TIDMMRO
RNS Number : 5021A
Melrose Industries PLC
24 March 2017
THIS ANNOUNCEMENT DOES NOT CONSTITUTE A PROSPECTUS OR PROSPECTUS
EQUIVALENT DOCUMENT AND NEITHER THIS ANNOUNCEMENT NOR ANYTHING
HEREIN FORMS THE BASIS FOR ANY OFFER TO PURCHASE OR SUBSCRIBE FOR
ANY SHARES OR OTHER SECURITIES IN MELROSE INDUSTRIES PLC NOR SHALL
IT FORM THE BASIS FOR ANY CONTRACT OR COMMITMENT WHATSOEVER.
24 March 2017
Melrose Industries PLC
Listing Rule 6.1.3D: Required Information
In accordance with the requirements of Listing Rule 6.1.3D, the
information in Parts I and II below is provided in connection with
the announcement dated 24 March 2017, regarding Melrose Industries
PLC's intention to transfer the listing category of its ordinary
shares from a Standard Listing to a Premium Listing on the official
list of the UK Listing Authority (the "Transfer Announcement"). For
full details on the intention to transfer, please refer to the
Transfer Announcement.
Deloitte LLP has given and not withdrawn its written consent to
the inclusion of its accountant's report in Part II of this
announcement in the form and context in which it is included.
Enquiries
+44 (0) 203 514
Montfort Communications 0897
+44 (0) 7973 130
(PR Adviser to Melrose Industries 669 / +44 (0) 7739
PLC) 701 634
+44 (0) 7921 881
Nick Miles / Charlotte McMullen 800
PART I - Nortek, Inc. Consolidated Historical Financial
Information
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Year ended
Notes 31 December 2016
-----------------
$m
Revenue 7 2,480.7
Cost of sales (1,803.8)
-----------------
Gross profit 676.9
-----------------
Net operating expenses 7 (845.6)
-----------------
Operating loss (168.7)
Finance costs, net 7 (137.6)
-----------------
Loss before tax (306.3)
Tax 8 111.2
-----------------
Loss for the year (195.1)
-----------------
Underlying operating profit 241.0
148.9
6 101.4
-----------------
Underlying profit before tax 6
-----------------
Underlying profit after tax 6
------------------------------ ------ -----------------
The accompanying notes are an integral part of this historical
financial information.
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Notes Year ended 31 December 2016
------ ----------------------------
$m
Loss for the year (195.1)
----------------------------
Items that will not be reclassified subsequently to the Income Statement:
Actuarial loss related to pension plans 17 (2.7)
Income tax relating to items that will not be reclassified 8 (0.8)
----------------------------
(3.5)
Items that may be reclassified subsequently to the Income Statement:
Loss on cash flow hedges (0.5)
Currency translation on net investments (6.1)
----------------------------
(6.6)
----------------------------
Other comprehensive loss after tax (10.1)
----------------------------
Total comprehensive loss for the year (205.2)
============================
The accompanying notes are an integral part of this historical
financial information.
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended
31 December
Notes 2016
------ -------------
$m
Net cash from operating activities 20 167.7
=============
Purchase of property, plant and equipment (43.6)
Cash paid for equity investment (4.0)
Acquisition of businesses (1.0)
Purchases of intangible assets (1.0)
Purchases of computer software (3.4)
Proceeds from sale of property, plant and equipment 4.4
Net cash used in investing activities (48.6)
=============
Repayment of ABL and other borrowings (47.9)
Repayment of the 8.5% Senior Notes (30.0)
Cash received from parent 128.6
Cash paid to parent (81.1)
Fees paid in connection with other debt facilities (1.0)
Settlement of share-based awards (59.7)
Net use from equity transactions (0.3)
Net cash used in financing activities (91.4)
=============
Net increase in cash and cash equivalents 27.7
Cash and cash equivalents at beginning of the year 25.8
Effect of foreign exchange rate changes (3.0)
-------------
Cash and cash equivalents at end of the year 50.5
=============
The accompanying notes are an integral part of this historical
financial information.
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Notes 31 December 2016
------ -----------------
$m
Non--current assets
Goodwill and other intangible assets 9 1,059.3
Property, plant and equipment 10 166.7
Deferred tax assets 8 41.9
Trade and other receivables 12 3.5
-----------------
1,271.4
Current assets
Inventories 11 305.5
Trade and other receivables 12 381.7
Derivative financial assets 15 1.3
Cash and cash equivalents 50.5
-----------------
739.0
-----------------
Total assets 2,010.4
-----------------
Current liabilities
Trade and other payables 13 431.7
Interest-bearing loans and borrowings 14 1.4
Derivative financial liabilities 15 1.8
Current tax liabilities 11.6
Provisions 16 128.5
-----------------
575.0
-----------------
Net current assets 164.0
-----------------
Non--current liabilities
Interest--bearing loans and borrowings 14 746.5
Provisions 16 129.3
Retirement benefit obligations 17 46.2
Trade and other payables 13 16.9
-----------------
938.9
-----------------
Total liabilities 1,513.9
-----------------
Net assets 496.5
-----------------
Equity
Share capital 19 ---
Accumulated deficit (390.7)
Other reserves 915.2
Hedging reserve
-----------------
Cumulative translation reserve (0.5)
(27.5)
-----------------
Total equity 496.5
-----------------
The accompanying notes are an integral part of this historical
financial information.
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Cumulative
Share Treasury Accumulated Other Hedging reserve translation Total
capital shares deficit reserves reserve equity
--------- --------- ------------ ---------- ------------------ ------------- --------
$m $m $m $m $m $m $m
At 1 January 2016 0.2 (58.4) (192.1) 288.9 - (21.4) 17.2
--------- --------- ------------ ---------- ------------------ ------------- --------
Loss for the year - - (195.1) - - - (195.1)
Other comprehensive loss - - (3.5) - (0.5) (6.1) (10.1)
--------- --------- ------------ ---------- ------------------ ------------- --------
Total comprehensive loss - - (198.6) - (0.5) (6.1) (205.2)
Exercise of stock
options - - - 0.2 - - 0.2
Shares withheld and
repurchased related to
minimum statutory tax
withholding
requirements
and shares repurchased
for share settlements - (0.5) - - - - (0.5)
Equity--settled
share--based payments - - - 19.6 - - 19.6
Excess tax benefit on
share--based awards - - - 3.8 - - 3.8
Creation of merger
reserve(1) - - - 661.4 - - 661.4
Other acquisition
related(2) (0.2) 58.9 - (58.7) - - -
--------- --------- ------------ ---------- ------------------ ------------- --------
At 31 December 2016 - - (390.7) 915.2 (0.5) (27.5) 496.5
--------- --------- ------------ ---------- ------------------ ------------- --------
Note:
1. The acquisition of the Nortek Group by Melrose was effected
by a merger between Nevada, Corp., an indirect wholly owned
subsidiary of Melrose, and Nortek, Inc. from which Nortek, Inc. was
the surviving entity. An intercompany loan between the two entities
was consequently cancelled as a result of the merger giving rise to
the creation of a merger reserve in Nortek, Inc. with a value of
$661.4 million.
2. As a result of the acquisition of the Nortek Group by
Melrose, all previously held share capital and treasury shares
issued by Nortek, Inc. were cancelled.
The accompanying notes are an integral part of this historical
financial information.
1. Corporate Information
The historical financial information of Nortek, Inc. ("Nortek")
and its subsidiaries (collectively, the "Nortek Group") for the
year ended 31 December 2016 was authorised for issue in accordance
with a resolution of the Directors on 21 March 2017.
Nortek was founded in 1967 and is incorporated in the State of
Delaware, the United States of America. The address of the
registered office is 2077 Convention Center Concourse, Suite 175,
Atlanta, Georgia, 30337.
On July 6, 2016, the Nortek Group entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Melrose Industries
PLC, a public limited company incorporated under the laws of the
United Kingdom and registered in England and Wales ("Melrose"), and
Nevada Corp., a Delaware corporation and an indirect wholly owned
subsidiary of Melrose. Upon completion of the merger, the Nortek
Group became an indirect wholly owned subsidiary of Melrose.
Nortek is a leading diversified global manufacturer of
innovative air management, security, home automation and ergonomic
and productivity solutions.
The Nortek Group manufactures and sells, primarily in the United
States, Canada, and Europe, with additional manufacturing in China
and Mexico, a wide variety of products principally for the
remodelling and replacement markets, the residential and commercial
new construction markets, and the personal and enterprise computer
markets.
2. Summary of significant accounting polices
Basis of accounting
The historical financial information has been prepared in
accordance with the requirements of the Listing Rules, on a basis
consistent with the accounting policies adopted in the latest
annual financial statements of Melrose. This historical financial
information has been prepared in accordance with International
Financial Reporting Standards ("IFRS") and interpretations issued
by the IFRS Interpretations Committee (IFRS IC) applicable to
companies reporting under IFRS. The historical financial
information complies with IFRS as adopted for use in the European
Union ("EU") and therefore complies with Article 4 of the EU IAS
Regulation.
IFRSs as adopted by the EU do not provide for the specific
accounting treatment set out below, and accordingly in preparing
the consolidated historical financial information certain
accounting conventions commonly used for the preparation of
historical financial information for inclusion in investment
circulars as described in the Annexure to SIR 2000 (Investment
Reporting Standard applicable to public reporting engagements on
historical financial information) issued by the UK Auditing
Practices Board have been applied. The application of these
conventions results in a departure from IFRSs as adopted by the EU
as financial information has been presented without comparative
information. In all other respects IFRSs as adopted by the EU have
been applied.
Accordingly, other than the exception noted, the Nortek Group
has prepared historical financial information which complies with
applicable IFRS, as described in the summary of significant
accounting policies.
The historical financial information is presented in US Dollars
("$") and all values stated in millions of US Dollars ("$m") except
where otherwise indicated.
The historical financial information has been prepared on an
historical cost basis, except for the revaluation of certain
financial instruments which are recognised at fair value at the end
of each reporting period. Historical cost is generally based on the
fair value of the consideration given in exchange for assets.
Alternative performance measures
In response to the Guidelines on Alternative Performance
Measures ("APMs") issued by the European Securities and Markets
Authority ("ESMA"), additional information on the APMs used by the
Group is provided below. The APMs used by the Group are:
- Underlying operating profit/(loss)
- Underlying profit/(loss) before tax
- Underlying profit/(loss) after tax
A reconciliation between statutory reported measures and the
underlying measures listed above is shown in note 6 to this
historical financial information.
Underlying profit/(loss) excludes items which are significant in
size or volatility or by nature are non-trading or non-recurring,
or any item released to the Income Statement that was previously a
fair value item booked on acquisition. These items are not included
in the performance measures the Board uses to monitor the
performance of the Group.
The underlying 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 underlying measures are also
used to value individual businesses as part of the "Buy, Improve
and Sell" Melrose strategy model.
Underlying 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.
Basis of consolidation
The Nortek Group historical financial information includes the
results of Nortek and all of its subsidiary undertakings. The
results of businesses acquired during the period are included from
the effective date of acquisition and for those sold during the
period to the effective date of disposal. Where necessary,
adjustments are made to the financial statements of subsidiaries to
bring the accounting policies used into line with those used by the
Nortek Group. All intra-Group balances and transactions, including
unrealised profits arising from intra-Group transactions, have been
eliminated in full.
Going concern
The Directors have, at the time of approving the historical
financial information, a reasonable expectation that the Nortek
Group has adequate resources to continue in operational existence
for the foreseeable future. In forming this view, the Directors
have considered the availability of finance from Melrose. Thus they
continue to adopt the going concern basis of accounting in
preparing the historical financial information.
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the
acquisition method. The cost of acquisition is measured at the fair
value of assets transferred, the liabilities incurred or assumed at
the date of exchange of control and equity instruments issued by
the Nortek Group in exchange for control of the acquiree. Control
is achieved where the Nortek Group has the power to govern the
financial and operating policies of an investee entity so as to
obtain benefits from its activities. Costs directly attributable to
business combinations are recognised as an expense in the Income
Statement as incurred.
The acquired identifiable assets and liabilities are measured at
their fair value at the date of acquisition except those where
specific guidance is provided by IFRSs. Non-current assets and
directly attributable liabilities that are classified as held for
sale in accordance with IFRS 5: "Non-current assets held for sale
and discontinued operations", are recognised and measured at fair
value less costs to sell. Also, deferred tax assets and liabilities
are recognised and measured in accordance with IAS 12: "Income
taxes", liabilities and assets related to employee benefit
arrangements are recognised and measured in accordance with IAS 19
(revised): "Employee benefits" and liabilities or equity
instruments related to the replacement by the Nortek Group of an
acquiree's share-based payments awards are measured in accordance
with IFRS 2: "Share-based payment". Any excess of the cost of the
acquisition over the fair values of the identifiable net assets
acquired is recognised as goodwill.
If the initial accounting for a business combination is
incomplete by the end of the reporting period in which the
combination occurs, the Nortek Group reports provisional amounts
where appropriate. Those provisional amounts are adjusted during
the measurement period, or additional assets or liabilities
recognised, to reflect new information obtained about facts and
circumstances that existed as of the acquisition date that, if
known, would have affected the amounts recognised at that date.
The measurement period is the period from the date of
acquisition to the date the Nortek Group obtains complete
information about facts and circumstances that existed as of the
acquisition date and is subject to a maximum period of one
year.
Goodwill on acquisition is initially measured at cost, being the
excess of the sum of the consideration transferred, the amount of
any non-controlling interest in the acquiree and the fair value of
the acquirer's previously held equity interest in the acquiree over
the acquirer's interest in the net fair value of the identifiable
assets, liabilities and contingent liabilities. Following initial
recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is reviewed for impairment annually or
more frequently if events or changes in circumstances indicate that
the carrying value may be impaired.
If, after reassessment, the Nortek Group's interest in the fair
value of the acquiree's identifiable net assets exceeds the sum of
the consideration transferred, the amount of any non-controlling
interest in the acquiree and the fair value of the acquirer's
previously held equity interest in the acquiree, the excess is
recognised immediately in profit or loss as a bargain purchase
gain.
As at the acquisition date, any goodwill acquired is allocated
to each of the cash-generating units acquired. Impairment is
determined by assessing the recoverable amount of the
cash-generating unit to which goodwill relates. Where the
recoverable amount of the cash-generating unit is less than the
carrying amount, an impairment loss is recognised in the Income
Statement and is not subsequently reversed. When there is a
disposal of a cash-generating unit, goodwill relating to the
operation disposed of is taken into account in determining the gain
or loss on disposal of that operation. The amount of goodwill
allocated to a partial disposal is measured on the basis of the
relative values of the operation disposed of and the operation
retained.
Revenue
Revenue is measured at the fair value of the consideration
received or receivable and represents amounts receivable for goods
and services provided in the normal course of business, net of
discounts, customs duties and sales related taxes. Revenue is
reduced for estimated customer returns, rebates and other similar
allowances. The nature of agreements into which the Nortek Group
enters means that:
- Certain of the Group's arrangements with its customers are
multiple--element arrangements that can include any combination of
products and services such as extended warranties, installation and
start up testing as deliverables. With the exception of certain
extended warranty arrangements, substantially all of the
deliverables within the Group's multiple element arrangements are
delivered within a one year period. Revenue for any
undelivered--elements are deferred until delivery occurs. The Group
allocates revenue to multiple element arrangements based on the
relative fair value of each element's estimated selling price.
- the service element of the contract is usually insignificant
in relation to the total contract value and is often provided on a
short-term or one-off basis. Where this is the case, revenue is
recognised when the service is complete.
- aftermarket activities generally relate to the provision of
spare parts, repairs and the rebuild of equipment. Revenue on the
provision of parts is recognised in accordance with the policy on
the sale of goods and revenue for repairs and rebuild is recognised
upon completion of the activity.
Cash discounts, volume rebates and other customer incentive
programs are based upon certain percentages agreed upon with the
Nortek Group's various customers, which are typically earned by the
customer over an annual period. The Nortek Group records periodic
estimates for these amounts based upon the historical results to
date, estimated future results through the end of the contract
period, and the contractual provisions of the customer agreements.
These are recorded as of the later of the date at which the
revenues are recognised or the incentive is offered and are
generally recorded as a reduction of sales at the time of sale
based upon the estimated future outcome.
The significant majority of the Nortek Group's revenue is
recognised on a sale of goods basis.
The specific methods used to recognise the different forms of
revenue earned by the Nortek Group are as follows:
Sale of goods
Revenue is recognised when all of the following conditions are
satisfied:
- the Nortek Group has transferred to the buyer the significant
risks and rewards of ownership of the goods;
- the Nortek Group retains neither continuing managerial
involvement to the degree usually associated with ownership nor
effective control over the goods;
- the amount of revenue can be measured reliably;
- it is probable that the economic benefits associated with the
transaction will flow to the Nortek Group; and
- the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
Transfers of risks and rewards vary depending on the nature of
the products sold and the individual terms of the contract of sale.
Sales made under internationally accepted trade terms are
recognised as revenue when the Nortek Group has completed the
primary duties required to transfer risks as stipulated in those
terms. Sales made outside of such terms are generally recognised on
delivery to the customer. No revenue is recognised where recovery
of the consideration is not probable or there are significant
uncertainties regarding associated costs or the possible return of
goods.
Provision of services
As noted above, because revenue from the rendering of services
is usually not significant in relation to the total contract value
and is generally provided on a short-term or one-off basis, revenue
is usually recognised when the service is complete.
Construction contracts
Revenue from significant contracts, without discrete elements,
is recognised in proportion to the stage of completion of the
contract by reference to the specific contract terms and the costs
incurred on the contract at the Balance Sheet date in comparison to
the total forecast costs of the contract. This is normally measured
by the proportion that contract costs incurred for work performed
to date bear to the estimated total contract costs, except where
this would not be representative of the stage of completion.
Variations in contract work, claims and incentive payments are
included in revenue from construction contracts when the amount can
be measured reliably and its receipt is considered probable.
Variations are included when the customer has agreed to the
variation or acknowledged liability for the variation in principle.
Claims are included when negotiations with the customer have
reached an advanced stage such that it is probable that the
customer will accept the claim. Incentive payments are included
when a contract is sufficiently advanced that it is probable that
the performance standards triggering the incentive will be
achieved.
Profit attributable to contract activity is recognised if the
final outcome of such contracts can be reliably assessed. Where
this is not the case contract revenue is recognised to the extent
of contract costs incurred where it is probable they will be
recovered. When it is probable that total contract costs will
exceed total contract revenue, the expected loss is recognised as
an expense immediately.
Borrowing Costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which are assets
that necessarily take a substantial period of time to get ready for
their intended use or sale, are added to the cost of those assets,
until such time as the assets are substantially ready for their
intended use or sale.
Investment income earned on the temporary investment of specific
borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in the Income Statement
in the period in which they are incurred.
Issue costs of loans
The finance cost recognised in the Income Statement in respect
of the issue costs of borrowings is allocated to periods over the
terms of the instrument using the effective interest rate
method.
Property, plant and equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and any impairment in value.
The initial cost of an asset comprises its purchase price or
construction cost, and any costs directly attributable to bring the
asset into operation. The purchase price or construction cost is
the aggregate amount paid and the fair value of any other
consideration given to acquire the asset.
Depreciation is calculated on a straight-line basis over the
estimated useful life of the asset as follows:
Buildings and improvements 3 - 43 years
Machinery and equipment 1 - 13 years
Leasehold improvements Shorter of the original lease term or the estimated
useful life
The estimated useful lives of property, plant and equipment are
reviewed on an annual basis and, if necessary, changes in useful
lives are accounted for prospectively.
The carrying values of property, plant and equipment are
reviewed for impairment when events or changes in circumstances
indicate that the carrying value may not be recoverable. If any
such indication exists an impairment review is performed and, where
the carrying values exceed the estimated recoverable amount, the
assets are written down to their recoverable amount. The
recoverable amount of property, plant and equipment is the greater
of net selling price and value in use. In assessing value in use,
the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate largely independent
cash inflows, the recoverable amount is determined for the
cash-generating unit to which the asset belongs.
An item of property, plant and equipment is derecognised upon
disposal or when no future economic benefits are expected to arise
from the continued use of the asset. Any gain or loss arising on
derecognition of the asset (calculated as the difference between
the net disposal proceeds or costs and the carrying amount of the
item) is included in the Income Statement in the year that the item
is derecognised.
Intangible assets
Intangible assets are stated at cost less accumulated
amortisation and accumulated impairment losses.
On acquisition of businesses, separately identifiable intangible
assets are initially recorded at their fair value at the
acquisition date.
Access to the use of trademarks and tradenames are valued using
a "relief from royalty" method which determines the net present
value of future additional cash flows arising from the use of the
intangible asset.
Customer relationships are valued on the basis of the net
present value of the future additional cash flows arising from
customer relationships with appropriate allowance for attrition of
customers.
Technology assets are valued using a replacement cost
approach.
Amortisation of intangible assets is recorded in administration
expenses in the Income Statement and is calculated on a
straight-line basis over the estimated useful lives of the asset as
follows:
Trademarks and tradenames 3 - 22 years
Developed technology 4 - 15 years
Customer relationships 2 - 21 years
Computer software 1 - 5 years
Other intangibles 3 - 6 years
Computer software is initially recorded at cost. Where these
assets have been acquired through a business combination, this will
be the fair value allocated in the acquisition accounting. Where
these have been acquired other than through a business combination,
the initial cost is the aggregate amount paid and the fair value of
any other consideration given to acquire the asset.
Intangible assets are tested for impairment annually or more
frequently whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Impairment losses
are measured on a similar basis to property, plant and equipment.
Useful lives are also examined on an annual basis and adjustments,
where applicable, are made on a prospective basis.
Research and development costs
Research costs are expensed as incurred.
Costs relating to clearly defined and identifiable development
projects are capitalised when there is a technical degree of
exploitation, adequacy of resources and a potential market or
development possibility in the undertaking that are recognisable;
and where it is the intention to produce, market or execute the
project. A correlation must also exist between the costs incurred
and future benefits and those costs can be measured reliably.
Capitalised costs are expensed on a straight-line basis over their
useful lives of five years or less. Costs not meeting such criteria
are expensed as incurred.
Inventories
Inventories are valued at the lower of cost and net realisable
value and measured using a first in, first out basis. Cost includes
all direct expenditure and appropriate production overhead
expenditure incurred in bringing goods to their current state under
normal operating conditions. Net realisable value is based on
estimated selling price less costs expected to be incurred to
completion and disposal. Provisions are made for obsolescence or
other expected losses where necessary.
Trade and other receivables
Trade receivables and other receivables are measured and carried
at amortised cost using the effective interest method, less any
impairment. The carrying amount of other receivables is reduced by
the impairment loss directly and a charge is recorded in the Income
Statement. For trade receivables, the carrying amount is reduced
through the use of an allowance account. Subsequent recoveries of
amounts previously written off are credited against the allowance
account and changes in the carrying amount of the allowance account
are recognised in the Income Statement.
Trade receivables that are assessed not to be impaired
individually are also assessed for impairment on a collective
basis. Objective evidence of impairment for a portfolio of
receivables could include the Nortek Group's past experience of
collecting receipts, an increase in the number of delayed receipts
in the portfolio past the average credit period, as well as
observable changes in national or local economic conditions that
correlate with default on receivables.
Cash and cash equivalents
Cash and cash equivalents in the Balance Sheet comprise cash in
hand, current balances with banks and similar institutions and
short-term deposits which are readily convertible to cash which are
subject to insignificant risks of changes in value.
For the purpose of the Consolidated Cash Flow Statement, cash
and cash equivalents consist of cash and cash equivalents as
defined above, net of outstanding bank overdrafts.
Interest--bearing loans and borrowings
All loans and borrowings are initially recognised at fair value
of the consideration received net of issue costs associated with
the borrowings.
After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortised cost using the effective
interest method. Amortised cost is calculated by taking into
account any issue costs, and any discount or premium on
settlement.
Gains and losses are recognised in the Income Statement when the
liabilities are derecognised or impaired, as well as through the
amortisation process.
Leases
Finance leases, which transfer to the Nortek Group substantially
all the risks and benefits incidental to ownership of the leased
item, are capitalised at the inception of the lease at the fair
value of the lease or, if lower, at the present value of the
minimum lease payments. The corresponding liability to the lessor
is included in the Balance Sheet as a finance lease obligation.
Lease payments are apportioned between the finance charges and
reduction of the lease liability so as to achieve a constant rate
of interest on the remaining balance of the liability.
Finance charges are charged directly against income. Capitalised
leased assets are depreciated over the shorter of the estimated
useful life of the asset or the lease term.
Operating lease payments are recognised as an expense in the
Income Statement on a straight-line basis over the lease term.
Rental income from operating leases is recognised on a
straight-line basis over the term of the relevant lease.
Derivative financial instruments and hedging
The Nortek Group uses derivative financial instruments to manage
its exposure to interest rate, foreign exchange rate and commodity
risks, arising from operating and financing activities. The Nortek
Group does not hold or issue derivative financial instruments for
trading purposes. Details of derivative financial instruments are
disclosed in note 15 of this historical financial information.
Derivative financial instruments are recognised and stated at
fair value. Their fair value is recalculated at each reporting
date. The accounting treatment for the resulting gain or loss will
depend on whether the derivative meets the criteria to qualify for
hedge accounting.
Where derivatives do not meet the criteria to qualify for hedge
accounting, any gains or losses on the revaluation to fair value at
the period end are recognised immediately in the Income Statement.
Where derivatives do meet the criteria to qualify for hedge
accounting, recognition of any resulting gain or loss on
revaluation depends on the nature of the hedge relationship and the
item being hedged.
Derivative financial instruments with maturity dates of less
than one year from the period end date are classified as current in
the Balance Sheet.
Hedge accounting
In order to qualify for hedge accounting, the Nortek Group is
required to document from inception the relationship between the
item being hedged and the hedging instrument and to show that the
hedge will be highly effective on an ongoing basis. This
effectiveness testing is performed at each period end to ensure
that the hedge remains highly effective.
Hedge accounting is discontinued when the Nortek Group revokes
the hedging relationship, the hedge instrument expires or is sold,
terminated, exercised, or no longer qualifies for hedge
accounting.
The Nortek Group designates certain hedging instruments as
either fair value hedges, cash flow hedges or hedges of net
investments in foreign operations.
Fair value hedge
Derivative financial instruments are classified as fair value
hedges when they hedge the Nortek Group's exposure to changes in
the fair value of a recognised asset or liability. Changes in the
fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the Income Statement immediately,
together with any changes in the fair value of the hedged item that
is attributable to the hedged risk.
Cash flow hedge
Derivative financial instruments are classified as cash flow
hedges when they hedge the Nortek Group's exposure to the
variability in cash flows that are either attributable to a
particular risk associated with a recognised asset or liability, or
a highly probable forecasted cash flow.
The effective portion of any gain or loss from revaluing the
derivative financial instrument is recognised in the Statement of
Comprehensive Income and accumulated in equity. The gain or loss
relating to the ineffective portion is recognised immediately in
the Income Statement.
Amounts previously recognised in the Statement of Comprehensive
Income and accumulated in equity are recycled to the Income
Statement in the periods when the hedged item is recognised in the
Income Statement or when the forecast transaction is no longer
expected to occur. However, when the forecast transaction that is
hedged results in the recognition of a non-financial asset or a
non-financial liability, the gains and losses previously deferred
in equity are transferred from equity and included in the initial
measurement of the cost of the non-financial asset or non-financial
liability.
Provisions
Provisions are recognised when the Nortek Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. If the effect
of the time value of money is material, provisions are determined
by discounting the expected future cash flows at a rate that
reflects the current market assessment of the time value of money
and, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provision due to the
passage of time is recognised as a finance cost.
Restructuring
A restructuring provision is recognised when the Nortek Group
has developed a detailed formal plan for the restructuring and has
raised a valid expectation in those affected that it will carry out
the restructuring by either starting to implement the plan or by
announcing its main features to those affected by it. The
measurement of a restructuring provision includes only the direct
expenditures arising from the restructuring, which are those
amounts that are both necessarily entailed by the restructuring and
not associated with the ongoing activities of the entity.
Warranties
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, using the Directors' best estimate of the
expenditure required to settle the Nortek Group's obligation.
Onerous contracts
Present obligations arising under onerous contracts are
recognised and measured as provisions. An onerous contract is
considered to exist where the Nortek Group has a contract under
which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under
it.
Environmental liabilities
Liabilities for environmental costs are recognised when
environmental assessments or clean-ups are probable and the
associated costs can be reasonably estimated. Generally, the timing
of these provisions coincides with the commitment to a formal plan
of action. The amount recognised is the best estimate of the
expenditure required. Where the liability will not be settled for a
number of years, the amount recognised is the present value of the
estimated future expenditure.
Employee related
Liabilities for health and workers compensation expenses are
provided for based on the total liabilities that are able to be
estimated and are probable as of the balance sheet date.
Product liability
Provisions are recorded for product and general liability claims
which are probable and for which the cost can be reliably
estimated.
Pensions and other retirement benefits
The Nortek Group operates defined benefit pension plans and
defined contribution plans, some of which require contributions to
be made to administered funds separate from the Nortek Group.
For the defined benefit pension and retirement benefit plans,
plan assets are measured at fair value and plan liabilities are
measured on an actuarial basis and discounted at an interest rate
equivalent to the current rate of return on a high quality
corporate bond of equivalent currency and term to the plan
liabilities. Any assets resulting from this calculation are limited
to past service cost plus the present value of available refunds
and reductions in future contributions to the plan. The present
value of the defined benefit obligation, and the related current
service cost and past service cost, are measured using the
projected unit credit method.
The service cost of providing pension and other retirement
benefits to employees for the period is charged to the Income
Statement.
Net interest expense on net defined benefit obligations is
determined by applying discount rates used to measure defined
benefit obligations at the beginning of the year to net defined
benefit obligations at the beginning of the year. Net interest
expense is recognised within finance costs.
Remeasurement gains and losses comprise actuarial gains and
losses, the effect of the asset ceiling (if applicable) and the
return on plan assets (excluding interest). Remeasurement gains and
losses, and taxation thereon, are recognised in full in the
Statement of Comprehensive Income in the period in which they occur
and are not subsequently recycled.
Actuarial gains and losses may result from differences between
the actuarial assumptions underlying the plan obligations and
actual experience during the period or changes in the actuarial
assumptions used in the valuation of the plan obligations.
For defined contribution plans, contributions payable are
charged to the Income Statement as an operating expense when
employees have rendered services entitling them to the
contributions.
Foreign currencies
The individual financial statements of each Nortek Group company
are presented in the currency of the primary economic environment
in which it operates (its functional currency). For the purpose of
the consolidated historical financial information, the results and
financial position of each Nortek Group company are expressed in
United States dollars, which is the functional currency of Nortek,
Inc., and the presentation currency for the consolidated historical
financial information.
In preparing the financial statements of the individual
companies, transactions in currencies other than the entity's
functional currency (foreign currencies) are recorded at the rates
of exchange prevailing on the dates of the transactions. At each
Balance Sheet date, monetary assets and liabilities that are
denominated in foreign currencies are retranslated at the rates
prevailing on the Balance Sheet date. Non-monetary items carried at
fair value that are denominated in foreign currencies are
translated at the rates prevailing at the date when the fair value
was determined. Non-monetary items that are measured in terms of
historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary
items, and on the retranslation of monetary items, are included in
the Income Statement for the period. Exchange differences arising
on the retranslation of non-monetary items carried at fair value
are included in the Income Statement for the period except for
differences arising on the retranslation of non-monetary items in
respect of which gains and losses are recognised directly in
equity. For such non-monetary items, any exchange component of that
gain or loss is also recognised directly in equity.
For the purpose of presenting the consolidated historical
financial information, the assets and liabilities of the Nortek
Group's foreign operations are translated at exchange rates
prevailing on the Balance Sheet date. Income and expense items are
translated at the average exchange rates for the period, unless
exchange rates fluctuate significantly during that period, in which
case the exchange rates at the date of transactions are used.
Exchange differences arising, if any, are recognised in the
Statement of Comprehensive Income and accumulated in equity
(attributed to non-controlling interests as appropriate). Such
translation differences are recognised as income or as expenses in
the period in which the related operation is disposed of. Any
exchange differences that have previously been attributed to
non-controlling interests are derecognised but they are not
reclassified to the Income Statement.
Taxation
The tax expense is based on the taxable profits for the period
and represents the sum of the tax paid or currently payable and
deferred tax.
Taxable profit differs from net profit as reported in the Income
Statement because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Nortek Group's liability
for current tax is calculated using tax rates and tax laws that
have been enacted or substantively enacted by the Balance Sheet
date.
Deferred tax is provided, using the liability method, on all
temporary differences at the Balance Sheet date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes.
Deferred tax liabilities are recognised for all taxable
temporary differences except:
- where the deferred tax liability arises on the initial
recognition of goodwill or an asset or liability in a transaction
that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable
profit or loss; and
- where the timing of the reversal of the temporary differences
associated with investments in subsidiaries and interests in joint
ventures can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary
differences, carry-forward of unused tax assets and unused tax
losses, to the extent that it is probable that taxable profit will
be available against which the deductible temporary differences,
and carry-forward of unused tax assets and unused tax losses can be
utilised except:
- where the deferred tax asset arises from the initial
recognition of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or loss; and
- in respect of deductible temporary differences associated with
investments in subsidiaries and interests in joint ventures,
deferred tax assets are only recognised to the extent that it is
probable that the temporary differences will reverse in the
foreseeable future and taxable profit will be available against
which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each
Balance Sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow
all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply to the year when the asset is
realised or the liability is settled, based on tax rates and tax
laws that have been enacted or substantively enacted at the
relevant Balance Sheet date.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes levied
by the same taxation authority and the Nortek Group intends to
settle its current tax assets and liabilities on a net basis.
Tax relating to items recognised directly in other comprehensive
income is recognised in the Statement of Comprehensive Income and
not in the Income Statement.
Revenues, expenses and assets are recognised net of the amount
of sales tax except:
- where the sales tax incurred on a purchase of goods and
services is not recoverable from the taxation authority, in which
case the sales tax is recognised as part of the cost of acquisition
of the asset or as part of the expense item as applicable; and
- where receivables and payables are stated with the amount of
sales tax included.
The net amount of sales tax recoverable from, or payable to, the
taxation authority is included as part of receivables or payables
in the Balance Sheet.
Share-based payments
The Nortek Group has applied the requirements of IFRS 2:
"Share-based payment". The Nortek Group issues equity-settled
share-based payments to certain employees. Equity-settled
share-based payments are measured at fair value of the equity
instrument excluding the effect of non-market based vesting
conditions at the date of grant. The fair value determined at the
grant date of the equity-settled share-based payments is expensed
on a straight-line basis over the vesting period, based on the
Nortek Group's estimate of shares that will eventually vest and
adjusted for the effect of non-market based vesting conditions.
Fair value is measured by use of the Black Scholes pricing
model. The expected life used in the model has been adjusted, based
on the Directors' best estimate, for the effects of
non-transferability, exercise restrictions, and behavioural
considerations.
3. Critical accounting judgements and key sources of estimation uncertainty
In the application of the accounting policies, which are
described in note 2, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical
experiences and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period, or in the period of revision and future periods
if the revision affects both current and future periods.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources
of estimation uncertainty at the reporting period that may have a
significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year,
are discussed below.
Provisions
The quantification of certain liabilities within provisions have
been estimated using the best information available. However, such
liabilities depend on the actions of third parties and on the
specific circumstances pertaining to each obligation, neither of
which is controlled by the Nortek Group. Although provisions are
reviewed on a regular basis and adjusted for management's best
current estimates, the judgemental nature of these items means that
future amounts settled may be different from those provided.
Further details are set out in note 16.
Assumptions used to determine the carrying amount of the Nortek
Group's defined benefit obligation
The Group's defined benefit obligation is discounted at a rate
set by reference to market yields at the end of the reporting
period on high quality corporate bonds. Significant judgement is
required when setting the criteria for bonds to be included in the
population from which the yield curve is derived. The most
significant criteria considered for the selection of bonds include
the issue size of the corporate bonds, quality of the bonds and the
identification of outliers which are excluded. In addition
judgement is made in determining mortality rate assumptions to be
used when valuing the Nortek Group's defined benefit obligations.
At 31 December 2016, the Nortek Group's retirement benefit
obligation deficit was $46.2 million. A sensitivity analysis on the
principal assumptions used to determine the Nortek Group's defined
benefit obligations is shown in note 17.
Taxation
The Nortek Group is subject to income tax in most of the
jurisdictions in which it operates. Management is required to
exercise judgement in determining the Nortek Group's provision for
income taxes. Management's judgement is required in estimating tax
provisions where management believe it is probable that additional
current tax will become payable in the future following the audit
by the tax authorities of previously filed tax returns. Such
provisions are measured based on management's best estimates of the
amounts payable. Management's judgement is also required as to
whether a deferred tax asset should be recognised based on the
availability of future taxable profits and the expected timing of
future disposals. While the Nortek Group aims to ensure that the
estimates recorded are accurate, the actual amounts could be
different from those expected. Further details are provided in note
8.
4. New Standards and Interpretations in issue but not yet effective
At the date of authorisation of this historical financial
information, the following Standards and Interpretations are in
issue but not yet effective (and in some cases have not been
adopted by the EU):
IFRS 9: Financial instruments
IFRS 15: Revenue from contracts with customers
IFRS 16: Leases
Amendments to IAS 7: Disclosure initiative
Amendments to IAS 12: Recognition of deferred tax losses
Amendments to IFRS 2: Classification and measurement of
share-based payment transactions
Amendments to IFRS 10 and IAS 28: Sale or contribution of assets
between an investor and its associate or
joint venture
Annual improvements to IFRSs: 2014-16 Cycle
Clarifications to IFRS 15: Revenue from contracts with
customers
The Directors do not expect that the adoption of the Standards
listed above will have a material impact on the financial
statements of the Nortek Group in future periods, except that IFRS
9 will impact both the measurement and disclosures of financial
instruments, IFRS 15 may have an impact on revenue recognition and
related disclosures and IFRS 16 will impact the recognition of
leases. Beyond the information above, it is not practicable to
provide a reasonable estimate of the effect of IFRS 9 and IFRS 15
until a detailed review has been completed, which is planned to be
undertaken in the next 12 months.
5. Business combinations
Nuiku
On May 19, 2016, one of the Nortek Group's wholly-owned
subsidiaries completed the acquisition of certain assets of Nuiku,
Inc. ("Nuiku"), which was a privately-owned company that had
developed a data driven platform and cloud based application
program interface that enables natural language processing for
multiple products ("NLP Software"). The acquired NLP Software is
expected to be integrated with certain of the Nortek Group's
Security & Smart Technology and Air Management products. The
Nortek Group completed the acquisition of Nuiku to expand its
technology and product offerings and functionality. The Nortek
Group acquired Nuiku for an aggregate initial all cash purchase
price of approximately $1.3 million, of which approximately $1.0
million was paid at closing and approximately $0.3 million was
deferred to be paid no later than August 14, 2017 subject to any
reduction for indemnification or other claims. There were no
tangible assets acquired or liabilities assumed and the Nortek
Group concluded that the estimated fair value of acquired developed
technology was approximately $1.3 million. In addition to the
initial cash purchase price consideration, the asset purchase
agreement also contained a contingent purchase consideration
provision whereby the Nortek Group is required to pay additional
consideration (all in cash), up to a maximum of $2.3 million.
MiOS
On May 2, 2016, the Nortek Group purchased certain preferred
stock of MiOS Limited ("MiOS") for approximately $4.5 million (of
which $4.0 million was paid in cash), which represents an ownership
of approximately 25% on a fully-diluted basis. MiOS is a global
technology company focused on developing and distributing advanced
control and monitoring solutions for the home and small enterprise
markets. Following the acquisition of Nortek by Melrose on 31
August 2016, a decision was made to fully impair this
investment.
6. Reconciliation between profit and underlying profit
As described in note 2, underlying profit/(loss) is the
alternative performance measure used by the Board to monitor the
underlying trading performance of the Nortek Group. A
reconciliation between the statutory loss and underlying profit for
2016 is shown below:
Year ended
Note 31 December 2016
------ ------------------
$m
Operating loss (168.7)
------------------
Acquisition fees and expenses a 37.8
Restructuring and transformation charges b 93.2
Stock based compensation c 19.6
Amortisation of intangible assets d 69.6
Adjustments made on acquisition e 177.0
Other f 12.5
------------------
Total adjustments 409.7
------------------
Underlying operating profit 241.0
------------------
a. Acquisition fees and expenses of $37.8 million, which were
incurred primarily as a result of the Melrose transaction. These
items are excluded from underlying results due to their size and
non-trading nature.
b. Restructuring and transformation charges of $93.2 million
were incurred during the year. These related principally to the
closure of the Nortek Head office and the restructuring of the Air
Management segment where the two Heating, Ventilation and Air
Conditioning ("HVAC") businesses were combined, closing various
loss making businesses, making further cost reductions and moving
the centralised functions for warehousing, human resources and IT
back to the businesses. These items are excluded from underlying
results due to their size and non-trading nature.
c. There was a charge of $19.6 million recorded in the Income
Statement related to the IFRS 2 charge for the first eight months
of 2016 and the accelerated vesting of share options as a
consequence of the Melrose transaction, whereby the acquirer
settled outstanding share options. These items are excluded from
underlying results due to their size and non-trading nature.
d. The amortisation of intangible assets acquired in business
combinations are excluded from underlying results due to their
non-trading nature.
e. As a result of the acquisition, adjustments of $177.0 million
were made to the carrying value of assets and liabilities. This
included changes in management estimates for the recoverability of
assets and the expected future costs of provisions and liabilities.
This non-recurring charge is not representative of the underlying
trading performance of the business and it has been excluded from
the underlying results by virtue of its size and nature.
f. Other non-underlying charges incurred totalled $12.5 million.
These items are excluded from underlying results due to their
non-trading nature.
Underlying profit before tax is as follows:
Year ended
Note 31 December 2016
-------- ------------------
$m
Loss before tax (306.3)
------------------
Adjustments to operating profit per above 409.7
Loss from debt retirement g 31.3
Write-off of deferred finance costs g 14.2
------------------
Adjustments to loss before tax 455.2
------------------
Underlying profit before tax 148.9
------------------
g. As a result of the Melrose transaction as at 31 August 2016,
outstanding borrowings and accrued interest under the Nortek
Group's 8.5% Senior Notes and Senior Secured Term Loan Facility
were repaid. The Nortek Group recorded a loss on debt retirement of
$31.3 million related to early redemption premiums on the 8.5%
Senior Notes and wrote-off $14.2 million of deferred finance costs.
These items are excluded from underlying results due to their size
and non-trading nature.
Underlying profit after tax is as follows:
Year ended
31 December 2016
------------------
$m
Loss for the year (195.1)
------------------
Adjustments to loss before tax per above 455.2
Tax effect of adjustments to underlying profit before tax (158.7)
------------------
Adjustments to loss for the year 296.5
------------------
Underlying profit after tax 101.4
------------------
7. Revenue and expenses
An analysis of the Nortek Group's revenue is as follows:
Year ended
31 December
2016
-------------
$m
Revenue from the sale of goods 2,437.3
Revenue from the provision of services 43.4
-------------
Total revenue 2,480.7
-------------
Net operating expenses comprise:
Year ended
31 December
2016
-------------
$m
Selling and distribution costs 241.5
Administration expenses 603.3
Shares of results of joint ventures 0.8
-------------
Total net operating expenses 845.6
-------------
Operating loss is stated after charging:
Year ended
31 December
2016
-------------
$m
Research and development costs 23.0
Depreciation 34.7
Amortisation of acquired intangibles 69.6
Amortisation of computer software 8.6
Foreign exchange losses 0.2
Operating lease expense 35.2
Write--down of inventory to net realisable value 41.9
Impairment of property, plant and equipment 13.7
Impairment of computer software 5.8
Impairment of trade receivables 12.1
Loss on sale of property, plant and equipment 0.1
Cost of inventories recognised as an expense 1,803.8
-------------
Staff costs during the year (including executive Directors)
comprise:
Year ended
31 December
2016
-------------
$m
Salaries and wages 522.0
Pension costs (note 17)
* Defined benefit plans 0.5
* Defined contribution plans 2.1
Payroll taxes and other fringe benefits 26.7
Share--based compensation 19.6
-------------
Total staff costs 570.9
-------------
Average number of persons employed (including executive
Directors):
Year ended
31 December
2016
-------------
Total average number of persons employed 11,092
=============
Finance costs and income comprise:
Year ended
31 December
2016
-------------
$m
Interest on bank loans and overdrafts 70.6
Interest paid to parent undertaking 15.2
Amortisation of costs of raising finance 2.1
Loss from debt retirement 31.3
Write-off of deferred finance costs 14.2
Pension interest cost 1.6
Unwind of discount on provisions 0.1
Other 2.5
-------------
Finance costs, net 137.6
-------------
8. Tax
The analysis of the tax credit in the consolidated Income
Statement is:
Year ended
31 December
2016
-------------
$m
Current tax (5.2)
Deferred tax (106.0)
-------------
Total tax credit in income statement (111.2)
-------------
The total tax credit of $111.2 million includes a tax credit
classified as non-underlying of $158.7 million. This credit is
comprised of a credit of $141.0 million on the non-underlying
adjustments to operating profit of $409.7 million, a credit of
$12.2 million on loss from debt retirement and a credit of $5.5
million on write-off of deferred finance costs.
The tax credit for the year can be reconciled to the loss per
the Income Statement as follows:
Year ended
31 December
2016
-------------
$m
Loss before tax (306.3)
-------------
Tax on loss at US Federal Rate
of 35% (107.2)
Disallowable expenses within
underlying items 2.1
Disallowable items in respect
of acquisition related costs 6.8
Temporary differences not recognised
in deferred tax 5.1
Impact of foreign tax rates (17.6)
Tax credits and other rate differences 0.2
Credit in respect of prior years (0.6)
-------------
(111.2)
-------------
In addition to the tax credit within the Income Statement, a tax
charge of $0.8 million has been recognised directly in the
Consolidated Statement of Comprehensive Income in respect of
actuarial movements on retirement benefit obligations. Also, a tax
credit of $3.8 million has been recognised in Other Reserves in
respect of the excess tax benefit on share based payments.
Deferred Taxes
The following table shows the major deferred tax assets and
liabilities recognised at 31 December 2016 and movements thereon
during the current period:
1 January 31 December
2016 P&L OCI Equity 2016
---------- ------ ------ ------- ------------
$m $m $m $m $m
Tax losses and other assets 102.2 114.2 (0.8) 3.8 219.4
Deferred tax on intangible assets (169.3) (8.2) --- --- (177.5)
Net deferred income tax (liabilities) / assets (67.1) 106.0 (0.8) 3.8 41.9
---------- ------ ------ ------- ------------
As at 31 December 2016, the Nortek Group had gross unused
federal and corporate losses of $133.5 million available for offset
against future profits. A deferred tax asset in respect of $27.2
million of these losses has been recognised in the Balance Sheet.
No asset was recognised in respect of the remaining losses due to
the geographic split of anticipated future profit streams. The
majority of these losses may be carried forward indefinitely
subject to certain continuity of business requirements. In
addition, deferred tax on tax credits and state tax losses with a
combined value of $39.3 million have been recognised and are
available to set against future tax liabilities.
A deferred tax asset of $10.4 million was recognised in respect
of retirement benefit obligations.
As at 31 December 2016, the aggregate amount of temporary
differences associated with undistributed earnings of subsidiaries
was $123.3 million on which deferred tax liabilities not recognised
were $41.7 million. No liability is recognised in respect of $102.1
million of the differences because the Nortek Group is in a
position to control the timing of the reversal of the temporary
differences and it is probable that such differences will not
reverse in the foreseeable future.
9. Goodwill and other intangible assets
Developed
Customer Trademarks and technology Computer
Goodwill relationships tradenames costs Software Other Total
--------- --------------- --------------- --------------- ---------------- ------- --------
$m $m $m $m $m $m $m
Cost
At 1 January 2016 509.9 634.4 209.7 120.2 - 25.5 1,499.7
--------- --------------- --------------- --------------- ---------------- ------- --------
Additions - - - 1.0 3.4 - 4.4
Acquisition of
businesses (note
5) - - - 1.3 - - 1.3
Disposals - - - - (4.8) - (4.8)
Reclassifications - - - - 60.7 - 60.7
--------- --------------- --------------- --------------- ---------------- ------- --------
At 31 December
2016 509.9 634.4 209.7 122.5 59.3 25.5 1,561.3
--------- --------------- --------------- --------------- ---------------- ------- --------
Amortisation
At 1 January 2016 (4.4) (233.5) (69.6) (53.4) - (24.1) (385.0)
--------- --------------- --------------- --------------- ---------------- ------- --------
Charge for the
year - (41.2) (11.6) (16.4) (8.6) (0.4) (78.2)
Impairments - - - - (5.8) - (5.8)
Disposals - - - - 2.5 - 2.5
Reclassification - - - - (35.5) - (35.5)
--------- --------------- --------------- --------------- ---------------- ------- --------
At 31 December
2016 (4.4) (274.7) (81.2) (69.8) (47.4) (24.5) (502.0)
--------- --------------- --------------- --------------- ---------------- ------- --------
Net book value
At 31 December
2016 505.5 359.7 128.5 52.7 11.9 1.0 1,059.3
--------- --------------- --------------- --------------- ---------------- ------- --------
The goodwill generated as a result of major acquisitions
represents the premium paid in excess of the fair value of all net
assets, including intangible assets, identified at the point of
acquisition. The goodwill arising on acquisitions is attributable
to the anticipated profitability and cash flows arising from the
businesses acquired, synergies as a result of the complementary
nature of the business with existing businesses, the assembled
workforce, technical expertise, knowhow, market share and
geographical advantages afforded to the Nortek Group.
The future improvements applied to the acquired businesses,
achieved through a combination of revised strategic direction,
operational improvements and investment, are expected to result in
improved profitability of the acquired businesses during the period
of ownership. The combined value achieved from these improvements
is expected to be in excess of the value of goodwill acquired.
Goodwill is allocated to groups of cash--generating units.
During the year, $25.2 million of computer related assets were
reclassified from machinery and equipment to software, there was no
impact on net assets.
The Nortek Group tests goodwill annually for impairment or more
frequently if there are indications that goodwill might be
impaired. Value in use calculations are used to determine the
recoverable amount of goodwill allocated to each group of CGU which
use the latest approved forecasts extrapolated to perpetuity using
growth rates shown below, and which do not exceed the long--term
growth rate for the relevant market.
The basis of these impairment tests and the key assumptions are
set out in the table below:
31 December 2016
Key
assumptions
applied in
the forecast
Basis of Carrying value Pre--tax Period of cash flow Long--term
Group of CGUs valuation of goodwill discount rate forecast projections growth rate
---------------- ---------------- --------------- --------------- --------------- -------------- ---------------
$m
Revenue
growth,
operating
Air Management Value in use 263.2 12.8% 4 years margins 3.0%
Revenue
Security & growth,
Smart operating
Technology Value in use 85.3 12.7% 4 years margins 3.0%
Revenue
growth,
operating
Ergonomics Value in use 157.0 12.6% 4 years margins 3.0%
Pre--tax risk adjusted discount rates
Cash flows are discounted using a pre--tax discount rate
specific to each CGU. Discount rates reflect the current market
assessments of the time value of money and are based on the
estimated cost of capital of each CGU. In determining the cost of
equity, the Capital Asset Pricing Model ("CAPM") has been used.
Under CAPM, the cost of equity is determined by adding a risk
premium to the risk free rate to reflect the additional risk
associated with investing outside of lending to a country. The risk
free rate is based on the cost of US government bonds. The premium
is 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 CGU relative to all
other sectors and geographies on average.
Assumptions applied in financial forecasts
The Nortek Group prepares cash flow forecasts derived from
financial budgets and medium term forecasts. The key assumptions
used in forecasting pre--tax cash flows relate to future budgeted
revenue and operating margins likely to be achieved and the likely
rates of long--term growth by market sector. Underlying factors in
determining the values assigned to each key assumption are shown
below:
Revenue growth and operating margins
Revenue growth assumptions in the forecast period are based on
financial budgets and medium term forecasts by management, taking
into account industry growth rates and management's historical
experience in the context of wider industry and economic
conditions. Projected sales are built up with reference to markets
and product categories. They incorporate past performance,
historical growth rates, projections of developments in key
markets, secured orders and orders likely to be achieved in the
short to medium--term given trends in the relevant market
sector.
Operating margins have been forecast based on historical levels
achieved considering the likely impact of changing economic
environments and competitive landscapes on volumes and revenues and
the impact of management actions on costs. Projected margins
reflect the impact of all initiated projects to improve operational
efficiency and leverage scale. The projections do not include the
impact of future restructuring projects to which the Nortek Group
is not yet committed. Forecasts for other operating costs are based
on inflation forecasts and supply and demand factors.
Long--term growth rates
Long-term growth rates are based on long-term forecasts for
growth in the sectors and geography in which the CGU operates.
Long-term growth rates are determined using a blend of publicly
available historical data and a long-term growth rate forecast and
further take into account the international presence and the
markets in which each business operates.
10. Property, plant and equipment
Land, Machinery
buildings and and
improvements equipment Total
--------------- ----------- --------
$m $m $m
Cost
At 1 January 2016 129.4 346.0 475.4
--------------- ----------- --------
Additions 3.1 41.1 44.2
Reclassifications - (60.7) (60.7)
Derecognition of leased assets (31.5) - (31.5)
Disposals (6.9) (25.3) (32.2)
Exchange adjustments (1.6) (1.0) (2.6)
--------------- ----------- --------
At 31 December 2016 92.5 300.1 392.6
--------------- ----------- --------
Accumulated depreciation
At 1 January 2016 (35.1) (211.3) (246.4)
--------------- ----------- --------
Depreciation (6.9) (27.8) (34.7)
Impairments - (13.7) (13.7)
Reclassifications - 35.5 35.5
Derecognition of leased assets 4.5 - 4.5
Disposals 3.6 24.1 27.7
Exchange adjustments 0.6 0.6 1.2
--------------- ----------- --------
At 31 December 2016 (33.3) (192.6) (225.9)
--------------- ----------- --------
Net book value
At 31 December 2016 59.2 107.5 166.7
--------------- ----------- --------
During the year, $25.2 million of computer related assets were
reclassified from machinery and equipment to software, there was no
impact on net assets.
As a result of the acquisition by Melrose, management performed
a review of finance leases held by Nortek. As a result of this
review, management identified previously classified finance leases
that meet the definition of operating leases, and hence have
derecognised both the finance lease and the corresponding fixed
asset in the current financial year
As a result of the acquisition by Melrose, management carried
out an impairment review and recorded an impairment charge relating
to machinery and equipment of $13.7 million, which has been
recognised in the Income Statement.
11. Inventories
31 December
2016
------------
$m
Raw materials 74.7
Work in progress 30.8
Finished goods 200.0
------------
305.5
------------
The Directors consider that there is no material difference
between the Balance Sheet value of inventories and their net
realisable value.
12. Trade and other receivables
31 December
2016
------------
$m
Current
Trade receivables 341.9
Allowance for doubtful receivables (21.3)
Interest-bearing loans to parent undertaking 29.1
Other receivables 16.8
Prepayments 15.2
------------
381.7
------------
Trade receivables are non--interest--bearing. Credit terms
offered to customers vary upon the country of operation but are
generally between 30 and 90 days.
31 December
2016
------------
$m
Non--current
Other receivables 3.5
An allowance has been made for estimated irrecoverable amounts
with reference to past default experience and management's
assessment of credit worthiness, an analysis of which is as
follows:
Total
------
$m
At 1 January 2016 13.4
------
Income Statement charge 12.1
Utilised (5.1)
Other, including exchange differences 0.9
------
At 31 December 2016 21.3
------
Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the
Nortek Group's customer base and their dispersion across many
different geographical regions. No single customer accounts for 10%
or more of consolidated net sales or trade and other
receivables.
Included in the Nortek Group's trade receivables balance are
overdue trade receivables with a carrying amount of $64.5 million
against which a provision of $21.3 million is held.
Impaired trade receivables comprise:
31 December
2016
------------
$m
1 - 30 days 10.6
31 - 60 days 7.6
60+ days 3.1
------------
21.3
============
The balance deemed recoverable of $43.2 million is past due as
follows:
31 December
2016
------------
$m
1 - 30 days 43.2
31 - 60 days -
60+ days -
------------
43.2
============
The Directors consider that the carrying amount of trade and
other receivables, including amounts not past due and not impaired,
approximates their fair value.
13. Trade and other payables
31 December
Current 2016
--------------------------------- ------------
$m
Trade payables 248.4
Other payables 7.7
Other taxes and social security 7.2
Accruals 168.4
------------
431.7
============
Trade payables are non--interest--bearing. The Directors
consider that the carrying amount of trade and other payables
approximates their fair value. Normal settlement terms vary by
country and the average credit period taken for trade purchases is
67 days.
31 December
Non-current 2016
---------------- ------------
$m
Other payables 11.8
Accruals 5.1
------------
16.9
============
14. Interest--bearing loans and borrowings
The Nortek Group has the following interest--bearing loans and
borrowings:
Current Non-current Total
31 December 31 December 31 December
2016 2016 2016
------------- ------------- -------------
$m $m $m
Amounts owed to parent undertaking --- 743.8 743.8
Obligations under finance leases 0.9 1.0 1.9
Other loans --- 1.7 1.7
Bank advances of the Nortek Group's foreign subsidiaries 0.5 --- 0.5
------------- ------------- -------------
Total interest--bearing loans and borrowings 1.4 746.5 747.9
------------- ------------- -------------
As at 31 December 2016, the Nortek Group was owed $29.1 million
from its parent undertaking. Amounts owed by parent undertaking
receive interest at interbank rates adjusted by a margin. The
margin as at 31 December 2016 was 0.25%.
Amounts owed to parent undertaking of $743.8 million bear
interest at 7.00%.
As a result of the Melrose transaction as at 31 August 2016,
outstanding borrowings and accrued interest under the Nortek
Group's 8.5% Senior Notes of $735.0 million and $28.6 million,
respectively, and the Senior Secured Term Loan Facility of $605.4
million and $1.9 million were repaid. Additionally, early
redemption premiums of $31.3 million related to the 8.5% Senior
Notes were paid. Of these amounts, the Nortek Group paid $30.0
million, with the remainder being paid by Melrose. The Nortek Group
recorded a loss on debt retirement of $31.3 million related to such
early redemption premiums on the 8.5% Senior Notes and wrote-off
$14.2 million of deferred finance costs.
Maturity of financial liabilities
The table below shows the maturity profile of anticipated future
cash flows, including interest, on an undiscounted basis in
relation to the Nortek Group's financial liabilities. The amounts
shown therefore differ from the carrying value and fair value of
the Nortek Group's financial liabilities.
Interest--
bearing Derivative Other Total
loans and financial financial financial
borrowings liabilities liabilities liabilities
------------ ------------- ------------- -------------
$m $m $m $m
Within one year 59.2 1.8 424.5 485.5
Two to five years 961.1 - 16.9 978.0
More than five years 1.0 - - 1.0
Effect of financing rates (273.4) - - (273.4)
------------ ------------- ------------- -------------
31 December 2016 747.9 1.8 441.4 1,191.1
------------ ------------- ------------- -------------
15. Financial instruments risk management objectives and policies
Fair values
The Nortek Group determines the fair market values of its
financial instruments, based on the fair value hierarchy, which
requires an entity to maximise the use of observable inputs and
minimise the use of unobservable inputs when measuring fair value.
Observable inputs are inputs that reflect the assumptions market
participants would use in pricing the asset or liability developed
based on the best information available in the circumstances. The
Nortek Group's assessment of the significance of a particular input
to the fair value measurement requires judgment, and may affect the
classification of fair value assets and liabilities within the fair
value hierarchy levels.
31 December 2016
---------------------------
Fair value measuring using
---------------------------
Level 2
---------------------------
$m
Financial assets measured at fair value
Derivative financial assets - foreign currency forward contracts 1.3
Financial liabilities measured at fair value
Derivative financial liabilities - foreign currency forward contracts (1.8)
There have been no transfers between levels in the year.
Foreign Currency Contracts
The Nortek Group had foreign currency hedge contracts
outstanding with a notional amount of approximately $47.2 million
as of 31 December 2016. There were no material unrealised gains or
losses related to contracts outstanding as of 31 December 2016.
The Nortek Group has determined the fair value of its derivative
instruments considering the estimated amount it would receive or
pay to sell or transfer these instruments at the reporting date and
by taking into account currency exchange rates, the
creditworthiness of the counterparty for assets, and the Nortek
Group's creditworthiness for liabilities. Generally, the Nortek
Group uses inputs that include quoted prices for similar assets or
liabilities in active markets.
The Nortek Group has classified its derivative assets and
liabilities within Level 2 of the fair value hierarchy, because
these observable inputs are available for substantially the full
term of its derivative instruments. Neither the total derivative
assets nor the total derivative liabilities were material as of 31
December 2016.
Financial risk management
The Nortek Group is exposed to credit risk, capital risk,
liquidity risk, interest rate risk and foreign currency risk. All
derivative activities for risk management purposes are carried out
by specialist teams that have the appropriate skills, experience
and supervision. It is the Nortek Group's policy that no trading in
derivatives for speculative purposes may be undertaken.
Credit risk
The Nortek Group's principal financial assets were cash and cash
equivalents, loans receivable from parent undertaking and trade and
other receivables for which the carrying values represent the
Nortek Group's maximum exposure to credit risk in relation to
financial assets and derive directly from its operations.
The Nortek Group's credit risk on cash and cash equivalents was
limited because the counterparties were banks with strong credit
ratings assigned by international credit rating agencies. The
Nortek Group's credit risk was primarily attributable to its trade
receivables and other receivables. The amounts presented in the
Balance Sheet were net of allowances for doubtful receivables,
estimated by the Nortek Group's management based on prior
experience and their assessment of the current economic
environment. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers
comprising the Nortek Group's customer base and their dispersion
across many different geographical regions.
Capital risk
The Nortek Group manages its capital to ensure that entities in
the Nortek Group will be able to continue as a going concern.
The capital structure of the Nortek Group as at 31 December 2016
consisted of cash and equity attributable to equity holders of the
parent, comprising issued share capital and reserves.
Liquidity risk
The Nortek Group's primary liquidity needs are to fund general
business requirements, including working capital requirements,
capital expenditures, interest payments, and debt repayments.
Nortek's principal sources of liquidity are cash flows from
operations, existing cash and cash equivalents, loans receivable
from its parent undertaking and the use of borrowings from its
parent undertaking.
Interest rate risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates. The Nortek Group is exposed to
market risk from changes in interest rates primarily through its
borrowing activities.
The long--term borrowings from the parent undertaking bear
interest at fixed interest rates.
Based upon interest rates in effect at 31 December 2016, an
overall increase in interest rates of 100 basis points would result
in additional interest income of $0.8 million.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future
cash flows of an exposure will fluctuate because of changes in
foreign exchange rates.
The Nortek Group manufactures, markets and sells its products
globally and, as a result, a portion of its sales are generated
outside the United States in local currencies. The Nortek Group
also incurs certain manufacturing, marketing and selling costs in
international markets in local currency. Accordingly, the Nortek
Group's earnings and cash flows are exposed to market risk from
changes in foreign currency exchange rates relative to the US
dollar, the Nortek Group's reporting currency.
The Nortek Group manages its exposure to foreign currency
exchange risk principally by trying to minimise its net investment
in foreign assets.
An overall unfavourable change in foreign exchange rates in
effect at 31 December 2016 of 10% would result in an increase in
equity as a result of the impact on the cumulative translation
adjustment of approximately $11.8 million. Additionally, an overall
unfavourable change in foreign exchange rates in effect at the
reporting date of 10% would result in a net loss of $1.0 million to
operating profit as a result of the impact on the foreign exchange
gains and losses.
16. Provisions
Surplus
Environmental leasehold
and property Employee Product Warranty
Other legal costs costs related liability related Total
------- -------------- --------------- --------------- --------------- --------------- --------
$m $m $m $m $m $m $m
At 1 January
2016 5.3 3.4 - 11.4 43.9 51.0 115.0
------- -------------- --------------- --------------- --------------- --------------- --------
Utilised (33.4) (4.4) (0.7) (55.4) (6.4) (25.7) (126.0)
Net charge to
operating
profit 69.6 45.1 20.1 54.8 15.2 64.2 269.0
Unwind of
discount --- --- 0.1 --- --- --- 0.1
Exchange
differences 0.1 (0.2) --- --- --- (0.2) (0.3)
------- -------------- --------------- --------------- --------------- --------------- --------
At 31 December
2016 41.6 43.9 19.5 10.8 52.7 89.3 257.8
------- -------------- --------------- --------------- --------------- --------------- --------
Current 35.7 32.2 4.1 6.4 14.4 35.7 128.5
Non-current 5.9 11.7 15.4 4.4 38.3 53.6 129.3
------- -------------- --------------- --------------- --------------- --------------- --------
Total 41.6 43.9 19.5 10.8 52.7 89.3 257.8
------- -------------- --------------- --------------- --------------- --------------- --------
The provision for surplus leasehold property costs represents
the estimated net payments payable over the term of these leases
together with any dilapidation costs. This is expected to result in
cash expenditure over the next one to eight years.
Environmental and legal costs 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. Due to their nature, it is not possible
to predict precisely when these provisions will be utilised.
The provision for warranty related costs represents the best
estimate of the expenditure required to settle the Nortek Group's
obligations, based on past experiences. Warranty terms are, on
average, between one and five years.
The employee related provision relates to the estimated cost of
the Nortek Group's health insurance and workers compensation plans.
The product liability provision relates to the estimated cost of
future product and general liabilities claims. Due to their nature
it is not possible to predict precisely when these provisions will
be utilised.
Other provisions relate to costs that will be incurred in
respect of restructuring programmes, usually resulting in cash
spend within one year. In addition 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 five years.
Where appropriate, provisions have been discounted using a
discount rate of 3%.
Other Commitments and Contingencies
The Nortek Group is subject to other contingencies, including
legal proceedings and claims, arising out of its businesses that
cover a wide range of matters including, among others,
environmental matters, contract and employment claims, workers'
compensation claims, product liability, warranty, and modification
and adjustment or replacement of component parts of units sold,
which include product recalls. Product liability, environmental and
other legal proceedings also include matters with respect to
businesses previously owned. Whilst it is difficult to reasonably
estimate the timing and ultimate outcome of these contingent
liabilities, management estimates that the financial effect of
these contingent liabilities could be approximately $30 million.
These liabilities are not probable and therefore have not been
provided for.
17. Pensions and other post--employment benefits plans
Retirement benefit obligations
Defined contribution plans
The Nortek Group operates defined contribution plans for
qualifying employees across several jurisdictions. The assets of
the plans are held separately from those of the Nortek Group in
funds under the control of trustees.
The total costs charged during the year of $2.1 million
represents contributions payable to these plans by the Nortek Group
at rates specified in the rules of the plans.
Defined benefit plans
The Nortek Group's pension plans offer subsidised early
retirement and lump sum payments. The Nortek Group's policy is to
generally fund currently at least the minimum required annual
contribution of its various qualified defined benefit plans. The
Nortek Group contributed $5.8 million to the continuing defined
benefit pension plans in the year ended 31 December 2016. At 31
December 2016, the Nortek Group expects to contribute approximately
$5.9 million to its defined benefit pension plans in 2017.
The cost of the Nortek Group's defined benefit plans are
determined using the advice of independent professionally qualified
actuaries on the basis of formal actuarial valuations and using the
projected unit credit method. In line with normal practice, these
valuations are undertaken triennially in the UK and annually in the
US.
The valuation of the US Pension Plan was based on a full
actuarial valuation as of 1 January 2016, updated at 31 December
2016 by independent actuaries. The valuation of the UK Pension Plan
was based on a full actuarial valuation as of 5 April 2015, updated
at 31 December 2016 by independent actuaries.
Actuarial assumptions
The discount rate assumptions used by the actuaries in
calculating the Nortek Group's pension liabilities are as set out
below:
31 December 2016
----------------------------------------
UK Plan % p.a. US Pension Plan % p.a.
--------------- -----------------------
Discount rate 2.7% 3.9%
The Nortek Group utilises long--term investment--grade bond
yields as the basis for selecting a discount rate by which plan
obligations are measured. An analysis of projected cash flows for
each plan is performed in order to determine plan--specific
duration. Discount rates are selected based on high quality
corporate bond yields of similar durations.
Mortality
UK Pension Plan
Mortality assumptions for the UK Pension Plan, as at 31 December
2016 were based on the Self--Administered Pension Scheme ('SAPS')
'S1' base tables with a scaling factor of 120%, which reflected the
results of a mortality analysis carried out on the plan's
membership. Future improvements are in line with the Continuous
Mortality Investigation ('CMI') improvement model with a long--term
rate of improvement of 1.25% p.a. for both males and females.
The assumptions were that a member currently aged 65 will live
on average for a further 21.0 years if they are male and for a
further 23.1 years if they are female. For a member who retires in
2036 at age 65, the assumptions were that they will live for a
further 22.7 years after retirement if they are male and for a
further 24.9 years after retirement if they are female.
US Pension Plan
The mortality assumptions adopted as at 31 December 2016 were
set to reflect the Nortek Group's best estimate view of life
expectancies of members of the pension arrangement. Each assumption
reflected the characteristics of the membership of the US Pension
Plan.
The assumptions were that a member currently aged 65 will live
on average for a further 20.2 years if they are male and for a
further 22.3 years if they are female. For a member who retires in
2036 at age 65, the assumptions were that they will live for a
further 21.8 years after retirement if they are male and for a
further 23.9 years after retirement if they are female.
Balance Sheet disclosures
The amounts recognised in the Balance Sheet arising from net
liabilities in respect of defined benefit plans were as
follows:
31 December 2016
-----------------
$m
Present value of funded defined benefit obligations (154.9)
Fair value of plan assets 116.3
-----------------
Funded status (38.6)
Present value of unfunded defined benefit obligations (7.6)
-----------------
Net liabilities (46.2)
-----------------
The plan liabilities and assets at 31 December 2016 were split
by plan as follows:
UK and European US
Pension Plans Pension Plan Total
---------------- -------------- --------
$m $m $m
Plan liabilities (44.5) (118.0) (162.5)
Plan assets 25.4 90.9 116.3
---------------- -------------- --------
Net liabilities (19.1) (27.1) (46.2)
---------------- -------------- --------
At 31 December 2016, $90.9 million of assets in relation to the
Nortek US Plan were held in cash as they were in the process of
being transferred to the new plan custodian. The investment
strategy is now approximately 60% equities and 40% bonds.
The assets were well diversified and the majority of plan assets
had quoted prices in active markets. All government bonds were
issued by reputable governments and were generally AA rated or
higher. Interest rate and inflation rate swaps were also employed
to complement the role of fixed and index-linked bond holdings for
liability risk management.
The trustees continually review whether the chosen investment
strategy is appropriate with a view to providing the pension
benefits and to ensure appropriate matching of risk and return
profiles. The main strategic policies included maintaining an
appropriate asset mix, managing interest rate sensitivity and
maintaining an appropriate equity buffer. Investment results were
regularly reviewed.
Movements in the present value of defined benefit obligations
during the year:
Year ended
31 December 2016
------------------
$m
At beginning of year 166.8
Current service cost 0.5
Interest cost on obligations 6.0
Remeasurement losses - demographic 0.9
Remeasurement losses - financial 8.9
Remeasurement gains - experience (3.6)
Benefits paid out of assets (11.4)
Benefits paid out of Company assets for unfunded plans (1.2)
Currency translation differences (4.4)
------------------
At end of year 162.5
------------------
The defined benefit plan liabilities were 10% in respect of
active plan participants, 24% in respect of deferred plan
participants and 66% in respect of pensioners.
The weighted average duration of the defined benefit plan
liabilities at 31 December 2016 was 12.2 years.
Movements in the fair value of plan assets during the year:
Year ended
31 December
2016
-------------
$m
At beginning of year 120.1
Interest income on plan assets 4.4
Return on plan assets (excluding amounts included in net interest expense) 3.5
Contributions 4.6
Benefits paid (11.4)
Expenses paid out of plan assets (1.0)
Currency translation differences (3.9)
-------------
At end of year 116.3
-------------
Income Statement disclosures
Amounts recognised in the Income Statement in respect of these
defined benefit plans were as follows:
Year ended
31 December
-------------
2016
-------------
$m
Included within operating profit:
* current service costs 0.5
* administrative expenses 1.0
-------------
* total included in operating profit 1.5
Included within net finance costs:
* net interest 1.6
Statement of Comprehensive Income disclosures
Amounts recognised in the Statement of Comprehensive Income in
respect of these defined benefit plans were as follows:
Year ended
31 December
2016
-------------
$m
Return on plan assets, excluding amounts included in net interest expense 3.5
Actuarial losses arising from changes in demographic assumptions (0.9)
Actuarial losses arising from changes in financial assumptions (8.9)
Actuarial gains arising from experience adjustments 3.6
-------------
Net remeasurement loss on retirement benefit obligations (2.7)
-------------
Risks and sensitivities
The defined benefit plans expose the Nortek Group to actuarial
risks, such as longevity risk, currency risk, salary risk, interest
rate risk and market (investment) risk. The Nortek Group is not
exposed to any unusual, entity specific or plan specific risks.
A sensitivity analysis on the principal assumptions used to
measure the plan liabilities at 31 December 2016 was as
follows:
Decrease/
Change in (increase) to plan
assumption liabilities
-------------------- --------------------
$m
Rate of salary increase Increase by 0.1% (0.5)
Decrease by 0.1% 0.5
Discount rate Decrease by 0.1% (2.0)
Increase by 0.1% 1.9
Assumed life expectancy (rate of mortality) Increase by 1 year (5.1)
Decrease by 1 year 5.1
The sensitivity analysis above was determined based on
reasonable possible changes to the respective assumptions, while
holding all other assumptions constant. There has been no change in
the methods and assumptions used in preparing the sensitivity
analysis from prior years.
The sensitivities were based on the relevant assumptions and
membership profile as at 31 December 2016 and were applied to the
obligations at the end of the reporting period. Whilst the analysis
does not take account of the full distribution of cash flows
expected, it does provide an approximation to the sensitivity of
the assumptions shown. Extrapolation of these results beyond the
sensitivity figures shown may not be appropriate and the
sensitivity analysis presented may not be representative of the
actual change in the defined benefit obligation as it is unlikely
that the change in assumptions would occur in isolation of one
another as some of the assumptions may be correlated.
18. Share--based payments
As a result of the Melrose transaction, all share based awards,
including restricted stock, previously granted immediately vested
and became exercisable. There was a charge of $19.6 million
recorded in the Income Statement related to the IFRS 2 charge for
the first eight months of 2016 and the accelerated vesting of share
options as a consequence of the Melrose transaction, whereby the
acquirer settled outstanding share options. In conjunction with the
Melrose transaction, the total value of these share based awards
were settled and the net cash value of $59.7 million was paid.
There are no share based awards outstanding as at 31 December 2016.
Refer to the "Circular to Melrose Shareholders" dated 6 July 2016
for details of the Nortek Group's previous share incentive
compensation plans.
19. Issued capital and reserves
Share Capital 31 December 2016
------------------------------------------------- -----------------
$m
Authorised common stock
1,000 Ordinary Shares of $0.01 each ---
Ordinary shares issued and fully paid
100 Ordinary Shares of $0.01 each ---
Authorised preferred stock
1,000 of $0.01 each; none issued and outstanding ---
-----------------
---
-----------------
Cumulative translation reserve
The Cumulative translation reserve contains exchange differences
on the translation of subsidiaries with a functional currency other
than United States dollars.
Hedging reserve
The Hedging reserve represents the cumulative fair value gains
and losses on derivative financial instruments for which cash flow
hedge accounting has been applied.
Other reserves
Pursuant to the merger agreement, Nortek, Inc. merged with
Nevada, Corp. The impact of the merger related entries was a credit
to equity of $661.4 million.
20. Cash flows from operating activities
Year ended
31 December 2016
-----------------
$m
Underlying operating profit 241.0
Adjustments for:
Depreciation of property, plant and equipment 34.7
Amortisation of computer software 8.6
Loss on sale of property, plant and equipment 0.1
Movement in provisions (30.6)
Decrease in receivables 15.5
Decrease in inventories 15.5
Decrease in payables (16.2)
Tax paid (6.9)
Interest paid (50.4)
Defined benefit contributions paid (5.8)
Acquisition costs (37.8)
-----------------
(73.3)
-----------------
Net cash from operating activities 167.7
-----------------
21. Commitments and contingencies
Lease Obligations
Future total minimum rentals payable under non--cancellable
operating leases were as follows:
31 December 2016
-----------------
$m
Amounts payable:
Within one year 24.9
After one year but within five years 63.3
Over five years 29.6
-----------------
117.8
-----------------
Certain of these lease agreements provide for increased payments
based on changes in the consumer price index. Under certain of
these lease agreements, the Nortek Group is also obligated to pay
insurance and taxes. Certain of the Nortek Group's operating lease
arrangements for the rental of real estate contain renewal options.
The Nortek Group has reviewed the provisions of the renewal options
and determined that none of the renewal options represent bargain
renewal options. In addition, certain of the Nortek Group's
operating lease arrangements for the rental of real estate contain
certain restrictions, including restrictions on use and sublease of
the leased properties. The Nortek Group has evaluated the
restrictions and determined that none of the restrictions limit its
ability to utilise the property for its intended purpose.
The Nortek Group is obligated under operating lease agreements
for the rental of certain real estate and machinery and equipment
to be used in operations. The lease terms of real estate range vary
in length and for the rental of machinery and equipment used in
operations range from approximately 1 to 5 years.
Capital commitments
At 31 December 2016, there were commitments of $2.4 million
relating to the acquisition of new plant and machinery.
22. Controlling Party
The Nortek Group's immediate parent is Nevada Holdco Corp., a
company incorporated in the United States of America. The ultimate
parent company and controlling party is Melrose Industries PLC, a
company incorporated in England & Wales. The registered office
of Melrose Industries PLC is 11th Floor, The Colmore Building, 20
Colmore Circus Queensway, Birmingham, West Midlands, B4 6AT.
23. Related party disclosures
Transactions between the Nortek Group and its subsidiaries,
which are related parties, have been eliminated on consolidation
and are not disclosed in this note. The Nortek Group did not enter
into any significant transactions in the ordinary course of
business with associates during the current or prior year.
Amounts owed to the parent undertaking as at 31 December 2016
were $743.8 million and amounts due from the parent undertaking
were $29.1 million. The amount of interest charged during the year
was $15.2 million.
Remuneration of key management personnel
Disclosures required by IAS 24 for compensation of key
management personnel have not been provided as the key management
personnel of Nortek have been replaced in the year by the key
management personnel in Melrose. The annual report of Melrose
Industries Plc discloses the remuneration of Melrose key management
personnel.
24. Nortek group information
Information on subsidiaries
The historical financial information of the Nortek Group
includes the following wholly owned subsidiaries:
Name Jurisdiction
----------------------------------------------------------------- ----------------
Best S.p.A. Italy
Best Deutschland GmbH Germany
Best Poland S.p.zo.o. Poland
Broan Building Products--Mexico, S. de R.L. de C.V. Mexico
Broan--NuTone Canada, ULC Canada
Nortek Air Solutions Canada Canada
Innergy Tech, Inc. Canada
Venmar Ventilation ULC Canada
Ergotron, Inc. Minnesota
Dongguan Ergotron Precision Technology Co. Ltd. China
Ergotron Nederland B.V. The Netherlands
Broan--NuTone LLC Delaware
Broan Building Products (Huizhou) Co., Ltd. China
Broan--NuTone (HK) Limited Hong Kong
Pacific Zephyr Range Hood, Inc. California
Zephyr Ventilation, LLC California
Eaton--Williams Group Limited United Kingdom
Nortek Security & Control LLC California
GTO Access Systems, LLC Florida
Operator Specialty Company, Inc. Michigan
Core Brands, LLC California
Linear Electronics (Shenzhen) Co., Ltd. China
Nortek International Holdings, B.V. The Netherlands
Nortek Global HVAC, LLC Delaware
Nortek Air Solutions, LLC Delaware
Nortek Global HVAC de Puerto Rico, LLC Puerto Rico
Nortek Global HVAC Latin America, Inc. Delaware
Nortek Global HVAC de Mexico S.A. de R.L. de C.V. Mexico
Nordyne Argentina SRL Argentina
Nordyne do Brasil Distribuidora de Ar Condicionado Ltda. Brazil
Nortek Air Solutions Quebec, Inc. Canada
Nortek (Shanghai) Trading Co., Ltd. China
Nortek Global HVAC (UK) Limited United Kingdom
Nortek Global HVAC France S.A.S. France
Nortek Global HVAC Belgium NV Belgium
Dongguan Ergotron Precision Technology Design Services Co., Ltd. China
Ergotron (UK) Limited United Kingdom
Ergotron Canada Corporation Canada
Ergotron Deutschland GmbH Germany
Ergotron France Sarl France
Ergotron Japan KK Japan
Nortek Distribution Services, LLC Delaware
Nortek Australia Pty Ltd. Australia
PART II - Accountant's Report
The Board of Directors
on behalf of Melrose Industries PLC
11th Floor, The Colmore Building
20 Colmore Circus Queensway
Birmingham
B4 6AT
Investec Bank plc
2 Gresham Street
London
EC2V 7QP
J.P. Morgan Securities plc
25 Bank Street
London
E14 5JP
24 March 2017
Dear Sirs
Nortek, Inc. (together with its subsidiaries, "Nortek
Group")
We report on the financial information in respect of Nortek
Group for the year ended 31 December 2016 set out above in Part I
(Nortek, Inc. Consolidated Historical Financial Information),
required to be included in the announcement of Melrose Industries
PLC (the "Company") dated 24 March 2017 to transfer its entire
ordinary share capital from the standard segment of the Official
List of the FCA to the premium segment (the "Transfer
Announcement"). This financial information has been prepared for
inclusion in the Transfer Announcement on the basis of the
accounting policies set out in note 2 to the financial information.
This report is required by obligations that the Company has under
Listing Rule 6.1.3DR and is given for the purpose of complying with
that requirement and for no other purpose.
Responsibilities
The Directors of the Company are responsible for preparing the
financial information on the basis of preparation set out in Note 2
to the financial information.
It is our responsibility to form an opinion on the financial
information and to report our opinion to you. Save for any
responsibility which we may have to those persons to whom this
report is expressly addressed as a result of the inclusion of this
report in the Announcement, to the fullest extent permitted by law
we do not assume any responsibility and will not accept any
liability to any other person for any loss suffered by any such
other person as a result of, arising out of, or in connection with
this report or our statement, consenting to its inclusion in the
Announcement.
Basis of opinion
We conducted our work in accordance with Standards for
Investment Reporting issued by the Auditing Practices Board in the
United Kingdom. Our work included an assessment of evidence
relevant to the amounts and disclosures in the financial
information. It also included an assessment of significant
estimates and judgments made by those responsible for the
preparation of the financial information and whether the accounting
policies are appropriate to the entity's circumstances,
consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the
information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance
that the financial information is free from material misstatement
whether caused by fraud or other irregularity or error.
Our work has not been carried out in accordance with auditing or
other standards and practices generally accepted in jurisdictions
outside the United Kingdom, including the United States of America,
and accordingly should not be relied upon as if it had been carried
out in accordance with those standards and practices.
Opinion on financial information
In our opinion, the financial information gives, for the
purposes of the Transfer Announcement, a true and fair view of the
state of affairs of the Nortek Group as at 31 December 2016 and of
its losses, cash flows and changes in equity for the year ended 31
December 2016 in accordance with the basis of preparation set out
in Note 2 to the financial information.
Yours faithfully
Deloitte LLP
Chartered Accountants
Deloitte LLP is a limited liability partnership registered in
England and Wales with registered number OC303675 and its
registered office at 2 New Street Square, London EC4A 3BZ, United
Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte
Touche Tohmatsu Limited ("DTTL"), a UK private company limited by
guarantee, whose member firms are legally separate and independent
entities. Please see www.deloitte.co.uk/about for a detailed
description of the legal structure of DTTL and its member
firms.
This information is provided by RNS
The company news service from the London Stock Exchange
END
MSCEALDLAEDXEFF
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