TIDMMRO
RNS Number : 2718L
Melrose Industries PLC
05 September 2019
5 September 2019
MELROSE INDUSTRIES PLC
UNAUDITED RESULTS
FOR THE SIX MONTHSED 30 JUNE 2019
Melrose Industries PLC today announces its interim results for
the six months ended 30 June 2019.
Highlights
Adjusted(1) results Statutory results
2019 2018 2019 2018
Continuing operations GBPm GBPm GBPm GBPm
--------- ---------- -------- ---------
Revenue 6,002 2,971 5,700 2,847
--------- ---------- -------- ---------
Operating profit/(loss) 539 284 (11) (325)
--------- ---------- -------- ---------
Profit/(loss) before tax 429 244 (128) (372)
--------- ---------- -------- ---------
Profit/(loss) after tax 330 188 (150) (330)
--------- ---------- -------- ---------
Diluted earnings per share 6.7p 6.0p (3.1)p (10.6)p
--------- ---------- -------- ---------
Group
-- Melrose is trading in line with expectations for 2019, with
the three main divisions of GKN on track to achieve previously
announced targets
-- Adjusted(1) operating profit was GBP539 million, which
excluding the uplift from loss-making contracts was GBP494 million.
The statutory operating loss was GBP11 million; of the GBP550
million adjusting items, only GBP79 million are cash
-- Net debt leverage at 2.3x EBITDA is better than expectations
due to stronger cash generation
-- Adjusted free cash inflow(2) from continuing operations of
GBP256 million
-- A new target to improve GKN's working capital efficiency,
releasing additional future free cash of GBP400 million within our
ownership period
-- An interim dividend of 1.7 pence per share (2018: 1.55 pence)
is declared, up 10%
Divisions
-- Aerospace performance is significantly better than prior year
period; adjusted(1) operating profit growth(3) of 37% and
adjusted(1) operating margin improvement of 2.0 percentage
points
-- Aerospace increasing to 34% of Group adjusted(1) profits,
becoming the largest division and profit driver in Melrose
-- Record year of investment in Aerospace technology and a major
announcement to create the 'One GKN Aerospace' organisation, to
improve performance further
-- Automotive and Powder Metallurgy are maintaining profit well
in an automotive industry downturn, due to decisive cost
reductions
-- Significant investment made into class leading eDrive
technology
-- Nortek businesses' adjusted(1) operating profit has grown by
approximately 40% during our ownership
-- Nortek Air & Security has strong fundamentals, HVAC has
signed a significant new contract for its industry leading new
proprietary StatePoint Technology(R)
-- Security & Smart Technology is challenged by US tariffs
and market headwinds
-- Many operational improvement programmes and capital
investment projects are underway to help improve performance
further, while good progress is being made on resolving the GKN
loss-making contracts
Justin Dowley, Chairman of Melrose Industries PLC, today
said:
"These results show the initial fruits of the 'improve' stage of
Melrose's ownership of GKN and, with the overall GKN margin
increasing positively, we are excited about what is possible. The
performance is in line with expectations and leverage is better
than expected. At the same time, this has been a year of record
investment in Aerospace technology and substantial eDrive
development. The Melrose Board is confident that our businesses
will deliver significant upside for shareholders."
(1. Considered by the Board to be a key measure of performance.
The adjusted results are described in the glossary to the Interim
Financial Statements)
(2. Adjusted free cash inflow excludes the one-off pension
contributions, restructuring spend and cash used in discontinued
operations)
(3. Growth is calculated at constant currency against 2018
results, excluding the impact of loss-making contracts in both
periods for consistency)
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
Investor Relations: ir@melroseplc.net
CHAIRMAN'S STATEMENT
I am pleased to report our interim results for the six months
ended 30 June 2019, which are in line with expectations for the
full year.
RESULTS FOR THE CONTINUING GROUP
These interim results include statutory revenue for the Melrose
Group of GBP5,700 million (2018: GBP2,847 million), an adjusted
profit before tax of GBP429 million (2018: GBP244 million) and a
statutory loss before tax of GBP128 million (2018: statutory loss
of GBP372 million).
Further details of these results are contained in the Finance
Director's Review.
TRADING
Having owned the GKN businesses for just over a year, we are
pleased with how they have responded to our initial investments and
initiatives. GKN Aerospace revenue grew strongly in the period with
decisive operational improvements also made, delivering a
significant increase in profit. While the global automotive sector
downturn is affecting the GKN Automotive and GKN Powder Metallurgy
businesses, we are pleased with their performance against the
challenging market backdrop.
We remain focused on technology and efficiency across our
businesses and there are substantial operational improvements
available. We are working with our management teams to secure these
improvements, whilst ensuring strong cash management. Even with
investments in technology at record levels, we have kept leverage
at 2.3x EBITDA and well within expectations.
The Nortek acquisition continues to be a success as our
investments start to deliver good returns, with profit for the
Nortek businesses up by approximately 40% in our ownership and the
Air businesses performing well. Unfortunately, the Security &
Smart Technology business continues to face material and persistent
market headwinds and tariff pressure, resulting in us taking the
actions outlined in these results.
Further details of these results are contained in the Chief
Executive's Review and the Finance Director's Review and I would
like to thank all employees for their efforts in helping to produce
this strong performance.
DIVID
Your Board declared an interim dividend of 1.7 pence per share
(2018: 1.55 pence), which is a 10% increase on last year and will
be paid on 11 October 2019 to shareholders on the register at the
close of business on 13 September 2019. Your Board continues to
align its dividend policy with the earnings of the Group and will
use this basis to set future dividends, including for the final
dividend for this year.
BOARD MATTERS
The Board has commenced a search for an additional non-executive
director with a view to further increasing the strength and
diversity of the Board.
STRATEGY
Melrose targets generating superior returns for our shareholders
whilst protecting the interests of all stakeholders through the
acquisition of high quality but under-performing manufacturing
businesses, investing heavily to improve their operational
performance before identifying an appropriate purchaser who will
look to guide them through their next phase of development.
The acquisition of GKN last year is the latest example of this
strategy in action and we are pleased to see the GKN businesses
already responding positively to the Melrose approach.
OUTLOOK
With these good results and actions underway, we remain
confident the Group will trade in line with our expectations for
this year, despite some macro challenges presented by tariffs and
the automotive sector downturn. We are on track to improve the
performance of our businesses, driven by continued and significant
investment in operational improvement projects, and backed by
stronger cash management and cost control, customer delivery and
management accountability. We are positive about the prospects for
the rest of 2019 and beyond.
Justin Dowley
Chairman
5 September 2019
CHIEF EXECUTIVE'S REVIEW
The first half of 2019 has been a busy period. We have focused
with our operational management teams on implementing targeted
investments, faster decision-making and improving customer
delivery, which will achieve the improvements that underline our
divisional profit margin targets. We have made a strong start in
addressing the GBP600 million of loss-making contracts of the GKN
businesses identified on acquisition, and we are seeing positive
change take hold. This has been an important area of focus for us
and we will update shareholders further in the full year accounts.
Following the success of a major procurement savings initiative, we
have commenced a thorough working capital review across the GKN
businesses, to unlock GBP400 million of additional future cash
within our ownership period. For the GKN group this has not been an
area previously focused upon.
At GKN Aerospace, sales were up by 7% compared to the first half
of last year. This is a strongly performing sector and is now the
biggest contributor to Melrose's Group profits. There is an
opportunity to improve this division so that it achieves its
potential. Having worked hard to address the inherited customer
relationship issues through improved performance and delivery, the
business is now in a position to implement the global operating
model announced this week. This will overcome the previously
fragmented structure and move it to a truly global integrated
business "One GKN Aerospace". We see this as a key stepping stone
in the ongoing improvement and performance of this division.
During the period, GKN Automotive has been dealing with the
global market downturn, which we expect to continue into the second
half. Prompt steps have been taken to control costs, which has
included the recently announced closure of one of its German
production facilities. GKN Powder Metallurgy has also been affected
by the automotive sector downturn and, like GKN Automotive, its
management team has been quick to take the necessary steps to
reengineer its business and protect profits.
In the Nortek Air & Security division, the Air businesses
have performed well, but we have struggled with a number of factors
affecting the Security & Smart Technology business. A
combination of significant tariff pressure, difficult market
conditions and the scheduled expiry of a major customer contract
has impacted trading performance in this particular business. This
has led us to review its underlying value in accordance with the
appropriate accounting standards. It is important to put this into
context with the overall improved performance of the Nortek
businesses, including an approximate 40% increase in profit for the
original Nortek Group since its acquisition. Overall, there has
been a substantial increase in shareholder value at Nortek.
At the same time, our commitment to invest in the technological
development of our businesses has accelerated during the first half
of 2019, including breaking ground at the new GBP32 million GKN
Aerospace Global Technology Centre in Filton, UK; commencing work
on the initial projects in the five year, GBP300 million investment
programme in GKN Automotive's eDrive technology; building out the
additive manufacturing capabilities for GKN Powder Metallurgy; and
supporting Nortek HVAC in their production ramp up for the
world-leading data centre climate control system StatePoint
Technology(R).
The sale of Walterscheid Powertrain Group was also completed in
the period, further streamlining the Group. Details of the first
half trading performance for each continuing business are set out
below.
AEROSPACE
GKN Aerospace made strong progress in the first half of 2019,
with sales and operating margins significantly improved. A number
of its North American facilities have returned to profitability
after receiving continued investment to sustainably improve their
processes, workforce and performance. This has set a strong
foundation from which to drive necessary margin improvements.
Efforts to improve its European Aerostructures and Engine
Systems operational performance are going well. As part of a
wholesale strategic review, the Special Technologies business
announced its intention to close its Kings Norton site, while
investing approximately GBP50 million in its other sites, including
Luton and Portsmouth. These investments will bolster the business's
position in developing world-leading niche technologies, including
fuel and flotation tanks, advanced canopies and cabin windows, and
electro-thermal ice-protection systems.
Additive manufacturing remains a key focus, with a new
world-leading pilot production cell at Oak Ridge National
Laboratory in the USA and two new additive manufacturing programmes
in Bristol, UK. These initiatives will further enhance GKN
Aerospace's strong market position within additive manufacturing
and composite manufacturing, as demonstrated by the production of
the first demonstrator wing components for Airbus's Wing of
Tomorrow research programme.
AUTOMOTIVE
GKN Automotive completed its leadership team change during the
first half of 2019 and continued to strive to offset difficult
market conditions and industry-wide pressure on sales, through a
disciplined focus on commercial excellence and cost improvement. We
are very pleased with the financial performance of this business in
the first half. Revenue declines were in line with market trends
and have been met with an improvement in operating margins against
2018.
Whilst adverse market conditions have masked the financial
performance improvement, we are confident that the much stronger
business we anticipated at acquisition will emerge as market
conditions improve. In the circumstances, this is the most
creditable performance of all the GKN businesses. Our management
team has continued to grow a strong pipeline of new business,
including four new eDrive programmes that are expected to
progressively ramp up over the next 12 months.
As with all of the GKN businesses, the pursuit and gradual
realisation of operating margin increases have promoted an
increased focus on working capital, which has led to an improved
cash flow position for the business.
We currently expect second half trading to be similar to the
first half of 2019. As with GKN Aerospace, this business has
significant upside potential and its new management team is well
positioned to realise this.
POWDER METALLURGY
The division performed well in challenging automotive market
conditions, with the business taking prompt action to ensure it
achieved its margin and cash generation targets. Continuous
improvement plans delivered the expected positive results, while
over GBP100 million new business wins were booked in the period. In
addition, the business acquired and integrated a small bearings
business in Italy, which increased its already strong presence in
the industrial sector in Europe and we continue to support its
focused acquisition strategy.
Progress has been made in reorganising GKN Powder Metallurgy's
footprint, as well as enhancing customer development initiatives
and collaboration in order to identify and introduce new powder
metallurgy and additive manufacturing applications to new energy
vehicles.
We expect end markets to remain challenging but for operational
improvements to partly offset this. We are now executing on our
strategy to develop cutting edge additive technology in this
business, refocus on operating margin improvement and improve the
operations of the business.
NORTEK AIR & SECURITY
The performance of Nortek Global HVAC ("HVAC") in this period
has been good, with end markets largely positive and we are very
pleased with its development. The high point has been the
development of world leading technology in StatePoint
Technology(R), as a result of considerable investment in people and
technology over the last two years.
The HVAC leadership team has continued to drive margin expansion
and new product development. They have focused on capturing
profitable growth within expanding vertical segments for retrofit
and new construction, particularly in the residential and
commercial markets, and innovative plug-and-play solutions for the
manufactured multi-family housing and light commercial markets.
Sustained investment in research and development during the
first half of 2019 has continued to enhance core product platforms.
Alongside the newly launched StatePoint Technology(R), a new High
Performance Computing Portfolio has ramped up during the first half
of the year which, along with HVAC's core Air Handling and Computer
Room Air Handler systems, continue to address growing demand within
the data centre cooling market. Two transformational projects have
been announced with a major technology firm that position this
business at the forefront of this market globally.
Simultaneously, HVAC has continued to implement its operational
footprint strategy by consolidating resources and upgrading its
existing manufacturing plants, underpinning our confidence in its
prospects for the rest of the year.
The Air Quality & Home Solution business ("AQH") saw modest
sales growth during the first half of 2019, but was held back by
lower single family housing starts in Canada and a slow start to
the year for US housebuilders. The business has successfully
implemented its 2019 product launch strategy, which remains on
track and is expected to positively impact financial performance in
the second half of 2019. Since our acquisition, we have redeveloped
the products of AQH substantially so as to further consolidate the
position of this business in its very strong North American
market.
Security & Smart Technology ("SST") is our most challenging
Nortek business. It continues to see an increasingly competitive
market in its traditional security markets, and flat demand for its
products in the home control and access markets. In response to
these challenges, SST has renewed its focus on technology and made
further structural changes to the business to improve its
competitive positions.
During the first half of 2019, SST continued to integrate the
IntelliVision technologies it acquired last year into its Home
Control and Access product lines. The business expects to launch
its next generation security platform over the next 12 months,
which will incorporate these new capabilities and complete the full
integration of analytics-based technologies across all of its
product platforms. The IntelliVision business has continued to
broaden SST's patent portfolio for these and related emerging
technologies, which have made it a leading player in the security
sector for data analytic technology.
Against the backdrop of difficult market conditions and
continuing pressure from tariffs, the business has taken the
decision to close its Chinese factory and switch to contract
manufacturing with a third party supplier. While this move is on
track to deliver the intended benefits, overall, we expect market
conditions to remain challenging.
OTHER INDUSTRIAL
The newly-installed fully flexible, automated off-highway rim
line at the GKN Wheels & Structures facility in the UK,
committed prior to our ownership, came on-stream during the first
half of 2019. This has been further bolstered by a new management
team and the sale of the Italian manufacturing line producing
commoditised products. The positive impact of these changes will be
realised over the next 12 months.
Global economic prospects for Brush's main markets remain
uncertain and the underlying trading environment in the first half
of 2019 continued to present significant challenges. Brush's key
gas turbine market continues to run far below its previous peak,
with anticipated stabilisation in generator demand for Brush this
year of approximately 50 generators, leading it to explore
alternative applications for its generator products and grow its
aftermarket services.
Ergotron is a market leading business, which is being impacted
by factors mainly outside its control, primarily tariffs and the
resultant market disruptions. The first half performance was down
compared to the first half of last year but at a similar level to
the second half of 2018. Following the implementation of US
tariffs, a review of its manufacturing footprint is now underway
and a strong pipeline of new products will launch this year and in
2020.
GROUP OUTLOOK
Our businesses have continued to perform in line with
expectations over this busy period. We are pleased that overall
Nortek is performing in a manner that shows it will deliver the
shareholder value we anticipated, albeit we have work to do, in
particular at SST. This has also been a period of huge positive
change at the GKN businesses. Despite automotive trading headwinds,
these businesses have enormous potential and it is both exciting
and a privilege to be on the journey to deliver that.
Simon Peckham
Chief Executive
5 September 2019
FINANCE DIRECTOR'S REVIEW
The results for the Group for the six months ended 30 June 2019
have been significantly impacted by the acquisition of GKN in April
last year. As a result, any comparisons with prior year are
difficult to interpret.
The comparative results in this Interim Report, which include
GKN for 73 days only, have been restated to show the results of the
Walterscheid Powertrain Group as a discontinued operation following
its disposal on 25 June 2019 and have also been restated to reflect
the finalisation of the opening Balance Sheet review process for
GKN.
MELROSE GROUP RESULTS - CONTINUING OPERATIONS
Statutory results:
The statutory IFRS results are shown on the face of the Income
Statement and show revenue of GBP5,700 million (2018: GBP2,847
million), an operating loss of GBP11 million (2018: loss of GBP325
million) and a loss before tax of GBP128 million (2018: loss of
GBP372 million). The diluted earnings per share ("EPS"), calculated
using the weighted average number of shares in issue during the
period of 4,858 million (2018: 3,045 million), were a loss of 3.1
pence (2018: loss of 10.6 pence).
Adjusted results:
The adjusted results are also shown on the face of the Income
Statement. They are adjusted to include the revenue and operating
profit from equity accounted investments ("EAIs") and 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 the Group'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"). APMs used by
the Group are set out in the glossary to the Condensed Interim
Financial Statements.
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 for the period ended 30 June 2019 show
revenue of GBP6,002 million (2018: GBP2,971 million), an operating
profit of GBP539 million (2018: GBP284 million) and a profit before
tax of GBP429 million (2018: GBP244 million). Adjusted diluted EPS
were 6.7 pence (2018: 6.0 pence).
Tables summarising the statutory results and adjusted results by
reportable segment are shown in note 3 of the Condensed Interim
Financial Statements.
The results for the period included a positive impact from
utilising loss-making contract provisions which were required under
IAS 37: "Provisions, contingent liabilities and contingent assets",
and were identified during the opening Balance Sheet review process
for GKN.
Excluding the positive impact of the utilisation of the
loss-making contracts provision, the adjusted results for
continuing operations would show an operating profit of GBP494
million, and an adjusted diluted EPS of 6.0 pence.
RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS
The following tables reconcile the Group statutory revenue and
operating loss to adjusted revenue and adjusted operating
profit:
2019 2018
Continuing operations: GBPm GBPm
------------------------------------------- ------ -----
Statutory revenue 5,700 2,847
------------------------------------------- ------ -----
Adjusting item:
------------------------------------------- ------ -----
Revenue from equity accounted investments 302 124
------------------------------------------- ------ -----
Adjusted revenue 6,002 2,971
------------------------------------------- ------ -----
Adjusting revenue item:
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.
During the period ended 30 June 2019, EAIs in the Group generated
GBP302 million of revenue (2018: GBP124 million), 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 from these EAIs is
included.
2019 2018
Continuing operations: GBPm GBPm
------------------------------------------------- ------ -----
Statutory operating loss (11) (325)
------------------------------------------------- ------ -----
Adjusting items:
------------------------------------------------- ------ -----
Amortisation of intangible assets acquired in
business combinations 269 125
------------------------------------------------- ------ -----
Impairment of assets 179 -
------------------------------------------------- ------ -----
Restructuring costs 75 128
------------------------------------------------- ------ -----
Currency movements in derivatives and movements
in associated financial assets and liabilities 13 123
------------------------------------------------- ------ -----
Acquisition and disposal related costs 11 124
------------------------------------------------- ------ -----
Other 3 10
------------------------------------------------- ------ -----
Reversal of uplift in value of inventory - 99
------------------------------------------------- ------ -----
Adjustments to statutory operating loss 550 609
------------------------------------------------- ------ -----
Adjusted operating profit 539 284
------------------------------------------------- ------ -----
Adjusting items to operating profit are consistent with prior
periods and include:
The amortisation charge on intangible assets acquired in
business combinations of GBP269 million (2018: GBP125 million) 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.
The 2018 Annual Report disclosed that the determination of the
recoverable amount in respect of the Security & Smart
Technology group of cash generating units ("CGUs") involved
management estimation of the impact of highly uncertain matters at
that time. Enhanced disclosures, including sensitivity analysis in
respect of the key assumptions used in the forecast models, were
shown at the 2018 year end. Subsequently, there has been further
deterioration in both the performance during the period and
forecast future prospects, particularly following increases in US
tariffs for goods being imported from China. This along with the
increased level of competition and technological change in the
market has resulted in the necessity to impair goodwill allocated
to the Security & Smart Technology group of CGUs by GBP179
million. The impairment charge is shown as an adjusting item due to
its non-trading nature and size.
Restructuring and other associated costs in the period totalled
GBP75 million (2018: GBP128 million). Restructuring costs are
adjusting items due to their size and non-trading nature and during
the period ended 30 June 2019 they included:
-- A charge of GBP45 million in respect of the GKN businesses.
Within this, GBP26 million related to the Aerospace division and
included costs incurred in improving quality and delivery for
customers in North America and costs relating to footprint
rationalisation projects within the Special Technologies business.
Within the Automotive division, GBP14 million of costs have been
incurred addressing the cost base of the business, whilst ensuring
a more flexible cost structure going forward. In addition, GBP5
million of restructuring costs were incurred in the Powder
Metallurgy division.
-- A charge of GBP21 million within Nortek Air & Security,
primarily relating to structural footprint changes in the Security
& Smart Technology business in an attempt to mitigate the
negative impact of the increase in US tariffs on goods manufactured
in China. In addition, there were charges related to continued
footprint rationalisation within the HVAC business.
-- A charge of GBP5 million within Other Industrial businesses,
predominantly relating to the finalisation of the restructuring
activities announced in Brush last year.
Hedge accounting is not applied within the GKN businesses for
transactional foreign exchange exposure. For consistency, the
movement in the fair 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 in the
GKN businesses, along with foreign exchange movements on the
associated financial assets and liabilities, totalling a charge of
GBP13 million (2018: GBP123 million), is shown as an adjusting item
because of its volatility and size.
Acquisition and disposal related costs of GBP11 million (2018:
GBP124 million) were incurred in the period and included the profit
or loss on the sale of two smaller businesses and their related
transaction costs. These items are excluded from adjusted results
due to their non-trading nature.
Other adjusting items include the charge for the Melrose
equity-settled Incentive Scheme, including its associated
employer's tax charge, of GBP7 million (2018: GBP10 million) which
is excluded from adjusted results due to its volatility; an
adjustment of GBP14 million (2018: GBP3 million) to gross up the
post tax profits of EAIs to be consistent with the adjusted
operating profits of subsidiaries within the Group; and the net
release of fair value items totalling GBP18 million (2018: GBP3
million) resolved for more favourable amounts than first
expected.
GOODWILL AND IMPAIRMENT REVIEW
Following the GKN acquisition in April 2018, an extensive review
of the GKN assets, liabilities and accounting policies in
accordance with IFRS 3 "Business Combinations" has now been
completed.
Since the year end this review has resulted in increases to
goodwill of GBP6 million, intangible assets of GBP21 million,
provisions and trade and other payables of GBP10 million and a
decrease to deferred tax assets of GBP17 million. The June 2018 and
December 2018 Balance Sheets have been restated in accordance with
IFRS 3.
The Security & Smart Technology business has experienced
tough trading conditions and as a result enhanced disclosures,
including sensitivity analysis in respect of the key assumptions
used in the forecast models, were shown in the 2018 Annual
Report.
During the period the impact of US tariffs on goods imported
from China became clearer. The impact of US tariffs and the
increased level of competition and technological change in the
market caused further deterioration in performance and in forecast
future prospects, resulting in a structural review of the business.
This review resulted in the decision to close the manufacturing
facility in China and the outsourcing of production to a third
party.
A full impairment review has been performed on the Security
& Smart Technology group of CGUs, which has assumed that US
tariffs at the current higher rate will remain permanently,
resulting in an impairment charge of GBP179 million in the
period.
DISPOSAL OF WALTERSCHEID POWERTRAIN GROUP
On 25 June 2019 the Group completed the disposal of Walterscheid
Powertrain Group to One Equity Partners, a US-based private equity
firm for cash consideration of GBP185 million, less costs charged
in the period of GBP7 million. Retirement benefit obligations of
GBP155 million were disposed with the business and the loss on
disposal was GBP21 million after the recycling of cumulative
translation differences of GBP13 million.
Walterscheid Powertrain Group was acquired with GKN on 19 April
2018, contributed GBP206 million of revenue and GBP10 million of
statutory operating profit in the period from 1 January 2019 up to
the date it was disposed, and is shown within discontinued
operations.
TAX - CONTINUING OPERATIONS
The statutory results for the period show a tax charge of GBP22
million (2018: credit of GBP42 million), arising on a statutory
loss before tax of GBP128 million (2018: loss of GBP372 million). A
tax charge was incurred on the statutory loss because certain
adjusting items, discussed earlier in this review, did not give
rise to tax deductions.
The Group Income Statement adjusted tax rate in the period was
23% (2018: 23%) and the Group paid GBP79 million (2018: GBP22
million) representing 18% of adjusted profit before tax.
ADOPTION OF IFRS 16 "LEASES"
IFRS 16 was adopted on 1 January 2019 and required operating
leases to be recognised on the Balance Sheet. Previously only
finance leases were recognised on the Balance Sheet, with costs
associated with leases categorised as operating expensed through
the Income Statement as incurred.
The impact of IFRS 16, on transition, has been to recognise a
lease liability of GBP589 million with a corresponding right-of-use
fixed asset in the Balance Sheet, which offset each other. The
impact of IFRS 16 on the Income Statement in the period was to
increase finance costs by GBP11 million, but this was broadly
offset by an associated increase in operating profit. In addition,
approximately GBP35 million of costs have been reclassified from a
lease expense to depreciation.
Both the lease liability and the depreciation on leased assets
are excluded from the definition of net debt and the resulting
leverage calculations in the Group banking agreements.
CASH GENERATION AND MANAGEMENT
Group net debt at 30 June 2019, translated at closing exchange
rates (being US $1.27 and EUR1.12), was GBP3,454 million (31
December 2018: GBP3,482 million). For bank covenant purposes the
Group's net debt is calculated at average exchange rates for the
previous twelve months, to better align the calculation with the
currency rates used to calculate profits. The Group net debt
leverage at 30 June 2019 was 2.3x EBITDA.
The movement in net debt during the period is summarised as
follows:
2019 2018
Movement in Group net debt GBPm GBPm
----------------------------------------------- -------- -------
At 1 January (3,482) (572)
----------------------------------------------- -------- -------
GKN acquisition related net debt movements - (2,789)
----------------------------------------------- -------- -------
Adjusted net debt brought forward (3,482) (3,361)
----------------------------------------------- -------- -------
Non-trading items:
----------------------------------------------- -------- -------
Net cash flow from disposal of Walterscheid
Powertrain Group 172 -
----------------------------------------------- -------- -------
Acquisition related costs (15) (26)
----------------------------------------------- -------- -------
Dividend paid to Melrose shareholders (148) (54)
----------------------------------------------- -------- -------
Foreign exchange and other non-cash movements (41) (24)
----------------------------------------------- -------- -------
Cash flow from non-trading items (32) (104)
----------------------------------------------- -------- -------
Free cash flow 60 92
----------------------------------------------- -------- -------
At 30 June at closing exchange rates (3,454) (3,373)
----------------------------------------------- -------- -------
At 30 June at twelve month average exchange
rates (3,404) (3,330)
----------------------------------------------- -------- -------
An analysis of the free cash flow is shown in the table below.
The comparative period includes GKN for 73 days following the
acquisition:
2019 2018
GBPm GBPm
--------------------------------------------------- ------ -----
Adjusted operating cash flow (pre capex) 599 240
--------------------------------------------------- ------ -----
Net capital expenditure (235) (85)
--------------------------------------------------- ------ -----
Net interest and net tax paid (148) (50)
--------------------------------------------------- ------ -----
Defined benefit pension contributions (111) (20)
--------------------------------------------------- ------ -----
Restructuring (91) (50)
--------------------------------------------------- ------ -----
Dividend income from equity accounted investments 67 64
--------------------------------------------------- ------ -----
Net other (including discontinued operations) (21) (7)
--------------------------------------------------- ------ -----
Free cash flow 60 92
--------------------------------------------------- ------ -----
Adjusted free cash flow 256 135
--------------------------------------------------- ------ -----
Net capital expenditure in the period was GBP235 million (2018:
GBP85 million), representing 1.1x depreciation on non-leased
assets. Net interest paid in the period was GBP69 million (2018:
GBP28 million) and tax was GBP79 million (2018: GBP22 million).
Adjusted free cash flow of GBP256 million (2018: GBP135 million)
is considered to be a reflection of ongoing Group cash flow and is
shown before the one-off special pension contribution of GBP94
million (2018: GBPnil), being the balance of the Melrose commitment
to contribute GBP150 million to the GKN UK 2012 and 2016 plans
within the first twelve months of GKN ownership. It is also shown
before cash spent on restructuring projects of GBP91 million (2018:
GBP50 million) and cash flows used in discontinued operations of
GBP11 million (2018: GBP7 million cash generated).
Free cash flow in the period, after all costs, was GBP60 million
(2018: GBP92 million).
PROVISIONS
Total provisions at 30 June 2019 were GBP1,335 million (31
December 2018: GBP1,471 million, restated following the
finalisation of the GKN opening Balance Sheet review process).
The following table details the movement in provisions in the
period:
Total
GBPm
--------------------------------------------------------------- -----
At 1 January 2019 (restated) 1,471
--------------------------------------------------------------- -----
Spend against provisions (156)
--------------------------------------------------------------- -----
Net charge to adjusted operating profit 49
--------------------------------------------------------------- -----
Net charge shown as an adjusting item in the Income Statement 37
--------------------------------------------------------------- -----
Utilisation of loss-making contract provision (45)
--------------------------------------------------------------- -----
Other (including foreign exchange) (21)
--------------------------------------------------------------- -----
At 30 June 2019 1,335
--------------------------------------------------------------- -----
The net charge to adjusted operating profit in the period of
GBP49 million, includes GBP12 million in respect of certain
non-cash divisional long-term incentive plan charges, and the
remainder is primarily in respect of warranty, product liability
and workers' compensation charges which are matched by similar cash
payments in the period.
The net charge shown as an adjusting item in the Income
Statement of GBP37 million, consists of charges of GBP68 million,
primarily related to restructuring activities discussed in the
adjusting items section of this review, offset by a GBP31 million
provision release, primarily relating to loss-making contracts
which have been favourably resolved.
During the period GBP91 million of cash was spent on
restructuring.
Included within other movements are foreign exchange changes,
the unwind of discounting on certain provisions, the
reclassification of surplus property lease provisions following the
adoption of IFRS 16 and the provisions disposed with Walterscheid
Powertrain Group.
PENSIONS AND POST-EMPLOYMENT OBLIGATIONS
At 30 June 2019 total plan assets of the Melrose Group's defined
benefit pension plans were GBP3,366 million (31 December 2018:
GBP3,273 million) and total plan liabilities were GBP4,692 million
(31 December 2018: GBP4,686 million), a net deficit of GBP1,326
million (31 December 2018: GBP1,413 million).
The values of the Group plans were updated at 30 June 2019 by
independent actuaries to reflect the latest key assumptions. A
summary of the assumptions used are shown in note 12 to the
Condensed Interim Financial Statements.
The most significant pension plan in the Group is the GKN UK
2012 plan, with a net accounting deficit of GBP583 million at 30
June 2019 (31 December 2018: GBP606 million). The plan had gross
assets of GBP2,191 million (31 December 2018: GBP2,007 million) and
liabilities of GBP2,774 million (31 December 2018: GBP2,613
million).
The Group has paid its committed one-off GBP150 million
contribution and is making ongoing annual contributions of GBP60
million to the GKN UK 2012 and 2016 plans. In addition, the Group
has committed to contribute to these plans 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. These commitments cease when the funding
target, which has been agreed with the 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.
On 1 July 2019 the GKN UK 2012 plan was separated into four
pension plans, two of which have been allocated to the Aerospace
division and two to the Automotive division as follows:
Assets Liabilities Deficit
GKN UK 2012 pension plan split GBPm GBPm GBPm
-------------------------------- -------- ----------- --------
Aerospace pension plans 1,402 (1,775) (373)
-------------------------------- -------- ----------- --------
Automotive pension plans 789 (999) (210)
-------------------------------- -------- ----------- --------
Total 2,191 (2,774) (583)
-------------------------------- -------- ----------- --------
Ongoing progress was made in the period to manage the pension
liabilities within the Group. The disposal of Walterscheid
Powertrain Group, the buyout of the Broan Aftermarket North
America, Inc. Group Pension Plan and some members voluntarily
choosing to leave certain pension plans, resulted in Group gross
pension liabilities reducing by over GBP400 million.
Contributions to the Melrose Group defined benefit pension plans
and post-employment medical plans from continuing operations in the
period were GBP111 million and included GBP94 million of one-off
special contributions, being the balance of the GBP150 million
upfront commitment following the acquisition of GKN.
EXCHANGE RATES USED IN THE PERIOD
Exchange rates used for currencies most relevant to the Group in
the period were:
Average rate
for GKN ownership Average Closing
US Dollar in 2018 rate rate
----------------------------------- ------------------ --------- --------
Six months to 30 June 2019 N/A 1.29 1.27
----------------------------------- ------------------ --------- --------
Twelve months to 31 December 2018 1.31 1.33 1.27
----------------------------------- ------------------ --------- --------
Six months to 30 June 2018 1.35 1.38 1.32
----------------------------------- ------------------ --------- --------
Euro
----------------------------------- ------------------ --------- --------
Six months to 30 June 2019 N/A 1.15 1.12
----------------------------------- ------------------ --------- --------
Twelve months to 31 December 2018 1.13 1.13 1.11
----------------------------------- ------------------ --------- --------
Six months to 30 June 2018 1.14 1.14 1.13
----------------------------------- ------------------ --------- --------
The Group policy on foreign currency risk is explained on pages
47 and 48 of the 2018 Annual Report, a copy of which is available
on the Company's website, www.melroseplc.net.
Noting recent movements in exchange rates, the following table
shows an indication of the full year impact of a 10 percent
strengthening of the major currencies, if they were to strengthen
in isolation against all other currencies, on the re-translation of
adjusted operating profit into Sterling:
GBPm USD EUR CNY Other
-------------------------------- ---- ---- ---- ------
Movement in adjusted operating
profit 71 22 9 16
-------------------------------- ---- ---- ---- ------
% impact on adjusted operating
profit 6% 2% 1% 1%
-------------------------------- ---- ---- ---- ------
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
result in a partial natural hedge against the translational
movement in profits and would have had the following impact on net
debt as at 30 June 2019:
GBPm USD EUR
------------------ ---- ----
Increase in debt 233 82
-------------------- ---- ----
FINANCIAL RISKS AND UNCERTAINTIES
The principal financial risks and uncertainties faced by the
Group have not changed significantly from 2018. In summary, these
financial risks include liquidity risk, finance cost risk, exchange
rate risk, contract and warranty risk and commodity risk. Detailed
explanations of these risks are discussed on pages 46 to 48 of the
2018 Annual Report and further explanations and details of the
strategic risk profile of the Group are set out on pages 52 to 58
of the 2018 Annual Report.
BREXIT
Whilst the effect of Brexit on the European economy remains
unclear, due to the Group's geographically balanced manufacturing
footprint, on a micro level resulting tariffs and customs clearance
are not expected to have a material negative effect on the Group as
a whole.
Sales of product between the UK and Europe are a small
proportion 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 7%. However, the outcome of any Brexit agreement is unknown, as
is 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 disruptive exit from the EU, or from any wider
supply-chain disruption causing scheduling issues for customers or
suppliers. 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.
Geoffrey Martin
Group Finance Director
5 September 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.
RESPONSIBILITY STATEMENT
We confirm to the best of our knowledge:
a) the condensed financial statements have been prepared in
accordance with IAS 34 "Interim Financial Reporting";
b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
and their impact, and description of principal risks and
uncertainties for the remaining six months of the financial year);
and
c) the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related parties'
transactions and changes therein).
By order of the Board
Simon Peckham Geoffrey Martin
Chief Executive Group Finance Director
5 September 2019 5 September 2019
INDEPENT REVIEW REPORT TO MELROSE INDUSTRIES PLC
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2019 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
cash flows, the condensed consolidated balance sheet, the condensed
consolidated statement of changes in equity and related notes 1 to
13. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2019 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
5 September 2019
Melrose Industries PLC
Condensed Consolidated Income Statement
Restated(1)
6 months 6 months
ended ended Restated(2)
30 June 30 June Year ended
2019 2018 31 December
Unaudited Unaudited 2018
Continuing operations Notes GBPm GBPm GBPm
--------------------------------------- ------- ---------- ----------- ------------
Revenue 3 5,700 2,847 8,325
Cost of sales (4,568) (2,342) (6,717)
--------------------------------------- ------- ---------- ----------- ------------
Gross profit 1,132 505 1,608
Share of results of equity accounted
investments 8 16 12 34
Net operating expenses (1,159) (842) (2,027)
--------------------------------------- ------- ---------- ----------- ------------
Operating loss 3 (11) (325) (385)
Finance costs (126) (51) (161)
Finance income 9 4 5
Loss before tax (128) (372) (541)
Tax 5 (22) 42 73
--------------------------------------- ------- ---------- ----------- ------------
Loss after tax for the period from
continuing operations (150) (330) (468)
Discontinued operations
Loss for the period from discontinued
operations 9 (15) (4) (7)
--------------------------------------- ------- ---------- ----------- ------------
Loss after tax for the period (165) (334) (475)
--------------------------------------- ------- ---------- ----------- ------------
Attributable to:
Owners of the parent (168) (328) (475)
Non-controlling interests 3 (6) -
--------------------------------------- ------- ---------- ----------- ------------
(165) (334) (475)
Earnings per share
Continuing operations
- Basic 6 (3.1)p (10.6)p (11.8)p
- Diluted 6 (3.1)p (10.6)p (11.8)p
Continuing and discontinued operations
- Basic 6 (3.4)p (10.8)p (12.0)p
- Diluted 6 (3.4)p (10.8)p (12.0)p
Adjusted results from continuing
operations
Adjusted revenue 3 6,002 2,971 8,818
Adjusted operating profit 3,4 539 284 819
Adjusted profit before tax 4 429 244 677
Adjusted profit after tax 4 330 188 520
Adjusted basic earnings per share 6 6.7p 6.0p 12.8p
Adjusted diluted earnings per share 6 6.7p 6.0p 12.8p
--------------------------------------- ------- ---------- ----------- ------------
(1) Results for the period ended 30 June 2018 have been restated
for the finalisation of acquisition accounting for GKN (see note 2)
and discontinued operations (see note 9).
(2) Results for the year ended 31 December 2018 have been
restated for discontinued operations (see note 9).
Melrose Industries PLC
Condensed Consolidated Statement of Comprehensive Income
Restated(1)
6 months 6 months
ended ended
30 June 30 June Year ended
2019 2018 31 December
Unaudited Unaudited 2018
Notes GBPm GBPm GBPm
---------------------------------------- ------- ---------- ----------- -------------
Loss after tax for the period (165) (334) (475)
----------------------------------------
Items that will not be reclassified
subsequently to the
Income Statement:
Net remeasurement (loss)/gain on
retirement benefit obligations (151) 166 (36)
Income tax credit/(charge) relating
to items that will not be reclassified 5 39 (25) 9
----------------------------------------
(112) 141 (27)
Items that may be reclassified
subsequently to the
Income Statement:
Currency translation on net investments 6 389 625
Share of other comprehensive income
from equity accounted investments 2 - 9
Transfer to Income Statement from
equity of cumulative translation
differences on disposal of foreign
operations 9 (13) - -
Losses on hedge relationships (44) (50) (97)
Transfer to Income Statement on
hedge relationships - (3) (2)
Income tax (charge)/credit relating
to items that may be reclassified 5 (8) 9 29
(57) 345 564
Other comprehensive (expense)/income
for the period (169) 486 537
Total comprehensive (expense)/income
for the period (334) 152 62
Attributable to:
Owners of the parent (337) 140 44
Non-controlling interests 3 12 18
---------------------------------------- ------- ---------- ----------- -------------
(334) 152 62
(1) Results for the period ended 30 June 2018 have been restated
for the finalisation of acquisition accounting for GKN (see note
2).
Melrose Industries PLC
Condensed Consolidated Statement of Cash Flows
Restated(1)
6 months 6 months
ended ended Restated(1)
30 June 30 June Year ended
2019 2018 31 December
Unaudited Unaudited 2018
Notes GBPm GBPm GBPm
------------------------------------------ ------- ---------- ------------- ------------
Operating activities
Net cash from/(used in) operating
activities from continuing operations 13 262 (3) 344
Net cash (used in)/from operating
activities from discontinued operations 13 (5) 9 29
------------------------------------------ ------- ---------- ------------- ------------
Net cash from operating activities 257 6 373
Investing activities
Disposal of businesses, net of cash
disposed 9 172 (1) (4)
Purchase of property, plant and equipment (223) (78) (333)
Proceeds from disposal of property,
plant and equipment 7 3 18
Purchase of computer software and
capitalised development costs (19) (10) (35)
Dividends received from equity accounted
investments 67 64 66
Equity accounted investment additions - - (3)
Acquisition of subsidiaries, net of
cash acquired - (1,009) (1,009)
Interest received 10 4 5
Net cash from/(used in) investing
activities from continuing operations 14 (1,027) (1,295)
Net cash used in investing activities
from discontinued operations 13 (4) (2) (9)
------------------------------------------ ------- ---------- ------------- ------------
Net cash from/(used in) investing activities 10 (1,029) (1,304)
Financing activities
Purchase of non-controlling interests - (179) (224)
Costs of issuing shares - (1) (1)
Repayment of borrowings (144) (803) (820)
New bank loans raised - 2,515 2,558
Costs of raising debt finance - (54) (51)
Repayment of principal under lease
obligations (43) - -
Dividends paid to non-controlling
interests (5) - (1)
Dividends paid to owners of the parent 7 (148) (54) (129)
Net cash (used in)/from financing
activities from continuing operations (340) 1,424 1,332
Net cash used in financing activities
from discontinued operations 13 (2) - -
------------------------------------------ ------- ---------- ------------- ------------
Net cash (used in)/from financing activities (342) 1,424 1,332
Net (decrease)/increase in cash and
cash equivalents (75) 401 401
Cash and cash equivalents at the beginning
of the period 415 16 16
Effect of foreign exchange rate changes - 9 (2)
------------------------------------------ -------
Cash and cash equivalents at the end
of the period 13 340 426 415
(1) Amounts for the periods ended 30 June 2018 and 31 December
2018 have been restated for discontinued operations (see notes 9
and 13).
As at 30 June 2019, the Group had net debt of GBP3,454 million
(31 December 2018: GBP3,482 million). A reconciliation of the
movement in net debt is shown in note 13.
Melrose Industries PLC
Condensed Consolidated Balance Sheet
Restated(1)
30 June 30 June Restated(1)
2019 2018 31 December
Unaudited Unaudited 2018
Notes GBPm GBPm GBPm
-------------------------------------- ------ ---------------------- ------------- ------------
Non-current assets
Goodwill and other intangible
assets 10,444 11,179 11,098
Property, plant and equipment 3,631 2,966 3,171
Interests in equity accounted
investments 439 473 492
Deferred tax assets 143 159 132
Derivative financial assets 20 25 26
Trade and other receivables 422 256 504
-------------------------------------- ------
15,099 15,058 15,423
Current assets
Inventories 1,504 1,403 1,489
Trade and other receivables 2,190 2,743 2,328
Derivative financial assets 38 20 15
Current tax assets 38 59 74
Cash and cash equivalents 340 426 415
4,110 4,651 4,321
-------------------------------------- ------ ---------------------- ------------- ------------
Total assets 3 19,209 19,709 19,744
Current liabilities
Trade and other payables 2,705 2,853 2,583
Interest-bearing loans and borrowings 394 1 377
Lease obligations 50 - 5
Derivative financial liabilities 218 100 204
Current tax liabilities 82 160 137
Provisions 10 376 393 391
3,825 3,507 3,697
-------------------------------------- ------ ---------------------- ------------- ------------
Net current assets 285 1,144 624
Non-current liabilities
Trade and other payables 403 549 762
Interest-bearing loans and borrowings 3,235 3,700 3,378
Lease obligations 566 - 52
Derivative financial liabilities 303 261 227
Deferred tax liabilities 811 966 874
Retirement benefit obligations 12 1,326 1,231 1,413
Provisions 10 959 1,065 1,080
-------------------------------------- ------ ---------------------- -------------
7,603 7,772 7,786
-------------------------------------- ------ ---------------------- ------------- ------------
Total liabilities 3 11,428 11,279 11,483
Net assets 7,781 8,430 8,261
Equity
Issued share capital 333 333 333
Share premium account 8,138 8,138 8,138
Merger reserve 109 109 109
Other reserves (2,330) (2,330) (2,330)
Hedging reserve (125) (36) (67)
Translation reserve 563 313 562
Retained earnings 1,071 1,875 1,492
Equity attributable to owners of
the parent 7,759 8,402 8,237
Non-controlling interests 22 28 24
-------------------------------------- ------ ---------------------- ------------- ------------
Total equity 7,781 8,430 8,261
(1) Amounts at 30 June 2018 and 31 December 2018 have been
restated for the finalisation of acquisition accounting for GKN
(see note 2).
Melrose Industries PLC
Condensed Consolidated Statement of Changes in Equity
Equity
attributable
Issued Share to owners Non-
share premium Merger Other Hedging Translation Retained of the controlling Total
capital account reserve reserves reserve reserve(1) earnings(1) parent interests(1) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- --------------- ---------- -------- ------- ------------ -----------
At 1 January 2018 133 1,493 109 (2,330) 8 (66) 2,538 1,885 - 1,885
Loss for the
period - - - - - - (328) (328) (6) (334)
Other
comprehensive
(expense)/income - - - - (44) 379 133 468 18 486
----------------- ---------------------- --------------- ---------- -------- ------- ------------ ----------- ------------ ------------- -------
Total
comprehensive
(expense)/income - - - - (44) 379 (195) 140 12 152
Acquisition of
GKN(2) 169 5,631 - - - - - 5,800 857 6,657
Purchase of
non-controlling
interests 31 1,014 - - - - (419) 626 (841) (215)
Implementation
of IFRS 9(3) - - - - - - (2) (2) - (2)
Dividends paid - - - - - - (54) (54) - (54)
Equity-settled
share-based
payments - - - - - - 7 7 - 7
----------------- ---------------------- --------------- ---------- -------- ------- ------------ ----------- ------------ ------------- -------
At 30 June 2018
(unaudited) 333 8,138 109 (2,330) (36) 313 1,875 8,402 28 8,430
Loss for the
period - - - - - - (147) (147) 6 (141)
Other
comprehensive
(expense)/income - - - - (31) 249 (167) 51 - 51
----------------- ---------------------- --------------- ---------- -------- ------- ------------ ----------- ------------ ------------- -------
Total
comprehensive
(expense)/income - - - - (31) 249 (314) (96) 6 (90)
Purchase of
non-controlling
interests - - - - - - - - (9) (9)
Dividends paid - - - - - - (75) (75) (1) (76)
Equity-settled
share-based
payments - - - - - - 6 6 - 6
At 31 December
2018 333 8,138 109 (2,330) (67) 562 1,492 8,237 24 8,261
Loss for the
period - - - - - - (168) (168) 3 (165)
Other
comprehensive
(expense)/income - - - - (58) 1 (112) (169) - (169)
----------------- ---------------------- --------------- ---------- -------- ------- ------------ ----------- ------------ ------------- -------
Total
comprehensive
(expense)/income - - - - (58) 1 (280) (337) 3 (334)
Dividends paid - - - - - - (148) (148) (5) (153)
Equity-settled
share-based
payments - - - - - - 7 7 - 7
At 30 June 2019
(unaudited) 333 8,138 109 (2,330) (125) 563 1,071 7,759 22 7,781
(1) Amounts at 30 June 2018 have been restated for the
finalisation of acquisition accounting for GKN (see note 2).
(2) Relates to 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.
(3) The Group adopted IFRS 9 on 1 January 2018.
Notes to the Condensed Interim Financial Statements
1. Corporate information
The interim financial information for the six months ended 30
June 2019 has been reviewed by the auditor, but not audited. The
information for the year ended 31 December 2018 shown in this
report does not constitute statutory accounts for that year as
defined in section 434 of the Companies Act 2006. A copy of the
statutory accounts for that year has been delivered to the
Registrar of Companies. The auditor has reported on those accounts.
Their report was unqualified, did not draw attention to any matters
by way of emphasis and did not contain a statement under section
498 (2) or (3) of the Companies Act 2006.
On 25 June 2019, the Group completed the disposal of the
Walterscheid Powertrain Group to One Equity Partners. The
Walterscheid Powertrain Group was previously reported within the
Other Industrial operating segment and is shown as a discontinued
operation in these Condensed Interim Financial Statements.
2. Summary of significant accounting policies
The interim financial information for the six months ended 30
June 2019, which has been approved by the Board of Directors, has
been prepared on the basis of the accounting policies set out in
the Group's 2018 Annual Report and financial statements on pages
132 to 141 other than as noted below.
The Group's 2018 Annual Report and financial statements can be
found on the Group's website www.melroseplc.net. These Condensed
Interim Financial Statements should be read in conjunction with the
2018 information. The annual financial statements are prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union ("IFRS"). These Condensed Interim
Financial Statements have been prepared in accordance with IAS 34:
"Interim Financial Reporting" as adopted by the European Union.
On 19 April 2018, the Group acquired approximately 85% of the
issued share capital and obtained control of GKN plc ("GKN") for
consideration of GBP7,091 million. The remaining 15% of the issued
share capital of GKN was acquired in the period from 19 April 2018
to 30 June 2018, at a cost of GBP1,260 million which was treated as
a purchase of a non-controlling interest.
The amounts recognised in respect of the identifiable assets and
liabilities assumed on the acquisition of GKN were set out in the
2018 Annual Report and reported as provisional. During the period
to 19 April 2019, the Group completed its review of the assets and
liabilities acquired. As a result, the Group has recorded its final
adjustments to the opening balance sheet of GKN and in accordance
with IFRS 3: "Business combinations" the acquisition Balance Sheet
at 19 April 2018 has been restated to reflect this. These
adjustments impact the Balance Sheets at 31 December 2018 and 30
June 2018.
As at 30 June 2018 the Group was still performing a programme of
GKN site visits at all significant locations to assess the fair
value of assets and liabilities acquired and appropriately align
accounting policies. As a consequence, the only fair value items
included at 30 June 2018 were in relation to: interest-bearing
loans and borrowings, derivative financial instruments, retirement
benefit obligations, certain interests in equity accounted
investments, tax balances, the uplift of inventory and an initial
value for property, plant and equipment. Given the magnitude of
GKN's acquired intangible assets and the associated deferred tax
liability, these values were removed from the acquisition balance
sheet at 30 June 2018 pending finalisation of the Group's valuation
and accordingly no amortisation was recognised in the period ended
30 June 2018.
There were many fair value changes identified in the second half
of 2018 as well as a small number of final adjustments identified
in the first half of the year up to 19 April 2019 that have
impacted the restated Balance Sheet at 30 June 2018. Amortisation
of acquired intangible assets amounting to a charge of GBP90
million, utilisation of loss-making contract provisions resulting
in income of GBP15 million and tax income of GBP17 million thereon
has impacted the Income Statement for the period ended 30 June
2018. Additionally, there was a GBP179 million gain recognised in
the Statement of Comprehensive Income for favourable foreign
exchange differences resulting primarily from the finalisation of
goodwill and acquired intangible asset valuations.
The small number of final adjustments identified in the first
half of the year up to 19 April 2019 that have impacted the
restated Balance Sheet at 31 December 2018 are as follows:
-- Provisions and trade and other payables have increased by GBP10 million;
o Provisions increased by GBP26 million, including a GBP16
million reclassification from trade and other payables;
o Trade and other payables decreased by GBP16 million due to a
reclassification to provisions
-- Deferred tax assets have reduced by GBP17 million;
-- Acquisition intangibles assets have increased by GBP21 million; and
-- Goodwill has correspondingly increased by GBP6 million.
There has been no restatement of the Income Statement or
Statement of Comprehensive Income for the year ended 31 December
2018 as a result of the finalisation of fair values on acquisition
accounting.
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 these
Condensed Interim Financial Statements 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 ("EAIs").
2. Summary of significant accounting policies (continued)
Adjusted profit measures exclude items which are significant in
size or volatility or by nature are non-trading or non-recurring,
any item released to the Income Statement that was previously a
fair value item booked on acquisition, and include adjusted profit
from EAIs.
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 related 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, 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.
Adoption of new accounting standards
The Group adopted IFRS 16 "Leases" on 1 January 2019 using the
modified retrospective approach, resulting in no adjustments to the
prior year comparatives. IFRS 16 superseded the previous lease
guidance including IAS 17: "Leases" and related interpretations.
IFRS 16 requires all leases, except where exemptions are applied,
to be recognised on the Balance Sheet as a lease liability with a
corresponding right-of-use asset presented within property, plant
and equipment. As a result of the transition to IFRS 16, the Group
recognised right-of-use assets of GBP589 million and lease
liabilities of GBP589 million.
As part of the initial application of IFRS 16, the Group has
applied the following exemptions available; IFRS 16 guidance has
not been applied to leases with a lease term which ends within 12
months of the date of initial application or to leases of low value
assets. Payments relating to these leases are recognised as an
expense in the Income Statement over the lease term and no
right-of-use asset or lease liability is recognised.
The Group opted to apply the relief option available under IFRS
16, which permits any right-of-use asset to be adjusted by the
value of any associated onerous lease provision recognised in the
Balance Sheet as at 31 December 2018, as an alternative to
performing an impairment review. As a result onerous lease
liabilities, previously held within surplus property provisions of
GBP20 million have been transferred to the IFRS 16 right-of-use
asset following adoption of IFRS 16 on 1 January 2019.
The lease liabilities were measured at the present value of the
remaining lease payments discounted at the incremental borrowing
rate as at 1 January 2019. On transition, the right-of-use assets
were measured at an amount equal to the lease liability, adjusted
by the amount of any prepaid or accrued lease payments.
In order to calculate the incremental borrowing rate, reference
interest rates were derived for corporate bonds, for a period of up
to 15 years. Interest rates were obtained for all key currencies
and were subsequently adjusted to reflect the country risk premium
and a leasing risk premium. The leasing risk premium derived was
adjusted to reflect whether the lease was deemed to be secured or
unsecured. The Group applied a single discount rate to a portfolio
of leases with similar characteristics, in line with the practical
expedient available under IFRS 16.
2. Summary of significant accounting policies (continued)
For leases that were classified as finance leases under IAS 17,
the carrying amount of the right-of-use asset and the corresponding
lease liability at 1 January 2019 was determined to be the carrying
amount of the lease asset and lease liability under IAS 17
immediately before that date.
The following explains the difference between operating lease
commitments disclosed, applying IAS 17, at 31 December 2018 and the
lease liability recognised on adoption of IFRS 16 at 1 January
2019.
GBPm
------------------------------------------------------ ------
Total minimum lease payments reported at 31 December
2018 under IAS 17 710
Change in assessment of lease term under IFRS 16 32
Leases outside the scope of IFRS 16 (11)
Impact of discounting lease liability under IFRS 16 (142)
------------------------------------------------------ ------
Lease liability recognised on transition to IFRS 16
at 1 January 2019 589
Going concern
The Group's business activities in the period, together with the
factors likely to affect its future development, performance and
position are set out in the Chief Executive's Review.
After making appropriate enquiries, the Directors have a
reasonable expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future, a
period of not less than twelve months from the date of this report.
Accordingly, they continue to adopt the going concern basis in
preparing these Condensed Interim Financial Statements.
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, which has been deemed to be the Group's Board, in
order to allocate resources to the segments and assess their
performance.
Aerospace - a multi-technology tier one supplier of air frame
and engine structures, including Aerostructures, Engine Systems and
Special Technologies.
Automotive - comprises Driveline, All Wheel Drive and e-Drive
(together e-Powertrain) 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 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. 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. 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, Brush and
Wheels & Structures businesses. The Walterscheid Powertrain
business has been included in discontinued operations and prior
periods have been restated following its disposal in June 2019.
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 cost
centres and charges related to the divisional management long-term
incentive plans.
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 six-month period ended 30 June 2019
and comparative periods.
3. Segment information (continued)
a) Segment revenues
6 months ended 30 June 2019
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm GBPm
Continuing operations GBPm GBPm
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Adjusted revenue 1,904 2,450 581 732 335 6,002
Equity accounted
investments (13) (282) (7) - - (302)
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Revenue 1,891 2,168 574 732 335 5,700
6 months ended 30 June 2018
- restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Continuing operations Aerospace GBPm GBPm Security GBPm GBPm
GBPm GBPm
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Adjusted revenue 714 1,019 254 720 264 2,971
Equity accounted
investments (1) (123) - - - (124)
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Revenue 713 896 254 720 264 2,847
Year ended 31 December 2018
- restated
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 1,458 606 8,818
Equity accounted
investments (42) (446) (5) - - (493)
------------------------- ---------- -------------- ------------- ----------- ------------- --------
Revenue 2,479 2,936 846 1,458 606 8,325
b) Segment operating profit
6 months ended 30
June
2019
Nortek
Powder Air & Other
Continuing Aerospace Automotive Metallurgy Security Industrial Corporate(2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- -------------- ------------- ----------- ------------- ------------- --------
Adjusted operating
profit/(loss) 192 186 66 92 31 (28) 539
Items not included in
adjusted operating
profit(1)
:
Amortisation of
intangible
assets acquired in
business
combinations (132) (73) (24) (28) (12) - (269)
Impairment of assets - - - (179) - - (179)
Restructuring costs (26) (14) (5) (21) (5) (4) (75)
Equity accounted
investments
adjustments - (14) - - - - (14)
Movement in
derivatives
and associated
financial
assets and
liabilities 2 (2) - - - (13) (13)
Acquisition and
disposal
related costs - - - - - (11) (11)
Melrose
equity-settled
compensation scheme
charges - - - - - (7) (7)
Release and changes
in discount rate of
fair value items (6) - 22 2 - - 18
Operating
profit/(loss) 30 83 59 (134) 14 (63) (11)
Finance costs (126)
Finance income 9
Loss before tax (128)
Tax (22)
Loss for the period from
continuing
operations (150)
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP28 million, includes
GBP4 million of costs in respect of remaining GKN central cost
centres and GBP12 million of costs in respect of divisional
long-term incentive plans.
3. Segment information (continued)
b) Segment operating profit (continued)
6 months ended 30 June 2018
- restated
Nortek
Powder Air & Other
Continuing Aerospace Automotive Metallurgy Security Industrial Corporate(2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------- -------------- ------------- ----------- ------------- ------------- --------
Adjusted
operating
profit/(loss) 57 74 30 104 32 (13) 284
Items not
included in
adjusted
operating
profit(1)
:
Restructuring
costs (12) (11) (1) (16) (69) (19) (128)
Amortisation of
intangible
assets acquired
in business
combinations (49) (29) (9) (26) (12) - (125)
Acquisition and
disposal
related costs - - - - - (124) (124)
Movement in
derivatives
and associated
financial
assets and
liabilities - - - - - (123) (123)
Reversal of
uplift in
value of
inventory (45) (42) (11) - (1) - (99)
Melrose
equity-settled
compensation
scheme
charges - - - - - (10) (10)
Equity accounted
investments
adjustments - (3) - - - - (3)
Release and
changes
in discount rate
of
fair value items - - - 3 - - 3
Operating
(loss)/profit (49) (11) 9 65 (50) (289) (325)
Finance costs (51)
Finance income 4
Loss before tax (372)
Tax 42
Loss for the period from
continuing
operations (330)
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP13 million, includes
GBP3 million of costs in respect of remaining GKN central cost
centres and GBP2 million of costs in respect of divisional
long-term incentive plans.
Year ended 31
December
2018 - restated
Nortek
Powder Air & Other
Continuing Aerospace Automotive Metallurgy Security Industrial Corporate(2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ------------ -------------- ------------- ----------- ------------- ------------- --------
Adjusted operating
profit/(loss) 250 231 98 198 70 (28) 819
Items not included
in
adjusted operating
profit(1)
:
Amortisation of
intangible
assets acquired in
business
combinations (176) (103) (34) (54) (24) - (391)
Restructuring costs (56) (46) (11) (22) (64) (32) (231)
Acquisition and
disposal
related 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) - (2) - (105)
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 and changes
in discount rate
of
fair value items 15 - - 4 1 - 20
Operating
(loss)/profit (44) 15 38 126 (152) (368) (385)
Finance costs (161)
Finance income 5
Loss before tax (541)
Tax 73
Loss for the year
from
continuing
operations (468)
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP28 million, includes
GBP6 million of costs in respect of remaining GKN central cost
centres and GBP2 million of costs in respect of divisional
long-term incentive plans.
3. Segment information (continued)
c) Segment total assets and liabilities
30 June 2019
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------- ------------- ---------- ---------
Total assets 7,702 5,696 2,117 2,112 1,038 544 19,209
Total liabilities (3,112) (2,419) (551) (594) (258) (4,494) (11,428)
------------------- ---------- -------------- ------------- ----------- ------------- ---------- ---------
30 June 2018 - restated
Nortek
Powder Air & Other
Aerospace Automotive Metallurgy Security Industrial(1) Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------- ---------------- ---------- ---------
Total assets 7,264 5,672 2,155 2,111 1,608 899 19,709
Total liabilities (2,968) (2,454) (342) (468) (531) (4,516) (11,279)
------------------- ---------- -------------- ------------- ----------- ---------------- ---------- ---------
(1) Includes assets of GBP421 million and liabilities of GBP186
million relating to discontinued operations.
31 December 2018 - restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial(1) Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------- ---------------- ---------- ---------
Total assets 7,725 5,685 2,070 2,142 1,494 628 19,744
Total liabilities (3,040) (2,330) (521) (492) (499) (4,601) (11,483)
------------------- ---------- -------------- ------------- ----------- ---------------- ---------- ---------
(1) Includes assets of GBP426 million and liabilities of GBP226
million relating to discontinued operations.
d) Segment capital expenditure and depreciation
6 months ended 30 June
2019
Powder Nortek
Automotive Metallurgy Air & Other Total
Aerospace GBPm GBPm Security Industrial(2) Corporate GBPm
GBPm GBPm GBPm GBPm
----------------------- ---------- -------------- ------------- ----------- --------------- ---------- --------
Capital expenditure(1) 67 95 31 20 10 - 223
Depreciation of
owned assets(1) 68 93 30 13 12 - 216
Depreciation of
leased assets 15 8 3 7 1 1 35
----------------------- ---------- -------------- ------------- ----------- --------------- ---------- --------
(1) Includes computer software and development costs. Capital
expenditure excludes finance lease additions.
(2) Includes capital expenditure of GBP4 million and
depreciation of GBP5 million relating to discontinued
operations.
6 months ended 30 June
2018
Nortek
Powder Air & Other
Aerospace Automotive Metallurgy Security Industrial(2) Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ---------- -------------- ------------- ----------- --------------- ---------- --------
Capital
expenditure(1) 14 43 10 23 6 - 96
Depreciation of
owned assets(1) 22 26 9 12 6 - 75
--------------------- ---------- -------------- ------------- ----------- --------------- ---------- --------
(1) Includes computer software and development costs. Capital
expenditure excludes finance lease additions.
(2) Includes capital expenditure of GBP2 million and
depreciation of GBP1 million relating to discontinued
operations.
Year ended 31 December 2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial(2) Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
-------------------- ---------- -------------- ------------- ----------- ---------------- ---------- --------
Capital
expenditure(1) 105 198 53 44 22 - 422
Depreciation of
owned assets(1) 88 116 37 24 17 - 282
-------------------- ---------- -------------- ------------- ----------- ---------------- ---------- --------
(1) Includes computer software and development costs. Capital
expenditure excludes finance lease additions.
(2) Includes capital expenditure of GBP11 million and
depreciation of GBP5 million relating to discontinued
operations.
3. Segment information (continued)
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 specific 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 Non-current assets
---------------------------------------------------- -----------------------------------
Restated
6 months 6 months Restated
ended ended Year ended Restated Restated
30 June 30 June 31 December 30 June 30 June 31 December
2019 2018 2018 2019 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------------------------ ---------- -------------- --------- --------- -------------
UK 578 266 834 2,435 2,630 2,459
Europe 1,316 594 1,869 5,431 5,422 5,704
North America 3,100 1,599 4,536 5,219 5,148 5,146
Other 706 388 1,086 1,429 1,418 1,452
Total 5,700 2,847 8,325 14,514 14,618 14,761
(1) Revenue is presented by destination.
4. Reconciliation of adjusted profit measures
As described in note 2, adjusted profit measures are an
alternative performance measure used by the Board to monitor the
operating performance of the Group.
a) Operating profit
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Continuing operations Notes GBPm GBPm GBPm
-------------
Operating loss (11) (325) (385)
------------------------------------------------- ---------- --------- -------------
Amortisation of intangible assets
acquired in business combinations a 269 125 391
Impairment of assets b 179 - 152
Restructuring costs c 75 128 231
Equity accounted investments
adjustments d 14 3 25
Movement in derivatives and associated
financial assets and liabilities e 13 123 143
Acquisition and disposal related
costs f 11 124 153
Melrose equity-settled compensation
scheme charges g 7 10 13
Release and changes in discount
rate of fair value items h (18) (3) (20)
Reversal of uplift in value of
inventory i - 99 105
Impact of GMP equalisation on
UK pension schemes j - - 11
Total adjustments to operating
loss 550 609 1,204
Adjusted operating profit 539 284 819
a. The amortisation charge on intangible assets acquired in
business combinations of GBP269 million (2018: GBP125 million) 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. The 2018 Annual Report disclosed that the determination of
the recoverable amount in respect of the Security & Smart
Technology group of cash generating units ("CGUs") involved
management estimation of the impact of highly uncertain matters at
that time. Enhanced disclosures, including sensitivity analysis in
respect of the key assumptions used in the forecast models, were
shown at the 2018 year end. Subsequently, there has been further
deterioration in both the performance during the period and
forecast future prospects, particularly following increases in US
tariffs for goods being imported from China. This along with the
increased level of competition and technological change in the
market has resulted in the necessity to impair goodwill allocated
to the Security & Smart Technology group of CGUs by GBP179
million. The impairment charge is shown as an adjusting item due to
its non-trading nature and size.
4. Reconciliation of adjusted profit measures (continued)
a) Operating profit (continued)
c. Restructuring and other associated costs in the period
totalled GBP75 million (2018: GBP128 million). Restructuring costs
are adjusting items due to their size and non-trading nature and
during the period ended 30 June 2019 they included:
-- A charge of GBP45 million in respect of the GKN businesses.
Within this, GBP26 million related to the Aerospace division and
included costs incurred in improving quality and delivery for
customers in North America and costs relating to footprint
rationalisation projects within the Special Technologies business.
Within the Automotive division, GBP14 million of costs have been
incurred addressing the cost base of the business, whilst ensuring
a more flexible cost structure going forward. In addition, GBP5
million of restructuring costs were incurred in the Powder
Metallurgy division.
-- A charge of GBP21 million within Nortek Air & Security,
primarily relating to structural footprint changes in the Security
& Smart Technology business in an attempt to mitigate the
negative impact of the increase in US tariffs on goods manufactured
in China. In addition, there were charges related to continued
footprint rationalisation within the HVAC business.
-- A charge of GBP5 million within Other Industrial businesses,
predominantly relating to the finalisation of the restructuring
activities announced in Brush last year.
d. 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 GBP302
million (2018: GBP124 million) of revenue in the period, 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.
e. Hedge accounting is not applied within the GKN businesses for
transactional foreign exchange exposure. For consistency, the
movement in the fair 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 in the
GKN businesses, along with foreign exchange movements on the
associated financial assets and liabilities, totalling a charge of
GBP13 million (2018: GBP123 million), is shown as an adjusting item
because of its volatility and size.
f. Acquisition and disposal related costs of GBP11 million
(2018: GBP124 million) were incurred in the period and included the
profit or loss on the sale of two smaller businesses and their
related transaction costs. These items are excluded from adjusted
results due to their non-trading nature.
g. The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer's tax charge, of GBP7 million
(2018: GBP10 million) is excluded from adjusted results due to its
size and 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.
h. Certain items previously recorded as fair value items on
acquisitions, have been settled for more favourable amounts than
first anticipated. The release of fair value items recognised on
acquisitions in the period of GBP29 million included a credit of
GBP26 million relating to certain loss-making contracts recognised
on the acquisition of GKN and is partly offset by an GBP11 million
charge relating to the movement in discount rates on the
loss-making contracts recognised as fair value items. The release
of any excess fair value item is shown as an adjusting item to
avoid positively distorting adjusted results.
i. 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
prior period, relating to GKN's acquired inventory was a charge of
GBP99 million and is excluded from adjusted results due to its size
and non-recurring nature.
j. 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 in the
year ended 31 December 2018, 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.
4. Reconciliation of adjusted profit measures (continued)
b) Profit before tax
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Continuing operations Notes GBPm GBPm GBPm
------------------------------------- -------- ---------- ---------- -------------------
Loss before tax (128) (372) (541)
------------------------------------------------ ---------- ---------- -------------------
Adjustments to operating loss
per above 550 609 1,204
Fair value changes on cross-currency
swaps k 7 - 8
Write-off previous debt facility
unamortised fees l - 7 7
Equity accounted investments
- interest m - - (1)
Total adjustments to loss before
tax 557 616 1,218
------------------------------------------------ ---------- ---------- -------------------
Adjusted profit before tax 429 244 677
k. The fair value changes on cross-currency swaps relating to
cost of hedging which are not deferred in equity, is shown as an
adjusting item because of its volatility and non-trading
nature.
l. 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. This
prior year charge is shown as an adjusting item because of its
one-off non-trading nature.
m. As explained in paragraph d 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
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Continuing operations Notes GBPm GBPm GBPm
-------------------------------- ------- -------------------- ------------------- --------------------
Loss after tax (150) (330) (468)
-------------------------------- ------- -------------------- ------------------- --------------------
Adjustments to loss before tax
per above 557 616 1,218
Equity accounted investments
- tax m (4) (3) (9)
Tax effect of adjustments to
loss before tax 5 (73) (95) (221)
-------------------------------- ------- -------------------- ------------------- --------------------
Total adjustments to loss after
tax 480 518 988
Adjusted profit after tax 330 188 520
5. Tax
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
Analysis of the charge/(credit) 2019 2018 2018
in the period: GBPm GBPm GBPm
--------------------------------- -------- --------- ------------
Continuing operations
Current tax 59 27 30
Deferred tax (37) (69) (103)
---------------------------------- -------- --------- ------------
Total income tax charge/(credit)
from continuing operations 22 (42) (73)
---------------------------------- -------- --------- ------------
Discontinued operations
Current tax 2 3 4
Deferred tax - (5) (6)
---------------------------------- -------- --------- ------------
Total income tax charge/(credit)
from discontinued operations 2 (2) (2)
---------------------------------- -------- --------- ------------
Total income tax charge/(credit) 24 (44) (75)
Continuing operations:
The effective tax rate in respect of adjusted profit before tax
for the half year is 23% (2018: 23%). The adjusted tax charge has
been calculated by applying the expected tax rate for the full year
to the adjusted profit before tax of GBP429 million (2018: GBP244
million), giving an adjusted tax charge of GBP99 million (2018:
GBP56 million).
5. Tax (continued)
The adjusted tax charge of GBP99 million (2018: GBP56 million)
excludes a tax credit on adjusting items of GBP73 million (2018:
GBP95 million). This represents a deferred tax credit on intangible
asset amortisation of GBP59 million (2018: GBP27 million) and a tax
credit on other adjusting items of GBP14 million (2018: GBP68
million). The adjusted tax charge includes a charge in respect of
EAIs of GBP4 million (2018: GBP3 million).
In addition to the amount charged to the Income Statement, a
credit of GBP31 million (2018: charge of GBP16 million) has been
recognised directly in the Statement of Comprehensive Income. This
represents a tax charge of GBP8 million (2018: credit of GBP9
million) in respect of movements on hedge relationships and
translation differences and a tax credit of GBP39 million (2018:
charge of GBP25 million) in respect of the remeasurement of
retirement benefit obligations.
6. Earnings per share
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
Earnings attributable to owners of the 2019 2018 2018
parent GBPm GBPm GBPm
-------------------------------------------- -------- --------- ------------
Earnings for basis of earnings per share (168) (328) (475)
Less: loss for the period from discontinued
operations 15 4 7
-------------------------------------------- -------- --------- ------------
Earnings for basis of earnings per share
from continuing operations (153) (324) (468)
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Number Number Number
------------------------------------------- -------- -------- ------------
Weighted average number of ordinary shares
for the purposes of basic earnings per
share (million) 4,858 3,045 3,959
Further shares for the purposes of diluted - - -
earnings per share (million)(1)
Weighted average number of ordinary shares
for the purposes of diluted earnings
per share (million) 4,858 3,045 3,959
(1) The results for all periods presented are a loss and
therefore in accordance with IAS 33: "Earnings per share" there is
no dilution. However, the dilutive number of shares for both
periods are used for the purpose of calculating adjusted diluted
earnings per share.
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Earnings per share pence pence pence
-------------------------------------------- -------- --------- ------------
Basic earnings per share
From continuing and discontinued operations (3.4) (10.8) (12.0)
From continuing operations (3.1) (10.6) (11.8)
From discontinued operations (0.3) (0.2) (0.2)
-------------------------------------------- -------- --------- ------------
Diluted earnings per share
From continuing and discontinued operations (3.4) (10.8) (12.0)
From continuing operations (3.1) (10.6) (11.8)
From discontinued operations (0.3) (0.2) (0.2)
-------------------------------------------- -------- --------- ------------
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
Adjusted earnings from continuing 2019 2018 2018
operations GBPm GBPm GBPm
------------------------------------ ---------- --------- -------------
Adjusted earnings(1) for the basis
of adjusted earnings per share 327 182 507
------------------------------------- ---------- --------- -------------
(1) Adjusted earnings for the 6 months ended 30 June 2019 comprises
adjusted profit after tax of GBP330 million (6 months ended 30
June 2018: GBP188 million - see note 4c), net of an allocation
to non-controlling interests of GBP3 million (6 months ended 30
June 2018: GBP6 million). Adjusted earnings for the year ended
31 December 2018 comprises adjusted profit after tax of GBP520
million, net of an allocation to non-controlling interests of
GBP13 million.
6. Earnings per share (continued)
Adjusted earnings per share from
continuing operations
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
pence pence pence
------------------------------------ ---------- --------- -------------
Adjusted basic earnings per share 6.7p 6.0p 12.8p
Adjusted diluted earnings per share 6.7p 6.0p 12.8p
7. Dividends
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
GBPm GBPm GBPm
------------------------------------ -------- -------- ------------
Final dividend for the year ended
31 December 2017 of 2.8p - 54 54
Interim dividend for the year ended
31 December 2018 of 1.55p - - 75
Final dividend for the year ended
31 December 2018 of 3.05p 148 - -
------------------------------------ -------- -------- ------------
Total dividends paid 148 54 129
An interim dividend of 1.7p per ordinary share (2018: 1.55p)
totalling GBP83 million (2018: GBP75 million) was declared by the
Board and in accordance with IAS 10: "Events after the reporting
period" has not been included as a liability as at 30 June
2019.
8. Share of results of equity accounted investments
Summary information for the Group's equity accounted investments
is as follows:
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Continuing operations GBPm GBPm GBPm
------------------------------------- -------- --------- ------------
Revenue 302 124 493
------------------------------------- -------- --------- ------------
Adjusted operating profit 30 15 59
------------------------------------- -------- --------- ------------
Adjusting items (10) - (15)
Net finance costs - - (1)
------------------------------------- -------- --------- ------------
Profit before tax 20 15 43
Tax (4) (3) (9)
------------------------------------- -------- --------- ------------
Share of results of equity accounted
investments 16 12 34
9. Discontinued operations
On 25 June 2019, the Group completed the sale of the
Walterscheid Powertrain Group for cash consideration of GBP185
million. The costs charged to the Income Statement during the
period associated with the disposal were GBP7 million. The loss on
disposal was GBP21 million after the recycling of cumulative
translation differences of GBP13 million.
The results of the Walterscheid Powertrain Group were previously
included within the Other Industrial operating segment and are
classified as a discontinued operation, in accordance with IFRS 5:
Non-current Assets Held for Sale and Discontinued Operations.
9. Discontinued operations (continued)
Financial performance of discontinued operations:
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
GBPm GBPm GBPm
Revenue 206 90 280
Operating costs (196) (96) (287)
--------------------------------------------- --------------------------- --------- -------------
Operating profit/(loss) 10 (6) (7)
Finance costs (2) - (2)
---------------------------------------- --- --------------------------- --------- -------------
Profit/(loss) before tax 8 (6) (9)
Tax (2) 2 2
---------------------------------------- --- --------------------------- --------- -------------
Profit/(loss) after tax 6 (4) (7)
Cumulative translation differences 13 - -
recycled on disposal
Loss on disposal of net assets of (34) - -
discontinued operations
Loss for the period from discontinued
operations (15) (4) (7)
The major classes of assets and liabilities disposed of during
the period were as follows:
GBPm
--------------------------------------------------------- ------
Goodwill and other intangible assets 210
Property, plant and equipment 110
Interests in equity accounted investments 4
Inventories 74
Trade and other receivables 67
Cash and cash equivalents 9
--------------------------------------------------------- ------
Total assets 474
Trade and other payables (54)
Lease obligations (34)
Retirement benefit obligations (155)
Provisions (10)
Current and deferred tax (9)
--------------------------------------------------------- ------
Total liabilities (262)
Net assets 212
Cash consideration, net of costs(1) 178
Cumulative translation difference recycled on disposals 13
--------------------------------------------------------- ------
Loss on disposal of businesses (21)
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents,
net of costs(2) 181
Less: cash and cash equivalents disposed (9)
--------------------------------------------------------- ------
172
(1) Cash consideration of GBP185 million net of GBP7 million of
disposal costs charged to the Income Statement, GBP3 million of
these costs were accrued at 30 June 2019.
(2) Cash consideration of GBP185 million net of GBP4 million of
cash disposal costs.
10. Provisions
Property Warranty
Loss-making related Environmental related
contracts costs and litigation costs Restructuring Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----------- -------- --------------- -------- ------------- -------- ----------
At 1 January
2019 - restated 616 74 218 397 116 50 1,471
Utilised (45) (2) (34) (26) (91) (3) (201)
Net (credit)/charge
to operating
profit(1) (25) - 21 7 68 15 86
Unwind of discount(2) 15 - - - - - 15
Disposal of businesses (1) (1) (1) (1) (2) (4) (10)
Transfers(3) - (20) - - - - (20)
Exchange differences (5) - 2 (2) - (1) (6)
----------------------- ----------- -------- --------------- -------- ------------- -------- ----------
At 30 June 2019 555 51 206 375 91 57 1,335
Current 77 13 70 111 85 20 376
Non-current 478 38 136 264 6 37 959
----------------------- ----------- -------- --------------- -------- ------------- -------- ----------
555 51 206 375 91 57 1,335
(1) Includes GBP37 million of adjusting items and GBP49 million
recognised in adjusted operating profit.
(2) Includes GBP4 million within finance costs relating to the
time value of money and GBP11 million relating to changes in
discount rates on loss-making contract provisions recognised as
fair value items on the acquisition of GKN, which has been included
as an adjusting item within operating profit.
(3) Onerous lease liabilities have been transferred to the IFRS
16 'right of use asset' following the adoption of IFRS 16 on 1
January 2019.
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.
The provision for property related costs represents the
estimated dilapidation costs for ongoing leases. This is expected
to result in cash expenditure over the next one to eight years.
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. Due
to their nature, it is not possible to predict precisely when these
provisions will be utilised.
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. Warranty terms are, on average, between one
and five years.
Restructuring provisions relate to committed costs in respect of
restructuring programmes, usually resulting in cash spend within
one year.
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 of between 0% and 8% (31 December 2018: 0% and 9%)
depending on the territory in which the provision resides and the
length of its expected utilisation.
11. Financial instruments
The table below sets out the Group's accounting classification
of each category of financial assets and liabilities and their fair
values as at 30 June 2019, 30 June 2018 and 31 December 2018:
Current Non-current Total
GBPm GBPm GBPm
--------------------------------------- ------------------- ------------------- --------
30 June 2019
Financial assets
Classified as amortised cost:
Cash and cash equivalents 340 - 340
Net trade receivables 1,762 - 1,762
Contract assets 186 404 590
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 10 5 15
Interest rate swaps 25 - 25
Embedded derivatives 3 15 18
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (394) (3,235) (3,629)
Government refundable advances (7) (66) (73)
Lease obligations (50) (566) (616)
Other financial liabilities (2,427) (106) (2,533)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (98) (121) (219)
Interest rate swaps (11) (73) (84)
Cross-currency swaps (108) (101) (209)
Embedded derivatives (1) (8) (9)
30 June 2018 - Restated
Financial assets
Classified as amortised cost:
Cash and cash equivalents 426 - 426
Net trade receivables 1,847 - 1,847
Contract assets 342 255 597
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 13 9 22
Interest rate swaps 4 7 11
Embedded derivatives 3 9 12
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (1) (3,700) (3,701)
Government refundable advances (8) (72) (80)
Other financial liabilities (2,732) (240) (2,972)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (90) (97) (187)
Cross-currency swaps (8) (159) (167)
Embedded derivatives (2) (5) (7)
31 December 2018
Financial assets
Classified as amortised cost:
Cash and cash equivalents 415 - 415
Net trade receivables 1,835 - 1,835
Contract assets 200 396 596
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 9 6 15
Interest rate swaps 3 5 8
Embedded derivatives 3 15 18
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (377) (3,378) (3,755)
Government refundable advances (8) (73) (81)
Lease obligations (5) (52) (57)
Other financial liabilities (2,309) (106) (2,415)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (100) (109) (209)
Interest rate swaps (1) (13) (14)
Cross-currency swaps (102) (97) (199)
Embedded derivatives (1) (8) (9)
--------------------------------------- ------------------- ------------------- --------
11. Financial instruments (continued)
The fair value of the derivative financial instruments is
derived from inputs other than quoted prices that are observable
for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices) and they are therefore
categorised within level 2 of the fair value hierarchy set out in
IFRS 13: "Fair value measurement". The Group's policy is to
recognise transfers into and out of the different fair value
hierarchy levels at the date of the event or change in
circumstances that caused the transfer to occur. There have been no
transfers between levels in the period.
12. Retirement benefit obligations
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.
The most significant defined benefit pension plans in the Group
at 30 June 2019 were:
GKN UK 2012 Pension Plan
The GKN UK 2012 Pension Plan is a funded plan, closed to new
members and was closed to future accrual in 2017. The valuation of
the plan was based on a full actuarial valuation as of 5 April
2016, updated to 30 June 2019 by independent actuaries.
GKN UK 2016 Pension Plan
The GKN UK 2016 Pension Plan is a funded plan, closed to new
members with no active members, containing assets and liabilities
in respect of the pension schemes from various legacy GKN
businesses. The valuation of the plan was based on a full actuarial
valuation as of 5 April 2016, updated to 30 June 2019 by
independent actuaries.
GKN US Consolidated Pension Plan
The GKN US Consolidated Pension Plan is a funded plan, closed to
new members and closed to future accrual. The US Pension Plan
valuation was based on a full actuarial valuation as of 1 January
2018, updated to 30 June 2019 by independent actuaries.
GKN Germany Pension Plans
The GKN Germany Pension Plans provide benefits dependent on
final salary and service with the Company. The plans are generally
unfunded and closed to new members.
Brush UK Pension Plan
The Brush Group (2013) ("Brush UK") Pension Plan is a funded
plan, closed to new members and closed to future accrual. The
valuation of the Brush UK Pension Plan was based on a full
actuarial valuation as of 31 December 2016, updated to 30 June 2019
by independent actuaries.
Other plans include a number of funded and unfunded defined
benefit arrangements and retiree medical insurance plans,
predominantly in the US and Europe.
The cost of the Group's defined benefit plans is determined in
accordance with IAS 19 (revised): "Employee benefits" using the
advice of independent professionally qualified actuaries on the
basis of formal actuarial valuations and using the projected unit
credit method. In line with normal practice, these valuations are
undertaken triennially in the UK and annually in the US and
Germany.
The amount recognised in the Balance Sheet in respect of defined
benefit plans is as follows:
30 June 2019
European
UK plans(1() US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- -------------- ---------- ---------- ------------- -------
Plan assets 3,039 257 28 42 3,366
Plan liabilities (3,594) (422) (620) (56) (4,692)
Net deficit (555) (165) (592) (14) (1,326)
(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.
30 June 2018 - restated
European
UK plans(1() US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- --------------- ---------- ---------- ------------- -------
Plan assets 2,914 438 29 37 3,418
Plan liabilities (3,374) (554) (668) (53) (4,649)
Net deficit (460) (116) (639) (16) (1,231)
(1) Includes a net deficit in respect of the GKN UK 2012 plan,
the GKN UK 2016 plan, GKN post-employment medical plans and the
Nortek UK plan and a surplus in respect of the Brush UK plan.
12. Retirement benefit obligations (continued)
31 December 2018
European
UK plans(1() US plans plans Other 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 deficit (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.
Valuations of material plans have been updated at 30 June 2019
by independent actuaries to reflect updated assumptions regarding
discount rates, inflation rates and asset values. The major
assumptions were as follows:
Rate of increase
in pensions in
payment Discount rate Price inflation
% p.a. % p.a. % p.a.
----------------- ---------------- ------------- ---------------
30 June 2019
GKN UK - 2012
plan 3.1 2.3 2.1
GKN UK - 2016
plan 3.1 2.2 2.1
GKN US plans n/a 3.5 2.5
GKN Europe plans 1.7 1.1 1.7
Brush UK plan 3.2 2.3 2.1
30 June 2018
GKN UK - 2012
plan 3.0 2.9 2.0
GKN UK - 2016
plan 3.0 2.7 2.0
GKN US plans n/a 4.2 n/a
GKN Europe plans 1.8 1.9 n/a
Brush UK plans 3.1 2.9 2.0
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
----------------- ---------------- ------------- ---------------
In addition, the defined benefit plan assets and liabilities
have been updated to reflect the contributions made to the defined
benefit plans and the benefits earned during the period to 30 June
2019.
During the period, an enhanced transfer value (ETV) exercise has
been carried out in the GKN UK 2012 pension plan. This has resulted
in a settlement credit of GBP6 million. Furthermore, the
liabilities of the Broan Aftermarket North America, Inc. Group
Pension Plan have been settled resulting in a settlement charge of
GBP7 million.
On 1 July 2019, the GKN UK 2012 pension plan was spilt into four
separate pension schemes which have been allocated to the Aerospace
and Automotive segments. There has been no change to the amounts
recognised by the Group as a result of this change.
13. Notes to the Cash Flow Statement
Restated
6 months 6 months Restated
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Continuing operations GBPm GBPm GBPm
------------------------------------------ -------- --------- --------------------
Reconciliation of adjusted operating
profit to cash generated from operating
activities
Adjusted operating profit(1) 539 284 819
Adjustments for:
Depreciation of property, plant and
equipment 214 61 233
Amortisation of computer software
and development costs 32 13 44
Share of adjusted operating profit
of equity accounted investments (30) (15) (59)
Restructuring costs paid and movements
in provisions (141) (78) (202)
Defined benefit pension contributions
paid(2() (111) (20) (99)
Change in inventories (92) (25) (110)
Change in receivables 164 (39) 179
Change in payables (140) (24) (160)
Acquisition costs and associated
transaction taxes (15) (106) (125)
Tax paid (79) (22) (65)
Interest paid (79) (32) (111)
Net cash from/(used in) operating
activities 262 (3) 344
(1) See note 4 for reconciliation of operating loss to adjusted
operating profit.
(2() The Group committed to contribute GBP150 million in total
to the GKN UK 2012 and GKN UK 2016 plans in the first 12 months of
ownership, GBP56 million was contributed in the year ended 31
December 2018 and GBP94 million was contributed in the period ended
30 June 2019.
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2019 2018 2018
Cash flow from discontinued operations GBPm GBPm GBPm
------------------------------------------ -------- ----------------------- -------------
Net cash (used in)/from discontinued
operations (3) 10 33
Defined benefit pension contributions
paid (2) (1) (3)
Tax paid - - (1)
Net cash (used in)/from operating
activities from discontinued operations (5) 9 29
Purchase of property, plant and equipment (4) (2) (11)
Proceeds from disposal of property,
plant and equipment - - 2
Net cash used in investing activities
from discontinued operations (4) (2) (9)
Repayment of principal under lease
obligations (2) - -
Net cash used in financing activities
from discontinued operations (2) - -
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. See the
glossary for a reconciliation of these measures.
13. Notes to the Cash Flow Statement (continued)
A reconciliation from the most directly comparable IFRS measure
to net debt is given below.
30 June 30 June 31 December
2019 2018 2018
GBPm GBPm GBPm
Interest-bearing loans and borrowings
- due within one year (394) (1) (377)
Interest-bearing loans and borrowings
- due after one year (3,235) (3,700) (3,378)
External debt (3,629) (3,701) (3,755)
Less:
Cash and cash equivalents 340 426 415
(3,289) (3,275) (3,340)
Adjustments:
Impact of cross-currency swaps (209) (167) (199)
Non-cash acquisition fair value adjustments 44 69 57
Net debt (3,454) (3,373) (3,482)
The table below shows the key components of the movement in net
debt:
At Acquisitions Other Effect At
31 December Cash and disposals non-cash of foreign 30 June
2018 flow movements exchange 2019
GBPm GBPm GBPm GBPm GBPm GBPm
External debt (3,755) 144 - 7 (25) (3,629)
Cross-currency
swaps (199) - - (6) (4) (209)
Non-cash acquisition
fair value adjustments 57 - - (13) - 44
(3,897) 144 - (12) (29) (3,794)
Cash and cash
equivalents 415 (232) 157 - - 340
Net debt (3,482) (88) 157 (12) (29) (3,454)
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
measures reported by other companies and they are not intended to
be a substitute for, or superior to, IFRS measures. All income
statement and cash flow measures are provided for continuing
operations unless otherwise stated.
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Income Statement Measures
Adjusted Revenue Share of Adjusted revenue includes the Group's
revenue revenue share of revenue of equity accounted
of equity investments ("EAIs"). This enables comparability
accounted between reporting periods.
investments Restated(1)
(note 8) 6 months 6 months Restated(2)
ended ended
30 June 30 June Year ended
2019 2018 31 December
GBPm GBPm 2018
Revenue GBPm
Revenue 5,700 2,847 8,325
Share of revenue
of equity accounted
investments 302 124 493
Adjusted revenue 6,002 2,971 8,818
Adjusting None Adjusting Those items which the Group excludes
items items (note from its adjusted profit metrics in
4) 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, any
item released to the Income Statement
that was previously a fair value item
booked on an acquisition, and include
adjusted profit from EAIs.
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 measures
operating profit/(loss)(3) items (note to provide a useful and more comparable
profit 4) measure of the ongoing performance
of the Group. Adjusted measures are
reconciled to statutory measures by
removing adjusting items, the nature
of which are disclosed above and further
detailed in note 4.
Restated(1)
6 months 6 months Restated(2)
ended ended
30 June 30 June Year ended
2019 2018 31 December
GBPm GBPm 2018
Operating profit GBPm
--------- ----------- -------------
Operating loss (11) (325) (385)
Adjusting items
(note 4) 550 609 1,204
--------- ----------- -------------
Adjusted operating
profit 539 284 819
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Adjusted Operating Share of Adjusted operating margin represents
operating margin(4) revenue Adjusted operating profit as a percentage
margin of equity of Adjusted revenue.
accounted
investments
(note 8),
adjusting
items (note
4)
Adjusted Profit/(loss) Adjusting Profit before the impact of adjusting
profit before items (note items and tax. As discussed above, adjusted
before tax 4) profit measures are used to provide
tax a useful and more comparable measure
of the ongoing performance of the Group.
Adjusted measures are reconciled to
statutory measures by removing adjusting
items, the nature of which are disclosed
above and further detailed in note 4.
Restated(1)
6 months 6 months Restated(2)
ended ended
30 June 30 June Year ended
2019 2018 31 December
GBPm GBPm 2018
Profit before tax GBPm
-------------
Loss before tax (128) (372) (541)
Adjusting items
(note 4) 557 616 1,218
-------------
Adjusted profit
before tax 429 244 677
Adjusted Profit/(loss) Adjusting Profit after tax but before the impact
profit after items (note of the adjusting items. As discussed
after tax 4) above, adjusted profit measures are
tax used to provide a useful and more comparable
measure of the ongoing performance of
the Group. Adjusted measures are reconciled
to statutory measures by removing adjusting
items, the nature of which are disclosed
above and further detailed in note 4.
Restated(1)
6 months 6 months Restated(2)
ended ended
30 June 30 June Year ended
2019 2018 31 December
GBPm GBPm 2018
Profit after tax GBPm
Loss after tax (150) (330) (468)
Adjusting items
(note 4) 480 518 988
Adjusted profit
after tax 330 188 520
Adjusted Operating Adjusting Adjusted operating profit for 12 months
EBITDA profit/ items (note subsequent to the reporting date, before
for covenant (loss)(3) 4), depreciation depreciation and impairment of property,
purposes of property, plant and equipment and before the amortisation
plant and and impairment of computer software
equipment and development costs.
and amortisation
of computer Adjusted EBITDA for covenant purposes
software is a measure used by external stakeholders
and development to measure performance.
costs, 12 months
share of ended Year ended(5)
depreciation 30 June 31 December
of property, 2019 2018
plant and Adjusted EBITDA for
equipment covenant purposes GBPm GBPm
and amortisation
of computer Adjusted operating
software profit 1,074 847
and development Depreciation of property,
costs of plant and equipment
equity and amortisation of
accounted computer software
investments and development costs 449 282
Full year impact of
acquisitions - 378
Other adjustments
required for covenant
purposes(6) (65) (15)
---------
Adjusted EBITDA for
covenant purposes 1,458 1,492
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Adjusted Effective Adjusting The income tax charge for the Group
tax rate tax rate items, adjusting excluding adjusting tax, and the tax
tax items impact of adjusting items, divided by
and the adjusted profit before tax.
tax impact
of adjusting This measure is a useful indicator of
items (note the ongoing tax rate for the Group.
4 and note Restated(1)
5) 6 months 6 months Restated(2)
ended ended
30 June 30 June Year ended
2019 2018 31 December
GBPm GBPm 2018
Adjusted tax rate GBPm
Tax (charge)/credit
per Income Statement (22) 42 73
Tax impact of
adjusting items (77) (98) (230)
Adjusted tax charge (99) (56) (157)
Adjusted profit
before tax 429 244 677
Adjusted tax rate 23% 23% 23%
Adjusted Basic Adjusting Profit after tax attributable to owners
basic earnings items (notes of the parent and before the impact of
earnings per share 4 and 6) adjusting items, divided by the weighted
per share average number of ordinary shares in
issue during the financial period.
Adjusted Diluted Adjusting Profit after tax attributable to owners
diluted earnings items (notes of the parent and before the impact of
earnings per share 4 and 6) adjusting items, divided by the weighted
per share average number of ordinary shares in
issue during the financial period 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.
Interest None Not applicable Adjusted EBITDA for covenant purposes
cover as a multiple of net interest payable
on bank loans and overdrafts, being 10.5x
in 12-month period ended 30 June 2019
(Year ended 31 December 2018: 11.6x).
This measure is used for bank covenant
testing.
Balance Sheet Measures
Working Inventories, Not applicable Working capital comprises inventories,
capital trade current and non-current trade and other
and other receivables and current and non-current
receivables trade and other payables.
less trade
and other
payables
Net debt Cash and Reconciliation Net debt comprises cash and cash equivalents,
cash equivalents of net interest-bearing loans and borrowings
less interest-bearing debt (note and cross-currency swaps but excludes
loans 13) non-cash acquisition fair value adjustments.
and borrowings
and finance Net debt is one measure that could be
related used to indicate the strength of the
derivative Group's Balance Sheet position and is
instruments a useful measure of the indebtedness
of the Group.
Leverage None Not applicable Bank covenant definition of net debt
of net divided by adjusted EBITDA for bank covenant
debt to purposes.
adjusted
EBITDA This measure is used for bank covenant
for covenant testing.
purposes
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Bank covenant Cash and Impact Net debt (as above) is presented in the
definition cash equivalents of foreign Balance Sheet translated at period end
of net less interest-bearing exchange exchange rates.
debt at loans and adjustments
average and borrowings for bank For bank covenant testing purposes net
rates and finance covenant debt is converted using average exchange
related purposes rates for the previous 12 months.
derivative Covenants were not applicable for the
instruments period ended 30 June 2018.
30 June 31 December
2019 2018
Net debt GBPm GBPm
------------
Net debt at closing rates
(note 13) 3,454 3,482
Impact of foreign exchange (50) (86)
------------
Net debt at average rates 3,404 3,396
Other adjustments required
for covenant purposes 14 11
------------
Bank covenant definition
of net debt at average
rates 3,418 3,407
------------
Leverage 2.34x 2.28x
Cash Flow Measures
Adjusted Net cash Non-working Adjusted operating cash flow (pre-capex)
operating from operating capital is calculated as adjusted profit before
cash flow activities items (note depreciation and amortisation attributable
(pre-capex) 13) to subsidiaries less movements in working
and Adjusted capital.
operating
cash flow Adjusted operating cash flow (pre-capex)
conversion conversion is adjusted operating cash
flow (pre-capex) divided by adjusted
profit before depreciation and amortisation
of assets attributable to subsidiaries,
less lease obligation payments and the
positive non-cash impact from loss-making
contracts.
This measure provides additional useful
information in respect of cash generation
and is consistent with how business performance
is measured internally.
Restated(1)
6 months 6 months Restated(2)
ended ended
30 June 30 June Year ended
2019 2018 31 December
GBPm GBPm 2018
Adjusted operating GBPm
cash flow
Adjusted operating
profit 539 284 819
Share of adjusted
operating profit of
equity accounted investments (30) (15) (59)
Depreciation of owned
property, plant and
equipment and amortisation
of computer software
and development costs 211 74 277
Depreciation of leased
property, plant and
equipment and amortisation
of computer software 35 - -
and development costs
Lease obligation payments (43) - -
Positive non-cash
impact from loss-making
contracts (45) (15) (63)
667 328 974
Change in inventories (92) (25) (110)
Change in receivables 164 (39) 179
Change in payables (140) (24) (160)
Adjusted operating
cash flow (pre-capex) 599 240 883
Adjusted operating
cash flow conversion 90% 73% 91%
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Free cash Net increase/ Acquisition Free cash flow represents cash generated
flow decrease related from trading after all costs including
in cash cash flows, restructuring, pension contributions,
and cash dividends tax and interest payments.
equivalents paid to
owners
of the
parent,
foreign
exchange,
discontinued
operating
cash flows
and other
non-cash
movements
Adjusted Net increase/ Free cash Adjusted free cash flow represents
free cash decrease flow, as free cash flow adjusted for special
flow in cash defined pension contributions, restructuring
and cash above, cash flows and discontinued operating
equivalents adjusted cash flows.
for special
pension
contributions,
restructuring
cash flows
and discontinued
operation
cash flows
Capital None Not applicable Calculated as the purchase of owned
expenditure property, plant and equipment and computer
(capex) software and expenditure on capitalised
development costs during the period,
excluding any assets acquired as part
of a business combination.
Net capital expenditure is capital
expenditure net of proceeds from disposal
of property, plant and equipment.
Capital None Not applicable Capital expenditure divided by depreciation
expenditure of owned property, plant and equipment
to depreciation and amortisation of computer software
ratio and development costs.
Dividend Dividend Not applicable Amounts payable by way of dividends
per share per share in terms of pence per share.
(1) Results for the period ended 30 June 2018 have been restated
for the finalisation of acquisition accounting for GKN (see note 2)
and discontinued operations (see note 9).
(2) Results for the year ended 31 December 2018 have been
restated for discontinued operations (see note 9).
(3) 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.
(4) Operating margin is not defined within IFRS but is a widely
accepted profit measure being derived from operating profit/loss(3)
divided by revenue.
(5) Year ended 31 December 2018 remains aligned to the original
calculations supporting the Group's bank debt compliance
certificate, and has not been restated for discontinued
operations.
(6) Included within other adjustments required for covenant
purposes are adjustments to include dividends received from equity
accounted investments, to remove adjusted operating profit of
equity accounted investments and adjustments in respect of
leases.
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
IR LLFETATISIIA
(END) Dow Jones Newswires
September 05, 2019 02:01 ET (06:01 GMT)
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