TIDMMRO

RNS Number : 8733X

Melrose Industries PLC

03 September 2020

3 September 2020

MELROSE INDUSTRIES PLC

UNAUDITED RESULTS

FOR THE SIX MONTHSED 30 JUNE 2020

Melrose Industries PLC today announces its interim results for the six months ended 30 June 2020 (the "Period").

Highlights

 
                               Adjusted(1) results    Statutory results 
                                    2020       2019        2020     2019 
 Continuing operations              GBPm       GBPm        GBPm     GBPm 
                              ----------  ---------  ----------  ------- 
 Revenue                           4,359      5,875       4,121    5,573 
                              ----------  ---------  ----------  ------- 
 Operating profit/(loss)              56        541       (581)        8 
                              ----------  ---------  ----------  ------- 
 Profit/(loss) after tax            (32)        332       (560)    (131) 
                              ----------  ---------  ----------  ------- 
 
 Diluted earnings per share       (0.7)p       6.8p     (11.5)p   (2.8)p 
                              ----------  ---------  ----------  ------- 
 

Group

-- The Group made an adjusted(1) operating profit of GBP56 million in the Period. The statutory operating loss was GBP581 million; of the GBP637 million adjusting items, only GBP99 million are cash related

-- Trading over the summer months has been at the higher end of the Board's expectations, particularly in automotive and key Nortek markets

-- Cash generation has been strong in the Period with GBP213 million of adjusted(1) free cash flow(2)

-- In addition to the significant working capital inflow in H1, the Group expects a further c.GBP300 million of efficiency improvements in working capital to be delivered

-- Net debt(1) has been reduced by GBP93 million(3) and the committed bank facility headroom has increased to nearly GBP1.2 billion at 30 June 2020 excluding the c.GBP300 million of cash in hand

-- Improved banking terms have been unanimously agreed with the Melrose lending bank syndicate, giving the flexibility if required over the medium-term to continue to improve the businesses

-- Restructuring projects are well underway that will improve the Group's trading performance by over GBP100 million next year. More cost saving projects are to come and there are substantial margin improvement opportunities across the GKN businesses

-- Investment in ground-breaking, energy efficient technology has been maintained, including electric and hydrogen powered aircraft technology; eDrive automotive systems; advanced 3D printing capabilities; and Nortek Air Management's revolutionary StatePoint Technology(R)

-- Whilst the Melrose Board understands the importance of dividends to shareholders and is encouraged by the strong cash performance, it does not consider it appropriate to pay an interim dividend to shareholders this year

Divisions

-- A substantial reduction of the Aerospace cost structure is underway, to significantly improve the business performance in 2021 without relying on sales growth. Sales in Aerospace reduced by 18% in the Period(3) ; however, Defence, which equates to around a third of the business, continued to grow

-- There are a number of encouraging signs of recovery in Automotive and Powder Metallurgy with recent trading in China ahead of last year; North America is also improving quickly and there are some positive signs in Europe, although the full speed and shape of improvements still remains uncertain. Automotive and Powder Metallurgy sales were down 36% in the Period(3)

-- Nortek Air Management is trading well; its performance has been less impacted by COVID-19 and sales in July and August were up 13% on last year(3) . New business wins are proving to be significant and are both enhancing the quality of the business and giving a strong order book into next year

Justin Dowley, Chairman of Melrose Industries PLC, today said:

"These are extraordinary times which we have addressed with rigorous cash management and decisive restructuring actions; recently, and encouragingly, we have started to see trading improving in some key end markets. Crucially, we own good businesses with significant improvement opportunities and have an experienced management team with an excellent track record. We have delivered good returns in tough times before and as we continue to make the strategic changes needed to position our businesses within their changed market environments, we are confident of doing so again."

(1. Considered by the Board to be a key measure of performance. The adjusted results are described in the glossary to the Interim Financial Statements)

(2. Adjusted free cash flow in the Period excludes restructuring and cash used in discontinued operations)

(3. Growth is calculated at constant currency against 2019 results)

S

Enquiries:

Montfort Communications: +44 (0) 20 3514 0897

Nick Miles +44 (0) 7739 701634 / Charlotte McMullen +44 (0) 7921 881 800

miles@montfort.london / mcmullen@montfort.london

Investor Relations: +44 (0) 7974 974690

ir@melroseplc.net

CHAIRMAN'S STATEMENT

We report our interim results for the six months ended 30 June 2020 (the "Period"), which are in line with the trading update released on 22 July 2020 ("July update").

RESULTS FOR THE GROUP

These interim results include statutory revenue for the Melrose Group of GBP 4,121 million (2019: GBP 5,573 million), a statutory loss before tax of GBP685 million (2019: statutory loss of GBP109 million) and an adjusted loss before tax of GBP40 million (2019: adjusted profit of GBP431 million).

Further details of these results are contained in the Finance Director's Review.

TRADING

As the July update made clear, the Group has faced numerous challenges presented by the global outbreak of COVID-19 and this is reflected in these results. The decision to favour cash generation over profit in 2020 has been highly successful in not only protecting but building further headroom in our committed bank facilities to just under GBP1.2 billion, with cash in hand of a further GBP339 million. It was a significant achievement by our businesses to generate over GBP200 million of cash, before restructuring spend, in this Period.

As we announced on 4 August, an agreement has been reached with our banking syndicate to amend our banking facilities to reset the financial covenants for a further two years, which will provide us with the time and the flexibility to make the changes needed to create value in our businesses. Once again, we thank them for their support.

This balance sheet strength has allowed us to commence the reshaping of our businesses according to their new market realities and good progress has been made already. Managing significant reorganisations against difficult market backdrops has always been part of the fundamental Melrose skill set. We demonstrated this with the FKI acquisition at the time of the 2008 financial crisis and we are confident of doing this again with the GKN businesses.

While GKN businesses are focused on reorganisations, Nortek Air Management has navigated the challenges of the first half very successfully. The delivery of their market leading StatePoint cooling systems is on track and is generating significant interest in their wider data centre applications, boosting their pipeline of projects. We are excited about their potential. The Board will review strategic options for this business in early 2021.

Pleasingly, trading for our Automotive, Powder Metallurgy and key Nortek Air Management businesses since the end of the Period has been at the higher end of our expectations, with the USA and China continuing to show recovery and Europe also improving. Whilst we cannot be certain this will continue the signs are currently positive. Unfortunately, GKN Aerospace is yet to see the same positive signs of improved trading since the end of the Period.

The Chief Executive's Review provides greater detail on the Group's trading for the Period.

DIVID

Your Board is very aware of the importance of dividends to shareholders. Indeed your directors are significant shareholders themselves. However, the Board concluded it was not appropriate to pay a final dividend for 2019 in May and considers it inappropriate to pay an interim dividend for 2020. We trust that shareholders will appreciate the importance of retaining cash within the Group to ensure net debt is kept under control whilst also funding the necessary restructuring of the Group to position it for the future.

BOARD MATTERS

Co-founder and executive vice chairman David Roper was due to retire in May 2020, but agreed to postpone this to assist the Company in navigating successfully through the COVID-19 crisis. From 1 January 2021, Peter Dilnot, who has made a valuable contribution since joining Melrose in April last year, will join the Board as an Executive Director. We thank David for his ongoing support and congratulate Peter on his appointment.

As expected, the 2017 Long-Term Incentive Scheme which crystallised in May was severely impacted by the COVID-19 crisis and resulted in no award for participants for the three year period despite being on track to do so. In addition, and despite firm support from shareholders, the Board withdrew the replacement 2020 scheme in the face of the uncertainty created by the crisis. With the beginnings of some stability, the Remuneration Committee intends to consult with shareholders on what changes are necessary to the 2020 Incentive Scheme for it to be put into place before the end of the year.

STRATEGY

The Melrose "Buy, Improve, Sell" strategy, already proven to be highly effective during the last global crisis, remains the same. We buy high quality underperforming manufacturing businesses and invest in making them stronger, better businesses for the benefit of all stakeholders, whilst delivering good returns for shareholders. We believe our model will once again deliver in the challenging circumstances of COVID-19 and we are excited about the opportunity to be able to demonstrate this.

OUTLOOK

The first half of 2020 presented unique challenges for the Group and decisive actions were taken quickly to respond. With the support of our banks, shareholders and employees, we have been successful in positioning our Group to emerge well from the crisis. Organically, we see some early signs of recovery in certain geographies, although GKN Aerospace will continue to experience market uncertainty. During the second half of 2020 we will continue to invest in our businesses to build for 2021 and future years. We also expect that 2021, and beyond, are likely to bring acquisition opportunities.

Justin Dowley

Chairman

3 September 2020

CHIEF EXECUTIVE'S REVIEW

Until March this year, our businesses continued their strong performance from 2019, with significant operational and financial improvement made, notably within the GKN businesses. Unfortunately this progress was then severely disrupted by the global outbreak of COVID-19 as governments across the world implemented unprecedented social and economic restrictions in an attempt to halt the pandemic. We were inevitably affected by these constraints and as a result Group revenues for this period were down 27% compared with last year. While these restrictions are at the time of writing beginning to ease, there remains a lot of uncertainty as to the speed and timing of any recovery and different industries will recover at different rates.

Against this challenging backdrop, the Group was quick to implement decisive cash preservation measures and cost controls to mitigate the impact of the disruption caused by COVID-19. These decisive measures included, an intense focus on reducing and aligning working capital with reduced sales, rescheduling capital expenditure and longer-term restructuring projects, and reducing operating costs. The actions taken have been highly successful in ensuring the Group generated gross cash of over GBP200 million (before restructuring costs) during this period and not only maintained, but grew its facility headroom to just under GBP1.2 billion as at 30 June 2020.

This involved an outstanding effort by our business unit operational teams and we thank them and all employees for their hard work, as they continue to implement their improvement plans. These actions will be monitored and bolstered during the second half of the year.

In spite of the unprecedented disruption of COVID-19, we are confident that our high quality businesses will deliver good returns for investors. To achieve this, we must adapt the businesses to meet the demands of the new economic environment and continue to focus on cost reduction throughout the Group. Early measures to protect the balance sheet have proved successful and, we are making significant progress in our efforts to reduce costs. Assuming the withdrawal of worldwide government support schemes and furlough takes place as scheduled, we estimate that these cost measures will have a net beneficial contribution to the Group of over GBP100 million in 2021. An important factor in achieving this has been the agreed amendments to our banking facilities announced on 4 August 2020. We thank our bank syndicate for their unanimous and swift support.

However, and very importantly, while the major focus in the current environment is naturally on cost reduction, we are protecting investment in R&D and continue to develop world leading technologies. Aerospace is investing in ground-breaking technologies for both electric and hydrogen powered aircraft. Automotive pressed ahead with its investment in eDrive auto systems and has produced its millionth eDrive unit. Powder Metallurgy has further developed its 3D printing capability including the acquisition of Forecast 3D. Nortek Air Management continues to deliver its revolutionary StatePoint Technology(R), achieving important milestones during the Period, as well as developing a strong demand pipeline in the data centre sector based on its technology leadership. Further development of these and other exciting projects are key to the successful development of the Group.

Your Board will review the strategic future of Nortek Air Management in the early part of next year.

Included below are further trading updates for each of the divisions.

AEROSPACE

In line with the wider aerospace sector, overall sales for GKN Aerospace declined 18% compared to the same period last year. A sales reduction of approximately 25-30% is expected for the full year, with the business broadly breaking even. While operating margins remained in line with targets until mid-March 2020, Civil Airframe and Engines experienced a sharp decline for the rest of the Period prompted by COVID-19 travel restrictions. The impact of this was partially offset by comparatively stronger performance in Defence, where sales grew compared to the same period last year.

Having ensured the strength of its balance sheet, GKN Aerospace management are currently implementing a decisive and wide ranging programme to address the impact of the business disruption caused by COVID-19. Initially focused on strict cash management measures, it is now undertaking a substantial reduction of its cost structure to enable an improved performance in 2021 without reliance on sales returning. Consultations are already well underway with employees and unions worldwide and regrettably a significant reduction in the worldwide workforce is inevitable in the second half of the year. We will report further on this at the year end when substantial progress on this restructuring will have been made. Your Board believes that this division can be returned to a better performance next year.

Despite the disruption of COVID-19, GKN Aerospace continued to implement its previously announced 'One Aerospace' global organisational design plan, to accelerate the improvement of its historically fragmented structure and to serve its global customer base more efficiently, with improved and better integrated commercial and technology offerings. GKN Aerospace has also sought to retain its skills and technology leadership positions through continued R&D investment during the Period.

Moving into the second half of 2020, current market trends are anticipated to persist for Civil Airframe and Engines, but are expected to be partially offset by a comparatively strong Defence sector. Whilst the next 12-18 months in particular are likely to be challenging, there is much that can be done to improve this world leading business further. Whilst medium-term operating margin targets do need to be adjusted as further detailed in the investor presentation, over time there is the opportunity for substantial improvement of this business. Your Board believes future opportunities will present themselves for organic and acquisition-led growth.

AUTOMOTIVE

During the Period, GKN Automotive continued to face market challenges, which were compounded by the initial impact of COVID-19 in China at the beginning of the year, followed by subsequent restrictions, temporary factory closures and disruption across Europe and North America.

Overall sales declined 37% compared to the same period last year, in line with core markets. However, early signs from sales in the second half are indicating that the recovery may be faster than previously predicted, especially in certain regions. China is currently ahead of last year and in the US, sales are only marginally below prior year levels. Europe is proving a bit slower to recover, but there are nonetheless some encouraging signs.

From the outset of 2020, GKN Automotive was already responding to market challenges by implementing measures to control its costs and working capital to limit the impact of declining sales on its profitability during the first half of 2020. The continuation of these 2019 actions enabled an agile operational flex down and associated cost reduction actions to soften the initial impact of the abrupt decline in sales caused by COVID-19. Your Board believes that this business should still be able to achieve the operating margin targets set for it at acquisition.

Operating cash flow was positive during the first half of 2020 which enabled GKN Automotive to continue its strategic investments in eDrive programmes and achieve further operational improvements. It is expected that continued investment in green technologies and pursuing the launch of five new integrated eDrive systems, will remain the division's core focus during the second half of 2020.

Whilst it is not possible to be certain, there are encouraging signs of recovery in this division and your Board is confident that its management team will continue improving this business.

Existing travel restrictions mean that the Automotive Investor Day in New York, intended to be held in October 2020, will be rescheduled.

POWDER METALLURGY

GKN Powder Metallurgy was similarly affected by the continuing market challenges in the automotive sector and the initial impact of COVID-19 in China. Following the temporary shutdown of certain factories across Europe and North America from mid-March, by late April many of those factories were steadily reopening. Overall, sales declined 32% compared to the same period last year, but this division is now seeing the same indications of recovery as GKN Automotive.

GKN Powder Metallurgy responded quickly to the impacts of COVID-19, shifting its focus to tight management of cash, costs, capital expenditure and working capital. Operating costs were reduced by the prompt implementation of shorter working time arrangements and furlough schemes, with a realignment of indirect and fixed labour costs to production activity levels. This was supplemented by the rationalisation of raw materials, WIP and finished goods to reduce stock levels by 30% during the Period.

Market uncertainties are expected to continue into the second half of 2020, but there is currently a clear rebound in China and North America and signs of recovery in Europe. Strong measures taken to control costs in the first half with plans for further cuts in the second half, are expected to position the division to navigate any challenges that lie ahead. The business should also be in a good position to benefit from what is likely to be a further period of consolidation in its sector, and it is expected this business will still in time be able to achieve its operating margin target.

NORTEK AIR MANAGEMENT

Nortek Air Management includes the Nortek Global HVAC ("HVAC") and Air Quality & Home Solutions ("AQH") segments, representing a range of world class products spanning custom and commercial air solutions for high-performance environments, residential and commercial HVAC and fresh air ventilation systems. It is uniquely poised to capture the growth opportunities in each of its key sectors alongside the significant pent-up demand in its large addressable markets.

The performance of HVAC during the Period has been strong considering the economic backdrop, and has proven the resilience of the business, the robustness of its underlying sector tailwinds, and its market leadership. In the first half, HVAC management focused on future growth for the business, whilst also protecting the cost base and minimising the impact of COVID-19.

Management is focused on the continued development of new sustainable innovations that address important global trends such as air quality, energy reduction and water efficiency. Having successfully commercialised its StatePoint Technology(R), which offers a potentially exponential growth lever to complement the core HVAC and AQH offerings, the HVAC business has now moved into the production phase of hyperscale data centre projects and has significantly increased its pipeline of new data centre opportunities. The business' substantial investment in R&D, product development and technology mean it is extremely well positioned to continue gaining market share.

Reassuringly, the rest of HVAC's businesses have also demonstrated their strength during the crisis. The air handling business has performed well given the market backdrop, continuing to execute on its strong backlog with mission critical customers and leveraging the strength of its local relationships to win share in new construction and retrofit projects. The Residential business is now recovering following the initial downward impact of COVID-19. HVAC has seen month-over-month improvements as distributors have taken steps to replenish inventories to supply pent-up demand from homeowners.

AQH started 2020 with momentum from recent product introductions and recovering housing markets in the USA and Canada. That momentum inevitably slowed as a result of certain retailer and distributor closures in the second quarter. Sales were hardest hit in April and have improved in each month of the Period since. AQH quickly implemented strict cost control measures to minimise the impact of the pandemic and continued to optimise production efficiencies.

Overall, the Period has proven the robustness and criticality of Nortek Air Management's products, particularly those ensuring optimal ventilation and air quality in commercial and residential buildings. Furthermore there exist additional opportunities to further expand margins and deliver significant incremental value creation in years to come. We are highly encouraged by the business' relative performance through the crisis and excited about the prospects of its market leading technologies.

OTHER INDUSTRIAL

Most of the Other Industrial businesses, comprising Brush, Security & Smart Technology ("SST") and Ergotron, demonstrated resilience to the global challenges presented by the COVID-19 pandemic, underpinned by supporting macro trends.

Despite the challenges of COVID-19, Brush has continued to invest in product development across all of its businesses, including broadening its product range in Switchgear and enhancing its Turbogenerators product portfolio. Operationally, Brush has taken proactive measures to control costs, supplemented by tight working capital and cash management initiatives, so that it is emerging a stronger and more agile business. Its significant order backlog is built on a more diversified customer base across a broad range of traditional and emerging end-markets. The business remains confident of a strong performance from its current base in 2020, tempered by the inevitable challenges of COVID-19.

With its end-user markets generally requiring physical attendance of professional installers onsite, a practice which has been heavily restricted during the crisis, SST has seen a significant economic impact from COVID-19, resulting in a sales decline of 31%. However, with the easing of global lockdown restrictions, trading began to improve at the end of the second quarter, and the business is focused on driving that momentum forward into the second half of 2020 to build a longer-term growth trajectory, backed by launches of several key product platform updates.

While Ergotron sales were down compared to last year, this masked a varied experience across its segments. The Healthcare segment benefited strongly from increased hospital demand and there was also good progress in the strategically targeted Asia Pacific region. These were offset by the negative impact of US national lockdown measures on demand for the Office segment, where resellers' activity essentially came to a halt from mid-March until June. Whilst the second half of 2020 will no doubt present some challenges, the business will continue to pursue several growth platforms, including new product launches and improved cost positioning to offset market headwinds, and is optimistic about continuing to take market share in the Healthcare segment.

Simon Peckham

Chief Executive

3 September 2020

FINANCE DIRECTOR'S REVIEW

The Group's trading conditions and results in the six months ended 30 June 2020 have been significantly disrupted by the worldwide impact of COVID-19, with factories in the Automotive and Powder Metallurgy businesses temporarily shut in the second quarter of the year and many factories in the other divisions operating under significantly reduced demand. As a consequence the Group's results are substantially lower than the same period last year.

MELROSE GROUP RESULTS - CONTINUING OPERATIONS

Statutory results:

The statutory IFRS results are shown on the face of the Income Statement and show revenue of GBP4,121 million (2019: GBP5,573 million), an operating loss of GBP581 million (2019: profit of GBP8 million) and a loss before tax of GBP685 million (2019: loss of GBP109 million). The diluted earnings per share ("EPS"), calculated using the weighted average number of shares in issue during the period of 4,858 million (2019: 4,858 million), were a loss of 11.5 pence (2019: loss of 2.8 pence).

Adjusted results:

The adjusted results are also shown on the face of the Income Statement. They are adjusted to include the revenue and operating profit from equity accounted investments ("EAIs") and to exclude certain items which are significant in size or volatility or by nature are non-trading or non-recurring, or are items released to the Income Statement that were previously a fair value item booked on an acquisition. It is the Group's accounting policy to exclude these items from the adjusted results, which are used as an Alternative Performance Measure ("APM") as described by the European Securities and Markets Authority ("ESMA"). APMs used by the Group are defined in the glossary to the Condensed Interim Financial Statements.

The Melrose Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as they achieve consistency and comparability between reporting periods when all businesses are held for the complete reporting period.

The adjusted results for the period ended 30 June 2020 show revenue of GBP4,359 million (2019: GBP5,875 million), an operating profit of GBP56 million (2019: GBP541 million) and a loss before tax of GBP40 million (2019: profit of GBP431 million). Adjusted diluted EPS were a loss of 0.7 pence (2019: profit of 6.8 pence).

Tables summarising the statutory results and adjusted results by reportable segment are shown in note 3 of the Condensed Interim Financial Statements.

RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS

The following tables reconcile the Group statutory revenue and operating (loss)/profit to adjusted revenue and adjusted operating profit:

 
 
                                               2020   2019 
 Continuing operations:                        GBPm   GBPm 
-------------------------------------------  ------  ----- 
 Statutory revenue                            4,121  5,573 
-------------------------------------------  ------  ----- 
 
 Adjusting item: 
-------------------------------------------  ------  ----- 
 Revenue from equity accounted investments      238    302 
-------------------------------------------  ------  ----- 
 
 Adjusted revenue                             4,359  5,875 
-------------------------------------------  ------  ----- 
 

Adjusting revenue item:

The Group has some investments in businesses in which it does not hold full control (EAIs), the largest of which is a 50% interest in Shanghai GKN HUAYU Driveline Systems ("SDS"), within the Automotive business. During the period ended 30 June 2020, EAIs in the Group generated GBP238 million of revenue (2019: GBP302 million), which is not included in the statutory results but is shown within adjusted revenue so as not to distort the operating margins reported in the businesses when the adjusted operating profit from these EAIs is included.

 
                                                      2020   2019 
 Continuing operations:                               GBPm   GBPm 
--------------------------------------------------  ------  ----- 
 Statutory operating (loss)/profit                   (581)      8 
--------------------------------------------------  ------  ----- 
 
 Adjusting items: 
--------------------------------------------------  ------  ----- 
 Amortisation of intangible assets acquired in 
  business combinations                                263    268 
--------------------------------------------------  ------  ----- 
 Write down of assets                                  179    179 
--------------------------------------------------  ------  ----- 
 Restructuring costs                                    99     74 
--------------------------------------------------  ------  ----- 
 Currency movements in derivatives and movements 
  in associated financial assets and liabilities        89     13 
--------------------------------------------------  ------  ----- 
 Other                                                   7    (1) 
--------------------------------------------------  ------  ----- 
 
 Adjustments to statutory operating (loss)/profit      637    533 
--------------------------------------------------  ------  ----- 
 
 Adjusted operating profit                              56    541 
--------------------------------------------------  ------  ----- 
 

Adjusting items to operating (loss)/profit are consistent with prior periods and include:

The amortisation charge on intangible assets acquired in business combinations of GBP263 million (2019: GBP268 million), which is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. However, where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not excluded from adjusted results.

The write down of assets in the period of GBP179 million, recognised as a result of the impact of COVID-19, of which GBP133 million was within the Aerospace division. The ultimate impact of the COVID-19 pandemic is unclear, and the measurement of its impact required a review of the operating assets of the Group, with a significant degree of estimation. This review resulted in GBP153 million of fixed assets and GBP26 million of other net operating assets being written down across certain sites within the businesses, as they adapt to new levels of industry demand. The write down of these assets is shown as an adjusting item due to the unprecedented nature of the COVID-19 pandemic, its non-trading nature and size. The charge of GBP179 million, recognised in 2019, related to impairment of goodwill allocated to the Security & Smart Technology group of CGUs.

Restructuring and other associated costs in the period totalling GBP99 million (2019: GBP74 million), shown as adjusting items due to their size and non-trading nature and during the period ended 30 June 2020 they included:

-- GBP43 million (2019: GBP26 million) relating to the Aerospace division including costs incurred as the business takes its initial steps to substantially reduce its cost structure following the impact of COVID-19 on the aerospace industry; as well as the continuation of its global integration to create "One Aerospace", ensuring the business is well positioned and able to react to changes in its new environment.

-- GBP25 million (2019: GBP14 million) of costs within the Automotive division, incurred as the business continues to address its high cost base, inherited on acquisition, and best position the business as it begins its recovery post COVID-19.

-- GBP23 million (2019: GBP5 million) of restructuring costs in the Powder Metallurgy division as it continues footprint consolidation actions which began in 2019, along with additional focus on reducing its fixed cost base to realign the business for future demand.

-- A charge of GBP8 million (2019: GBP29 million) within the Nortek Air Management, Other Industrial and Corporate divisions, primarily relating to the completion of a factory consolidation within the HVAC business and the finalisation of the changes made in the Security & Smart Technology business to move to a third party contract manufacturing model.

Movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts where hedge accounting is not applied) entered into within the GKN businesses to mitigate the potential volatility of future cash flows, on long-term foreign currency customer and supplier contracts, along with foreign exchange movements on the associated financial assets and liabilities. This totalled a charge of GBP89 million (2019: GBP13 million) in the period and is shown as an adjusting item because of its volatility and size.

Other adjusting items include: acquisition and disposal related charges of GBP4 million (2019: credit of GBP4 million), excluded from adjusted results due to their non-trading nature; the charge for the Melrose equity-settled Incentive Scheme, including its associated employer's tax charge, of GBP1 million (2019: GBP7 million), excluded from adjusted results due to its volatility; an adjustment of GBP14 million (2019: GBP14 million) to gross up the post-tax profits of EAIs to be consistent with the adjusted operating profits of subsidiaries within the Group; and the net release of fair value items totalling GBP12 million (2019: GBP18 million), shown as an adjusting item to avoid positively distorting adjusted results.

GOODWILL AND IMPAIRMENT REVIEW

The Group's goodwill and intangible assets have been tested for impairment as at 30 June 2020, and in accordance with IAS 36 "Impairment of assets" the recoverable amount has been assessed as being the higher of the fair value less costs to sell and the value in use.

Under IAS 36, the value in use basis for calculating the recoverable amount prohibits the inclusion of future uncommitted restructuring plans as at the balance sheet date, whilst the fair value less costs to sell basis of valuation allows the inclusion of these plans if it is deemed that a market participant would also restructure.

With the future benefits of restructuring projects currently forming a material part of valuations for businesses, because they will have to substantially reduce their cost structure to align with the new levels of demand post COVID-19, the fair value less costs to sell basis gives the higher valuation at this point in time and therefore in accordance with IAS 36, has been used in assessing the recoverable amount for the Melrose businesses.

Sensitivity analysis and increased disclosures have been provided in note 14 to these Condensed Interim Financial Statements for the Aerospace, Automotive Driveline, Powder Metallurgy and Security & Smart Technology businesses, being the businesses showing the tightest headroom at 30 June 2020.

Whilst the headroom on impairment testing has inevitably reduced in the period, the Board is comfortable that no impairment is required in respect of the valuation of goodwill and intangible assets in its businesses as at 30 June 2020. The Group's goodwill and intangible assets will continue to be monitored and retested at 31 December 2020.

TAX - CONTINUING OPERATIONS

The statutory results for the period show a tax credit of GBP125 million (2019: charge of GBP22 million), arising on a statutory loss before tax of GBP685 million (2019: loss of GBP109 million), a blended statutory tax rate of 18%. The Group paid GBP8 million (2019: GBP79 million) of tax in the period.

CASH GENERATION AND MANAGEMENT

Following the realisation that COVID-19 was likely to have a significant impact on the global economy, and in particular the end markets in which the Melrose businesses operate, robust cash management was set as the top commercial priority for the Group this year with comprehensive cash preservation actions being successfully implemented in each business.

As a result of these strong cash management initiatives, an adjusted free cash inflow of GBP213 million before restructuring spend (2019: GBP269 million before restructuring spend and one-off special contributions to defined benefit pension plans) was achieved in the period.

An analysis of the adjusted free cash flow is shown in the table below:

 
                                                         2020   2019 
                                                         GBPm   GBPm 
-----------------------------------------------------  ------  ----- 
 Adjusted operating profit                                 56    541 
-----------------------------------------------------  ------  ----- 
 Adjusted operating profit from EAIs                     (21)   (30) 
-----------------------------------------------------  ------  ----- 
 Depreciation and amortisation                            252    243 
-----------------------------------------------------  ------  ----- 
 Lease obligation payments                               (38)   (32) 
-----------------------------------------------------  ------  ----- 
 Positive non-cash impact from loss-making contracts     (31)   (45) 
-----------------------------------------------------  ------  ----- 
 Working capital movements                                251   (59) 
-----------------------------------------------------  ------  ----- 
 Adjusted operating cash flow (pre-capex)                 469    618 
-----------------------------------------------------  ------  ----- 
 Net capital expenditure                                (174)  (231) 
-----------------------------------------------------  ------  ----- 
 Net interest and net tax paid                           (73)  (159) 
-----------------------------------------------------  ------  ----- 
 Defined benefit pension contributions                   (43)  (111) 
-----------------------------------------------------  ------  ----- 
 Restructuring                                           (95)   (90) 
-----------------------------------------------------  ------  ----- 
 Dividend income from equity accounted investments         27     67 
-----------------------------------------------------  ------  ----- 
 Net other                                                  7    (9) 
-----------------------------------------------------  ------  ----- 
 Free cash flow                                           118     85 
-----------------------------------------------------  ------  ----- 
 
 Adjusted free cash flow                                  213    269 
-----------------------------------------------------  ------  ----- 
 

Net working capital was reduced by GBP251 million in the first half of the year (2019: increase of GBP59 million), along with net capital expenditure in the period being cut to GBP174 million (2019: GBP231 million), representing 0.8x depreciation of owned assets.

Net interest paid in the period was GBP65 million (2019: GBP80 million), tax payments were GBP8 million (2019: GBP79 million) and ongoing contributions to defined benefit pension schemes were GBP43 million (2019: GBP111 million, which included a special contribution of GBP94 million).

Free cash flow in the period, after restructuring spend of GBP95 million (2019: GBP90 million), was an inflow of GBP118 million (2019: GBP85 million).

The movement in net debt (as defined in the glossary to the Condensed Interim Financial Statements) is summarised as follows:

 
                                                         2020     2019 
                                                         GBPm     GBPm 
---------------------------------------------------  --------  ------- 
 At 1 January                                         (3,283)  (3,482) 
---------------------------------------------------  --------  ------- 
 Non-trading items: 
---------------------------------------------------  --------  ------- 
 Net cash flow from disposal and acquisition 
  related activities                                     (25)      157 
---------------------------------------------------  --------  ------- 
 Dividend paid to Melrose shareholders                      -    (148) 
---------------------------------------------------  --------  ------- 
 Foreign exchange and other non-cash movements          (209)     (41) 
---------------------------------------------------  --------  ------- 
 Discontinued operations                                    -     (25) 
---------------------------------------------------  --------  ------- 
 Cash flow from non-trading items and discontinued 
  operations                                            (234)     (57) 
---------------------------------------------------  --------  ------- 
 
 Free cash flow                                           118       85 
---------------------------------------------------  --------  ------- 
 At 30 June at closing exchange rates                 (3,399)  (3,454) 
---------------------------------------------------  --------  ------- 
 
 At 30 June at twelve month average exchange 
  rates                                               (3,330)  (3,404) 
---------------------------------------------------  --------  ------- 
 

Group net debt at 30 June 2020, translated at closing exchange rates (being US $1.24 and EUR1.10), was GBP3,399 million (31 December 2019: GBP3,283 million).

The movement in net debt during the period consisted of a free cash inflow of GBP118 million, being more than offset by GBP25 million of spend on acquisition related activities, primarily relating to the acquisition of FORECAST 3D in the Powder Metallurgy division, and a GBP209 million increase to net debt in respect of foreign exchange and other non-cash movements.

For bank covenant purposes the Group's net debt is calculated at average exchange rates for the previous twelve months, to better align the calculation with the currency rates used to calculate profits, and was GBP3,330 million. The Group net debt leverage on this basis at 30 June 2020 was 3.4x EBITDA (31 December 2019: 2.3x EBITDA).

PROVISIONS

Total provisions at 30 June 2020 were GBP1,108 million (31 December 2019: GBP1,087 million).

The following table details the movement in provisions in the period:

 
                                                                 Total 
                                                                  GBPm 
---------------------------------------------------------------  ----- 
 At 1 January 2020                                               1,087 
---------------------------------------------------------------  ----- 
 Spend against provisions                                        (142) 
---------------------------------------------------------------  ----- 
 Net charge to adjusted operating profit                            52 
---------------------------------------------------------------  ----- 
 Net charge shown as an adjusting item in the Income Statement      78 
---------------------------------------------------------------  ----- 
 Utilisation of loss-making contract provision                    (31) 
---------------------------------------------------------------  ----- 
 Other (including foreign exchange)                                 64 
---------------------------------------------------------------  ----- 
 At 30 June 2020                                                 1,108 
---------------------------------------------------------------  ----- 
 

The net charge to adjusted operating profit in the period of GBP52 million, includes GBP5 million in respect of certain non-cash divisional long-term incentive plan charges. The remainder is primarily in respect of warranty, product liability and workers' compensation charges which are matched by similar cash payments in the period.

The net charge shown as an adjusting item in the Income Statement of GBP78 million, includes charges of GBP89 million related to restructuring activities discussed in the adjusting items section of this review. These are partly offset by a net release of GBP7 million related to loss-making contracts.

During the period GBP95 million of cash was spent on restructuring.

Included within Other are foreign exchange movements of GBP56 million, the unwind of discounting on certain provisions of GBP7 million and the provisions acquired with FORECAST 3D in the period totalling GBP1 million.

PENSIONS AND POST-EMPLOYMENT OBLIGATIONS

At 30 June 2020 total plan assets of the Melrose Group's defined benefit pension plans were GBP3,693 million (31 December 2019: GBP3,412 million) and total plan liabilities were GBP4,855 million (31 December 2019: GBP4,533 million), a net deficit of GBP1,162 million (31 December 2019: GBP1,121 million), a reduction in the net deficit at constant currency.

The most significant pension schemes in the Group are the GKN UK schemes, with a net accounting deficit of GBP409 million at 30 June 2020 (31 December 2019: GBP423 million). The plans had gross assets of GBP3,027 million (31 December 2019: GBP2,785 million) and liabilities of GBP3,436 million (31 December 2019: GBP3,208 million).

The values of the Group plans were updated at 30 June 2020 by independent actuaries to reflect the latest key assumptions. A summary of the assumptions used are shown in note 12 to the Condensed Interim Financial Statements.

Contributions to the Melrose Group defined benefit pension plans and post-employment medical plans in the period were GBP43 million.

EXCHANGE RATES USED IN THE PERIOD

Exchange rates used for currencies most relevant to the Group in the period were:

 
 
                                       Average   Closing 
 US Dollar                                rate      rate 
-----------------------------------  ---------  -------- 
 Six months to 30 June 2020               1.26      1.24 
-----------------------------------  ---------  -------- 
 Twelve months to 31 December 2019        1.28      1.33 
-----------------------------------  ---------  -------- 
 Six months to 30 June 2019               1.29      1.27 
-----------------------------------  ---------  -------- 
 
 Euro 
-----------------------------------  ---------  -------- 
 Six months to 30 June 2020               1.14      1.10 
-----------------------------------  ---------  -------- 
 Twelve months to 31 December 2019        1.14      1.18 
-----------------------------------  ---------  -------- 
 Six months to 30 June 2019               1.15      1.12 
-----------------------------------  ---------  -------- 
 
 

The Group policy on foreign currency risk is explained on pages 43 and 44 of the 2019 Annual Report, a copy of which is available on the Company's website, www.melroseplc.net .

Noting recent movements in exchange rates, the following table shows an indication of a full year impact of a 10 percent strengthening of the major currencies, if they were to strengthen in isolation against all other currencies, on the re-translation of adjusted operating profit into Sterling:

 
 GBPm                              USD   EUR   CNY   Other 
--------------------------------  ----  ----  ----  ------ 
 Movement in adjusted operating 
  profit                            43     6     7       5 
--------------------------------  ----  ----  ----  ------ 
 % impact on adjusted operating 
  profit                            7%    1%    1%      1% 
--------------------------------  ----  ----  ----  ------ 
 

The impact from transactional foreign exchange exposures is not material in the short-term due to hedge coverage being approximately 90%.

A 10 percent strengthening in either the US Dollar or Euro would result in a partial natural hedge against the translational movement in profits and would have had the following impact on debt as at 30 June 2020:

 
 GBPm                  USD   EUR 
------------------    ----  ---- 
 Increase in debt      210    87 
--------------------  ----  ---- 
 

FINANCIAL RISKS AND UNCERTAINTIES

The principal financial risks and uncertainties faced by the Group include: liquidity risk; finance cost risk; exchange rate risk; contract and warranty risk; and commodity cost risk and are explained in detail on pages 43 and 44 of the 2019 Annual Report. Further explanations and details of the strategic risk profile of the Group, which includes non-financial risk, are set out on pages 48 to 55 of the 2019 Annual Report.

Following the impact of COVID-19 on the Group businesses and their end markets, the liquidity of the Group has been a key focus in the period.

LIQUIDITY AND COVENANT COMPLIANCE

The Group's net debt position at 30 June 2020 was GBP3,399 million (31 December 2019: GBP3,283 million).

The Group's committed bank funding includes: a multi-currency denominated term loan of GBP100 million and US$960 million that matures in April 2021, with the option at the Company's request to extend the loan for a further three years to April 2024; and a multi-currency denominated revolving credit facility of GBP1.1 billion, US$2.0 billion and EUR0.5 billion that matures in January 2023.

As at 30 June 2020, the term loan was fully drawn and there remains a significant amount of headroom on the multi-currency committed revolving credit facility. Applying the exchange rates at 30 June 2020, the headroom equated to GBP1,174 million.

In addition to the headroom on the multi-currency committed revolving credit facility, cash, deposits and marketable securities in the Group amounted to GBP339 million at 30 June 2020 (31 December 2019: GBP317 million).

The Group also holds capital market borrowings as at 30 June 2020 consisting of:

 
                                                        Interest rate 
                    Notional           Cross-currency              on 
                      amount   Coupon           swaps           swaps 
 Maturity date          GBPm   % p.a.         million          % p.a. 
----------------  ----------  -------  --------------  -------------- 
 September 2022          450   5.375%          US$373           5.70% 
                                               EUR284           3.87% 
----------------  ----------  -------  --------------  -------------- 
 May 2032                300   4.625%             n/a             n/a 
----------------  ----------  -------  --------------  -------------- 
 

The committed bank funding has two financial covenants, being a net debt to adjusted EBITDA covenant and an interest cover covenant, both of which are normally tested half-yearly in June and December.

During the period the Group agreed, with its lending banks, a waiver for its net debt to adjusted EBITDA covenant test as at 30 June 2020 and 31 December 2020. Furthermore, since 30 June 2020, the Group has extended this waiver to cover the test at 30 June 2021 and negotiated a test covenant level of 5.25x at 31 December 2021; 4.75x at 30 June 2022; and 4.0x at 31 December 2022, before returning to 3.5x at 30 June 2023 and onwards.

The interest cover was 6.9x at 30 June 2020, compared to a covenant set at 4.0x (31 December 2019: 10.8x). Subsequent to 30 June 2020 the Group has negotiated a change to the interest cover covenant test such that at 31 December 2020 the test is set at 2.5x; 3.0x at 30 June 2021 and 31 December 2021; and 3.25x at 30 June 2022, before returning to 4.0x from 31 December 2022 onwards.

GOING CONCERN

As part of their consideration of going concern, the Directors have reviewed the Group's future cash forecasts and profit projections, which are based on market and internal data and recent past experience. Given the global political and economic uncertainty resulting from the COVID-19 pandemic, it is difficult to estimate with precision the impact on the Group's prospective financial performance.

The Group has modelled a reasonably possible downside scenario against these future cash forecasts and throughout this scenario the Group would not breach any of the revised financial covenants and would not require any additional sources of financing.

The long-term impact of COVID-19 remains uncertain and the impacts of the pandemic on trading conditions could be more prolonged or severe than that which the Directors have considered in this reasonably possible scenario.

However, the Group's current committed bank facility headroom, its access to liquidity, and the sensible levels of bank covenants recently agreed with the Group's supportive lending banks, allow the Directors to consider it appropriate that the Group can manage its business risks successfully and adopt a going concern basis in preparing these Condensed Interim Financial Statements .

Geoffrey Martin

Group Finance Director

3 September 2020

CAUTIONARY STATEMENT

This announcement contains forward-looking statements. These statements are made in good faith based on the information available up to the time of the approval of this announcement, and should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Accordingly, readers are cautioned not to place undue reliance on any such forward-looking statements. Subject to compliance with applicable laws and regulations, the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this announcement.

This announcement has been prepared solely to provide information to shareholders to assess the Company's strategies and the potential for those strategies to succeed, and neither the Company nor its directors accept any liability to any other person save as would arise under English law.

RESPONSIBILITY STATEMENT

We confirm to the best of our knowledge:

a) the condensed financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting";

b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events and their impact, and description of principal risks and uncertainties for the remaining six months of the financial year); and

c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

   Simon Peckham                                                                     Geoffrey Martin 

Chief Executive Group Finance Director

   3 September 2020                                                                   3 September 2020 

INDEPENT REVIEW REPORT TO MELROSE INDUSTRIES PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of cash flows, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity and related notes 1 to 14. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Use of our report

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, United Kingdom

3 September 2020

Melrose Industries PLC

Condensed Consolidated Income Statement

 
                                                                Restated 
                                                                     (1) 
                                                    6 months    6 months 
                                                       ended       ended     Year ended 
                                                     30 June     30 June    31 December 
                                                        2020        2019           2019 
                                                   Unaudited   Unaudited        Audited 
Continuing operations                      Notes        GBPm        GBPm           GBPm 
---------------------------------------  -------  ----------  ----------  ------------- 
 
Revenue                                     3          4,121       5,573         10,967 
Cost of sales                                        (3,586)     (4,456)        (8,732) 
---------------------------------------  -------  ----------  ----------  ------------- 
 
Gross profit                                             535       1,117          2,235 
 
Share of results of equity accounted 
 investments                                8              7          16             38 
Net operating expenses                               (1,123)     (1,125)        (1,955) 
---------------------------------------  -------  ----------  ----------  ------------- 
 
Operating (loss)/profit                    3,4         (581)           8            318 
 
 
Finance costs                                          (105)       (126)          (221) 
Finance income                                             1           9              9 
 
(Loss)/profit before tax                               (685)       (109)            106 
Tax                                         5            125        (22)           (51) 
---------------------------------------  -------  ----------  ----------  ------------- 
 
(Loss)/profit after tax for the period 
 from continuing operations                            (560)       (131)             55 
 
 
Discontinued operations 
Loss for the period from discontinued 
 operations                                 9            (8)        (34)          (106) 
---------------------------------------  -------  ----------  ----------  ------------- 
 
Loss after tax for the period                          (568)       (165)           (51) 
---------------------------------------  -------  ----------  ----------  ------------- 
 
Attributable to: 
 
Owners of the parent                                   (569)       (168)           (60) 
Non-controlling interests                                  1           3              9 
---------------------------------------  -------  ----------  ----------  ------------- 
 
                                                       (568)       (165)           (51) 
 
 
Earnings per share 
 Continuing operations 
  - Basic                                   6        (11.5)p      (2.8)p           0.9p 
  - Diluted                                 6        (11.5)p      (2.8)p           0.9p 
 
Continuing and discontinued operations 
  - Basic                                   6        (11.7)p      (3.4)p         (1.2)p 
  - Diluted                                 6        (11.7)p      (3.4)p         (1.2)p 
 
Adjusted results from continuing 
 operations 
 
Adjusted revenue                            3          4,359       5,875         11,592 
Adjusted operating profit                  3,4            56         541          1,102 
Adjusted (loss)/profit before 
 tax                                        4           (40)         431            889 
Adjusted (loss)/profit after 
 tax                                        4           (32)         332            699 
Adjusted basic earnings per share           6         (0.7)p        6.8p          14.3p 
Adjusted diluted earnings per 
 share                                      6         (0.7)p        6.8p          14.3p 
---------------------------------------  -------  ----------  ----------  ------------- 
 

(1) Results for the period ended 30 June 2019 have been restated for discontinued operations (see note 9).

Melrose Industries PLC

Condensed Consolidated Statement of Comprehensive Income

 
 
                                                           6 months     6 months 
                                                              ended        ended     Year ended 
                                                            30 June      30 June    31 December 
                                                               2020         2019           2019 
                                                          Unaudited    Unaudited        Audited 
                                                  Notes        GBPm         GBPm           GBPm 
----------------------------------------------  -------  ----------  -----------  ------------- 
 
Loss after tax for the period                                 (568)        (165)           (51) 
---------------------------------------------- 
 
 Items that will not be reclassified 
  subsequently to the 
  Income Statement: 
Net remeasurement loss on retirement 
 benefit obligations                                          (15 )       (151 )           (32) 
Fair value loss on investments 
 in equity instruments                                          (5)            -              - 
Income tax credit relating to items 
 that will not be reclassified                        5           2           39             15 
---------------------------------------------- 
 
                                                               (18)        (112)           (17) 
 
 Items that may be reclassified 
  subsequently to the 
  Income Statement: 
Currency translation on net investments                         417            6          (346) 
Share of other comprehensive income/(expense) 
 from equity accounted investments                               23            2           (23) 
Transfer to Income Statement from 
 equity of cumulative translation 
 differences on disposal of foreign 
 operations                                                       -         (13)           (13) 
Losses on hedge relationships                                  (97)         (44)           (17) 
Transfer to Income Statement on 
 hedge relationships                                              1            -              - 
Income tax credit/(charge) relating 
 to items that may be reclassified                    5          10          (8)           (19) 
 
                                                                354         (57)          (418) 
 
 
Other comprehensive income/(expense) 
 for the period                                                 336        (169)          (435) 
 
 
Total comprehensive expense for 
 the period                                                   (232)        (334)          (486) 
 
Attributable to: 
 
Owners of the parent                                          (234)        (337)          (494) 
Non-controlling interests                                         2            3              8 
----------------------------------------------  -------  ----------  -----------  ------------- 
 
                                                              (232)        (334)          (486) 
 
 

Melrose Industries PLC

Condensed Consolidated Statement of Cash Flows

 
 
                                                                    Restated 
                                                                         (1) 
                                                       6 months     6 months 
                                                          ended        ended     Year ended 
                                                        30 June      30 June    31 December 
                                                           2020         2019           2019 
                                                      Unaudited    Unaudited        Audited 
                                              Notes        GBPm         GBPm           GBPm 
------------------------------------------  -------  ----------  -----------  ------------- 
 
Operating activities 
Net cash from operating activities 
 from continuing operations                   13            301          261            769 
Net cash from/(used in) operating 
 activities from discontinued operations      13              1         (15)           (20) 
------------------------------------------  -------  ----------  -----------  ------------- 
 
Net cash from operating activities                          302          246            749 
 
 
Investing activities 
Disposal of businesses, net of cash 
 disposed                                                     -          172            169 
Purchase of property, plant and equipment                 (156)        (219)          (465) 
Proceeds from disposal of property, 
 plant and equipment                                          3            7             24 
Purchase of computer software and 
 capitalised development costs                             (21)         (19)           (54) 
Dividends received from equity accounted 
 investments                                                 27           67             67 
Purchase of investments                                     (2)            -           (50) 
Settlement of derivatives used in 
 net investment hedging                                       -            -          (100) 
Acquisition of subsidiaries, net of 
 cash acquired                                             (21)            -              - 
Interest received                                             1           10              9 
 
Net cash (used in)/from investing 
 activities from continuing operations                    (169)           18          (400) 
  Net cash used in investing activities 
       from discontinued operations           13            (1)          (8)           (15) 
------------------------------------------  -------  ----------  -----------  ------------- 
 
Net cash (used in)/from investing activities              (170)           10          (415) 
 
 
Financing activities 
Repayment of borrowings                                    (73)        (144)          (456) 
New bank loans raised                                         -            -            350 
Cost of raising debt finance                                (1)            -              - 
Repayment of principal under lease 
 obligations                                               (38)         (32)           (70) 
Dividends paid to non-controlling 
 interests                                                    -          (5)            (6) 
Dividends paid to owners of the parent         7              -        (148)          (231) 
                                                                              ------------- 
 
Net cash used in financing activities 
 from continuing operations                               (112)       (329 )          (413) 
Net cash used in financing activities 
 from discontinued operations                 13              -          (2)            (2) 
------------------------------------------  -------  ----------  -----------  ------------- 
 
Net cash used in financing activities                     (112)        (331)          (415) 
 
 
Net increase/(decrease) in cash and 
 cash equivalents                                            20         (75)           (81) 
Cash and cash equivalents at the beginning 
 of the period                                              317          415            415 
Effect of foreign exchange rate changes                       2            -           (17) 
------------------------------------------  ------- 
 
   Cash and cash equivalents at the end 
               of the period                  13            339          340            317 
 
 
 

(1) Results for the period ended 30 June 2019 have been restated for discontinued operations (see note 9).

As at 30 June 2020, the Group had net debt of GBP3,399 million (31 December 2019: GBP3,283 million). A definition and reconciliation of the movement in net debt is shown in note 13.

Melrose Industries PLC

Condensed Consolidated Balance Sheet

 
                                                                30 June                 30 June  31 December 
                                                                   2020                    2019         2019 
                                                              Unaudited               Unaudited      Audited 
                                          Notes                    GBPm                    GBPm         GBPm 
--------------------------------------  -------  ----------------------  ----------------------  ----------- 
Non-current assets 
Goodwill and other intangible 
 assets                                                          10,039                  10,444        9,784 
Property, plant and equipment                                     3,422                   3,631        3,432 
Investments                                                          49                       -           48 
Interests in equity accounted 
 investments                                                        439                     439          436 
Deferred tax assets                                                 259                     143          160 
Derivative financial assets                                          42                      20           38 
Trade and other receivables                                         501                     422          424 
--------------------------------------  ------- 
 
                                                                 14,751                  15,099       14,322 
Current assets 
Inventories                                                       1,317                   1,504        1,332 
Trade and other receivables                                       1,518                   2,190        1,970 
Derivative financial assets                                          10                      38           19 
Current tax assets                                                   18                      38           20 
Cash and cash equivalents                                           339                     340          317 
Assets classified as held for 
 sale                                                                55                       -           65 
 
                                                                  3,257                   4,110        3,723 
--------------------------------------  -------  ----------------------  ---------------------- 
 
Total assets                               3                     18,008                  19,209       18,045 
 
 
Current liabilities 
Trade and other payables                                          2,274                   2,705        2,461 
Interest-bearing loans and borrowings                                14                     394           89 
Lease obligations                                                    79                      50           71 
Derivative financial liabilities                                    182                     218          106 
Current tax liabilities                                             121                      82          106 
Provisions                                10                        397                     376          412 
Liabilities associated with assets 
 held for sale                                                       40                       -           46 
 
                                                                  3,107                   3,825        3,291 
--------------------------------------  -------  ----------------------  ----------------------  ----------- 
 
Net current assets                                                  150                     285          432 
 
 
Non-current liabilities 
Trade and other payables                                            438                     403          444 
Interest-bearing loans and borrowings                             3,615                   3,235        3,464 
Lease obligations                                                   524                     566          511 
Derivative financial liabilities                                    371                     303          216 
Deferred tax liabilities                                            756                     811          772 
Retirement benefit obligations            12                      1,162                   1,326        1,121 
Provisions                                10                        711                     959          675 
--------------------------------------  -------  ----------------------  ---------------------- 
 
                                                                  7,577                   7,603        7,203 
--------------------------------------  -------  ----------------------  ---------------------- 
 
Total liabilities                          3                     10,684                  11,428       10,494 
 
 
Net assets                                                        7,324                   7,781        7,551 
 
 
Equity 
Issued share capital                                                333                     333          333 
Share premium account                                             8,138                   8,138        8,138 
Merger reserve                                                      109                     109          109 
Other reserves                                                  (2,330)                 (2,330)      (2,330) 
Translation and hedging reserve                                     431                     438           78 
Retained earnings                                                   615                   1,071        1,197 
 
Equity attributable to owners of 
 the parent                                                       7,296                   7,759        7,525 
 
 
Non-controlling interests                                            28                      22           26 
--------------------------------------  -------  ----------------------  ----------------------  ----------- 
 
Total equity                                                      7,324                   7,781        7,551 
 
 
 

Melrose Industries PLC

Condensed Consolidated Statement of Changes in Equity

 
                                                                                                        Equity 
                                                                                                  attributable 
                                   Issued    Share                        Translation                to owners          Non- 
                                    share  premium     Merger     Other   and hedging   Retained        of the   controlling    Total 
                                  capital  account    reserve  reserves       reserve   earnings        parent     interests   equity 
                                     GBPm     GBPm       GBPm      GBPm          GBPm       GBPm          GBPm          GBPm     GBPm 
                   ----------------------  -------  ---------  --------  ------------  --------- 
 
At 1 January 2019                     333    8,138        109   (2,330)           495      1,492         8,237            24    8,261 
 
(Loss)/profit 
 for the period                         -        -          -         -             -      (168)         (168)             3    (165) 
Other 
 comprehensive 
 expense                                -        -          -         -          (57)      (112)         (169)             -    (169) 
-----------------  ----------------------  -------  ---------  --------  ------------  ---------  ------------  ------------  ------- 
 
Total 
 comprehensive 
 (expense)/income                       -        -          -         -          (57)      (280)         (337)             3    (334) 
Dividends paid                          -        -          -         -             -      (148)         (148)           (5)    (153) 
Equity-settled 
 share-based 
 payments                               -        -          -         -             -          7             7             -        7 
-----------------  ----------------------  -------  ---------  --------  ------------  ---------  ------------  ------------  ------- 
 
At 30 June 2019 
 (unaudited)                          333    8,138        109   (2,330)           438      1,071         7,759            22    7,781 
 
Profit for the 
 period                                 -        -          -         -             -        108           108             6      114 
Other 
 comprehensive 
 (expense)/income                       -        -          -         -         (360)         95         (265)           (1)    (266) 
-----------------  ----------------------  -------  ---------  --------  ------------  ---------  ------------  ------------  ------- 
 
Total 
 comprehensive 
 (expense)/income                       -        -          -         -         (360)        203         (157)             5    (152) 
Dividends paid                          -        -          -         -             -       (83)          (83)           (1)     (84) 
Equity-settled 
 share-based 
 payments                               -        -          -         -             -          6             6             -        6 
 
At 31 December 
 2019 (audited)                       333    8,138        109   (2,330)            78      1,197         7,525            26    7,551 
 
(Loss)/profit 
 for the period                         -        -          -         -             -      (569)         (569)             1    (568) 
Other 
 comprehensive 
 income/(expense)                       -        -          -         -           353       (18)           335             1      336 
-----------------  ----------------------  -------  ---------  --------  ------------  ---------  ------------  ------------  ------- 
 
Total 
 comprehensive 
 income/(expense)                       -        -          -         -           353      (587)         (234)             2    (232) 
Equity-settled 
 share-based 
 payments                               -        -          -         -             -          5             5             -        5 
 
At 30 June 2020 
 (unaudited)                          333    8,138        109   (2,330)           431        615         7,296            28    7,324 
 
 

Notes to the Condensed Interim Financial Statements

   1.   Corporate information 

The interim financial information for the six months ended 30 June 2020 has been reviewed by the auditor, but not audited. The information for the year ended 31 December 2019 shown in this report does not constitute statutory accounts for that year as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor has reported on those accounts. Their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

   2.   Summary of significant accounting policies 

The interim financial information for the six months ended 30 June 2020, which has been approved by the Board of Directors, has been prepared on the basis of the accounting policies set out in the Group's 2019 Annual Report and financial statements on pages 130 to 138. Updated information on the Group's significant estimation uncertainty can be found in note 14.

The Group's 2019 Annual Report and financial statements can be found on the Group's website www.melroseplc.net. These Condensed Interim Financial Statements should be read in conjunction with the 2019 information. The annual financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). These Condensed Interim Financial Statements have been prepared in accordance with IAS 34: "Interim Financial Reporting" as adopted by the European Union.

During the second half of the year ended 31 December 2019, the Group formally commenced a disposal process, aligned to its strategic priority, to dispose of the Wheels & Structures business, with a high expectation this process would conclude within one year. The Wheels & Structures business was previously reported within the Other Industrial operating segment and is shown as a discontinued operation in these Condensed Interim Financial Statements, with the Income Statement, the Statement of Cash Flows and their associated notes for the period ended 30 June 2019 being restated accordingly.

On 2 January 2020, GKN Powder Metallurgy acquired FORECAST 3D, a leading US specialist in plastic additive manufacturing and 3D printing services offering a full range of services from concept to series production, for a total consideration of up to GBP29 million, of which GBP21 million was paid on 2 January 2020. During the period to 30 June 2020, the Group has performed a provisional assessment of the assets and liabilities acquired in accordance with IFRS 3: "Business combinations".

Alternative performance measures

The Group presents Alternative Performance Measures ("APMs") in addition to the statutory results of the Group. These are presented in accordance with the Guidelines on APMs issued by the European Securities and Markets Authority ("ESMA").

APMs used by the Group are set out in the glossary to these Condensed Interim Financial Statements and the reconciling items between statutory and adjusted results are listed below and described in more detail in note 4.

Adjusted revenue includes the Group's share of revenue from equity accounted investments ("EAIs").

Adjusted profit measures exclude items which are significant in size or volatility or by nature are non-trading or non-recurring, any item released to the Income Statement that was previously a fair value item booked on an acquisition, and include adjusted profit from EAIs.

On this basis, the following are the principal items included within adjusting items impacting operating profit:

-- Amortisation of intangible assets that are acquired in a business combination, excluding computer software and development costs;

-- Significant restructuring costs and other associated costs, including losses incurred following the announcement of closure for identified businesses, arising from significant strategy changes that are not considered by the Group to be part of the normal operating costs of the business;

   --      Acquisition and disposal related costs; 

-- Impairment charges that are considered to be significant in nature and/or value to the trading performance of the business;

-- Movement in derivative financial instruments not designated in hedging relationships, including revaluation of associated financial assets and liabilities;

   --      Reversal of inventory uplift in value recorded on acquisition; 

-- Removal of adjusting items, interest and tax on equity accounted investments to reflect operating results;

-- The charge for the Melrose equity-settled compensation scheme, including its associated employer's tax charge; and

   --      The net release of fair value items booked on acquisitions. 

Further to the adjusting items above, adjusting items impacting profit before tax include:

-- Acceleration of unamortised debt issue costs written off as a consequence of Group refinancing; and

-- The fair value changes on cross-currency swaps, entered into by GKN prior to acquisition, relating to cost of hedging which are not deferred in equity.

   2.   Summary of significant accounting policies (continued) 

In addition to the items above, adjusting items impacting profit after tax include:

-- The net effect on tax of significant restructuring from strategy changes that are not considered by the Group to be part of the normal operating costs of the business; and

   --      The tax effects of adjustments to profit/(loss) before tax. 

The Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as this provides a meaningful reflection of how the businesses are managed and measured on a day-to-day basis and achieves consistency and comparability between reporting periods, when all businesses are held for a complete reporting period.

The adjusted measures are used to partly determine the variable element of remuneration of senior management throughout the Group and are also in alignment with performance measures used by certain external stakeholders. The adjusted measures are also taken into account when valuing individual businesses as part of the "Buy, Improve, Sell" Group strategy model.

Adjusted profit is not a defined term under IFRS and may not be comparable with similarly titled profit measures reported by other companies. It is not intended to be a substitute for, or superior to, GAAP measures. All APMs relate to the current period results and comparative periods where provided.

Going concern

The Condensed Interim Financial Statements have been prepared on a going concern basis as the Directors consider that adequate resources exist for the Company to continue in operational existence for the foreseeable future.

The Group's liquidity and funding arrangements are described in the Finance Director's Review. There is significant liquidity/financing headroom (in excess of GBP1 billion) at 30 June 2020 and throughout the going concern forecast period. There has been a greater focus on forecast covenant compliance which is considered further below.

Covenants

The Group's banking facility has two financial covenants being a net debt to adjusted EBITDA covenant and an interest cover covenant, both of which are tested half yearly in June and December. The net debt to adjusted EBITDA covenant test was originally set at 3.5x leverage and the interest cover covenant was originally set at 4.0x for each of the half yearly measurement dates for the remainder of the term of the facility.

Due to the pervasive impact of COVID-19 on certain of the Group's businesses, it has been necessary to formally renegotiate the financial covenants with lending banks. The revised financial covenants during the period of assessment for going concern and up to 31 December 2021 are as follows:

 
                                31 December   30 June   31 December 
                                       2020      2021          2021 
-----------------------------  ------------  --------  ------------ 
 Net debt to adjusted EBITDA         Waived    Waived         5.25x 
-----------------------------  ------------  --------  ------------ 
 Interest cover                        2.5x      3.0x          3.0x 
-----------------------------  ------------  --------  ------------ 
 

Testing

The Group has modelled two scenarios in its assessment of going concern; a base case and a reasonably possible sensitised case.

The base case takes into account the estimated impact of the COVID-19 global pandemic as well as other end market and operational factors throughout the going concern period and has been monitored against the actual results and cash generation in the period since 1 July 2020. Due to the severe impact on trading during the second quarter of 2020, details of which are discussed within the Chief Executive's Review, along with new ways of working to accommodate social distancing and other regulations in factories, it is difficult to estimate with precision the impact on the Group's prospective financial performance.

The reasonably possible sensitised case models a more pronounced decline in sales in the fourth quarter of 2020 and in 2021. This additional decline in revenue over and above the base case, ranging from 4% to 12% taking into account the different businesses and geographies affected, has an impact on adjusted operating profit of between 25% and 40% of absolute revenue changes.

Under the reasonably possible sensitised case, no covenant is breached at any of the forecast testing dates being; 31 December 2020 and 30 June 2021, with the testing at 31 December 2021 also favourable, and the Group will not require any additional sources of finance.

The reasonably possible sensitised case has also been used as a 'reverse stress test' to consider the point at which the covenants may be breached. This reverse stress test indicates that a significant reduction in sales, beyond what is considered reasonable, would be required in order to breach covenants. In this remote situation, management could take further mitigating actions to protect profits, conserve cash and reduce capital expenditure to minimum maintenance levels. Annual adjusted operating profit would need to fall by more than GBP950 million from that achieved in the year ended 31 December 2019 before a covenant breach would occur in the assessment period.

   3.   Segment information 

Segment information is presented in accordance with IFRS 8: "Operating segments" which requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group's Chief Operating Decision Maker ("CODM"), which has been deemed to be the Group's Board, in order to allocate resources to the segments and assess their performance.

During the second half of 2019, a decision was made to explore strategic options for the Nortek Air Management business separate to the Security & Smart Technology business and internal reporting provided to the CODM was revised. As a consequence, the Nortek Air & Security operating segment was revised with the Security & Smart Technology business now included in the Other Industrial operating segment. Other Industrial has also been impacted by the removal of the Wheels & Structures business, which has been included in discontinued operations (note 9). Comparative results for the six month period ended 30 June 2019 have been restated accordingly.

The operating segments are as follows:

Aerospace - a multi-technology global tier one supplier of both civil and defence air frames and engine structures, including Aerostructures and Engine Systems.

Automotive - comprises Driveline, All Wheel Drive and eDrive (together ePowertrain) and Cylinder Liners businesses; a global technology and systems engineer which designs, develops, manufactures and integrates an extensive range of driveline technologies.

Powder Metallurgy - a global leader in precision powder metal parts for the automotive and industrial sectors, as well as the production of powder metal.

Nortek Air Management - comprises the Group's Air Management businesses, which includes the Air Quality and Home Solutions business ("AQH") and the Global Heating, Ventilation & Air Conditioning business ("HVAC"). AQH is a leading manufacturer of ventilation products for the professional remodelling and replacement markets, residential new construction market and DIY market. HVAC manufactures and sells split-system and packaged air conditioners, heat pumps, furnaces, air handlers and parts for the residential replacement and new construction markets along with custom designed and engineered products and systems for data centres and non-residential applications.

Other Industrial - comprises the Group's Ergotron, Brush and Security & Smart Technology businesses.

In addition, there are central cost centres which are also reported to the Board. The central corporate cost centres contain the Melrose Group head office costs and charges related to the divisional management long-term incentive plans.

Reportable segment results include items directly attributable to a segment as well as those which can be allocated on a reasonable basis. Inter-segment pricing is determined on an arm's length basis in a manner similar to transactions with third parties.

The Group's geographical segments are determined by the location of the Group's non-current assets and, for revenue, the location of external customers. Inter-segment sales are not material and have not been disclosed.

The following tables present the results and certain asset and liability information regarding the Group's operating segments and central cost centres for the six month period ended 30 June 2020 and comparative periods.

   a)   Segment revenues 
 
 6 months ended 30 June 2020 
 
                                                              Powder             Nortek          Other 
                            Aerospace      Automotive     Metallurgy     Air Management     Industrial     Total 
   Continuing operations         GBPm            GBPm           GBPm               GBPm           GBPm      GBPm 
-------------------------  ----------  --------------  -------------  -----------------  -------------  -------- 
 
 Adjusted revenue               1,580           1,541            396                550            292     4,359 
 Equity accounted 
  investments                     (3)           (228)            (7)                  -              -     (238) 
-------------------------  ----------  --------------  -------------  -----------------  -------------  -------- 
 
 Revenue                        1,577           1,313            389                550            292     4,121 
 
 
 
 
   6 months ended 30 June 2019 - restated 
 
                                                              Powder             Nortek          Other 
                            Aerospace      Automotive     Metallurgy     Air Management     Industrial     Total 
   Continuing operations         GBPm            GBPm           GBPm               GBPm           GBPm      GBPm 
-------------------------  ----------  --------------  -------------  -----------------  -------------  -------- 
 
 Adjusted revenue               1,904           2,450            581                578            362     5,875 
 Equity accounted 
  investments                    (13)           (282)            (7)                  -              -     (302) 
-------------------------  ----------  --------------  -------------  -----------------  -------------  -------- 
 
 Revenue                        1,891           2,168            574                578            362     5,573 
 
 
   3.   Segment information (continued) 
   a)   Segment revenues (continued) 
 
 Year ended 31 December 2019 
 
                                                              Powder             Nortek          Other 
                            Aerospace      Automotive     Metallurgy     Air Management     Industrial     Total 
   Continuing operations         GBPm            GBPm           GBPm               GBPm           GBPm      GBPm 
-------------------------  ----------  --------------  -------------  -----------------  -------------  -------- 
 
 Adjusted revenue               3,852           4,739          1,115              1,178            708    11,592 
 Equity accounted 
  investments                    (16)           (593)           (16)                  -              -     (625) 
 
 Revenue                        3,836           4,146          1,099              1,178            708    10,967 
 
 
   b)   Segment operating profit 
 
 6 months ended 30 
  June 2020 
 
 
                                                        Powder             Nortek          Other   Corporate 
  Continuing          Aerospace      Automotive     Metallurgy     Air Management     Industrial         (2)     Total 
  operations               GBPm            GBPm           GBPm               GBPm           GBPm        GBPm      GBPm 
-------------------  ----------  --------------  -------------  -----------------  -------------  ----------  -------- 
 
 Adjusted operating 
  profit/(loss)              54            (64)            (3)                 71             18        (20)        56 
 
 Items not included 
 in adjusted 
 operating 
 profit (1) : 
 Amortisation of 
  intangible 
  assets acquired 
  in 
  business 
  combinations            (129)            (74)           (24)               (18)           (18)           -     (263) 
 Impairment and 
  write 
  down of assets          (133)            (18)           (28)                  -              -           -     (179) 
 Restructuring 
  costs                    (43)            (25)           (23)                (2)            (4)         (2)      (99) 
 Movement in 
  derivatives 
  and associated 
  financial 
  assets and 
  liabilities                 8             (4)              -                  -              -        (93)      (89) 
 Equity accounted 
  investments 
  adjustments                 -            (14)              -                  -              -           -      (14) 
 Acquisition and 
  disposal 
  costs                       -               -              -                  -              -         (4)       (4) 
 Melrose 
  equity-settled 
  compensation 
  scheme 
  charges                     -               -              -                  -              -         (1)       (1) 
 Net release and 
  changes 
  in discount rate 
  of fair value 
  items                      18            (12)              5                  -              1           -        12 
 
 
 Operating 
  (loss)/profit           (225)           (211)           (73)                 51            (3)       (120)     (581) 
 
 
 Finance costs                                                                                                   (105) 
 Finance income                                                                                                      1 
 
 
 Loss before tax                                                                                                 (685) 
 Tax                                                                                                               125 
 
 
 Loss for the period from 
  continuing operations                                                                                          (560) 
 
 

(1) For further details on adjusting items, refer to note 4.

(2) C orporate adjusted operating loss of GBP20 million includes GBP5 million of costs in respect of divisional long-term incentive plans.

   3.   Segment information (continued) 
   b)   Segment operating profit (continued) 
 
  6 months ended 30 June 
   2019 - restated 
 
                                                      Powder            Nortek         Other   Corporate 
  Continuing         Aerospace      Automotive    Metallurgy    Air Management    Industrial         (2)     Total 
  operations              GBPm            GBPm          GBPm              GBPm          GBPm        GBPm      GBPm 
------------------  ----------  --------------  ------------  ----------------  ------------  ----------  -------- 
 
 Adjusted 
  operating 
  profit/(loss)            192             186            66                79            46        (28)       541 
 
 Items not 
 included 
 in adjusted 
 operating 
 profit (1) : 
 Amortisation of 
  intangible 
  assets acquired 
  in 
  business 
  combinations           (132)            (73)          (24)              (18)          (21)           -     (268) 
 Impairment of 
  assets                     -               -             -                 -         (179)           -     (179) 
 Restructuring 
  costs                   (26)            (14)           (5)               (6)          (19)         (4)      (74) 
 Equity accounted 
  investments 
  adjustments                -            (14)             -                 -             -           -      (14) 
 Movement in 
  derivatives 
  and associated 
  financial 
  assets and 
  liabilities                2             (2)             -                 -             -        (13)      (13) 
 Melrose 
  equity-settled 
  compensation 
  scheme 
  charges                    -               -             -                 -             -         (7)       (7) 
 Net release and 
  changes 
  in discount rate 
  of 
  fair value items         (6)               -            22                 2             -           -        18 
 Acquisition and 
  disposal 
  costs                      -               -             -                 -             -           4         4 
 
 
 Operating 
  profit/(loss)             30              83            59                57         (173)        (48)         8 
 
 
 Finance costs                                                                                               (126) 
 Finance income                                                                                                  9 
 
 
 Loss before tax                                                                                             (109) 
 Tax                                                                                                          (22) 
 
 
 Loss for the period from 
  continuing operations                                                                                      (131) 
 
 
 

(1) For further details on adjusting items, refer to note 4.

(2) C orporate adjusted operating loss of GBP28 million includes GBP12 million of costs in respect of divisional long-term incentive plans.

 
 Year ended 31 
 December 
 2019 
 
                                                          Powder            Nortek         Other   Corporate 
  Continuing             Aerospace      Automotive    Metallurgy    Air Management    Industrial         (2)     Total 
  operations                  GBPm            GBPm          GBPm              GBPm          GBPm        GBPm      GBPm 
----------------------  ----------  --------------  ------------  ----------------  ------------  ----------  -------- 
 
 Adjusted operating 
  profit/(loss)                409             367           117               175            86        (52)     1,102 
 
 Items not included 
 in adjusted operating 
 profit (1) : 
 Amortisation of 
  intangible 
  assets acquired in 
  business 
  combinations               (261)           (148)          (48)              (36)          (41)           -     (534) 
 Restructuring costs          (79)            (83)          (19)              (11)          (37)         (9)     (238) 
 Impairment of assets            -               -             -                 -         (179)           -     (179) 
 Equity accounted 
  investments                                                                                                      (28 
  adjustments                  (1)           (27 )             -                 -             -           -         ) 
 Melrose 
  equity-settled 
  compensation scheme 
  charges                        -               -             -                 -             -        (17)      (17) 
 Net release and 
  changes 
  in discount rate of 
  fair value items              34              79            28                11             1           -       153 
 Movement in 
  derivatives 
  and associated 
  financial 
  assets and 
  liabilities                    2             (2)             -                 -             -          55        55 
 Acquisition and 
  disposal 
  costs                          -               -           (1)                 -             -           5         4 
 
 
 Operating 
  profit/(loss)                104             186            77               139         (170)        (18)       318 
 
 
 Finance costs                                                                                                   (221) 
 Finance income                                                                                                      9 
 
 
 Profit before tax                                                                                                 106 
 Tax                                                                                                              (51) 
 
 
 Profit for the year from 
  continuing operations                                                                                             55 
 
 

(1) For further details on adjusting items, refer to note 4.

(2) Corporate adjusted operating loss of GBP52 million includes GBP20 million of costs in respect of divisional long-term incentive plans.

   3.   Segment information (continued) 
   c)   Segment total assets and liabilities 
 
                                  Total assets                        Total liabilities 
                     -------------------------------------  ------------------------------------- 
                                  Restated                               Restated 
                        30 June    30 June     31 December     30 June    30 June     31 December 
                           2020       2019            2019        2020       2019            2019 
                           GBPm       GBPm            GBPm        GBPm       GBPm            GBPm 
-------------------  ----------  ---------  --------------  ----------  ---------  -------------- 
 Aerospace                7,384      7,702           7,478       3,096      3,112           3,089 
 Automotive               5,276      5,696           5,391       2,163      2,419           2,304 
 Powder Metallurgy        1,897      2,117           1,906         493        551             472 
 Nortek Air 
  Management              1,500      1,613           1,415         429        469             362 
 Other Industrial         1,277      1,393           1,237         252        326             259 
 Corporate                  619        544             553       4,211      4,494           3,962 
-------------------  ----------  ---------  --------------  ----------  ---------  -------------- 
 Continuing 
  operations             17,953     19,065          17,980      10,644     11,371          10,448 
-------------------  ----------  ---------  --------------  ----------  ---------  -------------- 
 Discontinued 
  operations                 55        144              65          40         57              46 
-------------------  ----------  ---------  --------------  ----------  ---------  -------------- 
 
 Total                   18,008     19,209          18,045      10,684     11,428          10,494 
 
 
   d)   Segment capital expenditure and depreciation 
 
                       Capital expenditure                   Depreciation of                 Depreciation of leased 
                                (1)                          owned assets (1)                         assets 
                ---------------------------------  ----------------------------------  ---------------------------------- 
 
                       6                                  6                                   6 
                  months   Restated                  months   Restated                   months   Restated 
                   ended   6 months                   ended   6 months                    ended   6 months 
                      30      ended    Year ended        30      ended     Year ended        30      ended     Year ended 
                    June    30 June   31 December      June    30 June    31 December      June    30 June    31 December 
                    2020       2019          2019      2020       2019           2019      2020       2019           2019 
                    GBPm       GBPm          GBPm      GBPm       GBPm           GBPm      GBPm       GBPm           GBPm 
--------------  --------  ---------  ------------  --------  ---------  -------------  --------  ---------  ------------- 
 Aerospace            61         67           178        65         68            139        15         15             30 
 Automotive           54         95           231       100         93            194         8          8             16 
 Powder 
  Metallurgy          12         31            55        31         30             59         5          3              8 
 Nortek 
  Air 
  Management          13         19            37        13         11             23         7          5             11 
 Other 
  Industrial           4          4             8         5          6             11         2          3              6 
 Corporate             -          -             -         -          -              -         1          1              1 
--------------  --------  ---------  ------------  --------  ---------  -------------  --------  ---------  ------------- 
 Continuing 
  operations         144        216           509       214        208            426        38         35             72 
--------------  --------  ---------  ------------  --------  ---------  -------------  --------  ---------  ------------- 
 Discontinued 
  operations           1          7            11         -          8             12         -          -              1 
--------------  --------  ---------  ------------  --------  ---------  -------------  --------  ---------  ------------- 
 
 Total               145        223           520       214        216            438        38         35             73 
 
 
 

(1) Includes computer software and development costs. Capital expenditure excludes lease additions.

   e)   Geographical information 

The Group operates in various geographical areas around the world. The parent company's country of domicile is the UK and the Group's revenues and non-current assets in the rest of Europe and North America are also considered to be material.

The Group's revenue from external customers and information about specific segment assets (non-current assets excluding deferred tax assets, non-current trade and other receivables and non-current derivative financial assets) by geographical location are detailed below:

 
                         Revenue(1) from external 
                                 customers                         Segment assets 
                  -------------------------------------  ---------------------------------- 
                               Restated 
                   6 months    6 months 
                      ended       ended      Year ended              Restated 
                    30 June     30 June     31 December    30 June    30 June   31 December 
                       2020        2019            2019       2020       2019          2019 
                       GBPm        GBPm            GBPm       GBPm       GBPm          GBPm 
----------------  ---------  ----------  --------------  ---------  ---------  ------------ 
 
 UK                     341         553           1,048      2,251      2,400         2,319 
 Rest of Europe         918       1,262           2,426      5,272      5,420         5,136 
 North America        2,366       3,064           6,073      5,131      5,199         4,917 
 Other                  496         694           1,420      1,295      1,414         1,328 
----------------  ---------  ----------  --------------  ---------  ---------  ------------ 
 Continuing 
  operations          4,121       5,573          10,967     13,949     14,433        13,700 
----------------  ---------  ----------  --------------  ---------  ---------  ------------ 
 Discontinued 
  operations             82         333             423          -         81             - 
----------------  ---------  ----------  --------------  ---------  ---------  ------------ 
 
 Total                4,203       5,906          11,390     13,949     14,514        13,700 
 
 

(1) Revenue is presented by destination.

   4.   Reconciliation of adjusted profit measures 

As described in note 2, adjusted profit measures are an alternative performance measure used by the Board to monitor the operating performance of the Group.

   a)   Operating profit 
 
                                                                Restated 
                                                     6 months   6 months 
                                                        ended      ended     Year ended 
                                                      30 June    30 June    31 December 
                                                         2020       2019           2019 
  Continuing operations                    Notes         GBPm       GBPm           GBPm 
                                                                          ------------- 
 
Operating (loss)/profit                                 (581)          8            318 
-------------------------------------------------  ----------  ---------  ------------- 
Amortisation of intangible assets 
 acquired in business combinations           a            263        268            534 
Write down of assets and impairment         b             179        179            179 
Restructuring costs                         c              99         74            238 
Movement in derivatives and associated 
 financial assets and liabilities            d             89         13           (55) 
Equity accounted investments 
 adjustments                                e              14         14             28 
Acquisition and disposal costs              f               4        (4)            (4) 
Melrose equity-settled compensation 
 scheme charges                             g               1          7             17 
Net release and changes in discount 
 rate of fair value items                   h            (12)       (18)          (153) 
 
Total adjustments to operating 
 (loss)/profit                                            637        533            784 
 
Adjusted operating profit                                  56        541          1,102 
 
 

a. The amortisation charge on intangible assets acquired in business combinations of GBP263 million (2019: GBP268 million), is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. However, where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not excluded from adjusted results.

b. The write down of assets totalling GBP179 million was recognised as a result of the impact of COVID-19, of which GBP133 million was within the Aerospace division. The ultimate impact of the COVID-19 pandemic is unclear and the measurement of its impact required a review of the operating assets of the Group, with a significant degree of estimation. This review resulted in GBP153 million of fixed assets and GBP26 million of other net operating assets being written down across a number of sites within the businesses, as they adapt to new levels of industry demand. The write down of these assets is shown as an adjusting item due to the unprecedented nature of the COVID-19 pandemic, its non-trading nature and size. The impairment recognised in 2019, of GBP179 million, related to goodwill allocated to the Security & Smart Technology group of CGUs, following a deterioration in their performance and future prospects at that time.

c. Restructuring and other associated costs in the period totalled GBP99 million (2019: GBP74 million) and are shown as adjusting items due to their size and non-trading nature. During the period ended 30 June 2020 they included:

-- GBP43 million (2019: GBP26 million) relating to the Aerospace division including costs incurred as the business takes its initial steps to substantially reduce its cost structure following the impact of COVID-19 on the aerospace industry; as well as the continuation of its global integration to create "One Aerospace", ensuring the business is well positioned and able to react to changes in its new environment.

-- GBP25 million (2019: GBP14 million) of costs within the Automotive division, incurred as the business continues to address its high cost base, inherited on acquisition, and best position the business as it begins its recovery post COVID-19.

-- GBP23 million (2019: GBP5 million) of restructuring costs in the Powder Metallurgy division as it continues footprint consolidation actions which began in 2019, along with additional focus on reducing its fixed cost base to realign the business for future demand.

-- A charge of GBP8 million (2019: GBP29 million) within the Nortek Air Management, Other Industrial and Corporate divisions, primarily related to completing the factory consolidation within the HVAC business and the finalisation of the changes made in the Security & Smart Technology business to move to a third-party contract manufacturing model.

d. Hedge accounting is not applied within the GKN businesses for transactional foreign exchange exposure. Consequently, for consistency and because of their volatility and size, the movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts) entered into to mitigate the potential volatility of future cash flows, on long-term foreign currency customer and supplier contracts in the GKN businesses, along with foreign exchange movements on the associated financial assets and liabilities are shown as an adjusting item and totalled a charge of GBP89 million (2019: GBP13 million).

   4.          Reconciliation of adjusted profit measures (continued) 
   a)         Operating profit (continued) 

e. The Group has a number of equity accounted investments ("EAIs") in which it does not hold full control, the largest of which is a 50% interest in Shanghai GKN HUAYU Driveline Systems ("SDS"), within the Automotive business. The EAIs generated GBP238 million (2019: GBP302 million) of revenue in the period, which is not included in the statutory results but is shown within adjusted revenue so as not to distort the operating margins reported in the businesses when the adjusted operating profit earned from these EAIs is included.

In addition, the profits and losses of EAIs, which are shown after amortisation of acquired intangible assets, interest and tax in the statutory results, are adjusted to show the adjusted operating profit consistent with the adjusted operating profits of the subsidiaries of the Group. The revenue and profit of EAIs are adjusted because they are considered to be significant in size and are important in assessing the performance of the business.

f. Acquisition and disposal related costs of GBP4 million (2019: credit of GBP4 million) were incurred in the period and related to transaction costs in respect of acquisition and disposal activities. These items are excluded from adjusted results due to their non-trading nature and volatility.

g. The charge for the Melrose equity-settled Incentive Scheme, including its associated employer's tax charge, of GBP1 million (2019: GBP7 million) is excluded from adjusted results due to its volatility. The shares that would be issued, based on the Scheme's current value at the end of the reporting period, are included in the calculation of the adjusted diluted earnings per share, which the Board considers to be a key measure of performance.

h. Certain items previously recorded as fair value items on acquisitions, have been resolved for more favourable amounts than first anticipated. The net release of fair value items recognised on acquisitions in the period of GBP12 million (2019: GBP18 million) included a credit of GBP17 million relating to certain loss-making contracts recognised on the acquisition of GKN and is partly offset by a GBP5 million charge relating to the movement in discount rates on the loss-making contracts recognised as fair value items. The net release of any excess fair value item is shown as an adjusting item to avoid positively distorting adjusted results.

   b)    Profit before tax 
 
                                                                Restated 
                                                     6 months   6 months 
                                                        ended      ended    Year ended 
                                                      30 June    30 June   31 December 
                                                         2020       2019          2019 
  Continuing operations                     Notes        GBPm       GBPm          GBPm 
---------------------------------------  --------  ----------  ---------  ------------ 
 
(Loss)/profit before tax                                (685)      (109)           106 
-------------------------------------------------  ----------  ---------  ------------ 
 
Adjustments to operating (loss)/profit 
 per above                                                637        533           784 
Fair value changes on cross-currency 
 swaps                                      i               4          7           (1) 
Bank facility negotiation fees              j               4          -             - 
 
Total adjustments to (loss)/profit 
 before tax                                               645        540           783 
-------------------------------------------------  ----------  ---------  ------------ 
 
Adjusted (loss)/profit before 
 tax                                                     (40)        431           889 
 
 

i. The fair value changes on cross-currency swaps relating to cost of hedging which are not deferred in equity, are shown as an adjusting item because of their volatility and non-trading nature.

j. Following the impact of COVID-19, the Group paid fees in negotiating waivers for its bank facility EBITDA to net debt covenants for June and December 2020. These fees were immediately written off and shown as an adjusting item because of their non-trading nature.

   4.     Reconciliation of adjusted profit measures (continued) 
   c)     Profit after tax 
 
                                                                                      Restated 
                                                                6 months              6 months 
                                                                   ended                 ended    Year ended 
                                                                 30 June               30 June   31 December 
                                                                    2020                  2019          2019 
  Continuing operations                     Notes                   GBPm                  GBPm          GBPm 
----------------------------------------  -------  ---------------------  --------------------  ------------ 
 
(Loss)/profit after tax                                            (560)                 (131)            55 
----------------------------------------  -------  ---------------------  --------------------  ------------ 
 
Adjustments to (loss)/profit 
 before tax per above                                                645                   540           783 
Tax effect of adjustments to 
 (loss)/profit before tax                    5                     (113)                  (73)         (123) 
Tax effect of significant restructuring                                -                     -           (9) 
Equity accounted investments 
 - tax                                       k                       (4)                   (4)           (7) 
----------------------------------------  -------  ---------------------  --------------------  ------------ 
 
Total adjustments to (loss)/profit 
 after tax                                                           528                   463           644 
----------------------------------------  -------  ---------------------  --------------------  ------------ 
 
Adjusted (loss)/profit after 
 tax                                                                (32)                   332           699 
 
 

k. As explained in paragraph e above, the profits and losses of EAIs are shown after interest and tax in the statutory results. They are adjusted to show the profit before tax and the profit after tax, consistent with the subsidiaries of the Group.

   5 .   Tax 
 
                                                                  Restated 
                                            6 months              6 months 
                                               ended                 ended    Year ended 
                                             30 June               30 June   31 December 
Analysis of the (credit)/charge in              2020                  2019          2019 
 the period:                                    GBPm                  GBPm          GBPm 
------------------------------------------  --------  --------------------  ------------ 
 
Continuing operations 
Current tax                                       20                    59           146 
Deferred tax                                   (145)                  (37)          (95) 
------------------------------------------  --------  --------------------  ------------ 
 
Total tax (credit)/charge from continuing 
 operations                                    (125)                    22            51 
------------------------------------------  --------  --------------------  ------------ 
 
Discontinued operations 
Current tax                                        -                     2             3 
Deferred tax                                       -                     -             - 
------------------------------------------  --------  --------------------  ------------ 
 
Total tax charge from discontinued 
 operations                                        -                     2             3 
------------------------------------------  --------  --------------------  ------------ 
 
Total tax (credit)/charge                      (125)                    24            54 
 
 
 

Continuing operations:

The effective tax rate in respect of adjusted profit before tax for the half year is 20% (2019: 23%). Adjusted tax has been calculated by applying the expected tax rate for the full year to the adjusted loss before tax of GBP40 million (2019: profit of GBP431 million), giving an adjusted tax credit of GBP8 million (2019: charge of GBP99 million).

The adjusted tax credit of GBP8 million (2019: charge of GBP99 million) excludes a tax credit on adjusting items of GBP113 million (2019: GBP73 million). This represents a deferred tax credit on intangible asset amortisation of GBP39 million (2019: GBP59 million) and a tax credit on other adjusting items of GBP74 million (2019: GBP14 million). The adjusted tax (credit)/charge includes a charge in respect of EAIs of GBP4 million (2019: GBP4 million).

In addition to the amount charged to the Income Statement, a credit of GBP12 million (2019: credit of GBP31 million) has been recognised directly in the Statement of Comprehensive Income. This represents a tax credit of GBP10 million (2019: charge of GBP8 million) in respect of movements on hedge relationships and translation differences and a tax credit of GBP2 million (2019: credit of GBP39 million) in respect of the remeasurement of retirement benefit obligations.

   6.    Earnings per share 
 
                                                         Restated 
                                              6 months   6 months 
                                                 ended      ended    Year ended 
                                               30 June    30 June   31 December 
Earnings attributable to owners of the            2020       2019          2019 
 parent                                           GBPm       GBPm          GBPm 
--------------------------------------------  --------  ---------  ------------ 
 
Earnings for basis of earnings per share         (569)      (168)          (60) 
Less: loss for the period from discontinued 
 operations                                          8         34           106 
--------------------------------------------  --------  ---------  ------------ 
 
Earnings for basis of earnings per share 
 from continuing operations                      (561)      (134)            46 
 
 
 
                                             6 months  6 months 
                                                ended     ended    Year ended 
                                              30 June   30 June   31 December 
                                                 2020      2019          2019 
                                               Number    Number        Number 
-------------------------------------------  --------  --------  ------------ 
Weighted average number of ordinary shares 
 for the purposes of basic earnings per 
 share (million)                                4,858     4,858         4,858 
Further shares for the purposes of diluted          -         -             - 
 earnings per share (million) 
 
Weighted average number of ordinary shares 
 for the purposes of diluted earnings 
 per share (million)                            4,858     4,858         4,858 
 
 
 
                                                         Restated 
                                              6 months   6 months 
                                                 ended      ended    Year ended 
                                               30 June    30 June   31 December 
                                                  2020       2019          2019 
Earnings per share                               pence      pence         pence 
--------------------------------------------  --------  ---------  ------------ 
Basic earnings per share 
From continuing and discontinued operations     (11.7)      (3.4)         (1.2) 
From continuing operations                      (11.5)      (2.8)           0.9 
From discontinued operations                     (0.2)      (0.6)         (2.1) 
--------------------------------------------  --------  ---------  ------------ 
 
Diluted earnings per share 
From continuing and discontinued operations     (11.7)      (3.4)         (1.2) 
From continuing operations                      (11.5)      (2.8)           0.9 
From discontinued operations                     (0.2)      (0.6)         (2.1) 
--------------------------------------------  --------  ---------  ------------ 
 
 
 
                                                   Restated 
                                        6 months   6 months 
                                           ended      ended     Year ended 
                                         30 June    30 June    31 December 
                                            2020       2019           2019 
  Adjusted earnings from continuing         GBPm       GBPm           GBPm 
  operations 
------------------------------------  ----------  ---------  ------------- 
 
Adjusted earnings (1) for the basis 
 of adjusted earnings per share             (33)        329            693 
------------------------------------  ----------  ---------  ------------- 
 
 

(1) Adjusted earnings for the 6 months ended 30 June 2020 comprises adjusted loss after tax of GBP32 million (2019: profit after tax of GBP332 million) net of an allocation of profit to non-controlling interests of GBP1 million (2019: GBP3 million). Adjusted earnings for the year ended 31 December 2019 comprises adjusted profit after tax of GBP699 million, net of an allocation to non-controlling interests of GBP6 million.

 
Adjusted earnings per share from 
 continuing operations 
 
 
                                                   Restated 
                                        6 months   6 months 
                                           ended      ended     Year ended 
                                         30 June    30 June    31 December 
                                            2020       2019           2019 
                                           pence      pence          pence 
------------------------------------  ----------  ---------  ------------- 
 
Adjusted basic earnings per share          (0.7)        6.8           14.3 
Adjusted diluted earnings per share        (0.7)        6.8           14.3 
 
 
   7.    Dividends 
 
                                      6 months  6 months 
                                         ended     ended    Year ended 
                                       30 June   30 June   31 December 
                                          2020      2019          2019 
                                          GBPm      GBPm          GBPm 
------------------------------------  --------  --------  ------------ 
 
Final dividend for the year ended 
 31 December 2018 of 3.05p                   -       148           148 
Interim dividend for the year ended 
 31 December 2019 of 1.7p                    -         -            83 
------------------------------------  --------  --------  ------------ 
 
Total dividends paid                         -       148           231 
 
 

No interim dividend (2019: 1.7p per ordinary share totalling GBP83 million) is proposed by the Board. The initially proposed final dividend for the year ended 31 December 2019 of 3.4p per ordinary share was withdrawn as announced on 7 May 2020.

   8.    Share of results of equity accounted investments 

Summary information for the Group's equity accounted investments is as follows:

 
                                       6 months  6 months 
                                          ended     ended    Year ended 
                                        30 June   30 June   31 December 
                                           2020      2019          2019 
Continuing operations                      GBPm      GBPm          GBPm 
-------------------------------------  --------  --------  ------------ 
 
Revenue                                     238       302           625 
-------------------------------------  --------  --------  ------------ 
 
Adjusted operating profit                    21        30            66 
-------------------------------------  --------  --------  ------------ 
 
Adjusting items                            (10)      (10)          (21) 
 
Profit before tax                            11        20            45 
Tax                                         (4)       (4)           (7) 
-------------------------------------  --------  --------  ------------ 
 
Share of results of equity accounted 
 investments                                  7        16            38 
 
 
   9.    Discontinued operations and assets held for sale 

Wheels & Structures

During the second half of 2019, following a strategic review, the Board formally commenced a disposal process aligned to its strategic priority, to dispose of the Wheels & Structures business, with a high expectation that this process would conclude within one year. In accordance with IFRS 5: " Non-current assets held for sale and discontinued operations", associated assets and liabilities were classified as held for sale at 31 December 2019 and continue to be separately shown on the Balance Sheet at 30 June 2020.

The results of the Wheels & Structures business were previously included within the Other Industrial operating segment for the period ended 30 June 2019 and are now classified as discontinued operations, in accordance with IFRS 5.

On 25 June 2019, the Group completed the sale of the Walterscheid Powertrain Group for cash consideration of GBP185 million. The costs charged to the Income Statement associated with the disposal were GBP7 million. The loss on disposal was GBP21 million after the recycling of cumulative translation differences of GBP13 million.

Financial performance of discontinued operations:

 
                                                                                     Restated 
                                                            6 months                 6 months 
                                                               ended                    ended     Year ended 
                                                             30 June                  30 June    31 December 
                                                                2020                     2019           2019 
                                                                GBPm                     GBPm           GBPm 
 Revenue                                                          82                      333            423 
 Operating costs                                                (84)                    (342)          (503) 
---------------------------------------  ---------------------------  -----------------------  ------------- 
 
 Operating loss (1)                                              (2)                      (9)           (80) 
 Finance costs                                                     -                      (2)            (2) 
---------------------------------------  ---------------------------  -----------------------  ------------- 
 
 Loss before tax                                                 (2)                     (11)           (82) 
 Tax                                                               -                      (2)            (3) 
---------------------------------------  ---------------------------  -----------------------  ------------- 
 
 Loss after tax                                                  (2)                     (13)           (85) 
 Loss on disposal of net assets of 
  discontinued operations, net of 
  recycled cumulative translation 
  differences                                                    (6)                     (21)           (21) 
 
 Loss for the period from discontinued 
  operations                                                     (8)                     (34)          (106) 
 
 
 

(1) The operating loss in the year ended 31 December 2019 included a GBP64 million charge on remeasurement to fair value less costs of disposal relating to the Wheels & Structures business on reclassification to assets held for sale.

   10.    Provisions 
 
                                    Property                   Warranty 
                       Loss-making   related    Environmental   related 
                         contracts     costs   and litigation     costs  Restructuring    Other      Total 
                              GBPm      GBPm             GBPm      GBPm           GBPm     GBPm       GBPm 
---------------------  -----------  --------  ---------------  --------  -------------  -------  --------- 
 
At 1 January 
 2020                          384        45              155       324            114       65      1,087 
Utilised                      (31)       (1)             (23)      (22)           (95)      (1)      (173) 
Net (credit)/charge 
 to operating 
 profit(1)                     (7)         1               26        19             89        2        130 
Unwind of discount 
 (2)                             7         -                -         -              -        -          7 
Acquisition of 
 businesses                      -         1                -         -              -        -          1 
Exchange adjustments            17         4                8        20              5        2         56 
---------------------  -----------  --------  ---------------  --------  -------------  -------  --------- 
 
At 30 June 2020                370        50              166       341            113       68      1,108 
 
 
Current                         55         8               97       124             99       14        397 
Non-current                    315        42               69       217             14       54        711 
---------------------  -----------  --------  ---------------  --------  -------------  -------  --------- 
 
                               370        50              166       341            113       68      1,108 
 
 
 

(1) Includes GBP78 million of adjusting items and GBP52 million recognised in adjusted operating profit.

(2) Includes GBP2 million within finance costs relating to the time value of money and GBP5 million relating to changes in discount rates on loss-making contract provisions recognised as fair value items on the acquisition of GKN, which has been included as an adjusting item within operating profit.

Provisions for loss-making contracts are considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it. This obligation has been discounted and will be utilised over the period of the respective contracts, which is up to 15 years.

The provision for property related costs represents the estimated dilapidation costs for ongoing leases. This is expected to result in cash expenditure over the next one to eight years.

Environmental and litigation provisions relate to the estimated remediation costs of pollution, soil and groundwater contamination at certain sites and estimated future costs and settlements in relation to legal claims and associated insurance obligations. Due to their nature, it is not possible to predict precisely when these provisions will be utilised.

Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the relevant products and subsequently updated for changes in estimates as necessary. Warranty terms are, on average, between one and five years.

Restructuring provisions relate to committed costs in respect of restructuring programmes, usually resulting in cash spend within one year.

Other provisions include long-term incentive plans for divisional senior management and the employer tax on equity-settled incentive schemes which are expected to result in cash expenditure over the next two to five years.

Where appropriate, provisions have been discounted using discount rates between 0% and 6% (31 December 2019: 0% and 7%) depending on the territory in which the provision resides and the length of its expected utilisation.

   11.    Financial instruments 

The table below sets out the Group's accounting classification of each category of financial assets and liabilities and their fair values as at 30 June 2020, 30 June 2019 and 31 December 2019:

 
                                          Current          Non-current     Total 
                                             GBPm                 GBPm      GBPm 
---------------------------------------  --------  -------------------  -------- 
 30 June 2020 
 Financial assets 
 Classified as amortised cost: 
 Cash and cash equivalents                    339                    -       339 
 Net trade receivables                      1,048                    -     1,048 
 Classified as fair value: 
 Investments                                    -                   49        49 
 Derivative financial assets: 
    Foreign currency forward contracts          8                   27        35 
    Embedded derivatives                        2                   15        17 
 Assets classified as held for 
  sale                                         55                    -        55 
 Financial liabilities 
 Classified as amortised cost: 
 Interest-bearing loans and borrowings       (14)              (3,615)   (3,629) 
 Government refundable advances               (8)                 (63)      (71) 
 Lease obligations                           (79)                (524)     (603) 
 Other financial liabilities              (1,777)                 (21)   (1,798) 
 Classified as fair value: 
 Derivative financial liabilities: 
    Foreign currency forward contracts      (121)                (155)     (276) 
 Interest rate swaps                         (35)                 (96)     (131) 
    Cross-currency swaps                     (25)                (112)     (137) 
 Embedded derivatives                         (1)                  (8)       (9) 
 Liabilities associated with assets 
  held for sale                              (40)                    -      (40) 
 30 June 2019 
 Financial assets 
 Classified as amortised cost: 
 Cash and cash equivalents                    340                    -       340 
 Net trade receivables                      1,762                    -     1,762 
 Classified as fair value: 
 Derivative financial assets: 
    Foreign currency forward contracts         10                    5        15 
    Interest rate swaps                        25                    -        25 
 Embedded derivatives                           3                   15        18 
 Financial liabilities 
 Classified as amortised cost: 
 Interest-bearing loans and borrowings      (394)              (3,235)   (3,629) 
 Government refundable advances               (7)                 (66)      (73) 
 Lease obligations                           (50)                (566)     (616) 
 Other financial liabilities              (2,427)                (106)   (2,533) 
 Classified as fair value: 
 Derivative financial liabilities: 
    Foreign currency forward contracts       (98)                (121)     (219) 
  Interest rate swaps                        (11)                 (73)      (84) 
    Cross-currency swaps                    (108)                (101)     (209) 
 Embedded derivatives                         (1)                  (8)       (9) 
 31 December 2019 
 Financial assets 
 Classified as amortised cost: 
 Cash and cash equivalents                    317                    -       317 
 Net trade receivables                      1,426                    -     1,426 
 Classified as fair value: 
 Investments                                    -                   48        48 
 Derivative financial assets: 
    Foreign currency forward contracts         17                   23        40 
 Interest rate swaps                            -                    1         1 
 Embedded derivatives                           2                   14        16 
 Assets classified as held for 
  sale                                         65                    -        65 
 Financial liabilities 
 Classified as amortised cost: 
 Interest-bearing loans and borrowings       (89)              (3,464)   (3,553) 
 Government refundable advances               (7)                 (59)      (66) 
 Lease obligations                           (71)                (511)     (582) 
 Other financial liabilities              (2,023)                 (13)   (2,036) 
 Classified as fair value: 
 Derivative financial liabilities: 
    Foreign currency forward contracts       (81)                 (93)     (174) 
    Interest rate swaps                      (17)                 (43)      (60) 
    Cross-currency swaps                      (7)                 (73)      (80) 
 Embedded derivatives                         (1)                  (7)       (8) 
 Liabilities associated with assets 
  held for sale                              (46)                    -      (46) 
---------------------------------------  --------  -------------------  -------- 
 
   11.   Financial instruments (continued) 

The fair value of the derivative financial instruments is derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) and they are therefore categorised within level 2 of the fair value hierarchy set out in IFRS 13: "Fair value measurement" which uses inputs based on market evidence. The Group's policy is to recognise transfers into and out of the different fair value hierarchy levels at the date of the event or change in circumstances that caused the transfer to occur. There have been no transfers between levels in the period.

   12.   Retirement benefit obligations 

The Group sponsors defined benefit plans for qualifying employees of certain subsidiaries. The funded defined benefit plans are administered by separate funds that are legally separated from the Group. The Trustees of the funds are required by law to act in the interest of the fund and of all relevant stakeholders in the plans. The Trustees of the pension funds are responsible for the investment policy with regard to the assets of the fund.

The most significant defined benefit pension plans in the Group at 30 June 2020 were:

GKN UK Group Pension Schemes (Numbers 1 - 4) (formerly GKN UK 2012 Pension Plan)

The GKN UK Group Pension Schemes (Numbers 1 - 4) are funded plans, closed to new members and were closed to future accrual in 2017. The valuation of the plans was based on a full actuarial valuation as of 5 April 2016, updated to 30 June 2020 by independent actuaries.

GKN UK 2016 Pension Plan

The GKN UK 2016 Pension Plan is a funded plan, closed to new members with no active members, containing assets and liabilities in respect of the pension schemes from various legacy GKN businesses. The valuation of the plan was based on a full actuarial valuation as of 5 April 2016, updated to 30 June 2020 by independent actuaries.

GKN US Consolidated Pension Plan

The GKN US Consolidated Pension Plan is a funded plan, closed to new members and closed to future accrual. The GKN US Consolidated Pension Plan valuation was based on a full actuarial valuation as of 1 January 2019, updated to 30 June 2020 by independent actuaries.

GKN Germany Pension Plans

The GKN Germany Pension Plans provide benefits dependent on final salary and service with the Company. The plans are generally unfunded and closed to new members.

Brush UK Pension Plan

The Brush Group (2013) ("Brush UK") Pension Plan is a funded plan, closed to new members and closed to future accrual. The valuation of the Brush UK Pension Plan was based on a full actuarial valuation as of 31 December 2019, updated to 30 June 2020 by independent actuaries.

Other plans include a number of funded and unfunded defined benefit arrangements and retiree medical insurance plans, predominantly in the USA and Europe.

The cost of the Group's defined benefit plans is determined in accordance with IAS 19 (revised): "Employee benefits" using the advice of independent professionally qualified actuaries on the basis of formal actuarial valuations and using the projected unit credit method. In line with normal practice, these valuations are undertaken triennially in the UK and annually in the USA and Germany.

The amount recognised in the Balance Sheet in respect of defined benefit plans was as follows:

30 June 2020

 
 
                     UK plans                European 
                        (1 ()    US plans       plans    Other plans    Total 
                         GBPm        GBPm        GBPm           GBPm     GBPm 
-----------------  ----------  ----------  ----------  -------------  ------- 
Plan assets             3,357         264          30             42    3,693 
Plan liabilities      (3,755)       (460)       (586)           (54)  (4,855) 
 
Net liabilities         (398)       (196)       (556)           (12)  (1,162) 
 
 

(1) Includes a net liability in respect of the GKN Group Pension Schemes (Numbers 1 - 4) (formerly GKN UK 2012 plan), GKN post-employment medical plans and the Nortek UK plan and a net asset in respect of the Brush UK Pension Plan and the GKN UK 2016 Pension Plan.

30 June 2019

 
 
                     UK plans                European 
                        (1 ()    US plans       plans    Other plans    Total 
                         GBPm        GBPm        GBPm           GBPm     GBPm 
-----------------  ----------  ----------  ----------  -------------  ------- 
Plan assets             3,039         257          28             42    3,366 
Plan liabilities      (3,594)       (422)       (620)           (56)  (4,692) 
 
Net liabilities         (555)       (165)       (592)           (14)  (1,326) 
 
 

(1) Includes a net liability in respect of the GKN UK 2012 Pension Plan, GKN post-employment medical plans and the Nortek UK plan and a net asset in respect of the Brush UK Pension Plan and the GKN UK 2016 Pension Plan.

   12.   Retirement benefit obligations (continued) 

31 December 2019

 
 
                     UK plans                European 
                          (1)    US plans       plans    Other plans    Total 
                         GBPm        GBPm        GBPm           GBPm     GBPm 
-----------------  ----------  ----------  ----------  -------------  ------- 
Plan assets             3,082         262          28             40    3,412 
Plan liabilities      (3,502)       (417)       (561)           (53)  (4,533) 
 
Net liabilities         (420)       (155)       (533)           (13)  (1,121) 
 
 

(1) Includes a net liability in respect of the GKN Group Pension Schemes (Numbers 1 - 4) (formerly GKN UK 2012 plan), GKN post-employment medical plans and the Nortek UK plan and a net asset in respect of the Brush UK Pension Plan and the GKN UK 2016 Pension Plan.

Valuations of material plans have been updated at 30 June 2020 by independent actuaries to reflect updated assumptions regarding discount rates, inflation rates and asset values. The major assumptions were as follows:

 
 
                                                                  Price inflation 
                                 Rate of increase 
                                      in pensions 
                                       in payment  Discount rate        (RPI/CPI) 
                                           % p.a.         % p.a.           % p.a. 
-------------------------------  ----------------  -------------  --------------- 
30 June 2020 
GKN UK - Group Pension Schemes 
 (Numbers 1 - 4)                              2.7            1.5          2.8/2.1 
GKN UK - 2016 Pension Plan                    2.7            1.5          2.8/2.1 
GKN US plans                                  n/a            2.7              n/a 
GKN Europe plans                              1.3            1.1          1.3/1.3 
Brush UK Pension Plan                         2.7            1.5          2.8/2.1 
 
30 June 2019 
GKN UK - 2012 Pension Plan                    3.1            2.3          3.2/2.1 
GKN UK - 2016 Pension Plan                    3.1            2.2          3.2/2.1 
GKN US plans                                  n/a            3.5              n/a 
GKN Europe plans                              1.7            1.1          1.7/1.7 
Brush UK Pension Plan                         3.2            2.3          3.2/2.1 
 
31 December 2019 
GKN UK - Group Pension Schemes 
 (Numbers 1 - 4)                              2.8            2.0          2.9/2.1 
GKN UK - 2016 Pension Plan                    2.8            2.0          2.9/2.1 
GKN US plans                                  n/a            3.1              n/a 
GKN Europe plans                              1.5            1.1          1.5/1.5 
Brush UK Pension Plan                         2.8            2.0          2.9/2.1 
-------------------------------  ----------------  -------------  --------------- 
 

In addition, the defined benefit plan assets and liabilities have been updated to reflect the contributions made to the defined benefit plans and the benefits earned during the period to 30 June 2020.

   13.   Notes to the Cash Flow Statement 
 
                                                        Restated 
                                             6 months   6 months 
                                                ended      ended            Year ended 
                                              30 June    30 June           31 December 
                                                 2020       2019                  2019 
Continuing operations                            GBPm       GBPm                  GBPm 
-------------------------------------------  --------  ---------  -------------------- 
 
Reconciliation of operating (loss)/profit 
 to cash generated from operating 
 activities 
Operating (loss)/profit                         (581)          8                   318 
Adjusting items (note 4)                          637        533                   784 
-------------------------------------------  --------  ---------  -------------------- 
Adjusted operating profit                          56        541                 1,102 
 
Adjustments for: 
Depreciation of property, plant and 
 equipment                                        222        211                   434 
Amortisation of computer software 
 and development costs                             30         32                    64 
Share of adjusted operating profit 
 of equity accounted investments                 (21)       (30)                  (66) 
Restructuring costs paid and movements 
 in provisions                                  (118)      (139)                 (320) 
Defined benefit pension contributions 
 paid                                            (43)      (111)                 (183) 
Change in inventories                              78       (93)                  (12) 
Change in receivables                             510        170                    72 
Change in payables                              (337)      (136)                   (2) 
Acquisition costs and associated 
 transaction taxes                                (2)       (15)                  (16) 
Tax paid                                          (8)       (79)                 (117) 
Interest paid on loans and borrowings            (57)       (79)                 (166) 
Interest paid on lease obligations                (9)       (11)                  (21) 
                                                       ---------  -------------------- 
 
Net cash from operating activities                301        261                   769 
 
 
 
 
                                                            Restated 
                                                 6 months   6 months 
                                                    ended      ended    Year ended 
                                                  30 June    30 June   31 December 
                                                     2020       2019          2019 
  Cash flow from discontinued operations             GBPm       GBPm          GBPm 
-----------------------------------------------  --------  ---------  ------------ 
 
Net cash from/(used in) discontinued 
 operations                                             1       (13)          (16) 
Defined benefit pension contributions 
 paid                                                   -        (2)           (2) 
Tax paid                                                -          -           (1) 
Interest paid on lease obligations                      -          -           (1) 
 
Net cash from/(used in) operating activities 
 from discontinued operations                           1       (15)          (20) 
 
 
Purchase of property, plant and equipment             (1)        (8)          (12) 
Disposal costs                                          -          -           (3) 
 
Net cash used in investing activities 
 from discontinued operations                         (1)        (8)          (15) 
 
 
Repayment of principal under lease obligations          -        (2)           (2) 
 
 
Net cash used in financing activities 
 from discontinued operations                           -        (2)           (2) 
 
 

Net debt reconciliation

Net debt consists of interest-bearing loans and borrowings (excluding any acquisition related fair value adjustments), cross-currency swaps and cash and cash equivalents. Currency denominated balances within net debt are translated to Sterling at swapped rates where hedged by cross-currency swaps.

Net debt is considered to be an alternative performance measure as it is not defined in IFRS. The most directly comparable IFRS measure is the aggregate of interest-bearing loans and borrowings (current and non-current) and cash and cash equivalents.

   13.   Notes to the Cash Flow Statement (continued) 

A reconciliation from the most directly comparable IFRS measure to net debt is given below.

 
                                               30 June   30 June  31 December 
                                                  2020      2019         2019 
                                                  GBPm      GBPm         GBPm 
 
Interest-bearing loans and borrowings 
 - due within one year                            (14)     (394)         (89) 
Interest-bearing loans and borrowings 
 - due after one year                          (3,615)   (3,235)      (3,464) 
                                              --------            ----------- 
External debt                                  (3,629)   (3,629)      (3,553) 
Less: 
Cash and cash equivalents                          339       340          317 
                                              --------            ----------- 
                                               (3,290)   (3,289)      (3,236) 
Adjustments: 
Impact of cross-currency swaps                   (137)     (209)         (80) 
Non-cash acquisition fair value adjustments         28        44           33 
 
Net debt                                       (3,399)   (3,454)      (3,283) 
 
 
 

The table below shows the key components of the movement in net debt:

 
 
                                      At             Acquisitions                 Other           Effect         At 
                             31 December   Cash     and disposals              non-cash       of foreign    30 June 
                                    2019   flow                               movements         exchange       2020 
                                    GBPm   GBPm              GBPm                  GBPm             GBPm       GBPm 
                          --------------         ----------------  --------------------                   --------- 
 
External debt                    (3,553)     73                 -                     -            (149)    (3,629) 
Cross-currency 
 swaps                              (80)      -                 -                   (2)             (55)      (137) 
Non-cash acquisition 
 fair value adjustments               33      -                 -                   (5)                -         28 
                          --------------         ----------------  --------------------                   --------- 
                                 (3,600)     73                 -                   (7)            (204)    (3,738) 
Cash and cash 
 equivalents                         317     45              (25)                     -                2        339 
                          --------------         ----------------  --------------------                   --------- 
 
Net debt                         (3,283)    118              (25)                   (7)            (202)    (3,399) 
 
 
   14.   Estimation uncertainty 

The full impact of the COVID-19 global pandemic on medium and long-term forecasts is difficult to predict and there could be significant changes from the best information currently available as circumstances continue to evolve. The Group is monitoring the impact on its businesses and assessing the emerging trends which indicate there are a range of potential outcomes. While the uncertainty continues, the Group will consider a range of estimates and assumptions in the application of its accounting policies which particularly affect those areas noted below. For a complete list of estimates, see note 3 of the 2019 Annual Report. In the event that assumed estimates and assumptions prove to be incorrect, there may be an adjustment to the carrying values of assets and liabilities within the next year:

   --      Loss-making contracts 

Loss-making contract provisions represent the forecast unavoidable costs required to meet the obligations of long-term agreements, in excess of the contractual inflow expected to be generated in respect of these agreements. Calculation of the liability includes estimations of volumes, price and costs to be incurred over the life of the contract, which are discounted to a current value. Future changes within these estimates could have a material impact on the provision in future periods. At 30 June 2020, the carrying value of the loss-making contracts provision in the Group was GBP370 million (31 December 2019: GBP384 million).

   --      Estimates of future revenues and costs of long-term contractual arrangements 

A key judgement is the recognition and measurement of variable consideration, in particular relating to risk and revenue sharing partnerships ("RRSPs"). The forecast revenues and costs in respect of RRSP contracts are inherently imprecise and significant estimates are required to assess the pattern of future maintenance activity, the costs to be incurred and escalation of revenue and costs. The estimates take account of the uncertainties, constraining the expected level of revenue as appropriate.

Measurement of variable consideration is driven by forecasting aftermarket revenue per delivered engine which is in turn contingent on overall programme success, levels of discounting that might be offered by the engine manufacturers (the Group's customers), engineering requirements needed for optimal performance of the engine and the allocation of revenue to individual units. Any of these inputs could change in the next year as programmes evolve and due to the size and scale of these contracts, almost any modification could result in material changes in future periods.

   14.   Estimation uncertainty (continued) 
   --      The carrying value of goodwill and other assets 

In assessing the impairment of non-current assets, estimation and judgement are required including assessment of customer demand. This may impact estimated future cash flows for value in use or fair value less costs to sell assessments and therefore potentially lead to impairment. Specifically, in respect of goodwill, further disclosure is included below.

Impairment Assessment

The Group tests goodwill annually or more frequently if there are indications that goodwill might be impaired. In accordance with IAS 36: "Impairment of assets" the Group assesses the carrying value of its groups of cash generating units ("CGUs") against the recoverable amount, being the higher of the value in use basis and the fair value less costs to sell.

The COVID-19 global pandemic is having a significant impact on the global end markets in which certain of the Group's businesses operate which has resulted in indicators of impairment at the interim reporting date for each of the Automotive Driveline, Automotive ePowertrain, Powder Metallurgy, Security & Smart Technology, Aerospace Engine Systems and Aerostructures groups of CGUs. These groups of CGUs saw a sharp decline in revenue during the second quarter and there is a wide range of possible outcomes around the future recovery of end markets.

No indicators of impairment were identified in respect of the AQH, HVAC and Ergotron groups of CGUs, which are principally North America based and have seen less of an impact to date.

The allocation of goodwill that has been subject to detailed impairment testing is shown below:

 
 
                                 30 June    31 December 
                                    2020           2019 
                                    GBPm           GBPm 
 
Nortek businesses: 
Security & Smart Technology          184            172 
GKN businesses: 
Aerostructures (1)                   615            595 
Aerospace Engine Systems (1)         370            346 
Automotive Driveline                 716            688 
Automotive ePowertrain               351            339 
Powder Metallurgy                    532            503 
 
 

(1) Following the GKN Aerospace reorganisation, announced in the 2019 Annual Report, the Aerostructures, Aerospace Engine Systems and Aerospace Special Technologies groups of CGUs were changed into Aerospace Engine Systems and Aerostructures effective 1 January 2020.

Assumptions used in the financial forecasts

Due to the impact of COVID-19 the businesses are mitigating the impact of lower levels of demand through cost reduction and efficiency actions, including significant restructuring. Under IAS 36, the value in use basis prohibits the inclusion of benefits from future uncommitted (at 30 June 2020) restructuring plans although this is permitted when applying the fair value less costs to sell basis, to the extent that similar actions would be carried out by a market participant. Recent trading announcements by other market participants support the inclusion of uncommitted restructuring (at 30 June 2020) in the fair value less costs to sell approach and due to the timing of announcements this has resulted in higher valuations than the value in use approach.

When applying the fair value less cost to sell methodology, it has been difficult to assess a sale value using observable market inputs (level 1) or inputs based on market evidence (level 2) in the current environment and so unobservable inputs (level 3) have been used. A combination of discounted cash flows and EBITDA multiples have been used to establish fair values for each of the groups of CGUs. There are three key inputs within the discounted cash flow models.

Cash flows

The Group prepares cash flow forecasts derived from financial budgets and medium-term forecasts. Each forecast has been prepared using a cash flow period deemed most appropriate by management, considering the nature of each group of CGUs and their end markets. There has been no change to the forecast periods used at 31 December 2019. The key assumptions used in forecasting post-tax cash flows relate to future budgeted revenue and operating margins likely to be achieved and the expected rates of long-term growth by market sector.

Revenue assumptions were made using external market data, where available, and also consider the recovery period to return to pre COVID-19 levels. A recovery period of between three years and five years was assumed for the Security & Smart Technology, Powder Metallurgy and Automotive groups of CGUs, whereas the Aerospace groups of CGUs are not assumed to fully recover until after the five year forecast period. The assumptions used to derive operating profit margins take into account an increase from returning sale volumes in addition to normal cost saving activities and a significant contribution from planned restructuring activity. The combination of these results in operating margins aligned to business plans for the medium-term, albeit risk adjusted in the discounted cash flow models.

   14.   Estimation uncertainty (continued) 

Post-tax risk adjusted discount rates

Cash flows are discounted using a post-tax discount rate specific to each group of CGUs. Discount rates reflect the current market assessments of the time value of money and the territories in which the group of CGUs operate. In determining a cost of equity, the Capital Asset Pricing Model ("CAPM") has been used. Under CAPM, the cost of equity is determined by adding a risk premium, based on an industry adjustment ("Beta"), to the expected return of the equity market above the risk-free return. The relative risk adjustment reflects the risk inherent in each group of CGUs relative to all other sectors and geographies on average. The cost of debt is determined using a risk-free rate based on the cost of government bonds, and an interest rate premium equivalent to a corporate bond with a similar credit rating to the Group.

Long-term growth rates

Long-term growth rates are based on long-term forecasts for growth in the sectors and geographies in which the group of CGUs operates. Long-term growth rates are determined using forecasts that take into account the international presence and the markets in which each business operates.

Long-term growth rates are consistent with those used in the impairment testing at the previous year end given the current uncertainty over future forecasts.

Sensitivity analysis

As a consequence of implications from the COVID-19 global pandemic and the substantial impact on certain groups of CGUs, additional sensitivity analysis has been performed to show the impact of a reasonably possible change in the key assumptions. There is no reasonably possible change in the key assumptions that could result in an impairment for the Automotive ePowertrain group of CGUs.

Powder Metallurgy group of CGUs - sensitivity analysis

The forecasts have been prepared using the methodology required by IAS 36 and show headroom of GBP172 million above the carrying amount for the Powder Metallurgy group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the post-tax discount rate and long-term growth rate from 9.0% to 9.7% or from 2.5% to 1.5% respectively would reduce headroom to GBPnil. A reduction in the risk adjusted terminal operating margin of 1.6 percentage points ("ppts") would also reduce headroom to GBPnil.

Automotive Driveline group of CGUs - sensitivity analysis

The forecasts have been prepared using the methodology required by IAS 36 and show headroom of GBP186 million above the carrying amount for the Automotive Driveline group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the post-tax discount rate and long-term growth rate from 10.3% to 10.9% or from 2.5% to 1.5% respectively would reduce headroom to GBPnil. A reduction in the risk adjusted terminal operating margin of 1.0 ppts would also reduce headroom to GBPnil.

Aerospace Engine Systems group of CGUs - sensitivity analysis

The forecasts have been prepared using the methodology required by IAS 36 and show headroom of GBP131 million above the carrying amount for the Aerospace Engine Systems group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the post-tax discount rate and long-term growth rate from 7.5% to 7.7% or from 3.0% to 2.8% respectively would reduce headroom to GBPnil. A reduction in the risk adjusted terminal operating margin of 0.9 ppts would also reduce headroom to GBPnil.

Aerostructures group of CGUs - sensitivity analysis

The forecasts have been prepared using the methodology required by IAS 36 and show headroom of GBP91 million above the carrying amount for the Aerostructures group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the post-tax discount rate and long-term growth rate from 7.3% to 7.4% or from 2.9% to 2.7% respectively would reduce headroom to GBPnil. A reduction in the risk adjusted terminal operating margin of 0.3 ppts would also reduce headroom to GBPnil.

Security & Smart Technology group of CGUs - sensitivity analysis

The forecasts have been prepared using the methodology required by IAS 36 and show headroom of GBP64 million above the carrying amount for the Security & Smart Technology group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the post-tax discount rate and long-term growth rate from 8.5% to 9.5% or from 3.5% to 2.3% respectively would reduce headroom to GBPnil. A reduction in the risk adjusted terminal operating margin of 1.3 ppts would also reduce headroom to GBPnil.

As can be seen, there is not a significant level of headroom in certain groups of CGUs and as noted there is inherent difficulty in forecasting in the medium to long-term. However, the Directors have concluded that at this time they are comfortable that no impairment charge is required for any of the groups of CGUs but will keep this assessment under review as end markets recover.

 
Glossary 
 

Alternative Performance Measures ("APMs")

In accordance with the Guidelines on APMs issued by the European Securities and Markets Authority ("ESMA"), additional information is provided on the APMs used by the Group below.

In the reporting of financial information, the Group uses certain measures that are not required under IFRS. These additional measures (commonly referred to as APMs) provide additional information on the performance of the business and trends to stakeholders. These measures are consistent with those used internally, and are considered important to understanding the financial performance and financial health of the Group. APMs are considered to be an important measure to monitor how the businesses are performing because this provides a meaningful comparison of how the business is managed and measured on a day-to-day basis and achieves consistency and comparability between reporting periods.

These APMs may not be directly comparable with similarly titled measures reported by other companies and they are not intended to be a substitute for, or superior to, IFRS measures. All Income Statement and Cash Flow measures are provided for continuing operations unless otherwise stated.

 
          Closest      Reconciling 
           equivalent   items to 
           statutory    statutory 
APM        measure      measure      Definition and purpose 
Income Statement Measures 
Adjusted  Revenue      Share of      Adjusted revenue includes the Group's 
 revenue                revenue       share of revenue of equity accounted 
                        of equity     investments ("EAIs"). This enables comparability 
                        accounted     between reporting periods. 
                        investments                                    Restated(1) 
                        (note 8)                             6 months     6 months 
                                                                ended        ended 
                                                              30 June      30 June    Year ended 
                                                                 2020         2019   31 December 
                                                                 GBPm         GBPm          2019 
                                      Revenue                                               GBPm 
 
                                      Revenue                   4,121        5,573        10,967 
                                      Share of revenue 
                                       of equity accounted 
                                       investments                238          302           625 
 
                                      Adjusted revenue          4,359        5,875        11,592 
 
 
Adjusting  None  Adjusting     Those items which the Group excludes 
 items            items (note   from its adjusted profit metrics in 
                  4)            order to present a further measure 
                                of the Group's performance. 
 
                                These include items which are significant 
                                in size or volatility or by nature 
                                are non-trading or non-recurring, any 
                                item released to the Income Statement 
                                that was previously a fair value item 
                                booked on an acquisition, and include 
                                adjusted profit from EAIs. 
 
                                This provides a meaningful comparison 
                                of how the business is managed and 
                                measured on a day-to-day basis and 
                                provides consistency and comparability 
                                between reporting periods. 
 
 
Adjusted     Operating           Adjusting       The Group uses adjusted profit measures 
 operating    profit/(loss)(2)    items (note     to provide a useful and more comparable 
 profit                           4)              measure of the ongoing performance 
                                                  of the Group. Adjusted measures are 
                                                  reconciled to statutory measures by 
                                                  removing adjusting items, the nature 
                                                  of which are disclosed above and further 
                                                  detailed in note 4. 
                                                                              Restated(1) 
                                       6 months                                  6 months 
                                          ended                                     ended 
                                        30 June                                   30 June     Year ended 
                                           2020                                      2019    31 December 
                                           GBPm                                      GBPm           2019 
 Operating profit                                                                                   GBPm 
 
Operating (loss)/profit                   (581)                                         8            318 
Adjusting items 
 to operating 
 (loss)/profit 
 (note 4)                                   637                                       533            784 
 
Adjusted operating 
 profit                                      56                                       541          1,102 
 
 
              Closest            Reconciling 
               equivalent         items to 
               statutory          statutory 
APM            measure            measure        Definition and purpose 
             ------------------ 
Adjusted      Operating          Share of        Adjusted operating margin represents 
 operating     margin(3)          revenue         Adjusted operating profit as a percentage 
 margin                           of equity       of Adjusted revenue. 
                                  accounted 
                                  investments 
                                  (note 8) 
                                  and adjusting 
                                  items (note 
                                  4) 
             ------------------ 
Adjusted      Profit/(loss)      Adjusting       Profit before the impact of adjusting 
 profit        before             items (note     items and tax. As discussed above, adjusted 
 before        tax                4)              profit measures are used to provide 
 tax                                              a useful and more comparable measure 
                                                  of the ongoing performance of the Group. 
                                                  Adjusted measures are reconciled to 
                                                  statutory measures by removing adjusting 
                                                  items, the nature of which are disclosed 
                                                  above and further detailed in note 4. 
                                                                              Restated(1) 
                                       6 months                                  6 months 
                                          ended                                     ended 
                                        30 June                                   30 June     Year ended 
                                           2020                                      2019    31 December 
                                           GBPm                                      GBPm           2019 
 Profit before tax                                                                                  GBPm 
 
(Loss)/profit before 
 tax                                      (685)                                     (109)            106 
Adjusting items 
 to (loss)/profit 
 before tax (note 
 4)                                         645                                       540            783 
 
Adjusted (loss)/profit 
 before tax                                (40)                                       431            889 
 
 
 
 
Adjusted    Profit/(loss)   Adjusting      Profit after tax but before the impact 
 profit      after           items (note    of the adjusting items. As discussed 
 after       tax             4)             above, adjusted profit measures are 
 tax                                        used to provide a useful and more comparable 
                                            measure of the ongoing performance of 
                                            the Group. Adjusted measures are reconciled 
                                            to statutory measures by removing adjusting 
                                            items, the nature of which are disclosed 
                                            above and further detailed in note 4. 
                                                    Restated(1) 
                                 6 months              6 months 
                                    ended                 ended 
                                  30 June               30 June              Year ended 
                                     2020                  2019             31 December 
                                     GBPm                  GBPm                    2019 
 Profit after tax                                                                  GBPm 
 
(Loss)/profit after 
 tax                                (560)                 (131)                      55 
Adjusting items 
 to (loss)/profit 
 after tax (note 
 4)                                   528                   463                     644 
 
Adjusted (loss)/profit 
 after tax                           (32)                   332                     699 
 
 
 
 
Adjusted       Operating     Adjusting         Adjusted operating profit for 12 months 
 EBITDA         profit/      items (note        prior to the reporting date, before 
 for leverage   (loss)(2)    4), depreciation   depreciation and impairment of property, 
 covenant                    of property,       plant and equipment and before the amortisation 
 purposes                    plant and          and impairment of computer software 
                             equipment          and development costs. 
                             and amortisation 
                             of computer        Adjusted EBITDA for leverage covenant 
                             software           purposes is a measure used by external 
                             and development    stakeholders to measure performance. 
                             costs,                                      12 months  12 months(4) 
                             imputed                                         ended         ended  Year ended(4) 
                             lease charge,                                 30 June       30 June    31 December 
                             share of                                         2020          2019           2019 
                             non-controlling    Adjusted EBITDA 
                             interests           for leverage covenant 
                             and other           purposes                     GBPm          GBPm           GBPm 
                             adjustments 
                             required           Adjusted operating 
                             for leverage        profit                        617         1,074          1,102 
                             covenant           Depreciation of 
                             purposes(5)         property, plant 
                                                 and equipment and 
                                                 amortisation of 
                                                 computer software 
                                                 and development 
                                                 costs                         507           449            498 
                                                Imputed lease charge          (95)          (51)           (91) 
                                                Non-controlling 
                                                 interests                     (4)           (9)            (6) 
                                                Other adjustments 
                                                 required for leverage 
                                                 covenant purposes 
                                                 (5)                          (31)           (5)              2 
                                                                                                  ------------- 
                                                Adjusted EBITDA 
                                                 for leverage covenant 
                                                 purposes                      994         1,458          1,505 
 
                Closest      Reconciling 
                 equivalent   items to 
                 statutory    statutory 
APM              measure      measure            Definition and purpose 
               ------------ 
Adjusted        Effective    Adjusting           The income tax charge for the Group 
 tax rate        tax rate     items, adjusting    excluding adjusting tax, and the tax 
                              tax items           impact of adjusting items, divided by 
                              and the             adjusted profit before tax. 
                              tax impact 
                              of adjusting        This measure is a useful indicator of 
                              items (note         the ongoing tax rate for the Group. 
                              4 and note                                                   Restated(1) 
                              5)                                                 6 months     6 months 
                                                                                    ended        ended 
                                                                                  30 June      30 June    Year ended 
                                                                                     2020         2019   31 December 
                                                                                     GBPm         GBPm          2019 
                                                  Adjusted tax rate                                             GBPm 
 
                                                  Tax credit/(charge) 
                                                   per Income Statement               125         (22)          (51) 
                                                  Tax impact of 
                                                   adjusting items                  (113)         (73)         (123) 
                                                  Tax impact of 
                                                   significant restructuring            -            -           (9) 
                                                  Tax impact of 
                                                   EAIs                               (4)          (4)           (7) 
 
                                                  Adjusted tax credit/(charge)          8         (99)         (190) 
 
                                                  Adjusted (loss)/profit 
                                                   before tax                        (40)          431           889 
 
                                                  Adjusted tax rate                 20.0%        23.0%         21.4% 
 
 
 
Adjusted        Basic              Adjusting         Profit after tax attributable to owners 
 basic           earnings           items (note       of the parent and before the impact 
 earnings        per share          4 and note        of adjusting items, divided by the weighted 
 per share                          6)                average number of ordinary shares in 
                                                      issue during the financial period. 
               ------------------ 
Adjusted        Diluted            Adjusting         Profit after tax attributable to owners 
 diluted         earnings           items (note       of the parent and before the impact 
 earnings        per share          4 and note        of adjusting items, divided by the weighted 
 per share                          6)                average number of ordinary shares in 
                                                      issue during the financial period adjusted 
                                                      for the effects of any potentially dilutive 
                                                      options. 
 
                                                      The Board considers this to be a key 
                                                      measure of performance when all businesses 
                                                      are held for the complete reporting 
                                                      period. 
               ------------------ 
Interest        None               Not applicable    Adjusted EBITDA calculated for interest 
 cover                                                cover covenant purposes (including EBITDA 
                                                      of businesses disposed) as a multiple 
                                                      of net interest payable on bank loans 
                                                      and overdrafts. 
 
                                                      This measure is used for bank covenant 
                                                      testing. 
                                                                              12 months  12 months(4) 
                                                                                  ended         ended   Year ended(4) 
                                                                                30 June       30 June     31 December 
                                                                                   2020          2019            2019 
                                                       Interest cover              GBPm          GBPm            GBPm 
                                                      Adjusted EBITDA 
                                                       for leverage 
                                                       covenant purposes            994         1,458           1,505 
                                                      Adjusted EBITDA 
                                                       from businesses 
                                                       disposed in the 
                                                       year                           -             8              36 
 
                                                      Adjusted EBITDA 
                                                       for interest 
                                                       cover covenant               994         1,466           1,541 
 
                                                      Interest on bank 
                                                       loans and overdrafts       (144)         (150)           (152) 
                                                      Finance income                  1            10               9 
                                                      Other interest 
                                                       for covenant                 (1)             -               - 
                                                       purposes 
 
                                                      Net finance charges 
                                                       for covenant 
                                                       purposes                   (144)         (140)           (143) 
 
 
                                                      Interest cover               6.9x         10.5x           10.8x 
 
 
 
                Closest            Reconciling 
                 equivalent         items to 
                 statutory          statutory 
  APM            measure            measure            Definition and purpose 
               ------------------ 
Balance Sheet Measures 
Working         Inventories,       Not applicable    Working capital comprises inventories, 
 capital         trade                                current and non-current trade and other 
                 and other                            receivables and current and non-current 
                 receivables                          trade and other payables. 
                 less trade 
                 and other 
                 payables 
               ------------------ 
Net debt        Cash and           Reconciliation    Net debt comprises cash and cash equivalents, 
                cash equivalents    of net debt       interest-bearing loans and borrowings 
                less                (note 13)         and cross-currency swaps but excludes 
                interest-bearing                      non-cash acquisition fair value adjustments. 
                loans 
                and borrowings                        Net debt is one measure that could be 
                and finance                           used to indicate the strength of the 
                related                               Group's Balance Sheet position and is 
                derivative                            a useful measure of the indebtedness 
                instruments                           of the Group. 
               ------------------ 
Bank covenant  Cash and            Impact of         Net debt (as above) is presented in 
 definition    cash equivalents     foreign           the Balance Sheet translated at period 
 of net        less                 exchange          end exchange rates. 
 debt at       interest-bearing     and adjustments 
 average       loans                for bank          For bank covenant testing purposes net 
 rates         and borrowings       covenant          debt is converted using average exchange 
 and leverage  and finance          purposes          rates for the previous 12 months. 
               related 
               derivative                             Leverage is calculated as the bank covenant 
               instruments                            definition of net debt divided by adjusted 
                                                      EBITDA for leverage covenant purposes. 
                                                      This measure is used for bank covenant 
                                                      testing. 
 
                                                                                 30 June  30 June(4)  31 December(4) 
                                                                                    2020        2019            2019 
                                                      Net debt                      GBPm        GBPm            GBPm 
                                                                                                      -------------- 
 
                                                      Net debt at closing 
                                                       rates (note 13)             3,399       3,454           3,283 
                                                      Impact of foreign 
                                                       exchange                     (69)        (50)              94 
                                                                                                      -------------- 
                                                      Net debt at average 
                                                       rates                       3,330       3,404           3,377 
                                                      Other adjustments 
                                                       required for covenant 
                                                       purposes                        -          14               8 
                                                                                                      -------------- 
 
                                                      Bank covenant definition 
                                                       of net debt at average 
                                                       rates                       3,330       3,418           3,385 
                                                                                                      -------------- 
 
                                                      Leverage                     3.35x       2.34x           2.25x 
 
 
                Closest           Reconciling 
                 equivalent        items to 
                 statutory         statutory 
APM              measure           measure         Definition and purpose 
Cash Flow Measures 
Adjusted        Net cash          Non-working    Adjusted operating cash flow (pre-capex) 
 operating       from operating    capital        is calculated as adjusted operating 
 cash flow       activities        items (note    profit before depreciation and amortisation 
 (pre-capex)                       13)            attributable to subsidiaries less lease 
 and Adjusted                                     obligation payments, the positive non-cash 
 operating                                        impact from loss-making contracts and 
 cash flow                                        movements in working capital. 
 conversion 
                                                  Adjusted operating cash flow (pre-capex) 
                                                  conversion is adjusted operating cash 
                                                  flow (pre-capex) divided by adjusted 
                                                  operating profit before depreciation 
                                                  and amortisation attributable to subsidiaries, 
                                                  less lease obligation payments and the 
                                                  positive non-cash impact from loss-making 
                                                  contracts. 
 
                                                  This measure provides additional useful 
                                                  information in respect of cash generation 
                                                  and is consistent with how business 
                                                  performance is measured internally. 
                                                          Restated(1) 
                                       6 months              6 months 
                                          ended                 ended 
                                        30 June               30 June                Year ended 
                                           2020                  2019               31 December 
                                           GBPm                  GBPm                      2019 
 Adjusted operating                                                                        GBPm 
  cash flow 
 
Adjusted operating 
 profit                                      56                   541                     1,102 
Share of adjusted 
 operating profit of 
 EAIs (note 8)                             (21)                  (30)                      (66) 
Depreciation of owned 
 property, plant and 
 equipment and amortisation 
 of computer software 
 and development costs                      214                   208                       426 
Depreciation of leased 
 property, plant and 
 equipment                                   38                    35                        72 
Lease obligation payments                  (38)                  (32)                      (70) 
Positive non-cash 
 impact from loss-making 
 contracts (note 10)                       (31)                  (45)                      (81) 
                                            218                   677                     1,383 
Change in inventories                        78                  (93)                      (12) 
Change in receivables                       510                   170                        72 
Change in payables                        (337)                 (136)                       (2) 
 
Adjusted operating 
 cash flow (pre-capex)                      469                   618                     1,441 
 
 
Adjusted operating 
 cash flow conversion                      215%                   91%                      104% 
 
 
 
 
Free cash         Net increase/  Acquisition         Free cash flow represents cash generated 
 flow              decrease       related             from trading from continuing businesses 
                   in cash        cash flows,         after all costs including restructuring, 
                   and cash       dividends           pension contributions, tax and interest 
                   equivalents    paid to             payments. 
                                  owners 
                                  of the              A reconciliation of free cash flow 
                                  parent,             is included within the Finance Director's 
                                  foreign             Review. 
                                  exchange, 
                                  discontinued 
                                  operating 
                                  cash flows 
                                  and other 
                                  non-cash 
                                  movements 
Adjusted          Net increase/  Free cash           Adjusted free cash flow represents 
 free cash         decrease       flow, as            free cash flow adjusted for special 
 flow              in cash        defined             pension contributions and restructuring 
                   and cash       above,              cash flows. 
                   equivalents    adjusted 
                                  for special 
                                  pension 
                                  contributions 
                                  and restructuring 
                                  cash flows 
 
 
                  Closest        Reconciling 
                   equivalent     items to 
                   statutory      statutory 
APM                measure        measure              Definition and purpose 
Capital           None           Not applicable      Calculated as the purchase of owned 
 expenditure                                          property, plant and equipment and computer 
 (capex)                                              software and expenditure on capitalised 
                                                      development costs during the period, 
                                                      excluding any assets acquired as part 
                                                      of a business combination. 
 
                                                      Net capital expenditure is capital 
                                                      expenditure net of proceeds from disposal 
                                                      of property, plant and equipment. 
Capital           None           Not applicable      Net capital expenditure divided by 
 expenditure                                          depreciation of owned property, plant 
 to depreciation                                      and equipment and amortisation of computer 
 ratio                                                software and development costs. 
Dividend          Dividend       Not applicable      Amounts payable by way of dividends 
 per share         per share                          in terms of pence per share. 
 

(1) Results for the period ended 30 June 2019 have been restated for discontinued operations (see note 9).

(2) Operating profit/(loss) is not defined within IFRS but is a widely accepted profit measure being profit/(loss) before finance costs, finance income

and tax.

(3) Operating margin is not defined within IFRS but is a widely accepted profit measure being derived from operating profit/(loss)(2) divided by revenue.

(4) Year ended 31 December 2019 and period ended 30 June 2019 remain aligned to the original calculations supporting the Group's bank debt compliance certificate, and have not been restated for discontinued operations.

(5) Included within other adjustments required for covenant purposes are dividends received from equity accounted investments, the removal of adjusted operating profit of equity accounted investments and the inclusion of operating profit and depreciation in respect of businesses classified as held for sale.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.

END

IR FLFFDAFIFIII

(END) Dow Jones Newswires

September 03, 2020 02:00 ET (06:00 GMT)

Melrose Industries (LSE:MRO)
Historical Stock Chart
From Sep 2020 to Oct 2020 Click Here for more Melrose Industries Charts.
Melrose Industries (LSE:MRO)
Historical Stock Chart
From Oct 2019 to Oct 2020 Click Here for more Melrose Industries Charts.