TIDMMRO
RNS Number : 9217Z
Melrose Industries PLC
06 September 2018
6 September 2018
MELROSE INDUSTRIES PLC
UNAUDITED RESULTS
FOR THE SIX MONTHSED 30 JUNE 2018
Melrose Industries PLC today announces its interim results for
the six months ended 30 June 2018.
Highlights
Proforma results assume that GKN plc ("GKN") was owned for the
full six month period, adjusted results and statutory results only
include GKN for the 73 day period from 19 April 2018 when it was
acquired by Melrose.
Proforma(1) Adjusted(2) Statutory
results results results
GBPm GBPm GBPm
----------- ----------- ---------
Revenue 6,203 3,062 2,937
----------- ----------- ---------
Operating profit/(loss) 501 280 (256)
----------- ----------- ---------
Profit/(loss) before tax 401 240 (303)
----------- ----------- ---------
Profit/(loss) after tax 307 184 (276)
----------- ----------- ---------
Diluted earnings per share 6.3p 5.8p (8.9p)
-----
Average number of shares for
diluted EPS (million) 4,858 3,045 3,045
----- ------ -------
-- Melrose is trading in line with the Board's expectations for
2018
-- The statutory loss occurred due to booking significant
acquisition related charges but only including 73 days of trading
from GKN
-- The Board has declared an interim dividend of 1.55 pence per
share (2017: 1.4 pence), an 11% increase on last year
-- GKN offers an outstanding opportunity which is meeting the
Board's expectations; no black holes found
-- All GKN businesses are being managed successfully on a
standalone basis, freed from head office bureaucracy and with
medium and long-term improvement plans agreed
-- Significant investment projects in development including:
- a planned new global technology centre for Aerospace in the UK
- substantial automotive factory improvements in Europe
- state-of-the-art aerospace engine repair facility in Asia
-- Whilst trading conditions in some Nortek businesses are
competitive, new breakthrough technologies with exciting prospects
have been developed
-- Net debt is in line with expectations at GBP3.4 billion, with
Group half year leverage being 2.4x EBITDA(3)
Christopher Miller, Chairman of Melrose Industries PLC, today
said:
"Melrose is delighted with the acquisition of GKN, which has the
significant potential for improvement which we identified when we
made our offer. Plans have been agreed and are now being
implemented to realise the full potential of GKN's world leading,
but currently underdeveloped, businesses. This is an exciting
opportunity for Melrose, its shareholders and all other
stakeholders."
(1. Proforma results, which are presented on an adjusted basis,
are described in the glossary to the Interim Financial Statements
and assume that GKN was owned for the full period)
(2. Considered by the Board to be a key measure of performance.
The adjusted results are described in the glossary to the Interim
Financial Statements)
(3.) Last 12 months proforma(1) operating profit before
depreciation and amortisation
A conference call with webcast for institutional investors will
be held at 12:30pm BST today.
Institutional investors should register for the call and / or
webcast. Please email melrosecall@montfort.london before 11am
today.
Enquiries:
Montfort Communications: +44 (0) 20 3514 0897
Nick Miles +44 (0) 7973 130 669 / Charlotte McMullen +44 (0)
7921 881 800
miles@montfort.london / mcmullen@montfort.london
CHAIRMAN'S STATEMENT
I am pleased to report our interim results for the six months
ended 30 June 2018.
RESULTS FOR THE GROUP
These interim results include statutory revenue for the Melrose
Group of GBP2,937 million (2017: GBP1,086 million), an adjusted
profit before tax of GBP240 million (2017: GBP131 million) and a
statutory loss(1) before tax of GBP303 million (2017: statutory
profit of GBP48 million).
Further details of these results are contained in the Finance
Director's Review.
GKN ACQUISITION
Having successfully navigated a high-profile offer period, we
took control of GKN plc on 19 April 2018, shortly thereafter
achieving the necessary threshold to delist the company on 21 May
and completed all the minority shareholder protocols on 30 June.
Accordingly, we now own 100% of GKN plc, which has been
reregistered as a private limited company.
We moved quickly upon taking control to decentralise GKN and
empower the operational management teams in accordance with the
Melrose model. This is the first step in the important cultural
change that, alongside our operational investments, we consider is
key to securing the improvements we believe are achievable for the
world class GKN businesses.
DIVID
Your Board has declared an interim dividend of 1.55 pence per
share (2017: 1.4 pence), which is an 11% increase on last year and
will be paid on 12 October 2018 to shareholders on the register at
the close of business on 14 September 2018. Your Board continues to
align its dividend policy with the earnings of the Group and will
use this basis to set future dividends, including for the final
dividend for this year.
BOARD MATTERS
Following conversations with our key shareholders and
recognising our elevation into the FTSE100 with the acquisition of
GKN, your Board has determined that it is the appropriate time for
the role of Chairman to become non-executive. Accordingly, to
enable me to continue with Melrose in a full-time executive
capacity, I will be handing over the role to Justin Dowley, our
current Senior Independent Director, effective from 1 January 2019,
to serve as our inaugural non-executive Chairman.
Well known to many shareholders already, Justin joined Melrose
with a wealth of experience in 2011 and has made a highly valued
contribution since. I look forward to working with him to achieve
further success for all our stakeholders.
From January, I will be taking up the role of Executive Vice
Chairman alongside David Roper and although I will have
relinquished the Chairmanship to Justin, I remain fully committed
to implementing the improvement opportunities we have identified in
Nortek and GKN. The search for an additional non-executive director
continues and we expect to be in a position to announce the
successful candidate in the near future.
STRATEGY
The successful acquisition of GKN this year has been a powerful
validation of the Melrose approach. Over many years we have
generated superior returns for our shareholders, whilst protecting
all stakeholders through the acquisition of high quality but
underperforming manufacturing businesses, investing heavily to
improve their operational performance before finding them the right
new environment to guide them through the next stage of their
development.
Throughout our ownership, we remain good and responsible
stewards working for the benefit of all stakeholders, as shown most
recently in the deal struck with the GKN pension scheme trustees in
committing cash to better secure the future for their members, as
we bring them back to properly funded schemes.
OUTLOOK
Whilst we are still in the early days of our GKN ownership,
significant progress has already been made. We have significantly
reduced central functions and agreed strategic plans with
operational management, who are now focused on implementation. Our
work with them to date has reinforced our belief in the scope for
improvement in the GKN businesses as well as the timeline necessary
for achieving it.
Similarly, improvements continue in the Nortek Air &
Security and Other Industrial businesses, more of which is detailed
in the Chief Executive's Review. Although tariffs and raw material
inflation may create some headwinds, we continue to trade in line
with the Board's expectations for 2018.
Christopher Miller
Chairman
6 September 2018
_________
(1) The statutory results include the full effect of GKN
acquisition costs, but only the short period of GKN ownership since
19 April 2018. Equally, the comparative period for 2017 does not
include results from the respective GKN businesses.
CHIEF EXECUTIVE'S REVIEW
Our successful acquisition of GKN plc has been the major event
for the Company this year. Having tracked the business over a
lengthy period, we made our approach in the belief that a change of
control was necessary to reinvigorate the GKN businesses, reverse
long-term underperformance versus peers and unlock their unachieved
potential.
We knew this would require a change of culture and the
re-energising of operations through significant targeted investment
and efficiency measures and central to this would be properly
motivated and engaged operational management teams.
Delivering on our promise of fast decision making, on taking
control in April we immediately removed the GKN head office
functions and set about decentralising its businesses in accordance
with the usual Melrose approach. We engaged directly with the
management teams of each of the businesses to agree their strategic
plans to deliver the scale of improvement that is achievable for
these world class businesses.
While our focus has been on applying the Melrose model across
the GKN businesses, this has included progress on delivering the
commitments we set out during the acquisition. Highlights since
taking control include the approval of significant investment on
research and development, including developing plans for a new
Global Technology Centre near Filton and continued support for the
Wing of the Future in collaboration with the National Composite
Centre. We have also appointed the first independent chairman to
the GKN UK pension schemes and have begun implementing our agreed
funding plan so as to seek to safeguard the interests of pensioners
and other members. In addition, we have set aside GBP10 million to
establish a skills, innovation and productivity fund and expect to
have invested this in the next twelve months.
We also took the opportunity to reorganise the monitoring and
reporting structure of the Melrose Group into five new divisions:
Aerospace, Automotive, Powder Metallurgy, Nortek Air & Security
and Other Industrial. Although there is a public focus on our
acquisition of GKN plc, we are also continuing with our investments
and improvements in the Nortek Air & Security and Other
Industrial businesses.
Further details of each division and their first half 2018
trading performance is set out below.
AEROSPACE
GKN Aerospace is a leading global multi-technology tier 1
aerospace supplier, with manufacturing locations in 14 countries
and serving over 90% of the world's aircraft and engine
manufacturers. It designs and manufactures innovative smart
aerospace systems and components, with technologies used in
aircraft ranging from the most used single aisle aircraft and the
largest passenger planes in the world to business jets and the
world's advanced 5th generation fighter aircraft.
On taking control, we supported management's new strategic plan
to start to reorganise the business globally around its three core
capabilities: Aerostructures, which accounts for more than half of
GKN Aerospace's total revenue; Engine Systems, which accounts for
approximately a third; and Special Technologies.
We inherited a business with challenges, particularly a
loss-making business in North America with poor customer
relationships. As a result, there has been an immediate
concentration on 'fixing' key underperforming and historically
underinvested Aerostructures sites in North America which is
already delivering tangible results, both in terms of customer
deliveries and stabilising key programmes. This process needs to
continue and we are committed to delivering the necessary
improvements including, where appropriate, rectifying long-term
under investment in people, processes and capital equipment.
In the Engines business, GKN Aerospace is well placed on more
than 20 major risk and revenue sharing partnerships and
cutting-edge technology, such as additive manufacturing, driving
confidence in its performance in the second half of 2018 and
beyond. Special Technologies continues to push the boundaries of
technology, including developing an innovative hydrophobic coating
for cockpit windows, currently undergoing performance assessment
with Airbus on flight-test aircraft.
Recognising that Asia will become the largest aerospace market
by the mid-2030s, GKN Aerospace also further expanded into the
region through a new fan blade repair centre in Malaysia, a new
wiring facility in Pune, India, and the signing of a memorandum of
understanding with Comac and AVIC in China for a new aerostructures
joint venture. There have been a number of other material contract
wins, such as the electrical wiring interconnection systems and
junction boxes for Boeing on the 777, 737 and P8A aircraft and the
manufacture of inner core fairings for Rolls-Royce's Trent 1000 and
84,000lb-thrust Trent XWB engine programmes until 2026.
GKN Aerospace has also applied a renewed focus on technology,
particularly in the UK where it is developing plans to build a
Global Technology Centre near its Filton production facility. This
centre will develop the next generation of composite and additive
manufacturing technologies to 'Industry 4.0' standards, in support
of a number of technology partnerships. GKN Aerospace will also be
announcing in the coming weeks the insertion of new additive
manufacturing technologies into the UK, focused on broadening the
design, process and industrialisation of these exciting new
technologies.
Looking at the wider market, aerospace continues to look strong
in both the commercial and defence sectors, with key indicators
including increasing air traffic, current aircraft orders and
deliveries, oil prices and predicted aircraft requirements all
looking positive. With significant improvements to come, the
business is well-positioned to take advantage of these market
conditions and we remain confident in GKN Aerospace's ability to
deliver to expectations and to become the world class operating
business that it should have always been.
AUTOMOTIVE
Our Automotive Division includes the GKN Driveline and GKN
ePowertrain businesses, both leading automotive driveline
technology and systems engineers utilising their global footprint
to design, develop, manufacture and integrate an extensive range of
driveline technologies for over 90% of the world's car
manufacturers.
These businesses are market leaders in constant velocity joint
systems, all-wheel drive and electric mobility and their
technologies feature in everything from the smallest ultra low cost
car to the most sophisticated and dynamic premium and motorsport
vehicles, with capabilities spanning two-wheel drive, all-wheel
drive, hybrid or pure electric vehicle architectures.
As with Aerospace, this business has world leading technologies
and removing the previous central management functions is enabling
a re-motivated operational management team and employees to respond
in improving the performance of their business. These results for
the first time disclose the investment in eDrive where it is hoped
GKN can play a leading part in this exciting new move to electric
vehicles. We look forward to the progress we expect to see over the
coming months and years.
GKN Driveline
During 2018, the market leading GKN Driveline business has
focused on driving its technology leadership, commercial excellence
and rigorous plant operational efficiency. We have agreed a
strategy with the business and margin improvement workstreams are
now in progress, with further automation upgrades being implemented
alongside capacity management, as well as an overdue GBP10 million
investment to expand its state-of-the-art Polish facility.
The 2018 half year performance is in line with expectations due
to a successful programme ramp up in the Americas and Europe. The
business is reacting quickly to flex operations to mitigate some
headwinds and significant effort is ongoing to secure contractual
customer recovery mechanisms to cover material cost increases.
We have also initiated a joint indirect procurement initiative
across this and the other core GKN businesses that will extend into
2019 and seeks to deliver significant savings and other permanent
improvements.
While some improvements are already visible in the business and
2018 trading is anticipated to be in line with our expectations,
the full benefit of this year's investments will be seen in 2019
and beyond.
GKN ePowertrain
GKN ePowertrain is an all-wheel drive ("AWD") systems integrator
and pioneering electric powertrain ("eDrive") systems engineer with
more than 725,000 electric axle drives produced to date. A pipeline
of over GBP2.5 billion for eDrive continues to grow and we have
approved a number of investments to ensure it can meet this demand,
including building a new facility in Japan, refurbishing an
existing facility in Italy and opening a new facility in China
intended to serve domestic customers, a key market for electric
drive vehicles.
The presentation of the eTwinsterX and the front Twinster at
this year's successful Wintertest was very well received by
customers and commentators alike and demonstrated GKN ePowertrain's
continued development of class leading technologies. We have
invested further in its inverter and eMotor development, which is
progressing well and it expects the first full proprietary system
to be available from 2019.
On acquisition we uncovered a number of operational challenges
for the business in North America. We have agreed the remediation
plan with management to address these, which is being implemented
along with a rigorous focus on cost control. GKN ePowertrain is
well positioned with proven technology, strong customer
relationships and solid growth prospects and we are continuing to
invest in this opportunity.
POWDER METALLURGY
GKN Powder Metallurgy is the world's largest provider of powder
metal solutions. Uniquely vertically integrated, it is a global
leader in both precision powder metal parts for the automotive and
industrial sectors as well as the production of powder metal.
Having consistently outperformed peers' sales growth in recent
years, GKN Powder Metallurgy is also implementing a margin
improvement plan to ensure its profitability better reflects its
leading position. A better focus on improving this business will
lead to an improved performance in the years to come.
A technology driven business, with widescale implementation of
automated production processes and globally connected systems, it
has unique additive manufacturing capability and design
flexibility. With a culture of innovation and continuous
improvement supported by three Global Innovation Centres and over
500 engineers, GKN Powder Metallurgy has a strong track record of
mastering new technologies ahead of its peers.
GKN Powder Metallurgy continues to push into new geographies,
establishing a new GBP17 million plant in Mexico with the first
product expected to ship in 2019, as well as a clear acquisition
strategy to further build on its leading position. The first hub of
the planned additive manufacturing network in Bonn, Germany, is now
fully operational, with further hubs planned in China and the US
this year
Since taking control in April, we have established that this
business is performing well, with significant opportunities to grow
sales and margins. It is expected to continue to outperform in core
geographies including North America, Europe and China, as well as
benefit from exciting acquisition prospects to expand. However, as
indicated at the time of the acquisition, we intend to focus on the
Aerospace and Automotive divisions over the longer term. While
there is no requirement to divest the business and, as ever, there
will be a focus on value creation, it is right, for the reasons set
out above, to explore strategic options for this business now and
we have appointed advisers accordingly.
NORTEK AIR & SECURITY
In order to better manage the Group following the acquisition of
GKN, we will now monitor and report the former Nortek Air
Management and Security businesses as a single division: Nortek Air
& Security. The following is the 2018 interim update of the
division's constituent parts: Global Heating Ventilation & Air
Conditioning; Air Quality & Home Solutions; and Security &
Smart Technology.
Global HVAC ('HVAC')
The HVAC leadership team continues to build on its improvements
through three core initiatives: operational excellence; innovation;
and sustainable profitable growth. Its Menen, Belgium, and Mercer,
Pennsylvania, production facilities have been rationalised in
accordance with its footprint strategy. Significant investments
have continued in enhancing core product platforms and breakthrough
technologies, including the launch of its StatePoint(R) technology
for the fast growing data centre sector and its integrated
CLEANSUITE(R) product family to capitalise on the retrofit and new
construction opportunity in medical operating rooms.
HVAC has made a bright start to 2018 and we expect this to
continue for the second half and beyond.
Air Quality & Home Solutions ('AQH')
Led by our chosen new management team, AQH's profitability
continues to improve as a result of operational initiatives and
strategic investments commenced in 2017. The consolidation of its
Canadian footprint and US warehousing operations were completed in
the first half of 2018, and benefits are being realised from recent
automation investments at its production facility in Hartford,
Wisconsin.
Sales growth was modest during the first half of 2018, but new
product development remains on track, with launches expected over
the next 12 months to coincide with the product line reviews of
major US retailers. The business expects to continue to deliver in
accordance with expectations for the full year.
Security & Smart Technology ('SST')
In the face of the increasingly competitive environments in both
the growing 'DIY' and traditional security markets, SST has
finalised its consolidation into a fully integrated business and
moved to state-of-the-art Carlsbad, California headquarters,
complete with a new R&D lab. It also acquired IntelliVision, an
industry leading engineering, video and software analytics company
that is expected to transform the business' technology platform as
the business looks to increase smartness and connectivity of its
product range through a seamless ecosystem of sensors and
peripheral devices.
The first half performance of the business was materially
impacted by the expected expiry of a significant volume contract
with a key customer. This has nonetheless enabled the business to
reshape its customer profile, improve its product mix and reduce
its SKU count through discontinuation of low margin products. While
market challenges are expected to continue into next year, the
business is well positioned to meet them.
OTHER INDUSTRIAL
In conjunction with the creation of the new Nortek Air &
Security Division, the existing Brush and Ergotron businesses have
been consolidated with the GKN Off-Highway Powertrain and GKN
Wheels & Structures businesses to form the Other Industrial
Division. They continue to be run as separate businesses.
Brush
While the Hawker Siddeley Switchgear business has performed well
in the first half of the year, the rest of the business continues
to be adversely impacted by the overall challenges and
uncertainties within the power generation market, which remains far
below its previous peak in 2011.
The restructuring of its Brush Generator production is
progressing well and is expected to be materially complete by the
end of 2018, with costs and benefits in line with expectations.
Nonetheless, trading conditions remain extremely challenging and
consequently all parts of the business remain under review to
ensure the correct actions are taken for the long-term future of
the business.
Ergotron
Despite experiencing some market and operational challenges over
the past year, Ergotron remains a high quality, design-focused
business. Ergotron has a robust pipeline of new products launching
in the back half of 2018 and early 2019 that will drive its growth
and capture market share, especially in the fast-growing healthcare
market as well as the office market.
Operationally, there has been a continued focus on cost
reduction initiatives in all areas of Ergotron's business to
maintain margins. The improvements made through Ergotron's
strategic focus on key product categories and sales channels,
supported by a fresh marketing approach, means the business is well
positioned for future developments.
GKN Off-Highway Powertrain ('OHP')
OHP is a leading supplier of engineered power transmission
products, systems and service solutions to the world's leading
off-highway and industrial equipment manufacturers driving
efficiency in the agriculture, construction, mining and industrial
markets, as well as providing aftermarket services for powertrain
solutions.
Sales increased ahead of the market growth rate during the first
half and a number of productivity and efficiency initiatives have
been implemented, including further automation. With strong
conditions in the agriculture and construction industries and a
solid second half order book, the business is confident about its
ability to deliver on its full year expectations.
GKN Wheels & Structures ('W&S')
The W&S business is a leading global manufacturer of
off-highway wheels for agricultural, construction, mining and
industrial use, as well as metallic structures for automotive and
off-highway vehicles. Having invested GBP30 million over the last
three years, committed prior to our ownership, in its European and
North American facilities, W&S has some of the most advanced
manufacturing facilities in the world.
Market conditions have continued to improve since a turning
point last year and the full benefit from improvement initiatives
is expected to flow from next year.
Simon Peckham
Chief Executive
6 September 2018
FINANCE DIRECTOR'S REVIEW
The acquisition of GKN plc ("GKN") on 19 April 2018
significantly increased the size of the Melrose Group.
Consequently, the results for the six month period ended 30 June
2018 include 73 days of trading for GKN and cannot be compared in a
meaningful way to the six month period ended 30 June 2017, which
did not include any trading for GKN.
ACQUISITION OF GKN
Melrose acquired GKN on 19 April 2018. Under the terms of the
acquisition GKN shareholders received 1.69 new Melrose shares and
81 pence in cash for every GKN share. In addition GKN shareholders
received the final GKN dividend of 6.2 pence per share which was
paid in May 2018 during Melrose ownership.
Transaction costs of GBP126 million, 1.2% of the enterprise
value, along with associated acquisition related taxes of GBP53
million were incurred by Melrose in respect of the acquisition of
GKN. The transaction costs included bank facility arrangement fees
of GBP54 million which have been included within net debt to be
amortised over the life of the facility and GBP1 million relating
to the transaction cost of issuing new shares, being offset against
share premium. The remaining GBP71 million of acquisition costs
which related to general transaction fees, along with the
associated acquisition taxes, are included within the Income
Statement.
In accordance with IFRS 3, the consideration paid to acquire GKN
in the Interim Financial Statements is calculated using the share
price at the date of acquisition of GBP2.35 and only includes
approximately 85% of the total amount paid, being the percentage of
acceptances received from GKN shareholders by 19 April 2018. The
remaining 15% of shares that were acquired in the period from 19
April 2018 to 30 June 2018 are treated as the purchase of
non-controlling interests and are shown as a movement in
equity.
Details of the banking facilities entered into to allow Melrose
to acquire GKN are discussed later in this review.
GROUP SEGMENTAL SPLIT
Acquiring GKN transformed the Melrose Group, and as a
consequence a new operating structure has been implemented. In
accordance with IFRS 8, it is deemed appropriate that the Melrose
Group now consists of five reportable segments summarised as
follows:
Segments Businesses
Aerospace Engine Systems, Aerostructures,
Special Technologies
-------------------------------------
Automotive GKN Driveline, GKN ePowertrain,
Cylinder Liners
-------------------------------------
Powder Metallurgy GKN Powder Metallurgy
-------------------------------------
Nortek Air & Security Air Quality & Home Solutions
("AQH"), Heating, Ventilation
& Air Conditioning ("Global HVAC"),
Security & Smart Technology ("SST")
-------------------------------------
Other Industrial GKN Off-Highway Powertrain, GKN
Wheels & Structures, Ergotron,
Brush
-------------------------------------
MELROSE GROUP RESULTS
The statutory IFRS results, which are shown on the face of the
Income Statement, include 73 days of trading for GKN and also
include certain items which are significant in size or volatility
or by nature are non-trading or non-recurring, or are items
released to the Income Statement that were previously a fair value
item booked on an acquisition. It is Melrose's accounting policy to
exclude these items from the adjusted results, which are used as an
Alternative Performance Measure ("APM") as described by the
European Securities and Markets Authority ("ESMA").
Adjusted results, which were previously referred to, and are
defined the same way as, underlying results, are shown below the
statutory results on the Income Statement. 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 monitored and measured on a day-to-day
basis and achieves consistency and comparability between reporting
periods.
Proforma results, which include the adjusted results of the GKN
businesses as if they had been acquired on 1 January 2018 and are
calculated using the ongoing interest charge, the tax rate of the
enlarged business and the diluted number of shares in issue at 30
June 2018, are also presented.
STATUTORY RESULTS
The statutory results for the period ended 30 June 2018 include
revenue of GBP2,937 million (2017: GBP1,086 million), an operating
loss of GBP256 million (2017: profit of GBP58 million), a statutory
loss before tax of GBP303 million (2017: profit of GBP48 million)
and diluted earnings per share ("EPS") being a loss of 8.9p (2017:
profit of 2.0p).
Tables summarising the statutory results by reportable segment
are shown in note 3 of the Interim Financial Statements.
ADJUSTING ITEMS
The following items have been classified as adjusting items in
these Interim Financial Statements:
Restructuring and other associated costs arising from
significant strategy changes totalled GBP128 million (2017: GBP25
million), including GBP5 million (2017: GBPnil) of losses incurred
following the announcement of the closure of certain businesses.
Restructuring costs are adjusting items due to their size and
non-trading nature.
As expected, following the announcement on 1 February 2018 of
the intended closure of its Dutch turbogenerator facility and the
downsizing of its turbogenerator production in the UK, Brush
incurred GBP63 million (2017: GBP2 million) of restructuring costs
and asset write downs in the period. Restructuring costs in the
period also included GBP44 million in respect of the early actions
that are underway within the GKN businesses and the ceasing of GKN
head office functions. In addition, restructuring costs within
Nortek Air & Security were GBP16 million (2017: GBP23 million),
which included footprint rationalisation within the HVAC
business.
Acquisition and disposal costs incurred in the period include
GBP71 million (2017: GBP2 million) of general transaction fees and
GBP53 million of associated transaction taxes, predominantly in
respect of the acquisition of GKN. These costs also include a small
amount relating to the GBP26 million bolt-on acquisition of
IntelliVision Inc., by the Security & Smart Technology
business. These items are excluded from adjusted results due to
their non-trading nature.
Melrose policy is to hedge account where possible. However,
hedge accounting has not historically been applied to the GKN
businesses, and this is under review. The movement in the value of
derivative financial instruments (primarily forward foreign
currency exchange contracts) taken out to mitigate the potential
volatility of future cash flows on long-term foreign currency
customer and supplier contracts, along with foreign exchange
movements on the associated financial assets and liabilities, is
shown as an adjusting item. The charge in the period was GBP123
million and is excluded from adjusted results because of its
volatility and size.
Finished goods and work in progress which are present in a
business when acquired, in accordance with IFRS 3, are required to
be uplifted in value to closer to their selling price. As a result,
in the early months of an acquisition, reduced profits are
generated as this inventory is sold. This one-off effect in the
period was a charge of GBP113 million (2017: GBPnil) and is
excluded from adjusted results due to its size and non-recurring
nature.
The amortisation of intangible assets acquired in business
combinations of GBP38 million (2017: GBP41 million) is excluded
from adjusted results due to its non-trading nature and to enable
comparison with companies that grow organically. Where intangible
assets are trading in nature, such as computer software and
development costs, the amortisation is not adjusted.
The charge for the Melrose equity-settled Incentive Plan,
including its associated employer's tax charge, is excluded from
adjusted results due to its size and volatility. The shares that
would be issued, based on the Plan'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.
The revenue from the Group's share of equity accounted
investments ("EAIs") is shown within adjusted revenue. In addition,
the profits and losses of EAIs, which are shown after interest and
tax in the statutory results, are adjusted to show the operating
profit before interest and tax, which is consistent with the
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.
Any items recognised as fair value items on an acquisition,
which have been settled for a more favourable amount than first
anticipated, are released as an adjusting item to avoid positively
distorting adjusted results.
To enable the acquisition of GKN, a new bank facility was
negotiated which replaced the old Group bank facility. As a result,
the unamortised debt fees of the old facility, totalling GBP7
million, have been written off. This charge is shown as an
adjusting item because of its one-off, non-trading nature.
ADJUSTED RESULTS
Adjusted results are the statutory results excluding the items
described above. The adjusted measures are used partly to 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. This is also one
measure used to value individual businesses as part of the "Buy,
Improve and Sell" Melrose strategy model.
The adjusted results in the period ended 30 June 2018 included
revenue of GBP3,062 million (2017: GBP1,088 million), an operating
profit of GBP280 million (2017: GBP141 million), a profit before
tax of GBP240 million (2017: GBP131 million) and adjusted diluted
EPS of 5.8p (2017: 4.9p). The following table reconciles the
statutory operating result to adjusted operating profit:
2018 2017
GBPm GBPm
------------------------------------------------------ ------ -----
Operating (loss)/profit (256) 58
------------------------------------------------------ ------ -----
Restructuring costs 128 25
------------------------------------------------------ ------ -----
Acquisition and disposal costs, including associated
transaction taxes 124 2
------------------------------------------------------ ------ -----
Movement in derivatives and associated financial
assets and liabilities 123 -
------------------------------------------------------ ------ -----
Reversal of one-off uplift in the value of
inventory in GKN businesses 113 -
------------------------------------------------------ ------ -----
Amortisation of intangible assets acquired
in business combinations 38 41
------------------------------------------------------ ------ -----
Melrose equity-settled compensation scheme
charges 10 17
------------------------------------------------------ ------ -----
Interest and tax on the Group's share of equity
accounted investments 3 -
------------------------------------------------------ ------ -----
Release of fair value items (3) (2)
------------------------------------------------------ ------ -----
Adjustments to statutory operating (loss)/profit 536 83
------------------------------------------------------ ------ -----
Adjusted operating profit 280 141
------------------------------------------------------ ------ -----
The performance of each of the reportable segments is shown in
note 3 of the Interim Financial Statements and the reasons for the
performance are discussed in the Chief Executive's Review.
Central costs were GBP13 million (2017: GBP12 million), which
included GBP8 million (2017: GBP8 million) of Melrose corporate
costs, GBP3 million (2017: GBPnil) of central costs relating to the
73 day ownership of GKN and GBP2 million (2017: GBP4 million) of
costs relating to the Nortek cash based long-term incentive
plan.
PROFORMA GROUP RESULTS
In addition to the statutory and adjusted results described
above, a proforma result for the enlarged Group, which is presented
on an adjusted basis as if GKN had been owned for the full six
month period, is shown below:
Proforma
2018
GBPm
------------------- --------
Revenue 6,203
------------------- --------
Operating profit 501
------------------- --------
Profit before tax 401
------------------- --------
Diluted EPS 6.3p
------------------- --------
Proforma results are described in the glossary to these Interim
Financial Statements. These results are an important measure of
ongoing performance in the current Group.
FAIR VALUE EXERCISE
Melrose is currently undertaking an extensive review of the GKN
assets, liabilities and accounting policies. This requires a
significant number of GKN site visits and the results of this
review will be finalised and recognised in the second half of the
year.
At 30 June 2018 provisional fair value adjustments have been
processed in respect of capital market bonds and derivative
instruments, the defined benefit pension schemes, freehold property
valuations, leasehold property commitments, uncertain tax
positions, the IFRS 3 uplift to inventory and the valuation of
certain equity accounted investments.
Acquisition related intangible assets and their associated
deferred tax liabilities, previously reported by GKN, have been
removed from the Balance Sheet shown at 30 June 2018. A valuation
of the intangible assets that existed at 19 April 2018 is underway
and will be completed in the second half of the year.
TAX
The effective tax rate on adjusted profit in the period was 23%
(2017: 27%). The rate has decreased primarily due to the reduction
in the US Federal tax rate as part of the Tax Cuts and Jobs Act,
passed on 22 December 2017. The tax rate applicable to GKN profits
in the period of ownership is similar to the Melrose tax rate prior
to the acquisition of GKN.
The Group paid GBP22 million of tax in the period (2017: GBP10
million).
As disclosed by GKN previously, the Group, along with a number
of other companies, is seeking recovery of corporate tax and
associated interest assessed on foreign dividends, which, in the
Group's view, was in breach of EU law. The case continues to
progress through the UK courts and the ultimate outcome of the case
remains insufficiently certain to recognise an asset on the Balance
Sheet at 30 June 2018. Should the Group's claim be successful, it
would be able to recognise additional deferred tax assets in the UK
and will receive cash payments from HMRC.
Deferred tax liabilities at 30 June 2018 are unusually low
because, as mentioned in the fair value exercise section of this
review, GKN's intangible assets and associated deferred tax
liabilities have been removed and will be replaced in the second
half of the year once the valuation of intangible assets at
acquisition has been finalised.
EARNINGS PER SHARE ("EPS") AND NUMBER OF SHARES IN ISSUE
Under the terms of the acquisition of GKN, 2,469 million new
Melrose shares were issued to acquire approximately 85% of the
shares on 19 April 2018. Subsequently, a further 448 million new
Melrose shares were issued at various dates between 19 April and 30
June 2018 to acquire the remaining 15% of GKN. The number of
Melrose shares in issue has risen from 1,941 million at the
beginning of the period to 4,858 million at 30 June 2018 and the
weighted average number of shares in issue in the period was 3,045
million.
In accordance with IAS 33, the statutory basic and diluted EPS
numbers are disclosed on the face of the Income Statement. In the
period ended 30 June 2018 the diluted EPS was a loss of 8.9p (2017:
a profit of 2.0p).
The adjusted diluted EPS for the period ended 30 June 2018 was
5.8p (2017: 4.9p) and the proforma diluted EPS, which is presented
on an adjusted basis, as if GKN had been owned for the full six
month period, was 6.3p.
ADOPTION OF IFRS 15 - IMPACT ON GKN AEROSPACE
IFRS 15: "Revenue from Contracts with Customers" was adopted on
1 January 2018 and for Melrose, at that date, the impact was not
material. However, IFRS 15, which requires revenue to be allocated
to performance obligations identified in a contract, had a
significant impact on GKN within the Aerospace division.
The main changes in revenue recognition for GKN Aerospace
following the adoption of IFRS 15 are as follows:
-- An element of future variable consideration, relating to risk
and revenue sharing partnerships in respect of certain engine
programmes, is now allocated to the sale at point of delivery for
the Original Equipment. Previously this element of revenue would
have been recognised during the aftermarket stage of the engine
programme. This has the effect of bringing forward the recognition
point for revenue and profit on certain programmes, creating a
contract asset for unbilled revenue, and separating the recognition
of revenue and profit from the receipt of cash.
-- Revenue from agreements with certain customers was previously
recognised on delivery of product, however, due to the contractual
right to compensation for costs and a margin in the event of
termination, is now recognised over time as progress is made in
satisfying the performance obligation. Whilst the profit associated
with these contracts is relatively small, the impact on the Balance
Sheet was the reclassification of a significant amount of inventory
to contract assets.
-- Participation fees paid to engine manufacturers have been
reclassified in the Balance Sheet from intangible assets to
contract assets, within other debtors. The balance will now be
recognised as a reduction in revenue across the performance
obligations rather than as a cost of sale.
-- Indirect payments to airlines and leasing companies, where
they concern the pro rata reimbursement of costs for an engine
programme to the consortium leader, are now recognised as a
reduction in revenue rather than as a cost of sale.
The overall impact of IFRS 15 in the Aerospace division has been
to recognise a contract asset, which was GBP606 million at 30 June
2018, and is forecast to reduce annual revenue by approximately
GBP80 million, mainly as a result of the netting of expenses
against revenue that were previously shown within cost of sales,
and to increase annual adjusted operating profit by GBP15 million,
mainly as a result of the earlier recognition of variable
consideration from risk and revenue sharing partnerships.
None of the other businesses have been materially impacted by
the adoption of IFRS 15.
CASH GENERATION AND MANAGEMENT
Group net debt at 30 June 2018, translated at closing exchange
rates, was GBP3,373 million (31 December 2017: GBP572 million) and
does not include the fair value uplift in respect of the capital
market borrowings acquired with GKN on 19 April 2018.
The movement in net debt in the period is summarised as
follows:
2018 2017
Movement in Group net debt GBPm GBPm
----------------------------------------------- -------- -----
At 1 January (572) (542)
----------------------------------------------- -------- -----
Net debt acquired with GKN (1,159) -
----------------------------------------------- -------- -----
Cash consideration for GKN (81 pence per
share) (1,362) -
----------------------------------------------- -------- -----
Payment of GKN 2017 final dividend (107) -
----------------------------------------------- -------- -----
Acquisition costs and related transaction
tax costs (161) (3)
----------------------------------------------- -------- -----
Acquisition of IntelliVision (26) -
----------------------------------------------- -------- -----
Cash flow from trading (after all costs
including tax) 92 (117)
----------------------------------------------- -------- -----
Dividend paid to Melrose shareholders (54) (36)
----------------------------------------------- -------- -----
Foreign exchange and other non-cash movements (24) 29
----------------------------------------------- -------- -----
At 30 June (3,373) (669)
----------------------------------------------- -------- -----
The increase in Group net debt in the period includes GBP1,159
million of net debt acquired with GKN. These borrowings are
described later in this review.
An analysis of the cash generation performance for the period,
which includes 73 days of GKN ownership in 2018 is shown in the
table below:
Cash flow from trading (after all costs 2018 2017
including tax) GBPm GBPm
--------------------------------------------------- ------ -----
Adjusted operating cash flow (pre capex) 265 111
--------------------------------------------------- ------ -----
Net capital expenditure (87) (21)
--------------------------------------------------- ------ -----
Net interest and net tax paid (50) (16)
--------------------------------------------------- ------ -----
Defined benefit pension contributions (21) (2)
--------------------------------------------------- ------ -----
Incentive scheme payments (including associated
employer's tax) - (147)
--------------------------------------------------- ------ -----
Restructuring (50) (30)
--------------------------------------------------- ------ -----
Dividend income from equity accounted investments 64 -
--------------------------------------------------- ------ -----
Net other (29) (12)
--------------------------------------------------- ------ -----
Cash flow from trading (after all costs
including tax) 92 (117)
--------------------------------------------------- ------ -----
The total cash outflow from operating and investing activities
included cash spent on restructuring of GBP50 million (2017: GBP30
million). In addition, net capital expenditure was GBP87 million
(2017: GBP21 million), representing 1.2x depreciation.
PROVISIONS
Total provisions at 30 June 2018 were GBP409 million (31
December 2017: GBP209 million). This is a significant increase from
the previous year, which is to be expected given the acquisition of
GKN and the GBP142 million of provisions acquired with the
business. The following table details the movement in provisions in
the period:
Total
GBPm
----------------------------------------------------- -----
At 31 December 2017 209
----------------------------------------------------- -----
Acquisition of GKN 142
----------------------------------------------------- -----
Net charge to adjusted operating profit 27
----------------------------------------------------- -----
Net charge shown as an adjusting item in the Income
Statement 103
----------------------------------------------------- -----
Spend against provisions (80)
----------------------------------------------------- -----
Other (including foreign exchange) 8
----------------------------------------------------- -----
At 30 June 2018 409
----------------------------------------------------- -----
The net charge to adjusted operating profit of GBP27 million
primarily relates to warranty, product liability and workers'
compensation, which are matched by similar cash payments in the
year. In addition, the net charge of GBP103 million, included as
adjusting items, primarily related to restructuring provisions
recognised in the year, in particular within Brush, the GKN
businesses and the footprint rationalisation within the Global HVAC
businesses.
Included within other movements in provisions are foreign
exchange movements and the unwind of discounting on certain
provisions.
PENSIONS
The acquisition of GKN has significantly increased the IAS 19
net deficit in the Balance Sheet as at 30 June 2018, with GBP1,238
million of the GBP1,229 million Group deficit, relating to the
acquired business.
At 30 June 2018 total plan assets of the Melrose Group's defined
benefit pension plans were GBP3,418 million (31 December 2017:
GBP525 million) and total plan liabilities were GBP4,647 million
(31 December 2017: GBP543 million).
The most significant pension plans in the Group are the GKN UK
2012 and 2016 plans. The net accounting deficit on these plans was
GBP458 million at 30 June 2018. These plans had gross assets at 30
June 2018 of GBP2,632 million and liabilities of GBP3,090
million.
The values of the Group plans were updated at 30 June 2018 by
independent actuaries to reflect the latest key assumptions. A
summary of the assumptions used are shown in note 12 to the Interim
Financial Statements.
During the GKN acquisition process, Melrose committed to
contribute GBP150 million to the GKN UK plans in the first twelve
months of ownership, and ongoing annual contributions of GBP60
million. In addition, Melrose committed to contribute GBP270
million upon the disposal of Powder Metallurgy, 10% of any proceeds
from disposals of GKN businesses and 5% of any proceeds from
non-GKN businesses to the GKN UK pension plans. These commitments
cease when the funding target which has been agreed with Trustees
is achieved, being gilts plus 25 basis points for the GKN UK 2016
plan and gilts plus 75 basis points for the GKN UK 2012 plan.
FINANCIAL RISK MANAGEMENT
Following the acquisition of GKN the financial risks the Group
faces have been reviewed and are unchanged. 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 30 June 2018 was GBP3,373
million (31 December 2017: GBP572 million).
A new multi-currency facility was entered into on 17 January
2018 to assist with the acquisition of GKN, which replaced the
previous facility of US $1.25 billion. This new facility consists
of a GBP1.5 billion term loan that runs for three years and six
months and was sized to allow the flexibility to redeem the GKN
bonds, and a five year multi-currency revolving credit facility,
denominated as Sterling GBP1.1 billion, US $2.0 billion and EUR0.5
billion. At 30 June 2018, GBP385 million of the term loan was
drawn, along with GBP1,634 million and US $684 million of the
multi-currency revolving credit facility.
As with previous facilities the new facility has two financial
covenants. There is a net debt to adjusted EBITDA covenant and an
interest cover covenant, both of which are tested half yearly, in
June and December. The first covenant test for the new bank
facility will be at 31 December 2018.
The EBITDA covenant test is set at a maximum 3.5x leverage for
each of the half yearly measurement dates for the remainder of the
term of the facility. The interest cover covenant is set at a
minimum 4.0x throughout the life of the facility.
Following the acquisition of GKN on 19 April 2018 the net debt
position of the Group increased significantly. At acquisition GKN
net debt had unexpectedly increased by GBP270 million from 31
December 2017, predominantly because of the payment of GBP129
million of defence costs and a working capital outflow of GBP182
million which included the unwind of a creditor stretch placed on
suppliers. Net debt acquired with GKN had a book value of GBP1,159
million.
The GKN net debt at acquisition included capital market
borrowings, comprising a GBP350 million 6.75% annual unsecured bond
maturing in October 2019, a GBP450 million 5.375% semi-annual
unsecured bond maturing in September 2022 and a GBP300 million
3.375% annual unsecured bond maturing in May 2032. The coupon rate
on the GBP300 million bond, maturing in 2032 will increase to
4.625% from May 2019. These bonds remain within the Group at 30
June 2018.
In addition, a series of cross currency swaps were acquired with
GKN and were recorded as a GBP109 million liability at the date of
acquisition. These cross currency swaps convert the GBP350 million
2019 bond into US $578 million with annual interest of 6.80% and
the GBP450 million 2022 bond into US $373 million and EUR284
million with annual interest of 5.70% and 3.87% respectively.
There are a number of uncommitted overdraft, guarantee and
borrowing facilities made available to the Group. These uncommitted
facilities have been lightly used.
Cash, deposits and marketable securities amounted to GBP426
million at 30 June 2018 (31 December 2017: GBP16 million) and are
offset to arrive at the Group net debt position of GBP3,373 million
(31 December 2017: GBP572 million). The combination of this cash
and the size of the new facility allows the Directors to consider
that the Group has sufficient access to liquidity for its current
needs.
The Board takes careful consideration of counterparty risk with
banks when deciding where to place cash on deposit.
Finance cost risk management
The bank margin on the new 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 facility; as at 30 June 2018 the margin
was 1.4% on the term loan and 1.65% on the revolving facility (31
December 2017: 1.35% on the Melrose committed bank debt).
The Group holds interest rate swap instruments to fix the cost
of LIBOR in addition to the three GKN bonds. The profile of the
interest rate swaps has been designed to hedge, after taking into
account the GKN bonds, up to 70% of the interest exposure on the
projected gross debt as it reduces over the five year term. Under
the terms of the swap arrangements and excluding the bank margin,
the Group will pay a weighted average fixed cost of c.2% until the
swaps terminate on 17 January 2023.
The interest on the interest rate swaps is payable annually in
arrears on 1 July. The bank margin is payable monthly. Interest on
the cross currency swaps is payable annually in October for the
2019 bond and semi-annually for the 2022 bond, in March and
September.
The average cost of the debt for the new enlarged Group is
expected to be c.3.5% over the next 12 months.
Exchange rate risk management
The Group trades in various countries around the world and is
exposed to movements in a number of foreign currencies. The Group
therefore carries exchange rate risk that can be categorised into
three types, transaction, translation and disposal related risk as
described in the paragraphs below. The Melrose policy is designed
to protect against the majority of the cash risks but not the
non-cash risks.
The most common exchange rate risk is the transaction risk the
Group takes when it invoices a sale in a different currency to the
one in which its cost of sale is incurred. The Melrose policy has
been to address this risk by taking out forward cover against
approximately 60% to 80% of the anticipated cash flows over the
following twelve months, placed on a rolling quarterly basis and
for 100% of each material contract. To reflect the long-term nature
of the contracts within the Aerospace and Automotive divisions, the
period of cover is higher in these two divisions. This policy does
not eliminate the cash risk but does bring some certainty to
it.
The translation rate risk is the effect on the Group results in
the period due to the movement of exchange rates used to translate
foreign results into Sterling from one period to the next. No
specific exchange instruments are used to protect against the
translation risk because it is a non-cash risk to the Group, unless
foreign currency is converted to Sterling. However, where the Group
has net debt, the hedge of having a matching debt facility funding
these foreign currency trading units protects against some of the
balance sheet and banking covenant translation risk.
Lastly, and potentially most significantly for Melrose, exchange
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 risk may
arise on conversion of foreign currency proceeds into Sterling, for
instance to pay a dividend or Capital Return to shareholders.
Protection against this risk is considered on a case-by-case
basis.
Exchange rates used for currencies most relevant to the enlarged
Group in the period are:
Six month average 73 day average Closing
US Dollar rate (GKN businesses) rate
----------- ------------------ ------------------ --------
2018 1.38 1.35 1.32
----------- ------------------ ------------------ --------
2017 1.26 N/A 1.30
Euro
----------- ------------------ ------------------ --------
2018 1.14 1.14 1.13
----------- ------------------ ------------------ --------
2017 1.16 N/A 1.14
For reference, in respect of the Melrose Group, an indication of
the short-term exchange rate risk on adjusted operating profit,
which shows both translation exchange rate risk and unhedged
transaction exchange rate risk, is as follows:
Increase
in adjusted
operating
Sensitivity to translation and unhedged transaction profit
exchange rate risk GBPm
------------------------------------------------------ -------------
For every 10 per cent strengthening of the US Dollar
against Sterling 81
------------------------------------------------------ -------------
For every 10 per cent strengthening of the Euro
against Sterling 21
------------------------------------------------------ -------------
The long-term exchange rate risk on adjusted operating profit,
which ignores any hedging instruments, is as follows:
Increase
in adjusted
operating
Sensitivity to translation and full transaction profit
exchange rate risk GBPm
------------------------------------------------------ -------------
For every 10 per cent strengthening of the US Dollar
against Sterling 128
------------------------------------------------------ -------------
For every 10 per cent strengthening of the Euro
against Sterling 19
------------------------------------------------------ -------------
The exchange rate risk on Group debt is as follows:
(Increase)
in debt
Sensitivity to translation exchange rate risk GBPm
------------------------------------------------------ -----------
For every 10 per cent strengthening of the US Dollar
against Sterling (169)
------------------------------------------------------ -----------
For every 10 per cent strengthening of the Euro
against Sterling (56)
------------------------------------------------------ -----------
Contract and warranty risk management
A robust bid and contract management process exists in the
businesses, which includes thorough reviews of contract terms and
conditions, contract-specific risk assessments and clear delegation
of authority for approvals. These processes aim to ensure effective
management of risks associated with complex contracts. The
financial risks connected with contracts and warranties include the
consideration of commercial, legal and warranty terms and their
duration, and are considered carefully by Melrose 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 future period. These risks are minimised through
sourcing policies, including the use of multiple suppliers, where
possible, and procurement contracts where prices are agreed for up
to one year to limit exposure to price volatility. On occasions,
Melrose does enter into financial instruments on commodities when
this is considered to be the most efficient way of protecting
against price movements.
PRINCIPAL RISKS AND UNCERTAINTIES
An explanation of the principal risks and uncertainties faced by
the Group, prior to the acquisition of GKN, are set out on pages 44
to 49 of the Annual Report for the year ended 31 December 2017. In
summary these risks include the acquisition of new businesses and
improvement strategies, the timing of disposals of businesses,
economic and political risk, the risk of loss of key management,
risks associated with legal, regulatory and environmental law
compliance, information security and cyber threat, foreign exchange
rate risk, pension risk and liquidity risk. These risks have the
potential to affect the Group's results and financial position
during the remainder of 2018.
Furthermore, following the acquisition of GKN, a significant
workstream has commenced in order to assess the principal risks and
uncertainties faced by the enlarged Group. This assessment will be
completed in the second half of the year and details will be
included in the Group's Annual Report for the year ended 31
December 2018. An explanation of the risks and uncertainties within
the GKN businesses is set out on pages 32 to 39 of the GKN plc
Annual Report for the year ended 31 December 2017. In summary these
risks relate to highly competitive markets, supply chain, customer
concentration, operating in global markets, laws, regulations and
corporate reputation, technology and innovation, people capability,
product quality, contract risk, programme management, health and
safety, information systems resilience and pension funding.
Geoffrey Martin
Group Finance Director
6 September 2018
CAUTIONARY STATEMENT
This announcement contains forward-looking statements. These
statements are made in good faith based on the information
available up to the time of the approval of this announcement, and
should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying any
such forward-looking information. Accordingly, readers are
cautioned not to place undue reliance on any such forward-looking
statements. Subject to compliance with applicable laws and
regulations, the Company does not undertake any obligation to
update any forward-looking statement to reflect events or
circumstances after the date of this announcement.
This announcement has been prepared solely to provide
information to shareholders to assess the Company's strategies and
the potential for those strategies to succeed, and neither the
Company nor its directors accept any liability to any other person
save as would arise under English law.
RESPONSIBILITY STATEMENT
We confirm to the best of our knowledge:
a) The condensed financial statements have been prepared in
accordance with IAS 34 "Interim Financial Reporting";
b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
and their impact, and description of principal risks and
uncertainties for the remaining six months of the financial year);
and
c) the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related parties'
transactions and changes therein).
By order of the Board
Simon Peckham Geoffrey Martin
Chief Executive Group Finance Director
6 September 2018 6 September 2018
INDEPENT REVIEW REPORT TO MELROSE INDUSTRIES PLC
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2018 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
cash flows, the condensed consolidated balance sheet, the condensed
consolidated statement of changes in equity, and related notes 1 to
13. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Auditing Practices
Board. Our work has been undertaken so that we might state to the
company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2018 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
6 September 2018
Melrose Industries PLC
Condensed Consolidated Income Statement
6 months 6 months
ended ended Year
30 June 30 June ended
2018 2017 31 December
Unaudited Unaudited 2017
Continuing operations Notes GBPm GBPm GBPm
------------------------------------- ------- ---------- ---------- ------------
Revenue 3 2,937 1,086 2,092
Cost of sales (2,431) (743) (1,439)
------------------------------------- ------- ---------- ---------- ------------
Gross profit 506 343 653
Share of results of equity accounted
investments 8 12 - -
Net operating expenses (774) (285) (660)
------------------------------------- ------- ---------- ---------- ------------
Operating (loss)/profit 3 (256) 58 (7)
Finance costs (51) (10) (22)
Finance income 4 - 1
(Loss)/profit before tax (303) 48 (28)
Tax 5 27 (10) 4
------------------------------------- ------- ---------- ---------- ------------
(Loss)/profit after tax for the period (276) 38 (24)
Attributable to:
Owners of the parent (270) 38 (24)
Non-controlling interests (6) - -
------------------------------------- ------- ---------- ---------- ------------
(276) 38 (24)
Earnings per share
- Basic 6 (8.9)p 2.0p (1.2)p
- Diluted 6 (8.9)p 2.0p (1.2)p
Adjusted Results
Adjusted revenue 3 3,062 1,088 2,095
Adjusted operating profit 3,4 280 141 279
Adjusted profit before tax 4 240 131 258
Adjusted profit after tax 4 184 95 191
Adjusted basic earnings per share 6 5.8p 5.0p 9.9p
Adjusted diluted earnings per share 6 5.8p 4.9p 9.8p
------------------------------------- ------- ---------- ---------- ------------
Melrose Industries PLC
Condensed Consolidated Statement of Comprehensive Income
6 months 6 months
ended ended Year
30 June 30 June ended
2018 2017 31 December
Unaudited Unaudited 2017
Notes GBPm GBPm GBPm
---------------------------------------- ------- ---------- ---------- -------------
(Loss)/profit after tax for the
period (276) 38 (24)
---------------------------------------- -------------
Items that will not be reclassified
subsequently to the
Income Statement:
Net remeasurement gain on retirement
benefit obligations 166 7 12
Income tax charge relating to
items that will not be reclassified 5 (25) - (1)
----------------------------------------
141 7 11
Items that may be reclassified
subsequently to the
Income Statement:
Currency translation on net investments 210 (78) (133)
Transfer to Income Statement from
equity of cumulative translation
differences on disposal of foreign
operations - - (1)
(Losses)/gains on cash flow hedges (50) 6 9
Transfer to Income Statement on
cash flow hedges (3) (2) (4)
Income tax credit/(charge) relating
to items that may be reclassified 5 9 (1) (1)
166 (75) (130)
Other comprehensive income/(expense)
for the period 307 (68) (119)
Total comprehensive income/(expense)
for the period 31 (30) (143)
---------------------------------------- ------- ---------- ---------- -------------
Attributable to:
Owners of the parent 19 (30) (143)
Non-controlling interests 12 - -
---------------------------------------- ------- ---------- ---------- -------------
31 (30) (143)
---------------------------------------- ------- ---------- ---------- -------------
Melrose Industries PLC
Condensed Consolidated Statement of Cash Flows
6 months 6 months
ended ended Year
30 June 30 June ended
2018 2017 31 December
Unaudited Unaudited 2017
Continuing operations Notes GBPm GBPm GBPm
-------------------------------------- ------- ------------------------- ----------- ------------
Net cash from/(used in) operating
activities 13 6 (99) 32
Investing activities
Disposal of businesses - - 11
Disposal costs (1) - -
Net cash disposed - - (1)
Purchase of property, plant and
equipment (80) (20) (48)
Proceeds from disposal of property,
plant and equipment 3 - 2
Purchase of computer software and
capitalised development costs (10) (1) (3)
Acquisition of subsidiaries, net
of cash acquired(1) (1,009) - (9)
Dividends received from equity
accounted investments 64 - -
Interest received 4 - 1
Net cash used in investing activities (1,029) (21) (47)
Financing activities
Purchase of non-controlling interests (179) - -
Costs of issuing shares (1) - -
Repayment of borrowings (803) - -
New bank loans raised 2,515 156 56
Costs of raising debt finance (54) - -
Repayment of finance leases - - (1)
Dividends paid 7 (54) (36) (63)
Net cash from/(used in) financing activities 1,424 120 (8)
Net increase/(decrease) in cash
and cash equivalents 401 - (23)
Cash and cash equivalents at the beginning
of the period 16 42 42
Effect of foreign exchange rate
changes 9 (1) (3)
-------------------------------------- -------
Cash and cash equivalents at the
end of the period 13 426 41 16
(1) Comprises consideration of GBP1,316 million, net of cash and
cash equivalents acquired of GBP307 million (note 9).
As at 30 June 2018, the Group had net debt of GBP3,373 million
(31 December 2017: GBP572 million). A reconciliation of the
movement in net debt is shown in note 13.
Melrose Industries PLC
Condensed Consolidated Balance Sheet
30 June 30 June
2018 2017 31 December
Unaudited Unaudited 2017
Notes GBPm GBPm GBPm
-------------------------------------- ------- ---------- --------------------- ---------------------------
Non-current assets
Goodwill and other intangible
assets 8,018 2,451 2,238
Property, plant and equipment 3,065 254 219
Interests in equity accounted
investments 488 - -
Deferred tax assets 508 29 49
Derivative financial assets 25 7 4
Other receivables and investments 382 3 2
-------------------------------------- -------
12,486 2,744 2,512
Current assets
Inventories 1,566 303 276
Trade and other receivables 2,720 365 332
Derivative financial assets 20 5 10
Current tax assets 59 - -
Cash and cash equivalents 426 41 16
Assets held for sale - 28 -
4,791 742 634
-------------------------------------- ------- ---------- --------------------- ---------------------------
Total assets 3 17,277 3,486 3,146
Current liabilities
Trade and other payables 2,759 394 367
Interest-bearing loans and borrowings 1 1 -
Derivative financial liabilities 100 - 1
Current tax liabilities 103 5 7
Provisions 10 226 99 92
Liabilities directly associated
with assets held for sale - 18 -
3,189 517 467
-------------------------------------- ------- ---------- --------------------- ---------------------------
Net current assets 1,602 225 167
Non-current liabilities
Trade and other payables 565 2 2
Interest-bearing loans and borrowings 3,700 709 588
Derivative financial liabilities 261 - -
Deferred tax liabilities 322 110 69
Retirement benefit obligations 12 1,229 22 18
Provisions 10 183 141 117
-------------------------------------- ------- ---------- ---------------------
6,260 984 794
-------------------------------------- ------- ---------- --------------------- ---------------------------
Total liabilities 3 9,449 1,501 1,261
Net assets 7,828 1,985 1,885
Equity
Issued share capital 333 133 133
Share premium account 8,138 1,493 1,493
Merger reserve 109 112 109
Other reserves (2,330) (2,330) (2,330)
Hedging reserve (36) 7 8
Translation reserve 134 (10) (66)
Retained earnings 1,438 2,580 2,538
Equity attributable to owners of
the parent 7,786 1,985 1,885
Non-controlling interests 42 - -
-------------------------------------- ------- ---------- --------------------- ---------------------------
Total equity 7,828 1,985 1,885
Melrose Industries PLC
Condensed Consolidated Statement of Changes in Equity
Equity
Share attributable Non-controlling
premium Translation to interests
Issued account reserve owners GBPm Total
share GBPm Merger Other Hedging GBPm Retained of the equity
capital reserve reserves reserve earnings parent GBPm
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- --------------- ------------ ----------- -------- ------------ ---------
At 1 January 2017 129 1,493 112 (2,330) 4 68 2,686 2,162 - 2,162
Profit for the
period - - - - - - 38 38 - 38
Other
comprehensive
income/(expense) - - - - 3 (78) 7 (68) - (68)
----------------- ---------------------- --------------- ------------ ----------- -------- ------------ --------- ------------- ---------------- -------
Total
comprehensive
income/(expense) - - - - 3 (78) 45 (30) - (30)
Dividends paid - - - - - - (36) (36) - (36)
Equity-settled
share-based
payments - - - - - - 4 4 - 4
Incentive scheme
related 4 - - - - - (119) (115) - (115)
At 30 June 2017
(unaudited) 133 1,493 112 (2,330) 7 (10) 2,580 1,985 - 1,985
Loss for the
period - - - - - - (62) (62) - (62)
Other
comprehensive
income/(expense) - - - - 1 (56) 4 (51) - (51)
----------------- ---------------------- --------------- ------------ ----------- -------- ------------ --------- ------------- ---------------- -------
Total
comprehensive
income/(expense) - - - - 1 (56) (58) (113) - (113)
Dividends paid - - - - - - (27) (27) - (27)
Equity-settled
share-based
payments - - - - - - 6 6 - 6
Deferred tax on
share-based
payments - - - - - - 34 34 - 34
Incentive scheme
related - - (3) - - - 3 - - -
----------------- ---------------------- --------------- ------------ ----------- -------- ------------ --------- ------------- ---------------- -------
At 31 December
2017 133 1,493 109 (2,330) 8 (66) 2,538 1,885 - 1,885
Loss for the
period - - - - - - (270) (270) (6) (276)
Other
comprehensive
(expense)/income - - - - (44) 200 133 289 18 307
----------------- ---------------------- --------------- ------------ ----------- -------- ------------ --------- ------------- ---------------- -------
Total
comprehensive
(expense)/income - - - - (44) 200 (137) 19 12 31
Acquisition of
GKN(1) 169 5,631 - - - - - 5,800 376 6,176
Purchase of
non-controlling
interests 31 1,014 - - - - (914) 131 (346) (215)
Implementation
of IFRS 9 and
IFRS 15(2) - - - - - - (2) (2) - (2)
Dividends paid - - - - - - (54) (54) - (54)
Equity-settled
share-based
payments - - - - - - 7 7 - 7
At 30 June 2018
(unaudited) 333 8,138 109 (2,330) (36) 134 1,438 7,786 42 7,828
(1) Relates to purchase of approximately 85% of the issued share
capital of GKN plc. The amount recognised within the share premium
account for the acquisition of GKN of GBP5,631 million is net of
GBP1 million for costs associated with issuing shares.
(2) The Group adopted IFRS 9 and IFRS 15 on 1 January 2018. See
note 2 for details.
Notes to the condensed interim financial statements
1. Corporate information
The interim financial information for the six months ended 30
June 2018 has been reviewed by the auditor, but not audited. The
information for the year ended 31 December 2017 shown in this
report does not constitute statutory accounts for that year as
defined in section 434 of the Companies Act 2006. A copy of the
statutory accounts for that year has been delivered to the
Registrar of Companies. The auditor has reported on those accounts.
Their report was unqualified, did not draw attention to any matters
by way of emphasis and did not contain a statement under section
498 (2) or (3) of the Companies Act 2006.
2. Summary of significant accounting policies
The interim financial information for the six months ended 30
June 2018, which has been approved by the Board of Directors, has
been prepared on the basis of the accounting policies set out in
the Group's 2017 Annual Report and financial statements on pages
107 to 114 other than as noted below.
The Group's 2017 Annual Report and financial statements can be
found on the Group's website www.melroseplc.net. These interim
financial statements should be read in conjunction with the 2017
information. The annual financial statements are prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union ("IFRS"). These interim financial
statements have been prepared in accordance with IAS 34: "Interim
Financial Reporting" as adopted by the European Union.
Following the acquisition of GKN plc ("GKN") on 19 April 2018
(see note 9), the Group has adapted certain accounting policies to
align them with the nature of the operations acquired with GKN. In
addition, the Group implemented the new accounting standards, IFRS
15: "Revenue from Contracts with Customers" and IFRS 9: "Financial
Instruments", which came into effect on 1 January 2018.
Accounting policies adapted to accommodate the nature of
operations acquired with GKN:
Equity accounted investments
A joint venture is an entity which is not a subsidiary
undertaking but where the interest of the Group is that of a
partner in a business over which the group exercises joint control
with its partners over the financial and operating policies. In all
cases voting rights are 50% or lower. Associated undertakings are
entities that are neither a subsidiary nor a joint venture, but
where the Group has a significant influence. The results, assets
and liabilities of equity accounted investments are accounted for
using the equity method of accounting. The Group's share of equity
includes goodwill arising on acquisition.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and any impairment in value.
The initial cost of an asset comprises its purchase price or
construction cost, any costs directly attributable to bring the
asset into operation, and any borrowing costs on qualifying assets.
Qualifying assets are defined as an asset or programme where the
period of capitalisation is more than 12 months. The purchase price
or construction cost is the aggregate amount paid and the fair
value of any other consideration given to acquire the asset.
Where assets are in the course of construction at the balance
sheet date, they are classified as capital work in progress.
Transfers are made to other asset categories when they are
available for use, at this point depreciation commences.
Depreciation is calculated on a straight-line basis over the
estimated useful life of the asset as follows:
Freehold land nil
Freehold buildings and long leasehold property over expected
economic life not exceeding 50 years
Short leasehold property over the term of the lease
Plant and equipment 3-15 years
The estimated useful lives of property, plant and equipment are
reviewed on an annual basis and, if necessary, changes in useful
lives are accounted for prospectively.
The carrying values of property, plant and equipment are
reviewed annually for indicators of impairment, or if events or
changes in circumstances indicate that the carrying value may not
be recoverable. If any such indication exists an impairment test is
performed and, where the carrying values exceed the estimated
recoverable amount, the assets are written down to their
recoverable amount. The recoverable amount of property, plant and
equipment is the greater of net selling price and value in use. In
assessing value in use, estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks
specific to the asset. For an asset that does not generate largely
independent cash inflows, the recoverable amount is determined for
the cash-generating unit to which the asset belongs.
An item of property, plant and equipment is derecognised upon
disposal or when no future economic benefits are expected to arise
from the continued use of the asset. Any gain or loss arising on
derecognition of the asset (calculated as the difference between
the net disposal proceeds or costs and the carrying amount of the
item) is included in the Income Statement in the period that the
item is derecognised.
Inventories
Inventories are valued at the lower of cost and net realisable
value and are measured using a first in, first out or weighted
average cost basis. Cost includes all direct expenditure and
appropriate production overhead expenditure incurred in bringing
goods to their current state under normal operating conditions. Net
realisable value is based on estimated selling price less costs
expected to be incurred to completion and disposal. Provisions are
made for obsolescence or other expected losses where necessary.
Government refundable advances
Government refundable advances are reported in "Trade and other
payables" in the Balance Sheet. Refundable advances include amounts
advanced by a government, accrued interest and directly
attributable costs. Refundable advances are provided to the Group
to part-finance expenditures on specific development programmes.
The advances are provided on a risk sharing basis, i.e. repayment
levels are determined subject to the success of the related
programme. Balances are held at amortised cost and interest is
calculated using the effective interest rate method.
New accounting policies adopted on 1 January 2018:
Revenue
The Group adopted IFRS 15: "Revenue from Contracts with
Customers" on 1 January 2018 using the "cumulative effect"
transition arrangement. This allows for comparative information to
remain unchanged and the initial financial impact to be recognised
in retained earnings. The transitional impact of IFRS 15 was
immaterial at a GBP1 million increase in net assets. The GKN IFRS
15 impact forms part of the acquired business and therefore is not
included in the transitional impact within these interim financial
statements. Within the acquisition balance sheet (see note 9),
contract assets are included within "trade and other receivables".
There was no net impact on revenue during the period, as the
reclassification of certain costs offset other changes. There was a
GBP6 million increase in operating profit, mostly from the 73 day
period post acquisition of GKN, which principally relates to
recognition of variable consideration.
IFRS 15 provides a single, principles based five-step model to
be applied to all sales contracts. It is based on the transfer of
control of goods and services to customers. In summary:
-- Revenues are recognised either on point of transfer of
control or recognised over time on an activity basis using the
costs incurred as the measure of the activity to allocate the
transaction price; and
-- Costs are recognised as they are incurred.
The nature of agreements into which the Group enters means that
certain of the Group's arrangements with its customers have
multiple--elements that can include any combination of:
-- Sale of products and services;
-- Risk and revenue sharing partnerships (RRSPs);
-- Design and build; and
-- Construction contracts.
Contracts are reviewed to identify each performance obligation
relating to a distinct good or service and the associated
consideration. The Group allocates revenue to multiple-element
arrangements based on the identified performance obligations within
the contracts in line with the policies below. A performance
obligation is identified if the customer can benefit from the good
or service on their own or together with other readily available
resources and can be separately identified within the contract.
This review is performed by reference to the specific contract
terms.
Sale of products and services
This revenue stream accounts for the overwhelming majority of
Group sales. Contracts in the Automotive, Powder Metallurgy, Nortek
Air & Security and Other Industrial segments operate almost
exclusively on this basis, and it also covers a high proportion of
the Aerospace segment revenues.
Invoices for goods are raised and revenue is recognised when
control of the goods is transferred to the customer. Dependent upon
contractual terms this may be at the point of despatch, acceptance
by the customer or, in Aerospace, certification by the customer.
The revenue recognised is the transaction price as it is the
observable selling price per product.
Cash discounts, volume rebates and other customer incentive
programmes are based on certain percentages agreed with the Group's
customers, which are typically earned by the customer over an
annual period. These are allocated to performance obligations in
line with the above and are recorded as a reduction in revenue at
the point of sale based on the estimated future outcome. Due to the
nature of these arrangements an estimate is made based on
historical results to date, estimated future results across the
contract period and the contractual provisions of the customer
agreement.
Many businesses in the Powder Metallurgy and Automotive segments
recognise an element of revenue via a surcharge or similar raw
material cost-recovery mechanism. The surcharge invoiced or
credited is generally based on prior period movement in raw
material price indices applied to current period deliveries. Other
cost recoveries are recorded according to the customer agreement.
In those instances where recovery of such increases is guaranteed,
irrespective of the level of future deliveries, revenue is
recognised, or due allowance made, in the same period as the cost
is incurred.
Risk and revenue sharing partnerships (RRSPs)
This revenue stream affects a small number of businesses,
exclusively in the Aerospace segment. Revenue is recognised under
RRSPs for both the sale of product as detailed above and sales of
services, which are recognised by reference to the stage of
completion based on the performance obligations in the contract. In
most RRSP contracts, there are two separate phases where the Group
earns revenue: sale of products principally to engine
manufacturers; and aftermarket support.
The assessment of the stage of completion is dependent on the
nature of the contract and the performance obligations within
it.
Under the requirements of IFRS 15, each element of revenue is
required to be allocated to a performance obligation based on the
terms within the contract. The value of revenue is based on the
standalone selling price for each element of the contract.
Revenue is recognised at the point control passes to the
customer. For products and services, this has been identified as
the point of despatch, acceptance by the customer or certification
by the customer. Where the amount of revenue to be recognised is
not due from the customer under the terms of the contract, it will
be recognised as a contract asset for the unbilled receivable.
Revenue is not recognised where recovery is not probable due to
potential significant reversals in the future. This can be affected
by assessment of future volumes which are impacted by technology
development, fuel price and competition.
Participation fees are payments made to engine manufacturers and
original equipment manufacturers relating to RRSPs and long-term
agreements. They are recognised as contract assets to the extent
they can be recovered from future sales. Where participation fees
have been paid under the RRSP, the balance is recognised as a
revenue reduction under IFRS 15, and therefore this amount is
included within the assessment of the value of revenue per
performance obligation for the associated contracts.
Design and build
This revenue stream affects a discrete number of businesses,
primarily in the Aerospace segment but also on a smaller scale in
the Automotive segment. Generally, revenue is only recognised on
the sale of product as detailed above, however, on occasions cash
is received in advance of work performed to compensate the Group
for costs incurred in design and development activities. Where such
amounts are due under the contract, the Group performs an
assessment as to whether an identified performance obligation has
been met. Where this has not occurred and control has not passed
these amounts are factored into the revenue allocated across the
performance obligations within the contract. Where the performance
obligation has not been satisfied amounts received are recognised
as a contract liability.
Due to the nature of design and build contracts, there can be
significant "learning curves" while the Group optimises its
production processes. During the early phase of these contracts,
all costs including any start-up losses are taken directly to the
Income Statement, as they do not meet the criteria for fulfilment
costs.
Construction contracts
Where multiple performance obligations are identified revenue is
required to be recognised as each performance obligation is met.
This requires an assessment of revenue to identify the allocation
across the performance obligations, based on the standalone selling
price for each obligation.
In cases where one of the following criteria is met revenue can
be recognised over time:
-- The customer simultaneously receives and consumes the
benefits provided by the Group's performance as it performs;
-- The Group's performance creates or enhances an asset that the
customer controls as the asset is created or enhanced; or
-- The Group's performance does not create an asset with an
alternative use to the Group and it has an enforceable right to
payment for performance completed to date.
Due to the nature of the criteria above, only certain contracts
in the Group qualify for over time recognition. On this basis
revenue is recognised using the input method, which uses costs
incurred and the assessed margin across the contract. The margin
and associated revenue is calculated based on the estimated
transaction price and expected total costs, with considerations
made for the associated contract risks.
If the above criteria are not met, revenue is recognised at a
point in time when control transfers to the customer which, in line
with the sale of goods and services above, is the point of delivery
or customer acceptance dependent on the terms of the contract.
Variable consideration, such as price or scope amendments, is
included based on the expected value or most likely amount, to the
extent that it is highly probable that the revenue will not
significantly reverse in the future. Variations in contract work,
claims and incentive payments are included in revenue from
construction contracts based on an estimate of the expected value
the Group expects to receive. Variations are included when the
customer has agreed to the variation or acknowledged liability for
the variation in principle. Claims are included when negotiations
with the customer have reached an advanced stage such that it is
virtually certain that the customer will accept the claim.
Incentive payments are included when a contract is sufficiently
advanced that it is probable that the performance standards
triggering the incentive will be achieved.
Other income is recognised in the income statement when it can
be reliably measured and its collectability is reasonably
assured.
Financial instruments
The Group adopted IFRS 9: "Financial Instruments" on 1 January
2018. IFRS 9 replaces the elements of IAS 39 relating to; a)
classification and measurement of financial assets and liabilities,
b) impairment of financial assets, and c) hedge accounting. The
Group has elected not to restate the comparatives but instead
record any adjustments identified in retained earnings in line with
the transition arrangement within the standard. Following
management's review, a GBP3 million reduction in net assets was
identified. The GKN IFRS 9 impact forms part of the acquired
business and therefore is not included in the transitional impact
within these financial statements.
The Group has reviewed the classification of its financial
instruments and has concluded the following:
-- There is no change in the classification of derivative
financial instruments that were classified as "fair value through
profit or loss" and did not qualify for hedge accounting, as under
IFRS 9 they fail the contractual cash flow characteristics test in
IFRS 9 (4.1.2(b)) and (4.1.2A(b));
-- Financial instruments designated in cash flow hedge and fair
value hedge relationships under IAS 39 continue to qualify for
hedge accounting under IFRS 9; and
-- Financial assets previously classified within the "loans and
receivables" category are now classified in the "amortised cost"
category.
The introduction of IFRS 9 has resulted in changes to the
accounting policies in the following areas:
-- Trade and other receivables;
-- Derivative financial instruments;
-- Amounts due from equity accounted investments; and
-- Contract receivables.
Classification and measurement
All of the above assets are classified as either those which are
measured at fair value, through profit or loss or other
comprehensive income, and those measured at amortised cost.
Financial assets are initially recognised at fair value. For
those which are not subsequently measured at fair value through
profit or loss, this includes directly attributable transaction
costs. Trade and other receivables, contract receivables and
amounts due from equity accounted investments are subsequently
measured at amortised cost. All available for sale financial assets
are subsequently measured at fair value, with fair value gains and
losses being presented within other comprehensive income.
The Group subsequently measures derivative financial instruments
at fair value. Gains and losses on derivative financial instruments
that do not qualify for hedge accounting are recognised in the
Income Statement. Where a derivative financial instrument is
designated as a cash flow hedge, the effective portion of any
change in the fair value of the instrument is recognised in other
comprehensive income and presented in the hedging reserve in
equity. Amounts recognised in equity are reclassified from reserves
into the cost of the underlying transaction and recognised in the
Income Statement when the underlying transaction affects the Income
Statement. The ineffective portion of any change in the fair value
of the instrument is recognised in profit or loss immediately.
Where a derivative financial instrument is designated as a fair
value hedge, changes in the fair value of the underlying asset or
liability attributable to the hedge risk, and gains and losses on
the derivative financial instrument, are recognised in the Income
Statement.
Derivatives embedded in non-derivative host contracts are
recognised at their fair value when the nature, characteristics and
risks of the derivative are not closely related to the host
contract. Gains and losses arising on the remeasurement of these
embedded derivatives at each balance sheet date are recognised in
the Income Statement.
Impairment of financial assets
For trade and other receivables, contract receivables and
amounts due from equity accounted investments, the simplified
approach under IFRS 9 is applied. The simplified approach requires
that at the point of initial recognition the expected loss across
the life of the receivable must be recognised. These balances do
not contain a significant financing element, therefore the
simplified approach relating to expected lifetime losses is
applicable. The credit risk has been assessed for all trade
receivables and no material additional risk was identified.
Cash and cash equivalents are also subject to IFRS 9's
impairment requirements, however no impairment loss was
identified.
Hedge accounting
There have been no changes in the accounting policies relating
to hedging.
Alternative performance measures
The Group presents Alternative Performance Measures ("APMs") in
addition to the unadjusted 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 and the
reconciling items between statutory and adjusted results are listed
below and described in more detail in note 4.
Adjusted revenue includes the revenue from the Group's share of
equity accounted investments.
Adjusted profit measures exclude items which are significant in
size or volatility or by nature are non-trading or non-recurring,
and any item released to the Income Statement that was previously a
fair value item booked on an acquisition.
On this basis, the following are the principal items included
within adjusting items impacting operating profit:
-- Impairment charges that are considered to be significant in
nature and/or value to the trading performance of the business;
-- Amortisation of intangible assets that are acquired in a business combination;
-- Significant restructuring costs and other associated costs
arising from significant strategy changes that are not considered
by the Group to be part of the normal operating costs of the
business;
-- Acquisition and disposal costs;
-- The charge for the Melrose equity-settled compensation
scheme, including its associated employer's tax charge;
-- The release of fair value items booked on acquisitions;
-- Movement in derivative financial instruments, including
revaluation of associated monetary working capital balances;
-- Removal of interest and tax on equity accounted investments
to reflect operating results; and
-- Reversal of a fair value adjustment to inventory recorded on acquisition.
Further to the items above, adjusted profit before tax
excludes:
-- Acceleration of unamortised debt issue costs written off as a
consequence of Group refinancing.
In addition to the items above, adjusted profit after tax
excludes:
-- Net effect of significant new tax legislation changes; and
-- The tax effects of adjustments to profit/(loss) before tax.
The Board considers the adjusted results to be an important
measure used to monitor how the businesses are performing as this
provides a meaningful reflection of how the businesses are managed
and measured on a day-to-day basis and achieves consistency and
comparability between reporting periods.
The adjusted measures are used to partly determine the variable
element of remuneration of senior management throughout the Group
and are also in alignment with performance measures used by certain
external stakeholders. The adjusted measures are also taken into
account when valuing individual businesses as part of the "Buy,
Improve and Sell" Group strategy model.
Adjusted profit is not a defined term under IFRS and may not be
comparable with similarly titled profit measures reported by other
companies. It is not intended to be a substitute for, or superior
to, GAAP measures. All APMs relate to the current year results and
comparative periods where provided.
Adoption of new accounting standards
The Group has not early adopted any standard, interpretation or
amendment that has been issued but is not yet effective. IFRS 16:
"Leases" is effective from 1 January 2019. It will require all
leases to be recognised on the Balance Sheet. Currently, IAS 17:
"Leases" only requires those categorised as finance leases to be
recognised on the Balance Sheet, with leases categorised as
operating leases expensed through the Income Statement. The impact
of IFRS 16 will be to recognise a lease liability and a
corresponding asset in the Balance Sheet for leases currently
classified as operating leases. This will also result in a
reclassification between operating costs and finance costs. The
Directors are continuing to evaluate the full impact of the
adoption of this standard and it is not practicable to provide a
reasonable estimate of the effect of IFRS 16 until a detailed
review has been completed, which is planned to be undertaken in the
second half of the year. It is expected that the adjustment will be
material following the acquisition of GKN.
Going concern
The Group's business activities in the period, together with the
factors likely to affect its future development, performance and
position are set out in the Chief Executive's Review.
After making appropriate enquiries, the Directors have a
reasonable expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future, a
period of not less than twelve months from the date of this report.
Accordingly, they continue to adopt the going concern basis in
preparing these interim financial statements.
3. Segment information
Segment information is presented in accordance with IFRS 8:
"Operating segments" which requires operating segments to be
identified on the basis of internal reports about components of the
Group that are regularly reported to the Group's Chief Operating
Decision Maker, which has been deemed to be the Group's Board, in
order to allocate resources to the segments and assess their
performance.
The Group's reportable operating segments have been reconsidered
following the acquisition of GKN in April 2018. The Group now
reports under a revised segment structure and comparative results
have been restated accordingly. The operating segments are as
follows:
Aerospace - comprises GKN's aerospace operations: a
multi-technology tier one supplier of air frame and engine
structures, including Aerostructures, Engine Systems and Special
Technologies.
Automotive - comprises GKN's Driveline, All Wheel Drive, eDrive
and Cylinder Liners businesses but excludes Off-Highway Powertrain;
a global technology and systems engineer which designs, develops,
manufactures and integrates an extensive range of driveline
technologies.
Powder Metallurgy - a global leader in both precision powder
metal parts for the automotive and industrial sectors, as well as
the production of powder metal.
Nortek Air & Security - comprises the Group's Air Management
and Security & Smart Technology businesses, previously reported
as separate segments. Air Management includes the Air Quality &
Home Solutions business ("AQH") and the Global Heating, Ventilation
& Air Conditioning business ("Global HVAC"). AQH is a leading
manufacturer of ventilation products for the professional
remodelling and replacement markets, residential new construction
market and DIY market. Global HVAC manufactures and sells
split-system and packaged air conditioners, heat pumps, furnaces,
air handlers and parts for the residential replacement and new
construction markets along with custom designed and engineered
products and systems for non-residential applications. Security
& Smart Technology manufactures and distributes products
designed to provide convenience and security primarily for
residential applications and audio visual equipment for the
residential audio video and professional video market.
Other Industrial - comprises the Group's Ergotron and Brush
businesses, previously reported separately as the Ergonomics and
Energy segments respectively, as well as GKN's Wheels and
Structures and Off-Highway Powertrain businesses.
In addition, there are central cost centres which are also
reported to the Board. The central corporate cost centre contains
the Melrose Group head office costs, the remaining GKN head office
costs and charges related to the divisional management long-term
incentive plans.
Prior year comparatives have been restated following the change
in the Group's segment structure. Reportable segment results
include items directly attributable to a segment as well as those
which can be allocated on a reasonable basis. Inter-segment pricing
is determined on an arm's length basis in a manner similar to
transactions with third parties.
The Group's geographical segments are determined by the location
of the Group's non-current assets and, for revenue, the location of
external customers. Inter-segment sales are not material and have
not been disclosed.
The following tables present the results and certain asset and
liability information regarding the Group's operating segments and
central cost centres for the six month period ended 30 June 2018
and comparative periods.
a) Segment revenues
6 months ended 30 June 2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
Adjusted revenue 714 1,019 254 720 355 - 3,062
Equity accounted
investments (1) (123) - - (1) - (125)
------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
Revenue 713 896 254 720 354 - 2,937
------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
6 months ended 30 June 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------ ----------- --------------- -------------- ----------- ------------- ---------- --------
Adjusted revenue - - - 854 234 - 1,088
Equity accounted
investments - - - - (2) - (2)
------------------ ----------- --------------- -------------- ----------- ------------- ---------- --------
Revenue - - - 854 232 - 1,086
------------------ ----------- --------------- -------------- ----------- ------------- ---------- --------
Year ended 31 December 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------ ----------- --------------- -------------- ----------- ------------- ---------- --------
Adjusted revenue - - - 1,600 495 - 2,095
Equity accounted
investments - - - - (3) - (3)
------------------ ----------- --------------- -------------- ----------- ------------- ---------- --------
Revenue - - - 1,600 492 - 2,092
------------------ ----------- --------------- -------------- ----------- ------------- ---------- --------
b) Segment operating profit
6 months ended 30
June
2018
Powder Nortek Other
Automotive Metallurgy Air Industrial Total
Aerospace GBPm GBPm & Security GBPm Corporate(2) GBPm
GBPm GBPm GBPm
-------------------- ---------- -------------- ------------- ------------- ------------- ------------- --------
Adjusted operating
profit/(loss) 49 70 28 104 42 (13) 280
Items not included
in
adjusted operating
profit:(1)
Restructuring costs (12) (11) (1) (16) (69) (19) (128)
Acquisition and
disposal
costs - - - - - (124) (124)
Amortisation of
intangible
assets acquired in
business
combinations - - - (26) (12) - (38)
Reversal of uplift
in
value of inventory (45) (42) (11) - (15) - (113)
Melrose
equity-settled
compensation
scheme
charges - - - - - (10) (10)
Release of fair
value
items - - - 3 - - 3
Movement in
derivatives
and associated
financial
assets and
liabilities - - - - - (123) (123)
Interest and tax on
equity accounted
investments - (3) - - - - (3)
Operating
(loss)/profit (8) 14 16 65 (54) (289) (256)
Finance costs (51)
Finance income 4
Loss before tax (303)
Tax 27
Loss for the period (276)
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP13 million, includes
GBP2 million of costs in respect of divisional long-term incentive
plans and GBP3 million of costs relating to the GKN central cost
centre.
6 months ended 30 June 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air Industrial Total
Aerospace GBPm GBPm & Security GBPm Corporate(2) GBPm
GBPm GBPm GBPm
----------------- ----------- --------------- -------------- ------------- ------------- ------------- --------
Adjusted
operating
profit/(loss) - - - 112 41 (12) 141
Items not
included in
adjusted
operating
profit:(1)
Restructuring
costs - - - (23) (2) - (25)
Acquisition and
disposal
costs - - - - - (2) (2)
Amortisation of
intangible
assets acquired
in business
combinations - - - (28) (13) - (41)
Melrose
equity-settled
compensation
scheme
charges - - - - - (17) (17)
Release of fair
value
items - - - 2 - - 2
Operating
profit/(loss) - - - 63 26 (31) 58
Finance costs (10)
Profit before tax 48
Tax (10)
Profit for the period 38
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP12 million, includes
GBP4 million of costs in respect of divisional long-term incentive
plans.
Year ended 31 December 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air Industrial Total
Aerospace GBPm GBPm & Security GBPm Corporate(2) GBPm
GBPm GBPm GBPm
----------------- ----------- --------------- -------------- ------------- ------------- ------------- --------
Adjusted
operating
profit/(loss) - - - 215 87 (23) 279
Items not
included in
adjusted
operating
profit:(1)
Impairment of
Brush
assets - - - - (145) - (145)
Restructuring
costs - - - (27) (8) - (35)
Acquisition and
disposal
costs - - - - - (6) (6)
Amortisation of
intangible
assets acquired
in business
combinations - - - (56) (26) - (82)
Melrose
equity-settled
compensation
scheme
charges - - - - - (24) (24)
Release of fair
value
items - - - 5 1 - 6
Operating
profit/(loss) - - - 137 (91) (53) (7)
Finance costs (22)
Finance income 1
Loss before tax (28)
Tax 4
Loss for the year (24)
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP23 million, includes
GBP8 million of costs in respect of divisional long-term incentive
plans.
c) Segment total assets and liabilities
30 June 2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate(1) GBPm
GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------- ------------- ------------- --------
Total assets 5,927 4,995 1,919 2,111 1,571 754 17,277
Total liabilities 2,054 1,881 190 468 508 4,348 9,449
------------------- ---------- -------------- ------------- ----------- ------------- ------------- --------
(1) Assets include GBP426 million in respect of Group cash.
Liabilities include GBP3,682 million in respect of interest-bearing
loans and borrowings.
30 June 2017 - restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
Total assets - - - 2,191 1,220 75 3,486
Total liabilities - - - 565 209 727 1,501
------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
31 December 2017 - restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
Total assets - - - 2,030 1,047 69 3,146
Total liabilities - - - 484 173 604 1,261
------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
d) Segment capital expenditure and depreciation
6 months ended 30 June
2018
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
------------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
Capital expenditure(1) 14 43 10 23 6 - 96
Depreciation(1) 22 26 9 12 6 - 75
------------------------ ---------- -------------- ------------- ----------- ------------- ---------- --------
(1) Including computer software and development costs.
6 months ended 30 June
2017 - restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
---------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
Capital
expenditure(1) - - - 19 2 - 21
Depreciation(1) - - - 12 6 - 18
---------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
(1) Including computer software and development costs.
Year ended 31 December 2017
- restated
Powder Nortek Other
Automotive Metallurgy Air & Industrial Total
Aerospace GBPm GBPm Security GBPm Corporate GBPm
GBPm GBPm GBPm
---------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
Capital
expenditure(1) - - - 48 4 - 52
Depreciation(1) - - - 23 12 - 35
---------------------- ----------- --------------- -------------- ----------- ------------- ---------- --------
(1) Including computer software and development costs.
e) Geographical information
The Group operates in various geographical areas around the
world. The parent company's country of domicile is the UK and the
Group's revenues and non-current assets in Europe and North America
are also considered to be material.
The Group's revenue from external customers and information
about specific segment assets (non-current assets excluding
deferred tax assets, non-current other receivables and investments
and non-current derivative financial assets) by geographical
location are detailed below:
Revenue(1) from external
customers Non-current assets
----------------------------------- ---------------------
6 months 6 months Year
ended ended ended 30
30 June 30 June 31 December 30 June June 31 December
2018 2017 2017 2018 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- --------- --------- ------------- ------------ ------- ------------
UK 272 53 105 5,793 180 130
Europe 651 53 124 1,484 168 109
North America 1,619 930 1,768 3,376 2,323 2,207
Other 395 50 95 918 34 11
Total 2,937 1,086 2,092 11,571 2,705 2,457
(1) Revenue is presented by destination.
4. Reconciliation of adjusted profit measures
Adjusted profit measures are alternative performance measures
used by the Board to monitor the trading performance of the
Group.
a) Operating profit
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Continuing operations Notes GBPm GBPm GBPm
-------------
Operating (loss)/profit (256) 58 (7)
---------------------------------------------- -------- -------- -------------
Restructuring costs a 128 25 35
Acquisition and disposal
costs b 124 2 6
Amortisation of intangible
assets acquired in business
combinations c 38 41 82
Reversal of uplift in value
of inventory d 113 - -
Melrose equity-settled compensation
scheme e 10 17 24
Release of fair value items f (3) (2) (6)
Movement in derivatives and
associated financial assets
and liabilities g 123 - -
Interest and tax on equity
accounted investments h 3 - -
Impairment of Brush assets i - - 145
------------------------------------ -------- -------- -------- -------------
Total adjustments to operating
(loss)/profit 536 83 286
Adjusted operating profit 280 141 279
a. Restructuring and other associated costs arising from
significant strategy changes totalled GBP128 million (2017: GBP25
million), including GBP5 million (2017: GBPnil) of losses incurred
following the announcement of the closure of certain businesses.
Restructuring costs are adjusting items due to their size and
non-trading nature.
Following the announcement on 1 February 2018 of the intended
closure of its Dutch turbogenerator facility and downsizing of its
turbogenerator production in the UK, Brush incurred GBP63 million
(2017: GBP2 million) of restructuring costs and asset write downs
in the period. Restructuring costs in the period also included
GBP44 million in respect of the early actions that are underway
within the GKN businesses, including the ceasing of GKN head office
functions. In addition, restructuring costs within Nortek Air &
Security were GBP16 million (2017: GBP23 million) and included
footprint rationalisation within the Global HVAC business.
b. Acquisition and disposal costs incurred in the period include
GBP71 million (2017: GBP2 million) of general transaction fees and
GBP53 million of associated transaction taxes, predominantly in
respect of the acquisition of GKN. These costs also include a small
amount relating to the GBP26 million bolt-on acquisition of
IntelliVision Inc., by the Security & Smart Technology
business. These items are excluded from adjusted results due to
their non-trading nature.
c. The amortisation of intangible assets acquired in business
combinations is excluded from adjusted results due to its
non-trading nature and to enable comparison with companies that
grow organically. Where intangible assets are trading in nature,
such as computer software and development costs, the amortisation
is not adjusted.
d. Finished goods and work in progress which are present in a
business when acquired, in accordance with IFRS 3, are required to
be uplifted in value to closer to their selling price. As a result,
in the early months of an acquisition, reduced profits are
generated as this inventory is sold. This one-off effect in the
period was a charge of GBP113 million (2017: GBPnil) and is
excluded from adjusted results due to its size and non-recurring
nature.
e. The charge for the Melrose equity-settled Incentive Plan,
including its associated employer's tax charge, is excluded from
adjusted results due to its size and volatility. The shares that
would be issued, based on the Plan'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 settled for a more favourable amount than
first anticipated. The release of any excess fair value item is
shown as an adjusting item to avoid positively distorting adjusted
results.
g. The movement in the value of derivative financial instruments
(primarily forward foreign currency exchange contracts) taken out
to mitigate the potential volatility of future cash flows on
long-term foreign currency customer and supplier contracts, along
with foreign exchange movements on the associated financial assets
and liabilities, is shown as an adjusting item. The charge in the
period was GBP123 million and is excluded from adjusted results
because of its volatility and size.
h. The revenue from the Group's share of equity accounted
investments ("EAIs") is shown within adjusted revenue. In addition,
the profits and losses of EAIs, which are shown after interest and
tax in the statutory results, are adjusted to show the operating
profit before interest and tax, which is consistent with the
operating profits of the subsidiaries of the Group. The revenue and
operating profit of EAIs are adjusted because they are considered
to be significant in size and are important in assessing the
performance of the business.
i. The results for the year ended 31 December 2017 included an
impairment charge totaling GBP145 million in respect of the
carrying value of assets held within the Brush business. The charge
included GBP31 million in respect of the net assets of Brush China
which was closed in November 2017, GBP19 million in respect of
property, plant and equipment elsewhere in the Brush Group and
GBP95 million in relation to goodwill. The impairment charge was
excluded from adjusted results due to its non-trading nature and
size.
b) Profit before tax
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Continuing operations Note GBPm GBPm GBPm
--------------------------------------- ------- ---------- ---------- -------------------
(Loss)/profit before tax (303) 48 (28)
Adjustments to operating (loss)/profit
per above 536 83 286
Adjustments to finance costs j 7 - -
Total adjustments to (loss)/profit
before tax 543 83 286
------------------------------------------------- ---------- ---------- -------------------
Adjusted profit before tax 240 131 258
j. Following the acquisition of GKN, existing bank facilities at
that time were repaid and replaced by a new bank facility and all
unamortised bank fees were written off. These charges are shown as
adjusting items because of their size and non-trading nature.
c) Profit after tax
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Continuing operations Notes GBPm GBPm GBPm
----------------------------------- ------- -------- ------------------- -------------------
(Loss)/profit after tax (276) 38 (24)
----------------------------------- ------- -------- ------------------- -------------------
Adjustments to (loss)/profit
before tax per above 543 83 286
Net effect of new tax legislation
in the US k - - (27)
Tax effect of adjustments to
(loss)/profit before tax 5 (83) (26) (44)
----------------------------------- ------- -------- ------------------- -------------------
Total adjustments to (loss)/profit
after tax 460 57 215
Adjusted profit after tax 184 95 191
k. The net tax credit arising from the new US tax legislation
enacted in December 2017, including an estimated repatriation
charge and changes to closing deferred tax items due to a reduction
in the Federal tax rate from 35% to 21%, was included as an
adjusting item because of its size and nature.
5. Tax
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Continuing operations GBPm GBPm GBPm
--------------------------------- ---------------- ----------------- ------------
Analysis of the (credit)/charge
in the period:
Current tax 30 5 13
Deferred tax (57) 5 (17)
---------------------------------- ---------------- ----------------- ------------
Total income tax (credit)/charge (27) 10 (4)
The effective tax rate in respect of adjusted profit before tax
for the half year is 23.3% (2017: 27.5%). The adjusted tax charge
has been calculated by applying the expected tax rate for the full
year to the adjusted profit before tax of GBP240 million (2017:
GBP131 million), giving an adjusted tax charge of GBP56 million
(2017: GBP36 million).
The adjusted tax charge of GBP56 million (2017: GBP36 million)
excludes a total tax credit of GBP83 million (2017: GBP26 million)
in respect of adjusting items. This represents a deferred tax
credit on intangible asset amortisation of GBP10 million (2017:
GBP15 million), a tax credit on equity accounted investments of
GBP3 million (2017: GBPnil) and a tax credit on other adjusting
items of GBP70 million (2017: GBP11 million). This gives a total
statutory tax credit of GBP27 million (2017: charge of GBP10
million).
In addition to the amount credited to the Income Statement, a
charge of GBP16 million (2017: GBP1 million) has been recognised
directly in the Statement of Comprehensive Income. This represents
a tax credit of GBP9 million (2017: charge of GBP1 million) in
respect of movements on cash flow hedges and a tax charge of GBP25
million (2017: GBPnil) in respect of the remeasurement of
retirement benefit obligations.
6. Earnings per share
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
Earnings attributable to owners of the 2018 2017 2017
parent GBPm GBPm GBPm
----------------------------------------- -------- -------- ------------
Earnings for basis of earnings per share (270) 38 (24)
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2018 2017 2017
Number Number Number
------------------------------------------- -------- -------- ------------
Weighted average number of ordinary shares
for the purposes of basic earnings per
share (million) 3,045 1,896 1,919
Further shares for the purposes of diluted
earnings per share (million)(1) - 45 22
Weighted average number of ordinary shares
for the purposes of diluted earnings
per share (million) 3,045 1,941 1,941
(1) The results for the 6 months ended 30 June 2018 and the year
ended 31 December 2017 are a loss and therefore in accordance with
IAS 33: "Earnings per share" there is no dilution. However, the
dilutive number of shares for both periods are used for the purpose
of calculating adjusted diluted earnings per share.
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Earnings per share pence pence pence
--------------------------- -------- -------- -----------------
Basic earnings per share (8.9) 2.0 (1.2)
Diluted earnings per share (8.9) 2.0 (1.2)
--------------------------- -------- -------- -----------------
On 19 April 2018, 2,469 million ordinary shares were issued as a
result of the acquisition GKN. Further issues of share capital
totalling 448 million took place between 19 April 2018 and 30 June
2018 in order to purchase the remaining non-controlling interests
of GKN. The total number of ordinary shares in issue therefore
increased from 1,941 million at 31 December 2017 to 4,858 million
at 30 June 2018.
6 months 6 months Year ended
ended ended 31 December
30 June 30 June 2017
Adjusted earnings 2018 2017 GBPm
GBPm GBPm
------------------------------------ ---------- ---------- -------------
Adjusted earnings(1) for the basis
of adjusted earnings per share 177 95 191
------------------------------------- ---------- ---------- -------------
(1) Adjusted earnings for the 6 months ended 30 June 2018 comprises
adjusted profit after tax of GBP184 million (see note 4c), net
of an allocation to non-controlling interests of GBP7 million.
Adjusted earnings per share
6 months 6 months Year ended
ended ended 31 December
30 June 30 June 2017
2018 2017 pence
pence pence
------------------------------------ ---------- ---------- -------------
Adjusted basic earnings per share 5.8 5.0 9.9
Adjusted diluted earnings per share 5.8 4.9 9.8
7. Dividends
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
------------------------------------- -------- ---------- ------------
Final dividend for the year ended 31
December 2016 of 1.9p - 36 36
Interim dividend for the year ended
31 December 2017 of 1.4p - - 27
Final dividend for the year ended 31
December 2017 of 2.8p 54 - -
------------------------------------- -------- ---------- ------------
Total dividends paid 54 36 63
An interim dividend of 1.55 pence per ordinary share (2017: 1.4
pence) totalling GBP75 million (2017: GBP27 million) was declared
by the Board and in accordance with IAS 10: "Events after the
reporting period" has not been included as a liability as at 30
June 2018.
8. Share of results of equity accounted investments
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
------------------------------------- -------- ---------- ------------
Revenue 125 2 3
------------------------------------- -------- ---------- ------------
Operating profit 15 - -
------------------------------------- -------- ---------- ------------
Net finance costs - - -
------------------------------------- -------- ---------- ------------
Profit before tax 15 - -
Tax (3) - -
------------------------------------- -------- ---------- ------------
Share of results of equity accounted
investments 12 - -
9. Acquisition of businesses
On 19 April 2018 the Group acquired approximately 85% of the
issued share capital and obtained control of GKN plc for
consideration of GBP7,091 million. The remaining 15% of share
capital was acquired during the subsequent period, prior to 30 June
2018, at a cost of GBP1,260 million which has been treated as a
purchase of a non-controlling interest.
GKN is a global engineering business which designs, manufactures
and services systems and components for original equipment
manufacturers, specialising in the aerospace and automotive
markets.
The Group is currently reviewing the assets and liabilities
acquired. Due to the proximity of the acquisition to 30 June 2018,
as well as the size of the acquired business, assessment of the
fair value of the assets and liabilities acquired has not yet been
completed. In accordance with IFRS 3: "Business combinations", the
acquisition Balance Sheet of GKN at 19 April 2018 remains
provisional as of 30 June 2018 and is based on the information
received to date. It is expected that there will be significant
further adjustment to the fair values recognised in the table
below.
Provisional
GKN IntelliVision fair value
GBPm GBPm GBPm
------------------------------------------ --------- --------------- -------------
Property, plant and equipment 2,718 - 2,718
Intangible assets, computer software
and development costs 487 9 496
Interests in equity accounted investments 527 - 527
Inventories 1,336 - 1,336
Trade and other receivables 2,600 1 2,601
Cash and cash equivalents 307 - 307
Trade and other payables (2,821) - (2,821)
Derivative financial instruments (137) - (137)
Provisions (142) - (142)
Deferred tax 177 - 177
Retirement benefit obligations (1,367) - (1,367)
Current tax liabilities (32) - (32)
Interest-bearing loans and borrowings (1,430) - (1,430)
Non-controlling interests (376) - (376)
------------------------------------------ --------- --------------- -------------
Net assets attributable to the
parent 1,847 10 1,857
Total consideration 7,091 26 7,117
------------------------------------------ --------- --------------- -------------
Provisional goodwill 5,244 16 5,260
Total consideration satisfied by:
Cash consideration 1,290 26 1,316
Shares issued to GKN shareholders 5,801 - 5,801
------------------------------------------ --------- --------------- -------------
Acquisition costs charged through the Income Statement amount to
GBP124 million (note 4), which includes GBP53 million of associated
transaction taxes. GKN contributed GBP2,134 million to adjusted
revenue and GBP158 million to adjusted operating profit for the 73
day period between the date of acquisition and the Balance Sheet
date. The amounts recognised in relation to GKN for the period from
the 19 April to 30 June 2018 include revenue and profit and the
associated impact on working capital, based on an estimate of
activity from 19 April to 30 April 2018. If the acquisition of GKN
had been completed on the first day of the financial year, Group
adjusted revenues would have been approximately GBP6,203 million
and Group adjusted operating profit would have been approximately
GBP501 million.
The Group is currently performing a programme of GKN site visits
at all significant locations to assess the fair value of assets and
liabilities acquired and appropriately align accounting policies.
This exercise is expected to complete in the second half of 2018.
Included in the table above, interest-bearing loans and borrowings,
derivative financial instruments, retirement benefit obligations,
certain interests in equity accounted investments, tax balances and
the uplift of inventory have been recognised at fair value in
accordance with the requirements of IFRS 3. These amounts remain
provisional at 30 June 2018. A review of the property, plant and
equipment has been performed, and while this has not been
finalised, the initial value has been reflected above. All
intangible assets, except for computer software and development
costs, have been recognised at nil value. The fair value of
computer software and development costs will be assessed in the
second half of the year. Given the magnitude of GKN's acquired
intangible assets and associated deferred tax liability, the values
have been removed from the acquisition balance sheet until the
Group's valuation is complete and accordingly no amortisation has
been recognised in the period. The Group expects to finalise its
valuation of all intangible assets during the second half of the
year.
On 27 April 2018 the Group acquired 100% of the issued share
capital and obtained control of IntelliVision Inc.
("IntelliVision") for consideration of GBP26 million. The amounts
recognised in respect of the identifiable assets acquired and
liabilities assumed are set out in the table above. Fair values are
provisional as at 30 June 2018 and are based on information
received to date. Should additional information come to light that
would require adjustment to the fair values recognised in the table
above, these will be recorded if material.
10. Provisions
Surplus
leasehold Environmental Warranty
property and related
costs litigation costs Restructuring Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------------- ---------- --------------- ------- --------
At 1 January 2018
- restated 14 88 73 20 14 209
Acquisition of
business 18 34 32 32 26 142
Utilised (2) (19) (13) (45) (1) (80)
Net charge to operating
profit(1) (2) 10 14 102 6 130
Unwind of discount - - - - 1 1
Exchange differences - 2 2 1 2 7
At 30 June 2018 28 115 108 110 48 409
Current 4 44 59 109 10 226
Non-current 24 71 49 1 38 183
28 115 108 110 48 409
(1() Includes GBP103 million of restructuring charges and other
adjusting items and GBP27 million recognised in adjusted operating
profit.
The Group's provision categories have been restated following
the acquisition of GKN which has resulted in certain
reclassifications between provision categories.
The provision for surplus leasehold property costs represents
the estimated net payments due over the term of the leases together
with any dilapidation costs. This is expected to result in cash
expenditure over the next one to eight years.
Environmental and litigation provisions relate to the estimated
remediation costs of pollution, soil and groundwater contamination
at certain sites and estimated future costs and settlements in
relation to legal claims and associated insurance obligations. Due
to their nature, it is not possible to predict precisely when these
provisions will be utilised.
The provision for warranty related costs represents the best
estimate of the expenditure required to settle the Group's
obligations, based on past experiences. Warranty terms are, on
average, between one and five years.
Restructuring provisions relate to committed costs in respect of
restructuring programmes, usually resulting in cash spend within
one year.
Other provisions include onerous contracts, 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 a
discount rate of 3% (31 December 2017: 3%).
11. Financial instruments
The table below sets out the Group's accounting classification
of each category of financial assets and liabilities and their fair
values as at 30 June 2018, 30 June 2017 and 31 December 2017:
Current Non-current Total
GBPm GBPm GBPm
--------------------------------------- -------------------- ------------------- --------
30 June 2018
Financial assets
Classified as amortised cost:
Cash and cash equivalents 426 - 426
Net trade receivables 1,897 - 1,897
Contract assets 233 373 606
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 13 9 22
Interest rate swaps 4 7 11
Embedded derivatives 3 9 12
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (1) (3,700) (3,701)
Government refundable advances (8) (72) (80)
Other financial liabilities (2,740) (479) (3,219)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (90) (97) (187)
Cross currency swaps (8) (159) (167)
Embedded derivatives (2) (5) (7)
30 June 2017
Financial assets
Classified as amortised cost:
Cash and cash equivalents 41 - 41
Net trade receivables 329 - 329
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 5 - 5
Interest rate swaps - 7 7
Net assets held for sale 10 - 10
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (1) (709) (710)
Other financial liabilities (388) (2) (390)
31 December 2017
Financial assets
Classified as amortised cost:
Cash and cash equivalents 16 - 16
Net trade receivables 298 - 298
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 6 - 6
Interest rate swaps 4 4 8
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings - (588) (588)
Other financial liabilities (359) (2) (361)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (1) - (1)
--------------------------------------- -------------------- ------------------- --------
The fair value of the derivative financial instruments is
derived from inputs other than quoted prices that are observable
for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices) and they are therefore
categorised within level 2 of the fair value hierarchy set out in
IFRS 13: "Fair value measurement". The Group's policy is to
recognise transfers into and out of the different fair value
hierarchy levels at the date of the event or change in
circumstances that caused the transfer to occur. There have been no
transfers between levels in the period.
The Directors consider the book value of net assets held for
sale approximates to their fair value.
12. Retirement benefit obligations
During the period, the Group acquired various pension schemes as
part of the acquisition of GKN. Plans acquired include both funded
and unfunded arrangements. The UK pension schemes are funded, with
the scheme assets held in trustee-administered funds, the German
and other European plans are generally unfunded, with pension
payments made from company funds as they fall due, rather than from
scheme assets. The US schemes include a combination of funded and
unfunded pension and medical plans.
The amount recognised in the Balance Sheet in respect of defined
benefit plans is as follows:
30 June 2018
Brush Nortek GKN Europe GKN UK GKN US GKN RoW
UK plans plans plans(1() plans plans Total
plans
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- -------------- -------- ------------ ----------- -------- --------- ---------
Fair value of plan
assets 261 253 29 2,632 206 37 3,418
Present value of
defined benefit
obligations (232) (273) (668) (3,105) (316) (53) (4,647)
Net surplus/(deficit) 29 (20) (639) (473) (110) (16) (1,229)
(1() Includes a net deficit in respect of the GKN UK 2012 plan,
the GKN UK 2016 plan and post-employment medical plans.
30 June 2017
Brush Nortek GKN Europe GKN UK GKN US GKN RoW
UK plans plans plans plans plans Total
plans
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------- -------- ------------ -------- -------- --------- -------
Fair value of plan
assets 255 267 - - - - 522
Present value of
defined benefit
obligations (238) (306) - - - - (544)
Net surplus/(deficit) 17 (39) - - - - (22)
31 December 2017
Brush Nortek GKN Europe GKN UK GKN US GKN RoW
UK plans plans plans plans plans Total
plans
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------- -------- ------------ -------- -------- --------- -------
Fair value of plan
assets 263 262 - - - - 525
Present value of
defined benefit
obligations (255) (288) - - - - (543)
Net surplus/(deficit) 8 (26) - - - - (18)
Valuations of material plans have been updated at 30 June 2018
by independent actuaries to reflect updated assumptions regarding
discount rates, inflation rates and asset values. The major
assumptions were as follows:
Rate of increase
in pensions Discount rate RPI inflation CPI inflation
in payment
% p.a. % p.a. % p.a. % p.a.
----------------- ---------------- --------------- --------------- ---------------
30 June 2018
Brush UK plans 3.1 2.9 3.1 2.0
GKN Europe plans 1.8 1.9 1.8 n/a
GKN UK - 2012
plan 3.0 2.9 3.1 2.0
GKN UK - 2016
plan 3.0 2.7 3.1 2.0
GKN US plans n/a 4.2 n/a n/a
30 June 2017
Brush UK plans 3.2 2.6 3.2 2.1
31 December 2017
Brush UK plans 3.2 2.5 3.2 2.1
----------------- ---------------- --------------- --------------- ---------------
In addition, the defined benefit plan assets and liabilities
have been updated to reflect the contributions made to the defined
benefit plans and the benefits earned during the period to 30 June
2018.
13. Notes to the Cash Flow Statement
6 months 6 months Year
ended ended ended
30 June 30 June 31 December
2018 2017 2017
Continuing operations GBPm GBPm GBPm
--------------------------------------- -------- -------- ------------------------
Reconciliation of adjusted operating profit
to cash generated
from operating activities
Adjusted operating profit(1) 280 141 279
Adjustments for:
Depreciation of property, plant and
equipment 62 16 31
Amortisation of computer software
and development costs 13 2 4
Share of operating profits of equity
accounted investments (15) - -
Restructuring costs paid and movements
in other provisions (63) (42) (74)
Defined benefit pension contributions
paid (21) (2) (4)
Change in inventories (22) (23) (8)
Change in receivables (42) (15) 8
Change in payables (26) (10) (16)
Acquisition costs and associated
transaction taxes (106) (3) (8)
Tax paid (22) (10) (16)
Interest paid (32) (6) (16)
Incentive scheme tax related payments - (147) (148)
Net cash from/(used in) operating
activities 6 (99) 32
(1) See note 4 for reconciliation of operating (loss)/profit to
adjusted operating profit.
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings,
excluding any acquisition related fair value adjustments, cross
currency swaps and cash. 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.
30 June 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
-------------------------------------- -------- ------- -----------
Interest-bearing loans and borrowings
- due within one year (1) (1) -
Interest-bearing loans and borrowings
- due after one year (3,700) (709) (588)
Less:
Cash and cash equivalents 426 41 16
-------------------------------------- -------- ------- -----------
(3,275) (669) (572)
Adjustments:
Impact of cross currency swaps (167) - -
Fair value adjustments 69 - -
Net debt (3,373) (669) (572)
The table below shows the key components of the movement in net
debt:
At 31 Other Effect
December Cash non-cash of foreign At 30 June
2017 flow Acquisitions movements exchange 2018
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ----------- -------- --------------- ------------------- --------------- -----------
External debt (587) (1,712) (1,417) 49 (15) (3,682)
Finance leases (1) - (13) (4) (1) (19)
Impact of cross
currency swaps - - (109) (58) - (167)
--------------------------- ----------- -------- --------------- ------------------- --------------- -----------
(588) (1,712) (1,539) (13) (16) (3,868)
Fair value adjustments - - 73 (4) - 69
Cash and cash equivalents 16 1,750 (1,349) - 9 426
--------------------------- ----------- -------- --------------- ------------------- --------------- -----------
Net debt (572) 38 (2,815) (17) (7) (3,373)
Glossary
--------
Alternative Performance Measures ("APMs")
In response to the Guidelines on APMs issued by 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 Alternative Performance Measures)
provide additional information on the performance of the business
and trends to stakeholders.
These APMs may not be directly comparable with similarly titled
profit measures reported by other companies and they are not
intended to be a substitute for, or superior to, IFRS measures.
These measures are consistent with those disclosed in the Group's
2017 Annual Report and financial statements, apart from adjusted
revenue following the acquisition of GKN. Proforma measures provide
a base for the Group, following the acquisition of GKN, to enable
comparisons in future periods. For further information on the
below, including definition and purpose, please see pages 152 to
155.
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
--------------------------- -------------------------- -----------------------
Income Statement measures
-------------------------------------------------------
Proforma revenue Revenue Adjusting items (note
3) and full period
impact of acquisitions
6 months
ended
30 June
Revenue 2018
GBPm
--------------------------- --------------------------
Revenue 2,937
Adjusting items (note
3) 125
--------------------------- --------------------------
Adjusted revenue 3,062
Full period impact of
acquisitions 3,141
Proforma revenue 6,203
Proforma operating profit Operating profit/(loss)(1) Adjusting items (note
4) and full period
impact of acquisitions
6 months
ended
30 June
Operating profit 2018
GBPm
--------------------------- --------------------------
Operating loss (256)
Adjusting items (note
4) 536
--------------------------- --------------------------
Adjusted operating profit 280
Full period impact of
acquisitions 221
Proforma operating profit 501
Proforma profit before Profit/(loss) before Adjusting items (note
tax tax 4) and full period
impact of acquisitions
6 months
ended
30 June
Profit before tax 2018
GBPm
--------------------------- --------------------------
Loss before tax (303)
Adjusting items (note
4) 543
--------------------------- --------------------------
Adjusted profit before
tax 240
Full period impact of
acquisitions 161
Proforma profit before
tax 401
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
---------------------- ------------------- --------------------------
Proforma profit after Profit/(loss) after Adjusting items (note
tax tax 4) and full period impact
of acquisitions
6 months
ended
30 June
Profit after tax 2018
GBPm
---------------------- -------------------
Loss after tax (276)
Adjusting items (note
4) 460
---------------------- -------------------
Adjusted profit after
tax 184
Full period impact of
acquisitions 123
Proforma profit after
tax 307
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
-------------------------- ---------------------------- ----------------------------------
Adjusted revenue Revenue Adjusting items (note
3)
-------------------------- ---------------------------- -------------------------------------
Adjusted operating profit Operating profit/(loss)(1) Adjusting items (note
4)
-------------------------- ---------------------------- -------------------------------------
Adjusted EBITDA Operating profit/(loss)(1) Adjusting items (note
4), depreciation and amortisation
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Adjusted EBITDA GBPm GBPm GBPm
-------------------------- ------------- ------------- ----------------------------------
Adjusted operating profit 280 141 279
Depreciation 62 16 31
Amortisation 13 2 4
-------------------------- ------------- ------------- ----------------------------------
Adjusted EBITDA 355 159 314
EBITDA on a proforma basis of GBP1,398 million includes adjusted
operating profit before depreciation and amortisation for the last
12 months, assuming that GKN had been owned for the full 12 month
period. This proforma EBITDA is used in calculation of banking
covenants.
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
------------------------ ---------------------- --------------------------
Adjusted profit before Profit/(loss) before Adjusting items (note
tax tax 4)
------------------------ ---------------------- --------------------------
Adjusted profit after Profit/(loss) after Adjusting items (note
tax tax 4)
------------------------ ---------------------- --------------------------
Adjusted tax rate Effective tax rate Adjusting items (note
4), adjusting tax items
and the tax impact of
adjusting items (note
5)
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Adjusted tax rate GBPm GBPm GBPm
------------------------ ---------- ---------- ------------------------
Tax credit/(charge) 27 (10) 4
Adjusting tax items - - (27)
Tax impact of adjusting
items (83) (26) (44)
------------------------ ---------- ---------- ------------------------
Adjusted tax charge (56) (36) (67)
Adjusted profit before
tax 240 131 258
Adjusted tax rate 23.3% 27.5% 25.9%
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
------------------------- -------------------- ----------------------
Adjusted basic earnings Basic earnings per Adjusting items (notes
per share share 4 and 6)
------------------------- -------------------- ----------------------
Adjusted diluted earnings Diluted earnings per Adjusting items (notes
per share share 4 and 6)
------------------------- -------------------- ----------------------
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
----------------------------- -------------------- ------------------------------
Proforma diluted earnings Diluted earnings per Adjusting items and full
per share share period impact of acquisitions
(notes 4 and 6)
6 months
ended
30 June
2018
Proforma diluted earnings GBPm
per share
----------------------------- --------------------
Proforma profit after
tax 307
----------------------------- --------------------
Attributable to:
Owners of the parent 304
Non-controlling interests 3
Diluted number of shares
at 30 June 2018 (million) 4,858
Proforma diluted earnings
per share 6.3p
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
--------------------------- --------------------------- -------------------------------
Balance Sheet measures
--------------------------- --------------------------- -------------------------------
Working capital Inventories, trade Not applicable
and other receivables
less trade and other
payables
--------------------------- --------------------------- -------------------------------
Net debt Cash and cash equivalents Reconciliation of net
less interest-bearing debt (note 13)
loans and borrowings
--------------------------- --------------------------- -------------------------------
Bank covenant definition Cash and cash equivalents Net debt per note 13 adjusted
of net debt at average less interest-bearing for finance leases and
rates loans and borrowings the impact of foreign
exchange
30 June 30 June 31 December
2018 2017 2017
Net debt GBPm GBPm GBPm
--------------------------- ------------- ------------ -----------------------------
Net debt as reported
(note 13) 3,373 669 572
Finance leases (19) (1) (1)
--------------------------- ------------- ------------ -----------------------------
Bank covenant definition
of net debt at closing
rates 3,354 668 571
Impact of foreign exchange (24) 15 23
--------------------------- ------------- ------------ -----------------------------
Bank covenant definition
of net debt at average
rates 3,330 683 594
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
-------------------------- -------------------------- ----------------------------
Cash Flow measures
-------------------------- -------------------------- ----------------------------
Adjusted operating cash Net cash from operating Changes in working capital
flow (pre capex) activities items
-------------------------- -------------------------- ----------------------------
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2018 2017 2017
Adjusted operating cash GBPm GBPm GBPm
flow
-------------------------- -------- ---------------- --------------------------
Adjusted EBITDA 355 159 314
Change in inventories (22) (23) (8)
Change in receivables (42) (15) 8
Change in payables (26) (10) (16)
-------------------------- -------- ---------------- --------------------------
Adjusted operating cash
flow (pre-capex) 265 111 298
APM Closest equivalent Reconciling
statutory measure items to statutory
measure
Other measures
---------------------- ------------------------ -------------------
Capital expenditure Additions to non-current Not applicable
(capex) assets
---------------------- ------------------------ -------------------
Capital expenditure None Not applicable
to depreciation ratio
---------------------- ------------------------ -------------------
Dividend per share None Not applicable
(1) Operating profit/(loss) is not defined within IFRS but is a
widely accepted profit measure being profit/(loss) before finance
costs, finance income
and tax.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR LFFLIALIEIIT
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