation and is consistent
with how business performance
is measured internally.
Year ended Year ended
31 December 31 December
2018 2017
Adjusted operating GBPm GBPm
cash flow
Adjusted EBITDA 1,147 314
Share of depreciation
and amortisation
of equity accounted (18) -
investments
Share of adjusted
operating profit
of equity accounted (59) -
investments
Adjusted EBITDA
attributable to
subsidiaries 1,070 314
Change in inventories (108) (8)
Change in receivables 181 8
Change in payables (159) (16)
Positive non-cash
impact from loss-making (63) -
contracts
Adjusted operating
cash flow (pre-capex) 921 298
Adjusted operating
cash flow conversion 86% 95%
Reconciling
Closest equivalent items to
statutory statutory
APM measure measure Definition and purpose
Free cash Net increase/decrease Acquisition Free cash flow represents cash
flow in cash and related cash generated from trading after
cash equivalents flows, dividends all costs including restructuring,
paid to owners pension contributions, tax and
of the parent, interest payments.
foreign exchange
and other
non-cash
movements
Capital None Not applicable Calculated as the purchase of
expenditure property, plant and equipment
(capex) and computer software and expenditure
on capitalised development costs
during the year, excluding any
assets acquired as part of a
business combination.
Capital None Not applicable Capital expenditure divided by
expenditure depreciation of property, plant
to depreciation and equipment and amortisation
ratio of computer software and development
costs.
Dividend Dividend Not applicable Amounts payable by way of dividends
per share per share in terms of pence per share.
(1) Operating profit/(loss) is not defined within IFRS but is a
widely accepted profit measure being profit/(loss) before finance
costs, finance income
and tax(.)
(2) Operating margin is not defined within IFRS but is a widely
accepted profit measure being derived from operating profit/loss(1)
divided by revenue.
[1] Considered by the Board to be a key measure of performance.
Adjusted measures are defined in the glossary to the Preliminary
Announcement
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR UNRRRKKAORUR
(END) Dow Jones Newswires
March 07, 2019 02:01 ET (07:01 GMT)
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