TIDMMRO
RNS Number : 4652K
Melrose Industries PLC
02 September 2021
2 September 2021
MELROSE INDUSTRIES PLC
UNAUDITED RESULTS
FOR THE SIX MONTHSED 30 JUNE 2021
Melrose Industries PLC today announces its interim results for
the six months ended 30 June 2021 ("the Period").
Highlights
Proforma(1) Adjusted(2) results Statutory results
(post Return
of Capital)
2021 2021 2020 2021 2020
Continuing operations GBPm GBPm GBPm GBPm GBPm
------------- --------- ---------- -------- ---------
Revenue 3,828 3,828 3,624 3,540 3,386
------------- --------- ---------- -------- ---------
Operating profit/(loss) 223 223 (11) (137) (618)
------------- --------- ---------- -------- ---------
Profit/(loss) after
tax 109 109 (80) (151) (585)
------------- --------- ---------- -------- ---------
Diluted earnings per
share 2.5p 2.2p (1.7)p (3.1)p (12.1)p
------------- --------- ---------- -------- ---------
Free cash flow(2) 75 75 29 n/a n/a
------------- --------- ---------- -------- ---------
Net debt(2) 1,029 300 3,399 n/a n/a
------------- --------- ---------- -------- ---------
Leverage(2) 1.5x 0.5x 3.4x n/a n/a
------------- --------- ---------- -------- ---------
Group
-- Melrose is trading ahead of expectations, with better profit
margins, better earnings per share and significantly lower net
debt(2) ; building the Group's encouraging momentum
-- The commitment, made on acquisition by Melrose, to improve
significantly the funding of the GKN UK defined benefit pension
schemes has been delivered ahead of schedule with the funding
position of the schemes transformed for the better. The funding
deficit of approximately GBP1 billion has currently reduced to
approximately GBP150 million. Consequently the annual contribution
halves to GBP30 million with no ongoing requirement to contribute
from future disposal proceeds
-- Net debt(2) at 30 June 2021 was significantly lower at GBP300
million; proforma net debt(2) at 30 June 2021 is GBP1,029 million
after adjusting for the announced Return of Capital to be settled
on 14 September 2021 (1.5x proforma leverage(2) )
-- Free cash flow(2) generation in the first half was GBP75
million; all the investment in restructuring costs, capital
expenditure and sustainable technology has been self-funded from
trading cash flows in the Period
-- The Group recorded an adjusted(2) earnings per share of 2.2
pence. Adjusting for the accretion post the announced Return of
Capital and share consolidation, the Proforma EPS(2) increases to
2.5 pence. The statutory loss per share was 3.1 pence
-- The Nortek Air Management and Brush disposals both completed
in the Period and Melrose has exchanged contracts for the sale of
Nortek Control for $285 million, all of which are consistent with
doubling shareholders' money, or more, on each acquisition
-- On 14 September Melrose is returning GBP729 million, 15 pence
per share, to shareholders. In addition, the Melrose Balance Sheet
has spare capacity for a significant further Capital Return next
year
-- An interim dividend of 0.75 pence per share (2020: nil) is declared
Melrose Industries PLC Leconfield House Curzon Street London W1J
5JA Tel: 020 7647 4500 Fax: 020 7647 4501
Registered in England & Wales Registered no: 09800044
Registered office: 11(th) floor The Colmore
Building Colmore Circus Queensway Birmingham West Midlands B4 6AT
Businesses
-- Melrose businesses own world-leading sustainable technology
which provides customers with solutions to significantly reduce
their impact on the environment
-- All businesses improved their adjusted(2) operating margin in
the Period compared to 2020 full year: Aerospace by +2.9 ppts;
Automotive by +4.0 ppts; Powder Metallurgy by +6.9 ppts; and
Ergotron by +0.8 ppts. Automotive and Powder Metallurgy are ahead
of plan on their restructuring projects
-- Aerospace is well positioned on many significant platforms;
the civil aerospace business is now weighted more towards the
faster narrowbody recovery and Defence demand remains strong. As
previously indicated, significant restructuring is ongoing
-- Automotive is well placed to benefit from the transition to
electric vehicles. In the first half of this year over one third of
new business bookings awarded were for pure electric platforms,
over 50% if full hybrid platforms are included. Additionally,
during the last 18 months Automotive has been awarded six major
eDrive programmes for global and Chinese vehicle manufacturers.
Automotive should grow at more than double the rate of light
vehicle production over the long-term
-- Powder Metallurgy is making clear market share gains, growing
revenue at 43% in the first half, and with close to 70% of the
business achieving more than 14% adjusted(2) operating margins
Justin Dowley, Chairman of Melrose Industries PLC, today
said:
"We are continuing to see recovery in all our businesses with
trading ahead of expectations. Encouragingly, our Aerospace
business is now weighted towards the expected narrowbody recovery.
Our Automotive and Powder Metallurgy businesses are poised for
strong growth as soon as the well publicised chip shortage abates
and the progression in margins is ahead of plan with more to come.
As with all its promises, Melrose has delivered its acquisition
funding commitment to GKN pensioners early. We have scope on our
balance sheet to return more money to shareholders next year and we
are excited by the upcoming possibilities."
1. Proforma results are presented to give a meaningful measure
of ongoing performance, adjusting for the announced Return of
Capital and the associated share consolidation
2. Described in the glossary to the 2021 Interim Financial
Statements
S
Enquiries:
Montfort Communications: +44 (0) 20 3514 0897
Nick Miles +44 (0) 7739 701634 / Charlotte McMullen +44 (0) 7921
881 800
miles@montfort.london / mcmullen@montfort.london
Investor Relations: +44 (0) 7974 974690
ir@melroseplc.net
CHAIRMAN'S STATEMENT
I am pleased to report our interim results for the six months
ended 30 June 2021 (the "Period"), which are ahead of expectations.
These highlight good progress across all Group businesses.
RESULTS FOR THE CONTINUING GROUP
These results include statutory revenue for the Group of
GBP3,540 million (2020: GBP3,386 million), an adjusted profit
before tax of GBP141 million (2020: adjusted loss of GBP105
million) and a statutory loss before tax of GBP256 million (2020:
GBP720 million).
Further details of these results are contained in the Finance
Director's Review.
TRADING
The impact of the global pandemic has continued now for over a
year and, while we are not yet free from the effects, our
businesses are progressing well on their recovery. It is pleasing
to see our GKN businesses improving their underlying performance,
delivery record and customer relations.
The semi-conductor shortage, whilst not impacting directly,
continues to weigh on the production output of the automotive
sector and GKN Automotive and GKN Powder Metallurgy are not immune
from that. However, as demonstrated at the recent Capital Markets
Day, having made a number of necessary structural changes over the
past 18 months, both of these businesses are performing strongly,
have world-leading technology and, with some further market
recovery, are well on their way to achieving their margin targets
ahead of schedule.
Encouragingly, after a challenging pandemic experience, GKN
Aerospace is making steady progress. We have continued to invest
heavily in world-leading technology, and we are taking the
necessary actions to reshape the business. With a new CEO now in
place and with exposure to narrowbody aircraft, which is currently
the largest part of the civil business and beginning to show
recovery, GKN Aerospace is building momentum and your Board is
confident that it will achieve our margin expectations as volumes
recover.
All businesses have continued to be robustly cash generative,
even as significant investments have been made for future growth
during the market recovery. Proforma net debt has been reduced to
GBP1,029 million after adjustment for the announced Return of
Capital, and proforma leverage is now a prudent 1.5 times adjusted
EBITDA.
The Chief Executive's Review provides greater detail on the
Group's trading for the Period.
M&A ACTIVITY
During the Period, we successfully completed the sales of the
Nortek Air Management division and the Brush business and have
recently agreed the sale of Nortek Control for $285 million. These
mark successful outcomes for shareholders, with the businesses
going to good new homes in which their development can be
continued. The GBP2.8 billion gross sale proceeds (including Nortek
Control), together with the value of the retained Ergotron
business, mean shareholders are on track to enjoy a doubling of
their equity investment in the Nortek acquisition. Meanwhile Brush
marks the last business to be sold from the highly successful FKI
acquisition, which has delivered shareholders a 2.6x equity
return.
RETURN OF CAPITAL
The Return of Capital following the sales of Nortek Air
Management and Brush has been approved by shareholders, with the
post consolidation shares admitted to trading on Tuesday of this
week and the distribution to shareholders to be settled on 14
September 2021.
In addition, as referred to in the 22 June 2021 announcement and
recognising the current prudent funding position of the Group, on
the assumption that our businesses continue their recoveries, your
Board intends to announce a further Return of Capital to
shareholders with the full year results next March.
DIVID
Your Board has declared an interim dividend of 0.75 pence per
share (2020: nil), which will be paid on 15 October 2021 to
shareholders on the register at the close of business on 10
September 2021.
PENSIONS
The GKN UK pension schemes, which we inherited in 2018, had at
that time an accounting deficit of GBP0.6 billion. At acquisition
of GKN we increased the funding target to a prudent level which
increased the funding deficit to approximately GBP1 billion. Within
three years we have delivered on our funding commitment to trustees
and members, ahead of schedule with the funding position for the
schemes being transformed for the better. The current funding
deficit has reduced to approximately GBP150 million, and therefore
the annual contribution halves to GBP30 million per annum with no
requirement for further contributions from future disposals. Your
Board is very proud to have been able to achieve this for the GKN
UK pension schemes. It is a clear illustration of Melrose
delivering its acquisition promises.
Further details are contained in the Finance Director's
Review.
BOARD MATTERS
Co-founder and Executive Vice Chairman David Roper retired as
scheduled on 31 May 2021. Archie Kane will also retire on 31
December 2021. We thank both of them for their service, but
particularly David for his significant contributions since helping
to found Melrose in 2003. They will both be missed. We appointed a
further two non-executive directors, Heather Lawrence and Victoria
Jarman, to the Board on 1 June 2021, who will add their extensive
experience, skills, and knowledge to your Board.
I am pleased to report your Board meets the guidelines of both
the Hampton Alexander Review and the Parker Report.
STRATEGY AND PURPOSE
Having shown its resilience throughout the pandemic, the Melrose
"Buy, Improve, Sell" strategy remains the same, with the disposals
in the Period being the latest demonstration of its strength. We
buy high quality underperforming manufacturing businesses and
invest in making them stronger, better businesses for the benefit
of all stakeholders, whilst delivering an excellent return for
shareholders. Only Ergotron now remains within the Group from our
Nortek acquisition and GKN has been focused on its key businesses.
We remain fully committed to the successful strategy we adopted at
inception in 2003.
OUTLOOK
We continue to execute well against our strategy and aims. The
GKN businesses' operational performance continues to improve and if
not for semi-conductor disruption in the auto markets the evidence
of this would be even clearer. As end markets recover we expect the
full operating margin benefit and targets to be delivered. We also
continue to invest in the success of the businesses with a focus on
leading sustainable technologies that secure our market positions
and drive opportunity over the longer term.
Encouragingly, our Automotive division continues to secure new
eDrive platform wins and demand remains strong for its core
sideshaft products. Aerospace is seeing more definite signs of end
market improvement, but our focus remains on operational change
with much work still to be done. Powder Metallurgy performed well
in the first half, and we see this progress continuing through the
second half as we expect to see a full operating margin benefit
when supply chain issues within the automotive sector
alleviate.
Justin Dowley
Non-Executive Chairman
2 September 2021
CHIEF EXECUTIVE'S REVIEW
I am pleased with the Group's first half performance. Outlined
below is an overview of each Division's performance over the
Period. GKN Automotive and GKN Powder Metallurgy are ahead of plan
and well progressed, with a number of key improvement and
restructuring projects implemented during the year. Restructuring
at GKN Powder Metallurgy is expected to be largely complete by the
end of the year. A key task for GKN Powder Metallurgy is the
development of its additive and hydrogen storage businesses. Whilst
we appreciate and regret the effect upon our employees of some
aspects of this restructuring, we have to improve our businesses'
performance so that they can achieve their potential and create the
best possible future prospects and competitiveness in rapidly
changing times. Both businesses are being positioned in their
markets to benefit from these changes as we transition to a more
sustainable environment.
While GKN Aerospace results do not yet reflect the improvements
already made to the underlying business, largely because of the
continued COVID-19 impact on the sector, there are significant
actions being undertaken to drive sustainable profitability, with
more to come in the second half and through 2022. Improving the
performance of our Aerospace business is a continuing focus for the
months to come.
There also continues to be a strong emphasis on working capital
discipline across the Group as growth has returned, which
contributed to the robust cash performance, but there remains
substantial opportunity for further improvements. As ever, we
continue to invest heavily in the world-leading technology of our
businesses, with sustainability being a key theme.
Our businesses are very well positioned to contribute to the
fight against climate change and we are committed to ensuring they
do so.
AEROSPACE
In the first half of the year GKN Aerospace made good progress
adjusting to the ongoing COVID-related challenges in the sector.
During the Period, sales were down 33% versus 2019 and 18% versus
2020 (which included a first quarter largely unaffected by COVID).
Encouragingly we have started to see demand pick up in recent
months, most notably due to the recovery in narrowbody build rates.
We expect this to continue in the second half and then strongly
into next year and beyond. GKN Aerospace is well placed to capture
this recovery with established supply positions on all major
narrowbody platforms, both in aerostructures and engines.
The significant ongoing cost actions taken to adjust the
business to lower civil demand levels has started to read through
to improving margins. We have adjusted costs to reflect the new
market reality, including reducing management layers and
simplifying the operating structure. We are taking difficult
decisions to exit unprofitable business and sold two non-core Dutch
businesses in the Period. There are actions underway to consolidate
and focus our production capabilities globally, including ongoing
footprint projects in Europe and further projects are planned in
North America. In the first half, we facilitated the consolidation
of our three Special Security (SSA) sites in the US under one SSA
Board. We are already starting to see the benefits of this more
coordinated approach. Our work also continues globally to improve
operational performance and there is momentum for further gains in
quality and delivery performance. All these improvement actions
simplify and focus GKN Aerospace, reduce costs and improve
productivity. In combination they provide a clear path to achieving
the operating margin target of 10% and, with further market
recovery, beyond.
From a market perspective, COVID clearly continues to impact the
aviation sector significantly, albeit domestic and regional air
travel is now recovering in all geographies. GKN Aerospace is well
placed to grow revenues given the forecasted increase in narrowbody
build rates and the continued positive outlook for major Defence
programmes. The business has good positions on all the high volume
civil and defence aircraft platforms today. For the Engines
division, we are also starting to see an increase in aftermarket
demand and increasing air travel will boost revenue from
flight-hour related customer contracts. In parallel, we are
increasing market share where appropriately profitable, including
by incorporating GKN proprietary technology, such as titanium
additive manufacturing, into OE engine manufacturing.
To underpin its long-term position, GKN Aerospace has continued
to maintain significant investment in developing sustainable
product solutions. The business is playing a leading role in the
aerospace sector's move to reducing the impact of aviation on the
environment. This encompasses building and flying current aircraft
far more efficiently, while also developing the next generation of
aircraft and engine propulsion systems to reduce emissions. For
example, GKN Aerospace continues to invest in the GBP54 million UK
H2GEAR collaboration programme and the GBP50 million European Clean
Sky 2 programme, both aiming to develop ground-breaking hydrogen
propulsion systems to power aircraft using liquid hydrogen and
generating just water as a by-product. The business has also
delivered the first fully integrated wings, tail and wiring system
for Eviation's Alice electric aircraft which is due to have its
maiden flight later this year. These and other projects provide
future growth opportunities in the years ahead with GKN Aerospace's
brand new GBP32 million Global Technology Centre in Bristol, UK
playing a central role.
Aerospace Outlook
GKN Aerospace has made good progress in its actions to align
with the market and future opportunities although there is still
much to accomplish. The business is being improved and restructured
in order to benefit from market recovery, while investment
continues in developing long-term sustainable technology. With
these ongoing management actions and the expected ramp-up in
narrowbody demand, GKN Aerospace is well placed to drive sustained
sales growth and margin expansion. The recent appointment of a new
CEO underpins our confidence in making good progress during the
second half of this year and beyond.
AUTOMOTIVE
GKN Automotive had a good first half of the year. While the
global semi-conductor shortage continues to weigh on the entire
automotive sector, the business has achieved a 34% increase in
sales for the Period compared to prior year, with Europe and Asia
Pacific ahead of the Americas, and China up by 21%.
Whilst volatility remains, management are ahead of plan in
implementing strong, additional measures to control costs and
working capital. These efforts have been supported by the continued
delivery of GKN Automotive's 'Full Potential' transformational
programme. This progress has contributed to the business achieving
8% decremental margins in the first half compared to the second
half of 2020 and holding adjusted operating margins at 6.2%,
showing a clear path to its operating margin target of at least
10%.
As outlined during the Capital Markets Day in May 2021, GKN
Automotive is optimally placed to benefit from the shift towards
electrified mobility. As the world transitions to electric vehicles
(EV), its world-leading drive system portfolio has secured strong
market share amongst both global automotive OEMs and pure-play
electric vehicle manufacturers. To compliment the business'
leadership position in driveshafts, Melrose has accelerated GKN
Automotive's investment in next generation eDrive capabilities, to
capture the significant growth opportunities presented by the
increasing demand for electric vehicles, including investment in
eDrive R&D of over GBP50 million per year. This has been
critical in placing GKN Automotive at the forefront of the global
switch to electric vehicles.
The UK based Abingdon Innovation Centre, expanded as part of the
GKN global R&D investment, has already received over GBP1
million from the Melrose Skills Fund, with a further GBP4 million
to follow in supporting the switch to eDrive and the next
generation of engineers. This has been supplemented with some
grants from the UK government averaging about GBP0.5 million per
year for the last three years. An important piece of this
investment in Abingdon has been funding partnerships with leading
research institutions in the UK automotive ecosystem, including the
University of Nottingham and the University of Newcastle, as GKN
Automotive continues to proactively contribute to the ongoing
decarbonisation of the global automotive sector. These partnerships
are leading to the development of lighter, more efficient EV
powertrains for the volume automotive market.
GKN Automotive's significant investment in the EV revolution is
already yielding success. Despite the pandemic, in the past 18
months GKN Automotive has secured critical eDrive awards on six key
platforms for a range of major global and Chinese vehicle
manufacturers and has a strong pipeline for the future. Over one
third of new business bookings awarded in the first half of this
year were on pure electric platforms, and over 50% including full
hybrid platforms as well . Automotive is well positioned to grow at
more than double the rate for light vehicle production over the
long-term.
Automotive Outlook
In the second half, GKN Automotive will need to remain agile and
responsive to ongoing market headwinds, including expected
production volatility, materials cost inflation and supply chain
disruption. However, the benefits of key restructuring projects are
expected to lead to improved margins in the second half of the year
and into 2022. In the event the sales in 2022 return to 2019
levels, GKN Automotive would be well on track to achieve its margin
target. Your Board believes that the underlying strength of the GKN
Automotive business and operations, and the results of management's
actions, have positioned the business well.
POWDER METALLURGY
GKN Powder Metallurgy has continued to gain market share and
sales increased by 43% compared to the first half of 2020, and were
broadly equivalent to pre-pandemic sales volumes in 2019. New
business wins during the first half reached approximately GBP100
million, almost 30% of which result from further consolidation of
the fragmented global sintering sector. We expect to continue to
benefit from the market consolidation.
GKN Powder Metallurgy reacted swiftly to the second quarter
semi-conductor supply challenges with targeted cost savings. It
continued to be swift in exiting non-core and unprofitable business
as well as taking the necessary operational improvements to achieve
11.2% adjusted operating margins for the first half. Its targeted
operating margins of 14% are within reach and we expect the
necessary improvement actions to be substantially complete by the
end of this year.
Hydrogen and Additive
Like our other businesses, GKN Powder Metallurgy continues to
invest heavily in its technology, including into its Additive
Manufacturing and Hydrogen Storage initiatives. In the short time
since its successful launch of GKN Hydrogen in May 2021, the
business has secured pilot schemes with key targeted partners.
Powder Metallurgy Outlook
With some predictions of an easing of semi-conductor shortage in
the second half, GKN Powder Metallurgy expects to see the start of
a more normalised supply period. Restructuring actions are expected
to be largely complete by the end of the year and the continued
investments in technology, together with a fully digitised
manufacturing approach, provides the business with the confidence
that it will thrive as its markets return.
OTHER INDUSTRIAL
With the sale of Brush in the Period and the agreement on 23
August 2021 to sell Nortek Control, the Other Industrial division
now comprises only Ergotron.
Ergotron
Ergotron's overall sales grew 11% during the Period, driven
predominantly by the Office segment as a result of the steady
return to work within the US. This growth is despite Ergotron
exiting some low margin business. Ergotron continued to capitalise
on new market opportunities, supporting companies reopening their
office spaces and employees working from home. The business
continues to develop and expand its market position to serve the
increasingly hybrid approach to office and home working as markets
recover from COVID-19.
Following strong demand within the Healthcare segment in 2020
due to pandemic-related purchasing, the first half of 2021 saw the
gradual resumption of new medical facility builds and equipment
upgrades. The pursuit of these opportunities during the first half
of the year was supported by several strategic operational and cost
optimisation initiatives.
Ergotron Outlook
During the second half of 2021, management expect continued
strong demand within the Office segment. The business is well
positioned to capture future growth opportunities as its core US
market continues to recover and rebuild.
Simon Peckham
Chief Executive
2 September 2021
FINANCE DIRECTOR'S REVIEW
The presentation of the results in these Condensed Interim
Financial Statements is impacted by the disposals of the Nortek Air
Management division and the Brush business, previously held within
the Other Industrial division, and their classification as
discontinued operations.
In addition, on 23 August 2021 contracts were exchanged for the
disposal of the Nortek Control business, previously held within the
Other Industrial division. Consistent with this, Nortek Control was
shown as being held for sale at 30 June 2021 and is similarly
classified as a discontinued operation.
MELROSE GROUP RESULTS - CONTINUING OPERATIONS
Statutory results:
The statutory IFRS results show revenue of GBP3,540 million
(2020: GBP3,386 million), an operating loss of GBP137 million
(2020: GBP618 million) and a loss before tax of GBP256 million
(2020: GBP720 million). The diluted earnings per share ("EPS"),
calculated using the weighted average number of shares in issue
during the Period of 4,860 million (2020: 4,858 million), were a
loss of 3.1 pence (2020: loss of 12.1 pence).
Adjusted results:
The adjusted results are also shown on the Income Statement.
They are adjusted to include the revenue and operating profit from
equity accounted investments ("EAIs") and to exclude certain items
which are significant in size or volatility or by nature are
non-trading or non-recurring, or are items released to the Income
Statement that were previously a fair value item booked on an
acquisition. The Group's accounting policy is to consistently
exclude these items from the adjusted results, which are used as an
Alternative Performance Measure ("APM") as described by the
European Securities and Markets Authority ("ESMA"). APMs used by
the Group are defined in the glossary to the Condensed Interim
Financial Statements.
The Melrose Board considers the adjusted results to be an
important measure used to monitor how the businesses are performing
as they achieve consistency and comparability between reporting
periods when all businesses are held for the complete reporting
period.
The adjusted results for the period ended 30 June 2021 show
revenue of GBP3,828 million (2020: GBP3,624 million), an operating
profit of GBP223 million (2020: loss of GBP11 million) and a profit
before tax of GBP141 million (2020: loss of GBP105 million).
Adjusted diluted EPS, calculated using the weighted average number
of shares in the Period, were 2.2 pence (2020: loss of 1.7
pence).
Proforma results:
Proforma results are presented for the period ended 30 June 2021
to give a meaningful measure of ongoing performance. These include
the impact of the Return of Capital and share consolidation, shown
as a post Balance Sheet event in these Condensed Interim Financial
Statements.
Proforma earnings per share were 2.5 pence, calculated using the
ongoing ordinary shares that are in issue following the 9 for 10
share capital consolidation on 31 August 2021, discussed later in
this review.
Both proforma net debt and proforma leverage, presented later in
this review, include the recently approved Return of Capital of
GBP729 million to be made subsequent to the half year.
Tables summarising the statutory results and adjusted results by
reportable segment are shown in note 3 of the Condensed Interim
Financial Statements.
RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS
The following tables reconcile the Group statutory revenue and
operating loss to adjusted revenue and adjusted operating
profit/(loss):
2021 2020
Continuing operations: GBPm GBPm
------------------------------------------- ------ -----
Statutory revenue 3,540 3,386
------------------------------------------- ------ -----
Adjusting item:
------------------------------------------- ------ -----
Revenue from equity accounted investments 288 238
------------------------------------------- ------ -----
Adjusted revenue 3,828 3,624
------------------------------------------- ------ -----
Adjusting revenue item:
The Group has certain investments in businesses in which it does
not hold full control (EAIs), the largest of which is a 50%
interest in Shanghai GKN HUAYU Driveline Systems ("SDS"), within
the Automotive business. During the period ended 30 June 2021, EAIs
in the Group generated GBP288 million of revenue (2020: GBP238
million), which is not included in the statutory results but is
shown within adjusted revenue so as not to distort the operating
margins reported in the businesses when the adjusted operating
profit from these EAIs is included.
2021 2020
Continuing operations: GBPm GBPm
------------------------------------------------- ------ -----
Statutory operating loss (137) (618)
------------------------------------------------- ------ -----
Adjusting items:
------------------------------------------------- ------ -----
Amortisation of intangible assets acquired in
business combinations 226 236
------------------------------------------------- ------ -----
Restructuring costs 85 95
------------------------------------------------- ------ -----
Currency movements in derivatives and movements
in associated financial assets and liabilities 44 89
------------------------------------------------- ------ -----
Other 5 8
------------------------------------------------- ------ -----
Write down of assets - 179
------------------------------------------------- ------ -----
Adjustments to statutory operating loss 360 607
------------------------------------------------- ------ -----
Adjusted operating profit/(loss) 223 (11)
------------------------------------------------- ------ -----
Adjusting items to the statutory operating loss are consistent
with prior periods and include:
The amortisation charge on intangible assets acquired in
business combinations of GBP226 million (2020: GBP236 million),
which is excluded from adjusted results due to its non-trading
nature and to enable comparison with companies that grow
organically. However, where intangible assets are trading in
nature, such as computer software and development costs, the
amortisation is not excluded from adjusted results.
Restructuring and other associated costs in the Period of GBP85
million (2020: GBP95 million) which are shown as adjusting items
due to their size and non-trading nature. During the period ended
30 June 2021 they included:
-- A charge of GBP26 million (2020: GBP43 million) within the
Aerospace division including costs incurred as the business takes
further steps to substantially reduce its cost structure,
recognising the magnitude and length of the impact of COVID-19 on
the aerospace industry. These include costs relating to the initial
stages of a major footprint consolidation in The Netherlands, as
well as the continued global integration programme, reducing
management layers and simplifying the business, ensuring the
Aerospace division is well positioned and able to react to changes
in its new environment.
-- A charge of GBP52 million (2020: GBP25 million) within the
Automotive division, which included the commencement of significant
footprint consolidation actions in Europe incurred as the business
continues to address its cost base and deliver its 'Full Potential'
transformational programme with a clear path to achieving greater
than 10% adjusted operating margins.
-- A total charge of GBP7 million (2020: GBP27 million) across
the Powder Metallurgy, Other Industrial and Corporate
divisions.
Movements in the fair value of derivative financial instruments
(primarily forward foreign currency exchange contracts) where hedge
accounting is not applied, entered into within the businesses to
mitigate the potential volatility of future cash flows, on
long-term foreign currency customer and supplier contracts, along
with foreign exchange movements on the associated financial assets
and liabilities. This totalled a charge of GBP44 million (2020:
GBP89 million) in the Period and is shown as an adjusting item
because of its volatility and size.
Other adjusting items, which include: acquisition and disposal
related net gains, on businesses not shown as discontinued
operations, of GBP10 million (2020: net losses of GBP4 million),
excluded from adjusted results due to their non-trading nature; the
charge for the Melrose equity-settled Incentive Scheme, including
its associated employer's tax charge, of GBP9 million (2020: GBP1
million), excluded from adjusted results due to its volatility; an
adjustment of GBP15 million (2020: GBP14 million) to gross up the
post-tax profits of EAIs to be consistent with the adjusted
operating profits of subsidiaries within the Group; and the net
release of fair value items totalling GBP9 million (2020: GBP11
million), shown as an adjusting item to avoid positively distorting
adjusted results.
In the comparative period, a write down of assets of GBP179
million, which was recognised as a result of the impact of
COVID-19, of which GBP133 million was within the Aerospace
division, was shown as an adjusting item because of the
unprecedented nature of the COVID-19 pandemic, along with its
non-trading nature and size.
TAX - CONTINUING OPERATIONS
The statutory results for the Period show a tax credit of GBP105
million (2020: GBP135 million), arising on a statutory loss before
tax of GBP256 million (2020: GBP720 million). The Group Income
Statement current underlying adjusted tax rate is approximately
22%.
During the Period ended 30 June 2021 the Group paid tax of GBP40
million (2020: GBP5 million).
DISPOSALS AND ASSETS HELD FOR SALE
The Nortek group was acquired on 31 August 2016 for an
enterprise value of GBP2.2 billion, funded by GBP1.6 billion of
equity and GBP0.6 billion of debt.
On 22 June 2021, the Group completed the disposal of Nortek Air
Management to Madison Industries LLC ("Madison") for gross proceeds
of GBP2.6 billion, and on 23 August 2021 the Group entered into an
agreement to sell Nortek Control for GBP0.2 billion, which together
represented 87% of the turnover of Nortek businesses. As such,
these businesses are shown as discontinued operations in all
periods throughout the Condensed Interim Financial Statements and
Nortek Control is held for sale at 30 June 2021.
The net proceeds associated with the disposal of Nortek Air
Management and Nortek Control, plus more than GBP700 million of
cash generated by the Nortek businesses since acquisition and the
retention of the Ergotron business in the Group, means the Group is
well placed to achieve the targeted doubling of shareholders'
investment on the Nortek acquisition.
In addition, the Group disposed of the Brush business on 18 June
2021, for cash consideration of GBP0.1 billion. Brush is the final
business to be sold from the FKI acquisition in 2008, which has
been a highly successful investment for Melrose shareholders,
providing a 2.6x return on shareholders' initial equity, equivalent
to an IRR of 29%.
Discontinued businesses included GBP832 million of revenue and a
statutory operating profit of GBP5 million (2020: revenue of GBP817
million and operating profit of GBP35 million) after remeasuring
Nortek Control to the disposal value of GBP0.2 billion and before
contributing a net GBP1.4 billion profit on disposal of businesses
in the Period.
RETURN OF CAPITAL AND NUMBER OF SHARES IN ISSUE
In line with the Group's strategy, following the disposal of
Nortek Air Management and Brush, a return of GBP729 million in cash
to shareholders, equivalent to 15 pence per existing ordinary share
was proposed and subsequently voted in favour by shareholders on 9
July 2021.
This return will be made via a redeemable preference share
scheme alongside a 9 for 10 share consolidation which happened on
31 August 2021 and reduced the number of ordinary shares by 10%,
from 4,858 million to 4,372 million. The weighted average number of
shares used for earnings per share in calculations in 2021 will be
4,695 million.
CASH GENERATION AND MANAGEMENT
As a result of good cash management initiatives adopted by all
businesses in the Group, a free cash inflow of GBP75 million (2020:
GBP29 million) was achieved in the Period, after restructuring
costs of GBP92 million (2020: GBP88 million). Adjusted free cash
flow, shown before restructuring cash spend, was GBP167 million
(2020: GBP117 million).
An analysis of the adjusted free cash flow from continuing
operations is shown in the table below:
2021 2020
GBPm GBPm
----------------------------------------------------- ------ -----
Adjusted operating profit/(loss) 223 (11)
----------------------------------------------------- ------ -----
Adjusted operating profit from EAIs (28) (21)
----------------------------------------------------- ------ -----
Depreciation and amortisation 209 227
----------------------------------------------------- ------ -----
Lease obligation payments (29) (31)
----------------------------------------------------- ------ -----
Positive non-cash impact from loss-making contracts (23) (31)
----------------------------------------------------- ------ -----
Working capital movements 6 220
----------------------------------------------------- ------ -----
Adjusted operating cash flow (pre-capex) 358 353
----------------------------------------------------- ------ -----
Net capital expenditure (104) (160)
----------------------------------------------------- ------ -----
Net interest and net tax paid (113) (68)
----------------------------------------------------- ------ -----
Defined benefit pension contributions (12) (43)
----------------------------------------------------- ------ -----
Restructuring (92) (88)
----------------------------------------------------- ------ -----
Dividend income from equity accounted investments 26 27
----------------------------------------------------- ------ -----
Net other 12 8
----------------------------------------------------- ------ -----
Free cash flow 75 29
----------------------------------------------------- ------ -----
Adjusted free cash flow 167 117
----------------------------------------------------- ------ -----
Net working capital was reduced by GBP6 million (2020: GBP220
million) in the first half, despite turnover growing over the same
period last year by 12% at constant currency.
Net capital expenditure in the Period was GBP104 million (2020:
GBP160 million), representing 0.6x (2020: 0.8x) depreciation of
owned assets, net interest paid in the Period was GBP73 million
(2020: GBP63 million), tax payments were GBP40 million (2020: GBP5
million) and ongoing contributions to defined benefit pension
schemes were GBP12 million (2020: GBP43 million).
The movement in net debt (as defined in the glossary to the
Condensed Interim Financial Statements) is summarised as
follows:
2021 2020
GBPm GBPm
--------------------------------------------------- -------- -------
Net debt at 1 January (2,847) (3,283)
--------------------------------------------------- -------- -------
Non-trading items:
--------------------------------------------------- -------- -------
Net cash flow from disposal and acquisition
related activities 2,401 (25)
--------------------------------------------------- -------- -------
Dividend paid to Melrose shareholders (36) -
--------------------------------------------------- -------- -------
Free cash flow from discontinued operations 56 89
--------------------------------------------------- -------- -------
Foreign exchange and other non-cash movements 51 (209)
--------------------------------------------------- -------- -------
Cash flow from non-trading items and discontinued
operations 2,472 (145)
--------------------------------------------------- -------- -------
Free cash flow 75 29
--------------------------------------------------- -------- -------
Net debt at 30 June at closing exchange rates (300) (3,399)
--------------------------------------------------- -------- -------
Net debt at 30 June at twelve month average
exchange rates (335) (3,330)
--------------------------------------------------- -------- -------
Group net debt at 30 June 2021, translated at closing exchange
rates (being US $1.38 and EUR1.16), was GBP300 million (31 December
2020: GBP2,847 million).
The movement in net debt during the Period consisted of a free
cash inflow of GBP75 million and significant inflows primarily
relating to the disposals of Nortek Air Management and Brush
totalling GBP2,401 million, shown after the settlement of
associated interest rate swaps totalling GBP47 million, tax paid on
the extraction of Ergotron and Nortek Control from the Nortek tax
group of GBP32 million and one-off contributions to defined benefit
pension schemes within disposed businesses of GBP39 million. In
addition, cash generated from discontinued operations totalled
GBP56 million, a dividend was paid to shareholders of GBP36 million
and there was a GBP51 million reduction to net debt in respect of
foreign exchange and other non-cash movements.
For bank covenant purposes the Group's net debt is calculated at
average exchange rates for the previous twelve months, to better
align the calculation with the currency rates used to calculate
profits, and was GBP335 million.
The Group net debt leverage on this basis at 30 June 2021 was
0.5x EBITDA (31 December 2020: 4.1x EBITDA), substantially below
the Melrose normal leverage of 2.0x to 2.5x EBITDA.
Proforma net debt following the payment of the approved Return
of Capital, discussed earlier in this review, was GBP1,029 million,
with proforma leverage of 1.5x. This calculation excludes the
agreed net proceeds from the disposal of Nortek Control.
PROVISIONS
Total provisions at 30 June 2021 were GBP838 million (31
December 2020: GBP1,021 million).
The following table details the movement in provisions in the
Period:
Total
GBPm
--------------------------------------------------------------- -----
Provisions at 1 January 2021 1,021
--------------------------------------------------------------- -----
Spend against provisions (136)
--------------------------------------------------------------- -----
Net charge to adjusted operating profit 47
--------------------------------------------------------------- -----
Net charge shown as an adjusting item in the Income Statement 68
--------------------------------------------------------------- -----
Utilisation of loss-making contract provision (23)
--------------------------------------------------------------- -----
Disposals (111)
--------------------------------------------------------------- -----
Other (including foreign exchange) (28)
--------------------------------------------------------------- -----
Provisions at 30 June 2021 838
--------------------------------------------------------------- -----
The net charge to adjusted operating profit in the Period of
GBP47 million, includes GBP10 million in respect of certain
non-cash divisional long-term incentive plan charges. The remainder
is primarily in respect of warranty, product liability and workers'
compensation charges which are closely matched by similar cash
payments in the Period.
The net charge shown as an adjusting item in the Income
Statement of GBP68 million includes a net charge of GBP75 million
related to restructuring activities which is partly offset by a net
release of GBP7 million related to fair value items.
During the Period GBP136 million of cash was spent against
provisions with GBP89 million relating to restructuring
activities.
Provisions of GBP111 million were disposed of with the sale of
the Brush and Nortek Air Management businesses and included within
Other are foreign exchange movements of GBP20 million, the transfer
of Nortek Control related provisions to held for sale of GBP6
million and the impact of discounting on certain provisions of GBP2
million.
PENSIONS AND POST-EMPLOYMENT OBLIGATIONS
At 30 June 2021 total plan assets of the Melrose Group's defined
benefit pension plans were GBP3,212 million (31 December 2020:
GBP3,775 million) and total plan liabilities were GBP3,905 million
(31 December 2020: GBP4,613 million), a net deficit of GBP693
million (31 December 2020: GBP838 million). The reduction in gross
assets and gross liabilities includes defined benefit pension plan
assets of GBP428 million and defined benefit pension plan
liabilities of GBP372 million, disposed with the Nortek Air
Management and Brush businesses.
The most significant pension schemes in the Group are the GKN
Group Pension Schemes (Numbers 1 - 4), two of which are allocated
to Aerospace and two of which are allocated to the Automotive
division. At 30 June 2021 in total these four plans had aggregate
gross assets of GBP2,465 million (31 December 2020: GBP2,556
million) and liabilities of GBP2,549 million (31 December 2020:
GBP2,755 million), and a net deficit of GBP84 million (31 December
2020: GBP199 million), split 47% of the deficit held within
Aerospace and 53% within Automotive.
The funding commitment of the GKN UK defined benefit schemes,
made by the Group when GKN was acquired in 2018, has been delivered
ahead of schedule and the ongoing contributions to these defined
benefit pension schemes will halve to GBP30 million per annum, with
no further requirement to contribute amounts following disposals of
businesses.
The values of the Group plans were updated at 30 June 2021 by
independent actuaries to reflect the latest key assumptions. A
summary of the assumptions used are shown in note 12 to the
Condensed Interim Financial Statements.
FINANCIAL RISKS AND UNCERTAINTIES
The principal financial risks and uncertainties faced by the
Group include: liquidity risk; finance cost risk; exchange rate
risk; contract and warranty risk; and commodity cost risk and are
explained in detail on pages 41 and 42 of the 2020 Annual Report.
Further explanations and details of the strategic risk profile of
the Group, which includes non-financial risk, are set out on pages
46 to 53 of the 2020 Annual Report.
EXCHANGE RATES USED IN THE PERIOD
Exchange rates used for currencies most relevant to the Group in
the Period were:
Average Closing
US Dollar rate rate
----------------------------------- --------- --------
Six months to 30 June 2021 1.39 1.38
----------------------------------- --------- --------
Twelve months to 31 December 2020 1.28 1.37
----------------------------------- --------- --------
Six months to 30 June 2020 1.26 1.24
----------------------------------- --------- --------
Euro
----------------------------------- --------- --------
Six months to 30 June 2021 1.15 1.16
----------------------------------- --------- --------
Twelve months to 31 December 2020 1.13 1.12
----------------------------------- --------- --------
Six months to 30 June 2020 1.14 1.10
----------------------------------- --------- --------
The Group policy on foreign currency risk is explained on pages
41 and 42 of the 2020 Annual Report, a copy of which is available
on the Company's website, www.melroseplc.net .
The following table shows an indication of a full year impact of
a 10 percent strengthening of the major currencies, if they were to
strengthen in isolation against all other currencies, on the
re-translation of adjusted operating profit into Sterling:
GBPm USD EUR CNY Other
-------------------------------- ---- ---- ---- ------
Movement in adjusted operating
profit 29 11 8 12
-------------------------------- ---- ---- ---- ------
% impact on adjusted operating
profit 6% 2% 2% 2%
-------------------------------- ---- ---- ---- ------
In the first half of the year the Group suffered an 8% adverse
translational foreign exchange impact compared to the same period
last year.
The impact from transactional foreign exchange exposures is not
material in the short-term due to hedge coverage being
approximately 90%.
A 10 percent strengthening in either the US Dollar or Euro would
result in a partial natural hedge against the translational
movement in profits and would have had the following impact on debt
as at 30 June 2021:
GBPm USD EUR
------------------ ---- ----
Increase in debt 85 47
-------------------- ---- ----
LIQUIDITY RISK MANAGEMENT
The Group's net debt position at 30 June 2021 was GBP300 million
(31 December 2020: GBP2,847 million). Adjusting for the approved
Return of Capital to shareholders, proforma net debt at 30 June
2021 was GBP1,029 million, as described earlier.
The Group's committed bank facilities include a multi-currency
denominated term loan that is due to mature in April 2024 and a
multi-currency denominated revolving credit facility that matures
in January 2023:
Local currency GBPm
-------------------------- ------------------------- ---------
Size Drawn Headroom Headroom
-------------------------- ------ ------ --------- ---------
Term loan maturing April
2024:
-------------------------- ------ ------ --------- ---------
USD 960 960 - -
-------------------------- ------ ------ --------- ---------
GBP 100 100 - -
-------------------------- ------ ------ --------- ---------
Revolving credit facility maturing January 2023:
----------------------------------------------------------------
USD 2,000 - 2,000 1,449
-------------------------- ------ ------ --------- ---------
GBP 1,100 - 1,100 1,100
-------------------------- ------ ------ --------- ---------
Euro 500 - 500 429
-------------------------- ------ ------ --------- ---------
Total bank debt 2,978
-------------------------- ------ ------ --------- ---------
As at 30 June 2021, the term loan was fully drawn and the
multi-currency committed revolving credit facility was undrawn.
Applying the exchange rates at 30 June 2021, the headroom equated
to just under GBP3.0 billion (31 December 2020: GBP1.6 billion
applying the exchange rates at 31 December 2020).
In addition to the headroom on the multi-currency committed
revolving credit facility, cash, deposits and marketable
securities, net of overdrafts, in the Group amounted to GBP1.3
billion at 30 June 2021 (31 December 2020: GBP160 million). As at
30 June 2021, GBP1.0 billion of the cash was placed in low
volatility money market funds that can be withdrawn at short
notice.
The Group also holds capital market borrowings as at 30 June
2021 consisting of:
Interest rate
Notional Cross-currency on
amount Coupon swaps swaps
Maturity date GBPm % p.a. million % p.a.
---------------- ---------- ------- -------------- --------------
September 2022 450 5.375% US$373 5.70%
EUR284 3.87%
---------------- ---------- ------- -------------- --------------
May 2032 300 4.625% n/a n/a
---------------- ---------- ------- -------------- --------------
The committed bank funding has two financial covenants, being a
net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are tested half-yearly in June and
December.
The Group had a waiver for its net debt to adjusted EBITDA
covenant test as at 30 June 2021, and following the disposal of
Nortek Air Management the net debt to adjusted EBITDA covenant test
level will be 4.25x at 31 December 2021; 4.0x at 30 June 2022; and
3.75x at 31 December 2022, before returning to 3.5x at 30 June 2023
and onwards. At 30 June 2021 the Group leverage afforded
substantial headroom and was 0.5x, or 1.5x when adjusting net debt
for the agreed GBP729 million Return of Capital to
shareholders.
The interest cover bank covenant test is set at 3.0x at 30 June
2021 and 31 December 2021; and 3.25x at 30 June 2022, before
returning to 4.0x from 31 December 2022 onwards. As at 30 June 2021
the Group interest cover was 5.6x, affording comfortable
headroom.
FINANCE COST RISK MANAGEMENT
The policy of the Board is to fix approximately 70% of the
interest rate exposure of the Group. Following the sale of Nortek
Air Management and Brush, the Group's net debt reduced
significantly and, to maintain the policy of fixing 70% of the
ongoing interest rate exposure, several of the interest rate swaps
were cancelled at a cost of GBP47 million.
At 30 June 2021 the weighted average cost of the instruments
used to fix the cost of LIBOR on the Group's committed bank
facility was c.1.2% and the bank margin on the Group's committed
bank facility will reduce, following the disposal of the Nortek Air
Management division and Brush business, to 0.95% on the revolving
credit facility and 0.75% for the term loan from October 2021
onwards.
The Group also holds cross-currency swaps associated with the
remaining fixed rate capital market borrowings, described earlier
in this review, with a weighted average income statement cost of
c.3.4% per annum.
The combined average Income Statement cost of the Group's debt
for the next 12 months is expected to be approximately 3.6% (31
December 2020: 3.9%) before the amortisation of the bank
arrangement fees and approximately 4.3% (31 December 2020: 4.2%)
including this amortisation charge.
GOING CONCERN
As part of their consideration of going concern, the Directors
have reviewed the Group's future cash forecasts and profit
projections, which are based on market and internal data and recent
past experience.
The Group has modelled a reasonably possible downside scenario
against future cash forecasts. The Group's Balance Sheet is
transformed compared to the same time last year, and for any
reasonably possible downside scenario, the Group has sufficient
headroom to avoid breaching any financial covenant and would not
require any additional sources of financing throughout the forecast
period.
The long-term impact of COVID-19 remains uncertain and the
impacts of the pandemic on trading conditions could be more
prolonged or severe than that which the Directors have considered
in this reasonably possible scenario.
The Group's current committed bank facility headroom, its access
to liquidity, and the sensible levels of bank covenants in place
with lending banks, allow the Directors to consider it appropriate
that the Group can manage its business risks successfully and adopt
a going concern basis in preparing these Condensed Interim
Financial Statements .
Geoffrey Martin
Group Finance Director
2 September 2021
CAUTIONARY STATEMENT
This announcement contains forward-looking statements. These
statements are made in good faith based on the information
available up to the time of the approval of this announcement, and
should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying any
such forward-looking information. Accordingly, readers are
cautioned not to place undue reliance on any such forward-looking
statements. Subject to compliance with applicable laws and
regulations, the Company does not undertake any obligation to
update any forward-looking statement to reflect events or
circumstances after the date of this announcement.
This announcement has been prepared solely to provide
information to shareholders to assess the Company's strategies and
the potential for those strategies to succeed, and neither the
Company nor its directors accept any liability to any other person
save as would arise under English law.
RESPONSIBILITY STATEMENT
We confirm to the best of our knowledge:
a) the condensed financial statements have been prepared in
accordance with IAS 34 "Interim Financial Reporting" as adopted by
the UK;
b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
and their impact, and description of principal risks and
uncertainties for the remaining six months of the financial year);
and
c) the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related parties'
transactions and changes therein).
By order of the Board
Simon Peckham Geoffrey Martin
Chief Executive Group Finance Director
2 September 2021 2 September 2021
INDEPENT REVIEW REPORT TO MELROSE INDUSTRIES PLC
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2021 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
cash flows, the condensed consolidated balance sheet, the condensed
consolidated statement of changes in equity and related notes 1 to
15. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
group will be prepared in accordance with United Kingdom adopted
International Financial Reporting Standards. The condensed set of
financial statements included in this half-yearly financial report
has been prepared in accordance with United Kingdom adopted
International Accounting Standard 34, "Interim Financial
Reporting".
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2021 is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard 34
and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor, London, United Kingdom
2 September 2021
Melrose Industries PLC
Condensed Consolidated Income Statement
Restated
(1) Restated
6 months 6 months (1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Unaudited Unaudited Audited
Continuing operations Notes GBPm GBPm GBPm
---------------------------------------- ------- ---------- ---------- ------------
Revenue 3 3,540 3,386 7,132
Cost of sales (2,998) (3,052) (6,330)
---------------------------------------- ------- ---------- ---------- ------------
Gross profit 542 334 802
Share of results of equity accounted
investments 8 13 7 32
Net operating expenses (692) (959) (1,321)
---------------------------------------- ------- ---------- ---------- ------------
Operating loss 3,4 (137) (618) (487)
Finance costs (120) (103) (195)
Finance income 1 1 3
Loss before tax (256) (720) (679)
Tax 5 105 135 114
---------------------------------------- ------- ---------- ---------- ------------
Loss after tax for the period from
continuing operations (151) (585) (565)
Discontinued operations
Profit for the period from discontinued
operations 9 1,318 17 32
---------------------------------------- ------- ---------- ---------- ------------
Profit/(loss) after tax for the
period 1,167 (568) (533)
---------------------------------------- ------- ---------- ---------- ------------
Attributable to:
Owners of the parent 1,166 (569) (536)
Non-controlling interests 1 1 3
---------------------------------------- ------- ---------- ---------- ------------
1,167 (568) (533)
Earnings per share
Continuing operations
- Basic 6 (3.1)p (12.1)p (11.7)p
- Diluted 6 (3.1)p (12.1)p (11.7)p
Continuing and discontinued operations
- Basic 6 24.0p (11.7)p (11.0)p
- Diluted 6 24.0p (11.7)p (11.0)p
Adjusted(2) results from continuing
operations
Adjusted revenue 3 3,828 3,624 7,723
Adjusted operating profit/(loss) 3,4 223 (11) 141
Adjusted profit/(loss) before
tax 4 141 (105) (41)
Adjusted profit/(loss) after
tax 4 109 (80) (27)
Adjusted basic earnings per share 6 2.2p (1.7)p (0.6)p
Adjusted diluted earnings per
share 6 2.2p (1.7)p (0.6)p
---------------------------------------- ------- ---------- ---------- ------------
(1) Results for the period ended 30 June 2020 and the year ended
31 December 2020 have been restated for discontinued operations
(see note 2).
(2) Defined in the summary of significant accounting policies (see note 2).
Melrose Industries PLC
Condensed Consolidated Statement of Comprehensive Income
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Unaudited Unaudited Audited
Notes GBPm GBPm GBPm
---------------------------------------------- ------- ----------- ----------- -------------
Profit/(loss) after tax for the period 1,167 (568) (533)
----------------------------------------------
Items that will not be reclassified
subsequently to the
Income Statement:
Net remeasurement gain/(loss) on
retirement benefit obligations 135 (15 ) 244
Fair value gain/(loss) on investments
in equity instruments 5 (5) (16)
Income tax (charge)/credit relating
to items that will not be reclassified 5 (29) 2 (42)
----------------------------------------------
111 (18) 186
Items that may be reclassified subsequently
to the
Income Statement:
Currency translation on net investments (128) 417 (42)
Share of other comprehensive (expense)/income
from equity accounted investments (1) 23 16
Transfer to Income Statement from
equity of cumulative translation
differences on disposal of foreign
operations 9 87 - -
Derivative gains/(losses) on hedge
relationships 47 (97) (99)
Transfer to Income Statement on hedge
relationships 38 1 8
Income tax (charge)/credit relating
to items that may be reclassified 5 (13) 10 9
30 354 (108)
Other comprehensive income for the
period 141 336 78
Total comprehensive income/(expense)
for the period 1,308 (232) (455)
Attributable to:
Owners of the parent 1,307 (234) (458)
Non-controlling interests 1 2 3
---------------------------------------------- ------- ----------- ----------- -------------
1,308 (232) (455)
Melrose Industries PLC
Condensed Consolidated Statement of Cash Flows
Restated
(1) Restated
6 months 6 months (1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Unaudited Unaudited Audited
Notes GBPm GBPm GBPm
------------------------------------------- ------- ------------ ----------- ------------
Operating activities
Net cash from operating activities
from continuing operations 13 181 191 476
Net cash from operating activities
from discontinued operations 13 3 111 288
------------------------------------------- ------- ------------ ----------- ------------
Net cash from operating activities 184 302 764
Investing activities
Disposal of businesses, net of cash
disposed 9 2,519 - 10
Purchase of property, plant and equipment (98) (145) (253)
Proceeds from disposal of property,
plant and equipment 3 3 25
Purchase of computer software and
capitalised development costs (9) (18) (37)
Dividends received from equity accounted
investments 26 27 54
Purchase of investments - (2) (2)
Acquisition of subsidiaries, net of
cash acquired - (21) (19)
Interest received 1 1 3
Net cash from/(used in) investing
activities from continuing operations 2,442 (155) (219)
Net cash used in investing activities
from discontinued operations 13 (12) (15) (29)
------------------------------------------- ------- ------------ ----------- ------------
Net cash from/(used in) investing activities 2,430 (170) (248)
Financing activities
Repayment of borrowings (1,363) (73) (598)
Settlement of interest rate swaps (47) - -
Cost of raising debt finance - (1) (1)
Repayment of principal under lease
obligations (29) (31) (63)
Dividends paid to owners of the parent 7 (36) - -
------------
Net cash used in financing activities
from continuing operations (1,475) (105) (662)
Net cash used in financing activities
from discontinued operations 13 (6) (7) (14)
------------------------------------------- ------- ------------ ----------- ------------
Net cash used in financing activities (1,481) (112) (676)
Net increase/(decrease) in cash and
cash equivalents, net of bank overdrafts 1,133 20 (160)
Cash and cash equivalents, net of
bank overdrafts at the beginning of
the period 160 317 317
Effect of foreign exchange rate changes 5 2 3
------------------------------------------- -------
Cash and cash equivalents, net of
bank overdrafts at the end of the
period 13 1,298 339 160
(1) Results for the period ended 30 June 2020 and year ended 31
December 2020 have been restated for discontinued operations (see
note 2).
As at 30 June 2021, the Group had net debt of GBP300 million (31
December 2020: GBP2,847 million). A definition and reconciliation
of the movement in net debt is shown in note 13.
Melrose Industries PLC
Condensed Consolidated Balance Sheet
Restated
(1)
30 June 30 June 31 December
2021 2020 2020
Unaudited Unaudited Audited
Notes GBPm GBPm GBPm
-------------------------------------- ------ ---------------------- ---------------------- -----------
Non-current assets
Goodwill and other intangible
assets 7,607 10,039 9,198
Property, plant and equipment 2,675 3,422 3,133
Investments 39 49 34
Interests in equity accounted
investments 416 439 430
Deferred tax assets 221 259 180
Derivative financial assets 68 42 101
Trade and other receivables 463 501 439
-------------------------------------- ------
11,489 14,751 13,515
Current assets
Inventories 972 1,317 1,126
Trade and other receivables 1,317 1,518 1,658
Derivative financial assets 31 10 47
Current tax assets 14 18 23
Cash and cash equivalents 1,329 415 311
Assets classified as held for
sale 9 282 55 -
3,945 3,333 3,165
Total assets 3 15,434 18,084 16,680
Current liabilities
Trade and other payables 2,115 2,274 2,456
Interest-bearing loans and borrowings 44 90 165
Lease obligations 14 52 79 81
Derivative financial liabilities 36 182 58
Current tax liabilities 146 121 188
Provisions 10 370 397 415
Liabilities associated with assets
held for sale 9 72 40 -
2,835 3,183 3,363
Net current assets/(liabilities) 1,110 150 (198)
Non-current liabilities
Trade and other payables 442 438 421
Interest-bearing loans and borrowings 1,538 3,615 2,926
Lease obligations 14 317 524 474
Derivative financial liabilities 124 371 210
Deferred tax liabilities 627 756 732
Retirement benefit obligations 12 693 1,162 838
Provisions 10 468 711 606
-------------------------------------- ------ ---------------------- ----------------------
4,209 7,577 6,207
Total liabilities 3 7,044 10,760 9,570
Net assets 8,390 7,324 7,110
Equity
Issued share capital 333 333 333
Share premium account 8,138 8,138 8,138
Merger reserve 109 109 109
Other reserves (2,330) (2,330) (2,330)
Translation and hedging reserve - 431 (30)
Retained earnings 2,110 615 861
Equity attributable to owners of
the parent 8,360 7,296 7,081
Non-controlling interests 30 28 29
Total equity 8,390 7,324 7,110
(1) Cash and cash equivalents and current interest-bearing loans
and borrowings have been restated, with no impact on net assets
(see note 2).
Melrose Industries PLC
Condensed Consolidated Statement of Changes in Equity
Equity
attributable
Issued Share Translation to owners Non-
share premium Merger Other and hedging Retained of the controlling Total
capital account reserve reserves reserve earnings parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- ------- --------- -------- ------------ --------
At 1 January 2020 333 8,138 109 (2,330) 78 1,197 7,525 26 7,551
(Loss)/profit
for the period - - - - - (569) (569) 1 (568)
Other
comprehensive
income/(expense) - - - - 353 (18) 335 1 336
----------------- ---------------------- ------- --------- -------- ------------ -------- ------------ ------------ -------
Total
comprehensive
income/(expense) - - - - 353 (587) (234) 2 (232)
Equity-settled
share-based
payments - - - - - 5 5 - 5
----------------- ---------------------- ------- --------- -------- ------------ -------- ------------ ------------ -------
At 30 June 2020
(unaudited) 333 8,138 109 (2,330) 431 615 7,296 28 7,324
Profit for the
period - - - - - 33 33 2 35
Other
comprehensive
(expense)/income - - - - (461) 204 (257) (1) (258)
----------------- ---------------------- ------- --------- -------- ------------ -------- ------------ ------------ -------
Total
comprehensive
(expense)/income - - - - (461) 237 (224) 1 (223)
Equity-settled
share-based
payments - - - - - 9 9 - 9
At 31 December
2020 (audited) 333 8,138 109 (2,330) (30) 861 7,081 29 7,110
Profit for the
period - - - - - 1,166 1,166 1 1,167
Other
comprehensive
income - - - - 30 111 141 - 141
----------------- ---------------------- ------- --------- -------- ------------ -------- ------------ ------------ -------
Total
comprehensive
income - - - - 30 1,277 1,307 1 1,308
Dividends paid - - - - - (36) (36) - (36)
Equity-settled
share-based
payments - - - - - 8 8 - 8
At 30 June 2021
(unaudited) 333 8,138 109 (2,330) - 2,110 8,360 30 8,390
Notes to the Condensed Interim Financial Statements
1. Corporate information
The interim financial information for the six months ended 30
June 2021 has been reviewed by the auditor, but not audited. The
information for the year ended 31 December 2020 shown in this
report does not constitute statutory accounts for that year as
defined in section 434 of the Companies Act 2006. A copy of the
statutory accounts for that year has been delivered to the
Registrar of Companies. The auditor has reported on those accounts.
Their report was unqualified, did not draw attention to any matters
by way of emphasis and did not contain a statement under section
498 (2) or (3) of the Companies Act 2006.
2. Summary of significant accounting policies
The interim financial information for the six months ended 30
June 2021, which has been approved by the Board of Directors, has
been prepared on the basis of the accounting policies set out in
the Group's 2020 Annual Report on pages 143 to 152.
The Group's 2020 Annual Report can be found on the Group's
website www.melroseplc.net. These Condensed Interim Financial
Statements should be read in conjunction with the 2020 information.
The Condensed Interim Financial Statements have been prepared in
accordance with UK-endorsed International Financial Reporting
Standards ("IFRS") which does not differ from the previous
EU-endorsed IFRS, and hence the previously reported accounting
policies still apply. These Condensed Interim Financial Statements
do not comprise statutory accounts within the meaning of section
435 of the Companies Act 2006 and should be read in conjunction
with the Annual Report 2020. These Condensed Interim Financial
Statements have been prepared in accordance with IAS 34: "Interim
Financial Reporting" contained in UK-adopted IFRS.
Discontinued operations and assets held for sale
During the first half of the year, the Group completed the
disposal of the Nortek Air Management segment and the Brush
business, previously included in the Other Industrial segment. In
addition, the Board formally commenced a disposal process aligned
to its strategic priorities, to dispose of the Nortek Control
business, previously included in the Other Industrial segment, with
a high expectation that this would conclude within one year. An
update is provided in note 15. In accordance with IFRS 5:
"Non-current assets held for sale and discontinued operations",
associated assets and liabilities at 30 June 2021 are classified as
held for sale and separately shown on the Balance Sheet.
The results of Nortek Air Management, Brush and Nortek Control
have been classified within discontinued operations for all periods
presented; with the Income Statement, the Statement of Cash Flows
and their associated notes being restated accordingly. In addition,
discontinued operations for 2020 include the results of the Wheels
and Structures business, also classified as held for sale at 30
June 2020, which was disposed in November 2020. Further detail is
shown in note 9.
Prior half year restatement of cash and cash equivalents and
bank overdrafts
During the second half of 2020, the Group changed its
presentation of cash and cash equivalents and bank overdrafts
within the Balance Sheet relating to cash pooling arrangements.
Whilst the Group has the legal right to offset amounts under these
cash pooling arrangements, it was determined that the appropriate
presentation should be on a gross basis in line with the
requirements of IAS 32: "Financial Instruments: Presentation" and
other associated interpretations. The 30 June 2020 Balance Sheet
comparatives have been restated accordingly. The impact of this
change is to increase both cash and cash equivalents and bank
overdrafts within current interest-bearing loans and borrowings by
GBP76 million as at 30 June 2020. This has no impact on net assets
or other primary statements.
Alternative performance measures
The Group presents Alternative Performance Measures ("APMs") in
addition to the statutory results of the Group. These are presented
in accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA").
APMs used by the Group are set out in the glossary to these
Condensed Interim Financial Statements and the reconciling items
between statutory and adjusted results are listed below and
described in more detail in note 4.
Adjusted revenue includes the Group's share of revenue from
equity accounted investments ("EAIs").
Adjusted profit measures exclude items which are significant in
size or volatility or by nature are non-trading or non-recurring,
any item released to the Income Statement that was previously a
fair value item booked on an acquisition, and include adjusted
profit from EAIs.
On this basis, the following are the principal items included
within adjusting items impacting operating profit:
-- Amortisation of intangible assets that are acquired in a business combination, excluding computer software and
development costs;
-- Significant restructuring costs and other associated costs, including losses incurred following the announcement
of closure for identified businesses, arising from significant strategy changes that are not considered by the
Group to be part of the normal operating costs of the business;
-- Acquisition and disposal related gains and losses;
-- Impairment charges that are considered to be significant in nature and/or value to the trading performance of the
business;
-- Movement in derivative financial instruments not designated in hedging relationships, including revaluation of
associated financial assets and liabilities;
2. Summary of significant accounting policies (continued)
-- Removal of adjusting items, interest and tax on equity accounted investments to reflect operating results;
-- The charge for the Melrose equity-settled compensation scheme, including its associated employer's tax charge;
-- Costs associated with the gender equalisation of guaranteed minimum pension ("GMP") for occupational schemes; and
-- The net release of fair value items booked on acquisitions.
Further to the adjusting items above, adjusting items impacting
profit before tax include:
-- Acceleration of unamortised debt issue costs written off as a consequence of Group refinancing;
-- Significant settlement gains and losses associated with interest rate swaps following acquisition or disposal
related activity, which is not considered by the Group to be part of the normal operating costs; and
-- The fair value changes on cross-currency swaps, entered into by GKN prior to acquisition, relating to cost of
hedging which are not deferred in equity.
In addition to the items above, adjusting items impacting profit
after tax include:
-- The net effect on tax of significant restructuring from strategy changes that are not considered by the Group to
be part of the normal operating costs of the business;
-- The net effect of significant new tax legislation; and
-- The tax effects of adjustments to profit/(loss) before tax.
The Board considers the adjusted results to be an important
measure used to monitor how the businesses are performing as this
provides a meaningful reflection of how the businesses are managed
and measured on a day-to-day basis and achieves consistency and
comparability between reporting periods, when all businesses are
held for a complete reporting period.
The adjusted measures are used to partly determine the variable
element of remuneration of senior management throughout the Group
and are also in alignment with performance measures used by certain
external stakeholders. The adjusted measures are also taken into
account when valuing individual businesses as part of the "Buy,
Improve, Sell" Group strategy model.
Adjusted profit is not a defined term under IFRS and may not be
comparable with similarly titled profit measures reported by other
companies. It is not intended to be a substitute for, or superior
to, GAAP measures. All APMs relate to the current period results
and comparative periods where provided.
Going concern
The Condensed Interim Financial Statements have been prepared on
a going concern basis as the Directors consider that adequate
resources exist for the Company to continue in operational
existence for the foreseeable future.
The Group's liquidity and funding arrangements are described in
the Finance Director's Review. There is significant
liquidity/financing headroom (c. GBP3 billion) at 30 June 2021 and
throughout the going concern forecast period. Forecast covenant
compliance is considered further below.
Covenants
The Group's banking facility has two financial covenants being a
net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are tested half yearly in June and
December.
Due to the pervasive impact of COVID-19 on certain of the
Group's businesses, revised financial covenants with lending banks
were agreed in 2020. These revised financial covenants, updated for
the disposal of Nortek Air Management, for the going concern period
are as follows:
30 June 31 December 30 June
2021 2021 2022
----------------------------- -------- ------------ --------
Net debt to adjusted EBITDA Waived 4.25x 4.00x
----------------------------- -------- ------------ --------
Interest cover 3.00x 3.00x 3.25x
----------------------------- -------- ------------ --------
Testing
The Group has modelled two scenarios in its assessment of going
concern; a base case and a reasonably possible sensitised case.
The base case takes into account the estimated impact of a
continued recovery from the COVID-19 pandemic as well as other end
market and operational factors throughout the going concern period
and has been monitored against the actual results and cash
generation in the period since 1 July 2021.
The reasonably possible sensitised case models more conservative
sales assumptions in the remaining period of 2021 and the relevant
period in 2022, however, given there is liquidity headroom of
approximately GBP3 billion and the Group's leverage was 0.5x at 30
June 2021, no further sensitivity detail is provided.
Under the reasonably possible sensitised case, even with
significant reductions, no covenant is breached at any of the
forecast testing dates being 31 December 2021 and 30 June 2022,
with the testing at 31 December 2022 also favourable, and the Group
does not require any additional sources of finance, even following
repayment of the GBP450 million bond in September 2022.
2. Summary of significant accounting policies (continued)
In addition to the reasonably possible sensitised case a
'reverse stress test' has been prepared to consider the point at
which the covenants may be breached. This reverse stress test
indicates that a significant reduction in sales, beyond what is
considered reasonable, would be required in order to breach
covenants. In this remote situation, management could take further
mitigating actions to protect profits and conserve cash, such as
reducing capital expenditure to minimum maintenance levels.
3. Segment information
Segment information is presented in accordance with IFRS 8:
"Operating segments" which requires operating segments to be
identified on the basis of internal reports about components of the
Group that are regularly reported to the Group's Chief Operating
Decision Maker ("CODM"), which has been deemed to be the Group's
Board, in order to allocate resources to the segments and assess
their performance.
As a result of the disposal, the results of the Nortek Air
Management business during the period are classified within
discontinued operations and the comparative results in 2020 have
been restated accordingly. In addition, the results of the Brush
business, which was disposed in June 2021, and the Nortek Control
business, which has been classified as held for sale as described
in note 2, have also been classified as discontinued operations.
The Brush and Nortek Control businesses were previously classified
within the Other Industrial segment and comparative results for
2020 have been restated accordingly.
The operating segments are as follows:
Aerospace - a multi-technology global tier one supplier of both
civil and defence air frames and engine structures.
Automotive - a global technology and systems engineer which
designs, develops, manufactures and integrates an extensive range
of driveline technologies, including electric vehicle
components.
Powder Metallurgy - a global leader in precision powder metal
parts for the automotive and industrial sectors, as well as the
production of powder metal.
Other Industrial - comprises the Group's Ergotron business.
In addition, there are central cost centres which are also
reported to the Board. The central corporate cost centres contain
the Melrose Group head office costs and charges related to the
divisional management long-term incentive plans.
Reportable segment results include items directly attributable
to a segment as well as those which can be allocated on a
reasonable basis. Inter-segment pricing is determined on an arm's
length basis, in a manner similar to transactions with third
parties.
The Group's geographical segments are determined by the location
of the Group's non-current assets and, for revenue, the location of
external customers. Inter-segment sales are not material and have
not been disclosed.
The following tables present the results and certain asset and
liability information regarding the Group's operating segments and
central cost centres for the six month period ended 30 June 2021
and comparative periods.
a) Segment revenues
6 months ended 30 June 2021
Powder Other
Aerospace Automotive Metallurgy Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------- -------------- ------------- ------------- --------
Adjusted revenue 1,219 1,965 535 109 3,828
Equity accounted investments (3) (272) (13) - (288)
------------------------------ ---------- -------------- ------------- ------------- --------
Revenue 1,216 1,693 522 109 3,540
6 months ended 30 June 2020 - restated(1)
Powder Other
Aerospace Automotive Metallurgy Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------- -------------- ------------- ------------- --------
Adjusted revenue 1,580 1,541 396 107 3,624
Equity accounted investments (3) (228) (7) - (238)
------------------------------ ---------- -------------- ------------- ------------- --------
Revenue 1,577 1,313 389 107 3,386
(1) Revenue has been restated for discontinued operations (see
note 2).
3. Segment information (continued)
a) Segment revenues (continued)
Year ended 31 December 2020 - restated(1)
Powder Other
Aerospace Automotive Metallurgy Industrial Total
Continuing operations GBPm GBPm GBPm GBPm GBPm
------------------------- ---------- -------------- ------------- ------------- --------
Adjusted revenue 2,804 3,797 905 217 7,723
Equity accounted
investments (6) (566) (19) - (591)
Revenue 2,798 3,231 886 217 7,132
(1) Revenue has been restated for discontinued operations (see
note 2).
b) Segment operating profit
6 months ended 30 June
2021
Powder Other Corporate
Aerospace Automotive Metallurgy Industrial (2) Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- -------------- ------------- ------------- ---------- --------
Adjusted operating profit/(loss) 41 121 60 27 (26) 223
Items not included in
adjusted operating profit
(1) :
Amortisation of intangible
assets acquired in business
combinations (122) (71) (25) (8) - (226)
Restructuring costs (26) (52) (3) - (4) (85)
Movement in derivatives
and associated financial
assets and liabilities - 1 - - (45) (44)
Equity accounted investments
adjustments - (15) - - - (15)
Melrose equity-settled
compensation scheme charges - - - - (9) (9)
Acquisition and disposal
related gains 2 - 8 - - 10
Net release and changes
in discount rates of
fair value items 3 4 2 - - 9
Operating (loss)/profit (102) (12) 42 19 (84) (137)
Finance costs (120)
Finance income 1
Loss before tax (256)
Tax 105
Loss for the period from
continuing operations (151)
(1) For further details on adjusting items, refer to note 4.
(2) C orporate adjusted operating loss of GBP26 million includes
GBP10 million of costs in respect of divisional long-term incentive
plans.
3. Segment information (continued)
b) Segment operating profit (continued)
6 months ended 30 June
2020 - restated(1)
Powder Other Corporate
Aerospace Automotive Metallurgy Industrial (3) Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- -------------- ------------ ------------ ---------- --------
Adjusted operating profit/(loss) 54 (64) (3) 22 (20) (11)
Items not included in
adjusted operating profit
(2) :
Amortisation of intangible
assets acquired in business
combinations (129) (74) (24) (9) - (236)
Impairment of assets (133) (18) (28) - - (179)
Restructuring costs (43) (25) (23) (2) (2) (95)
Movement in derivatives
and associated financial
assets and liabilities 8 (4) - - (93) (89)
Equity accounted investments
adjustments - (14) - - - (14)
Acquisition and disposal
related costs - - - - (4) (4)
Melrose equity-settled
compensation scheme charges - - - - (1) (1)
Net release and changes
in discount rates of
fair value items 18 (12) 5 - - 11
Operating (loss)/profit (225) (211) (73) 11 (120) (618)
Finance costs (103)
Finance income 1
Loss before tax (720)
Tax 135
Loss for the period from
continuing operations (585)
(1) Operating profit has been restated for discontinued
operations (see note 2).
(2) For further details on adjusting items, refer to note 4.
(3) C orporate adjusted operating loss of GBP20 million includes
GBP5 million of costs in respect of divisional long-term incentive
plans.
Year ended 31 December
2020 - restated(1) Powder Other Corporate
Aerospace Automotive Metallurgy Industrial (3) Total
Continuing operations GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- -------------- ------------ ------------ ---------- --------
Adjusted operating profit/(loss) 14 82 39 52 (46) 141
Items not included in
adjusted operating profit
(2) :
Amortisation of intangible
assets acquired in business
combinations (256) (147) (52) (17) - (472)
Restructuring costs (110) (60) (48) (1) (2) (221)
Impairment of assets (133) (21) (30) - - (184)
Equity accounted investments
adjustments - (30) - - - (30)
Melrose equity-settled
compensation scheme charges - - - - (11) (11)
Acquisition and disposal
related costs - - - - (5) (5)
Impact of GMP equalisation
on UK pension schemes (1) (1) - - - (2)
Movement in derivatives
and associated financial
assets and liabilities (9) (2) - - 193 182
Net release and changes
in discount rates of
fair value items 85 (4) 34 - - 115
Operating (loss)/profit (410) (183) (57) 34 129 (487)
Finance costs (195)
Finance income 3
Loss before tax (679)
Tax 114
Loss for the year from
continuing operations (565)
(1) Operating profit has been restated for discontinued
operations (see note 2).
(2) For further details on adjusting items, refer to note 4.
(3) C orporate adjusted operating loss of GBP46 million includes
GBP12 million of costs in respect of divisional long-term incentive
plans.
3. Segment information (continued)
c) Segment total assets and liabilities
Total assets Total liabilities
-------------------------------------- --------------------------------------
Restated(1) Restated(2) Restated(1) Restated(2)
30 June 30 June 31 December 30 June 30 June 31 December
2021 2020 2020 2021 2020 2020
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- --------- ------------ ------------- --------- ------------ -------------
Aerospace 6,295 7,384 6,614 2,337 3,096 2,691
Automotive 4,902 5,276 5,172 2,128 2,163 2,407
Powder Metallurgy 1,737 1,897 1,816 426 493 476
Other Industrial 607 690 604 89 94 76
Corporate 1,611 695 513 1,992 4,287 3,281
------------------- --------- ------------ ------------- --------- ------------ -------------
Continuing
operations 15,152 15,942 14,719 6,972 10,133 8,931
------------------- --------- ------------ ------------- --------- ------------ -------------
Discontinued
operations 282 2,142 1,961 72 627 639
------------------- --------- ------------ ------------- --------- ------------ -------------
Total 15,434 18,084 16,680 7,044 10,760 9,570
(1) Assets and liabilities at 30 June 2020 have been restated
for discontinued operations and presentation of cash and cash
equivalents and bank overdrafts (see note 2).
(2) Assets and liabilities at 31 December 2020 have been
restated for discontinued operations (see note 2).
d) Segment capital expenditure and depreciation
Capital expenditure Depreciation of Depreciation of leased
(1) owned assets (1) assets
--------------------------------------- --------------------------------------- ---------------------------------------
Restated(2) Restated(2) Restated(2) Restated(2)
6 months Restated(2) 6 months Restated(2) 6 months
ended 6 months ended 6 months ended 6 months
ended Year ended ended Year ended ended Year ended
30 June 30 June 31 December 30 June 30 June 31 December 30 June 30 June 31 December
2021 2020 2020 2021 2020 2020 2021 2020 2020
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- ------------ ------------- ---------- ------------ ------------- ---------- ------------ -------------
Aerospace 23 61 98 60 65 121 11 15 28
Automotive 46 54 130 97 100 199 8 8 18
Powder
Metallurgy 18 12 33 27 31 61 4 5 9
Other
Industrial - 2 2 1 2 3 - - 1
Corporate - - - - - 1 1 1 1
-------------- ---------- ------------ ------------- ---------- ------------ ------------- ---------- ------------ -------------
Continuing
operations 87 129 263 185 198 385 24 29 57
-------------- ---------- ------------ ------------- ---------- ------------ ------------- ---------- ------------ -------------
Discontinued
operations 12 16 27 16 16 33 7 9 17
-------------- ---------- ------------ ------------- ---------- ------------ ------------- ---------- ------------ -------------
Total 99 145 290 201 214 418 31 38 74
(1) Includes computer software and development costs. Capital
expenditure excludes lease additions.
(2) Capital expenditure and depreciation have been restated for
discontinued operations (see note 2).
e) Geographical information
The Group operates in various geographical areas around the
world. The parent company's country of domicile is the UK and the
Group's revenues and non-current assets in the rest of Europe and
North America are also considered to be material.
The Group's revenue from external customers and information
about specific segment assets (non-current assets excluding
deferred tax assets, non-current trade and other receivables and
non-current derivative financial assets) by geographical location
are detailed below:
Revenue(1) from external
customers Segment assets
---------------------------------------- --------------------------------------
Restated(2)
6 months 6 months
ended ended Restated(2) Restated(2)
30 June 30 June Year ended 30 June 30 June Restated(2)
31 December 31 December
2021 2020 2020 2021 2020 2020
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ---------- ------------ -------------- --------- ------------ -------------
UK 301 309 571 2,051 2,215 2,132
Rest of Europe 1,027 861 1,892 4,527 5,220 4,820
North America 1,693 1,761 3,642 3,005 3,568 3,137
Other 519 455 1,027 1,154 1,290 1,216
---------------- ---------- ------------ -------------- --------- ------------ -------------
Continuing
operations 3,540 3,386 7,132 10,737 12,293 11,305
---------------- ---------- ------------ -------------- --------- ------------ -------------
Discontinued
operations 832 817 1,782 - 1,656 1,490
---------------- ---------- ------------ -------------- --------- ------------ -------------
Total 4,372 4,203 8,914 10,737 13,949 12,795
(1) Revenue is presented by destination.
(2) Revenue and segment assets have been restated for
discontinued operations (see note 2).
4. Reconciliation of adjusted profit measures
As described in note 2, adjusted profit measures are an
alternative performance measure used by the Board to monitor the
performance of the Group.
a) Operating profit
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Continuing operations Notes GBPm GBPm GBPm
-------------
Operating loss (137) (618) (487)
------------------------------------------------ --------- ----------- -------------
Amortisation of intangible assets
acquired in business combinations a 226 236 472
Restructuring costs b 85 95 221
Movement in derivatives and associated
financial assets and liabilities c 44 89 (182)
Equity accounted investments
adjustments d 15 14 30
Melrose equity-settled compensation
scheme charges e 9 1 11
Acquisition and disposal related
gains and losses f (10) 4 5
Net release and changes in discount
rates of fair value items g (9) (11) (115)
Impairment of assets - 179 184
Impact of GMP equalisation on
UK pension schemes - - 2
Total adjustments to operating
loss 360 607 628
Adjusted operating profit/(loss) 223 (11) 141
(1) Results have been restated for discontinued operations (see
note 2).
a. The amortisation charge on intangible assets acquired in
business combinations of GBP226 million (2020: GBP236 million), is
excluded from adjusted results due to its non-trading nature and to
enable comparison with companies that grow organically. However,
where intangible assets are trading in nature, such as computer
software and development costs, the amortisation is not excluded
from adjusted results.
b. Restructuring and other associated costs in the period of
GBP85 million (2020: GBP95 million) are shown as adjusting items
due to their size and non-trading nature. During the period ended
30 June 2021 they included:
-- A charge of GBP26 million (2020: GBP43 million) within the
Aerospace division including costs incurred as the business takes
further steps to substantially reduce its cost structure,
recognising the magnitude and length of the impact of COVID-19 on
the aerospace industry. These include costs relating to the initial
stages of a major footprint consolidation in The Netherlands, as
well as the continued global integration programme, reducing
management layers and simplifying the business, ensuring the
Aerospace division is well positioned and able to react to changes
in its new environment.
-- A charge of GBP52 million (2020: GBP25 million) within the
Automotive division, which included the commencement of significant
footprint consolidation actions in Europe incurred as the business
continues to address its cost base and deliver its 'Full Potential'
transformational programme with a clear path to achieving greater
than 10% adjusted operating margins.
-- A total charge of GBP7 million (2020: GBP27 million) across
the Powder Metallurgy, Other Industrial and Corporate
divisions.
c. Hedge accounting is not app lied within the GKN businesses
for transactional foreign exchange exposure. Consequently, for
consistency and because of their volatility and size, the movements
in the fair value of derivative financial instruments (primarily
forward foreign currency exchange contracts) entered into to
mitigate the potential volatility of future cash flows, on
long-term foreign currency customer and supplier contracts in the
businesses, along with foreign exchange movements on the associated
financial assets and liabilities, totalled a charge of GBP44
million (2020: GBP89 million).
d. The Group has a number of equity accounted investments
("EAIs") in which it does not hold full control, the largest of
which is a 50% interest in Shanghai GKN HUAYU Driveline Systems
("SDS"), within the Automotive business. The EAIs generated GBP288
million (2020: GBP238 million) of revenue in the period, which is
not included in the statutory results but is shown within adjusted
revenue so as not to distort the operating margins reported in the
businesses when the adjusted operating profit earned from these
EAIs is included.
In addition, the profits and losses of EAIs, which are shown
after amortisation of acquired intangible assets, interest and tax
in the statutory results, are adjusted to show the adjusted
operating profit consistent with the adjusted operating profits of
the subsidiaries of the Group. The revenue and profit of EAIs are
adjusted because they are considered to be significant in size and
are important in assessing the performance of the business.
4. Reconciliation of adjusted profit measures (continued)
a) Operating profit (continued)
e. The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer's tax charge, of GBP9 million
(2020: GBP1 million) is excluded from adjusted results due to its
volatility. The shares that would be issued, based on the Scheme's
current value at the end of the reporting period, are included in
the calculation of the adjusted diluted earnings per share, which
the Board considers to be a key measure of performance.
f. Acquisition and disposal related net gains in continuing
businesses of GBP10 million (2020: net losses of GBP4 million) were
recorded in the period and related to profits on disposal of
manufacturing sites, associated costs and reassessment of
contingent consideration on a previous bolt-on acquisition. These
items are excluded from adjusted results due to their non-trading
nature and volatility.
g. Certain items previously recorded as fair value items on
acquisitions, have been resolved for more favourable amounts than
first anticipated. The net release of fair value items recognised
on acquisitions in the period of GBP9 million (2020: GBP11 million)
included a credit of GBP6 million relating to provisions recognised
on the acquisition of GKN and a credit of GBP3 million relating to
the movement in discount rates on the loss-making contract
provisions recognised as fair value items. The net release of any
excess fair value item is shown as an adjusting item to avoid
positively distorting adjusted results.
b) Profit before tax
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Continuing operations Notes GBPm GBPm GBPm
------------------------------------- ------- --------- ----------- -------------
Loss before tax (256) (720) (679)
---------------------------------------------- --------- ----------- -------------
Adjustments to operating loss
per above 360 607 628
Settlement of interest rate swaps h 39 - -
Fair value changes on cross-currency
swaps i (2) 4 2
Bank facility negotiation fees - 4 8
Total adjustments to loss before
tax 397 615 638
---------------------------------------------- --------- ----------- -------------
Adjusted profit/(loss) before
tax 141 (105) (41)
(1) Results have been restated for discontinued operations (see
note 2).
h. On disposal of Nortek Air Management and Brush, the
significant proceeds received together with future expectations of
debt requirements enabled the Group to settle certain interest rate
swap instruments that were no longer needed. Specific recycling
from the cash flow hedge reserve, under IFRS 9, of GBP39 million
has been accelerated and shown as an adjusting item due to its
non-trading nature.
i. The fair value changes on cross-currency swaps relating to
cost of hedging which are not deferred in equity, are shown as an
adjusting item because of their volatility and non-trading
nature.
c) Profit after tax
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Continuing operations Notes GBPm GBPm GBPm
---------------------------------------- ------ -------------------- --------------------- -------------
Loss after tax (151) (585) (565)
---------------------------------------- ------ -------------------- --------------------- -------------
Adjustments to loss before tax
per above 397 615 638
Tax effect of adjustments to
loss before tax 5 (77) (106) (99)
Tax effect of significant legislative
changes 5 (55) - -
Tax effect of significant restructuring - - 7
Equity accounted investments
- tax j (5) (4) (8)
---------------------------------------- ------ -------------------- --------------------- -------------
Total adjustments to loss after
tax 260 505 538
---------------------------------------- ------ -------------------- --------------------- -------------
Adjusted profit/(loss) after
tax 109 (80) (27)
(1) Results have been restated for discontinued operations (see
note 2).
j. As explained in paragraph d above, the profits and losses of
EAIs are shown after interest and tax in the statutory results.
They are adjusted to show the profit before tax and the profit
after tax, consistent with the subsidiaries of the Group.
5 . Tax
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Analysis of the (credit)/charge in
the period: GBPm GBPm GBPm
-------------------------------------------- -------- -------------------- -------------
Continuing operations
Current tax 33 20 6
Deferred tax (138) (155) (120)
-------------------------------------------- -------- -------------------- -------------
Total tax credit from continuing operations (105) (135) (114)
-------------------------------------------- -------- -------------------- -------------
Discontinued operations
Current tax 59 - 70
Deferred tax (3) 10 34
-------------------------------------------- -------- -------------------- -------------
Total tax charge from discontinued
operations 56 10 104
-------------------------------------------- -------- -------------------- -------------
Total tax credit (49) (125) (10)
(1) Tax has been restated for discontinued operations (see note
2).
Continuing operations:
The effective tax rate in respect of adjusted profit before tax
for the half year is 22.7% (2020: 23.8%). Adjusted tax has been
calculated by applying the expected tax rate to the adjusted profit
before tax of GBP141 million (2020: loss of GBP105 million), giving
an adjusted tax charge of GBP32 million (2020: credit of GBP25
million).
The adjusted tax charge of GBP32 million (2020: credit of GBP25
million) excludes a tax credit on adjusting items of GBP77 million
(2020: GBP106 million). This represents a deferred tax credit on
intangible asset amortisation of GBP43 million (2020: GBP33
million) and a tax credit on other adjusting items of GBP34 million
(2020: GBP73 million). The adjusted tax charge also excludes a tax
credit of GBP55 million (2020: GBPnil) in respect of recognition of
deferred tax assets as a result of legislative changes. In
addition, the adjusted tax charge/(credit) includes a charge in
respect of EAIs of GBP5 million (2020: GBP4 million).
In addition to the amount credited in the Income Statement, a
charge of GBP42 million (2020: credit of GBP12 million) has been
recognised directly in the Statement of Comprehensive Income. This
represents a tax charge of GBP29 million (2020: credit of GBP2
million) in respect of the remeasurement of retirement benefit
obligations and a tax charge of GBP13 million (2020: credit of
GBP10 million) in respect of movements on hedge relationships and
translation differences.
6. Earnings per share
Restated(1)
6 months Restated(1)
6 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Earnings attributable to owners of the
parent GBPm GBPm GBPm
---------------------------------------------- -------- ----------- -------------
Earnings for basis of earnings per share 1,166 (569) (536)
Less: profit for the period from discontinued
operations (note 9) (1,318) (17) (32)
---------------------------------------------- -------- ----------- -------------
Earnings for basis of earnings per share
from continuing operations (152) (586) (568)
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Number Number Number
------------------------------------------- -------- -------- ------------
Weighted average number of ordinary shares
for the purposes of basic earnings per
share (million) 4,858 4,858 4,858
Further shares for the purposes of diluted
earnings per share (million) 2 - -
Weighted average number of ordinary shares
for the purposes of diluted earnings
per share (million) 4,860 4,858 4,858
6. Earnings per share (continued)
6 months Restated(1)
6 months
ended ended Restated(1)
30 June 30 June Year ended
31 December
2021 2020 2020
Earnings per share pence pence pence
-------------------------------------------- -------- ----------- -------------
Basic earnings per share
From continuing and discontinued operations 24.0 (11.7) (11.0)
From continuing operations (3.1) (12.1) (11.7)
From discontinued operations 27.1 0.4 0.7
-------------------------------------------- -------- ----------- -------------
Diluted earnings per share
From continuing and discontinued operations 24.0 (11.7) (11.0)
From continuing operations (3.1) (12.1) (11.7)
From discontinued operations 27.1 0.4 0.7
-------------------------------------------- -------- ----------- -------------
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2020
2021 2020 GBPm
Adjusted earnings from continuing GBPm GBPm
operations
------------------------------------ --------- ----------- -------------
Adjusted earnings (2) for the basis
of adjusted earnings per share 108 (81) (30)
------------------------------------ --------- ----------- -------------
Adjusted earnings per share from
continuing operations
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2020
2021 2020 pence
pence pence
------------------------------------ --------- ----------- -------------
Adjusted basic earnings per share 2.2 (1.7) (0.6)
Adjusted diluted earnings per share 2.2 (1.7) (0.6)
(1) Earnings has been restated for discontinued operations (see
note 2).
(2) Adjusted earnings for the 6 months ended 30 June 2021
comprises adjusted profit after tax (see note 4c) of GBP109 million
(2020: loss after tax of GBP80 million), net of an allocation of
profit to non-controlling interests of GBP1 million (2020: GBP1
million). Adjusted earnings for the year ended 31 December 2020
comprises adjusted loss after tax of GBP27 million, net of an
allocation to non-controlling interests of GBP3 million.
7. Dividends
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
---------------------------------- -------- -------- ------------
Final dividend for the year ended
31 December 2020 of 0.75p 36 - -
Total dividends paid 36 - -
An interim dividend of 0.75 pence per ordinary share (2020: nil)
is declared by the Board. Following a 9 for 10 share consolidation
on 31 August 2021, detailed in the Finance Director's Review, the
interim dividend will be paid on 4,372 million ordinary shares,
totalling GBP33 million (2020: GBPnil).
In addition, a proposed Return of Capital of 15 pence per
ordinary share, totalling approximately GBP729 million was approved
by shareholders on 9 July 2021 and is expected to be paid in
September 2021 (see note 15).
8. Share of results of equity accounted investments
Summary information for the Group's equity accounted investments
is as follows:
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Continuing operations GBPm GBPm GBPm
------------------------------------- -------- -------- ------------
Revenue 288 238 591
Operating costs (260) (217) (529)
------------------------------------- -------- -------- ------------
Adjusted operating profit 28 21 62
------------------------------------- -------- -------- ------------
Adjusting items (10) (10) (22)
Profit before tax 18 11 40
Tax (5) (4) (8)
------------------------------------- -------- -------- ------------
Share of results of equity accounted
investments 13 7 32
9. Disposals, discontinued operations and assets held for sale
On 18 June 2021, the Group completed the sale of the Brush
business, previously included in the Other Industrial division, for
cash consideration of GBP127 million. The costs charged to the
Income Statement associated with the disposal were GBP2 million.
The profit on disposal was GBP24 million after the recycling of
cumulative translation gains of GBP22 million.
On 22 June 2021, the Group announced the completion of the sale
of the Nortek Air Management business for net cash consideration of
GBP2,470 million. The costs charged to the Income Statement
associated with the disposal were GBP41 million. The profit on
disposal was GBP1,347 million after the recycling of cumulative
translation losses of GBP110 million.
During the first half of the year, the Board formally commenced
a sale process aligned to its strategic priorities, to dispose of
the Nortek Control business, previously included in the Other
Industrial division, with a high expectation that this would
conclude within one year. An update is provided in note 15. In
accordance with IFRS 5: "Non-current assets held for sale and
discontinued operations", associated assets and liabilities at 30
June 2021 are classified as held for sale and are separately shown
on the Balance Sheet.
During the period, the Aerospace and Powder Metallurgy
businesses disposed of certain non-core entities. Cumulative
disposal proceeds from these activities amounted to GBP3 million
and the profit on disposal was GBP1 million after the recycling of
cumulative translation gains of GBP1 million, and disposal costs of
GBP1 million.
The results of Nortek Air Management, Brush and Nortek Control
have been classified within discontinued operations for all periods
presented. In addition, discontinued operations for 2020 include
the results of the Wheels and Structures business which was
disposed in November 2020.
Financial performance of discontinued operations:
Restated(1)
6 months 6 months
ended ended Restated(1)
30 June 30 June Year ended
31 December
2021 2020 2020
GBPm GBPm GBPm
Revenue 832 817 1,782
Operating costs(2) (827) (782) (1,633)
----------------------------------------- ----------------------------- --------------------------- -------------
Operating profit 5 35 149
Finance costs (2) (2) (5)
----------------------------------------- ----------------------------- --------------------------- -------------
Profit before tax 3 33 144
Tax (56) (10) (104)
----------------------------------------- ----------------------------- --------------------------- -------------
(Loss)/profit after tax (53) 23 40
Gain/(loss) on disposal of net assets
of discontinued operations, net
of recycled cumulative translation
differences 1,371 (6) (8)
Profit for the period from discontinued
operations 1,318 17 32
(1) Restated for discontinued operations (see note 2).
(2) Operating costs in the period ended 30 June 2021, included
an GBP85 million charge on remeasurement to fair value less costs
to sell related to the Nortek Control business on reclassification
to assets held for sale (see note 2).
Cash flow information relating to discontinued operations is
shown in note 13.
9. Disposals, discontinued operations and assets held for sale (continued)
Classes of assets and liabilities held for sale and disposed of
during the period were as follows:
Held for sale
------------------------------------------ -------------------------------------- -----------
Held Businesses
Reclassified Remeasured for disposed
sale
------------------------------------------ --------------- ------------- ------ -----------
GBPm GBPm GBPm GBPm
------------------------------------------ --------------- ------------- ------ -----------
Goodwill and other intangible assets 267 (85) 182 901
Property, plant and equipment 18 - 18 254
Retirement benefit obligations - - - 56
Inventories 46 - 46 233
Trade and other receivables 36 - 36 247
Cash and cash equivalents - - - 41
------------------------------------------ --------------- ------------- ------ -----------
Total assets 367 (85) 282 1,732
(328
Trade and other payables (35) - (35) )
(138
Lease obligations (13) - (13) )
(111
Provisions (6) - (6) )
Current and deferred tax (18) - (18) (58 )
------------------------------------------ --------------- ------------- ------ -----------
(635
Total liabilities (72) - (72) )
Net assets 295 (85) 210 1,097
--------------- ------------- ------
Cash consideration, net of costs
(1) 2,556
Cumulative translation difference
recycled on disposals (87)
------------------------------------------ --------------- ------------- ------ -----------
Profit on disposal of businesses 1,372
Profit on disposal of businesses
classified as discontinued operations 1,371
Profit on disposal of businesses
classified within continuing operations 1
------------------------------------------ --------------- ------------- ------ -----------
1,372
------------------------------------------ --------------- ------------- ------ -----------
Net cash inflow arising on disposal:
Consideration received in cash and
cash equivalents, net of costs (2) 2,560
Less: cash and cash equivalents
disposed (41)
------------------------------------------ --------------- ------------- ------ -----------
2,519
(1) Cash consideration of GBP2,600 million net of GBP44 million
of disposal costs charged to the Income Statement, GBP4 million of
these costs were accrued at 30 June 2021.
(2) Cash consideration of GBP2,600 million net of GBP40 million
of disposal costs paid in the period.
10. Provisions
Property Warranty
Loss-making related Environmental related
contracts costs and litigation costs Restructuring Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----------- -------- --------------- -------- ------------- -------- ---------
At 1 January
2021 241 43 191 330 147 69 1,021
Utilised (23) - (26) (20) (89) (1) (159)
Charge to operating
profit(1) 2 - 24 43 82 13 164
Release to operating
profit(2) - - (26) (16) (7) - (49)
Impact of discounting
(3) (2) - - - - - (2)
Transfer to held
for sale - - (2) (4) - - (6)
Disposal of businesses (5) (6) (29) (35) (18) (18) (111)
Exchange adjustments (4) - (3) (9) (3) (1) (20)
----------------------- ----------- -------- --------------- -------- ------------- -------- ---------
At 30 June 2021 209 37 129 289 112 62 838
Current 51 12 67 139 93 8 370
Non-current 158 25 62 150 19 54 468
----------------------- ----------- -------- --------------- -------- ------------- -------- ---------
209 37 129 289 112 62 838
(1) Includes GBP82 million of adjusting items and GBP82 million
recognised in adjusted operating profit.
(2) Includes GBP14 million of adjusting items and GBP35 million
recognised in adjusted operating profit.
(3) Includes GBP1 million charge within finance costs relating
to the time value of money and a credit of GBP3 million relating to
changes in discount rates on loss-making contract provisions
recognised as fair value items on the acquisition of GKN, which has
been included as an adjusting item within operating profit.
Provisions for loss-making contracts are considered to exist
where the Group has a contract under which the unavoidable costs of
meeting the obligations exceed the economic benefits expected to be
received under it. This obligation has been discounted and will be
utilised over the period of the respective contracts, which is up
to 15 years.
10. Provisions (continued)
The provision for property related costs represents the
estimated dilapidation costs for ongoing leases. This is expected
to result in cash expenditure over the next eight years.
Environmental and litigation provisions relate to the estimated
remediation costs of pollution, soil and groundwater contamination
at certain sites and estimated future costs and settlements in
relation to legal claims and associated insurance obligations. Due
to their nature, it is not possible to predict precisely when these
provisions will be utilised.
Provisions for the expected cost of warranty obligations under
local sale of goods legislation are recognised at the date of sale
of the relevant products and subsequently updated for changes in
estimates as necessary. Warranty terms are, on average, between one
and five years.
Restructuring provisions relate to committed costs in respect of
restructuring programmes, usually resulting in cash spend within
one year.
Other provisions include long-term incentive plans for
divisional senior management and the employer tax on equity-settled
incentive schemes which are expected to result in cash expenditure
over the next two to five years.
Where appropriate, provisions have been discounted using
discount rates between 0% and 9% (31 December 2020: 0% and 7%)
depending on the territory in which the provision resides and the
length of its expected utilisation.
11. Financial instruments
The table below sets out the Group's accounting classification
of each category of financial assets and liabilities and their fair
values as at 30 June 2021, 30 June 2020 and 31 December 2020:
Current Non-current Total
GBPm GBPm GBPm
----------------------------------------- -------- ------------------- --------
30 June 2021
Financial assets
Classified as amortised cost:
Cash and cash equivalents 1,329 - 1,329
Net trade receivables 898 - 898
Classified as fair value:
Investments - 39 39
Derivative financial assets:
Foreign currency forward contracts 26 59 85
Cross-currency swaps 3 - 3
Embedded derivatives 2 9 11
Assets classified as held for
sale 282 - 282
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (44) (1,538) (1,582)
Government refundable advances (8) (49) (57)
Lease obligations (52) (317) (369)
Other financial liabilities (1,736) (32) (1,768)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (35) (38) (73)
Interest rate swaps - (15) (15)
Cross-currency swaps - (67) (67)
Embedded derivatives (1) (4) (5)
Liabilities associated with assets
held for sale (72) - (72)
30 June 2020
Financial assets
Classified as amortised cost:
Cash and cash equivalents - restated(1) 415 - 415
Net trade receivables 1,048 - 1,048
Classified as fair value:
Investments - 49 49
Derivative financial assets:
Foreign currency forward contracts 8 27 35
Embedded derivatives 2 15 17
Assets classified as held for
sale 55 - 55
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
- restated(1) (90) (3,615) (3,705)
Government refundable advances (8) (63) (71)
Lease obligations (79) (524) (603)
Other financial liabilities (1,777) (21) (1,798)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (121) (155) (276)
Interest rate swaps (35) (96) (131)
Cross-currency swaps (25) (112) (137)
Embedded derivatives (1) (8) (9)
Liabilities associated with assets
held for sale (40) - (40)
31 December 2020
Financial assets
Classified as amortised cost:
Cash and cash equivalents 311 - 311
Net trade receivables 1,228 - 1,228
Classified as fair value:
Investments - 34 34
Derivative financial assets:
Foreign currency forward contracts 45 90 135
Embedded derivatives 2 11 13
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings (165) (2,926) (3,091)
Government refundable advances (7) (51) (58)
Lease obligations (81) (474) (555)
Other financial liabilities (1,941) (49) (1,990)
Classified as fair value:
Derivative financial liabilities:
Foreign currency forward contracts (46) (40) (86)
Interest rate swaps (2) (85) (87)
Cross-currency swaps (9) (80) (89)
Embedded derivatives (1) (5) (6)
----------------------------------------- -------- ------------------- --------
(1) Restated for the presentation of cash and cash equivalents
and bank overdrafts (see note 2).
11. Financial instruments (continued)
The fair value of the derivative financial instruments, other
than embedded derivatives, is derived from inputs other than quoted
prices that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices)
and they are therefore categorised within level 2 of the fair value
hierarchy set out in IFRS 13: "Fair value measurement". The
embedded derivatives are classified as level 3 fair value under the
IFRS 13 fair value hierarchy. The Group's policy is to recognise
transfers into and out of the different fair value hierarchy levels
at the date of the event or change in circumstances that caused the
transfer to occur. There have been no transfers between levels in
the period.
12. Retirement benefit obligations
The Group sponsors defined benefit plans for qualifying
employees of certain subsidiaries. The funded defined benefit plans
are administered by separate funds that are legally separated from
the Group. The Trustees of the funds are required by law to act in
the interest of the fund and of all relevant stakeholders in the
plans. The Trustees of the pension funds are responsible for the
investment policy with regard to the assets of the fund.
During the period, defined benefit pension plans with a net
surplus of GBP56 million were disposed with the Nortek Air
Management and Brush businesses (see note 9).
The most significant defined benefit pension plans in the Group
at 30 June 2021 were:
GKN Group Pension Schemes (Numbers 1 - 4)
The GKN Group Pension Schemes (Numbers 1 - 4) are funded plans,
closed to new members and were closed to future accrual in 2017.
The valuation of the plans was based on a full actuarial valuation
as of 30 June 2019, updated to 30 June 2021 by independent
actuaries.
GKN UK 2016 Pension Plan
The GKN UK 2016 Pension Plan is a funded plan, closed to new
members with no active members, containing assets and liabilities
in respect of the pension schemes from various legacy GKN
businesses. The valuation of the plan was based on a full actuarial
valuation as of 5 April 2019, updated to 30 June 2021 by
independent actuaries.
GKN US Consolidated Pension Plan
The GKN US Consolidated Pension Plan is a funded plan, closed to
new members and closed to future accrual. The US Pension Plan
valuation was based on a full actuarial valuation as of 1 January
2020, updated to 30 June 2021 by independent actuaries.
GKN Germany Pension Plans
The GKN Germany Pension Plans provide benefits dependent on
final salary and service with the Company. The plans are generally
unfunded and closed to new members.
Other plans include a number of funded and unfunded defined
benefit arrangements and retiree medical insurance plans,
predominantly in the US and Europe.
The cost of the Group's defined benefit plans is determined in
accordance with IAS 19 (revised): "Employee benefits" using the
advice of independent professionally qualified actuaries on the
basis of formal actuarial valuations and using the projected unit
credit method. In line with normal practice, these valuations are
undertaken triennially in the UK and annually in the US and
Germany.
The amount recognised in the Balance Sheet in respect of defined
benefit plans was as follows:
30 June 2021
UK plans European
(1 () US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ---------- ---------- ------------- -------
Plan assets 2,959 197 24 32 3,212
Plan liabilities (3,006) (303) (557) (39) (3,905)
Net liabilities (47) (106) (533) (7) (693)
(1) Includes a net liability in respect of the GKN Group Pension
Schemes (Numbers 1 and 3) and GKN post-employment medical plans and
a net asset in respect of the GKN UK 2016 Pension Plan and the GKN
Group Pension Schemes (Numbers 2 and 4).
30 June 2020
UK plans European
(1 () US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ---------- ---------- ------------- -------
Plan assets 3,357 264 30 42 3,693
Plan liabilities (3,755) (460) (586) (54) (4,855)
Net liabilities (398) (196) (556) (12) (1,162)
(1) Includes a net liability in respect of the GKN Group Pension
Schemes (Numbers 1 - 4), GKN post-employment medical plans and the
Nortek UK plan and a net asset in respect of the Brush UK Pension
Plan and the GKN UK 2016 Pension Plan.
12. Retirement benefit obligations (continued)
31 December 2020
UK plans European
(1) US plans plans Other plans Total
GBPm GBPm GBPm GBPm GBPm
----------------- ---------- ---------- ---------- ------------- -------
Plan assets 3,442 271 27 35 3,775
Plan liabilities (3,560) (408) (603) (42) (4,613)
Net liabilities (118) (137) (576) (7) (838)
(1) Includes a net liability in respect of the GKN Group Pension
Schemes (Numbers 1 - 3), GKN post-employment medical plans and the
Nortek UK plan and a net asset in respect of the Brush UK Pension
Plan, the GKN UK 2016 Pension Plan and the GKN Group Pension Scheme
Number 4.
Valuations of material plans have been updated at 30 June 2021
by independent actuaries to reflect updated assumptions regarding
discount rates, inflation rates and asset values. The major
assumptions were as follows:
Rate of increase
of pensions
in payment Discount rate Price inflation
% p.a. % p.a. % p.a. (RPI/CPI)
------------------------------- ---------------- ------------- -----------------
30 June 2021
GKN UK - Group Pension Schemes
(Numbers 1 - 4) 2.5 1.9 2.9/2.4
GKN UK - 2016 Pension Plan 2.0 1.9 2.9/2.4
GKN US plans n/a 2.7 n/a
GKN Europe plans 1.7 1.0 1.7/1.7
30 June 2020
GKN UK - Group Pension Schemes
(Numbers 1 - 4) 2.7 1.5 2.8/2.1
GKN UK - 2016 Pension Plan 2.7 1.5 2.8/2.1
GKN US plans n/a 2.7 n/a
GKN Europe plans 1.3 1.1 1.3/1.3
Brush UK Pension Plan 2.7 1.5 2.8/2.1
31 December 2020
GKN UK - Group Pension Schemes
(Numbers 1 - 4) 2.4 1.4 2.7/2.2
GKN UK - 2016 Pension Plan 1.9 1.4 2.7/2.2
GKN US plans n/a 2.4 n/a
GKN Europe plans 1.4 0.6 1.4/1.4
Brush UK Pension Plan 3.1 1.4 2.7/2.2
------------------------------- ---------------- ------------- -----------------
In addition, the defined benefit plan assets and liabilities
have been updated to reflect the contributions made to the defined
benefit plans and the benefits earned during the period to 30 June
2021.
13. Notes to the Cash Flow Statement
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Continuing operations GBPm GBPm GBPm
--------------------------------------- -------- ----------- ------------
Reconciliation of operating loss
to net cash generated from operating
activities
Operating loss (137) (618) (487)
Adjusting items (note 4) 360 607 628
--------------------------------------- -------- ----------- ------------
Adjusted operating profit/(loss) 223 (11) 141
Adjustments for:
Depreciation of property, plant and
equipment 183 199 391
Amortisation of computer software
and development costs 26 28 51
Share of adjusted operating profit
of equity accounted investments (28) (21) (62)
Restructuring costs paid and movements
in provisions (103) (110) (135)
Defined benefit pension contributions
paid (12) (43) (107)
Change in inventories (104) 69 173
Change in receivables 3 512 269
Change in payables 107 (361) (71)
Acquisition costs and associated - (2) -
transaction taxes
Tax paid (40) (5) (14)
Interest paid on loans and borrowings (67) (57) (144)
Interest paid on lease obligations (7) (7) (16)
----------- ------------
Net cash from operating activities 181 191 476
(1) Restated for discontinued operations (see note 2).
Restated(1)
6 months 6 months
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Reconciliation of cash and cash
equivalents, net of bank overdrafts GBPm GBPm GBPm
---------------------------------------
Cash and cash equivalents per Balance
Sheet 1,329 415 311
Bank overdrafts included within
current interest-bearing loans and
borrowings (31) (76) (151)
--------------------------------------- --------
Cash and cash equivalents, net of
bank overdrafts per Statement of
Cash Flows 1,298 339 160
---------------------------------------
(1) Restated for the presentation of cash and cash equivalents
and bank overdrafts (see note 2).
Restated(1)
6 months 6 months Restated(1)
ended ended Year ended
30 June 30 June 31 December
2021 2020 2020
Cash flow from discontinued operations GBPm GBPm GBPm
Net cash from discontinued operations 86 116 284
Defined benefit pension contributions
paid (40) - (4)
Tax (paid)/received (41) (3) 13
Interest paid on lease obligations (2) (2) (5)
Net cash from operating activities
from discontinued operations (2) 3 111 288
Purchase of property, plant and equipment (11) (12) (24)
Purchase of computer software and capitalised
development costs (1) (3) (5)
Net cash used in investing activities
from discontinued operations (12) (15) (29)
Repayment of principal under lease obligations (6) (7) (14)
Net cash used in financing activities
from discontinued operations (6) (7) (14)
(1) Restated for discontinued operations (see note 2).
(2) Includes tax paid of GBP32 million following the extraction
of Ergotron and Nortek Control from the Nortek tax group prior to
the disposal of Nortek Air Management and specific defined benefit
pension contributions of GBP39 million paid on disposal of Nortek
Air Management and Brush.
13. Notes to the Cash Flow Statement (continued)
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings
(excluding any acquisition related fair value adjustments),
cross-currency swaps and cash and cash equivalents. Currency
denominated balances within net debt are translated to Sterling at
swapped rates where hedged by cross-currency swaps.
Net debt is an alternative performance measure as it is not
defined in IFRS. The most directly comparable IFRS measure is the
aggregate of interest-bearing loans and borrowings (current and
non-current) and cash and cash equivalents.
A reconciliation from the most directly comparable IFRS measure
to net debt is given below.
Restated(1)
30 June 30 June 31 December
2021 2020 2020
GBPm GBPm GBPm
Interest-bearing loans and borrowings
- due within one year (44) (90) (165)
Interest-bearing loans and borrowings
- due after one year (1,538) (3,615) (2,926)
------- -----------
External debt (1,582) (3,705) (3,091)
Less:
Cash and cash equivalents 1,329 415 311
------- -----------
(253) (3,290) (2,780)
Adjustments:
Impact of cross-currency swaps (64) (137) (89)
Non-cash acquisition fair value adjustments 17 28 22
Net debt (300) (3,399) (2,847)
(1) Restated for the presentation of cash and cash equivalents
and bank overdrafts (see note 2).
The table below shows the key components of the movement in net
debt:
At Acquisitions Other Effect At
31 December Cash and disposals non-cash of foreign 30 June
2020 flow movements exchange 2021
GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- ---------------- -------------------- ---------
External debt
(excluding bank
overdrafts) (2,940) 1,360 - - 29 (1,551)
Cross-currency
swaps (89) 3 - - 22 (64)
Non-cash acquisition
fair value
adjustments 22 - - (5) - 17
-------------- ---------- ---------------- -------------------- ---------
(3,007) 1,363 - (5) 51 (1,598)
Cash and cash
equivalents, net
of bank overdrafts 160 (1,386) 2,519 - 5 1,298
-------------- ---------- ---------------- -------------------- ---------
Net debt (2,847) (23) 2,519 (5) 56 (300)
14. Lease obligations
Amounts payable under lease obligations:
30 June 30 June 31 December
2021 2020 2020
Minimum lease payments GBPm GBPm GBPm
Amounts payable:
Within one year 66 99 101
After one year but within five years 158 262 239
Over five years 214 359 325
Less: future finance charges (69) (117) (110)
------- -----------
Present value of lease obligations 369 603 555
Analysed as:
Amounts due for settlement within one
year 52 79 81
Amounts due for settlement after one
year 317 524 474
Present value of lease obligations 369 603 555
During the period GBP151 million of lease obligations were
either disposed with the Nortek Air Management and Brush businesses
(GBP138 million) or reclassified as held for sale (GBP13 million)
(see note 9).
14. Lease obligations (continued)
It is the Group's policy to lease certain of its property, plant
and equipment. The average lease term is 10 years. Interest rates
are fixed at the contract date.
15. Post balance sheet events
On 9 July 2021 shareholders approved a Return of Capital of 15
pence per ordinary share, along with a share consolidation of 9
ordinary shares for every 10 held. The share consolidation took
place on 31 August 2021, reducing ordinary shares in issue from
4,858 million to 4,372 million. The Return of Capital of GBP729
million will be settled on 14 September 2021.
On 23 August 2021, the Group signed a sale and purchase
agreement to dispose of Nortek Control for an enterprise value of
$285 million. This business has been presented within discontinued
operations and held as an asset for sale in these Condensed Interim
Financial Statements.
Glossary
Alternative Performance Measures ("APMs")
In accordance with the Guidelines on APMs issued by the European
Securities and Markets Authority ("ESMA"), additional information
is provided on the APMs used by the Group below.
In the reporting of financial information, the Group uses
certain measures that are not required under IFRS. These additional
measures (commonly referred to as APMs) provide additional
information on the performance of the business and trends to
stakeholders. These measures are consistent with those used
internally, and are considered important to understanding the
financial performance and financial health of the Group. APMs are
considered to be an important measure to monitor how the businesses
are performing because this provides a meaningful comparison of how
the business is managed and measured on a day-to-day basis and
achieves consistency and comparability between reporting
periods.
These APMs may not be directly comparable with similarly titled
measures reported by other companies and they are not intended to
be a substitute for, or superior to, IFRS measures. All Income
Statement and Cash Flow measures are provided for continuing
operations unless otherwise stated.
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Income Statement Measures
Adjusted Revenue Share of Adjusted revenue includes the Group's
revenue revenue share of revenue of equity accounted
of equity investments ("EAIs"). This enables comparability
accounted between reporting periods.
investments Restated(1)
(note 8) 6 months 6 months Restated(1)
ended ended
30 June 30 June Year ended
2021 2020 31 December
GBPm GBPm 2020
Revenue GBPm
Revenue 3,540 3,386 7,132
Share of revenue
of equity accounted
investments
(note 8) 288 238 591
Adjusted revenue 3,828 3,624 7,723
Adjusting None Adjusting Those items which the Group excludes
items items (note from its adjusted profit metrics in
4) order to present a further measure
of the Group's performance.
These include items which are significant
in size or volatility or by nature
are non-trading or non-recurring, any
item released to the Income Statement
that was previously a fair value item
booked on an acquisition, and includes
adjusted profit from EAIs.
This provides a meaningful comparison
of how the business is managed and
measured on a day-to-day basis and
provides consistency and comparability
between reporting periods.
Adjusted Operating Adjusting The Group uses adjusted profit measures
operating profit/(loss)(2) items (note to provide a useful and more comparable
profit 4) measure of the ongoing performance
of the Group. Adjusted measures are
reconciled to statutory measures by
removing adjusting items, the nature
of which are disclosed above and further
detailed in note 4.
Restated(1)
6 months 6 months Restated(1)
ended ended
30 June 30 June Year ended
2021 2020 31 December
GBPm GBPm 2020
Operating profit GBPm
Operating loss (137) (618) (487)
Adjusting items
to operating
loss (note 4) 360 607 628
Adjusted operating
profit/(loss) 223 (11) 141
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
------------------
Adjusted Operating Share of Adjusted operating margin represents
operating margin(3) revenue Adjusted operating profit as a percentage
margin of equity of Adjusted revenue. The Group uses
accounted adjusted profit measures to provide
investments a useful and more comparable measure
(note 8) of the ongoing performance of the Group.
and adjusting
items (note
4)
------------------
Adjusted Loss before Adjusting Profit before the impact of adjusting
profit tax items (note items and tax. As discussed above, adjusted
before 4) profit measures are used to provide
tax a useful and more comparable measure
of the ongoing performance of the Group.
Adjusted measures are reconciled to
statutory measures by removing adjusting
items, the nature of which are disclosed
above and further detailed in note 4.
Restated(1)
6 months 6 months Restated(1)
ended ended
30 June 30 June Year ended
2021 2020 31 December
GBPm GBPm 2020
Profit before tax GBPm
Loss before tax (256) (720) (679)
Adjusting items
to loss before tax
(note 4) 397 615 638
Adjusted profit/(loss)
before tax 141 (105) (41)
Adjusted Loss after Adjusting Profit after tax but before the impact
profit tax items (note of the adjusting items. As discussed
after 4) above, adjusted profit measures are
tax used to provide a useful and more comparable
measure of the ongoing performance of
the Group. Adjusted measures are reconciled
to statutory measures by removing adjusting
items, the nature of which are disclosed
above and further detailed in note 4.
Restated(1)
6 months 6 months Restated(1)
ended ended
30 June 30 June Year ended
2021 2020 31 December
GBPm GBPm 2020
Profit after tax GBPm
Loss after tax (151) (585) (565)
Adjusting items
to loss after tax
(note 4) 260 505 538
Adjusted profit/(loss)
after tax 109 (80) (27)
Adjusted Operating Adjusting Adjusted operating profit for 12 months
EBITDA profit/ items (note prior to the reporting date, before
for (loss)(2) 4), depreciation and impairment of property,
leverage depreciation plant and equipment and before the amortisation
covenant of property, and impairment of computer software
purposes plant and and development costs.
equipment
and Adjusted EBITDA for leverage covenant
amortisation purposes is a measure used by external
of computer stakeholders to measure performance.
software 12 months 12 months(4)
and development ended ended Year ended(4)
costs, 30 June 30 June 31 December
imputed 2021 2020 2020
lease charge, Adjusted EBITDA
share of for leverage covenant
non-controlling purposes GBPm GBPm GBPm
interests
and other Adjusted operating
adjustments profit 375 617 340
required Depreciation of
for leverage property, plant
covenant and equipment and
purposes(5) amortisation of
computer software
and development
costs 424 507 492
Imputed lease charge (77) (95) (97)
Non-controlling
interests (3) (4) (3)
Other adjustments
required for leverage
covenant purposes
(5) (8) (31) (8)
--------- ------------ -------------
Adjusted EBITDA
for leverage covenant
purposes 711 994 724
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
----------------
H1 Operating Adjusting Adjusted operating profit for the six
annualised profit/(loss)(2) items (note months prior to the reporting date,
adjusted 4), depreciation before depreciation and impairment of
EBITDA of property, property, plant and equipment and before
for plant and the amortisation and impairment of computer
leverage equipment software and development costs. This
covenant and amortisation is doubled to give a H1 annualised adjusted
purposes of computer EBITDA for leverage covenant purposes.
software H1 annualised adjusted EBITDA for leverage
and development covenant purposes is a useful indicator
costs, imputed to measure the ongoing performance of
lease charge, the Group.
share of 6 months
non-controlling ended
interests 30 June
and other H1 annualised adjusted EBITDA 2021
adjustments for leverage covenant purposes GBPm
required
for leverage Adjusted EBITDA for leverage
covenant covenant purposes 711
purposes(5) Less: Adjusted EBITDA for leverage
covenant purposes for six months
to 31 December 2020 (308)
H1 adjusted EBITDA for leverage
covenant purposes 403
H1 annualised adjusted EBITDA
for leverage covenant purposes 806
Adjusted Effective Adjusting The income tax charge for the Group
tax rate tax rate items, adjusting excluding adjusting tax, and the tax
tax items impact of adjusting items, divided by
and the adjusted profit/(loss) before tax.
tax impact
of adjusting This measure is a useful indicator of
items (note the ongoing tax rate for the Group.
4 and note Restated(1)
5) 6 months 6 months Restated(1)
ended ended
30 June 30 June Year ended
2021 2020 31 December
GBPm GBPm 2020
Adjusted tax rate GBPm
Tax credit per
Income Statement 105 135 114
Adjusted for:
Tax impact of adjusting
items (77) (106) (99)
Tax impact of significant
legislative changes (55) - -
Tax impact of significant
restructuring - - 7
Tax impact of EAIs (5) (4) (8)
Adjusted tax (charge)/credit (32) 25 14
Adjusted profit/(loss)
before tax 141 (105) (41)
Adjusted tax rate 22.7% 23.8% 34.1%
Adjusted Basic Adjusting Profit after tax attributable to owners
basic earnings items (note of the parent and before the impact
earnings per share 4 and note of adjusting items, divided by the weighted
per share 6) average number of ordinary shares in
issue during the financial period.
-----------
Adjusted Diluted Adjusting Profit after tax attributable to owners
diluted earnings items (note of the parent and before the impact
earnings per share 4 and note of adjusting items, divided by the weighted
per share 6) average number of ordinary shares in
issue during the financial period adjusted
for the effects of any potentially dilutive
options.
The Board considers this to be a key
measure of performance when all businesses
are held for the complete reporting
period.
----------- ----------- ---------------
Proforma Basic Adjusting Profit after tax attributable to owners
earnings earnings items (note of the parent and before the impact
per share per share 4 and note of adjusting items, divided by the number
6) and changes of ordinary shares in issue of 4,372
to the number million, following the 9 for 10 share
of shares consolidation which took place on 31
(note 15) August 2021.
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Interest None Not applicable Adjusted EBITDA calculated for covenant
cover purposes (including adjusted EBITDA
of businesses disposed) as a multiple
of net interest payable on bank loans
and overdrafts.
This measure is used for bank covenant
testing.
12 months 12 months(4)
ended ended Year ended(4)
30 June 30 June 31 December
2021 2020 2020
Interest cover GBPm GBPm GBPm
-------------
Adjusted EBITDA
for leverage covenant
purposes 711 994 724
Adjusted EBITDA
from businesses
disposed in the
year 271 - 2
Adjusted EBITDA
for interest cover 982 994 726
Interest on bank
loans and overdrafts (126) (144) (136)
Finance income 3 1 3
Other interest
for covenant purposes(6) (53) (1) (9)
-------------
Net finance charges
for covenant purposes (176) (144) (142)
Interest cover 5.6x 6.9x 5.1x
Balance Sheet Measures
Working Inventories, Not applicable Working capital comprises inventories,
capital trade current and non-current trade and other
and other receivables and current and non-current
receivables trade and other payables.
less trade
and other This measure provides additional information
payables in respect of working capital management.
---------- ----------------------- ---------------
Net debt Cash and Reconciliation Net debt comprises cash and cash equivalents,
cash equivalents of net debt interest-bearing loans and borrowings
less interest-bearing (note 13) and cross-currency swaps but excludes
loans non-cash acquisition fair value adjustments.
and borrowings
and finance Net debt is one measure that could be
related used to indicate the strength of the
derivative Group's Balance Sheet position and is
instruments a useful measure of the indebtedness
of the Group.
---------- ----------------------- ---------------
Proforma Cash and Reconciliation Net debt (as above) is adjusted for
net debt cash equivalents of net debt the shareholder approved Return of Capital
less interest-bearing (note 13) (note 15) to measure the ongoing indebtedness
loans and a Return of the Group and indicate the strength
and borrowings of Capital of the Group's Balance Sheet position.
and finance (note 15)
related 30 June
derivative 2021
instruments Net debt GBPm
--------
Net debt at closing rates (note
13) 300
Return of Capital (note 15) 729
--------
Proforma net debt 1,029
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Bank covenant Cash and Impact of Net debt (as above) is presented in
definition cash equivalents foreign the Balance Sheet translated at period
of net less exchange end exchange rates.
debt at interest-bearing and adjustments
average loans for bank For bank covenant testing purposes net
rates and borrowings covenant debt is converted using average exchange
and leverage and finance purposes rates for the previous 12 months.
related
derivative Leverage is calculated as the bank covenant
instruments definition of net debt divided by adjusted
EBITDA for leverage covenant purposes.
This measure is used for bank covenant
testing.
30 June 30 June(4) 31 December(4)
2021 2020 2020
Net debt GBPm GBPm GBPm
--------------
Net debt at closing
rates (note 13) 300 3,399 2,847
Impact of foreign
exchange 35 (69) 106
--------------
Bank covenant definition
of net debt at average
rates 335 3,330 2,953
--------------
Leverage 0.5x 3.4x 4.1x
Proforma Cash and Adjustments Proforma leverage is calculated as the
leverage cash equivalents for bank bank covenant definition of net debt,
less covenant adjusted for the shareholder approved
interest-bearing purposes, Return of Capital (note 15), divided
loans a Return by adjusted EBITDA for leverage covenant
and borrowings of Capital purposes. This measure shows the effect
and finance (note 15), of material disposal-related transactions
related and the on the Group's ongoing leverage for
derivative impact of bank covenant testing purposes.
instruments foreign 30 June
exchange 2021
GBPm
-------
Bank covenant definition of
net debt at average rates 335
Return of Capital (note 15) 729
Bank covenant definition of
net debt at average rates, after
proforma adjustment 1,064
-------
Proforma leverage 1.5x
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Cash Flow Measures
Adjusted Net cash Non-working Adjusted operating cash flow (pre-capex)
operating from operating capital is calculated as adjusted operating
cash flow activities items (note profit before depreciation and amortisation
(pre-capex) 13) attributable to subsidiaries, repayment
conversion of principal under lease obligations,
and Adjusted the positive non-cash utilisation from
operating loss-making contracts and movements
cash flow in working capital.
conversion
Adjusted operating cash flow (pre-capex)
conversion is adjusted operating cash
flow (pre-capex) divided by adjusted
operating profit before depreciation
and amortisation attributable to subsidiaries,
less repayment of principal under lease
obligations and the positive non-cash
utilisation from loss-making contracts.
This measure provides additional useful
information in respect of cash generation
and is consistent with how business
performance is measured internally.
Restated(1)
6 months 6 months Restated(1)
ended ended
30 June 30 June Year ended
2021 2020 31 December
Adjusted operating GBPm GBPm 2020
cash flow
(pre-capex) GBPm
Adjusted operating
profit/(loss) 223 (11) 141
Share of adjusted
operating profit of
EAIs (note 8) (28) (21) (62)
Depreciation of owned
property, plant and
equipment and amortisation
of owned computer
software and development
costs (note 3) 185 198 385
Depreciation of leased
property, plant and
equipment and amortisation
of leased computer
software and development
costs (note 3) 24 29 57
Repayment of principal
under lease obligations (29) (31) (63)
Positive non-cash
utilisation from loss-making
contracts (note 10) (23) (31) (59)
352 133 399
Change in inventories (104) 69 173
Change in receivables 3 512 269
Change in payables 107 (361) (71)
Adjusted operating
cash flow (pre-capex) 358 353 770
Adjusted operating
cash flow (pre-capex)
conversion 102% 265% 193%
Free cash Net increase/ Acquisition Free cash flow represents cash generated
flow decrease related from trading from continuing businesses
in cash cash flows, after all costs including restructuring,
and cash dividends pension contributions, tax and interest
equivalents paid to payments.
owners of
the parent, A reconciliation of free cash flow is
foreign included within the Finance Director's
exchange, Review.
discontinued
operating
cash flows
and other
non-cash
movements
--------------
Adjusted Net increase/ Free cash Adjusted free cash flow represents free
free cash decrease flow, as cash flow adjusted for special pension
flow in cash defined contributions and restructuring cash
and cash above, adjusted flows.
equivalents for special
pension A reconciliation of adjusted free cash
contributions flow is included within the Finance
and restructuring Director's Review.
cash flows
Closest Reconciling
equivalent items to
statutory statutory
APM measure measure Definition and purpose
Capital None Not applicable Calculated as the purchase of owned
expenditure property, plant and equipment and
(capex) computer software and expenditure
on capitalised development costs
during the period, excluding any
assets acquired as part of a business
combination.
Net capital expenditure is capital
expenditure net of proceeds from
disposal of property, plant and equipment.
Capital None Not applicable Net capital expenditure divided by
expenditure depreciation of owned property, plant
to depreciation and equipment and amortisation of
ratio computer software and development
costs.
Dividend Dividend Not applicable Amounts payable by way of dividends
per share per share in terms of pence per share.
(1) Results for the period ended 30 June 2020 and the year ended
31 December 2020 have been restated for discontinued operations
(see note 2).
(2) Operating profit/(loss) is not defined within IFRS but is a
widely accepted profit measure being profit/(loss) before finance
costs, finance income
and tax.
(3) Operating margin is not defined within IFRS but is a widely
accepted profit measure being derived from operating
profit/(loss)(2) divided by revenue.
(4) Year ended 31 December 2020 and period ended 30 June 2020
remain aligned to the original calculations supporting the Group's
bank debt compliance certificate, and have not been restated for
discontinued operations.
(5) Included within other adjustments required for leverage
covenant purposes are dividends received from equity accounted
investments, the removal of adjusted operating profit of equity
accounted investments and the inclusion of operating profit,
depreciation and an imputed lease charge in respect of businesses
classified as held for sale.
(6) Other interest for covenant purposes includes bank facility
renegotiation fees and costs associated with the cancellation of
interest rate swap arrangements.
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