TIDMMRO
RNS Number : 0566F
Melrose Industries PLC
05 March 2020
5 March 2020
MELROSE INDUSTRIES PLC
AUDITED RESULTS
FOR THE YEARED 31 DECEMBER 2019
Melrose Industries PLC today announces its audited results for
the year ended 31 December 2019.
Highlights
Adjusted(1) results Statutory results
2019 2018 2019 2018
Continuing operations(2) GBPm GBPm GBPm GBPm
---------- --------- ---------- -------
Revenue 11,592 8,645 10,967 8,152
---------- --------- ---------- -------
Operating profit/(loss) 1,102 813 318 (387)
---------- --------- ---------- -------
Profit/(loss) before tax 889 672 106 (542)
---------- --------- ---------- -------
Diluted earnings per share 14.3p 12.7p 0.9p (11.8p)
Group
-- The results for 2019 were comfortably ahead of the Board's
expectations for both profit and cash generation
-- Adjusted(1) diluted earnings per share ("EPS") were 14.3
pence, up 13% on last year (statutory EPS: 0.9 pence) and adjusted
free cash flow(3) was GBP591 million, up 72%(4) on an annualised
like-for-like basis
-- Group net debt and leverage have both been improved and were
reduced to GBP3.28 billion and 2.25x respectively
-- Net trade working capital in the Group was reduced by GBP95
million (5%) in the year, with adjusted profit conversion to
cash(1) of 104%. More progress in net trade working capital to
come, in line with achieving the previously announced GBP400
million target within the Melrose ownership period
-- Loss-making contracts have been improved materially with the
losses from 2018 reducing by 11% in 2019. In addition, c.25% of the
remaining provision has been released (as previously stated this
release is not included in adjusted(1) operating profit) due to
improvements implemented by management this year. These
improvements impact future trading in GKN positively
-- The GKN UK defined benefit pension schemes are significantly
better funded, aided by over GBP240 million(5) of cash
contributions from the Group so far during Melrose ownership, fully
in line with the plan agreed with the Trustees. Along with better
investment returns, the remaining contributions required to make
these schemes well funded has reduced from up to GBP1 billion at
acquisition to c.GBP500 million
-- A proposed final dividend of 3.4 pence per share (2018: 3.05
pence) is 11% up on last year, giving a full year dividend of 5.1
pence per share (2018: 4.6 pence) up 11%
-- During 2019, a record total level of investment has been made
in new product development; technology; environmental, social &
governance (ESG); and capital and restructuring projects - all
designed to improve the quality of the businesses and their future
performance
-- The effects of the COVID-19 outbreak are not fully known at
present. However, whilst there will clearly be some impact, the
opportunities to improve GKN in 2020 and beyond position Melrose
well to deliver positive returns for shareholders in the future
Divisions(6)
-- Aerospace sales grew by 7% in 2019 and the adjusted(1)
operating margin rose to 10.6%, up from 9.9% in 2018. The second
half margin was 11.1%, fully on track to achieve the target
previously set
-- Aerospace is implementing its extensive restructuring
project, "One Aerospace", as announced in September 2019, to
achieve further performance enhancements and is investing in new
technology to improve aircraft efficiency in the future. North
American Aerostructures became profitable in 2019; only two years
ago this part of Aerospace made a GBP43 million loss
-- Automotive sales reduced by 6% over the full year in 2019 in
line with the market, but saw an improved trend in the second half,
being 4% down, despite the General Motors strike in the autumn. An
exciting new commercial partnership in eDrive has been signed with
Delta Electronics Inc to accelerate the development of electric
vehicles
-- The Automotive adjusted(1) operating margin in the full year
was 7.7% with the second half margin rising to 7.9% up from 6.8% in
2018, a very encouraging performance. This meant the adjusted(1)
operating profit actually rose by 14% in the second half compared
to the same period in 2018 despite the macro Automotive
headwinds
-- The Automotive and Aerospace businesses are now totally
separate from a head office, legal, tax and pensions perspective.
Melrose will be holding an Investor Day for Automotive in New York
in October this year to update the markets on its future
strategy
-- Nortek Air Management continues to benefit from its leading
edge sustainable StatePoint Technology(R) to reduce energy and
water consumption in data centres. Nortek Security had a tough year
but is rebuilding under new management. Ergotron ended the year
strongly with its second half profit being 26% ahead of the
previous year
-- Melrose has appointed advisers to explore the strategic
options for Nortek Air Management, although clearly recent events
may have some bearing on timing. In the event of a significant
disposal, a further reduction to net debt would be made along with
an exceptional repayment to shareholders and a further contribution
to the GKN UK defined benefit pension schemes
Justin Dowley, Chairman of Melrose Industries PLC, said:
"We are delighted with the Melrose performance in 2019 and the
substantial value that is being unlocked. Notwithstanding any
implications of the COVID-19 outbreak, the bedrock has now been
built for the GKN businesses to attain results which were not
previously achievable, and, in addition, the shareholder value
built up in our longer held assets is closer to being realised.
This shows, once more, that the Melrose model thrives by investing
properly in businesses and giving management the entrepreneurial
freedom to succeed. This is just the start of what is possible for
GKN."
(1. Considered by the Board to be a key measure of performance.
Described in the glossary to the 2019 Preliminary Announcement)
(2. Results for 2018 include GKN for 8 months only and have been
restated for discontinued operations)
(3. Adjusted free cash flow excludes the special one-off pension
contributions and restructuring spend)
(4. Calculated compared to 2018 annualised adjusted free cash
flow, excluding the previously announced GBP150 million cash
outflow from unwinding creditor stretch in 2018. 2018 annualised
adjusted free cash flow includes 12 months of GKN ownership)
(5. Including the contribution paid on 6 January 2020)
(6. All growth metrics are calculated at constant currency
against 2018 annualised results, excluding the impact of
loss-making contracts in both periods for consistency. 2018
annualised results include 12 months of GKN ownership)
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 17(th) set of annual results since
flotation in 2003.
CALAR YEAR 2019(1)
The past year has seen us take some important steps towards
unlocking the full potential of the GKN businesses and this is
showing through in these results. We achieved statutory revenue for
the Melrose Group of GBP10,967 million (2018: GBP8,152 million),
with an adjusted operating profit of GBP1,102 million (2018: GBP813
million) based on a statutory operating profit of GBP318 million
(2018: loss of GBP387 million). Importantly, adjusted free cash
flow improved by 72% to GBP591 million on an annualised
like-for-like basis, thus reducing leverage in the Group to 2.25x
EBITDA.
While there remains plenty to do, this clearly demonstrates that
the improvements we are making to the GKN businesses are starting
to deliver the performance that we believe is achievable. Nortek
Global HVAC ("HVAC") has enjoyed another strong year as the
installations of its cutting edge sustainable StatePoint technology
in large scale data centres gain momentum across the globe. With
the appointment of advisers to consider strategic options for
Nortek Air Management ("Air Management"), the business is reported
in these accounts as a stand-alone division and Security &
Smart Technology ("Security") has been moved to the Other
Industrial division.
Further details of these results are contained in the Chief
Executive's Review and Finance Director's Review and I would like
to thank all employees for their efforts in helping to produce this
strong performance.
DIVID
In line with our progressive dividend policy, the Board proposes
to pay a final dividend of 3.4 pence per share (2018: 3.05 pence),
making a total dividend for the year of 5.1 pence per share (2018:
4.6 pence), an increase of 11% from last year. The final dividend
will be paid on 20 May 2020 to those shareholders on the register
at 3 April 2020, subject to approval at the Annual General Meeting
("AGM") on 7 May 2020.
PENSIONS
We are very proud of our track record in improving the funding
of pension schemes under our stewardship. We were proactive,
transparent and constructive in agreeing commitments with pension
trustees during the acquisition of GKN to provide comfort that the
improvements we had planned for the businesses included greater
security for their members. We continue to deliver on our promises,
increasing the prudence of their funding targets, while over GBP240
million of cash contributions so far have helped to significantly
improve the funding position.
This improvement in funding has been matched by structural
enhancements. In line with plans agreed with the trustees, we have
rebalanced the pension liabilities more evenly across the
supporting businesses. Stronger, better funded and more secure GKN
pension schemes are the latest example in our good track record for
responsible stewardship.
BOARD MATTERS
As announced last year, co-founder and Executive Vice Chairman
David Roper will retire at the end of May. His period of service,
first as inaugural CEO and then as Executive Vice Chairman, has
been one of great success for the business he helped found in 2003.
It is a testament to his leadership that he leaves Melrose in such
good health. We thank him for his long and successful service and
wish him all the best in his retirement. David's departure is part
of the ongoing succession planning for the Board that has also seen
us welcome Funmi Adegoke as a non-executive director last
October.
Although I have only served as independent non-executive
Chairman for a short period, I will have served as a director for
nine years in September 2020, which is a key date for independent
directors under the guidance of the new UK Corporate Governance
Code (the "Code") that came into force after my appointment had
been announced. The Company therefore conducted an engagement
exercise with its key shareholders regarding the possible extension
of my tenure past the nine year guidance. I am pleased to say that
the feedback was unanimously supportive and accordingly, the Board
proposes that my appointment as Chairman continues for up to a
further three years, subject to annual re-election, to provide
stability and certainty following the acquisition of GKN, as well
as to oversee smooth succession and increasing diversity for the
Board.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG") DISCLOSURE
You will see that we have produced our first stand-alone ESG
Report as part of our Annual Report. This ESG Report draws together
all the actions, programmes and performance on ESG matters for us
and our businesses to aid the understanding of our investors and
other stakeholders.
Consistent with our "Buy, Improve, Sell" strategy, some of the
businesses we acquire may be underdeveloped in one or more areas of
ESG focus. While we set a good example centrally through strong
governance practices and responsible stewardship, a key part of the
improvement strategy is providing the investment, support and
encouragement that our businesses need to make meaningful,
continuous ESG improvements. This delivers material production
efficiencies, such as the 30% reduction in emissions achieved by
GKN facilities over the past two years, and sustainability
breakthroughs on product developments such as the composite "Wing
of Tomorrow" and electric aircraft initiatives of GKN Aerospace,
the P4 eDrive system of GKN Automotive reducing CO(2) emissions by
up to 100%, and HVAC's cutting edge StatePoint technology, which
enables savings of up to 30% for energy consumption and up to 90%
for water usage on cooling systems in the fast growing hyperscale
data centre market.
These are all long-term programmes requiring significant
investment that will continue to deliver sustainable benefits long
after our ownership and demonstrate the strength of our commitment.
We welcome the evolving focus and clarity on ESG matters as yet
another opportunity to demonstrate how we build better, stronger
businesses for the benefit of all stakeholders whilst producing
excellent returns for shareholders. We see these as entirely
compatible and I refer you to the ESG Report for full details.
PURPOSE AND STRATEGY
Melrose was founded in 2003 to empower businesses to unlock
their full potential for the collective benefit of stakeholders,
whilst providing shareholders with a superior return on their
investment. This has been delivered through Melrose's "Buy,
Improve, Sell" strategy, which means we buy good quality but
underperforming manufacturing businesses and then invest heavily to
improve performance and productivity as they become stronger,
better businesses under our responsible stewardship. At the
appropriate time, we find them a new home for the next stage of
their development and return the proceeds to shareholders. This
current set of results is a strong demonstration of this strategy
in action, and a continuation of the achievements that have seen
Melrose ranked as the second highest performer for total
shareholder return in the FTSE350 over the past decade.
OUTLOOK 2020
2019 was a year of significant progress but encouragingly much
remains to be done and our divisional teams are delivering. As
such, we expect 2020 to be another year of good progress driven by
each of the key businesses with a dual focus on efficiency
programmes, to deliver operational improvements, as well as record
investment in R&D to maintain technological market leadership.
The Melrose model has always been focussed on performance
improvement rather than end market growth and it is in uncertain
and volatile markets that this shines through most clearly. While
it is too early to be precise on the impact of COVID-19 on our
businesses or wider economic conditions, we remain focussed on what
we can control. Longer term, we continue to see significant value
in the Group and the foundations to realise this are stronger than
ever.
Justin Dowley
Chairman
5 March 2020
CHIEF EXECUTIVE'S REVIEW
After a busy eight months following the acquisition of GKN, our
first full year of ownership has proved to be equally significant
as our investments and improvement plans have gained momentum.
Having legally separated all the GKN businesses and with motivated
executive teams, we were able to increase the focus on performance,
with pleasing results.
Although benefiting from a strong sector, GKN Aerospace was
successful in both growing its sales as well as improving adjusted
operating margins to approximately 11% in the second half of the
year. Continued record investment in technology supported a number
of advances, including the first composite components for the Wing
of Tomorrow programme for Airbus, while continuing efficiency and
productivity programmes saw a return to profitability for the
previously troubled North American sites. Good progress has been
made on the "One Aerospace" reorganisation announced last
September. This has reshaped the division into three business lines
- Civil Airframe, Defense and Engines - to align with its customer
base and centralise the global control of operations under the
Chief Operating Officer. It is a key focus for 2020 to evolve the
management structure of this business.
With the global downturn in the automotive sector continuing
into 2019, GKN Automotive was quick to take corrective action that
limited its impact on profitability. Although sales declined 6%
over the year, in line with the market, the business was able to
improve adjusted operating margins in the second half to just under
8% and adjusted operating profit for the same period rose by 14%
compared with the prior year. These actions are part of GKN
Automotive's ambitious plan to achieve the margin target announced
last year and are matched by ongoing record investment in research
and development. The exciting new collaboration with Delta
Electronics Inc announced in January 2020 to jointly produce 3-in-1
eDrive systems builds on a strong existing relationship and will
enable both parties to build on their respective positions in this
dynamic market.
Being predominantly an automotive component manufacturer, GKN
Powder Metallurgy also felt the challenges of the automotive sector
downturn in 2019. This was accentuated by its exposure to the
General Motors strike in the second half which drove sales down by
10% and adjusted operating margins to 10.5%. Accordingly, it is
implementing a plan to rebalance its cost base and a focus for this
year is on improving its Sinter Large division. There is now a
strong focus on improving this business and the recent acquisition
of Forecast 3D is an exciting opportunity for GKN Powder Metallurgy
to be a market leader in additive manufacturing.
All of our businesses are keeping the unfolding events
surrounding the COVID-19 outbreak under review. To provide some
context of the impact to date, approximately 10% of Group sales are
manufactured in China, of which only 5% is sold in China. GKN
Automotive has the largest exposure through its SDS joint venture,
but all except one site are operational after the new year break.
Whilst there is clearly going to be a material impact on the
Chinese economy, at the time of writing there are increasing signs
of a return to normal levels of production.
The working capital improvement programme is building momentum
across the Group, which delivered significant progress towards the
targeted GBP400 million of ultimate savings through a 5% reduction
in trade working capital. Group cash conversion was strong at 104%.
Each of GKN Aerospace and GKN Automotive have continued their focus
on procurement, delivering significant savings year on year.
The GKN businesses are also making good progress in addressing
the GBP629 million of loss-making contracts we inherited on
acquisition. Through a mixture of operational improvements,
productivity, procurement initiatives and commercial discussions,
they have achieved sufficient improvements in the long-term
positions of these contracts to enable a release of approximately
25% of the remaining provision (as previously indicated not
included in adjusted operating profit). GKN Automotive has been
particularly effective in making progress, but we are confident
there are significant further improvements available to all
businesses.
Last year saw a number of important milestones for Air
Management's game changing data centre climate control technology
StatePoint, with the business initiating roll out in two mega scale
facilities for a global technology company and developing a strong
pipeline of new opportunities to gain further market share.
Elsewhere, the Nortek Air Solutions business continues to go from
strength to strength, while the Air Quality and Home Solutions
business overcame some headwinds in its Canadian market and
delivered a number of important new product launches.
Security has been moved to the Other Industrial division, with
the impairment unchanged from the interim results, and has a new
management team as it looks to finalise the transition of its
production away from China to minimise tariff exposure. These
results indicate that the new management team at Ergotron look to
have put recent challenges from tariffs behind them as they further
develop their product portfolio and clarify their best routes to
market. Brush has emerged from its restructuring programme better
shaped and well positioned to serve its growing markets.
Set out below is a more detailed overview of the performance for
each division.
AEROSPACE DIVISION
GKN Aerospace is a global tier 1 aerospace partner with market
leading positions driven by technological innovation, advanced
processes and engineering excellence. GKN Aerospace's technology is
used throughout the aerospace industry: from high-use single aisle
aircraft and the world's largest passenger planes, through to
business jets, helicopters and the world's most advanced fighter
jets. GKN Aerospace technologies help aircrafts fly faster, further
and greener.
During 2019, GKN Aerospace consolidated on the early gains made
since our acquisition and continued to take the required actions to
increase customer confidence and improve operational delivery.
Those measures have resulted in good progress being made in
addressing loss-making contracts identified in the opening balance
sheet review, although this remains a work in progress with
significant further opportunities available. The business has also
kept its exposure to Boeing 737 MAX under close review and, in
discussion with Boeing, is taking the necessary mitigating action.
The exposure of GKN Aerospace to the 737 MAX is approximately a
shipset value of up to GBP400,000 for each aircraft.
The business also sharpened its focus on commercial performance
improvement, supported by operational efficiency measures and
significant investment from Melrose. These have been particularly
noticeable in the North American transformation programme in 2019
that has enabled this group of sites to move from a GBP43 million
loss in 2017 to a small profit in 2019. This contributed to a
stronger second half performance for GKN Aerospace, with operating
margins for that period reaching 11% and operating margin growth
across the year of more than 1 percentage point.
GKN Aerospace commenced a wholesale reorganisation during the
second half of the year to create a stronger, simpler, more
competitive business, based on a fully integrated global operating
model and organised around three business lines: Civil Airframe,
Defense and Engines as well as a regional network of operational
sites supported by global functions. Over the next 18 months full
deployment of the "One Aerospace" operating model will refocus the
business to better serve its customers by placing accountability
for customer relationships and product lines at the heart of the
commercial organisation.
The refreshed organisation will better enable the business to
unlock its full potential by supporting and directing its key
improvement measures including continued investment in new
facilities, centralised control of operations, further investment
in technology, and improvements to delivery, quality and customer
relationships. It will also result in a more streamlined and nimble
management structure. Implementation of the reorganisation will
remain a key focus for the business in 2020 and into 2021.
GKN Aerospace's continued investment in technology led to
several landmark achievements in 2019, strengthening its position
as a key partner to several major blue-chip customers. In the Civil
Airframe market, GKN Aerospace's advanced composite leadership saw
it manufacture and deliver the first components for Airbus' Wing of
Tomorrow programme, including a revolutionary 4-metre demonstrator
tool to accelerate future progress. In Engines, GKN Aerospace's
world-leading additive manufacturing capability accelerated the
production of a Fan Case Mount Ring component. This is the largest
purely additive aerospace part ever produced, while reducing
titanium waste, CO(2) emissions, and production time and costs, and
providing opportunities for expansion into key engine
platforms.
GKN Aerospace also strengthened its additive manufacturing
leadership position within Civil Airframe and Defense, winning key
roles on collaborative R&D programmes in the UK and announcing
a new world-leading additive pilot production cell at Oak Ridge
National Laboratory in the US. These advances in additive
manufacturing technology continue to target untapped productivity
and profitability improvements, as well as secure new business
opportunities.
Throughout the year, GKN Aerospace continued its strategic
repositioning in the emerging Asia market, announcing a new
facility in China and starting production in its new wiring site in
Pune, India, while closing two loss-making sites. With Melrose
support, over GBP50 million was committed to new investment in
productivity across key European and US facilities, including
Cowes, Luton and Portsmouth in the UK, and Garden Grove in the
US.
Outlook
Despite some challenges, overall the long-term civil aerospace
market remains in line with our acquisition assumptions, with order
backlog and predicted aircraft requirements supporting a positive
long-term outlook for GKN Aerospace globally. An increase in
international defence spending is driving strong demand
expectations in the aerospace defence market.
While the Boeing 737 MAX has made headlines over the past 12
months, the full extent of the impact on the market still remains
unclear for 2020 and, whilst relatively less significant for GKN
Aerospace, the business is taking appropriate mitigating actions.
GKN Aerospace's strong relationships with major OEMs and good
exposure to the growing Asian market, world-leading technology and
a renewed focus on operational efficiencies driven centrally across
its global footprint, is expected to enable a reshaped GKN
Aerospace to continue to deliver further improvements towards
achieving its margin targets and again perform strongly in
2020.
AUTOMOTIVE DIVISION
GKN Automotive is a world leading supplier of automotive
driveline technology and systems used across the automotive
industry, from the smallest ultra-low-cost cars to the most
sophisticated premium vehicles demanding the most complex driving
dynamics. GKN Automotive has global operations in 21 countries and
is principally organised around its two key core competencies: (i)
Driveline, which is the world's pre -eminent global driveshaft
manufacturer; and (ii) ePowertrain, an industry leader in electric
powertrains ("eDrive") and intelligent all-wheel drive ("AWD")
systems.
The Driveline division is an industry leader, supplying to more
than 90% of global vehicle manufacturers, with more than 50% of the
80 million new cars sold each year running on GKN Automotive parts.
The business provides a comprehensive range of sideshafts,
propshafts and constant velocity joints, offering a simple,
reliable solution for every type of hybrid, electric or combustion
passenger vehicle. Despite the global automotive downturn in 2019,
the Driveline pipeline has expanded throughout the year, bolstering
the division's market leading position as it moves into 2020.
GKN Automotive also has an unparalleled 17 years of eDrive
development and integration expertise and has produced more than
one million eDrive systems to date, with a rapidly expanding order
book. The business has pioneered the advancement of eDrive
technologies, developing its systems integration and production
capabilities. GKN Automotive recently announced a strategic
collaboration with Delta Electronics Inc, a global power
electronics specialist, for the joint development of advanced
eDrive technology, with GKN Automotive acting as system
integrator.
This partnership will further GKN Automotive's technical
capabilities and accelerate time to market for scalable, next
generation semi integrated 2-in-1 and fully integrated 3-in-1
eDrive systems of power classes from 80kW to 155kW. This important
development milestone has been matched by commercial success, with
four successful programme launches and GBP2.4 billion of lifetime
value ePowertrain programmes secured, and the delivery of GKN
Automotive's millionth eDrive system. This milestone underlines GKN
Automotive's early technology position in the fast-growing and
competitive eDrive market, which is projected to be worth more than
GBP12 billion by 2030.
China continues to be an important market for GKN Automotive. A
long-standing excellent relationship with local partner HASCO
through GKN Automotive's 50% equity investment in the strong joint
venture, Shanghai GKN HUAYU Driveline Systems ("SDS"), continues to
generate impressive returns. The business in this region
experienced a healthy evolution of its eDrive pipeline in 2019 and
executed three major eDrive programme launches during the year. GKN
Automotive is closely monitoring the situation surrounding the
COVID-19 outbreak, both in China and elsewhere, and is working to
mitigate the potential impact. It will be quick to take action
where required. Whilst COVID-19 is very likely to have a negative
effect on the Chinese economy this year, the market position of the
joint venture makes us confident that China will be a very
successful market for GKN Automotive in the future.
Despite facing challenging global market conditions, 2019 was a
strong year for GKN Automotive. An inevitable market-driven sales
decline was offset by the disciplined operational focus of the
refreshed and settled management team and targeted cost control
measures, resulting in an increase in operating profit margins that
were just short of 8% in the second half. This margin performance
is benefiting from the implementation of an ambitious improvement
programme based on six main levers, including procurement
optimisation, fixed cost reduction, commercial improvement and
operational excellence.
The improvement programme has a very healthy pipeline of value
creation initiatives, some of which have already contributed to the
margin improvement witnessed in 2019. Procurement delivered over
GBP40 million of savings from both direct and indirect material
purchasing and value engineering, while centralising the function
has improved costing intelligence and diversified supply sources.
Strategic footprint rationalisation opportunities continue to be
assessed, with the business building greater discipline around its
investment in its core manufacturing capabilities, driven by smart
automation and insourcing of essential, core GKN Automotive
capabilities, as well as targeted footprint expansion in best cost
locations supported by rationalisation elsewhere.
The business also made significant progress in addressing
loss-making contracts, taking an integrated approach to driving
efficiencies while improving commercial terms and performance
delivery, enabling a GBP60 million release from the opening balance
sheet provision and making a distinct impact on current programme
profitability. Through a better allocation of resources and
increased focus on working capital management throughout 2019, GKN
Automotive was also able to make significant improvements in cash
flow, with a conversion rate of greater than 100% for the full
year.
Outlook
GKN Automotive's performance in 2019 has set strong foundations
for further performance improvements. While global production
volumes are expected to remain soft and the full impact of the
COVID-19 outbreak is not yet known, continued focus on cost
management initiatives in its improvement plan are expected to have
a further positive impact on underlying operating profit
margins.
Driveline has over 60 programme launches planned for 2020 and is
pushing hard to drive productivity gains through smart automation
and execution of operational excellence and industrial strategy
initiatives approved and deployed in 2019. For ePowertrain, market
growth is expected to continue in 2020, which is expected to
accelerate GKN Automotive's delivery of next generation semi
integrated 2-in-1 and fully integrated 3-in-1 eDrive systems,
further strengthening the business' position in the sizeable and
rapidly expanding eDrive market.
With a positive underlying operating margin trajectory, improved
cash position, and the strategic investments that the business made
during 2019, we believe 2020 is set to be another year of
transformation for GKN Automotive irrespective of market
conditions.
POWDER METALLURGY DIVISION
GKN Powder Metallurgy is a global leader in both precision
powder metal parts for the automotive and industrial sectors, and
the production of metal powder, through its prized vertically
integrated business platform.
GKN Powder Metallurgy comprises: (i) Sinter Metals - the world's
leading manufacturer of precision automotive components and
components for industrial and consumer applications spread across
its Small and Large segments; (ii) Hoeganaes - the world's second
largest manufacturer of metal powder, the essential raw material
for powder metallurgy, with manufacturing facilities in North
America, Europe, and China; and (iii) Additive - a leading digital
manufacturer of additive manufacturing parts, both metals and
polymer, and materials for prototypes, manufactured through a
global, digitally connected print-network.
During 2019, GKN Powder Metallurgy faced its most challenging
market conditions for some years, most notably in the automotive
sector, that most significantly impacted the Sinter Large segment
of its business. Whilst the business largely outperformed the
market in Europe, China and Brazil, in its largest market of North
America the combination of a weaker domestic automotive market, the
impact of industrial action at certain customers, and reduced
exports to China proved challenging, as reflected in the 2019
results. This has nonetheless provided some opportunities, with
further market consolidation expected as smaller competitors exit
the market.
Although sales performance was impacted by macro events, the
business was largely able to protect margins through investment and
efficiency programmes that are part of a wider renewed strategic
plan for the business, which is being implemented after a
comprehensive review of its operations and cost base. This plan has
a particular focus on the underperforming Large segment of Sinter
Metals and has included the closure of two plants in North America,
as well as further continuous improvement initiatives to bolster
Sinter Metals market leadership in product quality and delivery.
These have reduced non-conformities and unnecessary expedited
freight costs. Further improvement is planned for the Large segment
of Sinter Metals in 2020.
Further automation initiatives were deployed throughout the GKN
Powder Metallurgy production footprint during 2019, supported by
increased shop floor digitisation. The harnessing of additional
activity data points has enabled more detailed and targeted mapping
of future improvement initiatives in process efficiency, quality
control and supply chain management, with a view to further
bolstering GKN Powder Metallurgy's technological and operational
leadership.
While rightly focusing on cost efficiency improvements, the
business nonetheless continues to pursue expansion opportunities.
After acquiring a small European sinter business in March 2019, GKN
Powder Metallurgy completed its acquisition of a leading US plastic
3D polymer printing company called Forecast 3D in January this
year. This acquisition has added 25 years of polymers experience
and capability to its already advanced additive manufacturing
production capabilities. Once fully integrated, it will build on
the success of GKN Powder Metallurgy's Metal Jet technology and
furthers the business' geographic reach in North America as well as
its market expansion and leadership ambitions in the high-growth 3D
metal & plastics printing solutions market globally.
Outlook
Delivery of the operational improvement opportunities remains
the key strategic focus for GKN Powder Metallurgy in 2020 as it
continues to take the steps necessary to achieve its margin
targets. The business is optimistic for its performance for the
year, despite the challenging end-markets expected for the
foreseeable period.
NORTEK AIR MANAGEMENT DIVISION
The Nortek Air Management division comprises (i) Nortek Global
HVAC ("HVAC") and (ii) Air Quality and Home Solutions ("AQH"). The
Security & Smart Technology business is now included in the
Other Industrial division.
NORTEK GLOBAL HVAC
The Nortek Global HVAC business includes the custom and
commercial business of Nortek Air Solutions, the residential and
light commercial business of HVAC and the dedicated data centre
business of StatePoint Liquid Cooling. It employs a strategic
framework of sustained growth, operational excellence, favourable
cash ow conversion and a commitment to its customers.
During 2019, the HVAC business continued its focus on creating
long-term value through strategies aimed at driving margin
expansion and future revenue growth. The introduction of common
procedures and optimisation of footprint and supply chain has
simplified the business while HVAC is starting to benefit from
significant investment in innovation and technology through the
development of breakthrough products and new portfolios. It has
sought to maximise the impact of these improvements with sales
channel growth to extend market leadership in critical segments of
the HVAC value chain and better cover previously under-penetrated
North American regions.
Throughout the year HVAC has successfully launched new products
and value propositions that address a number of key global societal
challenges, including the reduction of energy usage intensity,
improved water efficiency and the expansion of broader
air-management standards. The regulatory changes governing
refrigerants used in the HVAC sector is resulting in the largest
product transition in decades, with HVAC's significant investment
in innovation and technology meaning it is strategically well
positioned to gain market share across its product portfolio.
This is most notably highlighted by HVAC's market leading
position in the global data centre market, with very significant
demand opportunities. HVAC achieved standout commercialisation of
its StatePoint cooling system in 2019, which included a
multi-continent collaboration with a leading global technology
company to provide cooling solutions. These systems deliver greatly
superior performance and geographic flexibility in the design and
construction of world-class hyperscale data centres across the
world.
Vitally, this investment has also demonstrated HVAC's
longstanding commitment to sustainability, with StatePoint cooling
systems enabling surrounding communities to benefit from up to 30%
energy savings and up to 90% water efficiency. These significant
improvements in performance and efficiency are fundamentally
important for the HVAC equipment market that is predicted to grow
by over $50 billion at a CAGR of 5% over the next five
years.(2)
Building on its market leading position in data centres, HVAC is
harnessing the advantages of its technology leadership to make
developments right across its product offering, as well as into
adjacent product lines such as desiccant enhanced evaporative
cooling systems. With the launch of a suite of new products and
services to help end markets react constructively to global trends,
the business continued to lead the way in 2019. Nortek Air
Solutions again delivered on its investments, showing further
margin improvement as well as strong sales growth. The residential
business faced more market challenges but was quick to react in
implementing a series of efficiency initiatives, including
footprint rationalisation, that mitigated some of the impact.
Outlook
Having moved into the construction phase of hyperscale data
centre projects for its StatePoint cooling systems during 2019,
HVAC has proven its ability to deliver on the promise of this
transformational opportunity and expects to pursue similar
large-scale projects in 2020. Further growth is backed by a product
portfolio and technology leadership that provides a platform to
remain ahead of the market. Combining this with a balanced and
dynamic capital allocation strategy and experienced management
team, HVAC expects further strong operational and nancial
performance in 2020.
AIR QUALITY AND HOME SOLUTIONS
AQH is a leading manufacturer of ventilation products for the
professional building remodelling and replacement market, the
residential new construction market, and the consumer DIY market.
It supplies to distributors and dealers of electrical and lighting
products, kitchen and bathroom dealers, retail home centres and
private label customers from its four manufacturing locations
around the world. AQH enjoys a leading market share and installed
base in US residential ventilation fans and range hoods.
Strong performances in 2019 from the business' high margin
brands Zephyr and Best and above market growth in China were enough
to offset wider market headwinds, in particular weak housing starts
in the US and Canada. This resulted in largely flat sales for the
year, although there was some targeted growth in the appliance and
wholesale channels and a breakthrough in the fresh air segment. The
business was successful in negotiating pass through arrangements to
partially mitigate the negative impact of tariffs.
An installed base of 80 million units in North America following
years of market leadership provides a significant opportunity for
recurring replacement and remodelling revenue. Accordingly, AQH has
refocussed some of its new product development to address this with
the aim of increasing its market share in aftermarket revenue. 2019
also saw a number of product upgrades including more powerful and
efficient fresh air platforms, a new cooker hood ventilation range,
and a connectable whole home air quality solution.
Operationally, AQH continued to optimise and realise production
efficiencies throughout 2019 to offset margin challenges from
tariffs, higher first half commodity costs and competitive pricing
pressures. The business continues to manage the product transfers
that are generating margin opportunities, with further supply chain
and logistics improvements set to deliver additional savings in
2020.
Outlook
Some cautious recovery is expected in those North American
markets that had a difficult 2019, with the business targeting
sales growth for 2020 through a strong pipeline of new product
development, scheduled product extensions, and the opportunities
presented by the large installed base. Operationally, further
supply chain, logistics and product optimisations are planned for
2020, providing confidence in the outlook of the business for the
year.
OTHER INDUSTRIAL DIVISION
The Other Industrial Division comprises (i) Brush, (ii) Security
& Smart Technology, and (iii) Ergotron. The Walterscheid
Powertrain Group business was sold during the year and GKN Wheels
& Structures is held for sale and both are classified as
discontinued operations.
BRUSH
Brush is a leading independent provider of Turbogenerators,
Transformers and Switchgear, and a fast-growing provider of
Services across these core product segments. Brush is a profitable,
cash generative business serving more diverse and growing end
markets than ever before, which benefit from supporting macro
trends.
The structural realignment of Brush's manufacturing footprint is
now complete and cost benefits are being realised by a strengthened
and refocussed management team in line with expectations. Brush is
now repositioned for future growth, driven by product innovation,
asset life extension, improved productivity and building on its
cost reduction initiatives that continue to generate savings. Brush
has continued to invest in product development across all of its
businesses, including broadening its product range in Switchgear
and enhancing its Turbogenerators product portfolio.
While trading conditions in the turbogenerator market remained
challenging, the reshaped business matches this new reality and has
mitigated the impact. For Switchgear, increased DC business from
China through a number of new metro projects offset delays with the
UK Distribution Network Operator sector, and the penetration of new
product lines has been positive. After a slow start, activity in
Transformers increased significantly during the latter half of
2019, contributing to a strong order book for deliveries scheduled
well into 2020.
Services activity remained somewhat subdued across all product
segments as some key customers deferred maintenance activities as a
result of market conditions. However, Brush's newly strengthened
commercial function for Services and increased bespoke
collaboration with key industries began to yield good results in
the latter half of the year.
Outlook
Brush has emerged from 2019 as a stronger and more agile
business, with a significant order backlog built on a more
diversified customer base and product portfolio that addresses
customer needs in a broad range of traditional and emerging
end-markets. After putting recent challenges behind it and now
under strategic review, the business is confident of a good
performance from its current base in the coming years.
SECURITY & SMART TECHNOLOGY
The Security business is a leading developer and manufacturer of
security, home automation and access control technologies for the
residential and commercial markets, principally in North America.
The business continues to bolster its expertise in the design and
manufacture of wireless connectivity devices, to leverage its
strong brand presence in professional security, integrator and
custom installer channels, and to invest in its relationships with
top resellers.
The business experienced another difficult year in 2019 as it
faced increasing market competition and higher tariffs on many of
its products, leading to the impairment announced at the half year.
Throughout 2019, Security rebuilt its management team and
maintained its strong focus on product development leading to a
strong pipeline of innovative products, many of which are set for
release in 2020. Security continued to optimise its operations and
footprint in 2019, including the consolidation of its research and
development and back office functions into newly built headquarters
in California, and the successful shift of production away from
China in response to increasing tariffs. These efforts have
resulted in reduced operating costs and an improved working capital
structure, as well as providing the business with a more
streamlined footprint moving forward.
Outlook
In 2020 a new management team, with a renewed discipline and
focus on product development in core offerings, will be executing
an updated go-to-market sales and marketing strategy. Following the
successful transition of the business's production activities to a
third party manufacturer, the business is repositioned for a better
performance in 2020.
ERGOTRON
Ergotron is a leading designer, manufacturer and distributor of
ergonomic products for use in a variety of working, learning and
healthcare environments. Based in Minneapolis, USA, Ergotron
comprises four business segments: Healthcare, Office, Education and
Custom.
The business continues to drive a product leadership strategy,
focusing on high-growth industry sectors and growing its presence
in the EMEA and APAC regions. In 2019 the business was reorganised
into focussed end segments positioning it for growth. Tariff
headwinds were mitigated through pass through arrangements and
securing certain regulatory exclusions.
Significant improvements have been made in new products, rapid
prototyping, test laboratories, CRM enhancement and improved
channel engagement. Closure of non-core operations in Tualatin,
Oregon and Phoenix, Arizona, USA enabled the business to refocus
its footprint to reflect its core strengths.
Outlook
Ergotron expects growth of its core businesses to accelerate in
2020, led by the healthcare segment, due to a significant number of
new product launches, enhanced end market focus, channel partner
realignment and accountability. Alongside current markets, Ergotron
is building its incremental growth prospects from new markets such
as Office Furniture and Industrial. A new leadership team,
revitalised channel engagement, new products and building on the
new product momentum established in 2019, all point to a positive
trajectory in 2020.
Simon Peckham
Chief Executive
5 March 2020
FINANCE DIRECTOR'S REVIEW
The results for the year ended 31 December 2019 include the
first full year of ownership of GKN. As a consequence, the results
for the year are not directly comparable to 2018 as the prior year
performance includes only eight months of GKN trading following its
acquisition on 19 April 2018.
The comparative results in this Preliminary Announcement have
been restated to show: the results of Walterscheid Powertrain Group
as discontinued following its disposal on 25 June 2019; the results
of GKN Wheels & Structures as discontinued following its
classification as an asset held for sale at 31 December 2019; the
reclassification of the results of the Security & Smart
Technology business from Nortek Air & Security to the Other
Industrial division, following the Board's intention to consider
strategic options for the Nortek Air Management business separate
to the Nortek Security business; and 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 GBP10,967 million (2018: GBP8,152
million), an operating profit of GBP318 million (2018: loss of
GBP387 million) and a profit before tax of GBP106 million (2018:
loss of GBP542 million). The diluted earnings per share ("EPS"),
calculated using the weighted average number of shares in issue
during the year of 4,858 million (2018: 3,959 million), were 0.9
pence (2018: loss of 11.8 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 defined in the glossary to the Preliminary
Announcement.
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 year ended 31 December 2019 show
revenue of GBP11,592 million (2018: GBP8,645 million), an operating
profit of GBP1,102 million (2018: GBP813 million) and a profit
before tax of GBP889 million (2018: GBP672 million). Adjusted
diluted EPS were 14.3 pence (2018: 12.7 pence).
Tables summarising the statutory results and adjusted results by
reportable segment are shown later in this review.
The continuing results in 2019 included a positive impact of
GBP81 million from utilising loss-making contract provisions as
required under IAS 37: "Provisions, contingent liabilities and
contingent assets", and identified during the opening Balance Sheet
review process for GKN.
RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS
The following tables reconcile the Group statutory revenue and
operating profit/(loss) to adjusted revenue and adjusted operating
profit:
2019 2018
Continuing operations: GBPm GBPm
---------------------------------------------------- ------- -----
Statutory revenue 10,967 8,152
---------------------------------------------------- ------- -----
Adjusting item:
---------------------------------------------------- ------- -----
Revenue from equity accounted investments ("EAIs") 625 493
---------------------------------------------------- ------- -----
Adjusted revenue 11,592 8,645
---------------------------------------------------- ------- -----
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 year ended 31 December 2019, EAIs in the Group generated
GBP625 million of revenue (2018: GBP493 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 profit/(loss) 318 (387)
---------------------------------------------------- ------ -----
Adjusting items:
---------------------------------------------------- ------ -----
Amortisation of intangible assets acquired in
business combinations 534 391
---------------------------------------------------- ------ -----
Restructuring costs 238 229
---------------------------------------------------- ------ -----
Write down of asset value 179 152
---------------------------------------------------- ------ -----
Net release of fair value items (153) (20)
---------------------------------------------------- ------ -----
Currency movements in derivatives and movements
in associated financial assets and liabilities (55) 143
---------------------------------------------------- ------ -----
Disposal proceeds net of transaction related costs (4) 153
---------------------------------------------------- ------ -----
Other 45 49
---------------------------------------------------- ------ -----
Reversal of uplift in value of inventory - 103
---------------------------------------------------- ------ -----
Adjustments to statutory operating profit/(loss) 784 1,200
---------------------------------------------------- ------ -----
Adjusted operating profit 1,102 813
---------------------------------------------------- ------ -----
Adjusting items to operating profit are consistent with prior
years and include:
The amortisation charge on intangible assets acquired in
business combinations of GBP534 million (2018: GBP391 million),
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 excluded from
adjusted results.
Restructuring and other associated costs in the year totalling
GBP238 million (2018: GBP229 million), shown as adjusting items due
to their size and non-trading nature and during the year ended 31
December 2019 included:
-- A charge of GBP83 million (2018: GBP46 million) within the
Automotive division including: costs associated with headcount
reduction programmes addressing the high cost base inherited with
the business and ensuring a more flexible structure; costs incurred
closing two loss-making factories in the second half of the year;
costs associated with further footprint consolidation
opportunities; and costs incurred separating the Automotive
business from other GKN businesses.
-- A charge of GBP79 million (2018: GBP56 million) within the
Aerospace division including: costs associated with initial
headcount reductions following the commencement of a global
integration process to create "One Aerospace" and achieve a
simpler, more competitive, customer focussed business; costs within
the North America Aerostructures business relating to two factory
closures; and costs relating to footprint rationalisation projects
within the Special Technologies business.
-- A charge of GBP19 million (2018: GBP11 million) within the
Powder Metallurgy division including costs associated with
headcount reductions and the commencement of footprint
consolidation actions.
-- A charge of GBP11 million (2018: GBP19 million) within Nortek
Air Management primarily relating to continued factory
consolidation within the HVAC business.
-- A charge of GBP37 million (2018: GBP65 million) within Other
Industrial businesses, predominantly relating to the closure of the
Chinese manufacturing facility and switching to a third party
contract manufacturing model in the Security & Smart Technology
business. Restructuring charges also included the finalisation of
the restructuring activities announced in Brush last year.
-- A charge of GBP9 million (2018: GBP32 million) within central
activities mainly relating to the separation of the GKN
businesses.
An impairment charge of GBP179 million, booked in the first half
of the year in respect of the Security & Smart Technology
business, shown within the Other Industrial division, following a
deterioration in performance and assumed future prospects. The
impairment charge is shown as an adjusting item due to its
non-trading nature and size, and has not changed in value in the
second half of the year.
The net release of fair value items in the year of GBP153
million (2018: GBP20 million) where items have been resolved for
more favourable amounts than first anticipated. During the year
this included GBP122 million in respect of the release of
loss-making contract provisions held within the GKN businesses,
where either contractual terms have been renegotiated with the
relevant customer or operational efficiencies have been identified
and demonstrated for a sustained period. The net release of fair
value items are shown as an adjusting item, avoiding positively
distorting adjusted results.
Hedge accounting is not applied within the GKN businesses for
transactional foreign exchange exposure. Consequently, for
consistency and because of their volatility and size, the movements
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 are shown as an
adjusting item. These movements totalled a credit of GBP55 million
(2018: charge of GBP143 million) in the year.
A net acquisition and disposal related credit of GBP4 million
(2018: charge of GBP153 million) including a profit on the sale of
a small business and transaction costs in respect of acquisition
and disposal activities. 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 GBP17 million (2018: GBP13 million) which
is excluded from adjusted results due to its volatility; an
adjustment of GBP28 million (2018: GBP25 million) to gross up the
post tax profits of EAIs to be consistent with the adjusted
operating profits of subsidiaries within the Group; and in 2018, an
GBP11 million past service cost in respect of gender equalisation
of guaranteed minimum pensions for occupational pension schemes,
which was shown as an adjusting item because of its non-trading and
non-recurring nature.
In 2018, in accordance with IFRS 3, the value of finished goods
and work in progress inventory acquired in the GKN business was
required to be uplifted by GBP103 million. The impact on gross
margin as the inventory was sold through in 2018 was shown as an
adjusting item due to its size and non-recurring nature.
STATUTORY AND ADJUSTED RESULTS BY REPORTING SEGMENT
The following table shows revenue split by reporting segment,
including EAIs for adjusted revenue:
Powder Nortek
Aerospace Automotive Metallurgy Air Mgmt. Other Industrial Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ----------- ------------ ----------- ----------- ---------------- --------
Statutory revenue 3,836 4,146 1,099 1,178 708 10,967
------------------- ----------- ------------ ----------- ----------- ---------------- --------
Reconciling
item:
Revenue from
EAIs 16 593 16 - - 625
------------------- ----------- ------------ ----------- ----------- ---------------- --------
Adjusted revenue 3,852 4,739 1,115 1,178 708 11,592
------------------- ----------- ------------ ----------- ----------- ---------------- --------
The following table shows operating profit/(loss) split by
reporting segment. Adjusting items are described earlier in this
review.
Powder Nortek Other
Aerospace Automotive Metallurgy Air Mgmt. Industrial Corporate Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- ------------ ----------- ----------- ----------- ----------- --------
Statutory operating
profit/(loss) 104 186 77 139 (170) (18) 318
--------------------- ----------- ------------ ----------- ----------- ----------- ----------- --------
Reconciling item:
Adjusting items 305 181 40 36 256 (34) 784
--------------------- ----------- ------------ ----------- ----------- ----------- ----------- --------
Adjusted operating
profit/(loss) 409 367 117 175 86 (52) 1,102
--------------------- ----------- ------------ ----------- ----------- ----------- ----------- --------
The performances of each of the reporting segments are discussed
in the Chief Executive's Review. The adjusted operating costs in
the corporate cost centre of GBP52 million (2018: GBP28 million)
included GBP26 million (2018: GBP20 million) of Melrose corporate
costs, GBP6 million (2018: GBP6 million) of the remaining GKN
central costs and GBP20 million (2018: GBP2 million) of costs
relating to divisional cash-based long-term incentive plans, mainly
for GKN businesses in 2019.
FINANCE COSTS AND INCOME - CONTINUING OPERATIONS
Net finance costs in the year ended 31 December 2019 were GBP212
million (2018: GBP155 million), which included a credit of GBP1
million (2018: charge of GBP15 million) treated as adjusting
items.
Adjusted finance costs:
The net adjusted finance costs for continuing operations in the
year ended 31 December 2019 were GBP213 million (2018: GBP141
million), the year-on-year increase reflecting a full year
ownership of GKN.
Net interest on external bank loans, bonds, overdrafts and cash
balances was GBP143 million (2018: GBP98 million). Melrose uses
interest rate swaps to fix the majority of the interest rate
exposure on its drawn debt. More detail on these swaps is given in
the finance cost risk management section of this review.
In addition, finance charges included: an GBP11 million (2018:
GBP11 million) amortisation charge relating to the arrangement
costs of raising the Group's current bank facility; an interest
charge on net pension liabilities of GBP31 million (2018: GBP21
million); a charge on lease liabilities of GBP21 million (2018:
GBPnil) following the adoption of IFRS 16 on 1 January 2019,
discussed later in this review; a charge for the unwind of
discounting on long-term provisions of GBP7 million (2018: GBP10
million); and in the prior year GBP1 million relating to the
interest charge in EAIs.
Adjusting items:
Adjusting items, within finance costs and income, include a
credit of GBP1 million (2018: charge of GBP8 million) relating to
the fair value changes on cross-currency swaps, and in the prior
year included GBP7 million relating to the accelerated amortisation
of fees associated with the previous Melrose bank facility, written
off when the new bank facility was entered into to acquire GKN and
the previous facility was repaid and cancelled. These charges are
shown as adjusting items because of their volatility and
non-trading nature.
DISCONTINUED OPERATIONS
Discontinued operations include the results of Walterscheid
Powertrain Group up to the date of disposal on 25 June 2019 and the
full year result of the GKN Wheels & Structures business which
was classified as held for sale at 31 December 2019. For the year
ended 31 December 2019 discontinued operations show revenue of
GBP423 million (2018: GBP453 million), a statutory operating loss
of GBP80 million (2018: GBP5 million) and a statutory loss before
tax of GBP82 million (2018: GBP8 million).
Walterscheid Powertrain Group was sold to One Equity Partners, a
US-based private equity firm, for cash consideration of GBP185
million, less costs charged in the year 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.
At 31 December 2019 negotiations are ongoing with potential
buyers for the GKN Wheels & Structures business, which made a
small adjusted operating loss in the year. It is the Board's
strategic priority to dispose of this business within the next
twelve months, and as such the value of the business has been
remeasured on a fair value less costs to sell basis. Consequently,
a charge of GBP64 million is included in the discontinued
operations operating loss in the year.
TAX - CONTINUING OPERATIONS
The statutory results show a tax charge of GBP51 million (2018:
credit of GBP75 million) which arises on a statutory profit before
tax of GBP106 million (2018: loss of GBP542 million), a statutory
tax rate of 48% (2018: 14%). This rate is higher than the adjusted
effective tax rate because many of the adjusting items, discussed
earlier in this review, do not give rise to tax deductions.
The effective rate on the adjusted profit before tax for the
year ended 31 December 2019 was 21.4% (2018: 23.1%).
The Group has tax losses and other deferred tax assets with a
value of GBP819 million (31 December 2018: GBP885 million). These
are offset by deferred tax liabilities on intangible assets of
GBP1,243 million (31 December 2018: GBP1,450 million) and GBP188
million (31 December 2018: GBP177 million) of other deferred tax
liabilities. The Group tax losses will generate future cash tax
savings, whereas the deferred tax liabilities on intangible assets
are not expected to give rise to cash tax payments.
Cash tax paid in the year ended 31 December 2019 was GBP117
million (2018: GBP68 million) representing 13% (2018: 10%) of
adjusted profit before tax. This was lower than the effective tax
rate on adjusted profit before tax because the Group benefits from
certain adjusting items being tax allowable and from existing tax
losses and other deferred tax assets brought forward.
IFRS 3 "BUSINESS COMBINATIONS"
In the first half of the year, the opening Balance Sheet review
of GKN assets, liabilities and accounting policies was finalised
and as a result the Balance Sheet at 31 December 2018 was restated,
increasing goodwill by GBP6 million, intangible assets by GBP21
million, provisions and trade and other payables by GBP10 million
and decreasing deferred tax assets by GBP17 million. These items
remain unchanged since the half year.
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 and costs
associated with operating leases expensed through the Income
Statement as incurred.
The impact of IFRS 16, on transition, was 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 for continuing operations in the
year was to increase finance costs by GBP21 million, but this was
broadly offset by an associated increase in operating profit. In
addition, GBP72 million of costs have been reclassified from lease
expense to depreciation in continuing operations.
Leverage calculations in the Group's banking agreements exclude
lease obligations from the definition of net debt. Similarly, for
bank covenant purposes only, they exclude the depreciation on
right-of-use assets from the definition of EBITDA, by including a
lease charge in the calculation of EBITDA.
CASH GENERATION AND MANAGEMENT
Group net debt at 31 December 2019, translated at closing
exchange rates (for 2019 being US $1.33 and EUR1.18), was GBP3,283
million (31 December 2018: GBP3,482 million). For bank covenant
purposes the Group's net debt is calculated using average exchange
rates for the previous twelve months, to better align the
calculation with the currency rates used to calculate profits, and
adjusted operating profit before depreciation and amortisation
("EBITDA") is adjusted for leases and EAIs. The Group net debt
leverage for bank covenant purposes at 31 December 2019 was 2.25x
EBITDA ( 31 December 2018: 2.28x).
The movement in net debt during the year 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 - (2,841)
--------------------------------------------------- -------- -------
Adjusted net debt brought forward (3,482) (3,413)
--------------------------------------------------- -------- -------
Non-trading items and discontinued operations:
--------------------------------------------------- -------- -------
Net cash flow from disposal and acquisition
related activities 103 (26)
--------------------------------------------------- -------- -------
Dividend paid to Melrose shareholders (231) (129)
--------------------------------------------------- -------- -------
Foreign exchange and other non-cash movements 74 (110)
--------------------------------------------------- -------- -------
Discontinued operations (37) 29
--------------------------------------------------- -------- -------
Cash flow from non-trading items and discontinued
operations (91) (236)
--------------------------------------------------- -------- -------
Free cash flow from continuing operations 290 167
--------------------------------------------------- -------- -------
At 31 December at closing exchange rates (3,283) (3,482)
--------------------------------------------------- -------- -------
At 31 December at twelve month average exchange
rates (3,385) (3,407)
--------------------------------------------------- -------- -------
An analysis of the free cash flow is shown in the table below.
The comparative period includes GKN for 8 months following the
acquisition:
2019 2018
GBPm GBPm
------------------------------------------------- ------ -----
Adjusted operating cash flow 1,441 868
------------------------------------------------- ------ -----
Net capital expenditure (495) (345)
------------------------------------------------- ------ -----
Net interest and net tax paid (295) (174)
------------------------------------------------- ------ -----
Defined benefit pension contributions - ongoing (72) (43)
------------------------------------------------- ------ -----
Dividend income from EAIs 67 66
------------------------------------------------- ------ -----
Net other (55) (36)
------------------------------------------------- ------ -----
Adjusted free cash flow 591 336
------------------------------------------------- ------ -----
Restructuring costs (190) (113)
------------------------------------------------- ------ -----
Defined benefit pension - special contributions (111) (56)
------------------------------------------------- ------ -----
Free cash flow from continuing operations 290 167
------------------------------------------------- ------ -----
The adjusted operating profit conversion to cash for the year
ended 31 December 2019 was 104% (2018: 90%). Net trade working
capital in the Group was reduced by GBP95 million, building
momentum towards achieving the previously announced GBP400 million
target for GKN.
Net capital expenditure in the year was GBP495 million (2018:
GBP345 million), representing 1.2x depreciation on non-leased
assets. Net interest paid in the year was GBP178 million (2018:
GBP106 million) and tax paid was GBP117 million (2018: GBP68
million).
Adjusted free cash flow of GBP591 million (2018: GBP336
million), is 72% higher than the annualised adjusted free cash flow
for 2018, due to improved Group cash flow processes. Adjusted free
cash flow is shown before restructuring and special pension
contributions, which included: GBP94 million (2018: GBP56 million),
being the completion of the Melrose commitment to contribute GBP150
million to the GKN UK 2012 and 2016 plans within the first twelve
months of GKN ownership; and before a contribution of GBP17
million, being 10% of the net proceeds received from the disposal
of Walterscheid Powertrain Group.
Free cash flow from continuing operations in the year, after all
costs, was GBP290 million (2018: GBP167 million).
ASSETS AND LIABILITIES
The summarised Melrose Group assets and liabilities are shown
below:
2019 2018
GBPm GBPm
---------------------------------------------- -------- --------
Goodwill and intangible assets acquired with
business combinations 9,342 10,618
---------------------------------------------- -------- --------
Tangible fixed assets, computer software and
development costs 3,874 3,651
---------------------------------------------- -------- --------
Equity accounted investments 436 492
---------------------------------------------- -------- --------
Net working capital 821 976
---------------------------------------------- -------- --------
Retirement benefit obligations (1,121) (1,413)
---------------------------------------------- -------- --------
Provisions (1,087) (1,471)
---------------------------------------------- -------- --------
Deferred tax and current tax (698) (805)
---------------------------------------------- -------- --------
Lease obligations (582) (57)
---------------------------------------------- -------- --------
Net other (151) (248)
---------------------------------------------- -------- --------
Total 10,834 11,743
---------------------------------------------- -------- --------
These assets and liabilities are funded by:
2019 2018
GBPm GBPm
---------- --------- ---------
Net debt (3,283) (3,482)
---------- --------- ---------
Equity (7,551) (8,261)
---------- --------- ---------
Total (10,834) (11,743)
---------- --------- ---------
GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW
The total value of goodwill as at 31 December 2019 was GBP3,653
million (31 December 2018: GBP4,058 million) and intangible assets
acquired with business combinations was GBP5,689 million (31
December 2018: GBP6,560 million). These items are split by
reporting segment as follows:
Powder Nortek Other Industrial
Aerospace Automotive Metallurgy Air Mgmt. GBPm Total
31 December 2019 GBPm GBPm GBPm GBPm GBPm
------------------------- ----------- ------------ ----------- ----------- ---------------- --------
Goodwill 941 1,027 503 592 590 3,653
------------------------- ----------- ------------ ----------- ----------- ---------------- --------
Intangible assets
acquired with business
combinations 3,076 1,293 653 346 321 5,689
------------------------- ----------- ------------ ----------- ----------- ---------------- --------
Total goodwill and
intangible assets 4,017 2,320 1,156 938 911 9,342
------------------------- ----------- ------------ ----------- ----------- ---------------- --------
The goodwill and intangible assets have been tested for
impairment as at 31 December 2019. In accordance with IAS 36
"Impairment of assets" the recoverable amount is assessed as being
the higher of the fair value less costs to sell and the value in
use.
A full impairment review was performed on the Security &
Smart Technology group of CGUs in the first half of the year, which
assumed that US tariffs at the higher rate would remain in place,
and resulted in an impairment charge of GBP179 million, shown
within adjusting items. This impairment charge has not changed in
the second half of the year.
The GKN businesses were acquired and recorded at fair value on
19 April 2018 and subsequently there has been a global automotive
market decline, naturally reducing the headroom at this point in
the cycle when testing goodwill and intangible assets in respect of
the Automotive and Powder Metallurgy businesses.
The Board is comfortable that no impairment is required in
respect of the goodwill and intangible assets of these businesses
at 31 December 2019.
PROVISIONS
Total provisions at 31 December 2019 were GBP1,087 million (31
December 2018: GBP1,471 million).
The following table details the movement in provisions in the
year:
Total
GBPm
-------------------------------------------------------- -----
At 1 January 2019 1,471
-------------------------------------------------------- -----
Spend against provisions (342)
-------------------------------------------------------- -----
Net charge to adjusted operating profit 92
-------------------------------------------------------- -----
Net charge shown as adjusting items 158
-------------------------------------------------------- -----
Release of loss-making contract provision to adjusting
items (122)
-------------------------------------------------------- -----
Utilisation of loss-making contract provision (83)
-------------------------------------------------------- -----
Other (including foreign exchange) (87)
-------------------------------------------------------- -----
At 31 December 2019 1,087
-------------------------------------------------------- -----
The net charge to adjusted operating profit in the year of GBP92
million includes GBP20 million in respect of certain divisional
long-term incentive plans to be paid in future years, and the
remainder is primarily in respect of warranty, product liability
and workers' compensation charges which are matched by similar cash
payments in the year.
The net charge shown as adjusting items in the Income Statement
primarily includes costs associated with restructuring actions of
GBP193 million, discussed within the adjusting items section of
this review, net of a release of GBP35 million, mainly relating to
fair value items settled for an amount favourable to first
anticipated.
The utilisation of the loss-making contract provision was GBP83
million, of which GBP2 million is included in discontinued
operations. Furthermore, GBP122 million, approximately 25%, of the
remaining loss-making contract provision was released as an
adjusting item in the year, either because contracts have been
favourably resolved following positive negotiations with customers
or because operational efficiencies have been demonstrated for a
sustained period of time.
During the period GBP190 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 provisions either disposed or transferred
to held for sale.
PENSIONS AND POST-EMPLOYMENT OBLIGATIONS
Melrose operates a number of defined benefit pension schemes and
retiree medical plans across the Group, accounted for using IAS 19
Revised: "Employee Benefits".
The values of the Group plans were updated at 31 December 2019
by independent actuaries to reflect the latest key assumptions. A
summary of the assumptions used are shown in note 12 of the
Preliminary Announcement.
At 31 December 2019 total plan assets of the Melrose Group's
defined benefit pension plans were GBP3,412 million (31 December
2018: GBP3,273 million) and total plan liabilities were GBP4,533
million (31 December 2018: GBP4,686 million), a net deficit of
GBP1,121 million (31 December 2018: GBP1,413 million).
The most significant pension plan in the Group at the beginning
of the year was the GKN UK 2012 plan, when gross assets were
GBP2,007 million, gross liabilities were GBP2,613 million and the
net deficit was GBP606 million. On 1 July 2019 the GKN UK 2012
pension plan was separated into four pension plans, namely the GKN
Group Pension Schemes (Numbers 1 - 4), two of which were allocated
to the Aerospace division and two to the Automotive division. In
total these four pension plans had aggregate gross assets of
GBP2,243 million, gross liabilities of GBP2,711 million and a net
deficit of GBP468 million at 31 December 2019. No changes to
member's benefits were made on separation of the plans.
The GKN Group Pension Schemes (Numbers 1 - 4) are closed to new
members and to the accrual of future benefits for current
members.
The Group has fulfilled its commitment to contribute special
one-off payments to the GKN UK plans totalling GBP150 million in
the first twelve months of ownership of GKN, and is also making
ongoing annual contributions of GBP60 million. In addition, the
Group paid GBP17 million into the GKN UK plans following the
disposal of Walterscheid Powertrain Group, in line with the
commitment to contribute 10% of the net proceeds from disposal of
GKN businesses (other than Powder Metallurgy) and 5% of the net
proceeds from disposal of non-GKN businesses. The Group has
committed to contribute GBP270 million to the GKN UK plans when
Powder Metallurgy is disposed. 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 Group Pension Schemes
(Numbers 1 - 4).
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
approximately GBP400 million in the year.
In total ongoing contributions to the Group defined benefit
pension plans and post-employment medical plans are expected to be
approximately GBP105 million in 2020.
It is noted that a 0.1 percentage point decrease in the discount
rate would increase the retirement benefit accounting liabilities
of the Group, on an IAS 19 basis, by GBP78 million, or 2%, and a
0.1 percentage point increase to inflation would increase the
liabilities by GBP59 million, or 1%. Furthermore, an increase by
one year in the expected life of a 65 year old member would
increase the pension liabilities on these plans by GBP186 million,
or 4%.
FINANCIAL RISK MANAGEMENT
The financial risks the Group faces have been considered and
policies have been implemented to appropriately deal with each
risk. The most significant financial risks are considered to be
liquidity risk, finance cost risk, exchange rate risk, contract and
warranty risk and commodity cost risk.
These are discussed in turn below.
Liquidity risk management
The Group's net debt position at 31 December 2019 was GBP3,283
million (31 December 2018: GBP3,482 million). Core funding comes
from a mix of committed bank funding and capital market
borrowings.
Committed bank funding consists of a multi-currency term loan
denominated GBP100 million and US$960 million that matures in April
2021 and a multi-currency revolving credit facility, denominated
GBP1.1 billion, US$2.0 billion and EUR0.5 billion that matures in
January 2023.
The term loan was amended on 31 December 2019, on the same
financial terms, to provide Melrose with the option at its request
to extend the loan for a further three years to April 2024, if
required. Loans drawn under this facility are guaranteed by Melrose
Industries PLC and certain of its subsidiaries, but there is no
security over any of the Melrose assets in respect of this
facility. As at 31 December 2019, the term loan was fully
drawn.
There remains a significant amount of headroom on the
multi-currency committed revolving credit facility at 31 December
2019. Applying the exchange rates at 31 December 2019, the headroom
equated to GBP1,136 million.
At the start of the year the Group held three capital market
borrowings, inherited as part of the GKN acquisition, totalling
GBP1.1 billion. During October 2019, one of these bonds reached
maturity and the revolving credit facility was utilised to repay
the notional amount of GBP350 million, together with the associated
cross-currency swap, which was out of the money by GBP100 million.
Capital market borrowings as at 31 December 2019 consist of:
Interest rate
Notional Cross-currency on
amount Coupon swaps swaps
Maturity date GBPm % p.a. million % p.a.
---------------- ---------- ------- -------------- --------------
September 2022 450 5.375% US $373 5.70%
EUR284 3.87%
---------------- ---------- ------- -------------- --------------
May 2032 300 4.625% n/a n/a
---------------- ---------- ------- -------------- --------------
To simplify the corporate reporting requirements of the Group,
the bonds were transferred to the Professional Securities Market in
March 2019 with the approval of the bondholders. The bondholders
now have the same guarantees from the Melrose Group companies as
those provided to the banks within the committed bank facility.
Cash, deposits and marketable securities amounted to GBP317
million at 31 December 2019 (31 December 2018: GBP415 million) and
are offset to arrive at the Group net debt position of GBP3,283
million (31 December 2018: GBP3,482 million). The Board takes
careful consideration of counterparty risk with banks when deciding
where to place cash on deposit. The combination of this cash and
the headroom on the revolving credit facility allows the Directors
to consider that the Group has sufficient access to liquidity for
its current needs.
The committed bank funding has two financial covenants, being a
net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are tested half-yearly in June and
December.
The EBITDA covenant test is set at 3.5x leverage for each of the
half-yearly measurement dates for the remainder of the term of the
facility. For the year ended 31 December 2019 it was 2.25x (31
December 2018: 2.28x), showing sufficient headroom compared to the
covenant test.
The interest cover covenant is set at 4.0x throughout the life
of the facility and was 10.8x at 31 December 2019 (31 December
2018: 11.6x), affording comfortable headroom compared to the
covenant test.
There are also a number of uncommitted facilities made available
to the Group which include a small number of uncommitted working
capital programmes, which predominately relate to programmes
inherited as part of the GKN acquisition. These programmes provide
favourable financing terms on eligible customer receipts and
competitive financing terms to suppliers on eligible supplier
payments.
A limited number of Group trade receivables are subject to
non-recourse factoring and customer supply chain finance
arrangements. As at 31 December 2019, these amounted to GBP200
million (31 December 2018: GBP206 million).
Finance cost risk management
The bank margin on the bank facility depends on the Group
leverage, and ranges from 0.75% to 2.0% on the term loan, and 0.95%
to 2.25% on the revolving credit facility. As at 31 December 2019
the margin was 1.4% (31 December 2018: 1.4%) on the term loan and
1.65% (31 December 2018: 1.65%) on the revolving credit
facility.
In addition to the cross-currency swaps associated with the
fixed rate capital market borrowings, inherited as part of the GKN
acquisition, the Group holds interest rate swap instruments to fix
the cost of LIBOR on borrowings under the bank facility. The policy
of the Board is to fix approximately 70% of the interest rate
exposure of the Group. Under the terms of the existing swap
arrangements and excluding the bank margin, the Group will pay a
weighted average fixed cost of approximately 2% until the swaps
terminate on 17 January 2023.
During the year, cross-currency swaps were also used to convert
US Dollar bank debt into Euro borrowings and at 31 December 2019,
US $620 million had been swapped into EUR559 million. These swaps
are rolled on a monthly basis and help to reduce the cost of the
Group's borrowings.
At 31 December 2019, the fair value liability of all
cross-currency swaps held by the Group was GBP80 million (31
December 2018: GBP199 million).
The average cost of the debt for the Group is expected to be
approximately 3.7% over the next 12 months.
Exchange rate risk management
The Group trades in various countries around the world and is
exposed to movements in a number of foreign currencies. The Group
therefore carries exchange rate risk that can be categorised into
three types: transaction, translation and disposal related risk, as
described in the paragraphs below. The Group's policy is designed
to protect against the majority of the cash risks but not the
non-cash risks.
The most common exchange rate risk is the transaction risk the
Group takes when it invoices a customer or purchases from suppliers
in a different currency to the underlying functional currency of
the relevant business. The Group's policy is to review
transactional foreign exchange exposures, and place necessary
hedging contracts, quarterly on a rolling basis. To the extent the
cash flows associated with a transactional foreign exchange risk
are committed, the Group will hedge 100% at the time the cash flow
becomes committed. For forecast and variable cash flows, the Group
hedges a proportion of the expected cash flows, with the percentage
being hedged lowering as the time horizon lengthens. The average
time horizons are longer for GKN Aerospace, GKN Automotive and GKN
Powder Metallurgy to reflect the longer-term nature of the
contracts within these divisions. Typically, in total the Group
hedges around 90% of foreign exchange exposures expected over the
next twelve months and approximately 60% to 70% of exposures
expected between 12 and 24 months. This policy does not eliminate
the cash risk but does bring some certainty to it.
The translation rate risk is the effect on the Group results in
the period due to the movement of exchange rates used to translate
foreign results into Sterling from one period to the next. No
specific exchange instruments are used to protect against the
translation risk because it is a non-cash risk to the Group, until
foreign currency is subsequently converted to Sterling. However,
the Group utilises its multi-currency revolving credit facility and
cross-currency swaps, where relevant, to maintain an appropriate
mix of debt in each currency. The hedge of having debt drawn in
these currencies funding the trading units with US Dollars or Euro
functional currencies protects against some of the Balance Sheet
and banking covenant translation risk.
Lastly, and potentially most significantly for Melrose, exchange
rate risk arises when a business that is predominantly based in a
foreign currency is sold. The proceeds for those businesses may be
received in a foreign currency and therefore an exchange rate risk
may arise on conversion of foreign currency proceeds into Sterling,
for instance to pay a Sterling dividend or Capital Return to
shareholders. Protection against this risk is considered on a case
by case basis and, if appropriate, hedged at the time.
Exchange rates for currencies most relevant to the Group in the
year were:
Twelve month 8 month average
US Dollar average rate (GKN businesses) Closing rate
----------- -------------- ------------------ -------------
2019 1.28 N/A 1.33
----------- -------------- ------------------ -------------
2018 1.33 1.31 1.27
Euro
----------- -------------- ------------------ -------------
2019 1.14 N/A 1.18
----------- -------------- ------------------ -------------
2018 1.13 1.13 1.11
A 10 percent strengthening of the major currencies within the
Group, if this were to happen in isolation against all other
currencies, would have the following impact on the re-translation
of adjusted operating profit into Sterling:
GBPm USD EUR CNY Other
-------------------------------- ---- ---- ---- ------
Movement in adjusted operating
profit 68 26 9 15
-------------------------------- ---- ---- ---- ------
% 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
have the following impact on net debt as at 31 December 2019:
USD EUR
-------------------------------- ---- ----
Increase in debt - GBP million 204 75
-------------------------------- ---- ----
Increase in debt 6% 2%
-------------------------------- ---- ----
Contract and warranty risk management
Under Melrose management a suitable bid and contract management
process exists in the businesses, which includes thorough reviews
of contract terms and conditions, contract-specific risk
assessments and clear delegation of authority for approvals. These
processes aim to ensure effective management of risks associated
with complex contracts. The financial risks connected with
contracts and warranties include the consideration of commercial,
legal and warranty terms and their duration, which are all
considered carefully by the businesses and Melrose centrally before
being entered into.
Commodity cost risk management
The cumulative expenditure on commodities is important to the
Group and the risk of base commodity costs increasing is mitigated,
wherever possible, by passing on the cost increases to customers or
by having suitable purchase agreements with suppliers which fix the
price over a certain period. These risks are also managed through
sourcing policies, including the use of multiple suppliers, where
possible, and procurement contracts where prices are agreed in
advance to limit exposure to price volatility. Occasionally,
businesses within the Group enter financial instruments on
commodities when this is considered to be the most efficient way of
protecting against price movements.
UK's relationship with the European Union
The UK left the European Union on 31 January 2020 and the
transition period to agree a trade deal is due to run until 31
December 2020, meaning the shape of the future relationship beyond
this date remains unclear. Due to the Group's geographically
balanced manufacturing footprint, on a micro company level, any
resulting tariffs and/or customs clearance would not have a
material negative effect on the Group as a whole.
Sales of product between the UK and Europe are a relatively
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%.
On a wider macro global level, the Group's financial results may
be impacted by general uncertainty and economic instability arising
from the transition period, or from any wider supply-chain
disruption causing scheduling issues for customers or suppliers.
Depending on the outcome of the trade negotiation, 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, however transactional exposures are generally well protected
in the short-term due to approximately 60% to 80% of exposures
being hedged over the next two years.
The Board will continue to monitor developments and adjust the
plans for its businesses accordingly.
POST BALANCE SHEET EVENT
On 2 January 2020 GKN Powder Metallurgy completed the
acquisition of FORECAST 3D, a leading US specialist in plastic
additive manufacturing and 3D printing services offering a full
range of services from concept to series production, for a total
consideration of up to GBP29 million, of which GBP20 million was
paid on 2 January 2020. The acquisition furthers GKN Powder
Metallurgy's ambition to achieve global market leadership in
industrialising additive manufacturing. In the year ended 31
December 2019 FORECAST 3D achieved sales of approximately GBP17
million.
GOING CONCERN
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chief Executive's Review. In addition, the
Annual Report includes details of the Group's borrowing facilities
and hedging activities along with the processes for managing its
exposures to liquidity risk, finance cost risk, exchange rate risk,
contract and warranty risk and commodity cost risk.
The Group has a strong record of cash management, and, as a
consequence, the Directors believe that the Group is well placed to
manage its business risks successfully taking into account the
various macro headwinds and the general economic environment.
After making enquiries, the Directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this reason,
they continue to adopt the going concern basis in preparing the
Financial Statements.
Geoffrey Martin
Group Finance Director
5 March 2020
CAUTIONARY STATEMENT
This announcement contains forward-looking statements. These
statements are made in good faith based on the information
available up to the time of the approval of this announcement, and
should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying any
such forward-looking information. Accordingly, readers are
cautioned not to place undue reliance on any such forward-looking
statements. Subject to compliance with applicable laws and
regulations, the Company does not undertake any obligation to
update any forward-looking statement to reflect events or
circumstances after the date of this announcement. This
announcement has been prepared solely to provide information to
shareholders to assess the Company's strategies and the potential
for those strategies to succeed, and neither the Company nor its
directors accept any liability to any other person save as would
arise under English law.
Melrose Industries PLC
Consolidated Income Statement
Restated
(1)
Year ended Year ended
31 December 31 December
2019 2018
Continuing operations Notes GBPm GBPm
--------------------------------------- ------- ------------ ------------
Revenue 3 10,967 8,152
Cost of sales (8,732) (6,573)
--------------------------------------- ------- ------------ ------------
Gross profit 2,235 1,579
Share of results of equity accounted
investments 10 38 34
Net operating expenses (1,955) (2,000)
--------------------------------------- ------- ------------ ------------
Operating profit/(loss) 3, 4 318 (387)
Finance costs (221) (160)
Finance income 9 5
Profit/(loss) before tax 106 (542)
Tax 5 (51) 75
--------------------------------------- ------- ------------ ------------
Profit/(loss) after tax for the year from
continuing operations 55 (467)
Discontinued operations
Loss for the year from discontinued
operations 9 (106) (8)
--------------------------------------- ------- ------------ ------------
Loss after tax for the year (51) (475)
Attributable to:
Owners of the parent (60) (475)
Non-controlling interests 9 -
--------------------------------------- ------- ------------ ------------
(51) (475)
Earnings per share
Continuing operations
- Basic 7 0.9p (11.8)p
- Diluted 7 0.9p (11.8)p
Continuing and discontinued operations
- Basic 7 (1.2)p (12.0)p
- Diluted 7 (1.2)p (12.0)p
Adjusted (2) results from continuing
operations
Adjusted revenue 3 11,592 8,645
Adjusted operating profit 3, 4 1,102 813
Adjusted profit before tax 4 889 672
Adjusted profit after tax 4 699 517
Adjusted basic earnings per share 7 14.3p 12.7p
Adjusted diluted earnings per share 7 14.3p 12.7p
--------------------------------------- ------- ------------ ------------
(1) Results for the year ended 31 December 2018 have been
restated for discontinued operations (note 1).
(2) Defined in note 2.
Melrose Industries PLC
Consolidated Statement of Comprehensive Income
Year ended Year ended
31 December 31 December
2019 2018
Notes GBPm GBPm
---------------------------------------------------- ------- ------------ ------------
Loss after tax for the year (51) (475)
---------------------------------------------------- ------- ------------ ------------
Items that will not be reclassified subsequently
to the Income Statement:
Net remeasurement loss on retirement benefit
obligations (32) (36)
Income tax credit relating to items that
will not be reclassified 5 15 9
---------------------------------------------------- ------- ------------ ------------
(17) (27)
Items that may be reclassified subsequently
to the Income Statement:
Currency translation on net investments (346) 625
Share of other comprehensive (expense)/income
from equity accounted investments (23) 9
Transfer to Income Statement from equity
of cumulative translation differences on
disposal of foreign operations 9 (13) -
Losses on hedge relationships (17) (97)
Transfer to Income Statement on hedge relationships - (2)
Income tax (charge)/credit relating to items
that may be reclassified 5 (19) 29
(418) 564
Other comprehensive (expense)/income for
the year (435) 537
Total comprehensive (expense)/income for the
year (486) 62
Attributable to:
Owners of the parent (494) 44
Non-controlling interests 8 18
---------------------------------------------------- ------- ------------ ------------
(486) 62
Melrose Industries PLC
Consolidated Statement of Cash Flows
Restated
(1)
Year ended Year ended
31 December 31 December
2019 2018
Notes GBPm GBPm
----------------------------------------------- ------- ------------ ------------
Operating activities
Net cash from operating activities from
continuing operations 13 769 330
Net cash (used in)/from operating activities
from discontinued operations 13 (20) 43
----------------------------------------------- ------- ------------ ------------
Net cash from operating activities 749 373
Investing activities
Disposal of businesses, net of cash disposed 9 169 (4)
Purchase of property, plant and equipment (465) (328)
Proceeds from disposal of property, plant
and equipment 24 18
Purchase of computer software and capitalised
development costs (54) (35)
Dividends received from equity accounted
investments 67 66
Purchase of investments (50) -
Settlement of derivatives used in net
investment hedging (100) -
Equity accounted investment additions - (3)
Acquisition of subsidiaries, net of cash
acquired - (1,009)
Interest received 9 5
Net cash used in investing activities
from continuing operations (400) (1,290)
Net cash used in investing activities
from discontinued operations 13 (15) (14)
----------------------------------------------- ------- ------------ ------------
Net cash used in investing activities (415) (1,304)
Financing activities
Purchase of non-controlling interests - (224)
Costs of issuing shares - (1)
Repayment of borrowings (456) (820)
New bank loans raised 350 2,558
Costs of raising debt finance - (51)
Repayment of principal under lease obligations (70) -
Dividends paid to non-controlling interests (6) (1)
Dividends paid to owners of the parent 6 (231) (129)
------------ ------------
Net cash (used in)/from financing activities
from continuing operations (413) 1,332
Net cash used in financing activities
from discontinued operations 13 (2) -
----------------------------------------------- ------- ------------ ------------
Net cash (used in)/from financing activities (415) 1,332
Net (decrease)/increase in cash and cash
equivalents (81) 401
Cash and cash equivalents at the beginning
of the year 13 415 16
Effect of foreign exchange rate changes 13 (17) (2)
Cash and cash equivalents at the end
of the year 13 317 415
(1) Amounts for the year ended 31 December 2018 have been
restated for discontinued operations (notes 1 and 13).
As at 31 December 2019, the Group had net debt of GBP3,283
million (31 December 2018: GBP3,482 million). A reconciliation of
the movement in net debt is shown in note 13.
Melrose Industries PLC
Consolidated Balance Sheet
Restated
(1)
31 December 31 December
2019 2018
Notes GBPm GBPm
------------------------------------------ --- ----- ----------- ------------
Non-current assets
Goodwill and other intangible assets 9,784 11,098
Property, plant and equipment 3,432 3,171
Investments 48 -
Interests in equity accounted investments 436 492
Deferred tax assets 160 132
Derivative financial assets 38 26
Trade and other receivables 424 504
14,322 15,423
Current assets
Inventories 1,332 1,489
Trade and other receivables 1,970 2,328
Derivative financial assets 19 15
Current tax assets 20 74
Cash and cash equivalents 317 415
Assets classified as held for sale 9 65 -
3,723 4,321
Total assets 3 18,045 19,744
Current liabilities
Trade and other payables 2,461 2,583
Interest-bearing loans and borrowings 89 377
Lease obligations 71 5
Derivative financial liabilities 106 204
Current tax liabilities 106 137
Provisions 11 412 391
Liabilities associated with assets
held for sale 9 46 -
3,291 3,697
Net current assets 432 624
Non-current liabilities
Trade and other payables 444 762
Interest-bearing loans and borrowings 3,464 3,378
Lease obligations 511 52
Derivative financial liabilities 216 227
Deferred tax liabilities 772 874
Retirement benefit obligations 12 1,121 1,413
Provisions 11 675 1,080
7,203 7,786
Total liabilities 3 10,494 11,483
Net assets 7,551 8,261
Equity
Issued share capital 333 333
Share premium account 8,138 8,138
Merger reserve 109 109
Other reserves (2,330) (2,330)
Translation and hedging reserve 78 495
Retained earnings 1,197 1,492
----------------------------------------------- -----
Equity attributable to owners of
the parent 7,525 8,237
Non-controlling interests 26 24
Total equity 7,551 8,261
(1) Amounts at 31 December 2018 have been restated for the
finalisation of acquisition accounting for GKN (note 1).
The Financial Statements were approved and authorised for issue
by the Board of Directors on 5 March 2020 and were signed on its
behalf by:
......................................................
...................................................
Geoffrey Martin Simon Peckham
Group Finance Director Chief Executive
Melrose Industries PLC
Consolidated Statement of Changes in Equity
Equity
attributable
Issued Share Translation to owners
share premium Merger Other and hedging Retained of the Non-controlling Total
capital account reserve reserves reserve earnings parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- -------- -------- -------- --------- ------------ --------- ------------- ---------------- ---------
At 1 January 2018 133 1,493 109 (2,330) (58) 2,538 1,885 - 1,885
Loss for the year - - - - - (475) (475) - (475)
Other
comprehensive
income/(expense) - - - - 553 (34) 519 18 537
----------------- -------- -------- -------- --------- ------------ --------- ------------- ---------------- ---------
Total
comprehensive
income/(expense) - - - - 553 (509) 44 18 62
Acquisition of
GKN 169 5,631 - - - - 5,800 857 6,657
Purchase of
non-controlling
interests 31 1,014 - - - (419) 626 (850) (224)
Implementation of
IFRS 9 - - - - - (2) (2) - (2)
Dividends paid - - - - - (129) (129) (1) (130)
Equity-settled
share-based
payments - - - - - 13 13 - 13
At 31 December
2018 333 8,138 109 (2,330) 495 1,492 8,237 24 8,261
(Loss)/profit for
the year - - - - - (60) (60) 9 (51)
Other
comprehensive
expense - - - - (417) (17) (434) (1) (435)
----------------- -------- -------- -------- --------- ------------ --------- ------------- ---------------- ---------
Total
comprehensive
(expense)/income - - - - (417) (77) (494) 8 (486)
Dividends paid - - - - - (231) (231) (6) (237)
Equity-settled
share-based
payments - - - - - 13 13 - 13
At 31 December
2019 333 8,138 109 (2,330) 78 1,197 7,525 26 7,551
Notes to the Preliminary Announcement
1. Corporate information
The financial information included within this Preliminary
Announcement does not constitute the Company's statutory Financial
Statements for the years ended 31 December 2019 or 31 December 2018
within the meaning of s435 of the Companies Act 2006, but is
derived from those Financial Statements. Statutory Financial
Statements for the year ended 31 December 2018 have been delivered
to the Registrar of Companies and those for the year ended 31
December 2019 will be delivered to the Registrar of Companies
during April 2020. The auditor has reported on those Financial
Statements; their reports were unqualified, did not draw attention
to any matters by way of emphasis and did not contain statements
under s498(2) or (3) of the Companies Act 2006.
While the financial information included in this Preliminary
Announcement has been prepared in accordance with the recognition
and measurement criteria of International Financial Reporting
Standards ("IFRSs") adopted for use in the European Union, this
announcement does not itself contain sufficient information to
comply with IFRSs. The Company expects to publish full Financial
Statements that comply with IFRSs during April 2020.
Prior year information
The results for the year ended 31 December 2018 include GKN for
eight months only.
The Consolidated Income Statement and Consolidated Statement of
Cash Flows have been restated for discontinued operations. The
Consolidated Balance Sheet has been restated for the finalisation
of acquisition accounting for the purchase of GKN.
Discontinued operations
On 25 June 2019, the Group completed the disposal of the
Walterscheid Powertrain Group to One Equity Partners. Additionally,
during the second half of the year the Group formally commenced a
disposal process, aligned to its strategic priority, to dispose of
the Wheels & Structures business, with a high expectation this
process will conclude within one year. Both the Walterscheid
Powertrain Group and Wheels & Structures businesses were
previously reported within the Other Industrial operating segment
and are shown as discontinued operations in this Preliminary
Announcement, with the Consolidated Income Statement, the
Consolidated Statement of Cash Flows and their associated notes
restated accordingly. Further detail is shown in note 9.
Finalisation of acquisition accounting for the purchase of
GKN
There were a small number of final adjustments to the fair value
of assets and liabilities acquired that were identified in the
first half of the year up to 18 April 2019, being 12 months since
the acquisition, that have impacted the restated Balance Sheet at
31 December 2018, as follows:
-- Provisions and non-current 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 intangible 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.
IFRS 16: "Leases"
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 property related cost
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.
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
2. Alternative Performance Measures
The Group presents Alternative Performance Measures ("APMs") in
addition to the statutory results of the Group. These are presented
in accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA").
APMs used by the Group are set out in the glossary to this
Preliminary Announcement and the reconciling items between
statutory and adjusted results are listed below and described in
more detail in note 4.
Adjusted revenue includes the Group's share of revenue from
equity accounted investments ("EAIs").
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 an 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") in 2018 for occupational
schemes; and
-- The net 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:
-- The net effect on tax of significant restructuring from
strategy changes that are not considered by the Group to be part of
the normal operating costs of the business; 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.
3. Segment information
Segment information is presented in accordance with IFRS 8:
"Operating Segments" which requires operating segments to be
identified on the basis of internal reports about components of the
Group that are regularly reported to the Group's Chief Operating
Decision Maker ("CODM"), which has been deemed to be the Group's
Board, in order to allocate resources to the segments and assess
their performance.
Following a decision to explore strategic options for the Nortek
Air Management business separate to the Security & Smart
Technology business, internal reporting provided to the CODM was
revised. As a consequence, the Nortek Air & Security operating
segment was revised with the Security & Smart Technology
business now included in the Other Industrial operating segment.
Other Industrial has also been impacted by the removal of the
Walterscheid Powertrain and Wheels & Structures businesses,
which have been included in discontinued operations (note 9).
Comparative results have been restated accordingly.
The operating segments are as follows:
Aerospace - a multi-technology global tier one supplier of both
civil and defence airframes and engine structures, including
Aerostructures and Engine Systems.
Automotive - comprises Driveline, All Wheel Drive and eDrive
(together ePowertrain) and Cylinder Liners businesses; a global
technology and systems engineer which designs, develops,
manufactures and integrates an extensive range of driveline
technologies.
Powder Metallurgy - a global leader in precision powder metal
parts for the automotive and industrial sectors, as well as the
production of powder metal.
Nortek Air Management - comprises the Group's Air Management
businesses, which includes the Air Quality and 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 data
centres and non-residential applications.
Other Industrial - comprises the Group's Ergotron, Brush and
Security & Smart Technology businesses.
In addition, there are central cost centres which are also
reported to the Board. The central corporate cost centres contain
the Melrose Group head office costs, the remaining GKN central
costs and charges related to the divisional management long-term
incentive plans.
Reportable segment results include items directly attributable
to a segment as well as those which can be allocated on a
reasonable basis. Inter-segment pricing is determined on an arm's
length basis in a manner similar to transactions with third
parties.
The Group's geographical segments are determined by the location
of the Group's non-current assets and, for revenue, the location of
external customers. Inter-segment sales are not material and have
not been disclosed.
The following tables present the results and certain asset and
liability information regarding the Group's operating segments and
central cost centres for the year ended 31 December 2019.
a) Segment revenues
The Group derives its revenue from the transfer of goods and
services over time and at a point in time. The Group has assessed
that the disaggregation of revenue recognised from contracts with
customers by operating segment is appropriate as this is the
information regularly reviewed by the CODM in evaluating financial
performance. The Group also believes that presenting this
disaggregation of revenue based on the timing of transfer of goods
or services provides useful information as to the nature and timing
of revenue from contracts with customers.
Year ended 31 December 2019
Powder Nortek Other
Aerospace Automotive Metallurgy Air Management Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------------ -------------- ------------ ---------------- ------------ --------
Adjusted revenue 3,852 4,739 1,115 1,178 708 11,592
Equity accounted
investments (16) (593) (16) - - (625)
------------------------- ------------ -------------- ------------ ---------------- ------------ --------
Revenue 3,836 4,146 1,099 1,178 708 10,967
------------------------- ------------ -------------- ------------ ---------------- ------------ --------
Timing of revenue
recognition
At a point in time 2,644 4,146 1,099 1,157 705 9,751
Over time 1,192 - - 21 3 1,216
------------------------- ------------ -------------- ------------ ---------------- ------------ --------
Revenue 3,836 4,146 1,099 1,178 708 10,967
------------------------- ------------ -------------- ------------ ---------------- ------------ --------
Year ended 31 December 2018
- restated
Powder Nortek Other
Aerospace Automotive Metallurgy Air Management Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ---------- -------------- ------------ ---------------- ------------ --------
Adjusted revenue 2,521 3,382 851 1,140 751 8,645
Equity accounted
investments (42) (446) (5) - - (493)
------------------------- ---------- -------------- ------------ ---------------- ------------ --------
Revenue 2,479 2,936 846 1,140 751 8,152
------------------------- ---------- -------------- ------------ ---------------- ------------ --------
Timing of revenue
recognition
At a point in time 1,483 2,936 846 1,140 744 7,149
Over time 996 - - - 7 1,003
------------------------- ---------- -------------- ------------ ---------------- ------------ --------
Revenue 2,479 2,936 846 1,140 751 8,152
------------------------- ---------- -------------- ------------ ---------------- ------------ --------
b) Segment operating profit
Year ended 31
December
2019
Powder Nortek Other Corporate
Continuing Aerospace Automotive Metallurgy Air Management Industrial (2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------------ -------------- ------------- ----------------- ------------- ---------- --------
Adjusted
operating
profit/(loss) 409 367 117 175 86 (52) 1,102
Items not
included in
adjusted
operating profit
(1) :
Amortisation of
intangible
assets acquired
in business
combinations (261) (148) (48) (36) (41) - (534)
Restructuring
costs (79) (83) (19) (11) (37) (9) (238)
Impairment of
assets - - - - (179) - (179)
Equity accounted
investments (28
adjustments (1) (27 ) - - - - )
Melrose
equity-settled
compensation
scheme
charges - - - - - (17) (17)
Release and
changes
in discount
rate of
fair value
items 34 79 28 11 1 - 153
Movement in
derivatives
and associated
financial
assets and
liabilities 2 (2) - - - 55 55
Acquisition and
disposal
costs - - (1) - - 5 4
Operating
profit/(loss) 104 186 77 139 (170) (18) 318
Finance costs (221)
Finance income 9
Profit before
tax 106
Tax (51)
Profit for the
year
from continuing
operations 55
Year ended 31
December
2018 - restated
Powder Nortek Other Corporate
Continuing Aerospace Automotive Metallurgy Air Management Industrial (2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------------ -------------- ------------- ---------------- ------------- ---------- ---------
Adjusted
operating
profit/(loss) 250 231 98 158 104 (28) 813
Items not
included in
adjusted
operating profit
(1) :
Amortisation of
intangible
assets acquired
in business
combinations (176) (103) (34) (34) (44) - (391)
Restructuring
costs (56) (46) (11) (19) (65) (32) (229)
Acquisition and
disposal
costs (7) - (1) - - (145) (153)
Impairment of
assets (17) - (3) - (132) - (152)
Movement in
derivatives
and associated
financial
assets and
liabilities - - - - - (143) (143)
Reversal of
uplift in
value of
inventory (50) (42) (11) - - - (103)
Equity accounted
investments (25
adjustments (1) (24 ) - - - - )
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 38 109 (137) (368) (387)
Finance costs (160)
Finance income 5
Loss before tax (542)
Tax 75
Loss for the
year from
continuing
operations (467)
(1) Further details on adjusting items are discussed in note
4.
(2) Corporate adjusted operating loss of GBP52 million (2018:
GBP28 million), includes GBP6 million in respect of remaining GKN
central costs (2018: GBP6 million) and GBP20 million (2018: GBP2
million) of costs in respect of divisional long-term incentive
plans.
c) Segment total assets and liabilities
Total assets Total liabilities
--------------------------- -----------------------------
Restated Restated
31 December 31 December 31 December 31 December
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
----------------------------- ------------ ------------- -------------- -------------
Aerospace 7,478 7,725 3,089 3,040
Automotive 5,391 5,685 2,304 2,330
Powder Metallurgy 1,906 2,070 472 521
Nortek Air Management 1,415 1,476 362 390
Other Industrial 1,237 1,574 259 301
Corporate 553 628 3,962 4,601
----------------------------- ------------ ------------- -------------- -------------
Total continuing operations 17,980 19,158 10,448 11,183
----------------------------- ------------ ------------- -------------- -------------
Discontinued operations 65 586 46 300
----------------------------- ------------ ------------- -------------- -------------
Total 18,045 19,744 10,494 11,483
d) Segment capital expenditure and depreciation
Capital expenditure Depreciation of Depreciation of
(1) owned assets (1) leased assets
---------------------------- ---------------------------- -----------------------------
Restated Restated
Year ended Year ended Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December 31 December 31 December
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------- ------------- ------------- ------------- ------------- --------------
Aerospace 178 105 139 88 30 -
Automotive 231 198 194 116 16 -
Powder Metallurgy 55 53 59 37 8 -
Nortek Air
Management 37 35 23 20 11 -
Other Industrial 8 15 11 12 6 -
Corporate - - - - 1 -
------------------- ------------- ------------- ------------- ------------- ------------- --------------
Total continuing
operations 509 406 426 273 72 -
------------------- ------------- ------------- ------------- ------------- ------------- --------------
Discontinued
operations 11 16 12 9 1 -
------------------- ------------- ------------- ------------- ------------- ------------- --------------
Total 520 422 438 282 73 -
(1) Including computer software and development costs. Capital
expenditure excludes lease additions.
e) Geographical information
The Group operates in various geographical areas around the
world. The parent company's country of domicile is the UK and the
Group's revenues and non-current assets in the rest of Europe and
North America are also considered to be material.
The Group's revenue from external customers and information
about its segment assets (non-current assets excluding deferred tax
assets; non-current trade and other receivables; and non-current
derivative financial assets) by geographical location are detailed
below:
Revenue(1) from external
customers Segment assets
---------------------------- ----------------------------
Restated
Year ended Year ended Restated
31 December 31 December 31 December 31 December
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
------------------------- ------------- ------------- ------------- -------------
UK 1,048 794 2,319 2,400
Rest of Europe 2,426 1,799 5,136 5,489
North America 6,073 4,490 4,917 5,056
Other 1,420 1,069 1,328 1,430
Continuing operations 10,967 8,152 13,700 14,375
Discontinued operations 423 453 - 386
Total 11,390 8,605 13,700 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
Year ended Year ended
31 December 31 December
2019 2018
Continuing operations Notes GBPm GBPm
------------
Operating profit/(loss) 318 (387)
------------------------------------------------------- ------------- ------------
Amortisation of intangible assets
acquired in business combinations a 534 391
Restructuring costs b 238 229
Impairment of assets c 179 152
Equity accounted investments adjustments d 28 25
Melrose equity-settled compensation
scheme charges e 17 13
Release and changes in discount rate
of fair value items f (153) (20)
Movement in derivatives and associated
financial assets and liabilities g (55) 143
Acquisition and disposal costs h (4) 153
Reversal of uplift in value of inventory i - 103
Impact of GMP equalisation on UK
pension schemes j - 11
Total adjustments to operating profit/(loss) 784 1,200
Adjusted operating profit 1,102 813
a. The amortisation charge on intangible assets acquired in
business combinations of GBP534 million (2018: GBP391 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 excluded from
adjusted results.
b. Restructuring and other associated costs in the year totalled
GBP238 million (2018: GBP229 million). Restructuring costs are
shown as adjusting items due to their size and non-trading nature
and during the year ended 31 December 2019 included:
-- A charge of GBP83 million (2018: GBP46 million) within the
Automotive division, including: costs associated with headcount
reduction programmes addressing the high cost base inherited with
the business and ensuring a more flexible cost structure; costs
incurred closing two loss-making factories; costs associated with
further footprint consolidation opportunities; and costs incurred
separating the Automotive business from other GKN businesses.
-- A charge of GBP79 million (2018: GBP56 million) within the
Aerospace division which included: costs associated with initial
headcount reductions following the commencement of a global
integration process to create "One Aerospace" and achieve a
simpler, more competitive, customer focussed business; costs within
the North America Aerostructures business relating to two factory
closures; and costs relating to footprint rationalisation projects
within the Special Technologies business.
-- A charge of GBP19 million (2018: GBP11 million) within the
Powder Metallurgy division including costs associated with
headcount reductions and the commencement of footprint
consolidation actions.
-- A charge of GBP11 million (2018: GBP19 million) within Nortek
Air Management primarily relating to continued factory
consolidation within the HVAC business.
-- A charge of GBP37 million (2018: GBP65 million) within Other
Industrial businesses, predominantly relating to the closure of the
Chinese manufacturing facility and switching to a third party
contract manufacturing model in the Security & Smart Technology
business. Restructuring charges also included the finalisation of
the restructuring activities announced in Brush last year.
-- A charge of GBP9 million (2018: GBP32 million) within central
activities, mainly relating to the separation of the GKN
business.
c. 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. During the first half of the year ended
31 December 2019, there was further deterioration in both the
performance and forecast future prospects of the business,
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 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.
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 GBP625
million (2018: GBP493 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. The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer's tax charge, of GBP17 million
(2018: GBP13 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.
f. Certain items previously recorded as fair value items on
acquisitions, have been resolved for more favourable amounts than
first anticipated. The net release of fair value items recognised
on acquisitions in the year of GBP153 million (2018: GBP20 million)
includes a credit of GBP122 million in respect of the release of
certain loss-making contracts, recognised on the acquisition of
GKN, where either contractual terms have been renegotiated with the
relevant customer or operational efficiencies have been identified
and demonstrated for a sustained period. The net release of fair
value items are shown as an adjusting item, avoiding positively
distorting adjusted results.
g. Hedge accounting is not applied within the GKN businesses for
transactional foreign exchange exposure. Consequently, for
consistency and because of their volatility and size, the movements
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, are shown as an
adjusting item. These movements totalled a credit of GBP55 million
(2018: charge of GBP143 million), in the year.
h. A net acquisition and disposal related credit of GBP4 million
(2018: costs of GBP153 million), that arose in the year, includes a
profit on the sale of a small business and transaction costs in
respect of acquisition and disposal activities. These items are
excluded from adjusted results due to their non-trading nature.
i. In the prior year, finished goods and work in progress
inventory which were present in the GKN businesses when acquired,
in accordance with IFRS 3, were required to be uplifted in value to
closer to their selling price. As a result, in the early months of
the acquisition, reduced profits were generated as this inventory
was sold. The one-off effect in 2018, relating to GKN's acquired
inventory was a charge of GBP103 million and was 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 in the prior year due to its non-trading and non-recurring
nature.
b) Profit before tax
Restated
Year ended Year ended
31 December 31 December
2019 2018
Continuing operations Notes GBPm GBPm
--------------------------------------- --------------- ------------- ------------
Profit/(loss) before tax 106 (542)
--------------------------------------------------------- ------------- ------------
Adjustments to operating profit/(loss)
as above 784 1,200
Fair value changes on cross-currency
swaps k (1) 8
Write-off previous debt facility
unamortised fees l - 7
Equity accounted investments
- interest m - (1)
Total adjustments to profit/(loss)
before tax 783 1,214
Adjusted profit before tax 889 672
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 in 2018, 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
Year ended Year ended
31 December 31 December
2019 2018
Continuing operations Notes GBPm GBPm
---------------------------------------- ------- -------------------- --------------------
Profit/(loss) after tax 55 (467)
---------------------------------------- ------- -------------------- --------------------
Adjustments to profit/(loss)
before tax as above 783 1,214
Tax effect of adjustments to
profit/(loss) before tax 5 (123) (221)
Tax effect of significant restructuring 5 (9) -
Equity accounted investments
- tax m (7) (9)
---------------------------------------- ------- -------------------- --------------------
Total adjustments to profit/(loss)
after tax 644 984
Adjusted profit after tax 699 517
5. Tax
Year ended Restated
31 December Year ended
2019 31 December
GBPm 2018
Continuing operations GBPm
-------------------------------------------------- -------------------- --------------------
Analysis of tax charge/(credit) in the year:
Current tax
Current year tax charge 156 55
Adjustments in respect of prior years (10) (21)
Total current tax charge 146 34
-------------------------------------------------- -------------------- --------------------
Deferred tax
Origination and reversal of temporary differences (89) (33)
Adjustments in respect of prior years 5 (6)
Tax on the change in value of derivative
financial instruments (10) (31)
Adjustments to deferred tax attributable
to changes in tax rates (2) (34)
Non-recognition of deferred tax 17 -
Recognition of previously unrecognised deferred
tax assets (16) (5)
Total deferred tax credit (95) (109)
-------------------------------------------------- -------------------- --------------------
Tax charge/(credit) on continuing operations 51 (75)
-------------------------------------------------- -------------------- --------------------
Tax charge on discontinued operations 3 -
-------------------------------------------------- -------------------- --------------------
Total tax charge/(credit) in year 54 (75)
Analysis of charge/(credit) on continuing GBPm GBPm
operations in the year:
---------------------------------------------------- ------- -------
Tax charge in respect of adjusted profit before
tax 190 155
Tax credit recognised as an adjusting item (139) (230)
---------------------------------------------------- ------- -------
Total tax charge/(credit) on continuing operations 51 (75)
The tax charge of GBP190 million (2018: GBP155 million) arising
on adjusted profit before tax of GBP889 million (2018: GBP672
million), results in an effective tax rate of 21.4% (2018:
23.1%).
The GBP139 million (2018: GBP230 million) tax credit recognised
as an adjusting item includes GBP123 million (2018: GBP221 million)
in respect of tax credits on adjustments to profit/(loss) before
tax of GBP783 million (2018: GBP1,214 million), GBP7 million (2018:
GBP9 million) in respect of the tax charge on equity accounted
investments and GBP9 million (2018: GBPnil) in respect of net tax
credits on restructuring, being a GBP1 million (2018: GBPnil) tax
charge on the legal separation of the GKN Aerospace and Automotive
divisions and a GBP10 million (2018: GBPnil) tax credit on other
internal Group restructuring.
The tax charge for the year for continuing and discontinued
operations can be reconciled to the profit/(loss) before tax per
the Income Statement as follows:
Restated
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
------------------------------------------------------ ----------------- -------------------
Profit/(loss) before tax:
Continuing operations 106 (542)
Discontinued operations (note 9) (82) (8)
------------------------------------------------------ ----------------- -------------------
24 (550)
Tax charge/(credit) on profit/(loss) before
tax at the weighted average rate of 21.0% (2018:
20.0%) 5 (110)
Tax effect of:
Disallowable expenses and other permanent differences
within adjusted profit 6 10
Disallowable items included within adjusting
items 54 57
Temporary differences not recognised in deferred
tax 17 14
Recognition of previously unrecognised deferred
tax assets (16) (5)
Tax credits, withholding taxes and other rate
differences 4 10
Adjustments in respect of prior years (5) (27)
Tax (credit)/charge classified within adjusting
items (9) 10
Effect of changes in tax rates (2) (34)
------------------------------------------------------
Total tax charge/(credit) for the year 54 (75)
The reconciliation has been performed at a blended Group tax
rate of 21.0% (2018: 20.0%) which represents the weighted average
of the tax rates applying to profits and losses in the
jurisdictions in which those results arose.
Tax charges/(credits) included in Other Comprehensive Income are
as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
------------------------------------------------ ------------- -------------
Deferred tax on retirement benefit obligations (15) (9)
Deferred tax on hedge relationship gains
and losses 16 (24)
Deferred tax on foreign currency gains and
losses 3 (5)
------------------------------------------------ ------------- -------------
Total charge/(credit) for the year 4 (38)
6. Dividends
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
------------------------------------------------ ------------ ------------
Final dividend for the year ended 31 December
2017 paid of 2.8p - 54
Interim dividend for the year ended 31 December
2018 paid of 1.55p - 75
Final dividend for the year ended 31 December
2018 of 3.05p 148 -
Interim dividend for the year ended 31 December
2019 of 1.7p 83 -
231 129
Proposed final dividend for the year ended 31 December 2019 of
3.4p per share (2018: 3.05p per share) totalling GBP165 million
(2018: GBP148 million).
The final dividend of 3.4p was proposed by the Board on 5 March
2020 and, in accordance with IAS 10: "Events after the reporting
period", has not been included as a liability in this Preliminary
Announcement.
7. Earnings per share
Restated
Year ended Year ended
31 December 31 December
Earnings attributable to owners of the 2019 2018
parent GBPm GBPm
------------------------------------------ ------------ -----------------
Earnings for basis of earnings per share (60) (475)
Less: loss for the year from discontinued
operations 106 8
------------------------------------------- ------------ -----------------
Earnings for basis of earnings per share
from continuing operations 46 (467)
Year ended Year ended
31 December 31 December
2019 2018
Number Number
---------------------------------------------------- ------------ ------------
Weighted average number of ordinary shares for
the purposes of basic earnings
per share (million) 4,858 3,959
Further shares for the purposes of diluted earnings - -
per share (million)
---------------------------------------------------- ------------ ------------
Weighted average number of ordinary shares for
the purposes of diluted earnings
per share (million) 4,858 3,959
---------------------------------------------------- ------------ ------------
Restated
Year ended Year ended
31 December 31 December
2019 2018
Earnings per share pence pence
-------------------------------------------- ------------ ------------
Basic earnings per share
From continuing and discontinued operations (1.2) (12.0)
From continuing operations 0.9 (11.8)
From discontinued operations (2.1) (0.2)
Diluted earnings per share
From continuing and discontinued operations (1.2) (12.0)
From continuing operations 0.9 (11.8)
From discontinued operations (2.1) (0.2)
Restated
Year ended Year ended
31 December 31 December
2019 2018
Adjusted earnings from continued operations GBPm GBPm
---------------------------------------------- ------------------ ------------
Adjusted earnings for the basis of adjusted
earnings per share (1) 693 504
----------------------------------------------- ------------------ ------------
( (1) Adjusted earnings for the year ended 31 December 2019
comprises adjusted profit after tax of GBP699 million (2018:
GBP517 million) (note 4), net of an allocation to non-controlling
interest of GBP6 million (2018: GBP13 million).
Adjusted earnings per share from continuing
operations
Restated
Year ended Year ended
31 December 31 December
2019 2018
pence pence
---------------------------------------------- ------------------ ------------
Adjusted basic earnings per share 14.3 12.7
Adjusted diluted earnings per share 14.3 12.7
8. Goodwill and other intangible assets
Goodwill acquired in business combinations, net of impairment,
has been allocated to the businesses, each of which comprises
several cash-generating units ("CGUs").
Restated
31 December 31 December
2019 2018
Goodwill GBPm GBPm
------------------------- -------------- -------------
Nortek businesses:
AQH 355 370
HVAC 237 246
Security & Smart
Technology 172 357
Ergotron 418 435
GKN businesses:
Aerostructures 545 558
Aerospace Engine
Systems 346 360
Aerospace Special
Technologies 50 51
Automotive Driveline 688 715
Automotive ePowertrain 339 345
Powder Metallurgy 503 529
Walterscheid Powertrain
Group (1) - 92
3,653 4,058
(1) Disposed on 25 June 2019.
Impairment Testing
The Group tests goodwill annually or more frequently if there
are indications that goodwill might be impaired. In accordance with
IAS 36: "Impairment of assets" the Group values goodwill at the
recoverable amount, being the higher of the value in use basis and
the fair value less costs to sell basis.
Value in use calculations have been used to determine the
recoverable amount of goodwill allocated to each group of CGUs. The
calculation uses the latest approved forecasts extrapolated to
perpetuity using growth rates shown below, which do not exceed the
long-term growth rate for the relevant market.
An impairment charge of GBP179 million was recorded in respect
of the Security & Smart Technology group of CGUs during the
first half of the year as a result of further deterioration in both
the performance and forecast future prospects, particularly
following increases in US tariffs for goods being imported from
China. The impairment charge recorded in the Consolidated Income
Statement, is shown as an adjusting item (note 4) and has not
changed in value in the second half of the year. Sensitivity
analysis has been provided in respect of reasonably possible
changes to key assumptions.
Based on impairment testing completed at the year-end no further
impairment was identified in respect of the Nortek and GKN
businesses. No reasonably possible change in key assumptions would
result in an impairment in the AQH, HVAC and Ergotron groups of
CGUs. Due to the proximity of the recent acquisition of GKN, the
recoverable amounts for GKN businesses will be close to carrying
values. There is no reasonably possible change in the key
assumptions for the three Aerospace and Automotive ePowertrain
groups of CGUs that could result in an impairment. There is also no
reasonably possible change in the key assumptions for the revised
two Aerospace groups of CGUs that are effective from 1 January 2020
that could result in an impairment.
The Automotive Driveline and Powder Metallurgy groups of CGUs,
impacted by the automotive market downturn, are mitigating
reductions in demand through cost and efficiency actions. No
impairment of goodwill is required within these businesses, but
sensitivity analysis has been provided in respect of reasonably
possible changes to key assumptions.
Significant assumptions and estimates
Each group of CGUs has been assessed through a value in use
methodology, using the following significant assumptions.
The basis of these impairment tests and the key assumptions are
set out in the table below:
31 December 2019 31 December 2018
------------------------ --------------------------------------------- --------------------------------------
Pre-tax Long-term Pre-tax Long-term
(1) discount growth Period discount growth Period
Group of CGUs rates rates of forecast rates rates of forecast
------------------------ ----------------- ---------- -------------- ---------- ---------- --------------
AQH 11.0% 3.3% 3 11.8% 3.3% 3
HVAC 11.2% 3.1% 3 11.8% 3.1% 3
Security & Smart
Technology 11.5% 3.5% 3 12.0% 3.3% 3
Ergotron 10.9% 3.4% 3 11.8% 3.3% 3
Aerostructures 9.4% 2.9% 5 10.2% 2.0% 5
Aerospace Engine
Systems 9.4% 3.0% 5 10.1% 2.5% 5
Aerospace Special
Technologies 9.8% 2.9% 5 9.7% 2.5% 5
Automotive Driveline 13.5% 2.5% 5 11.6% 0.0% 5
Automotive ePowertrain 10.0% 2.8% 5 12.0% 3.0% 5
Powder Metallurgy 11.8% 2.5% 5 12.0% 2.0% 5
(1) Adjusted for the impact of IFRS 16.
Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific
to each group of CGUs. Discount rates reflect the current market
assessments of the time value of money and the territories in which
the CGU operates. In determining the cost of equity, the Capital
Asset Pricing Model ("CAPM") has been used. Under CAPM, the cost of
equity is determined by adding a risk premium, based on an industry
adjustment ("Beta"), to the expected return of the equity market
above the risk-free return. The relative risk adjustment reflects
the risk inherent in each group of CGUs relative to all other
sectors and geographies on average.
The cost of debt is determined using a risk-free rate based on
the cost of government bonds, and an interest rate premium
equivalent to a corporate bond with a similar credit rating to
Melrose.
The Group adopted IFRS 16: "Leases" on 1 January 2019 which has
affected the calculation of pre-tax discount rates. The change in
accounting standard does not affect impairment conclusions.
Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial
budgets and medium-term forecasts. Each forecast has been prepared
using a cash flow period deemed most appropriate by management,
considering the nature of each group of CGUs. The key assumptions
used in forecasting pre-tax cash flows relate to future budgeted
revenue and operating margins likely to be achieved and the
expected rates of long-term growth by market sector. Underlying
factors in determining the values assigned to each key assumption
are shown below:
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on
financial budgets and medium-term forecasts by management, taking
into account industry growth rates and management's historical
experience in the context of wider industry and economic
conditions. Projected sales are built up with reference to markets
and product categories. They incorporate past performance,
historical growth rates, projections of developments in key
markets, secured orders and orders forecast to be achieved in the
short to medium term given trends in the relevant market
sector.
Operating margins have been forecast based on historical levels
achieved considering the likely impact of changing economic
environments and competitive landscapes on volumes and revenues and
the impact of management actions on costs. Projected margins
reflect the impact of all initiated projects to improve operational
efficiency and leverage scale. The projections do not include the
impact of future restructuring projects to which the Group is not
yet committed. Forecasts for other operating costs are based on
inflation forecasts and supply and demand factors.
Aerospace - The key drivers for growth in revenue and operating
margins are global demand for commercial and military aircraft.
Consumer spending, passenger load factors, raw material input
costs, market expectations for aircraft production requirements,
technological advancements, and other macroeconomic factors
influence demand for these products.
Automotive - The key drivers for growth in revenue and operating
margins are global demand for a large range of cars including
smaller low-cost cars to larger premium vehicles. Demand is
influenced by technological advancements particularly in electric
and full hybrid vehicles, market expectations for global vehicle
production requirements, fuel prices, raw material input costs,
consumer spending, credit availability, and other macroeconomic
factors.
Powder Metallurgy - The key drivers for growth in revenue and
operating margins are trends in the automotive and industrial
markets. Market expectations for global light vehicle production
requirements, raw material input costs, technological advancements,
particularly in additive manufacturing, influence demand for these
products along with other macroeconomic factors.
HVAC and AQH - The key drivers for growth in revenue and
operating margins are the levels of residential remodelling and
replacement activity and the levels of residential and
non-residential new construction in the markets in which these
businesses operate. New residential and non-residential
construction activity and, to a lesser extent, residential
remodelling and replacement activity are affected by seasonality
and cyclical factors such as interest rates, credit availability,
inflation, consumer spending, employment levels and other
macroeconomic factors.
Security & Smart Technology - The key driver for growth in
revenue and operating margins is global demand for security and
home automation products. Consumer spending, employment levels,
regulation, technological advancements and the evolution of the
traditional security market towards home automation and other
macroeconomic factors influence demand for these products.
Ergotron - The key driver for growth in revenue and operating
margins is demand for technology and wellness products in the
markets in which Ergotron operates. Seasonal factors, public
authority spending, corporate and consumer spending, employment
levels, the public awareness of wellness, regulation, technological
advancements and other macroeconomic factors influence demand for
these products.
Long-term growth rates:
Long-term growth rates are based on long-term forecasts for
growth in the sectors and geography in which the CGU operates.
Long-term growth rates are determined using long-term growth rate
forecasts that take into account the international presence and the
markets in which each business operates.
Security & Smart Technology group of CGUs
The 2018 Annual Report disclosed that the determination of the
recoverable amount in respect of the Security & Smart
Technology group of 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, in the first half of 2019 there was further
deterioration in both the performance 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 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 (note 4) due to its non-trading
nature and size and is unchanged in value from the first half of
the year.
Sensitivity analysis
The forecasts are prepared using the methodology required by IAS
36 and show headroom of GBP43 million above the carrying amount for
the Security & Smart Technology group of CGUs. Sensitivity
analysis has been carried out and a reasonably possible change in
the discount rate and long-term growth rate from 11.5% to 12.5% or
from 3.5% to 2.4% respectively would reduce headroom to GBPnil. A
reduction in the terminal operating margin from 10.8% to 9.5% would
also reduce headroom to GBPnil.
Powder Metallurgy and Automotive group of CGUs
The GKN businesses were acquired and recorded at fair value on
19 April 2018 and subsequently there has been a global automotive
market decline, naturally reducing the headroom when testing
goodwill and intangible assets in respect of the Automotive and
Powder Metallurgy businesses at this point in the cycle.
Powder Metallurgy group of CGUs - sensitivity analysis
The forecasts are prepared using the methodology required by IAS
36 and show headroom of GBP90 million above the carrying amount for
the Powder Metallurgy group of CGUs. Sensitivity analysis has been
carried out and a reasonably possible change in the discount rate
and long-term growth rate from 11.8% to 12.3% or from 2.5% to 1.7%
respectively would reduce headroom to GBPnil. A reduction in the
terminal operating margin from 14.2% to 13.2% would also reduce
headroom to GBPnil.
Automotive Driveline group of CGUs - sensitivity analysis
The forecasts are prepared using the methodology required by IAS
36 and show headroom of GBP103 million above the carrying amount
for the Automotive Driveline group of CGUs. Sensitivity analysis
has been carried out and a reasonably possible change in the
discount rate and long term growth rate from 13.5% to 14.0% or from
2.5% to 1.7% respectively would reduce headroom to GBPnil. A
reduction in the terminal operating margin from 10.0% to 9.4% would
also reduce headroom to GBPnil.
9. Assets held for sale and discontinued operations
Wheels & Structures
During the second half of the year, following a strategic
review, the Board formally commenced a disposal process aligned to
its strategic priority, to dispose of the Wheels & Structures
business, with a high expectation that this process will conclude
within one year. In accordance with IFRS 5: " Non-current assets
held for sale and discontinued operations", associated assets and
liabilities have been classified as held for sale and are
separately shown on the Balance Sheet, having been remeasured to
the fair value less costs of disposal.
Walterscheid Powertrain Group
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 associated with
the disposal were GBP7 million. The loss on disposal was GBP21
million after the recycling of a net favourable cumulative
translation difference of GBP13 million.
The results of the Walterscheid Powertrain Group and Wheels
& Structures business were previously included within the Other
Industrial operating segment and are classified as discontinued
operations, in accordance with IFRS 5.
Financial performance of discontinued operations:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
Revenue 423 453
Operating costs (1) (503) (458)
------------------------------------------- --------------------------- -------------
Operating loss (80) (5)
Finance costs (2) (3)
-------------------------------------- --- --------------------------- -------------
Loss before tax (82) (8)
Tax (3) -
-------------------------------------- --- --------------------------- -------------
Loss after tax (85) (8)
Loss on disposal of businesses (21) -
Loss for the year from discontinued
operations (106) (8)
(1) The operating loss in the year includes a GBP64 million
charge on remeasurement to fair values less costs of disposal
relating to the Wheels & Structures business on
reclassification to assets held for sale.
The major classes of assets and liabilities held for sale or
disposed of during the year were as follows:
Walterscheid
Wheels & Structures Powertrain
Group disposed
GBPm
-------------------------------- ---------------------------------------- ----------------
Held for
Reclassified Remeasurement sale
GBPm GBPm GBPm
-------------------------------- ------------- -------------- --------- ----------------
Goodwill and other intangible
assets 18 (18) - 210
Property, plant and
equipment 60 (49) 11 110
Interests in equity
accounted investments - - - 4
Inventories 22 - 22 74
Deferred tax assets 6 - 6 25
Trade and other receivables 26 - 26 67
Cash and cash equivalents - - - 9
-------------------------------- ------------- -------------- --------- ----------------
Total assets 132 (67) 65 499
Trade and other payables (36) - (36) (54)
Lease obligations (2) - (2) (34)
Retirement benefit obligations - - - (155)
Provisions (3) - (3) (10)
Current and deferred
tax (8) 3 (5) (34)
-------------------------------- ------------- -------------- --------- ----------------
Total liabilities (49) 3 (46) (287)
Net assets 83 (64) 19 212
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 (1) 178
Less: cash and cash
equivalents disposed (9)
-------------------------------- ------------- -------------- --------- ----------------
169
(1) Cash consideration of GBP185 million net of GBP7 million of
disposal costs charged to the Income Statement.
10. Equity accounted investments
Restated
Year ended Year ended
31 December 31 December
Group share of results from continuing 2019 2018
operations GBPm GBPm
--------------------------------------- --------------- ----------------
Revenue 625 493
Operating costs (559) (434)
---------------------------------------- --------------- ----------------
Adjusted operating profit 66 59
Adjusting items (21) (15)
Net finance costs - (1)
---------------------------------------- --------------- ----------------
Profit before tax 45 43
Tax (7) (9)
---------------------------------------- --------------- ----------------
Share of results of equity accounted
investments 38 34
11. Provisions
Warranty
Loss-making Property Environmental related
contracts related and costs Restructuring
(1) costs litigation GBPm GBPm Other Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2019
- restated 616 74 218 397 116 50 1,471
Utilised (83) (5) (87) (54) (190) (6) (425)
Net (credit)/charge
to operating
profit(2) (122) (1) 35 (2) 193 25 128
Unwind of
discount(3) 20 - 1 - - 1 22
Transfers (4) (10) (20) (2) - - - (32)
Transfer to held
for sale (1) - (2) - - - (3)
Disposal of
businesses (1) (1) (1) (1) (2) (4) (10)
Exchange adjustments (35) (2) (7) (16) (3) (1) (64)
-------------------- --------- -------- ------------- ---------- -------------- ------- ----------
At 31 December
2019 384 45 155 324 114 65 1,087
Current 70 9 86 114 110 23 412
Non-current 314 36 69 210 4 42 675
384 45 155 324 114 65 1,087
(1) Utilisation of loss-making contracts includes GBP81 million
shown within continuing adjusted operating profit and GBP2 million
within discontinued operating profit.
(2) Includes GBP36 million of adjusting items and GBP92 million
recognised in adjusted operating profit.
(3) Includes GBP7 million within finance costs relating to the
time value of money and GBP15 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 (note 4).
(4) Onerous lease liabilities of GBP20 million have been
transferred to the 'right-of-use asset' following the adoption of
IFRS 16 on 1 January 2019. Other transfers have occurred due to
developments in commercial matters where the expected value and
timing of cash outflow have become more certain.
Loss-making contracts
Provisions for loss-making contracts are considered to exist
where the Group has a contract under which the unavoidable costs of
meeting the obligations exceed the economic benefits expected to be
received under it. This obligation has been discounted and will be
utilised over the period of the respective contracts, which is up
to 15 years.
Calculation of loss-making contract provisions is based on
contract documentation and delivery expectations, along with an
estimate of directly attributable costs and represents management's
best estimate of the unavoidable costs of fulfilling the
contract.
Property related costs
The provision for property related costs represents dilapidation
costs for ongoing leases and is expected to result in cash
expenditure over the next eight years. Calculation of dilapidation
obligations are based on lease agreements with landlords and
external quotes, or in the absence of specific documentation,
management's best estimate of the costs required to fulfil
obligations.
Environmental and litigation
Environmental and litigation provisions relate to the estimated
remediation costs of pollution, soil and groundwater contamination
at certain sites and estimated future costs and settlements in
relation to legal claims and associated insurance obligations.
Liabilities for environmental costs are recognised when
environmental assessments are probable and the associated costs can
be reasonably estimated.
Provisions are recorded for product and general liability claims
which are probable and for which the cost can be reliably
estimated. These liabilities include an estimate of claims incurred
but not yet reported and are based on actuarial valuations using
claim data. Due to their nature, it is not possible to predict
precisely when these provisions will be utilised.
The Group has on occasion been required to take legal or other
actions to defend itself against proceedings brought by other
parties. Provisions are made for the expected costs associated with
such matters, based on past experience of similar items and other
known factors, considering professional advice received. This
represents management's best estimate of the likely outcome. The
timing of utilisation of these provisions is frequently uncertain,
reflecting the complexity of issues and the outcome of various
court proceedings and negotiations. Contractual and other
provisions represent management's best estimate of the cost of
settling future obligations and reflect management's assessment of
the likely settlement method, which may change over time. However,
no provision is made for proceedings which have been, or might be,
brought by other parties against Group companies unless management,
considering professional advice received, assess that it is more
likely than not that such proceedings may be successful.
Warranty related costs
Provisions for the expected cost of warranty obligations under
local sale of goods legislation are recognised at the date of sale
of the relevant products and subsequently updated for changes in
estimates as necessary. The provision for warranty related costs
represents the best estimate of the expenditure required to settle
the Group's obligations, based on past experience, recent claims
and current estimates of costs relating to specific claims.
Warranty terms are, on average, between one and five years.
Restructuring
Restructuring provisions relate to committed costs in respect of
restructuring programmes, usually resulting in cash spend within
one year. A restructuring provision is recognised when the Group
has developed a detailed formal plan for the restructuring and has
raised a valid expectation in those affected that it will carry out
the restructuring by either starting to implement the plan or by
announcing its main features to those affected by it. The
measurement of a restructuring provision includes only the direct
expenditures arising from the restructuring, which are those
amounts that are necessarily entailed by the restructuring
programmes.
Other
Other provisions include long-term incentive plans for
divisional senior management and the employer tax on equity-settled
incentive schemes which are expected to result in cash expenditure
over the next two to five years.
Where appropriate, provisions have been discounted using
discount rates between 0% and 7% (31 December 2018: 0% and 9%)
depending on the territory in which the provision resides and the
length of its expected utilisation.
12. Retirement benefit obligations
Defined benefit plans
The Group sponsors defined benefit plans for qualifying
employees of certain subsidiaries. The funded defined benefit plans
are administered by separate funds that are legally separated from
the Group. The Trustees of the funds are required by law to act in
the interest of the fund and of all relevant stakeholders in the
plans. The Trustees of the pension funds are responsible for the
investment policy with regard to the assets of the fund.
GKN Group Pension Schemes (Numbers 1 - 4)
On 1 July 2019 the GKN UK 2012 Pension Plan was split into four
separate pension schemes which have been allocated to the Aerospace
and Automotive segments resulting in no change to the benefits
accrued by members or to the amounts recognised by the Group. The
four new plans are called the GKN Group Pension Schemes (Numbers 1
- 4). All four schemes are funded plans, closed to new members and
were closed to future accrual in 2017. The valuation of the plans
was based on a full actuarial valuation as of 5 April 2016, updated
to 31 December 2019 by independent actuaries.
Contributions
The Group committed to contribute and has subsequently now fully
paid GBP150 million in total to the GKN UK 2012 and 2016 plans in
the first twelve months of ownership, as well as ongoing annual
contributions of GBP60 million. In addition, the Group has
committed to contribute GBP270 million upon the disposal of Powder
Metallurgy, 10% of the proceeds from disposal of other GKN
businesses and 5% of the proceeds from disposal of non-GKN
businesses to the GKN UK pension plans. These commitments cease
when the funding target which has been agreed with Trustees is
achieved, being gilts plus 25 basis points for the GKN UK 2016 plan
and gilts plus 75 basis points for the GKN Group pension schemes
(numbers 1 - 4).
The Group contributed GBP185 million (2018: GBP102 million) to
defined benefit pension plans and post-employment plans in the year
ended 31 December 2019, including GBP94 million (2018: GBP56
million) of the Melrose commitment to contribute GBP150 million to
the GKN UK 2012 and 2016 plans within the first twelve months of
GKN ownership. Furthermore, in July 2019 the Group contributed
GBP17 million following the disposal of Walterscheid Powertrain
Group.
The Group expects to contribute GBP105 million to defined
benefit pension plans and post-employment plans in 2020.
Actuarial assumptions
The major assumptions used by the actuaries in calculating the
Group's pension liabilities are as set out below:
Rate of increase
of pensions Discount Price inflation
in payment rate % per annum
% per annum % per annum
------------------------------------ ----------------- -------------- ------------------
31 December 2019
GKN Group pension schemes (numbers
1 - 4) 2.8 2.0 2.1
GKN UK - 2016 plan 2.8 2.0 2.1
GKN US plans n/a 3.1 2.1
GKN Europe plans 1.5 1.1 1.5
Brush UK plan 2.8 2.0 2.1
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
------------------------------------ ----------------- -------------- ------------------
Balance Sheet disclosures
The amount recognised in the Consolidated Balance Sheet arising
from net liabilities in respect of defined benefit plans was as
follows:
31 December 31 December
2019 2018
GBPm GBPm
----------------------------------- ---- ---------------- ----------------
Present value of funded defined
benefit obligations (3,899) (3,937)
Fair value of plan assets 3,412 3,273
------------------------------------------ ---------------- ----------------
Funded status (487) (664)
Present value of unfunded defined
benefit obligations (634) (749)
------------------------------------ --- ---------------- ----------------
Net liabilities (1,121) (1,413)
The plan assets and liabilities at 31 December 2019 were as
follows:
UK US European Other
Plans Plans Plans Plans Total
(1) GBPm GBPm GBPm GBPm
GBPm
------------------ ---------------- --------------- ----------- --------------- ---------------
Plan assets 3,082 262 28 40 3,412
Plan liabilities (3,502) (417) (561) (53) (4,533)
------------------ ---------------- --------------- ----------- --------------- ---------------
Net liabilities (420) (155) (533) (13) (1,121)
(1) Includes a net liability in respect of the GKN Group Pension
Schemes (numbers 1 - 4) (formerly GKN UK 2012 plan), GKN
post-employment medical plans, and the Nortek UK plan and a net
asset in respect of the Brush UK pension plan and the GKN UK 2016
pension plan.
13. Cash flow statement
Restated
Year ended Year ended
31 December 31 December
2019 2018
Notes GBPm GBPm
-------------------------------------------------- ------- ---------------- ---------------
Reconciliation of operating profit to cash
generated by continuing operations
Operating profit/(loss) 318 (387)
Adjusting items 4 784 1,200
-------------------------------------------------- ------- ---------------- ---------------
Adjusted operating profit 4 1,102 813
Adjustments for:
Depreciation of property, plant and equipment 434 229
Amortisation of computer software and development
costs 64 44
Share of adjusted operating profit of equity
accounted investments 10 (66) (59)
Restructuring costs paid and movements
in provisions (320) (198)
Defined benefit pension contributions paid
(1) (183) (99)
Change in inventories (12) (108)
Change in receivables 72 172
Change in payables (2) (160)
Acquisition costs and associated transaction
taxes (16) (125)
Tax paid (117) (68)
Interest paid on loans and borrowings (166) (111)
Interest paid on lease obligations (21) -
Net cash from operating activities 769 330
(1) 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 year ended
31 December 2019. Furthermore, in July 2019 the Group contributed
GBP17 million to the GKN UK plans following the disposal of
Walterscheid Powertrain Group.
Year ended Year ended
31 December 31 December
2019 2018
Cash flow from discontinued operations GBPm GBPm
--------------------------------------------- ------------ -------------
Net cash (used in)/from discontinued
operations (16) 44
Defined benefit pension contributions
paid (2) (3)
Interest paid on lease obligations (1) -
Tax (paid)/received (1) 2
Net cash (used in)/from operating activities
from discontinued operations (20) 43
Purchase of property, plant and equipment (12) (16)
Disposal costs (3) -
Proceeds from disposal of property,
plant and equipment - 2
Net cash used in investing activities
from discontinued operations (15) (14)
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.
A reconciliation from the most directly comparable IFRS measure
to net debt is given below:
31 December 31 December
2019 2018
GBPm GBPm
-------------------------------------------- ----------- -----------
Interest-bearing loans and borrowings
- due within one year (89) (377)
Interest-bearing loans and borrowings
- due after one year (3,464) (3,378)
External debt (3,553) (3,755)
Less:
Cash and cash equivalents 317 415
(3,236) (3,340)
Adjustments:
Impact of cross-currency swaps (80) (199)
Non-cash acquisition fair value adjustments 33 57
Net debt (3,283) (3,482)
The table below shows the key components of the movement in net
debt:
At 31 Acquisitions Other Effect At 31
December and non-cash of foreign December
2018 Cash flow disposals movements exchange 2019
GBPm GBPm GBPm GBPm GBPm GBPm
External debt (3,755) 106 - 13 83 (3,553)
Cross-currency
swaps (199) 100 - (5) 24 (80)
Non-cash acquisition
fair value
adjustments 57 - - (24) - 33
(3,897) 206 - (16) 107 (3,600)
Cash and cash
equivalents 415 (234) 153 - (17) 317
Net debt (3,482) (28) 153 (16) 90 (3,283)
14. Post Balance Sheet events
On 2 January 2020 GKN Powder Metallurgy completed the
acquisition of FORECAST 3D, a leading US specialist in plastic
additive manufacturing and 3D printing services offering a full
range of services from concept to series production, for a total
consideration of up to GBP29 million, of which GBP20 million was
paid on 2 January 2020. The acquisition furthers GKN Powder
Metallurgy's ambition to achieve global market leadership in
industrialising additive manufacturing. In the year ended 31
December 2019 FORECAST 3D achieved sales of approximately GBP17
million.
Glossary
Alternative Performance Measures ("APMs")
In accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA"), additional information
is provided on the APMs used by the Group below.
In the reporting of financial information, the Group uses
certain measures that are not required under IFRS. These additional
measures (commonly referred to as APMs) provide additional
information on the performance of the business and trends to
stakeholders. These measures are consistent with those used
internally, and are considered important to understanding the
financial performance and financial health of the Group. APMs are
considered to be an important measure to monitor how the businesses
are performing because this provides a meaningful comparison of how
the business is managed and measured on a day-to-day basis and
achieves consistency and comparability between reporting
periods.
These APMs may not be directly comparable with similarly titled
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
(note 3) Restated(1)
Year ended Year ended
31 December 31 December
2019 2018
Revenue GBPm GBPm
Revenue 10,967 8,152
Share of revenue
of equity accounted
investments 625 493
Adjusted revenue 11,592 8,645
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 includes
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)(2) 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)
Year ended Year ended
31 December 31 December
2019 2018
Operating profit GBPm GBPm
Operating profit/(loss) 318 (387)
Adjusting items
(note 4) 784 1,200
Adjusted operating
profit 1,102 813
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Adjusted Operating Share of Adjusted operating margin represents
operating margin(3) revenue Adjusted operating profit as a percentage
margin of equity of Adjusted revenue.
accounted
investments
(note 3)
and 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)
Year ended Year ended
31 December 31 December
2019 2018
Profit before tax GBPm GBPm
Profit/(loss) before
tax 106 (542)
Adjusting items
(note 4) 783 1,214
Adjusted profit
before tax 889 672
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)
Year ended Year ended
31 December 31 December
2019 2018
Profit after tax GBPm GBPm
Profit/(loss)
after tax 55 (467)
Adjusting items
(note 4) 644 984
Adjusted profit
after tax 699 517
Adjusted Operating Adjusting Adjusted operating profit for 12 months
EBITDA profit/ items (note prior to the reporting date, before
for leverage (loss)(2) 4), depreciation depreciation and impairment of property,
covenant of property, plant and equipment and before the amortisation
purposes 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. Year ended
costs, Year ended (4)
imputed 31 December 31 December
lease charge, 2019 2018
share of Adjusted EBITDA for
non-controlling leverage covenant
interests purposes GBPm GBPm
and other
adjustments Adjusted operating
required profit 1,102 847
for covenant Depreciation of property,
purposes(5) plant and equipment
and amortisation of
computer software
and development costs 498 282
Full year impact of
acquisitions - 378
Imputed lease charge (91) (6)
Non-controlling interests (6) -
Other adjustments
required for covenant
purposes (5) 2 (9)
Adjusted EBITDA for
leverage covenant
purposes 1,505 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) Year ended Year ended
31 December 31 December
2019 2018
Adjusted tax rate GBPm GBPm
Tax (charge)/credit
per Income Statement (51) 75
Tax impact of adjusting
items (123) (221)
Tax impact of restructuring (9) -
Tax impact of EAIs (7) (9)
Adjusted tax charge (190) (155)
Adjusted profit before
tax 889 672
Adjusted tax rate 21.4% 23.1%
Adjusted Basic Adjusting Profit after tax attributable to owners
basic earnings items (note of the parent and before the impact of
earnings per share 4 and note adjusting items, divided by the weighted
per share 7) average number of ordinary shares in
issue during the financial year.
-----------------------
Adjusted Diluted Adjusting Profit after tax attributable to owners
diluted earnings items (note of the parent and before the impact of
earnings per share 4 and note adjusting items, divided by the weighted
per share 7) average number of ordinary shares in
issue during the financial year adjusted
for the effects of any potentially dilutive
options.
The Board considers this to be a key
measure of performance when all businesses
are held for the complete reporting period.
----------------------- -----------------
Interest None Not applicable Adjusted EBITDA calculated for covenant
cover purposes (including EBITDA of businesses
disposed) as a multiple of net interest
payable on bank loans and overdrafts.
This measure is used for bank covenant
testing. Year ended Year ended(4)
31 December 31 December
2019 2018
Interest cover GBPm GBPm
--------------
Adjusted EBITDA for
leverage covenant
purposes 1,505 1,492
Adjusted EBITDA from
businesses disposed 36 -
in the year
Removal of full year
impact of acquisitions - (378)
Other adjustments
required for covenant
purposes - 18
Adjusted EBITDA for
interest cover 1,541 1,132
Interest on bank loans
and overdrafts (152) (103)
Finance income 9 5
Net finance charges
for covenant purposes (143) 98
Interest cover 10.8x 11.6x
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
-----------------------
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.
----------------------- -----------------
Bank covenant Cash and Impact Net debt (as above) is presented in the
definition cash equivalents of foreign Balance Sheet translated at year 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
and leverage related purposes rates for the previous 12 months.
derivative
instruments Leverage is calculated as the bank covenant
definition of net debt divided by adjusted
EBITDA for leverage covenant purposes.
This measure is used for bank covenant
testing.
31 December 31 December
2019 2018
Net debt GBPm GBPm
----------- -----------
Net debt at closing rates
(note 13) 3,283 3,482
Impact of foreign exchange 94 (86)
----------- -----------
Net debt at average rates 3,377 3,396
Other adjustments required
for covenant purposes 8 11
----------- -----------
Bank covenant definition
of net debt at average
rates 3,385 3,407
----------- -----------
Leverage 2.25x 2.28x
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
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 lease obligation
and Adjusted payments, the positive non-cash impact
operating from loss-making contracts and movements
cash flow in working capital.
conversion
Adjusted operating cash flow (pre-capex)
conversion is adjusted operating cash
flow (pre-capex) divided by adjusted
profit before depreciation and amortisation
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)
Year ended Year ended
31 December 31 December
2019 2018
Adjusted operating cash GBPm GBPm
flow
Adjusted operating profit 1,102 813
Share of adjusted operating
profit of equity accounted
investments (note 10) (66) (59)
Depreciation of owned
property, plant and
equipment and amortisation
of computer software
and development costs 426 273
Depreciation of leased
property, plant and
equipment and amortisation 72 -
of leased computer software
and development costs
Lease obligation payments (70) -
Positive non-cash impact
from loss-making contracts (81) (63)
1,383 964
Change in inventories (12) (108)
Change in receivables 72 172
Change in payables (2) (160)
Adjusted operating cash
flow (pre-capex) 1,441 868
Adjusted operating cash
flow conversion 104% 90%
Movement Change The year-on-year Movement in net trade working capital
in net in inventories, movement represents the cash flow from inventories,
trade change in non-trade net trade receivables and trade payables
working in receivables working during the year. The percentage reduction
capital and change capital in net trade working capital is the movement
and percentage in payables comprising in net trade working capital divided
change as included movements by net trade working capital as at 31
within in other December 2018.
net cash receivables Year ended
from and other 31 December
operating payables 2019
activities Movement in net trade working GBPm
(note capital
13) -------------
Change in inventories (note
13) (12)
Change in receivables (note
13) 72
Change in payables (note 13) (2)
-------------
Movement in working capital 58
Removal of change in other
receivables and change in
other payables 37
Movement in net trade working
capital 95
Net trade working capital
at 31 December 2018 comprises:
Inventories 1,489
Trade receivables 1,877
Allowance for doubtful receivables (42 )
(1,307
Trade payables )
Net trade working capital 2,017
Percentage reduction in net
trade working capital 5%
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 from continuing businesses
in cash cash flows, after all costs including restructuring,
and cash dividends pension contributions, tax and interest
equivalents paid to payments. Year ended Year ended
owners 31 December 31 December
of the 2019 2018
parent, Free cash flow GBPm GBPm
foreign -------------
exchange, Adjusted operating
discontinued cash flow (pre-capex) 1,441 868
operating Net capital expenditure (495) (345)
cash flows Net interest and tax
and other paid (295) (174)
non-cash Defined benefit pension
movements contributions paid
(note 13) (183) (99)
Restructuring costs
paid (190) (113)
Dividends received
from EAIs 67 66
Trading net other
cash flows(6) (55) (36)
-------------
Free cash flow 290 167
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 and restructuring
and cash above, cash flows. Year ended Year ended
equivalents adjusted 31 December 31 December
for special 2019 2018
pension Adjusted free cash GBPm GBPm
contributions flow
and -------------
restructuring Free cash flow 290 167
cash flows Special pension contributions(7) 111 56
Restructuring costs
paid 190 113
Full year impact of
acquisitions - (143)
Reversal of creditor
stretch under previous
ownership - 150
Adjusted free cash
flow 591 343
Increase in adjusted
free cash flow 72%
Capital None Not Calculated as the purchase of owned
expenditure applicable property, plant and equipment and computer
(capex) software and expenditure on capitalised
development costs during the year,
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 Net capital expenditure divided by
expenditure applicable depreciation of owned property, plant
to and equipment and amortisation of computer
depreciation software and development costs.
ratio
Dividend Dividend Not Amounts payable by way of dividends
per share per share applicable in terms of pence per share.
(1) Results for the year ended 31 December 2018 have been
restated for discontinued operations (note 9).
(2) 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.
(3) Operating margin is not defined within IFRS but is a widely
accepted profit measure being derived from operating
profit/(loss)(2) divided by revenue.
(4) 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.
(5) Included within other adjustments required for covenant
purposes are dividends received from equity accounted investments,
the removal of adjusted operating profit of equity accounted
investments and the inclusion of operating profit and depreciation
in respect of businesses classified as held for sale.
(6) Trading net other cash flows include cash paid against
provisions and dividends paid to non-controlling interests.
(7) Special pension contributions include GBP94 million of
one-off payments, being the balance of the GBP150 million upfront
commitment and a GBP17 million contribution following the disposal
of Walterscheid Powertrain Group.
(1) Results for 2018 include GKN businesses for the eight months
of ownership and have been restated for discontinued operations
(2) Source: Technavio
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR USURRRKUORUR
(END) Dow Jones Newswires
March 05, 2020 02:00 ET (07:00 GMT)
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