TIDMMRO
RNS Number : 8733X
Melrose Industries PLC
03 September 2020
3 September 2020
MELROSE INDUSTRIES PLC
UNAUDITED RESULTS
FOR THE SIX MONTHSED 30 JUNE 2020
Melrose Industries PLC today announces its interim results for
the six months ended 30 June 2020 (the "Period").
Highlights
Adjusted(1) results Statutory results
2020 2019 2020 2019
Continuing operations GBPm GBPm GBPm GBPm
---------- --------- ---------- -------
Revenue 4,359 5,875 4,121 5,573
---------- --------- ---------- -------
Operating profit/(loss) 56 541 (581) 8
---------- --------- ---------- -------
Profit/(loss) after tax (32) 332 (560) (131)
---------- --------- ---------- -------
Diluted earnings per share (0.7)p 6.8p (11.5)p (2.8)p
---------- --------- ---------- -------
Group
-- The Group made an adjusted(1) operating profit of GBP56
million in the Period. The statutory operating loss was GBP581
million; of the GBP637 million adjusting items, only GBP99 million
are cash related
-- Trading over the summer months has been at the higher end of
the Board's expectations, particularly in automotive and key Nortek
markets
-- Cash generation has been strong in the Period with GBP213
million of adjusted(1) free cash flow(2)
-- In addition to the significant working capital inflow in H1,
the Group expects a further c.GBP300 million of efficiency
improvements in working capital to be delivered
-- Net debt(1) has been reduced by GBP93 million(3) and the
committed bank facility headroom has increased to nearly GBP1.2
billion at 30 June 2020 excluding the c.GBP300 million of cash in
hand
-- Improved banking terms have been unanimously agreed with the
Melrose lending bank syndicate, giving the flexibility if required
over the medium-term to continue to improve the businesses
-- Restructuring projects are well underway that will improve
the Group's trading performance by over GBP100 million next year.
More cost saving projects are to come and there are substantial
margin improvement opportunities across the GKN businesses
-- Investment in ground-breaking, energy efficient technology
has been maintained, including electric and hydrogen powered
aircraft technology; eDrive automotive systems; advanced 3D
printing capabilities; and Nortek Air Management's revolutionary
StatePoint Technology(R)
-- Whilst the Melrose Board understands the importance of
dividends to shareholders and is encouraged by the strong cash
performance, it does not consider it appropriate to pay an interim
dividend to shareholders this year
Divisions
-- A substantial reduction of the Aerospace cost structure is
underway, to significantly improve the business performance in 2021
without relying on sales growth. Sales in Aerospace reduced by 18%
in the Period(3) ; however, Defence, which equates to around a
third of the business, continued to grow
-- There are a number of encouraging signs of recovery in
Automotive and Powder Metallurgy with recent trading in China ahead
of last year; North America is also improving quickly and there are
some positive signs in Europe, although the full speed and shape of
improvements still remains uncertain. Automotive and Powder
Metallurgy sales were down 36% in the Period(3)
-- Nortek Air Management is trading well; its performance has
been less impacted by COVID-19 and sales in July and August were up
13% on last year(3) . New business wins are proving to be
significant and are both enhancing the quality of the business and
giving a strong order book into next year
Justin Dowley, Chairman of Melrose Industries PLC, today
said:
"These are extraordinary times which we have addressed with
rigorous cash management and decisive restructuring actions;
recently, and encouragingly, we have started to see trading
improving in some key end markets. Crucially, we own good
businesses with significant improvement opportunities and have an
experienced management team with an excellent track record. We have
delivered good returns in tough times before and as we continue to
make the strategic changes needed to position our businesses within
their changed market environments, we are confident of doing so
again."
(1. Considered by the Board to be a key measure of performance.
The adjusted results are described in the glossary to the Interim
Financial Statements)
(2. Adjusted free cash flow in the Period excludes restructuring
and cash used in discontinued operations)
(3. Growth is calculated at constant currency against 2019
results)
S
Enquiries:
Montfort Communications: +44 (0) 20 3514 0897
Nick Miles +44 (0) 7739 701634 / Charlotte McMullen +44 (0) 7921
881 800
miles@montfort.london / mcmullen@montfort.london
Investor Relations: +44 (0) 7974 974690
ir@melroseplc.net
CHAIRMAN'S STATEMENT
We report our interim results for the six months ended 30 June
2020 (the "Period"), which are in line with the trading update
released on 22 July 2020 ("July update").
RESULTS FOR THE GROUP
These interim results include statutory revenue for the Melrose
Group of GBP 4,121 million (2019: GBP 5,573 million), a statutory
loss before tax of GBP685 million (2019: statutory loss of GBP109
million) and an adjusted loss before tax of GBP40 million (2019:
adjusted profit of GBP431 million).
Further details of these results are contained in the Finance
Director's Review.
TRADING
As the July update made clear, the Group has faced numerous
challenges presented by the global outbreak of COVID-19 and this is
reflected in these results. The decision to favour cash generation
over profit in 2020 has been highly successful in not only
protecting but building further headroom in our committed bank
facilities to just under GBP1.2 billion, with cash in hand of a
further GBP339 million. It was a significant achievement by our
businesses to generate over GBP200 million of cash, before
restructuring spend, in this Period.
As we announced on 4 August, an agreement has been reached with
our banking syndicate to amend our banking facilities to reset the
financial covenants for a further two years, which will provide us
with the time and the flexibility to make the changes needed to
create value in our businesses. Once again, we thank them for their
support.
This balance sheet strength has allowed us to commence the
reshaping of our businesses according to their new market realities
and good progress has been made already. Managing significant
reorganisations against difficult market backdrops has always been
part of the fundamental Melrose skill set. We demonstrated this
with the FKI acquisition at the time of the 2008 financial crisis
and we are confident of doing this again with the GKN
businesses.
While GKN businesses are focused on reorganisations, Nortek Air
Management has navigated the challenges of the first half very
successfully. The delivery of their market leading StatePoint
cooling systems is on track and is generating significant interest
in their wider data centre applications, boosting their pipeline of
projects. We are excited about their potential. The Board will
review strategic options for this business in early 2021.
Pleasingly, trading for our Automotive, Powder Metallurgy and
key Nortek Air Management businesses since the end of the Period
has been at the higher end of our expectations, with the USA and
China continuing to show recovery and Europe also improving. Whilst
we cannot be certain this will continue the signs are currently
positive. Unfortunately, GKN Aerospace is yet to see the same
positive signs of improved trading since the end of the Period.
The Chief Executive's Review provides greater detail on the
Group's trading for the Period.
DIVID
Your Board is very aware of the importance of dividends to
shareholders. Indeed your directors are significant shareholders
themselves. However, the Board concluded it was not appropriate to
pay a final dividend for 2019 in May and considers it inappropriate
to pay an interim dividend for 2020. We trust that shareholders
will appreciate the importance of retaining cash within the Group
to ensure net debt is kept under control whilst also funding the
necessary restructuring of the Group to position it for the
future.
BOARD MATTERS
Co-founder and executive vice chairman David Roper was due to
retire in May 2020, but agreed to postpone this to assist the
Company in navigating successfully through the COVID-19 crisis.
From 1 January 2021, Peter Dilnot, who has made a valuable
contribution since joining Melrose in April last year, will join
the Board as an Executive Director. We thank David for his ongoing
support and congratulate Peter on his appointment.
As expected, the 2017 Long-Term Incentive Scheme which
crystallised in May was severely impacted by the COVID-19 crisis
and resulted in no award for participants for the three year period
despite being on track to do so. In addition, and despite firm
support from shareholders, the Board withdrew the replacement 2020
scheme in the face of the uncertainty created by the crisis. With
the beginnings of some stability, the Remuneration Committee
intends to consult with shareholders on what changes are necessary
to the 2020 Incentive Scheme for it to be put into place before the
end of the year.
STRATEGY
The Melrose "Buy, Improve, Sell" strategy, already proven to be
highly effective during the last global crisis, remains the same.
We buy high quality underperforming manufacturing businesses and
invest in making them stronger, better businesses for the benefit
of all stakeholders, whilst delivering good returns for
shareholders. We believe our model will once again deliver in the
challenging circumstances of COVID-19 and we are excited about the
opportunity to be able to demonstrate this.
OUTLOOK
The first half of 2020 presented unique challenges for the Group
and decisive actions were taken quickly to respond. With the
support of our banks, shareholders and employees, we have been
successful in positioning our Group to emerge well from the crisis.
Organically, we see some early signs of recovery in certain
geographies, although GKN Aerospace will continue to experience
market uncertainty. During the second half of 2020 we will continue
to invest in our businesses to build for 2021 and future years. We
also expect that 2021, and beyond, are likely to bring acquisition
opportunities.
Justin Dowley
Chairman
3 September 2020
CHIEF EXECUTIVE'S REVIEW
Until March this year, our businesses continued their strong
performance from 2019, with significant operational and financial
improvement made, notably within the GKN businesses. Unfortunately
this progress was then severely disrupted by the global outbreak of
COVID-19 as governments across the world implemented unprecedented
social and economic restrictions in an attempt to halt the
pandemic. We were inevitably affected by these constraints and as a
result Group revenues for this period were down 27% compared with
last year. While these restrictions are at the time of writing
beginning to ease, there remains a lot of uncertainty as to the
speed and timing of any recovery and different industries will
recover at different rates.
Against this challenging backdrop, the Group was quick to
implement decisive cash preservation measures and cost controls to
mitigate the impact of the disruption caused by COVID-19. These
decisive measures included, an intense focus on reducing and
aligning working capital with reduced sales, rescheduling capital
expenditure and longer-term restructuring projects, and reducing
operating costs. The actions taken have been highly successful in
ensuring the Group generated gross cash of over GBP200 million
(before restructuring costs) during this period and not only
maintained, but grew its facility headroom to just under GBP1.2
billion as at 30 June 2020.
This involved an outstanding effort by our business unit
operational teams and we thank them and all employees for their
hard work, as they continue to implement their improvement plans.
These actions will be monitored and bolstered during the second
half of the year.
In spite of the unprecedented disruption of COVID-19, we are
confident that our high quality businesses will deliver good
returns for investors. To achieve this, we must adapt the
businesses to meet the demands of the new economic environment and
continue to focus on cost reduction throughout the Group. Early
measures to protect the balance sheet have proved successful and,
we are making significant progress in our efforts to reduce costs.
Assuming the withdrawal of worldwide government support schemes and
furlough takes place as scheduled, we estimate that these cost
measures will have a net beneficial contribution to the Group of
over GBP100 million in 2021. An important factor in achieving this
has been the agreed amendments to our banking facilities announced
on 4 August 2020. We thank our bank syndicate for their unanimous
and swift support.
However, and very importantly, while the major focus in the
current environment is naturally on cost reduction, we are
protecting investment in R&D and continue to develop world
leading technologies. Aerospace is investing in ground-breaking
technologies for both electric and hydrogen powered aircraft.
Automotive pressed ahead with its investment in eDrive auto systems
and has produced its millionth eDrive unit. Powder Metallurgy has
further developed its 3D printing capability including the
acquisition of Forecast 3D. Nortek Air Management continues to
deliver its revolutionary StatePoint Technology(R), achieving
important milestones during the Period, as well as developing a
strong demand pipeline in the data centre sector based on its
technology leadership. Further development of these and other
exciting projects are key to the successful development of the
Group.
Your Board will review the strategic future of Nortek Air
Management in the early part of next year.
Included below are further trading updates for each of the
divisions.
AEROSPACE
In line with the wider aerospace sector, overall sales for GKN
Aerospace declined 18% compared to the same period last year. A
sales reduction of approximately 25-30% is expected for the full
year, with the business broadly breaking even. While operating
margins remained in line with targets until mid-March 2020, Civil
Airframe and Engines experienced a sharp decline for the rest of
the Period prompted by COVID-19 travel restrictions. The impact of
this was partially offset by comparatively stronger performance in
Defence, where sales grew compared to the same period last
year.
Having ensured the strength of its balance sheet, GKN Aerospace
management are currently implementing a decisive and wide ranging
programme to address the impact of the business disruption caused
by COVID-19. Initially focused on strict cash management measures,
it is now undertaking a substantial reduction of its cost structure
to enable an improved performance in 2021 without reliance on sales
returning. Consultations are already well underway with employees
and unions worldwide and regrettably a significant reduction in the
worldwide workforce is inevitable in the second half of the year.
We will report further on this at the year end when substantial
progress on this restructuring will have been made. Your Board
believes that this division can be returned to a better performance
next year.
Despite the disruption of COVID-19, GKN Aerospace continued to
implement its previously announced 'One Aerospace' global
organisational design plan, to accelerate the improvement of its
historically fragmented structure and to serve its global customer
base more efficiently, with improved and better integrated
commercial and technology offerings. GKN Aerospace has also sought
to retain its skills and technology leadership positions through
continued R&D investment during the Period.
Moving into the second half of 2020, current market trends are
anticipated to persist for Civil Airframe and Engines, but are
expected to be partially offset by a comparatively strong Defence
sector. Whilst the next 12-18 months in particular are likely to be
challenging, there is much that can be done to improve this world
leading business further. Whilst medium-term operating margin
targets do need to be adjusted as further detailed in the investor
presentation, over time there is the opportunity for substantial
improvement of this business. Your Board believes future
opportunities will present themselves for organic and
acquisition-led growth.
AUTOMOTIVE
During the Period, GKN Automotive continued to face market
challenges, which were compounded by the initial impact of COVID-19
in China at the beginning of the year, followed by subsequent
restrictions, temporary factory closures and disruption across
Europe and North America.
Overall sales declined 37% compared to the same period last
year, in line with core markets. However, early signs from sales in
the second half are indicating that the recovery may be faster than
previously predicted, especially in certain regions. China is
currently ahead of last year and in the US, sales are only
marginally below prior year levels. Europe is proving a bit slower
to recover, but there are nonetheless some encouraging signs.
From the outset of 2020, GKN Automotive was already responding
to market challenges by implementing measures to control its costs
and working capital to limit the impact of declining sales on its
profitability during the first half of 2020. The continuation of
these 2019 actions enabled an agile operational flex down and
associated cost reduction actions to soften the initial impact of
the abrupt decline in sales caused by COVID-19. Your Board believes
that this business should still be able to achieve the operating
margin targets set for it at acquisition.
Operating cash flow was positive during the first half of 2020
which enabled GKN Automotive to continue its strategic investments
in eDrive programmes and achieve further operational improvements.
It is expected that continued investment in green technologies and
pursuing the launch of five new integrated eDrive systems, will
remain the division's core focus during the second half of
2020.
Whilst it is not possible to be certain, there are encouraging
signs of recovery in this division and your Board is confident that
its management team will continue improving this business.
Existing travel restrictions mean that the Automotive Investor
Day in New York, intended to be held in October 2020, will be
rescheduled.
POWDER METALLURGY
GKN Powder Metallurgy was similarly affected by the continuing
market challenges in the automotive sector and the initial impact
of COVID-19 in China. Following the temporary shutdown of certain
factories across Europe and North America from mid-March, by late
April many of those factories were steadily reopening. Overall,
sales declined 32% compared to the same period last year, but this
division is now seeing the same indications of recovery as GKN
Automotive.
GKN Powder Metallurgy responded quickly to the impacts of
COVID-19, shifting its focus to tight management of cash, costs,
capital expenditure and working capital. Operating costs were
reduced by the prompt implementation of shorter working time
arrangements and furlough schemes, with a realignment of indirect
and fixed labour costs to production activity levels. This was
supplemented by the rationalisation of raw materials, WIP and
finished goods to reduce stock levels by 30% during the Period.
Market uncertainties are expected to continue into the second
half of 2020, but there is currently a clear rebound in China and
North America and signs of recovery in Europe. Strong measures
taken to control costs in the first half with plans for further
cuts in the second half, are expected to position the division to
navigate any challenges that lie ahead. The business should also be
in a good position to benefit from what is likely to be a further
period of consolidation in its sector, and it is expected this
business will still in time be able to achieve its operating margin
target.
NORTEK AIR MANAGEMENT
Nortek Air Management includes the Nortek Global HVAC ("HVAC")
and Air Quality & Home Solutions ("AQH") segments, representing
a range of world class products spanning custom and commercial air
solutions for high-performance environments, residential and
commercial HVAC and fresh air ventilation systems. It is uniquely
poised to capture the growth opportunities in each of its key
sectors alongside the significant pent-up demand in its large
addressable markets.
The performance of HVAC during the Period has been strong
considering the economic backdrop, and has proven the resilience of
the business, the robustness of its underlying sector tailwinds,
and its market leadership. In the first half, HVAC management
focused on future growth for the business, whilst also protecting
the cost base and minimising the impact of COVID-19.
Management is focused on the continued development of new
sustainable innovations that address important global trends such
as air quality, energy reduction and water efficiency. Having
successfully commercialised its StatePoint Technology(R), which
offers a potentially exponential growth lever to complement the
core HVAC and AQH offerings, the HVAC business has now moved into
the production phase of hyperscale data centre projects and has
significantly increased its pipeline of new data centre
opportunities. The business' substantial investment in R&D,
product development and technology mean it is extremely well
positioned to continue gaining market share.
Reassuringly, the rest of HVAC's businesses have also
demonstrated their strength during the crisis. The air handling
business has performed well given the market backdrop, continuing
to execute on its strong backlog with mission critical customers
and leveraging the strength of its local relationships to win share
in new construction and retrofit projects. The Residential business
is now recovering following the initial downward impact of
COVID-19. HVAC has seen month-over-month improvements as
distributors have taken steps to replenish inventories to supply
pent-up demand from homeowners.
AQH started 2020 with momentum from recent product introductions
and recovering housing markets in the USA and Canada. That momentum
inevitably slowed as a result of certain retailer and distributor
closures in the second quarter. Sales were hardest hit in April and
have improved in each month of the Period since. AQH quickly
implemented strict cost control measures to minimise the impact of
the pandemic and continued to optimise production efficiencies.
Overall, the Period has proven the robustness and criticality of
Nortek Air Management's products, particularly those ensuring
optimal ventilation and air quality in commercial and residential
buildings. Furthermore there exist additional opportunities to
further expand margins and deliver significant incremental value
creation in years to come. We are highly encouraged by the
business' relative performance through the crisis and excited about
the prospects of its market leading technologies.
OTHER INDUSTRIAL
Most of the Other Industrial businesses, comprising Brush,
Security & Smart Technology ("SST") and Ergotron, demonstrated
resilience to the global challenges presented by the COVID-19
pandemic, underpinned by supporting macro trends.
Despite the challenges of COVID-19, Brush has continued to
invest in product development across all of its businesses,
including broadening its product range in Switchgear and enhancing
its Turbogenerators product portfolio. Operationally, Brush has
taken proactive measures to control costs, supplemented by tight
working capital and cash management initiatives, so that it is
emerging a stronger and more agile business. Its significant order
backlog is built on a more diversified customer base across a broad
range of traditional and emerging end-markets. The business remains
confident of a strong performance from its current base in 2020,
tempered by the inevitable challenges of COVID-19.
With its end-user markets generally requiring physical
attendance of professional installers onsite, a practice which has
been heavily restricted during the crisis, SST has seen a
significant economic impact from COVID-19, resulting in a sales
decline of 31%. However, with the easing of global lockdown
restrictions, trading began to improve at the end of the second
quarter, and the business is focused on driving that momentum
forward into the second half of 2020 to build a longer-term growth
trajectory, backed by launches of several key product platform
updates.
While Ergotron sales were down compared to last year, this
masked a varied experience across its segments. The Healthcare
segment benefited strongly from increased hospital demand and there
was also good progress in the strategically targeted Asia Pacific
region. These were offset by the negative impact of US national
lockdown measures on demand for the Office segment, where
resellers' activity essentially came to a halt from mid-March until
June. Whilst the second half of 2020 will no doubt present some
challenges, the business will continue to pursue several growth
platforms, including new product launches and improved cost
positioning to offset market headwinds, and is optimistic about
continuing to take market share in the Healthcare segment.
Simon Peckham
Chief Executive
3 September 2020
FINANCE DIRECTOR'S REVIEW
The Group's trading conditions and results in the six months
ended 30 June 2020 have been significantly disrupted by the
worldwide impact of COVID-19, with factories in the Automotive and
Powder Metallurgy businesses temporarily shut in the second quarter
of the year and many factories in the other divisions operating
under significantly reduced demand. As a consequence the Group's
results are substantially lower than the same period last year.
MELROSE GROUP RESULTS - CONTINUING OPERATIONS
Statutory results:
The statutory IFRS results are shown on the face of the Income
Statement and show revenue of GBP4,121 million (2019: GBP5,573
million), an operating loss of GBP581 million (2019: profit of GBP8
million) and a loss before tax of GBP685 million (2019: loss of
GBP109 million). The diluted earnings per share ("EPS"), calculated
using the weighted average number of shares in issue during the
period of 4,858 million (2019: 4,858 million), were a loss of 11.5
pence (2019: loss of 2.8 pence).
Adjusted results:
The adjusted results are also shown on the face of the Income
Statement. They are adjusted to include the revenue and operating
profit from equity accounted investments ("EAIs") and to exclude
certain items which are significant in size or volatility or by
nature are non-trading or non-recurring, or are items released to
the Income Statement that were previously a fair value item booked
on an acquisition. It is the Group's accounting policy to exclude
these items from the adjusted results, which are used as an
Alternative Performance Measure ("APM") as described by the
European Securities and Markets Authority ("ESMA"). APMs used by
the Group are defined in the glossary to the Condensed Interim
Financial Statements.
The Melrose Board considers the adjusted results to be an
important measure used to monitor how the businesses are performing
as they achieve consistency and comparability between reporting
periods when all businesses are held for the complete reporting
period.
The adjusted results for the period ended 30 June 2020 show
revenue of GBP4,359 million (2019: GBP5,875 million), an operating
profit of GBP56 million (2019: GBP541 million) and a loss before
tax of GBP40 million (2019: profit of GBP431 million). Adjusted
diluted EPS were a loss of 0.7 pence (2019: profit of 6.8
pence).
Tables summarising the statutory results and adjusted results by
reportable segment are shown in note 3 of the Condensed Interim
Financial Statements.
RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS
The following tables reconcile the Group statutory revenue and
operating (loss)/profit to adjusted revenue and adjusted operating
profit:
2020 2019
Continuing operations: GBPm GBPm
------------------------------------------- ------ -----
Statutory revenue 4,121 5,573
------------------------------------------- ------ -----
Adjusting item:
------------------------------------------- ------ -----
Revenue from equity accounted investments 238 302
------------------------------------------- ------ -----
Adjusted revenue 4,359 5,875
------------------------------------------- ------ -----
Adjusting revenue item:
The Group has some investments in businesses in which it does
not hold full control (EAIs), the largest of which is a 50%
interest in Shanghai GKN HUAYU Driveline Systems ("SDS"), within
the Automotive business. During the period ended 30 June 2020, EAIs
in the Group generated GBP238 million of revenue (2019: GBP302
million), which is not included in the statutory results but is
shown within adjusted revenue so as not to distort the operating
margins reported in the businesses when the adjusted operating
profit from these EAIs is included.
2020 2019
Continuing operations: GBPm GBPm
-------------------------------------------------- ------ -----
Statutory operating (loss)/profit (581) 8
-------------------------------------------------- ------ -----
Adjusting items:
-------------------------------------------------- ------ -----
Amortisation of intangible assets acquired in
business combinations 263 268
-------------------------------------------------- ------ -----
Write down of assets 179 179
-------------------------------------------------- ------ -----
Restructuring costs 99 74
-------------------------------------------------- ------ -----
Currency movements in derivatives and movements
in associated financial assets and liabilities 89 13
-------------------------------------------------- ------ -----
Other 7 (1)
-------------------------------------------------- ------ -----
Adjustments to statutory operating (loss)/profit 637 533
-------------------------------------------------- ------ -----
Adjusted operating profit 56 541
-------------------------------------------------- ------ -----
Adjusting items to operating (loss)/profit are consistent with
prior periods and include:
The amortisation charge on intangible assets acquired in
business combinations of GBP263 million (2019: GBP268 million),
which is excluded from adjusted results due to its non-trading
nature and to enable comparison with companies that grow
organically. However, where intangible assets are trading in
nature, such as computer software and development costs, the
amortisation is not excluded from adjusted results.
The write down of assets in the period of GBP179 million,
recognised as a result of the impact of COVID-19, of which GBP133
million was within the Aerospace division. The ultimate impact of
the COVID-19 pandemic is unclear, and the measurement of its impact
required a review of the operating assets of the Group, with a
significant degree of estimation. This review resulted in GBP153
million of fixed assets and GBP26 million of other net operating
assets being written down across certain sites within the
businesses, as they adapt to new levels of industry demand. The
write down of these assets is shown as an adjusting item due to the
unprecedented nature of the COVID-19 pandemic, its non-trading
nature and size. The charge of GBP179 million, recognised in 2019,
related to impairment of goodwill allocated to the Security &
Smart Technology group of CGUs.
Restructuring and other associated costs in the period totalling
GBP99 million (2019: GBP74 million), shown as adjusting items due
to their size and non-trading nature and during the period ended 30
June 2020 they included:
-- GBP43 million (2019: GBP26 million) relating to the Aerospace
division including costs incurred as the business takes its initial
steps to substantially reduce its cost structure following the
impact of COVID-19 on the aerospace industry; as well as the
continuation of its global integration to create "One Aerospace",
ensuring the business is well positioned and able to react to
changes in its new environment.
-- GBP25 million (2019: GBP14 million) of costs within the
Automotive division, incurred as the business continues to address
its high cost base, inherited on acquisition, and best position the
business as it begins its recovery post COVID-19.
-- GBP23 million (2019: GBP5 million) of restructuring costs in
the Powder Metallurgy division as it continues footprint
consolidation actions which began in 2019, along with additional
focus on reducing its fixed cost base to realign the business for
future demand.
-- A charge of GBP8 million (2019: GBP29 million) within the
Nortek Air Management, Other Industrial and Corporate divisions,
primarily relating to the completion of a factory consolidation
within the HVAC business and the finalisation of the changes made
in the Security & Smart Technology business to move to a third
party contract manufacturing model.
Movements in the fair value of derivative financial instruments
(primarily forward foreign currency exchange contracts where hedge
accounting is not applied) entered into within the GKN businesses
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. This totalled a charge of GBP89 million (2019:
GBP13 million) in the period and is shown as an adjusting item
because of its volatility and size.
Other adjusting items include: acquisition and disposal related
charges of GBP4 million (2019: credit of GBP4 million), excluded
from adjusted results due to their non-trading nature; the charge
for the Melrose equity-settled Incentive Scheme, including its
associated employer's tax charge, of GBP1 million (2019: GBP7
million), excluded from adjusted results due to its volatility; an
adjustment of GBP14 million (2019: GBP14 million) to gross up the
post-tax profits of EAIs to be consistent with the adjusted
operating profits of subsidiaries within the Group; and the net
release of fair value items totalling GBP12 million (2019: GBP18
million), shown as an adjusting item to avoid positively distorting
adjusted results.
GOODWILL AND IMPAIRMENT REVIEW
The Group's goodwill and intangible assets have been tested for
impairment as at 30 June 2020, and in accordance with IAS 36
"Impairment of assets" the recoverable amount has been assessed as
being the higher of the fair value less costs to sell and the value
in use.
Under IAS 36, the value in use basis for calculating the
recoverable amount prohibits the inclusion of future uncommitted
restructuring plans as at the balance sheet date, whilst the fair
value less costs to sell basis of valuation allows the inclusion of
these plans if it is deemed that a market participant would also
restructure.
With the future benefits of restructuring projects currently
forming a material part of valuations for businesses, because they
will have to substantially reduce their cost structure to align
with the new levels of demand post COVID-19, the fair value less
costs to sell basis gives the higher valuation at this point in
time and therefore in accordance with IAS 36, has been used in
assessing the recoverable amount for the Melrose businesses.
Sensitivity analysis and increased disclosures have been
provided in note 14 to these Condensed Interim Financial Statements
for the Aerospace, Automotive Driveline, Powder Metallurgy and
Security & Smart Technology businesses, being the businesses
showing the tightest headroom at 30 June 2020.
Whilst the headroom on impairment testing has inevitably reduced
in the period, the Board is comfortable that no impairment is
required in respect of the valuation of goodwill and intangible
assets in its businesses as at 30 June 2020. The Group's goodwill
and intangible assets will continue to be monitored and retested at
31 December 2020.
TAX - CONTINUING OPERATIONS
The statutory results for the period show a tax credit of GBP125
million (2019: charge of GBP22 million), arising on a statutory
loss before tax of GBP685 million (2019: loss of GBP109 million), a
blended statutory tax rate of 18%. The Group paid GBP8 million
(2019: GBP79 million) of tax in the period.
CASH GENERATION AND MANAGEMENT
Following the realisation that COVID-19 was likely to have a
significant impact on the global economy, and in particular the end
markets in which the Melrose businesses operate, robust cash
management was set as the top commercial priority for the Group
this year with comprehensive cash preservation actions being
successfully implemented in each business.
As a result of these strong cash management initiatives, an
adjusted free cash inflow of GBP213 million before restructuring
spend (2019: GBP269 million before restructuring spend and one-off
special contributions to defined benefit pension plans) was
achieved in the period.
An analysis of the adjusted free cash flow is shown in the table
below:
2020 2019
GBPm GBPm
----------------------------------------------------- ------ -----
Adjusted operating profit 56 541
----------------------------------------------------- ------ -----
Adjusted operating profit from EAIs (21) (30)
----------------------------------------------------- ------ -----
Depreciation and amortisation 252 243
----------------------------------------------------- ------ -----
Lease obligation payments (38) (32)
----------------------------------------------------- ------ -----
Positive non-cash impact from loss-making contracts (31) (45)
----------------------------------------------------- ------ -----
Working capital movements 251 (59)
----------------------------------------------------- ------ -----
Adjusted operating cash flow (pre-capex) 469 618
----------------------------------------------------- ------ -----
Net capital expenditure (174) (231)
----------------------------------------------------- ------ -----
Net interest and net tax paid (73) (159)
----------------------------------------------------- ------ -----
Defined benefit pension contributions (43) (111)
----------------------------------------------------- ------ -----
Restructuring (95) (90)
----------------------------------------------------- ------ -----
Dividend income from equity accounted investments 27 67
----------------------------------------------------- ------ -----
Net other 7 (9)
----------------------------------------------------- ------ -----
Free cash flow 118 85
----------------------------------------------------- ------ -----
Adjusted free cash flow 213 269
----------------------------------------------------- ------ -----
Net working capital was reduced by GBP251 million in the first
half of the year (2019: increase of GBP59 million), along with net
capital expenditure in the period being cut to GBP174 million
(2019: GBP231 million), representing 0.8x depreciation of owned
assets.
Net interest paid in the period was GBP65 million (2019: GBP80
million), tax payments were GBP8 million (2019: GBP79 million) and
ongoing contributions to defined benefit pension schemes were GBP43
million (2019: GBP111 million, which included a special
contribution of GBP94 million).
Free cash flow in the period, after restructuring spend of GBP95
million (2019: GBP90 million), was an inflow of GBP118 million
(2019: GBP85 million).
The movement in net debt (as defined in the glossary to the
Condensed Interim Financial Statements) is summarised as
follows:
2020 2019
GBPm GBPm
--------------------------------------------------- -------- -------
At 1 January (3,283) (3,482)
--------------------------------------------------- -------- -------
Non-trading items:
--------------------------------------------------- -------- -------
Net cash flow from disposal and acquisition
related activities (25) 157
--------------------------------------------------- -------- -------
Dividend paid to Melrose shareholders - (148)
--------------------------------------------------- -------- -------
Foreign exchange and other non-cash movements (209) (41)
--------------------------------------------------- -------- -------
Discontinued operations - (25)
--------------------------------------------------- -------- -------
Cash flow from non-trading items and discontinued
operations (234) (57)
--------------------------------------------------- -------- -------
Free cash flow 118 85
--------------------------------------------------- -------- -------
At 30 June at closing exchange rates (3,399) (3,454)
--------------------------------------------------- -------- -------
At 30 June at twelve month average exchange
rates (3,330) (3,404)
--------------------------------------------------- -------- -------
Group net debt at 30 June 2020, translated at closing exchange
rates (being US $1.24 and EUR1.10), was GBP3,399 million (31
December 2019: GBP3,283 million).
The movement in net debt during the period consisted of a free
cash inflow of GBP118 million, being more than offset by GBP25
million of spend on acquisition related activities, primarily
relating to the acquisition of FORECAST 3D in the Powder Metallurgy
division, and a GBP209 million increase to net debt in respect of
foreign exchange and other non-cash movements.
For bank covenant purposes the Group's net debt is calculated at
average exchange rates for the previous twelve months, to better
align the calculation with the currency rates used to calculate
profits, and was GBP3,330 million. The Group net debt leverage on
this basis at 30 June 2020 was 3.4x EBITDA (31 December 2019: 2.3x
EBITDA).
PROVISIONS
Total provisions at 30 June 2020 were GBP1,108 million (31
December 2019: GBP1,087 million).
The following table details the movement in provisions in the
period:
Total
GBPm
--------------------------------------------------------------- -----
At 1 January 2020 1,087
--------------------------------------------------------------- -----
Spend against provisions (142)
--------------------------------------------------------------- -----
Net charge to adjusted operating profit 52
--------------------------------------------------------------- -----
Net charge shown as an adjusting item in the Income Statement 78
--------------------------------------------------------------- -----
Utilisation of loss-making contract provision (31)
--------------------------------------------------------------- -----
Other (including foreign exchange) 64
--------------------------------------------------------------- -----
At 30 June 2020 1,108
--------------------------------------------------------------- -----
The net charge to adjusted operating profit in the period of
GBP52 million, includes GBP5 million in respect of certain non-cash
divisional long-term incentive plan charges. The remainder is
primarily in respect of warranty, product liability and workers'
compensation charges which are matched by similar cash payments in
the period.
The net charge shown as an adjusting item in the Income
Statement of GBP78 million, includes charges of GBP89 million
related to restructuring activities discussed in the adjusting
items section of this review. These are partly offset by a net
release of GBP7 million related to loss-making contracts.
During the period GBP95 million of cash was spent on
restructuring.
Included within Other are foreign exchange movements of GBP56
million, the unwind of discounting on certain provisions of GBP7
million and the provisions acquired with FORECAST 3D in the period
totalling GBP1 million.
PENSIONS AND POST-EMPLOYMENT OBLIGATIONS
At 30 June 2020 total plan assets of the Melrose Group's defined
benefit pension plans were GBP3,693 million (31 December 2019:
GBP3,412 million) and total plan liabilities were GBP4,855 million
(31 December 2019: GBP4,533 million), a net deficit of GBP1,162
million (31 December 2019: GBP1,121 million), a reduction in the
net deficit at constant currency.
The most significant pension schemes in the Group are the GKN UK
schemes, with a net accounting deficit of GBP409 million at 30 June
2020 (31 December 2019: GBP423 million). The plans had gross assets
of GBP3,027 million (31 December 2019: GBP2,785 million) and
liabilities of GBP3,436 million (31 December 2019: GBP3,208
million).
The values of the Group plans were updated at 30 June 2020 by
independent actuaries to reflect the latest key assumptions. A
summary of the assumptions used are shown in note 12 to the
Condensed Interim Financial Statements.
Contributions to the Melrose Group defined benefit pension plans
and post-employment medical plans in the period were GBP43
million.
EXCHANGE RATES USED IN THE PERIOD
Exchange rates used for currencies most relevant to the Group in
the period were:
Average Closing
US Dollar rate rate
----------------------------------- --------- --------
Six months to 30 June 2020 1.26 1.24
----------------------------------- --------- --------
Twelve months to 31 December 2019 1.28 1.33
----------------------------------- --------- --------
Six months to 30 June 2019 1.29 1.27
----------------------------------- --------- --------
Euro
----------------------------------- --------- --------
Six months to 30 June 2020 1.14 1.10
----------------------------------- --------- --------
Twelve months to 31 December 2019 1.14 1.18
----------------------------------- --------- --------
Six months to 30 June 2019 1.15 1.12
----------------------------------- --------- --------
The Group policy on foreign currency risk is explained on pages
43 and 44 of the 2019 Annual Report, a copy of which is available
on the Company's website, www.melroseplc.net .
Noting recent movements in exchange rates, the following table
shows an indication of a full year impact of a 10 percent
strengthening of the major currencies, if they were to strengthen
in isolation against all other currencies, on the re-translation of
adjusted operating profit into Sterling:
GBPm USD EUR CNY Other
-------------------------------- ---- ---- ---- ------
Movement in adjusted operating
profit 43 6 7 5
-------------------------------- ---- ---- ---- ------
% impact on adjusted operating
profit 7% 1% 1% 1%
-------------------------------- ---- ---- ---- ------
The impact from transactional foreign exchange exposures is not
material in the short-term due to hedge coverage being
approximately 90%.
A 10 percent strengthening in either the US Dollar or Euro would
result in a partial natural hedge against the translational
movement in profits and would have had the following impact on debt
as at 30 June 2020:
GBPm USD EUR
------------------ ---- ----
Increase in debt 210 87
-------------------- ---- ----
FINANCIAL RISKS AND UNCERTAINTIES
The principal financial risks and uncertainties faced by the
Group include: liquidity risk; finance cost risk; exchange rate
risk; contract and warranty risk; and commodity cost risk and are
explained in detail on pages 43 and 44 of the 2019 Annual Report.
Further explanations and details of the strategic risk profile of
the Group, which includes non-financial risk, are set out on pages
48 to 55 of the 2019 Annual Report.
Following the impact of COVID-19 on the Group businesses and
their end markets, the liquidity of the Group has been a key focus
in the period.
LIQUIDITY AND COVENANT COMPLIANCE
The Group's net debt position at 30 June 2020 was GBP3,399
million (31 December 2019: GBP3,283 million).
The Group's committed bank funding includes: a multi-currency
denominated term loan of GBP100 million and US$960 million that
matures in April 2021, with the option at the Company's request to
extend the loan for a further three years to April 2024; and a
multi-currency denominated revolving credit facility of GBP1.1
billion, US$2.0 billion and EUR0.5 billion that matures in January
2023.
As at 30 June 2020, the term loan was fully drawn and there
remains a significant amount of headroom on the multi-currency
committed revolving credit facility. Applying the exchange rates at
30 June 2020, the headroom equated to GBP1,174 million.
In addition to the headroom on the multi-currency committed
revolving credit facility, cash, deposits and marketable securities
in the Group amounted to GBP339 million at 30 June 2020 (31
December 2019: GBP317 million).
The Group also holds capital market borrowings as at 30 June
2020 consisting of:
Interest rate
Notional Cross-currency on
amount Coupon swaps swaps
Maturity date GBPm % p.a. million % p.a.
---------------- ---------- ------- -------------- --------------
September 2022 450 5.375% US$373 5.70%
EUR284 3.87%
---------------- ---------- ------- -------------- --------------
May 2032 300 4.625% n/a n/a
---------------- ---------- ------- -------------- --------------
The committed bank funding has two financial covenants, being a
net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are normally tested half-yearly in June and
December.
During the period the Group agreed, with its lending banks, a
waiver for its net debt to adjusted EBITDA covenant test as at 30
June 2020 and 31 December 2020. Furthermore, since 30 June 2020,
the Group has extended this waiver to cover the test at 30 June
2021 and negotiated a test covenant level of 5.25x at 31 December
2021; 4.75x at 30 June 2022; and 4.0x at 31 December 2022, before
returning to 3.5x at 30 June 2023 and onwards.
The interest cover was 6.9x at 30 June 2020, compared to a
covenant set at 4.0x (31 December 2019: 10.8x). Subsequent to 30
June 2020 the Group has negotiated a change to the interest cover
covenant test such that at 31 December 2020 the test is set at
2.5x; 3.0x at 30 June 2021 and 31 December 2021; and 3.25x at 30
June 2022, before returning to 4.0x from 31 December 2022
onwards.
GOING CONCERN
As part of their consideration of going concern, the Directors
have reviewed the Group's future cash forecasts and profit
projections, which are based on market and internal data and recent
past experience. Given the global political and economic
uncertainty resulting from the COVID-19 pandemic, it is difficult
to estimate with precision the impact on the Group's prospective
financial performance.
The Group has modelled a reasonably possible downside scenario
against these future cash forecasts and throughout this scenario
the Group would not breach any of the revised financial covenants
and would not require any additional sources of financing.
The long-term impact of COVID-19 remains uncertain and the
impacts of the pandemic on trading conditions could be more
prolonged or severe than that which the Directors have considered
in this reasonably possible scenario.
However, the Group's current committed bank facility headroom,
its access to liquidity, and the sensible levels of bank covenants
recently agreed with the Group's supportive lending banks, allow
the Directors to consider it appropriate that the Group can manage
its business risks successfully and adopt a going concern basis in
preparing these Condensed Interim Financial Statements .
Geoffrey Martin
Group Finance Director
3 September 2020
CAUTIONARY STATEMENT
This announcement contains forward-looking statements. These
statements are made in good faith based on the information
available up to the time of the approval of this announcement, and
should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying any
such forward-looking information. Accordingly, readers are
cautioned not to place undue reliance on any such forward-looking
statements. Subject to compliance with applicable laws and
regulations, the Company does not undertake any obligation to
update any forward-looking statement to reflect events or
circumstances after the date of this announcement.
This announcement has been prepared solely to provide
information to shareholders to assess the Company's strategies and
the potential for those strategies to succeed, and neither the
Company nor its directors accept any liability to any other person
save as would arise under English law.
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
3 September 2020 3 September 2020
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 2020 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
14. 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.
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 Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2020 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
3 September 2020
Melrose Industries PLC
Condensed Consolidated Income Statement
Restated
(1)
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Unaudited Unaudited Audited
Continuing operations Notes GBPm GBPm GBPm
--------------------------------------- ------- ---------- ---------- -------------
Revenue 3 4,121 5,573 10,967
Cost of sales (3,586) (4,456) (8,732)
--------------------------------------- ------- ---------- ---------- -------------
Gross profit 535 1,117 2,235
Share of results of equity accounted
investments 8 7 16 38
Net operating expenses (1,123) (1,125) (1,955)
--------------------------------------- ------- ---------- ---------- -------------
Operating (loss)/profit 3,4 (581) 8 318
Finance costs (105) (126) (221)
Finance income 1 9 9
(Loss)/profit before tax (685) (109) 106
Tax 5 125 (22) (51)
--------------------------------------- ------- ---------- ---------- -------------
(Loss)/profit after tax for the period
from continuing operations (560) (131) 55
Discontinued operations
Loss for the period from discontinued
operations 9 (8) (34) (106)
--------------------------------------- ------- ---------- ---------- -------------
Loss after tax for the period (568) (165) (51)
--------------------------------------- ------- ---------- ---------- -------------
Attributable to:
Owners of the parent (569) (168) (60)
Non-controlling interests 1 3 9
--------------------------------------- ------- ---------- ---------- -------------
(568) (165) (51)
Earnings per share
Continuing operations
- Basic 6 (11.5)p (2.8)p 0.9p
- Diluted 6 (11.5)p (2.8)p 0.9p
Continuing and discontinued operations
- Basic 6 (11.7)p (3.4)p (1.2)p
- Diluted 6 (11.7)p (3.4)p (1.2)p
Adjusted results from continuing
operations
Adjusted revenue 3 4,359 5,875 11,592
Adjusted operating profit 3,4 56 541 1,102
Adjusted (loss)/profit before
tax 4 (40) 431 889
Adjusted (loss)/profit after
tax 4 (32) 332 699
Adjusted basic earnings per share 6 (0.7)p 6.8p 14.3p
Adjusted diluted earnings per
share 6 (0.7)p 6.8p 14.3p
--------------------------------------- ------- ---------- ---------- -------------
(1) Results for the period ended 30 June 2019 have been restated
for discontinued operations (see note 9).
Melrose Industries PLC
Condensed Consolidated Statement of Comprehensive Income
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Unaudited Unaudited Audited
Notes GBPm GBPm GBPm
---------------------------------------------- ------- ---------- ----------- -------------
Loss after tax for the period (568) (165) (51)
----------------------------------------------
Items that will not be reclassified
subsequently to the
Income Statement:
Net remeasurement loss on retirement
benefit obligations (15 ) (151 ) (32)
Fair value loss on investments
in equity instruments (5) - -
Income tax credit relating to items
that will not be reclassified 5 2 39 15
----------------------------------------------
(18) (112) (17)
Items that may be reclassified
subsequently to the
Income Statement:
Currency translation on net investments 417 6 (346)
Share of other comprehensive income/(expense)
from equity accounted investments 23 2 (23)
Transfer to Income Statement from
equity of cumulative translation
differences on disposal of foreign
operations - (13) (13)
Losses on hedge relationships (97) (44) (17)
Transfer to Income Statement on
hedge relationships 1 - -
Income tax credit/(charge) relating
to items that may be reclassified 5 10 (8) (19)
354 (57) (418)
Other comprehensive income/(expense)
for the period 336 (169) (435)
Total comprehensive expense for
the period (232) (334) (486)
Attributable to:
Owners of the parent (234) (337) (494)
Non-controlling interests 2 3 8
---------------------------------------------- ------- ---------- ----------- -------------
(232) (334) (486)
Melrose Industries PLC
Condensed Consolidated Statement of Cash Flows
Restated
(1)
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Unaudited Unaudited Audited
Notes GBPm GBPm GBPm
------------------------------------------ ------- ---------- ----------- -------------
Operating activities
Net cash from operating activities
from continuing operations 13 301 261 769
Net cash from/(used in) operating
activities from discontinued operations 13 1 (15) (20)
------------------------------------------ ------- ---------- ----------- -------------
Net cash from operating activities 302 246 749
Investing activities
Disposal of businesses, net of cash
disposed - 172 169
Purchase of property, plant and equipment (156) (219) (465)
Proceeds from disposal of property,
plant and equipment 3 7 24
Purchase of computer software and
capitalised development costs (21) (19) (54)
Dividends received from equity accounted
investments 27 67 67
Purchase of investments (2) - (50)
Settlement of derivatives used in
net investment hedging - - (100)
Acquisition of subsidiaries, net of
cash acquired (21) - -
Interest received 1 10 9
Net cash (used in)/from investing
activities from continuing operations (169) 18 (400)
Net cash used in investing activities
from discontinued operations 13 (1) (8) (15)
------------------------------------------ ------- ---------- ----------- -------------
Net cash (used in)/from investing activities (170) 10 (415)
Financing activities
Repayment of borrowings (73) (144) (456)
New bank loans raised - - 350
Cost of raising debt finance (1) - -
Repayment of principal under lease
obligations (38) (32) (70)
Dividends paid to non-controlling
interests - (5) (6)
Dividends paid to owners of the parent 7 - (148) (231)
-------------
Net cash used in financing activities
from continuing operations (112) (329 ) (413)
Net cash used in financing activities
from discontinued operations 13 - (2) (2)
------------------------------------------ ------- ---------- ----------- -------------
Net cash used in financing activities (112) (331) (415)
Net increase/(decrease) in cash and
cash equivalents 20 (75) (81)
Cash and cash equivalents at the beginning
of the period 317 415 415
Effect of foreign exchange rate changes 2 - (17)
------------------------------------------ -------
Cash and cash equivalents at the end
of the period 13 339 340 317
(1) Results for the period ended 30 June 2019 have been restated
for discontinued operations (see note 9).
As at 30 June 2020, the Group had net debt of GBP3,399 million
(31 December 2019: GBP3,283 million). A definition and
reconciliation of the movement in net debt is shown in note 13.
Melrose Industries PLC
Condensed Consolidated Balance Sheet
30 June 30 June 31 December
2020 2019 2019
Unaudited Unaudited Audited
Notes GBPm GBPm GBPm
-------------------------------------- ------- ---------------------- ---------------------- -----------
Non-current assets
Goodwill and other intangible
assets 10,039 10,444 9,784
Property, plant and equipment 3,422 3,631 3,432
Investments 49 - 48
Interests in equity accounted
investments 439 439 436
Deferred tax assets 259 143 160
Derivative financial assets 42 20 38
Trade and other receivables 501 422 424
-------------------------------------- -------
14,751 15,099 14,322
Current assets
Inventories 1,317 1,504 1,332
Trade and other receivables 1,518 2,190 1,970
Derivative financial assets 10 38 19
Current tax assets 18 38 20
Cash and cash equivalents 339 340 317
Assets classified as held for
sale 55 - 65
3,257 4,110 3,723
-------------------------------------- ------- ---------------------- ----------------------
Total assets 3 18,008 19,209 18,045
Current liabilities
Trade and other payables 2,274 2,705 2,461
Interest-bearing loans and borrowings 14 394 89
Lease obligations 79 50 71
Derivative financial liabilities 182 218 106
Current tax liabilities 121 82 106
Provisions 10 397 376 412
Liabilities associated with assets
held for sale 40 - 46
3,107 3,825 3,291
-------------------------------------- ------- ---------------------- ---------------------- -----------
Net current assets 150 285 432
Non-current liabilities
Trade and other payables 438 403 444
Interest-bearing loans and borrowings 3,615 3,235 3,464
Lease obligations 524 566 511
Derivative financial liabilities 371 303 216
Deferred tax liabilities 756 811 772
Retirement benefit obligations 12 1,162 1,326 1,121
Provisions 10 711 959 675
-------------------------------------- ------- ---------------------- ----------------------
7,577 7,603 7,203
-------------------------------------- ------- ---------------------- ----------------------
Total liabilities 3 10,684 11,428 10,494
Net assets 7,324 7,781 7,551
Equity
Issued share capital 333 333 333
Share premium account 8,138 8,138 8,138
Merger reserve 109 109 109
Other reserves (2,330) (2,330) (2,330)
Translation and hedging reserve 431 438 78
Retained earnings 615 1,071 1,197
Equity attributable to owners of
the parent 7,296 7,759 7,525
Non-controlling interests 28 22 26
-------------------------------------- ------- ---------------------- ---------------------- -----------
Total equity 7,324 7,781 7,551
Melrose Industries PLC
Condensed Consolidated Statement of Changes in Equity
Equity
attributable
Issued Share Translation to owners Non-
share premium Merger Other and hedging Retained of the controlling Total
capital account reserve reserves reserve earnings parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------- --------- -------- ------------ ---------
At 1 January 2019 333 8,138 109 (2,330) 495 1,492 8,237 24 8,261
(Loss)/profit
for the period - - - - - (168) (168) 3 (165)
Other
comprehensive
expense - - - - (57) (112) (169) - (169)
----------------- ---------------------- ------- --------- -------- ------------ --------- ------------ ------------ -------
Total
comprehensive
(expense)/income - - - - (57) (280) (337) 3 (334)
Dividends paid - - - - - (148) (148) (5) (153)
Equity-settled
share-based
payments - - - - - 7 7 - 7
----------------- ---------------------- ------- --------- -------- ------------ --------- ------------ ------------ -------
At 30 June 2019
(unaudited) 333 8,138 109 (2,330) 438 1,071 7,759 22 7,781
Profit for the
period - - - - - 108 108 6 114
Other
comprehensive
(expense)/income - - - - (360) 95 (265) (1) (266)
----------------- ---------------------- ------- --------- -------- ------------ --------- ------------ ------------ -------
Total
comprehensive
(expense)/income - - - - (360) 203 (157) 5 (152)
Dividends paid - - - - - (83) (83) (1) (84)
Equity-settled
share-based
payments - - - - - 6 6 - 6
At 31 December
2019 (audited) 333 8,138 109 (2,330) 78 1,197 7,525 26 7,551
(Loss)/profit
for the period - - - - - (569) (569) 1 (568)
Other
comprehensive
income/(expense) - - - - 353 (18) 335 1 336
----------------- ---------------------- ------- --------- -------- ------------ --------- ------------ ------------ -------
Total
comprehensive
income/(expense) - - - - 353 (587) (234) 2 (232)
Equity-settled
share-based
payments - - - - - 5 5 - 5
At 30 June 2020
(unaudited) 333 8,138 109 (2,330) 431 615 7,296 28 7,324
Notes to the Condensed Interim Financial Statements
1. Corporate information
The interim financial information for the six months ended 30
June 2020 has been reviewed by the auditor, but not audited. The
information for the year ended 31 December 2019 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 2020, 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 2019 Annual Report and financial statements on pages
130 to 138. Updated information on the Group's significant
estimation uncertainty can be found in note 14.
The Group's 2019 Annual Report and financial statements can be
found on the Group's website www.melroseplc.net. These Condensed
Interim Financial Statements should be read in conjunction with the
2019 information. The annual financial statements are prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union ("IFRS"). These Condensed Interim
Financial Statements have been prepared in accordance with IAS 34:
"Interim Financial Reporting" as adopted by the European Union.
During the second half of the year ended 31 December 2019, the
Group formally commenced a disposal process, aligned to its
strategic priority, to dispose of the Wheels & Structures
business, with a high expectation this process would conclude
within one year. The Wheels & Structures business was
previously reported within the Other Industrial operating segment
and is shown as a discontinued operation in these Condensed Interim
Financial Statements, with the Income Statement, the Statement of
Cash Flows and their associated notes for the period ended 30 June
2019 being restated accordingly.
On 2 January 2020, GKN Powder Metallurgy acquired FORECAST 3D, a
leading US specialist in plastic additive manufacturing and 3D
printing services offering a full range of services from concept to
series production, for a total consideration of up to GBP29
million, of which GBP21 million was paid on 2 January 2020. During
the period to 30 June 2020, the Group has performed a provisional
assessment of the assets and liabilities acquired in accordance
with IFRS 3: "Business combinations".
Alternative performance measures
The Group presents Alternative Performance Measures ("APMs") in
addition to the statutory results of the Group. These are presented
in accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA").
APMs used by the Group are set out in the glossary to these
Condensed Interim Financial Statements and the reconciling items
between statutory and adjusted results are listed below and
described in more detail in note 4.
Adjusted revenue includes the Group's share of revenue from
equity accounted investments ("EAIs").
Adjusted profit measures exclude items which are significant in
size or volatility or by nature are non-trading or non-recurring,
any item released to the Income Statement that was previously a
fair value item booked on an acquisition, and include adjusted
profit from EAIs.
On this basis, the following are the principal items included
within adjusting items impacting operating profit:
-- Amortisation of intangible assets that are acquired in a
business combination, excluding computer software and development
costs;
-- Significant restructuring costs and other associated costs,
including losses incurred following the announcement of closure for
identified businesses, arising from significant strategy changes
that are not considered by the Group to be part of the normal
operating costs of the business;
-- Acquisition and disposal related costs;
-- Impairment charges that are considered to be significant in
nature and/or value to the trading performance of the business;
-- Movement in derivative financial instruments not designated
in hedging relationships, including revaluation of associated
financial assets and liabilities;
-- Reversal of inventory uplift in value recorded on acquisition;
-- Removal of adjusting items, interest and tax on equity
accounted investments to reflect operating results;
-- The charge for the Melrose equity-settled compensation
scheme, including its associated employer's tax charge; and
-- The net release of fair value items booked on acquisitions.
Further to the adjusting items above, adjusting items impacting
profit before tax include:
-- Acceleration of unamortised debt issue costs written off as a
consequence of Group refinancing; and
-- The fair value changes on cross-currency swaps, entered into
by GKN prior to acquisition, relating to cost of hedging which are
not deferred in equity.
2. Summary of significant accounting policies (continued)
In addition to the items above, adjusting items impacting profit
after tax include:
-- The net effect on tax of significant restructuring from
strategy changes that are not considered by the Group to be part of
the normal operating costs of the business; and
-- The tax effects of adjustments to profit/(loss) before tax.
The Board considers the adjusted results to be an important
measure used to monitor how the businesses are performing as this
provides a meaningful reflection of how the businesses are managed
and measured on a day-to-day basis and achieves consistency and
comparability between reporting periods, when all businesses are
held for a complete reporting period.
The adjusted measures are used to partly determine the variable
element of remuneration of senior management throughout the Group
and are also in alignment with performance measures used by certain
external stakeholders. The adjusted measures are also taken into
account when valuing individual businesses as part of the "Buy,
Improve, Sell" Group strategy model.
Adjusted profit is not a defined term under IFRS and may not be
comparable with similarly titled profit measures reported by other
companies. It is not intended to be a substitute for, or superior
to, GAAP measures. All APMs relate to the current period results
and comparative periods where provided.
Going concern
The Condensed Interim Financial Statements have been prepared on
a going concern basis as the Directors consider that adequate
resources exist for the Company to continue in operational
existence for the foreseeable future.
The Group's liquidity and funding arrangements are described in
the Finance Director's Review. There is significant
liquidity/financing headroom (in excess of GBP1 billion) at 30 June
2020 and throughout the going concern forecast period. There has
been a greater focus on forecast covenant compliance which is
considered further below.
Covenants
The Group's banking facility has two financial covenants being a
net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are tested half yearly in June and
December. The net debt to adjusted EBITDA covenant test was
originally set at 3.5x leverage and the interest cover covenant was
originally set at 4.0x for each of the half yearly measurement
dates for the remainder of the term of the facility.
Due to the pervasive impact of COVID-19 on certain of the
Group's businesses, it has been necessary to formally renegotiate
the financial covenants with lending banks. The revised financial
covenants during the period of assessment for going concern and up
to 31 December 2021 are as follows:
31 December 30 June 31 December
2020 2021 2021
----------------------------- ------------ -------- ------------
Net debt to adjusted EBITDA Waived Waived 5.25x
----------------------------- ------------ -------- ------------
Interest cover 2.5x 3.0x 3.0x
----------------------------- ------------ -------- ------------
Testing
The Group has modelled two scenarios in its assessment of going
concern; a base case and a reasonably possible sensitised case.
The base case takes into account the estimated impact of the
COVID-19 global pandemic as well as other end market and
operational factors throughout the going concern period and has
been monitored against the actual results and cash generation in
the period since 1 July 2020. Due to the severe impact on trading
during the second quarter of 2020, details of which are discussed
within the Chief Executive's Review, along with new ways of working
to accommodate social distancing and other regulations in
factories, it is difficult to estimate with precision the impact on
the Group's prospective financial performance.
The reasonably possible sensitised case models a more pronounced
decline in sales in the fourth quarter of 2020 and in 2021. This
additional decline in revenue over and above the base case, ranging
from 4% to 12% taking into account the different businesses and
geographies affected, has an impact on adjusted operating profit of
between 25% and 40% of absolute revenue changes.
Under the reasonably possible sensitised case, no covenant is
breached at any of the forecast testing dates being; 31 December
2020 and 30 June 2021, with the testing at 31 December 2021 also
favourable, and the Group will not require any additional sources
of finance.
The reasonably possible sensitised case has also been used as a
'reverse stress test' to consider the point at which the covenants
may be breached. This reverse stress test indicates that a
significant reduction in sales, beyond what is considered
reasonable, would be required in order to breach covenants. In this
remote situation, management could take further mitigating actions
to protect profits, conserve cash and reduce capital expenditure to
minimum maintenance levels. Annual adjusted operating profit would
need to fall by more than GBP950 million from that achieved in the
year ended 31 December 2019 before a covenant breach would occur in
the assessment period.
3. Segment information
Segment information is presented in accordance with IFRS 8:
"Operating segments" which requires operating segments to be
identified on the basis of internal reports about components of the
Group that are regularly reported to the Group's Chief Operating
Decision Maker ("CODM"), which has been deemed to be the Group's
Board, in order to allocate resources to the segments and assess
their performance.
During the second half of 2019, a decision was made to explore
strategic options for the Nortek Air Management business separate
to the Security & Smart Technology business and internal
reporting provided to the CODM was revised. As a consequence, the
Nortek Air & Security operating segment was revised with the
Security & Smart Technology business now included in the Other
Industrial operating segment. Other Industrial has also been
impacted by the removal of the Wheels & Structures business,
which has been included in discontinued operations (note 9).
Comparative results for the six month period ended 30 June 2019
have been restated accordingly.
The operating segments are as follows:
Aerospace - a multi-technology global tier one supplier of both
civil and defence air frames and engine structures, including
Aerostructures and Engine Systems.
Automotive - comprises Driveline, All Wheel Drive and eDrive
(together ePowertrain) and Cylinder Liners businesses; a global
technology and systems engineer which designs, develops,
manufactures and integrates an extensive range of driveline
technologies.
Powder Metallurgy - a global leader in precision powder metal
parts for the automotive and industrial sectors, as well as the
production of powder metal.
Nortek Air Management - comprises the Group's Air Management
businesses, which includes the Air Quality and Home Solutions
business ("AQH") and the Global Heating, Ventilation & Air
Conditioning business ("HVAC"). AQH is a leading manufacturer of
ventilation products for the professional remodelling and
replacement markets, residential new construction market and DIY
market. HVAC manufactures and sells split-system and packaged air
conditioners, heat pumps, furnaces, air handlers and parts for the
residential replacement and new construction markets along with
custom designed and engineered products and systems for data
centres and non-residential applications.
Other Industrial - comprises the Group's Ergotron, Brush and
Security & Smart Technology businesses.
In addition, there are central cost centres which are also
reported to the Board. The central corporate cost centres contain
the Melrose Group head office costs and charges related to the
divisional management long-term incentive plans.
Reportable segment results include items directly attributable
to a segment as well as those which can be allocated on a
reasonable basis. Inter-segment pricing is determined on an arm's
length basis in a manner similar to transactions with third
parties.
The Group's geographical segments are determined by the location
of the Group's non-current assets and, for revenue, the location of
external customers. Inter-segment sales are not material and have
not been disclosed.
The following tables present the results and certain asset and
liability information regarding the Group's operating segments and
central cost centres for the six month period ended 30 June 2020
and comparative periods.
a) Segment revenues
6 months ended 30 June 2020
Powder Nortek Other
Aerospace Automotive Metallurgy Air Management Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ---------- -------------- ------------- ----------------- ------------- --------
Adjusted revenue 1,580 1,541 396 550 292 4,359
Equity accounted
investments (3) (228) (7) - - (238)
------------------------- ---------- -------------- ------------- ----------------- ------------- --------
Revenue 1,577 1,313 389 550 292 4,121
6 months ended 30 June 2019 - restated
Powder Nortek Other
Aerospace Automotive Metallurgy Air Management Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ---------- -------------- ------------- ----------------- ------------- --------
Adjusted revenue 1,904 2,450 581 578 362 5,875
Equity accounted
investments (13) (282) (7) - - (302)
------------------------- ---------- -------------- ------------- ----------------- ------------- --------
Revenue 1,891 2,168 574 578 362 5,573
3. Segment information (continued)
a) Segment revenues (continued)
Year ended 31 December 2019
Powder Nortek Other
Aerospace Automotive Metallurgy Air Management Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ---------- -------------- ------------- ----------------- ------------- --------
Adjusted revenue 3,852 4,739 1,115 1,178 708 11,592
Equity accounted
investments (16) (593) (16) - - (625)
Revenue 3,836 4,146 1,099 1,178 708 10,967
b) Segment operating profit
6 months ended 30
June 2020
Powder Nortek Other Corporate
Continuing Aerospace Automotive Metallurgy Air Management Industrial (2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ---------- -------------- ------------- ----------------- ------------- ---------- --------
Adjusted operating
profit/(loss) 54 (64) (3) 71 18 (20) 56
Items not included
in adjusted
operating
profit (1) :
Amortisation of
intangible
assets acquired
in
business
combinations (129) (74) (24) (18) (18) - (263)
Impairment and
write
down of assets (133) (18) (28) - - - (179)
Restructuring
costs (43) (25) (23) (2) (4) (2) (99)
Movement in
derivatives
and associated
financial
assets and
liabilities 8 (4) - - - (93) (89)
Equity accounted
investments
adjustments - (14) - - - - (14)
Acquisition and
disposal
costs - - - - - (4) (4)
Melrose
equity-settled
compensation
scheme
charges - - - - - (1) (1)
Net release and
changes
in discount rate
of fair value
items 18 (12) 5 - 1 - 12
Operating
(loss)/profit (225) (211) (73) 51 (3) (120) (581)
Finance costs (105)
Finance income 1
Loss before tax (685)
Tax 125
Loss for the period from
continuing operations (560)
(1) For further details on adjusting items, refer to note 4.
(2) C orporate adjusted operating loss of GBP20 million includes
GBP5 million of costs in respect of divisional long-term incentive
plans.
3. Segment information (continued)
b) Segment operating profit (continued)
6 months ended 30 June
2019 - restated
Powder Nortek Other Corporate
Continuing Aerospace Automotive Metallurgy Air Management Industrial (2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ---------- -------------- ------------ ---------------- ------------ ---------- --------
Adjusted
operating
profit/(loss) 192 186 66 79 46 (28) 541
Items not
included
in adjusted
operating
profit (1) :
Amortisation of
intangible
assets acquired
in
business
combinations (132) (73) (24) (18) (21) - (268)
Impairment of
assets - - - - (179) - (179)
Restructuring
costs (26) (14) (5) (6) (19) (4) (74)
Equity accounted
investments
adjustments - (14) - - - - (14)
Movement in
derivatives
and associated
financial
assets and
liabilities 2 (2) - - - (13) (13)
Melrose
equity-settled
compensation
scheme
charges - - - - - (7) (7)
Net release and
changes
in discount rate
of
fair value items (6) - 22 2 - - 18
Acquisition and
disposal
costs - - - - - 4 4
Operating
profit/(loss) 30 83 59 57 (173) (48) 8
Finance costs (126)
Finance income 9
Loss before tax (109)
Tax (22)
Loss for the period from
continuing operations (131)
(1) For further details on adjusting items, refer to note 4.
(2) C orporate adjusted operating loss of GBP28 million includes
GBP12 million of costs in respect of divisional long-term incentive
plans.
Year ended 31
December
2019
Powder Nortek Other Corporate
Continuing Aerospace Automotive Metallurgy Air Management Industrial (2) Total
operations GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ---------- -------------- ------------ ---------------- ------------ ---------- --------
Adjusted operating
profit/(loss) 409 367 117 175 86 (52) 1,102
Items not included
in adjusted operating
profit (1) :
Amortisation of
intangible
assets acquired in
business
combinations (261) (148) (48) (36) (41) - (534)
Restructuring costs (79) (83) (19) (11) (37) (9) (238)
Impairment of assets - - - - (179) - (179)
Equity accounted
investments (28
adjustments (1) (27 ) - - - - )
Melrose
equity-settled
compensation scheme
charges - - - - - (17) (17)
Net release and
changes
in discount rate of
fair value items 34 79 28 11 1 - 153
Movement in
derivatives
and associated
financial
assets and
liabilities 2 (2) - - - 55 55
Acquisition and
disposal
costs - - (1) - - 5 4
Operating
profit/(loss) 104 186 77 139 (170) (18) 318
Finance costs (221)
Finance income 9
Profit before tax 106
Tax (51)
Profit for the year from
continuing operations 55
(1) For further details on adjusting items, refer to note 4.
(2) Corporate adjusted operating loss of GBP52 million includes
GBP20 million of costs in respect of divisional long-term incentive
plans.
3. Segment information (continued)
c) Segment total assets and liabilities
Total assets Total liabilities
------------------------------------- -------------------------------------
Restated Restated
30 June 30 June 31 December 30 June 30 June 31 December
2020 2019 2019 2020 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ---------- --------- -------------- ---------- --------- --------------
Aerospace 7,384 7,702 7,478 3,096 3,112 3,089
Automotive 5,276 5,696 5,391 2,163 2,419 2,304
Powder Metallurgy 1,897 2,117 1,906 493 551 472
Nortek Air
Management 1,500 1,613 1,415 429 469 362
Other Industrial 1,277 1,393 1,237 252 326 259
Corporate 619 544 553 4,211 4,494 3,962
------------------- ---------- --------- -------------- ---------- --------- --------------
Continuing
operations 17,953 19,065 17,980 10,644 11,371 10,448
------------------- ---------- --------- -------------- ---------- --------- --------------
Discontinued
operations 55 144 65 40 57 46
------------------- ---------- --------- -------------- ---------- --------- --------------
Total 18,008 19,209 18,045 10,684 11,428 10,494
d) Segment capital expenditure and depreciation
Capital expenditure Depreciation of Depreciation of leased
(1) owned assets (1) assets
--------------------------------- ---------------------------------- ----------------------------------
6 6 6
months Restated months Restated months Restated
ended 6 months ended 6 months ended 6 months
30 ended Year ended 30 ended Year ended 30 ended Year ended
June 30 June 31 December June 30 June 31 December June 30 June 31 December
2020 2019 2019 2020 2019 2019 2020 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- -------- --------- ------------ -------- --------- ------------- -------- --------- -------------
Aerospace 61 67 178 65 68 139 15 15 30
Automotive 54 95 231 100 93 194 8 8 16
Powder
Metallurgy 12 31 55 31 30 59 5 3 8
Nortek
Air
Management 13 19 37 13 11 23 7 5 11
Other
Industrial 4 4 8 5 6 11 2 3 6
Corporate - - - - - - 1 1 1
-------------- -------- --------- ------------ -------- --------- ------------- -------- --------- -------------
Continuing
operations 144 216 509 214 208 426 38 35 72
-------------- -------- --------- ------------ -------- --------- ------------- -------- --------- -------------
Discontinued
operations 1 7 11 - 8 12 - - 1
-------------- -------- --------- ------------ -------- --------- ------------- -------- --------- -------------
Total 145 223 520 214 216 438 38 35 73
(1) Includes computer software and development costs. Capital
expenditure excludes lease additions.
e) Geographical information
The Group operates in various geographical areas around the
world. The parent company's country of domicile is the UK and the
Group's revenues and non-current assets in the rest of Europe and
North America are also considered to be material.
The Group's revenue from external customers and information
about specific segment assets (non-current assets excluding
deferred tax assets, non-current trade and other receivables and
non-current derivative financial assets) by geographical location
are detailed below:
Revenue(1) from external
customers Segment assets
------------------------------------- ----------------------------------
Restated
6 months 6 months
ended ended Year ended Restated
30 June 30 June 31 December 30 June 30 June 31 December
2020 2019 2019 2020 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------- ---------- -------------- --------- --------- ------------
UK 341 553 1,048 2,251 2,400 2,319
Rest of Europe 918 1,262 2,426 5,272 5,420 5,136
North America 2,366 3,064 6,073 5,131 5,199 4,917
Other 496 694 1,420 1,295 1,414 1,328
---------------- --------- ---------- -------------- --------- --------- ------------
Continuing
operations 4,121 5,573 10,967 13,949 14,433 13,700
---------------- --------- ---------- -------------- --------- --------- ------------
Discontinued
operations 82 333 423 - 81 -
---------------- --------- ---------- -------------- --------- --------- ------------
Total 4,203 5,906 11,390 13,949 14,514 13,700
(1) Revenue is presented by destination.
4. Reconciliation of adjusted profit measures
As described in note 2, adjusted profit measures are an
alternative performance measure used by the Board to monitor the
operating performance of the Group.
a) Operating profit
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Continuing operations Notes GBPm GBPm GBPm
-------------
Operating (loss)/profit (581) 8 318
------------------------------------------------- ---------- --------- -------------
Amortisation of intangible assets
acquired in business combinations a 263 268 534
Write down of assets and impairment b 179 179 179
Restructuring costs c 99 74 238
Movement in derivatives and associated
financial assets and liabilities d 89 13 (55)
Equity accounted investments
adjustments e 14 14 28
Acquisition and disposal costs f 4 (4) (4)
Melrose equity-settled compensation
scheme charges g 1 7 17
Net release and changes in discount
rate of fair value items h (12) (18) (153)
Total adjustments to operating
(loss)/profit 637 533 784
Adjusted operating profit 56 541 1,102
a. The amortisation charge on intangible assets acquired in
business combinations of GBP263 million (2019: GBP268 million), is
excluded from adjusted results due to its non-trading nature and to
enable comparison with companies that grow organically. However,
where intangible assets are trading in nature, such as computer
software and development costs, the amortisation is not excluded
from adjusted results.
b. The write down of assets totalling GBP179 million was
recognised as a result of the impact of COVID-19, of which GBP133
million was within the Aerospace division. The ultimate impact of
the COVID-19 pandemic is unclear and the measurement of its impact
required a review of the operating assets of the Group, with a
significant degree of estimation. This review resulted in GBP153
million of fixed assets and GBP26 million of other net operating
assets being written down across a number of sites within the
businesses, as they adapt to new levels of industry demand. The
write down of these assets is shown as an adjusting item due to the
unprecedented nature of the COVID-19 pandemic, its non-trading
nature and size. The impairment recognised in 2019, of GBP179
million, related to goodwill allocated to the Security & Smart
Technology group of CGUs, following a deterioration in their
performance and future prospects at that time.
c. Restructuring and other associated costs in the period
totalled GBP99 million (2019: GBP74 million) and are shown as
adjusting items due to their size and non-trading nature. During
the period ended 30 June 2020 they included:
-- GBP43 million (2019: GBP26 million) relating to the Aerospace
division including costs incurred as the business takes its initial
steps to substantially reduce its cost structure following the
impact of COVID-19 on the aerospace industry; as well as the
continuation of its global integration to create "One Aerospace",
ensuring the business is well positioned and able to react to
changes in its new environment.
-- GBP25 million (2019: GBP14 million) of costs within the
Automotive division, incurred as the business continues to address
its high cost base, inherited on acquisition, and best position the
business as it begins its recovery post COVID-19.
-- GBP23 million (2019: GBP5 million) of restructuring costs in
the Powder Metallurgy division as it continues footprint
consolidation actions which began in 2019, along with additional
focus on reducing its fixed cost base to realign the business for
future demand.
-- A charge of GBP8 million (2019: GBP29 million) within the
Nortek Air Management, Other Industrial and Corporate divisions,
primarily related to completing the factory consolidation within
the HVAC business and the finalisation of the changes made in the
Security & Smart Technology business to move to a third-party
contract manufacturing model.
d. Hedge accounting is not applied within the GKN businesses for
transactional foreign exchange exposure. Consequently, for
consistency and because of their volatility and size, the movements
in the fair value of derivative financial instruments (primarily
forward foreign currency exchange contracts) entered into to
mitigate the potential volatility of future cash flows, on
long-term foreign currency customer and supplier contracts in the
GKN businesses, along with foreign exchange movements on the
associated financial assets and liabilities are shown as an
adjusting item and totalled a charge of GBP89 million (2019: GBP13
million).
4. Reconciliation of adjusted profit measures (continued)
a) Operating profit (continued)
e. The Group has a number of equity accounted investments
("EAIs") in which it does not hold full control, the largest of
which is a 50% interest in Shanghai GKN HUAYU Driveline Systems
("SDS"), within the Automotive business. The EAIs generated GBP238
million (2019: GBP302 million) of revenue in the period, which is
not included in the statutory results but is shown within adjusted
revenue so as not to distort the operating margins reported in the
businesses when the adjusted operating profit earned from these
EAIs is included.
In addition, the profits and losses of EAIs, which are shown
after amortisation of acquired intangible assets, interest and tax
in the statutory results, are adjusted to show the adjusted
operating profit consistent with the adjusted operating profits of
the subsidiaries of the Group. The revenue and profit of EAIs are
adjusted because they are considered to be significant in size and
are important in assessing the performance of the business.
f. Acquisition and disposal related costs of GBP4 million (2019:
credit of GBP4 million) were incurred in the period and related to
transaction costs in respect of acquisition and disposal
activities. These items are excluded from adjusted results due to
their non-trading nature and volatility.
g. The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer's tax charge, of GBP1 million
(2019: GBP7 million) is excluded from adjusted results due to its
volatility. The shares that would be issued, based on the Scheme's
current value at the end of the reporting period, are included in
the calculation of the adjusted diluted earnings per share, which
the Board considers to be a key measure of performance.
h. Certain items previously recorded as fair value items on
acquisitions, have been resolved for more favourable amounts than
first anticipated. The net release of fair value items recognised
on acquisitions in the period of GBP12 million (2019: GBP18
million) included a credit of GBP17 million relating to certain
loss-making contracts recognised on the acquisition of GKN and is
partly offset by a GBP5 million charge relating to the movement in
discount rates on the loss-making contracts recognised as fair
value items. The net release of any excess fair value item is shown
as an adjusting item to avoid positively distorting adjusted
results.
b) Profit before tax
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Continuing operations Notes GBPm GBPm GBPm
--------------------------------------- -------- ---------- --------- ------------
(Loss)/profit before tax (685) (109) 106
------------------------------------------------- ---------- --------- ------------
Adjustments to operating (loss)/profit
per above 637 533 784
Fair value changes on cross-currency
swaps i 4 7 (1)
Bank facility negotiation fees j 4 - -
Total adjustments to (loss)/profit
before tax 645 540 783
------------------------------------------------- ---------- --------- ------------
Adjusted (loss)/profit before
tax (40) 431 889
i. The fair value changes on cross-currency swaps relating to
cost of hedging which are not deferred in equity, are shown as an
adjusting item because of their volatility and non-trading
nature.
j. Following the impact of COVID-19, the Group paid fees in
negotiating waivers for its bank facility EBITDA to net debt
covenants for June and December 2020. These fees were immediately
written off and shown as an adjusting item because of their
non-trading nature.
4. Reconciliation of adjusted profit measures (continued)
c) Profit after tax
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Continuing operations Notes GBPm GBPm GBPm
---------------------------------------- ------- --------------------- -------------------- ------------
(Loss)/profit after tax (560) (131) 55
---------------------------------------- ------- --------------------- -------------------- ------------
Adjustments to (loss)/profit
before tax per above 645 540 783
Tax effect of adjustments to
(loss)/profit before tax 5 (113) (73) (123)
Tax effect of significant restructuring - - (9)
Equity accounted investments
- tax k (4) (4) (7)
---------------------------------------- ------- --------------------- -------------------- ------------
Total adjustments to (loss)/profit
after tax 528 463 644
---------------------------------------- ------- --------------------- -------------------- ------------
Adjusted (loss)/profit after
tax (32) 332 699
k. As explained in paragraph e above, the profits and losses of
EAIs are shown after interest and tax in the statutory results.
They are adjusted to show the profit before tax and the profit
after tax, consistent with the subsidiaries of the Group.
5 . Tax
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
Analysis of the (credit)/charge in 2020 2019 2019
the period: GBPm GBPm GBPm
------------------------------------------ -------- -------------------- ------------
Continuing operations
Current tax 20 59 146
Deferred tax (145) (37) (95)
------------------------------------------ -------- -------------------- ------------
Total tax (credit)/charge from continuing
operations (125) 22 51
------------------------------------------ -------- -------------------- ------------
Discontinued operations
Current tax - 2 3
Deferred tax - - -
------------------------------------------ -------- -------------------- ------------
Total tax charge from discontinued
operations - 2 3
------------------------------------------ -------- -------------------- ------------
Total tax (credit)/charge (125) 24 54
Continuing operations:
The effective tax rate in respect of adjusted profit before tax
for the half year is 20% (2019: 23%). Adjusted tax has been
calculated by applying the expected tax rate for the full year to
the adjusted loss before tax of GBP40 million (2019: profit of
GBP431 million), giving an adjusted tax credit of GBP8 million
(2019: charge of GBP99 million).
The adjusted tax credit of GBP8 million (2019: charge of GBP99
million) excludes a tax credit on adjusting items of GBP113 million
(2019: GBP73 million). This represents a deferred tax credit on
intangible asset amortisation of GBP39 million (2019: GBP59
million) and a tax credit on other adjusting items of GBP74 million
(2019: GBP14 million). The adjusted tax (credit)/charge includes a
charge in respect of EAIs of GBP4 million (2019: GBP4 million).
In addition to the amount charged to the Income Statement, a
credit of GBP12 million (2019: credit of GBP31 million) has been
recognised directly in the Statement of Comprehensive Income. This
represents a tax credit of GBP10 million (2019: charge of GBP8
million) in respect of movements on hedge relationships and
translation differences and a tax credit of GBP2 million (2019:
credit of GBP39 million) in respect of the remeasurement of
retirement benefit obligations.
6. Earnings per share
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
Earnings attributable to owners of the 2020 2019 2019
parent GBPm GBPm GBPm
-------------------------------------------- -------- --------- ------------
Earnings for basis of earnings per share (569) (168) (60)
Less: loss for the period from discontinued
operations 8 34 106
-------------------------------------------- -------- --------- ------------
Earnings for basis of earnings per share
from continuing operations (561) (134) 46
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Number Number Number
------------------------------------------- -------- -------- ------------
Weighted average number of ordinary shares
for the purposes of basic earnings per
share (million) 4,858 4,858 4,858
Further shares for the purposes of diluted - - -
earnings per share (million)
Weighted average number of ordinary shares
for the purposes of diluted earnings
per share (million) 4,858 4,858 4,858
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Earnings per share pence pence pence
-------------------------------------------- -------- --------- ------------
Basic earnings per share
From continuing and discontinued operations (11.7) (3.4) (1.2)
From continuing operations (11.5) (2.8) 0.9
From discontinued operations (0.2) (0.6) (2.1)
-------------------------------------------- -------- --------- ------------
Diluted earnings per share
From continuing and discontinued operations (11.7) (3.4) (1.2)
From continuing operations (11.5) (2.8) 0.9
From discontinued operations (0.2) (0.6) (2.1)
-------------------------------------------- -------- --------- ------------
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Adjusted earnings from continuing GBPm GBPm GBPm
operations
------------------------------------ ---------- --------- -------------
Adjusted earnings (1) for the basis
of adjusted earnings per share (33) 329 693
------------------------------------ ---------- --------- -------------
(1) Adjusted earnings for the 6 months ended 30 June 2020
comprises adjusted loss after tax of GBP32 million (2019: profit
after tax of GBP332 million) net of an allocation of profit to
non-controlling interests of GBP1 million (2019: GBP3 million).
Adjusted earnings for the year ended 31 December 2019 comprises
adjusted profit after tax of GBP699 million, net of an allocation
to non-controlling interests of GBP6 million.
Adjusted earnings per share from
continuing operations
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
pence pence pence
------------------------------------ ---------- --------- -------------
Adjusted basic earnings per share (0.7) 6.8 14.3
Adjusted diluted earnings per share (0.7) 6.8 14.3
7. Dividends
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
------------------------------------ -------- -------- ------------
Final dividend for the year ended
31 December 2018 of 3.05p - 148 148
Interim dividend for the year ended
31 December 2019 of 1.7p - - 83
------------------------------------ -------- -------- ------------
Total dividends paid - 148 231
No interim dividend (2019: 1.7p per ordinary share totalling
GBP83 million) is proposed by the Board. The initially proposed
final dividend for the year ended 31 December 2019 of 3.4p per
ordinary share was withdrawn as announced on 7 May 2020.
8. Share of results of equity accounted investments
Summary information for the Group's equity accounted investments
is as follows:
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Continuing operations GBPm GBPm GBPm
------------------------------------- -------- -------- ------------
Revenue 238 302 625
------------------------------------- -------- -------- ------------
Adjusted operating profit 21 30 66
------------------------------------- -------- -------- ------------
Adjusting items (10) (10) (21)
Profit before tax 11 20 45
Tax (4) (4) (7)
------------------------------------- -------- -------- ------------
Share of results of equity accounted
investments 7 16 38
9. Discontinued operations and assets held for sale
Wheels & Structures
During the second half of 2019, following a strategic review,
the Board formally commenced a disposal process aligned to its
strategic priority, to dispose of the Wheels & Structures
business, with a high expectation that this process would conclude
within one year. In accordance with IFRS 5: " Non-current assets
held for sale and discontinued operations", associated assets and
liabilities were classified as held for sale at 31 December 2019
and continue to be separately shown on the Balance Sheet at 30 June
2020.
The results of the Wheels & Structures business were
previously included within the Other Industrial operating segment
for the period ended 30 June 2019 and are now classified as
discontinued operations, in accordance with IFRS 5.
On 25 June 2019, the Group completed the sale of the
Walterscheid Powertrain Group for cash consideration of GBP185
million. The costs charged to the Income Statement associated with
the disposal were GBP7 million. The loss on disposal was GBP21
million after the recycling of cumulative translation differences
of GBP13 million.
Financial performance of discontinued operations:
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
Revenue 82 333 423
Operating costs (84) (342) (503)
--------------------------------------- --------------------------- ----------------------- -------------
Operating loss (1) (2) (9) (80)
Finance costs - (2) (2)
--------------------------------------- --------------------------- ----------------------- -------------
Loss before tax (2) (11) (82)
Tax - (2) (3)
--------------------------------------- --------------------------- ----------------------- -------------
Loss after tax (2) (13) (85)
Loss on disposal of net assets of
discontinued operations, net of
recycled cumulative translation
differences (6) (21) (21)
Loss for the period from discontinued
operations (8) (34) (106)
(1) The operating loss in the year ended 31 December 2019
included a GBP64 million charge on remeasurement to fair value less
costs of disposal relating to the Wheels & Structures business
on reclassification to assets held for sale.
10. Provisions
Property Warranty
Loss-making related Environmental related
contracts costs and litigation costs Restructuring Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ----------- -------- --------------- -------- ------------- ------- ---------
At 1 January
2020 384 45 155 324 114 65 1,087
Utilised (31) (1) (23) (22) (95) (1) (173)
Net (credit)/charge
to operating
profit(1) (7) 1 26 19 89 2 130
Unwind of discount
(2) 7 - - - - - 7
Acquisition of
businesses - 1 - - - - 1
Exchange adjustments 17 4 8 20 5 2 56
--------------------- ----------- -------- --------------- -------- ------------- ------- ---------
At 30 June 2020 370 50 166 341 113 68 1,108
Current 55 8 97 124 99 14 397
Non-current 315 42 69 217 14 54 711
--------------------- ----------- -------- --------------- -------- ------------- ------- ---------
370 50 166 341 113 68 1,108
(1) Includes GBP78 million of adjusting items and GBP52 million
recognised in adjusted operating profit.
(2) Includes GBP2 million within finance costs relating to the
time value of money and GBP5 million relating to changes in
discount rates on loss-making contract provisions recognised as
fair value items on the acquisition of GKN, which has been included
as an adjusting item within operating profit.
Provisions for loss-making contracts are considered to exist
where the Group has a contract under which the unavoidable costs of
meeting the obligations exceed the economic benefits expected to be
received under it. This obligation has been discounted and will be
utilised over the period of the respective contracts, which is up
to 15 years.
The provision for property related costs represents the
estimated dilapidation costs for ongoing leases. This is expected
to result in cash expenditure over the next one to eight years.
Environmental and litigation provisions relate to the estimated
remediation costs of pollution, soil and groundwater contamination
at certain sites and estimated future costs and settlements in
relation to legal claims and associated insurance obligations. Due
to their nature, it is not possible to predict precisely when these
provisions will be utilised.
Provisions for the expected cost of warranty obligations under
local sale of goods legislation are recognised at the date of sale
of the relevant products and subsequently updated for changes in
estimates as necessary. Warranty terms are, on average, between one
and five years.
Restructuring provisions relate to committed costs in respect of
restructuring programmes, usually resulting in cash spend within
one year.
Other provisions include long-term incentive plans for
divisional senior management and the employer tax on equity-settled
incentive schemes which are expected to result in cash expenditure
over the next two to five years.
Where appropriate, provisions have been discounted using
discount rates between 0% and 6% (31 December 2019: 0% and 7%)
depending on the territory in which the provision resides and the
length of its expected utilisation.
11. Financial instruments
The table below sets out the Group's accounting classification
of each category of financial assets and liabilities and their fair
values as at 30 June 2020, 30 June 2019 and 31 December 2019:
Current Non-current Total
GBPm GBPm GBPm
--------------------------------------- -------- ------------------- --------
30 June 2020
Financial assets
Classified as amortised cost:
Cash and cash equivalents 339 - 339
Net trade receivables 1,048 - 1,048
Classified as fair value:
Investments - 49 49
Derivative financial assets:
Foreign currency forward contracts 8 27 35
Embedded derivatives 2 15 17
Assets classified as held for
sale 55 - 55
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (14) (3,615) (3,629)
Government refundable advances (8) (63) (71)
Lease obligations (79) (524) (603)
Other financial liabilities (1,777) (21) (1,798)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (121) (155) (276)
Interest rate swaps (35) (96) (131)
Cross-currency swaps (25) (112) (137)
Embedded derivatives (1) (8) (9)
Liabilities associated with assets
held for sale (40) - (40)
30 June 2019
Financial assets
Classified as amortised cost:
Cash and cash equivalents 340 - 340
Net trade receivables 1,762 - 1,762
Classified as fair value:
Derivative financial assets:
Foreign currency forward contracts 10 5 15
Interest rate swaps 25 - 25
Embedded derivatives 3 15 18
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (394) (3,235) (3,629)
Government refundable advances (7) (66) (73)
Lease obligations (50) (566) (616)
Other financial liabilities (2,427) (106) (2,533)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (98) (121) (219)
Interest rate swaps (11) (73) (84)
Cross-currency swaps (108) (101) (209)
Embedded derivatives (1) (8) (9)
31 December 2019
Financial assets
Classified as amortised cost:
Cash and cash equivalents 317 - 317
Net trade receivables 1,426 - 1,426
Classified as fair value:
Investments - 48 48
Derivative financial assets:
Foreign currency forward contracts 17 23 40
Interest rate swaps - 1 1
Embedded derivatives 2 14 16
Assets classified as held for
sale 65 - 65
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (89) (3,464) (3,553)
Government refundable advances (7) (59) (66)
Lease obligations (71) (511) (582)
Other financial liabilities (2,023) (13) (2,036)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (81) (93) (174)
Interest rate swaps (17) (43) (60)
Cross-currency swaps (7) (73) (80)
Embedded derivatives (1) (7) (8)
Liabilities associated with assets
held for sale (46) - (46)
--------------------------------------- -------- ------------------- --------
11. Financial instruments (continued)
The fair value of the derivative financial instruments is
derived from inputs other than quoted prices that are observable
for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices) and they are therefore
categorised within level 2 of the fair value hierarchy set out in
IFRS 13: "Fair value measurement" which uses inputs based on market
evidence. The Group's policy is to recognise transfers into and out
of the different fair value hierarchy levels at the date of the
event or change in circumstances that caused the transfer to occur.
There have been no transfers between levels in the period.
12. Retirement benefit obligations
The Group sponsors defined benefit plans for qualifying
employees of certain subsidiaries. The funded defined benefit plans
are administered by separate funds that are legally separated from
the Group. The Trustees of the funds are required by law to act in
the interest of the fund and of all relevant stakeholders in the
plans. The Trustees of the pension funds are responsible for the
investment policy with regard to the assets of the fund.
The most significant defined benefit pension plans in the Group
at 30 June 2020 were:
GKN UK Group Pension Schemes (Numbers 1 - 4) (formerly GKN UK
2012 Pension Plan)
The GKN UK Group Pension Schemes (Numbers 1 - 4) are funded
plans, closed to new members and were closed to future accrual in
2017. The valuation of the plans was based on a full actuarial
valuation as of 5 April 2016, updated to 30 June 2020 by
independent actuaries.
GKN UK 2016 Pension Plan
The GKN UK 2016 Pension Plan is a funded plan, closed to new
members with no active members, containing assets and liabilities
in respect of the pension schemes from various legacy GKN
businesses. The valuation of the plan was based on a full actuarial
valuation as of 5 April 2016, updated to 30 June 2020 by
independent actuaries.
GKN US Consolidated Pension Plan
The GKN US Consolidated Pension Plan is a funded plan, closed to
new members and closed to future accrual. The GKN US Consolidated
Pension Plan valuation was based on a full actuarial valuation as
of 1 January 2019, updated to 30 June 2020 by independent
actuaries.
GKN Germany Pension Plans
The GKN Germany Pension Plans provide benefits dependent on
final salary and service with the Company. The plans are generally
unfunded and closed to new members.
Brush UK Pension Plan
The Brush Group (2013) ("Brush UK") Pension Plan is a funded
plan, closed to new members and closed to future accrual. The
valuation of the Brush UK Pension Plan was based on a full
actuarial valuation as of 31 December 2019, updated to 30 June 2020
by independent actuaries.
Other plans include a number of funded and unfunded defined
benefit arrangements and retiree medical insurance plans,
predominantly in the USA and Europe.
The cost of the Group's defined benefit plans is determined in
accordance with IAS 19 (revised): "Employee benefits" using the
advice of independent professionally qualified actuaries on the
basis of formal actuarial valuations and using the projected unit
credit method. In line with normal practice, these valuations are
undertaken triennially in the UK and annually in the USA and
Germany.
The amount recognised in the Balance Sheet in respect of defined
benefit plans was as follows:
30 June 2020
UK plans European
(1 () US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ---------- ---------- ------------- -------
Plan assets 3,357 264 30 42 3,693
Plan liabilities (3,755) (460) (586) (54) (4,855)
Net liabilities (398) (196) (556) (12) (1,162)
(1) Includes a net liability in respect of the GKN Group Pension
Schemes (Numbers 1 - 4) (formerly GKN UK 2012 plan), GKN
post-employment medical plans and the Nortek UK plan and a net
asset in respect of the Brush UK Pension Plan and the GKN UK 2016
Pension Plan.
30 June 2019
UK plans European
(1 () US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ---------- ---------- ------------- -------
Plan assets 3,039 257 28 42 3,366
Plan liabilities (3,594) (422) (620) (56) (4,692)
Net liabilities (555) (165) (592) (14) (1,326)
(1) Includes a net liability in respect of the GKN UK 2012
Pension Plan, GKN post-employment medical plans and the Nortek UK
plan and a net asset in respect of the Brush UK Pension Plan and
the GKN UK 2016 Pension Plan.
12. Retirement benefit obligations (continued)
31 December 2019
UK plans European
(1) US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ---------- ---------- ------------- -------
Plan assets 3,082 262 28 40 3,412
Plan liabilities (3,502) (417) (561) (53) (4,533)
Net liabilities (420) (155) (533) (13) (1,121)
(1) Includes a net liability in respect of the GKN Group Pension
Schemes (Numbers 1 - 4) (formerly GKN UK 2012 plan), GKN
post-employment medical plans and the Nortek UK plan and a net
asset in respect of the Brush UK Pension Plan and the GKN UK 2016
Pension Plan.
Valuations of material plans have been updated at 30 June 2020
by independent actuaries to reflect updated assumptions regarding
discount rates, inflation rates and asset values. The major
assumptions were as follows:
Price inflation
Rate of increase
in pensions
in payment Discount rate (RPI/CPI)
% p.a. % p.a. % p.a.
------------------------------- ---------------- ------------- ---------------
30 June 2020
GKN UK - Group Pension Schemes
(Numbers 1 - 4) 2.7 1.5 2.8/2.1
GKN UK - 2016 Pension Plan 2.7 1.5 2.8/2.1
GKN US plans n/a 2.7 n/a
GKN Europe plans 1.3 1.1 1.3/1.3
Brush UK Pension Plan 2.7 1.5 2.8/2.1
30 June 2019
GKN UK - 2012 Pension Plan 3.1 2.3 3.2/2.1
GKN UK - 2016 Pension Plan 3.1 2.2 3.2/2.1
GKN US plans n/a 3.5 n/a
GKN Europe plans 1.7 1.1 1.7/1.7
Brush UK Pension Plan 3.2 2.3 3.2/2.1
31 December 2019
GKN UK - Group Pension Schemes
(Numbers 1 - 4) 2.8 2.0 2.9/2.1
GKN UK - 2016 Pension Plan 2.8 2.0 2.9/2.1
GKN US plans n/a 3.1 n/a
GKN Europe plans 1.5 1.1 1.5/1.5
Brush UK Pension Plan 2.8 2.0 2.9/2.1
------------------------------- ---------------- ------------- ---------------
In addition, the defined benefit plan assets and liabilities
have been updated to reflect the contributions made to the defined
benefit plans and the benefits earned during the period to 30 June
2020.
13. Notes to the Cash Flow Statement
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Continuing operations GBPm GBPm GBPm
------------------------------------------- -------- --------- --------------------
Reconciliation of operating (loss)/profit
to cash generated from operating
activities
Operating (loss)/profit (581) 8 318
Adjusting items (note 4) 637 533 784
------------------------------------------- -------- --------- --------------------
Adjusted operating profit 56 541 1,102
Adjustments for:
Depreciation of property, plant and
equipment 222 211 434
Amortisation of computer software
and development costs 30 32 64
Share of adjusted operating profit
of equity accounted investments (21) (30) (66)
Restructuring costs paid and movements
in provisions (118) (139) (320)
Defined benefit pension contributions
paid (43) (111) (183)
Change in inventories 78 (93) (12)
Change in receivables 510 170 72
Change in payables (337) (136) (2)
Acquisition costs and associated
transaction taxes (2) (15) (16)
Tax paid (8) (79) (117)
Interest paid on loans and borrowings (57) (79) (166)
Interest paid on lease obligations (9) (11) (21)
--------- --------------------
Net cash from operating activities 301 261 769
Restated
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2020 2019 2019
Cash flow from discontinued operations GBPm GBPm GBPm
----------------------------------------------- -------- --------- ------------
Net cash from/(used in) discontinued
operations 1 (13) (16)
Defined benefit pension contributions
paid - (2) (2)
Tax paid - - (1)
Interest paid on lease obligations - - (1)
Net cash from/(used in) operating activities
from discontinued operations 1 (15) (20)
Purchase of property, plant and equipment (1) (8) (12)
Disposal costs - - (3)
Net cash used in investing activities
from discontinued operations (1) (8) (15)
Repayment of principal under lease obligations - (2) (2)
Net cash used in financing activities
from discontinued operations - (2) (2)
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings
(excluding any acquisition related fair value adjustments),
cross-currency swaps and cash and cash equivalents. Currency
denominated balances within net debt are translated to Sterling at
swapped rates where hedged by cross-currency swaps.
Net debt is considered to be an alternative performance measure
as it is not defined in IFRS. The most directly comparable IFRS
measure is the aggregate of interest-bearing loans and borrowings
(current and non-current) and cash and cash equivalents.
13. Notes to the Cash Flow Statement (continued)
A reconciliation from the most directly comparable IFRS measure
to net debt is given below.
30 June 30 June 31 December
2020 2019 2019
GBPm GBPm GBPm
Interest-bearing loans and borrowings
- due within one year (14) (394) (89)
Interest-bearing loans and borrowings
- due after one year (3,615) (3,235) (3,464)
-------- -----------
External debt (3,629) (3,629) (3,553)
Less:
Cash and cash equivalents 339 340 317
-------- -----------
(3,290) (3,289) (3,236)
Adjustments:
Impact of cross-currency swaps (137) (209) (80)
Non-cash acquisition fair value adjustments 28 44 33
Net debt (3,399) (3,454) (3,283)
The table below shows the key components of the movement in net
debt:
At Acquisitions Other Effect At
31 December Cash and disposals non-cash of foreign 30 June
2019 flow movements exchange 2020
GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------------- -------------------- ---------
External debt (3,553) 73 - - (149) (3,629)
Cross-currency
swaps (80) - - (2) (55) (137)
Non-cash acquisition
fair value adjustments 33 - - (5) - 28
-------------- ---------------- -------------------- ---------
(3,600) 73 - (7) (204) (3,738)
Cash and cash
equivalents 317 45 (25) - 2 339
-------------- ---------------- -------------------- ---------
Net debt (3,283) 118 (25) (7) (202) (3,399)
14. Estimation uncertainty
The full impact of the COVID-19 global pandemic on medium and
long-term forecasts is difficult to predict and there could be
significant changes from the best information currently available
as circumstances continue to evolve. The Group is monitoring the
impact on its businesses and assessing the emerging trends which
indicate there are a range of potential outcomes. While the
uncertainty continues, the Group will consider a range of estimates
and assumptions in the application of its accounting policies which
particularly affect those areas noted below. For a complete list of
estimates, see note 3 of the 2019 Annual Report. In the event that
assumed estimates and assumptions prove to be incorrect, there may
be an adjustment to the carrying values of assets and liabilities
within the next year:
-- Loss-making contracts
Loss-making contract provisions represent the forecast
unavoidable costs required to meet the obligations of long-term
agreements, in excess of the contractual inflow expected to be
generated in respect of these agreements. Calculation of the
liability includes estimations of volumes, price and costs to be
incurred over the life of the contract, which are discounted to a
current value. Future changes within these estimates could have a
material impact on the provision in future periods. At 30 June
2020, the carrying value of the loss-making contracts provision in
the Group was GBP370 million (31 December 2019: GBP384
million).
-- Estimates of future revenues and costs of long-term contractual arrangements
A key judgement is the recognition and measurement of variable
consideration, in particular relating to risk and revenue sharing
partnerships ("RRSPs"). The forecast revenues and costs in respect
of RRSP contracts are inherently imprecise and significant
estimates are required to assess the pattern of future maintenance
activity, the costs to be incurred and escalation of revenue and
costs. The estimates take account of the uncertainties,
constraining the expected level of revenue as appropriate.
Measurement of variable consideration is driven by forecasting
aftermarket revenue per delivered engine which is in turn
contingent on overall programme success, levels of discounting that
might be offered by the engine manufacturers (the Group's
customers), engineering requirements needed for optimal performance
of the engine and the allocation of revenue to individual units.
Any of these inputs could change in the next year as programmes
evolve and due to the size and scale of these contracts, almost any
modification could result in material changes in future
periods.
14. Estimation uncertainty (continued)
-- The carrying value of goodwill and other assets
In assessing the impairment of non-current assets, estimation
and judgement are required including assessment of customer demand.
This may impact estimated future cash flows for value in use or
fair value less costs to sell assessments and therefore potentially
lead to impairment. Specifically, in respect of goodwill, further
disclosure is included below.
Impairment Assessment
The Group tests goodwill annually or more frequently if there
are indications that goodwill might be impaired. In accordance with
IAS 36: "Impairment of assets" the Group assesses the carrying
value of its groups of cash generating units ("CGUs") against the
recoverable amount, being the higher of the value in use basis and
the fair value less costs to sell.
The COVID-19 global pandemic is having a significant impact on
the global end markets in which certain of the Group's businesses
operate which has resulted in indicators of impairment at the
interim reporting date for each of the Automotive Driveline,
Automotive ePowertrain, Powder Metallurgy, Security & Smart
Technology, Aerospace Engine Systems and Aerostructures groups of
CGUs. These groups of CGUs saw a sharp decline in revenue during
the second quarter and there is a wide range of possible outcomes
around the future recovery of end markets.
No indicators of impairment were identified in respect of the
AQH, HVAC and Ergotron groups of CGUs, which are principally North
America based and have seen less of an impact to date.
The allocation of goodwill that has been subject to detailed
impairment testing is shown below:
30 June 31 December
2020 2019
GBPm GBPm
Nortek businesses:
Security & Smart Technology 184 172
GKN businesses:
Aerostructures (1) 615 595
Aerospace Engine Systems (1) 370 346
Automotive Driveline 716 688
Automotive ePowertrain 351 339
Powder Metallurgy 532 503
(1) Following the GKN Aerospace reorganisation, announced in the
2019 Annual Report, the Aerostructures, Aerospace Engine Systems
and Aerospace Special Technologies groups of CGUs were changed into
Aerospace Engine Systems and Aerostructures effective 1 January
2020.
Assumptions used in the financial forecasts
Due to the impact of COVID-19 the businesses are mitigating the
impact of lower levels of demand through cost reduction and
efficiency actions, including significant restructuring. Under IAS
36, the value in use basis prohibits the inclusion of benefits from
future uncommitted (at 30 June 2020) restructuring plans although
this is permitted when applying the fair value less costs to sell
basis, to the extent that similar actions would be carried out by a
market participant. Recent trading announcements by other market
participants support the inclusion of uncommitted restructuring (at
30 June 2020) in the fair value less costs to sell approach and due
to the timing of announcements this has resulted in higher
valuations than the value in use approach.
When applying the fair value less cost to sell methodology, it
has been difficult to assess a sale value using observable market
inputs (level 1) or inputs based on market evidence (level 2) in
the current environment and so unobservable inputs (level 3) have
been used. A combination of discounted cash flows and EBITDA
multiples have been used to establish fair values for each of the
groups of CGUs. There are three key inputs within the discounted
cash flow models.
Cash flows
The Group prepares cash flow forecasts derived from financial
budgets and medium-term forecasts. Each forecast has been prepared
using a cash flow period deemed most appropriate by management,
considering the nature of each group of CGUs and their end markets.
There has been no change to the forecast periods used at 31
December 2019. The key assumptions used in forecasting post-tax
cash flows relate to future budgeted revenue and operating margins
likely to be achieved and the expected rates of long-term growth by
market sector.
Revenue assumptions were made using external market data, where
available, and also consider the recovery period to return to pre
COVID-19 levels. A recovery period of between three years and five
years was assumed for the Security & Smart Technology, Powder
Metallurgy and Automotive groups of CGUs, whereas the Aerospace
groups of CGUs are not assumed to fully recover until after the
five year forecast period. The assumptions used to derive operating
profit margins take into account an increase from returning sale
volumes in addition to normal cost saving activities and a
significant contribution from planned restructuring activity. The
combination of these results in operating margins aligned to
business plans for the medium-term, albeit risk adjusted in the
discounted cash flow models.
14. Estimation uncertainty (continued)
Post-tax risk adjusted discount rates
Cash flows are discounted using a post-tax discount rate
specific to each group of CGUs. Discount rates reflect the current
market assessments of the time value of money and the territories
in which the group of CGUs operate. In determining a cost of
equity, the Capital Asset Pricing Model ("CAPM") has been used.
Under CAPM, the cost of equity is determined by adding a risk
premium, based on an industry adjustment ("Beta"), to the expected
return of the equity market above the risk-free return. The
relative risk adjustment reflects the risk inherent in each group
of CGUs relative to all other sectors and geographies on average.
The cost of debt is determined using a risk-free rate based on the
cost of government bonds, and an interest rate premium equivalent
to a corporate bond with a similar credit rating to the Group.
Long-term growth rates
Long-term growth rates are based on long-term forecasts for
growth in the sectors and geographies in which the group of CGUs
operates. Long-term growth rates are determined using forecasts
that take into account the international presence and the markets
in which each business operates.
Long-term growth rates are consistent with those used in the
impairment testing at the previous year end given the current
uncertainty over future forecasts.
Sensitivity analysis
As a consequence of implications from the COVID-19 global
pandemic and the substantial impact on certain groups of CGUs,
additional sensitivity analysis has been performed to show the
impact of a reasonably possible change in the key assumptions.
There is no reasonably possible change in the key assumptions that
could result in an impairment for the Automotive ePowertrain group
of CGUs.
Powder Metallurgy group of CGUs - sensitivity analysis
The forecasts have been prepared using the methodology required
by IAS 36 and show headroom of GBP172 million above the carrying
amount for the Powder Metallurgy group of CGUs. Sensitivity
analysis has been carried out and a reasonably possible change in
the post-tax discount rate and long-term growth rate from 9.0% to
9.7% or from 2.5% to 1.5% respectively would reduce headroom to
GBPnil. A reduction in the risk adjusted terminal operating margin
of 1.6 percentage points ("ppts") would also reduce headroom to
GBPnil.
Automotive Driveline group of CGUs - sensitivity analysis
The forecasts have been prepared using the methodology required
by IAS 36 and show headroom of GBP186 million above the carrying
amount for the Automotive Driveline group of CGUs. Sensitivity
analysis has been carried out and a reasonably possible change in
the post-tax discount rate and long-term growth rate from 10.3% to
10.9% or from 2.5% to 1.5% respectively would reduce headroom to
GBPnil. A reduction in the risk adjusted terminal operating margin
of 1.0 ppts would also reduce headroom to GBPnil.
Aerospace Engine Systems group of CGUs - sensitivity
analysis
The forecasts have been prepared using the methodology required
by IAS 36 and show headroom of GBP131 million above the carrying
amount for the Aerospace Engine Systems group of CGUs. Sensitivity
analysis has been carried out and a reasonably possible change in
the post-tax discount rate and long-term growth rate from 7.5% to
7.7% or from 3.0% to 2.8% respectively would reduce headroom to
GBPnil. A reduction in the risk adjusted terminal operating margin
of 0.9 ppts would also reduce headroom to GBPnil.
Aerostructures group of CGUs - sensitivity analysis
The forecasts have been prepared using the methodology required
by IAS 36 and show headroom of GBP91 million above the carrying
amount for the Aerostructures group of CGUs. Sensitivity analysis
has been carried out and a reasonably possible change in the
post-tax discount rate and long-term growth rate from 7.3% to 7.4%
or from 2.9% to 2.7% respectively would reduce headroom to GBPnil.
A reduction in the risk adjusted terminal operating margin of 0.3
ppts would also reduce headroom to GBPnil.
Security & Smart Technology group of CGUs - sensitivity
analysis
The forecasts have been prepared using the methodology required
by IAS 36 and show headroom of GBP64 million above the carrying
amount for the Security & Smart Technology group of CGUs.
Sensitivity analysis has been carried out and a reasonably possible
change in the post-tax discount rate and long-term growth rate from
8.5% to 9.5% or from 3.5% to 2.3% respectively would reduce
headroom to GBPnil. A reduction in the risk adjusted terminal
operating margin of 1.3 ppts would also reduce headroom to
GBPnil.
As can be seen, there is not a significant level of headroom in
certain groups of CGUs and as noted there is inherent difficulty in
forecasting in the medium to long-term. However, the Directors have
concluded that at this time they are comfortable that no impairment
charge is required for any of the groups of CGUs but will keep this
assessment under review as end markets recover.
Glossary
Alternative Performance Measures ("APMs")
In accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA"), additional information
is provided on the APMs used by the Group below.
In the reporting of financial information, the Group uses
certain measures that are not required under IFRS. These additional
measures (commonly referred to as APMs) provide additional
information on the performance of the business and trends to
stakeholders. These measures are consistent with those used
internally, and are considered important to understanding the
financial performance and financial health of the Group. APMs are
considered to be an important measure to monitor how the businesses
are performing because this provides a meaningful comparison of how
the business is managed and measured on a day-to-day basis and
achieves consistency and comparability between reporting
periods.
These APMs may not be directly comparable with similarly titled
measures reported by other companies and they are not intended to
be a substitute for, or superior to, IFRS measures. All Income
Statement and Cash Flow measures are provided for continuing
operations unless otherwise stated.
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Income Statement Measures
Adjusted Revenue Share of Adjusted revenue includes the Group's
revenue revenue share of revenue of equity accounted
of equity investments ("EAIs"). This enables comparability
accounted between reporting periods.
investments Restated(1)
(note 8) 6 months 6 months
ended ended
30 June 30 June Year ended
2020 2019 31 December
GBPm GBPm 2019
Revenue GBPm
Revenue 4,121 5,573 10,967
Share of revenue
of equity accounted
investments 238 302 625
Adjusted revenue 4,359 5,875 11,592
Adjusting None Adjusting Those items which the Group excludes
items items (note from its adjusted profit metrics in
4) order to present a further measure
of the Group's performance.
These include items which are significant
in size or volatility or by nature
are non-trading or non-recurring, any
item released to the Income Statement
that was previously a fair value item
booked on an acquisition, and include
adjusted profit from EAIs.
This provides a meaningful comparison
of how the business is managed and
measured on a day-to-day basis and
provides consistency and comparability
between reporting periods.
Adjusted Operating Adjusting The Group uses adjusted profit measures
operating profit/(loss)(2) items (note to provide a useful and more comparable
profit 4) measure of the ongoing performance
of the Group. Adjusted measures are
reconciled to statutory measures by
removing adjusting items, the nature
of which are disclosed above and further
detailed in note 4.
Restated(1)
6 months 6 months
ended ended
30 June 30 June Year ended
2020 2019 31 December
GBPm GBPm 2019
Operating profit GBPm
Operating (loss)/profit (581) 8 318
Adjusting items
to operating
(loss)/profit
(note 4) 637 533 784
Adjusted operating
profit 56 541 1,102
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
------------------
Adjusted Operating Share of Adjusted operating margin represents
operating margin(3) revenue Adjusted operating profit as a percentage
margin of equity of Adjusted revenue.
accounted
investments
(note 8)
and adjusting
items (note
4)
------------------
Adjusted Profit/(loss) Adjusting Profit before the impact of adjusting
profit before items (note items and tax. As discussed above, adjusted
before tax 4) profit measures are used to provide
tax a useful and more comparable measure
of the ongoing performance of the Group.
Adjusted measures are reconciled to
statutory measures by removing adjusting
items, the nature of which are disclosed
above and further detailed in note 4.
Restated(1)
6 months 6 months
ended ended
30 June 30 June Year ended
2020 2019 31 December
GBPm GBPm 2019
Profit before tax GBPm
(Loss)/profit before
tax (685) (109) 106
Adjusting items
to (loss)/profit
before tax (note
4) 645 540 783
Adjusted (loss)/profit
before tax (40) 431 889
Adjusted Profit/(loss) Adjusting Profit after tax but before the impact
profit after items (note of the adjusting items. As discussed
after tax 4) above, adjusted profit measures are
tax used to provide a useful and more comparable
measure of the ongoing performance of
the Group. Adjusted measures are reconciled
to statutory measures by removing adjusting
items, the nature of which are disclosed
above and further detailed in note 4.
Restated(1)
6 months 6 months
ended ended
30 June 30 June Year ended
2020 2019 31 December
GBPm GBPm 2019
Profit after tax GBPm
(Loss)/profit after
tax (560) (131) 55
Adjusting items
to (loss)/profit
after tax (note
4) 528 463 644
Adjusted (loss)/profit
after tax (32) 332 699
Adjusted Operating Adjusting Adjusted operating profit for 12 months
EBITDA profit/ items (note prior to the reporting date, before
for leverage (loss)(2) 4), depreciation depreciation and impairment of property,
covenant of property, plant and equipment and before the amortisation
purposes plant and and impairment of computer software
equipment and development costs.
and amortisation
of computer Adjusted EBITDA for leverage covenant
software purposes is a measure used by external
and development stakeholders to measure performance.
costs, 12 months 12 months(4)
imputed ended ended Year ended(4)
lease charge, 30 June 30 June 31 December
share of 2020 2019 2019
non-controlling Adjusted EBITDA
interests for leverage covenant
and other purposes GBPm GBPm GBPm
adjustments
required Adjusted operating
for leverage profit 617 1,074 1,102
covenant Depreciation of
purposes(5) property, plant
and equipment and
amortisation of
computer software
and development
costs 507 449 498
Imputed lease charge (95) (51) (91)
Non-controlling
interests (4) (9) (6)
Other adjustments
required for leverage
covenant purposes
(5) (31) (5) 2
-------------
Adjusted EBITDA
for leverage covenant
purposes 994 1,458 1,505
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
------------
Adjusted Effective Adjusting The income tax charge for the Group
tax rate tax rate items, adjusting excluding adjusting tax, and the tax
tax items impact of adjusting items, divided by
and the adjusted profit before tax.
tax impact
of adjusting This measure is a useful indicator of
items (note the ongoing tax rate for the Group.
4 and note Restated(1)
5) 6 months 6 months
ended ended
30 June 30 June Year ended
2020 2019 31 December
GBPm GBPm 2019
Adjusted tax rate GBPm
Tax credit/(charge)
per Income Statement 125 (22) (51)
Tax impact of
adjusting items (113) (73) (123)
Tax impact of
significant restructuring - - (9)
Tax impact of
EAIs (4) (4) (7)
Adjusted tax credit/(charge) 8 (99) (190)
Adjusted (loss)/profit
before tax (40) 431 889
Adjusted tax rate 20.0% 23.0% 21.4%
Adjusted Basic Adjusting Profit after tax attributable to owners
basic earnings items (note of the parent and before the impact
earnings per share 4 and note of adjusting items, divided by the weighted
per share 6) average number of ordinary shares in
issue during the financial period.
------------------
Adjusted Diluted Adjusting Profit after tax attributable to owners
diluted earnings items (note of the parent and before the impact
earnings per share 4 and note of adjusting items, divided by the weighted
per share 6) average number of ordinary shares in
issue during the financial period adjusted
for the effects of any potentially dilutive
options.
The Board considers this to be a key
measure of performance when all businesses
are held for the complete reporting
period.
------------------
Interest None Not applicable Adjusted EBITDA calculated for interest
cover cover covenant purposes (including EBITDA
of businesses disposed) as a multiple
of net interest payable on bank loans
and overdrafts.
This measure is used for bank covenant
testing.
12 months 12 months(4)
ended ended Year ended(4)
30 June 30 June 31 December
2020 2019 2019
Interest cover GBPm GBPm GBPm
Adjusted EBITDA
for leverage
covenant purposes 994 1,458 1,505
Adjusted EBITDA
from businesses
disposed in the
year - 8 36
Adjusted EBITDA
for interest
cover covenant 994 1,466 1,541
Interest on bank
loans and overdrafts (144) (150) (152)
Finance income 1 10 9
Other interest
for covenant (1) - -
purposes
Net finance charges
for covenant
purposes (144) (140) (143)
Interest cover 6.9x 10.5x 10.8x
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
------------------
Balance Sheet Measures
Working Inventories, Not applicable Working capital comprises inventories,
capital trade current and non-current trade and other
and other receivables and current and non-current
receivables trade and other payables.
less trade
and other
payables
------------------
Net debt Cash and Reconciliation Net debt comprises cash and cash equivalents,
cash equivalents of net debt interest-bearing loans and borrowings
less (note 13) and cross-currency swaps but excludes
interest-bearing non-cash acquisition fair value adjustments.
loans
and borrowings Net debt is one measure that could be
and finance used to indicate the strength of the
related Group's Balance Sheet position and is
derivative a useful measure of the indebtedness
instruments of the Group.
------------------
Bank covenant Cash and Impact of Net debt (as above) is presented in
definition cash equivalents foreign the Balance Sheet translated at period
of net less exchange end exchange rates.
debt at interest-bearing and adjustments
average loans for bank For bank covenant testing purposes net
rates and borrowings covenant debt is converted using average exchange
and leverage and finance purposes rates for the previous 12 months.
related
derivative Leverage is calculated as the bank covenant
instruments definition of net debt divided by adjusted
EBITDA for leverage covenant purposes.
This measure is used for bank covenant
testing.
30 June 30 June(4) 31 December(4)
2020 2019 2019
Net debt GBPm GBPm GBPm
--------------
Net debt at closing
rates (note 13) 3,399 3,454 3,283
Impact of foreign
exchange (69) (50) 94
--------------
Net debt at average
rates 3,330 3,404 3,377
Other adjustments
required for covenant
purposes - 14 8
--------------
Bank covenant definition
of net debt at average
rates 3,330 3,418 3,385
--------------
Leverage 3.35x 2.34x 2.25x
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Cash Flow Measures
Adjusted Net cash Non-working Adjusted operating cash flow (pre-capex)
operating from operating capital is calculated as adjusted operating
cash flow activities items (note profit before depreciation and amortisation
(pre-capex) 13) attributable to subsidiaries less lease
and Adjusted obligation payments, the positive non-cash
operating impact from loss-making contracts and
cash flow movements in working capital.
conversion
Adjusted operating cash flow (pre-capex)
conversion is adjusted operating cash
flow (pre-capex) divided by adjusted
operating profit before depreciation
and amortisation attributable to subsidiaries,
less lease obligation payments and the
positive non-cash impact from loss-making
contracts.
This measure provides additional useful
information in respect of cash generation
and is consistent with how business
performance is measured internally.
Restated(1)
6 months 6 months
ended ended
30 June 30 June Year ended
2020 2019 31 December
GBPm GBPm 2019
Adjusted operating GBPm
cash flow
Adjusted operating
profit 56 541 1,102
Share of adjusted
operating profit of
EAIs (note 8) (21) (30) (66)
Depreciation of owned
property, plant and
equipment and amortisation
of computer software
and development costs 214 208 426
Depreciation of leased
property, plant and
equipment 38 35 72
Lease obligation payments (38) (32) (70)
Positive non-cash
impact from loss-making
contracts (note 10) (31) (45) (81)
218 677 1,383
Change in inventories 78 (93) (12)
Change in receivables 510 170 72
Change in payables (337) (136) (2)
Adjusted operating
cash flow (pre-capex) 469 618 1,441
Adjusted operating
cash flow conversion 215% 91% 104%
Free cash Net increase/ Acquisition Free cash flow represents cash generated
flow decrease related from trading from continuing businesses
in cash cash flows, after all costs including restructuring,
and cash dividends pension contributions, tax and interest
equivalents paid to payments.
owners
of the A reconciliation of free cash flow
parent, is included within the Finance Director's
foreign Review.
exchange,
discontinued
operating
cash flows
and other
non-cash
movements
Adjusted Net increase/ Free cash Adjusted free cash flow represents
free cash decrease flow, as free cash flow adjusted for special
flow in cash defined pension contributions and restructuring
and cash above, cash flows.
equivalents adjusted
for special
pension
contributions
and restructuring
cash flows
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Capital None Not applicable Calculated as the purchase of owned
expenditure property, plant and equipment and computer
(capex) software and expenditure on capitalised
development costs during the period,
excluding any assets acquired as part
of a business combination.
Net capital expenditure is capital
expenditure net of proceeds from disposal
of property, plant and equipment.
Capital None Not applicable Net capital expenditure divided by
expenditure depreciation of owned property, plant
to depreciation and equipment and amortisation of computer
ratio software and development costs.
Dividend Dividend Not applicable Amounts payable by way of dividends
per share per share in terms of pence per share.
(1) Results for the period ended 30 June 2019 have been restated
for discontinued operations (see note 9).
(2) Operating profit/(loss) is not defined within IFRS but is a
widely accepted profit measure being profit/(loss) before finance
costs, finance income
and tax.
(3) Operating margin is not defined within IFRS but is a widely
accepted profit measure being derived from operating
profit/(loss)(2) divided by revenue.
(4) Year ended 31 December 2019 and period ended 30 June 2019
remain aligned to the original calculations supporting the Group's
bank debt compliance certificate, and have not been restated for
discontinued operations.
(5) Included within other adjustments required for covenant
purposes are dividends received from equity accounted investments,
the removal of adjusted operating profit of equity accounted
investments and the inclusion of operating profit and depreciation
in respect of businesses classified as held for sale.
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